[Reuters] China calls on Canada to free Huawei CFO or face consequences
[Reuters] China's November export, import growth shrinks, showing weak demand
[Reuters] China's November trade surplus with U.S. widens to $35.55 billion
[Reuters] China watchdog calls for banks to meet private sector credit demand: China Party journal
[BloombergQ] Federal Reserve Officials Search for the Elusive ‘Neutral’ Interest Rate
[Reuters] Police clash with 'yellow vest' protesters in Paris
[BBC] Yellow vest movement: Paris police detain hundreds of protesters
[WSJ] Huawei Executive’s Arrest Stirs Fears About Corporate Travel
[WSJ] Uber Joins Lyft in Race to Tap Investors
Saturday, December 8, 2018
Friday, December 7, 2018
Weekly Commentary: Q3 2018 Z.1 and THE Cycle Peak
Total Non-Financial Debt (NFD) expanded at a 4.4% annual rate during Q3 to a record $51.324 TN. Since the end of 2008, NFD has increased $16.3 TN, or 46%. Q3’s NFD growth rate was down from Q2’s 5.2% and Q1’s 6.3% - and lower as well than Q3 2017’s 4.9%. Total Household borrowings accelerated to 3.4% growth from Q2’s 2.9%, led by a jump in Consumer Credit growth (5.4% from 3.7%). Household Mortgages expanded at a 3.1% pace, up from Q2’s 2.7% and the year ago 2.9%.
Evidence of tighter financial conditions, Total Business borrowings slowed markedly. After Q2’s 6.9% rate (strongest since Q1 ’16), Total Business debt growth slowed to 3.9%. The expansion of Corporate (a component of Business) borrowings slowed markedly, from 7.2% to 4.1%. State & Local government debt contracted at a 1.4% pace (Q2 -0.38%). Winning the Piggy Borrower contest, perennially, was our federal government. Federal borrowings expanded at a 6.8% pace, down slightly from Q2.
Yet percentage growth rates don’t do justice late in a Credit Cycle. Outstanding Treasuries expanded $1.187 TN over the past four quarters (7.3%) and $1.774 TN over eight quarters (11.3%). On a seasonally-adjusted and annualized rate basis (SAAR), Q3 federal borrowings expanded $1.180 TN, almost the same as Q2. So far in 2018, federal debt has expanded the most since 2010.
It’s also worth noting that Federal borrowings this year have accounted for in excess of half of Total Non-Financial Debt growth (Q3 SAAR $1.180 TN of SAAR $2.228 TN). Total Household borrowings expanded SAAR $516 billion (mortgage SAAR $314 billion and Consumer Credit SAAR $210 billion) during Q3. Total Business borrowings expanded SAAR $575 billion, with Corporate borrowings increasing SAAR $389 billion. Foreign U.S. borrowings grew SAAR $292 billion.
Outstanding Treasury Securities ended Q3 at $17.419 TN, having now inflated 188% ($11.367TN) since the end of 2007. Treasuries ended the quarter at 84% of GDP, up from 41% at the conclusion of ’07. And let’s not overlook the government-sponsored enterprises (GSEs). Outstanding Agency Securities (debt and MBS) surpassed $9.0 TN for the first time during Q3, expanding $263 billion, or 3.0%, over the past year. Total Treasuries and Agency Securities ended the quarter at a record $26.439 TN (up $1.450TN y-o-y), or 128% of GDP.
Total outstanding Debt Securities jumped nominal $433 billion during the quarter to a record $44.455 TN, with one-year growth of $1.850 TN. Debt Securities ended Q3 at 215% of GDP, up from 200% and 157% to end 2007 and 1999. Equities Securities increased nominal $2.269 TN during Q3 to a record $50.602 TN (one-year growth $5.493TN). Equities Securities ended the quarter at a record 245% of GDP versus 172% at the end of 2007 ('99=202%). Total (Debt and Equities) Securities increased nominal $2.701 TN during Q3, and $7.344 TN in four quarters, to a record $95.057 TN. Total Securities ended the quarter at a record 460% of GDP. This compares to previous cycle peaks 379% (Q3 ’07) and 359% (Q1 ’00).
Securities market inflation continued to inflate Household Assets during the quarter, while the Bubble in Household Net Worth remains fundamental to the U.S. Bubble Economy. Household Assets increased nominal $2.238 TN during Q3 to a record $124.934 TN. Household Assets increased $8.810 TN (7.6%) over the past year. Household Liabilities gained $167 billion during the quarter ($539bn y-o-y) to a record $15.895 TN.
Household Net Worth (Assets less Liabilities) expanded $2.070 TN during the quarter ($8.271 TN y-o-y) to a record $109.039 TN. It’s worth noting that Net Worth surged $15.795 TN, or 16.9%, over two years (Assets up $16.810 TN, or 15.5%, less Liabilities up $1.015 TN, or 6.8%). Household Net Worth ended the quarter at a record 528% of GDP, up from the year ago 514% and Q3 2016’s 498%. Household Net Worth to GDP set previous cycle peaks at 484% (Q1 ‘07) and 435% (Q4 ‘99).
Still, most would dismissively ask, where’s the Bubble? Well, Household Net Worth has inflated $50 TN (85%) since the end of 2008, which certainly has supported elevated confidence, spending and economic activity. And it’s clear that booming securities markets have been integral to the record expansion in Household perceived wealth. So, what have been the driving forces behind bubbling markets?
Rest of World (ROW) holdings of U.S. Financial Assets jumped nominal $558 billion during Q3 to a record $28.087 TN. ROW holdings were up $1.598 TN over the past year and $3.830 TN over seven quarters. ROW holdings increased to a record 136% of GDP, up from 100% ($14.646 TN) to end 2007 and 57% ($5.639 TN) to conclude 1999. Where in the world has all this “money” been coming from? Sustainable? Reversible?
ROW holdings of U.S. Debt Securities increased nominal $44 billion during Q3 to $11.218 TN, following contractions in Q2 (nominal -$113bn) and Q1 (nominal -$120bn). Treasury holdings added nominal $11 billion and Agencies $20 billion. U.S. Corporate Bonds gained nominal $13 billion. In contrast, ROW holdings of Total U.S. Equities (Corporate Equities and Mutual Fund Shares) jumped nominal $529 billion during the quarter and $1.426 TN over the past year – to a record $8.343 TN (vs. previous cycle peak $3.225 TN in Q4 ’07).
The jump in Equities holdings masks a pivotal slowdown in ROW purchases of U.S. Debt Securities. Though purchases were positive during Q3, ROW holdings of U.S. Debt Securities actually contracted nominal $190 billion during the first three quarters of 2018. This contraction in ROW U.S. Debt Securities holdings is in stark contrast to 2017’s gain of $747 billion and the $324 billion increase in 2016.
The y-t-d contraction in ROW U.S. Debt Securities is largely explained by a $174 billion contraction in U.S. Corporate Bonds. To put this into perspective, ROW increased Corporate Bond holdings by $442 billion in 2017 and $348 billion in 2016. Indeed, ROW U.S. Corporate Bond holdings surged $1.383 TN in the six years 2012 through 2017. It’s worth noting as well that after increasing $282 billion in 2017, ROW Treasury holdings contracted $62 billion in the first three quarters of 2018.
I would posit that tightening global finance – in particular, the de-risking/deleveraging dynamic that took hold in the speculator community – contributed to waning international demand for U.S. Corporate Bonds. At the same time, EM outflows and pressure on EM central banks to support faltering currencies led to sharply lower international demand for Treasuries (not to mention geopolitical frictions). Overall, it points to an important inflection point in international financial flows into U.S. securities markets. For much of the year, major flows into outperforming U.S. equities helped to conceal adverse repercussions. With U.S. equities succumbing to de-risking/deleveraging, markets generally will now confront momentous changes in the liquidity backdrop.
If the market liquidity environment has indeed transitioned, the lackluster growth in U.S. Bank credit now becomes a more pressing issue. Bank (“Private Depository Institutions”) Loans expanded nominal $96.5 billion during Q3, down from Q2’s $174 billion and Q3 2017’s $112 billion. On a SAAR basis, Bank Loans increased $393 billion during Q3 (only two weaker quarters in the past five years). Mortgage loans expanded SAAR $153 billion, the slowest growth in four years, and down from Q2’s SAAR $193 billion, Q1’s SAAR $204 billion, and Q4 ‘17’s SAAR $224 billion. Bank’s Consumer Credit continued to swell, expanding SAAR $127 billion. Non-mortgage and consumer Loans “Not Elsewhere Classified” expanded SAAR $114 billion, a notable drop from Q2’s SAAR $279 billion.
Security Broker/Dealer holdings increased nominal $56 billion to $3.194 TN, up from Q2’s $47 billion increase and the strongest growth since Q2 ’17. Most of the gain was explained by increases in Security Repurchase Agreements and Miscellaneous Assets. Debt Securities holdings actually contracted nominal $11 billion (Treasuries down $30bn).
The confluence of the powerful global tightening of financial conditions, a significant decline in ROW debt purchases, the slowdown in bank lending and the now tenuous backdrop in the equities marketplace creates an extraordinarily fragile backdrop. Moreover, the current quarter has experienced a sharp slowdown in junk bond issuance and leveraged lending. What’s more, significant deleveraging has commenced in U.S. equities. Overall, it points to a troubling liquidity backdrop for both the markets and the U.S. economy, more generally.
I’ll add that “Periphery to Core Crisis Dynamics” are coming home to roost. Keep in mind that the initial faltering Global Bubble phase – de-risking/deleveraging at the “Periphery” – worked to exacerbated flows to - and speculative excess at - the “Core.” The huge increase in ROW Equities holdings is emblematic of speculative “blow-off” dynamics right in the face of rapidly deteriorating fundamental prospects. It recalls heightened systemic fragilities created by dysfunctional market dynamics in early-2000 and, even more so, in the second-half of 2007.
At this point, I’ll posit a (not unlikely) possible scenario. De-risking/deleveraging exposes problematic underlying speculative leverage in both equities and corporate Credit. A sharp tightening of corporate Credit conditions weighs on debt issuance and business borrowing more generally. Tighter finance and sinking equities prices engender some reassessment regarding the rationale for aggressive stock buyback programs. Further weighing on inflated market valuations, the rapidly deteriorating backdrop will also provoke some overdue rethink on the M&A front.
Meanwhile, the vast chasm between elevated consumer confidence and fading economic prospects will have to narrow. Household Net Worth has inflated $20 TN, or about 100% of GDP, in just the past three years ($50 TN since the end of ’08!). This surge in perceived wealth spurred consumption and boosted auto and home purchases (along with boats, campers, timeshares, cruises, etc.) After stoking discretionary and luxury spending, it’s reasonable to begin anticipating a problematic change in spending patterns.
There are many aspects of the unfolding downturn that go unappreciated. I worry about deep economic structural maladjustment. How many thousands of uneconomic enterprises have propagated from all the easy finance and surging asset prices? I have deep concern for Silicon Valley. If the unfolding trade and cold war with China wasn’t enough, they’re about to get the rug pulled out from under them by the financial markets. How much perceived wealth will be lost in a bursting Bubble of inflated technology shares and private business equity, compounded by a deflating Bubble in wildly inflated real estate prices surrounding the tech hubs? I fear a complete lack of understanding and preparation.
It’s difficult not to see the arrest of a top Huawei executive on the same day as the Trump/Xi summit as an ominous development. The CFO and daughter of the founder of one of China’s most powerful international technology conglomerates faces fraud charges and possible extradition to the U.S. In China, outrage. Sure, there was a weird level of ambiguity regarding the true gains from Saturday’s U.S./China trade meeting. But to see global markets convulse on the arrest of a Chinese executive rather starkly illuminates the acute fragilities the world now confronts.
Ten-year Treasury yields dropped 14 bps this week to 2.85%. German bund yields fell six bps to 0.25%. Not to be outdone, 10-year Japanese JGB yields declined three bps to 0.06%. No signs of confidence in the soundness of the global financial system from those three. Safe havens showed a pulse this week. Gold jumped $26 to an almost five-month high $1,248. The Japanese yen gained 0.8% and the Swiss franc increased 0.6%.
It was curious to see the U.S. dollar under some selling pressure (dollar index down 0.7% this week). But, then again… If our asset markets (i.e. stocks, fixed-income, real estate…) are as vulnerable as I believe and the American economy as maladjusted, there’s a credible bear case against the U.S. currency to ponder. We’ve certainly done our level best to swamp the world with dollars over recent decades.
A dollar break would really catch the speculator community (and investors) positioned poorly. It’s reached the point that NOTHING can be taken for granted in these chaotic financial markets. Which portends something really important: ongoing pressure to de-risk and deleverage. Why do I have the feeling I’ll be using Q3 2018 Z.1 data for Household Net Worth (along with both Equities and Total Securities to GDP, etc.) as THE Cycle Peak for years (decades?) to come?
Evidence of tighter financial conditions, Total Business borrowings slowed markedly. After Q2’s 6.9% rate (strongest since Q1 ’16), Total Business debt growth slowed to 3.9%. The expansion of Corporate (a component of Business) borrowings slowed markedly, from 7.2% to 4.1%. State & Local government debt contracted at a 1.4% pace (Q2 -0.38%). Winning the Piggy Borrower contest, perennially, was our federal government. Federal borrowings expanded at a 6.8% pace, down slightly from Q2.
Yet percentage growth rates don’t do justice late in a Credit Cycle. Outstanding Treasuries expanded $1.187 TN over the past four quarters (7.3%) and $1.774 TN over eight quarters (11.3%). On a seasonally-adjusted and annualized rate basis (SAAR), Q3 federal borrowings expanded $1.180 TN, almost the same as Q2. So far in 2018, federal debt has expanded the most since 2010.
It’s also worth noting that Federal borrowings this year have accounted for in excess of half of Total Non-Financial Debt growth (Q3 SAAR $1.180 TN of SAAR $2.228 TN). Total Household borrowings expanded SAAR $516 billion (mortgage SAAR $314 billion and Consumer Credit SAAR $210 billion) during Q3. Total Business borrowings expanded SAAR $575 billion, with Corporate borrowings increasing SAAR $389 billion. Foreign U.S. borrowings grew SAAR $292 billion.
Outstanding Treasury Securities ended Q3 at $17.419 TN, having now inflated 188% ($11.367TN) since the end of 2007. Treasuries ended the quarter at 84% of GDP, up from 41% at the conclusion of ’07. And let’s not overlook the government-sponsored enterprises (GSEs). Outstanding Agency Securities (debt and MBS) surpassed $9.0 TN for the first time during Q3, expanding $263 billion, or 3.0%, over the past year. Total Treasuries and Agency Securities ended the quarter at a record $26.439 TN (up $1.450TN y-o-y), or 128% of GDP.
Total outstanding Debt Securities jumped nominal $433 billion during the quarter to a record $44.455 TN, with one-year growth of $1.850 TN. Debt Securities ended Q3 at 215% of GDP, up from 200% and 157% to end 2007 and 1999. Equities Securities increased nominal $2.269 TN during Q3 to a record $50.602 TN (one-year growth $5.493TN). Equities Securities ended the quarter at a record 245% of GDP versus 172% at the end of 2007 ('99=202%). Total (Debt and Equities) Securities increased nominal $2.701 TN during Q3, and $7.344 TN in four quarters, to a record $95.057 TN. Total Securities ended the quarter at a record 460% of GDP. This compares to previous cycle peaks 379% (Q3 ’07) and 359% (Q1 ’00).
Securities market inflation continued to inflate Household Assets during the quarter, while the Bubble in Household Net Worth remains fundamental to the U.S. Bubble Economy. Household Assets increased nominal $2.238 TN during Q3 to a record $124.934 TN. Household Assets increased $8.810 TN (7.6%) over the past year. Household Liabilities gained $167 billion during the quarter ($539bn y-o-y) to a record $15.895 TN.
Household Net Worth (Assets less Liabilities) expanded $2.070 TN during the quarter ($8.271 TN y-o-y) to a record $109.039 TN. It’s worth noting that Net Worth surged $15.795 TN, or 16.9%, over two years (Assets up $16.810 TN, or 15.5%, less Liabilities up $1.015 TN, or 6.8%). Household Net Worth ended the quarter at a record 528% of GDP, up from the year ago 514% and Q3 2016’s 498%. Household Net Worth to GDP set previous cycle peaks at 484% (Q1 ‘07) and 435% (Q4 ‘99).
Still, most would dismissively ask, where’s the Bubble? Well, Household Net Worth has inflated $50 TN (85%) since the end of 2008, which certainly has supported elevated confidence, spending and economic activity. And it’s clear that booming securities markets have been integral to the record expansion in Household perceived wealth. So, what have been the driving forces behind bubbling markets?
Rest of World (ROW) holdings of U.S. Financial Assets jumped nominal $558 billion during Q3 to a record $28.087 TN. ROW holdings were up $1.598 TN over the past year and $3.830 TN over seven quarters. ROW holdings increased to a record 136% of GDP, up from 100% ($14.646 TN) to end 2007 and 57% ($5.639 TN) to conclude 1999. Where in the world has all this “money” been coming from? Sustainable? Reversible?
ROW holdings of U.S. Debt Securities increased nominal $44 billion during Q3 to $11.218 TN, following contractions in Q2 (nominal -$113bn) and Q1 (nominal -$120bn). Treasury holdings added nominal $11 billion and Agencies $20 billion. U.S. Corporate Bonds gained nominal $13 billion. In contrast, ROW holdings of Total U.S. Equities (Corporate Equities and Mutual Fund Shares) jumped nominal $529 billion during the quarter and $1.426 TN over the past year – to a record $8.343 TN (vs. previous cycle peak $3.225 TN in Q4 ’07).
The jump in Equities holdings masks a pivotal slowdown in ROW purchases of U.S. Debt Securities. Though purchases were positive during Q3, ROW holdings of U.S. Debt Securities actually contracted nominal $190 billion during the first three quarters of 2018. This contraction in ROW U.S. Debt Securities holdings is in stark contrast to 2017’s gain of $747 billion and the $324 billion increase in 2016.
The y-t-d contraction in ROW U.S. Debt Securities is largely explained by a $174 billion contraction in U.S. Corporate Bonds. To put this into perspective, ROW increased Corporate Bond holdings by $442 billion in 2017 and $348 billion in 2016. Indeed, ROW U.S. Corporate Bond holdings surged $1.383 TN in the six years 2012 through 2017. It’s worth noting as well that after increasing $282 billion in 2017, ROW Treasury holdings contracted $62 billion in the first three quarters of 2018.
I would posit that tightening global finance – in particular, the de-risking/deleveraging dynamic that took hold in the speculator community – contributed to waning international demand for U.S. Corporate Bonds. At the same time, EM outflows and pressure on EM central banks to support faltering currencies led to sharply lower international demand for Treasuries (not to mention geopolitical frictions). Overall, it points to an important inflection point in international financial flows into U.S. securities markets. For much of the year, major flows into outperforming U.S. equities helped to conceal adverse repercussions. With U.S. equities succumbing to de-risking/deleveraging, markets generally will now confront momentous changes in the liquidity backdrop.
If the market liquidity environment has indeed transitioned, the lackluster growth in U.S. Bank credit now becomes a more pressing issue. Bank (“Private Depository Institutions”) Loans expanded nominal $96.5 billion during Q3, down from Q2’s $174 billion and Q3 2017’s $112 billion. On a SAAR basis, Bank Loans increased $393 billion during Q3 (only two weaker quarters in the past five years). Mortgage loans expanded SAAR $153 billion, the slowest growth in four years, and down from Q2’s SAAR $193 billion, Q1’s SAAR $204 billion, and Q4 ‘17’s SAAR $224 billion. Bank’s Consumer Credit continued to swell, expanding SAAR $127 billion. Non-mortgage and consumer Loans “Not Elsewhere Classified” expanded SAAR $114 billion, a notable drop from Q2’s SAAR $279 billion.
Security Broker/Dealer holdings increased nominal $56 billion to $3.194 TN, up from Q2’s $47 billion increase and the strongest growth since Q2 ’17. Most of the gain was explained by increases in Security Repurchase Agreements and Miscellaneous Assets. Debt Securities holdings actually contracted nominal $11 billion (Treasuries down $30bn).
The confluence of the powerful global tightening of financial conditions, a significant decline in ROW debt purchases, the slowdown in bank lending and the now tenuous backdrop in the equities marketplace creates an extraordinarily fragile backdrop. Moreover, the current quarter has experienced a sharp slowdown in junk bond issuance and leveraged lending. What’s more, significant deleveraging has commenced in U.S. equities. Overall, it points to a troubling liquidity backdrop for both the markets and the U.S. economy, more generally.
I’ll add that “Periphery to Core Crisis Dynamics” are coming home to roost. Keep in mind that the initial faltering Global Bubble phase – de-risking/deleveraging at the “Periphery” – worked to exacerbated flows to - and speculative excess at - the “Core.” The huge increase in ROW Equities holdings is emblematic of speculative “blow-off” dynamics right in the face of rapidly deteriorating fundamental prospects. It recalls heightened systemic fragilities created by dysfunctional market dynamics in early-2000 and, even more so, in the second-half of 2007.
At this point, I’ll posit a (not unlikely) possible scenario. De-risking/deleveraging exposes problematic underlying speculative leverage in both equities and corporate Credit. A sharp tightening of corporate Credit conditions weighs on debt issuance and business borrowing more generally. Tighter finance and sinking equities prices engender some reassessment regarding the rationale for aggressive stock buyback programs. Further weighing on inflated market valuations, the rapidly deteriorating backdrop will also provoke some overdue rethink on the M&A front.
Meanwhile, the vast chasm between elevated consumer confidence and fading economic prospects will have to narrow. Household Net Worth has inflated $20 TN, or about 100% of GDP, in just the past three years ($50 TN since the end of ’08!). This surge in perceived wealth spurred consumption and boosted auto and home purchases (along with boats, campers, timeshares, cruises, etc.) After stoking discretionary and luxury spending, it’s reasonable to begin anticipating a problematic change in spending patterns.
There are many aspects of the unfolding downturn that go unappreciated. I worry about deep economic structural maladjustment. How many thousands of uneconomic enterprises have propagated from all the easy finance and surging asset prices? I have deep concern for Silicon Valley. If the unfolding trade and cold war with China wasn’t enough, they’re about to get the rug pulled out from under them by the financial markets. How much perceived wealth will be lost in a bursting Bubble of inflated technology shares and private business equity, compounded by a deflating Bubble in wildly inflated real estate prices surrounding the tech hubs? I fear a complete lack of understanding and preparation.
It’s difficult not to see the arrest of a top Huawei executive on the same day as the Trump/Xi summit as an ominous development. The CFO and daughter of the founder of one of China’s most powerful international technology conglomerates faces fraud charges and possible extradition to the U.S. In China, outrage. Sure, there was a weird level of ambiguity regarding the true gains from Saturday’s U.S./China trade meeting. But to see global markets convulse on the arrest of a Chinese executive rather starkly illuminates the acute fragilities the world now confronts.
Ten-year Treasury yields dropped 14 bps this week to 2.85%. German bund yields fell six bps to 0.25%. Not to be outdone, 10-year Japanese JGB yields declined three bps to 0.06%. No signs of confidence in the soundness of the global financial system from those three. Safe havens showed a pulse this week. Gold jumped $26 to an almost five-month high $1,248. The Japanese yen gained 0.8% and the Swiss franc increased 0.6%.
It was curious to see the U.S. dollar under some selling pressure (dollar index down 0.7% this week). But, then again… If our asset markets (i.e. stocks, fixed-income, real estate…) are as vulnerable as I believe and the American economy as maladjusted, there’s a credible bear case against the U.S. currency to ponder. We’ve certainly done our level best to swamp the world with dollars over recent decades.
A dollar break would really catch the speculator community (and investors) positioned poorly. It’s reached the point that NOTHING can be taken for granted in these chaotic financial markets. Which portends something really important: ongoing pressure to de-risk and deleverage. Why do I have the feeling I’ll be using Q3 2018 Z.1 data for Household Net Worth (along with both Equities and Total Securities to GDP, etc.) as THE Cycle Peak for years (decades?) to come?
For the Week:
The S&P500 sank 4.6% (down 1.5% y-t-d), and the Dow fell 4.5% (down 1.3%). The Utilities gained 1.2% (up 5.6%). The Banks sank 8.2% (down 12.6%), and the Broker/Dealers were hit 6.0% (down 6.9%). The Transports were hammered 8.0% (down 6.2%). The S&P 400 Midcaps dropped 5.2% (down 6.3%), and the small cap Russell 2000 fell 5.6% (down 5.7%). The Nasdaq100 dropped 4.8% (up 3.4%). The Semiconductors lost 6.6% (down 7.6%). The Biotechs fell 6.0% (up 5.8%). With bullion jumping $26, the HUI gold index rallied 6.1% (down 20%).
Three-month Treasury bill rates ended the week at 2.34%. Two-year government yields declined seven bps to 2.71% (up 83bps y-t-d). Five-year T-note yields dropped 12 bps to 2.69% (up 48bps). Ten-year Treasury yields sank 14 bps to 2.85% (up 44bps). Long bond yields fell 15 bps to 3.14% (up 40bps). Benchmark Fannie Mae MBS yields sank 15 bps to 3.71% (up 71bps).
Greek 10-year yields declined four bps to 4.21% (up 14bps y-t-d). Ten-year Portuguese yields dipped three bps to 1.80% (down 14bps). Italian 10-year yields dropped eight bps to 3.13% (up 112bps). Spain's 10-year yields declined five bps to 1.45% (down 12bps). German bund yields fell six bps to 0.25% (down 18bps). French yields were unchanged at 0.69% (down 10bps). The French to German 10-year bond spread widened six to 44 bps. U.K. 10-year gilt yields sank 10 bps to 1.27% (up 8bps). U.K.'s FTSE equities index fell 2.9% (down 11.8%).
Japan's Nikkei 225 equities index dropped 3.0% (down 4.8% y-t-d). Japanese 10-year "JGB" yields declined three bps to 0.06% (up 1bp). France's CAC40 sank 3.8% (down 9.4%). The German DAX equities index dropped 4.2% (down 16.5%). Spain's IBEX 35 equities index lost 2.9% (down 12.2%). Italy's FTSE MIB index declined 2.3% (down 14.2%). EM equities generally outperformed "developed" markets. Brazil's Bovespa index declined 1.6% (up 15.3%), while Mexico's Bolsa recovered 0.3% (down 15.2%). South Korea's Kospi index fell 1.0% (down 15.9%). India's Sensex equities index slipped 1.4% (up 4.7%). China's Shanghai Exchange gained 0.7% (down 21.2%). Turkey's Borsa Istanbul National 100 index fell 1.8% (down 18.8%). Russia's MICEX equities index rose 1.6% (up 15.2%).
Investment-grade bond funds saw outflows of $1.268 billion, and junk bond funds posted outflows of $829 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates fell six bps to 4.75% (up 81bps y-o-y). Fifteen-year rates declined four bps to 4.21% (up 85bps). Five-year hybrid ARM rates fell five bps to 4.07% (up 72bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down eight bps to 4.60% (up 45bps).
Federal Reserve Credit last week declined $16.1bn to $4.048 TN. Over the past year, Fed Credit contracted $349bn, or 7.9%. Fed Credit inflated $1.237 TN, or 44%, over the past 317 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $2.1bn last week to $3.404 TN. "Custody holdings" were up $13.8bn y-o-y, or 0.4%.
M2 (narrow) "money" supply rose $19.8bn last week to a record $14.334 TN. "Narrow money" gained $523bn, or 3.8%, over the past year. For the week, Currency increased $1.4bn. Total Checkable Deposits were little changed, while Savings Deposits gained $13.1bn. Small Time Deposits added $2.2bn. Retail Money Funds increased $3.4bn.
Total money market fund assets dropped $34.5bn to $2.909 TN. Money Funds gained $102bn y-o-y, or 3.6%.
Total Commercial Paper fell $15.5bn to $1.075 TN. CP rose $22.5bn y-o-y, or 2.1%.
