[Reuters] U.S. outlines 'Phase 1' trade deal with China, suspends October tariff hike
[CNBC] Wall Street has doubts after partial trade deal: ‘I don’t think this gets us to Christmas’
[Reuters] Wall Street Week Ahead: Bruised U.S. banks expected to report third quarter earnings decline
[Reuters] QE on the QT? Fed says no, economists say maybe so
[Reuters] Turkish-led forces advance into Syrian border town, fighting rages
[Reuters] Turkey's Syria offensive 'invasion' of Arab land: Arab League secretary general
[Reuters] Petrol bombs thrown in Hong Kong metro, protesters defy face mask ban
[Bloomberg] QE, or Not QE? Impact of Fed Bond-Buying Will Depend on Treasury
[Bloomberg] China’s PBOC Clarifies Standard Assets as New Regulations Loom
[Bloomberg] Historic Slump in China Car Market Continues as Sales Drop 6.6%
[FT] China makes few concessions in trade truce with US
Saturday, October 12, 2019
Friday, October 11, 2019
Weekly Commentary: What the Heck is Happening in the Cayman Islands?
Please join Doug Noland and David McAlvany Thursday, October 17th, at 4:00PM Eastern/ 2:00pm Mountain time for the Tactical Short Q3 recap conference call, "Managing Short-Side ‘Beta’ in an Extraordinary Environment.” Click here to register.
Another quiet week… When the Fed on Friday announced its “Not QE” balance sheet reflation strategy, the Dow was already 400 points higher on anticipation of a positive trade negotiation outcome. The Federal Reserve will Tuesday begin buying $60 billion of Treasury bills monthly through 2020’s second quarter. This follows a five-week period where Federal Reserve Credit surged $187 billion. In addition, the Fed said it will continue with its overnight and term “repo” market interventions, along with reinvesting proceeds from maturing longer-dated maturities.
I have speculated the Fed’s balance sheet might inflate to $10 TN over the course of the next crisis and down-cycle. It’s possible that we could see expansion approaching $500 billion over the next six to nine months.
Announcing its “Not QE” plan as markets were in the throes of an intense short squeeze creates poor optics. Most analysts had expected the rollout to come at the Fed’s end-of-month meeting - or even during November. This is one more example of the Fed acting as if it is facing a serious risk to financial stability.
October 11 – Bloomberg (Rich Miller and Christopher Condon): “…The central bank… stressed that ‘these actions are purely technical measures to support the effective implementation’ of interest-rate policy and ‘do not represent a change’ in its monetary stance. ‘In particular, purchases of Treasury bills likely will have little if any impact on the level of longer-term interest rates and broader financial conditions.’”
There may come a day when bond markets push back against central bank interventions – “purely technical” or otherwise. Ten-year Treasury yields jumped six bps Friday to 1.73% - though this move higher was in response to the markets’ “risk on” mood ahead of the completion of trade talks. Two-year Treasury yields rose five bps Friday to 1.60%, up 19 bps for the week (reversing most of last week’s drop). The implied yield on January Fed funds futures rose 9.5 bps this week to 1.555% (current Fed funds rate 1.82%). Even with a successful “Phase 1” trade deal with China – not to mention the Fed’s plan to expand holdings - the probability of a rate cut at the Fed’s October 30th meeting was little changed this week at 71%.
University of Michigan Consumer Confidence was reported at a much stronger-than-expected – and three-month high - 96. The Current Conditions component jumped 4.9 points to 113.4, the high going back to December 2018 (116.1). The St. Louis Fed’s Real GDP Nowcast Model has Q3 GDP at 3.12%. And if the world is indeed at the cusp of a U.S./China trade truce, there is even less justification for an additional rate cut. Yet I am not convinced trade risks – or economic vulnerabilities more generally – are the crux of underlying market fragilities and central bank unease.
It was an unfittingly low-key headline: “Better Data on Modern Finance Reveals Uncomfortable Truths.” The subheading to Gillian Tett’s Thursday FT article was more direct: “It is Unnerving That the Shadow Banking Sector is Swelling, Given its Role in the Financial Crisis.”
The FT’s list of “most read” articles included “Why Investors See Inflation as a Very British Problem” and “TP ICAP Pays £15m to Settle FCA Charges Over ‘Wash Trades.’” Ms. Tett’s insightful piece failed to make the cut. I was however reminded of an FT article from early 1998 highlighting the explosion of trading in Russia currency and bond derivatives, along with Gillian Tett’s exceptional reporting on the proliferation of subprime CDOs and mortgage derivatives late in the mortgage finance Bubble period.
October 10 – Financial Times (Gillian Tett): “What the heck is happening in the Cayman Islands? That is a question often asked in relation to corporate tax. This week, for example, the OECD called for an end to the loopholes that let global companies cut their tax bills in places like the British overseas territory. As the debate bubbles on, there is another facet of globalisation that merits more discussion: the financial flows associated with offshore centres, particularly between banks and non-bank entities.”
“Cross-border lending by banks to non-bank financial institutions, such as hedge funds, has also jumped, from $4.8tn in 2016 to $6.6tn in 2019. More striking, those non-bank institutions have quietly ‘become important sources of cross-border funding for banks, particularly in international currencies,’ the BIS notes. Yet again, those offshore financial centres feature: almost 20% of banks’ cross-border dollar funding is now supplied by entities based in the Cayman Islands, a ratio only topped by those in the US, while entities based in Luxembourg and the Caymans are crucial in the euro markets. Or as the BIS concludes, ‘Banks’ positions with [non-banks] are concentrated in few countries, particularly financial centres.’”
“Non-bank intermediaries’ share of total financial system assets increased from 31% to 36%” between 2007 and 2017, observes a report from the IESE Business School… Meanwhile, the BIS data shows that banks’ cross-border dealings with non-bank entities has been swelling too. One reason is that banks are increasingly funding governments (by buying their debt). But their exposure to non-financial companies is also rising noticeably, both to onshore and offshore subsidiaries. ‘Banks lend significant amounts to non-financial corporations located in financial centres . . . [providing] credit to the financing arms of multinational corporations located there,’ the BIS notes, adding that banks’ claims on NFCs [non-financial corporations] in the Cayman Islands are larger than on those in Italy. (Yes, really.)”
Convoluted, murky stuff: The amalgamation of “offshore financial centres,” “cross-border dollar funding,” “non-bank intermediaries” and “offshore subsidiaries,” make CDOs, special purpose vehicles, and other mortgage financial Bubble era “shadow” financial processes appear rather clear and luminous by comparison.
Ms. Tett’s article pinpoints the “belly of the beast.” The GSEs, securitizations, sophisticated mortgage derivatives, and “repo” finance created the nucleus of the risk intermediation and leverage fueling precarious mortgage finance Bubble excess. I am convinced the mushrooming of government bonds, the proliferation of global “repo” markets and off-shore securities lending operations, along with unmatched global derivatives excess and leveraged speculation, are at the epicenter of the runaway “global government finance Bubble.”
Tett’s article notes the global push to accumulate reliable official data. The BIS (Bank for International Settlements) has expanded data for non-bank counterparties and offshore financial centers. While interesting – and certainly illustrating the enormous scope of offshore finance – I’m not confident that the BIS and global central bank community have a handle on what evolved into colossal global flows intermediated through securities finance and “offshore” financial centers. The recurring extensive revisions to the Fed’s Rest of World (ROW) Z.1 data informs me that there are major shortcomings and outright holes in the data. Indeed, What the Heck is Happening in the Cayman Islands?
A few snippets from the BIS’s September 2019 Quarterly Review - International Banking and Financial Market Developments (referenced in Tett’s article).
“Derivatives trading in over-the-counter (OTC) markets rose even more rapidly than that on exchanges, according to the latest BIS Central Bank Triennial Survey… The daily average turnover of interest rate and FX derivatives on markets worldwide – on exchanges and OTC – rose from $11.3 trillion in April 2016 to $18.9 trillion in April 2019.”
“The turnover of interest rate derivatives increased markedly between April 2016 and April 2019, especially in OTC markets, where trading more than doubled from $2.7 trillion per day to $6.5 trillion.”
“The OTC trading of FX derivatives also rose substantially… In OTC markets, the daily average turnover of FX derivatives increased from $3.4 trillion to $4.6 trillion between April 2016 and April 2019.”
Tett’s article also mentioned data from the Financial Stability Board (FSB), whose Global Monitoring Report on Non-Bank Financial Intermediation 2018 (issued in February) includes detail on global non-bank entities through the end of 2017.
The FSB’s tabulation of MUNFI (monitoring universe of non-bank financial intermediaries) has a 2017 ending value of $185 TN, up substantially from the $100.6 TN to close out 2008. FSB analysis focuses on a “Narrow Measure of NBFI” (non-bank financial intermediaries), and then breaks down this category by Economic Function (subgroups EF1 through EF5). EF1 ended 2017 at $36.7 TN, more than double the $14.2 TN from 2008.
“EF1 includes collective investment vehicles (CIVs) with features that make them susceptible to runs.” This group includes fixed-income funds, hedge funds, money market funds, trust companies, ETF and real estate funds (along with smaller components). “EF1 growth is mainly attributable to the four jurisdictions where most EF1 entities reside – US (with 26.3% of total EF1 assets), China (16.5%), the Cayman Islands (14.3%), and Luxembourg (8.9%).”
Breaking down “Narrow Measure of NBFI:” Investment Funds ($45.4 TN, 13.6% ’17 growth); Captive Financial Institutions and Money Lenders ($25.9 TN, 0.5% ’17 contraction); Broker-Dealers ($9.6 TN, 1.1% ’17 contraction); Money Market Funds ($5.8 TN, 10.2% ’17 growth); Hedge Funds ($4.4 TN, 15.8% ’17 growth); Structured Finance Vehicles ($4.9 TN, 2.2% ’17 growth); Trust Companies ($4.6 TN, 27.1% ’17 growth).
“The resulting narrow measure was $51.6 trillion at end-2017” (from ‘08’s $36.2TN). “The total financial assets of entities in the narrow measure grew in 2017 (8.5%), both in absolute terms and relative to GDP... This growth rate is consistent with the average annual growth rate (8.8%) of the narrow measure over 2011-16. This average growth rate was mainly driven by the Cayman Islands, China, Ireland and Luxembourg, which together accounted for 67% of the dollar value increase since 2011.”
Such heady growth in finance comes with consequences. That growth in non-bank (“shadow”) finance over this boom cycle has been driven by entities in the Cayman Islands, China, Ireland and Luxembourg bodes well for the accumulation of leverage and latent risk intermediation issues – not so much for sustainability and stability.
Other highlights: “The total repo assets of banks and OFIs grew by 9.6% in 2017 to reach $9.4 trillion, while their total repo liabilities grew by 9.8% to reach $9.2 trillion, largely driven by banks’ increasing use of repos.”
“Hedge funds’ assets grew in 2017, based on data reported from 15 jurisdictions. The Cayman Islands continues to be the largest hub for such funds among reporting jurisdictions (87% of submitted total hedge fund assets) where they grew by 17.5%, driving the overall growth of the reported sector.” This passage comes with a curious footnote: “There is no separate licensing category for hedge funds incorporated in the Cayman Islands, thus the Cayman Islands Monetary Authority (CIMA) estimated their size based on certain characteristics (eg leverage).”
“China accounted for most trust company assets (88% of global trust company assets) and overall growth. The growth rate of China’s trust company assets has increased over the past three years (16.6% in 2015, 24.0% in 2016 and 29.8% in 2017).”
In a recent CBB, I posited it was no coincidence that instability in Chinese money markets was followed not many weeks later by instability in U.S. “repo” finance. I believe a decade of zero and near-zero rates and unrelenting global QE has fostered unprecedented leveraged speculation on a global basis. I suspect the size of “carry trades” and myriad forms of speculative leverage dwarf that from the mortgage finance Bubble era – having seeped into all corners, nooks and crannies of global fixed-income markets. Moreover, “repo,” securities shorting, derivatives and securities finance more generally are the unappreciated sources of global liquidity abundance – in tightly interconnected funding markets with the nucleus in “offshore financial centers.”
I hold the view that massive leverage has accumulated in U.S. fixed income, in Chinese Credit, European debt, dollar-denominated bonds globally and EM debt more generally. I’ll assume heady grown in “repo” and offshore financial intermediation only accelerated since 2017.
It was no coincidence that U.S. “repo” market tumult followed on the heels of an abrupt reversal in global bond yields. I appreciate how the enormous global buildup in leveraged speculation works miraculously so long as bond yields are declining (bond prices rising). Furthermore, uncertainty associated with escalating U.S./China trade frictions spurred a historic global speculative “blow-off” and market dislocation. If only bond yields could fall forever – even as debt and deficits expand uncontrollably. It’s not clear to me how the global system doesn’t turn increasingly unstable, which I believe explains why the ECB and now the Fed have resorted again to QE.
Question: “When you first became chair, you were spotted numerous times carrying Paul Volcker’s book under your arm – and I’m curious what lessons did you learned from Paul Volcker and what lessons are you taking through your chairmanship?”
Jerome Powell, October 8th, 2019, during Q&A at a National Association of Business Economics event in Denver: “I’ve known Paul Volcker since I was an Assistant Secretary in the Treasury in 1992 or 1991. Of course, at that time, he had just relatively recently left the Fed - and I was frightened of even meeting him. I was just so intimidated by this global figure. And he couldn’t have been nicer and more interested in helping me and supporting me and we kind of kept up. He was really a great person to know. I read numerous accounts of his life. This book, if you haven’t read it, really sums it up really well. I don’t think there has been a greater public servant in our broad area in our lifetimes. He really just did exactly what he thought was the right thing – all the time. And he lets the chips fall where they may. He was famously booed at a Washington Bullets basketball game when he had rates very high… He’s a great man. I’m still in touch with him. I actually thought that I should buy 500 copies of this book and just hand them out at the Fed. I didn’t do that. It’s a book I strongly recommend, and we can all hope to live up to some part of who he is.”
For the Week:
The S&P500 increased 0.6% (up 18.5% y-t-d), and the Dow gained 0.9% (up 15.0%). The Utilities fell 1.4% (up 21.6%). The Banks rallied 1.4% (up 14.9%), and the Broker/Dealers recovered 2.6% (up 6.9%). The Transports jumped 2.6% (up 12.2%). The S&P 400 Midcaps gained 0.7% (up 15.2%), and the small cap Russell 2000 rose 0.7% (up 12.1%). The Nasdaq100 advanced 1.2% (up 23.9%). The Semiconductors gained 1.1% (up 37.7%). The Biotechs were little changed (down 0.1%). With bullion down $16, the HUI gold index dropped 3.4% (up 27.1%).
Another quiet week… When the Fed on Friday announced its “Not QE” balance sheet reflation strategy, the Dow was already 400 points higher on anticipation of a positive trade negotiation outcome. The Federal Reserve will Tuesday begin buying $60 billion of Treasury bills monthly through 2020’s second quarter. This follows a five-week period where Federal Reserve Credit surged $187 billion. In addition, the Fed said it will continue with its overnight and term “repo” market interventions, along with reinvesting proceeds from maturing longer-dated maturities.
I have speculated the Fed’s balance sheet might inflate to $10 TN over the course of the next crisis and down-cycle. It’s possible that we could see expansion approaching $500 billion over the next six to nine months.
Announcing its “Not QE” plan as markets were in the throes of an intense short squeeze creates poor optics. Most analysts had expected the rollout to come at the Fed’s end-of-month meeting - or even during November. This is one more example of the Fed acting as if it is facing a serious risk to financial stability.
October 11 – Bloomberg (Rich Miller and Christopher Condon): “…The central bank… stressed that ‘these actions are purely technical measures to support the effective implementation’ of interest-rate policy and ‘do not represent a change’ in its monetary stance. ‘In particular, purchases of Treasury bills likely will have little if any impact on the level of longer-term interest rates and broader financial conditions.’”
There may come a day when bond markets push back against central bank interventions – “purely technical” or otherwise. Ten-year Treasury yields jumped six bps Friday to 1.73% - though this move higher was in response to the markets’ “risk on” mood ahead of the completion of trade talks. Two-year Treasury yields rose five bps Friday to 1.60%, up 19 bps for the week (reversing most of last week’s drop). The implied yield on January Fed funds futures rose 9.5 bps this week to 1.555% (current Fed funds rate 1.82%). Even with a successful “Phase 1” trade deal with China – not to mention the Fed’s plan to expand holdings - the probability of a rate cut at the Fed’s October 30th meeting was little changed this week at 71%.
University of Michigan Consumer Confidence was reported at a much stronger-than-expected – and three-month high - 96. The Current Conditions component jumped 4.9 points to 113.4, the high going back to December 2018 (116.1). The St. Louis Fed’s Real GDP Nowcast Model has Q3 GDP at 3.12%. And if the world is indeed at the cusp of a U.S./China trade truce, there is even less justification for an additional rate cut. Yet I am not convinced trade risks – or economic vulnerabilities more generally – are the crux of underlying market fragilities and central bank unease.
It was an unfittingly low-key headline: “Better Data on Modern Finance Reveals Uncomfortable Truths.” The subheading to Gillian Tett’s Thursday FT article was more direct: “It is Unnerving That the Shadow Banking Sector is Swelling, Given its Role in the Financial Crisis.”
The FT’s list of “most read” articles included “Why Investors See Inflation as a Very British Problem” and “TP ICAP Pays £15m to Settle FCA Charges Over ‘Wash Trades.’” Ms. Tett’s insightful piece failed to make the cut. I was however reminded of an FT article from early 1998 highlighting the explosion of trading in Russia currency and bond derivatives, along with Gillian Tett’s exceptional reporting on the proliferation of subprime CDOs and mortgage derivatives late in the mortgage finance Bubble period.
October 10 – Financial Times (Gillian Tett): “What the heck is happening in the Cayman Islands? That is a question often asked in relation to corporate tax. This week, for example, the OECD called for an end to the loopholes that let global companies cut their tax bills in places like the British overseas territory. As the debate bubbles on, there is another facet of globalisation that merits more discussion: the financial flows associated with offshore centres, particularly between banks and non-bank entities.”
“Cross-border lending by banks to non-bank financial institutions, such as hedge funds, has also jumped, from $4.8tn in 2016 to $6.6tn in 2019. More striking, those non-bank institutions have quietly ‘become important sources of cross-border funding for banks, particularly in international currencies,’ the BIS notes. Yet again, those offshore financial centres feature: almost 20% of banks’ cross-border dollar funding is now supplied by entities based in the Cayman Islands, a ratio only topped by those in the US, while entities based in Luxembourg and the Caymans are crucial in the euro markets. Or as the BIS concludes, ‘Banks’ positions with [non-banks] are concentrated in few countries, particularly financial centres.’”
“Non-bank intermediaries’ share of total financial system assets increased from 31% to 36%” between 2007 and 2017, observes a report from the IESE Business School… Meanwhile, the BIS data shows that banks’ cross-border dealings with non-bank entities has been swelling too. One reason is that banks are increasingly funding governments (by buying their debt). But their exposure to non-financial companies is also rising noticeably, both to onshore and offshore subsidiaries. ‘Banks lend significant amounts to non-financial corporations located in financial centres . . . [providing] credit to the financing arms of multinational corporations located there,’ the BIS notes, adding that banks’ claims on NFCs [non-financial corporations] in the Cayman Islands are larger than on those in Italy. (Yes, really.)”
Convoluted, murky stuff: The amalgamation of “offshore financial centres,” “cross-border dollar funding,” “non-bank intermediaries” and “offshore subsidiaries,” make CDOs, special purpose vehicles, and other mortgage financial Bubble era “shadow” financial processes appear rather clear and luminous by comparison.
Ms. Tett’s article pinpoints the “belly of the beast.” The GSEs, securitizations, sophisticated mortgage derivatives, and “repo” finance created the nucleus of the risk intermediation and leverage fueling precarious mortgage finance Bubble excess. I am convinced the mushrooming of government bonds, the proliferation of global “repo” markets and off-shore securities lending operations, along with unmatched global derivatives excess and leveraged speculation, are at the epicenter of the runaway “global government finance Bubble.”
Tett’s article notes the global push to accumulate reliable official data. The BIS (Bank for International Settlements) has expanded data for non-bank counterparties and offshore financial centers. While interesting – and certainly illustrating the enormous scope of offshore finance – I’m not confident that the BIS and global central bank community have a handle on what evolved into colossal global flows intermediated through securities finance and “offshore” financial centers. The recurring extensive revisions to the Fed’s Rest of World (ROW) Z.1 data informs me that there are major shortcomings and outright holes in the data. Indeed, What the Heck is Happening in the Cayman Islands?
A few snippets from the BIS’s September 2019 Quarterly Review - International Banking and Financial Market Developments (referenced in Tett’s article).
“Derivatives trading in over-the-counter (OTC) markets rose even more rapidly than that on exchanges, according to the latest BIS Central Bank Triennial Survey… The daily average turnover of interest rate and FX derivatives on markets worldwide – on exchanges and OTC – rose from $11.3 trillion in April 2016 to $18.9 trillion in April 2019.”
“The turnover of interest rate derivatives increased markedly between April 2016 and April 2019, especially in OTC markets, where trading more than doubled from $2.7 trillion per day to $6.5 trillion.”
“The OTC trading of FX derivatives also rose substantially… In OTC markets, the daily average turnover of FX derivatives increased from $3.4 trillion to $4.6 trillion between April 2016 and April 2019.”
Tett’s article also mentioned data from the Financial Stability Board (FSB), whose Global Monitoring Report on Non-Bank Financial Intermediation 2018 (issued in February) includes detail on global non-bank entities through the end of 2017.
The FSB’s tabulation of MUNFI (monitoring universe of non-bank financial intermediaries) has a 2017 ending value of $185 TN, up substantially from the $100.6 TN to close out 2008. FSB analysis focuses on a “Narrow Measure of NBFI” (non-bank financial intermediaries), and then breaks down this category by Economic Function (subgroups EF1 through EF5). EF1 ended 2017 at $36.7 TN, more than double the $14.2 TN from 2008.
“EF1 includes collective investment vehicles (CIVs) with features that make them susceptible to runs.” This group includes fixed-income funds, hedge funds, money market funds, trust companies, ETF and real estate funds (along with smaller components). “EF1 growth is mainly attributable to the four jurisdictions where most EF1 entities reside – US (with 26.3% of total EF1 assets), China (16.5%), the Cayman Islands (14.3%), and Luxembourg (8.9%).”
Breaking down “Narrow Measure of NBFI:” Investment Funds ($45.4 TN, 13.6% ’17 growth); Captive Financial Institutions and Money Lenders ($25.9 TN, 0.5% ’17 contraction); Broker-Dealers ($9.6 TN, 1.1% ’17 contraction); Money Market Funds ($5.8 TN, 10.2% ’17 growth); Hedge Funds ($4.4 TN, 15.8% ’17 growth); Structured Finance Vehicles ($4.9 TN, 2.2% ’17 growth); Trust Companies ($4.6 TN, 27.1% ’17 growth).
“The resulting narrow measure was $51.6 trillion at end-2017” (from ‘08’s $36.2TN). “The total financial assets of entities in the narrow measure grew in 2017 (8.5%), both in absolute terms and relative to GDP... This growth rate is consistent with the average annual growth rate (8.8%) of the narrow measure over 2011-16. This average growth rate was mainly driven by the Cayman Islands, China, Ireland and Luxembourg, which together accounted for 67% of the dollar value increase since 2011.”
Such heady growth in finance comes with consequences. That growth in non-bank (“shadow”) finance over this boom cycle has been driven by entities in the Cayman Islands, China, Ireland and Luxembourg bodes well for the accumulation of leverage and latent risk intermediation issues – not so much for sustainability and stability.
Other highlights: “The total repo assets of banks and OFIs grew by 9.6% in 2017 to reach $9.4 trillion, while their total repo liabilities grew by 9.8% to reach $9.2 trillion, largely driven by banks’ increasing use of repos.”
“Hedge funds’ assets grew in 2017, based on data reported from 15 jurisdictions. The Cayman Islands continues to be the largest hub for such funds among reporting jurisdictions (87% of submitted total hedge fund assets) where they grew by 17.5%, driving the overall growth of the reported sector.” This passage comes with a curious footnote: “There is no separate licensing category for hedge funds incorporated in the Cayman Islands, thus the Cayman Islands Monetary Authority (CIMA) estimated their size based on certain characteristics (eg leverage).”
“China accounted for most trust company assets (88% of global trust company assets) and overall growth. The growth rate of China’s trust company assets has increased over the past three years (16.6% in 2015, 24.0% in 2016 and 29.8% in 2017).”
In a recent CBB, I posited it was no coincidence that instability in Chinese money markets was followed not many weeks later by instability in U.S. “repo” finance. I believe a decade of zero and near-zero rates and unrelenting global QE has fostered unprecedented leveraged speculation on a global basis. I suspect the size of “carry trades” and myriad forms of speculative leverage dwarf that from the mortgage finance Bubble era – having seeped into all corners, nooks and crannies of global fixed-income markets. Moreover, “repo,” securities shorting, derivatives and securities finance more generally are the unappreciated sources of global liquidity abundance – in tightly interconnected funding markets with the nucleus in “offshore financial centers.”
I hold the view that massive leverage has accumulated in U.S. fixed income, in Chinese Credit, European debt, dollar-denominated bonds globally and EM debt more generally. I’ll assume heady grown in “repo” and offshore financial intermediation only accelerated since 2017.
It was no coincidence that U.S. “repo” market tumult followed on the heels of an abrupt reversal in global bond yields. I appreciate how the enormous global buildup in leveraged speculation works miraculously so long as bond yields are declining (bond prices rising). Furthermore, uncertainty associated with escalating U.S./China trade frictions spurred a historic global speculative “blow-off” and market dislocation. If only bond yields could fall forever – even as debt and deficits expand uncontrollably. It’s not clear to me how the global system doesn’t turn increasingly unstable, which I believe explains why the ECB and now the Fed have resorted again to QE.
Question: “When you first became chair, you were spotted numerous times carrying Paul Volcker’s book under your arm – and I’m curious what lessons did you learned from Paul Volcker and what lessons are you taking through your chairmanship?”
Jerome Powell, October 8th, 2019, during Q&A at a National Association of Business Economics event in Denver: “I’ve known Paul Volcker since I was an Assistant Secretary in the Treasury in 1992 or 1991. Of course, at that time, he had just relatively recently left the Fed - and I was frightened of even meeting him. I was just so intimidated by this global figure. And he couldn’t have been nicer and more interested in helping me and supporting me and we kind of kept up. He was really a great person to know. I read numerous accounts of his life. This book, if you haven’t read it, really sums it up really well. I don’t think there has been a greater public servant in our broad area in our lifetimes. He really just did exactly what he thought was the right thing – all the time. And he lets the chips fall where they may. He was famously booed at a Washington Bullets basketball game when he had rates very high… He’s a great man. I’m still in touch with him. I actually thought that I should buy 500 copies of this book and just hand them out at the Fed. I didn’t do that. It’s a book I strongly recommend, and we can all hope to live up to some part of who he is.”
