[Bloomberg] Treasuries Slide, Dollar Gains as Busy Week Begins: Markets Wrap
[Bloomberg] U.S. Consumer Spending Rose in December, Saving Rate Dipped
[Bloomberg] Europe to Trump: If You Want a Trade War, You'll Get One
[Bloomberg] China H Shares Are Testing History With Wildest Swings Since '07
[Bloomberg] Goldman Thinks This Fed Meeting May Not Be a Sleeper After All
[Bloomberg] Frenzied Feast of Bullish Buyers Puts Risk Market in Danger Zone
[Reuters] China eyes black swans, gray rhinos as 2018 growth seen slowing to 6.5-6.8 percent - media
[Bloomberg] Corporate Animal Spirits Are Back and That’s Bad News for Bondholders
[Bloomberg] Worst Asian Bond Market Has More to Fear: Modi's Borrowings
[CNBC] A fire sale by the Treasury could send shock waves through the bond market, strategist warns
[Reuters] Trump security team sees building U.S. 5G network as option
[NYT] Chinese Investors Keep Losing Billions Online. Here’s Why.
[FT] China faces refinancing crunch with $2.7tn of bonds bearing down
[FT] Global dealmaking running at fastest clip since 2000
[FT] Government debt sell-off gains pace
[FT] Vanguard warns of strengthening ‘predators’ in ETF market
Sunday, January 28, 2018
Sunday's Evening Links
[Bloomberg] Asian Equity Rally Ekes Out More Gains; Bonds Flat: Markets Wrap
[Reuters] Trump hints at retaliation at 'very unfair' EU trade policies
[Bloomberg] Massive Cryptocurrency Heist Puts Spotlight on Exchange Security
[Bloomberg] China Stock Euphoria Enters New Stage as Laggards Start to Surge
[Bloomberg] China Ousted as Asia's No. 1 Buyer of U.S. Commercial Property
[WSJ] Global Stocks Roar Into 2018, Making Some Investors Even More Nervous
[Reuters] Trump hints at retaliation at 'very unfair' EU trade policies
[Bloomberg] Massive Cryptocurrency Heist Puts Spotlight on Exchange Security
[Bloomberg] China Stock Euphoria Enters New Stage as Laggards Start to Surge
[Bloomberg] China Ousted as Asia's No. 1 Buyer of U.S. Commercial Property
[WSJ] Global Stocks Roar Into 2018, Making Some Investors Even More Nervous
Saturday, January 27, 2018
Saturday's News Links
[Reuters] China to review anti-dumping duties on U.S., E.U. industrial solvents
[NYT] Every One of the World’s Big Economies Is Now Growing
[WSJ] My 10-Year Odyssey Through America’s Housing Crisis
[FT] How long can emerging market debt continue to shine?
[WSJ] Syrian City is Flashpoint of Tensions Between Turkey and U.S.
[NYT] Every One of the World’s Big Economies Is Now Growing
[WSJ] My 10-Year Odyssey Through America’s Housing Crisis
[FT] How long can emerging market debt continue to shine?
[WSJ] Syrian City is Flashpoint of Tensions Between Turkey and U.S.
Friday, January 26, 2018
Weekly Commentary: America First and the Decapitation of King Dollar
The U.S. ran a $71.6 billion Goods Trade Deficit in December, the largest goods deficit since July 2008’s $76.88 billion. The U.S. likely accumulated a near $550 billion Current Account Deficit in 2017, also near the biggest since before the crisis. Going all the way back to 1982, the U.S. has posted only two quarterly surpluses (Q1, Q2 1991) in the Current Account. Since 1990, the U.S has run cumulative Current Account Deficits of $10.177 TN. From the Fed’s Z.1 report, Rest of World holdings of U.S. financial asset began the nineties at $1.738 TN; closed out 2008 at $13.699 TN; and ended Q3 2017 at $26.347 TN. It’s gone rather parabolic – with a curiously similar trajectory to equities markets.
For better than three decades, the U.S. has been in an enviable position of trading new financial claims for foreign manufactured goods. The U.S. has literally flooded the world with dollar balances. In the process, the U.S. exported Credit Bubble Dynamics (including financial innovation and central bank doctrine) to the world. When the central bank to the world’s reserve currency actively inflates, the entire world is welcome to inflate. The resulting global monetary disorder ensured a world of fundamentally vulnerable currencies.
Despite unrelenting Current Account Deficits, there have been two distinct “king dollar” episodes. There was the “king dollar” period of the late-nineties, fueled by global financial instability, a U.S. edge in technology and, importantly, the Greenspan Fed’s competitive advantage in sustaining U.S. securities market inflation. More recently, a resurgent “king dollar” was winning by default in 2013-2016, as the ECB, BOJ and others implemented massive “whatever it takes” QE and rate programs. Moreover, the shale revolution and a dramatic reduction in oil imports was to improve the U.S. trade position. Oil imports did shrink dramatically, but this was easily offset by American consumers’ insatiable appetite for imported goods.
It’s an intriguing case of parallel analytical universes. There’s the bullish – U.S. as the world’s invincible superpower – view. America is blessed with superior systems – economic, governmental, market and technological. The world’s best and brightest still yearn to come to the land of opportunity. And with a few notable exceptions, this view has received almost constant affirmation from booming equities, debt securities and other asset markets. Robust bond markets, in particular, ensured insatiable international demand for dollars. Surely, concern for U.S. Trade and Current Account Deficits is archaic, at best.
The opposing view holds that the U.S. financial situation is unsound and untenable. A deindustrialized “services” and finance-based economy is dependent upon unending Credit expansion, with the vast majority of new Credit non-productive in nature. The U.S. boom is again financed by unsound leveraging, this time generated chiefly by global central banks and foreign-sourced speculative finance. The perpetual outflow of U.S. currency balances internationally ensures at some point a crisis of confidence in the dollar. What’s more, extreme monetary inflation by the other major central banks since 2012 only increases the likelihood of a more systemic crisis of confidence throughout global finance and currency markets. The resulting unprecedented looseness in global monetary conditions over recent years has promoted a degree and scope of excess sufficient for a deep and prolonged global crisis.
It’s been my long-hold expectation that the world at some point would discipline U.S. profligacy. The world instead followed in our footsteps. Global central banks accommodated unfettered finance, adopted inflationism and, without protest, recycled trade surpluses right back into U.S. financial markets.
There was Greenspan’s “conundrum” and Bernanke’s “global savings glut.” The reality is that U.S. trade deficits have been at the heart of a runaway expansion of market-based finance around the world. This dysfunctional and precarious financial backdrop was interrupted temporarily in 2008. Zero/negative rates along with $14 TN (and counting) of central bank liquidity fueled a much more systemic Bubble of unprecedented dimensions. Importantly, central bankers came together to support a common goal: reflation of markets and economies. Concerted policymaking – from Washington to Ottawa, London, Frankfurt, Zurich, Tokyo, Sydney, Beijing and beyond – has been fundamental to the synchronized global surge in risk-taking, over-liquefied market Bubbles and economic recovery.
January 24 – New York Times (Jack Ewing): “Mario Draghi… directed unusually sharp criticism at Steven Mnuchin, the United States Treasury secretary…, effectively accusing Mr. Mnuchin of violating agreements among nations against starting currency wars. Mr. Draghi… said he objected to ‘the use of language in discussing exchange rate developments that doesn’t reflect the terms of reference that have been agreed.’ He then quoted from an agreement reached in Washington in October under which countries promised to ‘refrain from competitive devaluations.’ …Mr. Draghi portrayed Mr. Mnuchin’s comments as part of a broader deterioration in international etiquette. At a meeting of the central bank’s Governing Council that preceded the news conference, Mr. Draghi said, ‘Several members expressed concern and this concern was broader than simply the exchange rate. It was about the overall status of international relations right now.’”
January 25 – Reuters (Doina Chiacu): “U.S. President Donald Trump said on Thursday he ultimately wants the dollar to be strong, contradicting comments made by Treasury Secretary Steven Mnuchin one day earlier. ‘The dollar is going to get stronger and stronger and ultimately I want to see a strong dollar,’ Trump said…, adding that Mnuchin’s comments had been misinterpreted.”
January 25 – CNBC (Sam Meredith): “Treasury Secretary Steven Mnuchin said Thursday he spends little time thinking about dollar weakness over the short term, walking back his comments that sent the U.S. currency reeling amid fears of a trade war. Speaking during a CNBC-moderated panel at the World Economic Forum in Davos, Mnuchin said dollar weakness in the short term was ‘not a concern of mine,’ before adding: ‘In the longer term, we fundamentally believe in the strength of the dollar.’”
After the dramatic cut in corporate tax rates and myriad measures seen as benefiting the wealthy, some argue that Trump populism is a ruse. But now we see a 2018 push on tariffs, aggressive trade negotiation, U.S. capital investment and higher wages meant to rebuild our manufacturing base to the benefit of the American worker. Rather than the rich continuing to build wealth at the expense of the lowly worker, they can now grow wealth together. Is such a radical change even possible? Where are the losers?
January 24 – CNBC (Matt Clinch): “Treasury Secretary Steven Mnuchin said the U.S. is open for business and welcomed a weaker dollar, saying that it would benefit the country. Speaking at a press conference at the World Economic Forum…, he made a bid for investment into the U.S., saying the government was committed to growth of 3% or higher. ‘Obviously a weaker dollar is good for us as it relates to trade and opportunities,’ Mnuchin told reporters…, adding that the currency's short term value is ‘not a concern of ours at all.’ ‘Longer term, the strength of the dollar is a reflection of the strength of the U.S. economy and the fact that it is and will continue to be the primary currency in terms of the reserve currency,’ he said.”
Surprisingly candid comments from our Treasury Secretary. And as much as he, the President and other administration officials work to “walk back” Wednesday’s comment, “obviously a weaker dollar is good for us” confirms what many had suspected: “America First” has a “beggar-thy-neighbor” currency devaluation component. A revitalized U.S. manufacturing sector will come at the expense of our trade partners and the holders of our debt.
I’ve posited in past CBBs that it would have been easier to implement the Trump agenda in a crisis backdrop. This requires revision: it would have been less risky to implement… Huge tax cuts at this late stage in the Bubble come with unexpected consequences, including those associated with stoking acutely speculative risk markets. There are major risks in feeding an investment boom now, following years of extraordinarily loose financial conditions and today’s 4.1% unemployment rate. It’s reckless running huge fiscal deficits at this late stage of a boom cycle – with federal debt having already inflated from $6.074 TN to $16.463 TN in less than ten years. And, this week, openly lauding the benefits of a weaker dollar with foreign holdings of U.S. debt securities at $11.370 TN (up 57% since the crisis!).
Mario Draghi’s rebuke was as swift as it was stern. The ECB’s Maestro well-appreciates that Mnuchin and the Trump folks are playing with fire. Global central bankers in concert have cultivated the perception that everything is well under control. No need to fret market liquidity, at least not in equities and bond markets. Currencies, well, that’s a whole different animal.
There are few matters that keep central bankers awake at night like the prospect of dislocation in the currency markets. These are massive markets, generally well-behaved but not easily controlled when they’re not. Disorderly selling of the dollar – with all the leveraged currency trades and unfathomable derivative exposures that have accumulated for decades and mushroomed since the crisis - now that’s lush habitat for the proverbial black swan.
The Dow gained another 545 points this week, bring 2018 gains (17 sessions) to 1,897 points. The S&P500 jumped 2.2%, as the dollar index declined 1.7%. Clearly, U.S. and global risk markets are fine with dollar devaluation. Heck, they’re delighted with the notion of concerted global currency devaluation. The sickly dollar will only pressure the ECB, BOJ and others to stay looser for even longer. What country these days feels comfortable with a strong currency? What could go wrong?
Does dollar weakness and attendant securities market froth pressure the Fed to pick up the pace of rate increases? Heaven forbid, might they come to the realization that they need to actually tighten monetary conditions. Beyond stock market Bubbles, the weakening dollar bolsters the case for an uptick in inflationary pressures. WTI crude is up a quick 9.5% y-t-d to $66.14. The GSCI commodities index has gained 4.7% in the first four weeks of the year. Heightened dollar vulnerability might also engender a consensus view within the global central bank community supportive of tighter U.S. monetary policy.
“Beggar-thy-neighbor” – not desperate depression-era measures, but amid economic/financial boom and record stock prices. Uncharted territory. Trapped in concerted reflationary monetary policymaking, global central bankers may be tempted to disregard ramifications of “America First.” This will unlikely be the case with foreign governments. And when do anxious governments begin to pressure their central banks against accommodating Team Trump ambitions? Beijing has already reminded the world of their prerogative to liquidate China’s Treasury hoard. Global markets remain confident that central banks have no option other than recycling dollars back into U.S. securities markets. Perhaps this is too complacent.
Crisis-period QE and zero rates evolved over years into “whatever it takes” open-ended QE, negative rates and egregious market manipulation. Global central bankers took control – and today have things fully under control. This market perception has been instrumental in the historic collapse in market volatility. Resulting readily available cheap market risk protection has incentivized historic risk-taking and today’s speculative melt-up market dynamic.
Historians may look back at Team Trump’s jaunt to chilly Davos as a pivotal juncture in global finance. Was it naivety, gall or a combination – or just typical of today’s overabundance of complacency? The U.S. Treasury Secretary - facing enormous fiscal deficits, rising rates, $16.5 TN of federal debt, a nervous bond market and suspicious foreign officials - openly advocating a weaker dollar.
There are certainly plenty of dollars in the world available to sell or hedge. What is the likelihood of dollar selling turning disorderly? One might look at several years of incredible ECB and BOJ “whatever it takes” liquidity creation and rate suppression (and interest-rate differentials you could drive a truck through) and ponder Friday’s closing prices of 1.24 for the euro and 108.58 for the dollar/yen. Those are two flashing warning signs of dollar vulnerability.
In all the euphoria, markets can be excused for presuming dollar weakness ensures a further delay in global monetary policy normalization. Yet things turn quite interesting the day unruly currency markets begin indicating disorderly trading. The almighty central bankers might have little to offer. What if they intervene to no avail? This could prove the juncture when markets begin questioning the Indomitable Central Banks in Control thesis. The price of market “insurance” would begin to creep (or, not unlikely, spike) higher, and the availability of cheap risk protection would wane (possibly abruptly). In such a development, I would expect the more sophisticated market operators to begin (aggressively) pulling back on risk and leverage. Such a dynamic, especially after such a spectacular melt-up, would mark an important inflection point for market liquidity.
Ten-year Treasury yields were little changed on the week at 2.66%. Yet two-year yields rose another five bps to 2.12% and five-year yields gained two bps to 2.47%. Global yields are on the move. German 10-year yields jumped six bps to a 13-month high 0.63%, and French yields gained seven bps to 0.91%. UK yields jumped 11 bps to 1.44%.
The dollar’s worst start to a year since 1987. Wildly speculative stock markets, rising bond yields, Fed rate hikes, dollar weakness and acrimony, and general currency market instability. Today’s backdrop recalls 1987, though with some important differences. The world has so much more debt these days. Global equities markets are so much bigger and interconnected – derivatives markets incredibly so. Did China even have a stock market in ’87?
Today’s central bank balance sheets would be unimaginable back in 1987. Markets certainly had much less faith in central bank liquidity backstops. 1987 had this exciting new financial product, “portfolio insurance.” 2017 has the continuation of this enchanting New Age notion that central banks insure all portfolios. The Great Irony of Contemporary Finance: years of extreme central bank inflationary measures ensured that global finance outgrew the capacity of central bank liquidity backstops.
January 25 – Wall Street Journal (Richard Barely): “Only a select few people can move foreign-exchange markets with a handful of words. U.S. Treasury Secretary Steven Mnuchin and European Central Bank President Mario Draghi are two of them. Thursday they clashed, and the ECB clearly has a fight on its hands. The euro had already been rising against the dollar before Mr. Mnuchin’s comments in Davos Wednesday, that a weak dollar was helpful for trade, sent it even higher. Mr. Mnuchin’s apparent attempt Thursday to play down that comment didn’t reverse the trend. Mr. Draghi’s first-round defense proved insufficient.”
January 21 – Bloomberg: “China’s bad-loan data, which analysts and investors have long regarded to be understated, was thrown into question again after the banking regulator uncovered faked reporting at a local lender. Shanghai Pudong Development Bank Co., the nation’s ninth-largest lender, illegally lent 77.5 billion yuan ($12bn) over many years to 1,493 shell companies to take over bad loans at its Chengdu branch, the China Banking Regulatory Commission said… The branch, which had reported zero bad loans, inflated its earnings and faked other operational data to improve performance and evade compliance, the CBRC found.”
January 21 – Bloomberg: “For years, a branch of a mid-sized Chinese bank outshone rivals by reporting zero bad loans at a time others were struggling with rising soured debt. Financial indicators at Shanghai Pudong Development Bank Co..’s branch in the western Chengdu city were healthy, officials raised no red flags, and Fitch Ratings upgraded the parent last July citing tighter support and supervision by local authorities. Unknown to most, however, regulators had been probing the lender for a fraud that may reverberate across China’s financial industry. ‘It is not just about Pudong Bank,’ analysts at Guangfa Securities Co., led by Ni Jun, wrote… ‘The underlying issue is that the market may conduct a systemic review and re-rating on the bad loan ratios of those highly-leveraged Chinese banks that had gone through a round of balance-sheet expansion.’”
For better than three decades, the U.S. has been in an enviable position of trading new financial claims for foreign manufactured goods. The U.S. has literally flooded the world with dollar balances. In the process, the U.S. exported Credit Bubble Dynamics (including financial innovation and central bank doctrine) to the world. When the central bank to the world’s reserve currency actively inflates, the entire world is welcome to inflate. The resulting global monetary disorder ensured a world of fundamentally vulnerable currencies.
Despite unrelenting Current Account Deficits, there have been two distinct “king dollar” episodes. There was the “king dollar” period of the late-nineties, fueled by global financial instability, a U.S. edge in technology and, importantly, the Greenspan Fed’s competitive advantage in sustaining U.S. securities market inflation. More recently, a resurgent “king dollar” was winning by default in 2013-2016, as the ECB, BOJ and others implemented massive “whatever it takes” QE and rate programs. Moreover, the shale revolution and a dramatic reduction in oil imports was to improve the U.S. trade position. Oil imports did shrink dramatically, but this was easily offset by American consumers’ insatiable appetite for imported goods.
It’s an intriguing case of parallel analytical universes. There’s the bullish – U.S. as the world’s invincible superpower – view. America is blessed with superior systems – economic, governmental, market and technological. The world’s best and brightest still yearn to come to the land of opportunity. And with a few notable exceptions, this view has received almost constant affirmation from booming equities, debt securities and other asset markets. Robust bond markets, in particular, ensured insatiable international demand for dollars. Surely, concern for U.S. Trade and Current Account Deficits is archaic, at best.
The opposing view holds that the U.S. financial situation is unsound and untenable. A deindustrialized “services” and finance-based economy is dependent upon unending Credit expansion, with the vast majority of new Credit non-productive in nature. The U.S. boom is again financed by unsound leveraging, this time generated chiefly by global central banks and foreign-sourced speculative finance. The perpetual outflow of U.S. currency balances internationally ensures at some point a crisis of confidence in the dollar. What’s more, extreme monetary inflation by the other major central banks since 2012 only increases the likelihood of a more systemic crisis of confidence throughout global finance and currency markets. The resulting unprecedented looseness in global monetary conditions over recent years has promoted a degree and scope of excess sufficient for a deep and prolonged global crisis.
It’s been my long-hold expectation that the world at some point would discipline U.S. profligacy. The world instead followed in our footsteps. Global central banks accommodated unfettered finance, adopted inflationism and, without protest, recycled trade surpluses right back into U.S. financial markets.
There was Greenspan’s “conundrum” and Bernanke’s “global savings glut.” The reality is that U.S. trade deficits have been at the heart of a runaway expansion of market-based finance around the world. This dysfunctional and precarious financial backdrop was interrupted temporarily in 2008. Zero/negative rates along with $14 TN (and counting) of central bank liquidity fueled a much more systemic Bubble of unprecedented dimensions. Importantly, central bankers came together to support a common goal: reflation of markets and economies. Concerted policymaking – from Washington to Ottawa, London, Frankfurt, Zurich, Tokyo, Sydney, Beijing and beyond – has been fundamental to the synchronized global surge in risk-taking, over-liquefied market Bubbles and economic recovery.
January 24 – New York Times (Jack Ewing): “Mario Draghi… directed unusually sharp criticism at Steven Mnuchin, the United States Treasury secretary…, effectively accusing Mr. Mnuchin of violating agreements among nations against starting currency wars. Mr. Draghi… said he objected to ‘the use of language in discussing exchange rate developments that doesn’t reflect the terms of reference that have been agreed.’ He then quoted from an agreement reached in Washington in October under which countries promised to ‘refrain from competitive devaluations.’ …Mr. Draghi portrayed Mr. Mnuchin’s comments as part of a broader deterioration in international etiquette. At a meeting of the central bank’s Governing Council that preceded the news conference, Mr. Draghi said, ‘Several members expressed concern and this concern was broader than simply the exchange rate. It was about the overall status of international relations right now.’”
January 25 – Reuters (Doina Chiacu): “U.S. President Donald Trump said on Thursday he ultimately wants the dollar to be strong, contradicting comments made by Treasury Secretary Steven Mnuchin one day earlier. ‘The dollar is going to get stronger and stronger and ultimately I want to see a strong dollar,’ Trump said…, adding that Mnuchin’s comments had been misinterpreted.”
January 25 – CNBC (Sam Meredith): “Treasury Secretary Steven Mnuchin said Thursday he spends little time thinking about dollar weakness over the short term, walking back his comments that sent the U.S. currency reeling amid fears of a trade war. Speaking during a CNBC-moderated panel at the World Economic Forum in Davos, Mnuchin said dollar weakness in the short term was ‘not a concern of mine,’ before adding: ‘In the longer term, we fundamentally believe in the strength of the dollar.’”
After the dramatic cut in corporate tax rates and myriad measures seen as benefiting the wealthy, some argue that Trump populism is a ruse. But now we see a 2018 push on tariffs, aggressive trade negotiation, U.S. capital investment and higher wages meant to rebuild our manufacturing base to the benefit of the American worker. Rather than the rich continuing to build wealth at the expense of the lowly worker, they can now grow wealth together. Is such a radical change even possible? Where are the losers?
January 24 – CNBC (Matt Clinch): “Treasury Secretary Steven Mnuchin said the U.S. is open for business and welcomed a weaker dollar, saying that it would benefit the country. Speaking at a press conference at the World Economic Forum…, he made a bid for investment into the U.S., saying the government was committed to growth of 3% or higher. ‘Obviously a weaker dollar is good for us as it relates to trade and opportunities,’ Mnuchin told reporters…, adding that the currency's short term value is ‘not a concern of ours at all.’ ‘Longer term, the strength of the dollar is a reflection of the strength of the U.S. economy and the fact that it is and will continue to be the primary currency in terms of the reserve currency,’ he said.”
Surprisingly candid comments from our Treasury Secretary. And as much as he, the President and other administration officials work to “walk back” Wednesday’s comment, “obviously a weaker dollar is good for us” confirms what many had suspected: “America First” has a “beggar-thy-neighbor” currency devaluation component. A revitalized U.S. manufacturing sector will come at the expense of our trade partners and the holders of our debt.
I’ve posited in past CBBs that it would have been easier to implement the Trump agenda in a crisis backdrop. This requires revision: it would have been less risky to implement… Huge tax cuts at this late stage in the Bubble come with unexpected consequences, including those associated with stoking acutely speculative risk markets. There are major risks in feeding an investment boom now, following years of extraordinarily loose financial conditions and today’s 4.1% unemployment rate. It’s reckless running huge fiscal deficits at this late stage of a boom cycle – with federal debt having already inflated from $6.074 TN to $16.463 TN in less than ten years. And, this week, openly lauding the benefits of a weaker dollar with foreign holdings of U.S. debt securities at $11.370 TN (up 57% since the crisis!).
Mario Draghi’s rebuke was as swift as it was stern. The ECB’s Maestro well-appreciates that Mnuchin and the Trump folks are playing with fire. Global central bankers in concert have cultivated the perception that everything is well under control. No need to fret market liquidity, at least not in equities and bond markets. Currencies, well, that’s a whole different animal.
There are few matters that keep central bankers awake at night like the prospect of dislocation in the currency markets. These are massive markets, generally well-behaved but not easily controlled when they’re not. Disorderly selling of the dollar – with all the leveraged currency trades and unfathomable derivative exposures that have accumulated for decades and mushroomed since the crisis - now that’s lush habitat for the proverbial black swan.
The Dow gained another 545 points this week, bring 2018 gains (17 sessions) to 1,897 points. The S&P500 jumped 2.2%, as the dollar index declined 1.7%. Clearly, U.S. and global risk markets are fine with dollar devaluation. Heck, they’re delighted with the notion of concerted global currency devaluation. The sickly dollar will only pressure the ECB, BOJ and others to stay looser for even longer. What country these days feels comfortable with a strong currency? What could go wrong?
Does dollar weakness and attendant securities market froth pressure the Fed to pick up the pace of rate increases? Heaven forbid, might they come to the realization that they need to actually tighten monetary conditions. Beyond stock market Bubbles, the weakening dollar bolsters the case for an uptick in inflationary pressures. WTI crude is up a quick 9.5% y-t-d to $66.14. The GSCI commodities index has gained 4.7% in the first four weeks of the year. Heightened dollar vulnerability might also engender a consensus view within the global central bank community supportive of tighter U.S. monetary policy.
