[Bloomberg] China Says Vice Premier Liu He to Join U.S Trade Talks Next Week
[Reuters] U.S. fund managers brace for consumer slowdown
[SeattleTimes] Wealth concentration near ‘levels last seen during the Roaring Twenties,’ study finds
[MarketWatch] Why stock-market traders are already bracing for a make-or-break month in March
[Reuters] China condemns Indian PM Modi's visit to disputed region
[WSJ] The Internet, Divided Between the U.S. and China, Has Become a Battleground
[FT] Biggest risk to quant funds is loss of confidence, says QMA chief
Saturday, February 9, 2019
Friday, February 8, 2019
Weekly Commentary: Delusional
February 8 – Bloomberg (Brian Chappatta): “Bond traders are dusting off their tried and true post-crisis playbook after the Federal Reserve’s pivot last month. What they don’t realize is that the game has most likely changed. In an unabashed reach for yield, investors suddenly can’t get enough of the riskiest debt, with the Bloomberg Barclays U.S. Corporate High Yield Bond Index posting a staggering 5.25% total return in the first five weeks of 2019, led by those securities rated in the CCC tier. In the largest CCC borrowing since September, Clear Channel Outdoor Holdings Inc. received orders this week of more than $5 billion for a $2.2 billion deal, allowing it to price its debt to yield 9.25%, compared with whisper talk of about 10%.”
A Friday headline from a separate Bloomberg article: “Corporate Bonds on Fire as Dovish Fed Soothes Investors,” with the opening sentence: “Fear is turning to exuberance in credit markets.” According to Lipper, corporate investment-grade funds enjoyed inflows of $2.668 billion last week, with high-yield funds receiving $3.859 billion. Bloomberg headline: “High-Yield Bond Funds See Biggest Inflow Since July 2016.” This follows the biggest high-yield inflows ($3.28bn) since December 2016 from two weeks ago.
There’s support for the argument that financial conditions have loosened significantly over recent weeks. Prices of corporate bond default protection have declined. After trading as high as 95 bps on December 24th, by Tuesday an index (Markit) of investment-grade credit default swap (CDS) prices had dropped all the way back to 64 (near October levels). Risk premiums have narrowed, especially for high-risk junk bonds. U.S. high-yield spreads (Bloomberg Barclays) traded as wide as 537 bps on (tumultuous) January 3rd. By this Wednesday, they were back down to 400 bps (still significantly above the 300bps from October 3rd).
Bank bond CDS prices have retreated. After spiking to 129 bps on January 3rd, Goldman Sachs CDS was back down to 82 bps on Tuesday (closed the week at 89). For perspective, GS CDS traded at 55 on the final day of July and 59 bps on October 3rd. After trading to 218 bps on January 3rd, Deutsche Bank CDS was back down to 167 bps by the end of January (ended Friday at 189bps)
February 8 – Reuter (Marc Jones): “Investors pumped record high volumes of cash into emerging markets shares and bonds in the past week, Bank of America Merrill Lynch (BAML) said on Friday amid expectations U.S. monetary policy could lead to a weaker U.S. dollar… Investors have piled into emerging market equities and bonds in recent months amid expectations that the U.S. Federal Reserve will not raise interest rates as quickly as previously expected or even no longer tighten its policy.”
February 7 – Reuter (Marc Jones): “A ‘wall of money’ is set to flood into emerging markets assets now the U.S. Federal Reserve has eased the risk of a sharp rise in global borrowing costs, the Institute of International Finance (IIF) said… The IIF, which closely tracks financing flows, said its high frequency indicators were picking up a “sharp spike” of inflows following last week’s confirmation of a change of tack from the U.S. central bank. ‘Recent events look likely to restart the ‘Wall of Money’ to Emerging Markets,’ IIF economists said in a report.”
Institute of International Finance estimates put January ETF inflows on a quarterly pace of about $50 billion, ‘already equal to strong EM inflows in 2017 and likely to go higher.’”
The MSCI Emerging Market equities index has gained 7.3% y-t-d. So far in 2019, dollar-denominated bond yields are down 828 bps in Venezuela, 36 bps in Indonesia, 34 bps in Ukraine, 33 bps in Saudi Arabia, 31 bps in Russia, 30 bps in Chile, 30 bps in Colombia, and 16 bps in Turkey. Local currency yields have sunk 91 bps in Lebanon, 77 bps in Philippines, 35 bps in Hungary, 35 bps in Mexico and 27 bps in Russia.
With “risk on” back on track, why then would “safe haven” bonds be attracting such keen interest? German 10-year bund yields sank eight bps this week to nine bps (0.09%), the low going back to October 2016. Two-year German yields were little changed at negative 0.58%. Ten-year Treasury yields declined five bps this week to 2.64%, only nine bps above the panic low yields from January 3rd. Japanese 10-year yields declined another basis point this week to negative three bps (negative 0.03%), only about a basis point above January 3rd lows. Swiss 10-year yields declined six bps this week to negative 0.33% - the low since October 2016.
So, who’s got this right – risk assets or the safe havens? Why can’t they both be “right” – or wrong? There is much discussion of a confused marketplace: extraordinary cross-currents leaving traders confounded. In search of an explanation, I’ll point to the consequences of Monetary Disorder.
It has now been a full decade of near zero interest rates globally. Trillions (estimates of around $16 TN) of new central bank “money” were injected into global securities markets. What’s more, global central banks have repeatedly intervened to buttress global markets - from 2008/09 crisis measures; to 2012’s “whatever it takes”; 2016’s “whatever it takes to support a faltering Chinese Bubble”; to last month’s Powell U-turn. The combination of a decade of artificially low rates, an unfathomable amount of new market liquidity and an unprecedented degree of central bank market support have fostered momentous market structural maladjustment. We’re living with the consequences.
It is certainly not easy to craft an explanation for today’s Aberrant Market Behavior. I would start by positing that a massive pool of speculative finance has accumulated over this protracted cycle. There is at the same time liquidity excess, excessive leverage and the proliferation of derivatives strategies (speculation and hedging). In short, there is trend-following and performance chasing finance like never before – keenly fixated on global monetary policies. Illiquidity lies in wait.
When this mercurial finance is flowing readily into inflating securities markets, the resulting conspicuous speculative excess pressures central bankers to move forward with “normalization” (Powell October 3rd). At the same time, this edifice of speculative finance is innately fragile.
Speculative markets reversing to the downside rather quickly unleash “Risk Off” dynamics. These days, de-risking/deleveraging abruptly alters a market’s liquidity profile. Not only is there the liquidation of holdings and the collapse of leverage, the resulting downward market pressure triggers risk aversion more generally for this imposing global pool of speculative finance. And as the ETF complex suffers outflows, the leveraged speculating community and derivatives industry move to shed risk ahead of a retail investor panic. And when a meaningful component of the marketplace seeks to hedge market risk, it’s difficult to envision who takes the other side of such a trade.
Meanwhile, major shifts in dynamic-hedging programs unfold throughout the derivative universe. When markets are running on the upside, derivative-related buying (i.e. hedging in-the-money call options written/sold) exacerbates already powerful trend-following flows. But when a speculative upside (i.e. “blow-off” or “melt-up”) market advance eventually reverses course, derivative-related buying swiftly transforms into destabilizing selling. For example, a quant model used for (dynamic) “delta hedging” exposures from derivatives previously written (i.e. call options) would halt aggressive buy programs - immediately becoming a seller into market weakness.
Meanwhile, sinking markets will see keen interest in buying downside derivative protection (i.e. puts) – both for speculation and hedging. The sellers of these derivatives will then dynamically hedge these instruments, which essentially require selling into declining markets. Using out-of-the-money put options as an example, the amount of selling required to protect the seller/writer of these instruments expands exponentially as market prices approach option strike prices. The point is, derivatives tend to play a significant role in promoting destabilizing upside market moves, dislocations that are then highly susceptible to reversals and destabilizing market breakdowns.
Why have risk markets rallied so strongly to begin 2019? Because the Powell U-Turn incited a reversal of short positions and the unwind of bearish hedges and speculations. Derivative-related (“dynamic”) selling – that had been rapidly gaining momentum – reversed course and became aggressive buying. Market momentum then incited buying from the enormous trend-following/performance chasing Crowd. Who can afford to miss a rally? Certainly not the global leveraged speculating community, with many at risk of losing assets, incomes and businesses.
Why have safe haven assets performed so well in the face of surging equities and corporate debt? Because current Market Structure is inherently unstable and increasingly prone to an accident. Today’s buyers of Treasuries, bunds and JGBs are less concerned with January/Q1 equities and junk bond returns, keenly focused instead on acute global market instabilities and the inevitability of a systemic market liquidity event. I would further argue that this dysfunctional market dynamic recalls the destabilizing rally in Treasuries and agency securities in 2007 and well into 2008. This market anomaly stoked end-of-cycle speculative Bubble excess and exacerbated systemic fragilities.
When risk markets advance, news and analysis invariably focus on the positives – an expanding U.S. economy, prospects of a trade deal with China, buoyant profits, a backdrop of ongoing exciting technological advancements, perpetual low interest rates, endless loose financial conditions, etc. With markets advancing, mounting risks are easily disregarded. “Deficits don’t matter.” Debt concerns are archaic. Market Structure is a nothing burger. Best to ignore escalating social, political and geopolitical risks. The unfolding clash between the U.S. and the rising China superpower – it’s nothing. An increasingly fragmented and combative world – ditto.
As we saw in December, sinking markets direct attention to an expanding list of troubling developments. Years of inflating securities prices seemed to demonstrate that so many of the old worries were unjustified – none really mattered. The problem is that many do matter – and some tremendously. The current extraordinary backdrop has all the makings for a decisive bearish turn in market sentiment that would create a problematic feedback loop within the real economy – domestically and globally.
I’ll highlight an issue that has come to be easily dismissed - yet matters tremendously. Zero rates and QE were a policy experiment. The consensus view holds that the great success of this monetary exercise ensures that QE is now a permanent fixture in the central banking “tool kit”. The original premise of this experiment rested on the supposition that a temporary boost of liquidity would stimulate higher risk market prices and risk-taking, with resulting wealth effects that would loosen financial conditions while stimulating investment, spending and income growth throughout the real economy. The expectation was that a shot of stimulus would return the real economy back to its long-term trajectory.
History teaches us that monetary inflations are rarely temporary. Travel down that road and it’s nearly impossible to get off. Dr. Bernanke, the Federal Reserve and global central bankers never contemplated what a decade of unending monetary stimulus would do to Market and Financial Structure. Most – in policy circles and the marketplace - believe beyond a doubt that monetary stimulus was hugely successful in resuscitating economic growth dynamics.
But it’s on the financial side where consequences and repercussions have been fatefully neglected. It’s in the financial world where a decade of QE, zero rates and central bank market backstops imparted momentous structural change: the colossal ETF complex, the passive “investing” craze, quantitative strategies, algorithmic and high-frequency trading, a proliferation of derivative trading, leveraging and trend-following speculation on a global basis – to list only the most obvious. Along the way, aggressive monetary stimulus had much greater inflationary effects on risk markets than upon real economies. This ensured a continuation of aggressive stimulus - and only deeper market Bubble maladjustment.
For a month now, markets have celebrated the view that Chairman Powell (and global central bankers more generally) will not be attempting to “normalize” monetary policy: No Fed-induced tightening of financial conditions, along with no fretting the new Chairman’s commitment to the “Fed put.” Lost in all of this is recognition that a decade of experimental monetary stimulus has failed. Global finance is much more fragile today than prior to the 2008 crisis – the global economy more imbalanced and vulnerable. Monetary management will continue to destabilize.
Never has it been so easy to speculate – equities and corporate Credit alike. Never has corporate Credit availability – and financial conditions more generally – been governed by an interplay between the ETF complex, derivatives strategies and a distressed global leveraged speculating community. The Powell U-Turn unleashed another round of speculative excess. Right in the face of faltering global growth, I would argue this bout of speculation is especially precarious. And when the current “risk on” gives way to reality, maladjusted Market Structure will ensure liquidity issues on a scale beyond December.
“This is deflation, the amazing lurch toward recession despite QE...,” read the opening sentence of a friendly email I received last week. Yet I remember all the talk of deflation after the 1987 stock market crash. It became even louder in 1990 – then again in ‘97/’98. Deflation was the big worry with the bursting of the “tech” Bubble and then with corporate debt problems in 2002. And global central bankers have been fighting deflation now for a decade since “the worst crisis since the Great Depression.”
For a long time now, I’ve argued that Bubbles are the overarching risk. The “scourge of deflation” was not the ghastly plight to vanquish with interminable “whatever it takes.” Rather, deflation is a fateful consequence of bursting Bubbles – Bubbles inflated in the process of central bankers fighting so-called “deflationary forces.” Now, after thirty years of unending global Credit growth, activist central banking and egregious financial speculation, Bubble risk has never been so great: “The amazing lurch toward recession” and financial dislocation specifically because of a failed experiment in QE and inflationist monetary management.
But I’ll conclude with Market Structure. Global markets have turned even more synchronized during this upside convulsion. This increases already highly elevated risk come the next downturn. And I wouldn’t expect much in the way of diversification benefits from Treasuries, bunds and JGBs. It’s worth mentioning that Italian 10-year yields were up 31 bps in two weeks (spreads to bunds widening 41 bps!). With Italian and European economic prospects darkening by the week, European corporate debt came under some pressure this week. Germany’s DAX equities index fell 2.4%, and Japan’s Nikkei dropped 2.2%. And one could almost see fissures start to appear in EM currencies, equities and bonds. Eastern European currencies were notably weak, while the South African rand, Brazilian real and Argentine peso were all down about 2%.
A Friday headline from a separate Bloomberg article: “Corporate Bonds on Fire as Dovish Fed Soothes Investors,” with the opening sentence: “Fear is turning to exuberance in credit markets.” According to Lipper, corporate investment-grade funds enjoyed inflows of $2.668 billion last week, with high-yield funds receiving $3.859 billion. Bloomberg headline: “High-Yield Bond Funds See Biggest Inflow Since July 2016.” This follows the biggest high-yield inflows ($3.28bn) since December 2016 from two weeks ago.
There’s support for the argument that financial conditions have loosened significantly over recent weeks. Prices of corporate bond default protection have declined. After trading as high as 95 bps on December 24th, by Tuesday an index (Markit) of investment-grade credit default swap (CDS) prices had dropped all the way back to 64 (near October levels). Risk premiums have narrowed, especially for high-risk junk bonds. U.S. high-yield spreads (Bloomberg Barclays) traded as wide as 537 bps on (tumultuous) January 3rd. By this Wednesday, they were back down to 400 bps (still significantly above the 300bps from October 3rd).
Bank bond CDS prices have retreated. After spiking to 129 bps on January 3rd, Goldman Sachs CDS was back down to 82 bps on Tuesday (closed the week at 89). For perspective, GS CDS traded at 55 on the final day of July and 59 bps on October 3rd. After trading to 218 bps on January 3rd, Deutsche Bank CDS was back down to 167 bps by the end of January (ended Friday at 189bps)
February 8 – Reuter (Marc Jones): “Investors pumped record high volumes of cash into emerging markets shares and bonds in the past week, Bank of America Merrill Lynch (BAML) said on Friday amid expectations U.S. monetary policy could lead to a weaker U.S. dollar… Investors have piled into emerging market equities and bonds in recent months amid expectations that the U.S. Federal Reserve will not raise interest rates as quickly as previously expected or even no longer tighten its policy.”
February 7 – Reuter (Marc Jones): “A ‘wall of money’ is set to flood into emerging markets assets now the U.S. Federal Reserve has eased the risk of a sharp rise in global borrowing costs, the Institute of International Finance (IIF) said… The IIF, which closely tracks financing flows, said its high frequency indicators were picking up a “sharp spike” of inflows following last week’s confirmation of a change of tack from the U.S. central bank. ‘Recent events look likely to restart the ‘Wall of Money’ to Emerging Markets,’ IIF economists said in a report.”
Institute of International Finance estimates put January ETF inflows on a quarterly pace of about $50 billion, ‘already equal to strong EM inflows in 2017 and likely to go higher.’”
The MSCI Emerging Market equities index has gained 7.3% y-t-d. So far in 2019, dollar-denominated bond yields are down 828 bps in Venezuela, 36 bps in Indonesia, 34 bps in Ukraine, 33 bps in Saudi Arabia, 31 bps in Russia, 30 bps in Chile, 30 bps in Colombia, and 16 bps in Turkey. Local currency yields have sunk 91 bps in Lebanon, 77 bps in Philippines, 35 bps in Hungary, 35 bps in Mexico and 27 bps in Russia.
With “risk on” back on track, why then would “safe haven” bonds be attracting such keen interest? German 10-year bund yields sank eight bps this week to nine bps (0.09%), the low going back to October 2016. Two-year German yields were little changed at negative 0.58%. Ten-year Treasury yields declined five bps this week to 2.64%, only nine bps above the panic low yields from January 3rd. Japanese 10-year yields declined another basis point this week to negative three bps (negative 0.03%), only about a basis point above January 3rd lows. Swiss 10-year yields declined six bps this week to negative 0.33% - the low since October 2016.
So, who’s got this right – risk assets or the safe havens? Why can’t they both be “right” – or wrong? There is much discussion of a confused marketplace: extraordinary cross-currents leaving traders confounded. In search of an explanation, I’ll point to the consequences of Monetary Disorder.
It has now been a full decade of near zero interest rates globally. Trillions (estimates of around $16 TN) of new central bank “money” were injected into global securities markets. What’s more, global central banks have repeatedly intervened to buttress global markets - from 2008/09 crisis measures; to 2012’s “whatever it takes”; 2016’s “whatever it takes to support a faltering Chinese Bubble”; to last month’s Powell U-turn. The combination of a decade of artificially low rates, an unfathomable amount of new market liquidity and an unprecedented degree of central bank market support have fostered momentous market structural maladjustment. We’re living with the consequences.
It is certainly not easy to craft an explanation for today’s Aberrant Market Behavior. I would start by positing that a massive pool of speculative finance has accumulated over this protracted cycle. There is at the same time liquidity excess, excessive leverage and the proliferation of derivatives strategies (speculation and hedging). In short, there is trend-following and performance chasing finance like never before – keenly fixated on global monetary policies. Illiquidity lies in wait.
When this mercurial finance is flowing readily into inflating securities markets, the resulting conspicuous speculative excess pressures central bankers to move forward with “normalization” (Powell October 3rd). At the same time, this edifice of speculative finance is innately fragile.
Speculative markets reversing to the downside rather quickly unleash “Risk Off” dynamics. These days, de-risking/deleveraging abruptly alters a market’s liquidity profile. Not only is there the liquidation of holdings and the collapse of leverage, the resulting downward market pressure triggers risk aversion more generally for this imposing global pool of speculative finance. And as the ETF complex suffers outflows, the leveraged speculating community and derivatives industry move to shed risk ahead of a retail investor panic. And when a meaningful component of the marketplace seeks to hedge market risk, it’s difficult to envision who takes the other side of such a trade.
Meanwhile, major shifts in dynamic-hedging programs unfold throughout the derivative universe. When markets are running on the upside, derivative-related buying (i.e. hedging in-the-money call options written/sold) exacerbates already powerful trend-following flows. But when a speculative upside (i.e. “blow-off” or “melt-up”) market advance eventually reverses course, derivative-related buying swiftly transforms into destabilizing selling. For example, a quant model used for (dynamic) “delta hedging” exposures from derivatives previously written (i.e. call options) would halt aggressive buy programs - immediately becoming a seller into market weakness.
Meanwhile, sinking markets will see keen interest in buying downside derivative protection (i.e. puts) – both for speculation and hedging. The sellers of these derivatives will then dynamically hedge these instruments, which essentially require selling into declining markets. Using out-of-the-money put options as an example, the amount of selling required to protect the seller/writer of these instruments expands exponentially as market prices approach option strike prices. The point is, derivatives tend to play a significant role in promoting destabilizing upside market moves, dislocations that are then highly susceptible to reversals and destabilizing market breakdowns.
Why have risk markets rallied so strongly to begin 2019? Because the Powell U-Turn incited a reversal of short positions and the unwind of bearish hedges and speculations. Derivative-related (“dynamic”) selling – that had been rapidly gaining momentum – reversed course and became aggressive buying. Market momentum then incited buying from the enormous trend-following/performance chasing Crowd. Who can afford to miss a rally? Certainly not the global leveraged speculating community, with many at risk of losing assets, incomes and businesses.
Why have safe haven assets performed so well in the face of surging equities and corporate debt? Because current Market Structure is inherently unstable and increasingly prone to an accident. Today’s buyers of Treasuries, bunds and JGBs are less concerned with January/Q1 equities and junk bond returns, keenly focused instead on acute global market instabilities and the inevitability of a systemic market liquidity event. I would further argue that this dysfunctional market dynamic recalls the destabilizing rally in Treasuries and agency securities in 2007 and well into 2008. This market anomaly stoked end-of-cycle speculative Bubble excess and exacerbated systemic fragilities.
When risk markets advance, news and analysis invariably focus on the positives – an expanding U.S. economy, prospects of a trade deal with China, buoyant profits, a backdrop of ongoing exciting technological advancements, perpetual low interest rates, endless loose financial conditions, etc. With markets advancing, mounting risks are easily disregarded. “Deficits don’t matter.” Debt concerns are archaic. Market Structure is a nothing burger. Best to ignore escalating social, political and geopolitical risks. The unfolding clash between the U.S. and the rising China superpower – it’s nothing. An increasingly fragmented and combative world – ditto.
As we saw in December, sinking markets direct attention to an expanding list of troubling developments. Years of inflating securities prices seemed to demonstrate that so many of the old worries were unjustified – none really mattered. The problem is that many do matter – and some tremendously. The current extraordinary backdrop has all the makings for a decisive bearish turn in market sentiment that would create a problematic feedback loop within the real economy – domestically and globally.
I’ll highlight an issue that has come to be easily dismissed - yet matters tremendously. Zero rates and QE were a policy experiment. The consensus view holds that the great success of this monetary exercise ensures that QE is now a permanent fixture in the central banking “tool kit”. The original premise of this experiment rested on the supposition that a temporary boost of liquidity would stimulate higher risk market prices and risk-taking, with resulting wealth effects that would loosen financial conditions while stimulating investment, spending and income growth throughout the real economy. The expectation was that a shot of stimulus would return the real economy back to its long-term trajectory.
History teaches us that monetary inflations are rarely temporary. Travel down that road and it’s nearly impossible to get off. Dr. Bernanke, the Federal Reserve and global central bankers never contemplated what a decade of unending monetary stimulus would do to Market and Financial Structure. Most – in policy circles and the marketplace - believe beyond a doubt that monetary stimulus was hugely successful in resuscitating economic growth dynamics.
But it’s on the financial side where consequences and repercussions have been fatefully neglected. It’s in the financial world where a decade of QE, zero rates and central bank market backstops imparted momentous structural change: the colossal ETF complex, the passive “investing” craze, quantitative strategies, algorithmic and high-frequency trading, a proliferation of derivative trading, leveraging and trend-following speculation on a global basis – to list only the most obvious. Along the way, aggressive monetary stimulus had much greater inflationary effects on risk markets than upon real economies. This ensured a continuation of aggressive stimulus - and only deeper market Bubble maladjustment.
For a month now, markets have celebrated the view that Chairman Powell (and global central bankers more generally) will not be attempting to “normalize” monetary policy: No Fed-induced tightening of financial conditions, along with no fretting the new Chairman’s commitment to the “Fed put.” Lost in all of this is recognition that a decade of experimental monetary stimulus has failed. Global finance is much more fragile today than prior to the 2008 crisis – the global economy more imbalanced and vulnerable. Monetary management will continue to destabilize.
Never has it been so easy to speculate – equities and corporate Credit alike. Never has corporate Credit availability – and financial conditions more generally – been governed by an interplay between the ETF complex, derivatives strategies and a distressed global leveraged speculating community. The Powell U-Turn unleashed another round of speculative excess. Right in the face of faltering global growth, I would argue this bout of speculation is especially precarious. And when the current “risk on” gives way to reality, maladjusted Market Structure will ensure liquidity issues on a scale beyond December.
“This is deflation, the amazing lurch toward recession despite QE...,” read the opening sentence of a friendly email I received last week. Yet I remember all the talk of deflation after the 1987 stock market crash. It became even louder in 1990 – then again in ‘97/’98. Deflation was the big worry with the bursting of the “tech” Bubble and then with corporate debt problems in 2002. And global central bankers have been fighting deflation now for a decade since “the worst crisis since the Great Depression.”
For a long time now, I’ve argued that Bubbles are the overarching risk. The “scourge of deflation” was not the ghastly plight to vanquish with interminable “whatever it takes.” Rather, deflation is a fateful consequence of bursting Bubbles – Bubbles inflated in the process of central bankers fighting so-called “deflationary forces.” Now, after thirty years of unending global Credit growth, activist central banking and egregious financial speculation, Bubble risk has never been so great: “The amazing lurch toward recession” and financial dislocation specifically because of a failed experiment in QE and inflationist monetary management.
But I’ll conclude with Market Structure. Global markets have turned even more synchronized during this upside convulsion. This increases already highly elevated risk come the next downturn. And I wouldn’t expect much in the way of diversification benefits from Treasuries, bunds and JGBs. It’s worth mentioning that Italian 10-year yields were up 31 bps in two weeks (spreads to bunds widening 41 bps!). With Italian and European economic prospects darkening by the week, European corporate debt came under some pressure this week. Germany’s DAX equities index fell 2.4%, and Japan’s Nikkei dropped 2.2%. And one could almost see fissures start to appear in EM currencies, equities and bonds. Eastern European currencies were notably weak, while the South African rand, Brazilian real and Argentine peso were all down about 2%.
For the Week:
The S&P500 was little changed (up 8.0% y-t-d), while the Dow added 0.2% (up 7.6%). The Utilities jumped 2.2% (up 5.4%). The Banks slipped 0.2% (up 12.5%), and the Broker/Dealers declined 0.5% (up 9.1%). The Transports added 0.5% (up 11.0%). The S&P 400 Midcaps increased 0.6% (up 11.4%), and the small cap Russell 2000 added 0.3% (up 11.7%). The Nasdaq100 gained 0.5% (up 9.2%). The Semiconductors rose 1.2% (up 12.7%). The Biotechs dropped 2.5% (up 13.4%). With bullion dipping $3, the HUI gold index slipped 0.2% (up 5.2%).