For the Week:
The S&P500 increased 0.6% (up 18.5% y-t-d), and the Dow gained 0.9% (up 15.0%). The Utilities fell 1.4% (up 21.6%). The Banks rallied 1.4% (up 14.9%), and the Broker/Dealers recovered 2.6% (up 6.9%). The Transports jumped 2.6% (up 12.2%). The S&P 400 Midcaps gained 0.7% (up 15.2%), and the small cap Russell 2000 rose 0.7% (up 12.1%). The Nasdaq100 advanced 1.2% (up 23.9%). The Semiconductors gained 1.1% (up 37.7%). The Biotechs were little changed (down 0.1%). With bullion down $16, the HUI gold index dropped 3.4% (up 27.1%).
Three-month Treasury bill rates ended the week at 1.63%. Two-year government yields jumped 19 bps to 1.60% (down 90bps y-t-d). Five-year T-note yields surged 21 bps to 1.56% (down 95bps). Ten-year Treasury yields rose 20 bps to 1.73% (down 95bps). Long bond yields jumped 18 bps to 2.20% (down 82bps). Benchmark Fannie Mae MBS yields surged 23 bps to 2.70% (down 80bps).
Greek 10-year yields rose 10 bps to 1.43% (down 297bps y-t-d). Ten-year Portuguese yields gained six bps to 0.20% (down 152bps). Italian 10-year yields jumped 11 bps to 0.94% (down 180ps). Spain's 10-year yields rose 10 bps to 0.24% (down 118bps). German bund yields surged 14 bps to negative 0.44% (down 68bps). French yields jumped 16 bps to negative 0.13% (down 84bps). The French to German 10-year bond spread widened two to 31 bps. U.K. 10-year gilt yields surged 26 bps to 0.71% (down 57bps). U.K.'s FTSE equities index rallied 1.3% (up 7.7% y-t-d).
Japan's Nikkei Equities Index jumped 1.8% (up 8.9% y-t-d). Japanese 10-year "JGB" yields increased three bps to negative 0.18% (down 18bps y-t-d). France's CAC40 rose 3.2% (up 19.8%). The German DAX equities index surged 4.2% (up 18.5%). Spain's IBEX 35 equities index advanced 3.5% (up 8.6%). Italy's FTSE MIB index rallied 3.2% (up 21.0%). EM equities were mixed. Brazil's Bovespa index gained 1.2% (up 14.1%), while Mexico's Bolsa declined 0.5% (up 3.8%). South Korea's Kospi index rose 1.2% (up 0.2%). India's Sensex equities index increased 1.2% (up 5.7%). China's Shanghai Exchange jumped 2.4% (up 19.2%). Turkey's Borsa Istanbul National 100 index sank 4.3% (up 8.5%). Russia's MICEX equities index added 0.6% (up 14.3%).
Investment-grade bond funds saw inflows of $1.840 billion, while junk bond funds posted outflows of $1.500 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates fell eight bps to 3.57% (down 133bps y-o-y). Fifteen-year rates dropped nine bps to 3.05% (down 124bps). Five-year hybrid ARM rates dipped three bps to 3.35% (down 65bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up two bps to 4.00% (down 81bps).
Federal Reserve Credit last week jumped $16.9bn to $3.909 TN. Over the past year, Fed Credit contracted $228bn, or 5.5%. Fed Credit inflated $1.098 Trillion, or 39%, over the past 361 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $22.6bn last week to $3.419 TN. "Custody holdings" fell $25.6bn y-o-y, or 0.7%.
M2 (narrow) "money" supply surged another $49.8bn last week to a record $15.141 TN. "Narrow money" gained $891bn, or 6.2%, over the past year. For the week, Currency increased $1.5bn. Total Checkable Deposits jumped $21.5bn, and Savings Deposits rose $18.2bn. Small Time Deposits were little changed. Retail Money Funds expanded $8.8bn.
Total money market fund assets gained $6.8bn to $3.470 TN. Money Funds gained $586bn y-o-y, or 20.3%.
Total Commercial Paper slipped $0.9bn to $1.092 TN. CP was down $10bn y-o-y, or 0.9%.
Currency Watch:
October 9 – Financial Times (Eva Szalay and Coby Smith): “The US dollar has long towered over global markets and finance. But cracks are starting to appear in the edifice. The greenback’s pre-eminent role in official funds and international trade is formidable and unlikely to fade quickly. But the latest data from the IMF on central banks’ reserves show a subtle shift away from the dollar that analysts say could signal a rethink on the political risk embedded into US assets. ‘Central banks [are] chipping away at the dollar’s ‘exorbitant privilege’,’ said Alan Ruskin, chief international strategist at Deutsche Bank… ‘Politics are starting to infringe in ways that have the potential to challenge the dollar’s dominance.’”
The U.S. dollar index slipped 0.5% to 98.301 (up 2.2% y-t-d). For the week on the upside, the British Pound increased 2.7%, the South African rand 1.9%, the Mexican peso 1.0%, the Canadian dollar 0.8%, the South Korean won 0.7%, the euro 0.6%, the Singapore dollar 0.4%, the Swedish krona 0.4%, the Australian dollar 0.3%, the New Zealand dollar 0.3% and the Norwegian krone 0.2%. On the downside, the Brazilian real declined 1.3%, the Japanese yen 0.3% and the Swiss franc 0.2%. The Chinese renminbi gained 0.85% versus the dollar this week (down 2.96% y-t-d).
Commodities Watch:
October 6 – Bloomberg (Ranjeetha Pakiam): “China has added more than 100 tons of gold to its reserves since it resumed buying in December, reinforcing its standing as one of the major official accumulators as central banks stock up on the precious metal. The People’s Bank of China picked up more gold last month, raising holdings to 62.64 million ounces in September from 62.45 million in August… In tonnage terms, the latest inflow totals 5.9 tons, and follows the addition of about 99.8 tons over the prior nine months.”
October 8 – Wall Street Journal (Sarah Toy): “It is going to take a heck of a winter to ease the pain for natural-gas investors and producers. Dragged down by a supply glut, U.S. natural-gas futures recently suffered their longest losing streak since at least 1990… The front-month gas futures contract fell 12 consecutive trading sessions through Oct. 2, a period in which it declined around 16%. Prices are down 30% from their levels a year ago.”
The Bloomberg Commodities Index gained 1.2% this week (up 2.4% y-t-d). Spot Gold fell 1.0% to $1,489 (up 16.1%). Silver dipped 0.5% to $17.544 (up 12.9%). WTI crude rallied $1.89 to $54.70 (up 20%). Gasoline surged 4.2% (up 24%), while Natural Gas sank 5.9% (down 25%). Copper jumped 2.6% (unchanged). Wheat gained 3.6% (up 1%). Corn rose 3.4% (up 6%).
Market Instability Watch:
October 10 – Reuters (Chibuike Oguh): “U.S. private equity firms raised $191 billion in the first nine months of 2019, nearly as much as in all of 2018, as investors flocked to well-known managers raising large capital pools, according to… Pitchbook. Some of the private equity industry’s biggest players completed their fundraising in the third quarter of this year, including Blackstone Group Inc with a $26 billion buyout fund, and Vista Equity Partners Management LLC with a $16 billion fund. This increased the amount raised by private equity funds by 38% year-on-year…”
Greek 10-year yields rose 10 bps to 1.43% (down 297bps y-t-d). Ten-year Portuguese yields gained six bps to 0.20% (down 152bps). Italian 10-year yields jumped 11 bps to 0.94% (down 180ps). Spain's 10-year yields rose 10 bps to 0.24% (down 118bps). German bund yields surged 14 bps to negative 0.44% (down 68bps). French yields jumped 16 bps to negative 0.13% (down 84bps). The French to German 10-year bond spread widened two to 31 bps. U.K. 10-year gilt yields surged 26 bps to 0.71% (down 57bps). U.K.'s FTSE equities index rallied 1.3% (up 7.7% y-t-d).
Japan's Nikkei Equities Index jumped 1.8% (up 8.9% y-t-d). Japanese 10-year "JGB" yields increased three bps to negative 0.18% (down 18bps y-t-d). France's CAC40 rose 3.2% (up 19.8%). The German DAX equities index surged 4.2% (up 18.5%). Spain's IBEX 35 equities index advanced 3.5% (up 8.6%). Italy's FTSE MIB index rallied 3.2% (up 21.0%). EM equities were mixed. Brazil's Bovespa index gained 1.2% (up 14.1%), while Mexico's Bolsa declined 0.5% (up 3.8%). South Korea's Kospi index rose 1.2% (up 0.2%). India's Sensex equities index increased 1.2% (up 5.7%). China's Shanghai Exchange jumped 2.4% (up 19.2%). Turkey's Borsa Istanbul National 100 index sank 4.3% (up 8.5%). Russia's MICEX equities index added 0.6% (up 14.3%).
Investment-grade bond funds saw inflows of $1.840 billion, while junk bond funds posted outflows of $1.500 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates fell eight bps to 3.57% (down 133bps y-o-y). Fifteen-year rates dropped nine bps to 3.05% (down 124bps). Five-year hybrid ARM rates dipped three bps to 3.35% (down 65bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up two bps to 4.00% (down 81bps).
Federal Reserve Credit last week jumped $16.9bn to $3.909 TN. Over the past year, Fed Credit contracted $228bn, or 5.5%. Fed Credit inflated $1.098 Trillion, or 39%, over the past 361 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $22.6bn last week to $3.419 TN. "Custody holdings" fell $25.6bn y-o-y, or 0.7%.
M2 (narrow) "money" supply surged another $49.8bn last week to a record $15.141 TN. "Narrow money" gained $891bn, or 6.2%, over the past year. For the week, Currency increased $1.5bn. Total Checkable Deposits jumped $21.5bn, and Savings Deposits rose $18.2bn. Small Time Deposits were little changed. Retail Money Funds expanded $8.8bn.
Total money market fund assets gained $6.8bn to $3.470 TN. Money Funds gained $586bn y-o-y, or 20.3%.
Total Commercial Paper slipped $0.9bn to $1.092 TN. CP was down $10bn y-o-y, or 0.9%.
Currency Watch:
October 9 – Financial Times (Eva Szalay and Coby Smith): “The US dollar has long towered over global markets and finance. But cracks are starting to appear in the edifice. The greenback’s pre-eminent role in official funds and international trade is formidable and unlikely to fade quickly. But the latest data from the IMF on central banks’ reserves show a subtle shift away from the dollar that analysts say could signal a rethink on the political risk embedded into US assets. ‘Central banks [are] chipping away at the dollar’s ‘exorbitant privilege’,’ said Alan Ruskin, chief international strategist at Deutsche Bank… ‘Politics are starting to infringe in ways that have the potential to challenge the dollar’s dominance.’”
The U.S. dollar index slipped 0.5% to 98.301 (up 2.2% y-t-d). For the week on the upside, the British Pound increased 2.7%, the South African rand 1.9%, the Mexican peso 1.0%, the Canadian dollar 0.8%, the South Korean won 0.7%, the euro 0.6%, the Singapore dollar 0.4%, the Swedish krona 0.4%, the Australian dollar 0.3%, the New Zealand dollar 0.3% and the Norwegian krone 0.2%. On the downside, the Brazilian real declined 1.3%, the Japanese yen 0.3% and the Swiss franc 0.2%. The Chinese renminbi gained 0.85% versus the dollar this week (down 2.96% y-t-d).
Commodities Watch:
October 6 – Bloomberg (Ranjeetha Pakiam): “China has added more than 100 tons of gold to its reserves since it resumed buying in December, reinforcing its standing as one of the major official accumulators as central banks stock up on the precious metal. The People’s Bank of China picked up more gold last month, raising holdings to 62.64 million ounces in September from 62.45 million in August… In tonnage terms, the latest inflow totals 5.9 tons, and follows the addition of about 99.8 tons over the prior nine months.”
October 8 – Wall Street Journal (Sarah Toy): “It is going to take a heck of a winter to ease the pain for natural-gas investors and producers. Dragged down by a supply glut, U.S. natural-gas futures recently suffered their longest losing streak since at least 1990… The front-month gas futures contract fell 12 consecutive trading sessions through Oct. 2, a period in which it declined around 16%. Prices are down 30% from their levels a year ago.”
The Bloomberg Commodities Index gained 1.2% this week (up 2.4% y-t-d). Spot Gold fell 1.0% to $1,489 (up 16.1%). Silver dipped 0.5% to $17.544 (up 12.9%). WTI crude rallied $1.89 to $54.70 (up 20%). Gasoline surged 4.2% (up 24%), while Natural Gas sank 5.9% (down 25%). Copper jumped 2.6% (unchanged). Wheat gained 3.6% (up 1%). Corn rose 3.4% (up 6%).
Market Instability Watch:
October 10 – Reuters (Chibuike Oguh): “U.S. private equity firms raised $191 billion in the first nine months of 2019, nearly as much as in all of 2018, as investors flocked to well-known managers raising large capital pools, according to… Pitchbook. Some of the private equity industry’s biggest players completed their fundraising in the third quarter of this year, including Blackstone Group Inc with a $26 billion buyout fund, and Vista Equity Partners Management LLC with a $16 billion fund. This increased the amount raised by private equity funds by 38% year-on-year…”
October 7 – Financial Times (Leo Lewis, Robin Harding and Tommy Stubbington): “For years, Japan’s giant government bond market has slumbered on the edges of global finance. Dominated by the country’s central bank, prices rarely budge, leaving traders with little to do. But at the start of this month, a sale of 10-year debt failed to stir the usual interest from investors in the ¥1.1 quadrillion ($10.3tn) market. Unnerved by new plans at the central bank to shift to buying more shorter-term debt, some private buyers stayed away, making it the worst auction in terms of demand since 2016. Japanese government bonds, JGBs, stumbled, sending ripples through other markets including US Treasuries and even, briefly, UK gilts.”
Trump Administration Watch:
October 11 – Bloomberg (Jenny Leonard, Saleha Mohsin, Josh Wingrove and Shawn Donnan): “The U.S. and China agreed on the outlines of a partial trade accord Friday that President Donald Trump said he and his counterpart Xi Jinping could sign as soon as next month. As part of the deal, China would significantly step up purchases of U.S. agricultural commodities, agree to certain intellectual-property measures and concessions related to financial services and currency, Trump said Friday at the White House. In exchange, the U.S. will delay a tariff increase due next week as the deal is finalized, though new levies scheduled for December haven’t yet been called off.”
October 8 – Wall Street Journal (Dan Strumpf and Yoko Kubota): “The U.S. decision to add eight Chinese companies to its trade blacklist strikes directly at China’s ambitions in artificial intelligence, threatening its companies’ access to crucial components and relationships with U.S. firms. Some of the companies affected are among China’s most advanced in core areas of AI, including technology involved in recognizing sounds and faces, autonomous driving and surveillance. Although many of the companies targeted have likely been stockpiling components and can shift to backup supply chains, cutting-edge research efforts could slow, given their heavy reliance on advanced U.S. chips.”
Trump Administration Watch:
October 11 – Bloomberg (Jenny Leonard, Saleha Mohsin, Josh Wingrove and Shawn Donnan): “The U.S. and China agreed on the outlines of a partial trade accord Friday that President Donald Trump said he and his counterpart Xi Jinping could sign as soon as next month. As part of the deal, China would significantly step up purchases of U.S. agricultural commodities, agree to certain intellectual-property measures and concessions related to financial services and currency, Trump said Friday at the White House. In exchange, the U.S. will delay a tariff increase due next week as the deal is finalized, though new levies scheduled for December haven’t yet been called off.”
October 8 – Wall Street Journal (Dan Strumpf and Yoko Kubota): “The U.S. decision to add eight Chinese companies to its trade blacklist strikes directly at China’s ambitions in artificial intelligence, threatening its companies’ access to crucial components and relationships with U.S. firms. Some of the companies affected are among China’s most advanced in core areas of AI, including technology involved in recognizing sounds and faces, autonomous driving and surveillance. Although many of the companies targeted have likely been stockpiling components and can shift to backup supply chains, cutting-edge research efforts could slow, given their heavy reliance on advanced U.S. chips.”
October 8 – Bloomberg (Jenny Leonard): “The Trump administration is moving ahead with discussions around possible restrictions on portfolio flows into China, with a particular focus on investments made by U.S. government retirement funds, people familiar with the internal deliberations said. The efforts are advancing even after American officials pushed back strongly against a Bloomberg News report late last month that a range of such limits was under review. Trump officials last week held meetings on the issue just hours after White House adviser Peter Navarro dismissed the report as ‘fake news,’ and zeroed in on how to prevent U.S. government retirement funds from financing China’s economic rise, the people said.”
October 8 – Reuters (Eric Beech and David Shepardson): “The United States has imposed visa restrictions on Chinese government and Communist Party officials it believes responsible for the detention or abuse of Muslim minorities in Xinjiang province, the U.S. State Department said… Secretary of State Mike Pompeo cited the decision of the Commerce Department on Monday to add 28 Chinese public security bureaus and companies - including video surveillance company Hikvision - to a U.S. trade blacklist over Beijing’s treatment of Uighur Muslims and other predominantly Muslim ethnic minorities. The visa restrictions ‘complement’ the Commerce Department actions, he said.”
October 8 – CNBC (Kevin Breuninger): “The White House said… that it will not cooperate with House Democrats’ impeachment inquiry into President Donald Trump, claiming that the proceedings amount to ‘baseless, unconstitutional efforts to overturn the democratic process.’ ‘You have designed and implemented your inquiry in a manner that violates fundamental fairness and constitutionally mandated due process,’ White House counsel Pat Cipollone said in an eight-page letter… A senior White House official told CNBC’s Eamon Javers that the letter signifies a ‘full halt’ to cooperation with the impeachment inquiry.”
October 7 – Bloomberg (Josh Wingrove and Selcan Hacaoglu): “Donald Trump’s administration said the U.S. will stand aside when Turkey’s military launches an operation against America’s wartime Kurdish allies in Syria, a significant shift in American policy that raises questions over the fate of thousands of Islamic State detainees. The Kurdish-led Syrian Democratic Forces have been a close U.S. ally in the fight to defeat Islamic State. But Turkey considers Syria’s Kurdish militants a threat to its national security and President Recep Tayyip Erdogan has said his forces were ready to begin a military operation against them in northeastern Syria imminently. The decision represents a dramatic reversal for U.S. policy…”
October 9 – Reuters (Colin Packham and Jonathan Barrett): “Tariffs are forcing China to pay attention to U.S. concerns, Secretary of Commerce Wilbur Ross said… ‘We do not love tariffs, in fact we would prefer not to use them, but after years of discussions and no action, tariffs are finally forcing China to pay attention to our concerns,’ Ross told a business function... ‘We could have had a deal two-and-a-half years ago without going through the whole tit-for-tat on tariffs that we have.’”
October 7 – Reuters (Jeff Mason): “President Donald Trump said… he wanted to see the U.S. Federal Reserve enact a ‘substantial’ cut in interest rates because of the lack of inflation in the United States. ‘We’d like to a see an interest rate cut, a very substantial one,’ Trump said. ‘We have no inflation. If anything it’s going below the number, so therefore we’re entitled to an interest rate cut. I hope the Fed does that.’”
Federal Reserve Watch:
October 9 – Financial Times (Joe Rennison): “Ten minutes after Federal Reserve chair Jay Powell insisted that the central bank restarting its Treasury purchases was ‘in no way’ the same as the post-financial crisis policy of quantitative easing, one Wall St analyst sent a note to his clients saying that the new strategy ‘sure sounds like QE’. He was not the only one. The confusion strikes at the heart of the latest communication challenge facing the Fed as it prepares to expand its balance sheet once more. The legacy of QE is rooted in economic woe. When the policy was implemented after the 2008 economic crisis, it was specifically designed to lower longer term interest rates and to ease financial conditions. This time is different, said Mr Powell… ‘It should not be taken as a shift in monetary policy. It is not being done to boost the general availability of credit. The US economy, by and large, remains on a firm footing.’”
October 9 – CNBC (Jeff Cox): “Some Federal Reserve policymakers expressed concern at their most recent meeting that markets are expecting more rate cuts than the central bank intends to deliver, according to minutes… The Federal Open Market Committee approved a quarter-point rate cut at the Sept. 17-18 meeting, putting the overnight funds rate in a target range of 1.75% to 2%. But documents released after the meeting also showed sharp divisions among members about the future path of policy. Minutes amplified those concerns, along with some worry that a market clamoring for easier monetary policy might be getting ahead of itself.”
October 6 – Reuters (Ann Saphir): “Kansas City Federal Reserve Bank President Esther George… rejected the notion that the U.S. central bank should cut interest rates to try to boost low inflation, which she said is largely a result of global forces that U.S. monetary policy can do little to counter. ‘In current circumstances, concern about low inflation seems unnecessary,’ George told the National Association for Business Economics in Denver. ‘The U.S. economy is currently in a good place, with low inflation, low unemployment and an outlook for continued moderate growth.’”
October 7 – Bloomberg (Catherine Bosley and Christopher Condon): “The U.S. economy’s loss of momentum isn’t severe enough to warrant a further reduction to interest rates, two hawkish Federal Reserve board members said. …Both Kansas City Fed President Esther George and the Boston Fed’s Eric Rosengren singled out consumer spending, which accounts for 70% of the economy, as a key variable and said that so long as it remained vibrant there was no need to add additional accommodation even as the manufacturing sector suffers and the trade war weighs on sentiment… ‘If the economy grows at 1.7%, consumption continues to be strong, inflation is gradually going up and the unemployment rate is at 3.5%, I would not see a need for additional accommodation’ at the Fed’s October or December policy meetings, Rosengren said…”
October 8 – Associated Press (Christopher Rugaber): “With the nation’s unemployment rate at its lowest point since human beings first walked on the moon, you might expect the Federal Reserve to be raising interest rates to keep the economy from overheating and igniting inflation. That’s what the rules of economics would suggest. Yet the Fed is moving in precisely the opposite direction: It is widely expected late this month to cut rates for the third time this year. Welcome to the strange world that Jerome Powell inhabits as chairman of the world’s most influential central bank. Though unemployment is low, so are inflation and long-term borrowing rates. Normally, all that would be cause for celebration. But with President Donald Trump’s trade wars slowing growth and overseas economies struggling, Powell faces pressure to keep cutting rates to sustain the U.S. economic expansion.”
U.S. Bubble Watch:
October 7 – The Hill (Niv Elis): “The federal budget deficit for 2019 is estimated at $984 billion, a hefty 4.7% of gross domestic product (GDP) and the highest since 2012, the Congressional Budget Office (CBO) said… The difference between federal spending and revenue has only ever exceeded $1 trillion four times, in the period immediately following the global financial crisis. The deficit, which has grown every year since 2015, is $205 billion higher than it was in 2018, a jump of 26%. The CBO has warned that the nation's debt is on an unsustainable path.”
October 7 – Bloomberg (Steve Matthews): “U.S. budget deficits and the national debt are on track to keep growing because both President Donald Trump and his Democratic rivals want to use low interest rates to finance more spending -- in effect embracing some form of Modern Monetary Theory, business economists said at a debate on the topic Monday.”
October 7 – Bloomberg (Reade Pickert): “U.S. consumer credit increased more than forecast in August as school loans and other non-revolving debt rose by the most in three years. Total credit climbed $17.9 billion from the prior month, after a revised $23 billion gain in July that was the largest since late 2017…”
October 8 – Bloomberg (William Edwards): “U.S. small-business sentiment fell to near the lowest level of Donald Trump’s presidency… The National Federation of Independent Business’s optimism index declined 1.3 points to 101.8 in September, the third drop in four months… While the gauge remains elevated by historical standards, it’s the lowest since March and close to January’s 101.2, which was the weakest since Trump’s term began in early 2017.”
October 8 – CNBC: “U.S. producer prices unexpectedly fell in September, leading to the smallest annual increase in nearly three years… The producer price index for final demand dropped 0.3% last month, weighed down by decreases in the costs of goods and services… That was the largest decline since January and followed a 0.1% gain in August. In the 12 months through September the PPI increased 1.4%, the smallest gain since November 2016, after rising 1.8% in August.”
October 8 – Reuters (Jane Lanhee Lee and Manas Mishra): “U.S. venture capitalists are expected to pour over $100 billion into startups for a second straight year, following the record sum invested in 2018… During the first three quarters of the year, venture capital firms had already invested $96.7 billion in 7,862 funding deals, according to… PitchBook Data Inc and National Venture Capital Association. In 2018 it invested a record $137.6 billion.”
October 6 – Wall Street Journal (Maureen Farrell): “The IPO market has gone from hot to not. Shares of newly public companies, earlier this year one of the hottest investments on Wall Street, are now in a slump after investors soured on unprofitable startups from Uber Technologies Inc. to WeWork. Shares of technology startups and other companies that went public in the U.S. this year are trading roughly 5% above, on average, their prices at their initial public offerings… That is a reversal from earlier in the year, when IPO shares were big outperformers. IPO-stock performance is the worst it has been since at least 1995, according to … Goldman Sachs… That and recent market gyrations have helped bring IPO activity to a virtual standstill heading into what is traditionally one of the busiest times of year for new issues…”
October 7 – CNBC (Jessica Bursztynsky): “Former Nasdaq CEO Bob Greifeld warned… that this year’s IPO boom feels similar to the late 1990s dot-com bubble. ‘It’s important to recognize that the IPO market was getting quite bubbly [nowadays],’ said Greifeld, a CNBC contributor and author of the new book, ‘Market Mover: Lessons from a Decade of Chance at Nasdaq.’”
October 9 – New York Times (Erin Griffith): “Fred Wilson, a venture capitalist at Union Square Ventures, recently published a blog post titled ‘The Great Public Market Reckoning.’ In it, he argued that the narrative that had driven start-up hype and valuations for the last decade was now falling apart. His post quickly ricocheted across Silicon Valley. Other venture capitalists… soon weighed in with their own warnings about fiscal responsibility. At some start-ups, entrepreneurs began behaving more cautiously. Travis VanderZanden, chief executive of the scooter start-up Bird, declared at a tech conference in San Francisco last week that his company was now focused on profit and not growth. ‘The challenge is to try to stay disciplined,’ he said. The moves all point to a new gospel that is starting to spread in start-up land.”