“Beggar-thy-neighbor” – not desperate depression-era measures, but amid economic/financial boom and record stock prices. Uncharted territory. Trapped in concerted reflationary monetary policymaking, global central bankers may be tempted to disregard ramifications of “America First.” This will unlikely be the case with foreign governments. And when do anxious governments begin to pressure their central banks against accommodating Team Trump ambitions? Beijing has already reminded the world of their prerogative to liquidate China’s Treasury hoard. Global markets remain confident that central banks have no option other than recycling dollars back into U.S. securities markets. Perhaps this is too complacent.
Crisis-period QE and zero rates evolved over years into “whatever it takes” open-ended QE, negative rates and egregious market manipulation. Global central bankers took control – and today have things fully under control. This market perception has been instrumental in the historic collapse in market volatility. Resulting readily available cheap market risk protection has incentivized historic risk-taking and today’s speculative melt-up market dynamic.
Historians may look back at Team Trump’s jaunt to chilly Davos as a pivotal juncture in global finance. Was it naivety, gall or a combination – or just typical of today’s overabundance of complacency? The U.S. Treasury Secretary - facing enormous fiscal deficits, rising rates, $16.5 TN of federal debt, a nervous bond market and suspicious foreign officials - openly advocating a weaker dollar.
There are certainly plenty of dollars in the world available to sell or hedge. What is the likelihood of dollar selling turning disorderly? One might look at several years of incredible ECB and BOJ “whatever it takes” liquidity creation and rate suppression (and interest-rate differentials you could drive a truck through) and ponder Friday’s closing prices of 1.24 for the euro and 108.58 for the dollar/yen. Those are two flashing warning signs of dollar vulnerability.
In all the euphoria, markets can be excused for presuming dollar weakness ensures a further delay in global monetary policy normalization. Yet things turn quite interesting the day unruly currency markets begin indicating disorderly trading. The almighty central bankers might have little to offer. What if they intervene to no avail? This could prove the juncture when markets begin questioning the Indomitable Central Banks in Control thesis. The price of market “insurance” would begin to creep (or, not unlikely, spike) higher, and the availability of cheap risk protection would wane (possibly abruptly). In such a development, I would expect the more sophisticated market operators to begin (aggressively) pulling back on risk and leverage. Such a dynamic, especially after such a spectacular melt-up, would mark an important inflection point for market liquidity.
Ten-year Treasury yields were little changed on the week at 2.66%. Yet two-year yields rose another five bps to 2.12% and five-year yields gained two bps to 2.47%. Global yields are on the move. German 10-year yields jumped six bps to a 13-month high 0.63%, and French yields gained seven bps to 0.91%. UK yields jumped 11 bps to 1.44%.
The dollar’s worst start to a year since 1987. Wildly speculative stock markets, rising bond yields, Fed rate hikes, dollar weakness and acrimony, and general currency market instability. Today’s backdrop recalls 1987, though with some important differences. The world has so much more debt these days. Global equities markets are so much bigger and interconnected – derivatives markets incredibly so. Did China even have a stock market in ’87?
Today’s central bank balance sheets would be unimaginable back in 1987. Markets certainly had much less faith in central bank liquidity backstops. 1987 had this exciting new financial product, “portfolio insurance.” 2017 has the continuation of this enchanting New Age notion that central banks insure all portfolios. The Great Irony of Contemporary Finance: years of extreme central bank inflationary measures ensured that global finance outgrew the capacity of central bank liquidity backstops.
January 25 – Wall Street Journal (Richard Barely): “Only a select few people can move foreign-exchange markets with a handful of words. U.S. Treasury Secretary Steven Mnuchin and European Central Bank President Mario Draghi are two of them. Thursday they clashed, and the ECB clearly has a fight on its hands. The euro had already been rising against the dollar before Mr. Mnuchin’s comments in Davos Wednesday, that a weak dollar was helpful for trade, sent it even higher. Mr. Mnuchin’s apparent attempt Thursday to play down that comment didn’t reverse the trend. Mr. Draghi’s first-round defense proved insufficient.”
January 21 – Bloomberg: “China’s bad-loan data, which analysts and investors have long regarded to be understated, was thrown into question again after the banking regulator uncovered faked reporting at a local lender. Shanghai Pudong Development Bank Co., the nation’s ninth-largest lender, illegally lent 77.5 billion yuan ($12bn) over many years to 1,493 shell companies to take over bad loans at its Chengdu branch, the China Banking Regulatory Commission said… The branch, which had reported zero bad loans, inflated its earnings and faked other operational data to improve performance and evade compliance, the CBRC found.”
January 21 – Bloomberg: “For years, a branch of a mid-sized Chinese bank outshone rivals by reporting zero bad loans at a time others were struggling with rising soured debt. Financial indicators at Shanghai Pudong Development Bank Co..’s branch in the western Chengdu city were healthy, officials raised no red flags, and Fitch Ratings upgraded the parent last July citing tighter support and supervision by local authorities. Unknown to most, however, regulators had been probing the lender for a fraud that may reverberate across China’s financial industry. ‘It is not just about Pudong Bank,’ analysts at Guangfa Securities Co., led by Ni Jun, wrote… ‘The underlying issue is that the market may conduct a systemic review and re-rating on the bad loan ratios of those highly-leveraged Chinese banks that had gone through a round of balance-sheet expansion.’”
For the Week:
The S&P500 jumped 2.2% (up 7.5% y-t-d), and the Dow rose 2.1% (up 7.7%). The Utilities rallied 2.3% (down 3.4%). The Banks gained 2.0% (up 9.1%), while the Broker/Dealers slipped 0.2% (up 6.3%). The Transports dropped 1.6% (up 4.8%). The S&P 400 Midcaps gained 0.8% (up 5.0%), and the small cap Russell 2000 added 0.7% (up 4.7%). The Nasdaq100 surged 2.8% (up 9.8%). The Semiconductors increased 0.7% (up 10.2%). The Biotechs surged 9.2% (up 16.7%). With bullion up $18, the HUI gold index jumped 3.3% (up 5.7%).
Three-month Treasury bill rates ended the week at 139 bps. Two-year government yield rose five bps to 2.12% (up 23bps y-t-d). Five-year T-note yields gained two bps to 2.47% (up 26bps). Ten-year Treasury yields were unchanged at 2.66% (up 25bps). Long bond yields slipped two bps to 2.91% (up 17bps).
Greek 10-year yields dropped 17 bps to 3.63% (down 44bps y-t-d). Ten-year Portuguese yields declined three bps to 1.95% (unchanged). Italian 10-year yields gained four bps to 2.01% (down 1bp). Spain's 10-year yields dipped three bps to 1.41% (down 16bps). German bund yields jumped six bps to 0.63% (up 20bps). French yields rose seven bps to 0.91% (up 13bps). The French to German 10-year bond spread widened one to 28 bps. U.K. 10-year gilt yields jumped 11 bps to 1.44% (up 25bps). U.K.'s FTSE equities index declined 0.8% (down 0.3%).
Japan's Nikkei 225 equities index declined 0.7% (up 3.8% y-o-y). Japanese 10-year "JGB" yields slipped one basis point to 0.078% (up 3bps). France's CAC40 was little changed (up 4.1%). The German DAX equities index fell 0.7% (up 3.3%). Spain's IBEX 35 equities index gained 1.1% (up 5.5%). Italy's FTSE MIB index added 0.5% (up 9.2%). EM markets marched higher. Brazil's Bovespa index surged 5.3% (up 11.9%), and Mexico's Bolsa jumped 2.8% (up 3.5%). South Korea's Kospi index gained 2.2% (up 4.3%). India’s Sensex equities index rose 1.5% (up 5.9%). China’s Shanghai Exchange jumped 2.0% (up 7.6%). Turkey's Borsa Istanbul National 100 index surged 4.8% (up 4.7%). Russia's MICEX equities index added 0.4% (up 8.8%).
Junk bond mutual funds saw outflows of $1.131 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates jumped 11 bps to a 10-month high 4.11% (down 4bps y-o-y). Fifteen-year rates surged 13 bps to 3.62% (up 22bps). Five-year hybrid ARM rates gained six bps to 3.52% (up 32bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up a basis point to 4.29% (down 2bps).
Federal Reserve Credit last week declined $3.9bn to $4.400 TN. Over the past year, Fed Credit contracted $18.9bn, or 0.4%. Fed Credit inflated $1.590 TN, or 57%, over the past 273 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $3.7bn last week to $3.352 TN. "Custody holdings" were up $181bn y-o-y, or 5.8%.
M2 (narrow) "money" supply jumped $20.9bn last week to $13.842 TN. "Narrow money" expanded $570bn, or 4.3%, over the past year. For the week, Currency increased $3.8bn. Total Checkable Deposits surged $53.2bn, while Savings Deposits fell $34.7bn. Small Time Deposits added $2.8bn. Retail Money Funds declined $3.3bn.
Total money market fund assets increased $8.4bn to $2.824 TN. Money Funds gained $139bn y-o-y, or 5.2%.
Total Commercial Paper rose another $10.0bn to a five-year high $1.129 TN. CP gained $165bn y-o-y, or 17.9%.
Currency Watch:
January 24 – Bloomberg (Cecile Gutscher and John Ainger): “Whether or not the White House choreographed the dollar’s slide to its lowest level in three years, the U.S. administration is certainly providing ammunition for those betting that the greenback will continue to weaken. The U.S. currency is caught in the rhetorical cross hairs after Treasury Secretary Steven Mnuchin laid out the benefits of a weaker dollar for the American economy at Davos on Wednesday. The comments came days after U.S. President Donald Trump stepped up his protectionist push by slapping of tariffs on solar panels and washing machines. Subsequent remarks by Commerce Secretary Wilbur Ross that Mnuchin has not shifted America’s long-standing strong-dollar policy did little to slow the currency’s depreciation.”
The U.S. dollar index sank 1.7% to $89.067 (down 3.3% y-o-y). For the week on the upside, the Swiss franc increased 3.3%, the South African rand 2.8%, the Swedish krona 2.4%, the Norwegian krone 2.3%, the British pound 2.2%, the Japanese yen 2.0%, the euro 1.7%, the Brazilian real 1.5%, the Canadian dollar 1.5%, the Australian dollar 1.4%, the Singapore dollar 1.0%, the New Zealand dollar 1.0%, the Mexican peso 0.8% and the South Korean won 0.2%. The Chinese renminbi increased 1.2% versus the dollar this week (up 2.8% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index jumped 2.9% (up 4.7% y-t-d). Spot Gold gained 1.3% to $1,350 (up 3.6%). Silver rose 2.4% to $17.441 (up 1.7%). Crude surged $2.77 to $66.14 (up 9.5%). Gasoline jumped 4.0% (up 8%), and Natural Gas surged 10.0% (up 19%). Copper increased 0.4% (down 3%). Wheat jumped 4.3% (up 3%). Corn gained 1.1% (up 2%).
Trump Administration Watch:
January 22 – Politico (Rachael Bade): “Washington will be back on the brink in less than three weeks. Lawmakers may have pulled themselves out of a debilitating government shutdown Monday, but the fight over immigration and spending that’s ground virtually all congressional business to a halt is far from over. And the fundamentals of the debate haven’t changed at all. Republican leaders are under increasing pressure from their own members to reach a long-term budget agreement by Feb. 8, when the government next runs out of money. Their defense hawks are desperate to increase defense spending, a key 2018 priority for President Donald Trump. And their members are sick of voting on short-term funding bills that they say cripple the military. But in order to strike any long-term budget accord, at least nine Senate Democrats are needed for passage. And while Democrats’ strategy of shuttering the government until securing relief for Dreamers blew up in their faces Monday, they can still withhold support for a long-term budget deal to get what they want on immigration.”
January 24 – CNBC (Dan Mangan): “The federal deficit could rise by a whopping $154 billion over the next eight years if just five states adopt measures to protect residents from the impact of the recently passed Trump tax law… California and New York alone could spark an increase of more than $110 billion in the deficit if they take such actions, the Bloomberg report… estimated. Those two states and three other Democratic-leaning ones examined in the report are actively considering the moves because the tax legislation passed in December will eliminate billions of dollars in deductions that their residents have been able to claim on federal income tax returns. The actions being eyed include ending state income taxes and having the same amount of revenue collected by the state through employer-paid payroll taxes.”
January 23 – Reuters (Ayesha Rascoe and Nichola Groom): “U.S. President Donald Trump signed into law a steep tariff on imported solar panels on Tuesday, a move billed as a way to protect American jobs but which the solar industry said would lead to thousands of layoffs and raise consumer prices. The 30% tariff on solar panels is among the first unilateral trade restrictions imposed by the administration as part of a broader protectionist agenda to help U.S. manufacturers, but which has alarmed Asian trading partners… The administration also introduced a tariff on imported washing machines. ‘You’re going to have people getting jobs again and we’re going to make our own product again. It’s been a long time,’ Trump said… But the solar industry countered that the move will raise the cost of installing panels, quash billions of dollars of investment, and kill tens of thousands of jobs, raising questions about whether Trump’s move will backfire by triggering mass layoffs.”
January 22 – Wall Street Journal (Jacob M. Schlesinger and Erin Ailworth): “President Donald Trump slapped steep tariffs on imports of solar panels and washing machines, kicking off his second year in office by showing he is ready to start implementing his long-promised ‘America First’ trade policy. The moves were announced… in response to U.S. industry pleas for relief from a recent flood of cheap imports and are the first of what administration officials said would be a series of trade-enforcement actions in the coming months. The tariffs are aimed mainly at Asian manufacturers—Chinese makers of solar panels and South Korean producers of washing machines.”
January 23 – Reuters (Ju-min Park and Stella Qiu): “China and South Korea condemned steep import tariffs on washing machines and solar panels imposed by U.S. President Donald Trump, with Seoul set to complain to the World Trade Organization (WTO) over the ‘excessive’ move. Europe also said on Tuesday it regretted the U.S. decision and would react ‘firmly and proportionately’ if EU exports were hit by the tariffs, which Asia fears could be the start of greater protectionism and stall a revival in global trade.”
January 24 – Bloomberg (Kathleen Hunter and Enda Curran): “Trade wars ‘are fought every single day,’ and the U.S. has been engaged in one ‘for quite a little while,’ Commerce Secretary Wilbur Ross said in comments that diverge from President Donald Trump.”
January 19 – Wall Street Journal (Jacob M. Schlesinger): “President Donald Trump’s ‘America First’ trade policy will be more focused in the coming year on countering China, after a first year tangling with allies ranging from North America to Europe and Asia, a White House economic official said… ‘There’s a lot of consensus around the viewpoint that China does need to be the focal point, because China’s behaviors are causing significant problems for the U.S. economy and for the global trading system,’ said the official… ‘I’m not going to minimize Nafta and Korus,’ the official said, referring to the North American Free Trade Agreement with Canada and Mexico, and the U.S.-South Korea free-trade agreement. Mr. Trump has threatened to end them. ‘I do think everyone realizes that even if Nafta and Korus aren’t working as well as they could, they are only part of the broader concerns we have,’ he added.”
January 22 – Reuters (Ben Blanchard and Michael Martina): “The United States, not China, threatens the global trade system, China’s foreign ministry said…, after U.S. President Donald Trump’s administration called U.S. support for Beijing’s joining the World Trade Organization in 2001 a mistake. WTO rules have proved ineffective in making China embrace a market-oriented trade regime, and the United States ‘erred’ in backing China’s entry to the trade body on such terms, the office of the U.S. Trade Representative said last week.”
January 21 – Reuters (Ben Blanchard): “China’s top newspaper, decrying Washington as a trouble-maker, said on Monday U.S. moves in the South China Sea like last week’s freedom of navigation operation will only cause China to strengthen its deployments in the disputed waterway.”
U.S. Bubble Watch:
January 24 – Reuters (Lucia Mutikani): “U.S. home sales fell more than expected in December as the supply of houses on the market dropped to a record low, pushing up prices and sidelining some potential first-time buyers. The decline in home sales… followed three straight months of strong increases… Existing home sales declined 3.6% to a seasonally adjusted annual rate of 5.57 million units last month… Unseasonably cold weather probably accounted for some of the weakness as sales in the Northeast and Midwest fell sharply… The number of previously owned homes on the market tumbled 11.4% to 1.48 million units in December, the lowest since January 1999 when the Realtors group started tracking the series… Housing inventory was down 10.3% from a year ago. It has declined for 31 straight months on a year-on-year basis. At December’s sales pace, it would take a record-low 3.2 months to exhaust the current inventory…”
January 22 – Reuters (Ben Hirschler, Sudip Kar-Gupta and Michael Erman): “Biotech deal activity exploded on Monday with French drugmaker Sanofi and U.S.-based Celgene spending a combined total of more than $20 billion to add new products for hemophilia and cancer to their medicine cabinets. The acquisitions will fuel expectations for a busy year of mergers and acquisitions (M&A) as large drugmakers snap up promising assets from smaller rivals to help revive growth… The two cash deals were agreed at a prices of $105 and $87 per share respectively. Shares in Bioverativ leaped 63% in early U.S. trading and Juno jumped 27%.”
January 22 – Financial Times (Javier Espinoza): “The investment industry usually operates on a simple piece of logic: money managers pitch to their clients and persuade them to stump up cash. But when CVC Capital Partners, the private equity group best known for the 2005 takeover of Formula One, set out to raise a new fund last year, the investors were the ones begging to gain access… Treated more like celebrities than investment managers, CVC’s star dealmakers were on display for investors wishing to buy into the heavily oversubscribed fund. ‘Every 45 minutes we would swap over,’ says a long-time investor in CVC funds, each time meeting a different executive in the hope that they would let them in their fund. ‘We make sure managers like us and keep us. It’s hard to get [our] money in the door these days.’ …Buyout volumes were up 27% year on year in 2017, according to Thomson Reuters, and are expected to accelerate this year, propelled by a record $1.1tn of cash pledged by investors last year.”
January 24 – Reuters (Richard Leong): “U.S. mortgage application activity climbed to their loftiest level in over four months despite 30-year home borrowing costs rising to their highest levels since March, the Mortgage Bankers Association said…”
January 24 – Bloomberg (Michelle Kaske and Yalixa Rivera): “Puerto Rico said it will have virtually no money to cover debt payments for the next five years as the bankrupt island deals with the crippling blow of Hurricane Maria, which caused tens of thousands of residents to leave and pushed the economy into its deepest contraction in more than a decade. The forecast… shows that the government expects to have a shortfall, before any debt service is paid, of $3.4 billion through 2022. That marks a significant shift from the proposal released before the storm that would have left hundreds of millions of dollars a year to cover its debts.”
January 21 – Financial Times (Alistair Gray): “The big four US retail banks sustained a near 20% jump in losses from credit cards in 2017, raising doubts about the ability of consumers to fuel economic expansion. ‘People are using their cards to get from pay cheque to pay cheque,’ said Charles Peabody, managing director at… Compass Point. ‘There’s an underlying deterioration in the ability of the consumer to keep up with their debt service burden.’ Recently disclosed results showed Citigroup, JPMorgan Chase, Bank of America and Wells Fargo took a combined $12.5bn hit from soured card loans last year, about $2bn more than a year ago.”
January 25 – Bloomberg (Claire Boston): “A growing share of the trade-ins that U.S. auto dealers and lenders accept for car-purchase financing are worthless on paper, a sign that banks and finance companies are making riskier loans to keep up revenue as vehicle sales slow. Almost a third of cars traded in last year were worth less than the loans that had been financing them… That’s up from about a quarter a decade earlier, said Edmunds, which looked at cars traded in as part of financing packages for new auto purchases in the U.S. The growing proportion of underwater trade-ins means that at least some borrowers are getting deeper and deeper in debt with every car they buy…”
January 25 – Bloomberg (Dani Burger): “Here’s one more piece of evidence that something’s amiss in the U.S. stock market: A usually reliable strategy used by quants is suddenly on the fritz. Quantitative investors have long used liquidity signals to strengthen their automated models. Simply put, bets on the least traded stocks should, in theory, outperform the market because there’s a reward for taking on the extra liquidity risk. But since December the opposite has been occurring, with the most liquid stocks rewarding investors to the greatest degree in nine years.”
January 21 – The Atlantic (Uria Friedman): “‘In God We Trust,’ goes the motto of the United States. In God, and apparently little else. Only a third of Americans now trust their government ‘to do what is right’—a decline of 14 percentage points from last year, according to a new report by the communications marketing firm Edelman. 42% trust the media, relative to 47% a year ago. Trust in business and non-governmental organizations… decreased by 10 and nine percentage points… Edelman, which for 18 years has been asking people around the world about their level of trust in various institutions, has never before recorded such steep drops in trust in the United States. ‘This is the first time that a massive drop in trust has not been linked to a pressing economic issue or catastrophe like [Japan’s 2011] Fukushima nuclear disaster,’ Richard Edelman, the head of the firm, noted… ‘In fact, it’s the ultimate irony that it’s happening at a time of prosperity, with the stock market and employment rates in the U.S. at record highs.”
January 22 – Reuters (Anna Irrera): “More than 10% of funds raised through ‘initial coin offerings’ are lost or stolen in hacker attacks, according to new research by Ernst & Young that delves into the risks of investing in cryptocurrency projects online. The professional services firm analyzed more than 372 ICOs, in which new digital currencies are distributed to buyers, and found that roughly $400 million of the total $3.7 billion funds raised to date had been stolen, according to research…”
The S&P500 jumped 2.2% (up 7.5% y-t-d), and the Dow rose 2.1% (up 7.7%). The Utilities rallied 2.3% (down 3.4%). The Banks gained 2.0% (up 9.1%), while the Broker/Dealers slipped 0.2% (up 6.3%). The Transports dropped 1.6% (up 4.8%). The S&P 400 Midcaps gained 0.8% (up 5.0%), and the small cap Russell 2000 added 0.7% (up 4.7%). The Nasdaq100 surged 2.8% (up 9.8%). The Semiconductors increased 0.7% (up 10.2%). The Biotechs surged 9.2% (up 16.7%). With bullion up $18, the HUI gold index jumped 3.3% (up 5.7%).
Three-month Treasury bill rates ended the week at 139 bps. Two-year government yield rose five bps to 2.12% (up 23bps y-t-d). Five-year T-note yields gained two bps to 2.47% (up 26bps). Ten-year Treasury yields were unchanged at 2.66% (up 25bps). Long bond yields slipped two bps to 2.91% (up 17bps).
Greek 10-year yields dropped 17 bps to 3.63% (down 44bps y-t-d). Ten-year Portuguese yields declined three bps to 1.95% (unchanged). Italian 10-year yields gained four bps to 2.01% (down 1bp). Spain's 10-year yields dipped three bps to 1.41% (down 16bps). German bund yields jumped six bps to 0.63% (up 20bps). French yields rose seven bps to 0.91% (up 13bps). The French to German 10-year bond spread widened one to 28 bps. U.K. 10-year gilt yields jumped 11 bps to 1.44% (up 25bps). U.K.'s FTSE equities index declined 0.8% (down 0.3%).
Japan's Nikkei 225 equities index declined 0.7% (up 3.8% y-o-y). Japanese 10-year "JGB" yields slipped one basis point to 0.078% (up 3bps). France's CAC40 was little changed (up 4.1%). The German DAX equities index fell 0.7% (up 3.3%). Spain's IBEX 35 equities index gained 1.1% (up 5.5%). Italy's FTSE MIB index added 0.5% (up 9.2%). EM markets marched higher. Brazil's Bovespa index surged 5.3% (up 11.9%), and Mexico's Bolsa jumped 2.8% (up 3.5%). South Korea's Kospi index gained 2.2% (up 4.3%). India’s Sensex equities index rose 1.5% (up 5.9%). China’s Shanghai Exchange jumped 2.0% (up 7.6%). Turkey's Borsa Istanbul National 100 index surged 4.8% (up 4.7%). Russia's MICEX equities index added 0.4% (up 8.8%).
Junk bond mutual funds saw outflows of $1.131 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates jumped 11 bps to a 10-month high 4.11% (down 4bps y-o-y). Fifteen-year rates surged 13 bps to 3.62% (up 22bps). Five-year hybrid ARM rates gained six bps to 3.52% (up 32bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up a basis point to 4.29% (down 2bps).
Federal Reserve Credit last week declined $3.9bn to $4.400 TN. Over the past year, Fed Credit contracted $18.9bn, or 0.4%. Fed Credit inflated $1.590 TN, or 57%, over the past 273 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $3.7bn last week to $3.352 TN. "Custody holdings" were up $181bn y-o-y, or 5.8%.
M2 (narrow) "money" supply jumped $20.9bn last week to $13.842 TN. "Narrow money" expanded $570bn, or 4.3%, over the past year. For the week, Currency increased $3.8bn. Total Checkable Deposits surged $53.2bn, while Savings Deposits fell $34.7bn. Small Time Deposits added $2.8bn. Retail Money Funds declined $3.3bn.
Total money market fund assets increased $8.4bn to $2.824 TN. Money Funds gained $139bn y-o-y, or 5.2%.
Total Commercial Paper rose another $10.0bn to a five-year high $1.129 TN. CP gained $165bn y-o-y, or 17.9%.
