[CNBC] Trump threatens to slap retaliatory tariff on European cars as trade war talk heats up
[BBC] Trump steps up war of words on trade with threat to tax EU cars
[Bloomberg] China Political Advisers Urge Response to U.S. Tariffs
[Bloomberg] Draghi Confronts Limit of His Powers as Latvian Standoff Endures
[Bloomberg] Italy Is Rolling Out a New Electoral System. Here's How It Works
[Reuters] North Korea threatens to 'counter' U.S. over military drills
[Reuters] Turkish warplanes hit pro-Syrian government forces in Afrin, kill 36: monitor
[WSJ] Trump Won’t Exclude Allies From Tariffs, White House Says
[WSJ] Fight Over Sorghum Offers a Taste of a Trade Retaliation
[FT] Berlusconi urges voters to back Italian revolution ‘for everyone’
[FT] Spectre of trade war delivers headache for investors
Saturday, March 3, 2018
Friday, March 2, 2018
Weekly Commentary: Cracks
After posting an intra-week high of 25,800 on Tuesday, the DJIA then dropped 1,583 points (6.1%) at the week’s Friday morning low (24,217) - before closing the session at 24,538 (down 3.0% for the week). The VIX traded as low as 15.29 Tuesday. It then closed Wednesday at 19.85, jumped as high as 25.30 on Thursday and then rose to 26.22 in wild Friday trading, before reversing sharply to close the week out at 19.59.
Friday’s session was another wild one. The Nasdaq Composite rallied 2.6% off early-session lows to finish the day up 1.1%. The small caps were as volatile, with an almost 1% decline turning into a 1.7% gain. The Banks had a 2.8% intraday swing and the Broker/Dealers 2.4%. The Biotechs had a 3.7% swing, ending the session up 3.2%. The Semiconductors swung 3.3%, gaining 1.8% on the day.
Friday morning trading was of the ominous ilk. Stocks, Treasuries, commodities and dollar/yen were all sinking in tandem. The VIX was surging. Japan’s Nikkei dropped 2.5% in Friday trading, with Germany’s DAX down 2.3% and France’s CAC losing 2.4%. The emerging markets (EEM) were down as much as 1.7%. For the week, the DAX sank 4.6% and the Nikkei fell 3.2%. Curiously, bank stocks outside of the U.S. came under notable pressure. European banks (STOXX) dropped 3.5%, Hong Kong’s Hang Seng Financial Index 4.5% and Japan’s TOPIX Bank index 3.4%.
There are cracks - cracks in the U.S. and cracks spread globally. This week’s market gyrations suggest these interconnected fissures will not prove transitory. VIX traders on edge. Risk parity and the CTA community on edge. ETF complex? Everything’s turned correlated. Hedges have become expensive, and the Treasury hedge isn’t working. The yen has taken on a life of its own. Central bankers playing coy. How long can all of this hold together?
This was never going to end well. It’s just that raging bull markets are willing to disregard so much. Fully inebriated by the bottomless libation of easy money, markets in speculative blow-off mode gleefully ignore about everything. President Trump had stated he wanted tariffs. Fed Chairman Powell was clearly no clone of Drs. Yellen and Bernanke. The Bank of Japan couldn’t stick with experimental monetary inflation forever. U.S. tax cuts won’t transform either a flawed financial structure or maladjusted economy.
Speculative blow-offs and “Terminal Phase Excess” are fundamental to Bubble analysis. It’s important to appreciate these culminations of excess are manifestations of Monetary Disorder. Invariably, prolonged bouts of asset inflation and Bubble Dynamics were fueled by some underlying monetary disturbance. Monetary policies remained excessively loose, with rates held too low for too long, often out of fear of lurking fragilities. Over time, markets will disregard underlying vulnerabilities – or even be willing to conceive of them bullishly. After all, structural deficiencies ensure uninterrupted easy “money” and ever higher asset prices. Speculative leverage accumulates at compounding rates.
As the cycle extends and timid central banks dilly-dally, the gap widens dramatically between bullish perceptions and mounting systemic deficiencies – between inflating expectations and deteriorating fundamental prospects. This chasm, however, is well-masked by the remarkable inflation of perceived financial wealth, along with, let us not forget, the associated boosts in “money,” Credit and market liquidity.
What’s more, loose financial conditions and rapidly inflating asset markets stimulate economic activity, reinforcing misperceptions as to the underlying soundness of the boom. This Wealth Illusion becomes powerfully self-reinforcing throughout both the Financial and Real Economy Spheres. It is one of the great wonders of economic history – how everyone turns so blindly optimistic right before the bottom falls out.
Tremendous structural damage can be wrought during the “Terminal Phase.” Financial flows go haywire, the reign of speculation dominates, markets turn whimsical, resources are terribly misallocated and systemic risk expands exponentially. Meanwhile, over-liquefied markets see sentiment turn wildly bullish. Misperceptions are rife, as rapidly mounting risks go completely unrecognized. When the spell is inevitably broken and markets reverse sharply lower, suddenly comes the recognition that things are not as previously perceived. So much changes so abruptly, as greed swings to fear.
Over the years, CBB analysis has focused on three epic and interrelated experiments: 1) Unfettered market-based finance. 2) A de-industrialized financial/services/consumption-based U.S. economic structure. 3) Activist central bank monetary inflation and market manipulation.
These runaway experiments have combined to inundate the world with “money” (dollar balances), inflating historic asset Bubbles at home and abroad. Unhinged U.S. finance cultivated unhinged finance globally. A Friday headline from ZeroHedge: “Pat Buchanan Blasts ‘The Fatal Delusions of Western Man - We fed the Tiger, and Created a Monster...’” China is unequalled in terms of feeding off unfettered dollar-based finance while championing economic power, national wealth, military might and global ambitions. And not until Bubbles burst will we have a clearer understanding as to how much wealth has been redistributed and how much has been pilfered and destroyed – and to what regrettably great consequence.
Myriad global Bubbles have been fundamental to unprecedented wealth redistribution, inequalities and economic stagnation - potent fuel for populism and anti-globalization movements (Italian election Sunday). The backdrop has nurtured the rise of the strongman politician, dictator and despot. In a deeply divided world, seemingly the only common understanding is that central bankers and policymakers won’t tolerate market dislocation, recession or crisis.
March 2 – Bloomberg (Joe Deaux, Andrew Mayeda, Toluse Olorunnipa, and Jeff Black): “President Donald Trump pushed back against a wave of criticism against steel tariffs, telling the world that not only are trade wars good, they are easy to win. Trump is facing anger from manufacturers and trade partners in China and Europe after announcing tariffs of 25% on imported steel and 10% on aluminum for ‘a long period of time.’ The formal order is expected to be signed next week. ‘When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win,’ Trump said in an early morning tweet on Friday.”
March 2 – Axios (Mike Allen and Jonathan Swan): “President Trump has long mused about doing what he wants, when he wants, how he wants. He wanted tariffs on steel and aluminum — big ones — now. He wanted to negotiate with Congress — in public, on his court, surprise and shock, all for the cameras. He wanted to ditch any P.C. pretenses and consider Singapore-style death for all drug dealers. He wanted to play by his rules alone. Why it matters: His staff at times managed to talk him off the ledge. No more. Tired of the restraints, tired of his staff, Trump is reveling in ticking off just about every person who serves him.”
Trump’s Tariffs should come as little surprise. Perhaps markets are finally beginning to come to terms with the disequilibrium and turmoil of the Trump presidency. Rumors have it that Wall Street darling Gary Cohen, having lost on tariffs, could be on his way out. It’s alarming to see the spectacle of the President referring to the Attorney General as “DISGRACEFUL,” and Mr. Sessions pushing back with “I will continue to discharge my duties with integrity and honor…”
Top aid and close confidante Hope Hicks abruptly resigned this week, with National Security advisor H.R. McMaster’s job said to be in jeopardy. Trump family members are under intense scrutiny, while chief of staff John Kelly has been under attack. After assailing the NRA and contemplating gun control, what might our President do next? Turn on the stock market? But hasn’t he used surging equities to define the incredible merits of his leadership? Commentators Friday on Bloomberg TV used “unleashed” and “rogue.” Not so easy to disregard the Washington spectacle when the markets are unsettled.
Fed Chairman Powell’s testimony should have provided little surprise. He impressed as a traditional central banker. It’s been awhile, and it sure was refreshing. Powell highlighted recent economic momentum and, as a disciplined central banker should at this point, demonstrated a resolve to move toward normalizing monetary policy. Our top central banker wasn’t going to belabor the nuances of academic discussions on employment demographics or r-star. No talk of the economy’s higher “speed limit” or of a “global savings glut.”
The new Chairman is not in awe and, at least to commence his term, seems disinclined to pander to the markets. With greed waning, the change in tone was difficult for an uncomfortable Wall Street to ignore. Markets have grown too accustomed to central bank chiefs with an academic view of “efficient” markets – scholars wedded to doctrine that it’s the role of central banks to bolster and backstop securities markets. Powell knows better. As the old saying goes, “he knows where the bodies are buried.” Wall Street fancies the naïve. FT: “‘Powell Put’ Assumption Challenged as Fed Chief Shows Hand.”
I believe Powell recognizes the perils associated with backstopping a speculative marketplace. That doesn’t mean he won’t be compelled to do it. At some point, he’ll have little choice. But it likely means he will not act in haste. The Powell Fed will be much more cautious in delivering market assurances. He was skeptical of QE in the past, and I’ll assume he knows he was right. He will resort to additional QE slowly and cautiously. Importantly, I believe the new Chairman will want to pull the Fed back to traditional central banking. His preference would be to conclude the monetary experiment – end the follies of “whatever it takes.”
February 27 – Bloomberg (Jeanna Smialek): “Call them the star wars. Debate is heating up over whether the Federal Reserve’s neutral interest rate -- commonly called r-star -- is about to head higher, and America’s monetary policy outlook hinges on who has it right. In one corner, San Francisco Fed President John Williams and his co-authors think long-term factors are holding down the interest rate that neither stokes nor slows growth, so the Fed will have to stop lifting rates this cycle at a historically low endpoint. In the other, Goldman Sachs chief economist Jan Hatzius thinks the recent decline owes to cyclical factors and could reverse meaningfully, allowing the Fed to lift rates higher next year. The intellectual showdown is relevant as Jerome Powell heads to Capitol Hill Tuesday for his first testimony as Fed Chair, and as central bank-watchers look eagerly for hints about how the new chief expects r-star to evolve.”
An incredible amount of intellectual effort is expended on “r-star,” the Philipps Curve, NAIRU (non-accelerating inflation rate of unemployment), and the like. “R-star” – the neutral rate - is a myth. There is no single aggregate price level – there is no equilibrium interest rate. Importantly, the three epic experiments completely altered price dynamics throughout finance and real economies. Inflation is no longer too much money chasing too few goods. Too much “money” – in this age of momentous technological advancement, globalization and changes in the nature of economic output – no longer manifests primarily in problematic consumer price inflation.
There are instead powerful inflationary biases in securities and asset markets. Too much “money” - and activist central bank support – chasing limited quantities of securities (and upscale homes, commercial real estate, art, collectibles, etc.) The academics need to discard “r-star.” Determining monetary policy based on some convoluted notion of aggregate consumer price indices (or economic equilibrium) in the current backdrop will ensure destabilizing loose finance for securities and asset markets.
In Powell’s testimony, there was mention of the long-accepted view that central banks should not be in the business of Credit allocation. Yet contemporary central bankers have gone so far as to conspicuously favor the securities markets. This is fundamental as to why financial stability risks now reign supreme. Central bankers should take a broad view of monetary stability and begin extricating themselves from the business of incentivizing financial flows and speculation into the markets. I know others disagree, but I believe the majority of central bankers would prefer to return back to traditional monetary management. After almost a decade, they’ve grown weary - of the experiment; rationalizing the experiment; justifying the experiment.
March 2 – Bloomberg (Toru Fujioka): “The Bank of Japan will start thinking about how to exit its massive monetary stimulus program around the fiscal year starting in April 2019, Governor Haruhiko Kuroda said Friday, marking the first time he’s provided any clear guidance on timing for normalizing policy. The yen surged, gaining as much as 0.5% to 105.71 per dollar, while yields on Japanese sovereign debt climbed across the curve. The Nikkei 225 Index closed 2.5% lower and the Topix Index fell 1.8%.”
For the Week:
The S&P500 fell 2.0% (up 0.7% y-t-d), and the Dow dropped 3.0% (down 0.7%). The Utilities sank 2.9% (down 7.8%). The Banks declined 2.0% (up 4.9%), while the Broker/Dealers were little changed (up 6.5%). The Transports fell 2.3% (down 2.6%). The S&P 400 Midcaps declined 1.3% (down 1.3%), and the small cap Russell 2000 dipped 1.0% (down 0.2%). The Nasdaq100 fell 1.2% (up 6.5%). The Semiconductors added 0.9% (up 8.8%). The Biotechs slipped 0.8% (up 10.3%). With bullion down $6, the HUI gold index declined 2.1% (down 10.0%).
Three-month Treasury bill rates ended the week at 1.61%. Two-year government yields were unchanged at 2.24% (up 36bps y-t-d). Five-year T-note yields added a basis point to 2.63% (up 42bps). Ten-year Treasury yields were little changed at 2.87% (up 46bps). Long bond yields declined two bps to 3.14% (up 40bps).
Greek 10-year yields declined three bps to 4.33% (up 25bps y-t-d). Ten-year Portuguese yields fell five bps to 1.99% (up 4bps). Italian 10-year yields sank 10 bps to 1.97% (down 5bps). Spain's 10-year yields fell five bps to 1.55% (down 2bps). German bund yields were unchanged at 0.65% (up 22bps). French yields dipped a basis point to 0.92% (up 14bps). The French to German 10-year bond spread narrowed one to 27 bps. U.K. 10-year gilt yields dropped five bps to 1.47% (up 28bps). U.K.'s FTSE equities index dropped 2.4% (down 8.0%).
Japan's Nikkei 225 equities index sank 3.2% (down 7.0% y-t-d). Japanese 10-year "JGB" yields gained two bps to 0.07% (up 2bps). France's CAC40 dropped 3.4% (down 3.3%). The German DAX equities index sank 4.6% (down 7.8%). Spain's IBEX 35 equities index lost 3.0% (down 5.1%). Italy's FTSE MIB index dropped 3.4% (up 0.3%). EM markets were lower. Brazil's Bovespa index declined 1.8% (up 12.3%), and Mexico's Bolsa dropped 2.3% (down 3.7%). South Korea's Kospi index fell 2.0% (down 2.6%). India’s Sensex equities index slipped 0.3% (unchanged). China’s Shanghai Exchange declined 1.0% (down 1.6%). Turkey's Borsa Istanbul National 100 index dipped 0.6% (up 1.3%). Russia's MICEX equities index fell 2.1% (up 8.5%).
Junk bond mutual funds saw outflows of $703 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates gained three bps to 4.43%, the high since January 2014 (up 33bps y-o-y). Fifteen-year rates jumped five bps to 3.90% (up 58bps). Five-year hybrid ARM rates declined three bps to 3.62% (up 48bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down five bps to 4.61% (up 31bps).
Federal Reserve Credit last week declined $3.1bn to $4.366 TN. Over the past year, Fed Credit contracted $60.6bn, or 1.4%. Fed Credit inflated $1.555 TN, or 55%, over the past 278 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $5.9bn last week to $3.418 TN. "Custody holdings" were up $243bn y-o-y, or 7.6%.
M2 (narrow) "money" supply declined $5.1bn last week to $13.843 TN. "Narrow money" expanded $553bn, or 4.2%, over the past year. For the week, Currency dipped $1.2bn. Total Checkable Deposits fell $9.3bn, while savings Deposits were little changed. Small Time Deposits added $1.5bn. Retail Money Funds gained $3.2bn.
Total money market fund assets declined $2.0bn to $2.842 TN. Money Funds gained $164bn y-o-y, or 6.1%.
Total Commercial Paper slipped $2.7bn to $1.092 TN. CP gained $121bn y-o-y, or 12.4%.
Currency Watch:
The U.S. dollar index added 0.1% to 89.935 (down 2.4% y-o-y). For the week on the upside, the Japanese yen increased 1.1%, the Norwegian krone 0.8%, and the euro 0.2%. For the week on the downside, the South African rand declined 3.1%, the Canadian dollar 1.9%, the Mexican peso 1.4%, the British pound 1.2%, the Australian dollar 1.1%, the New Zealand dollar 0.9%, the Swedish krona 0.9%, the Brazilian real 0.5%, the Swiss franc 0.1%, the South Korean won 0.1% and the Singapore dollar 0.1%. The Chinese renminbi declined 0.13% versus the dollar this week (up 2.54% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index dropped 2.2% (down 0.2% y-t-d). Spot Gold slipped 0.5% to $1,323 (up 1.5%). Silver declined 0.5% to $16.466 (down 4.0%). Crude sank $2.30 to $61.25 (up 1%). Gasoline jumped 5.0% (up 6%), and Natural Gas gained 2.7% (down 9%). Copper sank 3.4% (down 5%). Wheat surged 7.7% (up 17%). Corn jumped 2.9% (up 9.8%).
Market Dislocation Watch:
February 27 – Financial Times (Yian Mui): “Federal Reserve Chairman Jerome Powell played down concerns about recent market volatility, arguing Tuesday that the dramatic swings do not weigh heavily on his outlook for the economy and maintaining his expectation for further gradual increases in interest rates. In Capitol Hill testimony, Powell emphasized that the job market remains robust, consumer spending is solid and wage growth is accelerating. He also highlighted gains in U.S. exports and stimulative fiscal policy as new ‘tailwinds’ for the economy. ‘After easing substantially during 2017, financial conditions in the United States have reversed some of that easing,’ he said… ‘At this point, we do not see these developments as weighing heavily on the outlook for economic activity, the labor market and inflation. Indeed, the economic outlook remains strong.’”
February 27 – CNBC (Jeff Cox): “February's stock market correction probably would have been worse if companies had not stepped in to the fray. With both traders and retail investors selling at a frenzied level earlier this month, corporations swept in looking for bargains… As the month nears a close, companies have bought back $113.4 billion of their own shares, good for the highest total since April 2015, according to… TrimTabs. That's part of an overall strong trend for buybacks, which stand at $5.8 billion a day during the current earnings season, a record.”
February 26 – Financial Times (Robin Wigglesworth and Lindsay Fortado): “Computer-driven, trend-following hedge funds are heading for their worst month in nearly 17 years after getting whipsawed when the stock market’s steady soar abruptly reversed into one of the quickest corrections in history earlier in February. Hedge funds known as ‘commodity trading advisers’ or managed futures funds — which surf the momentum of markets — got sucked into big bets on stocks from last year’s rally, which culminated in the strongest monthly equity fund inflows since 1987 in January. But the rally unravelled in dramatic fashion in early February, slamming trend-followers. Société Générale’s CTA index is down 5.55% this month…, making it the worst period for these systematic hedge funds since November 2001.”
February 27 – Bloomberg (Sid Verma): “Risk appetite is back with a vengeance. As U.S. stocks rose to a nearly four-week high on Monday, inflows into the benchmark exchange-traded fund for technology shares jumped to the second-most on record… Money managers sank at least $2.7 billion into the PowerShares QQQ Trust Series 1 ETF, which follows the Nasdaq 100 Index, bringing assets under management to an all-time high of $65.7 billion.”
February 27 – Bloomberg (Luke Kawa): “Options tied to exchange-traded products that allow investors to place bets on U.S. equity volatility are getting crushed in early trading on Tuesday. Late on Monday evening, ProShares announced that it would be dialing down the leverage on the Short VIX Short-Term Futures exchange-traded fund (ticker SVXY) -- a product that offers exposure to market tranquility -- and the Ultra VIX Short-Term Futures ETF (ticker UVXY), whose owners were making a levered wager that equity volatility would increase. Reducing the leverage on these funds will dampen their price swings going forward. The shifts also make it much less likely that any out-of-the-money options tied to these products would ultimately pay off.”
Trump Administration Watch:
February 25 – Axios (Jonathan Swan): “Bloomberg scooped on Friday that Trump wants the Commerce Department to seek the harshest maximum tariffs on global steel imports: 24%. I’m told that’s accurate, but with one small tweak: Sources tell me the president has told confidants he actually wants a 25% global tariff on steel because it's a round number and sounds better. The big picture: Also, an official with knowledge of the trade discussions told me the White House is preparing to impose tariffs on a ‘shit ton’ — meaning, potentially hundreds — of Chinese products. They'll avoid going through the World Trade Organization — which Trump doesn't trust — and instead use Section 301 of the Trade Act of 1974 to unilaterally retaliate against China for stealing Americans’ intellectual property.”
March 1 – Bloomberg (Andrew Mayeda): “President Donald Trump is warning the U.S. will use ‘all available tools’ to prevent China’s state-driven economic model from undermining global competition, the latest warning to Beijing as America readies a host of trade actions. China hasn’t lived up to the promises of economic reforms it made when it joined the World Trade Organization in 2001, and actually appears to be moving further away from ‘market principles’ in recent years, according to the president’s annual report to Congress… China’s ‘statist’ policies are causing a ‘dramatic misallocation’ of global resources that is leaving all countries poorer than they should be, said the report.”
U.S. Bubble Watch:
February 27 – CNBC (Diana Olick): “Sky-high demand and record-low supply continued to push home prices higher in December, far faster than income growth. U.S. home prices increased 6.3% compared with December 2016, according to the… S&P CoreLogic Case-Shiller national home prices index. That is an increase from 6.1% annual growth in the previous month. The index measuring the nation's 20 largest metropolitan markets rose 6.3% year over year… ‘The rise in home prices should be causing the same nervous wonder aimed at the stock market after its recent bout of volatility,’ David M. Blitzer, managing director and chairman of the Index Committee at S&P Dow Jones Indices, said… ‘Across the 20 cities covered by S&P Corelogic Case Shiller Home Price Indices, the average increase from the financial crisis low is 62%; over the same period, inflation was 12.4%. Even considering the recovery from the financial crisis, we are experiencing a boom in home prices.’ The boom is strongest in Seattle, Las Vegas and San Francisco…”
March 1 – Bloomberg (Sho Chandra): “Americans’ wallets fattened in January on recent tax cuts, indicating increased spending power may boost the economy this quarter. Real disposable income, or earnings adjusted for taxes and inflation, advanced 0.6% from the prior month, the biggest gain since April 2015… Nominal consumer spending grew 0.2%, matching the median forecast… and following a 0.4% gain. The Federal Reserve’s preferred price gauge, excluding food and energy, had the biggest monthly increase in a year.”
