[Reuters] Xi says China faces 'grave situation' as virus toll hits 41
[Reuters] U.S. to evacuate its citizens from Wuhan, China - WSJ
[UK Guardian] Coronavirus Live Updates
[Reuters] The latest on the coronavirus spreading in China and beyond
[BBC] China coronavirus spread is accelerating, Xi Jinping warns
[CNBC] The next fronts in the US trade war shift to Europe, UK
[Reuters] Trump increases tariffs on derivative steel, aluminum products from some countries
[Reuters] Lebanon central bank reassures foreign investors about deposits
[Bloomberg] After Months of Calm, Volatility Finally Resurfaces in Stocks
[WSJ] Refinancing Boom Fuels Mortgages to Postcrisis Record
Saturday, January 25, 2020
Friday, January 24, 2020
Weekly Commentary: Coronavirus and the End of Boom and Bust
The market week began with cases of the coronavirus jumping to 222, including four outside China. China’s National Health Commission confirmed human-to-human virus transmission. By Friday, more than 1,200 infections had been confirmed, with 41 deaths (8,420 under observation according to the Washington Post). China on Thursday suspended flights and travel out of Wuhan, a city of 11 million. The virus has quickly spread to Taiwan, Japan, South Korea, Thailand, Malaysia, Vietnam, Pakistan, Nepal, France, Australia and the United States.
China has moved to quarantine 13 cities involving an estimated 46 million, according to Bloomberg “the first large-scale quarantine in modern times.” From Bloomberg (Lisa Du): “‘The containment of a city hasn’t been done in the history of international public health policy,’ said Shigeru Omi, who headed the World Health Organization’s Western Pacific Region during the SARS outbreak in the early 2000s. ‘It’s a balance between respecting freedom of movement of people, and also prevention of further disease and public interest. It’s not a simple sort of thing; it’s very complex.’” Included in the 46 million are foreign nationals now unable to leave China.
A 1,000-bed emergency hospital is to be constructed in ten days in overwhelmed Wuhan, as 400 military doctors are deployed to support local providers. In Beijing and throughout the country, officials have cancelled “Year of the Rat” Chinese New Year’s celebrations. Beijing’s Forbidden City is closed to tourist until further notice. Across China, there is fear of going to markets, restaurants, movies and public events.
China has moved to quarantine 13 cities involving an estimated 46 million, according to Bloomberg “the first large-scale quarantine in modern times.” From Bloomberg (Lisa Du): “‘The containment of a city hasn’t been done in the history of international public health policy,’ said Shigeru Omi, who headed the World Health Organization’s Western Pacific Region during the SARS outbreak in the early 2000s. ‘It’s a balance between respecting freedom of movement of people, and also prevention of further disease and public interest. It’s not a simple sort of thing; it’s very complex.’” Included in the 46 million are foreign nationals now unable to leave China.
A 1,000-bed emergency hospital is to be constructed in ten days in overwhelmed Wuhan, as 400 military doctors are deployed to support local providers. In Beijing and throughout the country, officials have cancelled “Year of the Rat” Chinese New Year’s celebrations. Beijing’s Forbidden City is closed to tourist until further notice. Across China, there is fear of going to markets, restaurants, movies and public events.
Nations around the globe have isolated ill patients awaiting coronavirus test results. That this scare is coming at the height of flu and cold season in the U.S. and other northern hemisphere countries adds further complication to a rapidly escalating crisis.
Florida Senator Rick Scott is urging the Trump administration to declare a public health emergency. Missouri Senator Josh Hawley has called for the administration to impose a temporary travel ban on flights from China. The coronavirus has the potential to turn highly disruptive to the Chinese economy, with wide-ranging effects on global markets and economies.
The Shanghai Composite dropped 2.8% in Thursday trading, and was down 3.2% for the week. Hong Kong’s Hang Seng index fell 3.8%, with the Hang Seng China Financials Index sinking 4.9%. For the most part, Asian equities ended the week with modest losses. Financial stocks were under pressure around the globe.
My Bubble thesis views China as the marginal source of both global Credit and demand for commodities (and much else). Any development posing risk to China’s vulnerable Bubble rather quickly becomes a pressing global issue. It’s worth noting the Bloomberg Commodities Index dropped 3.1% this week. WTI crude sank 7.4%, while Copper was hit for 5.7%. Nickel fell 6.9%, Tin 5.4% and Zinc 3.6%. China’s renminbi declined 1.2% versus the dollar. In spite of notable investor optimism and attendant financial flows, EM currencies reversed lower this week.
Global safe haven bonds appeared to believe the week’s developments were a big deal. Ten-year Treasury yields dropped 14 bps to a three-month low 1.685%, and German bund yields fell 12 bps to negative 0.34%. The two-year versus 10-year Treasury spread declined almost eight bps this week to a six-week low 18.5 bps (after ending 2019 at 34bps). The market now prices in a 41% probability of a rate cut by the July 29th FOMC meeting, up from the previous week’s 29%. While on the subject of safe havens, gold bucked this week's commodities market selloff to gain 0.9% to $1,572.
U.S. stocks were under moderate pressure in early Thursday trading. By the close, the S&P500 was positive for the session and back near record highs. The situation turned more concerning by Friday. The S&P500 ended the session down 0.9%, with a loss for the week of 1.0%. The Bank index dropped almost 2% in Friday trading.
January 22 – Reuters: “U.S. home sales jumped to their highest level in nearly two years in December, the latest indication that lower mortgage rates are helping the housing market to regain its footing after hitting a soft patch in 2018. …Existing home sales increased 3.6% to a seasonally adjusted annual rate of 5.54 million units last month, the highest level since February 2018. November’s sales pace was unrevised at 5.35 million units… Existing home sales, which make up about 90% of U.S. home sales, surged 10.0% on a year-on-year basis in December. For all of 2019, sales were unchanged at 5.34 million units.”
Between the impeachment trial and the coronavirus, noteworthy housing data received scant attention. Housing and mortgage finance in 2020 will reemerge as prominent factors in U.S. Bubble Analysis, especially if global developments continue to pressure market yields (and mortgage rates) lower. While December Existing Home Sales (seasonally-adjusted) were the strongest in almost two years, more notable was the decline in available inventory to 3.0 months. This was down from November’s 3.7 months (and September’s 4.1) to the lowest level in the 20-year history of the data series. The chief economist for the National Association of Realtors stated, “America is facing a dire housing shortage condition.” Little wonder home price gains have begun to accelerate.
January 17 – Bloomberg (Prashant Gopal): “U.S. home prices rose the most in 19 months in December, fueled by low mortgage rates and the tightest supply on record, according to Redfin. Prices jumped 6.9% from a year earlier to a median of $312,500, the biggest annual increase since May 2018… Values fell in just two of the 85 largest metropolitan areas Redfin tracks: New York, with a 2.4% decline, and San Francisco, down 1.7%... Some of the most-affordable cities in Redfin’s study had the biggest price gains, led by Memphis, Tennessee, with a 16% jump. The inventory of available homes for sale nationwide tumbled 15% from a year earlier. There were fewer properties for sale last month than at any time since at least December 2012…”
January 21 – CNBC (Diana Olick): “Homebuilding took a sharp turn higher to end 2019, but it is far from enough to satisfy the current demand. The U.S. housing market is short nearly 4 million homes, according to new analysis from realtor.com. Analyzing U.S. census data, the report showed that the 5.9 million single-family homes built between 2012 and 2019 do not offset the 9.8 million new households formed during that time. Even with an above average pace of construction, it would take builders between four and five years to get back to a balanced market. The shortfall today can be blamed on the epic housing crash of more than a decade ago… With loans available to even the riskiest buyers, builders responded by putting up 1.7 million single-family homes at the peak of the construction boom in 2005, according to the U.S. census. That was about 5 million more than the 20-year average.”
January 23 – Wall Street Journal (James Mackintosh): “The Davos consensus can be a powerful counter-indicator, but this year it is worrying me for all the wrong reasons. Two years ago the elite assembled for the World Economic Forum in the Alps strongly believed in global growth, and were completely wrong. A year ago they were concerned, and again entirely wrong as markets subsequently soared. This year the problem is that I find myself sharing the consensus view, justifying high stock valuations on the basis of easy monetary policy. It is a deeply uncomfortable place to be.”