Currency Watch:
January 24 – Bloomberg (Cecile Gutscher and John Ainger): “Whether or not the White House choreographed the dollar’s slide to its lowest level in three years, the U.S. administration is certainly providing ammunition for those betting that the greenback will continue to weaken. The U.S. currency is caught in the rhetorical cross hairs after Treasury Secretary Steven Mnuchin laid out the benefits of a weaker dollar for the American economy at Davos on Wednesday. The comments came days after U.S. President Donald Trump stepped up his protectionist push by slapping of tariffs on solar panels and washing machines. Subsequent remarks by Commerce Secretary Wilbur Ross that Mnuchin has not shifted America’s long-standing strong-dollar policy did little to slow the currency’s depreciation.”
The U.S. dollar index sank 1.7% to $89.067 (down 3.3% y-o-y). For the week on the upside, the Swiss franc increased 3.3%, the South African rand 2.8%, the Swedish krona 2.4%, the Norwegian krone 2.3%, the British pound 2.2%, the Japanese yen 2.0%, the euro 1.7%, the Brazilian real 1.5%, the Canadian dollar 1.5%, the Australian dollar 1.4%, the Singapore dollar 1.0%, the New Zealand dollar 1.0%, the Mexican peso 0.8% and the South Korean won 0.2%. The Chinese renminbi increased 1.2% versus the dollar this week (up 2.8% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index jumped 2.9% (up 4.7% y-t-d). Spot Gold gained 1.3% to $1,350 (up 3.6%). Silver rose 2.4% to $17.441 (up 1.7%). Crude surged $2.77 to $66.14 (up 9.5%). Gasoline jumped 4.0% (up 8%), and Natural Gas surged 10.0% (up 19%). Copper increased 0.4% (down 3%). Wheat jumped 4.3% (up 3%). Corn gained 1.1% (up 2%).
Trump Administration Watch:
January 22 – Politico (Rachael Bade): “Washington will be back on the brink in less than three weeks. Lawmakers may have pulled themselves out of a debilitating government shutdown Monday, but the fight over immigration and spending that’s ground virtually all congressional business to a halt is far from over. And the fundamentals of the debate haven’t changed at all. Republican leaders are under increasing pressure from their own members to reach a long-term budget agreement by Feb. 8, when the government next runs out of money. Their defense hawks are desperate to increase defense spending, a key 2018 priority for President Donald Trump. And their members are sick of voting on short-term funding bills that they say cripple the military. But in order to strike any long-term budget accord, at least nine Senate Democrats are needed for passage. And while Democrats’ strategy of shuttering the government until securing relief for Dreamers blew up in their faces Monday, they can still withhold support for a long-term budget deal to get what they want on immigration.”
January 24 – CNBC (Dan Mangan): “The federal deficit could rise by a whopping $154 billion over the next eight years if just five states adopt measures to protect residents from the impact of the recently passed Trump tax law… California and New York alone could spark an increase of more than $110 billion in the deficit if they take such actions, the Bloomberg report… estimated. Those two states and three other Democratic-leaning ones examined in the report are actively considering the moves because the tax legislation passed in December will eliminate billions of dollars in deductions that their residents have been able to claim on federal income tax returns. The actions being eyed include ending state income taxes and having the same amount of revenue collected by the state through employer-paid payroll taxes.”
January 23 – Reuters (Ayesha Rascoe and Nichola Groom): “U.S. President Donald Trump signed into law a steep tariff on imported solar panels on Tuesday, a move billed as a way to protect American jobs but which the solar industry said would lead to thousands of layoffs and raise consumer prices. The 30% tariff on solar panels is among the first unilateral trade restrictions imposed by the administration as part of a broader protectionist agenda to help U.S. manufacturers, but which has alarmed Asian trading partners… The administration also introduced a tariff on imported washing machines. ‘You’re going to have people getting jobs again and we’re going to make our own product again. It’s been a long time,’ Trump said… But the solar industry countered that the move will raise the cost of installing panels, quash billions of dollars of investment, and kill tens of thousands of jobs, raising questions about whether Trump’s move will backfire by triggering mass layoffs.”
January 22 – Wall Street Journal (Jacob M. Schlesinger and Erin Ailworth): “President Donald Trump slapped steep tariffs on imports of solar panels and washing machines, kicking off his second year in office by showing he is ready to start implementing his long-promised ‘America First’ trade policy. The moves were announced… in response to U.S. industry pleas for relief from a recent flood of cheap imports and are the first of what administration officials said would be a series of trade-enforcement actions in the coming months. The tariffs are aimed mainly at Asian manufacturers—Chinese makers of solar panels and South Korean producers of washing machines.”
January 23 – Reuters (Ju-min Park and Stella Qiu): “China and South Korea condemned steep import tariffs on washing machines and solar panels imposed by U.S. President Donald Trump, with Seoul set to complain to the World Trade Organization (WTO) over the ‘excessive’ move. Europe also said on Tuesday it regretted the U.S. decision and would react ‘firmly and proportionately’ if EU exports were hit by the tariffs, which Asia fears could be the start of greater protectionism and stall a revival in global trade.”
January 24 – Bloomberg (Kathleen Hunter and Enda Curran): “Trade wars ‘are fought every single day,’ and the U.S. has been engaged in one ‘for quite a little while,’ Commerce Secretary Wilbur Ross said in comments that diverge from President Donald Trump.”
January 19 – Wall Street Journal (Jacob M. Schlesinger): “President Donald Trump’s ‘America First’ trade policy will be more focused in the coming year on countering China, after a first year tangling with allies ranging from North America to Europe and Asia, a White House economic official said… ‘There’s a lot of consensus around the viewpoint that China does need to be the focal point, because China’s behaviors are causing significant problems for the U.S. economy and for the global trading system,’ said the official… ‘I’m not going to minimize Nafta and Korus,’ the official said, referring to the North American Free Trade Agreement with Canada and Mexico, and the U.S.-South Korea free-trade agreement. Mr. Trump has threatened to end them. ‘I do think everyone realizes that even if Nafta and Korus aren’t working as well as they could, they are only part of the broader concerns we have,’ he added.”
January 22 – Reuters (Ben Blanchard and Michael Martina): “The United States, not China, threatens the global trade system, China’s foreign ministry said…, after U.S. President Donald Trump’s administration called U.S. support for Beijing’s joining the World Trade Organization in 2001 a mistake. WTO rules have proved ineffective in making China embrace a market-oriented trade regime, and the United States ‘erred’ in backing China’s entry to the trade body on such terms, the office of the U.S. Trade Representative said last week.”
January 21 – Reuters (Ben Blanchard): “China’s top newspaper, decrying Washington as a trouble-maker, said on Monday U.S. moves in the South China Sea like last week’s freedom of navigation operation will only cause China to strengthen its deployments in the disputed waterway.”
U.S. Bubble Watch:
January 24 – Reuters (Lucia Mutikani): “U.S. home sales fell more than expected in December as the supply of houses on the market dropped to a record low, pushing up prices and sidelining some potential first-time buyers. The decline in home sales… followed three straight months of strong increases… Existing home sales declined 3.6% to a seasonally adjusted annual rate of 5.57 million units last month… Unseasonably cold weather probably accounted for some of the weakness as sales in the Northeast and Midwest fell sharply… The number of previously owned homes on the market tumbled 11.4% to 1.48 million units in December, the lowest since January 1999 when the Realtors group started tracking the series… Housing inventory was down 10.3% from a year ago. It has declined for 31 straight months on a year-on-year basis. At December’s sales pace, it would take a record-low 3.2 months to exhaust the current inventory…”
January 22 – Reuters (Ben Hirschler, Sudip Kar-Gupta and Michael Erman): “Biotech deal activity exploded on Monday with French drugmaker Sanofi and U.S.-based Celgene spending a combined total of more than $20 billion to add new products for hemophilia and cancer to their medicine cabinets. The acquisitions will fuel expectations for a busy year of mergers and acquisitions (M&A) as large drugmakers snap up promising assets from smaller rivals to help revive growth… The two cash deals were agreed at a prices of $105 and $87 per share respectively. Shares in Bioverativ leaped 63% in early U.S. trading and Juno jumped 27%.”
January 22 – Financial Times (Javier Espinoza): “The investment industry usually operates on a simple piece of logic: money managers pitch to their clients and persuade them to stump up cash. But when CVC Capital Partners, the private equity group best known for the 2005 takeover of Formula One, set out to raise a new fund last year, the investors were the ones begging to gain access… Treated more like celebrities than investment managers, CVC’s star dealmakers were on display for investors wishing to buy into the heavily oversubscribed fund. ‘Every 45 minutes we would swap over,’ says a long-time investor in CVC funds, each time meeting a different executive in the hope that they would let them in their fund. ‘We make sure managers like us and keep us. It’s hard to get [our] money in the door these days.’ …Buyout volumes were up 27% year on year in 2017, according to Thomson Reuters, and are expected to accelerate this year, propelled by a record $1.1tn of cash pledged by investors last year.”
January 24 – Reuters (Richard Leong): “U.S. mortgage application activity climbed to their loftiest level in over four months despite 30-year home borrowing costs rising to their highest levels since March, the Mortgage Bankers Association said…”
January 24 – Bloomberg (Michelle Kaske and Yalixa Rivera): “Puerto Rico said it will have virtually no money to cover debt payments for the next five years as the bankrupt island deals with the crippling blow of Hurricane Maria, which caused tens of thousands of residents to leave and pushed the economy into its deepest contraction in more than a decade. The forecast… shows that the government expects to have a shortfall, before any debt service is paid, of $3.4 billion through 2022. That marks a significant shift from the proposal released before the storm that would have left hundreds of millions of dollars a year to cover its debts.”
January 21 – Financial Times (Alistair Gray): “The big four US retail banks sustained a near 20% jump in losses from credit cards in 2017, raising doubts about the ability of consumers to fuel economic expansion. ‘People are using their cards to get from pay cheque to pay cheque,’ said Charles Peabody, managing director at… Compass Point. ‘There’s an underlying deterioration in the ability of the consumer to keep up with their debt service burden.’ Recently disclosed results showed Citigroup, JPMorgan Chase, Bank of America and Wells Fargo took a combined $12.5bn hit from soured card loans last year, about $2bn more than a year ago.”
January 25 – Bloomberg (Claire Boston): “A growing share of the trade-ins that U.S. auto dealers and lenders accept for car-purchase financing are worthless on paper, a sign that banks and finance companies are making riskier loans to keep up revenue as vehicle sales slow. Almost a third of cars traded in last year were worth less than the loans that had been financing them… That’s up from about a quarter a decade earlier, said Edmunds, which looked at cars traded in as part of financing packages for new auto purchases in the U.S. The growing proportion of underwater trade-ins means that at least some borrowers are getting deeper and deeper in debt with every car they buy…”
January 25 – Bloomberg (Dani Burger): “Here’s one more piece of evidence that something’s amiss in the U.S. stock market: A usually reliable strategy used by quants is suddenly on the fritz. Quantitative investors have long used liquidity signals to strengthen their automated models. Simply put, bets on the least traded stocks should, in theory, outperform the market because there’s a reward for taking on the extra liquidity risk. But since December the opposite has been occurring, with the most liquid stocks rewarding investors to the greatest degree in nine years.”
January 21 – The Atlantic (Uria Friedman): “‘In God We Trust,’ goes the motto of the United States. In God, and apparently little else. Only a third of Americans now trust their government ‘to do what is right’—a decline of 14 percentage points from last year, according to a new report by the communications marketing firm Edelman. 42% trust the media, relative to 47% a year ago. Trust in business and non-governmental organizations… decreased by 10 and nine percentage points… Edelman, which for 18 years has been asking people around the world about their level of trust in various institutions, has never before recorded such steep drops in trust in the United States. ‘This is the first time that a massive drop in trust has not been linked to a pressing economic issue or catastrophe like [Japan’s 2011] Fukushima nuclear disaster,’ Richard Edelman, the head of the firm, noted… ‘In fact, it’s the ultimate irony that it’s happening at a time of prosperity, with the stock market and employment rates in the U.S. at record highs.”
January 22 – Reuters (Anna Irrera): “More than 10% of funds raised through ‘initial coin offerings’ are lost or stolen in hacker attacks, according to new research by Ernst & Young that delves into the risks of investing in cryptocurrency projects online. The professional services firm analyzed more than 372 ICOs, in which new digital currencies are distributed to buyers, and found that roughly $400 million of the total $3.7 billion funds raised to date had been stolen, according to research…”
China Watch:
January 22 – Bloomberg (Keith Bradsher): “China has tried just about everything to tame a property market in which home prices sometimes jump around like the value of Bitcoin. Over the years, in one city or another, it has limited mortgage lending. It has tried to halt purchases of homes by people who already own one. It has plowed billions of dollars into building new homes that regular Chinese people can afford. Now the Chinese government is considering adopting something that, while familiar to homeowners in the United States and elsewhere… a property tax. Living in a place without property taxes may sound appealing, but a growing number of experts and policymakers in China say the absence of one has helped destabilize a vast and crucial part of the Chinese economy. Many investors snap up homes — in China, they are mostly apartments — hoping to ride a price surge. In the biggest cities, property prices on average have at least doubled over the past eight years. But vast numbers of apartments in many cities lie empty, either because the buyers have no intention of moving in or renting out, or because speculators built homes that nobody wants.”
January 22 – Bloomberg (Keith Bradsher): “China has tried just about everything to tame a property market in which home prices sometimes jump around like the value of Bitcoin. Over the years, in one city or another, it has limited mortgage lending. It has tried to halt purchases of homes by people who already own one. It has plowed billions of dollars into building new homes that regular Chinese people can afford. Now the Chinese government is considering adopting something that, while familiar to homeowners in the United States and elsewhere… a property tax. Living in a place without property taxes may sound appealing, but a growing number of experts and policymakers in China say the absence of one has helped destabilize a vast and crucial part of the Chinese economy. Many investors snap up homes — in China, they are mostly apartments — hoping to ride a price surge. In the biggest cities, property prices on average have at least doubled over the past eight years. But vast numbers of apartments in many cities lie empty, either because the buyers have no intention of moving in or renting out, or because speculators built homes that nobody wants.”
January 23 – Bloomberg: “Strains are spreading in China’s $15 trillion shadow banking industry as investors pull back from the debt-like savings products that helped drive leverage to dangerous levels. Most affected are some $3.8 trillion of so-called trust products, until now the fastest-growing shadow banking segment and a popular way for debt-ridden property developers and local governments to raise funds from millions of ordinary Chinese. In recent weeks, at least two of the products have been forced to delay payments as the market started to freeze up, making it harder to refinance maturing issues with new ones. ‘On the one hand you have cash-strapped borrowers scrambling for refinancing; on the other you have cash-rich investors not knowing where to put their money for fear of getting burned,’ said James Yang, a sales manager at Shanghai Xiangyi Asset Management Co.”
January 23 – Bloomberg (Lianting Tu): “Struggling Chinese conglomerate HNA Group Co. faces rising bond maturities later this year even if it’s able to navigate current difficulties in repaying debt to banks. HNA is under mounting pressure as several banks are said to have frozen some unused credit lines to its units after missed payments. That follows a $40-billion-plus buying spree that saw the conglomerate emerge from obscurity to take large stakes in companies including Deutsche Bank AG and Hilton Worldwide… The bill on maturing offshore and onshore notes for the group and its units will swell to more than 12 billion yuan ($1.88bn) in both the third and fourth quarters, from 1 billion yuan this quarter…”
January 24 – New York Times (Keith Bradsher): “A reclusive and influential senior adviser to President Xi Jinping of China emerged… with a public message that many in the financial world have been eager to hear: The country has a timetable for curbing its vast appetite for debt. Speaking to attendees at the World Economic Forum, the adviser, Liu He, said that the Chinese government planned to bring its debt under control within three years. Mr. Liu said Beijing intended to focus on reining in the growth of debt among local governments and companies. ‘We have full confidence and a clear plan to get the job done,’ he said. Mr. Liu did not offer details of the government’s plans…”
January 21 – Bloomberg (Prudence Ho): “Shares of HNA Group Co. units fell in Shanghai and Shenzhen trading after more of the conglomerate’s subsidiaries halted their stock from trading, pending ‘major’ announcements. Hainan HNA Infrastructure Investment Group Co. fell by the 10% daily limit…, while HNA Innovation Co. slumped more than 9%. HNA Investment Group Co. sank as much as 5.4%. Four HNA units -- HNA-Caissa Travel Group Co., Bohai Capital Holding Co., Tianjin Tianhai Investment Co. and flagship Hainan Airlines Holding Co. -- suspended their shares from trading this month ahead of unspecified announcements.”
January 24 – Bloomberg: “Just as the U.S. throws up new barriers to cross-border commerce, its largest trading partner China is redoubling its efforts to seal free-trade agreements. From deals with blocs including the Association of Southeast Asian Nations to bilaterals with tiny countries like Maldives, China’s FTAs already cover 21 countries. That compares with the 20 countries covered by U.S. agreements. More than a dozen additional pacts are being negotiated or studied... While President Donald Trump this week imposed tariffs…, underscoring his America first outlook, China is hoping for a ‘bumper year’ for new trade deals, according to the Commerce Ministry.”
Central Bank Watch:
January 25 – Reuters (Balazs Koranyi and Francesco Canepa): “European Central Bank chief Mario Draghi took a swipe at Washington on Thursday for talking down the dollar, a move he said threatened a decades-old pact not to target the currency and might force his bank to change its own policy. Singling out the euro’s surge as a source of uncertainty, Draghi said any unjustified move could force the ECB to rethink its strategy as a strong currency could put a lid on inflation, thwarting its efforts to lift prices.”
January 25 – Bloomberg (Carolynn Look): “Mario Draghi expressed conviction that euro-area inflation will pick up, pushing the euro even higher despite his warning that the exchange rate is a renewed concern. The European Central Bank president said the strengthening economy justifies some currency appreciation, while reviving a warning on volatility that hasn’t been used since September… Improving economic momentum has ‘strengthened further our confidence that inflation will converge to close to but below 2%,” the European Central Bank president told reporters…, adding that domestic price pressures remain muted. ‘Against this background, recent volatility in the exchange rate represents a source of uncertainty which requires monitoring with regard to its possible implications for the medium term outlook of price stability.’”
January 21 – Financial Times (Jim Brunsden, Claire Jones and Arthur Beesley): “Euro area governments will kick off the process on Monday of finding a successor to VÃtor Constâncio as vice-president of the European Central Bank with Spain well placed to secure the role for its economy minister Luis de Guindos. The opening of nominations for the new vice-president will be the first move in a complex chess game of ECB appointments with two-thirds of the central bank’s six-member executive board set to depart during the next two years. This includes the bank’s president, Mario Draghi, whose term ends in October 2019. A complex set of political and other considerations will underlie the appointments process — including the unwritten rule that the currency bloc’s biggest countries should always have a seat, and the need for better gender balance at the highest levels of ECB decision-making.”
Global Bubble Watch:
January 22 – Wall Street Journal (Asjylyn Loder): “The first exchange-traded fund was born 25 years ago this week, enabling investors for the first time to buy or sell the S&P 500 index in a single publicly traded share. Over the years since then, ETFs have come to dominate the financial landscape. Today, there are almost 7,200 exchange-traded products world-wide with $4.8 trillion in assets… Growth is accelerating as investors forsake active money managers in favor of passive, index-tracking funds. Last year, U.S. ETFs raked in a record $466 billion, a 61% increase over 2016 inflows…”
January 22 – Bloomberg (Sarah Ponczek and Carolina Wilson): “Mohamed El-Erian, chief economic adviser at Allianz SE, reiterated his concerns about liquidity in exchange-traded funds. In front of an audience filled with financial advisers during a keynote address at the ‘Inside ETFs’ conference in Hollywood, Florida, the economist… listed some geopolitical and market risks for 2018. And ETFs didn’t escape the short list. ‘Some ETFs, it’s a small proportion, but some of them have inadvertently over-promised liquidity to users,’ he said. ‘The users have assumed much more liquidity than what the underlying asset class can serve.’ El-Erian is talking about the problems that arise as investors move even more money into passive investing products, ‘some of which venture quite far from highly liquid market segments,’ he wrote...”
January 23 – Bloomberg (Sid Verma): “Global stocks and U.S. Treasuries are in the throes of their most ‘extreme’ start to the year ever as bullish sentiment engulfs markets, according to Goldman Sachs… The bank’s cross-asset measure of risk appetite around the world is the highest since it started the gauge in 1991. Euphoria is turbo-charging global equities while 10-year U.S. government bonds are suffering their worst performance in risk-adjusted terms, according to Goldman. ‘Risk appetite is now at its highest level on record, which leads to the question of what future returns can be,’ strategists including Ian Wright wrote…”
January 22 – Bloomberg (Andrew Mayeda): “The International Monetary Fund warned policymakers to be on guard for the next recession even as it predicted global growth will accelerate to the fastest pace in seven years as U.S. tax cuts spur businesses to invest. The fund raised its forecast for world expansion to 3.9% this year and next, up 0.2 percentage point both years from its projection in October. That would be the fastest rate since 2011, when the world was bouncing back from the financial crisis. The strengthening recovery offers a ‘perfect opportunity now for world leaders to repair their roof,’ IMF Managing Director Christine Lagarde told reporters…”
January 21 – Bloomberg (Shelly Hagan): “The global economy created a record number of billionaires last year, exacerbating inequality amid a weakening of workers’ rights and a corporate push to maximize shareholder returns, charity organization Oxfam International said… The world now has 2,043 billionaires, after a new one emerged every two days in the past year… The group of mostly men saw its wealth surge by $762 billion, which is enough money to end extreme poverty seven times over, according to Oxfam. According to separate data compiled by Bloomberg, the top 500 billionaires’ net worth grew 24% to $5.38 trillion in 2017…”
Fixed-Income Bubble Watch:
January 21 – Wall Street Journal (Nick Timiraos): “In enacting a tax cut that is projected to raise annual federal-budget deficits to nearly $1 trillion in the coming years, Washington could be trading more growth now for the risk of more pain down the road. The U.S. government has traditionally reduced interest rates, boosted spending or cut taxes when the economy contracts. Budget analysts warn that future policy makers would have less ammunition to take such actions during the next recession because tax changes are projected to push already-rising national debt levels even higher. That could make the next downturn more severe than it would otherwise be and put added pressure on the Federal Reserve to respond to future crises. ‘While I’m always for reforming the tax code, the timing of this thing doesn’t make any sense,’ said William Hoagland, a former budget adviser to Senate Republicans now at the Bipartisan Policy Center…”
January 21 – Financial Times (Chris Flood): “The supply of US Treasury bonds is set to almost double to $1tn this year, a dramatic increase that could pose a significant risk for the high-flying US stock market as well as for fixed-income investors. The US government’s rising budget deficit, President Donald Trump’s tax cuts and the Federal Reserve’s push to shrink its balance sheet as it reverses the post-financial crisis bond-buying programme are some of the reasons behind the expected increase. This could drive 10-year Treasury bond yields up from their level of 2.6% to 3% by the end of this year and to 3.5% by the end of next year, according to Deutsche Bank. In addition, the amount of investment grade and high-yield bonds issued by US companies that will mature and require refinancing is forecast to increase significantly over the next two years. As a result, total US fixed-income supply could rise from $1tn last year to just over $2tn in 2019…”
January 22 – Bloomberg (Dani Burger and Sid Verma): “U.S. corporate debt exchange-traded funds have bled a near-historic sum of assets over the past two weeks, but holders of the underlying securities are paying little heed. U.S.-listed corporate bond ETFs are headed for a second consecutive month of outflows, the first time that’s occurred in at least seven years. The pain is across ratings. The iShares iBoxx Investment Grade Corporate Bond ETF, LQD, had the biggest day of losses last week since 2016, while BlackRock’s high-yield equivalent, HYG, is in the midst of its biggest two-month outflows on record.”
January 25 – Financial Times (Joe Rennison): “A profit warning… from Swiss baker Aryzta, whose customers include McDonald’s, would not ordinarily be of interest to bond investors. Except the company pointed to faster than expected wage growth in its US business as one of the culprits. The prospect of American workers receiving bigger pay rises taps into a growing anxiety among fixed-income investors: that 2018 may be the year in which inflation finally accelerates, posing a fundamental challenge for holders of long-term bonds that pay ultra low fixed-rate coupons. Signs that a broad-based global economic recovery is gathering pace, rising oil prices and a sweeping US tax cut are raising a red flag for the bond market.”
January 23 – Bloomberg (Lianting Tu): “Struggling Chinese conglomerate HNA Group Co. faces rising bond maturities later this year even if it’s able to navigate current difficulties in repaying debt to banks. HNA is under mounting pressure as several banks are said to have frozen some unused credit lines to its units after missed payments. That follows a $40-billion-plus buying spree that saw the conglomerate emerge from obscurity to take large stakes in companies including Deutsche Bank AG and Hilton Worldwide… The bill on maturing offshore and onshore notes for the group and its units will swell to more than 12 billion yuan ($1.88bn) in both the third and fourth quarters, from 1 billion yuan this quarter…”
January 24 – New York Times (Keith Bradsher): “A reclusive and influential senior adviser to President Xi Jinping of China emerged… with a public message that many in the financial world have been eager to hear: The country has a timetable for curbing its vast appetite for debt. Speaking to attendees at the World Economic Forum, the adviser, Liu He, said that the Chinese government planned to bring its debt under control within three years. Mr. Liu said Beijing intended to focus on reining in the growth of debt among local governments and companies. ‘We have full confidence and a clear plan to get the job done,’ he said. Mr. Liu did not offer details of the government’s plans…”
January 21 – Bloomberg (Prudence Ho): “Shares of HNA Group Co. units fell in Shanghai and Shenzhen trading after more of the conglomerate’s subsidiaries halted their stock from trading, pending ‘major’ announcements. Hainan HNA Infrastructure Investment Group Co. fell by the 10% daily limit…, while HNA Innovation Co. slumped more than 9%. HNA Investment Group Co. sank as much as 5.4%. Four HNA units -- HNA-Caissa Travel Group Co., Bohai Capital Holding Co., Tianjin Tianhai Investment Co. and flagship Hainan Airlines Holding Co. -- suspended their shares from trading this month ahead of unspecified announcements.”