February 28 – Bloomberg (Sarah McGregor): “Foreign holdings of U.S. securities rose to a record $18.4 trillion as of the end of June… An annual survey of foreign portfolio investments -- including U.S. stocks along with short-and long-term debt -- showed holdings rose by 8%, up from $17.1 trillion a year earlier… Japan was largest investing country with $2 trillion, followed by the Cayman Islands at $1.7 trillion and the U.K. and China at about $1.5 trillion each. Luxembourg rounded out the top five at $1.4 trillion. Foreign holdings of U.S. equities climbed to $7.2 trillion as of June 30, from $6.2 trillion a year earlier. Short-term debt holdings increased to $954 billion from $909 billion, while long-term debt holdings rose to $10.3 trillion from $10 trillion…”
March 1 – Wall Street Journal (Akane Otani, Richard Rubin and Theo Francis): “U.S. companies are buying back their shares at an aggressive pace, stirring debates in Washington and on Wall Street about how savings from corporate tax cuts are being used and who benefits most. Share buybacks announced by large U.S. companies have exceeded $200 billion in the past three months, more than double the prior year, according to a Wall Street Journal analysis of data for S&P 500 companies. Among the biggest: Cisco Systems Inc. at $25 billion, Wells Fargo & Co. at about $21 billion, PepsiCo Inc. at $15 billion, AbbVie Inc. and Amgen Inc. at $10 billion apiece, and Alphabet Inc. at $8.6 billion.”
February 25 – Reuters (Eric M. Johnson and Chris Prentice): “The drive for cost cuts and higher margins at U.S. trucking and railroad operators is pinching their biggest customers, forcing the likes of General Mills Inc and Hormel Foods Corp to spend more on deliveries and consider raising their own prices as a way to pass along the costs. Interviews with executives at 10 companies across the food, consumer goods and commodities sectors reveal that many are grappling with how to defend their profit margins as transportation costs climb at nearly double the inflation rate.”
February 26 – Bloomberg (Sho Chandra): “U.S. sales of new homes unexpectedly fell in January to the lowest level since August as borrowing costs rose and winter weather depressed demand… Single-family home sales dropped 7.8% m/m to 593k annualized pace (est. 647k) after 643k rate (revised from 625k)… The results, which are volatile on a month-to-month basis, showed a 14.2% slump in the South, the largest decrease since March 2015 and a sharp decline in the Northeast. The two areas experienced inclement weather.”
February 27 – Bloomberg (Shelly Hagan and Sho Chandra): “U.S. consumer confidence jumped to a 17-year high as optimism about employment prospects grew and Americans began seeing additional money in their paychecks from recently enacted tax cuts, data from the… Conference Board showed… Confidence index rose to 130.8 (est. 126.5), highest since Nov. 2000, from downwardly revised 124.3 in January. Present conditions measure climbed to 162.4, highest since 2001, from 154.7.”
February 28 – Bloomberg (Luke Kawa): “The high-flying technology sector hit a potentially ominous milestone on Tuesday: It now amounts to more than 25% of the S&P 500 Index. ‘It’s the first time the sector has made up at least a quarter of the S&P since a one-year period that ran from Thanksgiving 1999 through Thanksgiving 2000,’ according… Bespoke Investment Group. ‘Notably, the weighting only got above 25% for the final four months of the dot-com bubble when share prices were going insane.’”
February 25 – Wall Street Journal (Michael Wursthorn and Chelsey Dulaney): “Investors borrowing record sums to bet on stocks exacerbated this month’s selloff, after they were hit with calls to reduce those obligations and forced to sell shares to raise cash. If that debt, known as margin loans, continues to rise at the current pace, analysts warn that big selloffs and sudden bouts of volatility in the stock market could become more commonplace. Retail and institutional investors have borrowed a record $642.8 billion against their portfolios…, as they try to pocket bigger gains by ramping up their exposure to stocks.”
Federal Reserve Watch:
March 1 – Financial Times (Joe Rennison and Nicole Bullock): “The Powell Put has a nice ring to it. After years of being able to count on having the Federal Reserve in their corner, investors had assumed it would be more of the same from the new Fed chair. Yet as Jay Powell, who has been a Fed governor since 2012 and spent almost 20 years as a partner at private equity firm Carlyle, publicly outlined his views on policy for the first time since succeeding Janet Yellen that assumption was under threat. In a marked departure from the more academic tone of his immediate predecessors in the Fed chair, the 65-year old signalled to Congress a willingness to look beyond bursts of volatility in financial markets and would tighten policy against a backdrop of a strengthening economy that may in due course reveal signs of overheating.”
February 27 – Bloomberg (Craig Torres and Christopher Condon): “Jerome Powell opened the door to the Federal Reserve raising U.S. interest rates four times this year as he acknowledged stronger economic growth may prompt policy makers to rethink their plan for three hikes. ‘My personal outlook for the economy has strengthened since December,’ the Fed chairman said Tuesday in response to a question about what would cause the central bank to step up the pace of policy tightening. He then listed four events that are causing him to revise up his outlook.”
February 25 – Bloomberg (Rich Miller and Shelly Hagan): “Federal Reserve Chairman Jerome Powell and his colleagues may be willing to accept inflation rising as high as 2.5% as they seek to extend the almost nine-year economic expansion. So say a number of veteran Fed watchers who argue that the central bank’s Federal Open Market Committee would tolerate a moderate rise in inflation above its 2% goal after years of falling below that objective… ‘I’ve had some hawks on the committee surprise me and say they wouldn’t be worried about a modest overshoot’ as long as it’s below 2.5%, former Fed governor Laurence Meyer said…”
February 26 – Financial Times (Sam Fleming): “The US may be on the cusp of a shift to higher sustained growth, pointing to a possible rise in the interest rate needed to maintain stable prices and full employment, a senior Federal Reserve policymaker said… Randal Quarles, the vice-chairman for financial supervision at the Fed’s board of governors, told a conference that growth may outpace central bankers’ forecasts as post-crisis drags abate… A jump in the growth rate to a durably faster pace could lead to a rise in the so-called natural rate of interest — the rate that keeps the economy on an even keel…. ‘There is a real possibility that some of the factors that have been holding back growth in recent years could shift, moving the economy on to a higher growth trajectory,’ Mr Quarles told the National Association for Business Economists…”
China Watch:
February 25 – Financial Times (Jamil Anderlini): “In the aftermath of Chairman Mao Zedong’s disastrous personality cult, Chinese paramount leader Deng Xiaoping recognised the dangers of totalitarian dictatorship. In the early 1980s Deng set about establishing a system that relied on competent governance, co-opting the elite and consensus rule at the top. China was still an autocracy but it incorporated and empowered enough interest groups to provide basic political stability and stellar economic growth, with just one big exception in 1989. That system, which has served China so well for decades, has now been swept away. On Sunday, the Communist party announced it would remove term limits on the presidency, allowing Xi Jinping to rule for life if he wants.”
February 26 – Financial Times (Lucy Hornby): “China’s Communist party has cleared the way for President Xi Jinping to rule for life, and in the process strengthened the state’s ‘command and control’ power over the world’s second-largest economy. Mr Xi’s unparalleled power theoretically allows him to push through painful reforms in the face of recalcitrant vested interests, particularly in state-dominated sectors... When Mr Xi took over the Communist party in 2012, bureaucrats hastened to reassure foreign businesses and diplomats that the president was merely consolidating power to enact economic reforms. So far economic liberalisation has been slow to materialise. ‘Xi believes that he is ideally suited to keep China politically and economically strong in coming decades and he is trying to make sure his power is equal to the task,’ says Andrew Collier, managing director at Orient Capital Research. Mr Xi’s advisers are aware the country faces the end of its demographic boom and a growing debt problem, he adds.”
February 28 – Financial Times (Hudson Lockett): “China’s official gauge of manufacturing activity suffered its largest fall since 2011 in February, an unexpectedly sharp slowdown that left it near the zero-growth level. The manufacturing purchasing managers’ index… dropped to 50.3, down a point from January and the largest fall in more than six years. The fall marked the gauge’s nearest brush with the 50-point mark that separates growth from contraction since August 2016.”
February 28 – Bloomberg: “China plans to expand its unprecedented crackdown on financial risk to money-market funds by capping how much investors can redeem in a day, people familiar with the matter said. The limit for same-day redemption will be set at 10,000 yuan ($1,580)… The same restriction will apply when investors use their assets in money-market funds directly for payment and consumption… Such a move would be the latest tightening by China’s policy makers, who are making stability job No. 1 as they work to balance continued expansion with defusing the country’s debt bomb.”
February 23 – Reuters (Josephine Mason and Pei Li): “China’s new home prices grew in January although major cities saw early signs of softening, as the government continued its efforts to rein in speculative demand to fend off bubble risk. The acceleration in prices across the nation suggests moves by provincial governments to support first-time buyers and upgraders by relaxing some purchase restrictions may be further fanning price gains in a market where fear of missing out is strong and mortgage fraud is rampant. Average new home prices in China’s 70 major cities rose 5% in January from a year earlier and 0.3% month on month…”
February 28 – Reuters (Michael Martina and Patricia Zengerle): “China expressed anger on Thursday after the U.S. Senate passed a bill promoting closer U.S. ties with Taiwan, but the step drew praise from the self-ruled island which pledged to deepen cooperation. The move adds to tensions between China and the United States, already at loggerheads over trade, with President Xi Jinping’s close economic advisor Liu He in Washington this week to try and avert a trade war.”
February 23 – Wall Street Journal (Nathaniel Taplin): “China’s Anbang Insurance went from zero to too-big-to-fail in the blink of an eye. It is a lesson in how quickly China’s financial problems grow—and how much is left to clean up. Beijing said Friday that the state is taking direct control of Anbang Insurance Group, the acquisitive purveyor of unusual investment products whose high-flying chairman Wu Xiaohui was detained last summer amid a broader crackdown on debt… The total cost of cleaning up the mess, including whatever losses sit on Anbang’s gargantuan balance sheet—put at close to 2 trillion yuan ($300bn) in April by financial magazine Caixin—is an unknown.”
March 1 – Bloomberg (Keith Zhai and Alfred Cang): “President Xi Jinping’s government has fired another warning shot at global dealmakers doing business with Chinese billionaires: Not even the most well-connected tycoons are safe. Ye Jianming, a globe-trotting Chinese tycoon who runs the conglomerate CEFC China Energy Co., has been investigated by authorities, according to people with knowledge… The news, first reported by local media outlet Caixin, comes shortly after Xi’s government seized Anbang Insurance Group Co., a global empire whose once-influential founder, Wu Xiaohui, is detained while facing fraud charges.”
Central Bank Watch:
March 2 – Bloomberg (Lucy Meakin and Edward Robinson): “Mark Carney is calling for greater regulation to bring the era of cryptocurrency “anarchy” to an end. ‘The time has come to hold the crypto-asset ecosystem to the same standards as the rest of the financial system,’ the Bank of England governor said… Carney, who is also head of the Financial Stability Board, joins a growing chorus calling for greater oversight of the technology after the explosion of new cryptocurrencies created more than $438 billion in paper wealth since March 2, 2017…”
Global Bubble Watch:
February 28 – Financial Times (Eric Platt and Joe Rennison): “Some of the biggest international buyers of US corporate debt are showing signs of stepping back from this $8.8tn market, reflecting expectations of a bigger shift under way: the retreat of central banks from the era of easy money. In contrast to Europe and Japan, the fixed yields paid to holders of US corporate debt has long been much higher, an attractive proposition to global investors until late last year. International investors were net sellers of US corporate paper in December, only the second time this has occurred in the past three years as the rising cost of insulating their portfolios against swings in the dollar erodes the attraction of high US bond yields. ‘[Foreign] investors are seeing their net returns post-hedge eroded,’ says Steven Oh, global head of credit and fixed income at PineBridge Investments. ‘And because they are losing that yield differential, they are going to rethink not only their allocation to US credit but going forward [if] they actually withdraw.’”
February 28 – Wall Street Journal (Jon Sindreu): “The rise in Treasury yields should make U.S. debt more attractive to international investors still struggling with low returns at home—yet few are buying. The rising costs of currency hedges means it often isn’t worth it… Last year, buying Treasurys and swapping the proceeds back into euros provided European investors with a higher return than buying German sovereign bonds. Now, hedging costs have increased so much that this trade is no longer profitable. That could sap an important source of demand for U.S. Treasurys. It’s also making it more expensive for foreign investors to buy U.S. corporate debt.”
February 25 – Financial Times (Javier Espinoza): “Private equity groups are buying public companies at the fastest rate since before the financial crisis, with deals totalling $180bn last year, nearly twice the level of 2016, according to Bain & Co. The jump in dealmaking is the largest increase since 2007 and comes as the sector is under pressure to deploy record sums of cash… Bain… said in its global report that the number of ‘public-to-private’ deals, where a private equity group buys a listed company, hit 152 last year, up from 94 in 2016. The all-time high of 196 transactions was hit in 2007, while the record value for such deals was $423bn in 2006.”
March 1 – Bloomberg (Emily Cadman): “Australian home prices fell for a fifth consecutive month in February, in a further sign the property boom is over. Housing prices fell 0.1% nationally, led by a 0.6% decline in Sydney, according to CoreLogic… Prices in Sydney, the epicenter of the boom, are down 0.5% from a year earlier -- the first annual decline since 2012.”
February 28 – Wall Street Journal (Jean Eaglesham and Paul Vigna): “The Securities and Exchange Commission has issued dozens of subpoenas and information requests to technology companies and advisers involved in the red-hot market for cryptocurrencies, according to people familiar with the matter. The sweeping probe significantly ratchets up the regulatory pressure on the multibillion-dollar U.S. market for raising funds in cryptocurrencies. It follows a series of warning shots from the top U.S. securities regulator suggesting that many token sales, or initial coin offerings, may be violating securities laws.”
Fixed-Income Bubble Watch:'
February 27 – Wall Street Journal (Kosaku Narioka and Saumya Vaishampayan): “Japanese investors may be America’s bond bears. They are shifting toward selling U.S. Treasury bonds and other dollar-based debt after fears have picked up in recent weeks that the Trump administration’s budget and other policies add up to a weak dollar… Any questioning in Tokyo of the dollar or of the U.S. Treasury is significant because Japanese holders including the government own nearly $1.1 trillion in Treasury bonds, a close second to China. For years, the U.S. economy has relied on Japan and China to recycle their trade surpluses back into the U.S. by buying American debt. Japan’s suspicions were fanned by Treasury Secretary Steven Mnuchin’s remark in January that ‘a weaker dollar is good for trade.’”
February 27 – Bloomberg (Sid Verma and Luke Kawa): “Investors reaching for yield are now finding it’s less of a stretch. Global credit markets are on the cusp of a post-crisis regime shift as higher rates on short-dated U.S. Treasuries challenge the investment case for high-grade corporate bonds -- on both sides of the Atlantic. Consider this: The Vanguard short-term corporate bond exchange-traded fund, which holds U.S. investment grade debt with a maturity of less than five years, now has an indicated dividend yield only 0.54 percentage point above that of the three-month Treasury bill. That represents a tiny pickup compared with a whopping 2 percentage points in early 2017.”
February 28 – Financial Times (Eric Platt and Joe Rennison): “US short-dated bank bonds have been in the line of fire in recent weeks and this selling pressure reflects tax reform, analysts say, rather than a change in traders’ beliefs about the creditworthiness of financials. Companies with large amounts of offshore cash from their global operations placed the money in US government and corporate bonds. Now as the cash appears set to come home thanks to changes in US tax law, the first signs of liquidation are being seen. Many big multinationals invested primarily in corporate bonds and the likes of Apple, for example, were large buyers of short-term bank bonds… Highlighting a sell-off, risk premiums rose for senior unsecured bonds issued by Bank of America, Citigroup and JPMorgan…”
Europe Watch:
March 1 – Reuters (Markus Wacket): “Germany’s Social Democrat (SPD) environment minister said on Thursday she expects party members to support a new coalition government with Chancellor Angela Merkel’s conservatives by a margin of 60%. The SPD’s 464,000 members are voting in a postal ballot on whether to endorse their party leadership’s decision to renew for another four years the ‘grand coalition’ that took office in 2013. The result of the postal ballot is due on Sunday.”
March 1 – Financial Times: “It is a mark of the impatience of Italian voters that Silvio Berlusconi is poised to stage a political resurrection in Italy’s March 4 elections. The disgraced tycoon and former prime minister is barred from holding office as a result of a conviction for tax fraud, at least until 2019. Whatever the fate of the alliance between his Forza Italia party, the resurgent populist nationalist Northern League, and smaller far-right Brothers of Italy in a centre right coalition, he remains the potential kingmaker. Strikingly, given the extreme views of his fellow travellers, Mr Berlusconi’s own past outbursts and indiscretions seem relatively moderate. Sunday’s polls are the most significant in this year’s European calendar, testing the resilience of the populist nationalist vote, and long-term future of the centre-left. They have a bearing on the future of the eurozone, on the precarious fortunes of its third-largest economy and on Europe’s response to migration.”
February 28 – BBC: “An EU proposal for the Northern Ireland border threatens the ‘constitutional integrity’ of the United Kingdom, Theresa May has said. The EU's draft legal agreement proposes a ‘common regulatory area’ after Brexit on the island of Ireland - in effect keeping Northern Ireland in a customs union - if no other solution is found. Mrs May said ‘no UK prime minister could ever agree’ to this. The EU says the ‘backstop’ option is not intended to "provoke" the UK.”
Japan Watch:
February 28 – Reuters (Stanley White): “Bank of Japan Governor Haruhiko Kuroda said… that once the central bank starts to normalize monetary policy the process would be ‘very gradual,’ and that the BOJ would pay attention to any risks to the economy. Speaking in the lower house of parliament, Kuroda said the BOJ would not continue with its aggressive monetary easing when inflation reached its price target and the economy was growing stably.”
EM Bubble Watch:
February 27 – Bloomberg (Selcuk Gokoluk): “Developing-nation borrowers are raising more money in local markets than ever before… Local-currency bond sales in emerging markets this year exceeded $1 trillion, almost triple the amount raised in the same period last year and dwarfing the $160 billion in hard-currency issues… Domestic sales have increased almost five-fold in the past five years.”
Leveraged Speculator Watch:
March 1 – Bloomberg (John Ainger): “Hedge-fund veteran Paul Tudor Jones has joined the growing chorus of big hitters in the fixed-income world warning that bonds are well and truly in a bear market. He sees 10-year U.S. Treasury yields rising to 3.75% by year-end as a ‘conservative’ target given that supply outweighs demand, economic momentum is outpacing the monetary policy response, and that bond valuations are ‘glaring.’ That puts him in the company of Bill Gross and Ray Dalio who say the days of a bond bull market are over.”
February 28 – Bloomberg (Scott Deveau): “One of the longest and most colorful battles in Wall Street history is over, and Bill Ackman lost. Ackman has almost entirely exited his position in Herbalife Ltd., ending a short-selling campaign that lasted more than five years… The move follows a steady rise in the shares of a company that he repeatedly called an illegal pyramid scheme and vowed to destroy.”
Geopolitical Watch:
February 28 – Wall Street Journal (Sune Engel Rasmussen): “The demise of Islamic State is intensifying a scramble among foreign powers in Syria, raising the risk that diverging strategic and commercial interests could lead to a wider regional war. In the past month, a U.S. airstrike in the eastern part of the country killed an unknown number of Russian military contractors; Israel hit Iranian military installations deep inside Syria; while Turkey waged a campaign against Kurdish militias in the north. The volatile situation is a result of how the fight against Islamic State was conducted, with players seizing territory, arming proxies and aggravating long-existing ethnic and political divisions. The result: a series of flashpoints where clashes could erupt among major powers and spill over Syria’s borders. ‘No one wants that war, but everyone is ready for it and expects it,’ said Emile Hokayem, a Syria expert at the International Institute for Strategic Studies in London.”
February 27 – Financial Times (Ben Bland): “While Beijing was outlining the path for Xi Jinping to rule as China’s president for life, Tsai Ing-wen, his democratically elected counterpart in Taiwan, was speaking about the importance of universal human rights at a Holocaust memorial ceremony in Taipei. But Mr Xi’s concentration of power — unparalleled since the era of Mao Zedong — represents a growing threat to Taiwan’s efforts to maintain de facto independence, in the face of Beijing’s insistence that the island is part of its territory, and to the embattled democracy movement in neighbouring, semi-autonomous Hong Kong. ‘Xi Jinping has largely been the author of fairly hard-line policies toward [Hong Kong and Taiwan],’ said William Stanton, a former US diplomat… ‘The problem with all dictators is that no one can put a brake on anything they want to do.’”
March 1 – Bloomberg (Ben Blanchard and Yimou Lee): “China warned Taiwan on Friday it would only get burnt if it sought to rely on foreigners, adding to warnings from state media the country could go to war over Taiwan if the United States passes into law a bill promoting closer U.S. ties.”
Friday’s session was another wild one. The Nasdaq Composite rallied 2.6% off early-session lows to finish the day up 1.1%. The small caps were as volatile, with an almost 1% decline turning into a 1.7% gain. The Banks had a 2.8% intraday swing and the Broker/Dealers 2.4%. The Biotechs had a 3.7% swing, ending the session up 3.2%. The Semiconductors swung 3.3%, gaining 1.8% on the day.
Friday morning trading was of the ominous ilk. Stocks, Treasuries, commodities and dollar/yen were all sinking in tandem. The VIX was surging. Japan’s Nikkei dropped 2.5% in Friday trading, with Germany’s DAX down 2.3% and France’s CAC losing 2.4%. The emerging markets (EEM) were down as much as 1.7%. For the week, the DAX sank 4.6% and the Nikkei fell 3.2%. Curiously, bank stocks outside of the U.S. came under notable pressure. European banks (STOXX) dropped 3.5%, Hong Kong’s Hang Seng Financial Index 4.5% and Japan’s TOPIX Bank index 3.4%.
There are cracks - cracks in the U.S. and cracks spread globally. This week’s market gyrations suggest these interconnected fissures will not prove transitory. VIX traders on edge. Risk parity and the CTA community on edge. ETF complex? Everything’s turned correlated. Hedges have become expensive, and the Treasury hedge isn’t working. The yen has taken on a life of its own. Central bankers playing coy. How long can all of this hold together?