Bob Prince, Co-CIO of Bridgewater Associates (in a Bloomberg Television interview from Davos): “2018 I think was a lesson learned. The tightening of central banks all around the world wasn’t intended to cause a downturn – wasn’t intended to cause what it did. But I think lessons were learned from that. And I think it was really a marker that we’ve probably seen the end of the boom and bust cycle.”
Bloomberg’s Tom Keene: “Is it the end of the hedge fund business in modeling portfolios off the guestimates of what central banks will do?”
Prince: “That won’t play much of a role nearly as it has. You remember the eighties when we sat and waited for the money supply numbers. We’ve come a long way since then… Now we talk 25 plus [bps Fed rate increase] – 25 minus. We’re not even going to get 25 plus or minus and we have negative yields. That idea of the boom/bust cycle – and that history that we’ve been in for decades – is really driven by shifts in credit and monetary policy. But you’re in a situation now where the Fed is in a box. They can’t tighten, and they can’t ease – nor can other central banks, particularly the reserve currencies. And so where do you go from here? It’s not going to look like it has.”
Bloomberg’s Jonathan Ferro: “Bob, you just said it twice – and I’m still surprised. And you said it before the interview started… It’s the end of the boom/bust cycle?”
Prince: “As we know it.”
Ferro: “There was a man called Gordon Brown, former Chancellor of the United Kingdom, a famous scene in Parliament of him standing up and saying, “It’s the end of the boom/bust,” and it was right before the financial crisis. It’s the end of the boom/bust cycle? What does that mean?”
Prince: “Cycles in growth are caused by the boom and bust in Credit. Credit expansion, Credit contraction. And those expansions and contractions of Credit are largely driven by changes in monetary policy. And so we’re in a situation today where with interest-rates is close to zero and secular deflationary forces, you’re not going to get a tightening of monetary policy. They learned that lesson last year and got the unintended effects of that. You’re not going to get a tightening, and one of the reasons you’re not going to get a tightening is because they can’t ease. If you can’t ease you don’t want to tighten to cause a problem for yourself that you can’t get out of. Therefore, you’re in a box; you don’t tighten, and you don’t ease.”
Keene: “It sounds like you read (Ray) Dalio’s book.”
Prince: “We work together” (laughter).
Ferro: “…What are the investment implications…”
Prince: “The nature of the economic environment is changing. So, we are converging on something – a slow growth environment, I’d say close to stagnation – approaching stagnation. That’s why interest rates are at zero. That’s why real interest rates are negative – is because central banks have to make cash very unattractive…, but also they have to make bonds unattractive. Central banks have taken cash and bonds and they’ve made it a funding vehicle – not an investment vehicle. And they’re trying to keep that rate low so that money goes from bonds to assets.”
Noland: I’m always fascinated when highly intelligent market professionals say peculiar things. I’m still not over Ray Dalio’s concept of “beautiful deleveraging” from some years back. When I first heard Prince’s comments, I thought immediately of the eminent American economist Irving Fisher and his infamous, “Stock prices have reached what looks like a permanently high plateau” - just days ahead of the great 1929 stock market crash.
But there is an analytical framework behind Prince’s view worthy of discussion. I’m with him completely when it comes to, “Cycles in growth are caused by the boom and bust in Credit.” In a historical context, I can accept “those expansions and contractions of Credit are largely driven by changes in monetary policy.” I agree “you’re not going to get a tightening of monetary policy.” Prince says central banks are “in a box,” while I prefer “trapped.”
But it is as if Mr. Prince is suggesting there is now some type of equilibrium condition that precludes a boom and bust dynamic. I would counter that central banks are locked in a position of administering extreme monetary stimulus, fueling a runaway boom that will end in a historic bust. Markets clearly expect ongoing aggressive stimulus (QE) from all the major global central banks.
And I don’t buy into the popular “rates are near zero because of stagnation” argument. The Fed cut rates three times in 2019 due to market fragility and the risk of a faltering Bubble - that had little to do with U.S. economic performance. Global rates are where they are because of acute global Bubble-related fragilities and resulting extreme monetary stimulus. Low global market yields (and negative real yields) are more a Bubble Dynamic than a reflection of deflationary forces. A historic boom/bust dynamic has global bond markets anticipating enormous prospective central bank bond purchases (QE).
The critical question: Can runaway booms descend into busts without a tightening of monetary policy? The answer seems a rather obvious “absolutely”. I don’t believe the Fed’s timid tightening measures in 1999 and early 2000 precipitated the bursting of the Internet and technology Bubble. The Fed was cutting rates aggressively into 2002, yet that didn’t arrest the bust in corporate Credit. I would strongly argue the Fed’s even more cautious 2006/2007 rate increases were not the catalyst for the bursting of the mortgage finance Bubble. In reality, in the face of strengthening Bubble Dynamics, financial conditions loosened significantly as the Fed tiptoed along with its so-called “tightening” cycle.
The Fed emerged from the 1994 tightening cycle recognizing that contemporary finance – with its hedge funds, speculative leverage, derivatives and Wall Street securitized finance and proprietary trading– carried an elemental propensity for excess and instability. That was effectively the end of Federal Reserve policy tightening cycles. From then on, it was cautious little “baby steps” to ensure the Fed wouldn’t upset the markets.
The “tech” and mortgage finance booms were left to inflate free from central bank restraint. Uncommonly painful busts were inevitable. Today’s most protracted all-encompassing global boom has not only been left free to inflate, central bankers continue their multi-trillion spending spree to pressure nonstop inflation. I do agree: when this fiasco runs its course, it certainly won’t be boom and bust “as we know it.”
January 21 – CNBC (Yun Li): “Billionaire investor Paul Tudor Jones said the stock market today is reminiscent of the latter stages of the bull market in 1999 that saw a giant surge that ultimately ended with the popping of the dot-com bubble. ‘We are just again in this craziest monetary and fiscal mix in history. It’s so explosive. It defies imagination,’ Jones said… ‘It reminds me a lot of the early ’99. In early ’99 we had 1.6% PCE, 2.3% CPI. We have the exact same metrics today.’ ‘The difference is fed funds were 4.75%; today it’s 1.62%. And back then we had budget surplus and we’ve got a 5% budget deficit,’ Jones added. ‘Crazy times.’”
Florida Senator Rick Scott is urging the Trump administration to declare a public health emergency. Missouri Senator Josh Hawley has called for the administration to impose a temporary travel ban on flights from China. The coronavirus has the potential to turn highly disruptive to the Chinese economy, with wide-ranging effects on global markets and economies.
The Shanghai Composite dropped 2.8% in Thursday trading, and was down 3.2% for the week. Hong Kong’s Hang Seng index fell 3.8%, with the Hang Seng China Financials Index sinking 4.9%. For the most part, Asian equities ended the week with modest losses. Financial stocks were under pressure around the globe.
My Bubble thesis views China as the marginal source of both global Credit and demand for commodities (and much else). Any development posing risk to China’s vulnerable Bubble rather quickly becomes a pressing global issue. It’s worth noting the Bloomberg Commodities Index dropped 3.1% this week. WTI crude sank 7.4%, while Copper was hit for 5.7%. Nickel fell 6.9%, Tin 5.4% and Zinc 3.6%. China’s renminbi declined 1.2% versus the dollar. In spite of notable investor optimism and attendant financial flows, EM currencies reversed lower this week.
Global safe haven bonds appeared to believe the week’s developments were a big deal. Ten-year Treasury yields dropped 14 bps to a three-month low 1.685%, and German bund yields fell 12 bps to negative 0.34%. The two-year versus 10-year Treasury spread declined almost eight bps this week to a six-week low 18.5 bps (after ending 2019 at 34bps). The market now prices in a 41% probability of a rate cut by the July 29th FOMC meeting, up from the previous week’s 29%. While on the subject of safe havens, gold bucked this week's commodities market selloff to gain 0.9% to $1,572.
U.S. stocks were under moderate pressure in early Thursday trading. By the close, the S&P500 was positive for the session and back near record highs. The situation turned more concerning by Friday. The S&P500 ended the session down 0.9%, with a loss for the week of 1.0%. The Bank index dropped almost 2% in Friday trading.