January 24 – Bloomberg: “Just as the U.S. throws up new barriers to cross-border commerce, its largest trading partner China is redoubling its efforts to seal free-trade agreements. From deals with blocs including the Association of Southeast Asian Nations to bilaterals with tiny countries like Maldives, China’s FTAs already cover 21 countries. That compares with the 20 countries covered by U.S. agreements. More than a dozen additional pacts are being negotiated or studied... While President Donald Trump this week imposed tariffs…, underscoring his America first outlook, China is hoping for a ‘bumper year’ for new trade deals, according to the Commerce Ministry.”
Central Bank Watch:
January 25 – Reuters (Balazs Koranyi and Francesco Canepa): “European Central Bank chief Mario Draghi took a swipe at Washington on Thursday for talking down the dollar, a move he said threatened a decades-old pact not to target the currency and might force his bank to change its own policy. Singling out the euro’s surge as a source of uncertainty, Draghi said any unjustified move could force the ECB to rethink its strategy as a strong currency could put a lid on inflation, thwarting its efforts to lift prices.”
January 25 – Bloomberg (Carolynn Look): “Mario Draghi expressed conviction that euro-area inflation will pick up, pushing the euro even higher despite his warning that the exchange rate is a renewed concern. The European Central Bank president said the strengthening economy justifies some currency appreciation, while reviving a warning on volatility that hasn’t been used since September… Improving economic momentum has ‘strengthened further our confidence that inflation will converge to close to but below 2%,” the European Central Bank president told reporters…, adding that domestic price pressures remain muted. ‘Against this background, recent volatility in the exchange rate represents a source of uncertainty which requires monitoring with regard to its possible implications for the medium term outlook of price stability.’”
January 21 – Financial Times (Jim Brunsden, Claire Jones and Arthur Beesley): “Euro area governments will kick off the process on Monday of finding a successor to VÃtor Constâncio as vice-president of the European Central Bank with Spain well placed to secure the role for its economy minister Luis de Guindos. The opening of nominations for the new vice-president will be the first move in a complex chess game of ECB appointments with two-thirds of the central bank’s six-member executive board set to depart during the next two years. This includes the bank’s president, Mario Draghi, whose term ends in October 2019. A complex set of political and other considerations will underlie the appointments process — including the unwritten rule that the currency bloc’s biggest countries should always have a seat, and the need for better gender balance at the highest levels of ECB decision-making.”
Global Bubble Watch:
January 22 – Wall Street Journal (Asjylyn Loder): “The first exchange-traded fund was born 25 years ago this week, enabling investors for the first time to buy or sell the S&P 500 index in a single publicly traded share. Over the years since then, ETFs have come to dominate the financial landscape. Today, there are almost 7,200 exchange-traded products world-wide with $4.8 trillion in assets… Growth is accelerating as investors forsake active money managers in favor of passive, index-tracking funds. Last year, U.S. ETFs raked in a record $466 billion, a 61% increase over 2016 inflows…”
January 22 – Bloomberg (Sarah Ponczek and Carolina Wilson): “Mohamed El-Erian, chief economic adviser at Allianz SE, reiterated his concerns about liquidity in exchange-traded funds. In front of an audience filled with financial advisers during a keynote address at the ‘Inside ETFs’ conference in Hollywood, Florida, the economist… listed some geopolitical and market risks for 2018. And ETFs didn’t escape the short list. ‘Some ETFs, it’s a small proportion, but some of them have inadvertently over-promised liquidity to users,’ he said. ‘The users have assumed much more liquidity than what the underlying asset class can serve.’ El-Erian is talking about the problems that arise as investors move even more money into passive investing products, ‘some of which venture quite far from highly liquid market segments,’ he wrote...”
January 23 – Bloomberg (Sid Verma): “Global stocks and U.S. Treasuries are in the throes of their most ‘extreme’ start to the year ever as bullish sentiment engulfs markets, according to Goldman Sachs… The bank’s cross-asset measure of risk appetite around the world is the highest since it started the gauge in 1991. Euphoria is turbo-charging global equities while 10-year U.S. government bonds are suffering their worst performance in risk-adjusted terms, according to Goldman. ‘Risk appetite is now at its highest level on record, which leads to the question of what future returns can be,’ strategists including Ian Wright wrote…”
January 22 – Bloomberg (Andrew Mayeda): “The International Monetary Fund warned policymakers to be on guard for the next recession even as it predicted global growth will accelerate to the fastest pace in seven years as U.S. tax cuts spur businesses to invest. The fund raised its forecast for world expansion to 3.9% this year and next, up 0.2 percentage point both years from its projection in October. That would be the fastest rate since 2011, when the world was bouncing back from the financial crisis. The strengthening recovery offers a ‘perfect opportunity now for world leaders to repair their roof,’ IMF Managing Director Christine Lagarde told reporters…”
January 21 – Bloomberg (Shelly Hagan): “The global economy created a record number of billionaires last year, exacerbating inequality amid a weakening of workers’ rights and a corporate push to maximize shareholder returns, charity organization Oxfam International said… The world now has 2,043 billionaires, after a new one emerged every two days in the past year… The group of mostly men saw its wealth surge by $762 billion, which is enough money to end extreme poverty seven times over, according to Oxfam. According to separate data compiled by Bloomberg, the top 500 billionaires’ net worth grew 24% to $5.38 trillion in 2017…”
Fixed-Income Bubble Watch:
January 21 – Wall Street Journal (Nick Timiraos): “In enacting a tax cut that is projected to raise annual federal-budget deficits to nearly $1 trillion in the coming years, Washington could be trading more growth now for the risk of more pain down the road. The U.S. government has traditionally reduced interest rates, boosted spending or cut taxes when the economy contracts. Budget analysts warn that future policy makers would have less ammunition to take such actions during the next recession because tax changes are projected to push already-rising national debt levels even higher. That could make the next downturn more severe than it would otherwise be and put added pressure on the Federal Reserve to respond to future crises. ‘While I’m always for reforming the tax code, the timing of this thing doesn’t make any sense,’ said William Hoagland, a former budget adviser to Senate Republicans now at the Bipartisan Policy Center…”
January 21 – Financial Times (Chris Flood): “The supply of US Treasury bonds is set to almost double to $1tn this year, a dramatic increase that could pose a significant risk for the high-flying US stock market as well as for fixed-income investors. The US government’s rising budget deficit, President Donald Trump’s tax cuts and the Federal Reserve’s push to shrink its balance sheet as it reverses the post-financial crisis bond-buying programme are some of the reasons behind the expected increase. This could drive 10-year Treasury bond yields up from their level of 2.6% to 3% by the end of this year and to 3.5% by the end of next year, according to Deutsche Bank. In addition, the amount of investment grade and high-yield bonds issued by US companies that will mature and require refinancing is forecast to increase significantly over the next two years. As a result, total US fixed-income supply could rise from $1tn last year to just over $2tn in 2019…”
January 22 – Bloomberg (Dani Burger and Sid Verma): “U.S. corporate debt exchange-traded funds have bled a near-historic sum of assets over the past two weeks, but holders of the underlying securities are paying little heed. U.S.-listed corporate bond ETFs are headed for a second consecutive month of outflows, the first time that’s occurred in at least seven years. The pain is across ratings. The iShares iBoxx Investment Grade Corporate Bond ETF, LQD, had the biggest day of losses last week since 2016, while BlackRock’s high-yield equivalent, HYG, is in the midst of its biggest two-month outflows on record.”
January 25 – Financial Times (Joe Rennison): “A profit warning… from Swiss baker Aryzta, whose customers include McDonald’s, would not ordinarily be of interest to bond investors. Except the company pointed to faster than expected wage growth in its US business as one of the culprits. The prospect of American workers receiving bigger pay rises taps into a growing anxiety among fixed-income investors: that 2018 may be the year in which inflation finally accelerates, posing a fundamental challenge for holders of long-term bonds that pay ultra low fixed-rate coupons. Signs that a broad-based global economic recovery is gathering pace, rising oil prices and a sweeping US tax cut are raising a red flag for the bond market.”
Europe Watch:
January 23 – Stratfor (Adriano Bosoni): “Italy's general election will be one of the most important political events for the European Union this year. Italian voters will head to the polls March 4 dissatisfied with their current leaders and with the state of the economy. What's more, they will find no shortage of anti-establishment candidates on the ballot. The rise of the Five Star Movement, a protest party made up mostly of political outsiders that lambastes Italy's traditional leaders, has pushed mainstream parties to espouse populist and Euroskeptic views. The right-wing Northern League, for example, has called for stronger immigration controls and proposed a referendum on Italy's membership in the eurozone. Former Prime Minister Silvio Berlusconi's center-right Forza Italia, meanwhile, has suggested introducing a parallel currency to coexist with the euro and ignoring EU rules that limit state intervention to rescue troubled banks. Even the center-left Democratic Party, while still pro-European Union, has criticized Brussels for its focus on austerity measures.”
January 23 – Stratfor (Adriano Bosoni): “Italy's general election will be one of the most important political events for the European Union this year. Italian voters will head to the polls March 4 dissatisfied with their current leaders and with the state of the economy. What's more, they will find no shortage of anti-establishment candidates on the ballot. The rise of the Five Star Movement, a protest party made up mostly of political outsiders that lambastes Italy's traditional leaders, has pushed mainstream parties to espouse populist and Euroskeptic views. The right-wing Northern League, for example, has called for stronger immigration controls and proposed a referendum on Italy's membership in the eurozone. Former Prime Minister Silvio Berlusconi's center-right Forza Italia, meanwhile, has suggested introducing a parallel currency to coexist with the euro and ignoring EU rules that limit state intervention to rescue troubled banks. Even the center-left Democratic Party, while still pro-European Union, has criticized Brussels for its focus on austerity measures.”
Japan Watch:
January 22 – Bloomberg (Toru Fujioka and Masahiro Hidaka): “Governor Haruhiko Kuroda delivered a message to investors speculating that the Bank of Japan might be nearing the start of policy normalization: Not so fast. Kuroda said the BOJ wasn’t in a position to even consider exiting its current policy, after it maintained its massive stimulus program and kept its inflation and economic forecasts unchanged… ‘Given there is still a distance to the achievement of the 2% price stability target, I don’t think that we are at a stage where we consider the timing for a so-called exit or how to deal with it,’ Kuroda said… ‘The Bank of Japan thinks it’s necessary to continue tenaciously with the current powerful easing for the sake of the economy.’”
January 23 – Bloomberg (Connor Cislo): “Japan closed out its best year for exports since the financial crisis with solid growth again in December, as the global economic recovery looks set to continue well into 2018. The value of exports rose 9.3% in December from a year earlier. Exports for the full year 2017 grew 11.8%, the most since 2010.”
Leveraged Speculation Watch:
January 24 – Bloomberg (Nishant Kumar and Erik Schatzker): “Billionaire hedge-fund manager Ray Dalio said that the bond market has slipped into a bear phase and warned that a rise in yields could spark the biggest crisis for fixed-income investors in almost 40 years. ‘A 1% rise in bond yields will produce the largest bear market in bonds that we have seen since 1980 to 1981,’ Bridgewater Associates founder Dalio said in a Bloomberg TV interview in Davos… We’re in a bear market, he said.”
Geopolitical Watch:
January 22 – Bloomberg (Toru Fujioka and Masahiro Hidaka): “Governor Haruhiko Kuroda delivered a message to investors speculating that the Bank of Japan might be nearing the start of policy normalization: Not so fast. Kuroda said the BOJ wasn’t in a position to even consider exiting its current policy, after it maintained its massive stimulus program and kept its inflation and economic forecasts unchanged… ‘Given there is still a distance to the achievement of the 2% price stability target, I don’t think that we are at a stage where we consider the timing for a so-called exit or how to deal with it,’ Kuroda said… ‘The Bank of Japan thinks it’s necessary to continue tenaciously with the current powerful easing for the sake of the economy.’”
January 23 – Bloomberg (Connor Cislo): “Japan closed out its best year for exports since the financial crisis with solid growth again in December, as the global economic recovery looks set to continue well into 2018. The value of exports rose 9.3% in December from a year earlier. Exports for the full year 2017 grew 11.8%, the most since 2010.”
Leveraged Speculation Watch:
January 24 – Bloomberg (Nishant Kumar and Erik Schatzker): “Billionaire hedge-fund manager Ray Dalio said that the bond market has slipped into a bear phase and warned that a rise in yields could spark the biggest crisis for fixed-income investors in almost 40 years. ‘A 1% rise in bond yields will produce the largest bear market in bonds that we have seen since 1980 to 1981,’ Bridgewater Associates founder Dalio said in a Bloomberg TV interview in Davos… We’re in a bear market, he said.”
Geopolitical Watch:
January 25 – Reuters (Doina Chiacu): “Turkey urged the United States… to halt its support for Kurdish YPG fighters or risk confronting Turkish forces on the ground in Syria, some of Ankara’s strongest comments yet about a potential clash with its NATO ally. The remarks, from the spokesman for President Tayyip Erdogan’s government, underscored the growing bilateral tensions…”
January 22 – Reuters (Mert Ozkan): “Turkey shelled targets in northwest Syria on Monday and said it would swiftly crush U.S.-backed Kurdish YPG fighters in an air and ground offensive on the Afrin region beyond its border. The three-day-old campaign has opened a new front in Syria’s multi-sided civil war, realigning a battlefield where outside powers are supporting local combatants.”
January 24 – Reuters (Tuvan Gumrukcu and Tom Perry): “President Tayyip Erdogan said… Turkey would extend its military operation in Syria to the town of Manbij, a move that could potentially bring Turkish forces into confrontation with those of their NATO ally the United States. Turkey’s air and ground ‘Operation Olive Branch’ in the Afrin region of northern Syria is now in its fifth day, targeting Kurdish YPG fighters and opening a new front in Syria’s multi-sided civil war. A push towards Manbij, in a separate Kurdish-held enclave some 100 km (60 miles) east of Afrin, could threaten U.S. plans to stabilize a swath of northeast Syria.”
January 22 – Reuters (Mert Ozkan): “Turkey shelled targets in northwest Syria on Monday and said it would swiftly crush U.S.-backed Kurdish YPG fighters in an air and ground offensive on the Afrin region beyond its border. The three-day-old campaign has opened a new front in Syria’s multi-sided civil war, realigning a battlefield where outside powers are supporting local combatants.”
January 24 – Reuters (Tuvan Gumrukcu and Tom Perry): “President Tayyip Erdogan said… Turkey would extend its military operation in Syria to the town of Manbij, a move that could potentially bring Turkish forces into confrontation with those of their NATO ally the United States. Turkey’s air and ground ‘Operation Olive Branch’ in the Afrin region of northern Syria is now in its fifth day, targeting Kurdish YPG fighters and opening a new front in Syria’s multi-sided civil war. A push towards Manbij, in a separate Kurdish-held enclave some 100 km (60 miles) east of Afrin, could threaten U.S. plans to stabilize a swath of northeast Syria.”
Friday Evening Links
[Bloomberg] Stocks Rise to Records on Earnings as Dollar Falls: Markets Wrap
[Bloomberg] Bankers, Policy Makers at Davos Revel in ‘Sweet Spot’ Economy
[Bloomberg] BOJ Says Kuroda Didn't Revise Inflation Outlook in Davos Remark
[Bloomberg] Illinois Ponders Pension-Fund Moonshot: a $107 Billion Bond Sale
[Bloomberg] Buying a Home in San Francisco Is About to Get Even Harder
[WSJ] Lured by Market Records and Hot Bets, Individual Investors Finally Dive In
[FT] Donald Trump in Davos: dollar talk adds to fears of trade war
[Bloomberg] Bankers, Policy Makers at Davos Revel in ‘Sweet Spot’ Economy
[Bloomberg] BOJ Says Kuroda Didn't Revise Inflation Outlook in Davos Remark
[Bloomberg] Illinois Ponders Pension-Fund Moonshot: a $107 Billion Bond Sale
[Bloomberg] Buying a Home in San Francisco Is About to Get Even Harder
[WSJ] Lured by Market Records and Hot Bets, Individual Investors Finally Dive In
[FT] Donald Trump in Davos: dollar talk adds to fears of trade war
Thursday, January 25, 2018
Friday's News Links
[Bloomberg] Dollar Stays Lower After GDP, Trump; Stocks Gain: Markets Wrap
[Reuters] World stocks party like its '99, dollar wilts again
[Bloomberg] U.S. GDP Grows Below-Forecast 2.6% on Trade, Inventory Drags
[Bloomberg] Trump warns Davos on unfair trade, says U.S. 'open for business'
[CNBC] Treasury Secretary Mnuchin says stronger dollar is in the best interest of the country
[Bloomberg] HNA's Week of Woe in Bond Market Shows Debt Concerns Spreading
[Reuters] BoJ's Kuroda says inflationary expectations picking up slightly
[Bloomberg] Biggest Stock Sell Signal Since 2013 Sparked by Record Inflows
[CNBC] I see 'irrational complacency' in Davos, and asset 'bubbles everywhere' — billionaire Jeff Greene
[Bloomberg] Dell Technologies Considering IPO, Other Options, Sources Say
[Bloomberg] Japanese Inflation Continues Rising But 2% Target Is Still Far Off
[Reuters] Turkey's Erdogan says military operation to make big sweep east across Syria
[NYT] For Mnuchin, a Lesson in How Words Can Move Markets
[Reuters] World stocks party like its '99, dollar wilts again
[Bloomberg] U.S. GDP Grows Below-Forecast 2.6% on Trade, Inventory Drags
[Bloomberg] Trump warns Davos on unfair trade, says U.S. 'open for business'
[CNBC] Treasury Secretary Mnuchin says stronger dollar is in the best interest of the country
[Bloomberg] HNA's Week of Woe in Bond Market Shows Debt Concerns Spreading
[Reuters] BoJ's Kuroda says inflationary expectations picking up slightly
[Bloomberg] Biggest Stock Sell Signal Since 2013 Sparked by Record Inflows
[CNBC] I see 'irrational complacency' in Davos, and asset 'bubbles everywhere' — billionaire Jeff Greene
[Bloomberg] Dell Technologies Considering IPO, Other Options, Sources Say
[Bloomberg] Japanese Inflation Continues Rising But 2% Target Is Still Far Off
[Reuters] Turkey's Erdogan says military operation to make big sweep east across Syria
[NYT] For Mnuchin, a Lesson in How Words Can Move Markets
Thursday Evening Links
[Bloomberg] Dollar Erases Drop on Trump Backing; Stocks Mixed: Markets Wrap
[CNBC] Trump says he wants 'strong dollar': CNBC interview
[Bloomberg] U.S. New-Home Sales Declined More Than Forecast in December
[Bloomberg] Market Is Reminiscent of 1994 Bond Selloff, Canyon's Friedman Says
[Reuters] ECB hits out at Washington for talking down the dollar
[Bloomberg] A Normally Reliable Quant Strategy for Stocks Goes Haywire
[Bloomberg] Worthless Auto Trade-Ins Signal Riskier Loans
[Bloomberg] Some ECB Officials Prefer June for Next Policy Shift
[Reuters] Turkey to U.S.: End support for Syrian Kurd YPG or risk confrontation
[WSJ] Steven Mnuchin vs. Mario Draghi: The ECB Loses
[CNBC] Trump says he wants 'strong dollar': CNBC interview
[Bloomberg] U.S. New-Home Sales Declined More Than Forecast in December
[Bloomberg] Market Is Reminiscent of 1994 Bond Selloff, Canyon's Friedman Says
[Reuters] ECB hits out at Washington for talking down the dollar
[Bloomberg] A Normally Reliable Quant Strategy for Stocks Goes Haywire
[Bloomberg] Worthless Auto Trade-Ins Signal Riskier Loans
[Bloomberg] Some ECB Officials Prefer June for Next Policy Shift
[Reuters] Turkey to U.S.: End support for Syrian Kurd YPG or risk confrontation
[WSJ] Steven Mnuchin vs. Mario Draghi: The ECB Loses
Wednesday, January 24, 2018
Thursday's News Links
[Bloomberg] Dollar Extends Drop After Draghi; U.S. Stocks Rise: Markets Wrap
[Bloomberg] ECB Keeps Policy Unchanged as Euro Gains Risk Curbing Inflation
[Bloomberg] Draghi Sees Inflation Optimism in Recovery But Euro a Concern
[Bloomberg] Draghi Says Mnuchin Dollar Comments Concern to ECB Officials
[CNBC] Mnuchin says 'dollar is not a concern of mine,' supports free trading in currency markets
[Reuters] ECB takes swipe at U.S. for breaking agreement not to stir currencies
[Bloomberg] China Starts Experiment to Tame Its Wild Property Market
[Bloomberg] What's Next in China's Bid to Cool Housing Market: QuickTake Q&A
[Bloomberg] HNA Share Pledges Are Behind Frozen Bank Accounts
[Bloomberg] Goldman Warns Trump's Not Done as Aluminum Levy May Be Next
[Bloomberg] Puerto Rico Fiscal Plan Leaves Almost No Money for Bond Payments
[NYT] China Will Tame Its Growing Debt Load in 3 Years, Top Xi Adviser Says
[NYT] Why Strong Growth Is a Headache for the European Central Bank
[NYT] Hurricane-Torn Puerto Rico Says It Can’t Pay Any of Its Debts for 5 Years
[WSJ] Making the Dollar Weak Again
[WSJ] Mnuchin Plays Down Dollar Comments After Selloff
[FT] Inflation threat gnaws away at bond investors
[FT] Draghi case to go slow on withdrawal of ECB easing under scrutiny
[FT] China’s date with real financial deleveraging will have to wait
[Bloomberg] ECB Keeps Policy Unchanged as Euro Gains Risk Curbing Inflation
[Bloomberg] Draghi Sees Inflation Optimism in Recovery But Euro a Concern
[Bloomberg] Draghi Says Mnuchin Dollar Comments Concern to ECB Officials
[CNBC] Mnuchin says 'dollar is not a concern of mine,' supports free trading in currency markets
[Reuters] ECB takes swipe at U.S. for breaking agreement not to stir currencies
[Bloomberg] China Starts Experiment to Tame Its Wild Property Market
[Bloomberg] What's Next in China's Bid to Cool Housing Market: QuickTake Q&A
[Bloomberg] HNA Share Pledges Are Behind Frozen Bank Accounts
[Bloomberg] Goldman Warns Trump's Not Done as Aluminum Levy May Be Next
[Bloomberg] Puerto Rico Fiscal Plan Leaves Almost No Money for Bond Payments
[NYT] China Will Tame Its Growing Debt Load in 3 Years, Top Xi Adviser Says
[NYT] Why Strong Growth Is a Headache for the European Central Bank
[NYT] Hurricane-Torn Puerto Rico Says It Can’t Pay Any of Its Debts for 5 Years
[WSJ] Making the Dollar Weak Again
[WSJ] Mnuchin Plays Down Dollar Comments After Selloff
[FT] Inflation threat gnaws away at bond investors
[FT] Draghi case to go slow on withdrawal of ECB easing under scrutiny
[FT] China’s date with real financial deleveraging will have to wait
Wednesday Evening Links
[Bloomberg] U.S. Stocks Mixed on Tariff Talk as Dollar Drops: Markets Wrap
[Bloomberg] Crude Breaks $65 as Record Drawdown Whittles U.S. Oil Stockpiles
[Bloomberg] History Suggests Mnuchin’s Dollar Rhetoric Could Backfire
[Reuters] U.S. home sales fall as record-low inventory boosts prices
[Bloomberg] Markets Are About to Get Ugly According to These Charts
[Bloomberg] Mnuchin, Dalio Raise the Stakes for Treasuries Before ECB Meets
[CNBC] Federal deficit could jump whopping $154 billion if these five states do end run around Trump tax law
[Bloomberg] China Piles Up Free Trade Deals as Trump Abandons Them
[Reuters] Erdogan says to extend Syria operation despite risk of U.S. confrontation
[NYT] Trump Sharply Warns Turkey Against Military Strikes in Syria
[WSJ] A Shortage of Trucks Is Forcing Companies to Cut Shipments or Pay Up
[Bloomberg] Crude Breaks $65 as Record Drawdown Whittles U.S. Oil Stockpiles
[Bloomberg] History Suggests Mnuchin’s Dollar Rhetoric Could Backfire
[Reuters] U.S. home sales fall as record-low inventory boosts prices
[Bloomberg] Markets Are About to Get Ugly According to These Charts
[Bloomberg] Mnuchin, Dalio Raise the Stakes for Treasuries Before ECB Meets
[CNBC] Federal deficit could jump whopping $154 billion if these five states do end run around Trump tax law
[Bloomberg] China Piles Up Free Trade Deals as Trump Abandons Them
[Reuters] Erdogan says to extend Syria operation despite risk of U.S. confrontation
[NYT] Trump Sharply Warns Turkey Against Military Strikes in Syria
[WSJ] A Shortage of Trucks Is Forcing Companies to Cut Shipments or Pay Up
Tuesday, January 23, 2018
Wednesday's News Links
[Bloomberg] Dollar Woes Deepen as Stocks Edge Up; Gold Rallies: Markets Wrap
[Reuters] Dollar skids to three-year low as Mnuchin welcomes currency weakness
[Bloomberg] White House Declares Open Season on the Dollar at Davos
[CNBC] A weaker dollar is good for the US, Treasury Secretary Mnuchin says
[Bloomberg] Gold Climbs Toward Highest Close Since 2016 in Heavy Trading
[Bloomberg] Trump Team at Davos Backs Weaker Dollar, Sharpens Trade War Talk
[Bloomberg] Ross Says U.S. Is in a Trade War, in Rhetorical Split With Trump
[Reuters] U.S. mortgage activity hits four-month high despite rising rates: MBA
[Bloomberg] Euro Demands Draghi's Attention at First ECB Meeting of 2018
[Bloomberg] U.S. to Pay Price for Tariff ‘Tricks,’ China's Global Times Says
[Bloomberg] Powell Approved by Senate to Succeed Yellen as Fed Chair
[Bloomberg] Dalio Says Bonds Face Biggest Bear Market in Almost 40 Years
[Bloomberg] Tech Stocks Are Showing Signs of Overheating
[Bloomberg] China's Beleaguered HNA Group Faces a Debt Wall in Second Half
[Bloomberg] China Orders State-Run Companies to Make Profits
[Bloomberg] Japan’s Exports Grow 9% in December to Close Out Strong Year
[CNBC] German leader Merkel says the current world order is under threat
[Forbes] Europe Braces For The Next Italian Election
[WSJ] Trump Starts His Trade War
[WSJ] Trump Tariffs Spark Criticism, Raise Tensions Over Trade
[WSJ] As Markets and Growth Steam Ahead, Signs of Caution Emerge
[Reuters] Dollar skids to three-year low as Mnuchin welcomes currency weakness
[Bloomberg] White House Declares Open Season on the Dollar at Davos
[CNBC] A weaker dollar is good for the US, Treasury Secretary Mnuchin says
[Bloomberg] Gold Climbs Toward Highest Close Since 2016 in Heavy Trading
[Bloomberg] Trump Team at Davos Backs Weaker Dollar, Sharpens Trade War Talk
[Bloomberg] Ross Says U.S. Is in a Trade War, in Rhetorical Split With Trump
[Reuters] U.S. mortgage activity hits four-month high despite rising rates: MBA
[Bloomberg] Euro Demands Draghi's Attention at First ECB Meeting of 2018
[Bloomberg] U.S. to Pay Price for Tariff ‘Tricks,’ China's Global Times Says
[Bloomberg] Powell Approved by Senate to Succeed Yellen as Fed Chair
[Bloomberg] Dalio Says Bonds Face Biggest Bear Market in Almost 40 Years
[Bloomberg] Tech Stocks Are Showing Signs of Overheating
[Bloomberg] China's Beleaguered HNA Group Faces a Debt Wall in Second Half
[Bloomberg] China Orders State-Run Companies to Make Profits
[Bloomberg] Japan’s Exports Grow 9% in December to Close Out Strong Year
[CNBC] German leader Merkel says the current world order is under threat
[Forbes] Europe Braces For The Next Italian Election
[WSJ] Trump Starts His Trade War
[WSJ] Trump Tariffs Spark Criticism, Raise Tensions Over Trade
[WSJ] As Markets and Growth Steam Ahead, Signs of Caution Emerge
Tuesday Evening Links
[Reuters] Netflix lifts S&P, Nasdaq; J&J weighs on Dow
[Bloomberg] Crude Swings Higher on Signs of Shrinking Spare U.S. Supplies
[Reuters] Crunch time for NAFTA as negotiators open Montreal round of talks
[Reuters] Fed nominee Goodfriend: Current Fed policy "more or less" on right course
[CNBC] How these states are rebelling against the GOP tax code
[Bloomberg] Cracks Are Showing in China's Shadow Banking Industry
[Bloomberg] Kuroda Stock Whispering Returns as Nikkei Blasts Past 24,000
[Bloomberg] Japan's December Exports Rise 9.3% on Year Compared to Estimates of 10%
[Bloomberg] Davos Displays Weakness of Western Leaders
[CNBC] Exec from Gundlach's firm sees global growth pushing bond yields and commodities higher
[FT] Investors look to ECB for firmer deadline on end of QE
[Bloomberg] Crude Swings Higher on Signs of Shrinking Spare U.S. Supplies
[Reuters] Crunch time for NAFTA as negotiators open Montreal round of talks
[Reuters] Fed nominee Goodfriend: Current Fed policy "more or less" on right course
[CNBC] How these states are rebelling against the GOP tax code
[Bloomberg] Cracks Are Showing in China's Shadow Banking Industry
[Bloomberg] Kuroda Stock Whispering Returns as Nikkei Blasts Past 24,000
[Bloomberg] Japan's December Exports Rise 9.3% on Year Compared to Estimates of 10%
[Bloomberg] Davos Displays Weakness of Western Leaders
[CNBC] Exec from Gundlach's firm sees global growth pushing bond yields and commodities higher
[FT] Investors look to ECB for firmer deadline on end of QE
Monday, January 22, 2018
Tuesday's News Links
[Bloomberg] Treasuries Rally After BOJ; U.S. Stocks Fluctuate: Markets Wrap
[Reuters] Trump slaps steep U.S. tariffs on imported washers, solar panels
[Reuters] Asia fears U.S. tariffs on washing machines, solar panels just the start
[Politico] Why the shutdown battle is only on pause
[Bloomberg] Goldman Says Risk Appetite Has Reached ‘Extreme’ Levels
[Bloomberg] Kuroda Pushes Back Against Speculation Tightening Is Near
[NBC] Trump signs spending bill to end three-day government shutdown
[Bloomberg] Here's What Trump's Tariffs on U.S. Imports Are Doing to Markets
[Bloomberg] Japan’s Central Bank Keeps Stimulus Unchanged, Maintains Inflation Outlook
[Bloomberg] El-Erian Warns Financial Advisers on Over-Promised ETF Liquidity
[Bloomberg] Morgan Stanley Warns on U.S. Trade Risk and Suggests Hedges
[Reuters] Globalisation is losing its lustre, India's Modi tells Davos summit
[NYT] China’s Housing Market Is Like a Casino. Can a Property Tax Tame It?