This was never going to end well. It’s just that raging bull markets are willing to disregard so much. Fully inebriated by the bottomless libation of easy money, markets in speculative blow-off mode gleefully ignore about everything. President Trump had stated he wanted tariffs. Fed Chairman Powell was clearly no clone of Drs. Yellen and Bernanke. The Bank of Japan couldn’t stick with experimental monetary inflation forever. U.S. tax cuts won’t transform either a flawed financial structure or maladjusted economy.
Speculative blow-offs and “Terminal Phase Excess” are fundamental to Bubble analysis. It’s important to appreciate these culminations of excess are manifestations of Monetary Disorder. Invariably, prolonged bouts of asset inflation and Bubble Dynamics were fueled by some underlying monetary disturbance. Monetary policies remained excessively loose, with rates held too low for too long, often out of fear of lurking fragilities. Over time, markets will disregard underlying vulnerabilities – or even be willing to conceive of them bullishly. After all, structural deficiencies ensure uninterrupted easy “money” and ever higher asset prices. Speculative leverage accumulates at compounding rates.
As the cycle extends and timid central banks dilly-dally, the gap widens dramatically between bullish perceptions and mounting systemic deficiencies – between inflating expectations and deteriorating fundamental prospects. This chasm, however, is well-masked by the remarkable inflation of perceived financial wealth, along with, let us not forget, the associated boosts in “money,” Credit and market liquidity.
What’s more, loose financial conditions and rapidly inflating asset markets stimulate economic activity, reinforcing misperceptions as to the underlying soundness of the boom. This Wealth Illusion becomes powerfully self-reinforcing throughout both the Financial and Real Economy Spheres. It is one of the great wonders of economic history – how everyone turns so blindly optimistic right before the bottom falls out.
Tremendous structural damage can be wrought during the “Terminal Phase.” Financial flows go haywire, the reign of speculation dominates, markets turn whimsical, resources are terribly misallocated and systemic risk expands exponentially. Meanwhile, over-liquefied markets see sentiment turn wildly bullish. Misperceptions are rife, as rapidly mounting risks go completely unrecognized. When the spell is inevitably broken and markets reverse sharply lower, suddenly comes the recognition that things are not as previously perceived. So much changes so abruptly, as greed swings to fear.
Over the years, CBB analysis has focused on three epic and interrelated experiments: 1) Unfettered market-based finance. 2) A de-industrialized financial/services/consumption-based U.S. economic structure. 3) Activist central bank monetary inflation and market manipulation.
These runaway experiments have combined to inundate the world with “money” (dollar balances), inflating historic asset Bubbles at home and abroad. Unhinged U.S. finance cultivated unhinged finance globally. A Friday headline from ZeroHedge: “Pat Buchanan Blasts ‘The Fatal Delusions of Western Man - We fed the Tiger, and Created a Monster...’” China is unequalled in terms of feeding off unfettered dollar-based finance while championing economic power, national wealth, military might and global ambitions. And not until Bubbles burst will we have a clearer understanding as to how much wealth has been redistributed and how much has been pilfered and destroyed – and to what regrettably great consequence.
Myriad global Bubbles have been fundamental to unprecedented wealth redistribution, inequalities and economic stagnation - potent fuel for populism and anti-globalization movements (Italian election Sunday). The backdrop has nurtured the rise of the strongman politician, dictator and despot. In a deeply divided world, seemingly the only common understanding is that central bankers and policymakers won’t tolerate market dislocation, recession or crisis.
March 2 – Bloomberg (Joe Deaux, Andrew Mayeda, Toluse Olorunnipa, and Jeff Black): “President Donald Trump pushed back against a wave of criticism against steel tariffs, telling the world that not only are trade wars good, they are easy to win. Trump is facing anger from manufacturers and trade partners in China and Europe after announcing tariffs of 25% on imported steel and 10% on aluminum for ‘a long period of time.’ The formal order is expected to be signed next week. ‘When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win,’ Trump said in an early morning tweet on Friday.”
March 2 – Axios (Mike Allen and Jonathan Swan): “President Trump has long mused about doing what he wants, when he wants, how he wants. He wanted tariffs on steel and aluminum — big ones — now. He wanted to negotiate with Congress — in public, on his court, surprise and shock, all for the cameras. He wanted to ditch any P.C. pretenses and consider Singapore-style death for all drug dealers. He wanted to play by his rules alone. Why it matters: His staff at times managed to talk him off the ledge. No more. Tired of the restraints, tired of his staff, Trump is reveling in ticking off just about every person who serves him.”
Trump’s Tariffs should come as little surprise. Perhaps markets are finally beginning to come to terms with the disequilibrium and turmoil of the Trump presidency. Rumors have it that Wall Street darling Gary Cohen, having lost on tariffs, could be on his way out. It’s alarming to see the spectacle of the President referring to the Attorney General as “DISGRACEFUL,” and Mr. Sessions pushing back with “I will continue to discharge my duties with integrity and honor…”
Top aid and close confidante Hope Hicks abruptly resigned this week, with National Security advisor H.R. McMaster’s job said to be in jeopardy. Trump family members are under intense scrutiny, while chief of staff John Kelly has been under attack. After assailing the NRA and contemplating gun control, what might our President do next? Turn on the stock market? But hasn’t he used surging equities to define the incredible merits of his leadership? Commentators Friday on Bloomberg TV used “unleashed” and “rogue.” Not so easy to disregard the Washington spectacle when the markets are unsettled.
Fed Chairman Powell’s testimony should have provided little surprise. He impressed as a traditional central banker. It’s been awhile, and it sure was refreshing. Powell highlighted recent economic momentum and, as a disciplined central banker should at this point, demonstrated a resolve to move toward normalizing monetary policy. Our top central banker wasn’t going to belabor the nuances of academic discussions on employment demographics or r-star. No talk of the economy’s higher “speed limit” or of a “global savings glut.”
The new Chairman is not in awe and, at least to commence his term, seems disinclined to pander to the markets. With greed waning, the change in tone was difficult for an uncomfortable Wall Street to ignore. Markets have grown too accustomed to central bank chiefs with an academic view of “efficient” markets – scholars wedded to doctrine that it’s the role of central banks to bolster and backstop securities markets. Powell knows better. As the old saying goes, “he knows where the bodies are buried.” Wall Street fancies the naïve. FT: “‘Powell Put’ Assumption Challenged as Fed Chief Shows Hand.”
I believe Powell recognizes the perils associated with backstopping a speculative marketplace. That doesn’t mean he won’t be compelled to do it. At some point, he’ll have little choice. But it likely means he will not act in haste. The Powell Fed will be much more cautious in delivering market assurances. He was skeptical of QE in the past, and I’ll assume he knows he was right. He will resort to additional QE slowly and cautiously. Importantly, I believe the new Chairman will want to pull the Fed back to traditional central banking. His preference would be to conclude the monetary experiment – end the follies of “whatever it takes.”
February 27 – Bloomberg (Jeanna Smialek): “Call them the star wars. Debate is heating up over whether the Federal Reserve’s neutral interest rate -- commonly called r-star -- is about to head higher, and America’s monetary policy outlook hinges on who has it right. In one corner, San Francisco Fed President John Williams and his co-authors think long-term factors are holding down the interest rate that neither stokes nor slows growth, so the Fed will have to stop lifting rates this cycle at a historically low endpoint. In the other, Goldman Sachs chief economist Jan Hatzius thinks the recent decline owes to cyclical factors and could reverse meaningfully, allowing the Fed to lift rates higher next year. The intellectual showdown is relevant as Jerome Powell heads to Capitol Hill Tuesday for his first testimony as Fed Chair, and as central bank-watchers look eagerly for hints about how the new chief expects r-star to evolve.”
An incredible amount of intellectual effort is expended on “r-star,” the Philipps Curve, NAIRU (non-accelerating inflation rate of unemployment), and the like. “R-star” – the neutral rate - is a myth. There is no single aggregate price level – there is no equilibrium interest rate. Importantly, the three epic experiments completely altered price dynamics throughout finance and real economies. Inflation is no longer too much money chasing too few goods. Too much “money” – in this age of momentous technological advancement, globalization and changes in the nature of economic output – no longer manifests primarily in problematic consumer price inflation.
There are instead powerful inflationary biases in securities and asset markets. Too much “money” - and activist central bank support – chasing limited quantities of securities (and upscale homes, commercial real estate, art, collectibles, etc.) The academics need to discard “r-star.” Determining monetary policy based on some convoluted notion of aggregate consumer price indices (or economic equilibrium) in the current backdrop will ensure destabilizing loose finance for securities and asset markets.
In Powell’s testimony, there was mention of the long-accepted view that central banks should not be in the business of Credit allocation. Yet contemporary central bankers have gone so far as to conspicuously favor the securities markets. This is fundamental as to why financial stability risks now reign supreme. Central bankers should take a broad view of monetary stability and begin extricating themselves from the business of incentivizing financial flows and speculation into the markets. I know others disagree, but I believe the majority of central bankers would prefer to return back to traditional monetary management. After almost a decade, they’ve grown weary - of the experiment; rationalizing the experiment; justifying the experiment.
March 2 – Bloomberg (Toru Fujioka): “The Bank of Japan will start thinking about how to exit its massive monetary stimulus program around the fiscal year starting in April 2019, Governor Haruhiko Kuroda said Friday, marking the first time he’s provided any clear guidance on timing for normalizing policy. The yen surged, gaining as much as 0.5% to 105.71 per dollar, while yields on Japanese sovereign debt climbed across the curve. The Nikkei 225 Index closed 2.5% lower and the Topix Index fell 1.8%.”
For the Week:
The S&P500 fell 2.0% (up 0.7% y-t-d), and the Dow dropped 3.0% (down 0.7%). The Utilities sank 2.9% (down 7.8%). The Banks declined 2.0% (up 4.9%), while the Broker/Dealers were little changed (up 6.5%). The Transports fell 2.3% (down 2.6%). The S&P 400 Midcaps declined 1.3% (down 1.3%), and the small cap Russell 2000 dipped 1.0% (down 0.2%). The Nasdaq100 fell 1.2% (up 6.5%). The Semiconductors added 0.9% (up 8.8%). The Biotechs slipped 0.8% (up 10.3%). With bullion down $6, the HUI gold index declined 2.1% (down 10.0%).
Three-month Treasury bill rates ended the week at 1.61%. Two-year government yields were unchanged at 2.24% (up 36bps y-t-d). Five-year T-note yields added a basis point to 2.63% (up 42bps). Ten-year Treasury yields were little changed at 2.87% (up 46bps). Long bond yields declined two bps to 3.14% (up 40bps).
Greek 10-year yields declined three bps to 4.33% (up 25bps y-t-d). Ten-year Portuguese yields fell five bps to 1.99% (up 4bps). Italian 10-year yields sank 10 bps to 1.97% (down 5bps). Spain's 10-year yields fell five bps to 1.55% (down 2bps). German bund yields were unchanged at 0.65% (up 22bps). French yields dipped a basis point to 0.92% (up 14bps). The French to German 10-year bond spread narrowed one to 27 bps. U.K. 10-year gilt yields dropped five bps to 1.47% (up 28bps). U.K.'s FTSE equities index dropped 2.4% (down 8.0%).
Japan's Nikkei 225 equities index sank 3.2% (down 7.0% y-t-d). Japanese 10-year "JGB" yields gained two bps to 0.07% (up 2bps). France's CAC40 dropped 3.4% (down 3.3%). The German DAX equities index sank 4.6% (down 7.8%). Spain's IBEX 35 equities index lost 3.0% (down 5.1%). Italy's FTSE MIB index dropped 3.4% (up 0.3%). EM markets were lower. Brazil's Bovespa index declined 1.8% (up 12.3%), and Mexico's Bolsa dropped 2.3% (down 3.7%). South Korea's Kospi index fell 2.0% (down 2.6%). India’s Sensex equities index slipped 0.3% (unchanged). China’s Shanghai Exchange declined 1.0% (down 1.6%). Turkey's Borsa Istanbul National 100 index dipped 0.6% (up 1.3%). Russia's MICEX equities index fell 2.1% (up 8.5%).
Junk bond mutual funds saw outflows of $703 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates gained three bps to 4.43%, the high since January 2014 (up 33bps y-o-y). Fifteen-year rates jumped five bps to 3.90% (up 58bps). Five-year hybrid ARM rates declined three bps to 3.62% (up 48bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down five bps to 4.61% (up 31bps).
Federal Reserve Credit last week declined $3.1bn to $4.366 TN. Over the past year, Fed Credit contracted $60.6bn, or 1.4%. Fed Credit inflated $1.555 TN, or 55%, over the past 278 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $5.9bn last week to $3.418 TN. "Custody holdings" were up $243bn y-o-y, or 7.6%.
M2 (narrow) "money" supply declined $5.1bn last week to $13.843 TN. "Narrow money" expanded $553bn, or 4.2%, over the past year. For the week, Currency dipped $1.2bn. Total Checkable Deposits fell $9.3bn, while savings Deposits were little changed. Small Time Deposits added $1.5bn. Retail Money Funds gained $3.2bn.
Total money market fund assets declined $2.0bn to $2.842 TN. Money Funds gained $164bn y-o-y, or 6.1%.
Total Commercial Paper slipped $2.7bn to $1.092 TN. CP gained $121bn y-o-y, or 12.4%.
Currency Watch:
The U.S. dollar index added 0.1% to 89.935 (down 2.4% y-o-y). For the week on the upside, the Japanese yen increased 1.1%, the Norwegian krone 0.8%, and the euro 0.2%. For the week on the downside, the South African rand declined 3.1%, the Canadian dollar 1.9%, the Mexican peso 1.4%, the British pound 1.2%, the Australian dollar 1.1%, the New Zealand dollar 0.9%, the Swedish krona 0.9%, the Brazilian real 0.5%, the Swiss franc 0.1%, the South Korean won 0.1% and the Singapore dollar 0.1%. The Chinese renminbi declined 0.13% versus the dollar this week (up 2.54% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index dropped 2.2% (down 0.2% y-t-d). Spot Gold slipped 0.5% to $1,323 (up 1.5%). Silver declined 0.5% to $16.466 (down 4.0%). Crude sank $2.30 to $61.25 (up 1%). Gasoline jumped 5.0% (up 6%), and Natural Gas gained 2.7% (down 9%). Copper sank 3.4% (down 5%). Wheat surged 7.7% (up 17%). Corn jumped 2.9% (up 9.8%).
Market Dislocation Watch:
February 27 – Financial Times (Yian Mui): “Federal Reserve Chairman Jerome Powell played down concerns about recent market volatility, arguing Tuesday that the dramatic swings do not weigh heavily on his outlook for the economy and maintaining his expectation for further gradual increases in interest rates. In Capitol Hill testimony, Powell emphasized that the job market remains robust, consumer spending is solid and wage growth is accelerating. He also highlighted gains in U.S. exports and stimulative fiscal policy as new ‘tailwinds’ for the economy. ‘After easing substantially during 2017, financial conditions in the United States have reversed some of that easing,’ he said… ‘At this point, we do not see these developments as weighing heavily on the outlook for economic activity, the labor market and inflation. Indeed, the economic outlook remains strong.’”
February 27 – CNBC (Jeff Cox): “February's stock market correction probably would have been worse if companies had not stepped in to the fray. With both traders and retail investors selling at a frenzied level earlier this month, corporations swept in looking for bargains… As the month nears a close, companies have bought back $113.4 billion of their own shares, good for the highest total since April 2015, according to… TrimTabs. That's part of an overall strong trend for buybacks, which stand at $5.8 billion a day during the current earnings season, a record.”
February 26 – Financial Times (Robin Wigglesworth and Lindsay Fortado): “Computer-driven, trend-following hedge funds are heading for their worst month in nearly 17 years after getting whipsawed when the stock market’s steady soar abruptly reversed into one of the quickest corrections in history earlier in February. Hedge funds known as ‘commodity trading advisers’ or managed futures funds — which surf the momentum of markets — got sucked into big bets on stocks from last year’s rally, which culminated in the strongest monthly equity fund inflows since 1987 in January. But the rally unravelled in dramatic fashion in early February, slamming trend-followers. Société Générale’s CTA index is down 5.55% this month…, making it the worst period for these systematic hedge funds since November 2001.”
February 27 – Bloomberg (Sid Verma): “Risk appetite is back with a vengeance. As U.S. stocks rose to a nearly four-week high on Monday, inflows into the benchmark exchange-traded fund for technology shares jumped to the second-most on record… Money managers sank at least $2.7 billion into the PowerShares QQQ Trust Series 1 ETF, which follows the Nasdaq 100 Index, bringing assets under management to an all-time high of $65.7 billion.”
February 27 – Bloomberg (Luke Kawa): “Options tied to exchange-traded products that allow investors to place bets on U.S. equity volatility are getting crushed in early trading on Tuesday. Late on Monday evening, ProShares announced that it would be dialing down the leverage on the Short VIX Short-Term Futures exchange-traded fund (ticker SVXY) -- a product that offers exposure to market tranquility -- and the Ultra VIX Short-Term Futures ETF (ticker UVXY), whose owners were making a levered wager that equity volatility would increase. Reducing the leverage on these funds will dampen their price swings going forward. The shifts also make it much less likely that any out-of-the-money options tied to these products would ultimately pay off.”
Trump Administration Watch:
February 25 – Axios (Jonathan Swan): “Bloomberg scooped on Friday that Trump wants the Commerce Department to seek the harshest maximum tariffs on global steel imports: 24%. I’m told that’s accurate, but with one small tweak: Sources tell me the president has told confidants he actually wants a 25% global tariff on steel because it's a round number and sounds better. The big picture: Also, an official with knowledge of the trade discussions told me the White House is preparing to impose tariffs on a ‘shit ton’ — meaning, potentially hundreds — of Chinese products. They'll avoid going through the World Trade Organization — which Trump doesn't trust — and instead use Section 301 of the Trade Act of 1974 to unilaterally retaliate against China for stealing Americans’ intellectual property.”
March 1 – Bloomberg (Andrew Mayeda): “President Donald Trump is warning the U.S. will use ‘all available tools’ to prevent China’s state-driven economic model from undermining global competition, the latest warning to Beijing as America readies a host of trade actions. China hasn’t lived up to the promises of economic reforms it made when it joined the World Trade Organization in 2001, and actually appears to be moving further away from ‘market principles’ in recent years, according to the president’s annual report to Congress… China’s ‘statist’ policies are causing a ‘dramatic misallocation’ of global resources that is leaving all countries poorer than they should be, said the report.”
U.S. Bubble Watch:
February 27 – CNBC (Diana Olick): “Sky-high demand and record-low supply continued to push home prices higher in December, far faster than income growth. U.S. home prices increased 6.3% compared with December 2016, according to the… S&P CoreLogic Case-Shiller national home prices index. That is an increase from 6.1% annual growth in the previous month. The index measuring the nation's 20 largest metropolitan markets rose 6.3% year over year… ‘The rise in home prices should be causing the same nervous wonder aimed at the stock market after its recent bout of volatility,’ David M. Blitzer, managing director and chairman of the Index Committee at S&P Dow Jones Indices, said… ‘Across the 20 cities covered by S&P Corelogic Case Shiller Home Price Indices, the average increase from the financial crisis low is 62%; over the same period, inflation was 12.4%. Even considering the recovery from the financial crisis, we are experiencing a boom in home prices.’ The boom is strongest in Seattle, Las Vegas and San Francisco…”
March 1 – Bloomberg (Sho Chandra): “Americans’ wallets fattened in January on recent tax cuts, indicating increased spending power may boost the economy this quarter. Real disposable income, or earnings adjusted for taxes and inflation, advanced 0.6% from the prior month, the biggest gain since April 2015… Nominal consumer spending grew 0.2%, matching the median forecast… and following a 0.4% gain. The Federal Reserve’s preferred price gauge, excluding food and energy, had the biggest monthly increase in a year.”
February 28 – Bloomberg (Sarah McGregor): “Foreign holdings of U.S. securities rose to a record $18.4 trillion as of the end of June… An annual survey of foreign portfolio investments -- including U.S. stocks along with short-and long-term debt -- showed holdings rose by 8%, up from $17.1 trillion a year earlier… Japan was largest investing country with $2 trillion, followed by the Cayman Islands at $1.7 trillion and the U.K. and China at about $1.5 trillion each. Luxembourg rounded out the top five at $1.4 trillion. Foreign holdings of U.S. equities climbed to $7.2 trillion as of June 30, from $6.2 trillion a year earlier. Short-term debt holdings increased to $954 billion from $909 billion, while long-term debt holdings rose to $10.3 trillion from $10 trillion…”
March 1 – Wall Street Journal (Akane Otani, Richard Rubin and Theo Francis): “U.S. companies are buying back their shares at an aggressive pace, stirring debates in Washington and on Wall Street about how savings from corporate tax cuts are being used and who benefits most. Share buybacks announced by large U.S. companies have exceeded $200 billion in the past three months, more than double the prior year, according to a Wall Street Journal analysis of data for S&P 500 companies. Among the biggest: Cisco Systems Inc. at $25 billion, Wells Fargo & Co. at about $21 billion, PepsiCo Inc. at $15 billion, AbbVie Inc. and Amgen Inc. at $10 billion apiece, and Alphabet Inc. at $8.6 billion.”
February 25 – Reuters (Eric M. Johnson and Chris Prentice): “The drive for cost cuts and higher margins at U.S. trucking and railroad operators is pinching their biggest customers, forcing the likes of General Mills Inc and Hormel Foods Corp to spend more on deliveries and consider raising their own prices as a way to pass along the costs. Interviews with executives at 10 companies across the food, consumer goods and commodities sectors reveal that many are grappling with how to defend their profit margins as transportation costs climb at nearly double the inflation rate.”
February 26 – Bloomberg (Sho Chandra): “U.S. sales of new homes unexpectedly fell in January to the lowest level since August as borrowing costs rose and winter weather depressed demand… Single-family home sales dropped 7.8% m/m to 593k annualized pace (est. 647k) after 643k rate (revised from 625k)… The results, which are volatile on a month-to-month basis, showed a 14.2% slump in the South, the largest decrease since March 2015 and a sharp decline in the Northeast. The two areas experienced inclement weather.”
February 27 – Bloomberg (Shelly Hagan and Sho Chandra): “U.S. consumer confidence jumped to a 17-year high as optimism about employment prospects grew and Americans began seeing additional money in their paychecks from recently enacted tax cuts, data from the… Conference Board showed… Confidence index rose to 130.8 (est. 126.5), highest since Nov. 2000, from downwardly revised 124.3 in January. Present conditions measure climbed to 162.4, highest since 2001, from 154.7.”