October 8 – CNBC (Diana Olick): “Cooler weather historically means a cooling off period in the housing market, but that is not the case this fall. After dropping to the lowest level in eight years, bidding wars are creeping back. In September, 11% of offers written by Redfin… faced a bidding war. That is down dramatically from 41% a year ago, but up from the 10% reading in August. That might not seem like a big deal, but in the past four years, the bidding war rate has dropped — not increased — from August to September.”
October 8 – Reuters (Tim McLaughlin and Ross Kerber): “Index funds now control half the U.S. stock mutual fund market, giving the biggest funds enormous power to influence decisions and demand better returns at the companies in which they invest trillions of dollars. But the leading U.S. index fund firms, BlackRock Inc, Vanguard Group and State Street Corp, rarely use that clout. Instead, they overwhelmingly support the decisions and pay packages of executives at the companies in their portfolios, including the worst performers, according to a Reuters analysis of their shareholder-voting records.”
October 6 – Reuters: “General Electric said… it was freezing pension plans for about 20,000 U.S. employees with salaried benefits, as the industrial conglomerate makes another drastic move to cut debt and reduce its pension deficit by up to $8 billion.”
October 9 – Bloomberg (Katherine Chiglinsky and Rick Clough): “General Electric Co.’s gaping pension deficit certainly stands out for its size. But the company is hardly the only one at risk of potentially shortchanging some of its employees come retirement. All across corporate America, underfunded pensions have become the norm. Even now, a decade after the financial crisis, the largest plans face a shortfall of $269 billion, right about where it was 10 years ago. Years of low interest rates have largely offset gains in the stock market. Companies haven’t helped matters by lavishing money on shareholder rewards and clinging to assumptions about returns that proved to be too rosy.”
China Watch:
October 8 – Bloomberg: “China signaled it would hit back after the Trump administration placed eight of the country’s technology giants on a blacklist over alleged human rights violations against Muslim minorities. Asked… whether China would retaliate over the blacklist, foreign ministry spokesman Geng Shuang told reporters ‘stay tuned.’ He also denied that the government abused human rights in the far west region of Xinjiang.”
October 9 – Reuters (Keith Zhai): “China is planning tighter visa restrictions for U.S. nationals with ties to anti-China groups…, following similar U.S. restrictions on Chinese nationals, as relations between the countries sour. China’s Ministry of Public Security has for months been working on rules to limit the ability of anyone employed, or sponsored, by U.S. intelligence services and human rights groups to travel to China. The proposed changes follow the introduction by the United States of tighter rules for visas for Chinese scholars in May.”
October 8 – New York Times (Amy Qin and Julie Creswell): “For international companies looking to do business in China, the rules were once simple. Don’t talk about the 3 T’s: Tibet, Taiwan and the Tiananmen Square crackdown. No longer. Fast-changing geopolitical tensions, growing nationalism and the rise of social media in China have made it increasingly difficult for multinationals to navigate commerce in the Communist country. As the National Basketball Association has discovered with a tweet about the Hong Kong protests, tripwires abound. Take the ‘wrong’ stance on one of any number of issues — Hong Kong, Taiwan, Korea, Japan, for instance — and you risk upsetting a country of 1.4 billion consumers and losing access to a hugely profitable market. Now, multinational companies are increasingly struggling with one question: how to be apolitical in an increasingly politicized and punitive China.”
October 8 – Reuters (David Stanway and Xihao Jiang): “Chinese organisers… cancelled a fan event on the eve of a National Basketball Association (NBA) exhibition game in Shanghai, the latest fallout in a growing row over a tweet by a team official supporting the recent protests in Hong Kong. Chinese sponsors and partners have been cutting ties with the NBA after the tweet by Houston Rockets general manager Daryl Morey last week supporting anti-government protests in the Chinese-ruled city. The Shanghai Sports Federation said the cancellation of the fan event ahead of Thursday’s game between the Brooklyn Nets and Los Angeles Lakers was due to the ‘inappropriate attitude’ of Morey and NBA Commissioner Adam Silver.”
October 8 – CNBC (Jake Novak): “Many financial journalists and political pundits have been trying for years to get the U.S. public more concerned about China’s increasingly repressive regime and the questionable trade-offs many American companies have been making to continue doing business in the country. Thanks to the NBA, Twitter and a Chinese government that feeds a national ‘outrage culture,’ those journalists and pundits won’t have to try so hard anymore.”
October 7 – Reuters (Ryan Woo): “China’s services sector grew at its slowest pace in seven months in September despite a strong increase in new orders, as operating expenses continued to rise at the end of the third quarter… The Caixin/Markit services purchasing managers’ index (PMI) fell to 51.3 last month, the weakest since February, versus August’s 52.1.”
October 6 – Wall Street Journal (Shen Hong): “The investment arms of China’s cities and provinces are selling debt at a record pace to fund roads, railways, utilities and ports, as they seek to shore up growth by spending more on infrastructure. Smaller cities and counties in China have long used local government financing vehicles to raise money via debt that is kept off the books of the municipalities themselves. The borrowers are often heavily indebted and lack formal state backing, although they are typically seen as carrying an implicit guarantee that Beijing would bail out investors if debts can’t be repaid… Local government financing vehicles have issued 2.37 trillion yuan ($332bn) of domestic bonds this year. That total is up 38% from the same period in 2018, and is poised to break the full-year record of 2.56 trillion yuan set three years ago.”
October 8 – Bloomberg: “Analysts on the lookout for China’s next financial shock are training their sights on the least regulated corner of the nation’s sprawling shadow banking system. Their concern centers on so-called independent wealth managers, which have expanded rapidly in recent years by selling high-yield products to affluent investors. Largely untouched by a government clampdown on nearly every other form of non-bank financing, the industry has grown from obscurity into a major source of funding for cash-strapped Chinese companies. The worry now is that products arranged by independent wealth managers will face mounting losses as China’s economic slowdown deepens and corporate defaults surge. Confidence in the industry has plunged since July, when Noah Holdings Ltd. said that 3.4 billion yuan ($477 million) of credit products overseen by one of its units were exposed to an alleged fraud by a Chinese conglomerate.”
October 5 – Reuters (James Pomfret and Jessie Pang): “Chinese soldiers issued a warning to Hong Kong protesters on Sunday who shone lasers at their barracks in the city, in the first direct interaction with mainland military forces in four months of anti-government demonstrations.”
October 10 – Bloomberg (Miaojung Lin): “Beijing’s growing political problems in Taiwan were laid bare…, as the island’s two main presidential contenders ruled out any move toward unification. First, President Tsai Ing-wen, who has long been an outspoken critic of Beijing, used her annual National Day address to issue a fresh rejection of China’s push to merge both sides under ‘one country, two systems.’ Moments later, Kaohsiung Mayor Han Kuo-yu -- the candidate for the more Beijing-friendly Kuomintang -- appeared on Facebook Live to say he believed that unification was something for the ‘next generation’ to resolve.”
Central Banking Watch:
October 8 – Financial Times (Caroline Grady): “More than half of central banks are now in easing mode, the biggest proportion since the aftermath of the financial crisis. During the third quarter, 58.5% of central banks cut interest rates. They were responding to a deepening malaise in global manufacturing, with the sector recording the longest downturn in seven years. Economists at UBS estimate that third-quarter global growth was running at an annualised rate of 2.3%, near the lows of the final quarter of 2018, when trade war disruption was at its peak.”
October 7 – Financial Times (Martin Arnold and Brendan Greeley): “The unprecedented growth in central banks’ balance sheets since the financial crisis has had a negative impact on the way in which financial markets function, according to a new report from the Bank for International Settlements. Over the past decade the world’s major central banks have lent vast sums of cheap money as well as buying trillions of dollars in bonds and other assets in a bid to stimulate the global economy. Some are still expanding their balance sheets: the European Central Bank last month decided to restart its €2.6tn bond-buying programme, while the Bank of Japan has used bond-buying as a stimulus measure for decades. Last month’s spike in short-term US borrowing costs was just the latest in a series of market shocks that have fuelled investors’ suspicions that this radical monetary policy is having an impact on how financial markets function.”
October 7 – Reuters (Marc Jones): “A report from a central bank-led global committee has defended the use of crisis-fighting tools such as negative interest rates and large-scale asset purchases, saying the benefits have outweighed the side effects. The study from the Committee on the Global Financial System Committee (CGFS) was a broad analysis, but is likely to attract considerable attention in Europe following growing criticism about the use of such measures… ‘On balance, unconventional monetary policy tools (UMPTs) helped the central banks that used them address the circumstances presented by the crisis and the ensuing economic downturn,’ said Philip Lowe, chair of the CGFS and governor of the Reserve Bank of Australia.”
October 9 – Financial Times (Martin Arnold): “The European Central Bank decided to restart its bond-buying programme last month over the objections of its own officials, a further sign of how the move has reopened divisions within the institution. The bank’s monetary policy committee, on which technocrats from the ECB and the 19 eurozone national central banks sit, advised against resuming its bond purchases in a letter sent to Mario Draghi and other members of its governing council days before their decision, according to three members of the council.”
Brexit Watch:
October 9 – Reuters (Elizabeth Piper and Peter Powell): “A Brexit deal could be clinched by the end of October to allow the United Kingdom to leave the European Union in an orderly fashion, Irish Prime Minister Leo Varadkar said after what he called a very positive meeting with Boris Johnson. With just three weeks to go before the United Kingdom is due to leave the world’s biggest trading bloc, it remains unclear on what terms it will leave or indeed whether it will leave at all… ‘I think it is possible for us to come to an agreement, to have a treaty agreed, to allow the UK to leave the EU in an orderly fashion and to have that done by the end of October,’ Varadkar told Irish reporters.”
October 8 – Bloomberg (Alex Morales, Dara Doyle and Robert Hutton): “The U.K. stepped up preparations for a no-deal Brexit in three weeks’ time as negotiations with the European Union headed toward a breakdown. In a call on Tuesday morning, Boris Johnson told German Chancellor Angela Merkel a divorce agreement is essentially impossible if the EU demands Northern Ireland must stay in the bloc’s customs union. Johnson spoke later to Irish Prime Minister Leo Varadkar and the two agreed to meet for talks before the end of the week.”
October 8 – Reuters (Guy Faulconbridge, Elizabeth Piper, John Chalmers): “The European Union accused Britain of playing a ‘stupid blame game’ over Brexit… after a Downing Street source said a deal was essentially impossible because German Chancellor Angela Merkel had made unacceptable demands. With just 23 days before the United Kingdom is due to leave the bloc, the future of Brexit remains deeply uncertain as both London and Brussels position themselves to avoid blame for a delay or a disorderly no-deal Brexit.”
Europe Watch:
October 8 – Bloomberg (Piotr Skolimowski): “Former European Central Bank Chief Economist Peter Praet appealed for calm in an increasingly bitter row over monetary policy that threatens to mar President Mario Draghi’s final weeks in office. Responding to criticism last week of ECB policy by his predecessors and a group of former policy makers, Praet said the memorandum they signed lambasting the institution’s efforts to stoke inflation was emotional and employed straw-man arguments. While recognizing their concern as genuine, he argued it would be better-addressed in a proper discussion… The memorandum criticized the ECB’s approach to complying with its price-stability mandate, raised alarm over the longer-term impact of negative interest rates and alleged the institution is financing governments with its bond-buying program -- a move that’s forbidden by European Union law.”
October 6 – Reuters (Paul Carrel): “German industrial orders fell more than expected in August on weaker domestic demand…, adding to signs that a manufacturing slump is pushing Europe’s largest economy into recession. Contracts for ‘Made in Germany’ goods fell 0.6% from the previous month, with demand for capital goods down 1.6%...”
EM Watch:
October 6 – Bloomberg (Divya Patil): “As India’s shadow banking crisis deepens, it’s getting harder for investors to cut their losses in the sector’s debt. Mutual funds are in a particularly tough spot, given their large holdings of non-bank financing company bonds. That, in turn, threatens everyone from individual investors to conglomerates with money in the funds, underscoring broader risks to policy makers already grappling with an economic slowdown.”
Global Bubble Watch:
October 8 – Reuters (David Lawder): “The global economy is experiencing a ‘synchronized slowdown,’ the new head of the International Monetary Fund said…, warning that it would worsen if governments failed to resolve trade conflicts and support growth. In a blunt inaugural speech since taking the helm of the global crisis lender on Oct. 1, IMF Managing Director Kristalina Georgieva said trade tensions had ‘substantially weakened’ manufacturing and investment activity worldwide. ‘There is a serious risk that services and consumption could soon be affected,’ she said.”
October 7 – Bloomberg (Rachel Evans): “The world’s biggest banks still play a surprisingly large role in the rapidly growing market for exchange-traded funds. Bank of America Corp., Goldman Sachs Group Inc. and ABN Amro Bank NV together handle about half of the $5.5 trillion gross flows into and out of ETFs, according to… BlackRock Inc., which analyzed the first batch of regulatory filings on the institutions that create or redeem ETF shares. That’s in stark contrast to the secondary market, where many banks have ceded market-making roles to faster, more tech-savvy electronic brokers.”
October 8 – Reuters (Eric Beech and David Shepardson): “The United States has imposed visa restrictions on Chinese government and Communist Party officials it believes responsible for the detention or abuse of Muslim minorities in Xinjiang province, the U.S. State Department said… Secretary of State Mike Pompeo cited the decision of the Commerce Department on Monday to add 28 Chinese public security bureaus and companies - including video surveillance company Hikvision - to a U.S. trade blacklist over Beijing’s treatment of Uighur Muslims and other predominantly Muslim ethnic minorities. The visa restrictions ‘complement’ the Commerce Department actions, he said.”
October 8 – CNBC (Kevin Breuninger): “The White House said… that it will not cooperate with House Democrats’ impeachment inquiry into President Donald Trump, claiming that the proceedings amount to ‘baseless, unconstitutional efforts to overturn the democratic process.’ ‘You have designed and implemented your inquiry in a manner that violates fundamental fairness and constitutionally mandated due process,’ White House counsel Pat Cipollone said in an eight-page letter… A senior White House official told CNBC’s Eamon Javers that the letter signifies a ‘full halt’ to cooperation with the impeachment inquiry.”
October 7 – Bloomberg (Josh Wingrove and Selcan Hacaoglu): “Donald Trump’s administration said the U.S. will stand aside when Turkey’s military launches an operation against America’s wartime Kurdish allies in Syria, a significant shift in American policy that raises questions over the fate of thousands of Islamic State detainees. The Kurdish-led Syrian Democratic Forces have been a close U.S. ally in the fight to defeat Islamic State. But Turkey considers Syria’s Kurdish militants a threat to its national security and President Recep Tayyip Erdogan has said his forces were ready to begin a military operation against them in northeastern Syria imminently. The decision represents a dramatic reversal for U.S. policy…”
October 9 – Reuters (Colin Packham and Jonathan Barrett): “Tariffs are forcing China to pay attention to U.S. concerns, Secretary of Commerce Wilbur Ross said… ‘We do not love tariffs, in fact we would prefer not to use them, but after years of discussions and no action, tariffs are finally forcing China to pay attention to our concerns,’ Ross told a business function... ‘We could have had a deal two-and-a-half years ago without going through the whole tit-for-tat on tariffs that we have.’”
October 7 – Reuters (Jeff Mason): “President Donald Trump said… he wanted to see the U.S. Federal Reserve enact a ‘substantial’ cut in interest rates because of the lack of inflation in the United States. ‘We’d like to a see an interest rate cut, a very substantial one,’ Trump said. ‘We have no inflation. If anything it’s going below the number, so therefore we’re entitled to an interest rate cut. I hope the Fed does that.’”
Federal Reserve Watch:
October 9 – Financial Times (Joe Rennison): “Ten minutes after Federal Reserve chair Jay Powell insisted that the central bank restarting its Treasury purchases was ‘in no way’ the same as the post-financial crisis policy of quantitative easing, one Wall St analyst sent a note to his clients saying that the new strategy ‘sure sounds like QE’. He was not the only one. The confusion strikes at the heart of the latest communication challenge facing the Fed as it prepares to expand its balance sheet once more. The legacy of QE is rooted in economic woe. When the policy was implemented after the 2008 economic crisis, it was specifically designed to lower longer term interest rates and to ease financial conditions. This time is different, said Mr Powell… ‘It should not be taken as a shift in monetary policy. It is not being done to boost the general availability of credit. The US economy, by and large, remains on a firm footing.’”
October 9 – CNBC (Jeff Cox): “Some Federal Reserve policymakers expressed concern at their most recent meeting that markets are expecting more rate cuts than the central bank intends to deliver, according to minutes… The Federal Open Market Committee approved a quarter-point rate cut at the Sept. 17-18 meeting, putting the overnight funds rate in a target range of 1.75% to 2%. But documents released after the meeting also showed sharp divisions among members about the future path of policy. Minutes amplified those concerns, along with some worry that a market clamoring for easier monetary policy might be getting ahead of itself.”
October 6 – Reuters (Ann Saphir): “Kansas City Federal Reserve Bank President Esther George… rejected the notion that the U.S. central bank should cut interest rates to try to boost low inflation, which she said is largely a result of global forces that U.S. monetary policy can do little to counter. ‘In current circumstances, concern about low inflation seems unnecessary,’ George told the National Association for Business Economics in Denver. ‘The U.S. economy is currently in a good place, with low inflation, low unemployment and an outlook for continued moderate growth.’”
October 7 – Bloomberg (Catherine Bosley and Christopher Condon): “The U.S. economy’s loss of momentum isn’t severe enough to warrant a further reduction to interest rates, two hawkish Federal Reserve board members said. …Both Kansas City Fed President Esther George and the Boston Fed’s Eric Rosengren singled out consumer spending, which accounts for 70% of the economy, as a key variable and said that so long as it remained vibrant there was no need to add additional accommodation even as the manufacturing sector suffers and the trade war weighs on sentiment… ‘If the economy grows at 1.7%, consumption continues to be strong, inflation is gradually going up and the unemployment rate is at 3.5%, I would not see a need for additional accommodation’ at the Fed’s October or December policy meetings, Rosengren said…”
October 8 – Associated Press (Christopher Rugaber): “With the nation’s unemployment rate at its lowest point since human beings first walked on the moon, you might expect the Federal Reserve to be raising interest rates to keep the economy from overheating and igniting inflation. That’s what the rules of economics would suggest. Yet the Fed is moving in precisely the opposite direction: It is widely expected late this month to cut rates for the third time this year. Welcome to the strange world that Jerome Powell inhabits as chairman of the world’s most influential central bank. Though unemployment is low, so are inflation and long-term borrowing rates. Normally, all that would be cause for celebration. But with President Donald Trump’s trade wars slowing growth and overseas economies struggling, Powell faces pressure to keep cutting rates to sustain the U.S. economic expansion.”
U.S. Bubble Watch:
October 7 – The Hill (Niv Elis): “The federal budget deficit for 2019 is estimated at $984 billion, a hefty 4.7% of gross domestic product (GDP) and the highest since 2012, the Congressional Budget Office (CBO) said… The difference between federal spending and revenue has only ever exceeded $1 trillion four times, in the period immediately following the global financial crisis. The deficit, which has grown every year since 2015, is $205 billion higher than it was in 2018, a jump of 26%. The CBO has warned that the nation's debt is on an unsustainable path.”
October 7 – Bloomberg (Steve Matthews): “U.S. budget deficits and the national debt are on track to keep growing because both President Donald Trump and his Democratic rivals want to use low interest rates to finance more spending -- in effect embracing some form of Modern Monetary Theory, business economists said at a debate on the topic Monday.”
October 7 – Bloomberg (Reade Pickert): “U.S. consumer credit increased more than forecast in August as school loans and other non-revolving debt rose by the most in three years. Total credit climbed $17.9 billion from the prior month, after a revised $23 billion gain in July that was the largest since late 2017…”
October 8 – Bloomberg (William Edwards): “U.S. small-business sentiment fell to near the lowest level of Donald Trump’s presidency… The National Federation of Independent Business’s optimism index declined 1.3 points to 101.8 in September, the third drop in four months… While the gauge remains elevated by historical standards, it’s the lowest since March and close to January’s 101.2, which was the weakest since Trump’s term began in early 2017.”
October 8 – CNBC: “U.S. producer prices unexpectedly fell in September, leading to the smallest annual increase in nearly three years… The producer price index for final demand dropped 0.3% last month, weighed down by decreases in the costs of goods and services… That was the largest decline since January and followed a 0.1% gain in August. In the 12 months through September the PPI increased 1.4%, the smallest gain since November 2016, after rising 1.8% in August.”
October 8 – Reuters (Jane Lanhee Lee and Manas Mishra): “U.S. venture capitalists are expected to pour over $100 billion into startups for a second straight year, following the record sum invested in 2018… During the first three quarters of the year, venture capital firms had already invested $96.7 billion in 7,862 funding deals, according to… PitchBook Data Inc and National Venture Capital Association. In 2018 it invested a record $137.6 billion.”
October 6 – Wall Street Journal (Maureen Farrell): “The IPO market has gone from hot to not. Shares of newly public companies, earlier this year one of the hottest investments on Wall Street, are now in a slump after investors soured on unprofitable startups from Uber Technologies Inc. to WeWork. Shares of technology startups and other companies that went public in the U.S. this year are trading roughly 5% above, on average, their prices at their initial public offerings… That is a reversal from earlier in the year, when IPO shares were big outperformers. IPO-stock performance is the worst it has been since at least 1995, according to … Goldman Sachs… That and recent market gyrations have helped bring IPO activity to a virtual standstill heading into what is traditionally one of the busiest times of year for new issues…”
October 7 – CNBC (Jessica Bursztynsky): “Former Nasdaq CEO Bob Greifeld warned… that this year’s IPO boom feels similar to the late 1990s dot-com bubble. ‘It’s important to recognize that the IPO market was getting quite bubbly [nowadays],’ said Greifeld, a CNBC contributor and author of the new book, ‘Market Mover: Lessons from a Decade of Chance at Nasdaq.’”
October 9 – New York Times (Erin Griffith): “Fred Wilson, a venture capitalist at Union Square Ventures, recently published a blog post titled ‘The Great Public Market Reckoning.’ In it, he argued that the narrative that had driven start-up hype and valuations for the last decade was now falling apart. His post quickly ricocheted across Silicon Valley. Other venture capitalists… soon weighed in with their own warnings about fiscal responsibility. At some start-ups, entrepreneurs began behaving more cautiously. Travis VanderZanden, chief executive of the scooter start-up Bird, declared at a tech conference in San Francisco last week that his company was now focused on profit and not growth. ‘The challenge is to try to stay disciplined,’ he said. The moves all point to a new gospel that is starting to spread in start-up land.”
October 8 – CNBC (Diana Olick): “Cooler weather historically means a cooling off period in the housing market, but that is not the case this fall. After dropping to the lowest level in eight years, bidding wars are creeping back. In September, 11% of offers written by Redfin… faced a bidding war. That is down dramatically from 41% a year ago, but up from the 10% reading in August. That might not seem like a big deal, but in the past four years, the bidding war rate has dropped — not increased — from August to September.”
October 8 – Reuters (Tim McLaughlin and Ross Kerber): “Index funds now control half the U.S. stock mutual fund market, giving the biggest funds enormous power to influence decisions and demand better returns at the companies in which they invest trillions of dollars. But the leading U.S. index fund firms, BlackRock Inc, Vanguard Group and State Street Corp, rarely use that clout. Instead, they overwhelmingly support the decisions and pay packages of executives at the companies in their portfolios, including the worst performers, according to a Reuters analysis of their shareholder-voting records.”
October 6 – Reuters: “General Electric said… it was freezing pension plans for about 20,000 U.S. employees with salaried benefits, as the industrial conglomerate makes another drastic move to cut debt and reduce its pension deficit by up to $8 billion.”
October 9 – Bloomberg (Katherine Chiglinsky and Rick Clough): “General Electric Co.’s gaping pension deficit certainly stands out for its size. But the company is hardly the only one at risk of potentially shortchanging some of its employees come retirement. All across corporate America, underfunded pensions have become the norm. Even now, a decade after the financial crisis, the largest plans face a shortfall of $269 billion, right about where it was 10 years ago. Years of low interest rates have largely offset gains in the stock market. Companies haven’t helped matters by lavishing money on shareholder rewards and clinging to assumptions about returns that proved to be too rosy.”
China Watch:
October 8 – Bloomberg: “China signaled it would hit back after the Trump administration placed eight of the country’s technology giants on a blacklist over alleged human rights violations against Muslim minorities. Asked… whether China would retaliate over the blacklist, foreign ministry spokesman Geng Shuang told reporters ‘stay tuned.’ He also denied that the government abused human rights in the far west region of Xinjiang.”
October 9 – Reuters (Keith Zhai): “China is planning tighter visa restrictions for U.S. nationals with ties to anti-China groups…, following similar U.S. restrictions on Chinese nationals, as relations between the countries sour. China’s Ministry of Public Security has for months been working on rules to limit the ability of anyone employed, or sponsored, by U.S. intelligence services and human rights groups to travel to China. The proposed changes follow the introduction by the United States of tighter rules for visas for Chinese scholars in May.”
October 8 – New York Times (Amy Qin and Julie Creswell): “For international companies looking to do business in China, the rules were once simple. Don’t talk about the 3 T’s: Tibet, Taiwan and the Tiananmen Square crackdown. No longer. Fast-changing geopolitical tensions, growing nationalism and the rise of social media in China have made it increasingly difficult for multinationals to navigate commerce in the Communist country. As the National Basketball Association has discovered with a tweet about the Hong Kong protests, tripwires abound. Take the ‘wrong’ stance on one of any number of issues — Hong Kong, Taiwan, Korea, Japan, for instance — and you risk upsetting a country of 1.4 billion consumers and losing access to a hugely profitable market. Now, multinational companies are increasingly struggling with one question: how to be apolitical in an increasingly politicized and punitive China.”
October 8 – Reuters (David Stanway and Xihao Jiang): “Chinese organisers… cancelled a fan event on the eve of a National Basketball Association (NBA) exhibition game in Shanghai, the latest fallout in a growing row over a tweet by a team official supporting the recent protests in Hong Kong. Chinese sponsors and partners have been cutting ties with the NBA after the tweet by Houston Rockets general manager Daryl Morey last week supporting anti-government protests in the Chinese-ruled city. The Shanghai Sports Federation said the cancellation of the fan event ahead of Thursday’s game between the Brooklyn Nets and Los Angeles Lakers was due to the ‘inappropriate attitude’ of Morey and NBA Commissioner Adam Silver.”
