[Reuters] Investors hit pause as ECB and Brexit risks loom
[Reuters] Oil at 5-month highs amid OPEC-led supply cuts, U.S. sanctions
[Reuters] Gold scales one-week high as dollar slips, stocks rally pauses
[Reuters] U.S. home purchase sentiment rises to nine-month high: Fannie Mae
[Reuters] Midwest floods hammer U.S. ethanol industry, push some gasoline prices toward five-year high
[NYT] What’s at Risk if the Fed Becomes as Partisan as the Rest of Washington
[Bloomberg] ‘Moment of Truth’ Arrives for U.S. Stocks After Fed-Fueled Rally
[Bloomberg] El-Erian: A China-U.S. Trade Deal Could Be a Mere Cease-Fire
[Bloomberg] JPMorgan Says Watch These Market Correlations for Warnings
[Bloomberg] Lira Falls as Erdogan Demands Probe of Istanbul Vote ‘Stealing’
[Bloomberg] China’s $1 Trillion Sovereign Wealth Fund Has Gone Quiet
[Reuters] Battle for Libya's capital rages, casualties mount
[WSJ] Yield-Hungry Investors Revive ‘Carry Trade’ in Emerging Markets
[WSJ] Big Retail Property Buyer Feels the Sting of Manhattan Slump
[FT] Hedge fund Renaissance pulls back on hunt for market trends
Sunday, April 7, 2019
Sunday Evening Links
[Reuters] Asia shares underpinned by U.S. job news, China stimulus
[Reuters] Oil hits November 2018 highs amid OPEC supply cuts, U.S. sanctions
[Reuters] Eastern Libyan forces conduct air strikes on Tripoli as U.N. fails to reach truce
[NY Post] Federal Reserve nominee Stephen Moore wants to cut interest rates
[Asian Age] Across Asia, populism & democracy is on test
[Bloomberg] India's Cash Crunch Is Weighing on Financial Health of Companies
[FT] Global economy enters ‘synchronised slowdown’
[Reuters] Oil hits November 2018 highs amid OPEC supply cuts, U.S. sanctions
[Reuters] Eastern Libyan forces conduct air strikes on Tripoli as U.N. fails to reach truce
[NY Post] Federal Reserve nominee Stephen Moore wants to cut interest rates
[Asian Age] Across Asia, populism & democracy is on test
[Bloomberg] India's Cash Crunch Is Weighing on Financial Health of Companies
[FT] Global economy enters ‘synchronised slowdown’
Sunday's News Links
[Reuters] Wall St Week Ahead-RPT-Big banks to report Q1 results with lowered expectations
[Reuters] New NAFTA deal 'in trouble', bruised by elections, tariff rows
[Reuters] Cain nomination for Federal Reserve seat 'still stands': Mulvaney
[Reuters] Compromise? Time ticking down for Britain to come to Brexit agreement
[AP] What next? Some scenarios for UK as Brexit crisis unfolds
[Reuters] China to step up bank reserve ratio cuts to help small firms: state media
[Bloomberg] Tripoli Government's Promise of Counterattack Raises Oil Jitters
[Bloomberg] China Is on a Big Gold-Buying Spree
[Bloomberg] Inflated Credit Scores Leave Investors in the Dark on Real Risks
[Washington Post] How regulators, Republicans and big banks fought for a big increase in lucrative but risky corporate loans
[Reuters] Haftar forces conduct air strike on Tripoli as U.N. calls for truce
[WSJ] Corporate Profit Squeeze Looms, Threatening Stocks’ Climb
[WSJ] Spending Battle Clouds Outlook for U.S. Growth
[FT] Donald Trump’s demands add to Federal Reserve interest rate headaches
[FT] What did the Federal Reserve see that investors did not?
[Reuters] New NAFTA deal 'in trouble', bruised by elections, tariff rows
[Reuters] Cain nomination for Federal Reserve seat 'still stands': Mulvaney
[Reuters] Compromise? Time ticking down for Britain to come to Brexit agreement
[AP] What next? Some scenarios for UK as Brexit crisis unfolds
[Reuters] China to step up bank reserve ratio cuts to help small firms: state media
[Bloomberg] Tripoli Government's Promise of Counterattack Raises Oil Jitters
[Bloomberg] China Is on a Big Gold-Buying Spree
[Bloomberg] Inflated Credit Scores Leave Investors in the Dark on Real Risks
[Washington Post] How regulators, Republicans and big banks fought for a big increase in lucrative but risky corporate loans
[Reuters] Haftar forces conduct air strike on Tripoli as U.N. calls for truce
[WSJ] Corporate Profit Squeeze Looms, Threatening Stocks’ Climb
[WSJ] Spending Battle Clouds Outlook for U.S. Growth
[FT] Donald Trump’s demands add to Federal Reserve interest rate headaches
[FT] What did the Federal Reserve see that investors did not?
Saturday, April 6, 2019
Saturday's News Links
[Reuters] G20 must tackle root causes of trade tensions that threaten growth: EU
[Reuters] U.S. ratchets up pressure on Venezuela, Cuban backers
[Reuters] U.S. to designate elite Iranian force as terrorist organization
[Bloomberg] Djibouti Needed Help, China Had Money, and Now the U.S. and France Are Worried
[NYT] What’s at Risk if the Fed Becomes as Partisan as the Rest of Washington
[WSJ] Libyan Crisis Presents New Worry for White House—and Oil Markets
[FT] Donald Trump calls for U-turn by Federal Reserve to stimulate economy
[Reuters] U.S. ratchets up pressure on Venezuela, Cuban backers
[Reuters] U.S. to designate elite Iranian force as terrorist organization
[Bloomberg] Djibouti Needed Help, China Had Money, and Now the U.S. and France Are Worried
[NYT] What’s at Risk if the Fed Becomes as Partisan as the Rest of Washington
[WSJ] Libyan Crisis Presents New Worry for White House—and Oil Markets
[FT] Donald Trump calls for U-turn by Federal Reserve to stimulate economy
Friday, April 5, 2019
Market Commentary: Faux Statesmanship
Please join Doug Noland and David McAlvany Thursday, April 18th, at 4:00PM EST/ 2:00pm MST for the Tactical Short Q1 recap conference call, "What are Central Banks Afraid of?" Click here to register.
April 5 – New York Times (Dealbook): “’It doesn’t take a genius’ to know capitalism needs fixing. Capitalism helped Ray Dalio build his investment empire. But in a lengthy LinkedIn post, the Bridgewater Associates founder says that it isn’t working anymore. Mr. Dalio writes that he has seen capitalism ‘evolve in a way that it is not working well for the majority of Americans because it’s producing self-reinforcing spirals up for the haves and down for the have-nots.’ ‘Disparity in wealth, especially when accompanied by disparity in values, leads to increasing conflict and, in the government, that manifests itself in the form of populism of the left and populism of the right and often in revolutions of one sort or another.’ ‘The problem is that capitalists typically don’t know how to divide the pie well and socialists typically don’t know how to grow it well.’ ‘We are now seeing conflicts between populists of the left and populists of the right increasing around the world in much the same way as they did in the 1930s when the income and wealth gaps were comparably large.’ ‘It doesn’t take a genius to know that when a system is producing outcomes that are so inconsistent with its goals, it needs to be reformed.’ Stay tuned: Mr. Dalio says that he’ll offer his solutions in another essay.”
I’m reminded of back in 2007 when Pimco’s Paul McCulley coined the term “shadow banking” – and the world finally began taking notice of the dangerous new financial structure that had over years come to dominate system Credit. Okay, but by then the damage was done. As someone that began posting the “Credit Bubble Bulletin” in 1999 and had chronicled the prevailing role of non-bank Credit in fueling the “mortgage finance Bubble” fiasco (on a weekly basis), it was all frustrating.
Why wasn’t the discussion started in 2001/02 when mortgage Credit began expanding at double-digit rates, and there were clear signs of Bubble formation? Oh yea, that’s right. There was desperation to reflate the system and fight the “scourge of deflation” after the bursting of the “tech” Bubble. Excess was welcomed early on – and later, when things got really heated up, nobody dared risk bursting the Bubble.
Reading Mr. Dalio’s latest, I have to ask, “What ever happened to ‘beautiful deleveraging’?” And I’m not on the edge of my seat waiting for his “solutions.”
There was a window of opportunity early in the mortgage financial Bubble period for “statesmen” to rise up and call out the recklessness of the Fed spurring mortgage Credit excess and house price inflation in the name of system reflation. Statesmen and women should have excoriated governor Bernanke for suggesting the “government printing press” and “helicopter money” - the type of crazy talk that should disqualify one for a position of responsibility at the Federal Reserve. Fed chairman? You’ve got to be kidding.
There was a window of opportunity to rein the Fed in after QE1. The Federal Reserve should have been held to their 2011 monetary stimulus “exit strategy.” Instead they doubled down – literally – as the Fed’s balance sheet doubled in about three years to $4.5 TN. Mr. Dalio - along with virtually everyone – didn’t seem to have any issues. Indeed, an unprecedented expansion of non-productive debt (certainly including central bank Credit and Treasury borrowings) somehow equated with “beautiful deleveraging.” It was ridiculous analysis in the face of the greatest global Bubble in human history.
Central banks aren’t fully to blame, but it's an awfully good place to start. Three decades of “activist” monetary management has left a horrible legacy. The Institute for International Finance reported this week that global debt ended 2018 at a record $243 TN. This debt mountain simply would not have been possible without “activist” central banking. Despite a lengthening list of risks, global stocks have powered higher in 2019 to near all-time highs. A relentless speculative Bubble has only been possible because of central bank policies.
I’m not all that interested in Dalio’s “solutions.” In my mind, he missed what was an exceptional opportunity for statesmanship. Bridgewater’s investors were the priority and have been rewarded handsomely. Pro-central bank “activism” has been the right call for compounding wealth for the past decade (or three). But no amount of ingenuity will resolve the historic predicament the world finds itself in today. Markets are broken, global imbalances the most extreme ever, and structural impairment unprecedented – and worsening, all of them.
Most regrettably, the type of structural reform required will only arise from a severe crisis. The Fed and global central bankers have been reflating Bubbles for more than three decades. Highly speculative global markets at this point completely disregard risk. And with borrowing costs incredibly low, what government (ok, Germany) is going to impose some spending discipline and operate on a fiscally responsible trajectory? At this point, finance is hopelessly unsound – and, importantly, hopelessly destructive on an unprecedented global scale.
I had the great pleasure of spending part of my Friday with the University of Oregon Investment Group. I gave a talk, “Money, Credit, Inflation and the Markets.” Being with bright, intellectually curious and enthusiastic university students gives me hope – and a smile.
From my presentation: “It just breaks my heart to see young people turn away from Capitalism. I anticipate spending the rest of my life trying to explain that the culprit is unsound finance and deeply flawed monetary management – and not the system of free-market Capitalism. History teaches us that credit is inherently unstable. I would argue that the experiment in New Age unfettered credit – with its serial booms and busts – evolved into a failed experiment in “activist” monetary management – another debacle in “inflationism.”
“The result has been a period of historic bubbles – in the markets and in economies – on a global scale. And protracted Bubbles become powerful mechanisms of wealth redistribution and destruction. Central banks readily creating new “money” and favoring the securities markets are fundamental to the problem. Such policies benefit the wealthy and worsen inequality. We’re witnessing the resulting rise of populism and a mounting crisis of confidence in our institutions. Even with 3.8% unemployment, near-record stock prices and one of the longest economic expansion on record, our country is deeply divided and resentful. I fear for the next downturn.”
A Friday Business Insider headline: “Hedge-fund billionaire Ray Dalio says the current state of capitalism poses 'an existential threat for the US'”; Barron’s: “Hedge Fund Billionaire Ray Dalio Says Capitalism ‘Must Evolve or Die’”; and Vanity Fair: “Billionaire Hedge-Fund Manager Warns a ‘Revolution’ is Coming.” Observer: “Ray Dalio on Capitalism Gone Wrong: America May See Dire Consequences.” And CBS: “Billionaire Investor Ray Dalio: Capitalism Run Amok is ‘Economically Stupid’”
I’m reminded of an analogy I’ve used in the past. One could make a reasonable argument that our eyeballs are flawed. How could something of such importance be so soft, delicate and vulnerable? Yet this vital organ is not flawed – imperfection is not a legitimate issue. It is the nature of its function that dictates its characteristics and vulnerabilities. Our eyes cannot sit within a protective ribcage like the heart, or within the hardened skull as the brain does.
To be able to see the world – looking at distant mountain ranges and then immediately shifting focus to the pages of a wonderful book – requires an exquisitely complex organ functioning exposed to the elements and largely unprotected. Importantly, we recognize and accept our eyes’ sensitivities and vulnerabilities. We would not wander into a metal shop without wearing protective eye coverings. We don sunglasses on bright days – darkened snow goggles for spring skiing. We learn at a very young age not to stare into the sun.
I disagree with the increasingly popular view that Capitalism as flawed. At the same time, I have been long frustrated by those dogmatically preaching the virtues of Capitalism without accepting the reality of inherent delicacy, vulnerabilities and weaknesses. As we are with our eyes, we have to be on guard, take precautions, and definitely avoid doing anything stupid. Who is reckless with their eyes? There’s too much to lose. No one wants to contemplate being blind for the rest of their life.
How could we ever have allowed Capitalism to be so irreparably damaged? There are innate instabilities in Credit and finance that have been disregarded for way too long. Unsound “money” is a primary (and insidious) risk to capitalistic systems. I would further argue that persistent asset inflation and recurring speculative Bubbles pose a major risk to sound finance and, as such, to Capitalism more generally. Moreover, inflationism – “activist” central banking – with its asset market focus, manipulation and nurturing of speculative excess and inequality, is anathema to free-market Capitalism.
When the Fed slid down the slippery slope and implemented QE, the economics profession and investment community failed society. The case against QE shouldn’t have been primarily focused on inflation risk. The overarching danger was a corrosive impairment of markets and finance, with resulting dysfunction for Capitalism more generally. The risk was destabilizing inequality, insecurity and resulting societal stress. There was the peril of a fragmented society, divided nation, political dysfunction and waning trust in our institutions. Somehow, everyone was content to ignore the reality that unsound “money” reverberates throughout the markets, the economy, society, politics and geopolitics.
Over the years, I’ve referred to the “first law of holes.” If you find yourself in a hole, the first requirement is to stop digging. Similarly, I’ve repeatedly noted the long-ago recognized issue with discretionary monetary management: One mistake invariably leads to only bigger mistakes. And I’m fond of reminding readers that “things turn crazy at the end of cycles.” Historic cycle, historic “crazy.” And I’ll repeat what I’ve written many times before: From my analytical perspective, things continue to follow the worst-case scenario.
It was yet another mistake for the Fed to go full U-Turn dovish. It was another blunder for the global central bank community to signal they were willing to move quickly and aggressively to bolster international markets. The 2019 speculative run in the markets only exacerbates underlying fragilities – worsens inequality – and sets the stage for an only deeper crisis.
I’ll be curious to see if Ray Dalio’s “solutions” include having the Fed disavow aggressive monetary stimulus, while letting markets begin functioning on their own. The biggest problem with Capitalism these days is that the system is not self-adjusting and correcting. Structurally distorted markets and deeply maladjusted economies are incapable of correction. Global imbalances only worsen every year. Speculative Bubbles inflate further.
Global central banks are understandably distressed about the potential for market dislocation and crisis. Yet recurring efforts to forestall upheaval increasingly risk financial collapse. There is no real solution until deeply flawed monetary management is recognized and changed. The current course will only exacerbate inequality and foment Dalio’s “revolution.” Any soul-searching and scrutinizing of Capitalism must begin with central banking and monetary mismanagement. Where were the likes of Dalio, Dimon and Buffett when it could have made a difference? Faux Statesmanship.
For the Week:
The S&P500 rose 2.1% (up 15.4% y-t-d), and the Dow gained 1.9% (up 13.3%). The Utilities slipped 0.2% (up 10.3%). The Banks jumped 4.3% (up 13.8%), and the Broker/Dealers surged 5.4% (up 12.3%). The Transports rose 3.1% (up 17.1%). The S&P 400 Midcaps (up 17.2%), and the small cap Russell 2000 (up 17.4%) both gained 2.8%. The Nasdaq100 rose 2.7% (up 19.7%). The Semiconductors surged 5.9% (up 27.9%). The Biotechs gained 2.6% (up 24.7%). With bullion little changed, the HUI gold index increased 0.7% (up 6.6%).
Three-month Treasury bill rates ended the week at 2.38%. Two-year government yields jumped eight bps to 2.34% (down 15bps y-t-d). Five-year T-note yields rose seven bps to 2.31% (down 21bps). Ten-year Treasury yields jumped nine bps to 2.50% (down 19bps). Long bond yields rose nine bps to 2.90% (down 11bps). Benchmark Fannie Mae MBS yields gained six bps to 3.17% (down 33bps).
Greek 10-year yields sank 21 bps to 3.52% (down 88bps y-t-d). Ten-year Portuguese yields added a basis point to 1.26% (down 47bps). Italian 10-year yields slipped one basis point to 2.48% (down 26bps). Spain's 10-year yields increased a basis point to 1.11% (down 31bps). German bund yields jumped eight bps to 0.01% (down 24bps). French yields rose four bps to 0.36% (down 35bps). The French to German 10-year bond spread narrowed four bps to 35 bps. U.K. 10-year gilt yields jumped 12 bps to 1.12% (down 16bps). U.K.'s FTSE equities index gained 2.3% (up 10.7% y-t-d).
Japan's Nikkei 225 equities index jumped 2.8% (up 9.0% y-t-d). Japanese 10-year "JGB" yields rose five bps to negative 0.03% (down 3bps y-t-d). France's CAC40 gained 2.3% (up 15.8%). The German DAX equities index surged 4.2% (up 13.7%). Spain's IBEX 35 equities index jumped 2.9% (up 11.4%). Italy's FTSE MIB index gained 2.2% (up 18.7%). EM equities were mostly higher. Brazil's Bovespa index gained 1.8% (up 6.7%), and Mexico's Bolsa surged 3.9% (up 8.0%). South Korea's Kospi index rose 3.2% (up 8.3%). India's Sensex equities index increased 0.5% (up 7.7%). China's Shanghai Exchange surged 5.0% (up 30.2%). Turkey's Borsa Istanbul National 100 index jumped 5.3% (up 8.2%). Russia's MICEX equities index gained 1.8% (up 7.2%).
Investment-grade bond funds saw inflows of $2.901 billion, and junk bond funds posted inflows of $2.0 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates increased two bps to 4.08% (down 32bps y-o-y). Fifteen-year rates slipped one basis point to 3.56% (down 31bps). Five-year hybrid ARM rates dropped nine bps to 3.66% (up 4bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up 14 bps to 4.30% (down 22bps).
Federal Reserve Credit last week declined $12.4bn to $3.909 TN. Over the past year, Fed Credit contracted $443bn, or 10.2%. Fed Credit inflated $1.098 TN, or 39%, over the past 335 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $10.3bn last week to $3.460 TN. "Custody holdings" gained $21.9bn y-o-y, or 0.6%.
M2 (narrow) "money" supply gained $32.3bn last week to a record $14.521 TN. "Narrow money" rose $569bn, or 4.1%, over the past year. For the week, Currency increased $2.2bn. Total Checkable Deposits rose $18.3bn, and Savings Deposits gained $5.1bn. Small Time Deposits increased $3.7bn. Retail Money Funds added $2.9bn.
Total money market fund assets rose $5.8bn to $3.107 TN. Money Funds gained $287bn y-o-y, or 10.2%.
Total Commercial Paper gained $6.3bn to $1.085 TN. CP expanded $37.4bn y-o-y, or 3.6%.
Currency Watch:
The U.S. dollar index was little changed at 97.395 (up 1.3% y-t-d). For the week on the upside, the South African rand increased 2.9%, the Mexican peso 1.9%, the Brazilian real 1.2%, the Norwegian krone 0.2%, the Australian dollar 0.1% and the Singapore dollar 0.1% . For the week on the downside, the New Zealand dollar declined 1.1%, the Japanese yen 0.8%, the Swiss franc 0.5%, the Canadian dollar 0.3%, the Swedish krona 0.1% and the South Korean won 0.1%. The Chinese renminbi declined 0.07% versus the dollar this week (up 2.40% y-t-d).
Commodities Watch:
The Bloomberg Commodities Index gained 1.6% this week (up 7.0% y-t-d). Spot Gold was about unchanged at $1,292 (up 0.7%). Silver slipped 0.2% to $15.086 (down 2.9%). Crude surged another $2.94 to $63.08 (up 39%). Gasoline jumped 4.6% (up 49%), while Natural Gas was little changed (down 9%). Copper declined 1.4% (up 10%). Wheat rallied 2.2% (down 7%). Corn recovered 1.7% (down 3%).
Market Instability Watch:
April 4 – Bloomberg (Michelle Davis): “Jamie Dimon warned investors to get ready for more wild rides like the one that upended markets at the end of last year. ‘The fourth quarter of 2018 might be a harbinger of things to come,’ the chief executive officer of JPMorgan… said… in his 51-page annual letter to shareholders. Dimon cited a raft of issues driving the more pessimistic outlook, including uncertainty about the Federal Reserve’s interest-rate shifts, Germany’s economic slowdown, Brexit and the U.S.-China trade spat. Investors face a ‘new normal’ of liquidity constraints because of tighter regulations on banks and other market makers, Dimon said, adding that ‘there are growing geopolitical tensions -- with less certainty around American global leadership.’”
April 2 – Bloomberg (Cecile Gutscher and Tasos Vossos): “For investors trying to make sense of recent extreme moves in the global credit market, bad news: The roller coaster may go on. The long-feared liquidity menace is well and truly here, and it’s overshadowing more prosaic factors like low default rates and corporate earnings when turbulence in the $13 trillion market erupts, according to… UBS Group AG. ‘Dizzying’ moves of late have been driven by rapidly rising and falling liquidity, strategists at the bank argued… These are symptoms of a herd mentality that’s exacerbating every selloff and rally, and the problem is particularly acute for junk-rated debt, they said.”
April 1 – Bloomberg (Lila Lee): “The $5.1-trillion-a-day foreign exchange market is suffering more than most from central bank decisions to move in tandem and keep interest rates low for longer. Policymakers moving to press pause on policy tightening in 2019, as well as broadly mixed messages from the biggest economies, have combined to suppress already-low volatility to levels not seen in five years… Volatility fell to its lowest levels since late 2014 in March, according to the Deutsche Bank Currency Volatility Index.”
April 1 – CNBC (Diana Olick): “A sharp drop in interest rates last week suddenly made millions more borrowers eligible to refinance their mortgages. With the average rate on the 30-year fixed now close to 4%, 4.9 million borrowers could likely qualify for a refinance that could reduce their interest rates by at least three-quarters of a percentage point, according to Black Knight, a mortgage data and analytics company. That’s a nearly 50% increase in the size of that population in a single week.”
April 3 – Bloomberg (Sarah Ponczek): “For active managers who spent the year’s first two months rediscovering their super powers, March was kryptonite. Stock-picking mutual funds have watched it all turn tragic over the last four weeks, with two-thirds trailing benchmarks, upending the strongest start to a year since the bull market began. Blame it on a loss of nerve. In a market that kept trudging upward, they bailed on the winners. Now, only 36% of large-cap portfolios are ahead of indexes like the Russell 1000…”
April 3 – Bloomberg (Rachel Evans): “A rough start to the year for more than $850 billion exchange-traded funds with quantitative strategies is fueling a product rethink. Smart-beta stock ETFs -- which use characteristics such as a company’s value, size or momentum to direct investments -- lured the least money in 12 months in the U.S., dragging asset growth below the five-year average for a second quarter… Instead of quitting, ETF providers are doubling down and trying to woo investors with all-in-one funds that pull together several factors.”
Trump Administration Watch:
April 2 – CNBC (Patti Domm): “When the U.S. escalated the trade war by slapping tariffs on $200 billion in Chinese goods last September, China’s economy was struggling and its stock market was in a deep slide, giving the U.S. a seeming advantage in a trans-Pacific trade rift. But months later, the U.S. has lost some of that edge. China’s Shanghai stock market has surged more than 27% in 2019 and is the best performer of major markets globally, while China’s economy is finally showing early signs of stabilizing. When the September tariffs were announced, President Donald Trump was seen as emboldened by the best two quarters of more than 3% U.S. growth in years and a stock market that was hitting all-time highs. While the U.S. is still seen as having an advantage, economic growth has faltered, to a below trend 1.5% pace in the first quarter.”
April 3 – Financial Times (James Politi and Lucy Hornby): “Top US and Chinese officials have resolved most of the issues standing in the way of a deal to end their long-running trade dispute but are still haggling over how to implement and enforce the agreement, people briefed on the talks have said. Liu He, China’s vice-premier, on Wednesday began meeting with Robert Lighthizer, the US trade representative, and Steven Mnuchin, the US Treasury secretary, for a potentially climactic negotiation session that was expected to last for three days. News that the two sides are closing in on a deal after four months of negotiations energised stock markets as the new round of talks began. Mr Lighthizer greeted Mr Liu with a handshake on the steps leading into the US trade representative’s headquarters…”
April 3 – Wall Street Journal (Nick Timiraos and Alex Leary): “President Trump is blaming the Federal Reserve for holding back the economy and stock market despite the central bank’s recent decision to do two things he wanted—halt rate increases and stop shrinking its asset portfolio. The president blasted the Fed and Chairman Jerome Powell at three meetings in the past week alone, telling Republican senators, supporters and staffers that if it wasn’t for the central bank’s past rate increases, economic output and stocks would be higher and the U.S. budget deficit would be rising less. ‘He was pretty rough,’ said one person… Mr. Trump also blamed Treasury Secretary Steven Mnuchin for recommending Mr. Powell for the top Fed job. ‘Mnuchin gave me this guy,’ Mr. Trump said. Mr. Trump recalled a recent phone conversation he had with Mr. Powell, this person said. ‘I guess I’m stuck with you,’ the president recalled telling Mr. Powell.”
March 31 – Reuters (Trevor Hunnicutt and Ann Saphir): “Barely a week after the U.S. Federal Reserve called a halt to interest rate hikes, policymakers are now battling a view growing in financial markets, and embraced by the Trump administration, that the Fed will need to cut rates before long. Larry Kudlow, President Donald Trump’s top economic advisor, said Friday on CBNC that while there is ‘no emergency,’ the Fed should cut rates to protect the U.S. economy from slowing down. But no fewer than five Fed officials in the past 24 hours have touted the underlying strength of the American economy and argued the recent spate of weak data on business activity is more likely to prove fleeting than lasting. Even the Fed’s two most dovish policymakers - the presidents of the St. Louis and Minneapolis regional banks - say they are not ready to agitate for the central bank to start reversing three years of rate increases.”