Currency Watch:
The U.S. dollar index declined 0.7% to 96.514 (up 4.8% y-t-d). For the week on the upside, the Norwegian krone increased 1.3%, the Japanese yen 0.8%, the Swedish krona 0.7%, the Swiss franc 0.6%, the euro 0.6%, the Mexican peso 0.5%, the Singapore dollar 0.2% and the South Korean won 0.1%. For the week on the downside, the South African rand declined 2.1%, the Australian dollar 1.3%, the Brazilian real 1.1%, the Canadian dollar 0.2%, the British pound 0.2% and the New Zealand dollar 0.1%. The Chinese renminbi rallied 1.25% versus the dollar this week (down 5.35% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index rallied 2.0% (down 5.9% y-t-d). Spot Gold surged $26 to $1,248 (down 4.2%). Silver jumped 3.1% to $14.696 (down 14.3%). Crude recovered $1.89 to $52.61 (down 13%). Gasoline surged 6.2% (down 17%), while Natural Gas fell 3.3% (up 52%). Copper declined 1.2% (down 16%). Wheat jumped 3.0% (up 24%). Corn gained 2.1% (up 10%).
Market Dislocation Watch:
December 4 – Bloomberg (Stephen Spratt and Edward Bolingbroke): “The rally in Treasuries went into overdrive Tuesday, threatening to upend the legion of investors who are betting against longer-maturity bonds. Thirty-year futures rose as much as 2 15/32 and outperformed on the curve, sending yields plunging as much as 12 bps. Open interest in the contract dropped for a fourth day Monday, suggesting traders who had taken bearish directional bets were already feeling the jitters before the latest plunge in stocks.”
December 6 – Bloomberg (Marcus Ashworth): “Falling yields on German government debt is the sign of a classic ‘risk-off’ mentality. As fear grows, investors plump for safety. But where’s the crisis in Europe? Yields on 10-year bunds have fallen steadily by 30 bps in the past two months. And German notes out to eight years are now in negative territory.”
December 5 – Bloomberg (Katherine Burton and Hema Parmar): “Billionaires Ken Griffin, Izzy Englander and Steve Cohen posted monthly losses in November that rank among their worst ever as stock hedge funds dumped holdings at a rate not seen since the financial crisis. Griffin’s Citadel lost about 3% last month, its poorest showing since the first quarter of 2016. Englander’s Millennium Management slid 2.8%, its third-worst month on record. Cohen’s Point72 Asset Management dropped about 5%, largely wiping out its 2018 gains… These firms market themselves as steady money makers because their stock managers tend to run portfolios with a roughly equal weighting of longs and shorts, or small net exposure in either a bullish or bearish direction… To control risk, individual portfolio managers are typically forced to sell positions after relatively small losses. To make money under those constraints, the firms employ heavy leverage. Citadel, Point72 and Millennium together hold less than $100 billion in net assets, but that sum swells to almost half a trillion dollars when borrowed money is included.”
November 30 – Financial Times (Adam Samson and Robin Wigglesworth): “Investors pulled more than $5bn from funds investing in corporate bonds in the past week, as the credit market heads for its worst year since the financial crisis a decade ago and concerns mount over the outlook for 2019.”
December 5 – Bloomberg (Elena Popina): “Market statisticians are falling over each other in 2018 to describe the pain being felt across asset classes. One venerable shop frames it this way: Things haven’t been this bad since Richard Nixon’s presidency. Ned Davis Research puts markets into eight big asset classes — everything from bonds to U.S. and international stocks to commodities. And not a single one of them is on track to post a return this year of more than 5%, a phenomenon last observed in 1972, according to Ed Clissold, a strategist at the firm.”
Trump Administration Watch:
December 2 – CNBC (David Reid): “President Donald Trump has told reporters on Air Force One that a trade deal brokered with China is one of the largest ever made. After meeting at the G-20 summit in Argentina, Trump and Chinese President Xi Jinping have agreed a temporary stop to their bilateral trade disagreement, striking a deal to hold off on any additional tariffs on each other’s goods after January 1. ‘It’s an incredible deal. It goes down, certainly, if it happens, it goes down as one of the largest deals ever made,’ Trump said…”
December 5 – Bloomberg (Editorial Board): “On the same day Donald Trump and Xi Jinping struck a trade war truce in Argentina, some 7,000 miles away Canadian authorities made an arrest that now threatens to make the U.S.-China conflict much worse. The U.S. is seeking the extradition of Wanzhou Meng, chief financial officer of Huawei Technologies Co., after convincing Canada to arrest her on Dec. 1. Canada confirmed she was in custody shortly after the Globe and Mail reported she had been arrested in connection with violating sanctions against Iran. China promptly reacted with outrage after the news broke, demanding that both countries move to free Meng. Later, the foreign ministry said it was waiting for details on why she was arrested, and said trade talks should continue.”
December 5 – CNBC (Huileng Tan): “The arrest of Huawei’s global chief financial officer in Canada, reportedly related to a violation of U.S. sanctions, will corrode trade negotiations between Washington and Beijing, risk consultancy Eurasia Group said… ‘Beijing is likely to react angrily to this latest arrest of a Chinese citizen in a third country for violating U.S. law,’ Eurasia analysts wrote. In fact, Global Times — a hyper-nationalistic tabloid tied to the Chinese Communist Party — responded to the arrest by posting on Twitter a statement about trade war escalation it attributed to an expert ‘close to the Chinese Ministry of Commerce.’ ‘China should be fully prepared for an escalation in the #tradewar with the US, as the US will not ease its stance on China, and the recent arrest of the senior executive of #Huawei is a vivid example,’ said the statement, paired with a photo of opposing fists with Chinese and American flags superimposed upon them.”
December 3 – Reuters (David Lawder): “U.S. Trade Representative Robert Lighthizer will lead negotiations with China over tariffs, market access and structural changes to intellectual property practices over the next 90 days…, potentially signaling a harder U.S. line… Lighthizer leading the talks marks a shift from the administration’s previous approach to China trade talks that had been largely led by U.S. Treasury Secretary Steven Mnuchin. Lighthizer, an experienced trade negotiator and having just completed a new agreement with Canada and Mexico, is one of the administration’s most vocal China critics.”
December 2 – CNBC (Evelyn Cheng): “While both the U.S. and China called this weekend’s meeting on trade very successful, many Chinese-language state media left out references to a 90-day condition for both sides to agree on issues such as technology transfer. While it’s typical for there to be some daylight between governments’ spin about bilateral meetings, a host of differences between the Chinese and the American version of events points to a potentially challenging road ahead for any negotiations. Another apparent discrepancy comes from Chinese Foreign Minister Wang Yi, who remarked that the two countries will work toward eliminating tariffs. A White House Press Secretary statement…, for its part, did not include that point.”
December 3 – Financial Times (Courtney Weaver): “Steven Mnuchin… has warned China to avoid ‘soft commitments’ in a new round of trade talks expected to follow a ceasefire deal reached at the weekend between presidents Donald Trump and Xi Jinping. In a telephone interview with the Financial Times after the truce was sealed…, Mr Mnuchin urged Beijing to flesh out pledges made in Buenos Aires in negotiations over the next three months. ‘There’s a 100% unanimous view on our economic team that this needs to be a real agreement… These can’t be soft commitments from China. There need to be specific dates, specific action items,” he added.”
December 4 – Reuters (Doina Chiacu): “U.S. President Donald Trump on Tuesday held out the possibility of an extension of the 90-day trade truce with China but warned he would revert to tariffs if the two sides could not resolve their differences. Trump said his team of trade advisers led by China trade hawk U.S. Trade Representative Robert Lighthizer would determine whether a ‘REAL deal’ with Beijing was possible. ‘If it is, we will get it done,’ Trump wrote in a Twitter post. ‘But if not remember, I am a Tariff Man.’”
December 4 – CNBC (Yen Nee Lee): “U.S. President Donald Trump, in a Twitter post on Tuesday evening, said America is going to have a ‘REAL DEAL’ or ‘no deal at all’ with China. Trump said if the two countries cannot agree on a deal, the U.S. will proceed with ‘major Tariffs’ against Chinese products. ‘Ultimately, I believe, we will be making a deal — either now or into the future,’ the president said.”
December 4 – Bloomberg (Shawn Donnan): “President Donald Trump’s advisers are scrambling to explain a trade deal he claimed he’d struck with China to reduce tariffs on U.S. cars exported to the country -- an agreement that doesn’t exist on paper and still hasn’t been confirmed in Beijing. In the day after Trump announced the deal in a two-sentence Twitter post, the White House provided no additional information. Meanwhile, China hasn’t formulated its response because bureaucrats are awaiting the return home of President Xi Jinping, according to three officials who were briefed but declined to be named as the matter isn’t public. Questioned about the agreement on Monday, Treasury Secretary Steven Mnuchin and Trump’s top economic adviser, Larry Kudlow, dialed back expectations and added qualifiers.”
December 4 – Wall Street Journal (Vivian Salama): “Trump administration officials said they planned to take a tough stand in their 90-day trade negotiations with China or impose further tariffs, as optimism over a truce gave way to uncertainties about how the two sides could find agreement on a wide range of issues. Having emphasized last weekend the possibilities for a wide-ranging deal, President Trump and other officials switched their focus to issues they want to see addressed and the consequences of not reaching an accord in a time frame that China initially didn’t acknowledge. Mr. Trump, in a series of tweets Tuesday morning, said he expected to see China start buying more U.S. agricultural exports immediately…”
December 3 – Reuters (Jeff Mason and David Shepardson): “White House economic adviser Larry Kudlow said… the Trump administration wants to end subsidies for electric cars and other items, including renewable energy sources… ‘As a matter of our policy, we want to end all of those subsidies,’ Kudlow said. ‘And by the way, other subsidies that were imposed during the Obama administration, we are ending, whether it’s for renewables and so forth.’”
December 6 – Bloomberg (Sarah Ponczek): “Stocks go south and President Donald Trump goes quiet. Since his election, Trump has tweeted about the stock market more than 35 times. Yet since Nov. 12, his social media account has been mum on the wild vacillations in U.S. equities.”
Federal Reserve Watch:
December 3 – Bloomberg (Christopher Condon and Jeanna Smialek): “Federal Reserve Vice Chairman Richard Clarida said the U.S. central bank will defend both sides of its inflation target and cautioned investors against thinking the Fed would act to halt a sharp market decline. ‘I don’t really think of it as a useful way to describe what the current Federal Reserve is doing,’ he said… when asked about the concept of a ‘Powell Put’ in an interview with Tom Keene on Bloomberg Television.”
December 4 – MarketWatch (Greg Robb): “The U.S. economy will stay strong in 2019 and inflation will tick up above 2% and so the U.S. central bank should continue to raise interest rates gradually, New York Fed President John Williams said… ‘Given this outlook of strong growth, strong labor market and inflation near our goal and taking account all the various risks around the outlook, I do expect further gradual increases in interest rates will best sponsor a sustained economic expansion,’ Williams said… The Fed’s last policy statement used the word ‘strong’ five times in describing the U.S. economy, he noted.”
December 3 – Reuters (Howard Schneider): “Federal Reserve vice chairman Randal Quarles said the Fed’s increasing ‘data dependence’ does not mean it will react to every rise or fall in economic statistics or markets, but only to ‘significant changes in direction.’ …’We should be data dependent but not reacting to every wavering of the needle across the dial...We have described in all the communications tools a path that is pretty clear,’ Quarles said. ‘We are following a strategy and taking account of data over time as it comes in and in response to significant changes in direction.’”
December 3 – Financial Times (Courtney Weaver): “President Donald Trump was taking a ‘dangerous’ path by attacking Jay Powell and legislation might be needed to protect the Federal Reserve chairman, a bipartisan pair of US senators has warned. Republican Jeff Flake… and Democrat Chris Coons… said… that the US president could attempt to take a similar approach to Mr Powell as he did to former attorney-general Jeff Sessions, whom he sacked after the midterm elections. The pair floated the idea of legislation to preserve the Fed’s independence after Mr Trump complained that he was not being ‘accommodated’ by Mr Powell and that he was ‘unhappy’ with his selection of chairman.”
U.S. Bubble Watch:
December 6 – Financial Times (Matthew Rocco): “The US trade deficit hit its widest level in a decade in October as the nation registered a record amount of imports and a decline in exports to China. The… gap between US imports and exports grew 1.7% month-over-month to $55.5bn, the most since October 2008 and the fifth straight month of deficit expansion.”
December 5 – Reuters (Jason Lange, Howard Schneider and by Ann Saphir): “Tariff-driven price increases have spread more broadly through the U.S. economy, though on balance inflation has risen at a modest pace in most parts of the country, the Federal Reserve said… The U.S. central bank’s ‘Beige Book’ report… also said that the economy appeared to be growing modestly to moderately. While a wide range of businesses cited concerns about the effects of a trade war between the United States and China, firms continued to hire and reported bumping up benefits and pay to compete for an increasingly scarce labor pool.”
December 6 – Reuters (Lucia Mutikani): “New orders for U.S.-made goods recorded their biggest drop in more than a year in October and business spending on equipment appeared to be softening, suggesting a slowdown in activity in the manufacturing sector. Factory goods orders fell 2.1% amid a decline in demand for a range of goods…”
December 4 – Wall Street Journal (Esther Fung): “Chinese investors unloaded more than $1 billion in U.S. real estate in the third quarter, extending their recent retreat from hotels, office buildings and other foreign property under pressure from Beijing to reduce debt and curb money sent abroad… That was the second straight quarter in which Chinese were net sellers of U.S. commercial real estate. The second quarter marked the first time these investors sold more U.S. property than they bought during a quarter since 2008.”
China Watch:
December 5 – Financial Times (Tom Mitchell): “Beijing and Washington on Wednesday sought to reassure shaken financial markets their trade ceasefire could lead to a lasting peace after a global sell-off exposed widespread investor fears that a G20 deal lacked any substantive agreement. In its first comments since the weekend truce between Xi Jinping, the Chinese president, and Donald Trump, his US counterpart, China’s government said it was ‘confident’ a comprehensive agreement could be reached before a tariff freeze expires in three months. Mr Trump hailed the ‘very strong signals’ from Beijing, and sought to pin the days-long silence from Chinese leaders, which helped spook markets, to ‘their long trip, including stops’ from the G20 in Argentina. ‘Not to sound naive or anything, but I believe President Xi meant every word of what he said at our long and hopefully historic meeting,’ Mr Trump wrote on Twitter.”
December 4 – CNBC (Kate Rooney): “China is reportedly confused by the Trump administration’s version of what happened in Buenos Aires. After the key meeting between President Donald Trump and Chinese President Xi Jinping, officials from Beijing are ‘puzzled and irritated’ by the Trump administration’s behavior, The Washington Post reported…, citing a former U.S. government official who has been in contact with the Chinese officials. ‘You don’t do this with the Chinese. You don’t triumphantly proclaim all their concessions in public. It’s just madness,’ the former official, who asked for anonymity to describe confidential discussions, told the Post.”
December 3 – Financial Times (Emily Feng and Kathrin Hille): “Xi Jinping, the Chinese president, visited a memory chip plant in the city of Wuhan earlier this year. In a white lab coat, he made an unexpectedly sentimental remark, comparing a computer chip to a human heart: ‘No matter how big a person is, he or she can never be strong without a sound and strong heart’. China’s ambitions to be a leader in next-generation technology, such as artificial intelligence, rest on whether or not it can design and manufacture cutting-edge chips, and Mr Xi has pledged $150bn to build up the sector. But China’s plan has alarmed the US, and chips… have become the central battlefield in the trade war… And it is a battle in which China has a very visible Achilles heel… The $412bn global semiconductor industry rests on the shoulders of just six equipment companies, three of them US-based. Together, the companies make nearly all of the crucial hardware and software tools needed to manufacture chips, meaning an American export ban would choke off China’s access to the basic tools needed to make their latest chip designs. ‘You cannot build a semiconductor facility without using the big major equipment companies, none of which are Chinese,’ said Brett Simpson, the founder of Arete Research… ‘If you fight a war with no guns you’re going to lose. And they don’t have the guns.’”
December 2 – Financial Times (James Kynge): “One of the motivations behind China’s historic decision to open its economy 40 years ago was the need to attract foreign direct investment. Strong inflows followed and helped transform the Chinese economy. But these are now starting to be eclipsed by a newer font of capital that is surging into the country’s financial markets. The shift in focus from direct investment into factories and offices towards portfolio flows into stocks and bonds reveals much about how China is changing — and how it is starting to exert greater influence over the world’s financial system… Foreign asset managers, sovereign wealth funds and central banks have increased their total holdings of Chinese domestic stocks and bonds — denominated in renminbi — to $462.2bn at the end of September, up by $122.5bn from a year ago…”
December 5 – Bloomberg: “China’s escalating crackdown on peer-to-peer lending could hardly have come at a worse time for the country’s slumping car market. P2P platforms, many of which are likely to wind down under a Chinese plan to shrink the industry, facilitated 248 billion yuan ($36bn) of auto loans in 2017, or more than a fifth of the total… P2P auto lending dropped 20% in the first half of this year…, and may shrink even further as policy makers push small- and medium-sized operators to close.”
December 4 – Bloomberg (Anjani Trivedi): “As compelling as the $1.4 trillion pile of distressed assets in China looks, there are few reasons to think foreign investors will walk away with substantial winnings. Prices are falling again after a blockbuster 2017, when a wave of domestic institutional money pushed distressed debt values to almost 80 cents on the dollar from 30. This partly reflects new supply and partly a crackdown on the shadow-banking system that previously allowed investors to finance purchases of nonperforming loans, according to Dinny McMahon of Macro Polo… of the Paulson Institute. About 3,000 local investment funds, well versed in the ground rules of Chinese nonperforming assets, have backed off for now. Returns on distressed assets have fallen as their quality deteriorates.”
Brexit Watch:
December 4 – BBC: “Theresa May has suffered three Brexit defeats in the Commons as she set out to sell her EU deal to sceptical MPs. Ministers have agreed to publish the government’s full legal advice on the deal after MPs found them in contempt of Parliament for issuing a summary. And MPs backed calls for the Commons to have a direct say in what happens if the PM's deal is rejected next Tuesday. Mrs May said MPs had a duty to deliver on the 2016 Brexit vote and the deal on offer was an ‘honourable compromise’. She was addressing the Commons at the start of a five-day debate on her proposed agreement on the terms of the UK's withdrawal and future relations with the EU. The agreement has been endorsed by EU leaders but must also be backed by the UK Parliament if it is to come into force. MPs will decide whether to reject or accept it on Tuesday 11 December.”
December 5 – Reuters (William James and Elizabeth Piper): “Prime Minister Theresa May’s Brexit deal came under fire from allies and opponents alike on Wednesday after the government was forced to publish legal advice showing the United Kingdom could be locked indefinitely in the European Union’s orbit. After a string of humiliating parliamentary defeats for May the day before cast new doubt over her ability to get a deal approved, U.S. investment bank J.P. Morgan said the chances of Britain calling off Brexit altogether had increased.”
EM Watch:
December 1 – Reuters (Sharay Angulo and Anthony Esposito): “Veteran leftist Andres Manuel Lopez Obrador took office as Mexican president…, vowing to see off a ‘rapacious’ elite in a country struggling with corruption, chronic poverty and gang violence on the doorstep of the United States. Backed by a gigantic Mexican flag, the 65-year-old took the oath of office in the lower house of Congress, pledging to bring about a ‘radical’ rebirth of Mexico to overturn what he called a disastrous legacy of decades of ‘neo-liberal’ governments. ‘The government will no longer be a committee at the service of a rapacious minority,’ said the new president… Nor would the government, he said, be a ‘simple facilitator of pillaging, as it has been.’”
December 1 – Bloomberg (Jose Orozco): “Venezuela devalued its Dicom foreign exchange rate by more than 40% to 171.67 sovereign bolivars per dollar from 96.84 in an auction on Friday, one day after President Nicolas Maduro ordered a minimum wage increase… Maduro ordered a 150% increase in the monthly minimum wage, the sixth hike this year… Maduro has raised the minimum wage 25 times since he took office in 2013…”
Central Bank Watch:
December 4 – Reuters (Francesco Canepa and Balazs Koranyi): “European Central Bank policymakers are debating ways to wean the euro zone off years of easy money, floating ideas such as a new kind of multi-year loans and staggered increases in interest rates… The ECB will have a difficult task over the next couple of years: dialing back its unprecedented stimulus without hurting a banking sector still deeply divided along national lines. Conversations with five sources on or close to the ECB’s policymaking body showed rate-setters were beginning to come up with ideas to ease the transition, including raising only the interest rate on bank deposits at first and offering multi-year loans at floating rates on a permanent basis.”
December 4 – Bloomberg (Piotr Skolimowski and Jana Randow): “The European Central Bank shouldn’t waste any time in normalizing monetary policy if the economic situation in the euro area allows for it, according to Bundesbank President Jens Weidmann. …Weidmann warned that maintaining very loose monetary conditions carries risks and could lead to excesses in the financial system. The end of net asset purchases -- which economists expect to be announced at the ECB’s Dec. 13 meeting -- is only the first step on a long road of paring back stimulus, he said. ‘It’s clear that the next steps in normalization will depend on how the data develops,’ Weidmann said. ‘But I am convinced that we shouldn’t lose time unnecessarily.’”
Italy Watch:
December 4 – Financial Times (Kate Allen): “Italian companies and banks are on track to sell the smallest amount of debt in a year since the financial crisis, underlining how ructions in the country’s sovereign bonds have rippled out across the private sector. As the capital markets wind down into the end of the year, companies and banks domiciled in Italy have sold $77bn of bonds in 2018… That is the lowest amount raised in the first 11 months of the year since 2008 and down more than a quarter on the same period last year. This week, rating agency Standard & Poor’s warned that continued wrangling between Brussels and Rome over the budget proposed by Italy’s populist government ‘could result in higher funding costs for the private sector, including banks’ and ‘constrain banks’ progress in their recovery, which is just halfway through’.”
December 4 – Reuters (Valentina Za): “Italian Economy Minister Giovanni Tria is considering resigning once parliament approved the 2019 budget… Citing people in direct contact with the minister, Corriere said Tria had not made up his mind yet and could stay on despite his increasing isolation within the government.”
Global Bubble Watch:
December 2 – Financial Times (Kate Allen): “The amount of dollar-denominated debt sold by companies and banks has hit its lowest level in two-and-a-half years as the impact of the currency’s appreciation ripples through the bond markets. Dollar-denominated bond sales by companies and financial institutions in developed economies dipped to $1.4tn in the six months to October, down 14% on the previous six-month period to their lowest level since April 2016… Investors had previously benefited from the favourable arbitrage available by swapping the dollar back into other currencies, but the greenback’s strengthening over the course of this year has eroded its relative attractiveness, undermining bond sellers’ incentive to price in dollars.”
December 1 – Bloomberg (Raymond Colitt, Josh Wingrove and Jennifer Epstein): “Leaders of the world’s largest economies agreed the global system of rules that’s underpinned trade for decades is flawed, in a post-summit statement… that the White House quickly claimed as a win for Donald Trump’s protectionist agenda. The Group of 20 communique was the culmination of days of round-the-clock talks. Some officials said just having a statement was a good result, given intense wrangling over issues like trade, migration and climate. Still, the watered-down language suggests further tests ahead for advocates of globalization and institutions like the World Trade Organization.”
December 1 – New York Times (Peter S. Goodman): “Only a few months ago, the world’s fortunes appeared increasingly robust. For the first time since the wealth-destroying agony of the global financial crisis, every major economy was growing in unison. So much for all that. The global economy is now palpably weakening, even as most countries are still grappling with the damage from that last downturn. Many nations are mired in stagnation or sliding that way. Oil prices are falling and factory orders are diminishing… Companies are warning of disappointing profits, sending stock markets into a frenetic bout of selling that reinforces the slowdown. Germany and Japan have both contracted in recent months. China is slowing more than experts anticipated.”
December 2 – Reuters (Jonathan Cable and Leika Kihara): “Global economic prospects appear gloomy as year-end approaches after factory activity and export orders weakened in November, prompting analysts to predict no quick rebound amid persistent global trade tensions. In a sign that corporate sentiment is taking a hit from the worries over protectionism, manufacturing activity slipped in November in countries as varied as France, Germany, Indonesia and South Korea, IHS Markit Purchasing Managers’ Indexes showed…”
December 2 – Financial Times (Hudson Lockett): “A drop in new orders helped push South Korea’s manufacturing sector into contraction after just two months of expansion, according to an industry survey. The Nikkei-Markit manufacturing purchasing managers’ index for South Korea dropped to 48.6 in November…”
December 2 – Financial Times (Edward White): “A gauge of activity in Taiwan’s manufacturing sector fell to its lowest level in three years last month amid a worsening outlook for the country’s exports. The Nikkei Taiwan Manufacturing purchasing managers’ index was 48.4 in November, down from 48.7 in October…”
December 6 – Bloomberg (Edward Bolingbroke): “Aggressive bull-flattening move across the eurodollar strip produces record volumes in the December 2019 contract, surpassing previous levels reached in May. Shortly after 12pm ET, a total of 1.202 million EDZ9 contracts have changed hands vs. around 600k in EDH9, the next most traded; volumes across EDZ9 up to 12pm ET ran at around 270% of 10-day average…”
Fixed Income Bubble Watch:
December 6 – Bloomberg (Kelsey Butler, Davide Scigliuzzo and Jeannine Amodeo): “JPMorgan… sold a loan tied to the takeover of a provider of private jet flights at one of the U.S. credit market’s steepest discounts this year after struggling to unload the debt. The $210 million term loan -- to fund Vista Global Holding Ltd.’s purchase of XOJET Inc. -- had gone unsold since it was first marketed to investors in the middle of October, forcing Vista Global and its bank JPMorgan to cut the size and sweeten terms... The sale priced Tuesday at a discount of 93 cents on the dollar, down from initial talk of 99.5 cents.”
Leveraged Speculation Watch:
December 1 – Financial Times (Jennifer Thompson and Laurence Fletcher): “Buoyed by growing interest from institutional investors, 2018 was supposed to be the comeback year for hedge funds. It has not worked out that way. Stalling global equity markets, compounded by sharp sell-offs in February and October, have thrown the $3.31tn sector off course. Investors pulled a net $10.1bn from hedge funds in the year to October, according to eVestment…”
December 5 – Financial Times (Laurence Fletcher and Lindsay Fortado): “Some of the hedge fund industry’s biggest names, including Millennium Management and Steve Cohen’s Point72 Asset Management, suffered sharp losses in November, even as equity markets bounced back. While the S&P 500 index rose 2.9% last month after October’s 7.9% fall, some hedge funds fared worse in the face of wild swings in energy markets and big moves in equity market sectors such as technology… The losses cap a bruising period for hedge funds, which on average were down 4.9% this year to the end of November, according to the data group HFR.”
December 4 – Bloomberg (Bei Hu): “Last year’s boom has turned to bust for Asia-focused hedge funds. Eleven percent of funds tracked by Eurekahedge Pte. lost at least 20% in the first 10 months of the year. And almost 72% of those that posted double-digit gains in 2017 -- the best year for regional funds since 2009 -- are in the red this year. The sudden reversal of fortune is making it harder for Asian hedge funds to shake off their image as beta-chasers -- those that can only make money in a rising market. The stock-heavy nature of the industry – 64% of assets are controlled by equity-focused managers -- hasn’t helped as rising interest rates and trade and political tensions sparked widespread selloffs.”
Geopolitics Watch:
December 4 – CNBC (Amanda Macias): “Secretary of State Mike Pompeo announced… that the United States is prepared to withdraw from a crucial weapons treaty signed by the world’s two biggest nuclear powers. Pompeo offered Russia an ultimatum: come into compliance in 60 days or the United States will leave the Intermediate-Range Nuclear Forces, or INF, Treaty. Russia, Pompeo said, has developed ‘multiple battalions of the SSC-8 missiles,’ a move that falls outside of the Cold War-era arms agreement.”
December 5 – Bloomberg (Hal Brands): “Sometimes a handshake can mean quite a lot. Richard Nixon’s outstretched hand to Zhou Enlai in 1972 marked the end of a quarter-century of Chinese-American estrangement. The decidedly bro-ey handshake between Russia’s Vladimir Putin and Saudi Arabia’s Mohammad bin Salman at the G-20 summit last week was also laden with symbolism. That handshake was, no doubt, a pointed reminder to Washington that the Saudis are willing to explore other geopolitical options if the U.S. gets tough in response to the assassination of the journalist Jamal Khashoggi. Yet it was also indicative of a broader trend that is reshaping global politics. Day by day, it becomes increasingly clear that a central fault line… in world affairs is the struggle between liberal and illiberal forms of government. And as this happens, geopolitical alignments are shifting in subtle but momentous ways. In particular, the bonds between the U.S. and many of its authoritarian allies are weakening, as those countries find that they have less in common ideologically with America than with its revisionist rivals.”