Three-month Treasury bill rates ended the week at 2.36%. Two-year government yields declined four bps to 2.47% (down 2bps y-t-d). Five-year T-note yields dropped six bps to 2.45% (down 7bps). Ten-year Treasury yields fell five bps to 2.64% (down 5bps). Long bond yields declined five bps to 2.98% (down 3bps). Benchmark Fannie Mae MBS yields fell seven bps to 3.40% (down 9bps).
Greek 10-year yields rose 10 bps to 4.00% (down 34bps y-t-d). Ten-year Portuguese yields added a basis point to 1.65% (down 45bps). Italian 10-year yields surged 21 bps to 2.96% (22bps). Spain's 10-year yields increased one basis point to 1.23% (down 18bps). German bund yields sank eight bps to 0.09% (down 15bps). French yields declined three bps to 0.54% (down 17bps). The French to German 10-year bond spread widened five to 45 bps. U.K. 10-year gilt yields dropped 10 bps to 1.15% (down 13bps). U.K.'s FTSE equities index increased 0.7% (up 5.1% y-t-d).
Japan's Nikkei 225 equities index dropped 2.2% (up 1.6% y-t-d). Japanese 10-year "JGB" yields declined two bps to negative 0.03% (down 3bps y-t-d). France's CAC40 declined 1.1% (up 4.9%). The German DAX equities index dropped 2.4% (up 3.3%). Spain's IBEX 35 equities index fell 1.8% (up 3.7%). Italy's FTSE MIB index declined 1.1% (up 5.6%). EM equities were mostly lower. Brazil's Bovespa index sank 2.6% (up 8.5%), and Mexico's Bolsa declined 1.3% (up 3.7%). South Korea's Kospi index fell 1.2% (up 6.7%). India's Sensex equities index added 0.2% (up 1.3%). China's Shanghai Exchange was closed for holiday (up 5.0%). Turkey's Borsa Istanbul National 100 index dipped 0.5% (up 12.3%). Russia's MICEX equities index declined 0.7% (up 6.1%).
Investment-grade bond funds saw inflows of $2.668 billion, and junk bond funds posted inflows of $3.859 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates declined five bps to 4.41% (up 9bps y-o-y). Fifteen-year rates fell five bps to 3.84% (up 7bps). Five-year hybrid ARM rates dropped five bps to 3.91% (up 34bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down a basis point to 4.41% (down 18bps).
Federal Reserve Credit last week declined $14.5bn to $3.986 TN. Over the past year, Fed Credit contracted $393bn, or 9.0%. Fed Credit inflated $1.176 TN, or 42%, over the past 326 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt jumped $12.9bn last week to a 15-week high $3.427 TN. "Custody holdings" rose $39.4bn y-o-y, or 1.2%.
M2 (narrow) "money" supply jumped $54.3bn last week to $14.512 TN. "Narrow money" gained $662bn, or 4.8%, over the past year. For the week, Currency increased $2.5bn. Total Checkable Deposits declined $3.2bn, while Savings Deposits surged $50.3bn. Small Time Deposits rose $4.2bn. Retail Money Funds were little changed.
Total money market fund assets jumped $25.1bn to $3.063 TN. Money Funds gained $237bn y-o-y, or 8.4%.
Total Commercial Paper fell $21.5bn to $1.057 TN. CP declined $72.8bn y-o-y, or 6.4%.
Currency Watch:
The U.S. dollar index gained 1.1% to 96.637 (up 0.5% y-t-d). For the week on the upside, the Mexican peso increased 0.2%. For the week on the downside, the Swedish krona declined 2.4%, the New Zealand dollar 2.3%, the Norwegian krone 2.3%, the Australian dollar 2.3%, the South African dollar 2.2%, the Brazilian real 2.0%, the Canadian dollar 1.3%, the euro 1.2%, the British pound 1.0%, the Swiss franc 0.5%, the Singapore dollar 0.5%, the South Korean won 0.3%, and the Japanese yen 0.2%. The Offshore Chinese renminbi declined 0.42% versus the dollar this week (up 1.27% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index declined 1.3% (up 9.0% y-t-d). Spot Gold slipped 0.2% to $1,315 (up 2.5%). Silver declined 0.8% to $15.809 (up 1.7%). Crude dropped $2.54 to $52.72 (up 16%). Gasoline added 0.7% (up 11%), while Natural Gas dropped 5.5% (down 12%). Copper gained 1.4% (up 7%). Wheat fell 1.3% (up 3%). Corn declined 1.1% (unchanged).
Market Dislocation Watch:
February 5 – Bloomberg (Cecile Gutscher): “Prayers for a sudden return to dovish monetary policies have been answered, and now investors are living with the aftermath: a world awash with $8.6 trillion in negative-yielding debt. That’s one reason money managers are wading once more into the fringes of fixed-income markets across the globe. Consider the action over the past week: Past defaulter Ecuador managed to sell $1 billion in new bonds even as the government is in talks for International Monetary Fund financing. Crisis-prone Greece received blockbuster orders for its 2.5 billion-euro ($2.9bn) sale. And the decidedly frontier republic of Uzbekistan… is meeting investors for a debut international offering… Meanwhile, U.S. high-yield is in the throes of a rebound, as traders bet easier monetary policy will prolong the business cycle. Lower-rated borrowers are in vogue after the asset class posted the biggest monthly gain in seven years.”
February 4 – Financial Times (Peter Wells): “Volatility in the US equity market has retreated to its lowest level since early October as a pledge from the Federal Reserve to be patient with potential future interest rate rises and flexible with its balance sheet policy have soothed markets. The decline means the gauge has now retraced most of the spike from the December quarter… The Cboe’s volatility index, or Vix, was down 1.9% at a reading of 15.83, which was its first time trading below 16 since December 3. At today’s session low of 15.78, the Vix reached its lowest since October 9.”
February 4 – Financial Times (Robin Wigglesworth): “Markets tend to veer between two extremes: fear and greed. But right now, the dominant emotion appears to be confusion. This may seem strange. After all, global equities have just notched up their best month in more than three years, as the panic that gripped investors in December has dissipated. The bond market has also clawed back most of the losses it suffered last year, helped by the US Federal Reserve’s abrupt decision to pause interest rate increases and willingness to re-examine how quickly it will sell its bond holdings. And yet, many investors admit a gnawing and growing unease. Where once there was certainty — whether bearish or bullish — there is now mostly doubt and indecision. As one top hedge fund manager says: ‘No one has a view, and everyone is positioned accordingly.’”
February 3 – Wall Street Journal (Akane Otani): “U.S. stocks and bonds are rallying together, an atypical pattern that some investors worry suggests the January rebound in equities is fated to run up against a painful reversal. Major indexes have started off the year on an upbeat note, closing out their best January since the 1980s… Yet yields on both shorter- and longer-term government debt have continued a monthslong slide, a development that has historically signified growing pessimism about the outlook for the U.S. economy. The yield on the benchmark 10-year Treasury note, used as a reference for everything from mortgage rates to student loans, has fallen for three consecutive months. That marks its longest streak of monthly declines since the summer of 2015…”
February 7 – Bloomberg (Alexandra Harris): “One of the world’s most important borrowing benchmarks staged its biggest one-day decline in a decade on Thursday. The three-month London interbank offered rate for dollars sank 4.063 bps to 2.697%, the largest one-day slide since May 2009. The move may reflect a benchmark that’s making up ground following a repricing of short-end Treasuries and associated instruments in the wake of the Federal Reserve’s dovish pivot in recent weeks.”
February 4 – Financial Times (Richard Henderson and Robin Wigglesworth): “Computer-driven investment funds whose activity is based on the level of market volatility are forecast to buy tens of billions of dollars of US stocks, according to analysts, as the strong start to the year lures them back into the equity market. Funds that target a specific level of market movement automatically change their exposure according to the ebb and flow of financial turbulence. Last year’s turmoil caused many to dump equities… However, with the benchmark S&P 500 recording its best January since 1987, these ‘volatility control’ strategies are buying once again. Deutsche Bank estimates that funds following these strategies have already bought $45bn of US stocks in January. A further $45bn of buying could come in the next three months as long as markets remain calm, according to the bank.”
Trump Administration Watch:
February 4 – Reuters (Susan Heavey): “White House economic adviser Kevin Hassett… said it remained to be seen how much progress has been made in U.S.-China trade talks but that U.S. President Donald Trump still hoped to make a deal by the March 1 deadline. ‘Exactly how much progress we made last week and how much progress we’ll make when Secretary (Steven) Mnuchin and Ambassador (Robert) Lighthizer head off to China is something ... we’re still waiting to see,’ Hassett, chairman of the White House Council of Economic Advisers, told CNBC…”
February 5 – Bloomberg (Jenny Leonard): “President Donald Trump in his State of the Union address said a trade deal with China will have to address not only what he called the chronic U.S. trade deficit but also changes in Chinese policies to protect American workers and businesses. ‘I have great respect for President Xi, and we are now working on a new trade deal with China,’ he said… ‘But it must include real, structural change to end unfair trade practices, reduce our chronic trade deficit, and protect American jobs.’”
February 4 – Bloomberg (Shawn Donnan and Jenny Leonard): “One of Donald Trump’s most persistent economic promises has been to rewrite the U.S. relationship with China. Yet as he approaches a potential deal, some of the very hawks who have cheered on the president’s trade war already fear he may end up falling short. With less than a month before a March 1 deadline for either a deal or an increase in U.S. tariffs, hardliners inside and outside the administration fret Trump is being outplayed by Chinese President Xi Jinping and seduced by what they see as empty promises. After Trump hosted Chinese Vice Premier Liu He… last week, one administration official privately likened the direction of negotiations to the president’s caving to Democrats in the shutdown battle over funding for a border wall. Another person close to the talks said Trump appeared determined to turn a pile of crumbs offered by China into what at best might turn out to be a slice of bread.”
February 6 – CNBC (Jeff Cox): “Treasury Secretary Steven Mnuchin expressed confidence… in the progress of trade talks with China and said he and a U.S. delegation are heading to China next week with the intent to make a deal before a March deadline. ‘We are committed to continue these talks,’ Mnuchin said on CNBC’s ‘Squawk Box.’ ‘We’re putting in an enormous amount of effort to hit this deadline and get a deal. That’s our objective.’ Mnuchin said the administration had ‘very productive meetings’ with Chinese Vice Premier Liu He. The White House has set a March 2 deadline to iron out myriad issues with Chinese over trade.”
February 6 – Bloomberg (Elena Mazneva): “President Donald Trump underscored his desire to reduce the trade gap with China in his State of the Union speech…, yet the deficit is on track to balloon again this year as a solid economy boosts American demand for imports. The total U.S. deficit in goods with China jumped by $37.6 billion, or 10.9%, in the first 11 months of 2018 compared with a year earlier… That brought the year-to-date U.S. trade gap with the world’s second-largest economy to $382.3 billion -- more than five times the next-largest deficit, with Mexico…”
February 4 – Reuters (Howard Schneider): “U.S. President Donald Trump and Fed Chairman Jerome Powell dined at the White House on Monday in their first meeting after months in which Trump lambasted the central bank for raising interest rates… The dinner, which included Treasury Secretary Steven Mnuchin and Vice chair Richard Clarida, follows a Fed meeting last week at which the central bank said, in fact, that further rate hikes were on hold for now - a step Powell and others said was based on recent economic developments, not the president’s public tirades against the Fed.”
February 6 – NPR (Jim Zarroli): “President Trump has nominated Treasury Department official David Malpass, a vocal critic of the World Bank, to head the international financial institution. Malpass, 62, is a conservative with longstanding ties to Trump. He once worked as chief economist at investment bank Bear Stearns… He also served in the Ronald Reagan and George H.W. Bush administrations. At Treasury, Malpass is currently involved in tense trade negotiations with China. If approved by the countries that control the World Bank's governing board, which is considered likely, Malpass would replace Jim Yong Kim… Treasury Secretary Steven Mnuchin and the president's daughter, Ivanka Trump, led the search for Kim's successor and recommended Malpass.”
February 7 – Bloomberg (Lynnley Browning): “President Donald Trump said he would consider changes to a controversial cap on the federal deduction for state and local taxes, one of the most divisive provisions of the 2017 Republican tax overhaul. Trump told regional newspaper reporters in… that he’s ‘open to talking about’ revisions to the so-called SALT cap, which limits to $10,000 the amount of state and local levies, including property taxes, that taxpayers can deduct each year on their federal returns. ‘There are some people from New York who have been speaking to me about doing something about that, about changing things. It’s been severe on them,’ he said.”
Federal Reserve Watch:
February 4 – Wall Street Journal (Michael S. Derby): “The Federal Reserve never played the negative interest rate card in response to the financial crisis, but new research claims the economy probably would have recovered faster if it had. A San Francisco Fed report… says allowing the benchmark federal-funds rate ‘to drop below zero may have reduced the depth of the recession and enabled the economy to return more quickly to its full potential.’ The report’s authors add that negative rates ‘may have allowed inflation to rise faster toward the Fed’s 2% target.’ …With a negative interest rate, depositors must pay to keep money at their bank.”
February 4 – Reuters (Ann Saphir): “The Federal Reserve’s new wait-and-see approach to monetary policy is suitable for now, Cleveland Fed President Loretta Mester said…, but the central bank may need to raise interest rates a bit further if the economy does as well as she expects. The Fed last week left its target range for short-term interest rates unchanged at between 2.25% and 2.5%, and in what was widely viewed as a dovish shift said it would be ‘patient’ in making any further adjustments to borrowing costs… ‘If the economy performs along the lines that I’ve outlined as most likely, the fed funds rate may need to move a bit higher than current levels,’ she said…”
February 3 – Reuters (Ann Saphir): “The Federal Reserve’s decision to stop raising interest rates puts a ‘fundamentally healthy’ U.S. economy on track to further growth, Minneapolis Federal Reserve Bank President Neel Kashkari suggested… ‘I think we still have room to run in the U.S. economy,’ Kashkari said at a town hall at a church in Long Lake, Minnesota. ‘The U.S. economy is fundamentally healthy,’ he added.’
U.S. Bubble Watch:
February 7 – Financial Times (Gillian Tett): “Last week, Beth Hammack, a senior Goldman Sachs banker who chairs a US government advisory group known as the Treasury Bond Advisory Committee, dispatched a letter to Steven Mnuchin, Treasury secretary, with a bombshell at the bottom. According to TBAC calculations, America will need to sell an eye-popping $12tn of bonds in the coming decade, sharply more than it did in the past 10 years. This will ‘pose a unique challenge for the Treasury’, Ms Hammack warned, even ‘without factoring in the possibility of a recession’. In plain English, the Wall Street luminaries on the committee were asking who on earth — or in global finance — will buy this looming mountain of Treasuries? The question is highly timely, if not ironic, given that Mr Mnuchin is heading to Beijing for yet another round of US-China trade talks. In recent decades China has been a reliable source of demand for American debt, as the country amassed vast defensive foreign exchange reserves and its export boom left it with dollars to invest.”
February 4 – Reuters (Lucia Mutikani): “New orders for U.S.-made goods unexpectedly fell in November amid sharp declines in demand for machinery and electrical equipment, government data showed on Monday, suggesting a slowdown in manufacturing as 2018 ended.”
February 4 – Reuters (Jason Lange): “Demand for loans weakened among U.S. businesses and households in the last three months of 2018 while banks tightened lending standards for commercial real estate, according to a survey of bank officers that gave worrisome signs for the economic outlook. The U.S. Federal Reserve… released its quarterly survey of senior loan officers. The survey also showed banks had kept standards for commercial and industrial lending ‘basically unchanged’ in the quarter but had tightened standards for credit card borrowing.”
February 5 – Reuters (Jason Lange): “A sharp drop in demand for U.S. auto and credit card loans could point to a troubling answer to a question vexing economists in recent weeks: Are consumers poised to pull back despite surging job growth? A partial shutdown of America’s federal government… interrupted the flow of official data on U.S. retail spending data that economists and policymakers use to gauge the gusto of U.S. consumers, whose spending accounts for roughly two-thirds of U.S. economic output. Other economic indicators have pointed to sharp drops in consumer sentiment in December and January as concerns about the global economy rocked financial markets.”
February 5 – Reuters (Lucia Mutikani): “U.S. services sector activity slowed to a six-month low in January as businesses worried about the impact of a partial shutdown of the federal government on the economy… The ISM said its non-manufacturing activity index dropped 1.3 points to a reading of 56.7 last month. That was the lowest reading since July and marked two straight monthly declines.”
February 4 – Wall Street Journal (Adrienne Roberts): “Car dealers are beginning 2019 with a heavier inventory of unsold vehicles on their lots... There were 3.95 million vehicles on dealership lots at the end of January, a 4% increase from December and up nearly 3% from the prior-year January, according to… WardsAuto. While January is typically a slower month for new-vehicle sales, analysts say the rising stock levels are becoming problematic because car companies will start this year with more unsold inventory than they had three years ago when U.S. auto sales peaked at 17.55 million for the year. Industry forecasters… predict sales this year will fall well below that figure, dropping to under 17 million vehicles for the first time since 2014.”
February 7 – Wall Street Journal (Jesse Newman and Jacob Bunge): “A wave of bankruptcies is sweeping the U.S. Farm Belt as trade disputes add pain to the low commodity prices that have been grinding down American farmers for years. Throughout much of the Midwest, U.S. farmers are filing for chapter 12 bankruptcy protection at levels not seen for at least a decade… Bankruptcies in three regions covering major farm states last year rose to the highest level in at least 10 years. The Seventh Circuit Court of Appeals, which includes Illinois, Indiana and Wisconsin, had double the bankruptcies in 2018 compared with 2008. In the Eighth Circuit, which includes states from North Dakota to Arkansas, bankruptcies swelled 96%. The 10th Circuit, which covers Kansas and other states, last year had 59% more bankruptcies than a decade earlier.”
February 5 – CNBC (Diana Olick): “After ending 2018 in a serious slump, demand for housing is suddenly soaring again, thanks to a drop in mortgage rates that could be temporary. Still, spring has sprung early, as buyers hope to get a quick deal before rates turn higher again. The average rate on the 30-year fixed mortgage rose throughout much of 2018, hitting a recent peak in November at just more than 5%. Rates had been in the 3% range throughout 2016 and 2017, which helped produce the run-up in home prices.”
February 3 – Wall Street Journal (Ruth Simon): “An Alabama welding-supply company is delaying purchases of new gas cylinders. A men’s clothing store in Louisiana has trimmed fall orders for suits and high-end sportswear. An information-technology consulting firm in California is holding back on planned hiring. After a banner year, many small businesses are becoming more cautious about their investment and hiring plans… Economic confidence among small firms, which edged downward for much of 2018, in January reached its lowest level since President Trump’s election, according to a monthly survey of 765 small firms for The Wall Street Journal by Vistage Worldwide… The survey showed 14% of firms expect the economy to improve this year, while 36% expect it to get worse. For the first time since the 2016 election, small firms were more pessimistic about their own financial prospects than they were a year earlier…”
February 5 – Politico (Ben White): “The prospect of 70% tax rates for multimillionaires and special levies on the super-rich draw howls about creeping socialism and warnings of economic disaster in much of Washington. But polling suggests that when it comes to soaking the rich, the American public is increasingly on board. Surveys are showing overwhelming support for raising taxes on top earners, including a new POLITICO/Morning Consult poll… that found 76% of registered voters believe the wealthiest Americans should pay more in taxes. A recent Fox News survey showed that 70% of Americans favor raising taxes on those earning over $10 million — including 54% of Republicans. The numbers suggest the political ground upon which the 2020 presidential campaign will be fought is shifting in dramatic ways, reflecting the rise in inequality in the United States and growing concerns in the electorate about the fairness of the American system.”
February 3 – Financial Times (Robin Wigglesworth): “When the dotcom bubble burst, Chuck Doyle smelt an opportunity — arranging loans for companies shunned by big banks and too small to tap the bond market. It proved very fertile ground. His company, …Business Capital, says it has since helped hundreds of smaller companies raise money to keep afloat, finance their inventory or expand. But Mr Doyle… says conditions in the non-bank, non-bond ‘private debt’ market have never been more frenzied. ‘We’ve been through a few cycles, but this one is crazy,’ he says. ‘We’ve seen unbelievably explosive growth. We’ve seen deals that banks wouldn’t have done even before the financial crisis.’ The post-crisis explosion of the US corporate bond market, and more recently the leveraged loans industry, have hogged the attention of analysts, investors and regulators. But it is arguably the underbelly of the American debt market that has seen most change in recent years. ‘It’s a wild west space, where everyone competes for every deal,’ says Oleg Melentyev, head of high-yield credit strategy at Bank of America Merrill Lynch. ‘The whole thing has exploded in size, and everyone is getting into it.’”
February 4 – Associated Press (Tom Krisher): “In the world of autonomous vehicles, Pittsburgh and Silicon Valley are bustling hubs of development and testing. But ask those involved in self-driving vehicles when we might actually see them carrying passengers in every city, and you’ll get an almost universal answer: Not anytime soon. An optimistic assessment is 10 years. Many others say decades as researchers try to conquer a number of obstacles. The vehicles themselves will debut in limited, well-mapped areas within cities and spread outward.”
February 4 – CNBC (Liz Moyer): “Senate liberals are proposing legislation that would prevent companies from buying back their own shares unless they first pay workers at least $15 an hour and offer paid time off and health benefits. Senate Democratic leader Charles Schumer… and Sen. Bernie Sanders… outlined their plan in a New York Times op-ed... The proposal would slap ‘preconditions’ on a company’s ability to buy its own shares. ‘Our legislation would set minimum requirements for corporate investment in workers and the long-term strength of the company as a precondition for a corporation entering into a share buyback plan. The goal is to curtail the overreliance on buybacks while also incentivizing the productive investment of corporate capital,’ they wrote. Last year, more than $1 trillion in buybacks were announced by large companies after a corporate tax cut pushed through Washington in late 2017 left companies with a lot of extra cash to spend.”
February 7 – Wall Street Journal (Akane Otani and Michael Wursthorn): “The yearslong expansion in U.S. corporate profits may be coming to an end sooner than investors expected, a warning sign for the nearly decadelong bull market. More than 30 companies in the S&P 500, including Netflix Inc., Delta Air Lines Inc. and Estée Lauder Cos., have offered first-quarter earnings forecasts that fell short of analysts’ estimates…, citing deteriorating outlooks for the global economy as well as uncertainty around trade policy. The flurry of tepid forecasts has put companies in the broad stock-market index on track to report a 1.4% decline in profits in the first quarter from a year earlier—a marked deterioration from September when earnings for the period were projected to grow by about 7%.”
February 3 – Wall Street Journal (Theo Francis and Richard Rubin): “With earnings season in full swing, investors are starting to learn which companies were overly optimistic about their tax cuts. Casino chain Las Vegas Sands Corp. has already taken a $727 million hit to its fourth-quarter profit, after a corporate tax regulation proposed in November made the 2017 tax overhaul less favorable than the company expected. International Business Machines Corp. said the same provision reduced its profit by $1.9 billion in the fourth quarter. As more companies report year-end results in coming weeks, investors can expect more dents in more bottom lines... ‘There’s so many provisions still left to be decided, determined, defined that can swing numbers pretty significantly,’ said Barbara Young, a Marriott International Inc. tax executive speaking on behalf of the Tax Executives Institute…”
February 4 – Wall Street Journal (Laura Kusisto, Arian Campo-Flores and Jimmy Vielkind): “A growing list of public officials in high-tax states are expressing alarm that big earners are bolting to low-tax states as new data suggests some home buyers are moving in response to the year-old change in the federal tax law. New York Gov. Andrew Cuomo became the latest… when he blamed a $2.3 billion state shortfall on the new federal tax law that he said is driving people to leave the state. …Mr. Cuomo said the 2017 law capping a deduction for state and local taxes at $10,000 is the reason for the deficiency. He specifically mentioned Florida as an attractive option for New Yorkers who are unhappy with the change in the tax law Preliminary data show a jump in Florida home purchases by buyers from high-tax states. Home values in lower-tax areas have been rising faster than those in places where limiting the ability to deduct high state and local taxes eroded some of the savings from the federal tax reduction…”
February 2 – Wall Street Journal (AnnaMaria Andriotis): “One generation of Americans owed $86 billion in student loan debt at last count. Its members are all 60 years old or more. Many of these seniors took out loans to help pay for their children’s college tuition and are still paying them off. Others took out student loans for themselves in the wake of the last recession, as they went back to school to boost their own employment prospects. On average, student loan borrowers in their 60s owed $33,800 in 2017, up 44% from 2010… Total student loan debt rose 161% for people aged 60 and older from 2010 to 2017—the biggest increase for any age group… Some are having funds garnished from their Social Security checks. The federal government… garnished the Social Security benefits, tax refunds or other federal payments of more than 40,000 people aged 65 and older in fiscal year 2015 because they defaulted… That’s up 362% from a decade prior, according to the latest data from the Government Accountability Office.”
February 4 – New York Times (Eduardo Porter): “It’s hard to miss the dogged technological ambition pervading this sprawling desert metropolis. There’s Intel’s $7 billion, seven-nanometer chip plant going up in Chandler. In Scottsdale, Axon, the maker of the Taser, is hungrily snatching talent from Silicon Valley as it embraces automation to keep up with growing demand. Start-ups in fields as varied as autonomous drones and blockchain are flocking to the area… Arizona State University is furiously churning out engineers. And yet for all its success in drawing and nurturing firms on the technological frontier, Phoenix cannot escape the uncomfortable pattern taking shape across the American economy: Despite all its shiny new high-tech businesses, the vast majority of new jobs are in workaday service industries, like health care, hospitality, retail and building services, where pay is mediocre.”
February 7 – Bloomberg (Alex Tanzi): “A decade after the recession, more than one in 11 mortgaged properties in the U.S. is considered ‘seriously underwater,’ according to the year-end home equity report by ATTOM Data Solutions. This dreaded classification applies when 25% or greater is owed than the home’s market value… More than five million U.S. properties fit the bill. In 27 zip codes, with a minimum of 2,500 mortgaged properties in each, more than half are ‘seriously underwater.’ At the end of 2018, the most ‘seriously underwater’ zip code was Trenton’s 08611 -- in New Jersey’s capital – where 70.3% of mortgaged homes were valued at $100 or less for every $125 owed. The St. Louis zip code 63137 follows at 64.8%. Zip codes 60426 in Harvey, Illinois (62.3%); 38106 in Memphis, Tennessee (60.5%) and 61104 in Rockford, Illinois (59.6%) round out the worst five. Additionally, the cities of Chicago, Cleveland, Atlantic City, Detroit and Virginia Beach show pockets of severely distressed mortgaged housing stock.”