[WSJ] It Has Been a Near-Perfect Investing Environment. But It May End Soon.
[WSJ] States Grapple With Federal Tax Cut That May Raise State Taxes
[WSJ] No Trade War With China—Yet
[FT] Private equity: flood of cash triggers buyout bubble fears
[Reuters] Trump slaps steep U.S. tariffs on imported washers, solar panels
[Reuters] Asia fears U.S. tariffs on washing machines, solar panels just the start
[Politico] Why the shutdown battle is only on pause
[Bloomberg] Goldman Says Risk Appetite Has Reached ‘Extreme’ Levels
[Bloomberg] Kuroda Pushes Back Against Speculation Tightening Is Near
[NBC] Trump signs spending bill to end three-day government shutdown
[Bloomberg] Here's What Trump's Tariffs on U.S. Imports Are Doing to Markets
[Bloomberg] Japan’s Central Bank Keeps Stimulus Unchanged, Maintains Inflation Outlook
[Bloomberg] El-Erian Warns Financial Advisers on Over-Promised ETF Liquidity
[Bloomberg] Morgan Stanley Warns on U.S. Trade Risk and Suggests Hedges
[Reuters] Globalisation is losing its lustre, India's Modi tells Davos summit
[NYT] China’s Housing Market Is Like a Casino. Can a Property Tax Tame It?
[WSJ] It Has Been a Near-Perfect Investing Environment. But It May End Soon.
[WSJ] States Grapple With Federal Tax Cut That May Raise State Taxes
[WSJ] No Trade War With China—Yet
[FT] Private equity: flood of cash triggers buyout bubble fears
Monday Afternoon Links
[Bloomberg] Stocks, Bonds Rise as Senate Votes to End Shutdown: Markets Wrap
[CNBC] Bill to reopen government clears the House, heads to Trump's desk for signature
[Reuters] Senate moves to end government shutdown
[Bloomberg] Secret to Dollar's Dim Future Found in Fed's Last Hiking Cycle
[Reuters] Biotech M&A takes off as Sanofi and Celgene spend $20 billion
[Bloomberg] Yen and Bond Traders Split on Whether the BOJ Will Taper in 2018
[Reuters] Catalan crisis rekindled as parliament proposes Puigdemont as leader
[WSJ] U.S. Imposes Trade Tariffs, Signaling Tougher Line on China
[WSJ] As First ETF Turns 25, Exchange-Traded Funds Dominate Investing World
[CNBC] Bill to reopen government clears the House, heads to Trump's desk for signature
[Reuters] Senate moves to end government shutdown
[Bloomberg] Secret to Dollar's Dim Future Found in Fed's Last Hiking Cycle
[Reuters] Biotech M&A takes off as Sanofi and Celgene spend $20 billion
[Bloomberg] Yen and Bond Traders Split on Whether the BOJ Will Taper in 2018
[Reuters] Catalan crisis rekindled as parliament proposes Puigdemont as leader
[WSJ] U.S. Imposes Trade Tariffs, Signaling Tougher Line on China
[WSJ] As First ETF Turns 25, Exchange-Traded Funds Dominate Investing World
Sunday, January 21, 2018
Monday's News Links
[Bloomberg] Stocks Mixed, Dollar Flat as Shutdown Continues: Markets Wrap
[The Hill] Shutdown grinds into workweek after Senate fails to clinch deal
[Bloomberg] Government Shutdown Starts to Bite, Raising Political Stakes
[Bloomberg] Senate at Impasse as Votes Delayed Until Monday: Shutdown Update
[Bloomberg] Nafta ‘Danger Zone’ Nears as Key Talks Begin Amid Trump Threats
[Bloomberg] Bond ETFs Awash in Pain May Be Warning Signal for Risk Appetite
[Bloomberg] IMF Raises 2018 Global Growth Forecast, Partly on U.S. Tax Cuts
[Reuters] China says United States is real threat to global trade, not itself
[Bloomberg] Fresh Doubts Raised on China's Bad-Loan Data
[Bloomberg] HNA Group Units Plunge Amid Concerns About Debt, Halted Shares
[Bloomberg] How a China Bank Foxed Regulators And May Force a Market Rethink
[Bloomberg] Recent ‘Odd’ Market Moves May Be a Warning Sign for Stocks
[Reuters] More than 10 percent of $3.7 billion raised in ICOs has been stolen: Ernst & Young
[Bloomberg] Italy's Election Promises Heap More Strain on Debt-Loaded Nation
[The Atlantic] Trust Is Collapsing in America
[Reuters] Turkey says campaign against U.S.-backed Kurds in Syria
[WSJ] By Adding to the Debt, Tax Cuts Could Complicate Next Downturn
[FT] ECB board shake-up kicks off with vice-president’s job
[FT] US fixed-income investors should prepare for a turbulent 2018
[The Hill] Shutdown grinds into workweek after Senate fails to clinch deal
[Bloomberg] Government Shutdown Starts to Bite, Raising Political Stakes
[Bloomberg] Senate at Impasse as Votes Delayed Until Monday: Shutdown Update
[Bloomberg] Nafta ‘Danger Zone’ Nears as Key Talks Begin Amid Trump Threats
[Bloomberg] Bond ETFs Awash in Pain May Be Warning Signal for Risk Appetite
[Bloomberg] IMF Raises 2018 Global Growth Forecast, Partly on U.S. Tax Cuts
[Reuters] China says United States is real threat to global trade, not itself
[Bloomberg] Fresh Doubts Raised on China's Bad-Loan Data
[Bloomberg] HNA Group Units Plunge Amid Concerns About Debt, Halted Shares
[Bloomberg] How a China Bank Foxed Regulators And May Force a Market Rethink
[Bloomberg] Recent ‘Odd’ Market Moves May Be a Warning Sign for Stocks
[Reuters] More than 10 percent of $3.7 billion raised in ICOs has been stolen: Ernst & Young
[Bloomberg] Italy's Election Promises Heap More Strain on Debt-Loaded Nation
[The Atlantic] Trust Is Collapsing in America
[Reuters] Turkey says campaign against U.S.-backed Kurds in Syria
[WSJ] By Adding to the Debt, Tax Cuts Could Complicate Next Downturn
[FT] ECB board shake-up kicks off with vice-president’s job
[FT] US fixed-income investors should prepare for a turbulent 2018
Sunday Evening Links
[Reuters] U.S. stock index futures dip after government shutdown continues
[Bloomberg] Euro Gains, Dollar Slips as Politics Dominates: Markets Wrap
[Reuters] Global stocks, dollar sag after U.S. government shutdown
[Politico] Shutdown breakthrough eludes Senate
[Bloomberg] World Inequality Grows Amid Glut of New Billionaires, Oxfam Says
[Reuters] China's top paper says U.S. forcing China to accelerate South China Sea deployments
[WSJ] Senate Pushes to End Budget Standoff as Government Shutdown Continues
[WSJ] What the Shutdown Says About U.S. Politics in 2018
[FT] Appetite for junk bonds sparks exposure warnings
[FT] China: market bulls beat the short sellers — for now
[Bloomberg] Euro Gains, Dollar Slips as Politics Dominates: Markets Wrap
[Reuters] Global stocks, dollar sag after U.S. government shutdown
[Politico] Shutdown breakthrough eludes Senate
[Bloomberg] World Inequality Grows Amid Glut of New Billionaires, Oxfam Says
[Reuters] China's top paper says U.S. forcing China to accelerate South China Sea deployments
[WSJ] Senate Pushes to End Budget Standoff as Government Shutdown Continues
[WSJ] What the Shutdown Says About U.S. Politics in 2018
[FT] Appetite for junk bonds sparks exposure warnings
[FT] China: market bulls beat the short sellers — for now
Sunday's News Links
[The Hill] Playing blame game over shutdown springs both parties in the hot seat
[Politico] Moderates move to break shutdown logjam
[CNN] White House targets filibuster, calls for 'nuclear option' as shutdown enters day 2
[CNBC] High-tax states plan workarounds to the federal SALT deduction
[Reuters] Oil producers will cooperate beyond 2018, says Saudi Arabia
[Reuters] Turkish forces push into Syria, Kurdish militia says attacks repulsed
[Asia Times] Fears grow over Chinese investors snared in $11 billion fraud probe
[WSJ] Lawmakers Struggle to Find Compromise as Government Shutdown Continues
[WSJ] China to Be Focus of U.S. Trade Policy This Year, White House Says
[FT] US banks suffer 20% jump in credit card losses
[Politico] Moderates move to break shutdown logjam
[CNN] White House targets filibuster, calls for 'nuclear option' as shutdown enters day 2
[CNBC] High-tax states plan workarounds to the federal SALT deduction
[Reuters] Oil producers will cooperate beyond 2018, says Saudi Arabia
[Reuters] Turkish forces push into Syria, Kurdish militia says attacks repulsed
[Asia Times] Fears grow over Chinese investors snared in $11 billion fraud probe
[WSJ] Lawmakers Struggle to Find Compromise as Government Shutdown Continues
[WSJ] China to Be Focus of U.S. Trade Policy This Year, White House Says
[FT] US banks suffer 20% jump in credit card losses
Saturday, January 20, 2018
Saturday's News Links
[Reuters] Government shuts down as Trump feuds with Democrats
[Reuters] What happens in a U.S. government shutdown?
[Reuters] China accuses U.S. warship of violating its sovereignty
[Reuters] Airstrikes pound Syria's Afrin as Turkey launches 'Operation Olive Branch'
[Reuters] U.S.-backed Syrian force says will have to respond if Turkey attacks
[WSJ] Lawmakers Return to Capitol for Spending Talks
[Reuters] What happens in a U.S. government shutdown?
[Reuters] China accuses U.S. warship of violating its sovereignty
[Reuters] Airstrikes pound Syria's Afrin as Turkey launches 'Operation Olive Branch'
[Reuters] U.S.-backed Syrian force says will have to respond if Turkey attacks
[WSJ] Lawmakers Return to Capitol for Spending Talks
Friday, January 19, 2018
Weekly Commentary: You Can Only Worry For So Long
Ten-year Treasury yields jumped 11 bps this week to 2.66%, moving decisively above the key 2.60% technical level - to the highest yields since July 2014. Two-year yields ended the week up seven bps to 2.07%, the high going back to September 2008. Five-year Treasury yields jumped 10 bps to 2.45%, the high since April 2010. Has the long-delayed bond bear market finally commenced – with barely a whimper? Markets fretted over a potential spike in yields over recent years. I suppose You Can Only Worry For So Long.
The S&P500 has gained 5.1% in three weeks. If this return is lacking, one could have made 6.5% in the Dow Transports, 6.9% in the Nasdaq100, 6.8% in the Nasdaq Composite, 7.0% in the KBW Bank index or 9.5% in the Semiconductors (SOX) – all in 2018’s first 13 trading sessions.
With equities deep into parabolic melt-up, let’s not expect market participants to be all too fixated on Treasury yields at a mere 2.64%. Why worry over where market yields might be in a few months, not with huge gains to harvest on an almost daily basis in equities markets. No reason to worry about the ECB winding down QE later this year. No basis for fretting a few Fed rate increases spread over many months. Clearly, the Bank of Japan is in no hurry either. Government shutdown - no issue. With tax cuts achieved, gridlock is fine. Liquidity abounds – might abound forever. Meanwhile, the reality is that global bond markets could be ending a three-decade bull market that changed the world.
January 17 – Financial Times (Kate Allen): “Governments are set to increase their borrowing from private investors this year for the first time in four years as central banks step back from the market, underlining market concern that the era of ultra-low bond yields appears vulnerable. The net debt of developed nations is expected to rise this year, chiefly driven by an increase in US bond sales, according to… JPMorgan Chase. The European Central Bank is scaling back its bond-buying programme and the Federal Reserve is shrinking its balance sheet… The Fed is set to roll off $222bn of its holdings of Treasuries this year, the analysis shows, while the ECB’s purchases of eurozone sovereign debt will drop to $221bn from $622bn last year. The US will raise a net $828bn of new issuance after the effects of the scaling back of quantitative easing are taken into account, according to JPMorgan — up from $357bn in 2017.”
January 16 – Bloomberg (Sid Verma): “A ‘dramatic’ increase in U.S. bond supply over the next year risks unhinging global markets from their bullish foundations, warns Torsten Slok at Deutsche Bank AG. The supply of U.S. government debt will almost double to $1 trillion this year to finance a widening budget deficit as the Federal Reserve whittles down its holdings. Unless new buyers emerge, the overhang could be far-reaching. ‘If demand for U.S. fixed income doesn’t double over the coming years then U.S. long rates will move higher, credit spreads will widen, the dollar will fall, and stocks will likely go down as foreigners move out of depreciating U.S. assets,’ the chief international economist at the German lender wrote… ‘And this could happen even in a situation where U.S. economic fundamentals remain solid.’”
Markets have grown comfortable with uncertainty. I would posit that markets have come to adore myriad uncertainties. After all, they ensure the certitude of interminable aggressive monetary stimulus. As the bullish thinking goes, it’s wasted energy to contemplate a spike in yields when, obviously, central banks won’t tolerate one. Waiting anxiously to perform another act of heroism, QE can be revived in an instant.
Unless something dramatic transpires, global central bank balance sheet growth will slow significantly in 2018. At the same time, governments are geared up to issue more debt. Central banks accommodated years of (“counter-cyclical”) massive deficit spending, and now big deficits are the (structural) norm.
Supply/demand dynamics will be shifting substantially, yet bond prices are expected to adjust slightly. The U.S. will be financing a huge fiscal deficit as the Fed pares back its balance sheet. Moreover, there’s an unusual degree of uncertainty surrounding future U.S. fiscal deficits. Tax cuts pay for themselves with bountiful prosperity, or perhaps this a replay of the late-nineties Bubble Mirage that had the U.S. paying off all its debt. There’s a scenario – a not outlandish one at that - where the Bubble bursts and deficits skyrocket toward $2.0 TN. For now, there is also the risk of trade battles coupled with a global economic boom and market Bubbles that create unusually uncertain inflation prospects.
Extraordinary: The end of an unparalleled bull market that saw $14 trillion of experimental “money” printing, along with zero/negative rates, push global yields to historic lows, in the face of unprecedented government debt issuance and record corporate debt sales. There is as well the issue of unquantifiable speculative leverage and derivatives exposures, along with a now enormous ETF complex untested in bear market dynamics. Reasons aplenty to take a cautious approach with long-term bonds globally.
When it comes to uncertain 2018 prospects, China joins bond yields near the top of the list. Similar to their approach with bonds, equities buyers are today comfortable with China and feel no compunction to ponder beyond the present. Markets over recent years fretted over a Chinese financial accident. I suppose You Can Only Worry For So Long.
January 12 – Reuters (Fang Cheng and Kevin Yao): “China’s bank lending halved in December as the government kept up its campaign to curb financial system risks, but banks still managed to dole out a record amount for the year amid the tighter scrutiny. Chinese authorities are trying to walk a fine line by containing riskier types of financing and slowing an explosive build-up in debt without stunting economic growth. Banks extended 584.4 billion yuan ($90.46 billion) in December, data from the People’s Bank of China (PBOC) showed…, well below expectations of 1 trillion yuan and November’s 1.12 trillion yuan. But banks lent a record 13.53 trillion yuan of new loans in 2017.”
Total Social Financing (TSF) dropped in December to a weaker-than-expected 1.140 TN yuan (estimates 1.500), or about $178 billion. This was down 30% from both November and December 2016. The fourth quarter marked a significant slowdown in TSF. Quarterly growth in TSF averaged 5.216 TN yuan ($815bn) during the first three quarters of 2017, but then dropped to 3.795 TN yuan ($593bn) during Q4. For the year, growth in TSF (which excludes government borrowings) was 9.2% ahead of 2016 levels to 19.443 TN ($3.038 TN). Yet for the first three quarters of 2017, TSF was expanding at a rate 16.3% above comparable 2016. The fourth quarter actually saw the growth in TSF 12.7% below that of Q4 2016.
Financial institution loans to Chinese households surged 21% in 2017, with lending remaining strong through year end. Lending to corporations slowed markedly last year, with December lending half November’s level. Mortgage loans dominate Chinese household borrowings. And with housing prices inflated after years of easy finance, China is becoming increasingly susceptible to a self-reinforcing downturn in both apartment prices and mortgage Credit growth.
China traditionally begins the year with blockbuster Credit growth. January lending data will provide some indication of whether the fourth quarter slowdown was chiefly seasonal or rather the beginning of a more determined effort by Beijing to rein in Credit excess. Chinese regulators this month toughened their crackdown on off-balance sheet “shadow” lending.
January 14 – Bloomberg: “China’s banking regulator pledged to continue its crackdown on malpractice in the $38 trillion industry in 2018, vowing to tackle everything from poor corporate governance and violation of lending policies to cross-holdings of risky financial products. The China Banking Regulatory Commission unveiled its regulatory priorities for the year… Inspecting the funding source of banks’ shareholders and ensuring they have obtained their stakes in a regular manner. Examining banks’ compliance with rules restricting loans to real estate developers, local governments, industries burdened by overcapacity, and some home buyers. Looking into banks’ interbank activities and wealth management businesses.”
Chinese exports were up 10.9% in December. China ran a $54.69 billion trade surplus in December, the largest since January 2016. Foreign reserves rose to a larger-than-expected $3.140 TN, the highest level in 16 months. Fourth quarter GDP was reported at a stronger-than-expected 6.8% - putting 2017 growth at an above target 6.9%.
Chinese 10-year yields closed Friday at 3.98%, the high going back to October 2014. With the global economy humming along and global finance bubbling along, it’s not an inopportune time for Beijing to finally assume an assertive stance in reining in Credit. They will, of course, seek to avoid a shock. Beijing will, as well, focus on assuring productive Credit is readily available to sustain economic expansion. Productive enterprises should be supported, while speculative endeavors will be starved of finance. Easy to plan, not so straightforward to execute (Federal Reserve 1928/29).
“Houses are built to be inhabited, not for speculation,” proclaimed President Xi back in October during the 19th Party Congress. The problem is that tens of millions of Chinese have made fortunes in real estate. Hundreds of millions more aspire to. Not only has housing become the epicenter of Chinese speculative excess, mortgage Credit has inflated to the point of becoming a majority of total Credit growth - as well as a prevailing source of finance for the real economy. It all evolved into a full-fledged mortgage Credit Bubble, surely an expanding black hole of malinvestment, fraud and bank losses.
January 19 – Reuters: “China’s yuan-denominated outstanding housing loans rose 20.9% from a year earlier to 32.2 trillion yuan ($5.03 trillion) at end-December, China’s central bank said... Outstanding individual mortgages at the end of December grew 22.2% to 21.9 trillion yuan…”
January 18 – Bloomberg: “China’s home sales surged to a record high last month, despite a prolonged government campaign to curb property speculation. Sales by value, excluding affordable housing, jumped to a record 1.45 trillion yuan ($225 billion) in December, gaining 21% at the fastest pace in six months… Earlier today, home price data pointed to a similar acceleration. The upswing comes even as officials have sought to tame resurgent buying sentiment in a market that’s seen home prices skyrocket. The resurgence defies predictions that China’s property market will slow amid China’s moves to tackle excessive leverage and maintain curbs on purchases.”
January 16 – Wall Street Journal – “China’s Hot Housing Market Begins to Cool” (Dominique Fong): “China’s housing market has defied gravity and government restraints for two years, floating on a tide of bank loans and speculation. Until now. In Beijing and Shanghai—two of the country’s largest markets—and other megacities, sales have stalled and prices have dropped, falling slightly in some pockets and dramatically in others. Demand has dried up in these areas as a result of government measures including higher mortgage rates, higher down-payment requirements and limits on buying a second or third home. Would-be sellers are increasingly putting plans on hold in hope that prices will rebound.”