February 28 – Bloomberg (Luke Kawa): “The high-flying technology sector hit a potentially ominous milestone on Tuesday: It now amounts to more than 25% of the S&P 500 Index. ‘It’s the first time the sector has made up at least a quarter of the S&P since a one-year period that ran from Thanksgiving 1999 through Thanksgiving 2000,’ according… Bespoke Investment Group. ‘Notably, the weighting only got above 25% for the final four months of the dot-com bubble when share prices were going insane.’”
February 25 – Wall Street Journal (Michael Wursthorn and Chelsey Dulaney): “Investors borrowing record sums to bet on stocks exacerbated this month’s selloff, after they were hit with calls to reduce those obligations and forced to sell shares to raise cash. If that debt, known as margin loans, continues to rise at the current pace, analysts warn that big selloffs and sudden bouts of volatility in the stock market could become more commonplace. Retail and institutional investors have borrowed a record $642.8 billion against their portfolios…, as they try to pocket bigger gains by ramping up their exposure to stocks.”
Federal Reserve Watch:
March 1 – Financial Times (Joe Rennison and Nicole Bullock): “The Powell Put has a nice ring to it. After years of being able to count on having the Federal Reserve in their corner, investors had assumed it would be more of the same from the new Fed chair. Yet as Jay Powell, who has been a Fed governor since 2012 and spent almost 20 years as a partner at private equity firm Carlyle, publicly outlined his views on policy for the first time since succeeding Janet Yellen that assumption was under threat. In a marked departure from the more academic tone of his immediate predecessors in the Fed chair, the 65-year old signalled to Congress a willingness to look beyond bursts of volatility in financial markets and would tighten policy against a backdrop of a strengthening economy that may in due course reveal signs of overheating.”
February 27 – Bloomberg (Craig Torres and Christopher Condon): “Jerome Powell opened the door to the Federal Reserve raising U.S. interest rates four times this year as he acknowledged stronger economic growth may prompt policy makers to rethink their plan for three hikes. ‘My personal outlook for the economy has strengthened since December,’ the Fed chairman said Tuesday in response to a question about what would cause the central bank to step up the pace of policy tightening. He then listed four events that are causing him to revise up his outlook.”
February 25 – Bloomberg (Rich Miller and Shelly Hagan): “Federal Reserve Chairman Jerome Powell and his colleagues may be willing to accept inflation rising as high as 2.5% as they seek to extend the almost nine-year economic expansion. So say a number of veteran Fed watchers who argue that the central bank’s Federal Open Market Committee would tolerate a moderate rise in inflation above its 2% goal after years of falling below that objective… ‘I’ve had some hawks on the committee surprise me and say they wouldn’t be worried about a modest overshoot’ as long as it’s below 2.5%, former Fed governor Laurence Meyer said…”
February 26 – Financial Times (Sam Fleming): “The US may be on the cusp of a shift to higher sustained growth, pointing to a possible rise in the interest rate needed to maintain stable prices and full employment, a senior Federal Reserve policymaker said… Randal Quarles, the vice-chairman for financial supervision at the Fed’s board of governors, told a conference that growth may outpace central bankers’ forecasts as post-crisis drags abate… A jump in the growth rate to a durably faster pace could lead to a rise in the so-called natural rate of interest — the rate that keeps the economy on an even keel…. ‘There is a real possibility that some of the factors that have been holding back growth in recent years could shift, moving the economy on to a higher growth trajectory,’ Mr Quarles told the National Association for Business Economists…”
China Watch:
February 25 – Financial Times (Jamil Anderlini): “In the aftermath of Chairman Mao Zedong’s disastrous personality cult, Chinese paramount leader Deng Xiaoping recognised the dangers of totalitarian dictatorship. In the early 1980s Deng set about establishing a system that relied on competent governance, co-opting the elite and consensus rule at the top. China was still an autocracy but it incorporated and empowered enough interest groups to provide basic political stability and stellar economic growth, with just one big exception in 1989. That system, which has served China so well for decades, has now been swept away. On Sunday, the Communist party announced it would remove term limits on the presidency, allowing Xi Jinping to rule for life if he wants.”
February 26 – Financial Times (Lucy Hornby): “China’s Communist party has cleared the way for President Xi Jinping to rule for life, and in the process strengthened the state’s ‘command and control’ power over the world’s second-largest economy. Mr Xi’s unparalleled power theoretically allows him to push through painful reforms in the face of recalcitrant vested interests, particularly in state-dominated sectors... When Mr Xi took over the Communist party in 2012, bureaucrats hastened to reassure foreign businesses and diplomats that the president was merely consolidating power to enact economic reforms. So far economic liberalisation has been slow to materialise. ‘Xi believes that he is ideally suited to keep China politically and economically strong in coming decades and he is trying to make sure his power is equal to the task,’ says Andrew Collier, managing director at Orient Capital Research. Mr Xi’s advisers are aware the country faces the end of its demographic boom and a growing debt problem, he adds.”
February 28 – Financial Times (Hudson Lockett): “China’s official gauge of manufacturing activity suffered its largest fall since 2011 in February, an unexpectedly sharp slowdown that left it near the zero-growth level. The manufacturing purchasing managers’ index… dropped to 50.3, down a point from January and the largest fall in more than six years. The fall marked the gauge’s nearest brush with the 50-point mark that separates growth from contraction since August 2016.”
February 28 – Bloomberg: “China plans to expand its unprecedented crackdown on financial risk to money-market funds by capping how much investors can redeem in a day, people familiar with the matter said. The limit for same-day redemption will be set at 10,000 yuan ($1,580)… The same restriction will apply when investors use their assets in money-market funds directly for payment and consumption… Such a move would be the latest tightening by China’s policy makers, who are making stability job No. 1 as they work to balance continued expansion with defusing the country’s debt bomb.”
February 23 – Reuters (Josephine Mason and Pei Li): “China’s new home prices grew in January although major cities saw early signs of softening, as the government continued its efforts to rein in speculative demand to fend off bubble risk. The acceleration in prices across the nation suggests moves by provincial governments to support first-time buyers and upgraders by relaxing some purchase restrictions may be further fanning price gains in a market where fear of missing out is strong and mortgage fraud is rampant. Average new home prices in China’s 70 major cities rose 5% in January from a year earlier and 0.3% month on month…”
February 28 – Reuters (Michael Martina and Patricia Zengerle): “China expressed anger on Thursday after the U.S. Senate passed a bill promoting closer U.S. ties with Taiwan, but the step drew praise from the self-ruled island which pledged to deepen cooperation. The move adds to tensions between China and the United States, already at loggerheads over trade, with President Xi Jinping’s close economic advisor Liu He in Washington this week to try and avert a trade war.”
February 23 – Wall Street Journal (Nathaniel Taplin): “China’s Anbang Insurance went from zero to too-big-to-fail in the blink of an eye. It is a lesson in how quickly China’s financial problems grow—and how much is left to clean up. Beijing said Friday that the state is taking direct control of Anbang Insurance Group, the acquisitive purveyor of unusual investment products whose high-flying chairman Wu Xiaohui was detained last summer amid a broader crackdown on debt… The total cost of cleaning up the mess, including whatever losses sit on Anbang’s gargantuan balance sheet—put at close to 2 trillion yuan ($300bn) in April by financial magazine Caixin—is an unknown.”
March 1 – Bloomberg (Keith Zhai and Alfred Cang): “President Xi Jinping’s government has fired another warning shot at global dealmakers doing business with Chinese billionaires: Not even the most well-connected tycoons are safe. Ye Jianming, a globe-trotting Chinese tycoon who runs the conglomerate CEFC China Energy Co., has been investigated by authorities, according to people with knowledge… The news, first reported by local media outlet Caixin, comes shortly after Xi’s government seized Anbang Insurance Group Co., a global empire whose once-influential founder, Wu Xiaohui, is detained while facing fraud charges.”
Central Bank Watch:
March 2 – Bloomberg (Lucy Meakin and Edward Robinson): “Mark Carney is calling for greater regulation to bring the era of cryptocurrency “anarchy” to an end. ‘The time has come to hold the crypto-asset ecosystem to the same standards as the rest of the financial system,’ the Bank of England governor said… Carney, who is also head of the Financial Stability Board, joins a growing chorus calling for greater oversight of the technology after the explosion of new cryptocurrencies created more than $438 billion in paper wealth since March 2, 2017…”
Global Bubble Watch:
February 28 – Financial Times (Eric Platt and Joe Rennison): “Some of the biggest international buyers of US corporate debt are showing signs of stepping back from this $8.8tn market, reflecting expectations of a bigger shift under way: the retreat of central banks from the era of easy money. In contrast to Europe and Japan, the fixed yields paid to holders of US corporate debt has long been much higher, an attractive proposition to global investors until late last year. International investors were net sellers of US corporate paper in December, only the second time this has occurred in the past three years as the rising cost of insulating their portfolios against swings in the dollar erodes the attraction of high US bond yields. ‘[Foreign] investors are seeing their net returns post-hedge eroded,’ says Steven Oh, global head of credit and fixed income at PineBridge Investments. ‘And because they are losing that yield differential, they are going to rethink not only their allocation to US credit but going forward [if] they actually withdraw.’”
February 28 – Wall Street Journal (Jon Sindreu): “The rise in Treasury yields should make U.S. debt more attractive to international investors still struggling with low returns at home—yet few are buying. The rising costs of currency hedges means it often isn’t worth it… Last year, buying Treasurys and swapping the proceeds back into euros provided European investors with a higher return than buying German sovereign bonds. Now, hedging costs have increased so much that this trade is no longer profitable. That could sap an important source of demand for U.S. Treasurys. It’s also making it more expensive for foreign investors to buy U.S. corporate debt.”
February 25 – Financial Times (Javier Espinoza): “Private equity groups are buying public companies at the fastest rate since before the financial crisis, with deals totalling $180bn last year, nearly twice the level of 2016, according to Bain & Co. The jump in dealmaking is the largest increase since 2007 and comes as the sector is under pressure to deploy record sums of cash… Bain… said in its global report that the number of ‘public-to-private’ deals, where a private equity group buys a listed company, hit 152 last year, up from 94 in 2016. The all-time high of 196 transactions was hit in 2007, while the record value for such deals was $423bn in 2006.”
March 1 – Bloomberg (Emily Cadman): “Australian home prices fell for a fifth consecutive month in February, in a further sign the property boom is over. Housing prices fell 0.1% nationally, led by a 0.6% decline in Sydney, according to CoreLogic… Prices in Sydney, the epicenter of the boom, are down 0.5% from a year earlier -- the first annual decline since 2012.”
February 28 – Wall Street Journal (Jean Eaglesham and Paul Vigna): “The Securities and Exchange Commission has issued dozens of subpoenas and information requests to technology companies and advisers involved in the red-hot market for cryptocurrencies, according to people familiar with the matter. The sweeping probe significantly ratchets up the regulatory pressure on the multibillion-dollar U.S. market for raising funds in cryptocurrencies. It follows a series of warning shots from the top U.S. securities regulator suggesting that many token sales, or initial coin offerings, may be violating securities laws.”
Fixed-Income Bubble Watch:'
February 27 – Wall Street Journal (Kosaku Narioka and Saumya Vaishampayan): “Japanese investors may be America’s bond bears. They are shifting toward selling U.S. Treasury bonds and other dollar-based debt after fears have picked up in recent weeks that the Trump administration’s budget and other policies add up to a weak dollar… Any questioning in Tokyo of the dollar or of the U.S. Treasury is significant because Japanese holders including the government own nearly $1.1 trillion in Treasury bonds, a close second to China. For years, the U.S. economy has relied on Japan and China to recycle their trade surpluses back into the U.S. by buying American debt. Japan’s suspicions were fanned by Treasury Secretary Steven Mnuchin’s remark in January that ‘a weaker dollar is good for trade.’”
February 27 – Bloomberg (Sid Verma and Luke Kawa): “Investors reaching for yield are now finding it’s less of a stretch. Global credit markets are on the cusp of a post-crisis regime shift as higher rates on short-dated U.S. Treasuries challenge the investment case for high-grade corporate bonds -- on both sides of the Atlantic. Consider this: The Vanguard short-term corporate bond exchange-traded fund, which holds U.S. investment grade debt with a maturity of less than five years, now has an indicated dividend yield only 0.54 percentage point above that of the three-month Treasury bill. That represents a tiny pickup compared with a whopping 2 percentage points in early 2017.”
February 28 – Financial Times (Eric Platt and Joe Rennison): “US short-dated bank bonds have been in the line of fire in recent weeks and this selling pressure reflects tax reform, analysts say, rather than a change in traders’ beliefs about the creditworthiness of financials. Companies with large amounts of offshore cash from their global operations placed the money in US government and corporate bonds. Now as the cash appears set to come home thanks to changes in US tax law, the first signs of liquidation are being seen. Many big multinationals invested primarily in corporate bonds and the likes of Apple, for example, were large buyers of short-term bank bonds… Highlighting a sell-off, risk premiums rose for senior unsecured bonds issued by Bank of America, Citigroup and JPMorgan…”
Europe Watch:
March 1 – Reuters (Markus Wacket): “Germany’s Social Democrat (SPD) environment minister said on Thursday she expects party members to support a new coalition government with Chancellor Angela Merkel’s conservatives by a margin of 60%. The SPD’s 464,000 members are voting in a postal ballot on whether to endorse their party leadership’s decision to renew for another four years the ‘grand coalition’ that took office in 2013. The result of the postal ballot is due on Sunday.”
March 1 – Financial Times: “It is a mark of the impatience of Italian voters that Silvio Berlusconi is poised to stage a political resurrection in Italy’s March 4 elections. The disgraced tycoon and former prime minister is barred from holding office as a result of a conviction for tax fraud, at least until 2019. Whatever the fate of the alliance between his Forza Italia party, the resurgent populist nationalist Northern League, and smaller far-right Brothers of Italy in a centre right coalition, he remains the potential kingmaker. Strikingly, given the extreme views of his fellow travellers, Mr Berlusconi’s own past outbursts and indiscretions seem relatively moderate. Sunday’s polls are the most significant in this year’s European calendar, testing the resilience of the populist nationalist vote, and long-term future of the centre-left. They have a bearing on the future of the eurozone, on the precarious fortunes of its third-largest economy and on Europe’s response to migration.”
February 28 – BBC: “An EU proposal for the Northern Ireland border threatens the ‘constitutional integrity’ of the United Kingdom, Theresa May has said. The EU's draft legal agreement proposes a ‘common regulatory area’ after Brexit on the island of Ireland - in effect keeping Northern Ireland in a customs union - if no other solution is found. Mrs May said ‘no UK prime minister could ever agree’ to this. The EU says the ‘backstop’ option is not intended to "provoke" the UK.”
Japan Watch:
February 28 – Reuters (Stanley White): “Bank of Japan Governor Haruhiko Kuroda said… that once the central bank starts to normalize monetary policy the process would be ‘very gradual,’ and that the BOJ would pay attention to any risks to the economy. Speaking in the lower house of parliament, Kuroda said the BOJ would not continue with its aggressive monetary easing when inflation reached its price target and the economy was growing stably.”
EM Bubble Watch:
February 27 – Bloomberg (Selcuk Gokoluk): “Developing-nation borrowers are raising more money in local markets than ever before… Local-currency bond sales in emerging markets this year exceeded $1 trillion, almost triple the amount raised in the same period last year and dwarfing the $160 billion in hard-currency issues… Domestic sales have increased almost five-fold in the past five years.”
Leveraged Speculator Watch:
March 1 – Bloomberg (John Ainger): “Hedge-fund veteran Paul Tudor Jones has joined the growing chorus of big hitters in the fixed-income world warning that bonds are well and truly in a bear market. He sees 10-year U.S. Treasury yields rising to 3.75% by year-end as a ‘conservative’ target given that supply outweighs demand, economic momentum is outpacing the monetary policy response, and that bond valuations are ‘glaring.’ That puts him in the company of Bill Gross and Ray Dalio who say the days of a bond bull market are over.”
February 28 – Bloomberg (Scott Deveau): “One of the longest and most colorful battles in Wall Street history is over, and Bill Ackman lost. Ackman has almost entirely exited his position in Herbalife Ltd., ending a short-selling campaign that lasted more than five years… The move follows a steady rise in the shares of a company that he repeatedly called an illegal pyramid scheme and vowed to destroy.”
Geopolitical Watch:
February 28 – Wall Street Journal (Sune Engel Rasmussen): “The demise of Islamic State is intensifying a scramble among foreign powers in Syria, raising the risk that diverging strategic and commercial interests could lead to a wider regional war. In the past month, a U.S. airstrike in the eastern part of the country killed an unknown number of Russian military contractors; Israel hit Iranian military installations deep inside Syria; while Turkey waged a campaign against Kurdish militias in the north. The volatile situation is a result of how the fight against Islamic State was conducted, with players seizing territory, arming proxies and aggravating long-existing ethnic and political divisions. The result: a series of flashpoints where clashes could erupt among major powers and spill over Syria’s borders. ‘No one wants that war, but everyone is ready for it and expects it,’ said Emile Hokayem, a Syria expert at the International Institute for Strategic Studies in London.”
February 27 – Financial Times (Ben Bland): “While Beijing was outlining the path for Xi Jinping to rule as China’s president for life, Tsai Ing-wen, his democratically elected counterpart in Taiwan, was speaking about the importance of universal human rights at a Holocaust memorial ceremony in Taipei. But Mr Xi’s concentration of power — unparalleled since the era of Mao Zedong — represents a growing threat to Taiwan’s efforts to maintain de facto independence, in the face of Beijing’s insistence that the island is part of its territory, and to the embattled democracy movement in neighbouring, semi-autonomous Hong Kong. ‘Xi Jinping has largely been the author of fairly hard-line policies toward [Hong Kong and Taiwan],’ said William Stanton, a former US diplomat… ‘The problem with all dictators is that no one can put a brake on anything they want to do.’”
March 1 – Bloomberg (Ben Blanchard and Yimou Lee): “China warned Taiwan on Friday it would only get burnt if it sought to rely on foreigners, adding to warnings from state media the country could go to war over Taiwan if the United States passes into law a bill promoting closer U.S. ties.”