January 22 – Reuters: “U.S. home sales jumped to their highest level in nearly two years in December, the latest indication that lower mortgage rates are helping the housing market to regain its footing after hitting a soft patch in 2018. …Existing home sales increased 3.6% to a seasonally adjusted annual rate of 5.54 million units last month, the highest level since February 2018. November’s sales pace was unrevised at 5.35 million units… Existing home sales, which make up about 90% of U.S. home sales, surged 10.0% on a year-on-year basis in December. For all of 2019, sales were unchanged at 5.34 million units.”
Between the impeachment trial and the coronavirus, noteworthy housing data received scant attention. Housing and mortgage finance in 2020 will reemerge as prominent factors in U.S. Bubble Analysis, especially if global developments continue to pressure market yields (and mortgage rates) lower. While December Existing Home Sales (seasonally-adjusted) were the strongest in almost two years, more notable was the decline in available inventory to 3.0 months. This was down from November’s 3.7 months (and September’s 4.1) to the lowest level in the 20-year history of the data series. The chief economist for the National Association of Realtors stated, “America is facing a dire housing shortage condition.” Little wonder home price gains have begun to accelerate.
January 17 – Bloomberg (Prashant Gopal): “U.S. home prices rose the most in 19 months in December, fueled by low mortgage rates and the tightest supply on record, according to Redfin. Prices jumped 6.9% from a year earlier to a median of $312,500, the biggest annual increase since May 2018… Values fell in just two of the 85 largest metropolitan areas Redfin tracks: New York, with a 2.4% decline, and San Francisco, down 1.7%... Some of the most-affordable cities in Redfin’s study had the biggest price gains, led by Memphis, Tennessee, with a 16% jump. The inventory of available homes for sale nationwide tumbled 15% from a year earlier. There were fewer properties for sale last month than at any time since at least December 2012…”
January 21 – CNBC (Diana Olick): “Homebuilding took a sharp turn higher to end 2019, but it is far from enough to satisfy the current demand. The U.S. housing market is short nearly 4 million homes, according to new analysis from realtor.com. Analyzing U.S. census data, the report showed that the 5.9 million single-family homes built between 2012 and 2019 do not offset the 9.8 million new households formed during that time. Even with an above average pace of construction, it would take builders between four and five years to get back to a balanced market. The shortfall today can be blamed on the epic housing crash of more than a decade ago… With loans available to even the riskiest buyers, builders responded by putting up 1.7 million single-family homes at the peak of the construction boom in 2005, according to the U.S. census. That was about 5 million more than the 20-year average.”
January 23 – Wall Street Journal (James Mackintosh): “The Davos consensus can be a powerful counter-indicator, but this year it is worrying me for all the wrong reasons. Two years ago the elite assembled for the World Economic Forum in the Alps strongly believed in global growth, and were completely wrong. A year ago they were concerned, and again entirely wrong as markets subsequently soared. This year the problem is that I find myself sharing the consensus view, justifying high stock valuations on the basis of easy monetary policy. It is a deeply uncomfortable place to be.”
Bob Prince, Co-CIO of Bridgewater Associates (in a Bloomberg Television interview from Davos): “2018 I think was a lesson learned. The tightening of central banks all around the world wasn’t intended to cause a downturn – wasn’t intended to cause what it did. But I think lessons were learned from that. And I think it was really a marker that we’ve probably seen the end of the boom and bust cycle.”
Bloomberg’s Tom Keene: “Is it the end of the hedge fund business in modeling portfolios off the guestimates of what central banks will do?”
Prince: “That won’t play much of a role nearly as it has. You remember the eighties when we sat and waited for the money supply numbers. We’ve come a long way since then… Now we talk 25 plus [bps Fed rate increase] – 25 minus. We’re not even going to get 25 plus or minus and we have negative yields. That idea of the boom/bust cycle – and that history that we’ve been in for decades – is really driven by shifts in credit and monetary policy. But you’re in a situation now where the Fed is in a box. They can’t tighten, and they can’t ease – nor can other central banks, particularly the reserve currencies. And so where do you go from here? It’s not going to look like it has.”
Bloomberg’s Jonathan Ferro: “Bob, you just said it twice – and I’m still surprised. And you said it before the interview started… It’s the end of the boom/bust cycle?”
Prince: “As we know it.”
Ferro: “There was a man called Gordon Brown, former Chancellor of the United Kingdom, a famous scene in Parliament of him standing up and saying, “It’s the end of the boom/bust,” and it was right before the financial crisis. It’s the end of the boom/bust cycle? What does that mean?”
Prince: “Cycles in growth are caused by the boom and bust in Credit. Credit expansion, Credit contraction. And those expansions and contractions of Credit are largely driven by changes in monetary policy. And so we’re in a situation today where with interest-rates is close to zero and secular deflationary forces, you’re not going to get a tightening of monetary policy. They learned that lesson last year and got the unintended effects of that. You’re not going to get a tightening, and one of the reasons you’re not going to get a tightening is because they can’t ease. If you can’t ease you don’t want to tighten to cause a problem for yourself that you can’t get out of. Therefore, you’re in a box; you don’t tighten, and you don’t ease.”
Keene: “It sounds like you read (Ray) Dalio’s book.”
Prince: “We work together” (laughter).
Ferro: “…What are the investment implications…”
Prince: “The nature of the economic environment is changing. So, we are converging on something – a slow growth environment, I’d say close to stagnation – approaching stagnation. That’s why interest rates are at zero. That’s why real interest rates are negative – is because central banks have to make cash very unattractive…, but also they have to make bonds unattractive. Central banks have taken cash and bonds and they’ve made it a funding vehicle – not an investment vehicle. And they’re trying to keep that rate low so that money goes from bonds to assets.”
Noland: I’m always fascinated when highly intelligent market professionals say peculiar things. I’m still not over Ray Dalio’s concept of “beautiful deleveraging” from some years back. When I first heard Prince’s comments, I thought immediately of the eminent American economist Irving Fisher and his infamous, “Stock prices have reached what looks like a permanently high plateau” - just days ahead of the great 1929 stock market crash.
But there is an analytical framework behind Prince’s view worthy of discussion. I’m with him completely when it comes to, “Cycles in growth are caused by the boom and bust in Credit.” In a historical context, I can accept “those expansions and contractions of Credit are largely driven by changes in monetary policy.” I agree “you’re not going to get a tightening of monetary policy.” Prince says central banks are “in a box,” while I prefer “trapped.”
But it is as if Mr. Prince is suggesting there is now some type of equilibrium condition that precludes a boom and bust dynamic. I would counter that central banks are locked in a position of administering extreme monetary stimulus, fueling a runaway boom that will end in a historic bust. Markets clearly expect ongoing aggressive stimulus (QE) from all the major global central banks.
And I don’t buy into the popular “rates are near zero because of stagnation” argument. The Fed cut rates three times in 2019 due to market fragility and the risk of a faltering Bubble - that had little to do with U.S. economic performance. Global rates are where they are because of acute global Bubble-related fragilities and resulting extreme monetary stimulus. Low global market yields (and negative real yields) are more a Bubble Dynamic than a reflection of deflationary forces. A historic boom/bust dynamic has global bond markets anticipating enormous prospective central bank bond purchases (QE).
The critical question: Can runaway booms descend into busts without a tightening of monetary policy? The answer seems a rather obvious “absolutely”. I don’t believe the Fed’s timid tightening measures in 1999 and early 2000 precipitated the bursting of the Internet and technology Bubble. The Fed was cutting rates aggressively into 2002, yet that didn’t arrest the bust in corporate Credit. I would strongly argue the Fed’s even more cautious 2006/2007 rate increases were not the catalyst for the bursting of the mortgage finance Bubble. In reality, in the face of strengthening Bubble Dynamics, financial conditions loosened significantly as the Fed tiptoed along with its so-called “tightening” cycle.
The Fed emerged from the 1994 tightening cycle recognizing that contemporary finance – with its hedge funds, speculative leverage, derivatives and Wall Street securitized finance and proprietary trading– carried an elemental propensity for excess and instability. That was effectively the end of Federal Reserve policy tightening cycles. From then on, it was cautious little “baby steps” to ensure the Fed wouldn’t upset the markets.
The “tech” and mortgage finance booms were left to inflate free from central bank restraint. Uncommonly painful busts were inevitable. Today’s most protracted all-encompassing global boom has not only been left free to inflate, central bankers continue their multi-trillion spending spree to pressure nonstop inflation. I do agree: when this fiasco runs its course, it certainly won’t be boom and bust “as we know it.”