April 2 – Reuters (David Lawder): “The Trump administration is maintaining support for prospective Federal Reserve nominee Stephen Moore following reports the conservative commentator has had legal problems, a White House adviser said… ‘We stand behind him a hundred percent,’ National Economic Council Director Larry Kudlow told reporters…”
April 1 – Politico (Sarah Ferris): “A looming battle between President Donald Trump and Democrats over government spending and the debt limit could make the 35-day government shutdown look like a blip. A series of budget deadlines converge in the coming months that could leave Washington on the precipice of another shutdown, $100 billion in automatic spending cuts and a full-scale credit crisis. And lawmakers are openly worried about stumbling over the edge. Some top Democrats have begun quietly pushing for a grand bargain to simultaneously raise the debt ceiling and Congress’ stiff budget caps — avoiding market turmoil and staving off harsh cuts to domestic and defense programs… But the White House, focused on Trump’s reelection bid, is resisting talk of another massive deal that could cost as much as $350 billion over two years.”
March 30 – Reuters (Julia Harte and Tim Reid): “The U.S. government cut aid to El Salvador, Guatemala and Honduras on Saturday after President Donald Trump blasted the Central American countries for sending migrants to the United States and threatened to shutter the U.S.-Mexico border... On Friday, Trump accused the nations of having ‘set up’ migrant caravans and sent them north. Trump said there was a ‘very good likelihood’ he would close the border this week if Mexico did not stop immigrants from reaching the United States.”
Federal Reserve Watch:
April 3 – Bloomberg (Jennifer Jacobs): “President Donald Trump intends to nominate Herman Cain, the former pizza company executive who ran for the 2012 Republican presidential nomination, for a seat on the Federal Reserve Board, according to people familiar with the matter. Trump plans to announce his selection very soon, said three people, who asked not be identified discussing the nomination because it hasn’t been announced. Cain would fill one of two open seats on the board; the president plans to name Stephen Moore, a visiting fellow at the Heritage Foundation and a long-time Trump supporter, for the other. In Cain and Moore, Trump would place two political loyalists on the board of a central bank that has frequently crossed him.”
April 3 – Bloomberg (Rich Miller): “The Federal Reserve risks stoking the same sort of asset bubbles that Chairman Jerome Powell has linked to the last two recessions with its new-found eagerness to fan inflation. The Fed’s surprise pivot away from any interest rate increases this year has boosted prices of stocks, high yield bonds and other risky assets in spite of nagging investor concerns about slowing global economic growth. Financial conditions, at least as measured by the Chicago Fed, are at their easiest since 1994. And they could well get looser.”
U.S. Bubble Watch:
April 1 – Associated Press (Josh Boak): “U.S. manufacturers grew at a faster pace in March, as the pace of employment jumped and new orders and production improved. The Institute for Supply Management… said… that its manufacturing index rose to 55.3 last month, up from 54.2 in February… The sector has been reporting growth for 31 months.”
April 4 – CNBC (Diana Olick): “If you’re shopping for a cheap home this spring, good luck. The median value of homes listed for sale in March hit a record $300,000, according to realtor.com. Home values overheated from 2016 to mid-2018, as demand outstripped supply, especially at the lower end of the market. Those gains began to shrink last summer, as mortgage rates rose. The difference this spring is that there continues to be a shortage of entry-level homes for sale, but the supply of higher-end homes is rising. ‘Despite a slowing growth rate, home prices will likely continue to set new records later this year,” said Danielle Hale, realtor.com’s chief economist. ‘Heading into spring, U.S. prices are expected to continue to rise and inventory is expected to continue to increase, but at a slower pace than we’ve seen the last few months…’”
March 31 – Wall Street Journal (Laura Kusisto): “The spring home-buying season is shaping up as the best in years, offering new opportunities after last year’s tough housing market drove away many would-be buyers. A number of economic factors that slowed sales in 2018 have eased or even reversed in recent weeks. Mortgage rates have been falling, home inventory is rising in many once-tight markets and the pace of home-price growth is slowing. These more favorable conditions are already bringing price cuts and fewer of the bidding wars that left many buyers empty-handed, recent data show. The housing market had become so skewed toward sellers that many buyers were giving up, causing sales to drop.”
March 30 – Wall Street Journal (Dana Cimilluca): “Remember the last time investors went nuts for an IPO boom? In 1999, hundreds of companies made a madcap dash to the public markets, capturing the imaginations of everyday Americans who thought they could day-trade their way to fortunes. Startups like Webvan and eToys were suddenly household names. The Pets.com sock puppet was a guest on ‘Live With Regis and Kathie Lee.’ All told, 547 companies had initial public offerings in the U.S. that year, taking in a record haul of $107.9 billion, according to Dealogic. This year could be even bigger.”
March 29 – Reuters (P.J. Huffstutter and Humeyra Pamuk): “At least 1 million acres of U.S. farmland were flooded after the ‘bomb cyclone’ storm left wide swaths of nine major grain producing states under water this month, satellite data analyzed by Gro Intelligence for Reuters showed.”
April 1 – CNBC (Tom Polansek): “The Black Hawk military helicopter flew over Iowa, giving a senior U.S. agriculture official and U.S. senator an eyeful of the flood damage below, where yellow corn from ruptured metal silos spilled out into the muddy water. And there’s nothing the U.S. government can do about the millions of bushels of damaged crops here under current laws or disaster-aid programs, U.S. Agriculture Under Secretary Bill Northey told a Reuters reporter… The USDA has no mechanism to compensate farmers for damaged crops in storage, Northey said, a problem never before seen on this scale. That’s in part because U.S. farmers have never stored so much of their harvests, after years of oversupplied markets, low prices and the latest blow of lost sales from the U.S. trade war with China…”
April 1 – Wall Street Journal (Dan Molinski): “Gasoline prices typically move higher this time of year. But the seasonal rise is even more pronounced thanks to flooding in the Midwest and dwindling oil production out of Venezuela. U.S. drivers now pay $2.71 for a gallon on average, up 28 cents from a month ago and nearly 50 cents higher since early January… Prices are closing in on the $2.98-a-gallon level reached in May, which was the priciest level since October 2014.”
April 2 – CNBC (Robert Frank): “Manhattan real estate had its worst first quarter since the financial crisis, capping the longest losing streak for sales in over 30 years… Total sales fell 3% in the first quarter, according to… Douglas Elliman and Miller Samuel. That marked the sixth straight quarter of declines, which is the longest downturn in the three decades that the appraisal and research firm has been keeping data… Prices in Manhattan continue to remain soft. While the average sale price got a big boost from hedge fun billionaire Ken Griffin’s $238 million condo purchase, hitting $2.1 million, the median sales price in Manhattan declined slightly, to just over $1 million.”
China Watch:
March 30 – Reuters (Yawen Chen and Ryan Woo): “Factory activity in China unexpectedly grew for the first time in four months in March, an official survey showed…, suggesting government stimulus measures may be starting to take hold in the world’s second largest economy… Factory output grew at its fastest pace in six months in March, reversing a brief contraction in the previous month. It rose to 52.7 from February’s 49.5, the highest level seen since September 2018. Total new orders also grew at a quicker pace, driving up factory-gate prices to a five-month high of 51.4, ending four months of contraction.”
April 2 – Reuters (Yawen Chen and Ryan Woo): “Activity in China’s services sector picked up to a 14-month high in March as demand improved at home and abroad…, adding to signs that government stimulus policies are gradually kicking in… The Caixin/Markit services purchasing managers’ index (PMI) rose to 54.4, the highest since January 2018 and up from February’s 51.1, a fourth-month low… Survey respondents said activity was being buoyed by stronger demand, new state policies and improved access to financing.”
April 3 – Bloomberg: “China offered new measures to reduce taxes and raise its citizens’ wages, ramping up an already ambitious plan to boost domestic demand. Policy makers are drafting policies to help farmers, small-business owners and scientific researchers boost their incomes, the Economic Information Daily reported, citing unnamed sources. The measures will probably include ‘bigger breakthroughs’ in land reform to enhance farmers’ property gains, the newspaper said.”
April 1 – Bloomberg: “Chinese companies have missed payments on 26.2 billion yuan ($3.9bn) of local bonds in the first quarter, almost quadruple the same period in 2018. It was also the third highest quarter for bond delinquencies in China’s history…”
April 3 – Bloomberg: “A series of bankruptcy filings by major private-sector bond issuers in China’s third-wealthiest province is shining a spotlight on aggressive efforts by local governments to manage unsustainable debt loads. Four debtors have entered bankruptcy procedures since the start of November in Dongying, a city of 2 million in the eastern province of Shandong that once thrived with a booming tire-making industry. While China sees thousands of bankruptcies each year, instances of court-led restructuring of publicly issued bonds have been rare.”
Central Bank Watch:
April 1 – Bloomberg (Viktoria Dendrinou and Piotr Skolimowski): “European Central Bank officials pressed the case for continued monetary-policy support as they signaled the euro-area economic slowdown is weighing on inflation. In a foreword to the ECB’s annual report, President Mario Draghi warned of a ‘persistence of uncertainties’ and said there’s a continued need for stimulus to boost inflation. His vice president, Luis de Guindos echoed that, saying ‘weaker growth momentum will leave its mark on domestic price pressures, slowing the adjustment of inflation toward our aim.’”
April 3 – Financial Times (Claire Jones): “Five years after the European Central Bank broke ground by cutting interest rates below zero, its officials are considering a redesign of the contentious policy as they face up to an economy and banking system that could remain fragile for a lot longer. ECB president Mario Draghi pushed the world’s leading central banks into uncharted territory in 2014 when the eurozone deposit rate — what commercial banks pay to hold money at the ECB — went negative. Further cuts have pushed the rate to minus 0.4% since 2016, part of a policy to spur banks to lend money rather than sit on it. Banks were dismayed at what has been in effect a tax on their activities, which ECB insiders say amounts to €7.5bn a year.”
Brexit Watch:
March 30 – Reuters (William Schomberg and David Milliken): “British Prime Minister Theresa May risks the ‘total collapse’ of her government if she fails to get her battered Brexit deal through parliament, the Sunday Times newspaper said, amid growing speculation that she might call an early election. Underscoring the tough choices facing May to break the Brexit impasse, the newspaper said at least six pro-European Union senior ministers will resign if she opts for a potentially damaging no-deal departure from the EU.”
April 3 – Financial Times (Lucy Meakin): “The risk of a no-deal Brexit is now ‘alarmingly high,’ according to Bank of England Governor Mark Carney, who described some claims about how the U.K. could manage such a situation as ‘absolute nonsense.’ Leaving the European Union without an agreement has become the ‘default’ outcome despite being opposed by Parliament, and could happen by accident, he said…”
Europe Watch:
April 4 – Associated Press (David Rising): “A group of leading German economic research institutes slashed their growth forecast for the country…, warning that if Britain leaves the European Union without a deal, it could get even worse. In a joint statement, the five institutes said they were reducing their autumn forecast of 1.9% growth for Europe’s largest economy downward to 0.8% after concluding ‘political risks have further clouded the global economic environment.’”
April 1 – Reuters (Gavin Jones): “Italy’s finances will deteriorate this year and next, with debt and the budget deficit both rising because of recession and higher public spending, the Organisation for Economic Cooperation and Development said… In a special report on Italy, the… OECD said the deficit would rise to 2.5% of gross domestic product this year, above the 2% target Rome agreed in December… The economy will shrink by 0.2% this year, the OECD said, confirming a forecast last month, before expanding 0.5% in 2020.”
EM Watch:
April 3 – Reuters (Ece Toksabay and Tuvan Gumrukcu): “Turkey’s main opposition candidate in Istanbul urged the High Election Board (YSK)… to confirm him as the elected mayor after it ruled in favour of a partial recount of votes in 18 of the city’s 39 districts. Initial results from Sunday’s mayoral elections showed the opposition Republican People’s Party (CHP) had narrowly won control of Turkey’s two biggest cities, Istanbul and Ankara, in a shock upset for President Tayyip Erdogan’s ruling AK Party.”
April 2 – Financial Times (Editorial Board): “It is hard to overstate the blow to Turkey’s president Recep Tayyip Erdogan represented by losing political control not just of Ankara but — most likely — Istanbul too. It was victories in Turkey’s two biggest cities 25 years ago that gave him his real political start; as he told party activists in 2017: ‘If we stumble in Istanbul, we lose our footing in Turkey.’ Sunday’s shock regional election setbacks bring Mr Erdogan to a fork in the road — where he must choose between the pragmatism he is capable of, and his instinct to double down against opposition.”
April 3 – Financial Times (Adam Samson): “Turkey’s inflation rate remained a whisker below 20% last month… Consumer prices rose 19.71% in March from the same month in 2018…, from 19.67% in February… The collapse last year in the value of the lira against other world currencies ignited a boom in price growth that has had wide-ranging implications across the economy.”
Global Bubble Watch:
April 2 – Bloomberg (John Authers and Lauren Leatherby): “This was the decade of de-leveraging that wasn’t. A decade ago, as the world began to piece the financial system back together after an epic credit crisis, there was agreement on one thing: Too much debt had caused the crisis, and so there must be a huge de-leveraging. It has not worked out like that. Everyone knew that leverage was too high. In 2007, as subprime lenders went bankrupt and the crisis took hold, sinister charts circulated around Wall Street. Shooting upwards, on one side, was U.S. household debt as a proportion of total GDP. Shooting downwards, on the other side, was the U.S. savings rate, plunging near zero… Behold the result of their labors: Leverage has increased. U.S. consumers and the Western banking system have cut back somewhat, but leverage has just moved elsewhere. Their retrenchment was far outstripped by a rise in borrowing by companies and particularly by governments.”
April 3 – Wall Street Journal (Laura Kusisto and Peter Grant): “Cities around the world, from New York to London to Stockholm to Sydney, are struggling to solve growing affordable housing crises. Acute shortages are persisting despite millions of dollars invested and hundreds of thousands of units built. Some countries have focused on solutions promoting unshackled free markets while others have turned more to rent control and subsidies. But no approach has solved the crises and most have other negative ripple effects. Across 32 major cities around the world, real home prices on average grew 24% over the last five years, while average real income grew by only 8%..., according to Knight Frank, a… real-estate consulting firm. Economists say it is striking that affordability has worsened even during a period of global prosperity over the last six years.”
March 30 – Wall Street Journal (Cara Lombardo and Ben Dummett): “Global political tension and slowing economies abroad are taking a bite out of mergers-and-acquisitions activity. So far this year, companies world-wide have struck $913 billion of merger deals, down 17% from the same period in 2018, according to Dealogic.”
March 31 – Financial Times (Don Weinland): “A global real estate boom fueled by China’s ambitious Belt and Road Initiative has slowed to a crawl, as Beijing seeks to rein in rogue building projects across the developing world. So far this year, less than $1bn has been invested into overseas commercial property projects by Chinese developers in designated BRI countries. That puts this year’s total on track to be far below last year’s figure of about $14bn, and marks another sharp drop from the peak of $23.6bn in 2016… When China announced its $1tn plan to build bridges, roads and ports in emerging markets starting in 2013, it also unleashed a wave of investments into hotels, office buildings and casinos from Mongolia to Montenegro — an unintended consequence of the plan.”
April 4 – Financial Times (Don Weinland): “Chinese state banks have been forced to recalibrate their appetite for risk on overseas infrastructure financing this year as developing countries struggle to repay debts. Over the past decade, government-controlled lenders such as China Development Bank, ICBC and Bank of China have risen up the ranks to become Asia’s largest players in infrastructure finance. China’s Belt and Road Initiative, a $1tn plan to build ports, roads and bridges across Eurasia and into Africa, has delivered a boost to the banks’ overseas activity.”
April 3 – Bloomberg (Wendy Tan): “Asian junk bonds suffered the worst downgrade-upgrade ratio from Fitch Ratings in seven years last quarter, led by Chinese issuers. That makes it vital to understand an issuer’s position in a business group. Distressed-debt cases including China’s HNA Group Co. have highlighted the risk of owning debt issued by a holding entity rather than its operating arms.”
March 31 – Bloomberg (Peter Vercoe): “Australian property prices continued their slide last month, as prospective buyers delay purchases until after national elections, and tougher lending standards make it harder to obtain financing. Housing values in the combined state and territory capitals fell 0.7% in March, to be down 8.2% from a year earlier, according to CoreLogic… The nation’s two biggest cities remained at the forefront of the slump. Sydney prices fell 0.9% last month, and are now down 13.9% from their mid-2017 peak, while Melbourne values dropped 0.8% to be 10.3% below their peak.”
Japan Watch:
March 31 – Financial Times (Andrew Whiffin): “The Bank of Japan is now in its tenth year of domestic stock buying through exchange traded funds and is showing little sign of winding the programme down. With the stated inflation target of 2% still elusive, Bank governor Haruhiko Kuroda rejected criticisms of the programme in an address to Japan’s parliament in December and dismissed the notion that an exit should be considered anytime soon. Last year the Bank bought just over Y6tn ($55bn) of ETFs in line with its target for 2018 and now holds close to 80% of outstanding Japanese ETF equity assets. Total purchases to date represent around 5% of the country’s total market capitalisation. The Bank also owns close to half of all outstanding Japanese government bonds.”
March 31 – Reuters (Leika Kihara and Tetsushi Kajimoto): “Japan’s business mood slumped to a two-year low in the March quarter, a central bank survey showed, underscoring concerns that Sino-U.S. trade tensions and softening global demand were taking a toll on the export-reliant economy. The gloom was most pronounced among big manufacturers, where sentiment soured at the fastest pace in more than six years… Separately…, a private business survey showed manufacturing activity in Japan contracted for a second straight month in March, with output down at the sharpest rate in nearly three years.”
Fixed-Income Bubble Watch:
April 2 – CNBC (Jeff Cox): “Debt market activity slowed to a comparative crawl to start out 2019… Issuance plummeted across the board, from syndicated loans to mergers and acquisitions to institutional lending. Securitized products such as collateralized loan obligations also saw a huge drop in activity as did leveraged buyouts, according to… Refinitiv. First-quarter syndicated lending overall declined 36% to about $400 billion. Leveraged loans… fell 56% to $152 billion. Institutional loans dropped to a three-year low of $58.8 billion, and investment grade and leveraged buyout funding slid 11% apiece… Bond issuance across the board fell 14.5% through February, with declines particularly sharp in mortgage-related bonds (off 32.5%) and asset-backed securities (down 55.6%), according to Securities Industry and Financial Markets Association data. Total bond market debt outstanding closed 2018 just shy of $43 trillion, up 4.7% from the year before.”
April 2 – Financial Times (Editorial Board): “Finance is more vulnerable to short-memory syndrome than other industries. An occasional reminder of the grim lessons of history is therefore useful, and no more so than in private equity. The industry still works on the basis that as long as the orchestra is playing a medley of cheap debt, deep pools of capital, and ever larger deals, it should leverage up and keep dancing. A warning from one of private equity’s own that this tune could come to an abrupt end is timely, important and welcome. This week, Jonathan Lavine, co-managing partner of Bain Capital, signalled his concern about private equity groups’ appetite for debt. This time is — slightly — different from the prelude to the financial crisis of 2008… In any case, the worrying similarities with 2007-08 outweigh the differences. Debt levels are high. Loan quality is low. Leveraged buyout loans rate predominantly at B2 or below — the most speculative end of speculative-grade debt — Moody’s says. In a repeat of the breakneck yield-chase before the crisis, investors are eager to grab the higher returns available on such loans. More than 80% of loans are also ‘covenant-lite’, according to LCD… Cov-lite loans may allow ailing companies to survive for longer, but traditional loan conditions are also an effective signal of trouble ahead.”
April 1 – Bloomberg (Tommy Wilkes and Ritvik Carvalho): “U.S. leveraged loans just had their best quarter since 2010, despite lackluster performance in March. The floating-rate asset class has returned about 4% year-to-date, trailing both investment grade and high-yield bonds. The S&P/Leveraged Loan Total Return Index fell 0.17% last month, while the Bloomberg Barclays U.S. investment grade bond index gained 2.5% and U.S. high-yield rose 0.9%. Junk is having the best start to a year since 2003 while BBB rated bonds are doing the best since 1995.”
Leveraged Speculator Watch:
April 2 – Bloomberg (Justina Lee and Ksenia Galouchko): “Quants surfing the momentum of assets around the world have caught the bullish wave powering government bonds in a tentative reprieve for the besieged $355 billion industry. Trend followers, or commodity trading advisers, have posted their best quarter since late 2017 after recession panic juiced long wagers tracking interest-rate markets, according to a Societe Generale SA index… The bad news: They’re only up 1.9%, even as stocks and crude post their best first-quarter performance in over a decade. Automated traders have largely missed out on the biggest gains on offer as their trading signals flash caution after last year’s market meltdown. All told, whipsawing trends continue to dog the industry after the worst outflows in over 10 years in 2018.”
Geopolitical Watch:
April 2 – Reuters (Angus Berwick and Vivian Sequera): “Venezuela’s Constituent Assembly, an all-powerful legislature controlled by the ruling Socialist Party, …approved a measure allowing for a trial of opposition leader Juan Guaido, in what appeared to be a step toward having him arrested. Guaido, leader of the opposition-controlled National Assembly, in January invoked the country’s constitution to assume the interim presidency after declaring President Nicolas Maduro’s 2018 re-election a fraud. He has been recognized by the United States and most other Western nations as Venezuela’s legitimate leader, and has said he does not recognize decisions emanating from the Maduro government.”
April 4 – Reuters (Maxim Rodionov): “Venezuela’s deputy foreign minister Ivan Gil said… he does not rule out that more Russian military personnel may arrive in Venezuela under agreements already concluded with Russia… The deputy minister also said Russian forces will stay in Venezuela as long as needed…”
March 31 – Reuters (Yimou Lee and Ben Blanchard): “Taiwan on Sunday condemned what it called a ‘provocative’ move by China after two Chinese fighter jets crossed a maritime border separating the two sides amid growing friction between Taipei and Beijing. Earlier on Sunday Taiwan scrambled aircraft to drive away the two Chinese planes, the self-ruled island’s defence ministry said.”
April 5 – New York Times (Dealbook): “’It doesn’t take a genius’ to know capitalism needs fixing. Capitalism helped Ray Dalio build his investment empire. But in a lengthy LinkedIn post, the Bridgewater Associates founder says that it isn’t working anymore. Mr. Dalio writes that he has seen capitalism ‘evolve in a way that it is not working well for the majority of Americans because it’s producing self-reinforcing spirals up for the haves and down for the have-nots.’ ‘Disparity in wealth, especially when accompanied by disparity in values, leads to increasing conflict and, in the government, that manifests itself in the form of populism of the left and populism of the right and often in revolutions of one sort or another.’ ‘The problem is that capitalists typically don’t know how to divide the pie well and socialists typically don’t know how to grow it well.’ ‘We are now seeing conflicts between populists of the left and populists of the right increasing around the world in much the same way as they did in the 1930s when the income and wealth gaps were comparably large.’ ‘It doesn’t take a genius to know that when a system is producing outcomes that are so inconsistent with its goals, it needs to be reformed.’ Stay tuned: Mr. Dalio says that he’ll offer his solutions in another essay.”
I’m reminded of back in 2007 when Pimco’s Paul McCulley coined the term “shadow banking” – and the world finally began taking notice of the dangerous new financial structure that had over years come to dominate system Credit. Okay, but by then the damage was done. As someone that began posting the “Credit Bubble Bulletin” in 1999 and had chronicled the prevailing role of non-bank Credit in fueling the “mortgage finance Bubble” fiasco (on a weekly basis), it was all frustrating.
Why wasn’t the discussion started in 2001/02 when mortgage Credit began expanding at double-digit rates, and there were clear signs of Bubble formation? Oh yea, that’s right. There was desperation to reflate the system and fight the “scourge of deflation” after the bursting of the “tech” Bubble. Excess was welcomed early on – and later, when things got really heated up, nobody dared risk bursting the Bubble.
Reading Mr. Dalio’s latest, I have to ask, “What ever happened to ‘beautiful deleveraging’?” And I’m not on the edge of my seat waiting for his “solutions.”
There was a window of opportunity early in the mortgage financial Bubble period for “statesmen” to rise up and call out the recklessness of the Fed spurring mortgage Credit excess and house price inflation in the name of system reflation. Statesmen and women should have excoriated governor Bernanke for suggesting the “government printing press” and “helicopter money” - the type of crazy talk that should disqualify one for a position of responsibility at the Federal Reserve. Fed chairman? You’ve got to be kidding.
There was a window of opportunity to rein the Fed in after QE1. The Federal Reserve should have been held to their 2011 monetary stimulus “exit strategy.” Instead they doubled down – literally – as the Fed’s balance sheet doubled in about three years to $4.5 TN. Mr. Dalio - along with virtually everyone – didn’t seem to have any issues. Indeed, an unprecedented expansion of non-productive debt (certainly including central bank Credit and Treasury borrowings) somehow equated with “beautiful deleveraging.” It was ridiculous analysis in the face of the greatest global Bubble in human history.
Central banks aren’t fully to blame, but it's an awfully good place to start. Three decades of “activist” monetary management has left a horrible legacy. The Institute for International Finance reported this week that global debt ended 2018 at a record $243 TN. This debt mountain simply would not have been possible without “activist” central banking. Despite a lengthening list of risks, global stocks have powered higher in 2019 to near all-time highs. A relentless speculative Bubble has only been possible because of central bank policies.
I’m not all that interested in Dalio’s “solutions.” In my mind, he missed what was an exceptional opportunity for statesmanship. Bridgewater’s investors were the priority and have been rewarded handsomely. Pro-central bank “activism” has been the right call for compounding wealth for the past decade (or three). But no amount of ingenuity will resolve the historic predicament the world finds itself in today. Markets are broken, global imbalances the most extreme ever, and structural impairment unprecedented – and worsening, all of them.
Most regrettably, the type of structural reform required will only arise from a severe crisis. The Fed and global central bankers have been reflating Bubbles for more than three decades. Highly speculative global markets at this point completely disregard risk. And with borrowing costs incredibly low, what government (ok, Germany) is going to impose some spending discipline and operate on a fiscally responsible trajectory? At this point, finance is hopelessly unsound – and, importantly, hopelessly destructive on an unprecedented global scale.
I had the great pleasure of spending part of my Friday with the University of Oregon Investment Group. I gave a talk, “Money, Credit, Inflation and the Markets.” Being with bright, intellectually curious and enthusiastic university students gives me hope – and a smile.