October 8 – CNBC (Jake Novak): “Many financial journalists and political pundits have been trying for years to get the U.S. public more concerned about China’s increasingly repressive regime and the questionable trade-offs many American companies have been making to continue doing business in the country. Thanks to the NBA, Twitter and a Chinese government that feeds a national ‘outrage culture,’ those journalists and pundits won’t have to try so hard anymore.”
October 7 – Reuters (Ryan Woo): “China’s services sector grew at its slowest pace in seven months in September despite a strong increase in new orders, as operating expenses continued to rise at the end of the third quarter… The Caixin/Markit services purchasing managers’ index (PMI) fell to 51.3 last month, the weakest since February, versus August’s 52.1.”
October 6 – Wall Street Journal (Shen Hong): “The investment arms of China’s cities and provinces are selling debt at a record pace to fund roads, railways, utilities and ports, as they seek to shore up growth by spending more on infrastructure. Smaller cities and counties in China have long used local government financing vehicles to raise money via debt that is kept off the books of the municipalities themselves. The borrowers are often heavily indebted and lack formal state backing, although they are typically seen as carrying an implicit guarantee that Beijing would bail out investors if debts can’t be repaid… Local government financing vehicles have issued 2.37 trillion yuan ($332bn) of domestic bonds this year. That total is up 38% from the same period in 2018, and is poised to break the full-year record of 2.56 trillion yuan set three years ago.”
October 8 – Bloomberg: “Analysts on the lookout for China’s next financial shock are training their sights on the least regulated corner of the nation’s sprawling shadow banking system. Their concern centers on so-called independent wealth managers, which have expanded rapidly in recent years by selling high-yield products to affluent investors. Largely untouched by a government clampdown on nearly every other form of non-bank financing, the industry has grown from obscurity into a major source of funding for cash-strapped Chinese companies. The worry now is that products arranged by independent wealth managers will face mounting losses as China’s economic slowdown deepens and corporate defaults surge. Confidence in the industry has plunged since July, when Noah Holdings Ltd. said that 3.4 billion yuan ($477 million) of credit products overseen by one of its units were exposed to an alleged fraud by a Chinese conglomerate.”
October 5 – Reuters (James Pomfret and Jessie Pang): “Chinese soldiers issued a warning to Hong Kong protesters on Sunday who shone lasers at their barracks in the city, in the first direct interaction with mainland military forces in four months of anti-government demonstrations.”
October 10 – Bloomberg (Miaojung Lin): “Beijing’s growing political problems in Taiwan were laid bare…, as the island’s two main presidential contenders ruled out any move toward unification. First, President Tsai Ing-wen, who has long been an outspoken critic of Beijing, used her annual National Day address to issue a fresh rejection of China’s push to merge both sides under ‘one country, two systems.’ Moments later, Kaohsiung Mayor Han Kuo-yu -- the candidate for the more Beijing-friendly Kuomintang -- appeared on Facebook Live to say he believed that unification was something for the ‘next generation’ to resolve.”
Central Banking Watch:
October 8 – Financial Times (Caroline Grady): “More than half of central banks are now in easing mode, the biggest proportion since the aftermath of the financial crisis. During the third quarter, 58.5% of central banks cut interest rates. They were responding to a deepening malaise in global manufacturing, with the sector recording the longest downturn in seven years. Economists at UBS estimate that third-quarter global growth was running at an annualised rate of 2.3%, near the lows of the final quarter of 2018, when trade war disruption was at its peak.”
October 7 – Financial Times (Martin Arnold and Brendan Greeley): “The unprecedented growth in central banks’ balance sheets since the financial crisis has had a negative impact on the way in which financial markets function, according to a new report from the Bank for International Settlements. Over the past decade the world’s major central banks have lent vast sums of cheap money as well as buying trillions of dollars in bonds and other assets in a bid to stimulate the global economy. Some are still expanding their balance sheets: the European Central Bank last month decided to restart its €2.6tn bond-buying programme, while the Bank of Japan has used bond-buying as a stimulus measure for decades. Last month’s spike in short-term US borrowing costs was just the latest in a series of market shocks that have fuelled investors’ suspicions that this radical monetary policy is having an impact on how financial markets function.”
October 7 – Reuters (Marc Jones): “A report from a central bank-led global committee has defended the use of crisis-fighting tools such as negative interest rates and large-scale asset purchases, saying the benefits have outweighed the side effects. The study from the Committee on the Global Financial System Committee (CGFS) was a broad analysis, but is likely to attract considerable attention in Europe following growing criticism about the use of such measures… ‘On balance, unconventional monetary policy tools (UMPTs) helped the central banks that used them address the circumstances presented by the crisis and the ensuing economic downturn,’ said Philip Lowe, chair of the CGFS and governor of the Reserve Bank of Australia.”
October 9 – Financial Times (Martin Arnold): “The European Central Bank decided to restart its bond-buying programme last month over the objections of its own officials, a further sign of how the move has reopened divisions within the institution. The bank’s monetary policy committee, on which technocrats from the ECB and the 19 eurozone national central banks sit, advised against resuming its bond purchases in a letter sent to Mario Draghi and other members of its governing council days before their decision, according to three members of the council.”
Brexit Watch:
October 9 – Reuters (Elizabeth Piper and Peter Powell): “A Brexit deal could be clinched by the end of October to allow the United Kingdom to leave the European Union in an orderly fashion, Irish Prime Minister Leo Varadkar said after what he called a very positive meeting with Boris Johnson. With just three weeks to go before the United Kingdom is due to leave the world’s biggest trading bloc, it remains unclear on what terms it will leave or indeed whether it will leave at all… ‘I think it is possible for us to come to an agreement, to have a treaty agreed, to allow the UK to leave the EU in an orderly fashion and to have that done by the end of October,’ Varadkar told Irish reporters.”
October 8 – Bloomberg (Alex Morales, Dara Doyle and Robert Hutton): “The U.K. stepped up preparations for a no-deal Brexit in three weeks’ time as negotiations with the European Union headed toward a breakdown. In a call on Tuesday morning, Boris Johnson told German Chancellor Angela Merkel a divorce agreement is essentially impossible if the EU demands Northern Ireland must stay in the bloc’s customs union. Johnson spoke later to Irish Prime Minister Leo Varadkar and the two agreed to meet for talks before the end of the week.”
October 8 – Reuters (Guy Faulconbridge, Elizabeth Piper, John Chalmers): “The European Union accused Britain of playing a ‘stupid blame game’ over Brexit… after a Downing Street source said a deal was essentially impossible because German Chancellor Angela Merkel had made unacceptable demands. With just 23 days before the United Kingdom is due to leave the bloc, the future of Brexit remains deeply uncertain as both London and Brussels position themselves to avoid blame for a delay or a disorderly no-deal Brexit.”
Europe Watch:
October 8 – Bloomberg (Piotr Skolimowski): “Former European Central Bank Chief Economist Peter Praet appealed for calm in an increasingly bitter row over monetary policy that threatens to mar President Mario Draghi’s final weeks in office. Responding to criticism last week of ECB policy by his predecessors and a group of former policy makers, Praet said the memorandum they signed lambasting the institution’s efforts to stoke inflation was emotional and employed straw-man arguments. While recognizing their concern as genuine, he argued it would be better-addressed in a proper discussion… The memorandum criticized the ECB’s approach to complying with its price-stability mandate, raised alarm over the longer-term impact of negative interest rates and alleged the institution is financing governments with its bond-buying program -- a move that’s forbidden by European Union law.”
October 6 – Reuters (Paul Carrel): “German industrial orders fell more than expected in August on weaker domestic demand…, adding to signs that a manufacturing slump is pushing Europe’s largest economy into recession. Contracts for ‘Made in Germany’ goods fell 0.6% from the previous month, with demand for capital goods down 1.6%...”
EM Watch:
October 6 – Bloomberg (Divya Patil): “As India’s shadow banking crisis deepens, it’s getting harder for investors to cut their losses in the sector’s debt. Mutual funds are in a particularly tough spot, given their large holdings of non-bank financing company bonds. That, in turn, threatens everyone from individual investors to conglomerates with money in the funds, underscoring broader risks to policy makers already grappling with an economic slowdown.”
Global Bubble Watch:
October 8 – Reuters (David Lawder): “The global economy is experiencing a ‘synchronized slowdown,’ the new head of the International Monetary Fund said…, warning that it would worsen if governments failed to resolve trade conflicts and support growth. In a blunt inaugural speech since taking the helm of the global crisis lender on Oct. 1, IMF Managing Director Kristalina Georgieva said trade tensions had ‘substantially weakened’ manufacturing and investment activity worldwide. ‘There is a serious risk that services and consumption could soon be affected,’ she said.”
October 7 – Bloomberg (Rachel Evans): “The world’s biggest banks still play a surprisingly large role in the rapidly growing market for exchange-traded funds. Bank of America Corp., Goldman Sachs Group Inc. and ABN Amro Bank NV together handle about half of the $5.5 trillion gross flows into and out of ETFs, according to… BlackRock Inc., which analyzed the first batch of regulatory filings on the institutions that create or redeem ETF shares. That’s in stark contrast to the secondary market, where many banks have ceded market-making roles to faster, more tech-savvy electronic brokers.”
Fixed-Income Bubble Watch:
October 10 – Bloomberg (Danielle Moran): “State and local governments have already borrowed at a faster pace than last year and aren’t slowing down yet, raising the possibility that issuance could reach $400 billion this year, a feat achieved only three times in the past decade.”
Leveraged Speculation Watch:
October 10 – Financial Times (Song Jung-a, Edward White and Hudson Lockett): “The biggest hedge fund manager in South Korea has blocked investors from pulling more than $500m from its funds after a regulatory probe into alleged illegal trading activities, in a move that highlights broader problems with liquidity in the country’s convertible bond market. Seoul-based Lime Asset Management, which manages assets worth about Won4.9tn ($4.1bn), last week froze as much as Won620bn over two of its funds after it received more requests for redemptions than it was able to meet.”
October 6 – Wall Street Journal (Eric Uhlfelder): “The hedge-fund industry continues to do this year what it has been doing for more than a decade—trailing the stock market big time. Hedge funds on average generated less than half the returns of the stock market in the first half of 2019, posting a net return of 7.2%, according to… BarclayHedge. The S&P 500 returned 18.5%. Performance varied widely depending on strategy… Despite net redemptions of nearly $23 billion during the first half of the year, hedge-fund assets continued to rise as returns easily offset that decline. …Hedge Fund Research reports total industry assets rose from $3.1 trillion at the beginning of the year to a record $3.25 trillion at the end of June.”
October 4 – Wall Street Journal (Rachael Levy): “Prominent hedge funds lost money in September, a swift comedown after a relatively strong run for the industry at large. Several technology-focused funds were among those hit hard. Tiger Global Management LLC… lost 7.4% last month, said people familiar… Philippe Laffont’s Coatue Management LLC lost about 6%, Whale Rock Capital Management LLC dropped 14%, and Glen Kacher’s Light Street Capital Management LLC lost around 10%...”
Geopolitical Watch:
October 9 – CNBC (Kevin Breuninger): “Turkey has launched a military operation in northern Syria, Turkish President Recep Tayyip Erdogan said…, days after the Trump administration announced its controversial decision to pull U.S. troops out of the area. ‘Turkish Armed Forces together with the Syrian National Army against PKK / YPG and Daesh terrorist organizations in northern Syria… has started,’ Erdogan wrote on Twitter… ‘Our aim is to destroy the terror corridor which is trying to be established on our southern border and to bring peace and peace to the region’…”
October 5 – BBC: “The US has denied that its day of nuclear talks with North Korea ended in failure, insisting that ‘good discussions’ were had. Earlier, North Korea said the meeting had broken down, because the US brought ‘nothing to the negotiation table’. Officials from the two countries met in Sweden on Saturday, in the hope of breaking their stalemate.”
October 10 – Bloomberg (Danielle Moran): “State and local governments have already borrowed at a faster pace than last year and aren’t slowing down yet, raising the possibility that issuance could reach $400 billion this year, a feat achieved only three times in the past decade.”
Leveraged Speculation Watch:
October 10 – Financial Times (Song Jung-a, Edward White and Hudson Lockett): “The biggest hedge fund manager in South Korea has blocked investors from pulling more than $500m from its funds after a regulatory probe into alleged illegal trading activities, in a move that highlights broader problems with liquidity in the country’s convertible bond market. Seoul-based Lime Asset Management, which manages assets worth about Won4.9tn ($4.1bn), last week froze as much as Won620bn over two of its funds after it received more requests for redemptions than it was able to meet.”
October 6 – Wall Street Journal (Eric Uhlfelder): “The hedge-fund industry continues to do this year what it has been doing for more than a decade—trailing the stock market big time. Hedge funds on average generated less than half the returns of the stock market in the first half of 2019, posting a net return of 7.2%, according to… BarclayHedge. The S&P 500 returned 18.5%. Performance varied widely depending on strategy… Despite net redemptions of nearly $23 billion during the first half of the year, hedge-fund assets continued to rise as returns easily offset that decline. …Hedge Fund Research reports total industry assets rose from $3.1 trillion at the beginning of the year to a record $3.25 trillion at the end of June.”
October 4 – Wall Street Journal (Rachael Levy): “Prominent hedge funds lost money in September, a swift comedown after a relatively strong run for the industry at large. Several technology-focused funds were among those hit hard. Tiger Global Management LLC… lost 7.4% last month, said people familiar… Philippe Laffont’s Coatue Management LLC lost about 6%, Whale Rock Capital Management LLC dropped 14%, and Glen Kacher’s Light Street Capital Management LLC lost around 10%...”
Geopolitical Watch:
October 9 – CNBC (Kevin Breuninger): “Turkey has launched a military operation in northern Syria, Turkish President Recep Tayyip Erdogan said…, days after the Trump administration announced its controversial decision to pull U.S. troops out of the area. ‘Turkish Armed Forces together with the Syrian National Army against PKK / YPG and Daesh terrorist organizations in northern Syria… has started,’ Erdogan wrote on Twitter… ‘Our aim is to destroy the terror corridor which is trying to be established on our southern border and to bring peace and peace to the region’…”
October 5 – BBC: “The US has denied that its day of nuclear talks with North Korea ended in failure, insisting that ‘good discussions’ were had. Earlier, North Korea said the meeting had broken down, because the US brought ‘nothing to the negotiation table’. Officials from the two countries met in Sweden on Saturday, in the hope of breaking their stalemate.”
Friday Afternoon Links
[Reuters] Wall Street rises but pares gains after news of partial U.S.-China deal
[Reuters] Dollar slides to 3-month low on hopes of Brexit, U.S.-China trade deals
[Reuters] Pound surges as Brexit deal optimism swells
[CNBC] Trump says US has come to a substantial phase one deal with China
[CNBC] The Fed is extending its overnight funding operations through January 2020
[Reuters] U.S. optimistic on trade talks; China open to partial deal
[CNBC] Trump administration clears the way for sanctions on Turkey: ‘We can shut down the Turkish economy’
[WSJ] Fed Will Purchase Treasury Bills at Least Into Second Quarter of 2020
[WSJ] New York Fed Adds $82.7 Billion To Financial System in Latest Repo Transaction
[Reuters] Dollar slides to 3-month low on hopes of Brexit, U.S.-China trade deals
[Reuters] Pound surges as Brexit deal optimism swells
[CNBC] Trump says US has come to a substantial phase one deal with China
[CNBC] The Fed is extending its overnight funding operations through January 2020
[Reuters] U.S. optimistic on trade talks; China open to partial deal
[CNBC] Trump administration clears the way for sanctions on Turkey: ‘We can shut down the Turkish economy’
[WSJ] Fed Will Purchase Treasury Bills at Least Into Second Quarter of 2020
[WSJ] New York Fed Adds $82.7 Billion To Financial System in Latest Repo Transaction
Thursday, October 10, 2019
Friday's News Links
[Reuters] Wall St. higher on trade war de-escalation bets
[Reuters] Oil jumps briefly after reports of Iranian tanker attack
[CNBC] Trump says ‘good things’ are happening at China trade talks: ‘Warmer feelings than in recent past’
[CNBC] Optimism is rising that some sort of US-China trade deal is coming — here’s what we know
[Reuters] With U.S. tariffs looming, China drums up hope for a partial trade deal
[Reuters] Trump to meet with Chinese Vice Premier Liu He at 2:45 p.m. EDT
[Reuters] EU, Britain to hold intense negotiations on Brexit deal as departure date nears
[Reuters] California governor calls widespread electricity shutdown to prevent fires 'unacceptable'
[Reuters] Rising old used car prices help push poor Americans over the edge
[Reuters] Iranian oil tanker hit off Saudi coast, may have been missiles - Iran reports
[Yahoo/Bloomberg] Dyson Becomes Latest Sign That Electric-Car Bubble Is Bursting
[Bloomberg] Yield Curve Recession Signal Fades as Haven Sell-Off Deepens
[Bloomberg] China’s Trade Chief Returns to Trump’s Oval Stage With Eyes on Deal
[Bloomberg] China’s Hidden Capital Flight Surges to Record High
[Bloomberg] China’s Resistance to a U.S. Investor Safeguard Riles Team Trump
[Bloomberg] JPMorgan Economists Warn of Black Swan Risks From Climate Change
[WSJ] A Bite-Size Trade Deal Won’t Save U.S. Industry
[FT] Beijing’s simplistic narrative on Taiwan is fuelling tensions
[Reuters] Oil jumps briefly after reports of Iranian tanker attack
[CNBC] Trump says ‘good things’ are happening at China trade talks: ‘Warmer feelings than in recent past’
[CNBC] Optimism is rising that some sort of US-China trade deal is coming — here’s what we know
[Reuters] With U.S. tariffs looming, China drums up hope for a partial trade deal
[Reuters] Trump to meet with Chinese Vice Premier Liu He at 2:45 p.m. EDT
[Reuters] EU, Britain to hold intense negotiations on Brexit deal as departure date nears
[Reuters] California governor calls widespread electricity shutdown to prevent fires 'unacceptable'
[Reuters] Rising old used car prices help push poor Americans over the edge
[Reuters] Iranian oil tanker hit off Saudi coast, may have been missiles - Iran reports
[Yahoo/Bloomberg] Dyson Becomes Latest Sign That Electric-Car Bubble Is Bursting
[Bloomberg] Yield Curve Recession Signal Fades as Haven Sell-Off Deepens
[Bloomberg] China’s Trade Chief Returns to Trump’s Oval Stage With Eyes on Deal
[Bloomberg] China’s Hidden Capital Flight Surges to Record High
[Bloomberg] China’s Resistance to a U.S. Investor Safeguard Riles Team Trump
[Bloomberg] JPMorgan Economists Warn of Black Swan Risks From Climate Change
[WSJ] A Bite-Size Trade Deal Won’t Save U.S. Industry
[FT] Beijing’s simplistic narrative on Taiwan is fuelling tensions
Thursday Evening Links
[CNBC] Stock futures rise after optimistic Trump comments on US-China trade
[Reuters] Stocks rise, dollar slides, with eyes on U.S.-Sino trade talks
[CNBC] Trump says China trade talks are going very well
[Reuters] Day 1 of U.S.-China trade talks ends with hopes for limited deal
[CNBC] Trump to meet with Chinese vice premier at White House: ‘Big day of negotiations with China’
[CNBC] Chinese Vice Premier Liu He says China comes with ‘great sincerity’ for trade talks
[Reuters] Brexit deal can be done by October 31, Ireland says after positive Johnson meeting
[Reuters] Fed's Mester: U.S. likely to avoid serious downturn; content to keep rates steady
[Reuters] Thousands flee, hundreds reported dead in Turkish attack on U.S.-allied Kurds in Syria
[Bloomberg] Trump Says Day 1 Trade Talks Went ‘Very Well;’ S&P Futures Rise
[Bloomberg] U.S., China Start Talks Aiming for Mini Deal to Ease Tariff Pain
[FT] Tett: Better data on modern finance reveals uncomfortable truths
[FT] European bond markets hit by backlash to ECB stimulus
[FT] ECB board meeting strained by dissent on policy decisions
[FT] South Korea’s biggest hedge fund freezes redemptions
[Reuters] Stocks rise, dollar slides, with eyes on U.S.-Sino trade talks
[CNBC] Trump says China trade talks are going very well
[Reuters] Day 1 of U.S.-China trade talks ends with hopes for limited deal
[CNBC] Trump to meet with Chinese vice premier at White House: ‘Big day of negotiations with China’
[CNBC] Chinese Vice Premier Liu He says China comes with ‘great sincerity’ for trade talks
[Reuters] Brexit deal can be done by October 31, Ireland says after positive Johnson meeting
[Reuters] Fed's Mester: U.S. likely to avoid serious downturn; content to keep rates steady
[Reuters] Thousands flee, hundreds reported dead in Turkish attack on U.S.-allied Kurds in Syria
[Bloomberg] Trump Says Day 1 Trade Talks Went ‘Very Well;’ S&P Futures Rise
[Bloomberg] U.S., China Start Talks Aiming for Mini Deal to Ease Tariff Pain
[FT] Tett: Better data on modern finance reveals uncomfortable truths
[FT] European bond markets hit by backlash to ECB stimulus
[FT] ECB board meeting strained by dissent on policy decisions
[FT] South Korea’s biggest hedge fund freezes redemptions
Wednesday, October 9, 2019
Thursday's News Links
[Reuters] U.S.-China trade deal hopes lift Wall Street
[CNBC] It’s been a crazy 12 hours for US-China trade news — here’s what we know
[Reuters] Top-level U.S.-China trade talks resume as irritants sour atmosphere
[Reuters] U.S. consumer prices unchanged in September
[Reuters] U.S. tariffs on China are working, says U.S. Secretary of Commerce
[Reuters] U.S. to issue licenses for supply of non-sensitive goods to Huawei: NYT
[Reuters] U.S. private equity fundraising swells as mega funds get bigger
[Reuters] Power cut to millions as California faces heightened wildfire risks
[Reuters] Bond buys, tiered deposit rate generated most opposition at ECB policy meeting
[Bloomberg] Offshore Yuan Erases Loss After News Currency Pact Being Weighed
[Bloomberg] U.S. Weighing Currency Pact With China as Part of Partial Deal
[Bloomberg] ECB Meeting Account Shows Officials Far Apart on Stimulus
[Bloomberg] Taiwan’s Tsai Says Unrest Shows China’s ‘Failure’ in Hong Kong
[WSJ] Fed to Increase Supply of Bank Reserves
[NYT] Trump Administration Weighs Economic Escalation Against China
[FT] Donald Trump trade team’s unified front tested in China talks
[FT] ECB’s Draghi ignored in-house advice on decision to restart QE
[CNBC] It’s been a crazy 12 hours for US-China trade news — here’s what we know
[Reuters] Top-level U.S.-China trade talks resume as irritants sour atmosphere
[Reuters] U.S. consumer prices unchanged in September
[Reuters] U.S. tariffs on China are working, says U.S. Secretary of Commerce
[Reuters] U.S. to issue licenses for supply of non-sensitive goods to Huawei: NYT
[Reuters] U.S. private equity fundraising swells as mega funds get bigger
[Reuters] Power cut to millions as California faces heightened wildfire risks
[Reuters] Bond buys, tiered deposit rate generated most opposition at ECB policy meeting
[Bloomberg] Offshore Yuan Erases Loss After News Currency Pact Being Weighed
[Bloomberg] U.S. Weighing Currency Pact With China as Part of Partial Deal
[Bloomberg] ECB Meeting Account Shows Officials Far Apart on Stimulus
[Bloomberg] Taiwan’s Tsai Says Unrest Shows China’s ‘Failure’ in Hong Kong
[WSJ] Fed to Increase Supply of Bank Reserves
[NYT] Trump Administration Weighs Economic Escalation Against China
[FT] Donald Trump trade team’s unified front tested in China talks
[FT] ECB’s Draghi ignored in-house advice on decision to restart QE
Wednesday Evening Links
[CNBC] Dow futures drop 250 points after Chinese media reports that trade talks have made no progress
[SCMP] US and China make no progress on key trade issues in two days of deputy-level talks, sources say
[Reuters] Trump says there is a 'really good chance' of U.S.-China trade deal
[Reuters] Tech stocks lift Wall Street as reports brighten hopes of trade deal
[Reuters] Federal Reserve policymakers increasingly divided on way ahead, minutes show
[CNBC] Market may be expecting more rate cuts than the Fed will deliver, meeting minutes show
[CNBC] Low expectations for trade talks: ‘If you’re looking for good news, they didn’t cancel the trip’
[AP] Powell faces key question: What’s wrong with low inflation?
[CNBC] Turkey launches military operation against Kurds and ISIS in northern Syria
[Bloomberg] Trump Is Tweeting Less About China and That’s Good for Stocks
[SCMP] US and China make no progress on key trade issues in two days of deputy-level talks, sources say
[Reuters] Trump says there is a 'really good chance' of U.S.-China trade deal
[Reuters] Tech stocks lift Wall Street as reports brighten hopes of trade deal
[Reuters] Federal Reserve policymakers increasingly divided on way ahead, minutes show
[CNBC] Market may be expecting more rate cuts than the Fed will deliver, meeting minutes show
[CNBC] Low expectations for trade talks: ‘If you’re looking for good news, they didn’t cancel the trip’
[AP] Powell faces key question: What’s wrong with low inflation?