December 5 – Reuters (Christopher Bing): “Hackers behind a massive breach at hotel group Marriott International Inc left clues suggesting they were working for a Chinese government intelligence gathering operation, according to sources familiar with the matter. Marriott said last week that a hack that began four years ago had exposed the records of up to 500 million customers in its Starwood hotels reservation system.”
The S&P500 sank 4.6% (down 1.5% y-t-d), and the Dow fell 4.5% (down 1.3%). The Utilities gained 1.2% (up 5.6%). The Banks sank 8.2% (down 12.6%), and the Broker/Dealers were hit 6.0% (down 6.9%). The Transports were hammered 8.0% (down 6.2%). The S&P 400 Midcaps dropped 5.2% (down 6.3%), and the small cap Russell 2000 fell 5.6% (down 5.7%). The Nasdaq100 dropped 4.8% (up 3.4%). The Semiconductors lost 6.6% (down 7.6%). The Biotechs fell 6.0% (up 5.8%). With bullion jumping $26, the HUI gold index rallied 6.1% (down 20%).
Three-month Treasury bill rates ended the week at 2.34%. Two-year government yields declined seven bps to 2.71% (up 83bps y-t-d). Five-year T-note yields dropped 12 bps to 2.69% (up 48bps). Ten-year Treasury yields sank 14 bps to 2.85% (up 44bps). Long bond yields fell 15 bps to 3.14% (up 40bps). Benchmark Fannie Mae MBS yields sank 15 bps to 3.71% (up 71bps).
Greek 10-year yields declined four bps to 4.21% (up 14bps y-t-d). Ten-year Portuguese yields dipped three bps to 1.80% (down 14bps). Italian 10-year yields dropped eight bps to 3.13% (up 112bps). Spain's 10-year yields declined five bps to 1.45% (down 12bps). German bund yields fell six bps to 0.25% (down 18bps). French yields were unchanged at 0.69% (down 10bps). The French to German 10-year bond spread widened six to 44 bps. U.K. 10-year gilt yields sank 10 bps to 1.27% (up 8bps). U.K.'s FTSE equities index fell 2.9% (down 11.8%).
Japan's Nikkei 225 equities index dropped 3.0% (down 4.8% y-t-d). Japanese 10-year "JGB" yields declined three bps to 0.06% (up 1bp). France's CAC40 sank 3.8% (down 9.4%). The German DAX equities index dropped 4.2% (down 16.5%). Spain's IBEX 35 equities index lost 2.9% (down 12.2%). Italy's FTSE MIB index declined 2.3% (down 14.2%). EM equities generally outperformed "developed" markets. Brazil's Bovespa index declined 1.6% (up 15.3%), while Mexico's Bolsa recovered 0.3% (down 15.2%). South Korea's Kospi index fell 1.0% (down 15.9%). India's Sensex equities index slipped 1.4% (up 4.7%). China's Shanghai Exchange gained 0.7% (down 21.2%). Turkey's Borsa Istanbul National 100 index fell 1.8% (down 18.8%). Russia's MICEX equities index rose 1.6% (up 15.2%).
Investment-grade bond funds saw outflows of $1.268 billion, and junk bond funds posted outflows of $829 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates fell six bps to 4.75% (up 81bps y-o-y). Fifteen-year rates declined four bps to 4.21% (up 85bps). Five-year hybrid ARM rates fell five bps to 4.07% (up 72bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down eight bps to 4.60% (up 45bps).
Federal Reserve Credit last week declined $16.1bn to $4.048 TN. Over the past year, Fed Credit contracted $349bn, or 7.9%. Fed Credit inflated $1.237 TN, or 44%, over the past 317 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $2.1bn last week to $3.404 TN. "Custody holdings" were up $13.8bn y-o-y, or 0.4%.
M2 (narrow) "money" supply rose $19.8bn last week to a record $14.334 TN. "Narrow money" gained $523bn, or 3.8%, over the past year. For the week, Currency increased $1.4bn. Total Checkable Deposits were little changed, while Savings Deposits gained $13.1bn. Small Time Deposits added $2.2bn. Retail Money Funds increased $3.4bn.
Total money market fund assets dropped $34.5bn to $2.909 TN. Money Funds gained $102bn y-o-y, or 3.6%.
Total Commercial Paper fell $15.5bn to $1.075 TN. CP rose $22.5bn y-o-y, or 2.1%.
Currency Watch:
The U.S. dollar index declined 0.7% to 96.514 (up 4.8% y-t-d). For the week on the upside, the Norwegian krone increased 1.3%, the Japanese yen 0.8%, the Swedish krona 0.7%, the Swiss franc 0.6%, the euro 0.6%, the Mexican peso 0.5%, the Singapore dollar 0.2% and the South Korean won 0.1%. For the week on the downside, the South African rand declined 2.1%, the Australian dollar 1.3%, the Brazilian real 1.1%, the Canadian dollar 0.2%, the British pound 0.2% and the New Zealand dollar 0.1%. The Chinese renminbi rallied 1.25% versus the dollar this week (down 5.35% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index rallied 2.0% (down 5.9% y-t-d). Spot Gold surged $26 to $1,248 (down 4.2%). Silver jumped 3.1% to $14.696 (down 14.3%). Crude recovered $1.89 to $52.61 (down 13%). Gasoline surged 6.2% (down 17%), while Natural Gas fell 3.3% (up 52%). Copper declined 1.2% (down 16%). Wheat jumped 3.0% (up 24%). Corn gained 2.1% (up 10%).
Market Dislocation Watch:
December 4 – Bloomberg (Stephen Spratt and Edward Bolingbroke): “The rally in Treasuries went into overdrive Tuesday, threatening to upend the legion of investors who are betting against longer-maturity bonds. Thirty-year futures rose as much as 2 15/32 and outperformed on the curve, sending yields plunging as much as 12 bps. Open interest in the contract dropped for a fourth day Monday, suggesting traders who had taken bearish directional bets were already feeling the jitters before the latest plunge in stocks.”
December 6 – Bloomberg (Marcus Ashworth): “Falling yields on German government debt is the sign of a classic ‘risk-off’ mentality. As fear grows, investors plump for safety. But where’s the crisis in Europe? Yields on 10-year bunds have fallen steadily by 30 bps in the past two months. And German notes out to eight years are now in negative territory.”
December 5 – Bloomberg (Katherine Burton and Hema Parmar): “Billionaires Ken Griffin, Izzy Englander and Steve Cohen posted monthly losses in November that rank among their worst ever as stock hedge funds dumped holdings at a rate not seen since the financial crisis. Griffin’s Citadel lost about 3% last month, its poorest showing since the first quarter of 2016. Englander’s Millennium Management slid 2.8%, its third-worst month on record. Cohen’s Point72 Asset Management dropped about 5%, largely wiping out its 2018 gains… These firms market themselves as steady money makers because their stock managers tend to run portfolios with a roughly equal weighting of longs and shorts, or small net exposure in either a bullish or bearish direction… To control risk, individual portfolio managers are typically forced to sell positions after relatively small losses. To make money under those constraints, the firms employ heavy leverage. Citadel, Point72 and Millennium together hold less than $100 billion in net assets, but that sum swells to almost half a trillion dollars when borrowed money is included.”
November 30 – Financial Times (Adam Samson and Robin Wigglesworth): “Investors pulled more than $5bn from funds investing in corporate bonds in the past week, as the credit market heads for its worst year since the financial crisis a decade ago and concerns mount over the outlook for 2019.”
December 5 – Bloomberg (Elena Popina): “Market statisticians are falling over each other in 2018 to describe the pain being felt across asset classes. One venerable shop frames it this way: Things haven’t been this bad since Richard Nixon’s presidency. Ned Davis Research puts markets into eight big asset classes — everything from bonds to U.S. and international stocks to commodities. And not a single one of them is on track to post a return this year of more than 5%, a phenomenon last observed in 1972, according to Ed Clissold, a strategist at the firm.”
Trump Administration Watch:
December 2 – CNBC (David Reid): “President Donald Trump has told reporters on Air Force One that a trade deal brokered with China is one of the largest ever made. After meeting at the G-20 summit in Argentina, Trump and Chinese President Xi Jinping have agreed a temporary stop to their bilateral trade disagreement, striking a deal to hold off on any additional tariffs on each other’s goods after January 1. ‘It’s an incredible deal. It goes down, certainly, if it happens, it goes down as one of the largest deals ever made,’ Trump said…”
December 5 – Bloomberg (Editorial Board): “On the same day Donald Trump and Xi Jinping struck a trade war truce in Argentina, some 7,000 miles away Canadian authorities made an arrest that now threatens to make the U.S.-China conflict much worse. The U.S. is seeking the extradition of Wanzhou Meng, chief financial officer of Huawei Technologies Co., after convincing Canada to arrest her on Dec. 1. Canada confirmed she was in custody shortly after the Globe and Mail reported she had been arrested in connection with violating sanctions against Iran. China promptly reacted with outrage after the news broke, demanding that both countries move to free Meng. Later, the foreign ministry said it was waiting for details on why she was arrested, and said trade talks should continue.”
December 5 – CNBC (Huileng Tan): “The arrest of Huawei’s global chief financial officer in Canada, reportedly related to a violation of U.S. sanctions, will corrode trade negotiations between Washington and Beijing, risk consultancy Eurasia Group said… ‘Beijing is likely to react angrily to this latest arrest of a Chinese citizen in a third country for violating U.S. law,’ Eurasia analysts wrote. In fact, Global Times — a hyper-nationalistic tabloid tied to the Chinese Communist Party — responded to the arrest by posting on Twitter a statement about trade war escalation it attributed to an expert ‘close to the Chinese Ministry of Commerce.’ ‘China should be fully prepared for an escalation in the #tradewar with the US, as the US will not ease its stance on China, and the recent arrest of the senior executive of #Huawei is a vivid example,’ said the statement, paired with a photo of opposing fists with Chinese and American flags superimposed upon them.”
December 3 – Reuters (David Lawder): “U.S. Trade Representative Robert Lighthizer will lead negotiations with China over tariffs, market access and structural changes to intellectual property practices over the next 90 days…, potentially signaling a harder U.S. line… Lighthizer leading the talks marks a shift from the administration’s previous approach to China trade talks that had been largely led by U.S. Treasury Secretary Steven Mnuchin. Lighthizer, an experienced trade negotiator and having just completed a new agreement with Canada and Mexico, is one of the administration’s most vocal China critics.”
December 2 – CNBC (Evelyn Cheng): “While both the U.S. and China called this weekend’s meeting on trade very successful, many Chinese-language state media left out references to a 90-day condition for both sides to agree on issues such as technology transfer. While it’s typical for there to be some daylight between governments’ spin about bilateral meetings, a host of differences between the Chinese and the American version of events points to a potentially challenging road ahead for any negotiations. Another apparent discrepancy comes from Chinese Foreign Minister Wang Yi, who remarked that the two countries will work toward eliminating tariffs. A White House Press Secretary statement…, for its part, did not include that point.”
December 3 – Financial Times (Courtney Weaver): “Steven Mnuchin… has warned China to avoid ‘soft commitments’ in a new round of trade talks expected to follow a ceasefire deal reached at the weekend between presidents Donald Trump and Xi Jinping. In a telephone interview with the Financial Times after the truce was sealed…, Mr Mnuchin urged Beijing to flesh out pledges made in Buenos Aires in negotiations over the next three months. ‘There’s a 100% unanimous view on our economic team that this needs to be a real agreement… These can’t be soft commitments from China. There need to be specific dates, specific action items,” he added.”
December 4 – Reuters (Doina Chiacu): “U.S. President Donald Trump on Tuesday held out the possibility of an extension of the 90-day trade truce with China but warned he would revert to tariffs if the two sides could not resolve their differences. Trump said his team of trade advisers led by China trade hawk U.S. Trade Representative Robert Lighthizer would determine whether a ‘REAL deal’ with Beijing was possible. ‘If it is, we will get it done,’ Trump wrote in a Twitter post. ‘But if not remember, I am a Tariff Man.’”
December 4 – CNBC (Yen Nee Lee): “U.S. President Donald Trump, in a Twitter post on Tuesday evening, said America is going to have a ‘REAL DEAL’ or ‘no deal at all’ with China. Trump said if the two countries cannot agree on a deal, the U.S. will proceed with ‘major Tariffs’ against Chinese products. ‘Ultimately, I believe, we will be making a deal — either now or into the future,’ the president said.”
December 4 – Bloomberg (Shawn Donnan): “President Donald Trump’s advisers are scrambling to explain a trade deal he claimed he’d struck with China to reduce tariffs on U.S. cars exported to the country -- an agreement that doesn’t exist on paper and still hasn’t been confirmed in Beijing. In the day after Trump announced the deal in a two-sentence Twitter post, the White House provided no additional information. Meanwhile, China hasn’t formulated its response because bureaucrats are awaiting the return home of President Xi Jinping, according to three officials who were briefed but declined to be named as the matter isn’t public. Questioned about the agreement on Monday, Treasury Secretary Steven Mnuchin and Trump’s top economic adviser, Larry Kudlow, dialed back expectations and added qualifiers.”
December 4 – Wall Street Journal (Vivian Salama): “Trump administration officials said they planned to take a tough stand in their 90-day trade negotiations with China or impose further tariffs, as optimism over a truce gave way to uncertainties about how the two sides could find agreement on a wide range of issues. Having emphasized last weekend the possibilities for a wide-ranging deal, President Trump and other officials switched their focus to issues they want to see addressed and the consequences of not reaching an accord in a time frame that China initially didn’t acknowledge. Mr. Trump, in a series of tweets Tuesday morning, said he expected to see China start buying more U.S. agricultural exports immediately…”
December 3 – Reuters (Jeff Mason and David Shepardson): “White House economic adviser Larry Kudlow said… the Trump administration wants to end subsidies for electric cars and other items, including renewable energy sources… ‘As a matter of our policy, we want to end all of those subsidies,’ Kudlow said. ‘And by the way, other subsidies that were imposed during the Obama administration, we are ending, whether it’s for renewables and so forth.’”
December 6 – Bloomberg (Sarah Ponczek): “Stocks go south and President Donald Trump goes quiet. Since his election, Trump has tweeted about the stock market more than 35 times. Yet since Nov. 12, his social media account has been mum on the wild vacillations in U.S. equities.”
Federal Reserve Watch:
December 3 – Bloomberg (Christopher Condon and Jeanna Smialek): “Federal Reserve Vice Chairman Richard Clarida said the U.S. central bank will defend both sides of its inflation target and cautioned investors against thinking the Fed would act to halt a sharp market decline. ‘I don’t really think of it as a useful way to describe what the current Federal Reserve is doing,’ he said… when asked about the concept of a ‘Powell Put’ in an interview with Tom Keene on Bloomberg Television.”
December 4 – MarketWatch (Greg Robb): “The U.S. economy will stay strong in 2019 and inflation will tick up above 2% and so the U.S. central bank should continue to raise interest rates gradually, New York Fed President John Williams said… ‘Given this outlook of strong growth, strong labor market and inflation near our goal and taking account all the various risks around the outlook, I do expect further gradual increases in interest rates will best sponsor a sustained economic expansion,’ Williams said… The Fed’s last policy statement used the word ‘strong’ five times in describing the U.S. economy, he noted.”
December 3 – Reuters (Howard Schneider): “Federal Reserve vice chairman Randal Quarles said the Fed’s increasing ‘data dependence’ does not mean it will react to every rise or fall in economic statistics or markets, but only to ‘significant changes in direction.’ …’We should be data dependent but not reacting to every wavering of the needle across the dial...We have described in all the communications tools a path that is pretty clear,’ Quarles said. ‘We are following a strategy and taking account of data over time as it comes in and in response to significant changes in direction.’”
December 3 – Financial Times (Courtney Weaver): “President Donald Trump was taking a ‘dangerous’ path by attacking Jay Powell and legislation might be needed to protect the Federal Reserve chairman, a bipartisan pair of US senators has warned. Republican Jeff Flake… and Democrat Chris Coons… said… that the US president could attempt to take a similar approach to Mr Powell as he did to former attorney-general Jeff Sessions, whom he sacked after the midterm elections. The pair floated the idea of legislation to preserve the Fed’s independence after Mr Trump complained that he was not being ‘accommodated’ by Mr Powell and that he was ‘unhappy’ with his selection of chairman.”
U.S. Bubble Watch:
December 6 – Financial Times (Matthew Rocco): “The US trade deficit hit its widest level in a decade in October as the nation registered a record amount of imports and a decline in exports to China. The… gap between US imports and exports grew 1.7% month-over-month to $55.5bn, the most since October 2008 and the fifth straight month of deficit expansion.”
December 5 – Reuters (Jason Lange, Howard Schneider and by Ann Saphir): “Tariff-driven price increases have spread more broadly through the U.S. economy, though on balance inflation has risen at a modest pace in most parts of the country, the Federal Reserve said… The U.S. central bank’s ‘Beige Book’ report… also said that the economy appeared to be growing modestly to moderately. While a wide range of businesses cited concerns about the effects of a trade war between the United States and China, firms continued to hire and reported bumping up benefits and pay to compete for an increasingly scarce labor pool.”
December 6 – Reuters (Lucia Mutikani): “New orders for U.S.-made goods recorded their biggest drop in more than a year in October and business spending on equipment appeared to be softening, suggesting a slowdown in activity in the manufacturing sector. Factory goods orders fell 2.1% amid a decline in demand for a range of goods…”
December 4 – Wall Street Journal (Esther Fung): “Chinese investors unloaded more than $1 billion in U.S. real estate in the third quarter, extending their recent retreat from hotels, office buildings and other foreign property under pressure from Beijing to reduce debt and curb money sent abroad… That was the second straight quarter in which Chinese were net sellers of U.S. commercial real estate. The second quarter marked the first time these investors sold more U.S. property than they bought during a quarter since 2008.”
China Watch:
December 5 – Financial Times (Tom Mitchell): “Beijing and Washington on Wednesday sought to reassure shaken financial markets their trade ceasefire could lead to a lasting peace after a global sell-off exposed widespread investor fears that a G20 deal lacked any substantive agreement. In its first comments since the weekend truce between Xi Jinping, the Chinese president, and Donald Trump, his US counterpart, China’s government said it was ‘confident’ a comprehensive agreement could be reached before a tariff freeze expires in three months. Mr Trump hailed the ‘very strong signals’ from Beijing, and sought to pin the days-long silence from Chinese leaders, which helped spook markets, to ‘their long trip, including stops’ from the G20 in Argentina. ‘Not to sound naive or anything, but I believe President Xi meant every word of what he said at our long and hopefully historic meeting,’ Mr Trump wrote on Twitter.”
December 4 – CNBC (Kate Rooney): “China is reportedly confused by the Trump administration’s version of what happened in Buenos Aires. After the key meeting between President Donald Trump and Chinese President Xi Jinping, officials from Beijing are ‘puzzled and irritated’ by the Trump administration’s behavior, The Washington Post reported…, citing a former U.S. government official who has been in contact with the Chinese officials. ‘You don’t do this with the Chinese. You don’t triumphantly proclaim all their concessions in public. It’s just madness,’ the former official, who asked for anonymity to describe confidential discussions, told the Post.”
December 3 – Financial Times (Emily Feng and Kathrin Hille): “Xi Jinping, the Chinese president, visited a memory chip plant in the city of Wuhan earlier this year. In a white lab coat, he made an unexpectedly sentimental remark, comparing a computer chip to a human heart: ‘No matter how big a person is, he or she can never be strong without a sound and strong heart’. China’s ambitions to be a leader in next-generation technology, such as artificial intelligence, rest on whether or not it can design and manufacture cutting-edge chips, and Mr Xi has pledged $150bn to build up the sector. But China’s plan has alarmed the US, and chips… have become the central battlefield in the trade war… And it is a battle in which China has a very visible Achilles heel… The $412bn global semiconductor industry rests on the shoulders of just six equipment companies, three of them US-based. Together, the companies make nearly all of the crucial hardware and software tools needed to manufacture chips, meaning an American export ban would choke off China’s access to the basic tools needed to make their latest chip designs. ‘You cannot build a semiconductor facility without using the big major equipment companies, none of which are Chinese,’ said Brett Simpson, the founder of Arete Research… ‘If you fight a war with no guns you’re going to lose. And they don’t have the guns.’”
December 2 – Financial Times (James Kynge): “One of the motivations behind China’s historic decision to open its economy 40 years ago was the need to attract foreign direct investment. Strong inflows followed and helped transform the Chinese economy. But these are now starting to be eclipsed by a newer font of capital that is surging into the country’s financial markets. The shift in focus from direct investment into factories and offices towards portfolio flows into stocks and bonds reveals much about how China is changing — and how it is starting to exert greater influence over the world’s financial system… Foreign asset managers, sovereign wealth funds and central banks have increased their total holdings of Chinese domestic stocks and bonds — denominated in renminbi — to $462.2bn at the end of September, up by $122.5bn from a year ago…”
December 5 – Bloomberg: “China’s escalating crackdown on peer-to-peer lending could hardly have come at a worse time for the country’s slumping car market. P2P platforms, many of which are likely to wind down under a Chinese plan to shrink the industry, facilitated 248 billion yuan ($36bn) of auto loans in 2017, or more than a fifth of the total… P2P auto lending dropped 20% in the first half of this year…, and may shrink even further as policy makers push small- and medium-sized operators to close.”
December 4 – Bloomberg (Anjani Trivedi): “As compelling as the $1.4 trillion pile of distressed assets in China looks, there are few reasons to think foreign investors will walk away with substantial winnings. Prices are falling again after a blockbuster 2017, when a wave of domestic institutional money pushed distressed debt values to almost 80 cents on the dollar from 30. This partly reflects new supply and partly a crackdown on the shadow-banking system that previously allowed investors to finance purchases of nonperforming loans, according to Dinny McMahon of Macro Polo… of the Paulson Institute. About 3,000 local investment funds, well versed in the ground rules of Chinese nonperforming assets, have backed off for now. Returns on distressed assets have fallen as their quality deteriorates.”
Brexit Watch:
December 4 – BBC: “Theresa May has suffered three Brexit defeats in the Commons as she set out to sell her EU deal to sceptical MPs. Ministers have agreed to publish the government’s full legal advice on the deal after MPs found them in contempt of Parliament for issuing a summary. And MPs backed calls for the Commons to have a direct say in what happens if the PM's deal is rejected next Tuesday. Mrs May said MPs had a duty to deliver on the 2016 Brexit vote and the deal on offer was an ‘honourable compromise’. She was addressing the Commons at the start of a five-day debate on her proposed agreement on the terms of the UK's withdrawal and future relations with the EU. The agreement has been endorsed by EU leaders but must also be backed by the UK Parliament if it is to come into force. MPs will decide whether to reject or accept it on Tuesday 11 December.”
December 5 – Reuters (William James and Elizabeth Piper): “Prime Minister Theresa May’s Brexit deal came under fire from allies and opponents alike on Wednesday after the government was forced to publish legal advice showing the United Kingdom could be locked indefinitely in the European Union’s orbit. After a string of humiliating parliamentary defeats for May the day before cast new doubt over her ability to get a deal approved, U.S. investment bank J.P. Morgan said the chances of Britain calling off Brexit altogether had increased.”
EM Watch:
December 1 – Reuters (Sharay Angulo and Anthony Esposito): “Veteran leftist Andres Manuel Lopez Obrador took office as Mexican president…, vowing to see off a ‘rapacious’ elite in a country struggling with corruption, chronic poverty and gang violence on the doorstep of the United States. Backed by a gigantic Mexican flag, the 65-year-old took the oath of office in the lower house of Congress, pledging to bring about a ‘radical’ rebirth of Mexico to overturn what he called a disastrous legacy of decades of ‘neo-liberal’ governments. ‘The government will no longer be a committee at the service of a rapacious minority,’ said the new president… Nor would the government, he said, be a ‘simple facilitator of pillaging, as it has been.’”
December 1 – Bloomberg (Jose Orozco): “Venezuela devalued its Dicom foreign exchange rate by more than 40% to 171.67 sovereign bolivars per dollar from 96.84 in an auction on Friday, one day after President Nicolas Maduro ordered a minimum wage increase… Maduro ordered a 150% increase in the monthly minimum wage, the sixth hike this year… Maduro has raised the minimum wage 25 times since he took office in 2013…”
Central Bank Watch:
December 4 – Reuters (Francesco Canepa and Balazs Koranyi): “European Central Bank policymakers are debating ways to wean the euro zone off years of easy money, floating ideas such as a new kind of multi-year loans and staggered increases in interest rates… The ECB will have a difficult task over the next couple of years: dialing back its unprecedented stimulus without hurting a banking sector still deeply divided along national lines. Conversations with five sources on or close to the ECB’s policymaking body showed rate-setters were beginning to come up with ideas to ease the transition, including raising only the interest rate on bank deposits at first and offering multi-year loans at floating rates on a permanent basis.”
December 4 – Bloomberg (Piotr Skolimowski and Jana Randow): “The European Central Bank shouldn’t waste any time in normalizing monetary policy if the economic situation in the euro area allows for it, according to Bundesbank President Jens Weidmann. …Weidmann warned that maintaining very loose monetary conditions carries risks and could lead to excesses in the financial system. The end of net asset purchases -- which economists expect to be announced at the ECB’s Dec. 13 meeting -- is only the first step on a long road of paring back stimulus, he said. ‘It’s clear that the next steps in normalization will depend on how the data develops,’ Weidmann said. ‘But I am convinced that we shouldn’t lose time unnecessarily.’”
Italy Watch:
December 4 – Financial Times (Kate Allen): “Italian companies and banks are on track to sell the smallest amount of debt in a year since the financial crisis, underlining how ructions in the country’s sovereign bonds have rippled out across the private sector. As the capital markets wind down into the end of the year, companies and banks domiciled in Italy have sold $77bn of bonds in 2018… That is the lowest amount raised in the first 11 months of the year since 2008 and down more than a quarter on the same period last year. This week, rating agency Standard & Poor’s warned that continued wrangling between Brussels and Rome over the budget proposed by Italy’s populist government ‘could result in higher funding costs for the private sector, including banks’ and ‘constrain banks’ progress in their recovery, which is just halfway through’.”
December 4 – Reuters (Valentina Za): “Italian Economy Minister Giovanni Tria is considering resigning once parliament approved the 2019 budget… Citing people in direct contact with the minister, Corriere said Tria had not made up his mind yet and could stay on despite his increasing isolation within the government.”
Global Bubble Watch:
December 2 – Financial Times (Kate Allen): “The amount of dollar-denominated debt sold by companies and banks has hit its lowest level in two-and-a-half years as the impact of the currency’s appreciation ripples through the bond markets. Dollar-denominated bond sales by companies and financial institutions in developed economies dipped to $1.4tn in the six months to October, down 14% on the previous six-month period to their lowest level since April 2016… Investors had previously benefited from the favourable arbitrage available by swapping the dollar back into other currencies, but the greenback’s strengthening over the course of this year has eroded its relative attractiveness, undermining bond sellers’ incentive to price in dollars.”
December 1 – Bloomberg (Raymond Colitt, Josh Wingrove and Jennifer Epstein): “Leaders of the world’s largest economies agreed the global system of rules that’s underpinned trade for decades is flawed, in a post-summit statement… that the White House quickly claimed as a win for Donald Trump’s protectionist agenda. The Group of 20 communique was the culmination of days of round-the-clock talks. Some officials said just having a statement was a good result, given intense wrangling over issues like trade, migration and climate. Still, the watered-down language suggests further tests ahead for advocates of globalization and institutions like the World Trade Organization.”
December 1 – New York Times (Peter S. Goodman): “Only a few months ago, the world’s fortunes appeared increasingly robust. For the first time since the wealth-destroying agony of the global financial crisis, every major economy was growing in unison. So much for all that. The global economy is now palpably weakening, even as most countries are still grappling with the damage from that last downturn. Many nations are mired in stagnation or sliding that way. Oil prices are falling and factory orders are diminishing… Companies are warning of disappointing profits, sending stock markets into a frenetic bout of selling that reinforces the slowdown. Germany and Japan have both contracted in recent months. China is slowing more than experts anticipated.”