From my presentation: “It just breaks my heart to see young people turn away from Capitalism. I anticipate spending the rest of my life trying to explain that the culprit is unsound finance and deeply flawed monetary management – and not the system of free-market Capitalism. History teaches us that credit is inherently unstable. I would argue that the experiment in New Age unfettered credit – with its serial booms and busts – evolved into a failed experiment in “activist” monetary management – another debacle in “inflationism.”
“The result has been a period of historic bubbles – in the markets and in economies – on a global scale. And protracted Bubbles become powerful mechanisms of wealth redistribution and destruction. Central banks readily creating new “money” and favoring the securities markets are fundamental to the problem. Such policies benefit the wealthy and worsen inequality. We’re witnessing the resulting rise of populism and a mounting crisis of confidence in our institutions. Even with 3.8% unemployment, near-record stock prices and one of the longest economic expansion on record, our country is deeply divided and resentful. I fear for the next downturn.”
A Friday Business Insider headline: “Hedge-fund billionaire Ray Dalio says the current state of capitalism poses 'an existential threat for the US'”; Barron’s: “Hedge Fund Billionaire Ray Dalio Says Capitalism ‘Must Evolve or Die’”; and Vanity Fair: “Billionaire Hedge-Fund Manager Warns a ‘Revolution’ is Coming.” Observer: “Ray Dalio on Capitalism Gone Wrong: America May See Dire Consequences.” And CBS: “Billionaire Investor Ray Dalio: Capitalism Run Amok is ‘Economically Stupid’”
I’m reminded of an analogy I’ve used in the past. One could make a reasonable argument that our eyeballs are flawed. How could something of such importance be so soft, delicate and vulnerable? Yet this vital organ is not flawed – imperfection is not a legitimate issue. It is the nature of its function that dictates its characteristics and vulnerabilities. Our eyes cannot sit within a protective ribcage like the heart, or within the hardened skull as the brain does.
To be able to see the world – looking at distant mountain ranges and then immediately shifting focus to the pages of a wonderful book – requires an exquisitely complex organ functioning exposed to the elements and largely unprotected. Importantly, we recognize and accept our eyes’ sensitivities and vulnerabilities. We would not wander into a metal shop without wearing protective eye coverings. We don sunglasses on bright days – darkened snow goggles for spring skiing. We learn at a very young age not to stare into the sun.
I disagree with the increasingly popular view that Capitalism as flawed. At the same time, I have been long frustrated by those dogmatically preaching the virtues of Capitalism without accepting the reality of inherent delicacy, vulnerabilities and weaknesses. As we are with our eyes, we have to be on guard, take precautions, and definitely avoid doing anything stupid. Who is reckless with their eyes? There’s too much to lose. No one wants to contemplate being blind for the rest of their life.
How could we ever have allowed Capitalism to be so irreparably damaged? There are innate instabilities in Credit and finance that have been disregarded for way too long. Unsound “money” is a primary (and insidious) risk to capitalistic systems. I would further argue that persistent asset inflation and recurring speculative Bubbles pose a major risk to sound finance and, as such, to Capitalism more generally. Moreover, inflationism – “activist” central banking – with its asset market focus, manipulation and nurturing of speculative excess and inequality, is anathema to free-market Capitalism.
When the Fed slid down the slippery slope and implemented QE, the economics profession and investment community failed society. The case against QE shouldn’t have been primarily focused on inflation risk. The overarching danger was a corrosive impairment of markets and finance, with resulting dysfunction for Capitalism more generally. The risk was destabilizing inequality, insecurity and resulting societal stress. There was the peril of a fragmented society, divided nation, political dysfunction and waning trust in our institutions. Somehow, everyone was content to ignore the reality that unsound “money” reverberates throughout the markets, the economy, society, politics and geopolitics.
Over the years, I’ve referred to the “first law of holes.” If you find yourself in a hole, the first requirement is to stop digging. Similarly, I’ve repeatedly noted the long-ago recognized issue with discretionary monetary management: One mistake invariably leads to only bigger mistakes. And I’m fond of reminding readers that “things turn crazy at the end of cycles.” Historic cycle, historic “crazy.” And I’ll repeat what I’ve written many times before: From my analytical perspective, things continue to follow the worst-case scenario.
It was yet another mistake for the Fed to go full U-Turn dovish. It was another blunder for the global central bank community to signal they were willing to move quickly and aggressively to bolster international markets. The 2019 speculative run in the markets only exacerbates underlying fragilities – worsens inequality – and sets the stage for an only deeper crisis.
I’ll be curious to see if Ray Dalio’s “solutions” include having the Fed disavow aggressive monetary stimulus, while letting markets begin functioning on their own. The biggest problem with Capitalism these days is that the system is not self-adjusting and correcting. Structurally distorted markets and deeply maladjusted economies are incapable of correction. Global imbalances only worsen every year. Speculative Bubbles inflate further.
Global central banks are understandably distressed about the potential for market dislocation and crisis. Yet recurring efforts to forestall upheaval increasingly risk financial collapse. There is no real solution until deeply flawed monetary management is recognized and changed. The current course will only exacerbate inequality and foment Dalio’s “revolution.” Any soul-searching and scrutinizing of Capitalism must begin with central banking and monetary mismanagement. Where were the likes of Dalio, Dimon and Buffett when it could have made a difference? Faux Statesmanship.
For the Week:
The S&P500 rose 2.1% (up 15.4% y-t-d), and the Dow gained 1.9% (up 13.3%). The Utilities slipped 0.2% (up 10.3%). The Banks jumped 4.3% (up 13.8%), and the Broker/Dealers surged 5.4% (up 12.3%). The Transports rose 3.1% (up 17.1%). The S&P 400 Midcaps (up 17.2%), and the small cap Russell 2000 (up 17.4%) both gained 2.8%. The Nasdaq100 rose 2.7% (up 19.7%). The Semiconductors surged 5.9% (up 27.9%). The Biotechs gained 2.6% (up 24.7%). With bullion little changed, the HUI gold index increased 0.7% (up 6.6%).
Three-month Treasury bill rates ended the week at 2.38%. Two-year government yields jumped eight bps to 2.34% (down 15bps y-t-d). Five-year T-note yields rose seven bps to 2.31% (down 21bps). Ten-year Treasury yields jumped nine bps to 2.50% (down 19bps). Long bond yields rose nine bps to 2.90% (down 11bps). Benchmark Fannie Mae MBS yields gained six bps to 3.17% (down 33bps).
Greek 10-year yields sank 21 bps to 3.52% (down 88bps y-t-d). Ten-year Portuguese yields added a basis point to 1.26% (down 47bps). Italian 10-year yields slipped one basis point to 2.48% (down 26bps). Spain's 10-year yields increased a basis point to 1.11% (down 31bps). German bund yields jumped eight bps to 0.01% (down 24bps). French yields rose four bps to 0.36% (down 35bps). The French to German 10-year bond spread narrowed four bps to 35 bps. U.K. 10-year gilt yields jumped 12 bps to 1.12% (down 16bps). U.K.'s FTSE equities index gained 2.3% (up 10.7% y-t-d).
Japan's Nikkei 225 equities index jumped 2.8% (up 9.0% y-t-d). Japanese 10-year "JGB" yields rose five bps to negative 0.03% (down 3bps y-t-d). France's CAC40 gained 2.3% (up 15.8%). The German DAX equities index surged 4.2% (up 13.7%). Spain's IBEX 35 equities index jumped 2.9% (up 11.4%). Italy's FTSE MIB index gained 2.2% (up 18.7%). EM equities were mostly higher. Brazil's Bovespa index gained 1.8% (up 6.7%), and Mexico's Bolsa surged 3.9% (up 8.0%). South Korea's Kospi index rose 3.2% (up 8.3%). India's Sensex equities index increased 0.5% (up 7.7%). China's Shanghai Exchange surged 5.0% (up 30.2%). Turkey's Borsa Istanbul National 100 index jumped 5.3% (up 8.2%). Russia's MICEX equities index gained 1.8% (up 7.2%).
Investment-grade bond funds saw inflows of $2.901 billion, and junk bond funds posted inflows of $2.0 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates increased two bps to 4.08% (down 32bps y-o-y). Fifteen-year rates slipped one basis point to 3.56% (down 31bps). Five-year hybrid ARM rates dropped nine bps to 3.66% (up 4bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up 14 bps to 4.30% (down 22bps).
Federal Reserve Credit last week declined $12.4bn to $3.909 TN. Over the past year, Fed Credit contracted $443bn, or 10.2%. Fed Credit inflated $1.098 TN, or 39%, over the past 335 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $10.3bn last week to $3.460 TN. "Custody holdings" gained $21.9bn y-o-y, or 0.6%.
M2 (narrow) "money" supply gained $32.3bn last week to a record $14.521 TN. "Narrow money" rose $569bn, or 4.1%, over the past year. For the week, Currency increased $2.2bn. Total Checkable Deposits rose $18.3bn, and Savings Deposits gained $5.1bn. Small Time Deposits increased $3.7bn. Retail Money Funds added $2.9bn.
Total money market fund assets rose $5.8bn to $3.107 TN. Money Funds gained $287bn y-o-y, or 10.2%.
Total Commercial Paper gained $6.3bn to $1.085 TN. CP expanded $37.4bn y-o-y, or 3.6%.
Currency Watch:
The U.S. dollar index was little changed at 97.395 (up 1.3% y-t-d). For the week on the upside, the South African rand increased 2.9%, the Mexican peso 1.9%, the Brazilian real 1.2%, the Norwegian krone 0.2%, the Australian dollar 0.1% and the Singapore dollar 0.1% . For the week on the downside, the New Zealand dollar declined 1.1%, the Japanese yen 0.8%, the Swiss franc 0.5%, the Canadian dollar 0.3%, the Swedish krona 0.1% and the South Korean won 0.1%. The Chinese renminbi declined 0.07% versus the dollar this week (up 2.40% y-t-d).
Commodities Watch:
The Bloomberg Commodities Index gained 1.6% this week (up 7.0% y-t-d). Spot Gold was about unchanged at $1,292 (up 0.7%). Silver slipped 0.2% to $15.086 (down 2.9%). Crude surged another $2.94 to $63.08 (up 39%). Gasoline jumped 4.6% (up 49%), while Natural Gas was little changed (down 9%). Copper declined 1.4% (up 10%). Wheat rallied 2.2% (down 7%). Corn recovered 1.7% (down 3%).
Market Instability Watch:
April 4 – Bloomberg (Michelle Davis): “Jamie Dimon warned investors to get ready for more wild rides like the one that upended markets at the end of last year. ‘The fourth quarter of 2018 might be a harbinger of things to come,’ the chief executive officer of JPMorgan… said… in his 51-page annual letter to shareholders. Dimon cited a raft of issues driving the more pessimistic outlook, including uncertainty about the Federal Reserve’s interest-rate shifts, Germany’s economic slowdown, Brexit and the U.S.-China trade spat. Investors face a ‘new normal’ of liquidity constraints because of tighter regulations on banks and other market makers, Dimon said, adding that ‘there are growing geopolitical tensions -- with less certainty around American global leadership.’”
April 2 – Bloomberg (Cecile Gutscher and Tasos Vossos): “For investors trying to make sense of recent extreme moves in the global credit market, bad news: The roller coaster may go on. The long-feared liquidity menace is well and truly here, and it’s overshadowing more prosaic factors like low default rates and corporate earnings when turbulence in the $13 trillion market erupts, according to… UBS Group AG. ‘Dizzying’ moves of late have been driven by rapidly rising and falling liquidity, strategists at the bank argued… These are symptoms of a herd mentality that’s exacerbating every selloff and rally, and the problem is particularly acute for junk-rated debt, they said.”
April 1 – Bloomberg (Lila Lee): “The $5.1-trillion-a-day foreign exchange market is suffering more than most from central bank decisions to move in tandem and keep interest rates low for longer. Policymakers moving to press pause on policy tightening in 2019, as well as broadly mixed messages from the biggest economies, have combined to suppress already-low volatility to levels not seen in five years… Volatility fell to its lowest levels since late 2014 in March, according to the Deutsche Bank Currency Volatility Index.”
April 1 – CNBC (Diana Olick): “A sharp drop in interest rates last week suddenly made millions more borrowers eligible to refinance their mortgages. With the average rate on the 30-year fixed now close to 4%, 4.9 million borrowers could likely qualify for a refinance that could reduce their interest rates by at least three-quarters of a percentage point, according to Black Knight, a mortgage data and analytics company. That’s a nearly 50% increase in the size of that population in a single week.”
April 3 – Bloomberg (Sarah Ponczek): “For active managers who spent the year’s first two months rediscovering their super powers, March was kryptonite. Stock-picking mutual funds have watched it all turn tragic over the last four weeks, with two-thirds trailing benchmarks, upending the strongest start to a year since the bull market began. Blame it on a loss of nerve. In a market that kept trudging upward, they bailed on the winners. Now, only 36% of large-cap portfolios are ahead of indexes like the Russell 1000…”
April 3 – Bloomberg (Rachel Evans): “A rough start to the year for more than $850 billion exchange-traded funds with quantitative strategies is fueling a product rethink. Smart-beta stock ETFs -- which use characteristics such as a company’s value, size or momentum to direct investments -- lured the least money in 12 months in the U.S., dragging asset growth below the five-year average for a second quarter… Instead of quitting, ETF providers are doubling down and trying to woo investors with all-in-one funds that pull together several factors.”
Trump Administration Watch:
April 2 – CNBC (Patti Domm): “When the U.S. escalated the trade war by slapping tariffs on $200 billion in Chinese goods last September, China’s economy was struggling and its stock market was in a deep slide, giving the U.S. a seeming advantage in a trans-Pacific trade rift. But months later, the U.S. has lost some of that edge. China’s Shanghai stock market has surged more than 27% in 2019 and is the best performer of major markets globally, while China’s economy is finally showing early signs of stabilizing. When the September tariffs were announced, President Donald Trump was seen as emboldened by the best two quarters of more than 3% U.S. growth in years and a stock market that was hitting all-time highs. While the U.S. is still seen as having an advantage, economic growth has faltered, to a below trend 1.5% pace in the first quarter.”
April 3 – Financial Times (James Politi and Lucy Hornby): “Top US and Chinese officials have resolved most of the issues standing in the way of a deal to end their long-running trade dispute but are still haggling over how to implement and enforce the agreement, people briefed on the talks have said. Liu He, China’s vice-premier, on Wednesday began meeting with Robert Lighthizer, the US trade representative, and Steven Mnuchin, the US Treasury secretary, for a potentially climactic negotiation session that was expected to last for three days. News that the two sides are closing in on a deal after four months of negotiations energised stock markets as the new round of talks began. Mr Lighthizer greeted Mr Liu with a handshake on the steps leading into the US trade representative’s headquarters…”
April 3 – Wall Street Journal (Nick Timiraos and Alex Leary): “President Trump is blaming the Federal Reserve for holding back the economy and stock market despite the central bank’s recent decision to do two things he wanted—halt rate increases and stop shrinking its asset portfolio. The president blasted the Fed and Chairman Jerome Powell at three meetings in the past week alone, telling Republican senators, supporters and staffers that if it wasn’t for the central bank’s past rate increases, economic output and stocks would be higher and the U.S. budget deficit would be rising less. ‘He was pretty rough,’ said one person… Mr. Trump also blamed Treasury Secretary Steven Mnuchin for recommending Mr. Powell for the top Fed job. ‘Mnuchin gave me this guy,’ Mr. Trump said. Mr. Trump recalled a recent phone conversation he had with Mr. Powell, this person said. ‘I guess I’m stuck with you,’ the president recalled telling Mr. Powell.”
March 31 – Reuters (Trevor Hunnicutt and Ann Saphir): “Barely a week after the U.S. Federal Reserve called a halt to interest rate hikes, policymakers are now battling a view growing in financial markets, and embraced by the Trump administration, that the Fed will need to cut rates before long. Larry Kudlow, President Donald Trump’s top economic advisor, said Friday on CBNC that while there is ‘no emergency,’ the Fed should cut rates to protect the U.S. economy from slowing down. But no fewer than five Fed officials in the past 24 hours have touted the underlying strength of the American economy and argued the recent spate of weak data on business activity is more likely to prove fleeting than lasting. Even the Fed’s two most dovish policymakers - the presidents of the St. Louis and Minneapolis regional banks - say they are not ready to agitate for the central bank to start reversing three years of rate increases.”
April 2 – Reuters (David Lawder): “The Trump administration is maintaining support for prospective Federal Reserve nominee Stephen Moore following reports the conservative commentator has had legal problems, a White House adviser said… ‘We stand behind him a hundred percent,’ National Economic Council Director Larry Kudlow told reporters…”
April 1 – Politico (Sarah Ferris): “A looming battle between President Donald Trump and Democrats over government spending and the debt limit could make the 35-day government shutdown look like a blip. A series of budget deadlines converge in the coming months that could leave Washington on the precipice of another shutdown, $100 billion in automatic spending cuts and a full-scale credit crisis. And lawmakers are openly worried about stumbling over the edge. Some top Democrats have begun quietly pushing for a grand bargain to simultaneously raise the debt ceiling and Congress’ stiff budget caps — avoiding market turmoil and staving off harsh cuts to domestic and defense programs… But the White House, focused on Trump’s reelection bid, is resisting talk of another massive deal that could cost as much as $350 billion over two years.”
March 30 – Reuters (Julia Harte and Tim Reid): “The U.S. government cut aid to El Salvador, Guatemala and Honduras on Saturday after President Donald Trump blasted the Central American countries for sending migrants to the United States and threatened to shutter the U.S.-Mexico border... On Friday, Trump accused the nations of having ‘set up’ migrant caravans and sent them north. Trump said there was a ‘very good likelihood’ he would close the border this week if Mexico did not stop immigrants from reaching the United States.”
Federal Reserve Watch:
April 3 – Bloomberg (Jennifer Jacobs): “President Donald Trump intends to nominate Herman Cain, the former pizza company executive who ran for the 2012 Republican presidential nomination, for a seat on the Federal Reserve Board, according to people familiar with the matter. Trump plans to announce his selection very soon, said three people, who asked not be identified discussing the nomination because it hasn’t been announced. Cain would fill one of two open seats on the board; the president plans to name Stephen Moore, a visiting fellow at the Heritage Foundation and a long-time Trump supporter, for the other. In Cain and Moore, Trump would place two political loyalists on the board of a central bank that has frequently crossed him.”
April 3 – Bloomberg (Rich Miller): “The Federal Reserve risks stoking the same sort of asset bubbles that Chairman Jerome Powell has linked to the last two recessions with its new-found eagerness to fan inflation. The Fed’s surprise pivot away from any interest rate increases this year has boosted prices of stocks, high yield bonds and other risky assets in spite of nagging investor concerns about slowing global economic growth. Financial conditions, at least as measured by the Chicago Fed, are at their easiest since 1994. And they could well get looser.”
U.S. Bubble Watch:
April 1 – Associated Press (Josh Boak): “U.S. manufacturers grew at a faster pace in March, as the pace of employment jumped and new orders and production improved. The Institute for Supply Management… said… that its manufacturing index rose to 55.3 last month, up from 54.2 in February… The sector has been reporting growth for 31 months.”
April 4 – CNBC (Diana Olick): “If you’re shopping for a cheap home this spring, good luck. The median value of homes listed for sale in March hit a record $300,000, according to realtor.com. Home values overheated from 2016 to mid-2018, as demand outstripped supply, especially at the lower end of the market. Those gains began to shrink last summer, as mortgage rates rose. The difference this spring is that there continues to be a shortage of entry-level homes for sale, but the supply of higher-end homes is rising. ‘Despite a slowing growth rate, home prices will likely continue to set new records later this year,” said Danielle Hale, realtor.com’s chief economist. ‘Heading into spring, U.S. prices are expected to continue to rise and inventory is expected to continue to increase, but at a slower pace than we’ve seen the last few months…’”
March 31 – Wall Street Journal (Laura Kusisto): “The spring home-buying season is shaping up as the best in years, offering new opportunities after last year’s tough housing market drove away many would-be buyers. A number of economic factors that slowed sales in 2018 have eased or even reversed in recent weeks. Mortgage rates have been falling, home inventory is rising in many once-tight markets and the pace of home-price growth is slowing. These more favorable conditions are already bringing price cuts and fewer of the bidding wars that left many buyers empty-handed, recent data show. The housing market had become so skewed toward sellers that many buyers were giving up, causing sales to drop.”
March 30 – Wall Street Journal (Dana Cimilluca): “Remember the last time investors went nuts for an IPO boom? In 1999, hundreds of companies made a madcap dash to the public markets, capturing the imaginations of everyday Americans who thought they could day-trade their way to fortunes. Startups like Webvan and eToys were suddenly household names. The Pets.com sock puppet was a guest on ‘Live With Regis and Kathie Lee.’ All told, 547 companies had initial public offerings in the U.S. that year, taking in a record haul of $107.9 billion, according to Dealogic. This year could be even bigger.”
March 29 – Reuters (P.J. Huffstutter and Humeyra Pamuk): “At least 1 million acres of U.S. farmland were flooded after the ‘bomb cyclone’ storm left wide swaths of nine major grain producing states under water this month, satellite data analyzed by Gro Intelligence for Reuters showed.”
April 1 – CNBC (Tom Polansek): “The Black Hawk military helicopter flew over Iowa, giving a senior U.S. agriculture official and U.S. senator an eyeful of the flood damage below, where yellow corn from ruptured metal silos spilled out into the muddy water. And there’s nothing the U.S. government can do about the millions of bushels of damaged crops here under current laws or disaster-aid programs, U.S. Agriculture Under Secretary Bill Northey told a Reuters reporter… The USDA has no mechanism to compensate farmers for damaged crops in storage, Northey said, a problem never before seen on this scale. That’s in part because U.S. farmers have never stored so much of their harvests, after years of oversupplied markets, low prices and the latest blow of lost sales from the U.S. trade war with China…”
April 1 – Wall Street Journal (Dan Molinski): “Gasoline prices typically move higher this time of year. But the seasonal rise is even more pronounced thanks to flooding in the Midwest and dwindling oil production out of Venezuela. U.S. drivers now pay $2.71 for a gallon on average, up 28 cents from a month ago and nearly 50 cents higher since early January… Prices are closing in on the $2.98-a-gallon level reached in May, which was the priciest level since October 2014.”
April 2 – CNBC (Robert Frank): “Manhattan real estate had its worst first quarter since the financial crisis, capping the longest losing streak for sales in over 30 years… Total sales fell 3% in the first quarter, according to… Douglas Elliman and Miller Samuel. That marked the sixth straight quarter of declines, which is the longest downturn in the three decades that the appraisal and research firm has been keeping data… Prices in Manhattan continue to remain soft. While the average sale price got a big boost from hedge fun billionaire Ken Griffin’s $238 million condo purchase, hitting $2.1 million, the median sales price in Manhattan declined slightly, to just over $1 million.”
China Watch:
March 30 – Reuters (Yawen Chen and Ryan Woo): “Factory activity in China unexpectedly grew for the first time in four months in March, an official survey showed…, suggesting government stimulus measures may be starting to take hold in the world’s second largest economy… Factory output grew at its fastest pace in six months in March, reversing a brief contraction in the previous month. It rose to 52.7 from February’s 49.5, the highest level seen since September 2018. Total new orders also grew at a quicker pace, driving up factory-gate prices to a five-month high of 51.4, ending four months of contraction.”
April 2 – Reuters (Yawen Chen and Ryan Woo): “Activity in China’s services sector picked up to a 14-month high in March as demand improved at home and abroad…, adding to signs that government stimulus policies are gradually kicking in… The Caixin/Markit services purchasing managers’ index (PMI) rose to 54.4, the highest since January 2018 and up from February’s 51.1, a fourth-month low… Survey respondents said activity was being buoyed by stronger demand, new state policies and improved access to financing.”
April 3 – Bloomberg: “China offered new measures to reduce taxes and raise its citizens’ wages, ramping up an already ambitious plan to boost domestic demand. Policy makers are drafting policies to help farmers, small-business owners and scientific researchers boost their incomes, the Economic Information Daily reported, citing unnamed sources. The measures will probably include ‘bigger breakthroughs’ in land reform to enhance farmers’ property gains, the newspaper said.”
April 1 – Bloomberg: “Chinese companies have missed payments on 26.2 billion yuan ($3.9bn) of local bonds in the first quarter, almost quadruple the same period in 2018. It was also the third highest quarter for bond delinquencies in China’s history…”
April 3 – Bloomberg: “A series of bankruptcy filings by major private-sector bond issuers in China’s third-wealthiest province is shining a spotlight on aggressive efforts by local governments to manage unsustainable debt loads. Four debtors have entered bankruptcy procedures since the start of November in Dongying, a city of 2 million in the eastern province of Shandong that once thrived with a booming tire-making industry. While China sees thousands of bankruptcies each year, instances of court-led restructuring of publicly issued bonds have been rare.”
Central Bank Watch:
April 1 – Bloomberg (Viktoria Dendrinou and Piotr Skolimowski): “European Central Bank officials pressed the case for continued monetary-policy support as they signaled the euro-area economic slowdown is weighing on inflation. In a foreword to the ECB’s annual report, President Mario Draghi warned of a ‘persistence of uncertainties’ and said there’s a continued need for stimulus to boost inflation. His vice president, Luis de Guindos echoed that, saying ‘weaker growth momentum will leave its mark on domestic price pressures, slowing the adjustment of inflation toward our aim.’”
April 3 – Financial Times (Claire Jones): “Five years after the European Central Bank broke ground by cutting interest rates below zero, its officials are considering a redesign of the contentious policy as they face up to an economy and banking system that could remain fragile for a lot longer. ECB president Mario Draghi pushed the world’s leading central banks into uncharted territory in 2014 when the eurozone deposit rate — what commercial banks pay to hold money at the ECB — went negative. Further cuts have pushed the rate to minus 0.4% since 2016, part of a policy to spur banks to lend money rather than sit on it. Banks were dismayed at what has been in effect a tax on their activities, which ECB insiders say amounts to €7.5bn a year.”
Brexit Watch:
March 30 – Reuters (William Schomberg and David Milliken): “British Prime Minister Theresa May risks the ‘total collapse’ of her government if she fails to get her battered Brexit deal through parliament, the Sunday Times newspaper said, amid growing speculation that she might call an early election. Underscoring the tough choices facing May to break the Brexit impasse, the newspaper said at least six pro-European Union senior ministers will resign if she opts for a potentially damaging no-deal departure from the EU.”