[CNBC] Turkey launches military operation against Kurds and ISIS in northern Syria
[Bloomberg] Trump Is Tweeting Less About China and That’s Good for Stocks
Tuesday, October 8, 2019
Wednesday's News Links
[Reuters] Stocks grind higher as investors cling to trade truce hopes
[Reuters] Oil rises on signs of easing U.S.-China tensions
[CNBC] China ready to discuss a partial trade deal and will increase US agricultural purchases, reports say
[Reuters] China plans to restrict visas for U.S. visitors with 'anti-China' links
[AP] China demands US lift tech curbs, will ‘safeguard’ interests
[CNBC] Weekly mortgage refinances jump 10% as rates drop to the lowest level since August
[Reuters] Chinese state media slam U.S. basketball's NBA in free speech row
[CNBC] China’s heavy-handed reaction to the NBA is just the wake-up call the world needed
[Reuters] Venture capital investments in U.S. set for another bonanza year
[Yahoo/FT] Why central banks are edging away from the dollar
[Reuters] Turkish and Syrian rebel forces to start Syria offensive 'shortly': Erdogan's aide
[Bloomberg] China Open to Partial Trade Deal If Trump Removes Tariff Threats
[Bloomberg] Trouble Is Brewing in the Darkest Corner of China’s Shadow Banking
[Bloomberg] Former Draghi Lieutenant Appeals for Calm in ECB Stimulus Row
[Bloomberg] The Repo Market Is More Than Mere Plumbing
[Bloomberg] GE’s Gaping Pension Deficit Is Just a Tiny Part of Companies’ $269 Billion Gap
[NYT] Fed Chair Powell Signals Balance Sheet Will Grow Soon After Recent Market Turmoil
[WSJ] Fed Minutes to Shed Light on Internal Debate Over Rates
[WSJ] Fed to Increase Supply of Bank Reserves
[FT] Fed restarts debt purchases — just don’t call it QE
[FT] Central bank easing soars to a decade high
[Reuters] Oil rises on signs of easing U.S.-China tensions
[CNBC] China ready to discuss a partial trade deal and will increase US agricultural purchases, reports say
[Reuters] China plans to restrict visas for U.S. visitors with 'anti-China' links
[AP] China demands US lift tech curbs, will ‘safeguard’ interests
[CNBC] Weekly mortgage refinances jump 10% as rates drop to the lowest level since August
[Reuters] Chinese state media slam U.S. basketball's NBA in free speech row
[CNBC] China’s heavy-handed reaction to the NBA is just the wake-up call the world needed
[Reuters] Venture capital investments in U.S. set for another bonanza year
[Yahoo/FT] Why central banks are edging away from the dollar
[Reuters] Turkish and Syrian rebel forces to start Syria offensive 'shortly': Erdogan's aide
[Bloomberg] China Open to Partial Trade Deal If Trump Removes Tariff Threats
[Bloomberg] Trouble Is Brewing in the Darkest Corner of China’s Shadow Banking
[Bloomberg] Former Draghi Lieutenant Appeals for Calm in ECB Stimulus Row
[Bloomberg] The Repo Market Is More Than Mere Plumbing
[Bloomberg] GE’s Gaping Pension Deficit Is Just a Tiny Part of Companies’ $269 Billion Gap
[NYT] Fed Chair Powell Signals Balance Sheet Will Grow Soon After Recent Market Turmoil
[WSJ] Fed Minutes to Shed Light on Internal Debate Over Rates
[WSJ] Fed to Increase Supply of Bank Reserves
[FT] Fed restarts debt purchases — just don’t call it QE
[FT] Central bank easing soars to a decade high
Tuesday Evening Links
[Reuters] Wall Street slumps as visa restrictions stoke U.S.-China worries
[Reuters] Oil eases on concerns over U.S.-China talks, weak demand signals
[CNBC] ‘Full halt’: White House says it will not cooperate with Trump impeachment inquiry
[AP] Constitutional collision: WH vows no cooperation in probe
[Reuters] U.S. imposes visa restrictions on Chinese officials over Muslim treatment
[Reuters] Fed's Powell: Outlook 'favorable', steps to address money market volatility coming 'soon'
[CNBC] Powell says the Fed will start expanding its balance sheet ‘soon’ in response to funding issues
[CNBC] China ‘strongly urges’ US to remove sanctions and stop accusing it of human rights violations
[Reuters] Rising U.S.-China tensions dim hopes for end to trade war
[Reuters] New IMF chief Georgieva warns of 'synchronized slowdown' in global growth
[CNBC] Bidding wars are taking a strange turn in the fall housing market
[Reuters] The end of Libor: the biggest banking challenge you've never heard of
[NYT] Silicon Valley’s Mantra of Spend Big, Grow Fast? It’s Changing
[NYT] China Is a Minefield, and Foreign Firms Keep Hitting New Tripwires
[WSJ] Expanded U.S. Trade Blacklist Hits Beijing’s Artificial-Intelligence Ambitions
[WSJ] Natural-Gas Producers Hard Hit by Tanking Prices
[FT] From Ataturk to Trump: the Kurdish fight for land and identity
[Reuters] Oil eases on concerns over U.S.-China talks, weak demand signals
[CNBC] ‘Full halt’: White House says it will not cooperate with Trump impeachment inquiry
[AP] Constitutional collision: WH vows no cooperation in probe
[Reuters] U.S. imposes visa restrictions on Chinese officials over Muslim treatment
[Reuters] Fed's Powell: Outlook 'favorable', steps to address money market volatility coming 'soon'
[CNBC] Powell says the Fed will start expanding its balance sheet ‘soon’ in response to funding issues
[CNBC] China ‘strongly urges’ US to remove sanctions and stop accusing it of human rights violations
[Reuters] Rising U.S.-China tensions dim hopes for end to trade war
[Reuters] New IMF chief Georgieva warns of 'synchronized slowdown' in global growth
[CNBC] Bidding wars are taking a strange turn in the fall housing market
[Reuters] The end of Libor: the biggest banking challenge you've never heard of
[NYT] Silicon Valley’s Mantra of Spend Big, Grow Fast? It’s Changing
[NYT] China Is a Minefield, and Foreign Firms Keep Hitting New Tripwires
[WSJ] Expanded U.S. Trade Blacklist Hits Beijing’s Artificial-Intelligence Ambitions
[WSJ] Natural-Gas Producers Hard Hit by Tanking Prices
[FT] From Ataturk to Trump: the Kurdish fight for land and identity
Monday, October 7, 2019
Tuesday's News Links
[Reuters] Stocks fall on trade angst; Brexit battle tackles pound
[Reuters] European stocks tumble further as Brexit, trade worries deepen
[CNBC] US producer prices post the biggest decline in eight months in September
[Reuters] White House eyes ways to limit capital flows to China: Bloomberg
[The Hill] Federal deficit estimated at $984B, highest in seven years
[Reuters] China services sector growth falls to seven-month low: Caixin PMI'
[Reuters] China Vice Premier Liu will travel to U.S. for trade talks on Oct.10-11
[AP] US seeks to blacklist Chinese artificial intelligence firms
[Reuters] China's Hikvision resolutely opposes U.S. blacklisting: state media
[Yahoo/Bloomberg] Johnson Tells Merkel Deal ‘Essentially Impossible’: Brexit Update
[AP] Fed’s odd dilemma: Low unemployment but pressure to do more
[Reuters] A Repeat of 2018’s Rout Is Likely Coming, Veteran Investor Says
[Reuters] EU tells British PM Johnson to stop playing 'stupid' Brexit blame game
[Reuters] Index funds invest trillions but rarely challenge management
[Bloomberg] White House Zeroes In on Limit to Chinese Stocks in Pension Fund
[Bloomberg] U.S. Small-Business Optimism Drops to Near Lowest of Trump Era
[Bloomberg] U.S. Blacklists Eight Chinese Tech Companies on Rights Violations
[Bloomberg] China Signals It Will Hit Back Over U.S. Tech Blacklist
[Yahoo/FT] Investors are addicted to the QE placebo
[Bloomberg] China’s Diplomatic Squeeze on Taiwan Risks Backfiring on Xi
[FT] Weak auction shakes Japan’s bond market from its slumber
[Reuters] European stocks tumble further as Brexit, trade worries deepen
[CNBC] US producer prices post the biggest decline in eight months in September
[Reuters] White House eyes ways to limit capital flows to China: Bloomberg
[The Hill] Federal deficit estimated at $984B, highest in seven years
[Reuters] China services sector growth falls to seven-month low: Caixin PMI'
[Reuters] China Vice Premier Liu will travel to U.S. for trade talks on Oct.10-11
[AP] US seeks to blacklist Chinese artificial intelligence firms
[Reuters] China's Hikvision resolutely opposes U.S. blacklisting: state media
[Yahoo/Bloomberg] Johnson Tells Merkel Deal ‘Essentially Impossible’: Brexit Update
[AP] Fed’s odd dilemma: Low unemployment but pressure to do more
[Reuters] A Repeat of 2018’s Rout Is Likely Coming, Veteran Investor Says
[Reuters] EU tells British PM Johnson to stop playing 'stupid' Brexit blame game
[Reuters] Index funds invest trillions but rarely challenge management
[Bloomberg] White House Zeroes In on Limit to Chinese Stocks in Pension Fund
[Bloomberg] U.S. Small-Business Optimism Drops to Near Lowest of Trump Era
[Bloomberg] U.S. Blacklists Eight Chinese Tech Companies on Rights Violations
[Bloomberg] China Signals It Will Hit Back Over U.S. Tech Blacklist
[Yahoo/FT] Investors are addicted to the QE placebo
[Bloomberg] China’s Diplomatic Squeeze on Taiwan Risks Backfiring on Xi
[FT] Weak auction shakes Japan’s bond market from its slumber
Monday Evening Links
[Reuters] Wall Street falls amid caution on U.S.-China trade dispute
[Reuters] Treasuries - Yields rise ahead of heavy supply at this week's auctions
[Reuters] U.S.-China deputy-level trade talks get underway in tense atmosphere
[Reuters] Exclusive: U.S. names Hikvision, Chinese security bureaus to economic blacklist - sources
[Reuters] Central bankers' committee defends unconventional crisis-fighting tools
[Reuters] Trump says U.S. economy entitled to 'substantial' interest rate cut
[CNBC] Ex-Nasdaq CEO Greifeld warns that recent IPOs’ unclear path to profits reminds him of tech bubble
[Reuters] Hong Kong police stage show of force on streets, jeered by residents
[Bloomberg] Meet the Banks Behind $5.5 Trillion of Trades That Power ETFs
[Bloomberg] U.S. Consumer Credit Tops Forecast on Non-Revolving Debt
[Bloomberg] Lira Slumps as Trump Warns Turkey Over Military Operation
[Bloomberg] Economists Worry That MMT Is Winning the Argument in Washington
[FT] Central bank stimulus is distorting financial markets, BIS finds
[Reuters] Treasuries - Yields rise ahead of heavy supply at this week's auctions
[Reuters] U.S.-China deputy-level trade talks get underway in tense atmosphere
[Reuters] Exclusive: U.S. names Hikvision, Chinese security bureaus to economic blacklist - sources
[Reuters] Central bankers' committee defends unconventional crisis-fighting tools
[Reuters] Trump says U.S. economy entitled to 'substantial' interest rate cut
[CNBC] Ex-Nasdaq CEO Greifeld warns that recent IPOs’ unclear path to profits reminds him of tech bubble
[Reuters] Hong Kong police stage show of force on streets, jeered by residents
[Bloomberg] Meet the Banks Behind $5.5 Trillion of Trades That Power ETFs
[Bloomberg] U.S. Consumer Credit Tops Forecast on Non-Revolving Debt
[Bloomberg] Lira Slumps as Trump Warns Turkey Over Military Operation
[Bloomberg] Economists Worry That MMT Is Winning the Argument in Washington
[FT] Central bank stimulus is distorting financial markets, BIS finds
Sunday, October 6, 2019
Monday's News Links
[Reuters] Stocks tiptoe higher as U.S. jobs boost offsets weak European data, trade anxiety
[Reuters] Yen rises, offshore yuan dips on caution over Sino-U.S. trade talks
[Reuters] Oil prices up as U.S.-China trade talks loom, supply issues mount
[Yahoo/Bloomberg] China’s Gold-Buying Spree Tops 100 Tons During Trade War
[CNBC] GE to freeze pension plans for about 20,000 US employees in a bid to cut debt
[Yahoo/Bloomberg] U.S. Won’t Stop Turkish Advance Into Syria in Major Policy Shift
[Reuters] German recession looms as industrial orders drop more than expected
[Reuters] Hong Kong faces more protests after night of violence
[Bloomberg] Fed’s George, Rosengren Don’t Think Rate Cut Is Justified Yet
[Bloomberg] Shadow Bank Crisis in India Makes It Hard to Cut Bond Losses
[Bloomberg] Turkish Assets Fall as Erdogan Readies Incursion Into Syria
[WSJ] Wild Swings in Repo Rates Raise Concerns About Bond Market’s Liquidity
[WSJ] Hedge-Fund Performance Goes From Bad to Less Bad
[FT] Fed official cites banks’ taste for reserves in repo glitch
[Reuters] Yen rises, offshore yuan dips on caution over Sino-U.S. trade talks
[Reuters] Oil prices up as U.S.-China trade talks loom, supply issues mount
[Yahoo/Bloomberg] China’s Gold-Buying Spree Tops 100 Tons During Trade War
[CNBC] GE to freeze pension plans for about 20,000 US employees in a bid to cut debt
[Yahoo/Bloomberg] U.S. Won’t Stop Turkish Advance Into Syria in Major Policy Shift
[Reuters] German recession looms as industrial orders drop more than expected
[Reuters] Hong Kong faces more protests after night of violence
[Bloomberg] Fed’s George, Rosengren Don’t Think Rate Cut Is Justified Yet
[Bloomberg] Shadow Bank Crisis in India Makes It Hard to Cut Bond Losses
[Bloomberg] Turkish Assets Fall as Erdogan Readies Incursion Into Syria
[WSJ] Wild Swings in Repo Rates Raise Concerns About Bond Market’s Liquidity
[WSJ] Hedge-Fund Performance Goes From Bad to Less Bad
[FT] Fed official cites banks’ taste for reserves in repo glitch
Sunday Evening Links
[Yahoo] U.S. Futures Drop, Yuan Dips as Trade Talks Loom: Markets Wrap
[CNBC] China is reportedly reluctant to agree to a broad US trade deal with talks set to restart
[CNBC] UAW says GM labor talks ‘have taken a turn for the worse’
[Reuters] Low inflation? Nothing to worry about, Fed's George says
[Reuters] Chinese soldiers in Hong Kong warn protesters as emergency rules fail to quell unrest
[UK Guardian] Hong Kong emergency law 'marks start of authoritarian rule'
[Bloomberg] China Narrows Scope for Trade Deal With U.S. Ahead of Talks
[Bloomberg] Fed’s George Sees No Need to Ease Unless Slowdown Deepens
[WSJ] Fed Confronts Balance-Sheet Decisions to Curb Money-Market Volatility
[WSJ] China’s Riskiest Form of State Borrowing Enjoys a New Boom
[CNBC] China is reportedly reluctant to agree to a broad US trade deal with talks set to restart
[CNBC] UAW says GM labor talks ‘have taken a turn for the worse’
[Reuters] Low inflation? Nothing to worry about, Fed's George says
[Reuters] Chinese soldiers in Hong Kong warn protesters as emergency rules fail to quell unrest
[UK Guardian] Hong Kong emergency law 'marks start of authoritarian rule'
[Bloomberg] China Narrows Scope for Trade Deal With U.S. Ahead of Talks
[Bloomberg] Fed’s George Sees No Need to Ease Unless Slowdown Deepens
[WSJ] Fed Confronts Balance-Sheet Decisions to Curb Money-Market Volatility
[WSJ] China’s Riskiest Form of State Borrowing Enjoys a New Boom
Sunday's News Links
[Reuters] Wall St Week Ahead-Capital spending outlook another worry ahead of earnings
[Reuters] As Fed policymakers comb data, few decisive signals on outlook
[Reuters] UK could move on 'mechanism' of Northern Ireland consent
[Yahoo/Bloomberg] World's Best-Run Pension Funds Say It's Time to Start Worrying
[Reuters] Petrol bombs and tear gas rock Hong Kong, scores arrested for defying mask ban
[WSJ] Fear Overtakes Greed in IPO Market After WeWork Debacle
[WSJ] Steve Cohen’s Hedge Fund, Point72, Tiger Global Hit in September
[FT] Can Donald Trump force the Federal Reserve to cut rates?
[Reuters] As Fed policymakers comb data, few decisive signals on outlook
[Reuters] UK could move on 'mechanism' of Northern Ireland consent
[Yahoo/Bloomberg] World's Best-Run Pension Funds Say It's Time to Start Worrying
[Reuters] Petrol bombs and tear gas rock Hong Kong, scores arrested for defying mask ban
[WSJ] Fear Overtakes Greed in IPO Market After WeWork Debacle
[WSJ] Steve Cohen’s Hedge Fund, Point72, Tiger Global Hit in September
[FT] Can Donald Trump force the Federal Reserve to cut rates?
Saturday, October 5, 2019
Saturday's News links
[Reuters] As Fed policymakers comb data, few decisive signals on outlook
[Reuters] Spain's Sanchez says he will defend food sector against 'unacceptable' U.S. tariffs
[BBC] North Korea and US nuclear talks break down in less than a day
[Reuters] Hong Kong goes quiet as subway, shops close after night of violence
[Reuters] Erdogan says Turkey to launch military operation in northeast Syria
[WSJ] Boris Johnson’s Irish Border Plan Leaves Companies Fretting
[Reuters] Spain's Sanchez says he will defend food sector against 'unacceptable' U.S. tariffs
[BBC] North Korea and US nuclear talks break down in less than a day
[Reuters] Hong Kong goes quiet as subway, shops close after night of violence
[Reuters] Erdogan says Turkey to launch military operation in northeast Syria
[WSJ] Boris Johnson’s Irish Border Plan Leaves Companies Fretting
Friday, October 4, 2019
Weekly Commentary: Resurrecting M2
This week’s disappointing ISM reports dominated business headlines: “US Manufacturing Survey Shows Worst Reading in a Decade.” “U.S. Factory Gauge Hits 10-Year Low as World Slowdown Widens.” “U.S. Manufacturers Experience Worst Month Since 2007-2009 Great Recession.” “ISM Services Index Hits Three-Year Low, Missing All Estimates.” “Services Survey Shows Economy is Weaker Than Expected Amid Slowdown Fears.”
A Google news search for recent “money supply” articles yields slim pickings: Apparently, China’s Xinhua news agency is now the go-to source for U.S. money supply insight: “U.S. Fed's M2 Money Stock Rises as Market Bets Another Rate Cut.” Other top results included, “Egypt's M2 Money Supply Rises 11.78% Year-On-Year in August,” and “Serbia's M3 Money Supply Grows 12.3% y/y in August.”
Not that many years ago economists and market analysts followed weekly money supply data with keen interest. Rapid monetary expansion was, after all, indicative of excessive Credit growth and attendant inflationary pressures. Slowing money growth would indicate a tightening of lending conditions or waning demand for Credit. The Federal Reserve and global central bankers duly monitored the monetary aggregates as an indication of the appropriateness of monetary policies. Indeed, money and Credit had been a prime focus since the establishment of central banks. Throughout its history, the Federal Reserve was expected to prudently manage the “money” supply to ensure stable prices.
M2 “money” supply surged $70.2 billion last week, the strongest advance since the week of January 11, 2016. Notable to be sure, but apparently not worthy of a headline or article. Moreover, M2 was up $262 billion in 10-weeks and $575 billion over 22 weeks. The Fed’s weekly H.6 “Money Stock and Debt Measures” report presented a 13-week seasonally-adjusted M2 growth rate of 8.5%.
Let’s focus on the extraordinary $575 billion M2 expansion over the past 22 weeks (that receives zero attention). This was the second strongest (22-week) monetary expansion in U.S. history, trailing only 2011’s “QE2” period (Fed expanded holdings by $600 billion) where M2 expanded as much as $616 billion over 22 weeks. M2 growth peaked at $530 billion (over 22 weeks) in February 2009 during the Federal Reserve’s inaugural QE operation.
Breaking down the recent $575 billion M2 expansion, Currency gained $44 billion and Total Demand Deposits rose $21 billion. Meanwhile, Savings Deposits at Commercial Banks surged $332 billion (Total Savings Deposits up $346bn), with Total Small Time Deposits rising $8 billion. Over this period, Retail Money Fund deposits (included in M2) jumped $103 billion.
The Fed some years back discontinued tabulating a broader “M3” aggregate. It does, however, report Institutional Money Fund deposits, previously a key component of M3. It’s certainly worth highlighting that Institutional Money Funds expanded $256 billion over the past 22 weeks, a 32% annualized growth rate. Combining M2 and Institutional Money Funds, growth in this aggregate reached $831 billion over the past 22 weeks (to $17.666 TN), a blistering 11.9% annualized growth rate.
In last week’s analysis of the Fed’s Q2 Z.1 report, I noted the strong pickup in Bank lending (Q2 6.8% annualized) along with the notable $710 billion nine-month surge in the “repo” market (Federal Funds and Securities Repurchase Agreements). It’s no coincidence that these developments corresponded with rapid growth in both commercial bank savings deposits and institutional money fund assets, along with the collapse in Treasury and corporate bond yields (surge in prices).
September 30 – Financial Times (Joe Rennison): “Companies around the world sold a record amount of bonds last month, taking advantage of low borrowing costs fueled by investors’ frenzied search for yield. September tends to be a busy period for the bond market… That trend was amplified this year by a global rally in government bonds in August which lowered interest costs for a host of companies looking to sell debt. A total of $434bn of corporate bonds were sold globally in September, according to… Dealogic. That sum… was about $5bn higher than the previous high of March 2017. ‘It’s very attractive for issuers coming into the market right now,’ said Monica Erickson, a portfolio manager at… DoubleLine.”
October 1 – Bloomberg (Finbarr Flynn and Hannah Benjamin): “Companies globally sold a record amount of bonds in September as investors hungry for yield poured into debt, betting that major central banks can keep the global economy out of a recession… September’s new U.S. investment-grade debt supply reached $158 billion, making it the third-largest month ever for issuance. It was a month for the record books: an unprecedented 130 issuers tapped debt capital markets after a frenzied start that made the first week the busiest market participants had seen in their careers.”
September 30 – The Bond Buyer (Aaron Weitzman): “Municipal bond volume continues to accelerate, closing out the month of September 39.1% higher and the quarter 17.8% higher than a year earlier, as issuers flocked to market with taxable deals. September volume rose to $35.38 billion of municipal bonds sold in 894 transactions…”
I have posited that a bond market “melt-up” was instrumental in what has been a period of extraordinary Monetary Disorder. A weakening global economic backdrop along with escalating trade war risks and fragile markets spurred a dovish U-turn by the Fed, ECB and global central banks generally. The global yield collapse was largely fueled by a combination of speculative excess and risk market hedging. Such strategies have focused on safe haven sovereign and investment-grade corporate debt as instruments that would see inflating prices in the event of a “risk off” backdrop and resulting central bank rates cuts and QE.
The surge in speculative leverage – exemplified by enormous “repo” market expansion – created a self-reinforcing surge in marketplace liquidity, of which a portion flowed into the “money” supply aggregates (notably through the expansion of commercial bank saving deposits and institutional money fund assets). Moreover, it’s my view that the abrupt September reversal of market yields and the prospect of end-of-quarter liquidity challenges spurred a reversal of some levered holdings that quickly manifested into a liquidity shortage and spike in overnight funding costs.
Federal Reserve Credit jumped $83.9 billion last week to $3.893 TN, the strongest weekly Fed balance sheet expansion since March 2009. This pushed four-week Federal Reserve liquidity operations to $170.5 billion – taking Fed Credit to the highest level since the week of April 17th.
I’ll assume at least some of this expansion will be reversed as quarter-end positioning normalizes in the marketplace (leverage reversed for reporting purposes is reestablished). Yet I view the eruption of acute repo market instability as an urgent signal of mounting financial market instability. The Fed seemingly agrees.
October 4 – Financial Times (Joe Rennison, Colby Smith and Brendan Greeley): “The Federal Reserve Bank of New York will extend its intervention in the repo market into November…, soothing concerns about a re-emergence of the cash crunch that sent short-term interest rates soaring in September. The New York Fed first stepped into the repo market… after the cost of borrowing money overnight quadrupled to 10% last month. It intensified its efforts heading into the end of September to ward off potential strain at the end of the third quarter… The markets arm of the US central bank announced that it would continue to inject $75bn in overnight loans into the repo market every day through to November 4. In addition, it would conduct a series of term-repo operations — loans ranging from six to 15 days — to maintain an additional $140bn in the market until early November. The announcement has helped ease traders’ concerns of a potential shortage of cash re-emerging when close to $140bn in existing two-week term repo loans rolls off next week.”
U.S. equities reversed higher after Friday’s “Goldilocks” jobs report. But the rally gained momentum on the New York Fed’s “repo” extension announcement. Late Friday afternoon, Cleveland Fed President Loretta Mester reiterated a comment made by her colleagues: “The Fed’s decision on reserve supplies isn’t about QE.” The problem is that Fed liquidity operations, and the resulting expansion in Fed Credit, is very much about backstopping the markets. Markets are not bothered by a “QE” or “overnight repo operation” label. Rather, the Fed’s aggressive measures further crystallize the market view the Fed (and global central bankers) has little tolerance for fledgling market instability. For good reason, markets expect central banks to respond with overwhelming force to any issue that risks unleashing latent Crisis Dynamics.
At 3.5%, the U.S. unemployment rate in September hit a 50-year low. Money supply is booming. It was the third-largest month ever for investment-grade debt issuance. The St. Louis Fed’s weekly forecast for Q3 GDP growth is up to 3.12%, which would be the strongest reading since Q3 ’18. With the tailwind of low mortgage rates, housing markets are gaining momentum. New Home Sales are running at the strongest pace since 2007. August Existing Home Sales were reported at the strongest pace since March 2018. Weekly mortgage purchase applications have recently been running about 10% above the year ago level. And at a 17.19 million annualized pace, auto sales held up solidly in September. The consumer is working, earning, borrowing and spending.
This week’s ISMs – manufacturing and non-manufacturing – both significantly missed estimates. Manufacturing is undoubtedly weak, with attention focused on the much larger non-manufacturing sector for indications of a broadening slowdown. At 52.6, the ISM Non-Manufacturing index is still expanding.
The implied yield on January Fed funds futures declined 10.5 bps this week to 1.47%, boosting the two-week drop to 16 bps. This implies market expectations for 36 bps of additional rate cuts by January. Markets are now pricing in a 73% probability of a cut at the Fed’s October 30th meeting (down from Thursday’s 85%). Two-year Treasury yields sank 23 bps this week to 1.41%. European bank stocks were slammed 4.7%. Bank stocks were down 3.0% in the U.S. and 2.7% in Japan.
A Google news search for recent “money supply” articles yields slim pickings: Apparently, China’s Xinhua news agency is now the go-to source for U.S. money supply insight: “U.S. Fed's M2 Money Stock Rises as Market Bets Another Rate Cut.” Other top results included, “Egypt's M2 Money Supply Rises 11.78% Year-On-Year in August,” and “Serbia's M3 Money Supply Grows 12.3% y/y in August.”
Not that many years ago economists and market analysts followed weekly money supply data with keen interest. Rapid monetary expansion was, after all, indicative of excessive Credit growth and attendant inflationary pressures. Slowing money growth would indicate a tightening of lending conditions or waning demand for Credit. The Federal Reserve and global central bankers duly monitored the monetary aggregates as an indication of the appropriateness of monetary policies. Indeed, money and Credit had been a prime focus since the establishment of central banks. Throughout its history, the Federal Reserve was expected to prudently manage the “money” supply to ensure stable prices.