China Watch:
February 3 – CNBC (Weizhen Tan): “Chinese authorities’ efforts to revive their country’s slowing economy have been ‘ineffective,’ and it needs to do more, J.P. Morgan Private Bank’s head of investment strategy for Asia said… ‘I still think they need to do more. I don’t think they’ve done enough yet. So far the measures they’ve taken have been fairly, fairly ineffective, they haven’t really produced the rebound in economic growth, and they haven’t really produced the rebound in confidence either,’ J.P. Morgan’s Alex Wolf told CNBC… ‘In recent years, China has engaged in extensive stimulus to keep its economy churning, Wolf said. But now, high debt levels and a change in the political landscape are pressuring Beijing to take smaller steps, he added. China’s banks extended a record 12.65 trillion yuan ($1.88 trillion) in loans in 2016 as the government encouraged credit-fueled stimulus to meet its economic growth target. The credit explosion stoked worries about financial risks from a rapid build-up in debt, which authorities have pledged to contain.”
February 5 – Financial Times (Lucy Hornby): “For economists who see ominous patterns in the world of numbers, one figure — 18 — is giving pause for thought. Last year, China, the world’s second-largest economy, accounted for 18% of the global economy — just like Japan on the cusp of a decade of stagnation, and just like the Soviet Union shortly before it collapsed. Like China today, these two nations were viewed as strategic rivals by Washington. In 1995, US newspapers were full of the industrial exploits of Japanese conglomerates. A decade earlier, the Soviet Union… was caught up in an arms race with the US. In reality, in each case, both the Japanese and Soviet economies were struggling. ‘The USSR and Japan were the two cases where everyone thought they would overtake the US,’ says Michael Pettis, professor of finance at Peking University’s Guanghua School of Management. ‘Every time you saw such rapid growth, there’s always been a significant reversal.’”
February 6 – Financial Times (Kathrin Hille): “China has started pulling mainland-based Taiwanese businesspeople and students into ‘brainstorming’ sessions on the future of the de facto independent nation, as President Xi Jinping seeks to show progress in moving towards unification. During the past month, officials from China’s Taiwan Affairs Office, which sets and implements Taiwan policy, have invited members of the Association of Taiwan Investment Enterprises on the Mainland to ‘study sessions’ and ‘discussion forums’ on Mr Xi’s latest Taiwan policy lines… Taiwanese students in Guangzhou and Chengdu said local authorities had organised meetings with Chinese student associations to discuss how Taiwan should be ruled after unification. And in Taipei, the Labour party, a splinter group with links on the mainland that advocates unification with China, held a forum debating Mr Xi’s policy proposals.”
Central Bank Watch:
February 7 – Financial Times (Chris Giles): “The Bank of England has become the latest central bank to perform a dovish U-turn after signalling that UK interest rates would remain on hold following concerns that the economy was stumbling ahead of Britain leaving the EU. Mark Carney, BoE governor, …said Brexit uncertainty and a weakening global economy had forced the central bank to forecast the slowest rate of growth since the financial crisis in 2009, with falling business investment and consumers showing greater caution. The BoE has retreated from previous plans for multiple interest rate rises, updating forecasts to reveal a one in four chance of a recession in the next six months even in the event of a smooth Brexit process.”
February 5 – Bloomberg (Carolynn Look and Piotr Skolimowski): “European Central Bank officials see no urgent need to offer new long-term loans to banks and aren’t certain to do so at their next policy meeting in March, according to people familiar with the matter. Officials aren’t yet convinced about the necessity for more liquidity and are nervous that an offering could fuel perceptions that they’re helping out particular lenders, said the people…”
February 4 – Bloomberg (Craig Stirling): “In the race to succeed Mario Draghi as European Central Bank president, Germany’s one-time favorite could yet stage a comeback. Bundesbank President Jens Weidmann… may make up lost ground after a double boost in recent days. First, Germany’s government last week decided, after apparent hesitation, not to propose a replacement for ECB Chief Economist Peter Praet, pointedly keeping alive Weidmann’s candidacy. Then Italy’s finance minister, Giovanni Tria, confirmed a thawing in his country’s longstanding opposition to the Bundesbanker when he told Die Welt that he’s ‘open’ to the prospect -- and ‘unbiased.’”
Brexit Watch:
February 7 – Reuters (William Schomberg and David Milliken): “The Bank of England said Britain faced its weakest economic growth in 10 years in 2019, blaming mounting Brexit uncertainty and the global slowdown, but it stuck to its message that interest rates will rise if a Brexit deal is done… ‘The fog of Brexit is causing short term volatility in the economic data, and more fundamentally, it is creating a series of tensions in the economy, tensions for business,’ BoE Governor Mark Carney said… after the Bank’s policymakers voted unanimously to keep rates at 0.75% as expected.”
February 6 – Reuters (Gabriela Baczynska and Alastair Macdonald): “The European Union will make no new offer on Brexit and those who promoted Britain’s exit without any understanding of how to deliver it deserve a ‘special place in hell’, European Council President Donald Tusk said… But as Tusk’s pointedly blunt language showed, frustration runs deep among European leaders over the British parliament’s rejection of the divorce deal and May’s demands that the EU now give up on key principles or face disruption in just 50 days.”
February 4 – Reuters (Andreas Rinke): “German Chancellor Angela Merkel… offered a way to break the deadlock over the United Kingdom’s exit from the European Union, calling for a ‘creative’ compromise to allay concerns over the future of Irish border arrangements.”
EM Watch:
February 6 – Bloomberg (Anirban Nag, Rahul Satija, and Vrishti Beniwal): “India’s new central bank chief delivered an unexpected interest rate cut, providing Prime Minister Narendra Modi with the kind of stimulus he needs to stoke economic growth in an election year. In a sharp reversal from October, when the Reserve Bank of India took rate cuts off the table, Governor Shaktikanta Das -- who took office in December -- opened the door to more policy easing and brought growth back into the Monetary Policy Committee’s focus. That was a departure from his predecessor Urjit Patel, whose singular aim was to meet the RBI’s 4% inflation mandate.”
Global Bubble Watch:
February 3 – Wall Street Journal (Mike Bird): “Data released… showed that the J.P. Morgan Global Manufacturing Purchasing Managers’ Index dropped to 50.7 in January. A reading above 50 indicates growth, but the index is signaling its weakest expansion in 2½ years. The new exports portion of the index was even weaker, dropping from 49.6 in December to 49.4 last month, the lowest since May 2016. The index, which is compiled from surveys of thousands of purchasing executives around the world, has been a reliable predictor of real global trade volumes which are published weeks or months after the fact.”
February 6 – Financial Times (Peter Campbell, Patrick McGee and Patti Waldmeir): “Three of the world’s largest automakers added to the industry’s gloom… by warning that 2019 is looking increasingly bleak, with little hope of an end to a Chinese slowdown or the changing customer tastes that are forcing costly overhauls to their model lines. The pessimistic outlook for the year ahead from Toyota, General Motors and Daimler — which together account for one in five vehicles sold globally — was accompanied by reports of dismal results for the year just concluded, with all three announcing a fall in profits.”
February 6 – Bloomberg (Elena Mazneva): “After two years of bumper profits, the steel industry is entering a slowdown. ArcelorMittal, as well as smaller European producers like Salzgitter AG and Voestalpine AG, are sounding the alarm about weakening conditions, particularly in China. The country, which uses about half of the world’s steel, is now expected to see a drop in demand, the first contraction since 2015. Demand in the U.S. and Europe will grow at a slower pace this year, ArcelorMittal said.”
February 3 – New York Times (David Streitfeld and Don Clark): “Don’t look now: Storm clouds are gathering over tech. Chinese consumers have pulled back their spending, blowing a $9 billion hole in Apple’s recent quarterly revenue. China was again a culprit when Nvidia warned last month that its revenue would come in 20% below expectations, though the graphics chip maker also blamed slack demand from Bitcoin miners and cloud data centers. Intel… cited intensifying ‘trade and macro concerns’ for financial results in January that did not meet expectations. And Samsung… said sales plunged 10% in the fourth quarter because of weakening demand for its memory chips from data centers and smartphones. China, smartphones, Bitcoin and cloud computing have been among the major drivers of the long tech boom, which in turn has powered the global economy for the last decade. The ingredient common to all of these sectors is computer chips, which form the brains of devices and whose ubiquity means they provide early signals about changes in supply and demand.”
February 4 – Bloomberg (Michael Heath): “Australian retail sales suffered the biggest drop in 12 months and imports slumped by the most in almost seven years, raising doubts about the resilience of household spending. Sales fell 0.4% in December, compared with estimates for an unchanged reading… Imports dropped 6% in the month, the worst result since February 2012. A private report… also showed a gauge of services -- a key component of the Australian economy -- plunged in January. The economy is confronting a sharp downturn in property prices that is threatening to hit consumers’ confidence through the so-called wealth effect -- even if losses on house prices so far are only on paper.”
February 3 – CNBC (Arjun Kharpal): “Two internets could emerge in the next five years — one led by China and one led by the United States — a top venture capitalist has predicted, adding to a growing chorus of voices suggesting such a development could take place. The concept has been dubbed the ‘splinternet,’ and it refers to a future in which the internet is fragmented, governed by separate regulations and run by different services. A unified definition is still unclear, but one suggestion is that the future could see Chinese and American apps and services each dominate half of the internet. That concept was the topic of much discussion at the World Economic Forum in Davos, Switzerland, last month.”
February 6 – Wall Street Journal (Timothy Puko): “The past five years have been the hottest in modern records, federal scientists said…, the latest in a series of warnings as House Democrats promise to combat climate change. Last year was the fourth-warmest year since 1880, according to the report by the National Aeronautics and Space Administration and the National Oceanic and Atmospheric Administration… The record was set in 2016, followed by 2017 and 2015—with 2014 following 2018 as No. 5 among the hottest years on record.”
Europe Watch:
February 7 – Reuters (Francesco Guarascio): “The European Commission sharply cut… its forecasts for euro zone economic growth this year and next because it expects the bloc’s largest countries to be held back by global trade tensions and an array of domestic challenges. The Commission said euro zone growth will slow to 1.3% this year from 1.9% in 2018, before rebounding in 2020 to 1.6%. The new estimates are far less optimistic than those released in November, when Brussels expected the euro zone to grow 1.9% this year…”
February 7 – Reuters (John Irish and Crispian Balmer): “France recalled its ambassador to Italy…, a remarkable diplomatic split between neighbors and European Union allies, after what it described as ‘repeated, baseless’ attacks by Italian political leaders against France. The rupture, the first withdrawal of a French envoy to Rome since World War Two, was announced by the foreign ministry. Diplomats said Paris acted after a series of insults from Italy, capped by Deputy Prime Minister Luigi di Maio’s decision this week to meet with members of France’s ‘yellow vest’ movement… ‘France has been, for several months, the target of repeated, baseless attacks and outrageous statements,’ the foreign ministry said… ‘Having disagreements is one thing, but manipulating the relationship for electoral aims is another.’”
February 5 – Reuters (Bate Felix): “Italy’s Deputy Prime Minister Luigi Di Maio said he met leaders of France’s ‘yellow vest’ anti-government movement…, an encounter likely to further test already strained bilateral relations. Di Maio, who also leads the populist, anti-establishment 5-Star party, said he had stopped over in France and met ‘yellow vests’ leader Christophe Chalencon and candidates on the grassroots movement’s list for European Parliament elections in May. ‘The winds of change have crossed the Alps’, Di Maio said…”
February 5 – Financial Times (Adam Samson): “Italy’s services sector slumped back into contraction as 2019 got under way, according to a new survey that suggests the country’s late 2018 economic downturn may have bled into the near year. The IHS Markit purchasing managers’ index, compiled based on a survey of business executives, slipped to 49.7 in January from 50.5 the previous month.”
February 7 – CNBC (Holly Ellyatt): “With its immense debt pile and potential budget blowout, Italy is a risk first and foremost to itself, Valdis Dombrovskis, a vice president at the European Commission told CNBC. ‘Fragility in Italy’s economy needs to be addressed,’ Dombrovski told CNBC’s Willem Marx… ‘Given the high level of Italy’s public debt, and Italy has the highest debt-to-GDP (gross domestic product) ratio in the EU after Greece, it’s important that Italy puts its debt-to-GDP ratio on a downwards trajectory. And this is something which we have (been) consistently emphasizing and we think that this is important,’ he said. Italy’s debt pile of 2.3 trillion euros ($2.6 trillion) is ‘first and foremost (it’s) a risk factor for Italy itself, but one that needs to be addressed,’ he added.”
February 6 – Associated Press: “German factory orders were down 1.6% in December compared with the previous month… — a worse-than-expected performance that adds to worries about slowing growth in Europe’s biggest economy. Economists had expected a 0.3% increase.”
February 3 – Reuters (Thomas Escritt): “Germany faces a 25 billion euro ($29bn) budget shortfall by 2023, unless it tightens spending, as tax revenues are set to fall and public sector wages are on the rise, Bild newspaper reported, citing an internal government document. The prospect of budget deficits would represent a dramatic deterioration in the finances of Europe’s biggest economy, which reported a 11.2 billion euro budget surplus last year.”
Fixed-Income Bubble Watch:
February 4 – Reuters (Jessica DiNapoli, Kate Duguid and Joshua Franklin): “Many U.S. companies that gorged on cheap debt with forgiving terms over the last decade now find themselves shackled by it, spending much of their earnings paying off lenders rather than investing in their businesses or hiring. As small firms, which together account for half of U.S. employment, begin to feel the squeeze, this could have a chilling effect on hiring, wages and consumption… The number of companies struggling with their debt obligations is hovering near record highs. Some 17% of publicly-traded U.S. companies had trouble making debt interest payments at the end of last year, up from less than 10% in 2010 and off from a high of over 20% in 2016, according to the Institute of International Finance…”
February 6 – Bloomberg (Brian Smith and Natalya Doris): “Demand for corporate bonds reached the highest level of the year this week as the Federal Reserve-fueled rally pushed into the riskiest corners of the high-grade market. Investors put in the most orders of the year for investment-grade bonds on Tuesday. Bids for Verizon… debt topped out at eight times the size of the deal, while Jersey Central Power & Light’s sale was six-fold oversubscribed. That followed the narrowing on Monday of new issue concessions… to the tightest this year.”
February 7 – Bloomberg (Molly Smith): “Clear Channel… sold $2.235 billion of bonds in the largest triple-C rated deal since September, the latest sign that the U.S. junk-bond market has been roused from its sleep. The bond sale, rated Caa1 by Moody’s… is the largest in the lowest junk ratings tier since Intelsat SA borrowed $2.25 billion through a subsidiary in September. High-yield debt has already proven to be one of the best-performing asset classes in fixed income this year, led by CCC rated bonds that have so far returned just over 6%...”
Geopolitical Watch:
February 2 – Reuters (Vladimir Soldatkin): “Russia has suspended the Cold War-era Intermediate-range Nuclear Forces Treaty, President Vladimir Putin said on Saturday, after the United States announced it would withdraw from the arms control pact, accusing Moscow of violations. Moscow’s relations with the West are strained over issues including Russia’s annexation of Crimea from Ukraine, allegations of meddling in the U.S. presidential election and being behind a nerve agent attack in Britain.”
February 3 – Reuters (Brian Ellsworth): “U.S. President Donald Trump said military intervention in Venezuela was ‘an option’ as Western nations boost pressure on socialist leader Nicolas Maduro to step down, while the troubled OPEC nation’s ally Russia warned against ‘destructive meddling.’ The United States, Canada and several Latin American countries have disavowed Maduro over his disputed re-election last year and recognized self-proclaimed President Juan Guaido as the country’s rightful leader. Trump said U.S. military intervention was under consideration in an interview with CBS aired on Sunday. ‘Certainly, it’s something that’s on the - it’s an option,’ Trump said…”
February 2 – Reuters (Ana Isabel Martinez and Angus Berwick): “Venezuelan President Nicolas Maduro proposed early parliamentary elections…, seeking to shore up his crumbling rule after a senior general defected to the opposition and tens of thousands thronged the streets in protest at his government. As domestic and international pressure on Maduro to step down mounts, a senior air force general disavowed him in a video that circulated earlier on Saturday, expressing his allegiance to parliament head and self-proclaimed interim president Juan Guaido.”
February 7 – Reuters: “Amid tensions between the United States and China, a group of Republican U.S. senators asked House of Representatives Speaker Nancy Pelosi to invite Taiwanese President Tsai Ing-Wen to address a joint meeting of the U.S. Congress, an invitation that would anger Beijing… The senators, including Cory Gardner, Marco Rubio, Tom Cotton, John Cornyn and Ted Cruz, released their letter to Pelosi…, ahead of a March 1 deadline for Washington and Beijing to reach a trade deal. Relations between China and Washington have been tense in recent months. Many U.S. lawmakers have been critical of Chinese business practices and accused its government of espionage and human rights abuses.”
February 5 – Reuters (Bozorgmehr Sharafedin and Jeffrey Heller): “Iran warned Israel… of a ‘firm and appropriate’ response if it continued attacking targets in Syria, where Tehran has backed President Bashar al-Assad and his forces in their nearly eight-year war against rebels and militants. Without responding directly, Israeli Prime Minister Benjamin Netanyahu nevertheless said it was important to block Iranian influence in Syria.”
The S&P500 was little changed (up 8.0% y-t-d), while the Dow added 0.2% (up 7.6%). The Utilities jumped 2.2% (up 5.4%). The Banks slipped 0.2% (up 12.5%), and the Broker/Dealers declined 0.5% (up 9.1%). The Transports added 0.5% (up 11.0%). The S&P 400 Midcaps increased 0.6% (up 11.4%), and the small cap Russell 2000 added 0.3% (up 11.7%). The Nasdaq100 gained 0.5% (up 9.2%). The Semiconductors rose 1.2% (up 12.7%). The Biotechs dropped 2.5% (up 13.4%). With bullion dipping $3, the HUI gold index slipped 0.2% (up 5.2%).
Three-month Treasury bill rates ended the week at 2.36%. Two-year government yields declined four bps to 2.47% (down 2bps y-t-d). Five-year T-note yields dropped six bps to 2.45% (down 7bps). Ten-year Treasury yields fell five bps to 2.64% (down 5bps). Long bond yields declined five bps to 2.98% (down 3bps). Benchmark Fannie Mae MBS yields fell seven bps to 3.40% (down 9bps).
Greek 10-year yields rose 10 bps to 4.00% (down 34bps y-t-d). Ten-year Portuguese yields added a basis point to 1.65% (down 45bps). Italian 10-year yields surged 21 bps to 2.96% (22bps). Spain's 10-year yields increased one basis point to 1.23% (down 18bps). German bund yields sank eight bps to 0.09% (down 15bps). French yields declined three bps to 0.54% (down 17bps). The French to German 10-year bond spread widened five to 45 bps. U.K. 10-year gilt yields dropped 10 bps to 1.15% (down 13bps). U.K.'s FTSE equities index increased 0.7% (up 5.1% y-t-d).
Japan's Nikkei 225 equities index dropped 2.2% (up 1.6% y-t-d). Japanese 10-year "JGB" yields declined two bps to negative 0.03% (down 3bps y-t-d). France's CAC40 declined 1.1% (up 4.9%). The German DAX equities index dropped 2.4% (up 3.3%). Spain's IBEX 35 equities index fell 1.8% (up 3.7%). Italy's FTSE MIB index declined 1.1% (up 5.6%). EM equities were mostly lower. Brazil's Bovespa index sank 2.6% (up 8.5%), and Mexico's Bolsa declined 1.3% (up 3.7%). South Korea's Kospi index fell 1.2% (up 6.7%). India's Sensex equities index added 0.2% (up 1.3%). China's Shanghai Exchange was closed for holiday (up 5.0%). Turkey's Borsa Istanbul National 100 index dipped 0.5% (up 12.3%). Russia's MICEX equities index declined 0.7% (up 6.1%).
Investment-grade bond funds saw inflows of $2.668 billion, and junk bond funds posted inflows of $3.859 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates declined five bps to 4.41% (up 9bps y-o-y). Fifteen-year rates fell five bps to 3.84% (up 7bps). Five-year hybrid ARM rates dropped five bps to 3.91% (up 34bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down a basis point to 4.41% (down 18bps).
Federal Reserve Credit last week declined $14.5bn to $3.986 TN. Over the past year, Fed Credit contracted $393bn, or 9.0%. Fed Credit inflated $1.176 TN, or 42%, over the past 326 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt jumped $12.9bn last week to a 15-week high $3.427 TN. "Custody holdings" rose $39.4bn y-o-y, or 1.2%.
M2 (narrow) "money" supply jumped $54.3bn last week to $14.512 TN. "Narrow money" gained $662bn, or 4.8%, over the past year. For the week, Currency increased $2.5bn. Total Checkable Deposits declined $3.2bn, while Savings Deposits surged $50.3bn. Small Time Deposits rose $4.2bn. Retail Money Funds were little changed.
Total money market fund assets jumped $25.1bn to $3.063 TN. Money Funds gained $237bn y-o-y, or 8.4%.
Total Commercial Paper fell $21.5bn to $1.057 TN. CP declined $72.8bn y-o-y, or 6.4%.
Currency Watch:
The U.S. dollar index gained 1.1% to 96.637 (up 0.5% y-t-d). For the week on the upside, the Mexican peso increased 0.2%. For the week on the downside, the Swedish krona declined 2.4%, the New Zealand dollar 2.3%, the Norwegian krone 2.3%, the Australian dollar 2.3%, the South African dollar 2.2%, the Brazilian real 2.0%, the Canadian dollar 1.3%, the euro 1.2%, the British pound 1.0%, the Swiss franc 0.5%, the Singapore dollar 0.5%, the South Korean won 0.3%, and the Japanese yen 0.2%. The Offshore Chinese renminbi declined 0.42% versus the dollar this week (up 1.27% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index declined 1.3% (up 9.0% y-t-d). Spot Gold slipped 0.2% to $1,315 (up 2.5%). Silver declined 0.8% to $15.809 (up 1.7%). Crude dropped $2.54 to $52.72 (up 16%). Gasoline added 0.7% (up 11%), while Natural Gas dropped 5.5% (down 12%). Copper gained 1.4% (up 7%). Wheat fell 1.3% (up 3%). Corn declined 1.1% (unchanged).
Market Dislocation Watch:
February 5 – Bloomberg (Cecile Gutscher): “Prayers for a sudden return to dovish monetary policies have been answered, and now investors are living with the aftermath: a world awash with $8.6 trillion in negative-yielding debt. That’s one reason money managers are wading once more into the fringes of fixed-income markets across the globe. Consider the action over the past week: Past defaulter Ecuador managed to sell $1 billion in new bonds even as the government is in talks for International Monetary Fund financing. Crisis-prone Greece received blockbuster orders for its 2.5 billion-euro ($2.9bn) sale. And the decidedly frontier republic of Uzbekistan… is meeting investors for a debut international offering… Meanwhile, U.S. high-yield is in the throes of a rebound, as traders bet easier monetary policy will prolong the business cycle. Lower-rated borrowers are in vogue after the asset class posted the biggest monthly gain in seven years.”
February 4 – Financial Times (Peter Wells): “Volatility in the US equity market has retreated to its lowest level since early October as a pledge from the Federal Reserve to be patient with potential future interest rate rises and flexible with its balance sheet policy have soothed markets. The decline means the gauge has now retraced most of the spike from the December quarter… The Cboe’s volatility index, or Vix, was down 1.9% at a reading of 15.83, which was its first time trading below 16 since December 3. At today’s session low of 15.78, the Vix reached its lowest since October 9.”
February 4 – Financial Times (Robin Wigglesworth): “Markets tend to veer between two extremes: fear and greed. But right now, the dominant emotion appears to be confusion. This may seem strange. After all, global equities have just notched up their best month in more than three years, as the panic that gripped investors in December has dissipated. The bond market has also clawed back most of the losses it suffered last year, helped by the US Federal Reserve’s abrupt decision to pause interest rate increases and willingness to re-examine how quickly it will sell its bond holdings. And yet, many investors admit a gnawing and growing unease. Where once there was certainty — whether bearish or bullish — there is now mostly doubt and indecision. As one top hedge fund manager says: ‘No one has a view, and everyone is positioned accordingly.’”
February 3 – Wall Street Journal (Akane Otani): “U.S. stocks and bonds are rallying together, an atypical pattern that some investors worry suggests the January rebound in equities is fated to run up against a painful reversal. Major indexes have started off the year on an upbeat note, closing out their best January since the 1980s… Yet yields on both shorter- and longer-term government debt have continued a monthslong slide, a development that has historically signified growing pessimism about the outlook for the U.S. economy. The yield on the benchmark 10-year Treasury note, used as a reference for everything from mortgage rates to student loans, has fallen for three consecutive months. That marks its longest streak of monthly declines since the summer of 2015…”
February 7 – Bloomberg (Alexandra Harris): “One of the world’s most important borrowing benchmarks staged its biggest one-day decline in a decade on Thursday. The three-month London interbank offered rate for dollars sank 4.063 bps to 2.697%, the largest one-day slide since May 2009. The move may reflect a benchmark that’s making up ground following a repricing of short-end Treasuries and associated instruments in the wake of the Federal Reserve’s dovish pivot in recent weeks.”
February 4 – Financial Times (Richard Henderson and Robin Wigglesworth): “Computer-driven investment funds whose activity is based on the level of market volatility are forecast to buy tens of billions of dollars of US stocks, according to analysts, as the strong start to the year lures them back into the equity market. Funds that target a specific level of market movement automatically change their exposure according to the ebb and flow of financial turbulence. Last year’s turmoil caused many to dump equities… However, with the benchmark S&P 500 recording its best January since 1987, these ‘volatility control’ strategies are buying once again. Deutsche Bank estimates that funds following these strategies have already bought $45bn of US stocks in January. A further $45bn of buying could come in the next three months as long as markets remain calm, according to the bank.”