April 3 – Financial Times (Lucy Meakin): “The risk of a no-deal Brexit is now ‘alarmingly high,’ according to Bank of England Governor Mark Carney, who described some claims about how the U.K. could manage such a situation as ‘absolute nonsense.’ Leaving the European Union without an agreement has become the ‘default’ outcome despite being opposed by Parliament, and could happen by accident, he said…”
Europe Watch:
April 4 – Associated Press (David Rising): “A group of leading German economic research institutes slashed their growth forecast for the country…, warning that if Britain leaves the European Union without a deal, it could get even worse. In a joint statement, the five institutes said they were reducing their autumn forecast of 1.9% growth for Europe’s largest economy downward to 0.8% after concluding ‘political risks have further clouded the global economic environment.’”
April 1 – Reuters (Gavin Jones): “Italy’s finances will deteriorate this year and next, with debt and the budget deficit both rising because of recession and higher public spending, the Organisation for Economic Cooperation and Development said… In a special report on Italy, the… OECD said the deficit would rise to 2.5% of gross domestic product this year, above the 2% target Rome agreed in December… The economy will shrink by 0.2% this year, the OECD said, confirming a forecast last month, before expanding 0.5% in 2020.”
EM Watch:
April 3 – Reuters (Ece Toksabay and Tuvan Gumrukcu): “Turkey’s main opposition candidate in Istanbul urged the High Election Board (YSK)… to confirm him as the elected mayor after it ruled in favour of a partial recount of votes in 18 of the city’s 39 districts. Initial results from Sunday’s mayoral elections showed the opposition Republican People’s Party (CHP) had narrowly won control of Turkey’s two biggest cities, Istanbul and Ankara, in a shock upset for President Tayyip Erdogan’s ruling AK Party.”
April 2 – Financial Times (Editorial Board): “It is hard to overstate the blow to Turkey’s president Recep Tayyip Erdogan represented by losing political control not just of Ankara but — most likely — Istanbul too. It was victories in Turkey’s two biggest cities 25 years ago that gave him his real political start; as he told party activists in 2017: ‘If we stumble in Istanbul, we lose our footing in Turkey.’ Sunday’s shock regional election setbacks bring Mr Erdogan to a fork in the road — where he must choose between the pragmatism he is capable of, and his instinct to double down against opposition.”
April 3 – Financial Times (Adam Samson): “Turkey’s inflation rate remained a whisker below 20% last month… Consumer prices rose 19.71% in March from the same month in 2018…, from 19.67% in February… The collapse last year in the value of the lira against other world currencies ignited a boom in price growth that has had wide-ranging implications across the economy.”
Global Bubble Watch:
April 2 – Bloomberg (John Authers and Lauren Leatherby): “This was the decade of de-leveraging that wasn’t. A decade ago, as the world began to piece the financial system back together after an epic credit crisis, there was agreement on one thing: Too much debt had caused the crisis, and so there must be a huge de-leveraging. It has not worked out like that. Everyone knew that leverage was too high. In 2007, as subprime lenders went bankrupt and the crisis took hold, sinister charts circulated around Wall Street. Shooting upwards, on one side, was U.S. household debt as a proportion of total GDP. Shooting downwards, on the other side, was the U.S. savings rate, plunging near zero… Behold the result of their labors: Leverage has increased. U.S. consumers and the Western banking system have cut back somewhat, but leverage has just moved elsewhere. Their retrenchment was far outstripped by a rise in borrowing by companies and particularly by governments.”
April 3 – Wall Street Journal (Laura Kusisto and Peter Grant): “Cities around the world, from New York to London to Stockholm to Sydney, are struggling to solve growing affordable housing crises. Acute shortages are persisting despite millions of dollars invested and hundreds of thousands of units built. Some countries have focused on solutions promoting unshackled free markets while others have turned more to rent control and subsidies. But no approach has solved the crises and most have other negative ripple effects. Across 32 major cities around the world, real home prices on average grew 24% over the last five years, while average real income grew by only 8%..., according to Knight Frank, a… real-estate consulting firm. Economists say it is striking that affordability has worsened even during a period of global prosperity over the last six years.”
March 30 – Wall Street Journal (Cara Lombardo and Ben Dummett): “Global political tension and slowing economies abroad are taking a bite out of mergers-and-acquisitions activity. So far this year, companies world-wide have struck $913 billion of merger deals, down 17% from the same period in 2018, according to Dealogic.”
March 31 – Financial Times (Don Weinland): “A global real estate boom fueled by China’s ambitious Belt and Road Initiative has slowed to a crawl, as Beijing seeks to rein in rogue building projects across the developing world. So far this year, less than $1bn has been invested into overseas commercial property projects by Chinese developers in designated BRI countries. That puts this year’s total on track to be far below last year’s figure of about $14bn, and marks another sharp drop from the peak of $23.6bn in 2016… When China announced its $1tn plan to build bridges, roads and ports in emerging markets starting in 2013, it also unleashed a wave of investments into hotels, office buildings and casinos from Mongolia to Montenegro — an unintended consequence of the plan.”
April 4 – Financial Times (Don Weinland): “Chinese state banks have been forced to recalibrate their appetite for risk on overseas infrastructure financing this year as developing countries struggle to repay debts. Over the past decade, government-controlled lenders such as China Development Bank, ICBC and Bank of China have risen up the ranks to become Asia’s largest players in infrastructure finance. China’s Belt and Road Initiative, a $1tn plan to build ports, roads and bridges across Eurasia and into Africa, has delivered a boost to the banks’ overseas activity.”
April 3 – Bloomberg (Wendy Tan): “Asian junk bonds suffered the worst downgrade-upgrade ratio from Fitch Ratings in seven years last quarter, led by Chinese issuers. That makes it vital to understand an issuer’s position in a business group. Distressed-debt cases including China’s HNA Group Co. have highlighted the risk of owning debt issued by a holding entity rather than its operating arms.”
March 31 – Bloomberg (Peter Vercoe): “Australian property prices continued their slide last month, as prospective buyers delay purchases until after national elections, and tougher lending standards make it harder to obtain financing. Housing values in the combined state and territory capitals fell 0.7% in March, to be down 8.2% from a year earlier, according to CoreLogic… The nation’s two biggest cities remained at the forefront of the slump. Sydney prices fell 0.9% last month, and are now down 13.9% from their mid-2017 peak, while Melbourne values dropped 0.8% to be 10.3% below their peak.”
Japan Watch:
March 31 – Financial Times (Andrew Whiffin): “The Bank of Japan is now in its tenth year of domestic stock buying through exchange traded funds and is showing little sign of winding the programme down. With the stated inflation target of 2% still elusive, Bank governor Haruhiko Kuroda rejected criticisms of the programme in an address to Japan’s parliament in December and dismissed the notion that an exit should be considered anytime soon. Last year the Bank bought just over Y6tn ($55bn) of ETFs in line with its target for 2018 and now holds close to 80% of outstanding Japanese ETF equity assets. Total purchases to date represent around 5% of the country’s total market capitalisation. The Bank also owns close to half of all outstanding Japanese government bonds.”
March 31 – Reuters (Leika Kihara and Tetsushi Kajimoto): “Japan’s business mood slumped to a two-year low in the March quarter, a central bank survey showed, underscoring concerns that Sino-U.S. trade tensions and softening global demand were taking a toll on the export-reliant economy. The gloom was most pronounced among big manufacturers, where sentiment soured at the fastest pace in more than six years… Separately…, a private business survey showed manufacturing activity in Japan contracted for a second straight month in March, with output down at the sharpest rate in nearly three years.”
Fixed-Income Bubble Watch:
April 2 – CNBC (Jeff Cox): “Debt market activity slowed to a comparative crawl to start out 2019… Issuance plummeted across the board, from syndicated loans to mergers and acquisitions to institutional lending. Securitized products such as collateralized loan obligations also saw a huge drop in activity as did leveraged buyouts, according to… Refinitiv. First-quarter syndicated lending overall declined 36% to about $400 billion. Leveraged loans… fell 56% to $152 billion. Institutional loans dropped to a three-year low of $58.8 billion, and investment grade and leveraged buyout funding slid 11% apiece… Bond issuance across the board fell 14.5% through February, with declines particularly sharp in mortgage-related bonds (off 32.5%) and asset-backed securities (down 55.6%), according to Securities Industry and Financial Markets Association data. Total bond market debt outstanding closed 2018 just shy of $43 trillion, up 4.7% from the year before.”
April 2 – Financial Times (Editorial Board): “Finance is more vulnerable to short-memory syndrome than other industries. An occasional reminder of the grim lessons of history is therefore useful, and no more so than in private equity. The industry still works on the basis that as long as the orchestra is playing a medley of cheap debt, deep pools of capital, and ever larger deals, it should leverage up and keep dancing. A warning from one of private equity’s own that this tune could come to an abrupt end is timely, important and welcome. This week, Jonathan Lavine, co-managing partner of Bain Capital, signalled his concern about private equity groups’ appetite for debt. This time is — slightly — different from the prelude to the financial crisis of 2008… In any case, the worrying similarities with 2007-08 outweigh the differences. Debt levels are high. Loan quality is low. Leveraged buyout loans rate predominantly at B2 or below — the most speculative end of speculative-grade debt — Moody’s says. In a repeat of the breakneck yield-chase before the crisis, investors are eager to grab the higher returns available on such loans. More than 80% of loans are also ‘covenant-lite’, according to LCD… Cov-lite loans may allow ailing companies to survive for longer, but traditional loan conditions are also an effective signal of trouble ahead.”
April 1 – Bloomberg (Tommy Wilkes and Ritvik Carvalho): “U.S. leveraged loans just had their best quarter since 2010, despite lackluster performance in March. The floating-rate asset class has returned about 4% year-to-date, trailing both investment grade and high-yield bonds. The S&P/Leveraged Loan Total Return Index fell 0.17% last month, while the Bloomberg Barclays U.S. investment grade bond index gained 2.5% and U.S. high-yield rose 0.9%. Junk is having the best start to a year since 2003 while BBB rated bonds are doing the best since 1995.”
Leveraged Speculator Watch:
April 2 – Bloomberg (Justina Lee and Ksenia Galouchko): “Quants surfing the momentum of assets around the world have caught the bullish wave powering government bonds in a tentative reprieve for the besieged $355 billion industry. Trend followers, or commodity trading advisers, have posted their best quarter since late 2017 after recession panic juiced long wagers tracking interest-rate markets, according to a Societe Generale SA index… The bad news: They’re only up 1.9%, even as stocks and crude post their best first-quarter performance in over a decade. Automated traders have largely missed out on the biggest gains on offer as their trading signals flash caution after last year’s market meltdown. All told, whipsawing trends continue to dog the industry after the worst outflows in over 10 years in 2018.”
Geopolitical Watch:
April 2 – Reuters (Angus Berwick and Vivian Sequera): “Venezuela’s Constituent Assembly, an all-powerful legislature controlled by the ruling Socialist Party, …approved a measure allowing for a trial of opposition leader Juan Guaido, in what appeared to be a step toward having him arrested. Guaido, leader of the opposition-controlled National Assembly, in January invoked the country’s constitution to assume the interim presidency after declaring President Nicolas Maduro’s 2018 re-election a fraud. He has been recognized by the United States and most other Western nations as Venezuela’s legitimate leader, and has said he does not recognize decisions emanating from the Maduro government.”
April 4 – Reuters (Maxim Rodionov): “Venezuela’s deputy foreign minister Ivan Gil said… he does not rule out that more Russian military personnel may arrive in Venezuela under agreements already concluded with Russia… The deputy minister also said Russian forces will stay in Venezuela as long as needed…”
March 31 – Reuters (Yimou Lee and Ben Blanchard): “Taiwan on Sunday condemned what it called a ‘provocative’ move by China after two Chinese fighter jets crossed a maritime border separating the two sides amid growing friction between Taipei and Beijing. Earlier on Sunday Taiwan scrambled aircraft to drive away the two Chinese planes, the self-ruled island’s defence ministry said.”
Friday Afternoon Links
[Reuters] U.S. payrolls report, trade optimism lift stocks
[Reuters] Trump urges Fed to lower U.S. interest rates
[Reuters] May's Brexit talks with Labour stall, delay request fails to convince EU
[WSJ] Trump Calls on Fed to Cut Interest Rates, Resume Bond-Buying to Stimulate Growth
[FT] Editorial Board: Donald Trump must be stopped from packing the US Federal Reserve
[Reuters] Trump urges Fed to lower U.S. interest rates
[Reuters] May's Brexit talks with Labour stall, delay request fails to convince EU
[WSJ] Trump Calls on Fed to Cut Interest Rates, Resume Bond-Buying to Stimulate Growth
[FT] Editorial Board: Donald Trump must be stopped from packing the US Federal Reserve
Thursday, April 4, 2019
Friday's News Links
[Reuters] Stocks extend gains after job growth rebounds in March
[CNBC] Job market bounces back in March with 196,000 gain in payrolls
[Reuters] Trump says U.S-China trade deal may be reached in four weeks
[CNBC] ‘New consensus’ reached on US-China trade, says Chinese Vice Premier Liu He
[AP] Trump choice of Herman Cain for Fed board could face hurdles
[Reuters] Exclusive: Saudi Arabia threatens to ditch dollar oil trades to stop 'NOPEC' - sources
[Reuters] EU worries about recession risks in Italy, German slowdown
[Bloomberg] What Will Cause the Next Debt Crisis?
[WSJ] Trump Picks Herman Cain for Fed Seat
[WSJ] A First German ECB Chief? It Looks Increasingly Likely
[WSJ] Beijing’s Bank Bailout Better Be Bold
[FT] Central bank independence is as dead as vaudeville
[FT] China’s bond market is opening — but are the rating agencies ready?
[CNBC] Job market bounces back in March with 196,000 gain in payrolls
[Reuters] Trump says U.S-China trade deal may be reached in four weeks
[CNBC] ‘New consensus’ reached on US-China trade, says Chinese Vice Premier Liu He
[AP] Trump choice of Herman Cain for Fed board could face hurdles
[Reuters] Exclusive: Saudi Arabia threatens to ditch dollar oil trades to stop 'NOPEC' - sources
[Reuters] EU worries about recession risks in Italy, German slowdown
[Bloomberg] What Will Cause the Next Debt Crisis?
[WSJ] Trump Picks Herman Cain for Fed Seat
[WSJ] A First German ECB Chief? It Looks Increasingly Likely
[WSJ] Beijing’s Bank Bailout Better Be Bold
[FT] Central bank independence is as dead as vaudeville
[FT] China’s bond market is opening — but are the rating agencies ready?
Thursday Evening Links
[Reuters] S&P 500, Dow advance with trade talks in focus
[Reuters] Trump says China trade talks going well, will only accept 'great' deal
[CNBC] Trump is reportedly set to nominate Herman Cain to the Fed
[Reuters] U.S. income inequality a 'national emergency': billionaire Ray Dalio
[CNBC] Home prices hit a new record, as higher-end listings dominate this spring’s market
[Reuters] Fed's Mester sees scope for U.S. rates to move 'a bit higher'
[FT] Tett: Weird things keep happening in the markets
[Reuters] Trump says China trade talks going well, will only accept 'great' deal
[CNBC] Trump is reportedly set to nominate Herman Cain to the Fed
[Reuters] U.S. income inequality a 'national emergency': billionaire Ray Dalio
[CNBC] Home prices hit a new record, as higher-end listings dominate this spring’s market
[Reuters] Fed's Mester sees scope for U.S. rates to move 'a bit higher'
[FT] Tett: Weird things keep happening in the markets
Wednesday, April 3, 2019
Thursday's News Links
[Reuters] Stocks stall on trade jitters, German economy angst
[Reuters] U.S. weekly jobless claims lowest since 1969
[Reuters] Japan policymakers shun 'Modern Monetary Theory' as dangerous
[AP] German economy forecast to slow sharply
[Bloomberg] There's Hated Stocks, Then There's Really Hated Stocks. And They're Killing It
[Bloomberg] Trump's Bet on China's Mythical Reformers Risks Another Letdown
[Bloomberg] China Preps More Stimulus Measures to Aid Consumption Recovery
[Bloomberg] Risky Company Debt Is Getting Riskier
[Bloomberg] Dimon Sees Recent Volatility as Harbinger of Things to Come
[Bloomberg] Pettis: Don’t Breathe Easy About China Yet
[Bloomberg] Bankruptcy Run in Wealthy China Province Spooks Creditors
[Reuters] Venezuelan deputy minister says more Russian troops could arrive: Interfax
[WSJ] U.S.-China Trade Talks in ‘End Game’ but No Final Deal Yet, Chamber Leader Says
[WSJ] Irrational Exuberance Endangers China’s Nasdaq
[FT] Has the yield curve predicted the next US downturn?
[FT] Draghi’s ECB tackles negatives of contentious interest rate policy
[FT] China state banks pull back from risky overseas projects
[FT] Hedge funds take profits from doom-laden bond market
[Reuters] U.S. weekly jobless claims lowest since 1969
[Reuters] Japan policymakers shun 'Modern Monetary Theory' as dangerous
[AP] German economy forecast to slow sharply
[Bloomberg] There's Hated Stocks, Then There's Really Hated Stocks. And They're Killing It
[Bloomberg] Trump's Bet on China's Mythical Reformers Risks Another Letdown
[Bloomberg] China Preps More Stimulus Measures to Aid Consumption Recovery
[Bloomberg] Risky Company Debt Is Getting Riskier
[Bloomberg] Dimon Sees Recent Volatility as Harbinger of Things to Come
[Bloomberg] Pettis: Don’t Breathe Easy About China Yet
[Bloomberg] Bankruptcy Run in Wealthy China Province Spooks Creditors
[Reuters] Venezuelan deputy minister says more Russian troops could arrive: Interfax
[WSJ] U.S.-China Trade Talks in ‘End Game’ but No Final Deal Yet, Chamber Leader Says
[WSJ] Irrational Exuberance Endangers China’s Nasdaq
[FT] Has the yield curve predicted the next US downturn?
[FT] Draghi’s ECB tackles negatives of contentious interest rate policy
[FT] China state banks pull back from risky overseas projects
[FT] Hedge funds take profits from doom-laden bond market
Wednesday Evening Links
[Reuters] U.S. chip stocks surge on trade deal hopes, Wall Street edges up
[Bloomberg] Border-Closing Options Under Study by Trump Officials
[Bloomberg] U.S. services, private payrolls data highlight slowing economy
[Reuters] German institutes cut 2019 growth forecast to 0.8 percent: sources
[CNBC] Don’t be fooled by the ‘unicorn’ hype this year, most IPOs lose money for investors after 5 years
[Bloomberg] BOE's Carney Says Risk of No-Deal Brexit Is Alarmingly High
[Bloomberg] Refinancing Spike to Keep Mortgage-Backed Security Investors on Guard
[NYT] America’s Biggest Economic Challenge May Be Demographic Decline
[WSJ] Tariffs Take Center Stage in U.S.-China Trade Talks
[FT] China stumbles in push to internationalise its currency
[Bloomberg] Border-Closing Options Under Study by Trump Officials
[Bloomberg] U.S. services, private payrolls data highlight slowing economy
[Reuters] German institutes cut 2019 growth forecast to 0.8 percent: sources
[CNBC] Don’t be fooled by the ‘unicorn’ hype this year, most IPOs lose money for investors after 5 years
[Bloomberg] BOE's Carney Says Risk of No-Deal Brexit Is Alarmingly High
[Bloomberg] Refinancing Spike to Keep Mortgage-Backed Security Investors on Guard
[NYT] America’s Biggest Economic Challenge May Be Demographic Decline
[WSJ] Tariffs Take Center Stage in U.S.-China Trade Talks
[FT] China stumbles in push to internationalise its currency
Tuesday, April 2, 2019
Wednesday's News Links
[Reuters] Hopes for U.S.-China trade, softer Brexit lift shares for fifth day
[Reuters] Oil nears $70, hovers near five-month highs on cuts and sanctions
[Reuters] U.S. private sector adds 129,000 jobs in March: ADP
[CNBC] Weekly mortgage refinances spike 39% after huge rate drop
[Reuters] White House's Kudlow says U.S.-China talks are progressing
[CNBC] US and China are reportedly drawing closer to a final trade agreement
[Reuters] China March services activity quickens to 14-month high in further sign of recovery: Caixin PMI
[Bloomberg] China-U.S. Trade Talks Enter Crunch Period as Liu Arrives in DC
[Reuters] Escalating U.S.-China trade war would hit manufacturing, agricultural jobs: IMF
[Bloomberg] The Decade of Deleveraging Didn’t Quite Turn Out That Way
[Bloomberg] Fed Risks Stoking Financial Bubble in Drive to Lift Inflation
[Bloomberg] $3.3 Trillion of Global Debt Starts to Tip the Scale
[Bloomberg] Quants Reboot Factor Investing as Ebbing Demand Bites at ETFs
[Reuters] Venezuela lawmakers loyal to Maduro open door to prosecution of Guaido
[Reuters] Turkish opposition demands mandate as Istanbul recount continues
[NYT] Japan Stumbles as China’s Growth Engine Slows
[WSJ] Trump to Fed Chairman Powell: ‘I Guess I’m Stuck With You’
[WSJ] Investors Brace for Hit to Profits as Costs Rise
[FT] US and China draw closer to final trade agreement
[FT] Why the yield curve is not the economic guide it once was
[FT] Turkish inflation holds just under 20% in March
[Reuters] Oil nears $70, hovers near five-month highs on cuts and sanctions
[Reuters] U.S. private sector adds 129,000 jobs in March: ADP
[CNBC] Weekly mortgage refinances spike 39% after huge rate drop
[Reuters] White House's Kudlow says U.S.-China talks are progressing
[CNBC] US and China are reportedly drawing closer to a final trade agreement
[Reuters] China March services activity quickens to 14-month high in further sign of recovery: Caixin PMI
[Bloomberg] China-U.S. Trade Talks Enter Crunch Period as Liu Arrives in DC
[Reuters] Escalating U.S.-China trade war would hit manufacturing, agricultural jobs: IMF
[Bloomberg] The Decade of Deleveraging Didn’t Quite Turn Out That Way
[Bloomberg] Fed Risks Stoking Financial Bubble in Drive to Lift Inflation
[Bloomberg] $3.3 Trillion of Global Debt Starts to Tip the Scale
[Bloomberg] Quants Reboot Factor Investing as Ebbing Demand Bites at ETFs
[Reuters] Venezuela lawmakers loyal to Maduro open door to prosecution of Guaido
[Reuters] Turkish opposition demands mandate as Istanbul recount continues
[NYT] Japan Stumbles as China’s Growth Engine Slows
[WSJ] Trump to Fed Chairman Powell: ‘I Guess I’m Stuck With You’
[WSJ] Investors Brace for Hit to Profits as Costs Rise
[FT] US and China draw closer to final trade agreement
[FT] Why the yield curve is not the economic guide it once was
[FT] Turkish inflation holds just under 20% in March
Tuesday Evening Links
[Reuters] May gambles on talks with Labour to unlock Brexit, enraging her party
[Reuters] Trump tells Fed chair Powell he is 'stuck' with him : WSJ
[Reuters] Trump administration stands behind Fed nominee Moore: aide
[Reuters] Trump says he's prepared to close Mexico border if necessary
[Reuters] U.S. March and quarter one auto sales drop in weak start to 2019
[CNBC] ‘The spigot turned off’: How the stock market fall clobbered corporate debt
[CNBC] China’s stock market is up 27% this year, giving it new leverage in trade talks
[Bloomberg] No End in Sight to Credit Market Roller Coaster
[WSJ] Affordable Housing Crisis Spreads Throughout World
[FT] Timely warnings about private equity debt levels
[Reuters] Trump tells Fed chair Powell he is 'stuck' with him : WSJ
[Reuters] Trump administration stands behind Fed nominee Moore: aide
[Reuters] Trump says he's prepared to close Mexico border if necessary
[Reuters] U.S. March and quarter one auto sales drop in weak start to 2019
[CNBC] ‘The spigot turned off’: How the stock market fall clobbered corporate debt
[CNBC] China’s stock market is up 27% this year, giving it new leverage in trade talks
[Bloomberg] No End in Sight to Credit Market Roller Coaster
[WSJ] Affordable Housing Crisis Spreads Throughout World
[FT] Timely warnings about private equity debt levels
Monday, April 1, 2019
Tuesday's News Links
[Reuters] Wall Street takes a breather, Walgreens slumps on profit warning
[Reuters] Oil rises on Iran sanctions threat, Venezuela shutdown
[Reuters] U.S. core capital goods orders slip in February, shipments unchanged
[BBC] Brexit: What just happened?
[CNBC] Manhattan real estate sales fall for sixth straight quarter — longest losing streak in 30 years
[Bloomberg] Trend-Following Quants Taste Comeback Powered by Bond Mania
[Reuters] U.S. disaster aid won't cover crops drowned by Midwest floods
[Politico] Congress fears Trump could stumble over next fiscal cliff
[WSJ] U.S. and Chinese Manufacturing Stabilize, While Europe Lags Behind
[WSJ] Official Says White House Stands Behind Stephen Moore’s Fed Nomination
[WSJ] Big Banks Reach for Small Deals as Merger Boom Slows
[WSJ] What’s Driving Turkey’s Markets Wild, in Seven Charts
[FT] Erdogan’s stumbles bring him to a fork in the road
[Reuters] Oil rises on Iran sanctions threat, Venezuela shutdown
[Reuters] U.S. core capital goods orders slip in February, shipments unchanged
[BBC] Brexit: What just happened?