Friday Afternoon Links
[Bloomberg] Stocks Fluctuate, Bonds Fall as Tariffs Set Tone: Markets Wrap
[Bloomberg] U.S. Car Loan Rates Rise to Highest in Eight Years
[Reuters] NAFTA talks soured, hamstrung by Trump steel trade war threats
[Bloomberg] The Yen Emerges as the Currency-Market Winner From Trade Tensions
[Bloomberg] Hedge Funds Feel Episodic Volatility: ‘You’re Going to Get Hurt’
[Reuters] Italy's 5-Star rallies voters as center-right frets
[Bloomberg] U.S. Car Loan Rates Rise to Highest in Eight Years
[Reuters] NAFTA talks soured, hamstrung by Trump steel trade war threats
[Bloomberg] The Yen Emerges as the Currency-Market Winner From Trade Tensions
[Bloomberg] Hedge Funds Feel Episodic Volatility: ‘You’re Going to Get Hurt’
[Reuters] Italy's 5-Star rallies voters as center-right frets
Thursday, March 1, 2018
Friday's News Links
[Bloomberg] Stocks Plunge on `Trade War' Talk; Gold Advances: Markets Wrap
[Bloomberg] Trump Says Trade Wars Are ‘Good, and Easy to Win’
[Bloomberg] Here’s How Trump Could Really Hurt China on Trade
[Bloomberg] Trump’s Tariffs Throw a Wrench in the Global Trading System
[CNBC] Trump's tariffs may anger China and here's how it may retaliate
[CNBC] Europe on Trump tariffs: We will 'react firmly and commensurately to defend our interests'
[Bloomberg] Bank of Japan Will Think About Stimulus Exit Around 2019: Kuroda
[Bloomberg] BOJ's Kuroda Joins Queue of Central Banks Looking Toward Exit
[Reuters] BOJ can communicate exit strategy to markets when right time comes: Kuroda
[Bloomberg] BOE’s Carney Calls for Rules to End Cryptocurrency Anarchy
[Reuters] China warns Taiwan playing with fire over U.S. bill
[FT] What you need to know about the Trump steel tariffs
[FT] China’s super-rich lose political clout
[FT] Italy’s post-poll future will gnaw at the EU core
[WSJ] How the Market Might React to Italy’s Election
[Bloomberg] Trump Says Trade Wars Are ‘Good, and Easy to Win’
[Bloomberg] Here’s How Trump Could Really Hurt China on Trade
[Bloomberg] Trump’s Tariffs Throw a Wrench in the Global Trading System
[CNBC] Trump's tariffs may anger China and here's how it may retaliate
[CNBC] Europe on Trump tariffs: We will 'react firmly and commensurately to defend our interests'
[Bloomberg] Bank of Japan Will Think About Stimulus Exit Around 2019: Kuroda
[Bloomberg] BOJ's Kuroda Joins Queue of Central Banks Looking Toward Exit
[Reuters] BOJ can communicate exit strategy to markets when right time comes: Kuroda
[Bloomberg] BOE’s Carney Calls for Rules to End Cryptocurrency Anarchy
[Reuters] China warns Taiwan playing with fire over U.S. bill
[FT] What you need to know about the Trump steel tariffs
[FT] China’s super-rich lose political clout
[FT] Italy’s post-poll future will gnaw at the EU core
[WSJ] How the Market Might React to Italy’s Election
Thursday Evening Links
[Bloomberg] Stocks Sink, Bonds Rally on Trump's Metals Duties: Markets Wrap
[Bloomberg] Trump Says U.S. to Impose Harsh Steel and Aluminum Tariffs
[Bloomberg] Fed's Powell Says He Sees ‘No Evidence’ of Overheating in the U.S. Economy
[Bloomberg] Manufacturing in U.S. Expands at Fastest Pace Since May 2004
[Bloomberg] Rising Prices Keep Fed Hikes on Track
[Bloomberg] Detroit Pickup Sales Drop With U.S. Auto Demand Poised to Slow
[CNBC] Pentagon urges calm after Putin and Russia up the ante on missile defense with new nuclear weapons
[Bloomberg] Trump Says U.S. to Impose Harsh Steel and Aluminum Tariffs
[Bloomberg] Fed's Powell Says He Sees ‘No Evidence’ of Overheating in the U.S. Economy
[Bloomberg] Manufacturing in U.S. Expands at Fastest Pace Since May 2004
[Bloomberg] Rising Prices Keep Fed Hikes on Track
[Bloomberg] Detroit Pickup Sales Drop With U.S. Auto Demand Poised to Slow
[CNBC] Pentagon urges calm after Putin and Russia up the ante on missile defense with new nuclear weapons
Wednesday, February 28, 2018
Thursday's News Links
[Bloomberg] Global Stocks Slide, Treasuries Rise Before Powell: Markets Wrap
[Bloomberg] U.S. Real Disposable Incomes Up Most in Five Years on Tax Cuts
[Bloomberg] Jobless Claims in U.S. Drop to Lowest in Almost Five Decades
[Reuters] Trump says U.S. steel, aluminum sectors 'decimated' by unfair trade
[Bloomberg] Winners and Losers From Trump's Tariffs on Aluminum and Steel
[CNBC] New Fed chief Powell testifies again and could double down on comments that rocked markets
[Bloomberg] Powell Aims for Soft Landing That Eluded Seasoned Fed Chiefs
[CNBC] SEC launches probe into cryptocurrency market: Wall Street Journal, citing sources
[Bloomberg] Tudor Jones Stands With Dalio, Gross in Calling Bond Bear Market
[Bloomberg] Australian Home Prices Fall Again in Further Sign Boom Is Over
[Bloomberg] Noble Group Warns Survival Hangs on Deal After Immense Loss
[Bloomberg] S&P 500 Hits Tech-Heavy Milestone Last Seen With Dot-Com Bubble
[Reuters] Senate passes Taiwan travel bill that has angered China
[Bloomberg] Xi’s Warning to Investors: Any Chinese Billionaire Could Fall
[WSJ] Boom in Share Buybacks Renews Question of Who Wins From Tax Cuts
[WSJ] Why an Unpleasant Inflation Surprise Could Be Coming
[WSJ] SEC Launches Cryptocurrency Probe
[FT] ‘Powell Put’ assumption challenged as Fed chief shows hand
[FT] Powell likely to quicken pace of Fed interest rate rises
[FT] Tudor Jones likens Powell’s job to Custer’s Last Stand
[FT] An abridged, illustrated history of volatility
[Bloomberg] U.S. Real Disposable Incomes Up Most in Five Years on Tax Cuts
[Bloomberg] Jobless Claims in U.S. Drop to Lowest in Almost Five Decades
[Reuters] Trump says U.S. steel, aluminum sectors 'decimated' by unfair trade
[Bloomberg] Winners and Losers From Trump's Tariffs on Aluminum and Steel
[CNBC] New Fed chief Powell testifies again and could double down on comments that rocked markets
[Bloomberg] Powell Aims for Soft Landing That Eluded Seasoned Fed Chiefs
[CNBC] SEC launches probe into cryptocurrency market: Wall Street Journal, citing sources
[Bloomberg] Tudor Jones Stands With Dalio, Gross in Calling Bond Bear Market
[Bloomberg] Australian Home Prices Fall Again in Further Sign Boom Is Over
[Bloomberg] Noble Group Warns Survival Hangs on Deal After Immense Loss
[Bloomberg] S&P 500 Hits Tech-Heavy Milestone Last Seen With Dot-Com Bubble
[Reuters] Senate passes Taiwan travel bill that has angered China
[Bloomberg] Xi’s Warning to Investors: Any Chinese Billionaire Could Fall
[WSJ] Boom in Share Buybacks Renews Question of Who Wins From Tax Cuts
[WSJ] Why an Unpleasant Inflation Surprise Could Be Coming
[WSJ] SEC Launches Cryptocurrency Probe
[FT] ‘Powell Put’ assumption challenged as Fed chief shows hand
[FT] Powell likely to quicken pace of Fed interest rate rises
[FT] Tudor Jones likens Powell’s job to Custer’s Last Stand
[FT] An abridged, illustrated history of volatility
Wednesday Evening Links
[Bloomberg] Stocks Sink Into Worst Monthly Decline Since 2016: Markets Wrap
[Bloomberg] Trump Says U.S. Will Use All Tools to Pressure China on Trade
[Reuters] Hawk or dove? Fed's Powell showed markets both sides in debut
[Reuters] Surge in imports helps curb U.S. fourth-quarter economic growth
[Bloomberg] Foreign Holdings of U.S. Securities Rise to Record $18 Trillion
[Bloomberg] Short Interest in High-Yield ETFs Hits Record
[Bloomberg] Shale Surge Sent U.S. Oil Production to Record High in November
[Bloomberg] Bill Ackman Gives Up Herbalife Fight, Ending Five-Year Saga
[WSJ] Why Italian Elections Matter: A New Type of Populism Is Rising
[Bloomberg] Trump Says U.S. Will Use All Tools to Pressure China on Trade
[Reuters] Hawk or dove? Fed's Powell showed markets both sides in debut
[Reuters] Surge in imports helps curb U.S. fourth-quarter economic growth
[Bloomberg] Foreign Holdings of U.S. Securities Rise to Record $18 Trillion
[Bloomberg] Short Interest in High-Yield ETFs Hits Record
[Bloomberg] Shale Surge Sent U.S. Oil Production to Record High in November
[Bloomberg] Bill Ackman Gives Up Herbalife Fight, Ending Five-Year Saga
[WSJ] Why Italian Elections Matter: A New Type of Populism Is Rising
Tuesday, February 27, 2018
Wednesday's News Links
[Bloomberg] U.S. Stocks Gain, Shaking Off Fed Rate Hike Fears: Markets Wrap
[Bloomberg] U.S. Fourth-Quarter Growth Revised Down to 2.5% Annualized Pace
[Bloomberg] Here's What We Learned From Powell's First Fed Chair Testimony
[Bloomberg] Bond Market Déjà Vu? Here's What Will Reveal If Rout Has Legs
[Reuters] Costly dollar hedges tarnish U.S. bonds for overseas investors
[Reuters] Exclusive: U.S. regulators examine Wall Street's Volcker rule wish list
[Bloomberg] May Says No U.K. PM Could Agree to EU Draft Deal: Brexit Update
[CNBC] Signs point to the Japanese yen getting even stronger as the US dollar weakens
[Reuters] BOJ's Kuroda says policy normalization would be 'very gradual'
[Bloomberg] China Factory Gauge Shows Easing Momentum Amid Holiday Season
[Bloomberg] China Plans Curbs on $1 Trillion in Money-Market Funds
[Bloomberg] When Will China Name a New PBOC Chief? Here's What We Know
[NYT] Xi Sets China on a Collision Course With History
[WSJ] Why International Investors Aren’t Buying U.S. Debt
[FT] China manufacturing gauge suffers sharpest fall in 6 years
[FT] Higher hedging costs take shine off US corporate debt
[FT] US tax reform puts bank bonds in the line of fire
[FT] Powell debut steals focus from pressure in the money market
[WSJ] In Syria, Foreign Powers’ Scramble for Influence Intensifies
[Bloomberg] U.S. Fourth-Quarter Growth Revised Down to 2.5% Annualized Pace
[Bloomberg] Here's What We Learned From Powell's First Fed Chair Testimony
[Bloomberg] Bond Market Déjà Vu? Here's What Will Reveal If Rout Has Legs
[Reuters] Costly dollar hedges tarnish U.S. bonds for overseas investors
[Reuters] Exclusive: U.S. regulators examine Wall Street's Volcker rule wish list
[Bloomberg] May Says No U.K. PM Could Agree to EU Draft Deal: Brexit Update
[CNBC] Signs point to the Japanese yen getting even stronger as the US dollar weakens
[Reuters] BOJ's Kuroda says policy normalization would be 'very gradual'
[Bloomberg] China Factory Gauge Shows Easing Momentum Amid Holiday Season
[Bloomberg] China Plans Curbs on $1 Trillion in Money-Market Funds
[Bloomberg] When Will China Name a New PBOC Chief? Here's What We Know
[NYT] Xi Sets China on a Collision Course With History
[WSJ] Why International Investors Aren’t Buying U.S. Debt
[FT] China manufacturing gauge suffers sharpest fall in 6 years
[FT] Higher hedging costs take shine off US corporate debt
[FT] US tax reform puts bank bonds in the line of fire
[FT] Powell debut steals focus from pressure in the money market
[WSJ] In Syria, Foreign Powers’ Scramble for Influence Intensifies
Tuesday Evening Links
[Bloomberg] Stocks Sell-Off to Reach Asia on Hawkish Powell: Markets Wrap
[Bloomberg] Powell Says Strong Outlook to Prod Fed to Review Rate-Hike Path
[CNBC] Yields started jumping right at this moment when Powell hinted at more rate hikes than expected ahead
[Bloomberg] Fed's Powell Has Bond Traders Pondering Four Rate Hikes in 2018
[Bloomberg] Five Charts to Help You Understand Tuesday's U.S. Economic Data
[CNBC] Executives are falling over themselves to buy back stock — just not with their own money
[Bloomberg] Volatility Options Suffer Bloodbath as ProShares Tweaks Funds
[WSJ] Fed’s Powell Says His Economic Outlook Has Improved
[FT] Powell hints at faster pace of rate rises
[FT] Xi Jinping’s bid to stay in power more of a gamble than it seems
[FT] Taiwan and HK fear China’s harder line after Xi Jinping power play
[FT] Anbang arrest demonstrates Beijing’s hostility to business
[Bloomberg] Powell Says Strong Outlook to Prod Fed to Review Rate-Hike Path
[CNBC] Yields started jumping right at this moment when Powell hinted at more rate hikes than expected ahead
[Bloomberg] Fed's Powell Has Bond Traders Pondering Four Rate Hikes in 2018
[Bloomberg] Five Charts to Help You Understand Tuesday's U.S. Economic Data
[CNBC] Executives are falling over themselves to buy back stock — just not with their own money
[Bloomberg] Volatility Options Suffer Bloodbath as ProShares Tweaks Funds
[WSJ] Fed’s Powell Says His Economic Outlook Has Improved
[FT] Powell hints at faster pace of rate rises
[FT] Xi Jinping’s bid to stay in power more of a gamble than it seems
[FT] Taiwan and HK fear China’s harder line after Xi Jinping power play
[FT] Anbang arrest demonstrates Beijing’s hostility to business
Monday, February 26, 2018
Tuesday's News Links
[Bloomberg] Stocks Drop, Treasuries Tumble on Powell Testimony: Markets Wrap
[Bloomberg] Powell Sees Gradual Rate Hikes Amid Strong U.S. Growth Outlook
[CNBC] Fed Chairman Powell: Market volatility won't stop more rate hikes
[CNBC] Home prices surge 6.3% in December amid critical housing shortage
[Bloomberg] U.S. Consumer Confidence Is at 17-Year High
[Bloomberg] Orders for U.S. Business Equipment Unexpectedly Fell in January
[Bloomberg] R-Star Wars Grip Economics as Powell Testifies: Eco Research Wrap
[Bloomberg] ProShares Slashes Leverage on Surviving Volatility Products
[Bloomberg] No, Worst Probably Not Over Yet for S&P 500, These Analysts Say
[Bloomberg] King Cash Threatens the Reign of Credit Markets From U.S. to Europe
[Bloomberg] U.S. Stock ETFs Ride Waves of Inflows as Market Euphoria Returns
[CNBC] Chinese takeover of Waldorf Astoria owner Anbang shows new strategy
[Bloomberg] ECB's Weidmann Insists QE Can End in 2018 Even as Inflation Dips
[Reuters] U.S. threatens action against Iran after Russia U.N. veto
[NYT] After Anbang Takeover, China’s Deal Money, Already Ebbing, Could Slow Further
[WSJ] U.S. Home Prices Continued to Rise at End of 2017
[WSJ] Japanese Shift Away From U.S. Debt Over Budget, Dollar Fears
[WSJ] Blessed by Xi Jinping: The New Captain of China’s Economy
[FT] Italian election: voters frustrated with shallow recovery
[Bloomberg] Powell Sees Gradual Rate Hikes Amid Strong U.S. Growth Outlook
[CNBC] Fed Chairman Powell: Market volatility won't stop more rate hikes
[CNBC] Home prices surge 6.3% in December amid critical housing shortage
[Bloomberg] U.S. Consumer Confidence Is at 17-Year High
[Bloomberg] Orders for U.S. Business Equipment Unexpectedly Fell in January
[Bloomberg] R-Star Wars Grip Economics as Powell Testifies: Eco Research Wrap
[Bloomberg] ProShares Slashes Leverage on Surviving Volatility Products
[Bloomberg] No, Worst Probably Not Over Yet for S&P 500, These Analysts Say
[Bloomberg] King Cash Threatens the Reign of Credit Markets From U.S. to Europe
[Bloomberg] U.S. Stock ETFs Ride Waves of Inflows as Market Euphoria Returns
[CNBC] Chinese takeover of Waldorf Astoria owner Anbang shows new strategy
[Bloomberg] ECB's Weidmann Insists QE Can End in 2018 Even as Inflation Dips
[Reuters] U.S. threatens action against Iran after Russia U.N. veto
[NYT] After Anbang Takeover, China’s Deal Money, Already Ebbing, Could Slow Further
[WSJ] U.S. Home Prices Continued to Rise at End of 2017
[WSJ] Japanese Shift Away From U.S. Debt Over Budget, Dollar Fears
[WSJ] Blessed by Xi Jinping: The New Captain of China’s Economy
[FT] Italian election: voters frustrated with shallow recovery
Monday Evening Links
[Bloomberg] Asia Stocks to Rise as U.S. Gains Before Powell: Markets Wrap
[Bloomberg] Stocks Rally, Bonds Climb With Fed's Powell on Tap: Markets Wrap
[Bloomberg] Oil Jumps to Three-Week High as Advancing Stocks Fan Optimism
[Bloomberg] Powell Heads to Congress With Fed Facing Riskier Post-Yellen World
[CNBC] While everyone else was selling stocks this month, companies were buying heavily
[WSJ] Blessed by Xi Jinping: The New Captain of China’s Economy
[FT] Fed governor raises prospect of faster US growth
[Bloomberg] Stocks Rally, Bonds Climb With Fed's Powell on Tap: Markets Wrap
[Bloomberg] Oil Jumps to Three-Week High as Advancing Stocks Fan Optimism
[Bloomberg] Powell Heads to Congress With Fed Facing Riskier Post-Yellen World
[CNBC] While everyone else was selling stocks this month, companies were buying heavily
[WSJ] Blessed by Xi Jinping: The New Captain of China’s Economy
[FT] Fed governor raises prospect of faster US growth
Sunday, February 25, 2018
Monday's News Links
[Bloomberg] Stocks Climb as Yields Hold Steady; Dollar Falls: Markets Wrap
[Bloomberg] Sales of New Homes in U.S. Fall to Lowest Level Since August
[Bloomberg] Powell Could Put Up With 2.5% Inflation to Keep Growth Pumping
[Reuters] Corporate America’s new dilemma: raising prices to cover higher transport costs
[Axios] Inside the White House trade fights
[Reuters] Surging bond yields to pinch home owners, retirees
[Bloomberg] Draghi Says ECB Needs Stimulus Persistence Amid Stronger Growth
[CNBC] As Xi Jinping tightens his grip on power, 'major risks' loom, experts say
[Bloomberg] Anbang Seizure a Warning to Chinese Conglomerates, Ashurst Says
[Reuters] China launches propaganda push for Xi after social media criticism
[WSJ] New Fed Chairman Jerome Powell to Testify Before Congress on Capitol Hill
[WSJ] Anbang’s Rescue Is China’s Too-Big-to-Fail Moment
[WSJ] Dollar-Rate Breakdown Exposes Foreign-Exchange Mystery
[FT] Private equity buyouts running at fastest rate since crisis
[FT] ‘Neutral rate’ in focus as Jay Powell takes Federal Reserve helm
[FT] Watchdog warns of gaps in US financial regulation
[FT] Power grab strengthens Xi’s influence on China economic reforms
[FT] Xi Jinping sweeps away consensus rule in China
[FT] Quantitative hedge funds take February beating
[Bloomberg] Sales of New Homes in U.S. Fall to Lowest Level Since August
[Bloomberg] Powell Could Put Up With 2.5% Inflation to Keep Growth Pumping
[Reuters] Corporate America’s new dilemma: raising prices to cover higher transport costs
[Axios] Inside the White House trade fights
[Reuters] Surging bond yields to pinch home owners, retirees
[Bloomberg] Draghi Says ECB Needs Stimulus Persistence Amid Stronger Growth
[CNBC] As Xi Jinping tightens his grip on power, 'major risks' loom, experts say
[Bloomberg] Anbang Seizure a Warning to Chinese Conglomerates, Ashurst Says
[Reuters] China launches propaganda push for Xi after social media criticism
[WSJ] New Fed Chairman Jerome Powell to Testify Before Congress on Capitol Hill
[WSJ] Anbang’s Rescue Is China’s Too-Big-to-Fail Moment
[WSJ] Dollar-Rate Breakdown Exposes Foreign-Exchange Mystery
[FT] Private equity buyouts running at fastest rate since crisis
[FT] ‘Neutral rate’ in focus as Jay Powell takes Federal Reserve helm
[FT] Watchdog warns of gaps in US financial regulation
[FT] Power grab strengthens Xi’s influence on China economic reforms
[FT] Xi Jinping sweeps away consensus rule in China
[FT] Quantitative hedge funds take February beating
Sunday Evening Links!
[Bloomberg] Asia Stock Rally Builds as Yen Slips, Bonds Steady: Markets Wrap
[Bloomberg] U.S. Downturn Seen as Clear Risk for Taiwan's New Monetary Chief
[Reuters] Weakened Merkel offers job to arch critic in young new German cabinet
[FT] Xi set to tighten grip on China by scrapping presidential term limit
[Bloomberg] U.S. Downturn Seen as Clear Risk for Taiwan's New Monetary Chief
[Reuters] Weakened Merkel offers job to arch critic in young new German cabinet
[FT] Xi set to tighten grip on China by scrapping presidential term limit
Sunday's News Links
[Reuters] Buffett says 'terrible mistake' for long-term investors to be in bonds
[Reuters] Anbang takeover puts China's companies on notice
[Reuters] China sets stage for Xi to stay in office indefinitely
[WSJ] Investors’ Zeal to Buy Stocks With Debt Leaves Markets Vulnerable
[WSJ] Want to Buy a Luxury Hotel in the U.S.? Try China’s Insurance Regulator
[FT] Trump’s protection plan to keep ‘competitor’ China at bay
[FT] US lawmakers push for crackdown on foreign companies
[FT] All eyes on Jay Powell for Fed policy signals
[Reuters] Anbang takeover puts China's companies on notice
[Reuters] China sets stage for Xi to stay in office indefinitely
[WSJ] Investors’ Zeal to Buy Stocks With Debt Leaves Markets Vulnerable
[WSJ] Want to Buy a Luxury Hotel in the U.S.? Try China’s Insurance Regulator
[FT] Trump’s protection plan to keep ‘competitor’ China at bay
[FT] US lawmakers push for crackdown on foreign companies
[FT] All eyes on Jay Powell for Fed policy signals
Saturday, February 24, 2018
Saturday's News Links
[Reuters] Markets fret over Federal Reserve's approach under new chair Powell
[Reuters] Latvia calls emergency meeting after third-largest bank fails
[Reuters] China's January home prices rise even as top cities register decline
[Bloomberg] Fed's Williams Says He Sees Case for a Rate Hike in the ‘Near Future’
[CNBC] Three charts that show gold is going to $1,400
[Bloomberg] Prime-Age Men May Never Return to U.S. Workforce, Fed Paper Says
[Reuters] U.S. imposes more North Korea sanctions, Trump warns of 'phase two'
[WSJ] Fed’s Crisis-Era, Bond-Buying Plan Was Largely Ineffective, Economists Say
[WSJ] Anbang and the Financialization of China’s Economy
[FT] Latvia: a banking scandal on the Baltic
[Reuters] Latvia calls emergency meeting after third-largest bank fails
[Reuters] China's January home prices rise even as top cities register decline
[Bloomberg] Fed's Williams Says He Sees Case for a Rate Hike in the ‘Near Future’
[CNBC] Three charts that show gold is going to $1,400
[Bloomberg] Prime-Age Men May Never Return to U.S. Workforce, Fed Paper Says
[Reuters] U.S. imposes more North Korea sanctions, Trump warns of 'phase two'
[WSJ] Fed’s Crisis-Era, Bond-Buying Plan Was Largely Ineffective, Economists Say
[WSJ] Anbang and the Financialization of China’s Economy
[FT] Latvia: a banking scandal on the Baltic
Friday, February 23, 2018
Weekly Commentary: Anbang and China's Mortgage Bubble
The Shanghai Composite traded as high as 3,587 intraday on Monday, January 29th, a more than two-year high. This followed the S&P500’s all-time closing high (2,873) on the previous Friday. On February 9th, the Shanghai Composite traded as low as 3,063, a 14.6% decline from trading highs just nine sessions earlier. In U.S. trading on February 9th, the S&P500 posted an intraday low of 2,533, a 10.7% drop from January 26th highs. Based on Friday’s closing prices, the Shanghai Composite had recovered 43% of recent declines and the S&P500 70%.
Global equities markets demonstrated notably strong correlations during the recent selloff. Few markets, however, tracked U.S. trading closer than Chinese shares. From the Bubble analysis perspective, tight market correlations provide confirmation of the global Bubble thesis. It’s also not surprising that Chinese markets were keenly sensitive to the abrupt drop in U.S. stocks. The U.S. and China are dual linchpins to increasingly vulnerable global Bubble Dynamics. Moreover, intensifying fragilities in Chinese Credit – and finance more generally – ensure China is keenly sensitive to any indication of a faltering U.S. Bubble.
February 21 – Bloomberg: “China stopped updating its homegrown version of the VIX Index, taking another step to discourage speculation in equity-linked options after authorities tightened trading restrictions last week. State-run China Securities Index Co. didn’t publish a value for the SSE 50 ETF Volatility Index on its website Thursday. An employee who answered CSI’s inquiry line said the company stopped updating the measure to work on an upgrade. The move was designed to curb activity in the options market, said people familiar with the matter… It’s unclear when the index will resume.”
Derivatives rule the world. Of course, Chinese authorities had few issues with booming options trading when markets were posting gains. Here in the U.S., regulators will supposedly now keep a more watchful eye on VIX-related products. In China, “the VIX goes dark,” as regulators place various restrictions on options trading. It’s not clear to me why international investors at this point would be drawn to Chinese markets. As Bubble fragilities turn more acute, Chinese officials will assume an even more heavy-handed approach.