January 16 – Reuters: “China's banking regulator chief warned that a ‘black swan,’ or an unforeseen event could threaten the country's financial stability, official People's Daily reported… Guo Shuqing said that while risks in the financial system are manageable, they are still ‘complex and serious.’ Since his appointment as the head of the China Banking Regulatory Commission early last year, Guo has introduced a flurry of new rules to reign in lender risks including from curbs on shadow banking activities to the crackdown on loan fraud. Guo said the dangers stem from the pressure of rising bad debt, imperfect internal risk systems at financial institutions, the relatively high levels of shadow banking activities and rule violations.”
It’s curious to see Chinese housing transactions and prices plateau (in key markets) in the face of rampant mortgage Credit excess. Markets’ lack of concern notwithstanding, we can remind ourselves that this is China’s first mortgage boom – and a rather long and spectacular one at that. And I’m all too familiar with the view that Beijing is adept at managing oh so many things. Yet they’ve sure made a historic mess of mortgage finance – the extent of which will begin to surface as soon as lending slows. It’s one of history’s great ongoing manias, one that these days barely garners attention in The Age of Equities and Cryptocurrencies.
At this point, it’s not clear how Beijing possibly succeeds in reining in housing speculation without bursting an epic apartment Bubble (makes bitcoin look so tiny). With global yields on the rise and Chinese regulators on the case, the Chinese apartment market could be a critical development to monitor in 2018. Hard for me to believe there’s not a black swan holed up in there somewhere. And that goes for global bond markets as well.
For the Week:
The S&P500 gained 0.9% (up 5.1% y-t-d), and the Dow rose 1.0% (up 5.5%). The Utilities slipped 0.5% (down 5.5%). The Banks gained 1.0% (up 7.0%), and the Broker/Dealers added 0.4% (up 6.5%). The Transports declined 0.6% (up 6.5%). The S&P 400 Midcaps rose 0.7% (up 4.1%), and the small cap Russell 2000 increased 0.4% (up 4.0%). The Nasdaq100 advanced 1.1% (up 6.8%).The Semiconductors surged 3.8% (up 9.5%). The Biotechs added 0.5% (up 6.9%). With bullion down $6, the HUI gold index fell 2.2% (up 2.4%).
Three-month Treasury bill rates ended the week at 140 bps. Two-year government yields rose seven bps to 2.07% (up 18bps y-t-d). Five-year T-note yields gained 10 bps to 2.45% (up 24bps). Ten-year Treasury yields jumped 11 bps to 2.66% (up 25bps). Long bond yields gained eight bps to 2.93% (up 19bps).
Greek 10-year yields fell six bps to 3.80% (down 27bps y-t-d). Ten-year Portuguese yields jumped 19 bps to 1.98% (up 4bps). Italian 10-year yields declined two bps to 1.96% (down 5bps). Spain's 10-year yields fell six bps to 1.44% (down 12bps). German bund yields dipped one basis point to 0.57% (up 14bps). French yields declined a basis point to 0.84% (up 6bps). The French to German 10-year bond spread was unchanged at 27 bps. U.K. 10-year gilt yields were unchanged at 1.34% (up 15bps). U.K.'s FTSE equities index slipped 0.3% (up 0.6%).
Japan's Nikkei 225 equities index gained 0.7% (up 4.6% y-o-y). Japanese 10-year "JGB" yields added one basis point to 0.085% (up 4bps). France's CAC40 increased 0.2% (up 4.0%). The German DAX equities index rose 1.4% (up 4.0%). Spain's IBEX 35 equities index added 0.2% (up 4.3%). Italy's FTSE MIB index rose another 1.4% (up 8.7%). EM markets were higher. Brazil's Bovespa index jumped 2.4% (up 6.3%), and Mexico's Bolsa gained 1.1% (up 0.7%). South Korea's Kospi index rose 1.0% (up 2.1%). India’s Sensex equities index surged 2.7% (up 4.3%). China’s Shanghai Exchange gained 1.7% (up 5.5%). Turkey's Borsa Istanbul National 100 index added 0.4% (down 0.2%). Russia's MICEX equities index advanced 1.1% (up 8.4%).
Junk bond mutual funds saw outflows of $3.076 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates gained five bps to 4.04% (down 5bps y-o-y). Fifteen-year rates rose five bps to 3.49% (up 15bps). Five-year hybrid ARM rates were unchanged at 3.46% (up 25bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down five bps to 4.28% (up 4bps).
Federal Reserve Credit last week declined $1.1bn to $4.404 TN. Over the past year, Fed Credit contracted $9.2bn. Fed Credit inflated $1.593 TN, or 57%, over the past 272 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $4.0bn last week to $3.356 TN. "Custody holdings" were up $186bn y-o-y, or 5.9%.
M2 (narrow) "money" supply jumped $20.5bn last week to $13.858 TN. "Narrow money" expanded $599bn, or 4.5%, over the past year. For the week, Currency increased $2.3bn. Total Checkable Deposits surged $97bn, while Savings Deposits dropped $74.7bn. Small Time Deposits were little changed. Retail Money Funds declined $3.8bn.
Total money market fund assets dropped $20.1bn to $2.816 TN. Money Funds gained $150bn y-o-y, or 5.6%.
Total Commercial Paper gained $7.5bn to a near five-year high $1.119 TN. CP gained $151bn y-o-y, or 15.7%.
Currency Watch:
The U.S. dollar index slipped 0.4% to 90.572 (down 1.7% y-o-y). For the week on the upside, the Mexican peso increased 2.2%, the South African rand 1.4%, the Australian dollar 1.0%, the British pound 1.0%, the Norwegian krone 0.7%, the New Zealand dollar 0.5%, the Swiss franc 0.5%, the Brazilian real 0.3%, the Singapore dollar 0.3%, the Japanese yen 0.3% and the euro 0.2%. For the week on the downside, the Canadian dollar declined 0.3% and the South Korean won slipped 0.1%. The Chinese renminbi gained 1.01% versus the dollar this week (up 1.60% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index slipped 0.6% (up 1.8% y-t-d). Spot Gold declined 0.5% to $1,332 (up 2.2%). Silver lost 0.6% to $17.036 (down 1%). Crude declined 93 cents to $63.37 (up 5%). Gasoline added 0.8% (up 4%), while Natural Gas declined 0.5% (up 8%). Copper fell 1.0% (down 3%). Wheat was down 1.8% (down 1%). Corn jumped 1.8% (up 1%).
Trump Administration Watch:
January 20 – Bloomberg (Laura Litvan, Erik Wasson and Anna Edgerton): “The U.S. government officially entered a partial shutdown early Saturday as Senate Democrats and a handful of Republicans blocked a House-passed bill to fund the government after the two parties failed to break their deadlock over immigration. As the midnight passed, senators kept haggling over whether a funding extension shorter than the four-weeks passed by the House might provide a bridge for negotiations. With Democrats mostly unified in their opposition and defections in the Republican ranks, Senate Majority Leader Mitch McConnell couldn’t muster the 60 votes needed to get the temporary funding measure to the floor before the deadline to act.”
January 18 – Reuters (Richard Cowan and Susan Cornwell): “The White House on Wednesday threw its support behind a Republican proposal to avert a government shutdown at week’s end with a one-month extension in funding, but it was unclear whether there were enough votes to pass it in Congress. Congress has been struggling for months to reach an agreement to fund the government, which is currently operating on its third temporary funding extension since the 2018 fiscal year began on Oct. 1. The latest measure expires on Friday.”
January 16 – Wall Street Journal (Andrew Browne): “The last time Washington mobilized for a trade war, Ronald Reagan was president and Japan the adversary. Today, the White House is readying the same big guns—a mix of tariffs and quotas—aimed mainly at Chinese imports. It has in its sights everything from steel to solar panels and washing machines. A record Chinese annual trade surplus with the U.S., announced last week, is the potential catalyst for hostilities after a year of bluster from President Donald Trump. A trade war isn’t a certainty, but if it comes, it will look nothing like the battles that raged in the 1980s over Japanese semiconductors, cars and TV sets.”
January 18 – Reuters (Jeff Mason): “President Donald Trump said… the United States was considering a big ‘fine’ as part of a probe into China’s alleged theft of intellectual property, the clearest indication yet that his administration will take retaliatory trade action against China. In an interview with Reuters, Trump and his economic adviser Gary Cohn said China had forced U.S. companies to transfer their intellectual property to China as a cost of doing business there. The United States has started a trade investigation into the issue…”
January 19 – Reuters (Michael Martina and Kevin Yao): “As influential voices within the U.S. business community warn China that U.S. President Donald Trump is serious about tough action over Beijing’s trade practices, there is little sense of a crisis in the Chinese capital, where officials think he is bluffing. In Beijing, many experts think Washington is unwilling to pay the heavy economic price needed to upset prevailing trade dynamics between the world’s two largest economies. Hanging over trade relations are several inquiries into whether steel and aluminum imports… are harming U.S. national security, possible tariffs on imported solar panels, as well as an investigation into potential Chinese abuse of intellectual property.”
January 17 – Reuters (Jeff Mason and David Lawder): “U.S. President Donald Trump… said that terminating the North American Free Trade Agreement would result in the ‘best deal’ to revamp the 24-year-old trade pact with Canada and Mexico in favor of U.S. interests. Lawmakers as well as agricultural and industrial groups have warned Trump not to quit NAFTA, but he said that may be the outcome. ‘We’re renegotiating NAFTA now. We’ll see what happens. I may terminate NAFTA,’ Trump said…”
Federal Reserve Watch:
January 19 – Bloomberg (Rich Miller): “Federal Reserve policy makers are openly voicing their willingness to accept above-target inflation even as price pressures are beginning to build. ‘Let me be clear: A small and transitory overshoot of 2% inflation would not be a problem,” William Dudley, president of the Federal Reserve Bank of New York, said… ‘Were it to occur, it would demonstrate that our inflation target is symmetric, and it would help keep inflation expectations well-anchored around our longer-run objective.’ Such talk suggests that the central bank won’t respond willy-nilly to mounting price pressures with significantly stepped-up interest rate increases.”
January 19 – Bloomberg (Jesse Hamilton): “The Federal Reserve is working to relax a key part of post-crisis demands for drastically increased capital levels at the biggest banks, according to people familiar with the work, a move that could free up billions of dollars for some Wall Street giants. Central bank staffers are rewriting the leverage-ratio rule -- a requirement that U.S. banks maintain a minimum level of capital against all their assets -- to better align with a recent agreement among global regulators… The people said the Fed effort is drawing opposition from the Federal Deposit Insurance Corp., an agency with authority over banking rules that’s still led by a Barack Obama appointee.”
U.S. Bubble Watch:
January 16 – Wall Street Journal (Martin Feldstein): “Year after year, the stock market has roared ahead, driven by the Federal Reserve’s excessively easy monetary policy. The result is a fragile financial situation—and potentially a steep drop somewhere up ahead. To deal with the Great Recession, the Fed cut interest rates to a historic low. The short-term federal-funds rate hit 0.15% in January 2009 and stayed there until the end of 2015. In a strategy aimed at reducing long-term rates, the Fed under then-Chairman Ben Bernanke promised to keep short-term rates close to zero until the economy fully recovered. The Fed also began buying long-term bonds and mortgage-backed securities, more than quintupling its balance sheet from nearly $900 billion in 2008 to $4.4 trillion now. Mr. Bernanke explained that this ‘unconventional’ monetary policy was designed to encourage an asset-substitution effect. Investors would shift out of bonds and into equities and real estate. The resulting rise in household wealth would push up consumer spending and strengthen the economic recovery.”
January 19 – Bloomberg (Brandon Kochkodin): “Volatility was one of the never-ending talking points of 2017… The Chicago Board Options Exchange Volatility Index, or VIX, finished the year with the lowest average daily level on record. During the course of the year, we saw the market’s fear gauge set a new record low when it closed at 9.14 on Nov. 3. Want more perspective? Try this: Arrange all the trading days this millennium from lowest to highest by the value of the VIX that day. The first 41 entries on that list would all be from 2017! Fully 80 of the top 100 calmest days since the turn of the century were in this past year. It’s not as if there wasn’t anything to worry about. The Federal Reserve’s Partisan Conflict Index, a measure of political disagreements with data stretching back to 1981, hit its highest point on record in March. The country endured the most expensive hurricane season. Threats of a federal government shutdown came and went. Not even a nuclear showdown with North Korea could raise investors’ collective pulse.”
January 16 – Reuters (Claire Milhench and Marc Jones): “Investors have raised their stock allocations to two-year highs and cut cash positions to five-year lows, with a majority expecting the equity bull run to continue into 2019, a survey by Bank of America Merrill Lynch (BAML) showed…”
January 17 – CNBC (Jeff Cox): “Stock market optimism among professional investors just keeps on surging, and is now at the highest levels since before the crash of 1987. Bullishness, or the belief that the market is heading higher, is now at 66.7% in the latest Investors Intelligence survey, a widely followed gauge of sentiment among investment newsletter authors. That's the highest level since early April 1986…”
January 17 – Bloomberg (Craig Torres): “Almost all of the 12 Federal Reserve districts reported ‘modest to moderate gains’ in economic activity at the start of 2018, a Federal Reserve survey showed. The central bank’s Beige Book economic report… said the Dallas Fed bank was the exception, reporting ‘a robust increase.’”
The S&P500 has gained 5.1% in three weeks. If this return is lacking, one could have made 6.5% in the Dow Transports, 6.9% in the Nasdaq100, 6.8% in the Nasdaq Composite, 7.0% in the KBW Bank index or 9.5% in the Semiconductors (SOX) – all in 2018’s first 13 trading sessions.
With equities deep into parabolic melt-up, let’s not expect market participants to be all too fixated on Treasury yields at a mere 2.64%. Why worry over where market yields might be in a few months, not with huge gains to harvest on an almost daily basis in equities markets. No reason to worry about the ECB winding down QE later this year. No basis for fretting a few Fed rate increases spread over many months. Clearly, the Bank of Japan is in no hurry either. Government shutdown - no issue. With tax cuts achieved, gridlock is fine. Liquidity abounds – might abound forever. Meanwhile, the reality is that global bond markets could be ending a three-decade bull market that changed the world.
January 17 – Financial Times (Kate Allen): “Governments are set to increase their borrowing from private investors this year for the first time in four years as central banks step back from the market, underlining market concern that the era of ultra-low bond yields appears vulnerable. The net debt of developed nations is expected to rise this year, chiefly driven by an increase in US bond sales, according to… JPMorgan Chase. The European Central Bank is scaling back its bond-buying programme and the Federal Reserve is shrinking its balance sheet… The Fed is set to roll off $222bn of its holdings of Treasuries this year, the analysis shows, while the ECB’s purchases of eurozone sovereign debt will drop to $221bn from $622bn last year. The US will raise a net $828bn of new issuance after the effects of the scaling back of quantitative easing are taken into account, according to JPMorgan — up from $357bn in 2017.”
January 16 – Bloomberg (Sid Verma): “A ‘dramatic’ increase in U.S. bond supply over the next year risks unhinging global markets from their bullish foundations, warns Torsten Slok at Deutsche Bank AG. The supply of U.S. government debt will almost double to $1 trillion this year to finance a widening budget deficit as the Federal Reserve whittles down its holdings. Unless new buyers emerge, the overhang could be far-reaching. ‘If demand for U.S. fixed income doesn’t double over the coming years then U.S. long rates will move higher, credit spreads will widen, the dollar will fall, and stocks will likely go down as foreigners move out of depreciating U.S. assets,’ the chief international economist at the German lender wrote… ‘And this could happen even in a situation where U.S. economic fundamentals remain solid.’”
Markets have grown comfortable with uncertainty. I would posit that markets have come to adore myriad uncertainties. After all, they ensure the certitude of interminable aggressive monetary stimulus. As the bullish thinking goes, it’s wasted energy to contemplate a spike in yields when, obviously, central banks won’t tolerate one. Waiting anxiously to perform another act of heroism, QE can be revived in an instant.
Unless something dramatic transpires, global central bank balance sheet growth will slow significantly in 2018. At the same time, governments are geared up to issue more debt. Central banks accommodated years of (“counter-cyclical”) massive deficit spending, and now big deficits are the (structural) norm.
Supply/demand dynamics will be shifting substantially, yet bond prices are expected to adjust slightly. The U.S. will be financing a huge fiscal deficit as the Fed pares back its balance sheet. Moreover, there’s an unusual degree of uncertainty surrounding future U.S. fiscal deficits. Tax cuts pay for themselves with bountiful prosperity, or perhaps this a replay of the late-nineties Bubble Mirage that had the U.S. paying off all its debt. There’s a scenario – a not outlandish one at that - where the Bubble bursts and deficits skyrocket toward $2.0 TN. For now, there is also the risk of trade battles coupled with a global economic boom and market Bubbles that create unusually uncertain inflation prospects.
Extraordinary: The end of an unparalleled bull market that saw $14 trillion of experimental “money” printing, along with zero/negative rates, push global yields to historic lows, in the face of unprecedented government debt issuance and record corporate debt sales. There is as well the issue of unquantifiable speculative leverage and derivatives exposures, along with a now enormous ETF complex untested in bear market dynamics. Reasons aplenty to take a cautious approach with long-term bonds globally.
When it comes to uncertain 2018 prospects, China joins bond yields near the top of the list. Similar to their approach with bonds, equities buyers are today comfortable with China and feel no compunction to ponder beyond the present. Markets over recent years fretted over a Chinese financial accident. I suppose You Can Only Worry For So Long.
January 12 – Reuters (Fang Cheng and Kevin Yao): “China’s bank lending halved in December as the government kept up its campaign to curb financial system risks, but banks still managed to dole out a record amount for the year amid the tighter scrutiny. Chinese authorities are trying to walk a fine line by containing riskier types of financing and slowing an explosive build-up in debt without stunting economic growth. Banks extended 584.4 billion yuan ($90.46 billion) in December, data from the People’s Bank of China (PBOC) showed…, well below expectations of 1 trillion yuan and November’s 1.12 trillion yuan. But banks lent a record 13.53 trillion yuan of new loans in 2017.”
Total Social Financing (TSF) dropped in December to a weaker-than-expected 1.140 TN yuan (estimates 1.500), or about $178 billion. This was down 30% from both November and December 2016. The fourth quarter marked a significant slowdown in TSF. Quarterly growth in TSF averaged 5.216 TN yuan ($815bn) during the first three quarters of 2017, but then dropped to 3.795 TN yuan ($593bn) during Q4. For the year, growth in TSF (which excludes government borrowings) was 9.2% ahead of 2016 levels to 19.443 TN ($3.038 TN). Yet for the first three quarters of 2017, TSF was expanding at a rate 16.3% above comparable 2016. The fourth quarter actually saw the growth in TSF 12.7% below that of Q4 2016.
Financial institution loans to Chinese households surged 21% in 2017, with lending remaining strong through year end. Lending to corporations slowed markedly last year, with December lending half November’s level. Mortgage loans dominate Chinese household borrowings. And with housing prices inflated after years of easy finance, China is becoming increasingly susceptible to a self-reinforcing downturn in both apartment prices and mortgage Credit growth.
China traditionally begins the year with blockbuster Credit growth. January lending data will provide some indication of whether the fourth quarter slowdown was chiefly seasonal or rather the beginning of a more determined effort by Beijing to rein in Credit excess. Chinese regulators this month toughened their crackdown on off-balance sheet “shadow” lending.
January 14 – Bloomberg: “China’s banking regulator pledged to continue its crackdown on malpractice in the $38 trillion industry in 2018, vowing to tackle everything from poor corporate governance and violation of lending policies to cross-holdings of risky financial products. The China Banking Regulatory Commission unveiled its regulatory priorities for the year… Inspecting the funding source of banks’ shareholders and ensuring they have obtained their stakes in a regular manner. Examining banks’ compliance with rules restricting loans to real estate developers, local governments, industries burdened by overcapacity, and some home buyers. Looking into banks’ interbank activities and wealth management businesses.”
Chinese exports were up 10.9% in December. China ran a $54.69 billion trade surplus in December, the largest since January 2016. Foreign reserves rose to a larger-than-expected $3.140 TN, the highest level in 16 months. Fourth quarter GDP was reported at a stronger-than-expected 6.8% - putting 2017 growth at an above target 6.9%.
Chinese 10-year yields closed Friday at 3.98%, the high going back to October 2014. With the global economy humming along and global finance bubbling along, it’s not an inopportune time for Beijing to finally assume an assertive stance in reining in Credit. They will, of course, seek to avoid a shock. Beijing will, as well, focus on assuring productive Credit is readily available to sustain economic expansion. Productive enterprises should be supported, while speculative endeavors will be starved of finance. Easy to plan, not so straightforward to execute (Federal Reserve 1928/29).
“Houses are built to be inhabited, not for speculation,” proclaimed President Xi back in October during the 19th Party Congress. The problem is that tens of millions of Chinese have made fortunes in real estate. Hundreds of millions more aspire to. Not only has housing become the epicenter of Chinese speculative excess, mortgage Credit has inflated to the point of becoming a majority of total Credit growth - as well as a prevailing source of finance for the real economy. It all evolved into a full-fledged mortgage Credit Bubble, surely an expanding black hole of malinvestment, fraud and bank losses.
January 19 – Reuters: “China’s yuan-denominated outstanding housing loans rose 20.9% from a year earlier to 32.2 trillion yuan ($5.03 trillion) at end-December, China’s central bank said... Outstanding individual mortgages at the end of December grew 22.2% to 21.9 trillion yuan…”
January 18 – Bloomberg: “China’s home sales surged to a record high last month, despite a prolonged government campaign to curb property speculation. Sales by value, excluding affordable housing, jumped to a record 1.45 trillion yuan ($225 billion) in December, gaining 21% at the fastest pace in six months… Earlier today, home price data pointed to a similar acceleration. The upswing comes even as officials have sought to tame resurgent buying sentiment in a market that’s seen home prices skyrocket. The resurgence defies predictions that China’s property market will slow amid China’s moves to tackle excessive leverage and maintain curbs on purchases.”
January 16 – Wall Street Journal – “China’s Hot Housing Market Begins to Cool” (Dominique Fong): “China’s housing market has defied gravity and government restraints for two years, floating on a tide of bank loans and speculation. Until now. In Beijing and Shanghai—two of the country’s largest markets—and other megacities, sales have stalled and prices have dropped, falling slightly in some pockets and dramatically in others. Demand has dried up in these areas as a result of government measures including higher mortgage rates, higher down-payment requirements and limits on buying a second or third home. Would-be sellers are increasingly putting plans on hold in hope that prices will rebound.”
January 16 – Reuters: “China's banking regulator chief warned that a ‘black swan,’ or an unforeseen event could threaten the country's financial stability, official People's Daily reported… Guo Shuqing said that while risks in the financial system are manageable, they are still ‘complex and serious.’ Since his appointment as the head of the China Banking Regulatory Commission early last year, Guo has introduced a flurry of new rules to reign in lender risks including from curbs on shadow banking activities to the crackdown on loan fraud. Guo said the dangers stem from the pressure of rising bad debt, imperfect internal risk systems at financial institutions, the relatively high levels of shadow banking activities and rule violations.”
It’s curious to see Chinese housing transactions and prices plateau (in key markets) in the face of rampant mortgage Credit excess. Markets’ lack of concern notwithstanding, we can remind ourselves that this is China’s first mortgage boom – and a rather long and spectacular one at that. And I’m all too familiar with the view that Beijing is adept at managing oh so many things. Yet they’ve sure made a historic mess of mortgage finance – the extent of which will begin to surface as soon as lending slows. It’s one of history’s great ongoing manias, one that these days barely garners attention in The Age of Equities and Cryptocurrencies.
At this point, it’s not clear how Beijing possibly succeeds in reining in housing speculation without bursting an epic apartment Bubble (makes bitcoin look so tiny). With global yields on the rise and Chinese regulators on the case, the Chinese apartment market could be a critical development to monitor in 2018. Hard for me to believe there’s not a black swan holed up in there somewhere. And that goes for global bond markets as well.
For the Week:
The S&P500 gained 0.9% (up 5.1% y-t-d), and the Dow rose 1.0% (up 5.5%). The Utilities slipped 0.5% (down 5.5%). The Banks gained 1.0% (up 7.0%), and the Broker/Dealers added 0.4% (up 6.5%). The Transports declined 0.6% (up 6.5%). The S&P 400 Midcaps rose 0.7% (up 4.1%), and the small cap Russell 2000 increased 0.4% (up 4.0%). The Nasdaq100 advanced 1.1% (up 6.8%).The Semiconductors surged 3.8% (up 9.5%). The Biotechs added 0.5% (up 6.9%). With bullion down $6, the HUI gold index fell 2.2% (up 2.4%).
Three-month Treasury bill rates ended the week at 140 bps. Two-year government yields rose seven bps to 2.07% (up 18bps y-t-d). Five-year T-note yields gained 10 bps to 2.45% (up 24bps). Ten-year Treasury yields jumped 11 bps to 2.66% (up 25bps). Long bond yields gained eight bps to 2.93% (up 19bps).