Trump Administration Watch:
February 4 – Reuters (Susan Heavey): “White House economic adviser Kevin Hassett… said it remained to be seen how much progress has been made in U.S.-China trade talks but that U.S. President Donald Trump still hoped to make a deal by the March 1 deadline. ‘Exactly how much progress we made last week and how much progress we’ll make when Secretary (Steven) Mnuchin and Ambassador (Robert) Lighthizer head off to China is something ... we’re still waiting to see,’ Hassett, chairman of the White House Council of Economic Advisers, told CNBC…”
February 5 – Bloomberg (Jenny Leonard): “President Donald Trump in his State of the Union address said a trade deal with China will have to address not only what he called the chronic U.S. trade deficit but also changes in Chinese policies to protect American workers and businesses. ‘I have great respect for President Xi, and we are now working on a new trade deal with China,’ he said… ‘But it must include real, structural change to end unfair trade practices, reduce our chronic trade deficit, and protect American jobs.’”
February 4 – Bloomberg (Shawn Donnan and Jenny Leonard): “One of Donald Trump’s most persistent economic promises has been to rewrite the U.S. relationship with China. Yet as he approaches a potential deal, some of the very hawks who have cheered on the president’s trade war already fear he may end up falling short. With less than a month before a March 1 deadline for either a deal or an increase in U.S. tariffs, hardliners inside and outside the administration fret Trump is being outplayed by Chinese President Xi Jinping and seduced by what they see as empty promises. After Trump hosted Chinese Vice Premier Liu He… last week, one administration official privately likened the direction of negotiations to the president’s caving to Democrats in the shutdown battle over funding for a border wall. Another person close to the talks said Trump appeared determined to turn a pile of crumbs offered by China into what at best might turn out to be a slice of bread.”
February 6 – CNBC (Jeff Cox): “Treasury Secretary Steven Mnuchin expressed confidence… in the progress of trade talks with China and said he and a U.S. delegation are heading to China next week with the intent to make a deal before a March deadline. ‘We are committed to continue these talks,’ Mnuchin said on CNBC’s ‘Squawk Box.’ ‘We’re putting in an enormous amount of effort to hit this deadline and get a deal. That’s our objective.’ Mnuchin said the administration had ‘very productive meetings’ with Chinese Vice Premier Liu He. The White House has set a March 2 deadline to iron out myriad issues with Chinese over trade.”
February 6 – Bloomberg (Elena Mazneva): “President Donald Trump underscored his desire to reduce the trade gap with China in his State of the Union speech…, yet the deficit is on track to balloon again this year as a solid economy boosts American demand for imports. The total U.S. deficit in goods with China jumped by $37.6 billion, or 10.9%, in the first 11 months of 2018 compared with a year earlier… That brought the year-to-date U.S. trade gap with the world’s second-largest economy to $382.3 billion -- more than five times the next-largest deficit, with Mexico…”
February 4 – Reuters (Howard Schneider): “U.S. President Donald Trump and Fed Chairman Jerome Powell dined at the White House on Monday in their first meeting after months in which Trump lambasted the central bank for raising interest rates… The dinner, which included Treasury Secretary Steven Mnuchin and Vice chair Richard Clarida, follows a Fed meeting last week at which the central bank said, in fact, that further rate hikes were on hold for now - a step Powell and others said was based on recent economic developments, not the president’s public tirades against the Fed.”
February 6 – NPR (Jim Zarroli): “President Trump has nominated Treasury Department official David Malpass, a vocal critic of the World Bank, to head the international financial institution. Malpass, 62, is a conservative with longstanding ties to Trump. He once worked as chief economist at investment bank Bear Stearns… He also served in the Ronald Reagan and George H.W. Bush administrations. At Treasury, Malpass is currently involved in tense trade negotiations with China. If approved by the countries that control the World Bank's governing board, which is considered likely, Malpass would replace Jim Yong Kim… Treasury Secretary Steven Mnuchin and the president's daughter, Ivanka Trump, led the search for Kim's successor and recommended Malpass.”
February 7 – Bloomberg (Lynnley Browning): “President Donald Trump said he would consider changes to a controversial cap on the federal deduction for state and local taxes, one of the most divisive provisions of the 2017 Republican tax overhaul. Trump told regional newspaper reporters in… that he’s ‘open to talking about’ revisions to the so-called SALT cap, which limits to $10,000 the amount of state and local levies, including property taxes, that taxpayers can deduct each year on their federal returns. ‘There are some people from New York who have been speaking to me about doing something about that, about changing things. It’s been severe on them,’ he said.”
Federal Reserve Watch:
February 4 – Wall Street Journal (Michael S. Derby): “The Federal Reserve never played the negative interest rate card in response to the financial crisis, but new research claims the economy probably would have recovered faster if it had. A San Francisco Fed report… says allowing the benchmark federal-funds rate ‘to drop below zero may have reduced the depth of the recession and enabled the economy to return more quickly to its full potential.’ The report’s authors add that negative rates ‘may have allowed inflation to rise faster toward the Fed’s 2% target.’ …With a negative interest rate, depositors must pay to keep money at their bank.”
February 4 – Reuters (Ann Saphir): “The Federal Reserve’s new wait-and-see approach to monetary policy is suitable for now, Cleveland Fed President Loretta Mester said…, but the central bank may need to raise interest rates a bit further if the economy does as well as she expects. The Fed last week left its target range for short-term interest rates unchanged at between 2.25% and 2.5%, and in what was widely viewed as a dovish shift said it would be ‘patient’ in making any further adjustments to borrowing costs… ‘If the economy performs along the lines that I’ve outlined as most likely, the fed funds rate may need to move a bit higher than current levels,’ she said…”
February 3 – Reuters (Ann Saphir): “The Federal Reserve’s decision to stop raising interest rates puts a ‘fundamentally healthy’ U.S. economy on track to further growth, Minneapolis Federal Reserve Bank President Neel Kashkari suggested… ‘I think we still have room to run in the U.S. economy,’ Kashkari said at a town hall at a church in Long Lake, Minnesota. ‘The U.S. economy is fundamentally healthy,’ he added.’
U.S. Bubble Watch:
February 7 – Financial Times (Gillian Tett): “Last week, Beth Hammack, a senior Goldman Sachs banker who chairs a US government advisory group known as the Treasury Bond Advisory Committee, dispatched a letter to Steven Mnuchin, Treasury secretary, with a bombshell at the bottom. According to TBAC calculations, America will need to sell an eye-popping $12tn of bonds in the coming decade, sharply more than it did in the past 10 years. This will ‘pose a unique challenge for the Treasury’, Ms Hammack warned, even ‘without factoring in the possibility of a recession’. In plain English, the Wall Street luminaries on the committee were asking who on earth — or in global finance — will buy this looming mountain of Treasuries? The question is highly timely, if not ironic, given that Mr Mnuchin is heading to Beijing for yet another round of US-China trade talks. In recent decades China has been a reliable source of demand for American debt, as the country amassed vast defensive foreign exchange reserves and its export boom left it with dollars to invest.”
February 4 – Reuters (Lucia Mutikani): “New orders for U.S.-made goods unexpectedly fell in November amid sharp declines in demand for machinery and electrical equipment, government data showed on Monday, suggesting a slowdown in manufacturing as 2018 ended.”
February 4 – Reuters (Jason Lange): “Demand for loans weakened among U.S. businesses and households in the last three months of 2018 while banks tightened lending standards for commercial real estate, according to a survey of bank officers that gave worrisome signs for the economic outlook. The U.S. Federal Reserve… released its quarterly survey of senior loan officers. The survey also showed banks had kept standards for commercial and industrial lending ‘basically unchanged’ in the quarter but had tightened standards for credit card borrowing.”
February 5 – Reuters (Jason Lange): “A sharp drop in demand for U.S. auto and credit card loans could point to a troubling answer to a question vexing economists in recent weeks: Are consumers poised to pull back despite surging job growth? A partial shutdown of America’s federal government… interrupted the flow of official data on U.S. retail spending data that economists and policymakers use to gauge the gusto of U.S. consumers, whose spending accounts for roughly two-thirds of U.S. economic output. Other economic indicators have pointed to sharp drops in consumer sentiment in December and January as concerns about the global economy rocked financial markets.”
February 5 – Reuters (Lucia Mutikani): “U.S. services sector activity slowed to a six-month low in January as businesses worried about the impact of a partial shutdown of the federal government on the economy… The ISM said its non-manufacturing activity index dropped 1.3 points to a reading of 56.7 last month. That was the lowest reading since July and marked two straight monthly declines.”
February 4 – Wall Street Journal (Adrienne Roberts): “Car dealers are beginning 2019 with a heavier inventory of unsold vehicles on their lots... There were 3.95 million vehicles on dealership lots at the end of January, a 4% increase from December and up nearly 3% from the prior-year January, according to… WardsAuto. While January is typically a slower month for new-vehicle sales, analysts say the rising stock levels are becoming problematic because car companies will start this year with more unsold inventory than they had three years ago when U.S. auto sales peaked at 17.55 million for the year. Industry forecasters… predict sales this year will fall well below that figure, dropping to under 17 million vehicles for the first time since 2014.”
February 7 – Wall Street Journal (Jesse Newman and Jacob Bunge): “A wave of bankruptcies is sweeping the U.S. Farm Belt as trade disputes add pain to the low commodity prices that have been grinding down American farmers for years. Throughout much of the Midwest, U.S. farmers are filing for chapter 12 bankruptcy protection at levels not seen for at least a decade… Bankruptcies in three regions covering major farm states last year rose to the highest level in at least 10 years. The Seventh Circuit Court of Appeals, which includes Illinois, Indiana and Wisconsin, had double the bankruptcies in 2018 compared with 2008. In the Eighth Circuit, which includes states from North Dakota to Arkansas, bankruptcies swelled 96%. The 10th Circuit, which covers Kansas and other states, last year had 59% more bankruptcies than a decade earlier.”
February 5 – CNBC (Diana Olick): “After ending 2018 in a serious slump, demand for housing is suddenly soaring again, thanks to a drop in mortgage rates that could be temporary. Still, spring has sprung early, as buyers hope to get a quick deal before rates turn higher again. The average rate on the 30-year fixed mortgage rose throughout much of 2018, hitting a recent peak in November at just more than 5%. Rates had been in the 3% range throughout 2016 and 2017, which helped produce the run-up in home prices.”
February 3 – Wall Street Journal (Ruth Simon): “An Alabama welding-supply company is delaying purchases of new gas cylinders. A men’s clothing store in Louisiana has trimmed fall orders for suits and high-end sportswear. An information-technology consulting firm in California is holding back on planned hiring. After a banner year, many small businesses are becoming more cautious about their investment and hiring plans… Economic confidence among small firms, which edged downward for much of 2018, in January reached its lowest level since President Trump’s election, according to a monthly survey of 765 small firms for The Wall Street Journal by Vistage Worldwide… The survey showed 14% of firms expect the economy to improve this year, while 36% expect it to get worse. For the first time since the 2016 election, small firms were more pessimistic about their own financial prospects than they were a year earlier…”
February 5 – Politico (Ben White): “The prospect of 70% tax rates for multimillionaires and special levies on the super-rich draw howls about creeping socialism and warnings of economic disaster in much of Washington. But polling suggests that when it comes to soaking the rich, the American public is increasingly on board. Surveys are showing overwhelming support for raising taxes on top earners, including a new POLITICO/Morning Consult poll… that found 76% of registered voters believe the wealthiest Americans should pay more in taxes. A recent Fox News survey showed that 70% of Americans favor raising taxes on those earning over $10 million — including 54% of Republicans. The numbers suggest the political ground upon which the 2020 presidential campaign will be fought is shifting in dramatic ways, reflecting the rise in inequality in the United States and growing concerns in the electorate about the fairness of the American system.”
February 3 – Financial Times (Robin Wigglesworth): “When the dotcom bubble burst, Chuck Doyle smelt an opportunity — arranging loans for companies shunned by big banks and too small to tap the bond market. It proved very fertile ground. His company, …Business Capital, says it has since helped hundreds of smaller companies raise money to keep afloat, finance their inventory or expand. But Mr Doyle… says conditions in the non-bank, non-bond ‘private debt’ market have never been more frenzied. ‘We’ve been through a few cycles, but this one is crazy,’ he says. ‘We’ve seen unbelievably explosive growth. We’ve seen deals that banks wouldn’t have done even before the financial crisis.’ The post-crisis explosion of the US corporate bond market, and more recently the leveraged loans industry, have hogged the attention of analysts, investors and regulators. But it is arguably the underbelly of the American debt market that has seen most change in recent years. ‘It’s a wild west space, where everyone competes for every deal,’ says Oleg Melentyev, head of high-yield credit strategy at Bank of America Merrill Lynch. ‘The whole thing has exploded in size, and everyone is getting into it.’”
February 4 – Associated Press (Tom Krisher): “In the world of autonomous vehicles, Pittsburgh and Silicon Valley are bustling hubs of development and testing. But ask those involved in self-driving vehicles when we might actually see them carrying passengers in every city, and you’ll get an almost universal answer: Not anytime soon. An optimistic assessment is 10 years. Many others say decades as researchers try to conquer a number of obstacles. The vehicles themselves will debut in limited, well-mapped areas within cities and spread outward.”
February 4 – CNBC (Liz Moyer): “Senate liberals are proposing legislation that would prevent companies from buying back their own shares unless they first pay workers at least $15 an hour and offer paid time off and health benefits. Senate Democratic leader Charles Schumer… and Sen. Bernie Sanders… outlined their plan in a New York Times op-ed... The proposal would slap ‘preconditions’ on a company’s ability to buy its own shares. ‘Our legislation would set minimum requirements for corporate investment in workers and the long-term strength of the company as a precondition for a corporation entering into a share buyback plan. The goal is to curtail the overreliance on buybacks while also incentivizing the productive investment of corporate capital,’ they wrote. Last year, more than $1 trillion in buybacks were announced by large companies after a corporate tax cut pushed through Washington in late 2017 left companies with a lot of extra cash to spend.”
February 7 – Wall Street Journal (Akane Otani and Michael Wursthorn): “The yearslong expansion in U.S. corporate profits may be coming to an end sooner than investors expected, a warning sign for the nearly decadelong bull market. More than 30 companies in the S&P 500, including Netflix Inc., Delta Air Lines Inc. and Estée Lauder Cos., have offered first-quarter earnings forecasts that fell short of analysts’ estimates…, citing deteriorating outlooks for the global economy as well as uncertainty around trade policy. The flurry of tepid forecasts has put companies in the broad stock-market index on track to report a 1.4% decline in profits in the first quarter from a year earlier—a marked deterioration from September when earnings for the period were projected to grow by about 7%.”
February 3 – Wall Street Journal (Theo Francis and Richard Rubin): “With earnings season in full swing, investors are starting to learn which companies were overly optimistic about their tax cuts. Casino chain Las Vegas Sands Corp. has already taken a $727 million hit to its fourth-quarter profit, after a corporate tax regulation proposed in November made the 2017 tax overhaul less favorable than the company expected. International Business Machines Corp. said the same provision reduced its profit by $1.9 billion in the fourth quarter. As more companies report year-end results in coming weeks, investors can expect more dents in more bottom lines... ‘There’s so many provisions still left to be decided, determined, defined that can swing numbers pretty significantly,’ said Barbara Young, a Marriott International Inc. tax executive speaking on behalf of the Tax Executives Institute…”
February 4 – Wall Street Journal (Laura Kusisto, Arian Campo-Flores and Jimmy Vielkind): “A growing list of public officials in high-tax states are expressing alarm that big earners are bolting to low-tax states as new data suggests some home buyers are moving in response to the year-old change in the federal tax law. New York Gov. Andrew Cuomo became the latest… when he blamed a $2.3 billion state shortfall on the new federal tax law that he said is driving people to leave the state. …Mr. Cuomo said the 2017 law capping a deduction for state and local taxes at $10,000 is the reason for the deficiency. He specifically mentioned Florida as an attractive option for New Yorkers who are unhappy with the change in the tax law Preliminary data show a jump in Florida home purchases by buyers from high-tax states. Home values in lower-tax areas have been rising faster than those in places where limiting the ability to deduct high state and local taxes eroded some of the savings from the federal tax reduction…”
February 2 – Wall Street Journal (AnnaMaria Andriotis): “One generation of Americans owed $86 billion in student loan debt at last count. Its members are all 60 years old or more. Many of these seniors took out loans to help pay for their children’s college tuition and are still paying them off. Others took out student loans for themselves in the wake of the last recession, as they went back to school to boost their own employment prospects. On average, student loan borrowers in their 60s owed $33,800 in 2017, up 44% from 2010… Total student loan debt rose 161% for people aged 60 and older from 2010 to 2017—the biggest increase for any age group… Some are having funds garnished from their Social Security checks. The federal government… garnished the Social Security benefits, tax refunds or other federal payments of more than 40,000 people aged 65 and older in fiscal year 2015 because they defaulted… That’s up 362% from a decade prior, according to the latest data from the Government Accountability Office.”
February 4 – New York Times (Eduardo Porter): “It’s hard to miss the dogged technological ambition pervading this sprawling desert metropolis. There’s Intel’s $7 billion, seven-nanometer chip plant going up in Chandler. In Scottsdale, Axon, the maker of the Taser, is hungrily snatching talent from Silicon Valley as it embraces automation to keep up with growing demand. Start-ups in fields as varied as autonomous drones and blockchain are flocking to the area… Arizona State University is furiously churning out engineers. And yet for all its success in drawing and nurturing firms on the technological frontier, Phoenix cannot escape the uncomfortable pattern taking shape across the American economy: Despite all its shiny new high-tech businesses, the vast majority of new jobs are in workaday service industries, like health care, hospitality, retail and building services, where pay is mediocre.”
February 7 – Bloomberg (Alex Tanzi): “A decade after the recession, more than one in 11 mortgaged properties in the U.S. is considered ‘seriously underwater,’ according to the year-end home equity report by ATTOM Data Solutions. This dreaded classification applies when 25% or greater is owed than the home’s market value… More than five million U.S. properties fit the bill. In 27 zip codes, with a minimum of 2,500 mortgaged properties in each, more than half are ‘seriously underwater.’ At the end of 2018, the most ‘seriously underwater’ zip code was Trenton’s 08611 -- in New Jersey’s capital – where 70.3% of mortgaged homes were valued at $100 or less for every $125 owed. The St. Louis zip code 63137 follows at 64.8%. Zip codes 60426 in Harvey, Illinois (62.3%); 38106 in Memphis, Tennessee (60.5%) and 61104 in Rockford, Illinois (59.6%) round out the worst five. Additionally, the cities of Chicago, Cleveland, Atlantic City, Detroit and Virginia Beach show pockets of severely distressed mortgaged housing stock.”
China Watch:
February 3 – CNBC (Weizhen Tan): “Chinese authorities’ efforts to revive their country’s slowing economy have been ‘ineffective,’ and it needs to do more, J.P. Morgan Private Bank’s head of investment strategy for Asia said… ‘I still think they need to do more. I don’t think they’ve done enough yet. So far the measures they’ve taken have been fairly, fairly ineffective, they haven’t really produced the rebound in economic growth, and they haven’t really produced the rebound in confidence either,’ J.P. Morgan’s Alex Wolf told CNBC… ‘In recent years, China has engaged in extensive stimulus to keep its economy churning, Wolf said. But now, high debt levels and a change in the political landscape are pressuring Beijing to take smaller steps, he added. China’s banks extended a record 12.65 trillion yuan ($1.88 trillion) in loans in 2016 as the government encouraged credit-fueled stimulus to meet its economic growth target. The credit explosion stoked worries about financial risks from a rapid build-up in debt, which authorities have pledged to contain.”
February 5 – Financial Times (Lucy Hornby): “For economists who see ominous patterns in the world of numbers, one figure — 18 — is giving pause for thought. Last year, China, the world’s second-largest economy, accounted for 18% of the global economy — just like Japan on the cusp of a decade of stagnation, and just like the Soviet Union shortly before it collapsed. Like China today, these two nations were viewed as strategic rivals by Washington. In 1995, US newspapers were full of the industrial exploits of Japanese conglomerates. A decade earlier, the Soviet Union… was caught up in an arms race with the US. In reality, in each case, both the Japanese and Soviet economies were struggling. ‘The USSR and Japan were the two cases where everyone thought they would overtake the US,’ says Michael Pettis, professor of finance at Peking University’s Guanghua School of Management. ‘Every time you saw such rapid growth, there’s always been a significant reversal.’”
February 6 – Financial Times (Kathrin Hille): “China has started pulling mainland-based Taiwanese businesspeople and students into ‘brainstorming’ sessions on the future of the de facto independent nation, as President Xi Jinping seeks to show progress in moving towards unification. During the past month, officials from China’s Taiwan Affairs Office, which sets and implements Taiwan policy, have invited members of the Association of Taiwan Investment Enterprises on the Mainland to ‘study sessions’ and ‘discussion forums’ on Mr Xi’s latest Taiwan policy lines… Taiwanese students in Guangzhou and Chengdu said local authorities had organised meetings with Chinese student associations to discuss how Taiwan should be ruled after unification. And in Taipei, the Labour party, a splinter group with links on the mainland that advocates unification with China, held a forum debating Mr Xi’s policy proposals.”
Central Bank Watch:
February 7 – Financial Times (Chris Giles): “The Bank of England has become the latest central bank to perform a dovish U-turn after signalling that UK interest rates would remain on hold following concerns that the economy was stumbling ahead of Britain leaving the EU. Mark Carney, BoE governor, …said Brexit uncertainty and a weakening global economy had forced the central bank to forecast the slowest rate of growth since the financial crisis in 2009, with falling business investment and consumers showing greater caution. The BoE has retreated from previous plans for multiple interest rate rises, updating forecasts to reveal a one in four chance of a recession in the next six months even in the event of a smooth Brexit process.”
February 5 – Bloomberg (Carolynn Look and Piotr Skolimowski): “European Central Bank officials see no urgent need to offer new long-term loans to banks and aren’t certain to do so at their next policy meeting in March, according to people familiar with the matter. Officials aren’t yet convinced about the necessity for more liquidity and are nervous that an offering could fuel perceptions that they’re helping out particular lenders, said the people…”
February 4 – Bloomberg (Craig Stirling): “In the race to succeed Mario Draghi as European Central Bank president, Germany’s one-time favorite could yet stage a comeback. Bundesbank President Jens Weidmann… may make up lost ground after a double boost in recent days. First, Germany’s government last week decided, after apparent hesitation, not to propose a replacement for ECB Chief Economist Peter Praet, pointedly keeping alive Weidmann’s candidacy. Then Italy’s finance minister, Giovanni Tria, confirmed a thawing in his country’s longstanding opposition to the Bundesbanker when he told Die Welt that he’s ‘open’ to the prospect -- and ‘unbiased.’”
Brexit Watch:
February 7 – Reuters (William Schomberg and David Milliken): “The Bank of England said Britain faced its weakest economic growth in 10 years in 2019, blaming mounting Brexit uncertainty and the global slowdown, but it stuck to its message that interest rates will rise if a Brexit deal is done… ‘The fog of Brexit is causing short term volatility in the economic data, and more fundamentally, it is creating a series of tensions in the economy, tensions for business,’ BoE Governor Mark Carney said… after the Bank’s policymakers voted unanimously to keep rates at 0.75% as expected.”
February 6 – Reuters (Gabriela Baczynska and Alastair Macdonald): “The European Union will make no new offer on Brexit and those who promoted Britain’s exit without any understanding of how to deliver it deserve a ‘special place in hell’, European Council President Donald Tusk said… But as Tusk’s pointedly blunt language showed, frustration runs deep among European leaders over the British parliament’s rejection of the divorce deal and May’s demands that the EU now give up on key principles or face disruption in just 50 days.”
February 4 – Reuters (Andreas Rinke): “German Chancellor Angela Merkel… offered a way to break the deadlock over the United Kingdom’s exit from the European Union, calling for a ‘creative’ compromise to allay concerns over the future of Irish border arrangements.”
EM Watch:
February 6 – Bloomberg (Anirban Nag, Rahul Satija, and Vrishti Beniwal): “India’s new central bank chief delivered an unexpected interest rate cut, providing Prime Minister Narendra Modi with the kind of stimulus he needs to stoke economic growth in an election year. In a sharp reversal from October, when the Reserve Bank of India took rate cuts off the table, Governor Shaktikanta Das -- who took office in December -- opened the door to more policy easing and brought growth back into the Monetary Policy Committee’s focus. That was a departure from his predecessor Urjit Patel, whose singular aim was to meet the RBI’s 4% inflation mandate.”
Global Bubble Watch:
February 3 – Wall Street Journal (Mike Bird): “Data released… showed that the J.P. Morgan Global Manufacturing Purchasing Managers’ Index dropped to 50.7 in January. A reading above 50 indicates growth, but the index is signaling its weakest expansion in 2½ years. The new exports portion of the index was even weaker, dropping from 49.6 in December to 49.4 last month, the lowest since May 2016. The index, which is compiled from surveys of thousands of purchasing executives around the world, has been a reliable predictor of real global trade volumes which are published weeks or months after the fact.”
February 6 – Financial Times (Peter Campbell, Patrick McGee and Patti Waldmeir): “Three of the world’s largest automakers added to the industry’s gloom… by warning that 2019 is looking increasingly bleak, with little hope of an end to a Chinese slowdown or the changing customer tastes that are forcing costly overhauls to their model lines. The pessimistic outlook for the year ahead from Toyota, General Motors and Daimler — which together account for one in five vehicles sold globally — was accompanied by reports of dismal results for the year just concluded, with all three announcing a fall in profits.”
February 6 – Bloomberg (Elena Mazneva): “After two years of bumper profits, the steel industry is entering a slowdown. ArcelorMittal, as well as smaller European producers like Salzgitter AG and Voestalpine AG, are sounding the alarm about weakening conditions, particularly in China. The country, which uses about half of the world’s steel, is now expected to see a drop in demand, the first contraction since 2015. Demand in the U.S. and Europe will grow at a slower pace this year, ArcelorMittal said.”