December 2 – Reuters (Jonathan Cable and Leika Kihara): “Global economic prospects appear gloomy as year-end approaches after factory activity and export orders weakened in November, prompting analysts to predict no quick rebound amid persistent global trade tensions. In a sign that corporate sentiment is taking a hit from the worries over protectionism, manufacturing activity slipped in November in countries as varied as France, Germany, Indonesia and South Korea, IHS Markit Purchasing Managers’ Indexes showed…”
December 2 – Financial Times (Hudson Lockett): “A drop in new orders helped push South Korea’s manufacturing sector into contraction after just two months of expansion, according to an industry survey. The Nikkei-Markit manufacturing purchasing managers’ index for South Korea dropped to 48.6 in November…”
December 2 – Financial Times (Edward White): “A gauge of activity in Taiwan’s manufacturing sector fell to its lowest level in three years last month amid a worsening outlook for the country’s exports. The Nikkei Taiwan Manufacturing purchasing managers’ index was 48.4 in November, down from 48.7 in October…”
December 6 – Bloomberg (Edward Bolingbroke): “Aggressive bull-flattening move across the eurodollar strip produces record volumes in the December 2019 contract, surpassing previous levels reached in May. Shortly after 12pm ET, a total of 1.202 million EDZ9 contracts have changed hands vs. around 600k in EDH9, the next most traded; volumes across EDZ9 up to 12pm ET ran at around 270% of 10-day average…”
Fixed Income Bubble Watch:
December 6 – Bloomberg (Kelsey Butler, Davide Scigliuzzo and Jeannine Amodeo): “JPMorgan… sold a loan tied to the takeover of a provider of private jet flights at one of the U.S. credit market’s steepest discounts this year after struggling to unload the debt. The $210 million term loan -- to fund Vista Global Holding Ltd.’s purchase of XOJET Inc. -- had gone unsold since it was first marketed to investors in the middle of October, forcing Vista Global and its bank JPMorgan to cut the size and sweeten terms... The sale priced Tuesday at a discount of 93 cents on the dollar, down from initial talk of 99.5 cents.”
Leveraged Speculation Watch:
December 1 – Financial Times (Jennifer Thompson and Laurence Fletcher): “Buoyed by growing interest from institutional investors, 2018 was supposed to be the comeback year for hedge funds. It has not worked out that way. Stalling global equity markets, compounded by sharp sell-offs in February and October, have thrown the $3.31tn sector off course. Investors pulled a net $10.1bn from hedge funds in the year to October, according to eVestment…”
December 5 – Financial Times (Laurence Fletcher and Lindsay Fortado): “Some of the hedge fund industry’s biggest names, including Millennium Management and Steve Cohen’s Point72 Asset Management, suffered sharp losses in November, even as equity markets bounced back. While the S&P 500 index rose 2.9% last month after October’s 7.9% fall, some hedge funds fared worse in the face of wild swings in energy markets and big moves in equity market sectors such as technology… The losses cap a bruising period for hedge funds, which on average were down 4.9% this year to the end of November, according to the data group HFR.”
December 4 – Bloomberg (Bei Hu): “Last year’s boom has turned to bust for Asia-focused hedge funds. Eleven percent of funds tracked by Eurekahedge Pte. lost at least 20% in the first 10 months of the year. And almost 72% of those that posted double-digit gains in 2017 -- the best year for regional funds since 2009 -- are in the red this year. The sudden reversal of fortune is making it harder for Asian hedge funds to shake off their image as beta-chasers -- those that can only make money in a rising market. The stock-heavy nature of the industry – 64% of assets are controlled by equity-focused managers -- hasn’t helped as rising interest rates and trade and political tensions sparked widespread selloffs.”
Geopolitics Watch:
December 4 – CNBC (Amanda Macias): “Secretary of State Mike Pompeo announced… that the United States is prepared to withdraw from a crucial weapons treaty signed by the world’s two biggest nuclear powers. Pompeo offered Russia an ultimatum: come into compliance in 60 days or the United States will leave the Intermediate-Range Nuclear Forces, or INF, Treaty. Russia, Pompeo said, has developed ‘multiple battalions of the SSC-8 missiles,’ a move that falls outside of the Cold War-era arms agreement.”
December 5 – Bloomberg (Hal Brands): “Sometimes a handshake can mean quite a lot. Richard Nixon’s outstretched hand to Zhou Enlai in 1972 marked the end of a quarter-century of Chinese-American estrangement. The decidedly bro-ey handshake between Russia’s Vladimir Putin and Saudi Arabia’s Mohammad bin Salman at the G-20 summit last week was also laden with symbolism. That handshake was, no doubt, a pointed reminder to Washington that the Saudis are willing to explore other geopolitical options if the U.S. gets tough in response to the assassination of the journalist Jamal Khashoggi. Yet it was also indicative of a broader trend that is reshaping global politics. Day by day, it becomes increasingly clear that a central fault line… in world affairs is the struggle between liberal and illiberal forms of government. And as this happens, geopolitical alignments are shifting in subtle but momentous ways. In particular, the bonds between the U.S. and many of its authoritarian allies are weakening, as those countries find that they have less in common ideologically with America than with its revisionist rivals.”
December 5 – Reuters (Christopher Bing): “Hackers behind a massive breach at hotel group Marriott International Inc left clues suggesting they were working for a Chinese government intelligence gathering operation, according to sources familiar with the matter. Marriott said last week that a hack that began four years ago had exposed the records of up to 500 million customers in its Starwood hotels reservation system.”
Friday Evening Links
[BloombergQ] U.S. Stocks Tumble With Tech Sinking on Trade Woes: Markets Wrap
[Reuters] Gold hits 5-month peak as U.S. jobs data tempers rate hike views
[CNBC] Huawei executive’s arrest puts more pressure on Trump and Xi as they grapple over the global order
[Reuters] Fed policymakers signal turning point on U.S. rate-hike path
[BloombergQ] Kudlow Says He Expects Fed Pause for ‘Quite Some Time’ After December Hike
[Reuters] Trump praises China talks; aides downplay friction over Huawei arrest
[Reuters] As Brexit crunch nears, campaign for new referendum gathers pace
[WSJ] American Entrepreneurs Who Flocked to China Are Heading Home, Disillusioned
[Reuters] Gold hits 5-month peak as U.S. jobs data tempers rate hike views
[CNBC] Huawei executive’s arrest puts more pressure on Trump and Xi as they grapple over the global order
[Reuters] Fed policymakers signal turning point on U.S. rate-hike path
[BloombergQ] Kudlow Says He Expects Fed Pause for ‘Quite Some Time’ After December Hike
[Reuters] Trump praises China talks; aides downplay friction over Huawei arrest
[Reuters] As Brexit crunch nears, campaign for new referendum gathers pace
[WSJ] American Entrepreneurs Who Flocked to China Are Heading Home, Disillusioned
Thursday, December 6, 2018
Friday's News Links
[Reuters] Tech stocks pull Wall St. lower, offseting jobs data bump
[BloombergQ] Oil Rises as Much as 5.4 Percent as OPEC+ Is Said to Agree Cuts
[Reuters] U.S. job growth slows; monthly wage gains miss expectations
[Reuters] Huawei CFO to appear in Canada court as Chinese media slam arrest
[SCMP] China separates arrest of Huawei executive Sabrina Meng Wanzhou from US trade talks
[BloombergQ] China State Media Calls Huawei Arrest a ‘Despicable Rogue’ Act
[BloombergQ] Powell Says U.S. Labor Market ‘Very Strong’ by Many Measures
[Reuters] Tariffs have hit confidence, to slow US economy, says Fed’s Williams
[Reuters] Japan said to plan to bar Huawei, ZTE from government procurement contracts
[BloombergQ] China Needs Bailout, Capital Plans for Crisis Event: PBOC's Ma
[Reuters] China should tolerate bigger budget deficit in 2019 to boost economy: state media
[BloombergQ] Biggest Worry for Traders? They Don't Know Why Stocks Are Moving
[NYT] With the Economy Uncertain, Tech ‘Unicorns’ Rush Toward I.P.O.
[WSJ] U.S. Companies Feel the Pinch as Tariff Costs Start to Mount
[WSJ] U.S. Takes Aim at Huawei
[WSJ] Bear Markets March Across the Globe
[FT] The America hawks circling Beijing
[FT] Chinese and US executives worry after Huawei CFO’s arrest
[BloombergQ] Oil Rises as Much as 5.4 Percent as OPEC+ Is Said to Agree Cuts
[Reuters] U.S. job growth slows; monthly wage gains miss expectations
[Reuters] Huawei CFO to appear in Canada court as Chinese media slam arrest
[SCMP] China separates arrest of Huawei executive Sabrina Meng Wanzhou from US trade talks
[BloombergQ] China State Media Calls Huawei Arrest a ‘Despicable Rogue’ Act
[BloombergQ] Powell Says U.S. Labor Market ‘Very Strong’ by Many Measures
[Reuters] Tariffs have hit confidence, to slow US economy, says Fed’s Williams
[Reuters] Japan said to plan to bar Huawei, ZTE from government procurement contracts
[BloombergQ] China Needs Bailout, Capital Plans for Crisis Event: PBOC's Ma
[Reuters] China should tolerate bigger budget deficit in 2019 to boost economy: state media
[BloombergQ] Biggest Worry for Traders? They Don't Know Why Stocks Are Moving
[NYT] With the Economy Uncertain, Tech ‘Unicorns’ Rush Toward I.P.O.
[WSJ] U.S. Companies Feel the Pinch as Tariff Costs Start to Mount
[WSJ] U.S. Takes Aim at Huawei
[WSJ] Bear Markets March Across the Globe
[FT] The America hawks circling Beijing
[FT] Chinese and US executives worry after Huawei CFO’s arrest
Thursday Evening Links
[Reuters] Battered Asia shares try to rally on talk of Fed pause
[Reuters] S&P 500, Dow slip on trade worries, but end off of lows
[CNBC] 10-year Treasury yield falls to 2.83% amid stock sell-off, was above 3% at the start of the week
[Reuters] Oil dives 4 percent after OPEC delays output decision
[BloombergQ] U.S. Said to Seek Extradition in China Crackdown: Huawei Update
[Reuters] U.S. household net worth rises to $109 trillion ahead of stock rout
[Reuters] U.S. fund investors pull most cash from bonds in five weeks: Lipper
[BloombergQ] Traders Starting to Doubt Fed Will Raise Rates Even Once in 2019
[CNBC] The market is tanking this week: Here’s what you need to know
[BloombergQ] Something Weird Is Going on With German Debt
[BloombergQ] Hedge Funds Pivot Back to Stocks, Raising Leverage From 2018 Low
[BloombergQ] Trump Hasn’t Tweeted About the Stock Market Since Nov. 12
[WSJ] Fed Weighs Wait-and-See Approach on Future Rate Increases
[WSJ] Senior Huawei Executive’s Arrest Steps Up U.S.-China Confrontation
[WSJ] House Passes Temporary Spending Bill
[FT] China and the US: trade war or cold war?
[FT] US trade deficit at widest level in 10 years
[FT] China demands release of Huawei CFO held on US charges
[Reuters] S&P 500, Dow slip on trade worries, but end off of lows
[CNBC] 10-year Treasury yield falls to 2.83% amid stock sell-off, was above 3% at the start of the week
[Reuters] Oil dives 4 percent after OPEC delays output decision
[BloombergQ] U.S. Said to Seek Extradition in China Crackdown: Huawei Update
[Reuters] U.S. household net worth rises to $109 trillion ahead of stock rout
[Reuters] U.S. fund investors pull most cash from bonds in five weeks: Lipper
[BloombergQ] Traders Starting to Doubt Fed Will Raise Rates Even Once in 2019
[CNBC] The market is tanking this week: Here’s what you need to know
[BloombergQ] Something Weird Is Going on With German Debt
[BloombergQ] Hedge Funds Pivot Back to Stocks, Raising Leverage From 2018 Low
[BloombergQ] Trump Hasn’t Tweeted About the Stock Market Since Nov. 12
[WSJ] Fed Weighs Wait-and-See Approach on Future Rate Increases
[WSJ] Senior Huawei Executive’s Arrest Steps Up U.S.-China Confrontation
[WSJ] House Passes Temporary Spending Bill
[FT] China and the US: trade war or cold war?
[FT] US trade deficit at widest level in 10 years
[FT] China demands release of Huawei CFO held on US charges
Wednesday, December 5, 2018
Thursday's News Links
[BloombergQ] Stocks Rout Deepens With Banks Leading Latest Drop: Markets Wrap
[BloombergQ] China Stocks Slump as Huawei Shakes Sentiment, Drugmakers Plunge
[CNBC] Oil prices slide 3% as OPEC is seen cutting output less than expected
[Reuters] Treasuries-U.S. yields hold near 3-month lows after ADP U.S. jobs data
[BloombergQ] ‘Shocking’ Huawei Arrest Threatens to Upend Trump-Xi Trade Truce
[CNBC] International trade deficit surges to highest in a decade as imports rise, US exports drop
[Reuters] U.S. factory orders post largest drop in more than a year
[CNBC] Arrest of Huawei CFO shows ‘the gloves are now fully off,’ says Eurasia Group
[Reuters] OPEC agrees tentative oil cut, waits for Russia to commit
[BloombergQ] China Lending Crackdown Deals Blow to World's Biggest Car Market
[BloombergQ] Putin’s Saudi Bromance Is Part of a Bigger Plan
[NYT] Arrest Shakes Huawei as Global Skepticism of Its Business Grows
[WSJ] The Trouble With Huawei Will Spread
[WSJ] Fed Chairman Jerome Powell Draws Congressional Support, Even as Trump Bashes Him
[FT] Hedge fund industry’s big guns misfired in November
[BloombergSub] China Outraged at Arrest of Huawei CFO in Canada After U.S. Request
[BloombergQ] China Stocks Slump as Huawei Shakes Sentiment, Drugmakers Plunge
[CNBC] Oil prices slide 3% as OPEC is seen cutting output less than expected
[Reuters] Treasuries-U.S. yields hold near 3-month lows after ADP U.S. jobs data
[BloombergQ] ‘Shocking’ Huawei Arrest Threatens to Upend Trump-Xi Trade Truce
[CNBC] International trade deficit surges to highest in a decade as imports rise, US exports drop
[Reuters] U.S. factory orders post largest drop in more than a year
[CNBC] Arrest of Huawei CFO shows ‘the gloves are now fully off,’ says Eurasia Group
[Reuters] OPEC agrees tentative oil cut, waits for Russia to commit
[BloombergQ] China Lending Crackdown Deals Blow to World's Biggest Car Market
[BloombergQ] Putin’s Saudi Bromance Is Part of a Bigger Plan
[NYT] Arrest Shakes Huawei as Global Skepticism of Its Business Grows
[WSJ] The Trouble With Huawei Will Spread
[WSJ] Fed Chairman Jerome Powell Draws Congressional Support, Even as Trump Bashes Him
[FT] Hedge fund industry’s big guns misfired in November
[BloombergSub] China Outraged at Arrest of Huawei CFO in Canada After U.S. Request
Wednesday Evening Links
[Reuters] U.S. stock futures fall, Asia follows after Canada arrests Huawei CFO
[Reuters] Canada arrests Huawei CFO facing US extradition for allegedly violating Iran sanctions
[Axios] After Huawei arrest, experts say China could retaliate
[Reuters] China top diplomat says Trump-Xi Argentina summit 'friendly and candid'
[BloombergQ] Stock Rout Eases on Trade Pledge; Pound Advances: Markets Wrap
[Reuters] Tariff effects broaden across U.S., wage growth higher: Fed
[Reuters] May's Brexit deal under fire as legal advice stiffens opposition
[Reuters] Mexico's Lopez Obrador throws down gauntlet to oil majors
[Reuters] Exclusive: Clues in Marriott hack implicate China - sources
[WSJ] Canadian Authorities Arrest CFO of Huawei Technologies at U.S. Request
[FT] Beijing and US try to rebuild trust in trade ceasefire
[Reuters] Canada arrests Huawei CFO facing US extradition for allegedly violating Iran sanctions
[Axios] After Huawei arrest, experts say China could retaliate
[Reuters] China top diplomat says Trump-Xi Argentina summit 'friendly and candid'
[BloombergQ] Stock Rout Eases on Trade Pledge; Pound Advances: Markets Wrap
[Reuters] Tariff effects broaden across U.S., wage growth higher: Fed
[Reuters] May's Brexit deal under fire as legal advice stiffens opposition
[Reuters] Mexico's Lopez Obrador throws down gauntlet to oil majors
[Reuters] Exclusive: Clues in Marriott hack implicate China - sources
[WSJ] Canadian Authorities Arrest CFO of Huawei Technologies at U.S. Request
[FT] Beijing and US try to rebuild trust in trade ceasefire
Tuesday, December 4, 2018
Wednesday's News Links
[Reuters] World stocks sideswiped by Wall Street, U.S. yield curve double whammy
[BloombergQ] Offshore China Stocks Retreat as Trade Doubts Return; Bonds Rise
[Reuters] Oil prices skid with global stock markets; U.S. supply swells
[Reuters] China confident on U.S. trade pact, Trump cites Xi's 'strong signals'
[CNBC] Trump says there will be a 'REAL DEAL' or no deal at all with China
[CNBC] 'Not to sound naive or anything': Trump says he believes China's Xi means 'every word' on trade truce
[BloombergQ] The Trump-Xi Truce Questions That Are Leaving Markets Flummoxed
[CNBC] George HW Bush's funeral: Here's a rundown of the financial markets that are open and closed
[The Hill] Economic pressures forcing Trump and Xi to play ball
[Reuters] Italy's Tria considering resigning after budget approval-paper
[Reuters] Exclusive: ECB policymakers debate new ways out of easy money - sources
[BloombergQ] Boom Has Turned to Bust for Asia Hedge Funds
[WSJ] China Breaks Its Silence on 90-Day U.S. Tariff Truce
[WSJ] Trump Team Set to Take Tough Stand in 90-Day Trade Talks With China
[WSJ] Flatter Yield Curves Aren’t Always Bad News—but This One Is
[FT] Beijing says it is ‘confident’ of trade deal with Trump
[FT] Italian sell-off hits debt sales of companies and banks
[BloombergQ] Offshore China Stocks Retreat as Trade Doubts Return; Bonds Rise
[Reuters] Oil prices skid with global stock markets; U.S. supply swells
[Reuters] China confident on U.S. trade pact, Trump cites Xi's 'strong signals'
[CNBC] Trump says there will be a 'REAL DEAL' or no deal at all with China
[CNBC] 'Not to sound naive or anything': Trump says he believes China's Xi means 'every word' on trade truce
[BloombergQ] The Trump-Xi Truce Questions That Are Leaving Markets Flummoxed
[CNBC] George HW Bush's funeral: Here's a rundown of the financial markets that are open and closed
[The Hill] Economic pressures forcing Trump and Xi to play ball
[Reuters] Italy's Tria considering resigning after budget approval-paper
[Reuters] Exclusive: ECB policymakers debate new ways out of easy money - sources
[BloombergQ] Boom Has Turned to Bust for Asia Hedge Funds
[WSJ] China Breaks Its Silence on 90-Day U.S. Tariff Truce
[WSJ] Trump Team Set to Take Tough Stand in 90-Day Trade Talks With China
[WSJ] Flatter Yield Curves Aren’t Always Bad News—but This One Is
[FT] Beijing says it is ‘confident’ of trade deal with Trump
[FT] Italian sell-off hits debt sales of companies and banks
Tuesday Evening Links
[BloombergQ] Asia Stocks Drop; U.S. Futures Rise on China News: Markets Wrap
[Reuters] China says confident it can clinch trade deal with U.S. as doubts grow
[Reuters] Wall St drops 3 percent on trade and economic worries
[BloombergQ] U.S. Stocks Battered by Trade, Yield Concerns: Markets Wrap
[BBC] Pound drops to 2017 lows after government contempt vote
[Reuters] Trump says if no China trade deal possible, 'I am a Tariff Man'
[CNBC] China is reportedly 'puzzled and irritated' by Trump administration's words of triumph after trade truce
[CNBC] The White House's muddled message on Trump's China trade truce is another headache for markets
[CNBC] The 'yield curve' explained and whether it really is a barometer for the economy and markets
[BBC] Theresa May suffers three Brexit defeats in Commons
[MarketWatch] Fed’s Williams: ‘Strong’ outlook for 2019 calls for continued interest-rate hikes
[CNBC] Pompeo gives Russia an ultimatum: 60 days to comply with nuclear weapons treaty or US will leave
[WashingtonPost] Uncertainty surrounds White House agreements on trade with China, North America
[WSJ] Dow Tumbles Nearly 800 Points as Trade Jitters Return
[WSJ] Trump Shows Willingness for Tariffs Amid Optimism on China Talks
[WSJ] Chinese Dumped $1 Billion of U.S. Real Estate in Third Quarter, Extending Recent Retreat
[FT] Trump’s breakthrough China deal mired in confusion
[FT] Theresa May suffers double defeat on Brexit deal
[FT] Flattening yield curve stirs US recession fears
[BloombergSub] The Trump-Xi Truce Questions That Are Leaving Markets Flummoxed
[BloombergSub] Nine Reasons for the Sell-Off in U.S. Stocks
[Reuters] China says confident it can clinch trade deal with U.S. as doubts grow
[Reuters] Wall St drops 3 percent on trade and economic worries
[BloombergQ] U.S. Stocks Battered by Trade, Yield Concerns: Markets Wrap
[BBC] Pound drops to 2017 lows after government contempt vote
[Reuters] Trump says if no China trade deal possible, 'I am a Tariff Man'
[CNBC] China is reportedly 'puzzled and irritated' by Trump administration's words of triumph after trade truce
[CNBC] The White House's muddled message on Trump's China trade truce is another headache for markets
[CNBC] The 'yield curve' explained and whether it really is a barometer for the economy and markets
[BBC] Theresa May suffers three Brexit defeats in Commons
[MarketWatch] Fed’s Williams: ‘Strong’ outlook for 2019 calls for continued interest-rate hikes
[CNBC] Pompeo gives Russia an ultimatum: 60 days to comply with nuclear weapons treaty or US will leave
[WashingtonPost] Uncertainty surrounds White House agreements on trade with China, North America
[WSJ] Dow Tumbles Nearly 800 Points as Trade Jitters Return
[WSJ] Trump Shows Willingness for Tariffs Amid Optimism on China Talks
[WSJ] Chinese Dumped $1 Billion of U.S. Real Estate in Third Quarter, Extending Recent Retreat
[FT] Trump’s breakthrough China deal mired in confusion
[FT] Theresa May suffers double defeat on Brexit deal
[FT] Flattening yield curve stirs US recession fears
[BloombergSub] The Trump-Xi Truce Questions That Are Leaving Markets Flummoxed
[BloombergSub] Nine Reasons for the Sell-Off in U.S. Stocks
Monday, December 3, 2018
Tuesday's News Links
[BloombergQ] Stocks Drop as Trade Hopes Fade; Curve Flattens: Markets Wrap
[Reuters] China stock bounce short-lived as growth, trade worries resurface
[Reuters] Dollar weakens as U.S. bond yields fall, trade truce supports riskier currencies
[Reuters] U.S. Treasury yields extend decline, 2-yr/10-yr spread at new 11-year low
[Reuters] As Trump touts trade war truce, China holds its tongue
[BloombergQ] Trump's Advisers Struggle to Explain Deal He Says He Cut With Xi
[Reuters] OPEC works on deal to cut output, still needs Russia on board
[CNBC] The thing the bond market most feared is starting to happen
[Reuters] White House seeks to end subsidies for electric cars, renewables
[Reuters] Britain's May launches high-stakes parliamentary debate on Brexit plan
[BloombergQ] ECB Shouldn't Wait Too Long to Normalize Policy, Weidmann Says
[BloombergQ] Chasing This $1.4 Trillion Prize May Cause Distress
[WSJ] Cash Is a Star in Rocky Year for Global Markets
[Reuters] China stock bounce short-lived as growth, trade worries resurface
[Reuters] Dollar weakens as U.S. bond yields fall, trade truce supports riskier currencies
[Reuters] U.S. Treasury yields extend decline, 2-yr/10-yr spread at new 11-year low
[Reuters] As Trump touts trade war truce, China holds its tongue
[BloombergQ] Trump's Advisers Struggle to Explain Deal He Says He Cut With Xi
[Reuters] OPEC works on deal to cut output, still needs Russia on board
[CNBC] The thing the bond market most feared is starting to happen
[Reuters] White House seeks to end subsidies for electric cars, renewables
[Reuters] Britain's May launches high-stakes parliamentary debate on Brexit plan
[BloombergQ] ECB Shouldn't Wait Too Long to Normalize Policy, Weidmann Says
[BloombergQ] Chasing This $1.4 Trillion Prize May Cause Distress
[WSJ] Cash Is a Star in Rocky Year for Global Markets
Monday Evening Links
[Reuters] Asia shares ease as doubts emerge over Sino-U.S. trade war truce
[BloombergQ] Stocks Rally on Trade Optimism; Curve Flattens
[Reuters] U.S. expects immediate action from China on trade commitments
[Reuters] As Fed says on track, narrowing yield curve could complicate debate
[Reuters] U.S. Trade Representative Lighthizer to lead talks with China: White House
[CNBC] Kudlow says progress in US-China trade will happen 'very quickly'
[BloombergQ] Surviving The Investing Game: Lessons From The World’s Greatest Stock Market Speculator
[WSJ] Investors’ New Lifeline: The Trump Put
[WSJ] Trump Names Lighthizer to Run U.S.-China Negotiations
[WSJ] Analysis: Powell Did Not Say His View of Neutral Rates Had Changed
[FT] Mnuchin warns China against going soft on trade commitments
[FT] Senators warn Trump against more attacks on Fed
[FT] US yield curve flattest since July 2007
[FT] China vulnerable in war with US over computer chips
[BloombergQ] Stocks Rally on Trade Optimism; Curve Flattens
[Reuters] U.S. expects immediate action from China on trade commitments
[Reuters] As Fed says on track, narrowing yield curve could complicate debate
[Reuters] U.S. Trade Representative Lighthizer to lead talks with China: White House
[CNBC] Kudlow says progress in US-China trade will happen 'very quickly'
[BloombergQ] Surviving The Investing Game: Lessons From The World’s Greatest Stock Market Speculator
[WSJ] Investors’ New Lifeline: The Trump Put
[WSJ] Trump Names Lighthizer to Run U.S.-China Negotiations
[WSJ] Analysis: Powell Did Not Say His View of Neutral Rates Had Changed
[FT] Mnuchin warns China against going soft on trade commitments
[FT] Senators warn Trump against more attacks on Fed
[FT] US yield curve flattest since July 2007
[FT] China vulnerable in war with US over computer chips
Sunday, December 2, 2018
Monday's News Links
[BloombergQ] Stocks Rally, Bonds Dip on Trade Truce; Oil Gains: Markets Wrap
[Reuters] Shanghai shares rally, yuan firms after China, U.S. pause trade war
[BloombergQ] Oil Surges on Saudi-Russia Agreement, Alberta Production Curb
[CNBC] US factory activity jumps in November while construction spending falls for third month
[Reuters] Fed's Quarles: Fed watching data but will not react to 'every wavering'
[CNBC] China's descriptions of the Trump-Xi deal differ from the White House's in a lot of ways
[CNBC] It's not over: The US-China trade war is still on despite 90-day tariff ceasefire, experts say
[Reuters] Trump says China to cut tariffs on U.S.-made autos after trade war truce
[Reuters] Asia's outlook darkens as factory activity slips, new orders fall
[Reuters] China November factory activity up a touch but client demand ebbs: Caixin PMI
[CNBC] Qatar to quit OPEC after more than 57 years, denies decision related to Saudi-led boycott
[WSJ] U.S., China Face Thorny Obstacles to Lasting Trade Peace
[WSJ] Investors Rev Up the Risk in Subprime Auto Deals
[FT] Beijing moves to cement influence over world’s financial markets
[FT] Dollar debt sales hit 2½-year low
[FT] Taiwan manufacturing sector shrinks at fastest pace in 3 years
[FT] South Korea manufacturing drops back into contraction
[BloombergSub] Fed’s Clarida Says ‘Powell Put’ Not a Useful Concept for Policy
[Reuters] Shanghai shares rally, yuan firms after China, U.S. pause trade war
[BloombergQ] Oil Surges on Saudi-Russia Agreement, Alberta Production Curb
[CNBC] US factory activity jumps in November while construction spending falls for third month
[Reuters] Fed's Quarles: Fed watching data but will not react to 'every wavering'
[CNBC] China's descriptions of the Trump-Xi deal differ from the White House's in a lot of ways
[CNBC] It's not over: The US-China trade war is still on despite 90-day tariff ceasefire, experts say
[Reuters] Trump says China to cut tariffs on U.S.-made autos after trade war truce
[Reuters] Asia's outlook darkens as factory activity slips, new orders fall
[Reuters] China November factory activity up a touch but client demand ebbs: Caixin PMI
[CNBC] Qatar to quit OPEC after more than 57 years, denies decision related to Saudi-led boycott
[WSJ] U.S., China Face Thorny Obstacles to Lasting Trade Peace
[WSJ] Investors Rev Up the Risk in Subprime Auto Deals
[FT] Beijing moves to cement influence over world’s financial markets
[FT] Dollar debt sales hit 2½-year low
[FT] Taiwan manufacturing sector shrinks at fastest pace in 3 years
[FT] South Korea manufacturing drops back into contraction
[BloombergSub] Fed’s Clarida Says ‘Powell Put’ Not a Useful Concept for Policy
Sunday Evening Links
[Reuters] Asia cheers Sino-U.S. trade truce, oil bounces
[CNBC] Dow futures surge more than 400 points after Trump and Xi agree to pause the US-China trade war
[Reuters] U.S. stock futures jump after Trump-Xi trade armistice
[BloombergQ] G-20 Leaders Give Nod to Trump in Watered-Down Trade Language
[NYT] Trade Truce by China and U.S. Gives Both Sides Political Breathing Room
[WSJ] U.S., China Face Thorny Obstacles to Lasting Trade Peace
[CNBC] Dow futures surge more than 400 points after Trump and Xi agree to pause the US-China trade war
[Reuters] U.S. stock futures jump after Trump-Xi trade armistice
[BloombergQ] G-20 Leaders Give Nod to Trump in Watered-Down Trade Language
[NYT] Trade Truce by China and U.S. Gives Both Sides Political Breathing Room
[WSJ] U.S., China Face Thorny Obstacles to Lasting Trade Peace
Sunday's News Links
[Reuters] U.S., China agree trade war ceasefire after Trump, Xi summit
[CNBC] Trump hails trade deal with China as one of the largest ever made
[BloombergQ] The U.S. and China’s Trade Truce Statements, Compared
[CNBC] Fed Chair Powell survives a critical week, now faces even bigger tests ahead
[Reuters] Trump likely to agree to two-week government funding extension
[Reuters] Macron mulls state of emergency after worst unrest in decades
[Reuters] Mexico new president vows to end 'rapacious' elite in first speech
[NYT] Global Growth Cools, Leaving Scars of ’08 Unhealed
[WSJ] U.S., China Reach a Truce on Trade
[FT] Trump offers Xi tariffs reprieve in trade war ceasefire
[FT] Fed chief Powell’s dovish comments keep investors guessing
[FT] Mexico’s López Obrador vows to end neo-liberalism in inauguration
[CNBC] Trump hails trade deal with China as one of the largest ever made
[BloombergQ] The U.S. and China’s Trade Truce Statements, Compared
[CNBC] Fed Chair Powell survives a critical week, now faces even bigger tests ahead
[Reuters] Trump likely to agree to two-week government funding extension
[Reuters] Macron mulls state of emergency after worst unrest in decades
[Reuters] Mexico new president vows to end 'rapacious' elite in first speech
[NYT] Global Growth Cools, Leaving Scars of ’08 Unhealed
[WSJ] U.S., China Reach a Truce on Trade
[FT] Trump offers Xi tariffs reprieve in trade war ceasefire
[FT] Fed chief Powell’s dovish comments keep investors guessing
[FT] Mexico’s López Obrador vows to end neo-liberalism in inauguration
Saturday, December 1, 2018
Saturday's News Links
[Reuters] Trump, China's Xi end high-stakes trade talks with no word on outcome
[Reuters] Trade summit between Trump and China's Xi went 'very well': U.S. aide
[Reuters] Xi Jinping says cooperation is best for China and US at G-20 meeting with Trump
[Reuters] Summit backs WTO reform ahead of Trump, Xi trade talks
[Reuters] Trump, China's Xi poised for high-stakes summit over trade war
[BloombergQ] G-20 Talks Drag Into Final Day With Risk of Laundry-List Deal
[Reuters] Trump-Xi meeting puts stock market on edge
[CNN] Stock markets will close on Wednesday to honor George H.W. Bush
[Reuters] Mexico leftist takes power torn between principles and pragmatism
[BloombergQ] Venezuela Devalues Currency by More Than 40% at Auction
[FT] Credit faces worst year since 2008 as strains intensify
[FT] Hedge fund comeback fails to materialise
[Reuters] Trade summit between Trump and China's Xi went 'very well': U.S. aide
[Reuters] Xi Jinping says cooperation is best for China and US at G-20 meeting with Trump
[Reuters] Summit backs WTO reform ahead of Trump, Xi trade talks
[Reuters] Trump, China's Xi poised for high-stakes summit over trade war
[BloombergQ] G-20 Talks Drag Into Final Day With Risk of Laundry-List Deal
[Reuters] Trump-Xi meeting puts stock market on edge
[CNN] Stock markets will close on Wednesday to honor George H.W. Bush
[Reuters] Mexico leftist takes power torn between principles and pragmatism
[BloombergQ] Venezuela Devalues Currency by More Than 40% at Auction
[FT] Credit faces worst year since 2008 as strains intensify
[FT] Hedge fund comeback fails to materialise
Friday, November 30, 2018
Weekly Commentary: Framework for Monitoring Financial Stability
Upon the public release of Jerome Powell's Wednesday speech came the Bloomberg headline: "Powell: No Preset Policy Path, Rates 'Just Below' Neutral Range." When the Fed Chairman began his presentation to the New York Economic Club just minutes later, the Dow had already surged 460 points. From Powell's prepared comments: "Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy‑‑that is, neither speeding up nor slowing down growth." When he read his speech, he used "range," as opposed to "broad range" of estimates.