Greek 10-year yields fell six bps to 3.80% (down 27bps y-t-d). Ten-year Portuguese yields jumped 19 bps to 1.98% (up 4bps). Italian 10-year yields declined two bps to 1.96% (down 5bps). Spain's 10-year yields fell six bps to 1.44% (down 12bps). German bund yields dipped one basis point to 0.57% (up 14bps). French yields declined a basis point to 0.84% (up 6bps). The French to German 10-year bond spread was unchanged at 27 bps. U.K. 10-year gilt yields were unchanged at 1.34% (up 15bps). U.K.'s FTSE equities index slipped 0.3% (up 0.6%).
Japan's Nikkei 225 equities index gained 0.7% (up 4.6% y-o-y). Japanese 10-year "JGB" yields added one basis point to 0.085% (up 4bps). France's CAC40 increased 0.2% (up 4.0%). The German DAX equities index rose 1.4% (up 4.0%). Spain's IBEX 35 equities index added 0.2% (up 4.3%). Italy's FTSE MIB index rose another 1.4% (up 8.7%). EM markets were higher. Brazil's Bovespa index jumped 2.4% (up 6.3%), and Mexico's Bolsa gained 1.1% (up 0.7%). South Korea's Kospi index rose 1.0% (up 2.1%). India’s Sensex equities index surged 2.7% (up 4.3%). China’s Shanghai Exchange gained 1.7% (up 5.5%). Turkey's Borsa Istanbul National 100 index added 0.4% (down 0.2%). Russia's MICEX equities index advanced 1.1% (up 8.4%).
Junk bond mutual funds saw outflows of $3.076 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates gained five bps to 4.04% (down 5bps y-o-y). Fifteen-year rates rose five bps to 3.49% (up 15bps). Five-year hybrid ARM rates were unchanged at 3.46% (up 25bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down five bps to 4.28% (up 4bps).
Federal Reserve Credit last week declined $1.1bn to $4.404 TN. Over the past year, Fed Credit contracted $9.2bn. Fed Credit inflated $1.593 TN, or 57%, over the past 272 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $4.0bn last week to $3.356 TN. "Custody holdings" were up $186bn y-o-y, or 5.9%.
M2 (narrow) "money" supply jumped $20.5bn last week to $13.858 TN. "Narrow money" expanded $599bn, or 4.5%, over the past year. For the week, Currency increased $2.3bn. Total Checkable Deposits surged $97bn, while Savings Deposits dropped $74.7bn. Small Time Deposits were little changed. Retail Money Funds declined $3.8bn.
Total money market fund assets dropped $20.1bn to $2.816 TN. Money Funds gained $150bn y-o-y, or 5.6%.
Total Commercial Paper gained $7.5bn to a near five-year high $1.119 TN. CP gained $151bn y-o-y, or 15.7%.
Currency Watch:
The U.S. dollar index slipped 0.4% to 90.572 (down 1.7% y-o-y). For the week on the upside, the Mexican peso increased 2.2%, the South African rand 1.4%, the Australian dollar 1.0%, the British pound 1.0%, the Norwegian krone 0.7%, the New Zealand dollar 0.5%, the Swiss franc 0.5%, the Brazilian real 0.3%, the Singapore dollar 0.3%, the Japanese yen 0.3% and the euro 0.2%. For the week on the downside, the Canadian dollar declined 0.3% and the South Korean won slipped 0.1%. The Chinese renminbi gained 1.01% versus the dollar this week (up 1.60% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index slipped 0.6% (up 1.8% y-t-d). Spot Gold declined 0.5% to $1,332 (up 2.2%). Silver lost 0.6% to $17.036 (down 1%). Crude declined 93 cents to $63.37 (up 5%). Gasoline added 0.8% (up 4%), while Natural Gas declined 0.5% (up 8%). Copper fell 1.0% (down 3%). Wheat was down 1.8% (down 1%). Corn jumped 1.8% (up 1%).
Trump Administration Watch:
January 20 – Bloomberg (Laura Litvan, Erik Wasson and Anna Edgerton): “The U.S. government officially entered a partial shutdown early Saturday as Senate Democrats and a handful of Republicans blocked a House-passed bill to fund the government after the two parties failed to break their deadlock over immigration. As the midnight passed, senators kept haggling over whether a funding extension shorter than the four-weeks passed by the House might provide a bridge for negotiations. With Democrats mostly unified in their opposition and defections in the Republican ranks, Senate Majority Leader Mitch McConnell couldn’t muster the 60 votes needed to get the temporary funding measure to the floor before the deadline to act.”
January 18 – Reuters (Richard Cowan and Susan Cornwell): “The White House on Wednesday threw its support behind a Republican proposal to avert a government shutdown at week’s end with a one-month extension in funding, but it was unclear whether there were enough votes to pass it in Congress. Congress has been struggling for months to reach an agreement to fund the government, which is currently operating on its third temporary funding extension since the 2018 fiscal year began on Oct. 1. The latest measure expires on Friday.”
January 16 – Wall Street Journal (Andrew Browne): “The last time Washington mobilized for a trade war, Ronald Reagan was president and Japan the adversary. Today, the White House is readying the same big guns—a mix of tariffs and quotas—aimed mainly at Chinese imports. It has in its sights everything from steel to solar panels and washing machines. A record Chinese annual trade surplus with the U.S., announced last week, is the potential catalyst for hostilities after a year of bluster from President Donald Trump. A trade war isn’t a certainty, but if it comes, it will look nothing like the battles that raged in the 1980s over Japanese semiconductors, cars and TV sets.”
January 18 – Reuters (Jeff Mason): “President Donald Trump said… the United States was considering a big ‘fine’ as part of a probe into China’s alleged theft of intellectual property, the clearest indication yet that his administration will take retaliatory trade action against China. In an interview with Reuters, Trump and his economic adviser Gary Cohn said China had forced U.S. companies to transfer their intellectual property to China as a cost of doing business there. The United States has started a trade investigation into the issue…”
January 19 – Reuters (Michael Martina and Kevin Yao): “As influential voices within the U.S. business community warn China that U.S. President Donald Trump is serious about tough action over Beijing’s trade practices, there is little sense of a crisis in the Chinese capital, where officials think he is bluffing. In Beijing, many experts think Washington is unwilling to pay the heavy economic price needed to upset prevailing trade dynamics between the world’s two largest economies. Hanging over trade relations are several inquiries into whether steel and aluminum imports… are harming U.S. national security, possible tariffs on imported solar panels, as well as an investigation into potential Chinese abuse of intellectual property.”
January 17 – Reuters (Jeff Mason and David Lawder): “U.S. President Donald Trump… said that terminating the North American Free Trade Agreement would result in the ‘best deal’ to revamp the 24-year-old trade pact with Canada and Mexico in favor of U.S. interests. Lawmakers as well as agricultural and industrial groups have warned Trump not to quit NAFTA, but he said that may be the outcome. ‘We’re renegotiating NAFTA now. We’ll see what happens. I may terminate NAFTA,’ Trump said…”
Federal Reserve Watch:
January 19 – Bloomberg (Rich Miller): “Federal Reserve policy makers are openly voicing their willingness to accept above-target inflation even as price pressures are beginning to build. ‘Let me be clear: A small and transitory overshoot of 2% inflation would not be a problem,” William Dudley, president of the Federal Reserve Bank of New York, said… ‘Were it to occur, it would demonstrate that our inflation target is symmetric, and it would help keep inflation expectations well-anchored around our longer-run objective.’ Such talk suggests that the central bank won’t respond willy-nilly to mounting price pressures with significantly stepped-up interest rate increases.”
January 19 – Bloomberg (Jesse Hamilton): “The Federal Reserve is working to relax a key part of post-crisis demands for drastically increased capital levels at the biggest banks, according to people familiar with the work, a move that could free up billions of dollars for some Wall Street giants. Central bank staffers are rewriting the leverage-ratio rule -- a requirement that U.S. banks maintain a minimum level of capital against all their assets -- to better align with a recent agreement among global regulators… The people said the Fed effort is drawing opposition from the Federal Deposit Insurance Corp., an agency with authority over banking rules that’s still led by a Barack Obama appointee.”
U.S. Bubble Watch:
January 16 – Wall Street Journal (Martin Feldstein): “Year after year, the stock market has roared ahead, driven by the Federal Reserve’s excessively easy monetary policy. The result is a fragile financial situation—and potentially a steep drop somewhere up ahead. To deal with the Great Recession, the Fed cut interest rates to a historic low. The short-term federal-funds rate hit 0.15% in January 2009 and stayed there until the end of 2015. In a strategy aimed at reducing long-term rates, the Fed under then-Chairman Ben Bernanke promised to keep short-term rates close to zero until the economy fully recovered. The Fed also began buying long-term bonds and mortgage-backed securities, more than quintupling its balance sheet from nearly $900 billion in 2008 to $4.4 trillion now. Mr. Bernanke explained that this ‘unconventional’ monetary policy was designed to encourage an asset-substitution effect. Investors would shift out of bonds and into equities and real estate. The resulting rise in household wealth would push up consumer spending and strengthen the economic recovery.”
January 19 – Bloomberg (Brandon Kochkodin): “Volatility was one of the never-ending talking points of 2017… The Chicago Board Options Exchange Volatility Index, or VIX, finished the year with the lowest average daily level on record. During the course of the year, we saw the market’s fear gauge set a new record low when it closed at 9.14 on Nov. 3. Want more perspective? Try this: Arrange all the trading days this millennium from lowest to highest by the value of the VIX that day. The first 41 entries on that list would all be from 2017! Fully 80 of the top 100 calmest days since the turn of the century were in this past year. It’s not as if there wasn’t anything to worry about. The Federal Reserve’s Partisan Conflict Index, a measure of political disagreements with data stretching back to 1981, hit its highest point on record in March. The country endured the most expensive hurricane season. Threats of a federal government shutdown came and went. Not even a nuclear showdown with North Korea could raise investors’ collective pulse.”
January 16 – Reuters (Claire Milhench and Marc Jones): “Investors have raised their stock allocations to two-year highs and cut cash positions to five-year lows, with a majority expecting the equity bull run to continue into 2019, a survey by Bank of America Merrill Lynch (BAML) showed…”
January 17 – CNBC (Jeff Cox): “Stock market optimism among professional investors just keeps on surging, and is now at the highest levels since before the crash of 1987. Bullishness, or the belief that the market is heading higher, is now at 66.7% in the latest Investors Intelligence survey, a widely followed gauge of sentiment among investment newsletter authors. That's the highest level since early April 1986…”
January 17 – Bloomberg (Craig Torres): “Almost all of the 12 Federal Reserve districts reported ‘modest to moderate gains’ in economic activity at the start of 2018, a Federal Reserve survey showed. The central bank’s Beige Book economic report… said the Dallas Fed bank was the exception, reporting ‘a robust increase.’”
January 17 – Bloomberg (Katia Dmitrieva): “U.S. factory production rose for a fourth straight month in December, capping the strongest quarter since 2010 and underscoring a resurgence in manufacturing that’s primed for further advances, Federal Reserve data showed…”
January 16 – Reuters (Uday Sampath and Siddharth Cavale): “U.S. shoppers spent a record $108 billion snapping up discounts on Amazon and other websites during the 2017 holiday season, with more people using smartphones and tablets, Adobe Analytics said… Adobe, which collects its data by measuring 80% of all online transactions from the top 100 U.S. web retailers, said the amount was 14.7% higher than last year’s total.”
January 16 – Bloomberg (Joanna Ossinger): “Volatility can’t stay this low forever -- or so investors have been saying for what feels like forever. They may have finally found their moment. As the market rallies, ‘volatility isn’t that low anymore,’ Pravit Chintawongvanich of Macro Risk Advisors said…, adding that the Cboe Volatility Index (VIX) curve is flattening. The VIX rose as much as 22% on Tuesday to as high as 12.41, the highest level in six weeks. That is still around 30% below the average of 18.1 since the bull market started in 2009. The correlation of S&P 500 Index stocks to each other has been increasing as the market rallies, the reverse of what’s typically seen, and this gain over the past two months points to broad buying of equities –- a ‘‘melt up’ so to speak,’ Chintawongvanich wrote.”
January 17 – Bloomberg (Martin Z Braun): “New York City is still reaping the benefits of the real estate boom. The city set a value of $1.26 trillion for its more than one million properties for the fiscal year beginning in July, an increase of 9.4% over the previous period that promises to boost the government’s tax collections. ‘This year’s roll confirms increases in the real estate market and additional construction activity in New York City, which is not just concentrated in Manhattan,’ Jacques Jiha, the city’s commissioner for the department of finance, said…”
January 17 – Wall Street Journal (Leslie Scism): “Long-term-care insurance was supposed to help pay for nursing homes, assisted living and personal aides for tens of millions of Americans when they became unable to take care of themselves. Now, though, the industry is in financial turmoil, causing misery for many of the 7.3 million people who own a long-term-care policy, equal to about a fifth of the U.S. population at least 65 years old. Steep rate increases that many policyholders never saw coming are confronting them with an awful choice: Come up with the money to pay more—or walk away from their coverage. ‘Never in our wildest imagination did we consider that the company would double the premium,’ says Sally Wylie, 67, a retired learning specialist…”
China Watch:
January 18 – New York Times (Keith Bradsher): “The pace of growth in China’s economy accelerated last year for the first time in seven years as exports, construction and consumer spending all climbed strongly. At least, that’s what the government says. In reality, the pace of growth in China’s economy is anybody’s guess. Various signals suggest China’s growth did speed up last year, which could give the government the room it needs to tackle an accumulation of serious financial, environmental and social problems this year… The National Bureau of Statistics announced… that the economy expanded 6.9% last year, up slightly from 6.7% in 2016 and breaking a trend of gradual slowing that began in 2011.”
January 18 – Bloomberg: “China home prices rose in the most cities in six months even as the government prolonged its campaign to curb property speculation. New-home prices… in December rose in 57 of 70 cities tracked by the government, compared with 50 in November… Prices fell in 7 cities from the previous month and were unchanged in six.”
January 16 – Reuters (Uday Sampath and Siddharth Cavale): “U.S. shoppers spent a record $108 billion snapping up discounts on Amazon and other websites during the 2017 holiday season, with more people using smartphones and tablets, Adobe Analytics said… Adobe, which collects its data by measuring 80% of all online transactions from the top 100 U.S. web retailers, said the amount was 14.7% higher than last year’s total.”
January 16 – Bloomberg (Joanna Ossinger): “Volatility can’t stay this low forever -- or so investors have been saying for what feels like forever. They may have finally found their moment. As the market rallies, ‘volatility isn’t that low anymore,’ Pravit Chintawongvanich of Macro Risk Advisors said…, adding that the Cboe Volatility Index (VIX) curve is flattening. The VIX rose as much as 22% on Tuesday to as high as 12.41, the highest level in six weeks. That is still around 30% below the average of 18.1 since the bull market started in 2009. The correlation of S&P 500 Index stocks to each other has been increasing as the market rallies, the reverse of what’s typically seen, and this gain over the past two months points to broad buying of equities –- a ‘‘melt up’ so to speak,’ Chintawongvanich wrote.”
January 17 – Bloomberg (Martin Z Braun): “New York City is still reaping the benefits of the real estate boom. The city set a value of $1.26 trillion for its more than one million properties for the fiscal year beginning in July, an increase of 9.4% over the previous period that promises to boost the government’s tax collections. ‘This year’s roll confirms increases in the real estate market and additional construction activity in New York City, which is not just concentrated in Manhattan,’ Jacques Jiha, the city’s commissioner for the department of finance, said…”
January 17 – Wall Street Journal (Leslie Scism): “Long-term-care insurance was supposed to help pay for nursing homes, assisted living and personal aides for tens of millions of Americans when they became unable to take care of themselves. Now, though, the industry is in financial turmoil, causing misery for many of the 7.3 million people who own a long-term-care policy, equal to about a fifth of the U.S. population at least 65 years old. Steep rate increases that many policyholders never saw coming are confronting them with an awful choice: Come up with the money to pay more—or walk away from their coverage. ‘Never in our wildest imagination did we consider that the company would double the premium,’ says Sally Wylie, 67, a retired learning specialist…”
China Watch:
January 18 – New York Times (Keith Bradsher): “The pace of growth in China’s economy accelerated last year for the first time in seven years as exports, construction and consumer spending all climbed strongly. At least, that’s what the government says. In reality, the pace of growth in China’s economy is anybody’s guess. Various signals suggest China’s growth did speed up last year, which could give the government the room it needs to tackle an accumulation of serious financial, environmental and social problems this year… The National Bureau of Statistics announced… that the economy expanded 6.9% last year, up slightly from 6.7% in 2016 and breaking a trend of gradual slowing that began in 2011.”
January 18 – Bloomberg: “China home prices rose in the most cities in six months even as the government prolonged its campaign to curb property speculation. New-home prices… in December rose in 57 of 70 cities tracked by the government, compared with 50 in November… Prices fell in 7 cities from the previous month and were unchanged in six.”
January 14 – Reuters (Michael Martina): “China will step up oversight in the banking sector this year to reduce financial risks, the country’s banking regulator said, stressing that long-term efforts would be needed to control banking sector chaos. The China Banking Regulatory Commission (CBRC) said… that its priorities included increasing supervision over shadow banking and interbank activities. ‘Banking shareholder management, corporate governance and risk control mechanisms are still relatively weak, and root causes creating market chaos have not fundamentally changed,’ the CBRC said.”
January 17 – Bloomberg: “A slump in Chinese government debt may worsen, with inflation picking up as breweries, dairies and others raise prices, and energy costs climb amid a government crackdown on coal. Cui Li, Hong Kong-based head of macro research at CCB International Holdings Ltd., expects inflation to rise to 2.5% this year, a marked increase from 2017 when China’s consumer price index averaged 1.6%. ‘Food prices will rise, raw material costs are passing through, and pollution curbs have intensified -- I don’t think the market has yet fully priced in the impact of inflation,’ said Cui. She expects China’s 10-year government bond yield to range between 4.3 and 4.5% by the end of the year versus 3.97% Thursday.”
January 16 – Bloomberg: “China’s central bank boosted injections via open-market operations to the most in two months to counter seasonal tightening of liquidity. The People’s Bank of China pumped in a net 270 billion yuan ($42bn) on Tuesday, as sales of reverse-repurchase agreements more than offset maturities. That’s the most since Nov. 16…”
January 17 – Wall Street Journal (Nathaniel Taplin): “Why did sentiment on China improve so much in 2017? Progress in taming long-running structural problems, such as the country’s excess manufacturing capacity and mushrooming off-balance sheet debt, deservedly caught investors’ attention. The driving force behind that progress was the same factor that should now give investors pause: The primacy of Xi Jinping. Mr. Xi’s five-year campaign to consolidate power has left him in firm control of China’s fractious bureaucracy. He has started to do what his predecessors couldn’t, bringing slippery local officials and state-owned banks and firms to heel. But his success entails a sea-change in how to view China: The biggest risk may no longer be a weak Beijing, but a strong Xi administration which local officials are terrified to defy. That brings up ghosts of a darker time.”
January 18 – Bloomberg (Denise Wee): “It’s been a bad week for bonds of the debt-laden Chinese conglomerate HNA Group Co., with stock trading halts at four units adding to investor concerns. One of the securities sold by HNA Group International Co. that matures in 2019 slid as much as 4.2 cents this week -- the biggest weekly fall in six months -- to a record low of 84 cents on the dollar. The company’s bonds due 2021 shed 3.3 cents this week to 79.5 cents, also near the lowest ever.”
January 18 – Bloomberg: “A local state-owned company in China’s Inner Mongolia, a region that recently admitted having inflated key economic data, has suffered a credit rating downgrade. Fitch Ratings cut Inner Mongolia High-Grade Highway Construction and Development Co.’s long-term foreign- and local-currency issuer default rating to BBB- from BBB, citing the local government’s revision of its fiscal figures… That follows its downgrade of an internal assessment of the creditworthiness of the Inner Mongolia region… Investors are growing more concerned about local credit risks as the government steps up efforts to curb leverage and two regions have admitted faking data.”
January 15 – Bloomberg: “China is escalating its clampdown on cryptocurrency trading, targeting online platforms and mobile apps that offer exchange-like services… While authorities banned cryptocurrency exchanges last year, they’ve recently noted an uptick in activity on alternative venues. The government plans to block domestic access to homegrown and offshore platforms that enable centralized trading, the people said… Authorities will also target individuals and companies that provide market-making, settlement and clearing services for centralized trading…”
January 16 – Financial Times (Yuan Yang, Lucy Hornby and Emily Feng): “China is plugging the last holes in its ‘Great Firewall’ internet censorship apparatus, hampering global groups’ ability to operate in the country. Five international companies and organisations told the Financial Times that access to the global internet from their Chinese offices has been disrupted in recent months. Some of the companies blamed Chinese telecoms providers, saying the groups blocked crucial software used to bypass censorship. China aggressively censors the internet, cutting off locals’ access to Facebook, Google, YouTube and much more, to control what news and facts reach its population.”
Central Bank Watch:
January 16 – Bloomberg (Piotr Skolimowski): “The European Central Bank should adjust its policy guidance before the summer and shouldn’t have any problems ending net asset purchases in one swoop after September, Governing Council member Ardo Hansson said… While the Estonian policy maker judged the ECB’s current stance as broadly appropriate, he argued… that there was a ‘need for action in our communication.’ ‘There are certainly good reasons to reduce the importance of the net purchases in our communication soon -- also with a view to a potential end to these purchases,’ he said. If growth and inflation continue to evolve broadly in line with the ECB’s latest projection, it would ‘certainly be conceivable and also appropriate to end the purchases after September,’ he said.”
January 16 – Bloomberg (Jana Randow): “Bundesbank President Jens Weidmann said that analysts’ expectations that European Central Bank interest rates won’t rise before the middle of next year are reasonable. ‘Those expectations seem to be grosso modo in line with the current forward guidance of the ECB Governing Council, which says that interest rates will only increase well beyond the end of net asset purchases,’ he said…”
January 17 – Bloomberg (Piotr Skolimowski and Alessandro Speciale): “The European Central Bank’s second-highest official waded into the debate over euro-area monetary stimulus after some policy makers expressed concerns over the single currency’s recent gains. Vice President Vitor Constancio cast his lot with Governing Council members Francois Villeroy de Galhau and Ewald Nowotny, who argued over the past two days that a stronger euro may harm ECB efforts to return inflation to the goal of just under 2%.”
January 14 – Reuters (Leika Kihara and Stanley White): “Bank of Japan Governor Haruhiko Kuroda offered a positive view on the economy and inflation…, sending the yen to a four-month high against the dollar on simmering speculation it may exit its ultra-loose monetary policy earlier than expected. Financial markets ignored Kuroda’s reminder that the BOJ will maintain its massive stimulus in a sign of how nervous investors have become on when it might follow the footsteps of other central banks in dialing back crisis-mode stimulus.”
January 17 – Bloomberg: “A slump in Chinese government debt may worsen, with inflation picking up as breweries, dairies and others raise prices, and energy costs climb amid a government crackdown on coal. Cui Li, Hong Kong-based head of macro research at CCB International Holdings Ltd., expects inflation to rise to 2.5% this year, a marked increase from 2017 when China’s consumer price index averaged 1.6%. ‘Food prices will rise, raw material costs are passing through, and pollution curbs have intensified -- I don’t think the market has yet fully priced in the impact of inflation,’ said Cui. She expects China’s 10-year government bond yield to range between 4.3 and 4.5% by the end of the year versus 3.97% Thursday.”
January 16 – Bloomberg: “China’s central bank boosted injections via open-market operations to the most in two months to counter seasonal tightening of liquidity. The People’s Bank of China pumped in a net 270 billion yuan ($42bn) on Tuesday, as sales of reverse-repurchase agreements more than offset maturities. That’s the most since Nov. 16…”
January 17 – Wall Street Journal (Nathaniel Taplin): “Why did sentiment on China improve so much in 2017? Progress in taming long-running structural problems, such as the country’s excess manufacturing capacity and mushrooming off-balance sheet debt, deservedly caught investors’ attention. The driving force behind that progress was the same factor that should now give investors pause: The primacy of Xi Jinping. Mr. Xi’s five-year campaign to consolidate power has left him in firm control of China’s fractious bureaucracy. He has started to do what his predecessors couldn’t, bringing slippery local officials and state-owned banks and firms to heel. But his success entails a sea-change in how to view China: The biggest risk may no longer be a weak Beijing, but a strong Xi administration which local officials are terrified to defy. That brings up ghosts of a darker time.”
January 18 – Bloomberg (Denise Wee): “It’s been a bad week for bonds of the debt-laden Chinese conglomerate HNA Group Co., with stock trading halts at four units adding to investor concerns. One of the securities sold by HNA Group International Co. that matures in 2019 slid as much as 4.2 cents this week -- the biggest weekly fall in six months -- to a record low of 84 cents on the dollar. The company’s bonds due 2021 shed 3.3 cents this week to 79.5 cents, also near the lowest ever.”
January 18 – Bloomberg: “A local state-owned company in China’s Inner Mongolia, a region that recently admitted having inflated key economic data, has suffered a credit rating downgrade. Fitch Ratings cut Inner Mongolia High-Grade Highway Construction and Development Co.’s long-term foreign- and local-currency issuer default rating to BBB- from BBB, citing the local government’s revision of its fiscal figures… That follows its downgrade of an internal assessment of the creditworthiness of the Inner Mongolia region… Investors are growing more concerned about local credit risks as the government steps up efforts to curb leverage and two regions have admitted faking data.”