February 3 – New York Times (David Streitfeld and Don Clark): “Don’t look now: Storm clouds are gathering over tech. Chinese consumers have pulled back their spending, blowing a $9 billion hole in Apple’s recent quarterly revenue. China was again a culprit when Nvidia warned last month that its revenue would come in 20% below expectations, though the graphics chip maker also blamed slack demand from Bitcoin miners and cloud data centers. Intel… cited intensifying ‘trade and macro concerns’ for financial results in January that did not meet expectations. And Samsung… said sales plunged 10% in the fourth quarter because of weakening demand for its memory chips from data centers and smartphones. China, smartphones, Bitcoin and cloud computing have been among the major drivers of the long tech boom, which in turn has powered the global economy for the last decade. The ingredient common to all of these sectors is computer chips, which form the brains of devices and whose ubiquity means they provide early signals about changes in supply and demand.”
February 4 – Bloomberg (Michael Heath): “Australian retail sales suffered the biggest drop in 12 months and imports slumped by the most in almost seven years, raising doubts about the resilience of household spending. Sales fell 0.4% in December, compared with estimates for an unchanged reading… Imports dropped 6% in the month, the worst result since February 2012. A private report… also showed a gauge of services -- a key component of the Australian economy -- plunged in January. The economy is confronting a sharp downturn in property prices that is threatening to hit consumers’ confidence through the so-called wealth effect -- even if losses on house prices so far are only on paper.”
February 3 – CNBC (Arjun Kharpal): “Two internets could emerge in the next five years — one led by China and one led by the United States — a top venture capitalist has predicted, adding to a growing chorus of voices suggesting such a development could take place. The concept has been dubbed the ‘splinternet,’ and it refers to a future in which the internet is fragmented, governed by separate regulations and run by different services. A unified definition is still unclear, but one suggestion is that the future could see Chinese and American apps and services each dominate half of the internet. That concept was the topic of much discussion at the World Economic Forum in Davos, Switzerland, last month.”
February 6 – Wall Street Journal (Timothy Puko): “The past five years have been the hottest in modern records, federal scientists said…, the latest in a series of warnings as House Democrats promise to combat climate change. Last year was the fourth-warmest year since 1880, according to the report by the National Aeronautics and Space Administration and the National Oceanic and Atmospheric Administration… The record was set in 2016, followed by 2017 and 2015—with 2014 following 2018 as No. 5 among the hottest years on record.”
Europe Watch:
February 7 – Reuters (Francesco Guarascio): “The European Commission sharply cut… its forecasts for euro zone economic growth this year and next because it expects the bloc’s largest countries to be held back by global trade tensions and an array of domestic challenges. The Commission said euro zone growth will slow to 1.3% this year from 1.9% in 2018, before rebounding in 2020 to 1.6%. The new estimates are far less optimistic than those released in November, when Brussels expected the euro zone to grow 1.9% this year…”
February 7 – Reuters (John Irish and Crispian Balmer): “France recalled its ambassador to Italy…, a remarkable diplomatic split between neighbors and European Union allies, after what it described as ‘repeated, baseless’ attacks by Italian political leaders against France. The rupture, the first withdrawal of a French envoy to Rome since World War Two, was announced by the foreign ministry. Diplomats said Paris acted after a series of insults from Italy, capped by Deputy Prime Minister Luigi di Maio’s decision this week to meet with members of France’s ‘yellow vest’ movement… ‘France has been, for several months, the target of repeated, baseless attacks and outrageous statements,’ the foreign ministry said… ‘Having disagreements is one thing, but manipulating the relationship for electoral aims is another.’”
February 5 – Reuters (Bate Felix): “Italy’s Deputy Prime Minister Luigi Di Maio said he met leaders of France’s ‘yellow vest’ anti-government movement…, an encounter likely to further test already strained bilateral relations. Di Maio, who also leads the populist, anti-establishment 5-Star party, said he had stopped over in France and met ‘yellow vests’ leader Christophe Chalencon and candidates on the grassroots movement’s list for European Parliament elections in May. ‘The winds of change have crossed the Alps’, Di Maio said…”
February 5 – Financial Times (Adam Samson): “Italy’s services sector slumped back into contraction as 2019 got under way, according to a new survey that suggests the country’s late 2018 economic downturn may have bled into the near year. The IHS Markit purchasing managers’ index, compiled based on a survey of business executives, slipped to 49.7 in January from 50.5 the previous month.”
February 7 – CNBC (Holly Ellyatt): “With its immense debt pile and potential budget blowout, Italy is a risk first and foremost to itself, Valdis Dombrovskis, a vice president at the European Commission told CNBC. ‘Fragility in Italy’s economy needs to be addressed,’ Dombrovski told CNBC’s Willem Marx… ‘Given the high level of Italy’s public debt, and Italy has the highest debt-to-GDP (gross domestic product) ratio in the EU after Greece, it’s important that Italy puts its debt-to-GDP ratio on a downwards trajectory. And this is something which we have (been) consistently emphasizing and we think that this is important,’ he said. Italy’s debt pile of 2.3 trillion euros ($2.6 trillion) is ‘first and foremost (it’s) a risk factor for Italy itself, but one that needs to be addressed,’ he added.”
February 6 – Associated Press: “German factory orders were down 1.6% in December compared with the previous month… — a worse-than-expected performance that adds to worries about slowing growth in Europe’s biggest economy. Economists had expected a 0.3% increase.”
February 3 – Reuters (Thomas Escritt): “Germany faces a 25 billion euro ($29bn) budget shortfall by 2023, unless it tightens spending, as tax revenues are set to fall and public sector wages are on the rise, Bild newspaper reported, citing an internal government document. The prospect of budget deficits would represent a dramatic deterioration in the finances of Europe’s biggest economy, which reported a 11.2 billion euro budget surplus last year.”
Fixed-Income Bubble Watch:
February 4 – Reuters (Jessica DiNapoli, Kate Duguid and Joshua Franklin): “Many U.S. companies that gorged on cheap debt with forgiving terms over the last decade now find themselves shackled by it, spending much of their earnings paying off lenders rather than investing in their businesses or hiring. As small firms, which together account for half of U.S. employment, begin to feel the squeeze, this could have a chilling effect on hiring, wages and consumption… The number of companies struggling with their debt obligations is hovering near record highs. Some 17% of publicly-traded U.S. companies had trouble making debt interest payments at the end of last year, up from less than 10% in 2010 and off from a high of over 20% in 2016, according to the Institute of International Finance…”
February 6 – Bloomberg (Brian Smith and Natalya Doris): “Demand for corporate bonds reached the highest level of the year this week as the Federal Reserve-fueled rally pushed into the riskiest corners of the high-grade market. Investors put in the most orders of the year for investment-grade bonds on Tuesday. Bids for Verizon… debt topped out at eight times the size of the deal, while Jersey Central Power & Light’s sale was six-fold oversubscribed. That followed the narrowing on Monday of new issue concessions… to the tightest this year.”
February 7 – Bloomberg (Molly Smith): “Clear Channel… sold $2.235 billion of bonds in the largest triple-C rated deal since September, the latest sign that the U.S. junk-bond market has been roused from its sleep. The bond sale, rated Caa1 by Moody’s… is the largest in the lowest junk ratings tier since Intelsat SA borrowed $2.25 billion through a subsidiary in September. High-yield debt has already proven to be one of the best-performing asset classes in fixed income this year, led by CCC rated bonds that have so far returned just over 6%...”
Geopolitical Watch:
February 2 – Reuters (Vladimir Soldatkin): “Russia has suspended the Cold War-era Intermediate-range Nuclear Forces Treaty, President Vladimir Putin said on Saturday, after the United States announced it would withdraw from the arms control pact, accusing Moscow of violations. Moscow’s relations with the West are strained over issues including Russia’s annexation of Crimea from Ukraine, allegations of meddling in the U.S. presidential election and being behind a nerve agent attack in Britain.”
February 3 – Reuters (Brian Ellsworth): “U.S. President Donald Trump said military intervention in Venezuela was ‘an option’ as Western nations boost pressure on socialist leader Nicolas Maduro to step down, while the troubled OPEC nation’s ally Russia warned against ‘destructive meddling.’ The United States, Canada and several Latin American countries have disavowed Maduro over his disputed re-election last year and recognized self-proclaimed President Juan Guaido as the country’s rightful leader. Trump said U.S. military intervention was under consideration in an interview with CBS aired on Sunday. ‘Certainly, it’s something that’s on the - it’s an option,’ Trump said…”
February 2 – Reuters (Ana Isabel Martinez and Angus Berwick): “Venezuelan President Nicolas Maduro proposed early parliamentary elections…, seeking to shore up his crumbling rule after a senior general defected to the opposition and tens of thousands thronged the streets in protest at his government. As domestic and international pressure on Maduro to step down mounts, a senior air force general disavowed him in a video that circulated earlier on Saturday, expressing his allegiance to parliament head and self-proclaimed interim president Juan Guaido.”
February 7 – Reuters: “Amid tensions between the United States and China, a group of Republican U.S. senators asked House of Representatives Speaker Nancy Pelosi to invite Taiwanese President Tsai Ing-Wen to address a joint meeting of the U.S. Congress, an invitation that would anger Beijing… The senators, including Cory Gardner, Marco Rubio, Tom Cotton, John Cornyn and Ted Cruz, released their letter to Pelosi…, ahead of a March 1 deadline for Washington and Beijing to reach a trade deal. Relations between China and Washington have been tense in recent months. Many U.S. lawmakers have been critical of Chinese business practices and accused its government of espionage and human rights abuses.”
February 5 – Reuters (Bozorgmehr Sharafedin and Jeffrey Heller): “Iran warned Israel… of a ‘firm and appropriate’ response if it continued attacking targets in Syria, where Tehran has backed President Bashar al-Assad and his forces in their nearly eight-year war against rebels and militants. Without responding directly, Israeli Prime Minister Benjamin Netanyahu nevertheless said it was important to block Iranian influence in Syria.”
Friday Evening Links
[Reuters] S&P, Nasdaq edge higher as earnings offset trade fears
[Reuters] U.S.-China trade talks resume next week, focus on intellectual property
[CNBC] Trade war headlines could get much worse before they get better as the US looks to Europe
[Reuters] New Illinois governor eyes larger FY 2020 budget hole
[Reuters] Exclusive: U.S. in direct contact with Venezuelan military, urging defections - source
[FT] Global economy: Why central bankers blinked
[Reuters] U.S.-China trade talks resume next week, focus on intellectual property
[CNBC] Trade war headlines could get much worse before they get better as the US looks to Europe
[Reuters] New Illinois governor eyes larger FY 2020 budget hole
[Reuters] Exclusive: U.S. in direct contact with Venezuelan military, urging defections - source
[FT] Global economy: Why central bankers blinked
Thursday, February 7, 2019
Friday's News Links
[Reuters] Darkening 'global economic skies' pull stocks lower
[Reuters] As growth fears mount, German Bund yield lurches towards zero percent
[Reuters] Oil falls on economic slowdown, but OPEC output cuts offer some support
[CNBC] The US and China don't even have a trade deal draft yet as deadline approaches
[AP] China-US tariff concerns stalk markets once again
[CNBC] Trump is reportedly expected to ban Chinese telecommunication equipment from US networks
[Reuters] Exclusive: U.S. considers withdrawal of zero tariffs for India - sources
[MarketWatch] How the European economy is raising fresh global growth fears
[Reuters] Investors pump record amounts of cash in emerging markets: BAML
[Reuters] Japan's modest household spending, wages growth point to fragile outlook
[FT] How London won the race for the renminbi
[FT] Why regulators need to worry about non-bank runs
[Bloomberg] Growth Angst Infects Every Corner of the World and Bonds Love It
[Bloomberg] The Stock Market Finally Acknowledges Reality
[Bloomberg] NYC Home Market to Face Glut After 2018 Sellers Found Few Takers
[Reuters] As growth fears mount, German Bund yield lurches towards zero percent
[Reuters] Oil falls on economic slowdown, but OPEC output cuts offer some support
[CNBC] The US and China don't even have a trade deal draft yet as deadline approaches
[AP] China-US tariff concerns stalk markets once again
[CNBC] Trump is reportedly expected to ban Chinese telecommunication equipment from US networks
[Reuters] Exclusive: U.S. considers withdrawal of zero tariffs for India - sources
[MarketWatch] How the European economy is raising fresh global growth fears
[Reuters] Investors pump record amounts of cash in emerging markets: BAML
[Reuters] Japan's modest household spending, wages growth point to fragile outlook
[FT] How London won the race for the renminbi
[FT] Why regulators need to worry about non-bank runs
[Bloomberg] Growth Angst Infects Every Corner of the World and Bonds Love It
[Bloomberg] The Stock Market Finally Acknowledges Reality
[Bloomberg] NYC Home Market to Face Glut After 2018 Sellers Found Few Takers
Thursday Evening Links
[CNBC] Dow drops more than 200 points as Trump won't meet Xi before US-China trade deadline
[Reuters] No talks between Trump and China's Xi before trade deadline
[Reuters] U.S. fund investors buy most junk bonds in more than 2 years -Lipper
[CNBC] Americans are starting to feel better about buying homes — sort of
[Reuters] France tells Italy 'Basta! - withdraws envoy after war of words
[Reuters] Republican U.S. senators want Taiwan president to address Congress
[WSJ] Trump Said to Be ‘Highly Unlikely’ to Meet With Xi Before March 1 Deadline
[WSJ] Pressure Grows on U.S., China to Forge Trade Deal
[FT] America faces a battle to find buyers for its bonds
[FT] US and China’s tech fight set to come to a head
[Reuters] No talks between Trump and China's Xi before trade deadline
[Reuters] U.S. fund investors buy most junk bonds in more than 2 years -Lipper
[CNBC] Americans are starting to feel better about buying homes — sort of
[Reuters] France tells Italy 'Basta! - withdraws envoy after war of words
[Reuters] Republican U.S. senators want Taiwan president to address Congress
[WSJ] Trump Said to Be ‘Highly Unlikely’ to Meet With Xi Before March 1 Deadline
[WSJ] Pressure Grows on U.S., China to Forge Trade Deal
[FT] America faces a battle to find buyers for its bonds
[FT] US and China’s tech fight set to come to a head
Wednesday, February 6, 2019
Thursday's News Links
[Reuters] Wall Street tumbles on growth worries, trade fears
[Reuters] Italian long-dated govt bond yields elevated as market digests new issue
[Reuters] German bond yields sink to two-year lows as EU cuts growth forecasts
[Reuters] Trump, Xi unlikely to meet before March 1 trade deadline: U.S. officials
[Reuters] 'Wall of money' flooding emerging markets after Fed change - IIF
[AP] Fed Chairman Powell urges plain speaking at Fed
[Reuters] Fed's Powell repeats that U.S. economy is in 'a good place'
[Reuters] EU slashes euro zone growth outlook, expects inflation to slow
[Reuters] Bank of England sees weakest UK outlook since 2009 on Brexit, global slowdown
[CNBC] ‘Fragility in Italy’s economy needs to be addressed,’ EU warns as it slashes growth forecasts
[WSJ] The Bull Market’s Next Test: A Possible Earnings Slump
[WSJ] ‘This One Here Is Gonna Kick My Butt’—Farm Belt Bankruptcies Are Soaring
[WSJ] 2018 Was Fourth-Hottest Year in Modern Records, U.S. Government Scientists Say
[FT] World’s largest carmakers warn of bleak year ahead
[FT] China lures Taiwanese into ‘brainstorming’ talks on island’s future
[Bloomberg] World's Top Steelmaker Says China Slowdown Weighs on Demand
[Bloomberg] The U.S. Trade Deficit With China Is Set to Balloon Again
[Bloomberg] India's New Central Bank Head Delivers 'Election Cut' for Modi
[Reuters] Italian long-dated govt bond yields elevated as market digests new issue
[Reuters] German bond yields sink to two-year lows as EU cuts growth forecasts
[Reuters] Trump, Xi unlikely to meet before March 1 trade deadline: U.S. officials
[Reuters] 'Wall of money' flooding emerging markets after Fed change - IIF
[AP] Fed Chairman Powell urges plain speaking at Fed
[Reuters] Fed's Powell repeats that U.S. economy is in 'a good place'
[Reuters] EU slashes euro zone growth outlook, expects inflation to slow
[Reuters] Bank of England sees weakest UK outlook since 2009 on Brexit, global slowdown
[CNBC] ‘Fragility in Italy’s economy needs to be addressed,’ EU warns as it slashes growth forecasts
[WSJ] The Bull Market’s Next Test: A Possible Earnings Slump
[WSJ] ‘This One Here Is Gonna Kick My Butt’—Farm Belt Bankruptcies Are Soaring
[WSJ] 2018 Was Fourth-Hottest Year in Modern Records, U.S. Government Scientists Say
[FT] World’s largest carmakers warn of bleak year ahead
[FT] China lures Taiwanese into ‘brainstorming’ talks on island’s future
[Bloomberg] World's Top Steelmaker Says China Slowdown Weighs on Demand
[Bloomberg] The U.S. Trade Deficit With China Is Set to Balloon Again
[Bloomberg] India's New Central Bank Head Delivers 'Election Cut' for Modi
Tuesday, February 5, 2019
Wednesday's News Links
[Reuters] World shares mixed following Trump’s State of Union speech
[CNBC] Steven Mnuchin says trade talks ‘very productive’ so far, confirms he’s headed to Beijing next week
[Bloomberg] Trump Says Trade Deal With China Must Include Structural Change
[Reuters] U.S. mortgage applications fall as borrowing costs slip: MBA
[Reuters] EU's Tusk rebuffs May, says Brexiteers deserve a place in hell
[AP] German factory orders slide in December, undercut forecasts
[CNBC] Investors are buying stocks and bonds at the same time, which means something has to give
[Bloomberg] Wall Street Veteran Says U.S.-China Deal Will Be Sell Trigger
[Bloomberg] ECB Is Said to Need More Convincing on Long-Term Loans for Banks
[Bloomberg] The Next Shadow-Banking Crisis in India
[CNBC] Steven Mnuchin says trade talks ‘very productive’ so far, confirms he’s headed to Beijing next week
[Bloomberg] Trump Says Trade Deal With China Must Include Structural Change
[Reuters] U.S. mortgage applications fall as borrowing costs slip: MBA
[Reuters] EU's Tusk rebuffs May, says Brexiteers deserve a place in hell
[AP] German factory orders slide in December, undercut forecasts
[CNBC] Investors are buying stocks and bonds at the same time, which means something has to give
[Bloomberg] Wall Street Veteran Says U.S.-China Deal Will Be Sell Trigger
[Bloomberg] ECB Is Said to Need More Convincing on Long-Term Loans for Banks
[Bloomberg] The Next Shadow-Banking Crisis in India
Tuesday Evening Links
[Reuters] Earnings send Wall Street higher ahead of Trump State of the Union speech
[Reuters] Gold edges higher as market awaits Trump address
[Reuters] U.S.' Mnuchin, Lighthizer to hold talks next week in China: sources
[Reuters] U.S. services sector activity at six-month low; shutdown blamed
[CNBC] In a surprising twist, the state of housing demand is suddenly strong again – but it could be temporary
[Reuters] Weak demand for U.S. consumer loans fuels spending outlook worries
[CNBC] Goldman Sachs: If you missed the January rally, you likely missed the 2019 gain
[Reuters] Italy's Di Maio meets French 'yellow vests', hails 'winds of change'
[FT] Beijing wary of warnings from the past as it hits ‘18%’ mark
[Reuters] Gold edges higher as market awaits Trump address
[Reuters] U.S.' Mnuchin, Lighthizer to hold talks next week in China: sources
[Reuters] U.S. services sector activity at six-month low; shutdown blamed
[CNBC] In a surprising twist, the state of housing demand is suddenly strong again – but it could be temporary
[Reuters] Weak demand for U.S. consumer loans fuels spending outlook worries
[CNBC] Goldman Sachs: If you missed the January rally, you likely missed the 2019 gain
[Reuters] Italy's Di Maio meets French 'yellow vests', hails 'winds of change'
[FT] Beijing wary of warnings from the past as it hits ‘18%’ mark
Monday, February 4, 2019
Tuesday's News Links
[Reuters] Stocks sizzle at 2-month highs, iron ore still on fire
[CNBC] Here’s what investors should watch for in Trump’s State of the Union
[Reuters] Fed Chair Powell and Trump met Monday to discuss economy: Fed
[Reuters] Fed's Mester says rates may need to rise if U.S. growth stays on track
[CNBC] Profits in the first quarter are now expected to decline as company outlooks fall short
[Reuters] Loose money era leaves trail of U.S. corporate debt junkies
[Reuters] Trump to choose Treasury's Malpass to lead World Bank: sources
[AP] 5 reasons why autonomous cars aren’t coming anytime soon
[Reuters] Exclusive: Fed could raise rates as much as twice this year - BlackRock's Rieder
[Reuters] Iran warns Israel against further air strikes in Syria
[Politico] Soak the rich? Americans say go for it
[NYT] Tech Is Splitting the U.S. Work Force in Two
[WSJ] Negative Rates Would Have Sped Up Economic Recovery, Fed Paper Says
[WSJ] Car Dealer Lots Are Flush With Unsold Cars as Sales Are Expected To Drop
[WSJ] To Gauge the Health of the Global Economy, Look to Purchasing Managers
[WSJ] Out-of-State Buyers Flock to Miami
[FT] Market calm gives volatility funds a green light to buy
[FT] Italian services sector slips back into contraction in January — PMI
[Bloomberg] Weidmann Comeback Could Yet Jolt ECB Race for Draghi Succession
[Bloomberg] Trade Hawks Quietly Bristle as Trump’s China Deadline Approaches
[Bloomberg] Australians Close Their Wallets as Retail Sales, Imports Tumble
[CNBC] Here’s what investors should watch for in Trump’s State of the Union
[Reuters] Fed Chair Powell and Trump met Monday to discuss economy: Fed
[Reuters] Fed's Mester says rates may need to rise if U.S. growth stays on track
[CNBC] Profits in the first quarter are now expected to decline as company outlooks fall short
[Reuters] Loose money era leaves trail of U.S. corporate debt junkies
[Reuters] Trump to choose Treasury's Malpass to lead World Bank: sources
[AP] 5 reasons why autonomous cars aren’t coming anytime soon
[Reuters] Exclusive: Fed could raise rates as much as twice this year - BlackRock's Rieder
[Reuters] Iran warns Israel against further air strikes in Syria
[Politico] Soak the rich? Americans say go for it
[NYT] Tech Is Splitting the U.S. Work Force in Two
[WSJ] Negative Rates Would Have Sped Up Economic Recovery, Fed Paper Says
[WSJ] Car Dealer Lots Are Flush With Unsold Cars as Sales Are Expected To Drop
[WSJ] To Gauge the Health of the Global Economy, Look to Purchasing Managers
[WSJ] Out-of-State Buyers Flock to Miami
[FT] Market calm gives volatility funds a green light to buy
[FT] Italian services sector slips back into contraction in January — PMI
[Bloomberg] Weidmann Comeback Could Yet Jolt ECB Race for Draghi Succession
[Bloomberg] Trade Hawks Quietly Bristle as Trump’s China Deadline Approaches
[Bloomberg] Australians Close Their Wallets as Retail Sales, Imports Tumble
Sunday, February 3, 2019
Monday's News Links
[Reuters] Wall Street flat as tech boost offset by lower oil prices
[Reuters] Oil prices edge lower, tightening supply outlook supports
[Reuters] U.S. factory orders unexpectedly fall in November
[Reuters] White House adviser: 'A lot of work to do' in China trade talks: CNBC
[CNBC] Chuck Schumer and Bernie Sanders call for restricting corporate share buybacks
[Reuters] Germany's Merkel drops hint of a 'creative' Brexit compromise
[CNBC] Beijing has been ‘ineffective’ in reviving its slowing economy: JP Morgan
[Reuters] Germany facing big budget hole as economy slows: finance ministry document
[Reuters] Australia vows to clean up financial sector after landmark misconduct inquiry
[CNBC] The ‘splinternet’: How China and the US could divide the internet for the rest of the world
[Reuters] Australia's central bank faces watershed week for policy
[WSJ] China Fears Loom Over Stocks After January Surge
[WSJ] January’s Stock-Market Rally Revives Appetite for Risky Margin Loans
[FT] Non-bank lenders thrive in the shadows
[FT] Forget fear and greed. Confusion is now markets’ watchword
[Bloomberg] The Safest Trade on Wall Street Is Entering the Danger Zone
[Reuters] Oil prices edge lower, tightening supply outlook supports
[Reuters] U.S. factory orders unexpectedly fall in November
[Reuters] White House adviser: 'A lot of work to do' in China trade talks: CNBC
[CNBC] Chuck Schumer and Bernie Sanders call for restricting corporate share buybacks
[Reuters] Germany's Merkel drops hint of a 'creative' Brexit compromise
[CNBC] Beijing has been ‘ineffective’ in reviving its slowing economy: JP Morgan
[Reuters] Germany facing big budget hole as economy slows: finance ministry document
[Reuters] Australia vows to clean up financial sector after landmark misconduct inquiry
[CNBC] The ‘splinternet’: How China and the US could divide the internet for the rest of the world
[Reuters] Australia's central bank faces watershed week for policy
[WSJ] China Fears Loom Over Stocks After January Surge
[WSJ] January’s Stock-Market Rally Revives Appetite for Risky Margin Loans
[FT] Non-bank lenders thrive in the shadows
[FT] Forget fear and greed. Confusion is now markets’ watchword
[Bloomberg] The Safest Trade on Wall Street Is Entering the Danger Zone
Sunday Evening Links
[Reuters] Asia stocks quiet, dollar supported after upbeat U.S. jobs data
[SCMP] Xi Jinping and Donald Trump ‘may meet in Da Nang, Vietnam’ at the end of February
[Reuters] Fed's Kashkari says Powell is 'coming around' to his dovish view
[Reuters] Germany could face budget deficits for years to come: Bild, citing government document
[NYT] Behind Tech’s Shine, Some Warnings Signs Appear
[SCMP] Xi Jinping and Donald Trump ‘may meet in Da Nang, Vietnam’ at the end of February
[Reuters] Fed's Kashkari says Powell is 'coming around' to his dovish view
[Reuters] Germany could face budget deficits for years to come: Bild, citing government document
[NYT] Behind Tech’s Shine, Some Warnings Signs Appear
Sunday's News Links
[Reuters] Wall St Week Ahead-Fed pause validates market fears about U.S. growth
[Reuters] China's services sector moderates in January but still solid: Caixin PMI
[Reuters] May will seek 'pragmatic' solution to Brexit deal in Brussels
[Reuters] Trump says sending military to Venezuela 'an option': CBS
[WSJ] Bond Rally Suggests the Stock Market Honeymoon Is on Borrowed Time
[WSJ] Small Businesses Are Waving the Caution Flag
[WSJ] For Some Companies, Tax-Cut Gains Are Smaller Than They Once Appeared
[Bloomberg] Asia Stocks Having a ‘Bear-Market Bounce,’ JPMorgan Asset Says
[Bloomberg] Feud Between U.S. Allies Deepens as Trump Sits on Sidelines
[Reuters] China's services sector moderates in January but still solid: Caixin PMI
[Reuters] May will seek 'pragmatic' solution to Brexit deal in Brussels
[Reuters] Trump says sending military to Venezuela 'an option': CBS
[WSJ] Bond Rally Suggests the Stock Market Honeymoon Is on Borrowed Time
[WSJ] Small Businesses Are Waving the Caution Flag
[WSJ] For Some Companies, Tax-Cut Gains Are Smaller Than They Once Appeared
[Bloomberg] Asia Stocks Having a ‘Bear-Market Bounce,’ JPMorgan Asset Says
[Bloomberg] Feud Between U.S. Allies Deepens as Trump Sits on Sidelines
Saturday, February 2, 2019
Saturday's News Links
[Reuters] Russia suspends nuclear arms treaty after U.S. says to pull out
[Reuters] Venezuelan general urges military to disavow Maduro as opposition stages rallies
[Bloomberg] What CEOs Are Saying About the Possibility of a Recession
[MarketWatch] Opinion: The evidence is in: Stocks are in a ‘bull trap’
[WSJ] Why the Fed Made a U-Turn: Perceived Risks to Growth Shifted
[WSJ] Over 60, and Crushed by Student Loan Debt
[Reuters] Venezuelan general urges military to disavow Maduro as opposition stages rallies
[Bloomberg] What CEOs Are Saying About the Possibility of a Recession
[MarketWatch] Opinion: The evidence is in: Stocks are in a ‘bull trap’
[WSJ] Why the Fed Made a U-Turn: Perceived Risks to Growth Shifted
[WSJ] Over 60, and Crushed by Student Loan Debt
Friday, February 1, 2019
Weekly Commentary: No Mystery
January 30 – Financial Times (Sam Fleming): “After putting traders on notice six weeks ago to expect further increases in US interest rates in 2019, the Federal Reserve… executed one of its sharpest U-turns in recent memory. Leaving rates unchanged at 2.25-2.5%, Jay Powell, Fed chairman, unveiled new language that opened up the possibility that the next move could equally be down, instead of up. Forecasts from the Fed’s December meeting that another two rate rises are likely this year now appear to be history. Changes to its guidance were needed, Mr Powell argued, because of ‘cross-currents’ that had recently emerged. Among them were slower growth in China and Europe, trade tensions, the risk of a hard Brexit and the federal government shutdown. Financial conditions had also tightened, he added. Yet the about-face left some Fed-watchers wrongfooted and bemused. Many of those hazards were already perfectly apparent in the central bank’s December meeting, when it lifted rates by a quarter point and kept in place language pointing to further ‘gradual’ increases.”