M2 “money” supply surged $70.2 billion last week, the strongest advance since the week of January 11, 2016. Notable to be sure, but apparently not worthy of a headline or article. Moreover, M2 was up $262 billion in 10-weeks and $575 billion over 22 weeks. The Fed’s weekly H.6 “Money Stock and Debt Measures” report presented a 13-week seasonally-adjusted M2 growth rate of 8.5%.
Let’s focus on the extraordinary $575 billion M2 expansion over the past 22 weeks (that receives zero attention). This was the second strongest (22-week) monetary expansion in U.S. history, trailing only 2011’s “QE2” period (Fed expanded holdings by $600 billion) where M2 expanded as much as $616 billion over 22 weeks. M2 growth peaked at $530 billion (over 22 weeks) in February 2009 during the Federal Reserve’s inaugural QE operation.
Breaking down the recent $575 billion M2 expansion, Currency gained $44 billion and Total Demand Deposits rose $21 billion. Meanwhile, Savings Deposits at Commercial Banks surged $332 billion (Total Savings Deposits up $346bn), with Total Small Time Deposits rising $8 billion. Over this period, Retail Money Fund deposits (included in M2) jumped $103 billion.
The Fed some years back discontinued tabulating a broader “M3” aggregate. It does, however, report Institutional Money Fund deposits, previously a key component of M3. It’s certainly worth highlighting that Institutional Money Funds expanded $256 billion over the past 22 weeks, a 32% annualized growth rate. Combining M2 and Institutional Money Funds, growth in this aggregate reached $831 billion over the past 22 weeks (to $17.666 TN), a blistering 11.9% annualized growth rate.
In last week’s analysis of the Fed’s Q2 Z.1 report, I noted the strong pickup in Bank lending (Q2 6.8% annualized) along with the notable $710 billion nine-month surge in the “repo” market (Federal Funds and Securities Repurchase Agreements). It’s no coincidence that these developments corresponded with rapid growth in both commercial bank savings deposits and institutional money fund assets, along with the collapse in Treasury and corporate bond yields (surge in prices).
September 30 – Financial Times (Joe Rennison): “Companies around the world sold a record amount of bonds last month, taking advantage of low borrowing costs fueled by investors’ frenzied search for yield. September tends to be a busy period for the bond market… That trend was amplified this year by a global rally in government bonds in August which lowered interest costs for a host of companies looking to sell debt. A total of $434bn of corporate bonds were sold globally in September, according to… Dealogic. That sum… was about $5bn higher than the previous high of March 2017. ‘It’s very attractive for issuers coming into the market right now,’ said Monica Erickson, a portfolio manager at… DoubleLine.”
October 1 – Bloomberg (Finbarr Flynn and Hannah Benjamin): “Companies globally sold a record amount of bonds in September as investors hungry for yield poured into debt, betting that major central banks can keep the global economy out of a recession… September’s new U.S. investment-grade debt supply reached $158 billion, making it the third-largest month ever for issuance. It was a month for the record books: an unprecedented 130 issuers tapped debt capital markets after a frenzied start that made the first week the busiest market participants had seen in their careers.”
September 30 – The Bond Buyer (Aaron Weitzman): “Municipal bond volume continues to accelerate, closing out the month of September 39.1% higher and the quarter 17.8% higher than a year earlier, as issuers flocked to market with taxable deals. September volume rose to $35.38 billion of municipal bonds sold in 894 transactions…”
I have posited that a bond market “melt-up” was instrumental in what has been a period of extraordinary Monetary Disorder. A weakening global economic backdrop along with escalating trade war risks and fragile markets spurred a dovish U-turn by the Fed, ECB and global central banks generally. The global yield collapse was largely fueled by a combination of speculative excess and risk market hedging. Such strategies have focused on safe haven sovereign and investment-grade corporate debt as instruments that would see inflating prices in the event of a “risk off” backdrop and resulting central bank rates cuts and QE.
The surge in speculative leverage – exemplified by enormous “repo” market expansion – created a self-reinforcing surge in marketplace liquidity, of which a portion flowed into the “money” supply aggregates (notably through the expansion of commercial bank saving deposits and institutional money fund assets). Moreover, it’s my view that the abrupt September reversal of market yields and the prospect of end-of-quarter liquidity challenges spurred a reversal of some levered holdings that quickly manifested into a liquidity shortage and spike in overnight funding costs.
Federal Reserve Credit jumped $83.9 billion last week to $3.893 TN, the strongest weekly Fed balance sheet expansion since March 2009. This pushed four-week Federal Reserve liquidity operations to $170.5 billion – taking Fed Credit to the highest level since the week of April 17th.
I’ll assume at least some of this expansion will be reversed as quarter-end positioning normalizes in the marketplace (leverage reversed for reporting purposes is reestablished). Yet I view the eruption of acute repo market instability as an urgent signal of mounting financial market instability. The Fed seemingly agrees.
October 4 – Financial Times (Joe Rennison, Colby Smith and Brendan Greeley): “The Federal Reserve Bank of New York will extend its intervention in the repo market into November…, soothing concerns about a re-emergence of the cash crunch that sent short-term interest rates soaring in September. The New York Fed first stepped into the repo market… after the cost of borrowing money overnight quadrupled to 10% last month. It intensified its efforts heading into the end of September to ward off potential strain at the end of the third quarter… The markets arm of the US central bank announced that it would continue to inject $75bn in overnight loans into the repo market every day through to November 4. In addition, it would conduct a series of term-repo operations — loans ranging from six to 15 days — to maintain an additional $140bn in the market until early November. The announcement has helped ease traders’ concerns of a potential shortage of cash re-emerging when close to $140bn in existing two-week term repo loans rolls off next week.”
U.S. equities reversed higher after Friday’s “Goldilocks” jobs report. But the rally gained momentum on the New York Fed’s “repo” extension announcement. Late Friday afternoon, Cleveland Fed President Loretta Mester reiterated a comment made by her colleagues: “The Fed’s decision on reserve supplies isn’t about QE.” The problem is that Fed liquidity operations, and the resulting expansion in Fed Credit, is very much about backstopping the markets. Markets are not bothered by a “QE” or “overnight repo operation” label. Rather, the Fed’s aggressive measures further crystallize the market view the Fed (and global central bankers) has little tolerance for fledgling market instability. For good reason, markets expect central banks to respond with overwhelming force to any issue that risks unleashing latent Crisis Dynamics.
At 3.5%, the U.S. unemployment rate in September hit a 50-year low. Money supply is booming. It was the third-largest month ever for investment-grade debt issuance. The St. Louis Fed’s weekly forecast for Q3 GDP growth is up to 3.12%, which would be the strongest reading since Q3 ’18. With the tailwind of low mortgage rates, housing markets are gaining momentum. New Home Sales are running at the strongest pace since 2007. August Existing Home Sales were reported at the strongest pace since March 2018. Weekly mortgage purchase applications have recently been running about 10% above the year ago level. And at a 17.19 million annualized pace, auto sales held up solidly in September. The consumer is working, earning, borrowing and spending.
This week’s ISMs – manufacturing and non-manufacturing – both significantly missed estimates. Manufacturing is undoubtedly weak, with attention focused on the much larger non-manufacturing sector for indications of a broadening slowdown. At 52.6, the ISM Non-Manufacturing index is still expanding.
The implied yield on January Fed funds futures declined 10.5 bps this week to 1.47%, boosting the two-week drop to 16 bps. This implies market expectations for 36 bps of additional rate cuts by January. Markets are now pricing in a 73% probability of a cut at the Fed’s October 30th meeting (down from Thursday’s 85%). Two-year Treasury yields sank 23 bps this week to 1.41%. European bank stocks were slammed 4.7%. Bank stocks were down 3.0% in the U.S. and 2.7% in Japan.
I would tend to somewhat downplay current U.S. economic weakness. These are clearly abnormal times, but it would be atypical for such loose financial conditions not to support economic activity (for now). Global markets are a different story. Myriad co-dependent Bubbles appear more vulnerable by the week – while monetary stimulus and prospects for additional QE only exacerbate excesses along with fragilities. Trade negotiations remain a major wildcard. Increasingly, impeachment proceedings and rancid Washington pandemonium add a layer of complexity upon a highly complex backdrop. Taking it one week at a time, there’s palpable pressure on the administration to make some headway with the Chinese.
For the Week:
In a volatile week, the S&P500 slipped 0.3% (up 17.8% y-t-d), and the Dow declined 0.9% (up 13.9%). The Utilities added 0.2% (up 23.4%). The Banks dropped 3.0% (up 13.3%), and the Broker/Dealers sank 7.2% (up 4.2%). The Transports lost 3.0% (up 9.4%). The S&P 400 Midcaps fell 1.0% (up 14.5%), and the small cap Russell 2000 slumped 1.3% (up 11.3%). The Nasdaq100 advanced 0.9% (up 22.5%). The Semiconductors jumped 2.0% (up 36.3%). The Biotechs increased 0.4% (down 0.1%). With bullion gaining $8, the HUI gold index added 0.3% (up 31.6%).
Three-month Treasury bill rates ended the week at 1.66%. Two-year government yields sank 23 bps to 1.41% (down 108bps y-t-d). Five-year T-note yields dropped 22 bps to 1.35% (down 116bps). Ten-year Treasury yields fell 15 bps to 1.53% (down 116bps). Long bond yields declined 11 bps to 2.02% (down 100bps). Benchmark Fannie Mae MBS yields dropped 15 bps to 2.47% (down 103bps).
Greek 10-year yields added a basis point to 1.33% (down 306bps y-t-d). Ten-year Portuguese yields declined three bps to 0.14% (down 158bps). Italian 10-year yields increased one basis point to 0.83% (down 191bps). Spain's 10-year yields declined two bps to 0.13% (down 128bps). German bund yields fell another basis point to negative 0.59% (down 83bps). French yields were unchanged at negative 0.28% (down 99bps). The French to German 10-year bond spread widened one to 31 bps. U.K. 10-year gilt yields dropped six bps to 0.44% (down 83bps). U.K.'s FTSE equities index sank 3.6% (up 6.4% y-t-d).
Japan's Nikkei Equities Index fell 2.1% (up 7.0% y-t-d). Japanese 10-year "JGB" yields declined three bps to negative 0.21% (down 21bps y-t-d). France's CAC40 dropped 2.7% (up 16.0%). The German DAX equities index sank 3.0% (up 13.8%). Spain's IBEX 35 equities index slumped 2.4% (up 4.9%). Italy's FTSE MIB index fell 2.5% (up 17.2%). EM equities were mostly lower. Brazil's Bovespa index dropped 2.4% (up 12.7%), while Mexico's Bolsa gained 1.3% (up 4.3%). South Korea's Kospi index declined 1.4% (down 1.0%). India's Sensex equities index sank 3.0% (up 4.4%). China's Shanghai Exchange declined 0.9% (up 16.5%). Turkey's Borsa Istanbul National 100 index lost 1.6% (up 13.4%). Russia's MICEX equities index dropped 2.4% (up 13.6%).
Investment-grade bond funds saw inflows of $733 million, and junk bond funds posted inflows of $198 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates added a basis point to 3.65% (down 106bps y-o-y). Fifteen-year rates declined two bps to 3.14% (down 101bps). Five-year hybrid ARM rates were unchanged at 3.38% (down 63bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down six bps to 3.98% (down 89bps).
Federal Reserve Credit last week surged $83.9bn to $3.892 TN. Over the past year, Fed Credit contracted $253bn, or 6.1%. Fed Credit inflated $1.082 Trillion, or 38%, over the past 360 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $17.1bn last week to $3.441 TN. "Custody holdings" increased $5.3bn y-o-y, or 0.2%.
M2 (narrow) "money" supply surged $70.2bn last week to a record $15.092 TN. "Narrow money" gained $840bn, or 5.9%, over the past year. For the week, Currency increased $2.4bn. Total Checkable Deposits rose $22.3bn, and Savings Deposits jumped $41.5bn. Small Time Deposits dipped $3.4bn. Retail Money Funds gained $7.4bn.
Total money market fund assets jumped $20.2bn to $3.463 TN. Money Funds gained $597bn y-o-y, or 20.8%.
Total Commercial Paper declined $4.7bn to $1.093 TN. CP was down $7.6bn y-o-y, or 0.7%.
Currency Watch:
The U.S. dollar index slipped 0.3% to 98.84 (up 2.8% y-t-d). For the week on the upside, the Brazilian real increased 2.6%, the Japanese yen 0.9%, the Mexican peso 0.9%, the South African rand 0.5%, the New Zealand dollar 0.4%, the euro 0.4%, the British pound 0.3%, the South Korean won 0.3%, the Singapore dollar 0.2% and the Australian dollar 0.1%. On the downside, the Canadian dollar declined 0.5%, the Swiss franc 0.5%, the Swedish krona 0.5% and the Norwegian krone 0.2%. The Chinese renminbi declined 0.36% versus the dollar this week (down 3.77% y-t-d).
Commodities Watch:
September 29 – Reuters (Matt Spetalnick and Timothy Gardner): “Saudi Arabia’s crown prince warned… that oil prices could spike to ‘unimaginably high numbers’ if the world doesn’t come together to deter Iran, but said he preferred a political solution to a military one… ‘If the world does not take a strong and firm action to deter Iran, we will see further escalations that will threaten world interests,” Prince Mohammed, known as MbS, said… ‘Oil supplies will be disrupted and oil prices will jump to unimaginably high numbers that we haven’t seen in our lifetimes.’”
The Bloomberg Commodities Index declined 0.5% this week (up 1.2% y-t-d). Spot Gold rallied 0.5% to $1,505 (up 17.3%). Silver slipped 0.2% to $17.625 (up 13.4%). WTI crude fell $3.10 to $52.81 (up 16%). Gasoline sank 4.7% (up 19%), and Natural Gas dropped 2.2% (down 20%). Copper lost 1.3% (down 3%). Wheat increased 0.7% (down 3%). Corn jumped 3.6% (up 3%).
Market Instability Watch:
October 1 – Reuters (Kate Duguid): “The New York Federal Reserve… awarded $54.85 billion to primary dealers at an operation of overnight repurchase agreements in an effort to maintain the federal funds rate within its target range of 1.75%-2.00%. Tuesday’s amount was smaller than the $63.5 billion in overnight repos the regional central bank awarded on Monday…”
October 2 – Bloomberg (Emily Barrett): “Last month’s surge in overnight funding rates arose from a perfect storm. Other squalls may arise before year-end... Some of the catalysts that whipped markets up last month will be back, according to Thomas Simons, money market economist at Jefferies. Another $381 billion of Treasury auctions are on the calendar for the fourth quarter -- though that’s smaller than the flurry of auctions that fueled repo turmoil in mid-September. Treasury cash balances will continue to rise, and more corporate taxes will be paid. Add to this a couple of long weekends, which can stir volatility. Then there are wild cards: the U.K.’s Oct. 31 deadline to leave the European Union and the risk of other geopolitical strife.”
September 30 – Bloomberg (Masaki Kondo, Kazumi Miura, and Emily Barrett): “Bond traders just had an inkling of what it could be like when central banks and pension funds aren’t there to support them. Japan’s bond futures tumbled by the most since 2016, triggering margin calls for investors, after the country’s worst 10-year debt auction in three years. Japanese government bond yields climbed and the curve steepened, while the sell-off also spilled into Treasuries and European debt even as euro-area data showed inflation remains lackluster. Behind the sudden collapse in JGBs lies the prospect that the Bank of Japan may slash bond purchases in October, and an announcement that the Government Pension Investment Fund is pivoting toward buying more foreign debt.”
September 30 – Bloomberg (Brandon Kochkodin): “Negative interest rates have quite literally broken one of the pillars of modern finance. As economists and central bankers weigh the pros and cons of sub-zero rates and their impact on the world, traders have been contending with a rather more mundane, but fundamental issue: How to price risk on trillions of dollars of financial instruments like interest-rate swaps when their complex mathematical models simply don’t work with negative numbers. Out are certain variations of the Black-Scholes model, the framework that allowed derivatives to flourish in the past four decades. In are a hodgepodge of approximations and workarounds, including one dating to the 19th century.”
Trump Administration Watch:
September 30 – Bloomberg (Shawn Donnan, Jenny Leonard and Saleha Mohsin): “The Trump administration has issued a partial -- and qualified -- denial to the revelation that it is discussing imposing limits on U.S. investments in Chinese companies and financial markets as China vowed to continue opening its markets to foreign investment. Bloomberg… reported that Larry Kudlow… was leading deliberations inside the White House over what some hawks have labeled a potential ‘financial decoupling’ of the world’s two largest economies. The options discussed have included forcing a delisting of Chinese companies from U.S. exchanges, imposing limits on investments in Chinese markets by U.S. government pension funds and putting caps on the value of Chinese companies included in indexes managed by U.S. firms…”
September 30 – Bloomberg (Shawn Donnan): “News that the White House is considering broadening its trade war with China into a financial flow war and discussing controls on capital coursing between the U.S. and China shook financial markets on Friday. So it is worth pointing out the context. What unnerved markets about the internal deliberations… was that they seemed like an extreme departure from the U.S.’s longstanding free-market orthodoxy. U.S. officials have for decades advocated opening financial markets around the world to capital. That the discussion is even taking place, therefore, is eye-popping for many in the world of international finance. Yet the Trump administration’s deliberations are not happening in isolation. Some of the loudest backers of the tariffs… imposed also advocate capital controls aimed at both managing what they see as damaging currency imbalances and limiting China’s access to America’s financial might.”
October 2 – Reuters (Tim Hepher, Philip Blenkinsop and David Lawder): “The United States… said it would slap 10% tariffs on European-made Airbus planes and 25% duties on French wine, Scotch and Irish whiskies, and cheese from across the continent as punishment for illegal EU aircraft subsidies. The announcement came after the World Trade Organization gave Washington a green light to impose tariffs on $7.5 billion worth of EU goods annually in the long-running case, a move that threatens to ignite a tit-for-tat transatlantic trade war.”
October 3 – Associated Press (Lorne Cook and Barry Hatton): “The European Union warned… it will retaliate against the U.S. decision to slap tariffs on a range of the bloc’s exports - from cheese to wine - that could cause job losses in Europe and price increases for Americans. The Trump administration’s decision to put new import taxes on EU goods worth $7.5 billion opened a new chapter in the global trade wars that are heightening fears of a global recession. The latest tariffs target large aircraft but also many typical European products such as olives, whiskey, wine, cheese and yogurt. They will take effect Oct. 18 and amount to a 10% tax on EU aircraft and steep 25% rate on everything else.”
October 1 – Reuters (Susan Heavey and Jason Lange): “U.S. President Donald Trump once again lashed out at the Federal Reserve…, this time in the wake of weak data on the manufacturing sector, saying the central bank has kept interest rates ‘too high’ and that a strong dollar is hurting U.S. factories. ‘As I predicted, Jay Powell and the Federal Reserve have allowed the Dollar to get so strong, especially relative to ALL other currencies, that our manufacturers are being negatively affected. Fed Rate too high. They are their own worst enemies, they don’t have a clue. Pathetic!’ Trump wrote.”
Federal Reserve Watch:
September 30 – Financial Times (Brendan Greeley, Laura Noonan, Joe Rennison, Robert Armstrong and Colby Smith): “The Federal Reserve is looking at whether regulation played a role in the sudden rise in short-term interest rates that rocked markets last month, when the largest US banks, despite being flush with cash reserves, did not lend them out overnight as expected. The central bank has indicated that it is focused on the concentration of reserves among a few banks and said it will consider the question at its next monetary policy meeting on October 29-30. According to policymakers, traders and bank executives, that concentration contributed to the rise in two ways. Larger banks have to meet higher regulatory standards for cash, particularly for same-day liquidity that only reserves can provide. And larger banks have different strategies for their own reserve holdings, which may not include lending them out overnight.”
September 29 – Bloomberg (Rich Miller): “They say it’s better to eat organic. But when it comes to the Federal Reserve’s balance sheet, Wall Street is hungering for a lot more. Financial analysts argue that the Fed needs to buy anywhere from about $200 billion to a half a trillion dollars in Treasury securities to bulk up its balance sheet and reduce the risk of money-market turmoil. Such a massive operation would seemingly be far bigger than the ‘organic’ balance sheet growth that many Fed policy makers are currently talking about. It would also be sure to draw comparisons to the quantitative easing programs that the central bank employed during the financial crisis and which President Donald Trump has spoken of approvingly.”
October 1 – Reuters (Balazs Koranyi and Francesco Canepa): “The Federal Reserve has set monetary policy to where it can deliver on its 2% inflation goal and there is scope to raise rates slightly over the next few years if the economy continues to grow, Chicago Fed President Charles Evans said…”
October 3 – Reuters (Jesus Aguado): “The U.S. Federal Reserve continues to enjoy ‘a reasonable amount of independence’ and is focused on its mandate despite criticism of its policy moves by U.S. President Donald Trump, Chicago Federal Reserve Bank President Charles Evans said… ‘People get to criticize you ... (but) what we need to do is to keep our head down and pay attention to our mandated objective’ of employment and inflation, Evans told a conference in Madrid.”
U.S. Bubble Watch:
October 1 – Wall Street Journal (Amara Omeokwe, Paul Hannon and Austen Hufford): “U.S. factory activity contracted for the second straight month in September and hit a 10-year low, triggering fresh concerns about the economy and a broad stock-market decline. The U.S. manufacturing readings were among several data points released Tuesday pointing towards the global impact of the U.S.-China trade war, as trade flows are set to grow this year at the weakest pace since the financial crisis, with rising tariffs and cooling growth. The Institute for Supply Management reported its manufacturing index fell to 47.8 in September, the lowest level since June 2009, from 49.1 the prior month.”
October 3 – Bloomberg (Reade Pickert): “America’s service industries joined manufacturing in taking a big step back last month, fueling concerns that the global slowdown and trade war are weighing more on the broader economy…. The Institute for Supply Management’s non-manufacturing index dropped 3.8 points to 52.6 in September, the lowest since August 2016 and well below the most pessimistic forecast…Growth in orders and business activity slowed abruptly, while the employment gauge registered its weakest print in more than five years.”
September 30 – Bloomberg (Caleb Mutua and Molly Smith): “The great deleveraging that was supposed to sweep over corporate America is dead. Or, at least, on hold. Blue-chip companies have begun to ramp up borrowing again as central banks globally flood economies with money. Liabilities have reached their highest level relative to income since 2009, according to Morgan Stanley’s analysis of second-quarter data. The number of companies selling investment-grade debt this month through Thursday has surged 63% from the same period last year… Around 40% of investment-grade companies now have obligations that are more consistent with junk ratings, according to Morgan Stanley.”
September 28 – Bloomberg (Jenny Leonard, Shawn Donnan, and Saleha Mohsin): “A U.S. Treasury official said there are no current plans to stop Chinese companies from listing on U.S. exchanges, a day after a report that the Trump administration is discussing ways to limit U.S. investors’ portfolio flows into China. ‘The administration is not contemplating blocking Chinese companies from listing shares on U.S. stock exchanges at this time,’ Treasury spokeswoman Monica Crowley said…”
September 28 – Bloomberg (Crystal Tse and Michael Hytha): “WeWork, Peloton, Endeavor, Poshmark and more just got the message: It’s not a great time to go public. Disappointing initial public offerings and unsettled economic conditions could shut down many IPOs for the rest of the year -- and maybe well into 2020, when the next batch of marquee IPO candidates like Airbnb could meet an even gloomier market and geopolitical environment. The Hollywood agency Endeavor Group Holdings Inc. shelved its IPO… Poshmark Inc., an online resale marketplace for second-hand clothing, is expected to postpone its IPO into next year. Also in flux are a range of stock offerings from e-commerce companies and cybersecurity firms Palantir Technologies Inc., Postmates Inc., and McAfee Inc.”
September 29 – Wall Street Journal (Peter Grant and Keiko Morris): “Turmoil at WeWork is causing the shared-office-space company to all but stop signing new leases, a fresh blow to New York City’s already softening commercial real-estate market. Since We Co. Chief Executive Adam Neumann stepped down…, the company has reversed its rapid growth strategy, looking to slow its expansion, shed head count and assets, and move closer to profitability. That new approach initially included a decision to forgo signing any new leases…”
September 30 – Wall Street Journal (Eliot Brown): “For years, WeWork’s parent company was defined by big spending as it relentlessly pursued rapid growth. Now, in the aftermath of a botched initial public offering attempt and the ouster of co-founder and chief executive Adam Neumann, it is facing a different reality: It needs to stop bleeding cash. On Monday, We Co. said it would file a request with the Securities and Exchange Commission to withdraw its IPO proposal… To cut costs, the company’s new co-CEOs, Sebastian Gunningham and Artie Minson, are planning thousands of job cuts, putting extraneous businesses up for sale and purging some luxuries from the previous CEO, such as a G650ER jet purchased for more than $60 million last year…”
September 29 – Wall Street Journal (Christopher M. Matthews and Rebecca Elliott): “The American shale boom is slowing as innovation plateaus—and just when shale’s importance in global markets has reached new highs following an attack on the heart of Saudi Arabia’s oil infrastructure. U.S. oil production increased by less than 1% during the first six months of the year…, down from nearly 7% growth over the same period last year. Unlike several years ago, when shale production fell due to a global price collapse, the slowdown this year is driven partly by core operational issues, including wells producing less than expected after being drilled too close to one another, and sweet spots running out sooner than anticipated.”
October 2 – CNBC (Diana Olick): “After a rough month for mortgage rates, borrowers saw a sign of hope and pounced: A small dip in the 30-year fixed rate lit a fire under refinances. That pushed total mortgage application volume up 8% for the week, according to the Mortgage Bankers Association’s seasonally adjusted index… Mortgage applications to purchase a home rose just 1% for the week but were 10% higher annually.”
October 1 – Wall Street Journal (Ben Eisen and Adrienne Roberts): “Walk into an auto dealership these days and you might walk out with a seven-year car loan. That means monthly payments that last well past when the brake pads give out and potentially beyond when the car gets traded in for a new one. About a third of auto loans for new vehicles taken in the first half of 2019 had terms of longer than six years, according to… Experian PLC. A decade ago, that number was less than 10%. Car loans that are increasingly stretched out are a pronounced sign that some American middle class buyers can’t afford a middle-class lifestyle.”
October 2 – Bloomberg (Oshrat Carmiel): “Resale prices for Manhattan apartments tumbled the most in seven years, pushed down by buyer demands for discounts in a market swamped with choices. Previously owned condos and co-ops sold for a median of $915,000 in the third quarter, down 8% from a year earlier, appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate reported. It was the first decline in the past 10 quarters and the biggest since the third quarter of 2012. ‘It’s just more signs that the sellers are capitulating,’ Jonathan Miller, president of Miller Samuel, said… ‘The market is going through what could be called a reset.’”