January 15 – Bloomberg: “China is escalating its clampdown on cryptocurrency trading, targeting online platforms and mobile apps that offer exchange-like services… While authorities banned cryptocurrency exchanges last year, they’ve recently noted an uptick in activity on alternative venues. The government plans to block domestic access to homegrown and offshore platforms that enable centralized trading, the people said… Authorities will also target individuals and companies that provide market-making, settlement and clearing services for centralized trading…”
January 16 – Financial Times (Yuan Yang, Lucy Hornby and Emily Feng): “China is plugging the last holes in its ‘Great Firewall’ internet censorship apparatus, hampering global groups’ ability to operate in the country. Five international companies and organisations told the Financial Times that access to the global internet from their Chinese offices has been disrupted in recent months. Some of the companies blamed Chinese telecoms providers, saying the groups blocked crucial software used to bypass censorship. China aggressively censors the internet, cutting off locals’ access to Facebook, Google, YouTube and much more, to control what news and facts reach its population.”
Central Bank Watch:
January 16 – Bloomberg (Piotr Skolimowski): “The European Central Bank should adjust its policy guidance before the summer and shouldn’t have any problems ending net asset purchases in one swoop after September, Governing Council member Ardo Hansson said… While the Estonian policy maker judged the ECB’s current stance as broadly appropriate, he argued… that there was a ‘need for action in our communication.’ ‘There are certainly good reasons to reduce the importance of the net purchases in our communication soon -- also with a view to a potential end to these purchases,’ he said. If growth and inflation continue to evolve broadly in line with the ECB’s latest projection, it would ‘certainly be conceivable and also appropriate to end the purchases after September,’ he said.”
January 16 – Bloomberg (Jana Randow): “Bundesbank President Jens Weidmann said that analysts’ expectations that European Central Bank interest rates won’t rise before the middle of next year are reasonable. ‘Those expectations seem to be grosso modo in line with the current forward guidance of the ECB Governing Council, which says that interest rates will only increase well beyond the end of net asset purchases,’ he said…”
January 17 – Bloomberg (Piotr Skolimowski and Alessandro Speciale): “The European Central Bank’s second-highest official waded into the debate over euro-area monetary stimulus after some policy makers expressed concerns over the single currency’s recent gains. Vice President Vitor Constancio cast his lot with Governing Council members Francois Villeroy de Galhau and Ewald Nowotny, who argued over the past two days that a stronger euro may harm ECB efforts to return inflation to the goal of just under 2%.”
January 14 – Reuters (Leika Kihara and Stanley White): “Bank of Japan Governor Haruhiko Kuroda offered a positive view on the economy and inflation…, sending the yen to a four-month high against the dollar on simmering speculation it may exit its ultra-loose monetary policy earlier than expected. Financial markets ignored Kuroda’s reminder that the BOJ will maintain its massive stimulus in a sign of how nervous investors have become on when it might follow the footsteps of other central banks in dialing back crisis-mode stimulus.”
January 17 – Reuters (Balazs Koranyi and Jan Strupczewski): “Euro zone officials could pick a new European Central Bank vice president within weeks, kicking off two years of flux at the top of one of Europe’s most vital institutions and previewing a tussle to replace ECB chief Mario Draghi in 2019. Germany is seen as eager to claim the presidency at last, two decades after the ECB’s creation, but the hawkish views of its obvious candidate, Bundesbank chief Jens Weidmann, will count against him in some member states, euro zone sources say.”
January 14 – Reuters (John Revill and Angelika Gruber): “Three years after the Swiss National Bank shocked currency markets by scrapping the franc’s peg to the euro, it faces the toughest task of any major central bank in normalising ultra-loose monetary policy. If it raises rates, the Swiss franc strengthens. If it sells off its massive balance sheet, the Swiss franc strengthens. If a global crisis hits, the Swiss franc strengthens. And the abrupt decision to scrap the currency peg on Jan. 15, 2015, means it still has credibility issues with financial markets.”
January 14 – Reuters (John Revill and Angelika Gruber): “Three years after the Swiss National Bank shocked currency markets by scrapping the franc’s peg to the euro, it faces the toughest task of any major central bank in normalising ultra-loose monetary policy. If it raises rates, the Swiss franc strengthens. If it sells off its massive balance sheet, the Swiss franc strengthens. If a global crisis hits, the Swiss franc strengthens. And the abrupt decision to scrap the currency peg on Jan. 15, 2015, means it still has credibility issues with financial markets.”
January 19 – Bloomberg (Masaki Kondo): “Investors in Australia’s bonds are boosting bets the central bank will join its global peers in shifting toward a more hawkish policy stance. The extra yield on the nation’s benchmark three-year bonds over the central bank’s overnight cash rate jumped to 75 bps Friday, the widest since May 2010. Retail sales and employment both grew at more than twice the pace economists predicted, according to the latest data published this month.”
Global Bubble Watch:
January 17 – Bloomberg (Daniel Moss): “This is going to be an exciting year for monetary policy. In fact, it already is, thanks to Europe and Japan. Investors were taken aback last week when the Bank of Japan bought fewer bonds and the European Central Bank revealed -- shock, horror -- its language would have to evolve with the euro region's economy. Both developments, and the reaction, were welcome. They say a lot about the strength of global growth and how it still surprises many people… The next potential flashpoint is the Jan. 25 meeting of the ECB's governing council. It's too soon to expect a shift in communications then, but individual council members are off and running.”
January 19 – Financial Times (Gillian Tett): “The $160bn Bridgewater hedge fund produced a chart last year about modern politics that was alarming for at least two reasons. First, the number crunching revealed that the proportion of votes garnered by populist, anti-establishment candidates in the west, such as US President Donald Trump, France’s Marine Le Pen and Jeremy Corbyn, leader of the UK Labour party, exploded from 7% in 2010 to 35% in 2017. Second, the chart showed that the only time an increase of this magnitude occurred in recent memory was in the 1930s, when another financial crisis led to populism. That time, the swing prefigured the rise of nationalism and led to war. Could history repeat itself? The global elite increasingly fears so. The World Economic Forum on Wednesday released its annual survey of the main concerns of its members.”
January 17 – Bloomberg (Adam Haigh): “One of the world’s largest money managers says you should fear the lack of fear in markets. Investors in global equities are enjoying the best start to a year in at least three decades, cutting back on cash positions and plowing more money into riskier assets. However, just as many expect this bull run to last even longer than previously expected, Pacific Investment Management Co. says now is the time for caution. ‘The fact that the fear is gone is the main reason why we should be worried,’ Joachim Fels, a global economic adviser at Pimco, told Bloomberg… ‘That means most investors are now pretty fully invested and that means they will want to get out if the markets start to correct -- exacerbating the downdraft.”
Global Bubble Watch:
January 17 – Bloomberg (Daniel Moss): “This is going to be an exciting year for monetary policy. In fact, it already is, thanks to Europe and Japan. Investors were taken aback last week when the Bank of Japan bought fewer bonds and the European Central Bank revealed -- shock, horror -- its language would have to evolve with the euro region's economy. Both developments, and the reaction, were welcome. They say a lot about the strength of global growth and how it still surprises many people… The next potential flashpoint is the Jan. 25 meeting of the ECB's governing council. It's too soon to expect a shift in communications then, but individual council members are off and running.”
January 19 – Financial Times (Gillian Tett): “The $160bn Bridgewater hedge fund produced a chart last year about modern politics that was alarming for at least two reasons. First, the number crunching revealed that the proportion of votes garnered by populist, anti-establishment candidates in the west, such as US President Donald Trump, France’s Marine Le Pen and Jeremy Corbyn, leader of the UK Labour party, exploded from 7% in 2010 to 35% in 2017. Second, the chart showed that the only time an increase of this magnitude occurred in recent memory was in the 1930s, when another financial crisis led to populism. That time, the swing prefigured the rise of nationalism and led to war. Could history repeat itself? The global elite increasingly fears so. The World Economic Forum on Wednesday released its annual survey of the main concerns of its members.”
January 17 – Bloomberg (Adam Haigh): “One of the world’s largest money managers says you should fear the lack of fear in markets. Investors in global equities are enjoying the best start to a year in at least three decades, cutting back on cash positions and plowing more money into riskier assets. However, just as many expect this bull run to last even longer than previously expected, Pacific Investment Management Co. says now is the time for caution. ‘The fact that the fear is gone is the main reason why we should be worried,’ Joachim Fels, a global economic adviser at Pimco, told Bloomberg… ‘That means most investors are now pretty fully invested and that means they will want to get out if the markets start to correct -- exacerbating the downdraft.”
Fixed Income Watch:
January 18 – CNBC (Patti Domm): “The bond market is in the process of making an important move, and stock traders are keeping a wary eye on it. On Thursday afternoon, the benchmark 10-year Treasury yield crept close to 2.63%, a level it came near last year but has not really traded above since 2014. The yield was above 2.62% in afternoon trading Thursday. ‘The pain point comes at 2.63%, where everybody believes that's the breakout, and everyone will be keying on that,’ said Art Hogan, chief market strategist at B. Riley FBR. ‘This is a more-than-three-year range that we're attempting to break out of here.’”
January 16 – Financial Times (Roger Blitz, Leo Lewis and Robin Harding): “Global bond investors are casting a nervous eye at Japan. As a wave of selling washed across debt markets last week, the disclosure that the Bank of Japan had trimmed the volume of longer bonds it purchased was seized upon as the trigger for a move higher in yields that prompted veteran investor Bill Gross to again call the end of the three-decade bull run for the $14tn US Treasury market. The intense interest in a standard operation in the BOJ’s quantitative easing programme revealed how sensitive investors are to any perceived changes at a juncture when the European Central Bank is halving its monthly bond buying and the Federal Reserve is tightening policy… Bret Barker, a portfolio manager with asset manager TCW, says the blowback into the US Treasury market reflects how central bank easing through the BoJ targeting a zero yield for the 10-year Japanese government bond, as well as debt purchases and negative rates from the ECB, has acted as an anchor for global interest rates. ‘If those anchors are released . . . that should increase volatility and raise longer rates in the US,’ he says.”
January 17 – Bloomberg (Sophie Caronello): “China and Japan’s combined share of Treasuries fell to about 36% of all foreign-held U.S. government debt in November, the lowest level in about 18 years. China, the biggest foreign holder of U.S. bonds, notes and bills, saw its total drop 1.1% to $1.18 trillion from the previous month… Japan’s holdings dropped 0.9% to $1.08 trillion, the lowest in more than four years.”
January 16 – Bloomberg (Carrie Hong, Annie Lee, Lianting Tu, and Narae Kim): “The boom in Asia’s dollar bond market is ratcheting up a notch, with investors placing orders for five times as much debt as has been sold so far this month. Chances of a steeper path higher for global interest rates that’s lifted government bond yields this year is doing little to damp the appeal for debt from Asian companies outside Japan. The ferocious appetite in 2017, in part due to the hunger from investors chasing higher yields, is extending into January with Chinese property companies finding a flurry of buyers wanting to get their hands on newly issued debt… After a record $322 billion of dollar bond issuance from the region in 2017, Asian firms are off to the strongest ever start to a year. Year-to-date sales have reached $19.3 billion…”
Europe Watch:
January 18 – CNBC (Patti Domm): “The bond market is in the process of making an important move, and stock traders are keeping a wary eye on it. On Thursday afternoon, the benchmark 10-year Treasury yield crept close to 2.63%, a level it came near last year but has not really traded above since 2014. The yield was above 2.62% in afternoon trading Thursday. ‘The pain point comes at 2.63%, where everybody believes that's the breakout, and everyone will be keying on that,’ said Art Hogan, chief market strategist at B. Riley FBR. ‘This is a more-than-three-year range that we're attempting to break out of here.’”
January 16 – Financial Times (Roger Blitz, Leo Lewis and Robin Harding): “Global bond investors are casting a nervous eye at Japan. As a wave of selling washed across debt markets last week, the disclosure that the Bank of Japan had trimmed the volume of longer bonds it purchased was seized upon as the trigger for a move higher in yields that prompted veteran investor Bill Gross to again call the end of the three-decade bull run for the $14tn US Treasury market. The intense interest in a standard operation in the BOJ’s quantitative easing programme revealed how sensitive investors are to any perceived changes at a juncture when the European Central Bank is halving its monthly bond buying and the Federal Reserve is tightening policy… Bret Barker, a portfolio manager with asset manager TCW, says the blowback into the US Treasury market reflects how central bank easing through the BoJ targeting a zero yield for the 10-year Japanese government bond, as well as debt purchases and negative rates from the ECB, has acted as an anchor for global interest rates. ‘If those anchors are released . . . that should increase volatility and raise longer rates in the US,’ he says.”
January 17 – Bloomberg (Sophie Caronello): “China and Japan’s combined share of Treasuries fell to about 36% of all foreign-held U.S. government debt in November, the lowest level in about 18 years. China, the biggest foreign holder of U.S. bonds, notes and bills, saw its total drop 1.1% to $1.18 trillion from the previous month… Japan’s holdings dropped 0.9% to $1.08 trillion, the lowest in more than four years.”
January 16 – Bloomberg (Carrie Hong, Annie Lee, Lianting Tu, and Narae Kim): “The boom in Asia’s dollar bond market is ratcheting up a notch, with investors placing orders for five times as much debt as has been sold so far this month. Chances of a steeper path higher for global interest rates that’s lifted government bond yields this year is doing little to damp the appeal for debt from Asian companies outside Japan. The ferocious appetite in 2017, in part due to the hunger from investors chasing higher yields, is extending into January with Chinese property companies finding a flurry of buyers wanting to get their hands on newly issued debt… After a record $322 billion of dollar bond issuance from the region in 2017, Asian firms are off to the strongest ever start to a year. Year-to-date sales have reached $19.3 billion…”
Europe Watch:
January 18 – Bloomberg (Alessandro Speciale, Piotr Skolimowski, and Carolynn Look): “Jens Weidmann hit back at criticism of Germany’s current-account and budget surpluses by International Monetary Fund Managing Director Christine Lagarde, saying that increasing public spending would be the wrong way to go. The Bundesbank president kicked off a joint conference by the two institutions by insisting that Europe’s largest economy doesn’t need more expenditure, though he agreed that it should be better planned. Public outlays should shift away from consumption and toward targeted investment, he said.”
January 14 – Bloomberg (Jeff Black, Stephen Engle, and Enda Curran): “Germany’s central bank has decided to include the Chinese yuan in its own reserves, in a further boost to the international status of the currency. …Bundesbank board member Andreas Dombret said the decision was taken last year following an investment of 500 million euros ($611 million) by the European Central Bank… ‘The renminbi is used increasingly as part of central banks’ foreign-exchange reserves -- for example, the ECB included the RMB but also other European central banks did so,’ Dombret said…”
Japan Watch:
January 19 – Reuters: “The Japanese government raised its assessment of the economy in January for the first time in seven months due to rising consumer spending, an encouraging sign that inflation could start to pick up this year. ‘Japan's economy is gradually recovering,’ the Cabinet Office said… That marked an upgrade from December, when the Cabinet Office said the economy is on a recovery path. The government also raised its assessment of consumer spending for the first time in seven months after retail sales, household spending, and new car sales gained momentum towards the end of last year.”
January 14 – Wall Street Journal (Megumi Fujikawa and Suryatapa Bhattacharya): “The Bank of Japan, after goosing Japanese share prices with a $50-billion-a-year program of stock purchases, now confronts a decision facing many other developed country central banks: when to stop. The Nikkei Stock Average, standing near a 26-year high, doesn’t seem in need of special help anymore, and critics say the BOJ’s buying distorts the market. The Nikkei has more than doubled in the last five years and is up 24% from a year ago. Yet central-bank officials worry that a premature pullback could send the wrong message by suggesting that the BOJ has given up its commitment to reaching 2% inflation.”
January 16 – Bloomberg (Netty Idayu Ismail): “A minor tweak in the Bank of Japan’s bond purchases has emboldened investors to bet the central bank is about to wind back monetary stimulus. Going long on the yen is the biggest currency wager for AMP Capital Investors Ltd.’s Nader Naeimi… Options traders are the most bullish on the yen among developed-market currencies. Japan’s longest stretch of economic growth in two decades is fueling bets the BOJ will join its global peers and begin normalizing policy as soon as this year. The central bank cut purchases of longer-maturity bonds last week, prompting speculation it will allow 10-year yields to rise above its current target of around zero percent.”
January 14 – Bloomberg (Jeff Black, Stephen Engle, and Enda Curran): “Germany’s central bank has decided to include the Chinese yuan in its own reserves, in a further boost to the international status of the currency. …Bundesbank board member Andreas Dombret said the decision was taken last year following an investment of 500 million euros ($611 million) by the European Central Bank… ‘The renminbi is used increasingly as part of central banks’ foreign-exchange reserves -- for example, the ECB included the RMB but also other European central banks did so,’ Dombret said…”
Japan Watch:
January 19 – Reuters: “The Japanese government raised its assessment of the economy in January for the first time in seven months due to rising consumer spending, an encouraging sign that inflation could start to pick up this year. ‘Japan's economy is gradually recovering,’ the Cabinet Office said… That marked an upgrade from December, when the Cabinet Office said the economy is on a recovery path. The government also raised its assessment of consumer spending for the first time in seven months after retail sales, household spending, and new car sales gained momentum towards the end of last year.”
January 14 – Wall Street Journal (Megumi Fujikawa and Suryatapa Bhattacharya): “The Bank of Japan, after goosing Japanese share prices with a $50-billion-a-year program of stock purchases, now confronts a decision facing many other developed country central banks: when to stop. The Nikkei Stock Average, standing near a 26-year high, doesn’t seem in need of special help anymore, and critics say the BOJ’s buying distorts the market. The Nikkei has more than doubled in the last five years and is up 24% from a year ago. Yet central-bank officials worry that a premature pullback could send the wrong message by suggesting that the BOJ has given up its commitment to reaching 2% inflation.”
January 16 – Bloomberg (Netty Idayu Ismail): “A minor tweak in the Bank of Japan’s bond purchases has emboldened investors to bet the central bank is about to wind back monetary stimulus. Going long on the yen is the biggest currency wager for AMP Capital Investors Ltd.’s Nader Naeimi… Options traders are the most bullish on the yen among developed-market currencies. Japan’s longest stretch of economic growth in two decades is fueling bets the BOJ will join its global peers and begin normalizing policy as soon as this year. The central bank cut purchases of longer-maturity bonds last week, prompting speculation it will allow 10-year yields to rise above its current target of around zero percent.”
January 18 – Bloomberg (Toru Fujioka and Masahiro Hidaka): “A small shift is taking place in internal discussions among Bank of Japan policy makers, with a minority raising the need to eventually start discussing policy normalization, even though they agree the current stimulus program must continue unchanged for some time… Some of them think the change is natural given the improvement in the economy, according to the people, who declined to be named because discussions are private. Japan’s extended economic recovery and a slow but steady rise in inflation are creating the need in the medium-term to at least begin talking about normalization, the people said.”
January 16 – Bloomberg (James Mayger, Connor Cislo, and Maiko Takahashi): “One of Japan’s key targets for addressing its ballooning debt is set to be pushed further into the future when the Cabinet Office updates economic forecasts next week. The primary balance, which measures the government’s fiscal position excluding interest payments on its borrowings, was meant to come out of the red in fiscal 2020. Reaching the goal was seen as a first step for Prime Minister Shinzo Abe’s administration to arrest debt growth… Yet a best-case projection for a primary balance surplus was reset to 2025 in a revision last year and now it’s going to be deferred again, until sometime in the late 2020s…”
January 16 – Bloomberg (James Mayger, Connor Cislo, and Maiko Takahashi): “One of Japan’s key targets for addressing its ballooning debt is set to be pushed further into the future when the Cabinet Office updates economic forecasts next week. The primary balance, which measures the government’s fiscal position excluding interest payments on its borrowings, was meant to come out of the red in fiscal 2020. Reaching the goal was seen as a first step for Prime Minister Shinzo Abe’s administration to arrest debt growth… Yet a best-case projection for a primary balance surplus was reset to 2025 in a revision last year and now it’s going to be deferred again, until sometime in the late 2020s…”
Leveraged Speculation Watch:
January 14 – Bloomberg (Nishant Kumar): “Cheese, sunflower seeds and rough rice sounds like an unappetizing mix -- unless you happen to be a hedge-fund manager. A handful of computer-driven funds had a bumper 2017 by betting on the future price of such ‘exotic’ assets. The success of this type of managed futures strategy, the industry’s term for trend-following, is now drawing new entrants despite the risks created by the low levels of liquidity. Hedge funds returns have been battered by central bank monetary policies that have made it more difficult for them to outperform the market… That’s prompting some trend followers to move into less crowded markets such as over-the-counter securities, electricity and coal.”
Geopolitical Watch:
January 15 – CNN (Emma Burrows, Angela Dewan and Lindsay Isaac): “Russian Foreign Minister Sergey Lavrov has accused the United States of destabilizing the world, airing a list of grievances over the Trump administration's foreign policy. Lavrov dedicated the opening of his annual press conference… to castigating the US, which is expected to soon issue a fresh round of sanctions against Russia over its interference in the 2016 US election. Russia has long denied meddling in the vote. Lavrov criticized the US for issuing regular ‘threats’ in relation to events in North Korea and Iran, saying they had ‘further destabilized’ the global situation.”
January 13 – Reuters (Andrey Ostroukh): “Iran said… it would retaliate against new sanctions imposed by the United States after President Donald Trump set an ultimatum to fix ‘disastrous flaws’ in a deal curbing Tehran’s nuclear program. Trump said… he would waive nuclear sanctions on Iran for the last time to give the United States and European allies a final chance to amend the pact. Washington also imposed sanctions on the head of Iran’s judiciary and others. Russia - one of the parties to the Iran pact alongside the United States, China, France, Britain, Germany and the European Union - called Trump’s comments ‘extremely negative.’”
January 16 – Newsweek (Jack Moore): “Iran has condemned the U.S. plan to create a 30,000-strong force inside Syria to protect territory held by the Kurdish-Arab coalition that helped oust the Islamic State militant group (ISIS) from most of northeastern Syria. The U.S.-led coalition worked with the Syrian Democratic Forces (SDF), made up of the Kurdish People’s Protection Units (YPG) militia and Arab militiamen, to defeat ISIS in Raqqa. Now, Washington is working with the SDF to create the force to secure territory along the northern Syrian border in Turkey.”
January 16 – Voice of America (Dorian Jones): “Turkish President Recep Erdogan… stepped up threats to launch a cross-border operation against the Syrian Kurdish militia known as the YPG, which the U.S. backs in the war against Islamic State militants. Ankara sees the YPG as a terrorist organization linked to an ongoing Kurdish insurgency in Turkey. Erdogan used his weekly parliamentary address to his ruling AK Party supporters to say the operation could be imminent. ‘Tomorrow, or the day after, or within a short period, we will get rid of terror nests one by one in Syria, starting with Afrin and Manbij,’ Erdogan said.”
January 14 – Bloomberg (Nishant Kumar): “Cheese, sunflower seeds and rough rice sounds like an unappetizing mix -- unless you happen to be a hedge-fund manager. A handful of computer-driven funds had a bumper 2017 by betting on the future price of such ‘exotic’ assets. The success of this type of managed futures strategy, the industry’s term for trend-following, is now drawing new entrants despite the risks created by the low levels of liquidity. Hedge funds returns have been battered by central bank monetary policies that have made it more difficult for them to outperform the market… That’s prompting some trend followers to move into less crowded markets such as over-the-counter securities, electricity and coal.”
Geopolitical Watch:
January 15 – CNN (Emma Burrows, Angela Dewan and Lindsay Isaac): “Russian Foreign Minister Sergey Lavrov has accused the United States of destabilizing the world, airing a list of grievances over the Trump administration's foreign policy. Lavrov dedicated the opening of his annual press conference… to castigating the US, which is expected to soon issue a fresh round of sanctions against Russia over its interference in the 2016 US election. Russia has long denied meddling in the vote. Lavrov criticized the US for issuing regular ‘threats’ in relation to events in North Korea and Iran, saying they had ‘further destabilized’ the global situation.”
January 13 – Reuters (Andrey Ostroukh): “Iran said… it would retaliate against new sanctions imposed by the United States after President Donald Trump set an ultimatum to fix ‘disastrous flaws’ in a deal curbing Tehran’s nuclear program. Trump said… he would waive nuclear sanctions on Iran for the last time to give the United States and European allies a final chance to amend the pact. Washington also imposed sanctions on the head of Iran’s judiciary and others. Russia - one of the parties to the Iran pact alongside the United States, China, France, Britain, Germany and the European Union - called Trump’s comments ‘extremely negative.’”
January 16 – Newsweek (Jack Moore): “Iran has condemned the U.S. plan to create a 30,000-strong force inside Syria to protect territory held by the Kurdish-Arab coalition that helped oust the Islamic State militant group (ISIS) from most of northeastern Syria. The U.S.-led coalition worked with the Syrian Democratic Forces (SDF), made up of the Kurdish People’s Protection Units (YPG) militia and Arab militiamen, to defeat ISIS in Raqqa. Now, Washington is working with the SDF to create the force to secure territory along the northern Syrian border in Turkey.”
January 16 – Voice of America (Dorian Jones): “Turkish President Recep Erdogan… stepped up threats to launch a cross-border operation against the Syrian Kurdish militia known as the YPG, which the U.S. backs in the war against Islamic State militants. Ankara sees the YPG as a terrorist organization linked to an ongoing Kurdish insurgency in Turkey. Erdogan used his weekly parliamentary address to his ruling AK Party supporters to say the operation could be imminent. ‘Tomorrow, or the day after, or within a short period, we will get rid of terror nests one by one in Syria, starting with Afrin and Manbij,’ Erdogan said.”
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