January 21 – CNBC (Yun Li): “Billionaire investor Paul Tudor Jones said the stock market today is reminiscent of the latter stages of the bull market in 1999 that saw a giant surge that ultimately ended with the popping of the dot-com bubble. ‘We are just again in this craziest monetary and fiscal mix in history. It’s so explosive. It defies imagination,’ Jones said… ‘It reminds me a lot of the early ’99. In early ’99 we had 1.6% PCE, 2.3% CPI. We have the exact same metrics today.’ ‘The difference is fed funds were 4.75%; today it’s 1.62%. And back then we had budget surplus and we’ve got a 5% budget deficit,’ Jones added. ‘Crazy times.’”
For the Week:
The S&P500 declined 1.0% (up 2.0% y-t-d), and the Dow fell 1.2% (up 1.6%). The Utilities jumped 2.5% (up 5.9%). The Banks sank 2.9% (down 5.0%), and the Broker/Dealers fell 2.5% (up 1.4%). The Transports slumped 1.9% (up 1.5%). The S&P 400 Midcaps fell 1.5% (up 0.1%), and the small cap Russell 2000 dropped 2.2% (down 0.4%). The Nasdaq100 slipped 0.4% (up 4.7%). The Semiconductors added 0.4% (up 4.0%). The Biotechs sank 4.3% (down 2.2%). With bullion jumping $14, the HUI gold index rallied 3.4% (down 2.2%).
Three-month Treasury bill rates ended the week at 1.495%. Two-year government yields declined six bps to 1.50% (down 7bps y-t-d). Five-year T-note yields dropped 12 bps to 1.51% (down 19bps). Ten-year Treasury yields sank 14 bps to 1.685% (down 23bps). Long bond yields fell 15 bps to 2.13% (down 26bps). Benchmark Fannie Mae MBS yields dropped 14 bps to 2.48% (down 23bps).
Greek 10-year yields fell 11 bps to 1.29% (down 14bps y-t-d). Ten-year Portuguese yields dropped 12 bps to 0.38% (down 6bps). Italian 10-year yields sank 14 bps to 1.23% (down 18bps). Spain's 10-year yields fell 12 bps to 0.35% (down 12bps). German bund yields sank 12 bps to negative 0.34% (down 15bps). French yields fell 12 bps to negative 0.07% (down 19bps). The French to German 10-year bond spread was little changed at 27 bps. U.K. 10-year gilt yields declined seven bps to 0.56% (down 26bps). U.K.'s FTSE equities index fell 1.2% (up 0.6%).
Japan's Nikkei Equities Index declined 0.9% (up 0.7% y-t-d). Japanese 10-year "JGB" yields declined two bps to negative 0.02% (down 1bp y-t-d). France's CAC40 lost 1.3% (up 0.8%). The German DAX equities index added 0.4% (up 2.5%). Spain's IBEX 35 equities index fell 1.2% (up 0.1%). Italy's FTSE MIB index declined 0.7% (up 2.0%). EM equities were mostly lower. Brazil's Bovespa index was little changed (up 2.4%), while Mexico's Bolsa dropped 1.5% (up 3.7%). South Korea's Kospi index slipped 0.2% (up 2.2%). India's Sensex equities index declined 0.8% (up 0.9%). China's Shanghai Exchange sank 3.2% (down 2.4%). Turkey's Borsa Istanbul National 100 index added 0.5% (up 6.7%). Russia's MICEX equities index fell 1.6% (up 3.3%).
Investment-grade bond funds saw inflows of $4.186 billion, and junk bond funds posted inflows of $719 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates fell five bps to 3.60% (down 85bps y-o-y). Fifteen-year rates declined five bps to 3.04% (down 84bps). Five-year hybrid ARM rates sank 11 bps to 3.28% (down 62bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down four bps to 3.95% (down 51bps).
Federal Reserve Credit last week declined $18.5bn to $4.114 TN, with a 19-week gain of $388 billion. Over the past year, Fed Credit expanded $103.5bn, or 2.6%. Fed Credit inflated $1.303 Trillion, or 46%, over the past 376 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $6.6 billion last week to $3.413 TN. "Custody holdings" increased $4.7 billion, or 0.1%, y-o-y.
M2 (narrow) "money" supply surged $46.3bn last week to a record $15.397 TN. "Narrow money" surged $969 billion, or 6.7%, over the past year. For the week, Currency increased $3.0bn. Total Checkable Deposits slipped $1.1bn, while Savings Deposits jumped $34.8bn. Small Time Deposits declined $1.7bn. Retail Money Funds rose $11.3bn.
Total money market fund assets added $3.5bn to $3.634 TN, with institutional money fund assets down $6.6bn to $2.255 TN. Total money funds gained $582bn y-o-y, or 19.1%.
Total Commercial Paper declined $6.3bn to $1.115 TN. CP was up $46.4bn, or 4.3% year-over-year.
Currency Watch:
January 22 – Financial Times (Tom Roderick): “Policymakers in Hong Kong have been riding their luck. They can be thankful for a dovish US Federal Reserve, which cut rates three times last year. That reduced the pressure on the Hong Kong dollar at a time of deepening political crisis in the Chinese territory. As the Hong Kong Monetary Authority runs out of options, the question is how long its currency can hold the line. For the past 37 years, the city has run a managed peg, tying the Hong Kong currency to the US dollar. Currently the greenback trades in a narrow band between HK$7.75-7.85. And given that the currencies are pegged, one should expect differences in market interest rates to be marginal.”
For the week, the U.S. dollar index added 0.3% to 97.853 (up 1.4% y-t-d). For the week on the upside, the Japanese yen increased 0.8%, the South African rand 0.5% and the British pound 0.4%. On the downside, the Norwegian krone declined 1.5%, the South Korean won 0.8%, the Australian dollar 0.7%, the Mexican peso 0.7%, the euro 0.6%, the Canadian dollar 0.6%, the Swedish krona 0.5%, the Brazilian real 0.5%, the Swiss franc 0.4%, the Singapore dollar 0.3%, and the New Zealand dollar 0.1%. The Chinese renminbi declined 1.19% versus the dollar this week (up 0.3% y-t-d).
Commodities Watch:
The S&P500 declined 1.0% (up 2.0% y-t-d), and the Dow fell 1.2% (up 1.6%). The Utilities jumped 2.5% (up 5.9%). The Banks sank 2.9% (down 5.0%), and the Broker/Dealers fell 2.5% (up 1.4%). The Transports slumped 1.9% (up 1.5%). The S&P 400 Midcaps fell 1.5% (up 0.1%), and the small cap Russell 2000 dropped 2.2% (down 0.4%). The Nasdaq100 slipped 0.4% (up 4.7%). The Semiconductors added 0.4% (up 4.0%). The Biotechs sank 4.3% (down 2.2%). With bullion jumping $14, the HUI gold index rallied 3.4% (down 2.2%).
Three-month Treasury bill rates ended the week at 1.495%. Two-year government yields declined six bps to 1.50% (down 7bps y-t-d). Five-year T-note yields dropped 12 bps to 1.51% (down 19bps). Ten-year Treasury yields sank 14 bps to 1.685% (down 23bps). Long bond yields fell 15 bps to 2.13% (down 26bps). Benchmark Fannie Mae MBS yields dropped 14 bps to 2.48% (down 23bps).
Greek 10-year yields fell 11 bps to 1.29% (down 14bps y-t-d). Ten-year Portuguese yields dropped 12 bps to 0.38% (down 6bps). Italian 10-year yields sank 14 bps to 1.23% (down 18bps). Spain's 10-year yields fell 12 bps to 0.35% (down 12bps). German bund yields sank 12 bps to negative 0.34% (down 15bps). French yields fell 12 bps to negative 0.07% (down 19bps). The French to German 10-year bond spread was little changed at 27 bps. U.K. 10-year gilt yields declined seven bps to 0.56% (down 26bps). U.K.'s FTSE equities index fell 1.2% (up 0.6%).