February 23 – Wall Street Journal (James T. Areddy): “When Anbang Insurance Group Co. paid about $2 billion to buy New York City’s Waldorf Astoria Hotel three years ago, the deal seemed to define an era for China Inc. President Xi Jinping shortly afterward dropped in to stay at the Park Avenue landmark. China’s business priorities have since changed, turning real-estate trophies into symbols of risk. Regulators in Beijing on Friday said they seized control of Anbang to keep the privately held insurer from collapsing, while prosecutors in Shanghai said they indicted Wu Xiaohui, Anbang’s swashbuckling ex-chairman, for alleged fraudulent fundraising and abuse of power. China’s government makes no secret of its penchant to guide commerce, even with private companies, but the boardroom takeover still rattled analysts used to Beijing’s applying its influence more quietly. ‘This is an unprecedented step, putting into receivership a Chinese company in such a public direct way,’ said Scott Kennedy at the… Center for Strategic and International Studies. ‘They are so worried about risks that they will stop at nothing to avoid them.’”
Wu Xiaohui, Anbang’s former chairman, disappeared (was detained) this past June. Married to the granddaughter of Deng Xiaoping, Wu for years operated as if protected by the Chinese establishment. As the WSJ article noted, Chinese President Xi stayed at the Waldorf Astoria hotel shortly after it was purchased by Anbang in 2015. At breakneck speed, Wu built a financial (“insurance”) empire with assets surpassing $300 billion, largely financed through high-yield wealth management/“shadow” deposits. Anbang’s ownership structure was opaque, which didn’t matter so long as Wu was in good graces with Beijing.
How quickly the world changes. Wu has been charged with fraud and embezzlement - “illegal business operations which may seriously endanger the company’s solvency”. It would appear the game of freewheeling – and well-connected – billionaire Chinese dealmakers tapping the shadow “money” spigot to buy prized international real estate assets has come to an end. The immediate impact on global trophy property values is unclear. Yet the government takeover and charges against Wu certainly send a strong message to the Chinese business community. Beijing is exerting control and pursuing President Xi’s priority to rein in financial risks.
February 23 - Bloomberg Gadfly (Nisha Gopalan): “Beijing’s interventions in the economy don't always merit applause, but the government's unprecedented seizure of Anbang Insurance Group Co. deserves a round. Anbang was a toxic threat to China's financial system after a debt-fueled global acquisition spree -- including trophy assets such as New York's Waldorf Astoria hotel -- that was funded by the sale of high-yield insurance policies. Those risky products propelled the company from obscurity into the ranks of the country's biggest insurers in the space of a few years. The government will take temporary control of Anbang for a year starting Friday… Markets reacted calmly to the announcement, underpinning the sense that regulators have acted in time to head off potentially bigger problems down the road.”
Anbang has been considered “too big to fail,” so the government takeover had little general market impact. And I suppose we can applaud Beijing for actions against one of the more conspicuously egregious high-risk financial operators. But in terms of an effect on overall systemic risk, this move barely registers on the risk-o-meter. Analysts have noted that Anbang’s assets have ballooned to a hefty 3% of Chinese GDP. But as a percentage of banking system assets, Anbang is less than 1%. With unrelenting rapid growth in Credit of deteriorating quality, systemic risk continues its parabolic ascent.
February 12 – Reuters (Kevin Yao, Fang Cheng): “China’s banks extended a record 2.9 trillion yuan ($458.3bn) in new yuan loans in January, blowing past expectations and nearly five times the previous month as policymakers aim to sustain solid economic growth while reining in debt risks. While Chinese banks tend to front-load loans early in the year to get higher-quality customers and win market share, the lofty figure was even higher than the most bullish forecast… Net new loans surpassed the previous record of 2.51 trillion yuan in January 2016, which is likely to support growth not only in China but may underpin liquidity globally as major Western central banks begin to withdraw stimulus… Corporate loans surged to 1.78 trillion yuan from 243.2 billion yuan in December, while household loans rose to 901.6 billion yuan in January from 329.4 billion yuan in December…”
The crackdown in shadow finance was surely a factor in January’s record-setting bank lending. The first month of 2018 saw major slowdowns in trust loans, entrusted loans and bankers’ acceptance lending, all key shadow instruments. Overall, Total Social Financing increased $483 billion in January, seasonally the strongest month of lending annually. This was gargantuan Credit growth, but actually 17% below January 2017. And looking at the most recent four-month period, growth in Total Social Financing was actually down 15% from the comparable year ago period.
Notably, household debt jumped $145 billion during January. This was easily a record and 21% above what at the time were record monthly household borrowings back in January 2017. For perspective, Chinese household debt growth averaged about $90 billion monthly in 2017, $80 billion in 2016, $50 billion in 2015 and $40 billion in 2014.
China faces major Credit issues from years of excessive corporate and local government borrowings. Chinese officials have moved somewhat to rein in these sectors. Meanwhile, household debt growth continues to accelerate. Apartment mortgages represent the largest component of China’s household borrowings, and I would argue that the Chinese mortgage finance Bubble is operating in the perilous “Terminal Phase.” It’s worth noting that the trajectory of China household borrowings is similar to mortgage Credit growth during the U.S. Bubble period.
Chinese officials used to claim they had studied and learned lessons from the Japanese Bubble period. They clearly learned little from the U.S. mortgage crisis. To be sure, mortgage Credit is seductive and too easily manipulated by government officials. It appears sound so long as housing prices are inflating. And the greater housing inflation, the greater the growth of self-reinforcing Credit. Risk, while growing exponentially, remains largely hidden.
Mortgage Credit is prone to rapid acceleration, as housing inflation spurs both rising prices and increasing quantities of transactions. Especially during the boom period, mortgage Credit becomes a major – and unrecognized - source of system liquidity, both in the financial system and throughout the real economy. As was certainly the case in the U.S., boom-time mortgage finance spurs consumption excesses along with mal-investment. A prolonged mortgage finance Bubble inflation fosters deep structural maladjustment.
China’s crackdown is no doubt having a major disciplining effect on the Chinese billionaire business community. Meanwhile, the Chinese mortgage and apartment Bubble runs mostly unchecked. Literally hundreds of millions of Chinese aspire to rising wealth and social mobility through the purchase of apartments that only go up in price. Virtually everyone believes Beijing will never tolerate a housing bust. This unwieldy episode of borrowing and speculation will continue to prove quite difficult for Beijing to control. The bust will be brutal.
I understand why Beijing would choose to crackdown on the likes of Anbang, HNA and Wanda. They’re conspicuous risk-takers outside of the core of the banking system (paying top renminbi for international non-essential assets). They can be easily and publicly disciplined, providing a stark warning to the business community without risking a systemic shock. I also assume it is somewhat of an opening act to what will evolve into broadening measures to rein in total system Credit growth and accompanying excesses. Such a strategy makes some sense, except for the reality that mortgage Credit is in the throes of dangerous “Terminal Phase” excess. Household debt expanded 21% in 2017, after 23% growth in 2016. And if January borrowings are any indication, 2018 could see Chinese household debt growth surpassing $1.3 TN, about three times the level from 2015.
Mortgage finance Bubbles don’t function well in reverse. At some point, lending tightens and the marginal buyers lose the capacity to bid up home/apartment prices. In China, a lot of serious problems are being masked by ever-rising apartment prices. It is said that in many markets up to one in four apartments remain vacant, purchased purely to speculate on higher prices. Deflating prices would likely see tens of millions of empty units transferred to lenders. Credit losses will no doubt be enormous, compounded by widespread fraud and shoddy construction.
A case can be made that household debt is rapidly becoming the greatest threat to China’s banking system and economy. They’ve clearly waited much too long to get mortgage Credit under control. At this point, the boom is an expedient to meet GDP targets. A burst apartment Bubble would now pose great systemic risk. Of course, the Beijing meritocracy believes they can adeptly manage through any circumstance. Their dilemma is that this type of Bubble becomes only more perilous over time, though mounting latent risks remain unappreciated. Chinese officials would prefer that new Credit finances productive endeavors. But at this late stage of the cycle, reliance on productive Credit would leave the system with woefully insufficient finance to keep the the Bubble levitated.
In years past, it received a decent amount of attention. Yet few analysts these days even bother to mention the Chinese housing Bubble, despite its historic inflation. The problem didn’t go away; it instead got much bigger than anyone could have imagined. Indeed, Bubble risk has inflated to the point of risking peril for China as well as the world – financially and economically. And while January’s lending data evidenced a boom replete with momentum, I would caution that there may be more near-term risk than is generally perceived.
The shadow banking crackdown will likely have a significant impact on higher-risk lending generally, including mortgage Credit. Moreover, regulators are demanding bankers slow loan growth, this after household lending expanded to a significant proportion of overall system Credit expansion. Total system Credit has already slowed. There are indications of tighter lending conditions and even an incipient slowdown in housing transactions. And let’s not forget rising global yields, one more factor to weigh on inflated Chinese apartment prices. Anbang, HNA and their ilk make for interesting reading, full of nuance and intrigue as Beijing plots a financial crackdown. The real story, however, might be unfolding in Chinese household and mortgage finance.
For the Week:
The S&P500 added 0.6% (up 2.8% y-t-d), and the Dow increased 0.4% (up 2.4%). The Utilities gained 0.6% (down 5.1%). The Banks added 0.4% (up 7.0%), while the Broker/Dealers slipped 0.4% (up 6.4%). The Transports gained 0.7% (down 0.3%). The S&P 400 Midcaps increased 0.2% (up 0.2%), and the small cap Russell 2000 rose 0.4% (up 0.9%). The Nasdaq100 jumped 1.9% (up 7.8%). The Semiconductors advanced 2.5% (up 7.8%). The Biotechs were little changed (up 11.2%). With bullion down $18, the HUI gold index fell 4.5% (down 8.1%).
Three-month Treasury bill rates ended the week at 1.61%. Two-year government yields rose five bps to 2.24% (up 36bps y-t-d). Five-year T-note yields slipped a basis point to 2.62% (up 41bps). Ten-year Treasury yields dipped one basis point to 2.87% (up 46bps). Long bond yields added two bps to 3.16% (up 42bps).
Greek 10-year yields jumped 12 bps to 4.36% (up 28bps y-t-d). Ten-year Portuguese yields gained three bps to 2.04% (up 9bps). Italian 10-year yields rose eight bps to 2.07% (up 5bps). Spain's 10-year yields jumped 14 bps to 1.60% (up 3bps). German bund yields fell five bps to 0.65% (up 23bps). French yields declined two bps to 0.93% (up 15bps). The French to German 10-year bond spread widened three to 28 bps. U.K. 10-year gilt yields fell six bps to 1.52% (up 33bps). U.K.'s FTSE equities index declined 0.7% (down 5.8%).
Japan's Nikkei 225 equities index gained 0.8% (down 3.8% y-t-d). Japanese 10-year "JGB" yields dipped one basis point to 0.05% (up 1bp). France's CAC40 rose 0.7% (up 0.1%). The German DAX equities index increased 0.3% (down 3.4%). Spain's IBEX 35 equities index was little changed (down 2.2%). Italy's FTSE MIB index declined 0.6% (up 3.7%). EM markets were mostly higher. Brazil's Bovespa index surged 3.3% (up 14.3%), while Mexico's Bolsa declined 0.5% (down 1.4%). South Korea's Kospi index rose 1.2% (down 0.6%). India’s Sensex equities index gained 0.4% (up 0.3%). China’s Shanghai Exchange jumped 2.8% (down 0.5%). Turkey's Borsa Istanbul National 100 index gained 0.9% (up 1.9%). Russia's MICEX equities index jumped 3.6% (up 10.8%).
Junk bond mutual funds saw outflows of $335 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates increased two bps to 4.40%, the high going back to April 2014 (up 24bps y-o-y). Fifteen-year rates added a basis point to 3.85% (up 48bps). Five-year hybrid ARM rates gained two bps to 3.65% (up 49bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up 11 bps to 4.66% (up 38bps).
Federal Reserve Credit last week declined $15.9bn to $4.369 TN. Over the past year, Fed Credit contracted $54.5bn, or 1.2%. Fed Credit inflated $1.558 TN, or 55%, over the past 277 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $13.8bn last week to $3.412 TN. "Custody holdings" were up $231bn y-o-y, or 7.3%.
M2 (narrow) "money" supply fell $10.0bn last week to $13.848 TN. "Narrow money" expanded $568bn, or 4.3%, over the past year. For the week, Currency slipped $1.3bn. Total Checkable Deposits dropped $20.9bn, while savings Deposits added $1.3bn. Small Time Deposits increased $1.6bn. Retail Money Funds jumped $9.4bn.
Total money market fund assets gained $15.6bn to $2.844 TN. Money Funds gained $164bn y-o-y, or 6.1%.
Total Commercial Paper contracted $23.1bn to $1.095 TN. CP gained $127bn y-o-y, or 13.2%.
Currency Watch:
The U.S. dollar index recovered 0.9% to 89.883 (down 2.4% y-o-y). For the week on the upside, the South African rand increased 0.3%. For the week on the downside, the Swedish krona declined 2.5%, the New Zealand dollar 1.1%, the Swiss franc 1.0%, the Norwegian krone 0.9%, the euro 0.9%, the Australian dollar 0.8%, the Japanese yen 0.6%, the Singapore dollar 0.6%, the Canadian dollar 0.6%, the British pound 0.4%, the Brazilian real 0.3%, the South Korean won 0.2% and the Mexican peso 0.2%. The Chinese renminbi added 0.07% versus the dollar this week (up 2.67% y-t-d).
Commodities Watch:
February 21 – Bloomberg (Eddie Van Der Walt): “Russia has overtaken China as the fifth-biggest sovereign holder of gold, allowing it to diversify its foreign currency holdings amid a deepening rift with the U.S. The Bank of Russia in January increased its holdings by almost 20 metric tons to 1,857 tons, topping the People’s Bank of China’s reported 1,843 tons. While Russia has increased its holdings every month since March 2015, China last reported buying gold in October 2016.”
The Goldman Sachs Commodities Index jumped 1.8% (up 2.1% y-t-d). Spot Gold declined 1.4% to $1,329 (up 2.0%). Silver fell 1.0% to $16.549 (down 3.5%). Crude rallied $1.87 to $63.55 (up 5%). Gasoline advanced 3.3% (up 1%), and Natural Gas gained 2.6% (down 11%). Copper declined 1.1% (down 2%). Wheat fell 1.5% (up 9%). Corn was little changed (up 7%).
Market Dislocation Watch:
February 23 – Bloomberg (Benjamin Bain and Matt Robinson): “U.S. regulators are scrutinizing this month’s implosion of investments that track stock-market turmoil, including whether wrongdoing contributed to steep losses for VIX exchange-traded products offered by Credit Suisse Group AG and other firms, several people familiar with the matter said. The Securities and Exchange Commission and the Commodity Futures Trading Commission have been conducting a broad review of trading since Feb. 5, when volatility spiked and investors lost billions of dollars, the people said.”
Trump Administration Watch:
February 21 – Wall Street Journal (John F. Cogan): “The federal deficit is big and getting bigger. President Trump’s budget estimates a deficit of nearly $900 billion for 2018 and nearly $1 trillion (with total spending of $4.4 trillion) for 2019. Its balance sheet reveals that the public debt will reach $15.7 trillion by October. This works out to $48,081.61 for every man, woman and child in the U.S. That doesn’t count unfunded liabilities, reported by the Social Security and Medicare Trustees, that are four times the current public debt. How did the federal government’s finances degenerate this far? It didn’t happen overnight. For seven decades, high tax rates and a growing economy have produced record revenue, but not enough to keep pace with Congress’s voracious appetite for spending. Since the end of World War II, federal tax revenue has grown 15% faster than national income—while federal spending has grown 50% faster.”
February 20 – Reuters (Richard Leong): “Some of the U.S. government’s short-term borrowing costs rose to their highest level in more than nine years on Tuesday as the government raised $179 billion in the Treasury securities market to fund spending and make debt payments. Tuesday’s auctions made up more than half of the $258 billion in Treasury debt supply scheduled for sale this week, which is projected to raise nearly $48 billion in new cash for the government.”
February 21 – Reuters (David Lawder): “The U.S. Treasury’s top diplomat ramped up his criticisms of China’s economic policies on Wednesday, accusing Beijing of ‘patently non-market behavior’ and saying that the United States needed stronger responses to counter it. David Malpass, Treasury undersecretary for international affairs, said… that China should no longer be ‘congratulated’ by the world for its progress and policies. ‘They went to Davos a year ago and said ‘We’re into trade,’ when in reality what they’re doing is perpetuating a system that worked for their benefit but ended up costing jobs in most of the rest of the world,’ Malpass said…”
February 17 – Bloomberg: “China said proposed U.S. tariffs on imported steel and aluminum products are groundless and that it reserves the right to retaliate if they are imposed. The U.S. recommendations, unveiled by the Commerce Department on Friday, aren’t consistent with the facts, Wang Hejun, chief of the trade remedy and investigation bureau at China’s Ministry of Commerce, said…”
February 20 – Financial Times (Barney Jopson): “The Trump administration is proposing to recast a central pillar of post-crisis financial regulation with a new ‘Chapter 14’ bankruptcy process designed to eliminate the risk that taxpayers will have to pick up the cost of a bank failure. The Treasury, which was ordered to examine the area by President Donald Trump in April, on Wednesday took aim at the ‘orderly liquidation’ regime established to deal with collapsing lenders. Both Wall Street and overseas regulators have warned the administration over the dangers of dismantling the system but the Treasury said it wanted to narrow its use so it could serve only as a last resort.”
U.S. Bubble Watch:
February 18 – Bloomberg (Chris Anstey): “An historic expansion in U.S. borrowing during a period of economic growth, alongside rising bond yields, will cause a surge in the cost of servicing American debt, according to Goldman Sachs… ‘Federal fiscal policy is entering uncharted territory,’ Goldman analysts including Alec Phillips in Washington wrote… ‘In the past, as the economy strengthens and the debt burden increases, Congress has responded by raising taxes and cutting spending. This time around, the opposite has occurred.’”
February 20 – Wall Street Journal (Heather Gillers): “Public pension funds that lost hundreds of billions during the last financial crisis still face significant risk from one basic investment: stocks. That vulnerability came into focus earlier this month as markets descended into correction territory for the first time since February 2016. The California Public Employees’ Retirement System, the largest public pension fund in the U.S., lost $18.5 billion in value over a 10-day trading period ended Feb. 9… The sudden drop represented 5% of total assets held by the pension fund, which had roughly half of its portfolio in equities as of late 2017… By the end of 2017, equities had surged to an average 53.6% of public pension portfolios from 50.3% one year earlier… Those average holdings were the highest on a percentage basis since 2010…, and near the 54.6% average these funds held at the end of 2007.”
February 20 – Bloomberg (Chris Anstey): “The U.S. stock market only had a taste of the potential damage from higher bond yields earlier this year, with the biggest test yet to come, according to Morgan Stanley. ‘Appetizer, not the main course,’ is how the bank’s strategists led by… Andrew Sheets described the correction of late January to early February. Although higher bond yields proved tough for equity investors to digest, the key metric of inflation-adjusted yields didn’t break out of their range for the past five years, they said in a note…”
February 21 – CNBC (Diana Olick): “The sharp drop in January home sales was not due to a shortage of homes for sale. It was due to a shortage of affordable homes for sale. While real estate economists continue to blame the pitiful 3.4-month supply of total listings (a six-month supply is considered a balanced market), a better indicator is a chart on the second-to-last page of the National Association of Realtors' monthly sales report… Sales of homes priced below $100,000 fell 13% in January year over year. Sales of homes priced between $100,000 and $250,000 dropped just more than 2%. The share of first-time buyers also declined to 29%, compared with 33% a year ago.”
February 16 – Wall Street Journal (Liz Hoffman, Christina Rexrode and Aaron Lucchetti): “Wall Street CEOs are getting paid the big bucks again. Goldman Sachs… and Citigroup Inc. said Friday that they gave their CEOs raises for 2017, meaning all five large U.S. banks with significant trading and investment-banking operations have done so. The chief executives of the banks, which include JPMorgan…, Bank of America Corp., and Morgan Stanley, were paid on average $25.3 million for their work last year, up 17% from 2016... For the group as a whole, combined total compensation of about $126 million is the highest annual tally since before the financial crisis. The gains mark the fifth consecutive year in which pay rose for Wall Street’s top CEOs.”
Federal Reserve Watch:
February 21 – New York Times (Binyamin Appelbaum): “Robust economic growth has increased the confidence of Federal Reserve officials that the economy is ready for higher interest rates, according to an official account of the central bank’s most recent policymaking meeting in late January… The account said Fed officials have upgraded their economic outlooks since the beginning of the year and listed three main reasons: The strength of recent economic data, accommodative financial conditions and the expected impact of the $1.5 trillion tax cut that took effect in January. ‘The effects of recently enacted tax changes — while still uncertain — might be somewhat larger in the near term than previously thought,’ said the meeting account…”
Global equities markets demonstrated notably strong correlations during the recent selloff. Few markets, however, tracked U.S. trading closer than Chinese shares. From the Bubble analysis perspective, tight market correlations provide confirmation of the global Bubble thesis. It’s also not surprising that Chinese markets were keenly sensitive to the abrupt drop in U.S. stocks. The U.S. and China are dual linchpins to increasingly vulnerable global Bubble Dynamics. Moreover, intensifying fragilities in Chinese Credit – and finance more generally – ensure China is keenly sensitive to any indication of a faltering U.S. Bubble.
February 21 – Bloomberg: “China stopped updating its homegrown version of the VIX Index, taking another step to discourage speculation in equity-linked options after authorities tightened trading restrictions last week. State-run China Securities Index Co. didn’t publish a value for the SSE 50 ETF Volatility Index on its website Thursday. An employee who answered CSI’s inquiry line said the company stopped updating the measure to work on an upgrade. The move was designed to curb activity in the options market, said people familiar with the matter… It’s unclear when the index will resume.”
Derivatives rule the world. Of course, Chinese authorities had few issues with booming options trading when markets were posting gains. Here in the U.S., regulators will supposedly now keep a more watchful eye on VIX-related products. In China, “the VIX goes dark,” as regulators place various restrictions on options trading. It’s not clear to me why international investors at this point would be drawn to Chinese markets. As Bubble fragilities turn more acute, Chinese officials will assume an even more heavy-handed approach.