[CNBC] Manhattan real estate sales fall for sixth straight quarter — longest losing streak in 30 years
[Bloomberg] Trend-Following Quants Taste Comeback Powered by Bond Mania
[Reuters] U.S. disaster aid won't cover crops drowned by Midwest floods
[Politico] Congress fears Trump could stumble over next fiscal cliff
[WSJ] U.S. and Chinese Manufacturing Stabilize, While Europe Lags Behind
[WSJ] Official Says White House Stands Behind Stephen Moore’s Fed Nomination
[WSJ] Big Banks Reach for Small Deals as Merger Boom Slows
[WSJ] What’s Driving Turkey’s Markets Wild, in Seven Charts
[FT] Erdogan’s stumbles bring him to a fork in the road
Monday Evening Links
[Reuters] Upbeat data pushes Wall Street higher
[Reuters] Oil rises to 2019 highs as demand outlook improves
[Bloomberg] U.S. Treasuries Drop by the Most in 3 Months
[Reuters] U.S. 3-month bills sold at lowest interest rate since late January
[Reuters] British parliament weighs forcing May into a softer Brexit
[CNBC] Nearly 5 million homeowners can now save money on their mortgages
[MarketWatch] Why Corporate America’s profits are set to drop
[Bloomberg] Leveraged Loans See Best Quarter Since 2010
[Bloomberg] San Francisco Fed Says Banks Could Weather a Big Hit to Housing
[CNBC] There’s a retirement crisis in America where most will be unable to afford a ‘solid life’
[Reuters] Forex traders fret as sleepy markets slow to calmest in years
[Reuters] Erdogan on track to lose Turkey's biggest cities in shock poll upset
[Reuters] Venezuelans plan protests over power and water as rationing looms
[Reuters] Oil rises to 2019 highs as demand outlook improves
[Bloomberg] U.S. Treasuries Drop by the Most in 3 Months
[Reuters] U.S. 3-month bills sold at lowest interest rate since late January
[Reuters] British parliament weighs forcing May into a softer Brexit
[CNBC] Nearly 5 million homeowners can now save money on their mortgages
[MarketWatch] Why Corporate America’s profits are set to drop
[Bloomberg] Leveraged Loans See Best Quarter Since 2010
[Bloomberg] San Francisco Fed Says Banks Could Weather a Big Hit to Housing
[CNBC] There’s a retirement crisis in America where most will be unable to afford a ‘solid life’
[Reuters] Forex traders fret as sleepy markets slow to calmest in years
[Reuters] Erdogan on track to lose Turkey's biggest cities in shock poll upset
[Reuters] Venezuelans plan protests over power and water as rationing looms
Sunday, March 31, 2019
Monday's News Links
[Reuters] Shares surge on China's factory rebound, trade optimism
[Reuters] Oil prices push higher as supply worries drive gains
[Reuters] U.S. retail sales unexpectedly fall in February
[AP] Survey: US manufacturing activity increased in March
[CNBC] China’s factory activity unexpectedly grows in March, a private survey shows
[Reuters] China's factory activity picks up slightly, but Asia broadly weak
[Bloomberg] Analysts Downgrade China's Stocks at Fastest Clip Since 2011
[Reuters] Euro zone factory activity contracts faster in March: PMI
[Reuters] Germany's manufacturing recession worsens: PMI
[AP] Eurozone economy gets double dose of bad news
[Reuters] Italy's budget deficit and debt to rise in 2019, 2020, OECD says
[Bloomberg] Draghi Points to Persisting Risks in Justifying Massive Stimulus
[WSJ] Fed’s Kashkari Says It Isn’t Time to Cut Rates
[WSJ] A Buyer’s Market? Hopes Rise With Falling Rates, More Homes for Sale
[WSJ] This Time Probably Isn’t Different for Fannie, Freddie
[WSJ] Gasoline Prices Creep Toward $3 a Gallon
[WSJ] China’s Entrepreneurs Are Left High and Dry Despite a Flood of Credit
[FT] BoJ’s dominance over ETFs raises concern on distorting influence
[FT] Investments in bond-based ETFs head for $1tn landmark
[Reuters] Oil prices push higher as supply worries drive gains
[Reuters] U.S. retail sales unexpectedly fall in February
[AP] Survey: US manufacturing activity increased in March
[CNBC] China’s factory activity unexpectedly grows in March, a private survey shows
[Reuters] China's factory activity picks up slightly, but Asia broadly weak
[Bloomberg] Analysts Downgrade China's Stocks at Fastest Clip Since 2011
[Reuters] Euro zone factory activity contracts faster in March: PMI
[Reuters] Germany's manufacturing recession worsens: PMI
[AP] Eurozone economy gets double dose of bad news
[Reuters] Italy's budget deficit and debt to rise in 2019, 2020, OECD says
[Bloomberg] Draghi Points to Persisting Risks in Justifying Massive Stimulus
[WSJ] Fed’s Kashkari Says It Isn’t Time to Cut Rates
[WSJ] A Buyer’s Market? Hopes Rise With Falling Rates, More Homes for Sale
[WSJ] This Time Probably Isn’t Different for Fannie, Freddie
[WSJ] Gasoline Prices Creep Toward $3 a Gallon
[WSJ] China’s Entrepreneurs Are Left High and Dry Despite a Flood of Credit
[FT] BoJ’s dominance over ETFs raises concern on distorting influence
[FT] Investments in bond-based ETFs head for $1tn landmark
Sunday Evening Links
[Bloomberg] Stocks Gain, Yen Dips as China Eases Growth Worry: Markets Wrap
[Reuters] Bond yield curveball stalls global stocks rally
[Reuters] Japan big manufacturers' morale worsens in first-quarter: BOJ tankan
[Reuters] Erdogan appears to concede Istanbul defeat after Ankara loss
[FT] China’s Belt and Road property boom cools off
[FT] Australian Property Slide Spreads on Lending Crackdown, Election
[Reuters] Bond yield curveball stalls global stocks rally
[Reuters] Japan big manufacturers' morale worsens in first-quarter: BOJ tankan
[Reuters] Erdogan appears to concede Istanbul defeat after Ankara loss
[FT] China’s Belt and Road property boom cools off
[FT] Australian Property Slide Spreads on Lending Crackdown, Election
Saturday, March 30, 2019
Sunday's News Links
[Reuters] Fed policymakers do not want rate cuts, not even the doves
[Reuters] China March factory activity grows for first time in four months, but exports weak
[Reuters] UK's May risks "total collapse" of government in Brexit impasse - Sunday Times
[Reuters] China's services activity quickens in March: official PMI
[Bloomberg] The Bond Market Shuddered. Now We Find Out If That Was Justified
[Reuters] Trump cuts aid to Central American countries as migrant crisis deepens
[Reuters] Turks vote in local elections which could see Erdogan lose in big cities
[Reuters] Taiwan condemns Beijing after Chinese jets cross maritime line
[WSJ] ‘Fear of Missing Out’ Pushes Investors Toward Stocks
[WSJ] Debt Investors at a Crossroads as Fed Pivots
[WSJ] Global Deal-Making Gets Off to a Slow Start in 2019
[Reuters] China March factory activity grows for first time in four months, but exports weak
[Reuters] UK's May risks "total collapse" of government in Brexit impasse - Sunday Times
[Reuters] China's services activity quickens in March: official PMI
[Bloomberg] The Bond Market Shuddered. Now We Find Out If That Was Justified
[Reuters] Trump cuts aid to Central American countries as migrant crisis deepens
[Reuters] Turks vote in local elections which could see Erdogan lose in big cities
[Reuters] Taiwan condemns Beijing after Chinese jets cross maritime line
[WSJ] ‘Fear of Missing Out’ Pushes Investors Toward Stocks
[WSJ] Debt Investors at a Crossroads as Fed Pivots
[WSJ] Global Deal-Making Gets Off to a Slow Start in 2019
Saturday's News Links
[Reuters] All Brexit options are on the table -UK Conservatives chair
[Reuters] U.S. investors seek comfort in flood of data
[Reuters] Exclusive: More than 1 million acres of U.S. cropland ravaged by floods
[Bloomberg] Brexit Descends Into Name-Calling, as Germany Derides U.K. Elite
[Bloomberg] Global Bond-Market Investors Are Getting Really Nervous
[Reuters] Exclusive: Trump eyeing stepped-up Venezuela sanctions for foreign companies - Bolton
[NYT] Lyft’s Shares Jump in Trading Debut, Cementing Rise of the Gig Economy
[WSJ] The 2019 IPO Frenzy Is Different From 1999. Really.
[Reuters] U.S. investors seek comfort in flood of data
[Reuters] Exclusive: More than 1 million acres of U.S. cropland ravaged by floods
[Bloomberg] Brexit Descends Into Name-Calling, as Germany Derides U.K. Elite
[Bloomberg] Global Bond-Market Investors Are Getting Really Nervous
[Reuters] Exclusive: Trump eyeing stepped-up Venezuela sanctions for foreign companies - Bolton
[NYT] Lyft’s Shares Jump in Trading Debut, Cementing Rise of the Gig Economy
[WSJ] The 2019 IPO Frenzy Is Different From 1999. Really.
Friday, March 29, 2019
Weekly Commentary: Everything Rally
From the global Bubble perspective, it was one extraordinary quarter worthy of chronicling in some detail. The “Everything Rally,” indeed. Markets turned even more highly synchronized – across the globe and across asset classes. As the quarter progressed, it seemingly regressed into a contest of speculative excess between so-called “safe haven” sovereign debt and the Bubbling risk markets. It didn’t really matter – just buy (and lever) whatever central bankers want the marketplace to buy (and lever): financial assets.
March 29 – Bloomberg (Cameron Crise): “While the total return of the S&P 500 is going to end this month roughly 2% below its closing level in September, a 60/40 portfolio of equities and Treasuries is ending March at all-time highs. Even a broader multi-asset portfolio using an aggregate bond index rather than simply govvies is closer to its high watermark than stocks. Similar to equities, balanced portfolios have enjoyed a stunning quarterly return. The broad balanced portfolio mentioned above returned nearly 8%, its best since 2011.”
According to Bloomberg (Decile Gutscher and Eddie van der Walt), it was the best FIRST quarter for the S&P500 since 1998 (strongest individual quarter since Q3 2009); for WTI crude since 2002; for U.S. high-yield Credit since 2003; for emerging market dollar bonds since 2012; and for U.S. investment-grade Credit since 1995. According to the Wall Street Journal (Akane Otani), it was the first quarter that all 11 S&P500 sectors posted gains since 2014.
March 29 – Financial Times (Peter Wells, Michael Hunter and Alice Woodhouse): “Driven mostly by Wall Street, global stocks ruled off on their largest quarterly advance since 2010. The climb over the past three months was sealed on Friday on hopes for progress in US-China trade talks that resumed in Beijing, while a rally in sovereign bonds eased. The FTSE All World index has risen 11.4% so far in 2019, its biggest quarterly increase since the September quarter of 2010.”
The S&P500 returned 13.6% for the quarter, a stunning reversal from Q4 - yet almost blasé compared to gains in “high beta”. The Nasdaq100 returned 16.6%. The Nasdaq Industrials rose 15.8%, the Nasdaq Computer Index 18.7%, and the Nasdaq Telecom Index 18.3%. The Semiconductors jumped 20.8%, and the Biotechs rose 21.5%. And let’s not forget Unicorn Fever. Money-losing Lyft now with a market-cap of $22.5 billion. Up north in Canada, equities were up 12.4% for the “best first quarter in 19 years.”
The broader U.S. market gave back some early-period outperformance but posted a big quarter all the same. The S&P400 Midcaps jumped 14.0% and the small cap Russell 2000 rose 14.2%. The average stock (Value Line Arithmetic) gained 14.3% during the quarter. The Bloomberg REITs index rose 15.8%, and the Philadelphia Oil Services Sector Index jumped 17.5%. The Goldman Sachs Most Short Index gained 18.5%.
What conventional analysts fancy as “Goldilocks,” I view as acute Monetary Disorder and resulting distorted and dysfunctional markets. For a decade now, coordinated rate and QE policy has nurtured a globalized liquidity and speculation market dynamic. Securities markets have come to be dominated by an unprecedented global pool of speculative, trend-following and performance-chasing finance. The extraordinary central bank-orchestrated market backdrop has over years incentivized the disregard of risk, in the process spurring the move to ETF and passive management – along with a proliferation of leverage and derivatives strategies.
The end of the quarter witnessed the first inverted Treasury yield curve (10-year vs. 3-month) since 2007. Ten-year Treasury yields sank 28 bps to close the quarter at 2.40% vs. three-month T-bills ending March at 2.34% (down 7bps y-t-d). The quarter saw two-year Treasury yields drop 23 bps (2.26%), five-year yields 28 bps (2.23%), and 30-year yields 20 bps (2.81%). Benchmark GSE-MBS yields sank a notable 39 bps to 3.11%. Five-year Treasury yields dropped an amazing 28 bps in March alone (10-year down 31bps). German 10-year bund yields dropped 31 bps during the quarter to negative 0.07% - the low since September 2016. Japan’s 10-year government yields fell another eight bps to negative 0.08%. Swiss 10-year yields dropped 13 bps to negative 44 bps.
March 28 – Financial Times (Robert Smith): “The amount of government debt with negative yields rose back above the $10tn mark this week, as central banks abandoned plans to tighten monetary policy. The idea of investing in bonds where you are guaranteed to lose money — if you hold them to maturity — has always seemed paradoxical. But it begins to make sense in a world where you are sure to lose even more money if you stick the cash in a bank. Parking your money in German government bonds, for example, is also safer than trying to stuff millions of euros under your mattress. More puzzling, however, is the negative-yielding corporate bond, a phenomenon that turns the idea of credit risk on its head. Here investors, in effect, pay for the privilege of lending to companies.”
Economic concerns supposedly pressuring sovereign yields much lower apparently didn’t trouble the corporate Credit sector. After starting the year at 88 bps, investment-grade CDS ended March at a six-month low 56 bps. The LQD investment-grade corporate bond ETF returned 6.18% for the quarter, closing March at a 14-month high. According to Bloomberg, BBB’s (lowest-rated investment-grade) 5.82% gain was the strongest quarterly return since Q3 2009. U.S. high-yield returned 7.04%, the strongest start to a year since 2003. The JNK high-yield bond EFT returned 8.11%, ending the quarter at a six-month high.
The quarter began with Chairman Powell’s dramatic January 4th dovish “U-Turn.” After raising rates and holding to cautious rate and balance sheet normalization at the December 19th FOMC meeting (in the face of market instability), such efforts were abruptly abandoned. The Fed will soon be winding down the reduction in its holdings, while markets now assume the next rate move(s) will be lower.
It was my view that Chairman Powell was hoping to distance his central bank from the marketplace preoccupation with the “Fed put” market backstop. The Fed’s about face delivered the exact opposite impact. Global markets have become thoroughly convinced that the Fed and global central banking community are as determined as ever to do whatever it takes to safeguard elevated international markets. Moreover, markets have become emboldened by the view that December instability impressed upon central bankers that a prompt wielding of all available powers will be necessary to avert market dislocation and panic.
As such, if markets lead economies and central bankers are to respond immediately to market instability, doesn’t that mean safe haven bonds should rally on the prospect of additional monetary stimulus while risk assets can be bought on the likelihood of ongoing loose “money” and meager economic risk? The Central Bank Everything Rally.
The Draghi ECB, fresh from the December conclusion of its latest QE program, also reversed course - indefinitely postponing any movement away from negative policy rates while reinstituting stimulus measures (Targeted LTRO/long-term refinancing operation). Even the Bank of Japan, cemented to zero rates and balance sheet expansion ($5TN and counting!), suggested it was willing to further ratchet up stimulus. Putting an exclamation mark on the extraordinary global shift, the FOMC came out of their March 20th meeting ready to exceed dovish market expectations – booming markets notwithstanding. Message Received.
The dovish turn from the Fed, ECB and BOJ flung the gates of dovishness wide open: The Bank of England, the Reserve Bank of New Zealand, the Swiss National Bank, etc. The tightening cycle in Asia came to rapid conclusion, with central banks in Taiwan, Philippines, and Indonesia (at the minimum) postponing rate increases.
But it wasn’t only central bankers hard at work. Posting an all-time shortfall in February, the fiscal 2019 U.S. federal deficit after five months ($544bn) ran 40% above the year ago level. But this is surely small potatoes compared to the shift in China, where Beijing has largely abandoned its deleveraging efforts in favor of fiscal and monetary stimulus. After an all-time record January, it was most likely a record quarter of Chinese Credit growth - monetary stimulus that spurred stock market gains while nursing sickly Chinese financial and economic Bubbles.
The Stimulus Arms Race accompanied intense Chinese/U.S. trade negotiations, in the process emboldening the bullish market view of a Chinese and U.S.-led global recovery. "My market gains are bigger than yours." With both sides needing a deal, markets had no qualms with stretched out negotiations.
The Shanghai Composite surged 23.9%. China’s CSI Midcap 200 jumped 33.5%, with the CSI Smallcap 500 up 33.1%. The growth stock ChiNext index surged 35.4%. Underperforming the broader market rally (as financial stocks did globally), the Hang Seng China Financial Index rose 14.2%. Up 33.7%, the Shenzhen Composite Index led global market returns.
Gains for major Asian equities indices included India’s 7.2%, Philippines’ 6.1%, South Korea’s 4.9%, Thailand’s 4.8%, Singapore’s 4.7% and Indonesia’s 4.4%.
Losing 1.9% during the final week of the quarter, Japan’s Nikkei posted a 6.0% Q1 gain. Hong Kong’s Hang Seng index jumped 12.4%, and Taiwan’s TAIEX rose 9.4%. Stocks jumped 9.5% in Australia and 11.7% in New Zealand.
The MSCI Emerging Markets ETF (EEM) gained 9.9%, more than reversing Q4’s 7.6% loss. Gains for Latin American equities indices included Colombia’s 19.8%, Argentina’s 10.5%, Brazil’s 8.6%, Peru’s 9.0% and Mexico’s 3.9%. Eastern Europe equities joined the party as well. Major indices were up 12.1% in Russia, 9.0% in Romania, 8.9% in Czech Republic, 6.5% in Hungary, 5.4% in Russia and 3.4% in Poland.
It was a big quarter for European equities, with the Euro Stoxx 50 jumping 11.7%. Italy’s MIB gained 16.2% (Italian banks up 12.9%), France’s CAC40 13.1%, Switzerland’s MKT 12.4%, Sweden’s Stockholm 30 10.3%, Portugal’s PSI 11.2%, Germany’s DAX 9.2% and Spain’s IBEX 35 8.2%. Major equities indices were up 17.6% in Greece, 14.1% in Denmark, 12.8% in Belgium, 12.5% in Netherlands, 12.0% in Ireland, 10.8% in Iceland, 10.5% in Austria, 8.5% in Finland and 7.3% in Norway. UK’s FTSE100 rose 8.0%.
Especially as the quarter was coming to an end, the conflicting messages being delivered by the safe havens and risk markets somewhat began to weigh on market sentiment. Increasingly, collapsing sovereign yields were raising concerns. U.S. bank stocks were hammered 8.2% in three sessions only two weeks prior to quarter-end, reducing Q1 gains to 9.1%. Portending a global economy in some serious trouble?
I view the yield backdrop as confirmation of underlying fragilities in global finance – in the acute vulnerability of global Bubbles – stocks, bonds, EM, China Credit, European banks, derivatives, the ETF complex, and global speculative finance more generally. While risk market participants fixate on capturing unbridled short-terms speculative returns, the safe havens see the inevitability of market dislocation, bursting Bubbles and ever more central bank monetary stimulus.
And it wasn’t as if global fragilities receded completely during Q1. The Turkish lira sank almost 6.0% in two late-quarter sessions (March 21/22), with dislocation seeing overnight swap rates spike to 1,000%. Ten-year Turkish government bond yields surged about 300 bps in a week to 18.5%. Turkey CDS jumped 150 bps to 480 bps, heading back towards last summer’s panic highs (560bps). With rapidly dissipating international reserves and huge dollar debt obligations, Turkey is extremely vulnerable. Municipal elections Sunday.
A surge in EM flows gave Turkey’s (and others’) Bubble(s) a new lease on life. But as Turkey sinks so swiftly back into crisis mode, worries begin to seep into some quarters of the marketplace that fragilities and contagion risk may be Lying in Wait just beneath the surface of booming markets. The sovereign rally gathered further momentum, while the risk markets saw lower yields and eager central bankers as ensuring favorable conditions. Yet the more egregious the Everything Rally’s speculative run, the more problematic the inevitable reversal. It should be an interesting second quarter and rest of the year.
For the Week:
The S&P500 gained 1.2% (up 13.1% y-t-d), and the Dow rose 1.7% (up 11.2%). The Utilities slipped 0.5% (up 10.5%). The Banks rallied 2.0% (up 9.1%), and the Broker/Dealers recovered 1.6% (up 6.6%). The Transports jumped 3.5% (up 13.5%). The S&P 400 Midcaps rose 2.2% (up 14.0%), and the small cap Russell 2000 gained 2.2% (up 14.2%). The Nasdaq100 increased 0.7% (up 16.6%). The Semiconductors declined 0.4% (up 20.8%). The Biotechs surged 3.6% (up 21.5%). With bullion dropping $21, the HUI gold index fell 1.8% (up 5.8%).
Three-month Treasury bill rates ended the week at 2.34%. Two-year government yields fell six bps to 2.26% (down 23bps y-t-d). Five-year T-note yields slipped a basis point to 2.23% (down 28bps). Ten-year Treasury yields declined four bps to 2.41% (down 28bps). Long bond yields fell six bps to 2.81% (down 20bps). Benchmark Fannie Mae MBS yields added a basis point to 3.11% (down 39bps).
Greek 10-year yields declined four bps to 3.73% (down 67bps y-t-d). Ten-year Portuguese yields slipped a basis point to 1.25% (down 47bps). Italian 10-year yields rose four bps to 2.49% (down 25bps). Spain's 10-year yields increased two bps to 1.10% (down 32bps). German bund yields dropped six bps to negative 0.07% (down 31bps). French yields fell four bps to 0.32% (down 39bps). The French to German 10-year bond spread widened two bps to 39 bps. U.K. 10-year gilt yields declined one basis point to 1.00% (down 28bps). U.K.'s FTSE equities index rose 1.0% (up 8.2% y-t-d).
Japan's Nikkei 225 equities index declined 1.9% (up 6.0% y-t-d). Japanese 10-year "JGB" yields declined one basis point to negative 0.08% (down 8bps y-t-d). France's CAC40 rose 1.5% (up 13.1%). The German DAX equities index rallied 1.4% (up 9.2%). Spain's IBEX 35 equities index increased 0.4% (up 8.2%). Italy's FTSE MIB index gained 1.0% (up 16.2%). EM equities were mixed. Brazil's Bovespa index rose 1.8% (up 4.8%), and Mexico's Bolsa gained 2.3% (up 3.9%). South Korea's Kospi index fell 2.1% (up 4.9%). India's Sensex equities index increased 1.3% (up 7.2%). China's Shanghai Exchange slipped 0.4% (up 23.9%). Turkey's Borsa Istanbul National 100 index sank 6.1% (up 2.8%). Russia's MICEX equities index added 0.2% (up 5.4%).
Investment-grade bond funds saw inflows of $2.754 billion, and junk bond funds posted inflows of $590 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates sank 22 bps to a 14-month low 4.06% (down 38bps y-o-y). Fifteen-year rates fell 14 bps to 3.57% (down 33bps). Five-year hybrid ARM rates declined nine bps to 3.75% (up 9bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 13 bps to a 14-month low 4.16% (down 33bps).
Federal Reserve Credit last week declined $6.9bn to $3.921 TN. Over the past year, Fed Credit contracted $436bn, or 10.0%. Fed Credit inflated $1.111 TN, or 40%, over the past 334 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $9.3bn last week to $3.470 TN. "Custody holdings" gained $25.9bn y-o-y, or 0.8%.
March 29 – Bloomberg (Cameron Crise): “While the total return of the S&P 500 is going to end this month roughly 2% below its closing level in September, a 60/40 portfolio of equities and Treasuries is ending March at all-time highs. Even a broader multi-asset portfolio using an aggregate bond index rather than simply govvies is closer to its high watermark than stocks. Similar to equities, balanced portfolios have enjoyed a stunning quarterly return. The broad balanced portfolio mentioned above returned nearly 8%, its best since 2011.”
According to Bloomberg (Decile Gutscher and Eddie van der Walt), it was the best FIRST quarter for the S&P500 since 1998 (strongest individual quarter since Q3 2009); for WTI crude since 2002; for U.S. high-yield Credit since 2003; for emerging market dollar bonds since 2012; and for U.S. investment-grade Credit since 1995. According to the Wall Street Journal (Akane Otani), it was the first quarter that all 11 S&P500 sectors posted gains since 2014.
March 29 – Financial Times (Peter Wells, Michael Hunter and Alice Woodhouse): “Driven mostly by Wall Street, global stocks ruled off on their largest quarterly advance since 2010. The climb over the past three months was sealed on Friday on hopes for progress in US-China trade talks that resumed in Beijing, while a rally in sovereign bonds eased. The FTSE All World index has risen 11.4% so far in 2019, its biggest quarterly increase since the September quarter of 2010.”
The S&P500 returned 13.6% for the quarter, a stunning reversal from Q4 - yet almost blasé compared to gains in “high beta”. The Nasdaq100 returned 16.6%. The Nasdaq Industrials rose 15.8%, the Nasdaq Computer Index 18.7%, and the Nasdaq Telecom Index 18.3%. The Semiconductors jumped 20.8%, and the Biotechs rose 21.5%. And let’s not forget Unicorn Fever. Money-losing Lyft now with a market-cap of $22.5 billion. Up north in Canada, equities were up 12.4% for the “best first quarter in 19 years.”
The broader U.S. market gave back some early-period outperformance but posted a big quarter all the same. The S&P400 Midcaps jumped 14.0% and the small cap Russell 2000 rose 14.2%. The average stock (Value Line Arithmetic) gained 14.3% during the quarter. The Bloomberg REITs index rose 15.8%, and the Philadelphia Oil Services Sector Index jumped 17.5%. The Goldman Sachs Most Short Index gained 18.5%.
What conventional analysts fancy as “Goldilocks,” I view as acute Monetary Disorder and resulting distorted and dysfunctional markets. For a decade now, coordinated rate and QE policy has nurtured a globalized liquidity and speculation market dynamic. Securities markets have come to be dominated by an unprecedented global pool of speculative, trend-following and performance-chasing finance. The extraordinary central bank-orchestrated market backdrop has over years incentivized the disregard of risk, in the process spurring the move to ETF and passive management – along with a proliferation of leverage and derivatives strategies.
The end of the quarter witnessed the first inverted Treasury yield curve (10-year vs. 3-month) since 2007. Ten-year Treasury yields sank 28 bps to close the quarter at 2.40% vs. three-month T-bills ending March at 2.34% (down 7bps y-t-d). The quarter saw two-year Treasury yields drop 23 bps (2.26%), five-year yields 28 bps (2.23%), and 30-year yields 20 bps (2.81%). Benchmark GSE-MBS yields sank a notable 39 bps to 3.11%. Five-year Treasury yields dropped an amazing 28 bps in March alone (10-year down 31bps). German 10-year bund yields dropped 31 bps during the quarter to negative 0.07% - the low since September 2016. Japan’s 10-year government yields fell another eight bps to negative 0.08%. Swiss 10-year yields dropped 13 bps to negative 44 bps.