Japan's Nikkei Equities Index declined 0.9% (up 0.7% y-t-d). Japanese 10-year "JGB" yields declined two bps to negative 0.02% (down 1bp y-t-d). France's CAC40 lost 1.3% (up 0.8%). The German DAX equities index added 0.4% (up 2.5%). Spain's IBEX 35 equities index fell 1.2% (up 0.1%). Italy's FTSE MIB index declined 0.7% (up 2.0%). EM equities were mostly lower. Brazil's Bovespa index was little changed (up 2.4%), while Mexico's Bolsa dropped 1.5% (up 3.7%). South Korea's Kospi index slipped 0.2% (up 2.2%). India's Sensex equities index declined 0.8% (up 0.9%). China's Shanghai Exchange sank 3.2% (down 2.4%). Turkey's Borsa Istanbul National 100 index added 0.5% (up 6.7%). Russia's MICEX equities index fell 1.6% (up 3.3%).
Investment-grade bond funds saw inflows of $4.186 billion, and junk bond funds posted inflows of $719 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates fell five bps to 3.60% (down 85bps y-o-y). Fifteen-year rates declined five bps to 3.04% (down 84bps). Five-year hybrid ARM rates sank 11 bps to 3.28% (down 62bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down four bps to 3.95% (down 51bps).
Federal Reserve Credit last week declined $18.5bn to $4.114 TN, with a 19-week gain of $388 billion. Over the past year, Fed Credit expanded $103.5bn, or 2.6%. Fed Credit inflated $1.303 Trillion, or 46%, over the past 376 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $6.6 billion last week to $3.413 TN. "Custody holdings" increased $4.7 billion, or 0.1%, y-o-y.
M2 (narrow) "money" supply surged $46.3bn last week to a record $15.397 TN. "Narrow money" surged $969 billion, or 6.7%, over the past year. For the week, Currency increased $3.0bn. Total Checkable Deposits slipped $1.1bn, while Savings Deposits jumped $34.8bn. Small Time Deposits declined $1.7bn. Retail Money Funds rose $11.3bn.
Total money market fund assets added $3.5bn to $3.634 TN, with institutional money fund assets down $6.6bn to $2.255 TN. Total money funds gained $582bn y-o-y, or 19.1%.
Total Commercial Paper declined $6.3bn to $1.115 TN. CP was up $46.4bn, or 4.3% year-over-year.
Currency Watch:
January 22 – Financial Times (Tom Roderick): “Policymakers in Hong Kong have been riding their luck. They can be thankful for a dovish US Federal Reserve, which cut rates three times last year. That reduced the pressure on the Hong Kong dollar at a time of deepening political crisis in the Chinese territory. As the Hong Kong Monetary Authority runs out of options, the question is how long its currency can hold the line. For the past 37 years, the city has run a managed peg, tying the Hong Kong currency to the US dollar. Currently the greenback trades in a narrow band between HK$7.75-7.85. And given that the currencies are pegged, one should expect differences in market interest rates to be marginal.”
For the week, the U.S. dollar index added 0.3% to 97.853 (up 1.4% y-t-d). For the week on the upside, the Japanese yen increased 0.8%, the South African rand 0.5% and the British pound 0.4%. On the downside, the Norwegian krone declined 1.5%, the South Korean won 0.8%, the Australian dollar 0.7%, the Mexican peso 0.7%, the euro 0.6%, the Canadian dollar 0.6%, the Swedish krona 0.5%, the Brazilian real 0.5%, the Swiss franc 0.4%, the Singapore dollar 0.3%, and the New Zealand dollar 0.1%. The Chinese renminbi declined 1.19% versus the dollar this week (up 0.3% y-t-d).
Commodities Watch:
The Bloomberg Commodities Index sank 3.1% (down 4.4% y-t-d). Spot Gold rallied 0.9% to $1,572 (up 3.5%). Silver added 0.2% to $18.113 (up 1.1%). WTI crude sank $4.35 to $54.19 (down 11%). Gasoline dropped 7.6% (down 10%), and Natural Gas fell 5.8% (down 14%). Copper sank 5.7% (down 4%). Wheat increased 0.5% (up 3%). Corn declined 0.5% (unchanged).
Market Instability Watch:
January 24 – Reuters (Gertrude Chavez-Dreyfuss): “The New York Federal Reserve on Friday accepted all $55.3 billion in three-day bids from primary dealers at a repurchase agreement (repo) operation, aimed at maintaining the federal funds rate within the target range.”
January 24 – Reuters (Thyagaraju Adinarayan): “Global equity and bond funds saw more inflows in the week to Wednesday and the ‘irrational bullish phase’ in markets was likely to continue in the first-quarter if the U.S. Fed continued to pump-in liquidity, BofA said… Bond funds attracted $16.2 billion and equities sucked in $8.5 billion last week even as concerns over the spread of a deadly virus in China rattled markets, BofA said citing EPFR data. At $4 billion, emerging market equity funds saw their biggest inflows in 57 weeks.”
January 24 – Bloomberg (Brian Chappatta): “‘Worrisome.’ ‘Dangerous and aggressive.’ ‘Abuse of documentation.’ ‘Peak greed.’ These are just a few of the ways investors and analysts have described the riskiest corners of the debt markets in the past few days. From the U.S. to Europe, whether in collateralized loan obligations or junk bonds, the feeling that the reach for yield in fixed income is fast approaching a breaking point is becoming too powerful to ignore. It’s perhaps best encapsulated by a quote in the Wall Street Journal from Luca Cazzulani, a senior fixed-income strategist at UniCredit: ‘Investors are not really interested in safety, they are quite keen on yield.’
January 19 – Wall Street Journal (Paul J. Davies): “Global banks’ use of funding from markets rather than from customer deposits has grown rapidly in recent years, mostly in the form of short-term funding, which was a central problem of the 2008 financial crisis… However, that growing use has been spread unevenly around the globe. Banks in the U.S., U.K. and Canada have become among the biggest lenders into short-term financing markets, while banks in France and Japan are now the biggest borrowers after rapid growth in all these markets in 2017 and 2018. Short-term market funding is risky because it can suddenly disappear when lenders—typically money-market funds, fund managers or cash-rich banks—get concerned about the creditworthiness of borrowers, who can then be forced into a fire-sale of assets if the lenders pull back.”
January 21 – Associated Press (Elaine Kurtenbach): “News that a new virus that has afflicted hundreds of people in central China can spread between humans has rattled financial markets and raised concern it might wallop the economy just as it might be regaining momentum. Health authorities across Asia have been stepping up surveillance and other precautions to prevent a repeat of the disruptions and deaths during the 2003 SARS crisis, which caused $40 billion to $50 billion in losses from reduced travel and spending.”
January 22 – Bloomberg (Ken McCallum): “After years of falling debt yields and new technologies enabling one-click purchases of complex financial products, mom and pop investors around the world are making bets that put them at danger of getting burned. In South Korea, regulators are investigating sales of derivative-linked products that caused individuals to lose almost all their invested money. Chinese savers have ignored government warnings about possible losses on so-called wealth management products. In India, shadow banks whose woes have triggered a credit crisis have sold bonds to the public. The list goes on.”
January 23 – Bloomberg (Luke Kawa and Lananh Nguyen): “In 30 years at the premier U.S. options exchange, Ed Tilly has never seen an election sow more anxiety than the 2020 presidential race. The chief executive officer of Cboe Global Markets Inc. made the observation… Thursday. Tilly highlighted elevated demand for protection around important dates in the primary campaign and general vote showing up in the term structure of implied volatility.”
Trump Administration Watch:
January 21 – Reuters (Shubham Kalia): “The Phase 2 trade deal with China would not necessarily be a ‘big bang’ that removes all existing tariffs, U.S. Treasury Secretary Steven Mnuchin told the Wall Street Journal… ‘We may do 2A and some of the tariffs come off. We can do this sequentially along the way,’ he added. Mnuchin also warned that Italy and Britain will face U.S. tariffs if they proceed with a tax on digital companies like Alphabet Inc's Google and Facebook…”
January 23 – CNBC (Jeff Cox): “The White House has started work on a second round of tax cuts even as the budget deficit continues to grow, Treasury Secretary Steven Mnuchin said… ‘The president has asked us to start working on what we call ‘tax 2.0,’ and that will be additional tax cuts,” Mnuchin told CNBC... ‘They’ll be tax cuts for the middle class, and we’ll also be looking at other incentives to stimulate economic growth.’ Talk of election-year tax cuts comes amid a swelling budget deficit that eclipsed $1 trillion for the 2019 calendar year. In addition, the total government debt recently passed $23 trillion, despite President Donald Trump’s promises that economic growth would wipe out the deficit and pull down the federal IOU.”