February 23 – Wall Street Journal (James T. Areddy): “When Anbang Insurance Group Co. paid about $2 billion to buy New York City’s Waldorf Astoria Hotel three years ago, the deal seemed to define an era for China Inc. President Xi Jinping shortly afterward dropped in to stay at the Park Avenue landmark. China’s business priorities have since changed, turning real-estate trophies into symbols of risk. Regulators in Beijing on Friday said they seized control of Anbang to keep the privately held insurer from collapsing, while prosecutors in Shanghai said they indicted Wu Xiaohui, Anbang’s swashbuckling ex-chairman, for alleged fraudulent fundraising and abuse of power. China’s government makes no secret of its penchant to guide commerce, even with private companies, but the boardroom takeover still rattled analysts used to Beijing’s applying its influence more quietly. ‘This is an unprecedented step, putting into receivership a Chinese company in such a public direct way,’ said Scott Kennedy at the… Center for Strategic and International Studies. ‘They are so worried about risks that they will stop at nothing to avoid them.’”
Wu Xiaohui, Anbang’s former chairman, disappeared (was detained) this past June. Married to the granddaughter of Deng Xiaoping, Wu for years operated as if protected by the Chinese establishment. As the WSJ article noted, Chinese President Xi stayed at the Waldorf Astoria hotel shortly after it was purchased by Anbang in 2015. At breakneck speed, Wu built a financial (“insurance”) empire with assets surpassing $300 billion, largely financed through high-yield wealth management/“shadow” deposits. Anbang’s ownership structure was opaque, which didn’t matter so long as Wu was in good graces with Beijing.
How quickly the world changes. Wu has been charged with fraud and embezzlement - “illegal business operations which may seriously endanger the company’s solvency”. It would appear the game of freewheeling – and well-connected – billionaire Chinese dealmakers tapping the shadow “money” spigot to buy prized international real estate assets has come to an end. The immediate impact on global trophy property values is unclear. Yet the government takeover and charges against Wu certainly send a strong message to the Chinese business community. Beijing is exerting control and pursuing President Xi’s priority to rein in financial risks.
February 23 - Bloomberg Gadfly (Nisha Gopalan): “Beijing’s interventions in the economy don't always merit applause, but the government's unprecedented seizure of Anbang Insurance Group Co. deserves a round. Anbang was a toxic threat to China's financial system after a debt-fueled global acquisition spree -- including trophy assets such as New York's Waldorf Astoria hotel -- that was funded by the sale of high-yield insurance policies. Those risky products propelled the company from obscurity into the ranks of the country's biggest insurers in the space of a few years. The government will take temporary control of Anbang for a year starting Friday… Markets reacted calmly to the announcement, underpinning the sense that regulators have acted in time to head off potentially bigger problems down the road.”
Anbang has been considered “too big to fail,” so the government takeover had little general market impact. And I suppose we can applaud Beijing for actions against one of the more conspicuously egregious high-risk financial operators. But in terms of an effect on overall systemic risk, this move barely registers on the risk-o-meter. Analysts have noted that Anbang’s assets have ballooned to a hefty 3% of Chinese GDP. But as a percentage of banking system assets, Anbang is less than 1%. With unrelenting rapid growth in Credit of deteriorating quality, systemic risk continues its parabolic ascent.
February 12 – Reuters (Kevin Yao, Fang Cheng): “China’s banks extended a record 2.9 trillion yuan ($458.3bn) in new yuan loans in January, blowing past expectations and nearly five times the previous month as policymakers aim to sustain solid economic growth while reining in debt risks. While Chinese banks tend to front-load loans early in the year to get higher-quality customers and win market share, the lofty figure was even higher than the most bullish forecast… Net new loans surpassed the previous record of 2.51 trillion yuan in January 2016, which is likely to support growth not only in China but may underpin liquidity globally as major Western central banks begin to withdraw stimulus… Corporate loans surged to 1.78 trillion yuan from 243.2 billion yuan in December, while household loans rose to 901.6 billion yuan in January from 329.4 billion yuan in December…”
The crackdown in shadow finance was surely a factor in January’s record-setting bank lending. The first month of 2018 saw major slowdowns in trust loans, entrusted loans and bankers’ acceptance lending, all key shadow instruments. Overall, Total Social Financing increased $483 billion in January, seasonally the strongest month of lending annually. This was gargantuan Credit growth, but actually 17% below January 2017. And looking at the most recent four-month period, growth in Total Social Financing was actually down 15% from the comparable year ago period.
Notably, household debt jumped $145 billion during January. This was easily a record and 21% above what at the time were record monthly household borrowings back in January 2017. For perspective, Chinese household debt growth averaged about $90 billion monthly in 2017, $80 billion in 2016, $50 billion in 2015 and $40 billion in 2014.
China faces major Credit issues from years of excessive corporate and local government borrowings. Chinese officials have moved somewhat to rein in these sectors. Meanwhile, household debt growth continues to accelerate. Apartment mortgages represent the largest component of China’s household borrowings, and I would argue that the Chinese mortgage finance Bubble is operating in the perilous “Terminal Phase.” It’s worth noting that the trajectory of China household borrowings is similar to mortgage Credit growth during the U.S. Bubble period.
Chinese officials used to claim they had studied and learned lessons from the Japanese Bubble period. They clearly learned little from the U.S. mortgage crisis. To be sure, mortgage Credit is seductive and too easily manipulated by government officials. It appears sound so long as housing prices are inflating. And the greater housing inflation, the greater the growth of self-reinforcing Credit. Risk, while growing exponentially, remains largely hidden.
Mortgage Credit is prone to rapid acceleration, as housing inflation spurs both rising prices and increasing quantities of transactions. Especially during the boom period, mortgage Credit becomes a major – and unrecognized - source of system liquidity, both in the financial system and throughout the real economy. As was certainly the case in the U.S., boom-time mortgage finance spurs consumption excesses along with mal-investment. A prolonged mortgage finance Bubble inflation fosters deep structural maladjustment.
China’s crackdown is no doubt having a major disciplining effect on the Chinese billionaire business community. Meanwhile, the Chinese mortgage and apartment Bubble runs mostly unchecked. Literally hundreds of millions of Chinese aspire to rising wealth and social mobility through the purchase of apartments that only go up in price. Virtually everyone believes Beijing will never tolerate a housing bust. This unwieldy episode of borrowing and speculation will continue to prove quite difficult for Beijing to control. The bust will be brutal.
I understand why Beijing would choose to crackdown on the likes of Anbang, HNA and Wanda. They’re conspicuous risk-takers outside of the core of the banking system (paying top renminbi for international non-essential assets). They can be easily and publicly disciplined, providing a stark warning to the business community without risking a systemic shock. I also assume it is somewhat of an opening act to what will evolve into broadening measures to rein in total system Credit growth and accompanying excesses. Such a strategy makes some sense, except for the reality that mortgage Credit is in the throes of dangerous “Terminal Phase” excess. Household debt expanded 21% in 2017, after 23% growth in 2016. And if January borrowings are any indication, 2018 could see Chinese household debt growth surpassing $1.3 TN, about three times the level from 2015.
Mortgage finance Bubbles don’t function well in reverse. At some point, lending tightens and the marginal buyers lose the capacity to bid up home/apartment prices. In China, a lot of serious problems are being masked by ever-rising apartment prices. It is said that in many markets up to one in four apartments remain vacant, purchased purely to speculate on higher prices. Deflating prices would likely see tens of millions of empty units transferred to lenders. Credit losses will no doubt be enormous, compounded by widespread fraud and shoddy construction.
A case can be made that household debt is rapidly becoming the greatest threat to China’s banking system and economy. They’ve clearly waited much too long to get mortgage Credit under control. At this point, the boom is an expedient to meet GDP targets. A burst apartment Bubble would now pose great systemic risk. Of course, the Beijing meritocracy believes they can adeptly manage through any circumstance. Their dilemma is that this type of Bubble becomes only more perilous over time, though mounting latent risks remain unappreciated. Chinese officials would prefer that new Credit finances productive endeavors. But at this late stage of the cycle, reliance on productive Credit would leave the system with woefully insufficient finance to keep the the Bubble levitated.
In years past, it received a decent amount of attention. Yet few analysts these days even bother to mention the Chinese housing Bubble, despite its historic inflation. The problem didn’t go away; it instead got much bigger than anyone could have imagined. Indeed, Bubble risk has inflated to the point of risking peril for China as well as the world – financially and economically. And while January’s lending data evidenced a boom replete with momentum, I would caution that there may be more near-term risk than is generally perceived.
The shadow banking crackdown will likely have a significant impact on higher-risk lending generally, including mortgage Credit. Moreover, regulators are demanding bankers slow loan growth, this after household lending expanded to a significant proportion of overall system Credit expansion. Total system Credit has already slowed. There are indications of tighter lending conditions and even an incipient slowdown in housing transactions. And let’s not forget rising global yields, one more factor to weigh on inflated Chinese apartment prices. Anbang, HNA and their ilk make for interesting reading, full of nuance and intrigue as Beijing plots a financial crackdown. The real story, however, might be unfolding in Chinese household and mortgage finance.
For the Week:
The S&P500 added 0.6% (up 2.8% y-t-d), and the Dow increased 0.4% (up 2.4%). The Utilities gained 0.6% (down 5.1%). The Banks added 0.4% (up 7.0%), while the Broker/Dealers slipped 0.4% (up 6.4%). The Transports gained 0.7% (down 0.3%). The S&P 400 Midcaps increased 0.2% (up 0.2%), and the small cap Russell 2000 rose 0.4% (up 0.9%). The Nasdaq100 jumped 1.9% (up 7.8%). The Semiconductors advanced 2.5% (up 7.8%). The Biotechs were little changed (up 11.2%). With bullion down $18, the HUI gold index fell 4.5% (down 8.1%).
Three-month Treasury bill rates ended the week at 1.61%. Two-year government yields rose five bps to 2.24% (up 36bps y-t-d). Five-year T-note yields slipped a basis point to 2.62% (up 41bps). Ten-year Treasury yields dipped one basis point to 2.87% (up 46bps). Long bond yields added two bps to 3.16% (up 42bps).
Greek 10-year yields jumped 12 bps to 4.36% (up 28bps y-t-d). Ten-year Portuguese yields gained three bps to 2.04% (up 9bps). Italian 10-year yields rose eight bps to 2.07% (up 5bps). Spain's 10-year yields jumped 14 bps to 1.60% (up 3bps). German bund yields fell five bps to 0.65% (up 23bps). French yields declined two bps to 0.93% (up 15bps). The French to German 10-year bond spread widened three to 28 bps. U.K. 10-year gilt yields fell six bps to 1.52% (up 33bps). U.K.'s FTSE equities index declined 0.7% (down 5.8%).
Japan's Nikkei 225 equities index gained 0.8% (down 3.8% y-t-d). Japanese 10-year "JGB" yields dipped one basis point to 0.05% (up 1bp). France's CAC40 rose 0.7% (up 0.1%). The German DAX equities index increased 0.3% (down 3.4%). Spain's IBEX 35 equities index was little changed (down 2.2%). Italy's FTSE MIB index declined 0.6% (up 3.7%). EM markets were mostly higher. Brazil's Bovespa index surged 3.3% (up 14.3%), while Mexico's Bolsa declined 0.5% (down 1.4%). South Korea's Kospi index rose 1.2% (down 0.6%). India’s Sensex equities index gained 0.4% (up 0.3%). China’s Shanghai Exchange jumped 2.8% (down 0.5%). Turkey's Borsa Istanbul National 100 index gained 0.9% (up 1.9%). Russia's MICEX equities index jumped 3.6% (up 10.8%).
Junk bond mutual funds saw outflows of $335 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates increased two bps to 4.40%, the high going back to April 2014 (up 24bps y-o-y). Fifteen-year rates added a basis point to 3.85% (up 48bps). Five-year hybrid ARM rates gained two bps to 3.65% (up 49bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up 11 bps to 4.66% (up 38bps).
Federal Reserve Credit last week declined $15.9bn to $4.369 TN. Over the past year, Fed Credit contracted $54.5bn, or 1.2%. Fed Credit inflated $1.558 TN, or 55%, over the past 277 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $13.8bn last week to $3.412 TN. "Custody holdings" were up $231bn y-o-y, or 7.3%.
M2 (narrow) "money" supply fell $10.0bn last week to $13.848 TN. "Narrow money" expanded $568bn, or 4.3%, over the past year. For the week, Currency slipped $1.3bn. Total Checkable Deposits dropped $20.9bn, while savings Deposits added $1.3bn. Small Time Deposits increased $1.6bn. Retail Money Funds jumped $9.4bn.
Total money market fund assets gained $15.6bn to $2.844 TN. Money Funds gained $164bn y-o-y, or 6.1%.
Total Commercial Paper contracted $23.1bn to $1.095 TN. CP gained $127bn y-o-y, or 13.2%.
Currency Watch:
The U.S. dollar index recovered 0.9% to 89.883 (down 2.4% y-o-y). For the week on the upside, the South African rand increased 0.3%. For the week on the downside, the Swedish krona declined 2.5%, the New Zealand dollar 1.1%, the Swiss franc 1.0%, the Norwegian krone 0.9%, the euro 0.9%, the Australian dollar 0.8%, the Japanese yen 0.6%, the Singapore dollar 0.6%, the Canadian dollar 0.6%, the British pound 0.4%, the Brazilian real 0.3%, the South Korean won 0.2% and the Mexican peso 0.2%. The Chinese renminbi added 0.07% versus the dollar this week (up 2.67% y-t-d).
Commodities Watch:
February 21 – Bloomberg (Eddie Van Der Walt): “Russia has overtaken China as the fifth-biggest sovereign holder of gold, allowing it to diversify its foreign currency holdings amid a deepening rift with the U.S. The Bank of Russia in January increased its holdings by almost 20 metric tons to 1,857 tons, topping the People’s Bank of China’s reported 1,843 tons. While Russia has increased its holdings every month since March 2015, China last reported buying gold in October 2016.”
The Goldman Sachs Commodities Index jumped 1.8% (up 2.1% y-t-d). Spot Gold declined 1.4% to $1,329 (up 2.0%). Silver fell 1.0% to $16.549 (down 3.5%). Crude rallied $1.87 to $63.55 (up 5%). Gasoline advanced 3.3% (up 1%), and Natural Gas gained 2.6% (down 11%). Copper declined 1.1% (down 2%). Wheat fell 1.5% (up 9%). Corn was little changed (up 7%).
Market Dislocation Watch:
February 23 – Bloomberg (Benjamin Bain and Matt Robinson): “U.S. regulators are scrutinizing this month’s implosion of investments that track stock-market turmoil, including whether wrongdoing contributed to steep losses for VIX exchange-traded products offered by Credit Suisse Group AG and other firms, several people familiar with the matter said. The Securities and Exchange Commission and the Commodity Futures Trading Commission have been conducting a broad review of trading since Feb. 5, when volatility spiked and investors lost billions of dollars, the people said.”
Trump Administration Watch:
February 21 – Wall Street Journal (John F. Cogan): “The federal deficit is big and getting bigger. President Trump’s budget estimates a deficit of nearly $900 billion for 2018 and nearly $1 trillion (with total spending of $4.4 trillion) for 2019. Its balance sheet reveals that the public debt will reach $15.7 trillion by October. This works out to $48,081.61 for every man, woman and child in the U.S. That doesn’t count unfunded liabilities, reported by the Social Security and Medicare Trustees, that are four times the current public debt. How did the federal government’s finances degenerate this far? It didn’t happen overnight. For seven decades, high tax rates and a growing economy have produced record revenue, but not enough to keep pace with Congress’s voracious appetite for spending. Since the end of World War II, federal tax revenue has grown 15% faster than national income—while federal spending has grown 50% faster.”
February 20 – Reuters (Richard Leong): “Some of the U.S. government’s short-term borrowing costs rose to their highest level in more than nine years on Tuesday as the government raised $179 billion in the Treasury securities market to fund spending and make debt payments. Tuesday’s auctions made up more than half of the $258 billion in Treasury debt supply scheduled for sale this week, which is projected to raise nearly $48 billion in new cash for the government.”
February 21 – Reuters (David Lawder): “The U.S. Treasury’s top diplomat ramped up his criticisms of China’s economic policies on Wednesday, accusing Beijing of ‘patently non-market behavior’ and saying that the United States needed stronger responses to counter it. David Malpass, Treasury undersecretary for international affairs, said… that China should no longer be ‘congratulated’ by the world for its progress and policies. ‘They went to Davos a year ago and said ‘We’re into trade,’ when in reality what they’re doing is perpetuating a system that worked for their benefit but ended up costing jobs in most of the rest of the world,’ Malpass said…”
February 17 – Bloomberg: “China said proposed U.S. tariffs on imported steel and aluminum products are groundless and that it reserves the right to retaliate if they are imposed. The U.S. recommendations, unveiled by the Commerce Department on Friday, aren’t consistent with the facts, Wang Hejun, chief of the trade remedy and investigation bureau at China’s Ministry of Commerce, said…”
February 20 – Financial Times (Barney Jopson): “The Trump administration is proposing to recast a central pillar of post-crisis financial regulation with a new ‘Chapter 14’ bankruptcy process designed to eliminate the risk that taxpayers will have to pick up the cost of a bank failure. The Treasury, which was ordered to examine the area by President Donald Trump in April, on Wednesday took aim at the ‘orderly liquidation’ regime established to deal with collapsing lenders. Both Wall Street and overseas regulators have warned the administration over the dangers of dismantling the system but the Treasury said it wanted to narrow its use so it could serve only as a last resort.”
U.S. Bubble Watch:
February 18 – Bloomberg (Chris Anstey): “An historic expansion in U.S. borrowing during a period of economic growth, alongside rising bond yields, will cause a surge in the cost of servicing American debt, according to Goldman Sachs… ‘Federal fiscal policy is entering uncharted territory,’ Goldman analysts including Alec Phillips in Washington wrote… ‘In the past, as the economy strengthens and the debt burden increases, Congress has responded by raising taxes and cutting spending. This time around, the opposite has occurred.’”
February 20 – Wall Street Journal (Heather Gillers): “Public pension funds that lost hundreds of billions during the last financial crisis still face significant risk from one basic investment: stocks. That vulnerability came into focus earlier this month as markets descended into correction territory for the first time since February 2016. The California Public Employees’ Retirement System, the largest public pension fund in the U.S., lost $18.5 billion in value over a 10-day trading period ended Feb. 9… The sudden drop represented 5% of total assets held by the pension fund, which had roughly half of its portfolio in equities as of late 2017… By the end of 2017, equities had surged to an average 53.6% of public pension portfolios from 50.3% one year earlier… Those average holdings were the highest on a percentage basis since 2010…, and near the 54.6% average these funds held at the end of 2007.”
February 20 – Bloomberg (Chris Anstey): “The U.S. stock market only had a taste of the potential damage from higher bond yields earlier this year, with the biggest test yet to come, according to Morgan Stanley. ‘Appetizer, not the main course,’ is how the bank’s strategists led by… Andrew Sheets described the correction of late January to early February. Although higher bond yields proved tough for equity investors to digest, the key metric of inflation-adjusted yields didn’t break out of their range for the past five years, they said in a note…”
February 21 – CNBC (Diana Olick): “The sharp drop in January home sales was not due to a shortage of homes for sale. It was due to a shortage of affordable homes for sale. While real estate economists continue to blame the pitiful 3.4-month supply of total listings (a six-month supply is considered a balanced market), a better indicator is a chart on the second-to-last page of the National Association of Realtors' monthly sales report… Sales of homes priced below $100,000 fell 13% in January year over year. Sales of homes priced between $100,000 and $250,000 dropped just more than 2%. The share of first-time buyers also declined to 29%, compared with 33% a year ago.”
February 16 – Wall Street Journal (Liz Hoffman, Christina Rexrode and Aaron Lucchetti): “Wall Street CEOs are getting paid the big bucks again. Goldman Sachs… and Citigroup Inc. said Friday that they gave their CEOs raises for 2017, meaning all five large U.S. banks with significant trading and investment-banking operations have done so. The chief executives of the banks, which include JPMorgan…, Bank of America Corp., and Morgan Stanley, were paid on average $25.3 million for their work last year, up 17% from 2016... For the group as a whole, combined total compensation of about $126 million is the highest annual tally since before the financial crisis. The gains mark the fifth consecutive year in which pay rose for Wall Street’s top CEOs.”
Federal Reserve Watch:
February 21 – New York Times (Binyamin Appelbaum): “Robust economic growth has increased the confidence of Federal Reserve officials that the economy is ready for higher interest rates, according to an official account of the central bank’s most recent policymaking meeting in late January… The account said Fed officials have upgraded their economic outlooks since the beginning of the year and listed three main reasons: The strength of recent economic data, accommodative financial conditions and the expected impact of the $1.5 trillion tax cut that took effect in January. ‘The effects of recently enacted tax changes — while still uncertain — might be somewhat larger in the near term than previously thought,’ said the meeting account…”
February 21 – Bloomberg (Craig Torres): “U.S. central bankers sent a strong message Wednesday that an expansion with ‘substantial underlying economic momentum’ could sustain additional increases in interest rates this year. Federal Reserve officials ‘anticipated that the rate of economic growth in 2018 would exceed their estimates of its sustainable longer-run pace and that labor market conditions would strengthen further,’ the minutes of their Jan. 30-31 meeting… showed. A number of participants ‘indicated that they had marked up their forecasts for economic growth in the near term relative to those made for the December meeting.’ Their collective position on inflation, meanwhile, remained one of cautious optimism that it will move toward their 2% target in the medium term.”
February 21 – Reuters (Ann Saphir): “Philadelphia Federal Reserve Bank President Patrick Harker… said he still thinks just two interest-rate hikes this year is ‘likely appropriate,’ but signaled he is open to more if needed. ‘Based on the relatively strong economy, but the continued stubbornness of inflation, I’ve penciled in two hikes for 2018,’ Harker said… ‘I use pencil because the data can change, and sometimes they don’t accurately point to future events.’”
China Watch:
February 20 – Financial Times (John Gapper): “When Ant Financial, the payments affiliate of the internet group Alibaba, goes public, its potential $120bn valuation could exceed that of Goldman Sachs. Alipay, Ant’s mobile payments platform with 520m users, is innovative as well as valuable, having devised a new method of credit rating. Sesame Credit, Alipay’s alternative to traditional credit scores such as Fico in the US and Schufa in Germany, is intriguing. It broadens access to loans in a developing market by monitoring people’s buying habits and social circles as well as their credit records. But it is also troubling, as China has recognised. The central bank is getting cold feet about the ‘social credit’ ratings schemes adopted by Alibaba and its competitors. The bank this month told Tencent to stop a national rollout of its rival to Sesame Credit after having encouraged such efforts in 2015.”