March 28 – Financial Times (Robert Smith): “The amount of government debt with negative yields rose back above the $10tn mark this week, as central banks abandoned plans to tighten monetary policy. The idea of investing in bonds where you are guaranteed to lose money — if you hold them to maturity — has always seemed paradoxical. But it begins to make sense in a world where you are sure to lose even more money if you stick the cash in a bank. Parking your money in German government bonds, for example, is also safer than trying to stuff millions of euros under your mattress. More puzzling, however, is the negative-yielding corporate bond, a phenomenon that turns the idea of credit risk on its head. Here investors, in effect, pay for the privilege of lending to companies.”
Economic concerns supposedly pressuring sovereign yields much lower apparently didn’t trouble the corporate Credit sector. After starting the year at 88 bps, investment-grade CDS ended March at a six-month low 56 bps. The LQD investment-grade corporate bond ETF returned 6.18% for the quarter, closing March at a 14-month high. According to Bloomberg, BBB’s (lowest-rated investment-grade) 5.82% gain was the strongest quarterly return since Q3 2009. U.S. high-yield returned 7.04%, the strongest start to a year since 2003. The JNK high-yield bond EFT returned 8.11%, ending the quarter at a six-month high.
The quarter began with Chairman Powell’s dramatic January 4th dovish “U-Turn.” After raising rates and holding to cautious rate and balance sheet normalization at the December 19th FOMC meeting (in the face of market instability), such efforts were abruptly abandoned. The Fed will soon be winding down the reduction in its holdings, while markets now assume the next rate move(s) will be lower.
It was my view that Chairman Powell was hoping to distance his central bank from the marketplace preoccupation with the “Fed put” market backstop. The Fed’s about face delivered the exact opposite impact. Global markets have become thoroughly convinced that the Fed and global central banking community are as determined as ever to do whatever it takes to safeguard elevated international markets. Moreover, markets have become emboldened by the view that December instability impressed upon central bankers that a prompt wielding of all available powers will be necessary to avert market dislocation and panic.
As such, if markets lead economies and central bankers are to respond immediately to market instability, doesn’t that mean safe haven bonds should rally on the prospect of additional monetary stimulus while risk assets can be bought on the likelihood of ongoing loose “money” and meager economic risk? The Central Bank Everything Rally.
The Draghi ECB, fresh from the December conclusion of its latest QE program, also reversed course - indefinitely postponing any movement away from negative policy rates while reinstituting stimulus measures (Targeted LTRO/long-term refinancing operation). Even the Bank of Japan, cemented to zero rates and balance sheet expansion ($5TN and counting!), suggested it was willing to further ratchet up stimulus. Putting an exclamation mark on the extraordinary global shift, the FOMC came out of their March 20th meeting ready to exceed dovish market expectations – booming markets notwithstanding. Message Received.
The dovish turn from the Fed, ECB and BOJ flung the gates of dovishness wide open: The Bank of England, the Reserve Bank of New Zealand, the Swiss National Bank, etc. The tightening cycle in Asia came to rapid conclusion, with central banks in Taiwan, Philippines, and Indonesia (at the minimum) postponing rate increases.
But it wasn’t only central bankers hard at work. Posting an all-time shortfall in February, the fiscal 2019 U.S. federal deficit after five months ($544bn) ran 40% above the year ago level. But this is surely small potatoes compared to the shift in China, where Beijing has largely abandoned its deleveraging efforts in favor of fiscal and monetary stimulus. After an all-time record January, it was most likely a record quarter of Chinese Credit growth - monetary stimulus that spurred stock market gains while nursing sickly Chinese financial and economic Bubbles.
The Stimulus Arms Race accompanied intense Chinese/U.S. trade negotiations, in the process emboldening the bullish market view of a Chinese and U.S.-led global recovery. "My market gains are bigger than yours." With both sides needing a deal, markets had no qualms with stretched out negotiations.
The Shanghai Composite surged 23.9%. China’s CSI Midcap 200 jumped 33.5%, with the CSI Smallcap 500 up 33.1%. The growth stock ChiNext index surged 35.4%. Underperforming the broader market rally (as financial stocks did globally), the Hang Seng China Financial Index rose 14.2%. Up 33.7%, the Shenzhen Composite Index led global market returns.
Gains for major Asian equities indices included India’s 7.2%, Philippines’ 6.1%, South Korea’s 4.9%, Thailand’s 4.8%, Singapore’s 4.7% and Indonesia’s 4.4%.
Losing 1.9% during the final week of the quarter, Japan’s Nikkei posted a 6.0% Q1 gain. Hong Kong’s Hang Seng index jumped 12.4%, and Taiwan’s TAIEX rose 9.4%. Stocks jumped 9.5% in Australia and 11.7% in New Zealand.
The MSCI Emerging Markets ETF (EEM) gained 9.9%, more than reversing Q4’s 7.6% loss. Gains for Latin American equities indices included Colombia’s 19.8%, Argentina’s 10.5%, Brazil’s 8.6%, Peru’s 9.0% and Mexico’s 3.9%. Eastern Europe equities joined the party as well. Major indices were up 12.1% in Russia, 9.0% in Romania, 8.9% in Czech Republic, 6.5% in Hungary, 5.4% in Russia and 3.4% in Poland.
It was a big quarter for European equities, with the Euro Stoxx 50 jumping 11.7%. Italy’s MIB gained 16.2% (Italian banks up 12.9%), France’s CAC40 13.1%, Switzerland’s MKT 12.4%, Sweden’s Stockholm 30 10.3%, Portugal’s PSI 11.2%, Germany’s DAX 9.2% and Spain’s IBEX 35 8.2%. Major equities indices were up 17.6% in Greece, 14.1% in Denmark, 12.8% in Belgium, 12.5% in Netherlands, 12.0% in Ireland, 10.8% in Iceland, 10.5% in Austria, 8.5% in Finland and 7.3% in Norway. UK’s FTSE100 rose 8.0%.
Especially as the quarter was coming to an end, the conflicting messages being delivered by the safe havens and risk markets somewhat began to weigh on market sentiment. Increasingly, collapsing sovereign yields were raising concerns. U.S. bank stocks were hammered 8.2% in three sessions only two weeks prior to quarter-end, reducing Q1 gains to 9.1%. Portending a global economy in some serious trouble?
I view the yield backdrop as confirmation of underlying fragilities in global finance – in the acute vulnerability of global Bubbles – stocks, bonds, EM, China Credit, European banks, derivatives, the ETF complex, and global speculative finance more generally. While risk market participants fixate on capturing unbridled short-terms speculative returns, the safe havens see the inevitability of market dislocation, bursting Bubbles and ever more central bank monetary stimulus.
And it wasn’t as if global fragilities receded completely during Q1. The Turkish lira sank almost 6.0% in two late-quarter sessions (March 21/22), with dislocation seeing overnight swap rates spike to 1,000%. Ten-year Turkish government bond yields surged about 300 bps in a week to 18.5%. Turkey CDS jumped 150 bps to 480 bps, heading back towards last summer’s panic highs (560bps). With rapidly dissipating international reserves and huge dollar debt obligations, Turkey is extremely vulnerable. Municipal elections Sunday.
A surge in EM flows gave Turkey’s (and others’) Bubble(s) a new lease on life. But as Turkey sinks so swiftly back into crisis mode, worries begin to seep into some quarters of the marketplace that fragilities and contagion risk may be Lying in Wait just beneath the surface of booming markets. The sovereign rally gathered further momentum, while the risk markets saw lower yields and eager central bankers as ensuring favorable conditions. Yet the more egregious the Everything Rally’s speculative run, the more problematic the inevitable reversal. It should be an interesting second quarter and rest of the year.
For the Week:
The S&P500 gained 1.2% (up 13.1% y-t-d), and the Dow rose 1.7% (up 11.2%). The Utilities slipped 0.5% (up 10.5%). The Banks rallied 2.0% (up 9.1%), and the Broker/Dealers recovered 1.6% (up 6.6%). The Transports jumped 3.5% (up 13.5%). The S&P 400 Midcaps rose 2.2% (up 14.0%), and the small cap Russell 2000 gained 2.2% (up 14.2%). The Nasdaq100 increased 0.7% (up 16.6%). The Semiconductors declined 0.4% (up 20.8%). The Biotechs surged 3.6% (up 21.5%). With bullion dropping $21, the HUI gold index fell 1.8% (up 5.8%).
Three-month Treasury bill rates ended the week at 2.34%. Two-year government yields fell six bps to 2.26% (down 23bps y-t-d). Five-year T-note yields slipped a basis point to 2.23% (down 28bps). Ten-year Treasury yields declined four bps to 2.41% (down 28bps). Long bond yields fell six bps to 2.81% (down 20bps). Benchmark Fannie Mae MBS yields added a basis point to 3.11% (down 39bps).
Greek 10-year yields declined four bps to 3.73% (down 67bps y-t-d). Ten-year Portuguese yields slipped a basis point to 1.25% (down 47bps). Italian 10-year yields rose four bps to 2.49% (down 25bps). Spain's 10-year yields increased two bps to 1.10% (down 32bps). German bund yields dropped six bps to negative 0.07% (down 31bps). French yields fell four bps to 0.32% (down 39bps). The French to German 10-year bond spread widened two bps to 39 bps. U.K. 10-year gilt yields declined one basis point to 1.00% (down 28bps). U.K.'s FTSE equities index rose 1.0% (up 8.2% y-t-d).
Japan's Nikkei 225 equities index declined 1.9% (up 6.0% y-t-d). Japanese 10-year "JGB" yields declined one basis point to negative 0.08% (down 8bps y-t-d). France's CAC40 rose 1.5% (up 13.1%). The German DAX equities index rallied 1.4% (up 9.2%). Spain's IBEX 35 equities index increased 0.4% (up 8.2%). Italy's FTSE MIB index gained 1.0% (up 16.2%). EM equities were mixed. Brazil's Bovespa index rose 1.8% (up 4.8%), and Mexico's Bolsa gained 2.3% (up 3.9%). South Korea's Kospi index fell 2.1% (up 4.9%). India's Sensex equities index increased 1.3% (up 7.2%). China's Shanghai Exchange slipped 0.4% (up 23.9%). Turkey's Borsa Istanbul National 100 index sank 6.1% (up 2.8%). Russia's MICEX equities index added 0.2% (up 5.4%).
Investment-grade bond funds saw inflows of $2.754 billion, and junk bond funds posted inflows of $590 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates sank 22 bps to a 14-month low 4.06% (down 38bps y-o-y). Fifteen-year rates fell 14 bps to 3.57% (down 33bps). Five-year hybrid ARM rates declined nine bps to 3.75% (up 9bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 13 bps to a 14-month low 4.16% (down 33bps).
Federal Reserve Credit last week declined $6.9bn to $3.921 TN. Over the past year, Fed Credit contracted $436bn, or 10.0%. Fed Credit inflated $1.111 TN, or 40%, over the past 334 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $9.3bn last week to $3.470 TN. "Custody holdings" gained $25.9bn y-o-y, or 0.8%.
M2 (narrow) "money" supply declined $11.2bn last week to $14.489 TN. "Narrow money" gained $573bn, or 4.1%, over the past year. For the week, Currency increased $1.2bn. Total Checkable Deposits dropped $40.1bn, while Savings Deposits jumped $22.7bn. Small Time Deposits gained $3.8bn. Retail Money Funds added $1.3bn.
Total money market fund assets jumped $36.5bn to $3.101 TN. Money Funds rose $243bn y-o-y, or 8.5%.
Total Commercial Paper slipped $3.7bn to $1.079 TN. CP expanded $17.4bn y-o-y, or 1.6%.
Currency Watch:
The U.S. dollar index gained 0.7% to 97.284 (up 1.1% y-t-d). For the week on the upside, the Canadian dollar increased 0.6% and the Australian dollar 0.2%. For the week on the downside, the Mexican peso declined 1.7%, the British pound 1.3%, the New Zealand dollar 1.1%, the Japanese yen 0.9%, the Norwegian krone 0.8%, the euro 0.7%, the South Korean won 0.4%, the Brazilian real 0.4%, the Singapore dollar 0.2%, the Swiss franc 0.2%, and the Swedish krona 0.1%. The Chinese renminbi increased 0.09% versus the dollar this week (up 2.48% y-t-d).
Commodities Watch:
The Bloomberg Commodities Index increased 0.8% this week (up 5.3% y-t-d). Spot Gold fell 1.6% to $1,292 (up 0.8%). Silver dropped 1.9% to $15.11 (down 2.8%). Crude gained $1.10 to $60.14 (up 32%). Gasoline fell 2.3% (up 42%), and Natural Gas sank 3.8% (down 10%). Copper jumped 3.3% (up 12%). Wheat declined 1.8% (down 9%). Corn sank 4.6% (down 5%).
Market Instability Watch:
March 26 – Bloomberg (Stephen Spratt, Edward Bolingbroke, and Liz McCormick): “The Federal Reserve’s surprise policy shift last week shook markets, but, even still, the intensity of the ensuing drop in U.S. bond yields has puzzled many observers. A massive wave of hedging in the swaps market helps explain the scale of the eye-catching move. Treasuries rallied after the Fed signaled it was done raising interest rates for the moment, driving yields on 10-year notes down to levels last seen in 2017. That forced two sets of traders -- those who had bought mortgage bonds and those who had bet markets would remain calm -- to turn to derivatives markets to tweak their portfolios or stanch their losses. They snapped up positions in interest-rate swaps, pushing Treasury yields down even more.”
March 27 – Bloomberg (Sid Verma): “Whether you call it ‘Japanification,’ a dash for safety or a bet on the Fed’s new normal, bond bulls are charging into some of the most notorious corners of developed debt markets. As benchmark Treasury yields trade at December 2017 lows and those on German bunds sink deeper into negative territory, century bonds riddled with interest-rate risk are suddenly one of the market’s biggest outperformers. And the market value of the world’s investment-grade and high-yield bonds has jumped by almost $1.6 trillion to $55 trillion in the past three weeks, with the index racing toward record highs…”
Total money market fund assets jumped $36.5bn to $3.101 TN. Money Funds rose $243bn y-o-y, or 8.5%.
Total Commercial Paper slipped $3.7bn to $1.079 TN. CP expanded $17.4bn y-o-y, or 1.6%.
Currency Watch:
The U.S. dollar index gained 0.7% to 97.284 (up 1.1% y-t-d). For the week on the upside, the Canadian dollar increased 0.6% and the Australian dollar 0.2%. For the week on the downside, the Mexican peso declined 1.7%, the British pound 1.3%, the New Zealand dollar 1.1%, the Japanese yen 0.9%, the Norwegian krone 0.8%, the euro 0.7%, the South Korean won 0.4%, the Brazilian real 0.4%, the Singapore dollar 0.2%, the Swiss franc 0.2%, and the Swedish krona 0.1%. The Chinese renminbi increased 0.09% versus the dollar this week (up 2.48% y-t-d).
Commodities Watch:
The Bloomberg Commodities Index increased 0.8% this week (up 5.3% y-t-d). Spot Gold fell 1.6% to $1,292 (up 0.8%). Silver dropped 1.9% to $15.11 (down 2.8%). Crude gained $1.10 to $60.14 (up 32%). Gasoline fell 2.3% (up 42%), and Natural Gas sank 3.8% (down 10%). Copper jumped 3.3% (up 12%). Wheat declined 1.8% (down 9%). Corn sank 4.6% (down 5%).
Market Instability Watch:
March 26 – Bloomberg (Stephen Spratt, Edward Bolingbroke, and Liz McCormick): “The Federal Reserve’s surprise policy shift last week shook markets, but, even still, the intensity of the ensuing drop in U.S. bond yields has puzzled many observers. A massive wave of hedging in the swaps market helps explain the scale of the eye-catching move. Treasuries rallied after the Fed signaled it was done raising interest rates for the moment, driving yields on 10-year notes down to levels last seen in 2017. That forced two sets of traders -- those who had bought mortgage bonds and those who had bet markets would remain calm -- to turn to derivatives markets to tweak their portfolios or stanch their losses. They snapped up positions in interest-rate swaps, pushing Treasury yields down even more.”
March 27 – Bloomberg (Sid Verma): “Whether you call it ‘Japanification,’ a dash for safety or a bet on the Fed’s new normal, bond bulls are charging into some of the most notorious corners of developed debt markets. As benchmark Treasury yields trade at December 2017 lows and those on German bunds sink deeper into negative territory, century bonds riddled with interest-rate risk are suddenly one of the market’s biggest outperformers. And the market value of the world’s investment-grade and high-yield bonds has jumped by almost $1.6 trillion to $55 trillion in the past three weeks, with the index racing toward record highs…”
March 25 – Bloomberg (Cecile Gutscher): “The stockpile of global bonds with below-zero yields just hit $10 trillion -- intensifying the conundrum for investors hungry for returns while fretting the brewing economic slowdown. A Bloomberg index tracking negative-yielding debt has reached the highest level since September 2017 as 10-year bunds trade in negative territory and the U.S. yield curve flashes recession warnings.”
March 24 – Bloomberg (Ruth Carson and Stephen Spratt): “Wherever you look in developed markets, sovereign bond yields are at their lowest levels in years as traders ratchet up bets that major central banks will be easing. Yields in Australia and New Zealand dropped to record lows after a closely-watched part of the U.S. curve inverted on Friday as investors wager that the Federal Reserve will need to cut rates. Trading volumes in Treasury futures were double the norm during Asian trading, while Japan’s 10-year yields fell to the lowest since 2016.”
March 27 – Financial Times (Adam Samson and Laura Pitel): “The cost to borrow Turkish liras overnight more than tripled to above 1,000% on Wednesday in a sign of how money markets have seized up after an apparent bid to stymie foreign short sellers. The offshore overnight swap rate, the cost to investors of exchanging foreign currency for lira over a set period, soared to 1,200%, after hitting 325%, the highest level since 2001, in the previous session. It was 22.6% at the end of last week, Refinitiv data show. The rising cost highlights what some analysts say is an attempt by Turkey’s government to arrest a decline in the lira, after the currency on Friday faced its heaviest plunge since the economic crisis during the summer of 2018.”
March 27 – Bloomberg (Cagan Koc and Firat Kozok): “Some foreign banks were unable to close lira swaps on Tuesday because they couldn’t find a Turkish counterparty to provide a sufficient amount of the currency, a senior official in Turkey said. The country’s central bank had to extend operating hours during which foreign lenders can wire money to Turkey to allow them more time, but some lenders were still unable to close their positions… Those foreign lenders that made a bet on a swift depreciation in the currency are now paying a price after precautions taken by the nation’s banking regulator and the central bank…”
March 27 – Bloomberg (Constantine Courcoulas and Cagan Koc): “Investors dumped Turkish bonds and stocks on Wednesday after the nation orchestrated a currency crunch to prevent the lira from sliding days before an election that will test support for President Recep Tayyip Erdogan’s rule. The cost of borrowing liras overnight on the offshore swap market soared past 1,000% at one point on Wednesday because local banks are under pressure not to provide liquidity to foreign fund managers who want to bet against the lira. A government official said the measures are temporary.”
March 27 – Bloomberg (John Ainger): “Germany’s bond market just flashed another warning sign that Europe’s biggest economy is going the way of Japan. Ten-year bond yields dropped below those of the Asian nation’s for the first time since 2016 after European Central Bank President Mario Draghi said risks for the euro area remain tilted to the downside. A wave of risk-off sentiment is spreading through global markets, adding to a rally in German bonds this year amid a deteriorating outlook for the euro area.”
March 27 – Financial Times (Claire Jones and Adam Samson): “Germany has sold 10-year debt with a negative yield for the first time since the autumn of 2016, amid fears of a worsening global economic outlook… Demand is so high for haven assets that Berlin on Wednesday sold €2.4bn in 10-year paper with an average yield of minus 0.05%, according to the German Finance Agency. The agency said it received 2.6 times more bids for the debt than it accepted.”
Trump Administration Watch:
March 29 – Bloomberg (Christopher Condon): “President Donald Trump ratcheted up his pressure on the Federal Reserve, saying that if the central bank had ‘not mistakenly raised interest rates,’ the U.S. gross domestic product would be higher and markets ‘would be in a better place.’ The president’s comment, in a Twitter post on Friday afternoon, was yet another shot across the bow of Fed Chairman Jerome Powell… ‘Had the Fed not mistakenly raised interest rates, especially since there is very little inflation, and had they not done the ridiculously timed quantitative tightening, the 3.0% GDP, & Stock Market, would have both been much higher & World Markets would be in a better place!’ the president said… Earlier Friday, White House chief economic adviser Larry Kudlow called on the Fed to ‘immediately’ cut interest rates by a half percentage point, escalating the Trump administration’s fight with the central bank and challenging its independence.”
March 27 – Bloomberg: “Even as the U.S. and China near a deal on trade, the Trump administration is becoming increasingly assertive in challenging Beijing on its geopolitical red lines. Since Sunday alone, the U.S. has sailed a warship through the Taiwan Strait, released a report criticizing travel restrictions in Tibet and hosted Uighur exiles at the State Department. The moves -- all of them defying China’s warnings against meddling in what it views as its internal affairs -- came ahead the arrival of Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer in Beijing for trade talks. All three visits by U.S. trade delegations since President Donald Trump and Chinese counterpart Xi Jinping declared their Dec. 1 tariff truce have been presaged by U.S. naval patrols through territory claimed by Beijing.”
March 27 – Reuters (Steve Holland and Lesley Wroughton): “U.S. President Donald Trump… called on Russia to pull its troops from Venezuela and said that ‘all options’ were open to make that happen. The arrival of two Russian air force planes outside Caracas on Saturday believed to be carrying nearly 100 Russian special forces and cybersecurity personnel has escalated the political crisis in Venezuela. Russia and China have backed President Nicolas Maduro, while the United States and most other Western countries support opposition leader Juan Guaido. In January, Guaido invoked the constitution to assume Venezuela’s interim presidency, arguing that Maduro’s 2018 re-election was illegitimate. ‘Russia has to get out,’ Trump told reporters in the Oval Office, where he met with Guaido’s wife, Fabiana Rosales.”
March 25 – Wall Street Journal (Nick Timiraos and Kate Davidson): “Former Trump campaign adviser Stephen Moore, the president’s latest pick for a Federal Reserve Board seat, said the central bank’s recent policy pivot shows that he was right to criticize its December interest-rate increase. Shortly after that rate increase, Mr. Moore delivered a scathing assessment of Fed Chairman Jerome Powell in a December interview with The Wall Street Journal, calling him ‘totally incompetent’ and saying he should resign. Mr. Moore said in a Journal interview Monday that the Fed’s rate increase was a mistake but that he could have chosen his words about Mr. Powell more carefully.”
March 25 – Financial Times (James Politi): “Greg Mankiw, a respected Republican economist, did not mince words when he posted his reaction to Donald Trump’s latest anti-establishment gambit — his nomination of Stephen Moore, a conservative economic analyst, for a seat on the Federal Reserve board. ‘Steve is an amiable guy, but he does not have the intellectual gravitas for this important job,’ wrote Mr Mankiw, the Harvard University professor and former chair of George W Bush’s council of economic advisers… ‘Mr Moore should not be confirmed.’ Just three months ago, Mr Mankiw had written a scathing review of Trumponomics, a book co-authored by Mr Moore, classifying it as a work of ‘rah-rah’ partisanship that ignored economic evidence. ‘In their view, the world is simple, and the opposition is just wrong, wrong, wrong,’ he said.”
March 27 – Reuters (Trevor Hunnicutt and Ann Saphir): “President Donald Trump’s expected nominee for the Federal Reserve Board of Governors, Stephen Moore, said the U.S. central bank should immediately cut interest rates by half a percentage point, according to an interview with the New York Times… Moore, a conservative economic commentator and a fellow at the Heritage Foundation, told the Times he is not a ‘sycophant for Trump’ or ‘a dove’ on monetary policy, a reference to Fed officials who favor an easier policy that supports economic growth.”
Federal Reserve Watch:
March 28 – Bloomberg (Matthew Boesler and Steve Matthews): “U.S. central bankers said the economy is still on track for solid growth this year despite concerns in financial markets that it was heading for trouble. Federal Reserve Bank of New York President John Williams, one of the U.S. central bank’s top policy makers, downplayed fears of recession risks being signaled by bond markets. James Bullard, president of the St. Louis Fed, later said he expected second-quarter growth to rebound after a sluggish start to the year, and that calls for a rate cut were ‘premature.’ For Williams -- vice chairman of the Fed’s rate-setting Federal Open Market Committee -- the ‘most likely case’ is for U.S. growth of 2% with the economy continuing to add jobs. ‘So, I still see the probability of a recession this year or next year as being not elevated relative to any year,’ he said…”
March 26 – Reuters (Noah Sin): “U.S. Federal Reserve policymakers will look at the scale of the slowdown in the Chinese and European economies to determine any possible impact on Fed policy, Charlie Evans, president of the Chicago Fed, said in Hong Kong… ‘It depends a lot on how large the slowdown would be in China, and how big the headwinds would be from European deceleration as well,’ he said…”
March 25 – Reuters (David Milliken and Marc Jones): “One interest rate hike this year ‘at most’ still makes sense given strong U.S. economic conditions, a Federal Reserve official said…, despite risks that keep him in ‘wait-and-see mode’ for now. Strong economic growth and a positive outlook could still keep a rate hike on the table this year and another in 2020, Federal Reserve Bank of Philadelphia President Patrick Harker said…. He also said the Fed will not be making ‘any drastic change in the near future’ to the kinds of bonds it keeps on its $4 trillion balance sheet.”
U.S. Bubble Watch:
March 27 – Reuters (Lucia Mutikani): “The U.S. current account deficit increased more than expected in the fourth quarter amid declining exports, pushing the overall shortfall in 2018 to its highest level in 10 years, and U.S. companies repatriated a record amount of foreign earnings last year following the Republican tax overhaul. …The current account deficit… rose 6.1% to $134.4 billion. The quarterly current account gap was the largest since the fourth quarter of 2008… The deficit increased 8.8% in 2018 to $488.5 billion, the highest level since 2008. For all of 2018, the current account deficit averaged 2.4% of GDP, the biggest share since 2012, from 2.3% in 2017.”
March 29 – Reuters: “Sales of new U.S. single-family homes increased to an 11-month high in February and sales for January were revised higher, suggesting that lower mortgage rates were starting to lift the struggling housing market. …New home sales rose 4.9% to a seasonally adjusted annual rate of 667,000 units last month, the highest level since March 2018. January’s sales pace was revised up to 636,000 units from the previously reported 607,000 units… New home sales in the South, which accounts for the bulk of transactions, rose 1.8% in February to their highest level since July 2007… At February’s sales pace it would take 6.1 months to clear the supply of houses on the market, down from 6.5 months in January.”