Equities responded to the Chairman's seeming dovish transformation with jubilation (and quite a short squeeze). It certainly appeared a far cry from, "We may go past neutral, but we're a long way from neutral at this point, probably," back on the third of October. Powell's choice of language was viewed consistent with the 'much closer' to the neutral level, as headlines ascribed to vice chair Richard Clarida. What he actually said in Tuesday's speech: "Although the real federal funds rate today is just below the range of longer-run estimates presented in the September [Summary of Economic Projections], it is much closer to the vicinity of r* than it was when the FOMC started to remove accommodation in December 2015. How close is a matter of judgment, and there is a range of views on the FOMC."
The "neutral rate" framework is problematic. Back in early October, the Fed was almost three years into its "tightening" cycle (first rate increase in December 2015). Yet the Atlanta Fed GDP Forecast was signaling 4% growth; consumer confidence was near decade highs; manufacturing indices were near multi-year highs; corporate Credit conditions remained quite loose; and WTI crude had just surpassed $75 a barrel. The S&P500 traded only fractionally below record highs in the hours before Powell's evening of October 3rd "long way from neutral…" With unemployment at (a multi-decade low) 3.7% and CPI up 2.3% y-o-y, there was a reasonable case at the time that significantly higher interest rates would be necessary for policy to reach some so-called "neutral rate."
In our age of speculative financial markets dictating overall financial conditions, major backdrop shifts unfold in spans of days and weeks. The S&P500 dropped about 10% from early-October highs, while corporate Credit conditions tightened meaningfully. The Atlanta Fed GDP forecast has dropped to 2.6%. Consumer confidence has weakened, and housing has slowed. WTI is trading near $50, down about one-third from early-October. One could argue the so-called "neutral rate" has collapsed in recent weeks. Did it jump, along with hyper-volatile stocks, this week?
I'm not taking exception with the market's view of a more dovish Fed. Of course, they are going to turn more cautious in the face of a significant tightening of financial conditions. At the same time, I expect they'll be keen to jump back on the normalization track if markets rally and financial conditions loosen. When the Fed says "data dependent," I would read "market dependent." Market conditions will lead the data. The substance of both Powell and Clarida's presentations were more balanced than dovish.
Powell's Wednesday presentation was titled, "The Federal Reserve's Framework for Monitoring Financial Stability" (with a reference to Hyman Minsky!). The Fed's introductory Financial Stability Report had been published the previous day. "This report summarizes the Federal Reserve Board's framework for assessing the resilience of the U.S. financial system and presents the Board's current assessment. By publishing this report, the Board intends to promote public understanding and increase transparency and accountability for the Federal Reserve's views on this topic. Promoting financial stability is a key element in meeting the Federal Reserve's dual mandate for monetary policy regarding full employment and stable prices."
I appreciate the Fed's attention to financial stability, stating explicitly the central role it plays within its broader mandate. Powell's speech offered a definition of "financial stability:" "A stable financial system is one that continues to function effectively even in severely adverse conditions. A stable system meets the borrowing and investment needs of households and businesses despite economic turbulence. An unstable system, in contrast, may amplify turbulence and prolong economic hardship in the face of stress by failing to provide these essential services when they are needed most."
It's a commendable effort to craft such complex subject matter into a characterization accessible to the general public. However, I would broadly argue that unfettered contemporary finance - dominated by securities markets, derivatives and speculative trading - is an "unstable system." Conditions will gravitate to excessive looseness during booms, only to tightened dramatically come the inevitable eruption of "risk off." The monetary policy approach that evolved from serial boom and bust dynamics has been to backstop marketplace liquidity, while assuring participants that central banks will respond aggressively in the event of market or economic instability. By extending boom phases, this policy doctrine has created the illusion of stability for an innately unstable system.
Significant thought and effort went into crafting the Fed's 37-page document. It is full of important data and insight. And, from my perspective, it as well illuminates key holes in the Fed's approach to monitoring financial stability. There's certainly a "generals fighting the last war" predisposition embedded within the Fed's analytical framework.
The Fed's "framework focuses primarily on monitoring vulnerabilities and emphasizes four broad categories based on research:" "Elevated Valuation Pressure;" "Excessive Borrowing by Businesses and Households;" "Excessive Leverage in the Financial Sector;" and "Funding Risks."
The Fed's current "financial stability" framework would have been generally suitable for the previous "tech" and "mortgage finance" Bubbles. These periods were characterized by major expansions in corporate debt, household borrowings and U.S. financial sector leverage, with financial intermediaries issuing huge quantities of perceived safe short-term liabilities to finance increasingly risky long-term assets.
Today's "global government finance Bubble" has markedly different dynamics. Most consequential, rapid expansion and leverage have characterized government and central bank balance sheets - across the globe. The U.S. cycle, in particular, has experienced an extraordinary expansion of government borrowings. After ending 2007 at $6.051 TN, outstanding Treasury debt expanded 182%, to end June at $17.091 TN. Treasury debt growth is now projected to surpass $1.0 TN annually for the foreseeable future.
For this cycle, traditional analysis of household and corporate balance sheets will underrate systemic risk. The problematic balance sheet expansion has been in the government sector, debt growth that has worked to this point to bolster Household and Corporate finances. The federal borrowing and spending boom has inflated Household incomes, while inflating Corporate sector profits. Nonetheless, according to the report, "After growing faster than GDP through most of the current expansion, total business-sector debt relative to GDP stands at a historically high level."
Traditional analysis has also been distorted by the past decade's extraordinary monetary policy backdrop. Low rates and QE (growth in central bank liabilities) significantly reduced debt service costs (slowing Household debt growth), while dramatically inflating Household Net Worth (Net Worth up 80% since the crisis to a record $107 TN). For the Corporate sector, unprecedented loose finance reduced debt service and the overall growth in corporate borrowings, while providing inexpensive finance for stock buybacks, M&A and easy EPS growth. QE-related liquidity was funneled into corporate coffers already bloated from enormous federal deficit spending.
With ongoing extraordinarily low market yields and federal deficits, I would argue that traditional valuation metrics will also understate systemic vulnerabilities. The previous crisis illuminated how quickly a perceived sustainable profit boom can implode spectacularly. Fed analysis has stock market valuation on the high-end of the historical range. I would argue that today's inflated profits are unsustainable and extremely vulnerable to the downside of a phenomenal boom cycle.
Ignoring the federal government balance sheet is a critical shortcoming of the Federal Reserve's "financial stability" framework. Fed officials would surely prefer to stay clear of fiscal politics, but the harsh reality is that monetary policy promoted unprecedented debt issuance and a tolerance for fiscal irresponsibility that has run unabated throughout a protracted economic boom. Treasury yields remain extraordinarily low in the face of a rapid deterioration in the Treasury's Credit profile. The report also didn't address potential financial stability issues associated with the scantly-capitalized government-sponsored enterprises and their almost $9.0 TN of outstanding agency (debt and MBS) securities. A spike in yields - a scenario not to be dismissed considering the risk trajectory of Treasury and agency obligations - would have a momentous impact on U.S. and global financial stability.
The Fed's analysis of "leverage in the financial sector" is interesting, especially considering their own balance sheet provided much of the leverage for this cycle. "Leverage at financial firms is low relative to historical standards…" "A greater amount and a higher quality of capital improve the ability of banks to bear losses…" "Capital levels at broker-dealers have also increased substantially relative to pre-crisis levels, and major insurance companies have strengthened their financial positions since the crisis."
The Fed then turns nebulous. "…Some indicators suggest that hedge fund leverage is at post-crisis highs." "Several indicators suggest hedge fund leverage has been increasing over the past two years."
Our central bank (along with others) doesn't have a good handle on speculative leverage. They place hedge fund "total assets" at $7.27 TN, having expanded 13.5% over the most recent year (2017). "A comprehensive measure that incorporates margin loans, repurchase agreements (repos), and derivatives-but is only available with a significant time lag-suggests that average hedge fund leverage has risen by about one-third over the course of 2016 and 2017." "The increased use of leverage by hedge funds exposes their counterparties to risks and raises the possibility that adverse shocks would result in forced asset sales by hedge funds that could exacerbate price declines."
Without a well-defined and comprehensive analysis of global speculative finance, an insightful appraisal of financial stability will remain forever elusive. There are questions fundamental to gauging financial stability. Rest of World (from the Fed's Z.1) holdings of U.S. financial assets have more than doubled since the end of 2008 to $27.5 TN. U.S. Debt Securities holdings were up 55% to $11.252 TN. How much foreign-sourced leverage has been behind the enormous flows into U.S. securities and financial assets - speculative, financial sector and central bank leverage? How vulnerable is global dollar liquidity to a bout of "risk off" speculative deleveraging? How vulnerable are inflated U.S. asset markets to the end of global QE and the deleveraging of central bank balance sheets (i.e. EM central banks selling U.S. securities to support faltering local currencies)?
The Fed's financial stability report touches on global risks, including Brexit, Europe, dollar-denominated EM debt and China. But I would argue that the U.S. economy and markets are more susceptible to global forces today than ever before. It's difficult to envisage a scenario of a bursting Chinese Bubble and faltering EM and Europe that doesn't have profound consequences for U.S. financial stability. Global fragilities alone pose great systemic risk for the U.S. Combined with our stock market and asset Bubbles, escalating fiscal risk, corporate Credit vulnerability and deep structural economic maladjustment, the prognosis for financial stability is dire.
The Fed's fourth broad category is "Funding Risk." "A measure of the total amount of liabilities that are most vulnerable to runs, including those issued by nonbanks, is relatively low." I don't disagree that "bank funding is less susceptible to runs now than in the period leading up to the financial crisis." "An aggregate measure of private short-term, whole- sale, and uninsured instruments that could be prone to runs-a measure that includes repos, commercial paper, money funds, uninsured bank deposits, and other forms of short-term debt-currently stands at $13 trillion, significantly lower than its peak at the start of the financial crisis."
But… "Total assets under management in corporate bond mutual funds and loan mutual funds have more than doubled in the past decade to over $2 trillion… The mismatch between the ability of investors in open-end bond or loan mutual funds to redeem shares daily and the longer time often required to sell corporate bonds or loans creates, in principle, conditions that can lead to runs, although widespread runs on mutual funds other than money market funds have not materialized during past episodes of stress."
Throughout this Bubble period, I have referred to the "Moneyness of Risk Assets." A "run" on perceived money-like Credit instruments sparked the collapse of the mortgage finance Bubble. Runs unfold when holders of perceived safe and liquid instruments suddenly recognize risk is much greater than previously appreciated. Past crises have typically originated in the money markets. But never have central bank and government policies so fostered the perception of safety and liquidity ("moneyness") for risk assets - equities and corporate Credit, in particular. I would argue the proliferation and massive growth of index fund products poses a major risk to financial stability. And when it comes to policy-induced distortions, already extraordinary risks to financial stability are only compounded by the proliferation and growth of derivative trading strategies, both retail and institutional.
One might ponder the notion of financial stability when the S&P500 sinks 3.8% one week and then rallies 4.8% the next. Expectations are now high that the Fed will be soon winding down "normalization," and that President Trump is hankering to strike a deal with the Chinese. Should be an interesting weekend. It was an interesting market rally - or lack of a rally in corporate Credit. Leveraged loans had a notably poor week. High yield debt remains suspect with crude at $50. Weak link GE was notably weak in the face of market strength. And while some Powell-induced dollar weakness stoked the short squeeze in EM, the Shanghai Composite struggled to end the week little changed. Moreover, seeing German bund yields decline another three bps (to 0.31%) hardly conjures bullish imagery. Financial Instability.
For the Week:
The S&P500 surged 4.8% (up 3.2% y-t-d), and the Dow rose 5.2% (up 3.3%). The Utilities rallied 2.9% (up 4.3%). The Banks jumped 3.6% (down 4.8%), and the Broker/Dealers gained 2.2% (down 1.0%). The Transports recovered 4.4% (up 2.0%). The S&P 400 Midcaps rallied 2.9% (down 1.2%), and the small cap Russell 2000 jumped 3.0% (down 0.1%). The Nasdaq100 surged 6.5% (up 8.6%). The Semiconductors rallied 5.1% (down 1.1%). The Biotechs jumped 4.7% (up 12.6%). While bullion was little changed, the HUI gold index fell 1.9% (down 24.6%).
Three-month Treasury bill rates ended the week at 2.30%. Two-year government yields slipped two bps to 2.79% (up 90bps y-t-d). Five-year T-note yields declined five bps to 2.81% (up 61bps). Ten-year Treasury yields fell five bps to 2.99% (up 58bps). Long bond yields dipped a basis point to 3.30% (up 55bps). Benchmark Fannie Mae MBS yields fell eight bps to 3.86% (up 87bps).
Greek 10-year yields sank 29 bps to 4.25% (up 18bps y-t-d). Ten-year Portuguese yields fell 12 bps to 1.83% (down 12bps). Italian 10-year yields dropped 19 bps to 3.21% (up 120bps). Spain's 10-year yields fell 13 bps to 1.50% (down 6bps). German bund yields declining three bps to 0.31% (down 11bps). French yields fell four bps to 0.68% (down 10bps). The French to German 10-year bond spread narrowed one to 37 bps. U.K. 10-year gilt yields declined two bps to 1.36% (up 17bps). U.K.'s FTSE equities index increased 0.4% (down 9.2%).
Equities responded to the Chairman's seeming dovish transformation with jubilation (and quite a short squeeze). It certainly appeared a far cry from, "We may go past neutral, but we're a long way from neutral at this point, probably," back on the third of October. Powell's choice of language was viewed consistent with the 'much closer' to the neutral level, as headlines ascribed to vice chair Richard Clarida. What he actually said in Tuesday's speech: "Although the real federal funds rate today is just below the range of longer-run estimates presented in the September [Summary of Economic Projections], it is much closer to the vicinity of r* than it was when the FOMC started to remove accommodation in December 2015. How close is a matter of judgment, and there is a range of views on the FOMC."
The "neutral rate" framework is problematic. Back in early October, the Fed was almost three years into its "tightening" cycle (first rate increase in December 2015). Yet the Atlanta Fed GDP Forecast was signaling 4% growth; consumer confidence was near decade highs; manufacturing indices were near multi-year highs; corporate Credit conditions remained quite loose; and WTI crude had just surpassed $75 a barrel. The S&P500 traded only fractionally below record highs in the hours before Powell's evening of October 3rd "long way from neutral…" With unemployment at (a multi-decade low) 3.7% and CPI up 2.3% y-o-y, there was a reasonable case at the time that significantly higher interest rates would be necessary for policy to reach some so-called "neutral rate."
In our age of speculative financial markets dictating overall financial conditions, major backdrop shifts unfold in spans of days and weeks. The S&P500 dropped about 10% from early-October highs, while corporate Credit conditions tightened meaningfully. The Atlanta Fed GDP forecast has dropped to 2.6%. Consumer confidence has weakened, and housing has slowed. WTI is trading near $50, down about one-third from early-October. One could argue the so-called "neutral rate" has collapsed in recent weeks. Did it jump, along with hyper-volatile stocks, this week?
I'm not taking exception with the market's view of a more dovish Fed. Of course, they are going to turn more cautious in the face of a significant tightening of financial conditions. At the same time, I expect they'll be keen to jump back on the normalization track if markets rally and financial conditions loosen. When the Fed says "data dependent," I would read "market dependent." Market conditions will lead the data. The substance of both Powell and Clarida's presentations were more balanced than dovish.
Powell's Wednesday presentation was titled, "The Federal Reserve's Framework for Monitoring Financial Stability" (with a reference to Hyman Minsky!). The Fed's introductory Financial Stability Report had been published the previous day. "This report summarizes the Federal Reserve Board's framework for assessing the resilience of the U.S. financial system and presents the Board's current assessment. By publishing this report, the Board intends to promote public understanding and increase transparency and accountability for the Federal Reserve's views on this topic. Promoting financial stability is a key element in meeting the Federal Reserve's dual mandate for monetary policy regarding full employment and stable prices."
I appreciate the Fed's attention to financial stability, stating explicitly the central role it plays within its broader mandate. Powell's speech offered a definition of "financial stability:" "A stable financial system is one that continues to function effectively even in severely adverse conditions. A stable system meets the borrowing and investment needs of households and businesses despite economic turbulence. An unstable system, in contrast, may amplify turbulence and prolong economic hardship in the face of stress by failing to provide these essential services when they are needed most."
It's a commendable effort to craft such complex subject matter into a characterization accessible to the general public. However, I would broadly argue that unfettered contemporary finance - dominated by securities markets, derivatives and speculative trading - is an "unstable system." Conditions will gravitate to excessive looseness during booms, only to tightened dramatically come the inevitable eruption of "risk off." The monetary policy approach that evolved from serial boom and bust dynamics has been to backstop marketplace liquidity, while assuring participants that central banks will respond aggressively in the event of market or economic instability. By extending boom phases, this policy doctrine has created the illusion of stability for an innately unstable system.
Significant thought and effort went into crafting the Fed's 37-page document. It is full of important data and insight. And, from my perspective, it as well illuminates key holes in the Fed's approach to monitoring financial stability. There's certainly a "generals fighting the last war" predisposition embedded within the Fed's analytical framework.
The Fed's "framework focuses primarily on monitoring vulnerabilities and emphasizes four broad categories based on research:" "Elevated Valuation Pressure;" "Excessive Borrowing by Businesses and Households;" "Excessive Leverage in the Financial Sector;" and "Funding Risks."
The Fed's current "financial stability" framework would have been generally suitable for the previous "tech" and "mortgage finance" Bubbles. These periods were characterized by major expansions in corporate debt, household borrowings and U.S. financial sector leverage, with financial intermediaries issuing huge quantities of perceived safe short-term liabilities to finance increasingly risky long-term assets.
Today's "global government finance Bubble" has markedly different dynamics. Most consequential, rapid expansion and leverage have characterized government and central bank balance sheets - across the globe. The U.S. cycle, in particular, has experienced an extraordinary expansion of government borrowings. After ending 2007 at $6.051 TN, outstanding Treasury debt expanded 182%, to end June at $17.091 TN. Treasury debt growth is now projected to surpass $1.0 TN annually for the foreseeable future.
For this cycle, traditional analysis of household and corporate balance sheets will underrate systemic risk. The problematic balance sheet expansion has been in the government sector, debt growth that has worked to this point to bolster Household and Corporate finances. The federal borrowing and spending boom has inflated Household incomes, while inflating Corporate sector profits. Nonetheless, according to the report, "After growing faster than GDP through most of the current expansion, total business-sector debt relative to GDP stands at a historically high level."
Traditional analysis has also been distorted by the past decade's extraordinary monetary policy backdrop. Low rates and QE (growth in central bank liabilities) significantly reduced debt service costs (slowing Household debt growth), while dramatically inflating Household Net Worth (Net Worth up 80% since the crisis to a record $107 TN). For the Corporate sector, unprecedented loose finance reduced debt service and the overall growth in corporate borrowings, while providing inexpensive finance for stock buybacks, M&A and easy EPS growth. QE-related liquidity was funneled into corporate coffers already bloated from enormous federal deficit spending.
With ongoing extraordinarily low market yields and federal deficits, I would argue that traditional valuation metrics will also understate systemic vulnerabilities. The previous crisis illuminated how quickly a perceived sustainable profit boom can implode spectacularly. Fed analysis has stock market valuation on the high-end of the historical range. I would argue that today's inflated profits are unsustainable and extremely vulnerable to the downside of a phenomenal boom cycle.
Ignoring the federal government balance sheet is a critical shortcoming of the Federal Reserve's "financial stability" framework. Fed officials would surely prefer to stay clear of fiscal politics, but the harsh reality is that monetary policy promoted unprecedented debt issuance and a tolerance for fiscal irresponsibility that has run unabated throughout a protracted economic boom. Treasury yields remain extraordinarily low in the face of a rapid deterioration in the Treasury's Credit profile. The report also didn't address potential financial stability issues associated with the scantly-capitalized government-sponsored enterprises and their almost $9.0 TN of outstanding agency (debt and MBS) securities. A spike in yields - a scenario not to be dismissed considering the risk trajectory of Treasury and agency obligations - would have a momentous impact on U.S. and global financial stability.
The Fed's analysis of "leverage in the financial sector" is interesting, especially considering their own balance sheet provided much of the leverage for this cycle. "Leverage at financial firms is low relative to historical standards…" "A greater amount and a higher quality of capital improve the ability of banks to bear losses…" "Capital levels at broker-dealers have also increased substantially relative to pre-crisis levels, and major insurance companies have strengthened their financial positions since the crisis."
The Fed then turns nebulous. "…Some indicators suggest that hedge fund leverage is at post-crisis highs." "Several indicators suggest hedge fund leverage has been increasing over the past two years."
Our central bank (along with others) doesn't have a good handle on speculative leverage. They place hedge fund "total assets" at $7.27 TN, having expanded 13.5% over the most recent year (2017). "A comprehensive measure that incorporates margin loans, repurchase agreements (repos), and derivatives-but is only available with a significant time lag-suggests that average hedge fund leverage has risen by about one-third over the course of 2016 and 2017." "The increased use of leverage by hedge funds exposes their counterparties to risks and raises the possibility that adverse shocks would result in forced asset sales by hedge funds that could exacerbate price declines."
Without a well-defined and comprehensive analysis of global speculative finance, an insightful appraisal of financial stability will remain forever elusive. There are questions fundamental to gauging financial stability. Rest of World (from the Fed's Z.1) holdings of U.S. financial assets have more than doubled since the end of 2008 to $27.5 TN. U.S. Debt Securities holdings were up 55% to $11.252 TN. How much foreign-sourced leverage has been behind the enormous flows into U.S. securities and financial assets - speculative, financial sector and central bank leverage? How vulnerable is global dollar liquidity to a bout of "risk off" speculative deleveraging? How vulnerable are inflated U.S. asset markets to the end of global QE and the deleveraging of central bank balance sheets (i.e. EM central banks selling U.S. securities to support faltering local currencies)?