The Wall Street Journal’s Greg Ip pursued a similar path with his article, “The Fed’s Mysterious Pause.” “Last December, Mr. Powell noted his colleagues thought they’d raise rates two more times this year, from between 2.25% and 2.5%, which was at the lower end of estimates of ‘neutral’—a level that neither stimulates nor holds back growth. On Wednesday, he suggested the Fed could already be at neutral: ‘Our policy stance is appropriate right now. We also know that our policy rate is in the range of the… committee’s estimates of neutral.’ If indeed the Fed is done, that would be a breathtaking pivot. Yet the motivation remains somewhat mystifying: What changed in the past six weeks to justify it?”
No Mystery. Don’t be bemused. The Fed Chairman was prepared to hold his ground, but the ground was suddenly giving way. Between the December 19th and January 30th FOMC meetings, acute systemic fragilities were revealed.
Not to dismiss economic weakness in China and Europe – or even tenuous U.S./Chinese trade talks and the government shutdown. But January 3rd was pivotal, not coincidently the wild market session ahead of Chairman Powell’s January 4th U-turn. Recall the currency market “flash crash” – with an 8% intraday move in the yen vs. Australian dollar, along with the dramatic widening of credit spreads (and a 19bps surge in Goldman Sachs CDS prices). Markets were careening toward dislocation.
Chairman Powell appeared somewhat downtrodden during his Wednesday press conference, a notable shift from his confident demeanor in December. We can assume Powell and other Fed officials have been alarmed by how swiftly booming securities markets succumb to instability and illiquidity. I believe Powell wanted to see markets begin standing on their own; that, in contrast to his three most-recent predecessors, he would be in no rush to come to the markets’ defense. He was content to see overheated markets commence the cooling process. A correction would actually be constructive for system stability. The predicament: Overinflated Bubbles don’t calmly deflate.
Circumstances forced the Fed’s hand. Old fears soon reemerged of escalating market instability getting ahead of the Fed. Better to act quickly before market/liquidity issues turned intricate and precarious. While not blatantly shock and awe, kind of along the same line. And responding to criticism of blurred messaging, the course of FOMC policymaking must appear coherent and decisive.
There will be no more rate hikes anytime soon. Now heeding market alarm, the Fed will also be reevaluating the runoff of its securities holdings. The Fed would prefer to convey that it remains “data dependent” in an environment of extraordinary uncertainties, while tepid inflation provides convenient cover for embracing “patience.” Well enough, but markets saw it for what it was: The Fed “caved” – just as the markets knew it would. No longer in doubt, the latest incantation of the “Fed put” is alive and well (irrespective of job or GDP growth). Indeed, the new Chairman’s hope for lowering the “put” strike price (Fed support not invoked before a significant market decline) was rather hastily quashed by acute market fragility.
There’s really nothing like a short “squeeze” to get market speculative juices flowing. How about a synchronized global squeeze across myriad asset classes? Only weeks ago, global markets were alarmingly synchronized to the downside. Now it’s everyone off to the races – lockstep (seemingly inebriated). Stocks and corporate Credit; EM currencies, stocks and bonds; Treasuries, bunds and JGBs; Italian bonds; crude and commodities and so on.
Here in the U.S., “Stocks Wrap Up Best January in 30 Years.” The DJIA surged 1,672 points (returning 7.2%) during the month. The S&P500 returned 8.0%, robust gains overshadowed by the broader market. The S&P 400 Midcaps jumped 10.4% in January, with the small cap Russell 2000 rising 11.2%. The average stock (Value Line Arithmetic) gained 11.2%. The Banks (BKX) rose 12.4%, with the Nasdaq Financials up 9.7%. The Nasdaq Composite also rose 9.7%. The Goldman Sachs Most Short index jumped 12.5%. The Philadelphia Oil Services index surged 19.3%.
Some of the problem-children EM currencies bounced strongly. The South African rand gained 8.2% in January, the Russian ruble 6.6%, Brazilian real 6.2%, Chilean peso 6.0%, Colombian peso 4.6%, Thai baht 4.2%, Indonesian rupiah 3.0% and Mexican peso 2.9%. The Chinese renminbi gained 2.7% against the dollar in January.
Over the past month, local currency bond yields were down 137 bps in Lebanon, 93 bps in the Philippines, 50 bps in Russia, 47 bps in Brazil, 34 bps in Cyprus, 33 bps in Hungary and 21 bps in Mexico. Equities gained 19.9% in Argentina, 14.0% in Turkey, 13.5% in Russia, 10.8% in Brazil, 9.6% in South Korea and 9.2% in Colombia. Dollar-denominated bond yields sank 124 bps in Argentina, 100 bps in Ukraine, 50 bps in Turkey, 34 bps in Indonesia and 35 bps in Russia.
January was also a big month for European equities. Major stock indices returned 8.9% in Portugal, 8.1% in Italy, 6.6% in Spain, 5.6% in France, 5.8% in Germany, 6.4% in Switzerland, 8.2% in Finland, 7.6% in Sweden and 8.7% in Austria. January saw 10-year sovereign yields drop 15 bps in Italy, nine bps in Germany, 15 bps in France, 22 bps in Spain, 10 bps in Portugal and 46 bps in Greece.
An overarching CBB theme over the years (debated compellingly generations ago): the problem with discretionary policymaking is that a policy mistake leads invariably to a series of mistakes. The Powell Fed coming quickly to the markets’ defense was a perpetuation of flawed policy doctrine. Moreover, it’s especially dangerous for central banks to so conspicuously buttress the securities markets at this late stage of historic speculative Bubbles. Calming language has an effect akin to electric shock therapy.
Clearly, such actions only further embolden a marketplace conditioned to reach for returns – adopting leverage while disregarding risk. Financial and economic stability are only further undermined. Blatant support of Wall Street will as well further erode public trust in such a critical institution. During the previous crisis, central bank measures were seen as vital to stabilization. I fear they will be viewed as fundamental to the problem in the coming crisis.
The delusion was believing zero rates and QE would over time support system stability. The “buyer of last resort” function during a time of crisis should never have morphed into the buyer of first resort for years of booming markets and economies. We’re now a full decade into aggressive stimulus, and global finance is more fragile than ever. Policy rates remain at zero and the ECB only recently ended its historic balance sheet expansion (to $4.7 TN). Yet economies throughout the Eurozone appear in - or headed toward - recession. Amazingly, despite a QE-induced collapse in market yields, Italy faces a recessionary backdrop with its fragile banks hanging in the balance.
Meanwhile, troubling data run unabated in China. The Caixin China Manufacturing PMI dropped 1.4 points during January to 48.3, the low since gloomy February 2016. It was also the first back-to-back months below 50 (contracting manufacturing activity) since May/June 2016. To see China’s economy weaken in the face of ongoing rapid Credit growth should be alarming to the entire world.
January 27 – Bloomberg: “The number of Chinese companies warning on earnings is turning into a flood, with no industry spared from worsening demand. Some 440 firms disclosed on Wednesday -- the day before a deadline to do so -- that their 2018 financial results deteriorated… Of the more than 2,400 mainland-listed firms that have announced preliminary numbers or issued guidance this season, some 373 said they’ll post a loss, the data show. About 86% of those were profitable in 2017.”
In a globalized, digitized and serviced-based economy, I never viewed consumer price inflation as the prevailing QE risk in the U.S. For the U.S. and the world more generally, zero rates and Trillions of fabricated “money” have fomented interminable Monetary Disorder (on full display during the past two months). Once unleashed, there was no controlling it. Yet with global markets in a synchronized rally, one easily assumes the Fed and central banks have again worked their magic. Stability has engulfed the world. Nothing could be more detached from reality.
The world is in the throes of a precarious period. Ill-advised central banking has ceded a historic global market Bubble additional rope. Meanwhile, until something snaps it is reckless fiscal policies accommodated by ultra-low rates, along with the precarious market perception that central banks will have no alternative other than to reinstitute QE. Central bank-induced Monetary Disorder has completely distorted sovereign debt markets, granting Washington politicians the proverbial blank checkbook. And it is worse than merely a marketplace devoid of “bond vigilantes.” Treasury yields are pressured downward by the fragility of global Bubbles and the expectation of aggressive monetary stimulus as far as the eye can see.
Reckless global monetary management fuels reckless global fiscal mismanagement. Here in the U.S., trillion-dollar plus federal deficits until the market invokes some discipline. And it’s all passed off as business as usual. If I were a bond, I’d be tense. Bailing on “normalization,” the Fed has essentially committed to perpetual loose “money” and stock market support. And in the event the risk market rally turns crazier, there’s just not much slack in the U.S. economy. Ten-year Treasury yields jumped six bps Friday (to 2.68%), although the more interesting move was the 16 bps surge in Italian yields (to 2.74%). Under the circumstances, gold’s $38 January advance was rather restrained.
To see securities markets – risk assets and safe haven alike – rally as they’ve done over recent weeks is something to behold. Sellers overwhelming the markets one month – buyers the next. Legitimate fears of illiquidity supplanted by the utter fright of being on the wrong side of the market and missing a rally. The S&P500 recorded its strongest January since 1987. It’s an apt reminder not to place too much faith in the “January effect”- especially when global markets are acutely speculative. With Monetary Disorder and Dysfunctional Market Structure operating at full-force, no reason not to expect 2019 to be anything but a momentous year.
For the Week:
The S&P500 gained 1.6% (up 8.0% y-t-d), and the Dow increased 1.3% (up 7.4%). The Utilities rose 2.4% (up 3.1%). The Banks declined 1.5% (up 12.8%), while the Broker/Dealers added 0.2% (up 9.6%). The Transports gained 2.0% (up 10.4%). The S&P 400 Midcaps (up 10.7%) and the small cap Russell 2000 (up 11.4%) increased 1.3%. The Nasdaq100 advanced 1.3% (up 8.6%). The Semiconductors added 0.5% (up 11.4%). The Biotechs increased 0.8% (up 16.3%). With bullion up $14.50, the HUI gold index surged 6.7% (up 5.4%).
Three-month Treasury bill rates ended the week at 2.34%. Two-year government yields dropped 10 bps to 2.51% (up 1bp y-t-d). Five-year T-note yields fell 10 bps to 2.50% (down 1bp). Ten-year Treasury yields declined seven bps to 2.69% (unchanged). Long bond yields fell four bps to 3.03% (up 1bp). Benchmark Fannie Mae MBS yields dropped nine bps to 3.47% (down 3bps).
Greek 10-year yields dropped 16 bps to 3.90% (down 44bps y-t-d). Ten-year Portuguese yields slipped a basis point to 1.64% (down 7bps). Italian 10-year yields jumped 10 bps to 2.75% (unchanged). Spain's 10-year yields declined one basis point to 1.22% (down 19bps). German bund yields fell three bps to 0.17% (down 7bps). French yields declined three bps to 0.57% (down 14bps). The French to German 10-year bond spread was little changed at 40 bps. U.K. 10-year gilt yields fell six bps to 1.25% (down 3bps). U.K.'s FTSE equities index rallied 3.1% (up 4.3% y-t-d).
Japan's Nikkei 225 equities index was little changed (up 3.9% y-t-d). Japanese 10-year "JGB" yields declined a basis point to negative 0.01% (down 2bps y-t-d). France's CAC40 rose 1.9% (up 6.1%). The German DAX equities index declined 0.9% (up 5.9%). Spain's IBEX 35 equities index fell 1.8% (up 5.6%). Italy's FTSE MIB index lost 1.2% (up 6.8%). EM equities were higher. Brazil's Bovespa index added 0.2% (up 11.3%), and Mexico's Bolsa increased 0.2% (up 5.0%). South Korea's Kospi index gained 1.2% (up 8.0%). India's Sensex equities index rose 1.2% (up 1.1%). China's Shanghai Exchange increased 0.6% (up 5.0%). Turkey's Borsa Istanbul National 100 index rose 1.1% (up 12.8%). Russia's MICEX equities index added 0.9% (up 6.9%).
Investment-grade bond funds saw inflows of $34 million, and junk bond funds posted inflows of $73 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates added a basis point to 4.46% (up 24bps y-o-y). Fifteen-year rates increased one basis point to 3.89% (up 21bps). Five-year hybrid ARM rates gained six bps to 3.96% (up 43bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down six bps to 4.42% (up 7bps).
Federal Reserve Credit last week declined $9.9bn to $4.001 TN. Over the past year, Fed Credit contracted $387bn, or 8.8%. Fed Credit inflated $1.189 TN, or 42%, over the past 325 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $5.6bn last week to $3.414 TN. "Custody holdings" rose $47.8bn y-o-y, or 1.4%.
M2 (narrow) "money" supply declined $2.3bn last week to $14.519 TN. "Narrow money" gained $673bn, or 4.9%, over the past year. For the week, Currency increased $1.9bn. Total Checkable Deposits jumped $39.6bn, while Savings Deposits dropped $51.7bn. Small Time Deposits gained $6.2bn. Retail Money Funds added $1.6bn.
Total money market fund assets declined $13.5bn to $3.038 TN. Money Funds gained $239bn y-o-y, or 8.5%.
Total Commercial Paper rose $9.9bn to $1.079 TN. CP declined $60bn y-o-y, or 5.3%.
Currency Watch:
The U.S. dollar index slipped 0.2% to 95.579 (down 0.6% y-t-d). For the week on the upside, the Brazilian real increased 2.9%, the South African rand 2.2%, the Australian dollar 1.0%, the New Zealand dollar 0.9%, the Canadian dollar 0.9%, the Norwegian krone 0.9%, the euro 0.4%, the Singapore dollar 0.3%, the South Korean won 0.2% and the Japanese yen 0.1%. For the week on the downside, the British pound declined 0.9%, the Mexican peso 0.6% and the Swiss franc 0.2%. The Chinese renminbi was little changed versus the dollar this week (up 1.97% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index added 0.9% (up 10.4% y-t-d). Spot Gold gained 1.1% to $1,318 (up 2.7%). Silver rose 1.5% to $15.931 (up 2.5%). Crude gained $1.57 to $55.26 (up 22%). Gasoline jumped 3.4% (up 10%), while Natural Gas dropped 14.0% (down 7%). Copper rose 1.6% (up 5%). Wheat increased 0.8% (up 4%). Corn declined 0.5% (up 1%).
Market Dislocation Watch:
January 28 – CNBC (Hugh Son): “The market meltdown that wiped out stocks’ gains late last year will be a recurring feature of the trading environment, according to Daniel Pinto, co-president of J.P. Morgan Chase and head of its massive corporate and investment bank. ‘Over time, you will probably see several more market events like we saw in December,’ Pinto said… ‘People know we are working towards the end of the cycle, and they have built some risk and some positions that they’ve been accumulating for years, and they know that when they want to trade, liquidity won’t necessarily be there,’ Pinto said. ‘So markets will tend to overreact to things, and you have these big moves, and then a correction to rationality, as we’ve seen.’”
January 31 – Financial Times (Joe Rennison and Colby Smith): “Retail investors pulled money from US loan funds for the 11th week in a row, as falling interest rate forecasts have damped demand for the asset class despite prices stabilising after a December slump. US loan funds suffered $935m in outflows for the week ending January 30, according to… Lipper, extending a run of outflows that has resulted in $19bn being withdrawn from the $1.2tn asset class.”
Trump Administration Watch:
January 31 – Financial Times (James Politi): “The US and China claimed progress in tackling some of the thorniest issues in their trade war as Donald Trump suggested that a new presidential summit might be necessary to settle the economic conflict within the next month. At the end of two days of negotiations in Washington, Robert Lighthizer, the US trade representative, said his talks with Liu He, China’s vice-premier, had finally centred on US demands for structural reforms by Beijing — such as ending the forced transfer of technology from US companies or reining in the use of industrial subsidies. But Mr Lighthizer failed to report a specific concession made by Beijing, and said he and Steven Mnuchin, US Treasury secretary, were considering a trip to Beijing after the Chinese new year celebration in early February to resume negotiations.”
January 29 – Reuters (Doina Chiacu and Susan Heavey): “U.S. Treasury Secretary Steve Mnuchin said… he expected to see significant progress in trade talks with Chinese officials this week and that U.S. charges against telecommunications giant Huawei Technologies Co Ltd were a separate issue. ‘Those are separate issues, and that’s a separate dialogue,’ Mnuchin said... ‘So those are not part of trade discussions. Forced technology issues are part of trade discussions, but any issues as it relates to violations of U.S. law or U.S. sanctions are going through a separate track.’”
January 27 – Wall Street Journal (Peter Nicholas and Kristina Peterson): “President Trump said Sunday he doesn’t believe congressional negotiators will strike a deal over border-wall funding that he could accept and vowed that he would build a wall anyway, using emergency powers if need be. Mr. Trump… assessed the chances of whether a newly formed group of 17 lawmakers could craft a deal before the next government-funding lapse, in less than three weeks: ‘I personally think it’s less than 50-50, but you have a lot of very good people on that board.’”
January 29 – Wall Street Journal (Andrew Ackerman): “The Trump administration plans to work with Congress to overhaul mortgage-finance giants Fannie Mae and Freddie Mac , a White House spokeswoman said… —playing down the idea the administration will seek to unilaterally release the firms from government control. The White House also expects to announce a framework for developing comprehensive housing-finance changes ‘shortly,’ White House spokeswoman Lindsay Walters said. But that framework will not likely make specific recommendations about what to do with the two companies, according to people familiar... For more than a decade, lawmakers have tried without success to overhaul Fannie and Freddie, which were placed in conservatorship during the 2008 financial crisis. Recent statements by administration officials indicated the government was reviewing plans to directly end government control without input from Congress, sending shares surging.”
Federal Reserve Watch:
January 31 – Reuters (Steve Holland, Makini Brice, Jason Lange and Ginger Gibson): “U.S. President Donald Trump is considering former pizza chain executive and Republican presidential candidate Herman Cain for a seat on the Federal Reserve Board, a senior administration official said…”
January 27 – Wall Street Journal (Nick Timiraos): “Some investors blame the stock market’s volatility on the Federal Reserve shrinking its bond portfolio. But the critique puzzles Fed officials and some economists because there is little evidence of turmoil in the two markets where the central bank actively intervened: Treasurys and mortgage debt. The Fed is shrinking its $4 trillion portfolio by allowing Treasury and mortgage securities to mature without replacing them. Up to $50 billion worth is allowed to expire every month under the plan, though the actual amounts have been closer to $40 billion in recent months. Markets barely blinked when the Fed announced its move in 2017. But in the last few months, a number of prominent investors, including Stanley Druckenmiller, have said the portfolio runoff is a big factor behind the return of market volatility. With stocks gyrating, President Trump said he wanted the Fed to slow or stop the moves.”
U.S. Bubble Watch:
January 29 – Reuters (Lucia Mutikani): “U.S consumer confidence fell to a 1-1/2 year-low in January as a partial shutdown of the government and financial markets turmoil left households a bit nervous about the economy’s prospects. The drop in confidence reported by the Conference Board… mirrors another survey earlier this month showing sentiment tumbling to its lowest level since President Donald Trump was elected more than two years ago, strengthening analysts expectations that the economy was losing momentum.”
January 28 – Bloomberg (Brendan Murray): “The U.S. Treasury Department indicated that the government’s borrowing needs are rising faster than previous estimates as the Trump administration finances a widening budget deficit. The department expects to issue $365 billion in net marketable debt from January through March, up $8 billion from its estimate in October… The Treasury sees an end-of-March cash balance of $320 billion, unchanged from its forecast three months ago. In its first estimate of the April-June period this year, the department estimated borrowing of $83 billion, $11 billion more than in the same period last year and the most for that quarter since 2012.”
January 30 – Bloomberg (Liz Capo McCormick and Saleha Mohsin): “The U.S. Treasury Department announced plans to issue another record-breaking amount of debt, giving President Donald Trump’s re-election opponents more ammunition as they question whether his tax cuts will pay for themselves. The federal budget shortfall is set to swell, driven by tax cuts, spending increases and an aging American population. As a result, the Treasury is raising its long-term debt issuance at its quarterly refunding auctions to $84 billion…, $1 billion more than three months ago. Such elevated levels of borrowing will finance the widening deficit, with Wall Street strategists projecting new debt issuance will top $1 trillion for a second straight year.”
January 29 – CNBC (Diana Olick): “Home values increased 5.2% annually in November, slowing from 5.3% in October, according to the… S&P CoreLogic Case-Shiller National Home Price Index. The 10-city composite annual increase also fell to 4.3%, down from 4.7% in the previous month. The 20-city composite saw a 4.7% annual gain, down from 5.0% in October. Home price gains have been slowing since last spring, as higher mortgage interest rates cut sharply into affordability. The gains are slowing the most in large metropolitan markets, where home prices had overheated over the past three years.”
January 27 – Financial Times (Richard Armstrong): “Fourth-quarter results from US regional banks — which finance many of America’s small and mid-sized businesses — revealed a robust domestic economy, despite worries about unsteady markets, global trade talks and slowdowns in China and Europe. At the 10 largest regional banks, or ‘super-regionals,’ which have combined assets of more than $2tn, business and credit-card loan portfolios grew 6%, in aggregate, accelerating from earlier in the year and surprising industry analysts. ‘There’s certainly a lot of chatter about the government shutdown, Brexit, trade talk, all of that . . . But so far, on Main Street, we don’t see that,’ said Kelly King, chief executive of BB&T…”
January 29 – Reuters: “Power provider PG&E filed for voluntary Chapter 11 bankruptcy protection on Tuesday, succumbing to liabilities stemming from wildfires in Northern California in 2017 and 2018… The owner of the biggest U.S. power utility has filed a motion seeking court approval for a $5.5 billion debtor-in-possession financing… PG&E listed assets of $71.39 billion and liabilities of $51.69 billion, in a court document…”
January 28 – Financial Times (Robert Armstrong): “In the years after the financial crisis, small businesses that needed credit were stuck. New capital rules discouraged big banks from touching any borrower perceived as risky. The bond and loan markets, where larger businesses flocked for inexpensive debt capital, have little use for sums under $100,000 — which is what most small enterprises need. A handful of non-bank lenders, payment and e-commerce companies have leapt into the gap. In an environment of easy money and economic expansion, small business lending operations at OnDeck, Kabbage, PayPal, Square and others have grown fast. The question now is whether these new, branchless business models can thrive in a market where credit is tightening and the economy slowing. The interest rates on the loans are high — often the equivalent of a 30-40% annual rate, or higher — and the borrowers tend to have short credit histories. There are some signs of vulnerability. Morgan Stanley analyst James Faucette notes that in periods where credit has tightened in recent years, the online lenders ‘have done worse than traditional lenders . . . they have all had to rework their underwriting in a significant way. Once they have done that, they try to re-engage during an expansion and take advantage of what they have learnt.’”
January 29 – Wall Street Journal (Ben Eisen and Nick Timiraos): “One of the principal gatekeepers to housing-finance markets is stepping up scrutiny of nonbank mortgage lenders, concerned that some may not have the financial heft needed to overcome stressed conditions. The increased oversight by the Government National Mortgage Association, or Ginnie Mae, comes as nonbank lenders play an ever-bigger role in making mortgages to Americans and as housing markets are cooling. Many of these companies flourished after the financial crisis as banks stepped back from the mortgage market but haven’t yet been tested by an economic downturn. For the first time in recent memory, the agency has asked a handful of these lenders to improve certain financial metrics before granting them full ability to continue issuing Ginnie-backed mortgage bonds, according to Maren Kasper, who stepped in as Ginnie’s acting head this month.”