March 27 – Reuters (Lucia Mutikani): “The U.S. trade deficit dropped more than expected in January likely as China boosted purchases of soybeans, leading to a rebound in exports after three straight monthly declines. The Commerce Department said on Wednesday the trade deficit declined 14.6%, the largest decline since March 2018, to $51.1 billion also as softening domestic demand and lower oil prices curbed the import bill.”
March 25 – Wall Street Journal (Ben Eisen): “The federal agency that insures mortgages for first-time home buyers is tightening its standards, concerned it is allowing too many risky loans to be extended. The Federal Housing Administration told lenders this month it would begin flagging more loans as high risk. Those mortgages, many of which are extended to borrowers with low credit scores and high loan payments relative to their incomes, will now go through a more rigorous manual underwriting process… The FHA’s decision to tighten underwriting standards could mean fewer first-time home buyers are able to get mortgages. Roughly 40,000 to 50,000 loans a year likely would be affected, or about 4% to 5% of the FHA-insured mortgages originated annually in recent years…”
March 25 – Wall Street Journal (Eliot Brown): “Ride-hailing company Lyft Inc. is leading a parade of Silicon Valley companies to Wall Street that display an unusual quality with parallels to companies going public in the dot-com era: lots of red ink. With its initial public offering expected this week, Lyft will serve as one of the biggest tests ever of investors’ appetite for money-losing companies. Lyft posted last year a loss of $911 million, more than any other U.S. startup lost in the 12 months preceding its IPO… Lyft’s loss, in the sixth year since the company’s founding, could soon be eclipsed by 10-year-old Uber Technologies Inc., which has been losing more than $800 million a quarter. Uber plans to go public later this year. Many other highly funded startups with a propensity for heavy spending similar to Lyft and Uber are considering listing as they age.”
March 27 – Financial Times (Joe Rennison): “Homeowners across the US are rushing to take advantage of lower borrowing costs by refinancing their mortgages, helping in the process to fuel the sharp rally in government bonds. Applications to refinance home loans rose about 12% in volume last week from the previous week… This means investors that own the debt expecting to be paid a certain coupon for a certain period of time could soon find the loans fully paid off. To guard against that possibility, some big money managers are buying Treasuries and interest rate swaps in an attempt to offset, at least partially, the lost income from the mortgages.”
March 26 – CNBC (Diana Olick): “Home prices are rising, but the gains are shrinking, since fewer buyers are able to afford the homes available for sale. Nationally, prices rose 4.3% annually in January, down from the 4.6% gain in December, according to the S&P CoreLogic Case-Shiller price index. The 10-city composite rose 3.2%, down from 3.7% in the previous month. The 20-city composite gained 3.6% year over year, down from 4.1% in December. The last time it advanced this slowly was April 2015. ‘In 16 of the 20 cities tracked, price gains were smaller in January 2019 than in January 2018,’ said David Blitzer, managing director… at S&P Dow Jones Indices. ‘Only Phoenix saw any appreciable acceleration. Some cities where prices surged in 2017-2018 now face much smaller increases.’”
March 27 – Wall Street Journal (Laura Kusisto): “The exurbs, the engine of the American housing market, are back. A decade ago, the sight of new homes under construction in Maricopa, an enclave of tidy cul-de-sacs 35 miles from downtown Phoenix, was almost unimaginable. Four in five homeowners were underwater, with their outstanding mortgages worth more than their properties… Neighbors felt compelled to cut the hedges and clean up garbage at empty houses. Last year, Maricopa issued permits for nearly 1,000 new homes. In the depths of the housing downturn, in 2010, it issued just 110. Across the country, the housing market overall has slowed. But in the regions just beyond the affluent suburbs, new home building and sales are showing signs of life.”
March 26 – CNBC (Robert Ferris): “U.S. auto sales are falling as vehicle prices climb, indicating that buyers at the lower end are getting squeezed out of the new car market… First-quarter auto sales are expected to drop by nearly 2.5% from a year earlier, to 4 million units, according to J.D. Power and LMC Automotive. Retail sales, which exclude sales to rental car companies and other commercial businesses, are expected to drop by about 5% to 2.9 million units. It’s the first time first-quarter retail sales are projected to fall short of 3 million units in six years…”
March 26 – Bloomberg (Ben Steverman): “The bad news is that almost half of Americans approaching retirement have nothing saved in a 401(k) or other individual account. The good news is that the new estimate, from the U.S. Government Accountability Office, is slightly better than a few years earlier. Of those 55 and older, 48% had nothing put away in a 401(k)-style defined contribution plan or an individual retirement account, according to a GAO estimate for 2016… That’s an improvement from the 52% without retirement money in 2013.”
March 26 – Reuters (Ann Saphir): “Federal Reserve policymakers need to be vigilant that muted inflation does not become ingrained in their expectations, but the U.S. central bank’s patient approach to monetary policy should allow inflation to reassert itself, San Francisco Federal Reserve Bank President Mary Daly said…”
March 27 – Financial Times (Robin Wigglesworth, Richard Henderson and Shannon Bond): “The New York Stock Exchange zealously enforces its dress code for the trading floor, even insisting that beards, moustaches and sideburns be kept ‘neatly trimmed’. But for one day last week the floor looked more like a Bruce Springsteen convention, with traders decked out in stonewashed jeans and denim jackets… It is also a reminder of the fierce battles that are being waged in US markets between exchanges for prestigious listings, bankers for the fees initial public offerings bring, and among big technology companies hustling to sell shares before markets turn turbulent again. A fear of missing out is one that haunts many executives, according to Craig Coben, vice-chairman of global capital markets at Bank of America Merrill Lynch. ‘When the IPO window opens you usually want to be one of the first ones out,’ he said. ‘That is especially true now, given that the outlook is pretty uncertain. There’s still a fear that we might have another market correction.’”
March 26 – Wall Street Journal (Konrad Putzier): “Private real-estate fund managers, sitting on record amounts of cash, are finding it increasingly difficult to spend all that money within the deadlines they promised investors. Funds with fixed lifespans generally promise investors they will spend the money they commit within three to five years. But as of last June, closed-end real-estate vehicles launched in 2013 and 2014 still held $24.8 billion in dry powder…, according to research and data firm Preqin Ltd. The problem is likely to get worse. The total amount of dry powder held by closed-end private property funds increased to a record $333 billion this month, up from $134 billion at the end of 2012… In a 2018 survey, 68% of real-estate fund managers told Preqin that it was more difficult to find attractive investments than it had been a year before.”
China Watch:
March 27 – Reuters (Kevin Yao and Yawen Chen): “China will cut ‘real interest rate levels’ and lower financing costs for companies, Premier Li Keqiang said on Thursday in a speech at the annual Boao forum held in the southern island of Hainan.”
March 26 – Reuters (Stella Qiu, Ryan Woo and Min Zhang): “China’s industrial firms posted their worst slump in profits since late 2011 in the first two months of this year…, as increasing strains on the economy in the face of slowing demand at home and abroad took a toll on businesses… Profits notched up by China’s industrial firms in January-February slumped 14.0% year-on-year to 708.01 billion yuan ($105.50bn)… It marked the biggest contraction since Reuters began keeping records in October 2011.”
March 26 – Bloomberg: “China’s economy showed ‘an unmistakable first-quarter recovery’ after a weak end to 2018, though the level of new borrowing casts doubt on the sustainability of the rebound, according to the China Beige Book. ‘The recovery extends across both sectors and geographies, with every major sector and each one of our regions showing better revenue results than Q4,’ CBB International said… ‘Yet this rally didn’t appear out of nowhere, and there are at least three compelling reasons to doubt its staying power: credit, credit, and credit.’”
March 24 – Bloomberg: “China has embraced the idea of defaults imposing some discipline on debtors in its bond market. And some of the most troubled debtors are local governments’ financing vehicles. So an LGFV default has long seemed on the cards. But it just isn’t happening. Moody’s… thought the first one might come in 2017. Almost two years later, there have been some close calls -- including with a late payment by a unit owned by Qinghai province on a dollar bond last month that caused ripples through the investment community -- but no default. What it suggests is China’s leadership isn’t prepared for a borrower with a regional authority’s imprimatur to renege on its principal, triggering higher borrowing costs across a swathe of the world’s third-largest bond market.”
March 25 - Bloomberg (Shuli Ren): “China’s most prominent development bank has been noticeably low-profile lately. For the last decade, the 16 trillion yuan ($2.39 trillion) China Development Bank, and its less-muscular cousins Agricultural Development Bank of China Ltd. and Export-Import Bank of China, were on the forefront of every major stimulus push. In 2008, CDB financed the 4 trillion yuan spending pledge by the Ministry of Finance, its former controlling shareholder. The bank shifted its focus to the monetary side after 2015, disseminating 3.5 trillion yuan of helicopter money for the central bank via shantytown developments. At this year’s National People’s Congress, though, policy banks seemed to be getting sidelined. There was hardly any mention of them; instead, the heavy stimulus lifting will be financed by special-purpose municipal bonds.”
March 27 – Wall Street Journal (Stella Yifan Xie): “The world’s biggest money-market fund, overseen by China’s Ant Financial Services Group, drew 114 million new investors last year despite regulatory pressure to shrink. Ant’s asset-management arm… said 588 million users of Alipay, Ant’s highly popular mobile-payments network, had parked cash in its flagship Tianhong Yu’e Bao fund at the end of 2018. That means more than a third of China’s population is now invested in the fund, whose assets under management totaled 1.13 trillion yuan ($168.26bn) at the end of last year.”
March 26 – Bloomberg: “Hui Ka Yan, China’s second-richest man and chairman of one of the nation’s biggest residential developers, has a funding challenge on his hands. China Evergrande Group has debt maturing in 12 months or less that exceeds its cash by 114 billion yuan ($17bn)… The gap is partly the result of a drop in its cash buffer in the second half of 2018.”
Central Bank Watch:
March 27 – Reuters (Francesco Canepa and Balazs Koranyi): “The European Central Bank could further delay an interest rate hike and may look at measures to mitigate the side-effects of negative interest rates, ECB President Mario Draghi said…, warning that risks to growth were on the rise… ‘Just as we did at our March meeting, we would ensure that monetary policy continues to accompany the economy by adjusting our rate forward guidance to reflect the new inflation outlook,’ Draghi told a conference… ‘If necessary, we need to reflect on possible measures that can preserve the favorable implications of negative rates for the economy, while mitigating the side effects, if any… That said, low bank profitability is not an inevitable consequence of negative rates.’”
March 26 – Bloomberg (Tracy Withers): “New Zealand’s central bank joined the global shift away from higher interest rates, saying its next move is more likely to be a cut and sending the kiwi dollar tumbling by the most in seven weeks. ‘Given the weaker global economic outlook and reduced momentum in domestic spending, the more likely direction of our next OCR move is down,’ Governor Adrian Orr said… after leaving the official cash rate at 1.75%. ‘Core consumer price inflation remains below our 2% target mid-point, necessitating continued supportive monetary policy.’”
March 26 – Reuters (Dhara Ranasinghe, Jennifer Ablan, Virginia Furness): “‘Whatever it takes’ is a daunting legacy for any departing central bank chief to bequeath a successor and leaves world markets anxious about what is to come after Mario Draghi leaves the European Central Bank later this year. Draghi’s 2012 pledge to save the euro won the confidence of financial markets and arrested the currency bloc’s debt crisis. Investors admired his willingness to break new policy ground — maneuvering past internal and external opposition — and clear communication of the ECB’s thinking. With growth and inflation flagging again, and the ECB’s policy arsenal depleted, whoever succeeds him may need to be similarly bold. Growing questions about the orthodoxies of economic policy — including monetary policy models — could present an additional test.”
March 27 – Bloomberg (William Horobin and Catherine Bosley): “The European Central Bank is hoping the economic situation will improve through 2019, but has the necessary tools to react if it worsens, Governing Council member Francois Villeroy de Galhau said… ‘We are continuing to follow the economic situation very closely, and without any doubt we have the tools and margins for maneuver that are sufficiently powerful to act as much as necessary,’ Villeroy said…”
March 22 – Bloomberg (William Horobin and Craig Stirling): “Jens Weidmann may struggle to pass the test that France’s finance minister is setting for prospective successors to European Central Bank President Mario Draghi. In a rare foray on the matter this week, Bruno Le Maire lavished praise on the Italian incumbent for quantitative easing, and suggested France would want someone with similar ‘courage’ as a replacement…. ‘Draghi’s term has changed deeply the approach to conducting monetary policy in the euro zone,’ said Bruno Cavalier, economist at Oddo BHF. ‘The only candidate who would represent a break from that is Weidmann.’”
Brexit Watch:
March 24 – Financial Times (Wolfgang Münchau): “Forecasting Brexit is still the same old mug’s game it always was. But the probability of a no-deal Brexit has risen dramatically since last week’s summit of European leaders. That scenario can be avoided, for now, if Theresa May were to be ousted as prime minister. The EU would always accept a request for a further delay in such a situation. But it would still insist Britain organise European Parliament elections on May 23 — the UK cannot be allowed to undermine the legitimacy of the European Parliament while it is negotiating its way out. And a new leader would face the same problems in finding a way out of the current impasse. The EU will not renegotiate Mrs May’s withdrawal agreement.”
Europe Watch:
March 24 – Reuters (Joseph Nasr): “The risk of Britain leaving the European Union without a deal is the biggest risk facing the slowing euro zone economy in the short term, Finnish central bank chief Olli Rehn told Germany’s Die Welt newspaper… ‘In the short term Brexit is surely the biggest threat,’ said Rehn, who sits on the European Central Bank’s rate-setting Governing Council. ‘Financial markets seem to be too relaxed and appear to underestimate the risk.’ He said the ECB had made arrangements with the Bank of England to blunt turbulence in the case of a disorderly Brexit.”
March 28 – Financial Times (Valentina Romei): “Lending to eurozone businesses gathered speed in February, the largest increase in the annual rate in more than two years, but remained weak in peripheral member states… In February, adjusted lending growth to non-financial companies rose 3.7% compared with the same month last year, picking up the pace since the previous month’s 3.4%...”
EM Watch:
March 25 – Financial Times (Laura Pitel and Katie Martin): “Turkish authorities have turned up the heat on western institutions with a critical view of the country’s economic policies, but the prospects of an investment backlash mean that probes into US bank JPMorgan Chase are unlikely to lead to a real clampdown, say analysts. Over the weekend, Turkey’s capital markets board and the country’s banking supervisor launched parallel investigations into the… investment bank, responding to what they described as ‘misleading’ and ‘manipulative’ advice from the bank to sell the lira. President Recep Tayyip Erdogan threatened a ‘very heavy price’ for foreign groups ‘trying to provoke us’.”
March 28 – Financial Times (Laura Pitel and Adam Samson): “Turkey has burnt through around a third of its foreign reserves this month in an effort to prop up the faltering lira ahead of local elections this weekend, spooking investors and sending the currency sliding on Thursday… When converted into dollars, the fall in the first three weeks of March was roughly $10bn, or 29%, leaving the reserves at about $24.7bn…”
March 28 – Reuters (Tuvan Gumrukcu and Ece Toksabay): “President Tayyip Erdogan said on Thursday he was ‘in charge of Turkey’s economy’ as he piled pressure on the central bank to cut interest rates despite double-digit inflation and a tumbling lira… The Turkish currency dived 5% against the dollar on Thursday after banks started providing lira liquidity to the London market again following several days of authorities withholding liquidity to support the currency. The renewed selling pressure stems from concerns about Turkey’s balance of payments, its ability to service its foreign debt, and repeated calls by Erdogan, who has described himself as an ‘enemy of interest rates’, for cheaper credit.”
March 27 – Bloomberg (Kerim Karakaya, Cagan Koc and Asli Kandemir): “The last time Turks went to the polls, the country’s paramount leader for the past 16 years vowed to tighten his grip on the economy. With another national campaign — this time for municipal offices — nearing its climax, he’s rolling out the same playbook. In the past eight months, President Recep Tayyip Erdogan’s government has imposed price controls, forced lenders to keep credit flowing and banned the use of dollars in most contracts. Most recently, he trained his invective on a familiar target: foreign bankers, with the promise of an investigation into… JPMorgan… for predicting a decline in the lira.”
March 26 – Reuters (Jorge Otaola and Cassandra Garrison): “Argentina’s peso currency weakened 1.34% to an all-time low close of 42.65 per dollar on Tuesday, as concerns about high inflation and political uncertainty ahead of the October presidential election dented confidence in the economy.”
March 27 – Bloomberg (Raymond Colitt and Simone Preissler Iglesias): “Three months into Brazilian President Jair Bolsonaro’s term, voters, investors and some supporters are starting to doubt if he can deliver on pledges to kick-start the economy and crack down on crime. At times, his government even looks like it could fall apart. The 64-year-old former Army captain has plummeted in opinion polls and antagonized key allies, while his cabinet is plagued by intrigue and infighting. Meanwhile, support for a pension overhaul looks more uncertain than ever, raising the risk of further debt increases and sovereign credit rating downgrades.”
Global Bubble Watch:
March 25 – Financial Times (Leslie Hook): “Global carbon dioxide emissions rose to their highest levels last year after a surge in energy demand stoked by a strong economy and extreme weather, according to the world’s energy watchdog. The… International Energy Agency said energy demand rose 2.3% last year — its fastest rate since 2010 — and that the growth was met mainly by fossil fuels. That pushed global emissions of carbon dioxide to a record high of 33bn tonnes in 2018, up 1.7% from the previous year. Fatih Birol, the head of the IEA, said the rise in energy demand was ‘exceptional’ and a ‘surprise for many’, moving the world further away from its climate goals.”
Japan Watch:
March 25 – Reuters (Leika Kihara): “Bank of Japan policymakers debated the feasibility of ramping up monetary stimulus at their rate review this month as heightening overseas risks weighed on the country’s fragile economy, a summary of opinions of the meeting showed on Tuesday.”
Fixed-Income Bubble Watch:
March 25 - Bloomberg (Finbarr Flynn): “Leveraged loans are suffering a ‘slow bleed’ and are the weakest link in U.S. credit markets, says UBS Group AG, adding to an expanding list of warnings. ‘We are growing more concerned over the deterioration in loan fundamentals, which is broad-based and appears less related to trade and more to fading cyclical momentum and a hangover from an M&A-driven debt boom,’ UBS credit strategists led by Matthew Mish wrote…”
March 26 – Wall Street Journal (Gunjan Banerji): “Illinois and its biggest city kick off hundreds of millions of dollars in borrowings this week, a test of investors’ willingness to lend to stressed governments prone to spending more money than they bring in. The state launched borrowings with about a $440 million bond deal on Tuesday, followed by a roughly $730 million sale by Chicago… Analysts expect what could be billions more especially from the state, as it puts together funds to do everything from paying retirees’ pensions to launching capital projects.”
Leveraged Speculator Watch:
March 25 – Financial Times (Robin Wigglesworth): “In 1988, Revolution Books, a tatty Communist bookstore near New York’s Union Square, got some strange new upstairs neighbours: a bunch of geeky programmers trying to crack the code to financial markets. In the early days, the embryonic hedge fund founded by David Shaw, a former computer science professor at Columbia University, was a ramshackle start-up. Exposed pipes and extension cords meant that tripping on a cable could take out its entire trading system. Yet today DE Shaw is one of the hedge fund industry’s biggest players, managing over $50bn of assets.”
March 27 – Bloomberg: “Three months after news first emerged of a hedge fund blowup that threatens to saddle Citigroup Inc. with millions of dollars in losses, details of the fund’s implosion are becoming clearer. GF Securities Co. said… its GTEC Pandion Multi-Strategy Fund SP lost $139 million in 2018 primarily on foreign exchange trades, leaving it with negative capital. As the fund’s losses spiraled last year, it faced margin calls from Citigroup, its prime broker… Pandion’s losses stemmed mainly from trades in the Turkish Lira…”
Geopolitical Watch:
March 28 – Reuters (Tom Balmforth and Maxim Rodionov): “Russia said on Thursday it had sent ‘specialists’ to Venezuela under a military cooperation deal but said they posed no threat to regional stability, brushing aside a call from U.S. President Donald Trump to remove all military personnel from the country.”
March 26 – AFP: “Secretary of State Mike Pompeo warned Russia Monday the United States will not ‘stand idly by’ as Moscow inserts military personnel into Venezuela to support the regime of President Nicolas Maduro. In a phone call with Foreign Minister Sergei Lavrov, Pompeo denounced the growing Russian military reinforcements as prolonging the political crisis in the South American country. Pompeo told Lavrov ‘the United States and regional countries will not stand idly by as Russia exacerbates tensions in Venezuela,’… ‘The continued insertion of Russian military personnel to support the illegitimate regime of Nicolas Maduro in Venezuela risks prolonging the suffering of the Venezuelan people who overwhelmingly support interim President Juan Guaido,’ he said.”
March 24 – Reuters (Idrees Ali): “The United States sent Navy and Coast Guard ships through the Taiwan Strait on Sunday, the U.S. military said, as part of an increase in the frequency of movement through the strategic waterway despite opposition from China. The voyage risks raising tensions with China further but will likely be viewed by self-ruled Taiwan as a sign of support from Washington amid growing friction between Taipei and Beijing.”
March 23 – Reuters (Giselda Vagnoni): “Italy endorsed China’s ambitious ‘Belt and Road’ infrastructure plan on Saturday, becoming the first major Western power to back the initiative to help revive the struggling Italian economy. Saturday’s signing ceremony was the highlight of a three-day trip to Italy by Chinese President Xi Jinping, with the two nations boosting their ties at a time when the United States is locked in a trade war with China. The rapprochement has angered Washington and alarmed some European Union allies, who fear it could see Beijing gain access to sensitive technologies and critical transport hubs.”
March 24 – Bloomberg (Ruth Carson and Stephen Spratt): “Wherever you look in developed markets, sovereign bond yields are at their lowest levels in years as traders ratchet up bets that major central banks will be easing. Yields in Australia and New Zealand dropped to record lows after a closely-watched part of the U.S. curve inverted on Friday as investors wager that the Federal Reserve will need to cut rates. Trading volumes in Treasury futures were double the norm during Asian trading, while Japan’s 10-year yields fell to the lowest since 2016.”
March 27 – Financial Times (Adam Samson and Laura Pitel): “The cost to borrow Turkish liras overnight more than tripled to above 1,000% on Wednesday in a sign of how money markets have seized up after an apparent bid to stymie foreign short sellers. The offshore overnight swap rate, the cost to investors of exchanging foreign currency for lira over a set period, soared to 1,200%, after hitting 325%, the highest level since 2001, in the previous session. It was 22.6% at the end of last week, Refinitiv data show. The rising cost highlights what some analysts say is an attempt by Turkey’s government to arrest a decline in the lira, after the currency on Friday faced its heaviest plunge since the economic crisis during the summer of 2018.”
March 27 – Bloomberg (Cagan Koc and Firat Kozok): “Some foreign banks were unable to close lira swaps on Tuesday because they couldn’t find a Turkish counterparty to provide a sufficient amount of the currency, a senior official in Turkey said. The country’s central bank had to extend operating hours during which foreign lenders can wire money to Turkey to allow them more time, but some lenders were still unable to close their positions… Those foreign lenders that made a bet on a swift depreciation in the currency are now paying a price after precautions taken by the nation’s banking regulator and the central bank…”
March 27 – Bloomberg (Constantine Courcoulas and Cagan Koc): “Investors dumped Turkish bonds and stocks on Wednesday after the nation orchestrated a currency crunch to prevent the lira from sliding days before an election that will test support for President Recep Tayyip Erdogan’s rule. The cost of borrowing liras overnight on the offshore swap market soared past 1,000% at one point on Wednesday because local banks are under pressure not to provide liquidity to foreign fund managers who want to bet against the lira. A government official said the measures are temporary.”
March 27 – Bloomberg (John Ainger): “Germany’s bond market just flashed another warning sign that Europe’s biggest economy is going the way of Japan. Ten-year bond yields dropped below those of the Asian nation’s for the first time since 2016 after European Central Bank President Mario Draghi said risks for the euro area remain tilted to the downside. A wave of risk-off sentiment is spreading through global markets, adding to a rally in German bonds this year amid a deteriorating outlook for the euro area.”
March 27 – Financial Times (Claire Jones and Adam Samson): “Germany has sold 10-year debt with a negative yield for the first time since the autumn of 2016, amid fears of a worsening global economic outlook… Demand is so high for haven assets that Berlin on Wednesday sold €2.4bn in 10-year paper with an average yield of minus 0.05%, according to the German Finance Agency. The agency said it received 2.6 times more bids for the debt than it accepted.”
Trump Administration Watch:
March 29 – Bloomberg (Christopher Condon): “President Donald Trump ratcheted up his pressure on the Federal Reserve, saying that if the central bank had ‘not mistakenly raised interest rates,’ the U.S. gross domestic product would be higher and markets ‘would be in a better place.’ The president’s comment, in a Twitter post on Friday afternoon, was yet another shot across the bow of Fed Chairman Jerome Powell… ‘Had the Fed not mistakenly raised interest rates, especially since there is very little inflation, and had they not done the ridiculously timed quantitative tightening, the 3.0% GDP, & Stock Market, would have both been much higher & World Markets would be in a better place!’ the president said… Earlier Friday, White House chief economic adviser Larry Kudlow called on the Fed to ‘immediately’ cut interest rates by a half percentage point, escalating the Trump administration’s fight with the central bank and challenging its independence.”
March 27 – Bloomberg: “Even as the U.S. and China near a deal on trade, the Trump administration is becoming increasingly assertive in challenging Beijing on its geopolitical red lines. Since Sunday alone, the U.S. has sailed a warship through the Taiwan Strait, released a report criticizing travel restrictions in Tibet and hosted Uighur exiles at the State Department. The moves -- all of them defying China’s warnings against meddling in what it views as its internal affairs -- came ahead the arrival of Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer in Beijing for trade talks. All three visits by U.S. trade delegations since President Donald Trump and Chinese counterpart Xi Jinping declared their Dec. 1 tariff truce have been presaged by U.S. naval patrols through territory claimed by Beijing.”
March 27 – Reuters (Steve Holland and Lesley Wroughton): “U.S. President Donald Trump… called on Russia to pull its troops from Venezuela and said that ‘all options’ were open to make that happen. The arrival of two Russian air force planes outside Caracas on Saturday believed to be carrying nearly 100 Russian special forces and cybersecurity personnel has escalated the political crisis in Venezuela. Russia and China have backed President Nicolas Maduro, while the United States and most other Western countries support opposition leader Juan Guaido. In January, Guaido invoked the constitution to assume Venezuela’s interim presidency, arguing that Maduro’s 2018 re-election was illegitimate. ‘Russia has to get out,’ Trump told reporters in the Oval Office, where he met with Guaido’s wife, Fabiana Rosales.”