February 20 – Bloomberg (Lianting Tu): “While there’s no indication that China’s embattled HNA Group Co. is facing such financial difficulties that a default is in the offing, some market participants are starting to game plan scenarios, and a variety of takes have emerged. The amount of dollar bonds outstanding for the conglomerate and its units -- at $13.7 billion, it accounts for more than 1% of Asian high-yield bonds outside of Japan -- raises the question of the impact on the broader market. Many see little wider impact in the event of a default, though the case of a default by China’s Kaisa Group Holdings Ltd. three years ago, when Asian dollar junk bond premiums widened considerably, serves as a warning.”
Central Bank Watch:
February 22 – Financial Times (Claire Jones): “The extent of European officials’ concerns over the weakness of the dollar was laid bare on Thursday in a set of European Central Bank accounts that highlighted fears that the US administration was deliberately trying to engage in currency wars. The accounts of the ECB’s January monetary policy vote also reveal that the governing council’s hawks pushed for a change in the bank’s communications, saying economic conditions were now strong enough to drop a commitment to boost the quantitative easing programme in the event of a slowdown.”
February 22 – Bloomberg (Jana Randow, Piotr Skolimowski, and Alessandro Speciale): “The European Central Bank got its communication largely back under control on the third anniversary of the publication of its policy accounts. Aside from a brief spike, the euro stayed relatively calm after the summary of January’s Governing Council meeting was released… That’s in contrast to the report on December’s session, which rocked currency and bond markets when it suggested that officials might move faster than expected toward reining in stimulus. That outcome should be a relief for President Mario Draghi. He’s shown a reluctance to allow too much discussion of potential policy changes in recent meetings, according to people familiar with the matter who asked not to be identified. The general concern is that any sign of a looming shift in stance could stoke market volatility and undermine the ECB’s stimulus plans.”
February 21 – Bloomberg (David Goodman): “Mark Carney said the U.K. is headed for higher interest rates, but policy makers are reluctant to give clearer guidance on the timing of any future increase. In testimony to Parliament’s Treasury Committee…, the Bank of England governor stuck to the script from the Inflation Report released earlier this month, reiterating that the Monetary Policy Committee considers that rates will need to rise somewhat earlier and to a somewhat greater extent than previously anticipated.”
February 19 – Reuters (Jan Strupczewski and Francesco Guarascio): “Euro zone finance ministers… chose Spanish Economy Minister Luis de Guindos to succeed European Central Bank Vice President Vitor Constancio in May, a move likely to boost the chances of a German becoming head of the ECB next year. The choice of a Southern European for vice president increases the likelihood that a northerner such as German Bundesbank governor Jens Weidmann could be elected to replace Mario Draghi as head of the ECB in 2019. This could influence the bank’s ultra-loose monetary policy for the 19-country common currency area.”
February 21 – Bloomberg (Alessandro Speciale): “European Central Bank policy makers will get their first chance on Wednesday to hear directly on the outsized crisis emanating from one of their smallest member states. Latvia -- 0.2% of the euro-area economy and 0.6% of the bloc’s population -- is the week’s hot topic as ECB President Mario Draghi chairs one of the Governing Council’s regular meetings in Frankfurt. The detention on bribery allegations of the nation’s central-bank governor, Ilmars Rimsevics, isn’t on the formal agenda… But it’s guaranteed to be a talking point, at least over dinner.”
Global Bubble Watch:
February 22 – Financial Times (Kate Allen and Chris Giles): “Developed nations face a rising tide of government debt that poses ‘a significant challenge’ to budgets as interest rates increase around the world, the OECD has warned. Low interest rates have helped sustain high levels of government debt and persistent budget deficits since the financial crisis, according to the OECD, but the ‘relatively favourable’ sovereign funding environment ‘may not be a permanent feature of financial markets’. Fatos Koc, senior policy analyst at the OECD, cautioned that most members of the organization… confront an ‘increasing refinancing burden from maturing debt, combined with continued budget deficits’… The total stock of OECD countries’ sovereign debt has increased from $25tn in 2008 to more than $45tn this year.”
February 19 – Wall Street Journal (William Wilkes): “One morning last September, Dwayne Elgin unbolted the front door of his home on the island of St. Martin and gazed upon a wasteland of flipped cars, uprooted trees and flattened homes. Irma, the strongest Atlantic hurricane on record, had laid waste to the Caribbean island overnight, and as head of Nagico Insurances, a local insurance firm, Mr. Elgin knew almost all of his policyholders would turn to him for help. But he was prepared: Like many insurers, he had unloaded a large portion of firm’s risk to reinsurers, the industry’s last line of defense. Irma and an extraordinary string of other natural disasters in 2017 saddled insurers and reinsurers globally with more than $135 billion in losses, according to Munich Re ’s 2017 Natural Catastrophe Report.”
February 22 – CNBC (Sara Salinas): “Global smartphone sales fell by 5.6% in the fourth quarter of 2017 — the industry's first decline since 2004, according to a study from research firm Gartner. Chinese smartphone makers Huawei and Xiaomi were the only vendors in the top five to experience year-over-year growth in the quarter, respectively by 7.6% and 79%. ‘Upgrades from feature phones to smartphones have slowed down due to a lack of quality 'ultra-low-cost' smartphones and users preferring to buy quality feature phones,’ said Anshul Gupta, research director at Gartner. ‘Replacement smartphone users are choosing quality models and keeping them longer.’”
February 18 – Bloomberg (Jake Lloyd-Smith): “Noble Group Ltd., the commodity trader battling to survive, warned that it’ll report another vast loss including from the operations meant to sustain a revamped business, and while it signaled progress in debt-restructuring talks, hurdles to a deal remain. The Hong Kong-based company will report a net loss of $1.73 billion to $1.93 billion for the final quarter of last year, potentially bringing losses for 2017 to almost $5 billion…”
Fixed-Income Bubble Watch:'
February 22 – Bloomberg (Brian Chappatta): “The U.S. Treasury’s $29 billion auction of seven-year notes drew the highest yield for securities at that tenor since 2011, capping a $258 billion flood of debt sales over three days. As with the week’s other note offerings, there was a dip in the amount of bids relative to the amount sold, signaling weaker demand. With the Treasury ramping up borrowing as part of its plan to finance widening budget deficits, the auction was $1 billion larger than it was last month and the bid-to-cover ratio slid to 2.49 from 2.73 at the prior sale.”
Japan Watch:
February 20 – Bloomberg (Masaki Kondo and James Mayger): “When the Bank of Japan reduced its purchases of government bonds in January, some investors saw it as another sign that the bank was scaling back its massive monetary stimulus program. The BOJ disagrees with that interpretation, but in February the bond market pushed yields to near the upper limit of what the bank’s targeting. While the BOJ was able to drive them lower with an offer to buy an unlimited amount of bonds, not everyone is convinced that it can continue with its current stimulus when the Federal Reserve is raising rates and the European Central Bank is starting to talk about when to end its own bond purchases.”
February 18 – Bloomberg (Connor Cislo): “Japan’s trade recovery powered into 2018, with exports and imports registering strong growth. The increase in imports resulted in the first monthly trade deficit since May 2017. The value of exports rose 12.2% in January from a year earlier (forecast +9.4%). Imports grew 7.9% (forecast +7.7%).”
EM Bubble Watch:
February 18 – Reuters (Krishna N. Das, Aditya Kalra, Devidutta Tripathy and Tom Lasseter): “The Punjab National Bank branch in south Mumbai sits just down the road from both the Bombay Stock Exchange and the Reserve Bank of India, at a physical center of one of the world’s fastest growing major economies. The branch, clad in a stately colonial edifice, is now also at the heart of a fraud case linked to billionaire jeweler Nirav Modi that has shaken confidence in a state banking sector that accounts for some 70% of India’s banking assets. It was here, according to accounts from Punjab National Bank executives and government investigators, that a lone middle-aged manager, later aided by his young subordinate, engineered fraudulent transactions totaling about $1.8 billion from 2011 to 2017.”
February 19 – Bloomberg (Srinivasan Sivabalan): “Indian equities have missed the rebound in emerging markets. The nation’s stocks have extended a slump that began late January and short sellers are betting record amounts that more declines are in store. Disappointment over the federal budget presented Feb. 1 and concern that a $2 billion bank fraud that came to light last week could turn into a contagion are applying the brakes on one of the world’s most expensive markets.”
Geopolitical Watch:
February 19 – Bloomberg (Henry Meyer): “Russian Foreign Minister Sergei Lavrov warned the Trump administration not to ‘play with fire’ as he lashed out at the U.S. over what he described as its ‘provocative’ support for autonomy-seeking Kurds in Syria. ‘The U.S. should stop playing very dangerous games which could lead to the dismemberment of the Syrian state,’ Lavrov said at a Middle East conference in Moscow…, alongside his Iranian counterpart Mohammad Javad Zarif and a top adviser of Syrian President Bashar al-Assad. ‘We are seeing attempts to exploit the Kurds’ aspirations.’”
February 18 – Reuters (Robin Emmott and Thomas Escritt): “Prime Minister Benjamin Netanyahu said… that Israel could act against Iran itself, not just its allies in the Middle East, after border incidents in Syria brought the Middle East foes closer to direct confrontation. Iran mocked Netanyahu’s tough words, saying Israel’s reputation for ‘invincibility’ had crumbled after one of its jets was shot down following a bombing run in Syria.”
February 22 – Reuters (Ellen Francis and Tuvan Gumrukcu): “The Syrian Kurdish YPG militia said… that fighters backing the Syrian government were deploying on the frontlines to help repel a Turkish assault, but that assistance would be needed from the Syrian army itself. In a move that may ease one of the Syrian government’s complaints about the YPG, the militia withdrew from an enclave it holds in Aleppo on Thursday, saying its fighters were needed for the battle in Afrin.”
February 22 – Reuters (Bozorgmehr Sharafedin): “Iran will withdraw from the 2015 nuclear deal if there is no economic benefit and major banks continue to shun the Islamic Republic, its deputy foreign minister said… Under the deal with Britain, China, France, Germany, Russia and the United States, Iran agreed to restrict its nuclear program in return for the removal of sanctions that have crippled its economy. Despite that, big banks have continued to stay away for fear of falling foul of remaining U.S. sanctions…”
February 17 – Bloomberg (Henry Meyer and Patrick Donahue): “As tensions escalate between Russia and the U.S., the nuclear-armed former Cold War rivals are risking the future of decades-old arms control agreements that have helped to keep a strategic balance and prevent the risk of accidental war. The conflict played out at a global security conference in Germany where Russia aired grievances about the U.S. and the Trump administration said a new nuclear doctrine unveiled this month doesn’t increase risks. Germany, caught in between, was among European countries voicing concern as both big powers modernize their nuclear arsenals.”
February 21 – Reuters (Ann Saphir): “Philadelphia Federal Reserve Bank President Patrick Harker… said he still thinks just two interest-rate hikes this year is ‘likely appropriate,’ but signaled he is open to more if needed. ‘Based on the relatively strong economy, but the continued stubbornness of inflation, I’ve penciled in two hikes for 2018,’ Harker said… ‘I use pencil because the data can change, and sometimes they don’t accurately point to future events.’”
China Watch:
February 20 – Financial Times (John Gapper): “When Ant Financial, the payments affiliate of the internet group Alibaba, goes public, its potential $120bn valuation could exceed that of Goldman Sachs. Alipay, Ant’s mobile payments platform with 520m users, is innovative as well as valuable, having devised a new method of credit rating. Sesame Credit, Alipay’s alternative to traditional credit scores such as Fico in the US and Schufa in Germany, is intriguing. It broadens access to loans in a developing market by monitoring people’s buying habits and social circles as well as their credit records. But it is also troubling, as China has recognised. The central bank is getting cold feet about the ‘social credit’ ratings schemes adopted by Alibaba and its competitors. The bank this month told Tencent to stop a national rollout of its rival to Sesame Credit after having encouraged such efforts in 2015.”
February 20 – Bloomberg (Lianting Tu): “While there’s no indication that China’s embattled HNA Group Co. is facing such financial difficulties that a default is in the offing, some market participants are starting to game plan scenarios, and a variety of takes have emerged. The amount of dollar bonds outstanding for the conglomerate and its units -- at $13.7 billion, it accounts for more than 1% of Asian high-yield bonds outside of Japan -- raises the question of the impact on the broader market. Many see little wider impact in the event of a default, though the case of a default by China’s Kaisa Group Holdings Ltd. three years ago, when Asian dollar junk bond premiums widened considerably, serves as a warning.”
Central Bank Watch:
February 22 – Financial Times (Claire Jones): “The extent of European officials’ concerns over the weakness of the dollar was laid bare on Thursday in a set of European Central Bank accounts that highlighted fears that the US administration was deliberately trying to engage in currency wars. The accounts of the ECB’s January monetary policy vote also reveal that the governing council’s hawks pushed for a change in the bank’s communications, saying economic conditions were now strong enough to drop a commitment to boost the quantitative easing programme in the event of a slowdown.”
February 22 – Bloomberg (Jana Randow, Piotr Skolimowski, and Alessandro Speciale): “The European Central Bank got its communication largely back under control on the third anniversary of the publication of its policy accounts. Aside from a brief spike, the euro stayed relatively calm after the summary of January’s Governing Council meeting was released… That’s in contrast to the report on December’s session, which rocked currency and bond markets when it suggested that officials might move faster than expected toward reining in stimulus. That outcome should be a relief for President Mario Draghi. He’s shown a reluctance to allow too much discussion of potential policy changes in recent meetings, according to people familiar with the matter who asked not to be identified. The general concern is that any sign of a looming shift in stance could stoke market volatility and undermine the ECB’s stimulus plans.”
February 21 – Bloomberg (David Goodman): “Mark Carney said the U.K. is headed for higher interest rates, but policy makers are reluctant to give clearer guidance on the timing of any future increase. In testimony to Parliament’s Treasury Committee…, the Bank of England governor stuck to the script from the Inflation Report released earlier this month, reiterating that the Monetary Policy Committee considers that rates will need to rise somewhat earlier and to a somewhat greater extent than previously anticipated.”
February 19 – Reuters (Jan Strupczewski and Francesco Guarascio): “Euro zone finance ministers… chose Spanish Economy Minister Luis de Guindos to succeed European Central Bank Vice President Vitor Constancio in May, a move likely to boost the chances of a German becoming head of the ECB next year. The choice of a Southern European for vice president increases the likelihood that a northerner such as German Bundesbank governor Jens Weidmann could be elected to replace Mario Draghi as head of the ECB in 2019. This could influence the bank’s ultra-loose monetary policy for the 19-country common currency area.”
February 21 – Bloomberg (Alessandro Speciale): “European Central Bank policy makers will get their first chance on Wednesday to hear directly on the outsized crisis emanating from one of their smallest member states. Latvia -- 0.2% of the euro-area economy and 0.6% of the bloc’s population -- is the week’s hot topic as ECB President Mario Draghi chairs one of the Governing Council’s regular meetings in Frankfurt. The detention on bribery allegations of the nation’s central-bank governor, Ilmars Rimsevics, isn’t on the formal agenda… But it’s guaranteed to be a talking point, at least over dinner.”
Global Bubble Watch:
February 22 – Financial Times (Kate Allen and Chris Giles): “Developed nations face a rising tide of government debt that poses ‘a significant challenge’ to budgets as interest rates increase around the world, the OECD has warned. Low interest rates have helped sustain high levels of government debt and persistent budget deficits since the financial crisis, according to the OECD, but the ‘relatively favourable’ sovereign funding environment ‘may not be a permanent feature of financial markets’. Fatos Koc, senior policy analyst at the OECD, cautioned that most members of the organization… confront an ‘increasing refinancing burden from maturing debt, combined with continued budget deficits’… The total stock of OECD countries’ sovereign debt has increased from $25tn in 2008 to more than $45tn this year.”
February 19 – Wall Street Journal (William Wilkes): “One morning last September, Dwayne Elgin unbolted the front door of his home on the island of St. Martin and gazed upon a wasteland of flipped cars, uprooted trees and flattened homes. Irma, the strongest Atlantic hurricane on record, had laid waste to the Caribbean island overnight, and as head of Nagico Insurances, a local insurance firm, Mr. Elgin knew almost all of his policyholders would turn to him for help. But he was prepared: Like many insurers, he had unloaded a large portion of firm’s risk to reinsurers, the industry’s last line of defense. Irma and an extraordinary string of other natural disasters in 2017 saddled insurers and reinsurers globally with more than $135 billion in losses, according to Munich Re ’s 2017 Natural Catastrophe Report.”
February 22 – CNBC (Sara Salinas): “Global smartphone sales fell by 5.6% in the fourth quarter of 2017 — the industry's first decline since 2004, according to a study from research firm Gartner. Chinese smartphone makers Huawei and Xiaomi were the only vendors in the top five to experience year-over-year growth in the quarter, respectively by 7.6% and 79%. ‘Upgrades from feature phones to smartphones have slowed down due to a lack of quality 'ultra-low-cost' smartphones and users preferring to buy quality feature phones,’ said Anshul Gupta, research director at Gartner. ‘Replacement smartphone users are choosing quality models and keeping them longer.’”
February 18 – Bloomberg (Jake Lloyd-Smith): “Noble Group Ltd., the commodity trader battling to survive, warned that it’ll report another vast loss including from the operations meant to sustain a revamped business, and while it signaled progress in debt-restructuring talks, hurdles to a deal remain. The Hong Kong-based company will report a net loss of $1.73 billion to $1.93 billion for the final quarter of last year, potentially bringing losses for 2017 to almost $5 billion…”
Fixed-Income Bubble Watch:'
February 22 – Bloomberg (Brian Chappatta): “The U.S. Treasury’s $29 billion auction of seven-year notes drew the highest yield for securities at that tenor since 2011, capping a $258 billion flood of debt sales over three days. As with the week’s other note offerings, there was a dip in the amount of bids relative to the amount sold, signaling weaker demand. With the Treasury ramping up borrowing as part of its plan to finance widening budget deficits, the auction was $1 billion larger than it was last month and the bid-to-cover ratio slid to 2.49 from 2.73 at the prior sale.”
Japan Watch:
February 20 – Bloomberg (Masaki Kondo and James Mayger): “When the Bank of Japan reduced its purchases of government bonds in January, some investors saw it as another sign that the bank was scaling back its massive monetary stimulus program. The BOJ disagrees with that interpretation, but in February the bond market pushed yields to near the upper limit of what the bank’s targeting. While the BOJ was able to drive them lower with an offer to buy an unlimited amount of bonds, not everyone is convinced that it can continue with its current stimulus when the Federal Reserve is raising rates and the European Central Bank is starting to talk about when to end its own bond purchases.”
February 18 – Bloomberg (Connor Cislo): “Japan’s trade recovery powered into 2018, with exports and imports registering strong growth. The increase in imports resulted in the first monthly trade deficit since May 2017. The value of exports rose 12.2% in January from a year earlier (forecast +9.4%). Imports grew 7.9% (forecast +7.7%).”
EM Bubble Watch:
February 18 – Reuters (Krishna N. Das, Aditya Kalra, Devidutta Tripathy and Tom Lasseter): “The Punjab National Bank branch in south Mumbai sits just down the road from both the Bombay Stock Exchange and the Reserve Bank of India, at a physical center of one of the world’s fastest growing major economies. The branch, clad in a stately colonial edifice, is now also at the heart of a fraud case linked to billionaire jeweler Nirav Modi that has shaken confidence in a state banking sector that accounts for some 70% of India’s banking assets. It was here, according to accounts from Punjab National Bank executives and government investigators, that a lone middle-aged manager, later aided by his young subordinate, engineered fraudulent transactions totaling about $1.8 billion from 2011 to 2017.”
February 19 – Bloomberg (Srinivasan Sivabalan): “Indian equities have missed the rebound in emerging markets. The nation’s stocks have extended a slump that began late January and short sellers are betting record amounts that more declines are in store. Disappointment over the federal budget presented Feb. 1 and concern that a $2 billion bank fraud that came to light last week could turn into a contagion are applying the brakes on one of the world’s most expensive markets.”
Geopolitical Watch:
February 19 – Bloomberg (Henry Meyer): “Russian Foreign Minister Sergei Lavrov warned the Trump administration not to ‘play with fire’ as he lashed out at the U.S. over what he described as its ‘provocative’ support for autonomy-seeking Kurds in Syria. ‘The U.S. should stop playing very dangerous games which could lead to the dismemberment of the Syrian state,’ Lavrov said at a Middle East conference in Moscow…, alongside his Iranian counterpart Mohammad Javad Zarif and a top adviser of Syrian President Bashar al-Assad. ‘We are seeing attempts to exploit the Kurds’ aspirations.’”
February 18 – Reuters (Robin Emmott and Thomas Escritt): “Prime Minister Benjamin Netanyahu said… that Israel could act against Iran itself, not just its allies in the Middle East, after border incidents in Syria brought the Middle East foes closer to direct confrontation. Iran mocked Netanyahu’s tough words, saying Israel’s reputation for ‘invincibility’ had crumbled after one of its jets was shot down following a bombing run in Syria.”
February 22 – Reuters (Ellen Francis and Tuvan Gumrukcu): “The Syrian Kurdish YPG militia said… that fighters backing the Syrian government were deploying on the frontlines to help repel a Turkish assault, but that assistance would be needed from the Syrian army itself. In a move that may ease one of the Syrian government’s complaints about the YPG, the militia withdrew from an enclave it holds in Aleppo on Thursday, saying its fighters were needed for the battle in Afrin.”
February 22 – Reuters (Bozorgmehr Sharafedin): “Iran will withdraw from the 2015 nuclear deal if there is no economic benefit and major banks continue to shun the Islamic Republic, its deputy foreign minister said… Under the deal with Britain, China, France, Germany, Russia and the United States, Iran agreed to restrict its nuclear program in return for the removal of sanctions that have crippled its economy. Despite that, big banks have continued to stay away for fear of falling foul of remaining U.S. sanctions…”
February 17 – Bloomberg (Henry Meyer and Patrick Donahue): “As tensions escalate between Russia and the U.S., the nuclear-armed former Cold War rivals are risking the future of decades-old arms control agreements that have helped to keep a strategic balance and prevent the risk of accidental war. The conflict played out at a global security conference in Germany where Russia aired grievances about the U.S. and the Trump administration said a new nuclear doctrine unveiled this month doesn’t increase risks. Germany, caught in between, was among European countries voicing concern as both big powers modernize their nuclear arsenals.”
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