January 29 – Wall Street Journal (Esther Fung): “Chinese net purchases of U.S. commercial real estate last year dwindled to their lowest level since 2012, as Beijing kept up the pressure on Chinese investors to bring cash home during a period of worsening economic growth. Insurers, conglomerates and other investors from mainland China were net sellers of $854 million of U.S. commercial property in the fourth quarter, according to Real Capital Analytics. That marked the third-straight quarter Chinese investors sold more U.S. property than they bought, the first time ever these investors have been sellers for that long a stretch. The selling during most of 2018 marked a powerful reversal from the previous five years, when Chinese investors went on a massive buying spree, often handily outbidding other investors for U.S. trophy properties.”
January 31 – Bloomberg (Arit John and Laura Davison): “Independent Senator Bernie Sanders is proposing to expand the estate tax on wealthy Americans, including a rate of up to 77% on the value of estates above $1 billion. Sanders of Vermont… said… his plan would apply to the wealthiest 0.2% Americans. It would set a 45% tax on the value of estates between $3.5 million and $10 million, increasing gradually to 77% for amounts more than $1 billion. The current estate tax kicks in when an estate is worth about $11 million.”
China Watch:
January 31 – Financial Times (Edward White): “A private sector gauge of China’s manufacturing sector in January contracted to its lowest level since February 2016, in the latest sign of economic headwinds hitting the world’s second largest economy despite moves by Beijing to shore up growth. The Caixin manufacturing purchasing managers’ index slipped to 48.3 in January, from 49.7 a month earlier and marking the second-straight monthly decline after the index retreated into negative territory for the first time in 19 months in December.”
January 29 – Bloomberg: “Chinese executives are sounding warning bells over the world’s second-largest economy. At least 20 companies, including China Life Insurance Co. and Chongqing Changan Automobile Co., told investors late Tuesday that full-year earnings would fall well short of expectations. Reasons they cited included the country’s economic slowdown, as well as recent changes to accounting rules and the equity market’s $2.3 trillion rout last year, the world’s biggest loss of value.”
January 28 – Reuters (Michael Sheetz): “Chinese representatives met with the World Trade Organization… to begin the process of legally challenging United States tariffs on China’s exports, Reuters reported, citing a transcript of the meeting’s discussion. ‘This is a blatant breach of the United States’ obligations under the WTO agreements and is posing a systemic challenge to the multilateral trading system,’ a Chinese representative said… ‘If the United States were free to continue infringing these principles without consequences, the future viability of this organization is in dire peril.’”
January 29 – Reuters (Associated Press): “U.S. criminal charges against Chinese electronics giant Huawei have sparked a fresh round of trans-Pacific recriminations, with Beijing demanding… that Washington back off what it called an ‘unreasonable crackdown’ on the maker of smartphones and telecom gear. China’s foreign ministry said it would defend the ‘lawful rights and interests of Chinese companies’ but gave no details. Huawei is the No. 2 smartphone maker and an essential player in global communications networks.”
January 31 – Reuters (Li Zheng, Zhang Xiaochong and Ryan Woo): “China’s central bank told some commercial banks in January to moderate their pace of lending…, as it seeks to manage the amount of credit flowing into the economy. In its guidance, the People’s Bank of China (PBOC) also told the lenders that the pace and size of loans granted should not fall below the level from the same period a year earlier.”
January 27 – Bloomberg (Christopher Balding): “In the past decade, China has relied primarily on credit growth to fund its economic ambitions. The country’s banks are now feeling the constraints of this lending binge and need to raise a lot of capital over the next couple of years… With 267 trillion yuan ($39.4 trillion) of total assets, and home to the world’s four largest banks by this measure, the country’s financial system doesn’t operate in isolation… Major Chinese banks raised or announced plans to raise 343 billion yuan in 2018, according to… Nomura Holdings Inc. That’s well below the estimates of UBS Group AG, which just last year said these firms would need 1 trillion to 3 trillion yuan… The fundamental problem is the conflicting pressures on the sector. Despite talk of deleveraging in 2018, as nominal GDP growth slowed to 9.7%, total loans outstanding grew 13.5%. To prop up the economy, Chinese banks have been lending well in excess of deposit growth. Since the beginning of 2016, as loans outstanding grew 41%, deposits rose just 29%...”
January 31 – Bloomberg (Andrew Mayeda and Katherine Greifeld): “China’s holdings of U.S. Treasuries fell to the lowest level in a year and a half amid a bruising trade war with the Trump administration. China’s pile of notes, bills and bonds dropped to $1.12 trillion in November, from $1.14 trillion in October… It was the sixth straight decline and left the nation’s stockpile the smallest since May 2017. China remains the U.S.’s biggest foreign creditor. Japan is next, with $1.04 trillion, up from $1.02 trillion in October, which was its smallest amount since 2011.”
January 29 – Financial Times (Don Weinland and Emma Dunkley): “S&P Global’s breakthrough into China’s domestic ratings scene is promising to bring a new level of clarity to foreign investors hoping to take a bigger slice of the country’s $12tn bond market. The… credit rating agency this week became the first foreign company to gain approval from China’s central bank to start assessing domestic bonds, following a year-long process to gain a foothold in the local market, the world’s third largest. The move could help to unlock flows into a market where foreign investors currently hold about 3% of the total bonds outstanding… But asset managers have flagged the perils of trying to compete with China’s domestic agencies, which routinely offer issuers high ratings. There are also questions as to whether S&P could come under pressure from the government to give better ratings to some state-backed debt issuers.”
Central Bank Watch:
January 28 – Bloomberg (Carolynn Look and Alexander Weber): “Mario Draghi said that while the euro-area economy is looking bleaker than anticipated, it’s not bad enough to warrant additional monetary support. The president of the European Central Bank blamed ‘softer external demand and some country and sector-specific factors’ for the slowdown, but indicated he still has some confidence in the underlying strength of the economy. ‘If things go very wrong, we can still resume other instruments in our toolbox. There is nothing objecting to that possibility,’ he told lawmakers in Brussels in response to a question on whether net asset purchases could be restarted. ‘The only point is under what contingency are we going to do this. And at this point in time, we don’t see such contingency as likely to materialize, certainly this year.’”
EM Watch:
February 1 – Bloomberg (Cagan Koc): “Turkey’s top economic body ruled out seeking support from the International Monetary Fund, in an effort to end market speculation that Ankara is in touch with the Washington-based lender to negotiate a rescue package. Those spreading the rumors are carrying out a propaganda war to ‘harm the Turkish government, the Turkish economy and Turkish people,’ the Treasury and Finance Ministry said… ‘This sick state of mind has reached a dangerous level.’”
February 1 – Bloomberg (Kartik Goyal and Subhadip Sircar): “Sovereign Indian bonds yields surged the most in eight months and rupee weakened after Prime Minister Narendra Modi’s government announced record borrowings to fund populist policies before elections by May. The administration plans to borrow 7.1 trillion rupees ($100bn) in the year starting April 1… That compares with a 6.4-trillion rupee forecast in a Bloomberg News survey and a revised 5.71 trillion rupees for the current fiscal period.”
Global Bubble Watch:
January 31 – Bloomberg (Jonathan Cable and Marius Zaharia): “Factory activity was at its weakest in years across much of the world during January, adding to worries trade tariffs, political uncertainty and cooling demand poses an increasing threat to global growth… Trade-focused Asia appears to be suffering the most visible loss of momentum so far, with activity shrinking in China, although European economies are stuck in low gear and many emerging markets are sputtering. The euro zone has been rocked by protests in France, an auto sector struggling to regain momentum, political strife and rising trade protectionism. Manufacturing growth in the bloc was minimal last month, at a four-year low, and forward looking indicators suggest there will be no turnaround soon.”
January 29 – Financial Times (Lucy Hornby): “China is ‘rebalancing’ its overseas lending practices in the face of mounting concerns over the debt burdens of developing countries, the head of the Asian Infrastructure Investment Bank told the Financial Times… Infrastructure investment in Asia’s largest developing countries fell in 2017 and 2018, amid a deleveraging campaign in China and deepening concern over the fiscal impact of Chinese-backed mega projects on their host countries. The AIIB, the Beijing-based multilateral bank, provides an alternative model to the Chinese state-backed bilateral lending that has contributed to the economic meltdown in Venezuela, a controversial debt renegotiation in Sri Lanka and cancelled projects in Malaysia. Jin Liqun, the AIIB’s president, told the FT that China is conscious of the criticism. ‘Chinese leaders definitely have picked up the message. You cannot go on and on putting money in, without taking a review of what’s going on, to rebalance.’”
January 28 – Bloomberg (Michael Heath): “Australian firms suffered the worst slump in conditions since the 2008 global financial crisis as evidence mounts that the economy slowed in the latter part of last year. The business conditions index -- measuring hiring, sales and profits -- dropped to 2 in December from 11 a month earlier, a National Australia Bank Ltd. report showed Tuesday. A gauge of employment fell to 4 from 9 in November, while profitability plunged to zero from 8. A separate confidence index was unchanged at 3.”
January 31 – Bloomberg (Jackie Edwards): “Sydney property values continued to fall in January, driving nationwide house prices back to levels last seen in October 2016, amid tighter lending conditions and high levels of housing supply. Nationwide home values dropped 1% last month, led by a 1.3% decline in Sydney and a 1.6% slide in Melbourne, according to CoreLogic…”
Europe Watch:
February 1 – Bloomberg (Carolynn Look): “Italy’s recession isn’t seeing any signs of a turnaround at the start of the year, as a drop in manufacturing orders weighed on output and forced companies to cut jobs. Manufacturing conditions worsened in January to the greatest extent in almost six years, a purchasing managers’ index showed on Friday. At 47.8, it’s well below the 50 level that marks the crossover between expansion and contraction. Growth in the euro area as a whole slowed, led by a contraction in Germany, the region’s biggest economy, a separate PMI report showed.”
February 1 – Bloomberg (Simbarashe Gumbo): “IHS Markit releases manufacturing purchasing managers’ index for Eurozone in January. Index falls to 50.5 from 51.4 in Dec.; Year ago 59.6. Lowest reading since Nov. 2014. New Orders fall to 47.8 vs 48.8 in Dec. Lowest reading since April 2013. Fourth consecutive month of contraction.”
Japan Watch:
February 1 – Bloomberg (Dave McCombs and Kazunori Takada): “The slowdown in China that’s rattled global stocks is hitting the earnings of Japanese manufacturers as the world’s third-biggest economy fights to bounce back from a contraction. The health of the Chinese economy reverberates through many countries but is especially important for export-reliant Japan. China is Japan’s top trading partner, easily eclipsing the U.S. and the Europe. Following the biggest contraction since 2014 in the three months through September, Japan’s economy is unlikely to see anything more than a tepid return to growth. Factory output dropped again in December, falling for the seventh time in the last nine months.”
The Wall Street Journal’s Greg Ip pursued a similar path with his article, “The Fed’s Mysterious Pause.” “Last December, Mr. Powell noted his colleagues thought they’d raise rates two more times this year, from between 2.25% and 2.5%, which was at the lower end of estimates of ‘neutral’—a level that neither stimulates nor holds back growth. On Wednesday, he suggested the Fed could already be at neutral: ‘Our policy stance is appropriate right now. We also know that our policy rate is in the range of the… committee’s estimates of neutral.’ If indeed the Fed is done, that would be a breathtaking pivot. Yet the motivation remains somewhat mystifying: What changed in the past six weeks to justify it?”
No Mystery. Don’t be bemused. The Fed Chairman was prepared to hold his ground, but the ground was suddenly giving way. Between the December 19th and January 30th FOMC meetings, acute systemic fragilities were revealed.
Not to dismiss economic weakness in China and Europe – or even tenuous U.S./Chinese trade talks and the government shutdown. But January 3rd was pivotal, not coincidently the wild market session ahead of Chairman Powell’s January 4th U-turn. Recall the currency market “flash crash” – with an 8% intraday move in the yen vs. Australian dollar, along with the dramatic widening of credit spreads (and a 19bps surge in Goldman Sachs CDS prices). Markets were careening toward dislocation.
Chairman Powell appeared somewhat downtrodden during his Wednesday press conference, a notable shift from his confident demeanor in December. We can assume Powell and other Fed officials have been alarmed by how swiftly booming securities markets succumb to instability and illiquidity. I believe Powell wanted to see markets begin standing on their own; that, in contrast to his three most-recent predecessors, he would be in no rush to come to the markets’ defense. He was content to see overheated markets commence the cooling process. A correction would actually be constructive for system stability. The predicament: Overinflated Bubbles don’t calmly deflate.
Circumstances forced the Fed’s hand. Old fears soon reemerged of escalating market instability getting ahead of the Fed. Better to act quickly before market/liquidity issues turned intricate and precarious. While not blatantly shock and awe, kind of along the same line. And responding to criticism of blurred messaging, the course of FOMC policymaking must appear coherent and decisive.
There will be no more rate hikes anytime soon. Now heeding market alarm, the Fed will also be reevaluating the runoff of its securities holdings. The Fed would prefer to convey that it remains “data dependent” in an environment of extraordinary uncertainties, while tepid inflation provides convenient cover for embracing “patience.” Well enough, but markets saw it for what it was: The Fed “caved” – just as the markets knew it would. No longer in doubt, the latest incantation of the “Fed put” is alive and well (irrespective of job or GDP growth). Indeed, the new Chairman’s hope for lowering the “put” strike price (Fed support not invoked before a significant market decline) was rather hastily quashed by acute market fragility.
There’s really nothing like a short “squeeze” to get market speculative juices flowing. How about a synchronized global squeeze across myriad asset classes? Only weeks ago, global markets were alarmingly synchronized to the downside. Now it’s everyone off to the races – lockstep (seemingly inebriated). Stocks and corporate Credit; EM currencies, stocks and bonds; Treasuries, bunds and JGBs; Italian bonds; crude and commodities and so on.
Here in the U.S., “Stocks Wrap Up Best January in 30 Years.” The DJIA surged 1,672 points (returning 7.2%) during the month. The S&P500 returned 8.0%, robust gains overshadowed by the broader market. The S&P 400 Midcaps jumped 10.4% in January, with the small cap Russell 2000 rising 11.2%. The average stock (Value Line Arithmetic) gained 11.2%. The Banks (BKX) rose 12.4%, with the Nasdaq Financials up 9.7%. The Nasdaq Composite also rose 9.7%. The Goldman Sachs Most Short index jumped 12.5%. The Philadelphia Oil Services index surged 19.3%.
Some of the problem-children EM currencies bounced strongly. The South African rand gained 8.2% in January, the Russian ruble 6.6%, Brazilian real 6.2%, Chilean peso 6.0%, Colombian peso 4.6%, Thai baht 4.2%, Indonesian rupiah 3.0% and Mexican peso 2.9%. The Chinese renminbi gained 2.7% against the dollar in January.
Over the past month, local currency bond yields were down 137 bps in Lebanon, 93 bps in the Philippines, 50 bps in Russia, 47 bps in Brazil, 34 bps in Cyprus, 33 bps in Hungary and 21 bps in Mexico. Equities gained 19.9% in Argentina, 14.0% in Turkey, 13.5% in Russia, 10.8% in Brazil, 9.6% in South Korea and 9.2% in Colombia. Dollar-denominated bond yields sank 124 bps in Argentina, 100 bps in Ukraine, 50 bps in Turkey, 34 bps in Indonesia and 35 bps in Russia.
January was also a big month for European equities. Major stock indices returned 8.9% in Portugal, 8.1% in Italy, 6.6% in Spain, 5.6% in France, 5.8% in Germany, 6.4% in Switzerland, 8.2% in Finland, 7.6% in Sweden and 8.7% in Austria. January saw 10-year sovereign yields drop 15 bps in Italy, nine bps in Germany, 15 bps in France, 22 bps in Spain, 10 bps in Portugal and 46 bps in Greece.
An overarching CBB theme over the years (debated compellingly generations ago): the problem with discretionary policymaking is that a policy mistake leads invariably to a series of mistakes. The Powell Fed coming quickly to the markets’ defense was a perpetuation of flawed policy doctrine. Moreover, it’s especially dangerous for central banks to so conspicuously buttress the securities markets at this late stage of historic speculative Bubbles. Calming language has an effect akin to electric shock therapy.
Clearly, such actions only further embolden a marketplace conditioned to reach for returns – adopting leverage while disregarding risk. Financial and economic stability are only further undermined. Blatant support of Wall Street will as well further erode public trust in such a critical institution. During the previous crisis, central bank measures were seen as vital to stabilization. I fear they will be viewed as fundamental to the problem in the coming crisis.
The delusion was believing zero rates and QE would over time support system stability. The “buyer of last resort” function during a time of crisis should never have morphed into the buyer of first resort for years of booming markets and economies. We’re now a full decade into aggressive stimulus, and global finance is more fragile than ever. Policy rates remain at zero and the ECB only recently ended its historic balance sheet expansion (to $4.7 TN). Yet economies throughout the Eurozone appear in - or headed toward - recession. Amazingly, despite a QE-induced collapse in market yields, Italy faces a recessionary backdrop with its fragile banks hanging in the balance.
Meanwhile, troubling data run unabated in China. The Caixin China Manufacturing PMI dropped 1.4 points during January to 48.3, the low since gloomy February 2016. It was also the first back-to-back months below 50 (contracting manufacturing activity) since May/June 2016. To see China’s economy weaken in the face of ongoing rapid Credit growth should be alarming to the entire world.
January 27 – Bloomberg: “The number of Chinese companies warning on earnings is turning into a flood, with no industry spared from worsening demand. Some 440 firms disclosed on Wednesday -- the day before a deadline to do so -- that their 2018 financial results deteriorated… Of the more than 2,400 mainland-listed firms that have announced preliminary numbers or issued guidance this season, some 373 said they’ll post a loss, the data show. About 86% of those were profitable in 2017.”
In a globalized, digitized and serviced-based economy, I never viewed consumer price inflation as the prevailing QE risk in the U.S. For the U.S. and the world more generally, zero rates and Trillions of fabricated “money” have fomented interminable Monetary Disorder (on full display during the past two months). Once unleashed, there was no controlling it. Yet with global markets in a synchronized rally, one easily assumes the Fed and central banks have again worked their magic. Stability has engulfed the world. Nothing could be more detached from reality.
The world is in the throes of a precarious period. Ill-advised central banking has ceded a historic global market Bubble additional rope. Meanwhile, until something snaps it is reckless fiscal policies accommodated by ultra-low rates, along with the precarious market perception that central banks will have no alternative other than to reinstitute QE. Central bank-induced Monetary Disorder has completely distorted sovereign debt markets, granting Washington politicians the proverbial blank checkbook. And it is worse than merely a marketplace devoid of “bond vigilantes.” Treasury yields are pressured downward by the fragility of global Bubbles and the expectation of aggressive monetary stimulus as far as the eye can see.
Reckless global monetary management fuels reckless global fiscal mismanagement. Here in the U.S., trillion-dollar plus federal deficits until the market invokes some discipline. And it’s all passed off as business as usual. If I were a bond, I’d be tense. Bailing on “normalization,” the Fed has essentially committed to perpetual loose “money” and stock market support. And in the event the risk market rally turns crazier, there’s just not much slack in the U.S. economy. Ten-year Treasury yields jumped six bps Friday (to 2.68%), although the more interesting move was the 16 bps surge in Italian yields (to 2.74%). Under the circumstances, gold’s $38 January advance was rather restrained.
To see securities markets – risk assets and safe haven alike – rally as they’ve done over recent weeks is something to behold. Sellers overwhelming the markets one month – buyers the next. Legitimate fears of illiquidity supplanted by the utter fright of being on the wrong side of the market and missing a rally. The S&P500 recorded its strongest January since 1987. It’s an apt reminder not to place too much faith in the “January effect”- especially when global markets are acutely speculative. With Monetary Disorder and Dysfunctional Market Structure operating at full-force, no reason not to expect 2019 to be anything but a momentous year.
For the Week:
The S&P500 gained 1.6% (up 8.0% y-t-d), and the Dow increased 1.3% (up 7.4%). The Utilities rose 2.4% (up 3.1%). The Banks declined 1.5% (up 12.8%), while the Broker/Dealers added 0.2% (up 9.6%). The Transports gained 2.0% (up 10.4%). The S&P 400 Midcaps (up 10.7%) and the small cap Russell 2000 (up 11.4%) increased 1.3%. The Nasdaq100 advanced 1.3% (up 8.6%). The Semiconductors added 0.5% (up 11.4%). The Biotechs increased 0.8% (up 16.3%). With bullion up $14.50, the HUI gold index surged 6.7% (up 5.4%).
Three-month Treasury bill rates ended the week at 2.34%. Two-year government yields dropped 10 bps to 2.51% (up 1bp y-t-d). Five-year T-note yields fell 10 bps to 2.50% (down 1bp). Ten-year Treasury yields declined seven bps to 2.69% (unchanged). Long bond yields fell four bps to 3.03% (up 1bp). Benchmark Fannie Mae MBS yields dropped nine bps to 3.47% (down 3bps).
Greek 10-year yields dropped 16 bps to 3.90% (down 44bps y-t-d). Ten-year Portuguese yields slipped a basis point to 1.64% (down 7bps). Italian 10-year yields jumped 10 bps to 2.75% (unchanged). Spain's 10-year yields declined one basis point to 1.22% (down 19bps). German bund yields fell three bps to 0.17% (down 7bps). French yields declined three bps to 0.57% (down 14bps). The French to German 10-year bond spread was little changed at 40 bps. U.K. 10-year gilt yields fell six bps to 1.25% (down 3bps). U.K.'s FTSE equities index rallied 3.1% (up 4.3% y-t-d).
Japan's Nikkei 225 equities index was little changed (up 3.9% y-t-d). Japanese 10-year "JGB" yields declined a basis point to negative 0.01% (down 2bps y-t-d). France's CAC40 rose 1.9% (up 6.1%). The German DAX equities index declined 0.9% (up 5.9%). Spain's IBEX 35 equities index fell 1.8% (up 5.6%). Italy's FTSE MIB index lost 1.2% (up 6.8%). EM equities were higher. Brazil's Bovespa index added 0.2% (up 11.3%), and Mexico's Bolsa increased 0.2% (up 5.0%). South Korea's Kospi index gained 1.2% (up 8.0%). India's Sensex equities index rose 1.2% (up 1.1%). China's Shanghai Exchange increased 0.6% (up 5.0%). Turkey's Borsa Istanbul National 100 index rose 1.1% (up 12.8%). Russia's MICEX equities index added 0.9% (up 6.9%).
Investment-grade bond funds saw inflows of $34 million, and junk bond funds posted inflows of $73 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates added a basis point to 4.46% (up 24bps y-o-y). Fifteen-year rates increased one basis point to 3.89% (up 21bps). Five-year hybrid ARM rates gained six bps to 3.96% (up 43bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down six bps to 4.42% (up 7bps).
Federal Reserve Credit last week declined $9.9bn to $4.001 TN. Over the past year, Fed Credit contracted $387bn, or 8.8%. Fed Credit inflated $1.189 TN, or 42%, over the past 325 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $5.6bn last week to $3.414 TN. "Custody holdings" rose $47.8bn y-o-y, or 1.4%.
M2 (narrow) "money" supply declined $2.3bn last week to $14.519 TN. "Narrow money" gained $673bn, or 4.9%, over the past year. For the week, Currency increased $1.9bn. Total Checkable Deposits jumped $39.6bn, while Savings Deposits dropped $51.7bn. Small Time Deposits gained $6.2bn. Retail Money Funds added $1.6bn.
Total money market fund assets declined $13.5bn to $3.038 TN. Money Funds gained $239bn y-o-y, or 8.5%.
Total Commercial Paper rose $9.9bn to $1.079 TN. CP declined $60bn y-o-y, or 5.3%.
Currency Watch:
The U.S. dollar index slipped 0.2% to 95.579 (down 0.6% y-t-d). For the week on the upside, the Brazilian real increased 2.9%, the South African rand 2.2%, the Australian dollar 1.0%, the New Zealand dollar 0.9%, the Canadian dollar 0.9%, the Norwegian krone 0.9%, the euro 0.4%, the Singapore dollar 0.3%, the South Korean won 0.2% and the Japanese yen 0.1%. For the week on the downside, the British pound declined 0.9%, the Mexican peso 0.6% and the Swiss franc 0.2%. The Chinese renminbi was little changed versus the dollar this week (up 1.97% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index added 0.9% (up 10.4% y-t-d). Spot Gold gained 1.1% to $1,318 (up 2.7%). Silver rose 1.5% to $15.931 (up 2.5%). Crude gained $1.57 to $55.26 (up 22%). Gasoline jumped 3.4% (up 10%), while Natural Gas dropped 14.0% (down 7%). Copper rose 1.6% (up 5%). Wheat increased 0.8% (up 4%). Corn declined 0.5% (up 1%).
Market Dislocation Watch:
January 28 – CNBC (Hugh Son): “The market meltdown that wiped out stocks’ gains late last year will be a recurring feature of the trading environment, according to Daniel Pinto, co-president of J.P. Morgan Chase and head of its massive corporate and investment bank. ‘Over time, you will probably see several more market events like we saw in December,’ Pinto said… ‘People know we are working towards the end of the cycle, and they have built some risk and some positions that they’ve been accumulating for years, and they know that when they want to trade, liquidity won’t necessarily be there,’ Pinto said. ‘So markets will tend to overreact to things, and you have these big moves, and then a correction to rationality, as we’ve seen.’”
January 31 – Financial Times (Joe Rennison and Colby Smith): “Retail investors pulled money from US loan funds for the 11th week in a row, as falling interest rate forecasts have damped demand for the asset class despite prices stabilising after a December slump. US loan funds suffered $935m in outflows for the week ending January 30, according to… Lipper, extending a run of outflows that has resulted in $19bn being withdrawn from the $1.2tn asset class.”
Trump Administration Watch:
January 31 – Financial Times (James Politi): “The US and China claimed progress in tackling some of the thorniest issues in their trade war as Donald Trump suggested that a new presidential summit might be necessary to settle the economic conflict within the next month. At the end of two days of negotiations in Washington, Robert Lighthizer, the US trade representative, said his talks with Liu He, China’s vice-premier, had finally centred on US demands for structural reforms by Beijing — such as ending the forced transfer of technology from US companies or reining in the use of industrial subsidies. But Mr Lighthizer failed to report a specific concession made by Beijing, and said he and Steven Mnuchin, US Treasury secretary, were considering a trip to Beijing after the Chinese new year celebration in early February to resume negotiations.”