The Fed's financial stability report touches on global risks, including Brexit, Europe, dollar-denominated EM debt and China. But I would argue that the U.S. economy and markets are more susceptible to global forces today than ever before. It's difficult to envisage a scenario of a bursting Chinese Bubble and faltering EM and Europe that doesn't have profound consequences for U.S. financial stability. Global fragilities alone pose great systemic risk for the U.S. Combined with our stock market and asset Bubbles, escalating fiscal risk, corporate Credit vulnerability and deep structural economic maladjustment, the prognosis for financial stability is dire.
The Fed's fourth broad category is "Funding Risk." "A measure of the total amount of liabilities that are most vulnerable to runs, including those issued by nonbanks, is relatively low." I don't disagree that "bank funding is less susceptible to runs now than in the period leading up to the financial crisis." "An aggregate measure of private short-term, whole- sale, and uninsured instruments that could be prone to runs-a measure that includes repos, commercial paper, money funds, uninsured bank deposits, and other forms of short-term debt-currently stands at $13 trillion, significantly lower than its peak at the start of the financial crisis."
But… "Total assets under management in corporate bond mutual funds and loan mutual funds have more than doubled in the past decade to over $2 trillion… The mismatch between the ability of investors in open-end bond or loan mutual funds to redeem shares daily and the longer time often required to sell corporate bonds or loans creates, in principle, conditions that can lead to runs, although widespread runs on mutual funds other than money market funds have not materialized during past episodes of stress."
Throughout this Bubble period, I have referred to the "Moneyness of Risk Assets." A "run" on perceived money-like Credit instruments sparked the collapse of the mortgage finance Bubble. Runs unfold when holders of perceived safe and liquid instruments suddenly recognize risk is much greater than previously appreciated. Past crises have typically originated in the money markets. But never have central bank and government policies so fostered the perception of safety and liquidity ("moneyness") for risk assets - equities and corporate Credit, in particular. I would argue the proliferation and massive growth of index fund products poses a major risk to financial stability. And when it comes to policy-induced distortions, already extraordinary risks to financial stability are only compounded by the proliferation and growth of derivative trading strategies, both retail and institutional.
One might ponder the notion of financial stability when the S&P500 sinks 3.8% one week and then rallies 4.8% the next. Expectations are now high that the Fed will be soon winding down "normalization," and that President Trump is hankering to strike a deal with the Chinese. Should be an interesting weekend. It was an interesting market rally - or lack of a rally in corporate Credit. Leveraged loans had a notably poor week. High yield debt remains suspect with crude at $50. Weak link GE was notably weak in the face of market strength. And while some Powell-induced dollar weakness stoked the short squeeze in EM, the Shanghai Composite struggled to end the week little changed. Moreover, seeing German bund yields decline another three bps (to 0.31%) hardly conjures bullish imagery. Financial Instability.
For the Week:
The S&P500 surged 4.8% (up 3.2% y-t-d), and the Dow rose 5.2% (up 3.3%). The Utilities rallied 2.9% (up 4.3%). The Banks jumped 3.6% (down 4.8%), and the Broker/Dealers gained 2.2% (down 1.0%). The Transports recovered 4.4% (up 2.0%). The S&P 400 Midcaps rallied 2.9% (down 1.2%), and the small cap Russell 2000 jumped 3.0% (down 0.1%). The Nasdaq100 surged 6.5% (up 8.6%). The Semiconductors rallied 5.1% (down 1.1%). The Biotechs jumped 4.7% (up 12.6%). While bullion was little changed, the HUI gold index fell 1.9% (down 24.6%).
Three-month Treasury bill rates ended the week at 2.30%. Two-year government yields slipped two bps to 2.79% (up 90bps y-t-d). Five-year T-note yields declined five bps to 2.81% (up 61bps). Ten-year Treasury yields fell five bps to 2.99% (up 58bps). Long bond yields dipped a basis point to 3.30% (up 55bps). Benchmark Fannie Mae MBS yields fell eight bps to 3.86% (up 87bps).
Greek 10-year yields sank 29 bps to 4.25% (up 18bps y-t-d). Ten-year Portuguese yields fell 12 bps to 1.83% (down 12bps). Italian 10-year yields dropped 19 bps to 3.21% (up 120bps). Spain's 10-year yields fell 13 bps to 1.50% (down 6bps). German bund yields declining three bps to 0.31% (down 11bps). French yields fell four bps to 0.68% (down 10bps). The French to German 10-year bond spread narrowed one to 37 bps. U.K. 10-year gilt yields declined two bps to 1.36% (up 17bps). U.K.'s FTSE equities index increased 0.4% (down 9.2%).
Japan's Nikkei 225 equities index rallied 3.3% (down 1.8% y-t-d). Japanese 10-year "JGB" yields slipped one basis point to 0.09% (up 4bps). France's CAC40 gained 1.2% (down 5.8%). The German DAX equities index increased 0.6% (down 12.9%). Spain's IBEX 35 equities index rose 1.8% (down 9.6%). Italy's FTSE MIB index recovered 2.5% (down 12.2%). EM equities were higher. Brazil's Bovespa index surged 3.8% (up 17.1%), and Mexico's Bolsa recovered 1.4% (down 15.4%). South Korea's Kospi index jumped 1.9% (down 15.0%). India's Sensex equities index surged 3.5% (up 6.3%). China's Shanghai Exchange increased 0.3% (down 21.7%). Turkey's Borsa Istanbul National 100 index rose 2.6% (down 17.3%). Russia's MICEX equities index gained 2.1% (up 13.4%).
Investment-grade bond funds saw outflows of $1.688 billion, and junk bond funds posted outflows of $1.20 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates were unchanged at 4.81% (up 91bps y-o-y). Fifteen-year rates added a basis point to 4.25% (up 95bps). Five-year hybrid ARM rates gained three bps to 4.12% (up 80bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down one basis point to 4.68% (up 55bps).
Federal Reserve Credit last week declined $6.2bn to $4.064 TN. Over the past year, Fed Credit contracted $342bn, or 7.8%. Fed Credit inflated $1.253 TN, or 45%, over the past 316 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $3.3bn last week to a four-month low $3.402 TN. "Custody holdings" were up $14.5bn y-o-y, or 0.4%.
M2 (narrow) "money" supply jumped $35.7bn last week to a record $14.315 TN. "Narrow money" gained $541bn, or 3.9%, over the past year. For the week, Currency increased $1.2bn. Total Checkable Deposits declined $4.7bn, while Savings Deposits jumped $39.5bn. Small Time Deposits gained $4.1bn. Retail Money Funds dipped $4.3bn.
Total money market fund assets gained $6.6bn to $2.944 TN - the high back to May 2010. Money Funds gained $145bn y-o-y, or 5.2%.
Total Commercial Paper added $2.1bn to $1.091 TN. CP rose $48bn y-o-y, or 4.6%.
Currency Watch:
The U.S. dollar index added 0.3% to 97.197 (up 5.5% y-t-d). For the week on the upside, the New Zealand dollar increased 1.3%, the Australian dollar 1.0%, the South Korean won 0.9%, the Mexican peso 0.2% and the Singapore dollar 0.2%. For the week on the downside, the Brazilian real declined 1.0%, the Japanese yen 0.5%, the British pound 0.5%, the Canadian dollar 0.4%, the Norwegian krone 0.3%, the euro 0.2%, the Swedish krona 0.1%, the South African rand 0.1% and the Swiss franc 0.1%. The Chinese renminbi declined 0.17% versus the dollar this week (down 6.52% y-t-d).
Commodities Watch:
November 29 - Bloomberg (Yash Upadhyaya): "Industrial metal prices have tumbled to their lowest in 17 months as falling demand in China and trade war concerns have made commodities cheaper. The Bloomberg Industrial Metals Sub-index tracking aluminium, copper, nickel and zinc has plunged close to 19% in 2018 to its worst level since July 2017. That tracks a fall in the base metals after they hit 52-week highs in the beginning of the year."
The Goldman Sachs Commodities Index recovered 1.1% (down 7.8% y-t-d). Spot Gold was about unchanged at $1,223 (down 6.2%). Silver declined 0.8% to $14.25 (down 16.9%). Crude recovered 32 cents to $50.72 (down 16%). Gasoline increased 0.6% (down 22%), and Natural Gas surged 6.5% (up 57%). Copper rallied 2.0% (down 15%). Wheat jumped 1.7% (up 21%). Corn rose 2.0% (up 8%).
Market Dislocation Watch:
November 28 - Wall Street Journal (Telis Demos and Gunjan Banerji): "As markets get wilder, some Wall Street traders are getting richer. The return of volatility might be making many rank-and-file investors queasy, but it is proving to be a boon to some trading desks at the biggest banks. Many desks focused on derivatives tied to stocks are set to generate billions of dollars more in revenue this year… It is a contrast to recent years, when these desks slumped amid calm and steady markets. As a result, the top traders on banks' equity derivatives desks are expected to take home some of Wall Street's biggest paychecks. Pay for the highest ranks could top $3 million this year, a few hundred thousand dollars more than a year ago… For the dozen largest investment banks globally, equity derivatives revenue in the Americas soared 84% in the first half of 2018 from the same period a year ago, to $3.8 billion…"
November 29 - Bloomberg (Shelly Hagan): "Leon Cooperman blasted algorithmic trading for exaggerating price moves and said it's 'scaring the hell out of the public.' 'Everyone I know of that has accumulated wealth, whether it's Warren Buffett or Mario Gabelli, they buy weakness and they sell strength,' Cooperman said… 'These algos, when it's up they want to buy it, when it's down they want to sell it. It increases volatility.'"
Trump Administration Watch:
November 29 - Wall Street Journal (Bob Davis and Lingling Wei): "The U.S. and China, looking to defuse tensions and boost markets, are exploring a trade deal in which Washington would hold off on further tariffs through the spring in exchange for new talks looking at big changes in Chinese economic policy, said officials on both sides of the Pacific. The talks have been conducted, via telephone, for several weeks, and are coming to a head shortly before President Trump and Chinese President Xi Jinping meet for dinner on Saturday at the end of the Group of 20 leaders summit in Buenos Aires. But it is far from clear whether the discussions will produce any agreement. New talks would focus on what both sides are calling trade 'architecture,' a broad term that could encompass many issues the U.S. has wanted Beijing to address, including intellectual property protection, coerced technology transfer, subsidies to state-owned enterprises, and even non-trade issues such as cyberespionage."
November 28 - Financial Times (Tom Mitchell and Sherry Fei Ju): "Three months ago, Chinese officials saw the meeting between Xi Jinping and Donald Trump at the G20 as their best hope for a settlement that would end Beijing's trade war with Washington. Then they hoped for a truce. Now they will consider themselves lucky if this week's encounter passes without any embarrassment for Mr Xi, as they brace themselves for a new round of US tariffs early next year. As the leaders of the world's two largest economies prepare to meet for the first time in more than a year… the gulf between the two sides remains large. According to people briefed on the talks, Beijing's position has not fundamentally changed since May, when Mr Trump contradicted an assertion by China's lead negotiator that the two sides had agreed not to proceed with tariffs."
November 27 - Financial Times (James Politi and James Kynge): "The White House's top economic adviser cast doubt over the prospect of a ceasefire in the escalating trade war with China, saying negotiations in the run-up to a high-stakes summit this week had made no progress and a new round of tariffs was likely. Larry Kudlow, director of the US National Economic Council, said it was up to Chinese President Xi Jinping to 'step up and come up with new ideas' to break the deadlock at Friday's G20 summit in Argentina… 'We can't find much change in their approach,' Mr Kudlow told reporters. 'President Xi may have a lot more to say in the bilateral [with Mr Trump], I hope he does by the way, I think we all hope he does . . . but at the moment, we don't see it.'"
November 27 - Reuters (Roberta Rampton): "U.S. President Donald Trump is open to reaching a deal on U.S.-China trade irritants over dinner on Saturday with Chinese leader Xi Jinping but is ready to hike tariffs on Chinese imports if there is no breakthrough, White House economic adviser Larry Kudlow said… Kudlow said Trump had told advisers that 'in his view, there is a good possibility that a deal can be made, and that he is open to that.' But he said 'certain conditions have to be met,' listing intellectual property theft, forced technology transfer, ownership of American companies in China, high tariffs and non-tariff barriers on commodities, and commercial hacking as examples of issues that 'must be solved.'"
November 28 - Financial Times (Richard Blackden): "Jay Powell is to address Wall Street bankers on Wednesday amid an intensifying White House campaign to undermine the Federal Reserve chairman's rate increase plans, an unorthodox offensive led by a sitting president who believes tightening monetary policy is choking off an economic boom. Donald Trump on Tuesday escalated his criticisms by telling the Washington Post he believed the Fed, which next month is expected to lift rates for a fourth time this year, 'is way off base with what they're doing'. Mr Trump added: 'So far, I'm not even a little bit happy with my selection of Jay.'"
November 28 - CNBC (Jeff Cox): "With the Federal Reserve under fire for raising interest rates, Treasury Secretary Steven Mnuchin has been looking to see if there are other ways to normalize monetary policy... Mnuchin has been asking some of the biggest players in the bond market if they would rather see the Fed step up the rundown of its balance sheet than hike short-term rates… The balance sheet consists mostly of bonds the central bank purchased in its efforts to stimulate the economy during and after the financial crisis. It currently totals $4.15 trillion, down from $4.51 trillion where it stood before it started allowing a capped level of proceeds from the bond holdings to run off each month."
November 27 - Bloomberg (Jennifer Jacobs and Saleha Mohsin): "Donald Trump plans to keep Treasury Secretary Steven Mnuchin and Commerce Secretary Wilbur Ross amid speculation of a broader shakeup in the president's Cabinet, according to three people familiar with his thinking. Trump has signaled that he plans to make changes at the most senior levels of his administration following midterm elections earlier this month in which his party lost control of the House of Representatives. But Mnuchin and Ross, who each have been the subject of reports that Trump is dissatisfied with them, will remain in their posts, the people said."
November 27 - CNBC (Jacob Pramuk): "President Donald Trump will consider cutting all subsidies to General Motors after the company announced plans to slash production at several American plants, he said… 'We are now looking at cutting all @GM subsidies, including ... for electric cars,' the president wrote in a pair of tweets. The automaker's shares fell following the tweets and were down more than 3% on Tuesday afternoon, on track for their worst day in a month."
Federal Reserve Watch:
November 28 - Reuters (Jonathan Spicer and Ann Saphir): "U.S. Federal Reserve Chair Jerome Powell injected investors with a strong dose of optimism on Wednesday, saying that the central bank's policy rate is now 'just below' estimates of a level that neither brakes nor boosts a healthy U.S. economy, comments that many investors read as signaling the Fed's three-year tightening cycle is drawing to a close. Stocks and interest-rate futures jumped, even while economists wrestled to interpret whether Powell intended to send a message or was simply misunderstood. On their face, the comments were a reversal from early last month, when Powell said the key interest rate was probably still a 'long way' from a so-called neutral level and that the Fed might even tighten policy beyond that level."
November 27 - CNBC (Jeff Cox): "Federal Reserve Vice Chairman Richard Clarida expressed a cautious view Tuesday about how the central bank should proceed in raising interest rates. The Federal Open Market Committee's newest member… emphasized the importance of policymakers being 'data dependent' in how they approach future moves. 'A monetary policy strategy must find a way to combine incoming data and a model of the economy with a healthy dose of judgment - and humility! - to formulate, and then communicate, a path for the policy rate most consistent with our policy objectives,' he said… Assessing the current state of interest rates, Clarida said the FOMC, which sets Fed monetary policy, is 'much closer' to a so-called neutral level…"
November 27 - Reuters (Jonathan Spicer): "The Federal Reserve should be even more attentive to new economic data as its gradual interest-rate hikes edge it ever closer to a neutral stance, the U.S. central bank's second-in-command said… In a carefully worded speech that comes on the heels of another volatile market drop, Fed Vice Chair Richard Clarida stressed how difficult it is for the U.S. central bank to determine both the neutral interest rate and the maximum level of employment."
November 27 - Wall Street Journal (Nick Timiraos): "Federal Reserve officials are moving into a more unpredictable phase of policy-making after two years of removing economic stimulus in regular, quarterly intervals. They will be deciding whether and when to raise interest rates more on the basis of the latest signs of economic vigor… and less on forecasts of how the economy is expected to perform in the months and years to come… This could mean increased uncertainty for markets about the likely path of interest rates more than a few months or even weeks ahead. Most Fed officials in September penciled in one more rate increase this year, which is expected when they meet Dec. 18-19. But their outlook for next year is wide open…"
November 28 - CNBC (Jeff Cox): "The Federal Reserve issued a cautionary note… about risks to financial stability, saying trade tensions, geopolitical uncertainty and a buildup in corporate debt among firms with weak balance sheets pose strong threats. In a lengthy first-time report on the banking system and corporate and business debt, the Fed warned of 'generally elevated' asset prices that 'appear high relative to their historical ranges.' In addition, the central bank said ongoing trade tensions… coupled with an uncertain geopolitical environment could combine with the high asset prices to provide a notable shock. 'An escalation in trade tensions, geopolitical uncertainty, or other adverse shocks could lead to a decline in investor appetite for risks in general,' the report said. 'The resulting drop in asset prices might be particularly large, given that valuations appear elevated relative to historical levels.'"
November 27 - Reuters (Jonathan Spicer and Howard Schneider): "Bankers, executives and investors are warning Federal Reserve officials behind closed doors that record leveraged lending to companies from lightly-regulated corners of Wall Street could make any economic downturn harder to manage. With the second-longest U.S. expansion in its advanced stages, the worry is that a key part of the credit market could be particularly vulnerable to a slowdown, as highly-indebted companies face a greater risk of default. Some of those involved in the debate who spoke to Reuters expressed frustration that the Fed is not taking the risk seriously enough. 'There is a sense at the Fed that it needs to watch this area, leveraged credit, but it's still in the infancy and it's unclear how far will it go,' said an economist familiar with the Fed's efforts."
U.S. Bubble Watch:
November 28 - Bloomberg (Katia Dmitrieva): "The U.S. merchandise-trade deficit widened to a second straight monthly record in October as exports declined, showing how President Donald Trump's tariff war is weighing on the economy. The goods-trade gap grew to $77.2 billion from $76.3 billion in September…"
November 27 - Financial Times (Shobhana Chandra): "Home-price gains in 20 U.S. cities grew in September at the slowest pace in almost two years, adding to signs that buyer interest is waning amid higher mortgage rates and elevated property values. The 20-city index of property values increased 5.1% from a year earlier, the least since November 2016, after rising 5.5% in the prior month, according to S&P CoreLogic Case-Shiller… The median estimate… called for a gain of 5.2%. Nationally, home prices were up 5.5% from September 2017."
November 29 - Reuters (Lucia Mutikani): "U.S. consumer spending increased by the most in seven months in October, but underlying price pressures slowed, with an inflation measure tracked by the Federal Reserve posting its smallest annual increase since February… Consumer spending, which accounts for more than two-thirds of U.S. economic activity, jumped 0.6% last month… The personal consumption expenditures (PCE) price index excluding the volatile food and energy components edged up 0.1% after increasing 0.2% in September. That lowered the year-on-year increase in the so-called core PCE price index to 1.8%..."
November 25 - Wall Street Journal (Ben Eisen and Christina Rexrode): "Rising mortgage rates are crushing much of the refinancing market. But Americans are still using refis to pull cash out of their homes. More than 80% of borrowers who refinanced in the third quarter chose the 'cash out' option, withdrawing $14.6 billion in equity out of their homes, according to… Freddie Mac . That is the highest share of cash-out refis since 2007. The trend attests to the current state of the U.S. economy, which is more than nine years into an expansion that has lifted home values sharply but raised worker pay at a much slower pace. Now, many are finding their homes to be a tappable source of wealth. 'Home equity is the big pot of gold,' said Sam Khater, the chief economist at Freddie Mac."
November 28 - Wall Street Journal (Sarah Chaney and Theo Francis): "Overseas profit growth at American firms is slowing, a new sign of how the faltering global economy is reverberating back to the U.S. U.S. profits earned overseas rose 7% in the third quarter from a year earlier, a slowdown from profit growth of 13.7% in the second quarter and 15.6% in the first… Growth in China slowed, and output in Germany and Japan contracted… The third-quarter picture looks different for U.S. domestic profits, which climbed 10.8% in the third quarter from a year earlier, the strongest pace since 2012."
November 26 - Bloomberg (Sonali Basak and Hannah Levitt): "Billionaires and millionaires in the U.S. are arranging loans to have funds readily available so they won't have to sell off investments in the event of an economic downturn, according to Jim Steiner, head of Wells Fargo & Co.'s ultra-high-net-worth business. 'They always want to have lines in place for if markets do turn down and they get capital calls on private investments,' Steiner, who leads Wells Fargo's Abbot Downing unit, said… 'They want to be able to make those capital calls through use of the line as opposed to basically selling equities in the public markets.' … Global personal wealth ballooned to a record $201.9 trillion last year, according to Boston Consulting Group, with the world's 500 richest people controlling an unprecedented $5.3 trillion, a boon for the private-banking industry."
November 26 - Wall Street Journal (Christopher M. Matthews): "Plunging oil prices once again threaten to force American shale drillers to pull back on production, just as they were preparing to unleash a flood of crude. U.S. benchmark prices… recently at $51.91… have tumbled more than 30% since October and closed Friday at their lowest level in more than a year. Falling prices could force shale drillers-who fracture underground rock formations to release the oil and gas trapped inside-to moderate their growth…"
November 26 - Financial Times (Ed Crooks): "Throughout the US shale oil and gas boom of the past 15 years, one of investors' greatest concerns has been that the exploration and production companies needed continual infusions of cash to finance their investment programmes. After the rise in crude prices this year, it looked as though those fears could be put to rest: in the third quarter of this year the US E&P sector was able to cover its capital spending from its operating cash flows, if only barely. The plunge in oil prices over the past two months is bringing those concerns gushing to the surface again… Over the past decade, US E&P companies have borrowed about $300bn from bond sales and $780bn in bank loans, while raising about $140bn from share sales, according to Dealogic."
November 26 - Wall Street Journal (Laura Kusisto): "A half-hour drive straight north from downtown Dallas sits one of the fastest-growing counties in the country. Cotton fields have been replaced with Toyota's new North American headquarters, a Dallas Cowboys training facility and a sand-colored shopping strip with a Tesla dealership and a three-story food hall. Yet even with the booming growth, Dallas's once vibrant housing market is sputtering. In the high-end subdivisions in the suburb of Frisco, builders are cutting prices on new homes by up to $150,000. On one street alone, $4 million of new homes sat empty on a visit earlier this month."
China Watch:
November 27 - Reuters (David Brunnstrom, David Lawder and Matt Spetalnick): "China is going to this week's G-20 summit hoping for a deal to ease a damaging trade war with the United States, Beijing's ambassador to Washington said…, while warning of dire consequences if U.S. hardliners try to separate the world's two largest economies. …Cui Tiankai said China and the United States had a shared responsibility to cooperate in the interests of the global economy. Asked whether he thought hardliners in the White House were seeking to separate the closely linked U.S. and Chinese economies, Cui said he did not think it was possible or helpful to do so, adding: 'I don't know if people really realize the possible consequences - the impact, the negative impact - if there is such a decoupling.' He drew parallels to the tariff wars of the 1930s among industrial countries, which contributed to a collapse of global trade and heightened tensions in the years before World War Two. 'The lessons of history are still there. In the last century, we had two world wars, and in between them, the Great Depression. I don't think anybody should really try to have a repetition of history. These things should never happen again, so people have to act in a responsible way.'"
November 27 - Reuters (Noah Barkin): "China's Vice Premier Liu He told an economic conference in Hamburg… that protectionist and unilateral approaches on trade would only deepen economic uncertainty, saying no country could emerge as a winner in a trade war. 'We believe that protectionist and unilateral approaches do not offer solutions to problems on trade. On the contrary, they will only bring about more economic uncertainty to the world… The history of economic development has proven time and again that raising tariffs will only lead to economic recession and no one ever emerged as a winner from a trade war. Our approach therefore is to seek a negotiated solution to the problems we have on the basis of equality and mutual respect,' he added."
November 28 - Bloomberg: "China's banking industry assets recorded their slowest year-on-year growth ever last month, reaching 258 trillion yuan ($37 trillion) in October. The 6.6% pace is the worst since the country's banking regulator started publishing data in 2011."
November 29 - Bloomberg: "China's financing units for local governments, already grappling with bloated debts, now face an even bigger predicament -- a build-up of credit guarantees that leave them vulnerable to surging defaults. Around 2,000 of these platforms, known as local government financing vehicles, have offered a total of 7 trillion yuan ($1 trillion) of guarantees to loans, bonds and shadow financing for domestic companies, said Lv Pin, an analyst at CITIC Securities Co. That surpasses the tally of LGFVs' own outstanding local bonds… These guarantees help private companies get financing as banks prefer to lend to state-owned ones. Such external obligations form part of the hidden debt in China's local governments, which S&P Global Ratings last month called 'an iceberg with titanic credit risks.'"
November 25 - Bloomberg: "China's central bank said oversight of the nation's financial holding companies needs to be stepped up due to an increasing number of risks to their operations, deputy governor Zhu Hexin was reported as saying. Potential measures include implementing stricter controls on market access and closer supervision of sources of funding and capital-adequacy ratios, while a 'firewall' system should be set up to better regulate the industry, Zhu was cited… as saying in a speech…"
November 29 - Bloomberg: "China is preparing to end its $176 billion experiment with peer-to-peer lending. Alarmed by a surge in defaults, fraud and investor anger, Chinese authorities are planning to wind down small- and medium-sized P2P lending platforms nationwide… The planned shakeout, which broadens a city-level purge in the P2P hub of Hangzhou, is the clearest sign yet that Chinese leaders want to dramatically shrink a market that spawned the nation's biggest Ponzi scheme, protests in major cities, and life-altering losses for thousands of savers. It suggests that Xi Jinping's government isn't done cracking down on China's $9 trillion shadow banking industry, despite concern that tougher rules have choked the flow of credit to the world's second-largest economy. 'Regulators are making it even more difficult for P2P platforms to survive, especially the smaller ones, so that the public won't suffer more losses,' said Yu Baicheng, Shanghai-based head of research at 01Caijing…"
November 29 - Bloomberg: "It's official now that Jack Ma, chairman of the Chinese e-commerce giant Alibaba Group Holdings Ltd., is a member of the Communist Party. He's also the richest of a growing gaggle of high-net-worth individuals in China, who between them control $6.5 trillion… The Bloomberg Billionaires Index tracks the wealth of the 500 richest individuals globally, 38 of whom are Chinese. More broadly, global wealth research firm Wealth-X found that of the world's 2,754 billionaires, 680 (25%) were in the U.S. and 338 (12%) were in China. UBS Group AG estimates a new billionaire is minted in China every two days."
November 25 - Reuters (Yilei Sun and Adam Jourdan): "When Cao Jun, 40, an engineer from the central Chinese city of Pingdingshan, takes his old, grey MG 3 car to be serviced he always steals a few moments to pop into the Nissan and Honda dealerships next door. But the Civic and Sylphy sedans in the showrooms are just eye candy. Cao wants to upgrade his car, but he's facing a steep loan repayment on his flat, medical bills for his wife and a tough local economy in his once-prosperous coal town. Cao is far from alone. China's car market, the world's largest, is on the brink of its first sales contraction in almost three decades…, a signal of wider economic strains that are rattling the country's leaders in Beijing."
November 27 - Bloomberg (Shawna Kwan): "Hong Kong's housing market is suffering its worst declines since 2016 -- by multiple measures. New-home sales this month are on track to be the lowest by volume since January or February of that year… In addition, used-home prices have this month recorded the biggest single-week decline since March 2016, falling 1.3% week-on-week… Anecdotal evidence… is also fueling speculation that the world's least affordable housing market is heading for a correction. So far, secondary home prices have dipped 5% from an August high. Goldman Sachs… is forecasting a 15 to 20% decline over two years…"
November 26 - Bloomberg (Fox Hu): "Hong Kong's hottest initial public offerings have produced the worst returns for investors this year… Ping An Healthcare and Technology Co., in which retail investors placed orders for 654 times the shares initially available, has tumbled 37% since it started trading in May. Biotechnology firm Ascletis Pharma Inc., whose retail book was covered 10 times, is down 44% from its IPO price, and Meituan Dianping, a food-delivery giant that attracted billionaire investors including Hong Kong's richest man Li Ka-shing, has dropped 24%."