March 25 – Wall Street Journal (Nick Timiraos and Kate Davidson): “Former Trump campaign adviser Stephen Moore, the president’s latest pick for a Federal Reserve Board seat, said the central bank’s recent policy pivot shows that he was right to criticize its December interest-rate increase. Shortly after that rate increase, Mr. Moore delivered a scathing assessment of Fed Chairman Jerome Powell in a December interview with The Wall Street Journal, calling him ‘totally incompetent’ and saying he should resign. Mr. Moore said in a Journal interview Monday that the Fed’s rate increase was a mistake but that he could have chosen his words about Mr. Powell more carefully.”
March 25 – Financial Times (James Politi): “Greg Mankiw, a respected Republican economist, did not mince words when he posted his reaction to Donald Trump’s latest anti-establishment gambit — his nomination of Stephen Moore, a conservative economic analyst, for a seat on the Federal Reserve board. ‘Steve is an amiable guy, but he does not have the intellectual gravitas for this important job,’ wrote Mr Mankiw, the Harvard University professor and former chair of George W Bush’s council of economic advisers… ‘Mr Moore should not be confirmed.’ Just three months ago, Mr Mankiw had written a scathing review of Trumponomics, a book co-authored by Mr Moore, classifying it as a work of ‘rah-rah’ partisanship that ignored economic evidence. ‘In their view, the world is simple, and the opposition is just wrong, wrong, wrong,’ he said.”
March 27 – Reuters (Trevor Hunnicutt and Ann Saphir): “President Donald Trump’s expected nominee for the Federal Reserve Board of Governors, Stephen Moore, said the U.S. central bank should immediately cut interest rates by half a percentage point, according to an interview with the New York Times… Moore, a conservative economic commentator and a fellow at the Heritage Foundation, told the Times he is not a ‘sycophant for Trump’ or ‘a dove’ on monetary policy, a reference to Fed officials who favor an easier policy that supports economic growth.”
Federal Reserve Watch:
March 28 – Bloomberg (Matthew Boesler and Steve Matthews): “U.S. central bankers said the economy is still on track for solid growth this year despite concerns in financial markets that it was heading for trouble. Federal Reserve Bank of New York President John Williams, one of the U.S. central bank’s top policy makers, downplayed fears of recession risks being signaled by bond markets. James Bullard, president of the St. Louis Fed, later said he expected second-quarter growth to rebound after a sluggish start to the year, and that calls for a rate cut were ‘premature.’ For Williams -- vice chairman of the Fed’s rate-setting Federal Open Market Committee -- the ‘most likely case’ is for U.S. growth of 2% with the economy continuing to add jobs. ‘So, I still see the probability of a recession this year or next year as being not elevated relative to any year,’ he said…”
March 26 – Reuters (Noah Sin): “U.S. Federal Reserve policymakers will look at the scale of the slowdown in the Chinese and European economies to determine any possible impact on Fed policy, Charlie Evans, president of the Chicago Fed, said in Hong Kong… ‘It depends a lot on how large the slowdown would be in China, and how big the headwinds would be from European deceleration as well,’ he said…”
March 25 – Reuters (David Milliken and Marc Jones): “One interest rate hike this year ‘at most’ still makes sense given strong U.S. economic conditions, a Federal Reserve official said…, despite risks that keep him in ‘wait-and-see mode’ for now. Strong economic growth and a positive outlook could still keep a rate hike on the table this year and another in 2020, Federal Reserve Bank of Philadelphia President Patrick Harker said…. He also said the Fed will not be making ‘any drastic change in the near future’ to the kinds of bonds it keeps on its $4 trillion balance sheet.”
U.S. Bubble Watch:
March 27 – Reuters (Lucia Mutikani): “The U.S. current account deficit increased more than expected in the fourth quarter amid declining exports, pushing the overall shortfall in 2018 to its highest level in 10 years, and U.S. companies repatriated a record amount of foreign earnings last year following the Republican tax overhaul. …The current account deficit… rose 6.1% to $134.4 billion. The quarterly current account gap was the largest since the fourth quarter of 2008… The deficit increased 8.8% in 2018 to $488.5 billion, the highest level since 2008. For all of 2018, the current account deficit averaged 2.4% of GDP, the biggest share since 2012, from 2.3% in 2017.”
March 29 – Reuters: “Sales of new U.S. single-family homes increased to an 11-month high in February and sales for January were revised higher, suggesting that lower mortgage rates were starting to lift the struggling housing market. …New home sales rose 4.9% to a seasonally adjusted annual rate of 667,000 units last month, the highest level since March 2018. January’s sales pace was revised up to 636,000 units from the previously reported 607,000 units… New home sales in the South, which accounts for the bulk of transactions, rose 1.8% in February to their highest level since July 2007… At February’s sales pace it would take 6.1 months to clear the supply of houses on the market, down from 6.5 months in January.”
March 27 – Reuters (Lucia Mutikani): “The U.S. trade deficit dropped more than expected in January likely as China boosted purchases of soybeans, leading to a rebound in exports after three straight monthly declines. The Commerce Department said on Wednesday the trade deficit declined 14.6%, the largest decline since March 2018, to $51.1 billion also as softening domestic demand and lower oil prices curbed the import bill.”
March 25 – Wall Street Journal (Ben Eisen): “The federal agency that insures mortgages for first-time home buyers is tightening its standards, concerned it is allowing too many risky loans to be extended. The Federal Housing Administration told lenders this month it would begin flagging more loans as high risk. Those mortgages, many of which are extended to borrowers with low credit scores and high loan payments relative to their incomes, will now go through a more rigorous manual underwriting process… The FHA’s decision to tighten underwriting standards could mean fewer first-time home buyers are able to get mortgages. Roughly 40,000 to 50,000 loans a year likely would be affected, or about 4% to 5% of the FHA-insured mortgages originated annually in recent years…”
March 25 – Wall Street Journal (Eliot Brown): “Ride-hailing company Lyft Inc. is leading a parade of Silicon Valley companies to Wall Street that display an unusual quality with parallels to companies going public in the dot-com era: lots of red ink. With its initial public offering expected this week, Lyft will serve as one of the biggest tests ever of investors’ appetite for money-losing companies. Lyft posted last year a loss of $911 million, more than any other U.S. startup lost in the 12 months preceding its IPO… Lyft’s loss, in the sixth year since the company’s founding, could soon be eclipsed by 10-year-old Uber Technologies Inc., which has been losing more than $800 million a quarter. Uber plans to go public later this year. Many other highly funded startups with a propensity for heavy spending similar to Lyft and Uber are considering listing as they age.”
March 27 – Financial Times (Joe Rennison): “Homeowners across the US are rushing to take advantage of lower borrowing costs by refinancing their mortgages, helping in the process to fuel the sharp rally in government bonds. Applications to refinance home loans rose about 12% in volume last week from the previous week… This means investors that own the debt expecting to be paid a certain coupon for a certain period of time could soon find the loans fully paid off. To guard against that possibility, some big money managers are buying Treasuries and interest rate swaps in an attempt to offset, at least partially, the lost income from the mortgages.”
March 26 – CNBC (Diana Olick): “Home prices are rising, but the gains are shrinking, since fewer buyers are able to afford the homes available for sale. Nationally, prices rose 4.3% annually in January, down from the 4.6% gain in December, according to the S&P CoreLogic Case-Shiller price index. The 10-city composite rose 3.2%, down from 3.7% in the previous month. The 20-city composite gained 3.6% year over year, down from 4.1% in December. The last time it advanced this slowly was April 2015. ‘In 16 of the 20 cities tracked, price gains were smaller in January 2019 than in January 2018,’ said David Blitzer, managing director… at S&P Dow Jones Indices. ‘Only Phoenix saw any appreciable acceleration. Some cities where prices surged in 2017-2018 now face much smaller increases.’”
March 27 – Wall Street Journal (Laura Kusisto): “The exurbs, the engine of the American housing market, are back. A decade ago, the sight of new homes under construction in Maricopa, an enclave of tidy cul-de-sacs 35 miles from downtown Phoenix, was almost unimaginable. Four in five homeowners were underwater, with their outstanding mortgages worth more than their properties… Neighbors felt compelled to cut the hedges and clean up garbage at empty houses. Last year, Maricopa issued permits for nearly 1,000 new homes. In the depths of the housing downturn, in 2010, it issued just 110. Across the country, the housing market overall has slowed. But in the regions just beyond the affluent suburbs, new home building and sales are showing signs of life.”
March 26 – CNBC (Robert Ferris): “U.S. auto sales are falling as vehicle prices climb, indicating that buyers at the lower end are getting squeezed out of the new car market… First-quarter auto sales are expected to drop by nearly 2.5% from a year earlier, to 4 million units, according to J.D. Power and LMC Automotive. Retail sales, which exclude sales to rental car companies and other commercial businesses, are expected to drop by about 5% to 2.9 million units. It’s the first time first-quarter retail sales are projected to fall short of 3 million units in six years…”
March 26 – Bloomberg (Ben Steverman): “The bad news is that almost half of Americans approaching retirement have nothing saved in a 401(k) or other individual account. The good news is that the new estimate, from the U.S. Government Accountability Office, is slightly better than a few years earlier. Of those 55 and older, 48% had nothing put away in a 401(k)-style defined contribution plan or an individual retirement account, according to a GAO estimate for 2016… That’s an improvement from the 52% without retirement money in 2013.”
March 26 – Reuters (Ann Saphir): “Federal Reserve policymakers need to be vigilant that muted inflation does not become ingrained in their expectations, but the U.S. central bank’s patient approach to monetary policy should allow inflation to reassert itself, San Francisco Federal Reserve Bank President Mary Daly said…”
March 27 – Financial Times (Robin Wigglesworth, Richard Henderson and Shannon Bond): “The New York Stock Exchange zealously enforces its dress code for the trading floor, even insisting that beards, moustaches and sideburns be kept ‘neatly trimmed’. But for one day last week the floor looked more like a Bruce Springsteen convention, with traders decked out in stonewashed jeans and denim jackets… It is also a reminder of the fierce battles that are being waged in US markets between exchanges for prestigious listings, bankers for the fees initial public offerings bring, and among big technology companies hustling to sell shares before markets turn turbulent again. A fear of missing out is one that haunts many executives, according to Craig Coben, vice-chairman of global capital markets at Bank of America Merrill Lynch. ‘When the IPO window opens you usually want to be one of the first ones out,’ he said. ‘That is especially true now, given that the outlook is pretty uncertain. There’s still a fear that we might have another market correction.’”
March 26 – Wall Street Journal (Konrad Putzier): “Private real-estate fund managers, sitting on record amounts of cash, are finding it increasingly difficult to spend all that money within the deadlines they promised investors. Funds with fixed lifespans generally promise investors they will spend the money they commit within three to five years. But as of last June, closed-end real-estate vehicles launched in 2013 and 2014 still held $24.8 billion in dry powder…, according to research and data firm Preqin Ltd. The problem is likely to get worse. The total amount of dry powder held by closed-end private property funds increased to a record $333 billion this month, up from $134 billion at the end of 2012… In a 2018 survey, 68% of real-estate fund managers told Preqin that it was more difficult to find attractive investments than it had been a year before.”
China Watch:
March 27 – Reuters (Kevin Yao and Yawen Chen): “China will cut ‘real interest rate levels’ and lower financing costs for companies, Premier Li Keqiang said on Thursday in a speech at the annual Boao forum held in the southern island of Hainan.”
March 26 – Reuters (Stella Qiu, Ryan Woo and Min Zhang): “China’s industrial firms posted their worst slump in profits since late 2011 in the first two months of this year…, as increasing strains on the economy in the face of slowing demand at home and abroad took a toll on businesses… Profits notched up by China’s industrial firms in January-February slumped 14.0% year-on-year to 708.01 billion yuan ($105.50bn)… It marked the biggest contraction since Reuters began keeping records in October 2011.”
March 26 – Bloomberg: “China’s economy showed ‘an unmistakable first-quarter recovery’ after a weak end to 2018, though the level of new borrowing casts doubt on the sustainability of the rebound, according to the China Beige Book. ‘The recovery extends across both sectors and geographies, with every major sector and each one of our regions showing better revenue results than Q4,’ CBB International said… ‘Yet this rally didn’t appear out of nowhere, and there are at least three compelling reasons to doubt its staying power: credit, credit, and credit.’”
March 24 – Bloomberg: “China has embraced the idea of defaults imposing some discipline on debtors in its bond market. And some of the most troubled debtors are local governments’ financing vehicles. So an LGFV default has long seemed on the cards. But it just isn’t happening. Moody’s… thought the first one might come in 2017. Almost two years later, there have been some close calls -- including with a late payment by a unit owned by Qinghai province on a dollar bond last month that caused ripples through the investment community -- but no default. What it suggests is China’s leadership isn’t prepared for a borrower with a regional authority’s imprimatur to renege on its principal, triggering higher borrowing costs across a swathe of the world’s third-largest bond market.”
March 25 - Bloomberg (Shuli Ren): “China’s most prominent development bank has been noticeably low-profile lately. For the last decade, the 16 trillion yuan ($2.39 trillion) China Development Bank, and its less-muscular cousins Agricultural Development Bank of China Ltd. and Export-Import Bank of China, were on the forefront of every major stimulus push. In 2008, CDB financed the 4 trillion yuan spending pledge by the Ministry of Finance, its former controlling shareholder. The bank shifted its focus to the monetary side after 2015, disseminating 3.5 trillion yuan of helicopter money for the central bank via shantytown developments. At this year’s National People’s Congress, though, policy banks seemed to be getting sidelined. There was hardly any mention of them; instead, the heavy stimulus lifting will be financed by special-purpose municipal bonds.”
March 27 – Wall Street Journal (Stella Yifan Xie): “The world’s biggest money-market fund, overseen by China’s Ant Financial Services Group, drew 114 million new investors last year despite regulatory pressure to shrink. Ant’s asset-management arm… said 588 million users of Alipay, Ant’s highly popular mobile-payments network, had parked cash in its flagship Tianhong Yu’e Bao fund at the end of 2018. That means more than a third of China’s population is now invested in the fund, whose assets under management totaled 1.13 trillion yuan ($168.26bn) at the end of last year.”
March 26 – Bloomberg: “Hui Ka Yan, China’s second-richest man and chairman of one of the nation’s biggest residential developers, has a funding challenge on his hands. China Evergrande Group has debt maturing in 12 months or less that exceeds its cash by 114 billion yuan ($17bn)… The gap is partly the result of a drop in its cash buffer in the second half of 2018.”
Central Bank Watch:
March 27 – Reuters (Francesco Canepa and Balazs Koranyi): “The European Central Bank could further delay an interest rate hike and may look at measures to mitigate the side-effects of negative interest rates, ECB President Mario Draghi said…, warning that risks to growth were on the rise… ‘Just as we did at our March meeting, we would ensure that monetary policy continues to accompany the economy by adjusting our rate forward guidance to reflect the new inflation outlook,’ Draghi told a conference… ‘If necessary, we need to reflect on possible measures that can preserve the favorable implications of negative rates for the economy, while mitigating the side effects, if any… That said, low bank profitability is not an inevitable consequence of negative rates.’”
March 26 – Bloomberg (Tracy Withers): “New Zealand’s central bank joined the global shift away from higher interest rates, saying its next move is more likely to be a cut and sending the kiwi dollar tumbling by the most in seven weeks. ‘Given the weaker global economic outlook and reduced momentum in domestic spending, the more likely direction of our next OCR move is down,’ Governor Adrian Orr said… after leaving the official cash rate at 1.75%. ‘Core consumer price inflation remains below our 2% target mid-point, necessitating continued supportive monetary policy.’”
March 26 – Reuters (Dhara Ranasinghe, Jennifer Ablan, Virginia Furness): “‘Whatever it takes’ is a daunting legacy for any departing central bank chief to bequeath a successor and leaves world markets anxious about what is to come after Mario Draghi leaves the European Central Bank later this year. Draghi’s 2012 pledge to save the euro won the confidence of financial markets and arrested the currency bloc’s debt crisis. Investors admired his willingness to break new policy ground — maneuvering past internal and external opposition — and clear communication of the ECB’s thinking. With growth and inflation flagging again, and the ECB’s policy arsenal depleted, whoever succeeds him may need to be similarly bold. Growing questions about the orthodoxies of economic policy — including monetary policy models — could present an additional test.”
March 27 – Bloomberg (William Horobin and Catherine Bosley): “The European Central Bank is hoping the economic situation will improve through 2019, but has the necessary tools to react if it worsens, Governing Council member Francois Villeroy de Galhau said… ‘We are continuing to follow the economic situation very closely, and without any doubt we have the tools and margins for maneuver that are sufficiently powerful to act as much as necessary,’ Villeroy said…”
March 22 – Bloomberg (William Horobin and Craig Stirling): “Jens Weidmann may struggle to pass the test that France’s finance minister is setting for prospective successors to European Central Bank President Mario Draghi. In a rare foray on the matter this week, Bruno Le Maire lavished praise on the Italian incumbent for quantitative easing, and suggested France would want someone with similar ‘courage’ as a replacement…. ‘Draghi’s term has changed deeply the approach to conducting monetary policy in the euro zone,’ said Bruno Cavalier, economist at Oddo BHF. ‘The only candidate who would represent a break from that is Weidmann.’”
Brexit Watch:
March 24 – Financial Times (Wolfgang Münchau): “Forecasting Brexit is still the same old mug’s game it always was. But the probability of a no-deal Brexit has risen dramatically since last week’s summit of European leaders. That scenario can be avoided, for now, if Theresa May were to be ousted as prime minister. The EU would always accept a request for a further delay in such a situation. But it would still insist Britain organise European Parliament elections on May 23 — the UK cannot be allowed to undermine the legitimacy of the European Parliament while it is negotiating its way out. And a new leader would face the same problems in finding a way out of the current impasse. The EU will not renegotiate Mrs May’s withdrawal agreement.”
Europe Watch:
March 24 – Reuters (Joseph Nasr): “The risk of Britain leaving the European Union without a deal is the biggest risk facing the slowing euro zone economy in the short term, Finnish central bank chief Olli Rehn told Germany’s Die Welt newspaper… ‘In the short term Brexit is surely the biggest threat,’ said Rehn, who sits on the European Central Bank’s rate-setting Governing Council. ‘Financial markets seem to be too relaxed and appear to underestimate the risk.’ He said the ECB had made arrangements with the Bank of England to blunt turbulence in the case of a disorderly Brexit.”
March 28 – Financial Times (Valentina Romei): “Lending to eurozone businesses gathered speed in February, the largest increase in the annual rate in more than two years, but remained weak in peripheral member states… In February, adjusted lending growth to non-financial companies rose 3.7% compared with the same month last year, picking up the pace since the previous month’s 3.4%...”
EM Watch:
March 25 – Financial Times (Laura Pitel and Katie Martin): “Turkish authorities have turned up the heat on western institutions with a critical view of the country’s economic policies, but the prospects of an investment backlash mean that probes into US bank JPMorgan Chase are unlikely to lead to a real clampdown, say analysts. Over the weekend, Turkey’s capital markets board and the country’s banking supervisor launched parallel investigations into the… investment bank, responding to what they described as ‘misleading’ and ‘manipulative’ advice from the bank to sell the lira. President Recep Tayyip Erdogan threatened a ‘very heavy price’ for foreign groups ‘trying to provoke us’.”
March 28 – Financial Times (Laura Pitel and Adam Samson): “Turkey has burnt through around a third of its foreign reserves this month in an effort to prop up the faltering lira ahead of local elections this weekend, spooking investors and sending the currency sliding on Thursday… When converted into dollars, the fall in the first three weeks of March was roughly $10bn, or 29%, leaving the reserves at about $24.7bn…”
March 28 – Reuters (Tuvan Gumrukcu and Ece Toksabay): “President Tayyip Erdogan said on Thursday he was ‘in charge of Turkey’s economy’ as he piled pressure on the central bank to cut interest rates despite double-digit inflation and a tumbling lira… The Turkish currency dived 5% against the dollar on Thursday after banks started providing lira liquidity to the London market again following several days of authorities withholding liquidity to support the currency. The renewed selling pressure stems from concerns about Turkey’s balance of payments, its ability to service its foreign debt, and repeated calls by Erdogan, who has described himself as an ‘enemy of interest rates’, for cheaper credit.”
March 27 – Bloomberg (Kerim Karakaya, Cagan Koc and Asli Kandemir): “The last time Turks went to the polls, the country’s paramount leader for the past 16 years vowed to tighten his grip on the economy. With another national campaign — this time for municipal offices — nearing its climax, he’s rolling out the same playbook. In the past eight months, President Recep Tayyip Erdogan’s government has imposed price controls, forced lenders to keep credit flowing and banned the use of dollars in most contracts. Most recently, he trained his invective on a familiar target: foreign bankers, with the promise of an investigation into… JPMorgan… for predicting a decline in the lira.”
March 26 – Reuters (Jorge Otaola and Cassandra Garrison): “Argentina’s peso currency weakened 1.34% to an all-time low close of 42.65 per dollar on Tuesday, as concerns about high inflation and political uncertainty ahead of the October presidential election dented confidence in the economy.”
March 27 – Bloomberg (Raymond Colitt and Simone Preissler Iglesias): “Three months into Brazilian President Jair Bolsonaro’s term, voters, investors and some supporters are starting to doubt if he can deliver on pledges to kick-start the economy and crack down on crime. At times, his government even looks like it could fall apart. The 64-year-old former Army captain has plummeted in opinion polls and antagonized key allies, while his cabinet is plagued by intrigue and infighting. Meanwhile, support for a pension overhaul looks more uncertain than ever, raising the risk of further debt increases and sovereign credit rating downgrades.”
Global Bubble Watch:
March 25 – Financial Times (Leslie Hook): “Global carbon dioxide emissions rose to their highest levels last year after a surge in energy demand stoked by a strong economy and extreme weather, according to the world’s energy watchdog. The… International Energy Agency said energy demand rose 2.3% last year — its fastest rate since 2010 — and that the growth was met mainly by fossil fuels. That pushed global emissions of carbon dioxide to a record high of 33bn tonnes in 2018, up 1.7% from the previous year. Fatih Birol, the head of the IEA, said the rise in energy demand was ‘exceptional’ and a ‘surprise for many’, moving the world further away from its climate goals.”
Japan Watch:
March 25 – Reuters (Leika Kihara): “Bank of Japan policymakers debated the feasibility of ramping up monetary stimulus at their rate review this month as heightening overseas risks weighed on the country’s fragile economy, a summary of opinions of the meeting showed on Tuesday.”
Fixed-Income Bubble Watch:
March 25 - Bloomberg (Finbarr Flynn): “Leveraged loans are suffering a ‘slow bleed’ and are the weakest link in U.S. credit markets, says UBS Group AG, adding to an expanding list of warnings. ‘We are growing more concerned over the deterioration in loan fundamentals, which is broad-based and appears less related to trade and more to fading cyclical momentum and a hangover from an M&A-driven debt boom,’ UBS credit strategists led by Matthew Mish wrote…”
March 26 – Wall Street Journal (Gunjan Banerji): “Illinois and its biggest city kick off hundreds of millions of dollars in borrowings this week, a test of investors’ willingness to lend to stressed governments prone to spending more money than they bring in. The state launched borrowings with about a $440 million bond deal on Tuesday, followed by a roughly $730 million sale by Chicago… Analysts expect what could be billions more especially from the state, as it puts together funds to do everything from paying retirees’ pensions to launching capital projects.”
Leveraged Speculator Watch:
March 25 – Financial Times (Robin Wigglesworth): “In 1988, Revolution Books, a tatty Communist bookstore near New York’s Union Square, got some strange new upstairs neighbours: a bunch of geeky programmers trying to crack the code to financial markets. In the early days, the embryonic hedge fund founded by David Shaw, a former computer science professor at Columbia University, was a ramshackle start-up. Exposed pipes and extension cords meant that tripping on a cable could take out its entire trading system. Yet today DE Shaw is one of the hedge fund industry’s biggest players, managing over $50bn of assets.”
March 27 – Bloomberg: “Three months after news first emerged of a hedge fund blowup that threatens to saddle Citigroup Inc. with millions of dollars in losses, details of the fund’s implosion are becoming clearer. GF Securities Co. said… its GTEC Pandion Multi-Strategy Fund SP lost $139 million in 2018 primarily on foreign exchange trades, leaving it with negative capital. As the fund’s losses spiraled last year, it faced margin calls from Citigroup, its prime broker… Pandion’s losses stemmed mainly from trades in the Turkish Lira…”
Geopolitical Watch:
March 28 – Reuters (Tom Balmforth and Maxim Rodionov): “Russia said on Thursday it had sent ‘specialists’ to Venezuela under a military cooperation deal but said they posed no threat to regional stability, brushing aside a call from U.S. President Donald Trump to remove all military personnel from the country.”
March 26 – AFP: “Secretary of State Mike Pompeo warned Russia Monday the United States will not ‘stand idly by’ as Moscow inserts military personnel into Venezuela to support the regime of President Nicolas Maduro. In a phone call with Foreign Minister Sergei Lavrov, Pompeo denounced the growing Russian military reinforcements as prolonging the political crisis in the South American country. Pompeo told Lavrov ‘the United States and regional countries will not stand idly by as Russia exacerbates tensions in Venezuela,’… ‘The continued insertion of Russian military personnel to support the illegitimate regime of Nicolas Maduro in Venezuela risks prolonging the suffering of the Venezuelan people who overwhelmingly support interim President Juan Guaido,’ he said.”
March 24 – Reuters (Idrees Ali): “The United States sent Navy and Coast Guard ships through the Taiwan Strait on Sunday, the U.S. military said, as part of an increase in the frequency of movement through the strategic waterway despite opposition from China. The voyage risks raising tensions with China further but will likely be viewed by self-ruled Taiwan as a sign of support from Washington amid growing friction between Taipei and Beijing.”
March 23 – Reuters (Giselda Vagnoni): “Italy endorsed China’s ambitious ‘Belt and Road’ infrastructure plan on Saturday, becoming the first major Western power to back the initiative to help revive the struggling Italian economy. Saturday’s signing ceremony was the highlight of a three-day trip to Italy by Chinese President Xi Jinping, with the two nations boosting their ties at a time when the United States is locked in a trade war with China. The rapprochement has angered Washington and alarmed some European Union allies, who fear it could see Beijing gain access to sensitive technologies and critical transport hubs.”
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