January 23 – Reuters (Susan Heavey and Doina Chiacu): “Treasury Secretary Steven Mnuchin said… the U.S. government cannot sustain federal deficits growing at current levels and will have to slow the rate of spending. As he acknowledged the administration of Republican President Donald Trump was considering additional tax cuts to stimulate the economy, Mnuchin blamed government spending - and Democrats in Congress - for the federal deficit.”
January 22 – CNBC (Mike Calia): “President Donald Trump told CNBC… that U.S. economic growth would have been closer to 4% if it weren’t for the lingering effect of Federal Reserve rate hikes… The president also suggested that the stock market would be even higher than its already record-setting highs if the Fed hadn’t raised rates so quickly before cutting them three times during 2019. ‘Now, with all of that, had we not done the big raise on interest, I think we would have been close to 4%,’ Trump said of the U.S. gross domestic product. ‘And I – I could see 5,000 to 10,000 points more on the Dow. But that was a killer when they raised the rate. It was just a big mistake.’”
January 22 – Bloomberg (Alfred Cang, Javier Blas, and Isis Almeida): “Donald Trump’s trade truce with Beijing included a pledge to buy billions of dollars of U.S. foodstuffs over the next two years, reopening one of the most important export markets for America’s farm belt. ‘The farmers are really happy with the new China Trade Deal,’ the president tweeted the day after a signing ceremony in the White House. The euphoria is fading fast. The dispute with Washington exposed Beijing’s vulnerability when it comes to food imports -- especially the soybeans needed to feed its massive herd of livestock -- and the Communist Party leadership will now do all it can to wean itself off the U.S. ‘Anytime you have a disruption in your supply chain, and especially with something as sensitive as food, they have to diversify their supply chain,’ said David MacLennan, chief executive of Cargill…”
January 22 – Reuters (Aziz El Yaakoubi and Ahmed Rasheed): “Iranian-backed Shi’ite factions have exhorted Iraqis to turn out for a ‘million-strong’ march on Friday aimed at whipping up anti-American sentiment as the United States’ struggle with Iran plays out on the streets of Baghdad. Those behind the rally have two goals in mind - to pressure Washington to pull its troops out of Iraq, and to eclipse the mass anti-government protests that have challenged their grip on power.”
January 21 – Reuters (Stephanie Nebehay): “North Korea said… it was no longer bound by commitments to halt nuclear and missile testing, blaming the United States’ failure to meet a year-end deadline for nuclear talks and ‘brutal and inhumane’ U.S. sanctions. North Korean leader Kim Jong Un set an end-December deadline for denuclearization talks with the United States and White House national security adviser Robert O’Brien said at the time the United States had opened channels of communication.”
Federal Reserve Watch:
January 17 – Bloomberg (Jesse Hamilton): “The Federal Reserve is shifting its focus from writing and revising rules aimed at limiting risk in the banking system to a concentration on how lenders interpret the restrictions, the agency’s supervision chief said… ‘Supervisors promote good risk management and thus help banks preemptively avert excessive risk-taking that would be costly and inefficient to correct after the fact,’ Quarles said. ‘Where banks fall materially out of compliance with a regulatory framework or act in a manner that poses a threat to their safety and soundness, supervisors can act rapidly to address the failures.’”
U.S. Bubble Watch:
January 24 – Dow Jones (Orla McCaffrey): “The mortgage market in 2019 had its best year since the height of the precrisis boom, the latest sign that housing is firming up after showing signs of weakness early last year. Lenders extended $2.4 trillion in home loans last year, the most since 2006, according to… Inside Mortgage Finance. That was also a 46% increase from 2018.”
January 21 – Wall Street Journal (Jean Eaglesham): “A brewing battle over how to treat more than $5.5 trillion in assets on company books is pitting investors against businesses, investment advisers against academics and even banks against their own trade association. At issue is an accounting term known as goodwill, which is the premium a company pays when it buys another for more than the value of its net assets. An unprecedented five-year boom in mergers and acquisitions has added urgency over how to account for the financial concept. When Amazon.com Inc. bought Whole Foods Market Inc. for $13.7 billion in 2017, the e-commerce giant paid $9 billion more than the value of the supermarket’s stores and other net assets. That amount was added to Amazon’s books as goodwill.”
Fixed-Income Bubble Watch:
January 21 – Financial Times (Joe Rennison, Robert Armstrong and Robin Wigglesworth): “When Josh Barrickman became known as the new ‘bond king’, his colleagues teased the taciturn fund manager by leaving paper crowns from Burger King at his desk. The low-key Ohio native may not have the high profile of bond market stars such as Bill Gross but he has earned his title. The fund he runs, the Vanguard Total Bond Market, is the world’s biggest fixed income fund, with $247bn in assets under management. The fund’s table-topping position exemplifies the revolution under way in the $9tn US bond market. Unlike the freewheeling, actively-managed Total Return fund once run by Mr Gross, Vanguard’s flagship bond fund is a passive, index-tracking fund. It takes a smaller fee from investors and tries to track the market, not beat it.”
January 24 – Bloomberg (Lisa Lee and Olivia Raimonde): “Investors, eager to snatch up higher-
yielding corporate debt, are buying even the leveraged loans they shied away from for most of 2019. Some of the riskiest companies are now jumping at the opportunity to borrow. Private equity firms are piling bigger loads of debt onto buyout targets. Junk-rated corporations, including one that exited bankruptcy not long ago, are managing to cut interest rates on loans at the fastest pace since November 2017 by one measure… Money managers are looking to buy new loans now that the chances of recession seem to be falling and the Federal Reserve is evidently on hold.”
January 20 – Wall Street Journal (Anna Hirtenstein and Pat Minczeski): “U.S. blue-chip companies raised an unprecedented sum in eurozone debt markets last year, reflecting the region’s ultralow interest rates and global investors’ thirst for securities issued by highly rated companies. Coca-Cola Co. and International Business Machines Corp. were among the companies that raised a total of €101.7 billion ($113.5bn)—a record… by selling corporate bonds denominated in euros in the past year, according to… Dealogic. That was more than double the €42.2 billion raised the previous year…”
January 23 – Bloomberg (Laura Benitez): “One of the riskiest corners of the European bond market is enjoying its busiest January ever as companies rush to grab ultra-cheap yields and some of the more dubious instruments popular ahead of the financial crisis resurface. Junk-rated borrowers lined up close to 7 billion euros of issuance into the market this week, with sales nearing the 10 billion euro mark ($11bn) this month… ‘We’re definitely in peak greed territory,’ Olivier Monnoyeur, a portfolio manager at BNP Paribas Asset Management… ‘We’ve seen this movie before, and it doesn’t end well.’”
China Watch:
January 24 – Reuters (Judy Hua and Cate Cadell): “China shut part of the Great Wall and suspended public transport in 10 cities, stranding millions of people at the start of the Lunar New Year holiday… as authorities rush to contain a virus that has killed 26 people and infected more than 800. The World Health Organization (WHO) has declared the new coronavirus an “emergency in China” but stopped short of declaring it of international concern.”
January 23 – Bloomberg: “China is struggling to contain rising public anger over its response to a spreading coronavirus even as it took unprecedented steps to slow the outbreak, restricting travel for 40 million people on the eve of Lunar New Year.”
January 22 – Bloomberg (Jeanny Yu): “From a gas supplier to a shopping mall operator, stocks with ties to the Chinese city at the heart of a virus outbreak are falling. Wuhan Department Store Group Co., which operates several malls in Wuhan, lost 3.1% to head for a weekly drop of 16%. Hubei Heyuan Gas Co., which generates all of its revenue from Hubei province, extended its two-day drop to 10%, the biggest on record.”
January 20 – Bloomberg: “Most of China’s provinces are expecting slower economic growth in 2020, underlining the nationwide trend which is expected to result in a tweaking of the formal goal when the legislature meets in March. Twenty-two of 31 major cities, provinces and autonomous regions have so far cut their 2020 target for gross domestic product expansion… Twelve provinces, which made up 42% of China’s economic output at the end of September last year, expect growth at around 6% or lower this year. Another nine provinces forecast their economy would expand between 6%-6.5% this year.”