EM Watch:
November 28 - Reuters (Michael O'Boyle): "Mexico's central bank… warned the economy could suffer long-lasting damage if new policies spark a 'loss of confidence' in the country, and the bank's chief pleaded for 'clarity' from the incoming leftist government."
November 27 - Financial Times (Jonathan Wheatley): "Is history repeating itself on Mexican markets? Bonds, stocks and the currency all fell sharply before the July 1 presidential election and the widely-predicted victory of Andrés Manuel López Obrador, the leftist nationalist who was the markets' least favoured candidate. Five months later, they are falling again in the approach to the victorious Mr López Obrador's inauguration on December 1. Back in July, markets staged a big comeback. The benchmark IPC stock index, for example, rose more than 10% from its low in late May to a peak at the end of August. Yet losses in recent weeks have taken the index down more than a fifth from that peak and few investors appear confident of another rally this time. They have been rattled, above all, by the incoming president's use of controversial popular polls to decide policy issues, such as last month's vote to halt construction of a partially-built $13bn airport near Mexico City."
Central Bank Watch:
November 29 - Financial Times (Claire Jones): "A global resurgence in protectionism, political turbulence within the single currency area and turmoil in some emerging markets have made the eurozone's financial system more vulnerable to shocks, the European Central Bank has acknowledged. The ECB said in the latest edition of its twice-yearly Financial Stability Review the risks to the region's financial system had risen since May… The biggest threat was that investors dump risky assets, which could lead to a 'disorderly' drop in the value of such stocks and bonds. The second was that concerns over the debt sustainability of sovereigns such as Italy could grow."
Italy Watch:
November 25 - Bloomberg (Kevin Costelloe and Sonia Sirletti): "Italy's Deputy Prime Minister Matteo Salvini, enjoying a steady climb in public opinion polls, said he would bring down the government if the coalition's budget deficit target was changed. The remarks by Salvini were quoted… hours before the country's prime minister, Giuseppe Conte, was scheduled to make an attempt in Brussels to convince the European Commission that the country's budget is sound. That includes the 2.4% deficit goal for 2019 that has become a lightning rod for Commission objections. 'The 2.4% deficit target can't be touched, otherwise I will bring down the government,' Repubblica quoted Salvini as saying… The report said Salvini was willing to make only minor concessions in next year's spending plan."
Europe Watch:
November 26 - Financial Times (Laurence Fletcher and Robert Smith): "Little over a month ago, Spanish supermarket Dia's bonds carried solid investment-grade credit ratings. Today this debt is ranked in the lower depths of the junk bond market, after a shock profit warning fuelled concerns over the retailer's future. Bond investors, who last year charged Dia less than 1% in annual interest to borrow €300m for six years, will regret that decision. But one of these burnt lenders is very different to all the others: the European Central Bank. The mess at Dia… comes just as the ECB is starting to put the brakes on a bond-buying programme designed to kick-start Europe's sluggish economy. Under its auspices, the ECB has hoovered up €175bn of corporate debt since June 2016. The ECB is widely expected to stop making additional purchases under its so-called "corporate sector purchase programme", or CSPP for short, next year…"
November 29 - Reuters (Joseph Nasr and Rene Wagner): "German annual inflation accelerated at a slower pace in November but stayed well above the European Central Bank's target… German consumer prices… rose by 2.2% year-on-year after an increase of 2.4% in the previous month…"
November 27 - Financial Times (Guy Chazan): "In a cavernous hall in the east German town of Halle, three politicians make their pitch to a crowd of 800 Christian Democrats. One is a diminutive mother-of-three with outsize glasses, another a 38-year-old gay man and the third a millionaire lawyer. Welcome to the battle for the soul of the CDU. 'Everyone who comes to this country must commit themselves to our Christian, western culture,' says the lawyer, Friedrich Merz, to thunderous applause. 'We have values, and they hold true.' Halle is the fourth stop in an eight-city tour by the three candidates to succeed Angela Merkel as leader of the Christian Democratic Union, a party that has ruled Germany for 49 of the past 69 years. Like many CDU members, Jens Gröger, from the nearby town of Wettin, says he is wavering between Mr Merz and Annegret Kramp-Karrenbauer, universally known as AKK, who is leading in the latest opinion poll. Mr Merz 'has the best leadership qualities', he says. 'But AKK is more popular with the general public, and that's ultimately what matters.'"
November 27 - Reuters (Michelle Martin, Ludwig Burger, Philip Blenkinsop, Helen Reid and Jeff Mason): "European auto stocks extended losses on Tuesday after a German magazine reported that U.S. President Donald Trump could impose tariffs on imported cars from next week. Wirtschaftswoche cited EU sources as saying a U.S. Department of Commerce investigation report was on Trump's desk, adding: 'Trump will possibly decide on tariffs as early as next week after the G20 meeting in Buenos Aires.'"
Global Bubble Watch:
November 28 - Reuters (Rodrigo Campos): "Debt among non-financial corporations across the globe rose to a record high of $75 trillion in the second quarter, driven mostly by China and the United States, the Institute of International Finance said… 'China's corporate sector has some of the highest debt levels in the world,' the report… stated, though it said businesses based in the world's second-largest economy also have significant 'cash holdings (that) provide an important cushion against risk.' Canada, India and Mexico rank first in nonfinancial corporate debt relative to cash holdings, the report said, while a 'significant proportion' of Brazilian, Canadian, American and Chinese corporations still struggle to pay interests on their debt."
November 25 - Bloomberg (Andy Mukherjee): "Liquidity is getting tight in Asia. Leave aside Japan, where the printing presses are still pumping out yen. In rest of the region, central banks' supply of currency plus bank reserves has shrunk 7% in real terms since the dollar began surging in April. This is the steepest contraction in base money since the 11% fall between January and October of 2008. Bank of America Merrill Lynch equity strategists recently looked at a similar measure of money supply for the world and asked if the squeeze was a harbinger of something ugly. The inflation-adjusted global monetary base has shrunk just five times since 1980, the analysts noted: in 1982, 1990, 1998, 2001 and 2006. All five episodes either preceded or coincided with global slowdowns."
November 27 - Bloomberg (Venus Feng): "Japan's rich have the largest accumulation of wealth in the Asia-Pacific region, at $7.7 trillion, but the legions of Chinese millionaires are rushing to catch up. The pool of wealth held by China's high-net-worth individuals grew by more than 144% between 2010 and 2017, to reach $6.5 trillion, according to the latest Asia-Pacific Wealth Report from… Capgemini. The equivalent rate of growth in Japan over the same period was about 87%. More recently, India's millionaires have been picking up the pace. Wealth held by Indian high-net-worth individuals rose close to 22% in 2017…"
November 26 - Reuters (Tom Miles): "Global growth in merchandise trade is likely to slow further this quarter, the World Trade Organization (WTO) said…, as it published a quarterly indicator showing declines in all seven of the drivers of trade that it tracks. The WTO's quarterly trade outlook indicator showed a reading of 98.6, the lowest since October 2016, reflecting a further loss of momentum since August, when the index was at 100.3. A reading below 100 signals below-trend growth in trade."
November 25 - Wall Street Journal (Akane Otani and Michael Wursthorn): "Stocks, bonds and commodities from copper to crude oil to burlap are staging a rare simultaneous retreat, putting global markets on track for one of their worst years on record and deepening a sense of unease on Wall Street. Data show global stocks and bonds could both finish the year in the red for the first time in at least a quarter-century… All told, 90% of the 70 asset classes tracked by Deutsche Bank are posting negative total returns in dollar terms for the year through mid-November. The previous high was in 1920, when 84% of 37 asset classes were negative. Last year, just 1% of asset classes delivered negative returns."
November 26 - Reuters (Tom Miles): "Global wage grew by 1.8% in 2017, down from 2.4% in 2016 and the slowest rate since the global financial crisis in 2008, the International Labour Organization said in its… Global Wage Report… 'What is now widely recognized is that slow wage growth has become an obstacle to achieving sustainable economic growth,' ILO Director-General Guy Ryder wrote…"
November 29 - Reuters (Arno Schuetze and Tom Sims): "Police raided six Deutsche Bank offices in and around Frankfurt on Thursday over money laundering allegations linked to the 'Panama Papers', the public prosecutor's office in Germany's financial capital said. Investigators are looking into the activities of two unnamed Deutsche Bank employees alleged to have helped clients set up offshore firms to launder money…"
November 25 - Reuters (Swati Pandey): "Australian regulators are 'monitoring' fast-growing non-bank lenders for possible financial stability risks, a senior central banker said… Non-banks have expanded their market share in Australia recently particularly for interest-only loans, a product category considered high-risk by policymakers. 'The Reserve Bank's liaison indicates that non-banks have been lending to some borrowers who may otherwise have obtained credit from banks in the absence of the regulatory measures,' said Christopher Kent, assistant governor of the Reserve Bank of Australia (RBA) said…"
November 26 - Bloomberg (Ian Fisher and Frederik Balfour): "A 1,000-year-old Chinese scroll rendered by the era's most important artist sold for HK$463 million ($59 million), falling short of expectations that it would set a new Asian record for a work of art at auction."
Japan Watch:
November 26 - Reuters (Leika Kihara): "Bank of Japan Governor Haruhiko Kuroda voiced confidence… that the central bank can shrink its balance sheet at an appropriate pace without disrupting markets, when it exits ultra-loose monetary policy. He also said the BOJ's huge bond buying was aimed at achieving its 2% inflation target, not at bank-rolling the government's huge public debt."
November 26 - Reuters (Tetsushi Kajimoto): "Japanese manufacturing activity expanded at the slowest pace in two years in November and new orders contracted for the first time since September 2016…, raising doubt about growth prospects for the current quarter. The Flash Markit/Nikkei Japan Manufacturing Purchasing Managers' Index (PMI) fell to a seasonally adjusted 51.8 in November from a final 52.9 in October."
Fixed Income Bubble Watch:
November 26 - New York Times (William D. Cohan): "Corporations, like people, are pretty simple: They do what they are rewarded to do. So when the Federal Reserve, by keeping interest rates very low for nearly a decade, rewards companies for borrowing money by making it historically inexpensive to do so, it can't be a surprise to anyone that that's exactly what they did. In 2008, in the wake of the financial crisis, the Fed began its 'quantitative easing' program, a determined effort to buoy the economy by lowering the cost of borrowing. It bought up trillions of dollars in Treasury and other debt securities, effectively reducing long-term interest rates. Debt issuance exploded. In the last decade, the amount of corporate bonds outstanding nearly doubled to $9 trillion, from $5.5 trillion. Much of that surge has come in the form of bonds rated BBB, near the riskier end of the investment-grade spectrum… There is now nearly $2.5 trillion of United States corporate debt rated in the BBB category, close to triple the amount of 2008, making up half of the investment-grade bond market. It's been quite a party. Now comes the hangover."
November 30 - Bloomberg (Adam Tempkin): "Sales of U.S. collateralized loan obligations have hit an all-time high… A $609 million CLO for the Carlyle Group LP sold today via Citigroup Inc. pushes issuance for the year to $124.5 billion, pushing volume over the $124 billion haul in 2014 with more than a month to spare. The market has been buoyed by higher demand for floating-rate debt and leveraged loans as rates rise."
November 28 - Wall Street Journal (Daniel Kruger): "The surge in U.S. government borrowing is beginning to warp bond indexes… The problem: Treasurys tend to offer investors lower yields and produce weaker returns than other kinds of bonds, such as high-quality company debt or securities backed by mortgage payments. Yet as the government steps up borrowing to fund last year's tax cuts, index funds end up holding more Treasurys, squeezing out the securities that pay higher rates of interest. The U.S. government is borrowing $129 billion this week, up 28% from the same series of note auctions a year ago. The increased borrowing means Treasurys now amount to almost 40% of the value in the leading bond market investment benchmark… which fund managers use to gauge their success. That is up from around 20% in 2006…"
November 27 - Financial Times (Kate Allen): "Rising geopolitical tensions are increasingly playing out in the global debt markets. Russia's launch this week of the sale of a euro-denominated bond is just the latest example. Its bid to move away from dollar-denominated issuance comes in the face of a growing threat of US sanctions on its sovereign debt investors. Some bankers have questioned whether Russia really needs to sell the bond, arguing that it is primarily a political display of defiance. But it is not the only recent instance of politics playing a role in countries' decisions about what kind of debt to sell, who to sell it to, and when to sell it. Saudi Arabia illustrated the trend in April when it gatecrashed Qatar's international bond sale, nipping in first with its own previously unannounced debt offering. The move threatened to soak up the market liquidity available to its Gulf state rival. Sovereign debt sales are not just used as hostile political manoeuvres. They can also be a diplomatic tool. Just ask eastern European countries such as Poland and Hungary. Both have sold panda bonds- renminbi denominated debt issued by foreign borrowers - as part of their efforts to woo China."
November 27 - Bloomberg (Kelsey Butler and Jeannine Amodeo): "Diversified manufacturer Jason Inc. became at least the fourth issuer to scrap a U.S. leveraged loan this month amid recent market turbulence. That's the most since July when five deals were pulled."
Leveraged Speculation Watch:
November 29 - Financial Times (Andrew Whiffin): "Emerging market hedge funds are on track for their worst annual performance since 2011 according to Hedge Fund Research… HRF said their Emerging Markets index had fallen 3.7% in October alone. The eighth consecutive month of decline pushed year to date losses to 10.7%, on track to be the worst since the index lost 14% in 2011. The company also said emerging market redemptions in the third quarter of the year were $3.1bn, the largest quarterly withdrawal since the first quarter of 2009. Hedge funds in China have performed particularly badly this year. In October, HFR's China index lost another 7.8%, bringing the year to date loss to 17%."
November 30 - Bloomberg (Ryan Collins): "Hedge funds' bearish bets on U.S. natural gas slid to the lowest in at least five years as the prospect of a winter supply crunch sent prices soaring. Hedge funds' short bets, or wagers on falling prices, in seven contracts fell by 25% in the week ended Nov. 27, the most since February. Total bearish positions dropped to the lowest in data going back to 2013…"
Geopolitics Watch:
November 28 - Reuters (Idrees Ali, Yimou Lee and Ben Blanchard): "The United States sent two Navy ships through the Taiwan Strait… in the third such operation this year, as the U.S. military increases the frequency of transits through the strategic waterway despite opposition from China. The voyage risks further heightening tensions with China but will likely be viewed in self-ruled Taiwan as a sign of support from U.S. President Donald Trump's government amid growing friction between Taipei and Beijing."
November 26 - Financial Times (Editorial Board): "Russia's seizure of three Ukrainian warships in the Black Sea is one of the most ominous incidents in Moscow's nearly five-year campaign of military, political and economic pressure on Kiev. Ukraine says six of its seamen were injured when Russian coast guards opened fire on the ships on Sunday. This is the first time Russia has admitted its own forces, rather than 'volunteers' in unmarked uniforms or the Kremlin's surrogates in east Ukraine, engaged directly with the Ukrainian military. The risk of escalation - with at least the potential to suck in Nato forces - is dangerously high."
November 26 - Bloomberg (Andrew Osborn and Natalia Zinets): "Ukraine… imposed martial law for 30 days in parts of the country most vulnerable to an attack from Russia after President Petro Poroshenko warned of the 'extremely serious' threat of a land invasion. Poroshenko said martial law was necessary to bolster Ukraine's defenses after Russia seized three Ukrainian naval ships and took their crew prisoner at the weekend."
November 28 - Bloomberg (Andrew Langley): "The flare-up between Russia and Ukraine off the coast of Crimea has stirred fears their conflict is set to reignite. Ukraine's leader has warned dramatically of such a scenario. More likely, according to an analysis by Chatham House, is that the aggression is simply the latest gambit in President Vladimir Putin's long game to chip away at his neighbor's economy to undermine the revolution that booted out its Kremlin-backed leader in 2014. By limiting access to the Sea of Azov -- to which the two one-time Soviet allies have equal access under a bilateral agreement -- Russia knows it can disrupt sea shipments of metals and agricultural goods that travel through Ukraine. Those industries are Ukraine's two biggest export earners."
November 26 - Wall Street Journal (Thomas Grove and Farnaz Fassihi): "U.S. Ambassador to the United Nations Nikki Haley warned Russia over the seizure of three Ukrainian naval ships and Kiev put its troops on military alert in response to an incident that is ratcheting up tensions between Moscow and the West. Ukrainian President Petro Poroshenko said the country's parliament had approved his declaration of martial law for 30 days…, for a number of provinces most vulnerable to Russian aggression. Ms. Haley called the seizure of the ships 'yet another reckless Russian escalation' and said, 'It will further undermine Russia's standing in the world. It will further sour Russia's relations with the U.S. and many other countries. It will further increase tensions with Ukraine.'"
Investment-grade bond funds saw outflows of $1.688 billion, and junk bond funds posted outflows of $1.20 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates were unchanged at 4.81% (up 91bps y-o-y). Fifteen-year rates added a basis point to 4.25% (up 95bps). Five-year hybrid ARM rates gained three bps to 4.12% (up 80bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down one basis point to 4.68% (up 55bps).
Federal Reserve Credit last week declined $6.2bn to $4.064 TN. Over the past year, Fed Credit contracted $342bn, or 7.8%. Fed Credit inflated $1.253 TN, or 45%, over the past 316 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $3.3bn last week to a four-month low $3.402 TN. "Custody holdings" were up $14.5bn y-o-y, or 0.4%.
M2 (narrow) "money" supply jumped $35.7bn last week to a record $14.315 TN. "Narrow money" gained $541bn, or 3.9%, over the past year. For the week, Currency increased $1.2bn. Total Checkable Deposits declined $4.7bn, while Savings Deposits jumped $39.5bn. Small Time Deposits gained $4.1bn. Retail Money Funds dipped $4.3bn.
Total money market fund assets gained $6.6bn to $2.944 TN - the high back to May 2010. Money Funds gained $145bn y-o-y, or 5.2%.
Total Commercial Paper added $2.1bn to $1.091 TN. CP rose $48bn y-o-y, or 4.6%.
Currency Watch:
The U.S. dollar index added 0.3% to 97.197 (up 5.5% y-t-d). For the week on the upside, the New Zealand dollar increased 1.3%, the Australian dollar 1.0%, the South Korean won 0.9%, the Mexican peso 0.2% and the Singapore dollar 0.2%. For the week on the downside, the Brazilian real declined 1.0%, the Japanese yen 0.5%, the British pound 0.5%, the Canadian dollar 0.4%, the Norwegian krone 0.3%, the euro 0.2%, the Swedish krona 0.1%, the South African rand 0.1% and the Swiss franc 0.1%. The Chinese renminbi declined 0.17% versus the dollar this week (down 6.52% y-t-d).
Commodities Watch:
November 29 - Bloomberg (Yash Upadhyaya): "Industrial metal prices have tumbled to their lowest in 17 months as falling demand in China and trade war concerns have made commodities cheaper. The Bloomberg Industrial Metals Sub-index tracking aluminium, copper, nickel and zinc has plunged close to 19% in 2018 to its worst level since July 2017. That tracks a fall in the base metals after they hit 52-week highs in the beginning of the year."
The Goldman Sachs Commodities Index recovered 1.1% (down 7.8% y-t-d). Spot Gold was about unchanged at $1,223 (down 6.2%). Silver declined 0.8% to $14.25 (down 16.9%). Crude recovered 32 cents to $50.72 (down 16%). Gasoline increased 0.6% (down 22%), and Natural Gas surged 6.5% (up 57%). Copper rallied 2.0% (down 15%). Wheat jumped 1.7% (up 21%). Corn rose 2.0% (up 8%).
Market Dislocation Watch:
November 28 - Wall Street Journal (Telis Demos and Gunjan Banerji): "As markets get wilder, some Wall Street traders are getting richer. The return of volatility might be making many rank-and-file investors queasy, but it is proving to be a boon to some trading desks at the biggest banks. Many desks focused on derivatives tied to stocks are set to generate billions of dollars more in revenue this year… It is a contrast to recent years, when these desks slumped amid calm and steady markets. As a result, the top traders on banks' equity derivatives desks are expected to take home some of Wall Street's biggest paychecks. Pay for the highest ranks could top $3 million this year, a few hundred thousand dollars more than a year ago… For the dozen largest investment banks globally, equity derivatives revenue in the Americas soared 84% in the first half of 2018 from the same period a year ago, to $3.8 billion…"
November 29 - Bloomberg (Shelly Hagan): "Leon Cooperman blasted algorithmic trading for exaggerating price moves and said it's 'scaring the hell out of the public.' 'Everyone I know of that has accumulated wealth, whether it's Warren Buffett or Mario Gabelli, they buy weakness and they sell strength,' Cooperman said… 'These algos, when it's up they want to buy it, when it's down they want to sell it. It increases volatility.'"
Trump Administration Watch:
November 29 - Wall Street Journal (Bob Davis and Lingling Wei): "The U.S. and China, looking to defuse tensions and boost markets, are exploring a trade deal in which Washington would hold off on further tariffs through the spring in exchange for new talks looking at big changes in Chinese economic policy, said officials on both sides of the Pacific. The talks have been conducted, via telephone, for several weeks, and are coming to a head shortly before President Trump and Chinese President Xi Jinping meet for dinner on Saturday at the end of the Group of 20 leaders summit in Buenos Aires. But it is far from clear whether the discussions will produce any agreement. New talks would focus on what both sides are calling trade 'architecture,' a broad term that could encompass many issues the U.S. has wanted Beijing to address, including intellectual property protection, coerced technology transfer, subsidies to state-owned enterprises, and even non-trade issues such as cyberespionage."
November 28 - Financial Times (Tom Mitchell and Sherry Fei Ju): "Three months ago, Chinese officials saw the meeting between Xi Jinping and Donald Trump at the G20 as their best hope for a settlement that would end Beijing's trade war with Washington. Then they hoped for a truce. Now they will consider themselves lucky if this week's encounter passes without any embarrassment for Mr Xi, as they brace themselves for a new round of US tariffs early next year. As the leaders of the world's two largest economies prepare to meet for the first time in more than a year… the gulf between the two sides remains large. According to people briefed on the talks, Beijing's position has not fundamentally changed since May, when Mr Trump contradicted an assertion by China's lead negotiator that the two sides had agreed not to proceed with tariffs."
November 27 - Financial Times (James Politi and James Kynge): "The White House's top economic adviser cast doubt over the prospect of a ceasefire in the escalating trade war with China, saying negotiations in the run-up to a high-stakes summit this week had made no progress and a new round of tariffs was likely. Larry Kudlow, director of the US National Economic Council, said it was up to Chinese President Xi Jinping to 'step up and come up with new ideas' to break the deadlock at Friday's G20 summit in Argentina… 'We can't find much change in their approach,' Mr Kudlow told reporters. 'President Xi may have a lot more to say in the bilateral [with Mr Trump], I hope he does by the way, I think we all hope he does . . . but at the moment, we don't see it.'"
November 27 - Reuters (Roberta Rampton): "U.S. President Donald Trump is open to reaching a deal on U.S.-China trade irritants over dinner on Saturday with Chinese leader Xi Jinping but is ready to hike tariffs on Chinese imports if there is no breakthrough, White House economic adviser Larry Kudlow said… Kudlow said Trump had told advisers that 'in his view, there is a good possibility that a deal can be made, and that he is open to that.' But he said 'certain conditions have to be met,' listing intellectual property theft, forced technology transfer, ownership of American companies in China, high tariffs and non-tariff barriers on commodities, and commercial hacking as examples of issues that 'must be solved.'"
November 28 - Financial Times (Richard Blackden): "Jay Powell is to address Wall Street bankers on Wednesday amid an intensifying White House campaign to undermine the Federal Reserve chairman's rate increase plans, an unorthodox offensive led by a sitting president who believes tightening monetary policy is choking off an economic boom. Donald Trump on Tuesday escalated his criticisms by telling the Washington Post he believed the Fed, which next month is expected to lift rates for a fourth time this year, 'is way off base with what they're doing'. Mr Trump added: 'So far, I'm not even a little bit happy with my selection of Jay.'"
November 28 - CNBC (Jeff Cox): "With the Federal Reserve under fire for raising interest rates, Treasury Secretary Steven Mnuchin has been looking to see if there are other ways to normalize monetary policy... Mnuchin has been asking some of the biggest players in the bond market if they would rather see the Fed step up the rundown of its balance sheet than hike short-term rates… The balance sheet consists mostly of bonds the central bank purchased in its efforts to stimulate the economy during and after the financial crisis. It currently totals $4.15 trillion, down from $4.51 trillion where it stood before it started allowing a capped level of proceeds from the bond holdings to run off each month."
November 27 - Bloomberg (Jennifer Jacobs and Saleha Mohsin): "Donald Trump plans to keep Treasury Secretary Steven Mnuchin and Commerce Secretary Wilbur Ross amid speculation of a broader shakeup in the president's Cabinet, according to three people familiar with his thinking. Trump has signaled that he plans to make changes at the most senior levels of his administration following midterm elections earlier this month in which his party lost control of the House of Representatives. But Mnuchin and Ross, who each have been the subject of reports that Trump is dissatisfied with them, will remain in their posts, the people said."
November 27 - CNBC (Jacob Pramuk): "President Donald Trump will consider cutting all subsidies to General Motors after the company announced plans to slash production at several American plants, he said… 'We are now looking at cutting all @GM subsidies, including ... for electric cars,' the president wrote in a pair of tweets. The automaker's shares fell following the tweets and were down more than 3% on Tuesday afternoon, on track for their worst day in a month."
Federal Reserve Watch:
November 28 - Reuters (Jonathan Spicer and Ann Saphir): "U.S. Federal Reserve Chair Jerome Powell injected investors with a strong dose of optimism on Wednesday, saying that the central bank's policy rate is now 'just below' estimates of a level that neither brakes nor boosts a healthy U.S. economy, comments that many investors read as signaling the Fed's three-year tightening cycle is drawing to a close. Stocks and interest-rate futures jumped, even while economists wrestled to interpret whether Powell intended to send a message or was simply misunderstood. On their face, the comments were a reversal from early last month, when Powell said the key interest rate was probably still a 'long way' from a so-called neutral level and that the Fed might even tighten policy beyond that level."
November 27 - CNBC (Jeff Cox): "Federal Reserve Vice Chairman Richard Clarida expressed a cautious view Tuesday about how the central bank should proceed in raising interest rates. The Federal Open Market Committee's newest member… emphasized the importance of policymakers being 'data dependent' in how they approach future moves. 'A monetary policy strategy must find a way to combine incoming data and a model of the economy with a healthy dose of judgment - and humility! - to formulate, and then communicate, a path for the policy rate most consistent with our policy objectives,' he said… Assessing the current state of interest rates, Clarida said the FOMC, which sets Fed monetary policy, is 'much closer' to a so-called neutral level…"
November 27 - Reuters (Jonathan Spicer): "The Federal Reserve should be even more attentive to new economic data as its gradual interest-rate hikes edge it ever closer to a neutral stance, the U.S. central bank's second-in-command said… In a carefully worded speech that comes on the heels of another volatile market drop, Fed Vice Chair Richard Clarida stressed how difficult it is for the U.S. central bank to determine both the neutral interest rate and the maximum level of employment."
November 27 - Wall Street Journal (Nick Timiraos): "Federal Reserve officials are moving into a more unpredictable phase of policy-making after two years of removing economic stimulus in regular, quarterly intervals. They will be deciding whether and when to raise interest rates more on the basis of the latest signs of economic vigor… and less on forecasts of how the economy is expected to perform in the months and years to come… This could mean increased uncertainty for markets about the likely path of interest rates more than a few months or even weeks ahead. Most Fed officials in September penciled in one more rate increase this year, which is expected when they meet Dec. 18-19. But their outlook for next year is wide open…"
November 28 - CNBC (Jeff Cox): "The Federal Reserve issued a cautionary note… about risks to financial stability, saying trade tensions, geopolitical uncertainty and a buildup in corporate debt among firms with weak balance sheets pose strong threats. In a lengthy first-time report on the banking system and corporate and business debt, the Fed warned of 'generally elevated' asset prices that 'appear high relative to their historical ranges.' In addition, the central bank said ongoing trade tensions… coupled with an uncertain geopolitical environment could combine with the high asset prices to provide a notable shock. 'An escalation in trade tensions, geopolitical uncertainty, or other adverse shocks could lead to a decline in investor appetite for risks in general,' the report said. 'The resulting drop in asset prices might be particularly large, given that valuations appear elevated relative to historical levels.'"