January 29 – Reuters (Doina Chiacu and Susan Heavey): “U.S. Treasury Secretary Steve Mnuchin said… he expected to see significant progress in trade talks with Chinese officials this week and that U.S. charges against telecommunications giant Huawei Technologies Co Ltd were a separate issue. ‘Those are separate issues, and that’s a separate dialogue,’ Mnuchin said... ‘So those are not part of trade discussions. Forced technology issues are part of trade discussions, but any issues as it relates to violations of U.S. law or U.S. sanctions are going through a separate track.’”
January 27 – Wall Street Journal (Peter Nicholas and Kristina Peterson): “President Trump said Sunday he doesn’t believe congressional negotiators will strike a deal over border-wall funding that he could accept and vowed that he would build a wall anyway, using emergency powers if need be. Mr. Trump… assessed the chances of whether a newly formed group of 17 lawmakers could craft a deal before the next government-funding lapse, in less than three weeks: ‘I personally think it’s less than 50-50, but you have a lot of very good people on that board.’”
January 29 – Wall Street Journal (Andrew Ackerman): “The Trump administration plans to work with Congress to overhaul mortgage-finance giants Fannie Mae and Freddie Mac , a White House spokeswoman said… —playing down the idea the administration will seek to unilaterally release the firms from government control. The White House also expects to announce a framework for developing comprehensive housing-finance changes ‘shortly,’ White House spokeswoman Lindsay Walters said. But that framework will not likely make specific recommendations about what to do with the two companies, according to people familiar... For more than a decade, lawmakers have tried without success to overhaul Fannie and Freddie, which were placed in conservatorship during the 2008 financial crisis. Recent statements by administration officials indicated the government was reviewing plans to directly end government control without input from Congress, sending shares surging.”
Federal Reserve Watch:
January 31 – Reuters (Steve Holland, Makini Brice, Jason Lange and Ginger Gibson): “U.S. President Donald Trump is considering former pizza chain executive and Republican presidential candidate Herman Cain for a seat on the Federal Reserve Board, a senior administration official said…”
January 27 – Wall Street Journal (Nick Timiraos): “Some investors blame the stock market’s volatility on the Federal Reserve shrinking its bond portfolio. But the critique puzzles Fed officials and some economists because there is little evidence of turmoil in the two markets where the central bank actively intervened: Treasurys and mortgage debt. The Fed is shrinking its $4 trillion portfolio by allowing Treasury and mortgage securities to mature without replacing them. Up to $50 billion worth is allowed to expire every month under the plan, though the actual amounts have been closer to $40 billion in recent months. Markets barely blinked when the Fed announced its move in 2017. But in the last few months, a number of prominent investors, including Stanley Druckenmiller, have said the portfolio runoff is a big factor behind the return of market volatility. With stocks gyrating, President Trump said he wanted the Fed to slow or stop the moves.”
U.S. Bubble Watch:
January 29 – Reuters (Lucia Mutikani): “U.S consumer confidence fell to a 1-1/2 year-low in January as a partial shutdown of the government and financial markets turmoil left households a bit nervous about the economy’s prospects. The drop in confidence reported by the Conference Board… mirrors another survey earlier this month showing sentiment tumbling to its lowest level since President Donald Trump was elected more than two years ago, strengthening analysts expectations that the economy was losing momentum.”
January 28 – Bloomberg (Brendan Murray): “The U.S. Treasury Department indicated that the government’s borrowing needs are rising faster than previous estimates as the Trump administration finances a widening budget deficit. The department expects to issue $365 billion in net marketable debt from January through March, up $8 billion from its estimate in October… The Treasury sees an end-of-March cash balance of $320 billion, unchanged from its forecast three months ago. In its first estimate of the April-June period this year, the department estimated borrowing of $83 billion, $11 billion more than in the same period last year and the most for that quarter since 2012.”
January 30 – Bloomberg (Liz Capo McCormick and Saleha Mohsin): “The U.S. Treasury Department announced plans to issue another record-breaking amount of debt, giving President Donald Trump’s re-election opponents more ammunition as they question whether his tax cuts will pay for themselves. The federal budget shortfall is set to swell, driven by tax cuts, spending increases and an aging American population. As a result, the Treasury is raising its long-term debt issuance at its quarterly refunding auctions to $84 billion…, $1 billion more than three months ago. Such elevated levels of borrowing will finance the widening deficit, with Wall Street strategists projecting new debt issuance will top $1 trillion for a second straight year.”
January 29 – CNBC (Diana Olick): “Home values increased 5.2% annually in November, slowing from 5.3% in October, according to the… S&P CoreLogic Case-Shiller National Home Price Index. The 10-city composite annual increase also fell to 4.3%, down from 4.7% in the previous month. The 20-city composite saw a 4.7% annual gain, down from 5.0% in October. Home price gains have been slowing since last spring, as higher mortgage interest rates cut sharply into affordability. The gains are slowing the most in large metropolitan markets, where home prices had overheated over the past three years.”
January 27 – Financial Times (Richard Armstrong): “Fourth-quarter results from US regional banks — which finance many of America’s small and mid-sized businesses — revealed a robust domestic economy, despite worries about unsteady markets, global trade talks and slowdowns in China and Europe. At the 10 largest regional banks, or ‘super-regionals,’ which have combined assets of more than $2tn, business and credit-card loan portfolios grew 6%, in aggregate, accelerating from earlier in the year and surprising industry analysts. ‘There’s certainly a lot of chatter about the government shutdown, Brexit, trade talk, all of that . . . But so far, on Main Street, we don’t see that,’ said Kelly King, chief executive of BB&T…”
January 29 – Reuters: “Power provider PG&E filed for voluntary Chapter 11 bankruptcy protection on Tuesday, succumbing to liabilities stemming from wildfires in Northern California in 2017 and 2018… The owner of the biggest U.S. power utility has filed a motion seeking court approval for a $5.5 billion debtor-in-possession financing… PG&E listed assets of $71.39 billion and liabilities of $51.69 billion, in a court document…”
January 28 – Financial Times (Robert Armstrong): “In the years after the financial crisis, small businesses that needed credit were stuck. New capital rules discouraged big banks from touching any borrower perceived as risky. The bond and loan markets, where larger businesses flocked for inexpensive debt capital, have little use for sums under $100,000 — which is what most small enterprises need. A handful of non-bank lenders, payment and e-commerce companies have leapt into the gap. In an environment of easy money and economic expansion, small business lending operations at OnDeck, Kabbage, PayPal, Square and others have grown fast. The question now is whether these new, branchless business models can thrive in a market where credit is tightening and the economy slowing. The interest rates on the loans are high — often the equivalent of a 30-40% annual rate, or higher — and the borrowers tend to have short credit histories. There are some signs of vulnerability. Morgan Stanley analyst James Faucette notes that in periods where credit has tightened in recent years, the online lenders ‘have done worse than traditional lenders . . . they have all had to rework their underwriting in a significant way. Once they have done that, they try to re-engage during an expansion and take advantage of what they have learnt.’”
January 29 – Wall Street Journal (Ben Eisen and Nick Timiraos): “One of the principal gatekeepers to housing-finance markets is stepping up scrutiny of nonbank mortgage lenders, concerned that some may not have the financial heft needed to overcome stressed conditions. The increased oversight by the Government National Mortgage Association, or Ginnie Mae, comes as nonbank lenders play an ever-bigger role in making mortgages to Americans and as housing markets are cooling. Many of these companies flourished after the financial crisis as banks stepped back from the mortgage market but haven’t yet been tested by an economic downturn. For the first time in recent memory, the agency has asked a handful of these lenders to improve certain financial metrics before granting them full ability to continue issuing Ginnie-backed mortgage bonds, according to Maren Kasper, who stepped in as Ginnie’s acting head this month.”
January 29 – Wall Street Journal (Esther Fung): “Chinese net purchases of U.S. commercial real estate last year dwindled to their lowest level since 2012, as Beijing kept up the pressure on Chinese investors to bring cash home during a period of worsening economic growth. Insurers, conglomerates and other investors from mainland China were net sellers of $854 million of U.S. commercial property in the fourth quarter, according to Real Capital Analytics. That marked the third-straight quarter Chinese investors sold more U.S. property than they bought, the first time ever these investors have been sellers for that long a stretch. The selling during most of 2018 marked a powerful reversal from the previous five years, when Chinese investors went on a massive buying spree, often handily outbidding other investors for U.S. trophy properties.”
January 31 – Bloomberg (Arit John and Laura Davison): “Independent Senator Bernie Sanders is proposing to expand the estate tax on wealthy Americans, including a rate of up to 77% on the value of estates above $1 billion. Sanders of Vermont… said… his plan would apply to the wealthiest 0.2% Americans. It would set a 45% tax on the value of estates between $3.5 million and $10 million, increasing gradually to 77% for amounts more than $1 billion. The current estate tax kicks in when an estate is worth about $11 million.”
China Watch:
January 31 – Financial Times (Edward White): “A private sector gauge of China’s manufacturing sector in January contracted to its lowest level since February 2016, in the latest sign of economic headwinds hitting the world’s second largest economy despite moves by Beijing to shore up growth. The Caixin manufacturing purchasing managers’ index slipped to 48.3 in January, from 49.7 a month earlier and marking the second-straight monthly decline after the index retreated into negative territory for the first time in 19 months in December.”
January 29 – Bloomberg: “Chinese executives are sounding warning bells over the world’s second-largest economy. At least 20 companies, including China Life Insurance Co. and Chongqing Changan Automobile Co., told investors late Tuesday that full-year earnings would fall well short of expectations. Reasons they cited included the country’s economic slowdown, as well as recent changes to accounting rules and the equity market’s $2.3 trillion rout last year, the world’s biggest loss of value.”
January 28 – Reuters (Michael Sheetz): “Chinese representatives met with the World Trade Organization… to begin the process of legally challenging United States tariffs on China’s exports, Reuters reported, citing a transcript of the meeting’s discussion. ‘This is a blatant breach of the United States’ obligations under the WTO agreements and is posing a systemic challenge to the multilateral trading system,’ a Chinese representative said… ‘If the United States were free to continue infringing these principles without consequences, the future viability of this organization is in dire peril.’”
January 29 – Reuters (Associated Press): “U.S. criminal charges against Chinese electronics giant Huawei have sparked a fresh round of trans-Pacific recriminations, with Beijing demanding… that Washington back off what it called an ‘unreasonable crackdown’ on the maker of smartphones and telecom gear. China’s foreign ministry said it would defend the ‘lawful rights and interests of Chinese companies’ but gave no details. Huawei is the No. 2 smartphone maker and an essential player in global communications networks.”
January 31 – Reuters (Li Zheng, Zhang Xiaochong and Ryan Woo): “China’s central bank told some commercial banks in January to moderate their pace of lending…, as it seeks to manage the amount of credit flowing into the economy. In its guidance, the People’s Bank of China (PBOC) also told the lenders that the pace and size of loans granted should not fall below the level from the same period a year earlier.”
January 27 – Bloomberg (Christopher Balding): “In the past decade, China has relied primarily on credit growth to fund its economic ambitions. The country’s banks are now feeling the constraints of this lending binge and need to raise a lot of capital over the next couple of years… With 267 trillion yuan ($39.4 trillion) of total assets, and home to the world’s four largest banks by this measure, the country’s financial system doesn’t operate in isolation… Major Chinese banks raised or announced plans to raise 343 billion yuan in 2018, according to… Nomura Holdings Inc. That’s well below the estimates of UBS Group AG, which just last year said these firms would need 1 trillion to 3 trillion yuan… The fundamental problem is the conflicting pressures on the sector. Despite talk of deleveraging in 2018, as nominal GDP growth slowed to 9.7%, total loans outstanding grew 13.5%. To prop up the economy, Chinese banks have been lending well in excess of deposit growth. Since the beginning of 2016, as loans outstanding grew 41%, deposits rose just 29%...”
January 31 – Bloomberg (Andrew Mayeda and Katherine Greifeld): “China’s holdings of U.S. Treasuries fell to the lowest level in a year and a half amid a bruising trade war with the Trump administration. China’s pile of notes, bills and bonds dropped to $1.12 trillion in November, from $1.14 trillion in October… It was the sixth straight decline and left the nation’s stockpile the smallest since May 2017. China remains the U.S.’s biggest foreign creditor. Japan is next, with $1.04 trillion, up from $1.02 trillion in October, which was its smallest amount since 2011.”
January 29 – Financial Times (Don Weinland and Emma Dunkley): “S&P Global’s breakthrough into China’s domestic ratings scene is promising to bring a new level of clarity to foreign investors hoping to take a bigger slice of the country’s $12tn bond market. The… credit rating agency this week became the first foreign company to gain approval from China’s central bank to start assessing domestic bonds, following a year-long process to gain a foothold in the local market, the world’s third largest. The move could help to unlock flows into a market where foreign investors currently hold about 3% of the total bonds outstanding… But asset managers have flagged the perils of trying to compete with China’s domestic agencies, which routinely offer issuers high ratings. There are also questions as to whether S&P could come under pressure from the government to give better ratings to some state-backed debt issuers.”
Central Bank Watch:
January 28 – Bloomberg (Carolynn Look and Alexander Weber): “Mario Draghi said that while the euro-area economy is looking bleaker than anticipated, it’s not bad enough to warrant additional monetary support. The president of the European Central Bank blamed ‘softer external demand and some country and sector-specific factors’ for the slowdown, but indicated he still has some confidence in the underlying strength of the economy. ‘If things go very wrong, we can still resume other instruments in our toolbox. There is nothing objecting to that possibility,’ he told lawmakers in Brussels in response to a question on whether net asset purchases could be restarted. ‘The only point is under what contingency are we going to do this. And at this point in time, we don’t see such contingency as likely to materialize, certainly this year.’”
EM Watch:
February 1 – Bloomberg (Cagan Koc): “Turkey’s top economic body ruled out seeking support from the International Monetary Fund, in an effort to end market speculation that Ankara is in touch with the Washington-based lender to negotiate a rescue package. Those spreading the rumors are carrying out a propaganda war to ‘harm the Turkish government, the Turkish economy and Turkish people,’ the Treasury and Finance Ministry said… ‘This sick state of mind has reached a dangerous level.’”
February 1 – Bloomberg (Kartik Goyal and Subhadip Sircar): “Sovereign Indian bonds yields surged the most in eight months and rupee weakened after Prime Minister Narendra Modi’s government announced record borrowings to fund populist policies before elections by May. The administration plans to borrow 7.1 trillion rupees ($100bn) in the year starting April 1… That compares with a 6.4-trillion rupee forecast in a Bloomberg News survey and a revised 5.71 trillion rupees for the current fiscal period.”
Global Bubble Watch:
January 31 – Bloomberg (Jonathan Cable and Marius Zaharia): “Factory activity was at its weakest in years across much of the world during January, adding to worries trade tariffs, political uncertainty and cooling demand poses an increasing threat to global growth… Trade-focused Asia appears to be suffering the most visible loss of momentum so far, with activity shrinking in China, although European economies are stuck in low gear and many emerging markets are sputtering. The euro zone has been rocked by protests in France, an auto sector struggling to regain momentum, political strife and rising trade protectionism. Manufacturing growth in the bloc was minimal last month, at a four-year low, and forward looking indicators suggest there will be no turnaround soon.”
January 29 – Financial Times (Lucy Hornby): “China is ‘rebalancing’ its overseas lending practices in the face of mounting concerns over the debt burdens of developing countries, the head of the Asian Infrastructure Investment Bank told the Financial Times… Infrastructure investment in Asia’s largest developing countries fell in 2017 and 2018, amid a deleveraging campaign in China and deepening concern over the fiscal impact of Chinese-backed mega projects on their host countries. The AIIB, the Beijing-based multilateral bank, provides an alternative model to the Chinese state-backed bilateral lending that has contributed to the economic meltdown in Venezuela, a controversial debt renegotiation in Sri Lanka and cancelled projects in Malaysia. Jin Liqun, the AIIB’s president, told the FT that China is conscious of the criticism. ‘Chinese leaders definitely have picked up the message. You cannot go on and on putting money in, without taking a review of what’s going on, to rebalance.’”
January 28 – Bloomberg (Michael Heath): “Australian firms suffered the worst slump in conditions since the 2008 global financial crisis as evidence mounts that the economy slowed in the latter part of last year. The business conditions index -- measuring hiring, sales and profits -- dropped to 2 in December from 11 a month earlier, a National Australia Bank Ltd. report showed Tuesday. A gauge of employment fell to 4 from 9 in November, while profitability plunged to zero from 8. A separate confidence index was unchanged at 3.”
January 31 – Bloomberg (Jackie Edwards): “Sydney property values continued to fall in January, driving nationwide house prices back to levels last seen in October 2016, amid tighter lending conditions and high levels of housing supply. Nationwide home values dropped 1% last month, led by a 1.3% decline in Sydney and a 1.6% slide in Melbourne, according to CoreLogic…”
Europe Watch:
February 1 – Bloomberg (Carolynn Look): “Italy’s recession isn’t seeing any signs of a turnaround at the start of the year, as a drop in manufacturing orders weighed on output and forced companies to cut jobs. Manufacturing conditions worsened in January to the greatest extent in almost six years, a purchasing managers’ index showed on Friday. At 47.8, it’s well below the 50 level that marks the crossover between expansion and contraction. Growth in the euro area as a whole slowed, led by a contraction in Germany, the region’s biggest economy, a separate PMI report showed.”
February 1 – Bloomberg (Simbarashe Gumbo): “IHS Markit releases manufacturing purchasing managers’ index for Eurozone in January. Index falls to 50.5 from 51.4 in Dec.; Year ago 59.6. Lowest reading since Nov. 2014. New Orders fall to 47.8 vs 48.8 in Dec. Lowest reading since April 2013. Fourth consecutive month of contraction.”
Japan Watch:
February 1 – Bloomberg (Dave McCombs and Kazunori Takada): “The slowdown in China that’s rattled global stocks is hitting the earnings of Japanese manufacturers as the world’s third-biggest economy fights to bounce back from a contraction. The health of the Chinese economy reverberates through many countries but is especially important for export-reliant Japan. China is Japan’s top trading partner, easily eclipsing the U.S. and the Europe. Following the biggest contraction since 2014 in the three months through September, Japan’s economy is unlikely to see anything more than a tepid return to growth. Factory output dropped again in December, falling for the seventh time in the last nine months.”
February 1 – Bloomberg (Keiko Ujikane and Shigeki Nozawa): “The world’s biggest pension fund posted a record loss after a global equity rout last quarter pummeled an asset class that made up about half of its investments. Japan’s Government Pension Investment Fund lost 9.1%, or 14.8 trillion yen ($136bn), in the three months ended Dec. 31… The decline in value and the rate of loss were the steepest based on comparable data back to April 2008.”
Fixed-Income Bubble Watch:
January 27 – Financial Times (Joe Rennison): “Wall Street’s debt machine is being powered by a familiar engine: securitisation. As scrutiny of the $1.2tn leveraged loan market has increased, focus has turned to the market’s main source of support: collateralised loan obligations. CLOs are vehicles which take a group of risky loans and then use them to back a series of bonds of varying degrees of safety. Investors in the most perilous, lowest-rated ‘tranches’, as they are known, are rewarded with higher returns but are hit first if the underlying loans — issued to low-rated or heavily indebted companies across the US — begin to default. As such, CLOs resemble other structures that rocked the financial system a decade ago, such as CDOs, which issued debt backed by bundles of (what turned out to be) junk mortgage bonds. But both investors and CLO managers say this time is different.”
January 30 – Bloomberg (Lisa Lee and Adam Tempkin): “The collateralized loan obligation machine is back as the all-important arbitrage between leveraged loans and CLO-manager borrowing costs shows signs of improvement. The improving arbitrage, buoyed by softer leveraged-loan prices, has been enough to kickstart CLO bond issuance this month. CLOs started coming out of the woodwork in mid-January, with $5.1 billion in supply so far this month, though less than the $8 billion seen in January 2018.”
Geopolitical Watch:
February 1 – Reuters (Lesley Wroughton and Arshad Mohammed): “The United States will suspend compliance with the Intermediate-range Nuclear Forces Treaty with Russia on Saturday and formally withdraw in six months if Moscow does not end its alleged violation of the pact, Secretary of State Mike Pompeo said…”
January 29 – Wall Street Journal (Dustin Volz and Warren P. Strobel): “U.S. intelligence officials warned Tuesday of increased threats to national security from tighter cooperation between China and Russia, while also differing with President Trump in their analysis of North Korea’s nuclear intentions and the current danger posed by Islamic State. The warnings were contained in an annual threat assessment that accompanied testimony by Director of National Intelligence Dan Coats, Federal Bureau of Investigation Director Chris Wray, Central Intelligence Agency Director Gina Haspel and other leaders of the U.S. intelligence community, who appeared Tuesday before a Senate panel. The annual exercise affords the public a look at imminent challenges facing the country, such as cyberattacks, nuclear proliferation and terrorism. The assessment cautioned that Beijing and Moscow are pouring resources into a ‘race for technological and military superiority’ that will define the 21st century. It said the two countries are more aligned than at any point since the mid-1950s.”
January 28 – Reuters (Matt Spetalnick and Brian Ellsworth): “The Trump administration on Monday imposed sweeping sanctions on Venezuelan state-owned oil firm PDVSA, aimed at severely curbing the OPEC member’s crude exports to the United States and at pressuring socialist President Nicolas Maduro to step down. Russia, a close ally of Venezuela, denounced the move as illegal interference in Venezuela’s affairs and said the curbs meant Venezuela would probably have problems servicing its $3.15 billion sovereign debt to Moscow.”
January 28 – Reuters (Ana Isabel Martinez): “Venezuela’s government struck back at self-declared interim president Juan Guaido on Tuesday, with the Supreme Court imposing a travel ban and freeze on his bank accounts despite a warning from Washington of ‘serious consequences’ if it did so. The court also said prosecutors could investigate Guaido, in apparent retaliation for sweeping U.S. sanctions on oil firm PDVSA…”
January 28 – Reuters (Parisa Hafezi): “A senior Iranian Revolutionary Guards commander… threatened Israel with destruction if it attacks Iran, state media reported. The comments by Brigadier General Hossein Salami, deputy head of the elite Islamic Revolutionary Guard Corps, followed an Israeli attack on Iranian targets in Syria last week - the latest in a series of assaults targeting Tehran’s presence there in support of President Bashar al-Assad’s government.”
Fixed-Income Bubble Watch:
January 27 – Financial Times (Joe Rennison): “Wall Street’s debt machine is being powered by a familiar engine: securitisation. As scrutiny of the $1.2tn leveraged loan market has increased, focus has turned to the market’s main source of support: collateralised loan obligations. CLOs are vehicles which take a group of risky loans and then use them to back a series of bonds of varying degrees of safety. Investors in the most perilous, lowest-rated ‘tranches’, as they are known, are rewarded with higher returns but are hit first if the underlying loans — issued to low-rated or heavily indebted companies across the US — begin to default. As such, CLOs resemble other structures that rocked the financial system a decade ago, such as CDOs, which issued debt backed by bundles of (what turned out to be) junk mortgage bonds. But both investors and CLO managers say this time is different.”
January 30 – Bloomberg (Lisa Lee and Adam Tempkin): “The collateralized loan obligation machine is back as the all-important arbitrage between leveraged loans and CLO-manager borrowing costs shows signs of improvement. The improving arbitrage, buoyed by softer leveraged-loan prices, has been enough to kickstart CLO bond issuance this month. CLOs started coming out of the woodwork in mid-January, with $5.1 billion in supply so far this month, though less than the $8 billion seen in January 2018.”
Geopolitical Watch:
February 1 – Reuters (Lesley Wroughton and Arshad Mohammed): “The United States will suspend compliance with the Intermediate-range Nuclear Forces Treaty with Russia on Saturday and formally withdraw in six months if Moscow does not end its alleged violation of the pact, Secretary of State Mike Pompeo said…”
January 29 – Wall Street Journal (Dustin Volz and Warren P. Strobel): “U.S. intelligence officials warned Tuesday of increased threats to national security from tighter cooperation between China and Russia, while also differing with President Trump in their analysis of North Korea’s nuclear intentions and the current danger posed by Islamic State. The warnings were contained in an annual threat assessment that accompanied testimony by Director of National Intelligence Dan Coats, Federal Bureau of Investigation Director Chris Wray, Central Intelligence Agency Director Gina Haspel and other leaders of the U.S. intelligence community, who appeared Tuesday before a Senate panel. The annual exercise affords the public a look at imminent challenges facing the country, such as cyberattacks, nuclear proliferation and terrorism. The assessment cautioned that Beijing and Moscow are pouring resources into a ‘race for technological and military superiority’ that will define the 21st century. It said the two countries are more aligned than at any point since the mid-1950s.”
January 28 – Reuters (Matt Spetalnick and Brian Ellsworth): “The Trump administration on Monday imposed sweeping sanctions on Venezuelan state-owned oil firm PDVSA, aimed at severely curbing the OPEC member’s crude exports to the United States and at pressuring socialist President Nicolas Maduro to step down. Russia, a close ally of Venezuela, denounced the move as illegal interference in Venezuela’s affairs and said the curbs meant Venezuela would probably have problems servicing its $3.15 billion sovereign debt to Moscow.”
January 28 – Reuters (Ana Isabel Martinez): “Venezuela’s government struck back at self-declared interim president Juan Guaido on Tuesday, with the Supreme Court imposing a travel ban and freeze on his bank accounts despite a warning from Washington of ‘serious consequences’ if it did so. The court also said prosecutors could investigate Guaido, in apparent retaliation for sweeping U.S. sanctions on oil firm PDVSA…”
January 28 – Reuters (Parisa Hafezi): “A senior Iranian Revolutionary Guards commander… threatened Israel with destruction if it attacks Iran, state media reported. The comments by Brigadier General Hossein Salami, deputy head of the elite Islamic Revolutionary Guard Corps, followed an Israeli attack on Iranian targets in Syria last week - the latest in a series of assaults targeting Tehran’s presence there in support of President Bashar al-Assad’s government.”
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