September 30 – Reuters (Sanjana Shivdas): “The U.S. office vacancy rate rose marginally to 16.8% in the third quarter from a year earlier, according to real estate research firm Reis Inc. Of the 79 metropolitan areas covered by Reis, 29 showed a rise in vacancies in the quarter.”
September 29 – Reuters (Richa Naidu and Aishwarya Venugopal): “Fast-fashion retailer Forever 21 filed for bankruptcy late on Sunday, joining a growing list of brick-and-mortar companies that have seen sales hit by the rise of competition from online sellers like Amazon.com Inc and the changing fashion trends dictated by millennial shoppers.”
China Watch:
September 30 – CNBC (Evelyn Cheng): “Chinese President Xi Jinping said… in a speech commemorating the 70th anniversary of the Chinese Communist Party’s rule that no force could sway China’s development. ‘There is no force that can shake the foundation of this great nation,’ Xi said… ‘No force can stop the Chinese people and the Chinese nation forging ahead.’ Xi did not specifically mention any other country by name, and emphasized that China would pursue peaceful development. ‘Long live the great Communist Party of China. And long live the great Chinese People!’ Xi concluded his speech…”
September 29 – Associated Press: “China’s top trade negotiator will lead an upcoming 13th round of talks aimed at resolving a trade war with the United States… Vice Premier Liu He will travel to Washington for the negotiations, Vice Commerce Minister Wang Shouwen said… ‘The two sides should find a solution through equal dialogue in accordance with the principle of mutual respect, equality and mutual benefit,’ Wang said…”
September 30 – Bloomberg (Ben Bartenstein): “The U.S.-China trade war is getting ‘considerably worse’ and comments at the United Nations General Assembly suggest no end in sight, according to Ian Bremmer, …president of Eurasia Group. Chinese officials will be patient, hoping to maintain the status quo while making no serious attempts at a breakthrough deal until after the 2020 U.S. election, Bremmer wrote… He said China’s Foreign Minister Wang Yi’s combative tone suggests a much deeper divide between the world’s two largest economies than six months ago. ‘The two sides are digging in and it’s gotten considerably worse in the past weeks,’ Bremmer said.”
September 29 – Reuters (Stella Qiu and Ryan Woo): “China’s factory activity unexpectedly expanded at the fastest pace in 19 months in September as plants ramped up production and new orders rose, …suggesting a modest recovery in the manufacturing sector from 50.4 in August, marking the second straight month of expansion.”
September 30 – Wall Street Journal (Shen Hong): “China is snapping up stakes in private companies at a record rate… The investments mark a reversal after decades in which state-owned enterprises have shrunk in importance, as reflected in measures such as their share of the workforce or asset ownership. Since China’s public-sector companies are typically less efficient or innovative than their private rivals, the shopping spree could lead to a fresh drag on growth. Private enterprises are in a weaker position because they have comparatively poorer access to cheap bank loans and other types of financing, and have also been squeezed by Beijing’s moves to reduce pollution and overproduction… In total, state-backed buyers bought 47 stakes in listed private companies from January through June, according to Fitch…. That compares with 52 deals in all of 2018.”
September 30 – Wall Street Journal (Nathaniel Taplin): “Deng Xiaoping, who launched China’s economic reforms, famously said that it was fine for some people to get rich first. As long as everyone got rich eventually, it was a price worth paying for the communist leader. That narrative, call it the original Chinese dream, was borne out for a long time. China’s opening to the world generated many millionaires and billionaires but also remade China overall into an upper-middle-income society. There are increasing signs, however, that those Chinese who haven’t yet gotten rich will face a far harder time doing so in the future. Following steep falls in the early 2010s, inequality is rising again while real income growth has flatlined… Two subtle changes in China’s economy tell the story. Following a long fall from 2008 to 2015, China’s Gini Coefficient, a measure of income inequality, has begun rising sharply again. Second, since 2016 housing prices have mostly grown much faster than incomes, the opposite of the situation from 2011 to 2015.”
October 2 – New York Times (Alexandra Stevenson): “Forty years after China began its near-miraculous run as the world’s most powerful economic growth engine, its people are experiencing something new and unsettling: a feeling that the best times may be behind them. The Chinese economy is slowing, and the cost of living is rising. The trade war with the United States shows no sign of ending. Wage growth is sluggish. More young people are chasing fewer job prospects. Chinese consumers, who have become more cautious over the past year, are now staging a broad retreat. They are buying fewer cars, smartphones and appliances. They are going to the movies less and taking fewer trips abroad. They would rather stick their money in the bank. For China’s young people, who have never experienced a prolonged slump in their lives, the shift is especially stark.”
October 1 – Reuters (Michael Martina): “China’s military… showed off new equipment at a parade in central Beijing to mark 70 years since the founding of the People’s Republic, including hypersonic-glide missiles that experts say could be difficult for the United States to counter… As expected, China unveiled new unmanned aerial vehicles (UAVs) and showcased its advancing intercontinental and hypersonic missiles, designed to attack the aircraft carriers and bases that undergird U.S. military strength in Asia. A state television announcer called the missile arsenal a ‘force for realizing the dream of a strong nation and strong military.’”
September 29 – Bloomberg (Shirley Zhao): “China is reeling out a string of patriotic films as the Communist Party prepares to celebrate 70 years in power amid challenges to its authority from the unrest in Hong Kong and an economy weakened by the trade war. At least three movies featuring the accomplishments of ordinary Chinese opened in mainland theaters Monday, the eve of the 70th anniversary of the founding of the People’s Republic of China.”
October 2 – Reuters (Clare Jim and Felix Tam): “Hong Kong’s government is expected to discuss sweeping emergency laws… that would include banning face masks at protests, two sources told Reuters, as the Chinese-ruled territory grapples with an escalating cycle of violence. Authorities have already loosened guidelines on the use of force by police…”
September 29 – New York Times (Peter S. Goodman and Austin Ramzy): “In a part of the world familiar with conflict, dislocation and ruthless ideological extremism, Hong Kong has long beckoned as an oasis of stability. It has prospered on the strength of its proximity to mainland China — close enough to be a base for investors capitalizing on China’s development, and still beyond reach of the authoritarian hand of the Chinese Communist Party. It has served as a bridge between two rival powers nursing mutual suspicions, the United States and China. It is Chinese territory yet governed by a legal system inherited from the West, and intertwined with the global financial system. But now Hong Kong’s status as neutral ground between mainland China and the outside world is being threatened by a pair of momentous confrontations.”
September 29 – Reuters (Echo Wang and Joshua Franklin): “Nasdaq Inc is cracking down on initial public offerings (IPOs) of small Chinese companies by tightening restrictions and slowing down their approval, according to regulatory filings, corporate executives and investment bankers. Nasdaq’s attempt to limit these stock market flotations comes as a growing number of them end up raising most of the capital in their IPO from Chinese sources, rather than from U.S. investors.”
Central Banking Watch:
September 30 – Reuters (Swati Pandey): “Australia’s central bank cut interest rates for the third time this year… in a bid to stimulate a sluggish economy and signaled it was prepared to do more if needed, knocking the local dollar to a one-month low… The Reserve Bank of Australia’s (RBA) quarter-point cut took the cash rate to an all-time low of just 0.75%, leaving little room for more reductions and raising the possibility of unconventional policy easing.”
September 29 – Financial Times (Lionel Barber and Claire Jones): “From his corner office on the 40th floor of the European Central Bank’s gleaming twin tower headquarters in Frankfurt, Mario Draghi sums up how the ECB has been transformed during his presidency. ‘[The building] embodies our values,’ says the 72-year-old Italian, with a touch of pride. ‘Transparency and independence.’ Under Mr Draghi, the ECB has come of age. Alongside the Federal Reserve and the Bank of England, it has developed a formidable arsenal, injecting trillions of euros of stimulus into the eurozone economy… Mr Draghi… has won standing ovations at Brussels summits. In May, President Emmanuel Macron awarded him France’s Commandeur de la Légion d’Honneur, praising him as the heir of Jean Monnet and Robert Schuman, the European project’s founding fathers. Yet for all Mr Draghi’s panache, the region’s economy remains fragile. And there is a growing feeling that his central bank has shouldered too much of the burden and can no longer be the only game in town.”
October 1 – Bloomberg (Piotr Skolimowski and Boris Groendahl): “Bundesbank President Jens Weidmann switched the focus of his opposition against European Central Bank stimulus to Mario Draghi himself, suggesting the president should be more open to different points of view. Responding to Draghi’s recent warning that discord among ECB officials could undermine the effectiveness of monetary policy, the German central-bank chief said an ‘intensive discussion’ about far-reaching measures such as bond-buying is not only normal, but ‘absolutely necessary.’ ‘The Austrian philosopher Karl Popper once stated that only a critical discourse could give us the maturity to consider an idea from many different perspectives and to judge it correctly… United in diversity’ is more than the motto of the European Union, which for some may seem abstract. It’s also the concrete mission to approach each other and bring people together.’”
Europe Watch:
October 3 - Bloomberg (Piotr Skolimowski): “The euro-area economy stagnated at the end of the third quarter, held back by an industrial recession and a sharper-than-expected slowdown in services. While the slump still remains broadly centered on manufacturing, the measure for services dropped last month to the lowest since January after being revised down from an initial estimate. If that’s a sign that the weakness is spreading, it’s a worrying development for the euro-area economy. A separate report showed U.K. services unexpectedly shrank, posting the weakest index reading since the Brexit referendum in 2016.”
October 3 - Bloomberg (Fergal O'Brien): “Germany’s economic woes are becoming more pronounced, with a sharp slowdown in services suggesting the pain from its industrial crisis is spreading. While the weakness is still largely centered on manufacturing, a downward revision to services in September adds to the negative news coming from Europe’s largest economy. IHS Markit said the figures mean a technical recession ‘now looks to be all but confirmed.’”
EM Watch:
September 30 – Bloomberg (Rahul Satija): “Mounting debt failures in India have been catching rating companies off guard, underscoring continued challenges a year after the landmark failure of shadow bank IL&FS increased scrutiny of the industry. Defaults at companies including Dewan Housing Finance Corp., Cox & Kings Ltd. and Altico Capital India Ltd. have occurred even as their long-term ratings indicated very low to moderate risk of non-payment. ‘Raters have not been able to detect stress in time,’ said Ashutosh Khajuria, chief financial officer at Federal Bank Ltd. ‘Cutting credit profiles after the defaults is no rocket science.’”
October 2 – Reuters (Nupur Anand): “Private-sector lender Yes Bank’s Chief Executive Officer Ravneet Gill assured investors on Thursday that the bank remains on solid financial footing, sending its stock as much as 25% higher. His remarks come after the stock plunged nearly 23% on Tuesday as fraud allegations against a housing finance company that Yes Bank has exposure to, spooked investors.”
September 30 – Reuters (Davide Barbuscia): “…Fitch downgraded Saudi Arabia's credit rating to A from A+…, citing rising geopolitical and military tensions in the Gulf following an attack on its oil facilities and a deterioration of the kingdom’s fiscal position. The Saudi finance ministry said it was disappointed by the ‘swift’ downgrade and urged Fitch to reconsider it, arguing the move did not reflect the kingdom's response to the Sept. 14 attack or its capacity to handle adversity.”
Japan Watch:
September 30 – Bloomberg (Chikako Mogi): “The Bank of Japan signaled potential deep cuts in bond purchases in October, taking what could be its biggest step yet to steepen the yield curve. The central bank slashed the purchase ranges for four major maturities, indicating it may even stop buying debt of more than 25 years… It sought to anchor yields from the one-to-three year zone by raising purchases in a regular operation earlier in the day and lifting the purchase band for the sector in October. Governor Haruhiko Kuroda has repeatedly expressed concern about an excessive flattening of the yield curve… A more aggressive stance on cuts to buying has taken hold as it became clearer that reducing purchases needn’t immediately lead to strengthening of the yen.”
September 30 – Reuters (Tetsushi Kajimoto): “Japan rolled out a twice-delayed increase in the sales tax to 10% from 8% on Tuesday, a move that is seen as critical for fixing the country’s tattered finances but that could tip the economy into recession by dampening consumer sentiment.”
October 2 – Reuters (Tetsushi Kajimoto): “A Bank of Japan board member with a casting vote on policy decisions said the central bank must consider ‘preventive steps’ against economic risks, a sign its nine-member board may be tilting toward further easing as global pressures intensify. …Yukitoshi Funo - who has consistently voted with the majority of the nine-member board and holds a neutral stance - stressed the BOJ’s resolve to act without hesitation if economic hazards increase.”
Global Bubble Watch:
October 3 – Bloomberg Businessweek (Davide Scigliuzzo, Kelsey Butler, and Sally Bakewell): “Private equity managers won the financial crisis. A decade since the world economy almost came apart, big banks are more heavily regulated and scrutinized. Hedge funds… have mostly lost their flair. But the firms once known as leveraged buyout shops are thriving. Almost everything that’s happened since 2008 has tilted in their favor. Low interest rates to finance deals? Check. A friendly political climate? Check. A long line of clients? Check. The PE industry, which runs funds that can invest outside public markets, has trillions of dollars in assets under management. In a world where bonds are paying next to nothing… many big investors are desperate for the higher returns PE managers seem to be able to squeeze from the markets. The business has made billionaires out of many of its founders. Funds have snapped up businesses from pet stores to doctors’ practices to newspapers. PE firms may also be deep into real estate, loans to businesses, and startup investments—but the heart of their craft is using debt to acquire companies and sell them later.”
September 30 – Reuters (Noel Randewich): “Major U.S. fund managers have tens of billion of dollars at stake in some of the most popular Chinese stocks on Wall Street, exposing them to potential losses should the White House move to delist Chinese firms from U.S. exchanges. White House trade adviser Peter Navarro… dismissed reports that the Trump administration was considering delisting Chinese companies from U.S. stock exchanges as ‘fake news’…”
September 30 – Bloomberg (Katrina Nicholas, Matt Turner and Lucca de Paoli): “The risk of a property bubble in the euro zone surged last year as ultra-low interest rates helped drive up house prices. Munich is now the city most vulnerable to a property bubble, according to UBS Group AG’s annual Real Estate Bubble Index. Frankfurt and Paris are increasingly in danger of prices becoming unsustainable, even as some of the priciest cities around the world cool... For the first time in four years, London is no longer regarded as dangerously overvalued.”
Fixed-Income Bubble Watch:
October 1 – Bloomberg (Amanda Albright): “An economically struggling U.S. territory. A government-run electricity provider facing potential insolvency. A debate among public officials about whether debts are too burdensome to pay. That’s the situation in the U.S. Virgin Islands, where the power agency is contending with a financial squeeze that echoes what happened in Puerto Rico in the run up to that government’s record-setting bankruptcy. The uncertainty led Moody’s… on Sept. 23 to downgrade the most senior Virgin Islands Water and Power Authority bonds to eight steps below investment grade, indicating a high likelihood of default.”
Leveraged Speculation Watch:
October 2 – Bloomberg (Lisa Lee): “It’s a marriage between two of Wall Street’s hottest products. Collateralized loan obligations -- typically chock-full of broadly-syndicated debt -- are increasingly being stuffed with private loans made to highly leveraged medium-sized companies with limited access to bank financing. Known as middle-market CLOs, the asset class has ballooned to $57 billion, from just $20 billion six years ago. Five new entrants this year… suggest issuance is only set to increase. The frenzied growth is another example of how banks, insurance companies and pension funds continue to reach for higher-paying securities in the face of almost $15 trillion of negative-yielding debt around the world. Middle-market CLOs can offer premiums of as much as 200 bps versus their garden-variety peers, in part due to the reduced liquidity that comes with direct lending…”
Geopolitical Watch:
October 2 – Reuters (Vladimir Soldatkin, Dmitry Zhdannikov and Olesya Astakhova): “Washington’s use of the dollar as a political tool is backfiring as more and more countries are reducing their holdings of the greenback and switching to other currencies in trade contracts, Russian President Vladimir Putin said… Putin also said the U.S. was ‘rudely intervening’ in European affairs by objecting to the construction of the Nord Stream gas pipeline.”
October 1 – Reuters (Joyce Lee and Chang-Ran Kim): “North Korea fired what may have been a submarine-launched ballistic missile from off its east coast…, a day after it announced the resumption of talks with the United States on ending its nuclear program. If confirmed, it would be the most provocative test by North Korea since it started the talks with the United States in 2018.”
October 3 – Wall Street Journal (Gordon Lubold and Nancy A. Youssef): “U.S. officials are increasingly concerned that Turkey soon will mount a major incursion into northern Syria and trigger a clash with Kurdish fighters, an action that would likely prompt the Trump administration to remove American forces from Syria to avoid the conflict. Because a U.S. pullout would essentially end the fight against Islamic State there, it could set back ongoing efforts to undercut the group… Both Turkey and the Kurds are allies of the U.S. but are longtime enemies of one another.”
October 2 – Reuters (Ahmed Rasheed and Ahmed Aboulenein): “Iraqi Prime Minister Adel Abdul Mahdi… declared a curfew in Baghdad until further notice after at least seven people were killed and more than 400 were injured during two days of nationwide anti-government protests. Curfews were imposed earlier in three southern cities while elite counter-terrorism troops opened fire on protesters trying to storm Baghdad airport and deployed to the southern city of Nassiriya after gunfights broke out between protesters and security forces…”
For the Week:
In a volatile week, the S&P500 slipped 0.3% (up 17.8% y-t-d), and the Dow declined 0.9% (up 13.9%). The Utilities added 0.2% (up 23.4%). The Banks dropped 3.0% (up 13.3%), and the Broker/Dealers sank 7.2% (up 4.2%). The Transports lost 3.0% (up 9.4%). The S&P 400 Midcaps fell 1.0% (up 14.5%), and the small cap Russell 2000 slumped 1.3% (up 11.3%). The Nasdaq100 advanced 0.9% (up 22.5%). The Semiconductors jumped 2.0% (up 36.3%). The Biotechs increased 0.4% (down 0.1%). With bullion gaining $8, the HUI gold index added 0.3% (up 31.6%).
Three-month Treasury bill rates ended the week at 1.66%. Two-year government yields sank 23 bps to 1.41% (down 108bps y-t-d). Five-year T-note yields dropped 22 bps to 1.35% (down 116bps). Ten-year Treasury yields fell 15 bps to 1.53% (down 116bps). Long bond yields declined 11 bps to 2.02% (down 100bps). Benchmark Fannie Mae MBS yields dropped 15 bps to 2.47% (down 103bps).
Greek 10-year yields added a basis point to 1.33% (down 306bps y-t-d). Ten-year Portuguese yields declined three bps to 0.14% (down 158bps). Italian 10-year yields increased one basis point to 0.83% (down 191bps). Spain's 10-year yields declined two bps to 0.13% (down 128bps). German bund yields fell another basis point to negative 0.59% (down 83bps). French yields were unchanged at negative 0.28% (down 99bps). The French to German 10-year bond spread widened one to 31 bps. U.K. 10-year gilt yields dropped six bps to 0.44% (down 83bps). U.K.'s FTSE equities index sank 3.6% (up 6.4% y-t-d).
Japan's Nikkei Equities Index fell 2.1% (up 7.0% y-t-d). Japanese 10-year "JGB" yields declined three bps to negative 0.21% (down 21bps y-t-d). France's CAC40 dropped 2.7% (up 16.0%). The German DAX equities index sank 3.0% (up 13.8%). Spain's IBEX 35 equities index slumped 2.4% (up 4.9%). Italy's FTSE MIB index fell 2.5% (up 17.2%). EM equities were mostly lower. Brazil's Bovespa index dropped 2.4% (up 12.7%), while Mexico's Bolsa gained 1.3% (up 4.3%). South Korea's Kospi index declined 1.4% (down 1.0%). India's Sensex equities index sank 3.0% (up 4.4%). China's Shanghai Exchange declined 0.9% (up 16.5%). Turkey's Borsa Istanbul National 100 index lost 1.6% (up 13.4%). Russia's MICEX equities index dropped 2.4% (up 13.6%).
Investment-grade bond funds saw inflows of $733 million, and junk bond funds posted inflows of $198 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates added a basis point to 3.65% (down 106bps y-o-y). Fifteen-year rates declined two bps to 3.14% (down 101bps). Five-year hybrid ARM rates were unchanged at 3.38% (down 63bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down six bps to 3.98% (down 89bps).
Federal Reserve Credit last week surged $83.9bn to $3.892 TN. Over the past year, Fed Credit contracted $253bn, or 6.1%. Fed Credit inflated $1.082 Trillion, or 38%, over the past 360 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $17.1bn last week to $3.441 TN. "Custody holdings" increased $5.3bn y-o-y, or 0.2%.
M2 (narrow) "money" supply surged $70.2bn last week to a record $15.092 TN. "Narrow money" gained $840bn, or 5.9%, over the past year. For the week, Currency increased $2.4bn. Total Checkable Deposits rose $22.3bn, and Savings Deposits jumped $41.5bn. Small Time Deposits dipped $3.4bn. Retail Money Funds gained $7.4bn.
Total money market fund assets jumped $20.2bn to $3.463 TN. Money Funds gained $597bn y-o-y, or 20.8%.
Total Commercial Paper declined $4.7bn to $1.093 TN. CP was down $7.6bn y-o-y, or 0.7%.
Currency Watch:
The U.S. dollar index slipped 0.3% to 98.84 (up 2.8% y-t-d). For the week on the upside, the Brazilian real increased 2.6%, the Japanese yen 0.9%, the Mexican peso 0.9%, the South African rand 0.5%, the New Zealand dollar 0.4%, the euro 0.4%, the British pound 0.3%, the South Korean won 0.3%, the Singapore dollar 0.2% and the Australian dollar 0.1%. On the downside, the Canadian dollar declined 0.5%, the Swiss franc 0.5%, the Swedish krona 0.5% and the Norwegian krone 0.2%. The Chinese renminbi declined 0.36% versus the dollar this week (down 3.77% y-t-d).
Commodities Watch:
September 29 – Reuters (Matt Spetalnick and Timothy Gardner): “Saudi Arabia’s crown prince warned… that oil prices could spike to ‘unimaginably high numbers’ if the world doesn’t come together to deter Iran, but said he preferred a political solution to a military one… ‘If the world does not take a strong and firm action to deter Iran, we will see further escalations that will threaten world interests,” Prince Mohammed, known as MbS, said… ‘Oil supplies will be disrupted and oil prices will jump to unimaginably high numbers that we haven’t seen in our lifetimes.’”
The Bloomberg Commodities Index declined 0.5% this week (up 1.2% y-t-d). Spot Gold rallied 0.5% to $1,505 (up 17.3%). Silver slipped 0.2% to $17.625 (up 13.4%). WTI crude fell $3.10 to $52.81 (up 16%). Gasoline sank 4.7% (up 19%), and Natural Gas dropped 2.2% (down 20%). Copper lost 1.3% (down 3%). Wheat increased 0.7% (down 3%). Corn jumped 3.6% (up 3%).
Market Instability Watch:
October 1 – Reuters (Kate Duguid): “The New York Federal Reserve… awarded $54.85 billion to primary dealers at an operation of overnight repurchase agreements in an effort to maintain the federal funds rate within its target range of 1.75%-2.00%. Tuesday’s amount was smaller than the $63.5 billion in overnight repos the regional central bank awarded on Monday…”
October 2 – Bloomberg (Emily Barrett): “Last month’s surge in overnight funding rates arose from a perfect storm. Other squalls may arise before year-end... Some of the catalysts that whipped markets up last month will be back, according to Thomas Simons, money market economist at Jefferies. Another $381 billion of Treasury auctions are on the calendar for the fourth quarter -- though that’s smaller than the flurry of auctions that fueled repo turmoil in mid-September. Treasury cash balances will continue to rise, and more corporate taxes will be paid. Add to this a couple of long weekends, which can stir volatility. Then there are wild cards: the U.K.’s Oct. 31 deadline to leave the European Union and the risk of other geopolitical strife.”
September 30 – Bloomberg (Masaki Kondo, Kazumi Miura, and Emily Barrett): “Bond traders just had an inkling of what it could be like when central banks and pension funds aren’t there to support them. Japan’s bond futures tumbled by the most since 2016, triggering margin calls for investors, after the country’s worst 10-year debt auction in three years. Japanese government bond yields climbed and the curve steepened, while the sell-off also spilled into Treasuries and European debt even as euro-area data showed inflation remains lackluster. Behind the sudden collapse in JGBs lies the prospect that the Bank of Japan may slash bond purchases in October, and an announcement that the Government Pension Investment Fund is pivoting toward buying more foreign debt.”
September 30 – Bloomberg (Brandon Kochkodin): “Negative interest rates have quite literally broken one of the pillars of modern finance. As economists and central bankers weigh the pros and cons of sub-zero rates and their impact on the world, traders have been contending with a rather more mundane, but fundamental issue: How to price risk on trillions of dollars of financial instruments like interest-rate swaps when their complex mathematical models simply don’t work with negative numbers. Out are certain variations of the Black-Scholes model, the framework that allowed derivatives to flourish in the past four decades. In are a hodgepodge of approximations and workarounds, including one dating to the 19th century.”
Trump Administration Watch:
September 30 – Bloomberg (Shawn Donnan, Jenny Leonard and Saleha Mohsin): “The Trump administration has issued a partial -- and qualified -- denial to the revelation that it is discussing imposing limits on U.S. investments in Chinese companies and financial markets as China vowed to continue opening its markets to foreign investment. Bloomberg… reported that Larry Kudlow… was leading deliberations inside the White House over what some hawks have labeled a potential ‘financial decoupling’ of the world’s two largest economies. The options discussed have included forcing a delisting of Chinese companies from U.S. exchanges, imposing limits on investments in Chinese markets by U.S. government pension funds and putting caps on the value of Chinese companies included in indexes managed by U.S. firms…”
September 30 – Bloomberg (Shawn Donnan): “News that the White House is considering broadening its trade war with China into a financial flow war and discussing controls on capital coursing between the U.S. and China shook financial markets on Friday. So it is worth pointing out the context. What unnerved markets about the internal deliberations… was that they seemed like an extreme departure from the U.S.’s longstanding free-market orthodoxy. U.S. officials have for decades advocated opening financial markets around the world to capital. That the discussion is even taking place, therefore, is eye-popping for many in the world of international finance. Yet the Trump administration’s deliberations are not happening in isolation. Some of the loudest backers of the tariffs… imposed also advocate capital controls aimed at both managing what they see as damaging currency imbalances and limiting China’s access to America’s financial might.”