November 27 - Reuters (Jonathan Spicer and Howard Schneider): "Bankers, executives and investors are warning Federal Reserve officials behind closed doors that record leveraged lending to companies from lightly-regulated corners of Wall Street could make any economic downturn harder to manage. With the second-longest U.S. expansion in its advanced stages, the worry is that a key part of the credit market could be particularly vulnerable to a slowdown, as highly-indebted companies face a greater risk of default. Some of those involved in the debate who spoke to Reuters expressed frustration that the Fed is not taking the risk seriously enough. 'There is a sense at the Fed that it needs to watch this area, leveraged credit, but it's still in the infancy and it's unclear how far will it go,' said an economist familiar with the Fed's efforts."
U.S. Bubble Watch:
November 28 - Bloomberg (Katia Dmitrieva): "The U.S. merchandise-trade deficit widened to a second straight monthly record in October as exports declined, showing how President Donald Trump's tariff war is weighing on the economy. The goods-trade gap grew to $77.2 billion from $76.3 billion in September…"
November 27 - Financial Times (Shobhana Chandra): "Home-price gains in 20 U.S. cities grew in September at the slowest pace in almost two years, adding to signs that buyer interest is waning amid higher mortgage rates and elevated property values. The 20-city index of property values increased 5.1% from a year earlier, the least since November 2016, after rising 5.5% in the prior month, according to S&P CoreLogic Case-Shiller… The median estimate… called for a gain of 5.2%. Nationally, home prices were up 5.5% from September 2017."
November 29 - Reuters (Lucia Mutikani): "U.S. consumer spending increased by the most in seven months in October, but underlying price pressures slowed, with an inflation measure tracked by the Federal Reserve posting its smallest annual increase since February… Consumer spending, which accounts for more than two-thirds of U.S. economic activity, jumped 0.6% last month… The personal consumption expenditures (PCE) price index excluding the volatile food and energy components edged up 0.1% after increasing 0.2% in September. That lowered the year-on-year increase in the so-called core PCE price index to 1.8%..."
November 25 - Wall Street Journal (Ben Eisen and Christina Rexrode): "Rising mortgage rates are crushing much of the refinancing market. But Americans are still using refis to pull cash out of their homes. More than 80% of borrowers who refinanced in the third quarter chose the 'cash out' option, withdrawing $14.6 billion in equity out of their homes, according to… Freddie Mac . That is the highest share of cash-out refis since 2007. The trend attests to the current state of the U.S. economy, which is more than nine years into an expansion that has lifted home values sharply but raised worker pay at a much slower pace. Now, many are finding their homes to be a tappable source of wealth. 'Home equity is the big pot of gold,' said Sam Khater, the chief economist at Freddie Mac."
November 28 - Wall Street Journal (Sarah Chaney and Theo Francis): "Overseas profit growth at American firms is slowing, a new sign of how the faltering global economy is reverberating back to the U.S. U.S. profits earned overseas rose 7% in the third quarter from a year earlier, a slowdown from profit growth of 13.7% in the second quarter and 15.6% in the first… Growth in China slowed, and output in Germany and Japan contracted… The third-quarter picture looks different for U.S. domestic profits, which climbed 10.8% in the third quarter from a year earlier, the strongest pace since 2012."
November 26 - Bloomberg (Sonali Basak and Hannah Levitt): "Billionaires and millionaires in the U.S. are arranging loans to have funds readily available so they won't have to sell off investments in the event of an economic downturn, according to Jim Steiner, head of Wells Fargo & Co.'s ultra-high-net-worth business. 'They always want to have lines in place for if markets do turn down and they get capital calls on private investments,' Steiner, who leads Wells Fargo's Abbot Downing unit, said… 'They want to be able to make those capital calls through use of the line as opposed to basically selling equities in the public markets.' … Global personal wealth ballooned to a record $201.9 trillion last year, according to Boston Consulting Group, with the world's 500 richest people controlling an unprecedented $5.3 trillion, a boon for the private-banking industry."
November 26 - Wall Street Journal (Christopher M. Matthews): "Plunging oil prices once again threaten to force American shale drillers to pull back on production, just as they were preparing to unleash a flood of crude. U.S. benchmark prices… recently at $51.91… have tumbled more than 30% since October and closed Friday at their lowest level in more than a year. Falling prices could force shale drillers-who fracture underground rock formations to release the oil and gas trapped inside-to moderate their growth…"
November 26 - Financial Times (Ed Crooks): "Throughout the US shale oil and gas boom of the past 15 years, one of investors' greatest concerns has been that the exploration and production companies needed continual infusions of cash to finance their investment programmes. After the rise in crude prices this year, it looked as though those fears could be put to rest: in the third quarter of this year the US E&P sector was able to cover its capital spending from its operating cash flows, if only barely. The plunge in oil prices over the past two months is bringing those concerns gushing to the surface again… Over the past decade, US E&P companies have borrowed about $300bn from bond sales and $780bn in bank loans, while raising about $140bn from share sales, according to Dealogic."
November 26 - Wall Street Journal (Laura Kusisto): "A half-hour drive straight north from downtown Dallas sits one of the fastest-growing counties in the country. Cotton fields have been replaced with Toyota's new North American headquarters, a Dallas Cowboys training facility and a sand-colored shopping strip with a Tesla dealership and a three-story food hall. Yet even with the booming growth, Dallas's once vibrant housing market is sputtering. In the high-end subdivisions in the suburb of Frisco, builders are cutting prices on new homes by up to $150,000. On one street alone, $4 million of new homes sat empty on a visit earlier this month."
China Watch:
November 27 - Reuters (David Brunnstrom, David Lawder and Matt Spetalnick): "China is going to this week's G-20 summit hoping for a deal to ease a damaging trade war with the United States, Beijing's ambassador to Washington said…, while warning of dire consequences if U.S. hardliners try to separate the world's two largest economies. …Cui Tiankai said China and the United States had a shared responsibility to cooperate in the interests of the global economy. Asked whether he thought hardliners in the White House were seeking to separate the closely linked U.S. and Chinese economies, Cui said he did not think it was possible or helpful to do so, adding: 'I don't know if people really realize the possible consequences - the impact, the negative impact - if there is such a decoupling.' He drew parallels to the tariff wars of the 1930s among industrial countries, which contributed to a collapse of global trade and heightened tensions in the years before World War Two. 'The lessons of history are still there. In the last century, we had two world wars, and in between them, the Great Depression. I don't think anybody should really try to have a repetition of history. These things should never happen again, so people have to act in a responsible way.'"
November 27 - Reuters (Noah Barkin): "China's Vice Premier Liu He told an economic conference in Hamburg… that protectionist and unilateral approaches on trade would only deepen economic uncertainty, saying no country could emerge as a winner in a trade war. 'We believe that protectionist and unilateral approaches do not offer solutions to problems on trade. On the contrary, they will only bring about more economic uncertainty to the world… The history of economic development has proven time and again that raising tariffs will only lead to economic recession and no one ever emerged as a winner from a trade war. Our approach therefore is to seek a negotiated solution to the problems we have on the basis of equality and mutual respect,' he added."
November 28 - Bloomberg: "China's banking industry assets recorded their slowest year-on-year growth ever last month, reaching 258 trillion yuan ($37 trillion) in October. The 6.6% pace is the worst since the country's banking regulator started publishing data in 2011."
November 29 - Bloomberg: "China's financing units for local governments, already grappling with bloated debts, now face an even bigger predicament -- a build-up of credit guarantees that leave them vulnerable to surging defaults. Around 2,000 of these platforms, known as local government financing vehicles, have offered a total of 7 trillion yuan ($1 trillion) of guarantees to loans, bonds and shadow financing for domestic companies, said Lv Pin, an analyst at CITIC Securities Co. That surpasses the tally of LGFVs' own outstanding local bonds… These guarantees help private companies get financing as banks prefer to lend to state-owned ones. Such external obligations form part of the hidden debt in China's local governments, which S&P Global Ratings last month called 'an iceberg with titanic credit risks.'"
November 25 - Bloomberg: "China's central bank said oversight of the nation's financial holding companies needs to be stepped up due to an increasing number of risks to their operations, deputy governor Zhu Hexin was reported as saying. Potential measures include implementing stricter controls on market access and closer supervision of sources of funding and capital-adequacy ratios, while a 'firewall' system should be set up to better regulate the industry, Zhu was cited… as saying in a speech…"
November 29 - Bloomberg: "China is preparing to end its $176 billion experiment with peer-to-peer lending. Alarmed by a surge in defaults, fraud and investor anger, Chinese authorities are planning to wind down small- and medium-sized P2P lending platforms nationwide… The planned shakeout, which broadens a city-level purge in the P2P hub of Hangzhou, is the clearest sign yet that Chinese leaders want to dramatically shrink a market that spawned the nation's biggest Ponzi scheme, protests in major cities, and life-altering losses for thousands of savers. It suggests that Xi Jinping's government isn't done cracking down on China's $9 trillion shadow banking industry, despite concern that tougher rules have choked the flow of credit to the world's second-largest economy. 'Regulators are making it even more difficult for P2P platforms to survive, especially the smaller ones, so that the public won't suffer more losses,' said Yu Baicheng, Shanghai-based head of research at 01Caijing…"
November 29 - Bloomberg: "It's official now that Jack Ma, chairman of the Chinese e-commerce giant Alibaba Group Holdings Ltd., is a member of the Communist Party. He's also the richest of a growing gaggle of high-net-worth individuals in China, who between them control $6.5 trillion… The Bloomberg Billionaires Index tracks the wealth of the 500 richest individuals globally, 38 of whom are Chinese. More broadly, global wealth research firm Wealth-X found that of the world's 2,754 billionaires, 680 (25%) were in the U.S. and 338 (12%) were in China. UBS Group AG estimates a new billionaire is minted in China every two days."
November 25 - Reuters (Yilei Sun and Adam Jourdan): "When Cao Jun, 40, an engineer from the central Chinese city of Pingdingshan, takes his old, grey MG 3 car to be serviced he always steals a few moments to pop into the Nissan and Honda dealerships next door. But the Civic and Sylphy sedans in the showrooms are just eye candy. Cao wants to upgrade his car, but he's facing a steep loan repayment on his flat, medical bills for his wife and a tough local economy in his once-prosperous coal town. Cao is far from alone. China's car market, the world's largest, is on the brink of its first sales contraction in almost three decades…, a signal of wider economic strains that are rattling the country's leaders in Beijing."
November 27 - Bloomberg (Shawna Kwan): "Hong Kong's housing market is suffering its worst declines since 2016 -- by multiple measures. New-home sales this month are on track to be the lowest by volume since January or February of that year… In addition, used-home prices have this month recorded the biggest single-week decline since March 2016, falling 1.3% week-on-week… Anecdotal evidence… is also fueling speculation that the world's least affordable housing market is heading for a correction. So far, secondary home prices have dipped 5% from an August high. Goldman Sachs… is forecasting a 15 to 20% decline over two years…"
November 26 - Bloomberg (Fox Hu): "Hong Kong's hottest initial public offerings have produced the worst returns for investors this year… Ping An Healthcare and Technology Co., in which retail investors placed orders for 654 times the shares initially available, has tumbled 37% since it started trading in May. Biotechnology firm Ascletis Pharma Inc., whose retail book was covered 10 times, is down 44% from its IPO price, and Meituan Dianping, a food-delivery giant that attracted billionaire investors including Hong Kong's richest man Li Ka-shing, has dropped 24%."
EM Watch:
November 28 - Reuters (Michael O'Boyle): "Mexico's central bank… warned the economy could suffer long-lasting damage if new policies spark a 'loss of confidence' in the country, and the bank's chief pleaded for 'clarity' from the incoming leftist government."
November 27 - Financial Times (Jonathan Wheatley): "Is history repeating itself on Mexican markets? Bonds, stocks and the currency all fell sharply before the July 1 presidential election and the widely-predicted victory of Andrés Manuel López Obrador, the leftist nationalist who was the markets' least favoured candidate. Five months later, they are falling again in the approach to the victorious Mr López Obrador's inauguration on December 1. Back in July, markets staged a big comeback. The benchmark IPC stock index, for example, rose more than 10% from its low in late May to a peak at the end of August. Yet losses in recent weeks have taken the index down more than a fifth from that peak and few investors appear confident of another rally this time. They have been rattled, above all, by the incoming president's use of controversial popular polls to decide policy issues, such as last month's vote to halt construction of a partially-built $13bn airport near Mexico City."
Central Bank Watch:
November 29 - Financial Times (Claire Jones): "A global resurgence in protectionism, political turbulence within the single currency area and turmoil in some emerging markets have made the eurozone's financial system more vulnerable to shocks, the European Central Bank has acknowledged. The ECB said in the latest edition of its twice-yearly Financial Stability Review the risks to the region's financial system had risen since May… The biggest threat was that investors dump risky assets, which could lead to a 'disorderly' drop in the value of such stocks and bonds. The second was that concerns over the debt sustainability of sovereigns such as Italy could grow."
Italy Watch:
November 25 - Bloomberg (Kevin Costelloe and Sonia Sirletti): "Italy's Deputy Prime Minister Matteo Salvini, enjoying a steady climb in public opinion polls, said he would bring down the government if the coalition's budget deficit target was changed. The remarks by Salvini were quoted… hours before the country's prime minister, Giuseppe Conte, was scheduled to make an attempt in Brussels to convince the European Commission that the country's budget is sound. That includes the 2.4% deficit goal for 2019 that has become a lightning rod for Commission objections. 'The 2.4% deficit target can't be touched, otherwise I will bring down the government,' Repubblica quoted Salvini as saying… The report said Salvini was willing to make only minor concessions in next year's spending plan."
Europe Watch:
November 26 - Financial Times (Laurence Fletcher and Robert Smith): "Little over a month ago, Spanish supermarket Dia's bonds carried solid investment-grade credit ratings. Today this debt is ranked in the lower depths of the junk bond market, after a shock profit warning fuelled concerns over the retailer's future. Bond investors, who last year charged Dia less than 1% in annual interest to borrow €300m for six years, will regret that decision. But one of these burnt lenders is very different to all the others: the European Central Bank. The mess at Dia… comes just as the ECB is starting to put the brakes on a bond-buying programme designed to kick-start Europe's sluggish economy. Under its auspices, the ECB has hoovered up €175bn of corporate debt since June 2016. The ECB is widely expected to stop making additional purchases under its so-called "corporate sector purchase programme", or CSPP for short, next year…"
November 29 - Reuters (Joseph Nasr and Rene Wagner): "German annual inflation accelerated at a slower pace in November but stayed well above the European Central Bank's target… German consumer prices… rose by 2.2% year-on-year after an increase of 2.4% in the previous month…"
November 27 - Financial Times (Guy Chazan): "In a cavernous hall in the east German town of Halle, three politicians make their pitch to a crowd of 800 Christian Democrats. One is a diminutive mother-of-three with outsize glasses, another a 38-year-old gay man and the third a millionaire lawyer. Welcome to the battle for the soul of the CDU. 'Everyone who comes to this country must commit themselves to our Christian, western culture,' says the lawyer, Friedrich Merz, to thunderous applause. 'We have values, and they hold true.' Halle is the fourth stop in an eight-city tour by the three candidates to succeed Angela Merkel as leader of the Christian Democratic Union, a party that has ruled Germany for 49 of the past 69 years. Like many CDU members, Jens Gröger, from the nearby town of Wettin, says he is wavering between Mr Merz and Annegret Kramp-Karrenbauer, universally known as AKK, who is leading in the latest opinion poll. Mr Merz 'has the best leadership qualities', he says. 'But AKK is more popular with the general public, and that's ultimately what matters.'"
November 27 - Reuters (Michelle Martin, Ludwig Burger, Philip Blenkinsop, Helen Reid and Jeff Mason): "European auto stocks extended losses on Tuesday after a German magazine reported that U.S. President Donald Trump could impose tariffs on imported cars from next week. Wirtschaftswoche cited EU sources as saying a U.S. Department of Commerce investigation report was on Trump's desk, adding: 'Trump will possibly decide on tariffs as early as next week after the G20 meeting in Buenos Aires.'"
Global Bubble Watch:
November 28 - Reuters (Rodrigo Campos): "Debt among non-financial corporations across the globe rose to a record high of $75 trillion in the second quarter, driven mostly by China and the United States, the Institute of International Finance said… 'China's corporate sector has some of the highest debt levels in the world,' the report… stated, though it said businesses based in the world's second-largest economy also have significant 'cash holdings (that) provide an important cushion against risk.' Canada, India and Mexico rank first in nonfinancial corporate debt relative to cash holdings, the report said, while a 'significant proportion' of Brazilian, Canadian, American and Chinese corporations still struggle to pay interests on their debt."
November 25 - Bloomberg (Andy Mukherjee): "Liquidity is getting tight in Asia. Leave aside Japan, where the printing presses are still pumping out yen. In rest of the region, central banks' supply of currency plus bank reserves has shrunk 7% in real terms since the dollar began surging in April. This is the steepest contraction in base money since the 11% fall between January and October of 2008. Bank of America Merrill Lynch equity strategists recently looked at a similar measure of money supply for the world and asked if the squeeze was a harbinger of something ugly. The inflation-adjusted global monetary base has shrunk just five times since 1980, the analysts noted: in 1982, 1990, 1998, 2001 and 2006. All five episodes either preceded or coincided with global slowdowns."
November 27 - Bloomberg (Venus Feng): "Japan's rich have the largest accumulation of wealth in the Asia-Pacific region, at $7.7 trillion, but the legions of Chinese millionaires are rushing to catch up. The pool of wealth held by China's high-net-worth individuals grew by more than 144% between 2010 and 2017, to reach $6.5 trillion, according to the latest Asia-Pacific Wealth Report from… Capgemini. The equivalent rate of growth in Japan over the same period was about 87%. More recently, India's millionaires have been picking up the pace. Wealth held by Indian high-net-worth individuals rose close to 22% in 2017…"
November 26 - Reuters (Tom Miles): "Global growth in merchandise trade is likely to slow further this quarter, the World Trade Organization (WTO) said…, as it published a quarterly indicator showing declines in all seven of the drivers of trade that it tracks. The WTO's quarterly trade outlook indicator showed a reading of 98.6, the lowest since October 2016, reflecting a further loss of momentum since August, when the index was at 100.3. A reading below 100 signals below-trend growth in trade."
November 25 - Wall Street Journal (Akane Otani and Michael Wursthorn): "Stocks, bonds and commodities from copper to crude oil to burlap are staging a rare simultaneous retreat, putting global markets on track for one of their worst years on record and deepening a sense of unease on Wall Street. Data show global stocks and bonds could both finish the year in the red for the first time in at least a quarter-century… All told, 90% of the 70 asset classes tracked by Deutsche Bank are posting negative total returns in dollar terms for the year through mid-November. The previous high was in 1920, when 84% of 37 asset classes were negative. Last year, just 1% of asset classes delivered negative returns."
November 26 - Reuters (Tom Miles): "Global wage grew by 1.8% in 2017, down from 2.4% in 2016 and the slowest rate since the global financial crisis in 2008, the International Labour Organization said in its… Global Wage Report… 'What is now widely recognized is that slow wage growth has become an obstacle to achieving sustainable economic growth,' ILO Director-General Guy Ryder wrote…"
November 29 - Reuters (Arno Schuetze and Tom Sims): "Police raided six Deutsche Bank offices in and around Frankfurt on Thursday over money laundering allegations linked to the 'Panama Papers', the public prosecutor's office in Germany's financial capital said. Investigators are looking into the activities of two unnamed Deutsche Bank employees alleged to have helped clients set up offshore firms to launder money…"
November 25 - Reuters (Swati Pandey): "Australian regulators are 'monitoring' fast-growing non-bank lenders for possible financial stability risks, a senior central banker said… Non-banks have expanded their market share in Australia recently particularly for interest-only loans, a product category considered high-risk by policymakers. 'The Reserve Bank's liaison indicates that non-banks have been lending to some borrowers who may otherwise have obtained credit from banks in the absence of the regulatory measures,' said Christopher Kent, assistant governor of the Reserve Bank of Australia (RBA) said…"
November 26 - Bloomberg (Ian Fisher and Frederik Balfour): "A 1,000-year-old Chinese scroll rendered by the era's most important artist sold for HK$463 million ($59 million), falling short of expectations that it would set a new Asian record for a work of art at auction."
Japan Watch:
November 26 - Reuters (Leika Kihara): "Bank of Japan Governor Haruhiko Kuroda voiced confidence… that the central bank can shrink its balance sheet at an appropriate pace without disrupting markets, when it exits ultra-loose monetary policy. He also said the BOJ's huge bond buying was aimed at achieving its 2% inflation target, not at bank-rolling the government's huge public debt."
November 26 - Reuters (Tetsushi Kajimoto): "Japanese manufacturing activity expanded at the slowest pace in two years in November and new orders contracted for the first time since September 2016…, raising doubt about growth prospects for the current quarter. The Flash Markit/Nikkei Japan Manufacturing Purchasing Managers' Index (PMI) fell to a seasonally adjusted 51.8 in November from a final 52.9 in October."
Fixed Income Bubble Watch:
November 26 - New York Times (William D. Cohan): "Corporations, like people, are pretty simple: They do what they are rewarded to do. So when the Federal Reserve, by keeping interest rates very low for nearly a decade, rewards companies for borrowing money by making it historically inexpensive to do so, it can't be a surprise to anyone that that's exactly what they did. In 2008, in the wake of the financial crisis, the Fed began its 'quantitative easing' program, a determined effort to buoy the economy by lowering the cost of borrowing. It bought up trillions of dollars in Treasury and other debt securities, effectively reducing long-term interest rates. Debt issuance exploded. In the last decade, the amount of corporate bonds outstanding nearly doubled to $9 trillion, from $5.5 trillion. Much of that surge has come in the form of bonds rated BBB, near the riskier end of the investment-grade spectrum… There is now nearly $2.5 trillion of United States corporate debt rated in the BBB category, close to triple the amount of 2008, making up half of the investment-grade bond market. It's been quite a party. Now comes the hangover."
November 30 - Bloomberg (Adam Tempkin): "Sales of U.S. collateralized loan obligations have hit an all-time high… A $609 million CLO for the Carlyle Group LP sold today via Citigroup Inc. pushes issuance for the year to $124.5 billion, pushing volume over the $124 billion haul in 2014 with more than a month to spare. The market has been buoyed by higher demand for floating-rate debt and leveraged loans as rates rise."
November 28 - Wall Street Journal (Daniel Kruger): "The surge in U.S. government borrowing is beginning to warp bond indexes… The problem: Treasurys tend to offer investors lower yields and produce weaker returns than other kinds of bonds, such as high-quality company debt or securities backed by mortgage payments. Yet as the government steps up borrowing to fund last year's tax cuts, index funds end up holding more Treasurys, squeezing out the securities that pay higher rates of interest. The U.S. government is borrowing $129 billion this week, up 28% from the same series of note auctions a year ago. The increased borrowing means Treasurys now amount to almost 40% of the value in the leading bond market investment benchmark… which fund managers use to gauge their success. That is up from around 20% in 2006…"
November 27 - Financial Times (Kate Allen): "Rising geopolitical tensions are increasingly playing out in the global debt markets. Russia's launch this week of the sale of a euro-denominated bond is just the latest example. Its bid to move away from dollar-denominated issuance comes in the face of a growing threat of US sanctions on its sovereign debt investors. Some bankers have questioned whether Russia really needs to sell the bond, arguing that it is primarily a political display of defiance. But it is not the only recent instance of politics playing a role in countries' decisions about what kind of debt to sell, who to sell it to, and when to sell it. Saudi Arabia illustrated the trend in April when it gatecrashed Qatar's international bond sale, nipping in first with its own previously unannounced debt offering. The move threatened to soak up the market liquidity available to its Gulf state rival. Sovereign debt sales are not just used as hostile political manoeuvres. They can also be a diplomatic tool. Just ask eastern European countries such as Poland and Hungary. Both have sold panda bonds- renminbi denominated debt issued by foreign borrowers - as part of their efforts to woo China."
November 27 - Bloomberg (Kelsey Butler and Jeannine Amodeo): "Diversified manufacturer Jason Inc. became at least the fourth issuer to scrap a U.S. leveraged loan this month amid recent market turbulence. That's the most since July when five deals were pulled."
Leveraged Speculation Watch:
November 29 - Financial Times (Andrew Whiffin): "Emerging market hedge funds are on track for their worst annual performance since 2011 according to Hedge Fund Research… HRF said their Emerging Markets index had fallen 3.7% in October alone. The eighth consecutive month of decline pushed year to date losses to 10.7%, on track to be the worst since the index lost 14% in 2011. The company also said emerging market redemptions in the third quarter of the year were $3.1bn, the largest quarterly withdrawal since the first quarter of 2009. Hedge funds in China have performed particularly badly this year. In October, HFR's China index lost another 7.8%, bringing the year to date loss to 17%."
November 30 - Bloomberg (Ryan Collins): "Hedge funds' bearish bets on U.S. natural gas slid to the lowest in at least five years as the prospect of a winter supply crunch sent prices soaring. Hedge funds' short bets, or wagers on falling prices, in seven contracts fell by 25% in the week ended Nov. 27, the most since February. Total bearish positions dropped to the lowest in data going back to 2013…"
Geopolitics Watch:
November 28 - Reuters (Idrees Ali, Yimou Lee and Ben Blanchard): "The United States sent two Navy ships through the Taiwan Strait… in the third such operation this year, as the U.S. military increases the frequency of transits through the strategic waterway despite opposition from China. The voyage risks further heightening tensions with China but will likely be viewed in self-ruled Taiwan as a sign of support from U.S. President Donald Trump's government amid growing friction between Taipei and Beijing."
November 26 - Financial Times (Editorial Board): "Russia's seizure of three Ukrainian warships in the Black Sea is one of the most ominous incidents in Moscow's nearly five-year campaign of military, political and economic pressure on Kiev. Ukraine says six of its seamen were injured when Russian coast guards opened fire on the ships on Sunday. This is the first time Russia has admitted its own forces, rather than 'volunteers' in unmarked uniforms or the Kremlin's surrogates in east Ukraine, engaged directly with the Ukrainian military. The risk of escalation - with at least the potential to suck in Nato forces - is dangerously high."
November 26 - Bloomberg (Andrew Osborn and Natalia Zinets): "Ukraine… imposed martial law for 30 days in parts of the country most vulnerable to an attack from Russia after President Petro Poroshenko warned of the 'extremely serious' threat of a land invasion. Poroshenko said martial law was necessary to bolster Ukraine's defenses after Russia seized three Ukrainian naval ships and took their crew prisoner at the weekend."
November 28 - Bloomberg (Andrew Langley): "The flare-up between Russia and Ukraine off the coast of Crimea has stirred fears their conflict is set to reignite. Ukraine's leader has warned dramatically of such a scenario. More likely, according to an analysis by Chatham House, is that the aggression is simply the latest gambit in President Vladimir Putin's long game to chip away at his neighbor's economy to undermine the revolution that booted out its Kremlin-backed leader in 2014. By limiting access to the Sea of Azov -- to which the two one-time Soviet allies have equal access under a bilateral agreement -- Russia knows it can disrupt sea shipments of metals and agricultural goods that travel through Ukraine. Those industries are Ukraine's two biggest export earners."
November 26 - Wall Street Journal (Thomas Grove and Farnaz Fassihi): "U.S. Ambassador to the United Nations Nikki Haley warned Russia over the seizure of three Ukrainian naval ships and Kiev put its troops on military alert in response to an incident that is ratcheting up tensions between Moscow and the West. Ukrainian President Petro Poroshenko said the country's parliament had approved his declaration of martial law for 30 days…, for a number of provinces most vulnerable to Russian aggression. Ms. Haley called the seizure of the ships 'yet another reckless Russian escalation' and said, 'It will further undermine Russia's standing in the world. It will further sour Russia's relations with the U.S. and many other countries. It will further increase tensions with Ukraine.'"
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