January 21 – Wall Street Journal (Chao Deng): “For years, China’s small banks had a field day. They lent to overstretched borrowers, disguised loans as investment products and fueled their business with short-term funds. One chairman dined out on delicacies like sea cucumber while ramping up lending to politically connected borrowers. Some banks funneled money to their own shareholders, others hid debt with financial engineering and haven’t reported complete information for years. Regulators used a light touch, eager to keep credit flowing to areas ignored by big national lenders. The country’s years of rapid economic growth papered over shoddy practices. Now, the bill is coming due. China’s growth rate is down by more than half from its peak a decade ago, nonperforming loans have expanded and the government is reining in banking risk. China is confronting a bank cleanup that could require hundreds of billions of dollars in bailouts.”
January 19 – Reuters (Shen Yan and Brenda Goh): “China expects the country’s vehicle sales to remain at around 25 million units in 2020, and could be flat or decline, Industry Minister Miao Wei said…”
January 22 – Bloomberg: “Investors will be closely watching HNA Group Co. as $500 million of dollar bonds mature this week, testing the debt-laden Chinese conglomerate’s repayment ability. A $200 million bond issued by HNA Group International will come due Jan. 23, while its $300 million note is set to mature a day later…”
January 20 – Reuters (Akshay Balan and Donny Kwok): “Moody’s downgraded Hong Kong’s credit rating one notch to ‘Aa3’ from ‘Aa2’ …, saying its view on the strength in the Chinese-ruled city’s institutions and governance is ‘lower than previously estimated.’ …‘The absence of tangible plans to address either the political or economic and social concerns of the Hong Kong population that have come to the fore in the past nine months may reflect weaker inherent institutional capacity than Moody’s had previously assessed,’ the agency said…”
Central Bank Watch:
January 22 – Financial Times (Martin Arnold and Mehreen Khan): “Every good central banker needs a legacy. Mario Draghi, the former head of the European Central Bank, is widely credited with rescuing the eurozone from a debt crisis. Today his successor, Christine Lagarde, will kick off the search for a defining cause of her own. Ms Lagarde will launch the second strategic review in the 20-year history of the ECB — a process that she has said will last until December as it turns ‘every stone’ in search of ways to fine tune its monetary policy toolkit.”
January 23 – Financial Times (David Crow): “Eurozone bank executives have launched a fresh lobbying push to convince policymakers of the dangers of long-term negative interest rates, warning they will hurt savers and pensioners while fuelling price bubbles in riskier assets. Bank chief executives have spent the past two years trying to force the European Central Bank to reverse its negative interest rates, which were first introduced in 2014. Other European central banks including Switzerland and Denmark also have negative rates. Rates below zero have slashed the amount that the region’s lenders earn from bread-and-butter lending and crushed their profit margins.”
January 20 – Reuters (Leika Kihara and Takahiko Wada): “The Bank of Japan nudged up its economic growth forecasts… and was cautiously optimistic about the global outlook, though it said ongoing risks meant it was far too soon to consider scaling down its massive stimulus program. The central bank signaled an expected domestic boost from a government fiscal spending package and Governor Haruhiko Kuroda, citing the U.S.-China Phase 1 trade deal, said overseas risks have subsided somewhat.”
January 20 – Reuters (Marc Jones and John Revill): “Central banks can’t be expected to save the world from climate change, a new book by the Bank for International Settlement said…, urging instead global co-ordination ranging from government policy to financial regulation. The book, titled ‘the Green Swan’, in a play on the idea of ‘black swan’ events, warned of the potentially seismic effects of climate change on the world’s financial system.”
EM Watch:
January 21 – Wall Street Journal (Santiago Pérez and Ryan Dube): “A far-left governor of Argentina’s most populous province is rattling investors with plans to hold off paying back foreign debt, raising fears that his faction of the ruling Peronist coalition could push the rest of the federal government into a messy new debt default. Axel Kicillof, Argentina’s former finance minister and new governor of Buenos Aires province, has given creditors until Wednesday night to accept a three-month delay in the repayment of $250 million in foreign debt issued by the Buenos Aires province due this coming Sunday. Prices of those bonds plunged after his announcement last week… The move comes as Argentina’s federal government prepares for negotiations with creditors to try to restructure more than $100 billion in debt that the government says it can’t repay.”
January 19 – Financial Times (Colby Smith and Robin Wigglesworth): “The developing world’s rapidly swelling corporate debt market is an accident waiting to happen, according to a prominent emerging-markets hedge fund that says a lack of liquidity could lead to violent price declines in a crisis. In a letter to investors…, Gramercy Funds Management wrote that the risk of sudden dislocations has been increased by a wave of bond buying by mutual funds and exchange traded funds that allow investors to pull out money quickly. ‘We are convinced that ‘liquid markets’ are not necessarily liquid,’ Robert Koenigsberger, chief investment officer, wrote… ‘The ‘perfect dislocation storm’ [is] waiting to happen.’”
January 19 – Bloomberg (Paul Wallace): “The yield on Lebanon’s next Eurobond to mature rocketed to more than 200% last week as the government’s prospects of avoiding a default diminished. Fitch… warned it may downgrade the country if it pushed ahead with a plan to get local holders of $1.2 billion of debt due on March 9 to swap into longer-dated bonds, instead of repaying it. The Arab nation has been wracked by protests since October over corruption and worsening living standards.”
January 22 – Reuters (Karin Strohecker, Tom Arnold and Tom Perry): “Lebanon’s new government faces huge upcoming debt repayments and a currency peg at breaking point, but it may already have run out of the hard cash firepower it needs to tackle these problems. The heavily indebted country faces hefty bond repayments coming up in March and April, when $1.34 billion and $842 million of interest and principal respectively come due. Analysts expect the central bank to be able to foot the bill, for now, though some in Beirut believe a rescheduling or restructuring is preferable.”
India Watch:
January 21 – Associated Press (Sheikh Saaliq): “A decision by the International Monetary Fund to downgrade its economic growth forecast for India is adding to pressure on Indian Prime Minister Narendra Modi over his policies. Opposition leaders and economists… blasted the government for failing to deliver on promises to reform the economy and keep growth on track. On Monday, the IMF slashed its growth estimate for the current fiscal year to 4.8% from 6.1% in the last fiscal year. It said India’s slowing growth was the single biggest drag on its global growth forecast in the past two years.”
January 21 – Bloomberg (Subhadip Sircar): “Global funds have turned net sellers of India’s sovereign bonds for the first time in four months, as expectations grow of a wider budget deficit. Foreign investors sold 110.2 billion rupees ($1.5bn) of government bonds so far in January, set for its first sell-off in four months, according to… Clearing Corp. of India… An increasing number of analysts predict that Prime Minister Narendra Modi will again announce a record borrowing plan at the Feb. 1 budget.”
January 23 – Bloomberg (Kartik Goyal): “A bond fund manager who correctly predicted that India’s central bank would introduce a U.S. Federal Reserve style Operation Twist, now says that the nation needs more foreign capital to fund its record borrowing. India’s borrowing may rise to 7.6 trillion rupees ($107bn) for the fiscal year starting April. 1, according to Suyash Choudhary, head of fixed income at IDFC Asset Management Co.”
January 22 – Bloomberg (Jeanette Rodrigues and Haslinda Amin): “The head of India’s biggest lender said he’s certain ‘some solutions will emerge’ to steady Yes Bank Ltd., which has been on a prolonged quest to raise new capital. ‘Yes Bank is a significant player in the market with an almost $40 billion balance sheet,’ State Bank of India Chairman Rajnish Kumar told Bloomberg… ‘I have a feeling that it will not be allowed to fail,’ he added. Kumar’s statement follows speculation that the government, which controls State Bank of India, may ask the lender to play a role in bailiing out the private-sector Yes Bank.”
Europe Watch:
January 21 – Reuters (Angelo Amante and Gavin Jones): “Luigi Di Maio stepped down… as leader of Italy’s co-governing 5-Star movement, as it seeks to stem a wave of defections that threatens the government’s parliamentary majority. While his decision is not expected to bring down the government, it underscores deep divisions within 5-Star and injects further uncertainty into already fractious relations with its coalition partner, the center-left Democratic Party (PD).”
January 22 – Bloomberg (William Shaw and James Hirai): “The prospect of a comeback for the populist Italian firebrand Matteo Salvini was hanging over markets… after a key political rival stepped down, raising the chances of an early election that could pave the way for him to pursue his euroskeptic agenda. The resignation of Luigi Di Maio as leader of the Five Star Movement has unsettled investors wary of another standoff between Italy and the European Union. Bonds fell as much as eight basis points on fears about the government’s stability but then recovered as the fragile coalition held together.”