October 2 – Reuters (Tim Hepher, Philip Blenkinsop and David Lawder): “The United States… said it would slap 10% tariffs on European-made Airbus planes and 25% duties on French wine, Scotch and Irish whiskies, and cheese from across the continent as punishment for illegal EU aircraft subsidies. The announcement came after the World Trade Organization gave Washington a green light to impose tariffs on $7.5 billion worth of EU goods annually in the long-running case, a move that threatens to ignite a tit-for-tat transatlantic trade war.”
October 3 – Associated Press (Lorne Cook and Barry Hatton): “The European Union warned… it will retaliate against the U.S. decision to slap tariffs on a range of the bloc’s exports - from cheese to wine - that could cause job losses in Europe and price increases for Americans. The Trump administration’s decision to put new import taxes on EU goods worth $7.5 billion opened a new chapter in the global trade wars that are heightening fears of a global recession. The latest tariffs target large aircraft but also many typical European products such as olives, whiskey, wine, cheese and yogurt. They will take effect Oct. 18 and amount to a 10% tax on EU aircraft and steep 25% rate on everything else.”
October 1 – Reuters (Susan Heavey and Jason Lange): “U.S. President Donald Trump once again lashed out at the Federal Reserve…, this time in the wake of weak data on the manufacturing sector, saying the central bank has kept interest rates ‘too high’ and that a strong dollar is hurting U.S. factories. ‘As I predicted, Jay Powell and the Federal Reserve have allowed the Dollar to get so strong, especially relative to ALL other currencies, that our manufacturers are being negatively affected. Fed Rate too high. They are their own worst enemies, they don’t have a clue. Pathetic!’ Trump wrote.”
Federal Reserve Watch:
September 30 – Financial Times (Brendan Greeley, Laura Noonan, Joe Rennison, Robert Armstrong and Colby Smith): “The Federal Reserve is looking at whether regulation played a role in the sudden rise in short-term interest rates that rocked markets last month, when the largest US banks, despite being flush with cash reserves, did not lend them out overnight as expected. The central bank has indicated that it is focused on the concentration of reserves among a few banks and said it will consider the question at its next monetary policy meeting on October 29-30. According to policymakers, traders and bank executives, that concentration contributed to the rise in two ways. Larger banks have to meet higher regulatory standards for cash, particularly for same-day liquidity that only reserves can provide. And larger banks have different strategies for their own reserve holdings, which may not include lending them out overnight.”
September 29 – Bloomberg (Rich Miller): “They say it’s better to eat organic. But when it comes to the Federal Reserve’s balance sheet, Wall Street is hungering for a lot more. Financial analysts argue that the Fed needs to buy anywhere from about $200 billion to a half a trillion dollars in Treasury securities to bulk up its balance sheet and reduce the risk of money-market turmoil. Such a massive operation would seemingly be far bigger than the ‘organic’ balance sheet growth that many Fed policy makers are currently talking about. It would also be sure to draw comparisons to the quantitative easing programs that the central bank employed during the financial crisis and which President Donald Trump has spoken of approvingly.”
October 1 – Reuters (Balazs Koranyi and Francesco Canepa): “The Federal Reserve has set monetary policy to where it can deliver on its 2% inflation goal and there is scope to raise rates slightly over the next few years if the economy continues to grow, Chicago Fed President Charles Evans said…”
October 3 – Reuters (Jesus Aguado): “The U.S. Federal Reserve continues to enjoy ‘a reasonable amount of independence’ and is focused on its mandate despite criticism of its policy moves by U.S. President Donald Trump, Chicago Federal Reserve Bank President Charles Evans said… ‘People get to criticize you ... (but) what we need to do is to keep our head down and pay attention to our mandated objective’ of employment and inflation, Evans told a conference in Madrid.”
U.S. Bubble Watch:
October 1 – Wall Street Journal (Amara Omeokwe, Paul Hannon and Austen Hufford): “U.S. factory activity contracted for the second straight month in September and hit a 10-year low, triggering fresh concerns about the economy and a broad stock-market decline. The U.S. manufacturing readings were among several data points released Tuesday pointing towards the global impact of the U.S.-China trade war, as trade flows are set to grow this year at the weakest pace since the financial crisis, with rising tariffs and cooling growth. The Institute for Supply Management reported its manufacturing index fell to 47.8 in September, the lowest level since June 2009, from 49.1 the prior month.”
October 3 – Bloomberg (Reade Pickert): “America’s service industries joined manufacturing in taking a big step back last month, fueling concerns that the global slowdown and trade war are weighing more on the broader economy…. The Institute for Supply Management’s non-manufacturing index dropped 3.8 points to 52.6 in September, the lowest since August 2016 and well below the most pessimistic forecast…Growth in orders and business activity slowed abruptly, while the employment gauge registered its weakest print in more than five years.”
September 30 – Bloomberg (Caleb Mutua and Molly Smith): “The great deleveraging that was supposed to sweep over corporate America is dead. Or, at least, on hold. Blue-chip companies have begun to ramp up borrowing again as central banks globally flood economies with money. Liabilities have reached their highest level relative to income since 2009, according to Morgan Stanley’s analysis of second-quarter data. The number of companies selling investment-grade debt this month through Thursday has surged 63% from the same period last year… Around 40% of investment-grade companies now have obligations that are more consistent with junk ratings, according to Morgan Stanley.”
September 28 – Bloomberg (Jenny Leonard, Shawn Donnan, and Saleha Mohsin): “A U.S. Treasury official said there are no current plans to stop Chinese companies from listing on U.S. exchanges, a day after a report that the Trump administration is discussing ways to limit U.S. investors’ portfolio flows into China. ‘The administration is not contemplating blocking Chinese companies from listing shares on U.S. stock exchanges at this time,’ Treasury spokeswoman Monica Crowley said…”
September 28 – Bloomberg (Crystal Tse and Michael Hytha): “WeWork, Peloton, Endeavor, Poshmark and more just got the message: It’s not a great time to go public. Disappointing initial public offerings and unsettled economic conditions could shut down many IPOs for the rest of the year -- and maybe well into 2020, when the next batch of marquee IPO candidates like Airbnb could meet an even gloomier market and geopolitical environment. The Hollywood agency Endeavor Group Holdings Inc. shelved its IPO… Poshmark Inc., an online resale marketplace for second-hand clothing, is expected to postpone its IPO into next year. Also in flux are a range of stock offerings from e-commerce companies and cybersecurity firms Palantir Technologies Inc., Postmates Inc., and McAfee Inc.”
September 29 – Wall Street Journal (Peter Grant and Keiko Morris): “Turmoil at WeWork is causing the shared-office-space company to all but stop signing new leases, a fresh blow to New York City’s already softening commercial real-estate market. Since We Co. Chief Executive Adam Neumann stepped down…, the company has reversed its rapid growth strategy, looking to slow its expansion, shed head count and assets, and move closer to profitability. That new approach initially included a decision to forgo signing any new leases…”
September 30 – Wall Street Journal (Eliot Brown): “For years, WeWork’s parent company was defined by big spending as it relentlessly pursued rapid growth. Now, in the aftermath of a botched initial public offering attempt and the ouster of co-founder and chief executive Adam Neumann, it is facing a different reality: It needs to stop bleeding cash. On Monday, We Co. said it would file a request with the Securities and Exchange Commission to withdraw its IPO proposal… To cut costs, the company’s new co-CEOs, Sebastian Gunningham and Artie Minson, are planning thousands of job cuts, putting extraneous businesses up for sale and purging some luxuries from the previous CEO, such as a G650ER jet purchased for more than $60 million last year…”
September 29 – Wall Street Journal (Christopher M. Matthews and Rebecca Elliott): “The American shale boom is slowing as innovation plateaus—and just when shale’s importance in global markets has reached new highs following an attack on the heart of Saudi Arabia’s oil infrastructure. U.S. oil production increased by less than 1% during the first six months of the year…, down from nearly 7% growth over the same period last year. Unlike several years ago, when shale production fell due to a global price collapse, the slowdown this year is driven partly by core operational issues, including wells producing less than expected after being drilled too close to one another, and sweet spots running out sooner than anticipated.”
October 2 – CNBC (Diana Olick): “After a rough month for mortgage rates, borrowers saw a sign of hope and pounced: A small dip in the 30-year fixed rate lit a fire under refinances. That pushed total mortgage application volume up 8% for the week, according to the Mortgage Bankers Association’s seasonally adjusted index… Mortgage applications to purchase a home rose just 1% for the week but were 10% higher annually.”
October 1 – Wall Street Journal (Ben Eisen and Adrienne Roberts): “Walk into an auto dealership these days and you might walk out with a seven-year car loan. That means monthly payments that last well past when the brake pads give out and potentially beyond when the car gets traded in for a new one. About a third of auto loans for new vehicles taken in the first half of 2019 had terms of longer than six years, according to… Experian PLC. A decade ago, that number was less than 10%. Car loans that are increasingly stretched out are a pronounced sign that some American middle class buyers can’t afford a middle-class lifestyle.”
October 2 – Bloomberg (Oshrat Carmiel): “Resale prices for Manhattan apartments tumbled the most in seven years, pushed down by buyer demands for discounts in a market swamped with choices. Previously owned condos and co-ops sold for a median of $915,000 in the third quarter, down 8% from a year earlier, appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate reported. It was the first decline in the past 10 quarters and the biggest since the third quarter of 2012. ‘It’s just more signs that the sellers are capitulating,’ Jonathan Miller, president of Miller Samuel, said… ‘The market is going through what could be called a reset.’”
September 30 – Reuters (Sanjana Shivdas): “The U.S. office vacancy rate rose marginally to 16.8% in the third quarter from a year earlier, according to real estate research firm Reis Inc. Of the 79 metropolitan areas covered by Reis, 29 showed a rise in vacancies in the quarter.”
September 29 – Reuters (Richa Naidu and Aishwarya Venugopal): “Fast-fashion retailer Forever 21 filed for bankruptcy late on Sunday, joining a growing list of brick-and-mortar companies that have seen sales hit by the rise of competition from online sellers like Amazon.com Inc and the changing fashion trends dictated by millennial shoppers.”
China Watch:
September 30 – CNBC (Evelyn Cheng): “Chinese President Xi Jinping said… in a speech commemorating the 70th anniversary of the Chinese Communist Party’s rule that no force could sway China’s development. ‘There is no force that can shake the foundation of this great nation,’ Xi said… ‘No force can stop the Chinese people and the Chinese nation forging ahead.’ Xi did not specifically mention any other country by name, and emphasized that China would pursue peaceful development. ‘Long live the great Communist Party of China. And long live the great Chinese People!’ Xi concluded his speech…”
September 29 – Associated Press: “China’s top trade negotiator will lead an upcoming 13th round of talks aimed at resolving a trade war with the United States… Vice Premier Liu He will travel to Washington for the negotiations, Vice Commerce Minister Wang Shouwen said… ‘The two sides should find a solution through equal dialogue in accordance with the principle of mutual respect, equality and mutual benefit,’ Wang said…”
September 30 – Bloomberg (Ben Bartenstein): “The U.S.-China trade war is getting ‘considerably worse’ and comments at the United Nations General Assembly suggest no end in sight, according to Ian Bremmer, …president of Eurasia Group. Chinese officials will be patient, hoping to maintain the status quo while making no serious attempts at a breakthrough deal until after the 2020 U.S. election, Bremmer wrote… He said China’s Foreign Minister Wang Yi’s combative tone suggests a much deeper divide between the world’s two largest economies than six months ago. ‘The two sides are digging in and it’s gotten considerably worse in the past weeks,’ Bremmer said.”
September 29 – Reuters (Stella Qiu and Ryan Woo): “China’s factory activity unexpectedly expanded at the fastest pace in 19 months in September as plants ramped up production and new orders rose, …suggesting a modest recovery in the manufacturing sector from 50.4 in August, marking the second straight month of expansion.”
September 30 – Wall Street Journal (Shen Hong): “China is snapping up stakes in private companies at a record rate… The investments mark a reversal after decades in which state-owned enterprises have shrunk in importance, as reflected in measures such as their share of the workforce or asset ownership. Since China’s public-sector companies are typically less efficient or innovative than their private rivals, the shopping spree could lead to a fresh drag on growth. Private enterprises are in a weaker position because they have comparatively poorer access to cheap bank loans and other types of financing, and have also been squeezed by Beijing’s moves to reduce pollution and overproduction… In total, state-backed buyers bought 47 stakes in listed private companies from January through June, according to Fitch…. That compares with 52 deals in all of 2018.”
September 30 – Wall Street Journal (Nathaniel Taplin): “Deng Xiaoping, who launched China’s economic reforms, famously said that it was fine for some people to get rich first. As long as everyone got rich eventually, it was a price worth paying for the communist leader. That narrative, call it the original Chinese dream, was borne out for a long time. China’s opening to the world generated many millionaires and billionaires but also remade China overall into an upper-middle-income society. There are increasing signs, however, that those Chinese who haven’t yet gotten rich will face a far harder time doing so in the future. Following steep falls in the early 2010s, inequality is rising again while real income growth has flatlined… Two subtle changes in China’s economy tell the story. Following a long fall from 2008 to 2015, China’s Gini Coefficient, a measure of income inequality, has begun rising sharply again. Second, since 2016 housing prices have mostly grown much faster than incomes, the opposite of the situation from 2011 to 2015.”
October 2 – New York Times (Alexandra Stevenson): “Forty years after China began its near-miraculous run as the world’s most powerful economic growth engine, its people are experiencing something new and unsettling: a feeling that the best times may be behind them. The Chinese economy is slowing, and the cost of living is rising. The trade war with the United States shows no sign of ending. Wage growth is sluggish. More young people are chasing fewer job prospects. Chinese consumers, who have become more cautious over the past year, are now staging a broad retreat. They are buying fewer cars, smartphones and appliances. They are going to the movies less and taking fewer trips abroad. They would rather stick their money in the bank. For China’s young people, who have never experienced a prolonged slump in their lives, the shift is especially stark.”
October 1 – Reuters (Michael Martina): “China’s military… showed off new equipment at a parade in central Beijing to mark 70 years since the founding of the People’s Republic, including hypersonic-glide missiles that experts say could be difficult for the United States to counter… As expected, China unveiled new unmanned aerial vehicles (UAVs) and showcased its advancing intercontinental and hypersonic missiles, designed to attack the aircraft carriers and bases that undergird U.S. military strength in Asia. A state television announcer called the missile arsenal a ‘force for realizing the dream of a strong nation and strong military.’”
September 29 – Bloomberg (Shirley Zhao): “China is reeling out a string of patriotic films as the Communist Party prepares to celebrate 70 years in power amid challenges to its authority from the unrest in Hong Kong and an economy weakened by the trade war. At least three movies featuring the accomplishments of ordinary Chinese opened in mainland theaters Monday, the eve of the 70th anniversary of the founding of the People’s Republic of China.”
October 2 – Reuters (Clare Jim and Felix Tam): “Hong Kong’s government is expected to discuss sweeping emergency laws… that would include banning face masks at protests, two sources told Reuters, as the Chinese-ruled territory grapples with an escalating cycle of violence. Authorities have already loosened guidelines on the use of force by police…”
September 29 – New York Times (Peter S. Goodman and Austin Ramzy): “In a part of the world familiar with conflict, dislocation and ruthless ideological extremism, Hong Kong has long beckoned as an oasis of stability. It has prospered on the strength of its proximity to mainland China — close enough to be a base for investors capitalizing on China’s development, and still beyond reach of the authoritarian hand of the Chinese Communist Party. It has served as a bridge between two rival powers nursing mutual suspicions, the United States and China. It is Chinese territory yet governed by a legal system inherited from the West, and intertwined with the global financial system. But now Hong Kong’s status as neutral ground between mainland China and the outside world is being threatened by a pair of momentous confrontations.”
September 29 – Reuters (Echo Wang and Joshua Franklin): “Nasdaq Inc is cracking down on initial public offerings (IPOs) of small Chinese companies by tightening restrictions and slowing down their approval, according to regulatory filings, corporate executives and investment bankers. Nasdaq’s attempt to limit these stock market flotations comes as a growing number of them end up raising most of the capital in their IPO from Chinese sources, rather than from U.S. investors.”
Central Banking Watch:
September 30 – Reuters (Swati Pandey): “Australia’s central bank cut interest rates for the third time this year… in a bid to stimulate a sluggish economy and signaled it was prepared to do more if needed, knocking the local dollar to a one-month low… The Reserve Bank of Australia’s (RBA) quarter-point cut took the cash rate to an all-time low of just 0.75%, leaving little room for more reductions and raising the possibility of unconventional policy easing.”
September 29 – Financial Times (Lionel Barber and Claire Jones): “From his corner office on the 40th floor of the European Central Bank’s gleaming twin tower headquarters in Frankfurt, Mario Draghi sums up how the ECB has been transformed during his presidency. ‘[The building] embodies our values,’ says the 72-year-old Italian, with a touch of pride. ‘Transparency and independence.’ Under Mr Draghi, the ECB has come of age. Alongside the Federal Reserve and the Bank of England, it has developed a formidable arsenal, injecting trillions of euros of stimulus into the eurozone economy… Mr Draghi… has won standing ovations at Brussels summits. In May, President Emmanuel Macron awarded him France’s Commandeur de la Légion d’Honneur, praising him as the heir of Jean Monnet and Robert Schuman, the European project’s founding fathers. Yet for all Mr Draghi’s panache, the region’s economy remains fragile. And there is a growing feeling that his central bank has shouldered too much of the burden and can no longer be the only game in town.”
October 1 – Bloomberg (Piotr Skolimowski and Boris Groendahl): “Bundesbank President Jens Weidmann switched the focus of his opposition against European Central Bank stimulus to Mario Draghi himself, suggesting the president should be more open to different points of view. Responding to Draghi’s recent warning that discord among ECB officials could undermine the effectiveness of monetary policy, the German central-bank chief said an ‘intensive discussion’ about far-reaching measures such as bond-buying is not only normal, but ‘absolutely necessary.’ ‘The Austrian philosopher Karl Popper once stated that only a critical discourse could give us the maturity to consider an idea from many different perspectives and to judge it correctly… United in diversity’ is more than the motto of the European Union, which for some may seem abstract. It’s also the concrete mission to approach each other and bring people together.’”
Europe Watch:
October 3 - Bloomberg (Piotr Skolimowski): “The euro-area economy stagnated at the end of the third quarter, held back by an industrial recession and a sharper-than-expected slowdown in services. While the slump still remains broadly centered on manufacturing, the measure for services dropped last month to the lowest since January after being revised down from an initial estimate. If that’s a sign that the weakness is spreading, it’s a worrying development for the euro-area economy. A separate report showed U.K. services unexpectedly shrank, posting the weakest index reading since the Brexit referendum in 2016.”
October 3 - Bloomberg (Fergal O'Brien): “Germany’s economic woes are becoming more pronounced, with a sharp slowdown in services suggesting the pain from its industrial crisis is spreading. While the weakness is still largely centered on manufacturing, a downward revision to services in September adds to the negative news coming from Europe’s largest economy. IHS Markit said the figures mean a technical recession ‘now looks to be all but confirmed.’”
EM Watch:
September 30 – Bloomberg (Rahul Satija): “Mounting debt failures in India have been catching rating companies off guard, underscoring continued challenges a year after the landmark failure of shadow bank IL&FS increased scrutiny of the industry. Defaults at companies including Dewan Housing Finance Corp., Cox & Kings Ltd. and Altico Capital India Ltd. have occurred even as their long-term ratings indicated very low to moderate risk of non-payment. ‘Raters have not been able to detect stress in time,’ said Ashutosh Khajuria, chief financial officer at Federal Bank Ltd. ‘Cutting credit profiles after the defaults is no rocket science.’”
October 2 – Reuters (Nupur Anand): “Private-sector lender Yes Bank’s Chief Executive Officer Ravneet Gill assured investors on Thursday that the bank remains on solid financial footing, sending its stock as much as 25% higher. His remarks come after the stock plunged nearly 23% on Tuesday as fraud allegations against a housing finance company that Yes Bank has exposure to, spooked investors.”
September 30 – Reuters (Davide Barbuscia): “…Fitch downgraded Saudi Arabia's credit rating to A from A+…, citing rising geopolitical and military tensions in the Gulf following an attack on its oil facilities and a deterioration of the kingdom’s fiscal position. The Saudi finance ministry said it was disappointed by the ‘swift’ downgrade and urged Fitch to reconsider it, arguing the move did not reflect the kingdom's response to the Sept. 14 attack or its capacity to handle adversity.”
Japan Watch:
September 30 – Bloomberg (Chikako Mogi): “The Bank of Japan signaled potential deep cuts in bond purchases in October, taking what could be its biggest step yet to steepen the yield curve. The central bank slashed the purchase ranges for four major maturities, indicating it may even stop buying debt of more than 25 years… It sought to anchor yields from the one-to-three year zone by raising purchases in a regular operation earlier in the day and lifting the purchase band for the sector in October. Governor Haruhiko Kuroda has repeatedly expressed concern about an excessive flattening of the yield curve… A more aggressive stance on cuts to buying has taken hold as it became clearer that reducing purchases needn’t immediately lead to strengthening of the yen.”
September 30 – Reuters (Tetsushi Kajimoto): “Japan rolled out a twice-delayed increase in the sales tax to 10% from 8% on Tuesday, a move that is seen as critical for fixing the country’s tattered finances but that could tip the economy into recession by dampening consumer sentiment.”
October 2 – Reuters (Tetsushi Kajimoto): “A Bank of Japan board member with a casting vote on policy decisions said the central bank must consider ‘preventive steps’ against economic risks, a sign its nine-member board may be tilting toward further easing as global pressures intensify. …Yukitoshi Funo - who has consistently voted with the majority of the nine-member board and holds a neutral stance - stressed the BOJ’s resolve to act without hesitation if economic hazards increase.”
Global Bubble Watch:
October 3 – Bloomberg Businessweek (Davide Scigliuzzo, Kelsey Butler, and Sally Bakewell): “Private equity managers won the financial crisis. A decade since the world economy almost came apart, big banks are more heavily regulated and scrutinized. Hedge funds… have mostly lost their flair. But the firms once known as leveraged buyout shops are thriving. Almost everything that’s happened since 2008 has tilted in their favor. Low interest rates to finance deals? Check. A friendly political climate? Check. A long line of clients? Check. The PE industry, which runs funds that can invest outside public markets, has trillions of dollars in assets under management. In a world where bonds are paying next to nothing… many big investors are desperate for the higher returns PE managers seem to be able to squeeze from the markets. The business has made billionaires out of many of its founders. Funds have snapped up businesses from pet stores to doctors’ practices to newspapers. PE firms may also be deep into real estate, loans to businesses, and startup investments—but the heart of their craft is using debt to acquire companies and sell them later.”
September 30 – Reuters (Noel Randewich): “Major U.S. fund managers have tens of billion of dollars at stake in some of the most popular Chinese stocks on Wall Street, exposing them to potential losses should the White House move to delist Chinese firms from U.S. exchanges. White House trade adviser Peter Navarro… dismissed reports that the Trump administration was considering delisting Chinese companies from U.S. stock exchanges as ‘fake news’…”
September 30 – Bloomberg (Katrina Nicholas, Matt Turner and Lucca de Paoli): “The risk of a property bubble in the euro zone surged last year as ultra-low interest rates helped drive up house prices. Munich is now the city most vulnerable to a property bubble, according to UBS Group AG’s annual Real Estate Bubble Index. Frankfurt and Paris are increasingly in danger of prices becoming unsustainable, even as some of the priciest cities around the world cool... For the first time in four years, London is no longer regarded as dangerously overvalued.”
Fixed-Income Bubble Watch:
October 1 – Bloomberg (Amanda Albright): “An economically struggling U.S. territory. A government-run electricity provider facing potential insolvency. A debate among public officials about whether debts are too burdensome to pay. That’s the situation in the U.S. Virgin Islands, where the power agency is contending with a financial squeeze that echoes what happened in Puerto Rico in the run up to that government’s record-setting bankruptcy. The uncertainty led Moody’s… on Sept. 23 to downgrade the most senior Virgin Islands Water and Power Authority bonds to eight steps below investment grade, indicating a high likelihood of default.”
Leveraged Speculation Watch:
October 2 – Bloomberg (Lisa Lee): “It’s a marriage between two of Wall Street’s hottest products. Collateralized loan obligations -- typically chock-full of broadly-syndicated debt -- are increasingly being stuffed with private loans made to highly leveraged medium-sized companies with limited access to bank financing. Known as middle-market CLOs, the asset class has ballooned to $57 billion, from just $20 billion six years ago. Five new entrants this year… suggest issuance is only set to increase. The frenzied growth is another example of how banks, insurance companies and pension funds continue to reach for higher-paying securities in the face of almost $15 trillion of negative-yielding debt around the world. Middle-market CLOs can offer premiums of as much as 200 bps versus their garden-variety peers, in part due to the reduced liquidity that comes with direct lending…”
Geopolitical Watch:
October 2 – Reuters (Vladimir Soldatkin, Dmitry Zhdannikov and Olesya Astakhova): “Washington’s use of the dollar as a political tool is backfiring as more and more countries are reducing their holdings of the greenback and switching to other currencies in trade contracts, Russian President Vladimir Putin said… Putin also said the U.S. was ‘rudely intervening’ in European affairs by objecting to the construction of the Nord Stream gas pipeline.”
October 1 – Reuters (Joyce Lee and Chang-Ran Kim): “North Korea fired what may have been a submarine-launched ballistic missile from off its east coast…, a day after it announced the resumption of talks with the United States on ending its nuclear program. If confirmed, it would be the most provocative test by North Korea since it started the talks with the United States in 2018.”
October 3 – Wall Street Journal (Gordon Lubold and Nancy A. Youssef): “U.S. officials are increasingly concerned that Turkey soon will mount a major incursion into northern Syria and trigger a clash with Kurdish fighters, an action that would likely prompt the Trump administration to remove American forces from Syria to avoid the conflict. Because a U.S. pullout would essentially end the fight against Islamic State there, it could set back ongoing efforts to undercut the group… Both Turkey and the Kurds are allies of the U.S. but are longtime enemies of one another.”
October 2 – Reuters (Ahmed Rasheed and Ahmed Aboulenein): “Iraqi Prime Minister Adel Abdul Mahdi… declared a curfew in Baghdad until further notice after at least seven people were killed and more than 400 were injured during two days of nationwide anti-government protests. Curfews were imposed earlier in three southern cities while elite counter-terrorism troops opened fire on protesters trying to storm Baghdad airport and deployed to the southern city of Nassiriya after gunfights broke out between protesters and security forces…”
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