Japan Watch:
January 22 – Reuters (Tetsushi Kajimoto): “Japan’s exports fell for a 13th straight month in December, hurt by U.S.-bound shipments of cars, construction and mining machinery, suggesting weak external demand is likely to remain a drag on the trade-reliant economy for a while longer. The 6.3% year-on-year fall in exports was worse than a 4.2% decrease expected… It followed a revised 7.9% year-on-year decline in the previous month…”
Global Bubble Watch:
January 19 – Reuters (George Obulutsa): “The world’s richest 2,153 people controlled more money than the poorest 4.6 billion combined in 2019, while unpaid or underpaid work by women and girls adds three times more to the global economy each year than the technology industry, Oxfam said…”
January 20 – Wall Street Journal (Stu Woo and Asa Fitch): “In terms of technology, the world had been unifying for years. Now it is reverting back to the likes of the VHS-versus-Betamax era, with much bigger consequences. Imagine two countries with completely different sets of hardware and software for the internet, electronic devices, telecommunications, and even social media and dating apps. That is the direction the U.S. and China are headed in—a world where the two global powers have mutually exclusive technology systems. The wedge being driven between the two countries alarms tech’s biggest names…”
January 17 – Financial Times (Jennifer Ablan): “Everything worked in 2019. US stocks, junk bonds, silver, oil, bitcoin and even Greece-focused exchange traded funds posted stunning gains, boosted by easy central bank policies. Now new risks lurk, as the US Federal Reserve continues to keep interest rates low and pursue monthly liquidity injections, as well as purchases of Treasury bills at a similar magnitude as previous rounds of quantitative easing. Such efforts have helped to send nearly every asset class into ‘bubbly’ territory. But a growing band of voices on Wall Street is warning of a possible consequence of this ever-looser monetary policy: inflation, which could dominate headlines this year for the first time in many. Jeffrey Gundlach, chief executive of DoubleLine Capital, said it was a remarkable day for financial markets in late October, when Fed chair Jay Powell said he would need to see a ‘really significant move up in inflation that’s persistent, before we would even consider raising rates to address inflation concerns’.”
January 19 – Bloomberg (Jacqueline Poh and Ruth McGavin): “The whole financial world is working to move away from Libor and other interbank lending benchmarks, which for decades have been used to set borrowing costs on bonds and loans, as well as products ranging from derivatives to credit cards. Since 2018, more than $150 billion worth of bonds have been sold using rates set by a new generation of benchmarks. The syndicated loan market is lagging far behind, with at least $12 trillion of deals needing to be replaced or rewritten so they follow a Libor alternative. There are no easy fixes in sight despite potential deadlines as early as this year.”
January 23 – Reuters (Matthew Green): “Australia’s bushfires are contributing to one of the biggest annual increases in the concentration of carbon dioxide in the Earth’s atmosphere since record-keeping began more than 60 years ago, according to a forecast… by Britain’s Met Office…”
Leveraged Speculation Watch:
January 22 – CNBC (Fred Imbert): “Billionaire hedge fund manager Seth Klarman is warning this rally that has taken stocks to record highs could soon end. Klarman, who runs Baupost Group in Boston, wrote in a letter to investors that the ‘the rocket fuel that has propelled markets in 2019 will run out,’ according to a Bloomberg News report.”
January 22 – Bloomberg (Melissa Karsh): “Hedge funds suffered almost $98 billion in net outflows in 2019, the most in three years, as managers trailed the stock market rally. Investors pulled more than $16 billion from the industry in December alone, capping a year that saw the longest stretch of monthly client withdrawals since the 2008 financial crisis, according to… eVestment. The redemptions equal about 3% of industry assets and are almost triple the $37.2 billion in outflows seen in 2018. Hedge funds are under pressure as investors revolt after years of high fees and lackluster performance.”
January 19 – Bloomberg (Nishant Kumar): “Billionaire money managers Chris Hohn and Stephen Mandel led hedge fund gains last year as surging markets helped the $3 trillion market post its best performance in a decade. The industry racked up gains worth $178 billion after fees, according to… LCH Investments, a fund of hedge funds. Hohn’s TCI Fund Management made $8.4 billion for clients, while Mandel’s Lone Pine Capital enriched investors by $7.3 billion.”
Geopolitical Watch:
January 21 – Financial Times (Kathrin Hille): “Taiwan’s identity as an independent democracy crystallised with the landslide re-election of President Tsai Ing-wen on a platform to defend the country’s institutions against China. Ms Tsai’s victory has even sparked a heated debate within the defeated Kuomintang (KMT), the opposition party which once ruled China, over how it can recast its policy towards the mighty neighbour to become palatable to voters again. Ms Tsai has called on Beijing to face reality over Taiwan. But for the Chinese Communist party (CCP) some things cannot be allowed to change, including the goal that Taiwan… must come under its control.”
January 21 – Financial Times (James Politi): “Last month, Robert Zoellick, former president of the World Bank and US trade representative, addressed a group of top US executives with business in China with a warning and a challenge. …With Cui Tiankai, China’s ambassador to the US, in the audience, Mr Zoellick asked if the gathering was ‘ready’ for a slide into US-China conflict. ‘The 20th century painted a shocking picture of industrial-age destruction; do not assume that the cyber era of the 21st century is immune to crack-ups or catastrophes of equal or even greater scale,’ Mr Zoellick said. ‘You need to decide whether you think the United States can still co-operate with China to mutual benefit while managing differences, and if so, how.’ His words captured the fears — particularly within parts of Washington’s economic and foreign policy establishment — that US President Donald Trump’s trade war against Beijing has paved the way for an irreversible ‘decoupling’ of the world’s two largest economies.”
January 19 – Wall Street Journal (Kathryn Dill and Kurt Wilberding): “Worries about income inequality, jobs disappearing due to automation and environmental sustainability are all feeding wide-scale distrust in capitalism as the world knows it, according to a new study… Edelman, a public-relations firm, conducted its 20th annual analysis of public trust in major institutions, surveying 34,000 people in 27 countries and Hong Kong. The data reveal both skepticism about those institutions—including government, business, the media and nongovernmental organizations—and a hunger for leadership on important issues. Anxiety about future employment prospects, wage gaps between the rich and middle class and corruption have made many people question the very systems of capitalism and democracy, the study found.”
January 19 – Bloomberg (Dave Graham): “Mexico should move to deepen its economic ties with China after U.S. congressional approval of a new North American trade deal, a senior Mexican official said… Jesus Seade, the deputy foreign minister for North America and Mexico’s top trade negotiator, said that as the second year of President Andres Manuel Lopez Obrador’s six-year term got underway, boosting economic ties with China was vital.”
Market Instability Watch:
January 24 – Reuters (Gertrude Chavez-Dreyfuss): “The New York Federal Reserve on Friday accepted all $55.3 billion in three-day bids from primary dealers at a repurchase agreement (repo) operation, aimed at maintaining the federal funds rate within the target range.”
January 24 – Reuters (Thyagaraju Adinarayan): “Global equity and bond funds saw more inflows in the week to Wednesday and the ‘irrational bullish phase’ in markets was likely to continue in the first-quarter if the U.S. Fed continued to pump-in liquidity, BofA said… Bond funds attracted $16.2 billion and equities sucked in $8.5 billion last week even as concerns over the spread of a deadly virus in China rattled markets, BofA said citing EPFR data. At $4 billion, emerging market equity funds saw their biggest inflows in 57 weeks.”
January 24 – Bloomberg (Brian Chappatta): “‘Worrisome.’ ‘Dangerous and aggressive.’ ‘Abuse of documentation.’ ‘Peak greed.’ These are just a few of the ways investors and analysts have described the riskiest corners of the debt markets in the past few days. From the U.S. to Europe, whether in collateralized loan obligations or junk bonds, the feeling that the reach for yield in fixed income is fast approaching a breaking point is becoming too powerful to ignore. It’s perhaps best encapsulated by a quote in the Wall Street Journal from Luca Cazzulani, a senior fixed-income strategist at UniCredit: ‘Investors are not really interested in safety, they are quite keen on yield.’
January 19 – Wall Street Journal (Paul J. Davies): “Global banks’ use of funding from markets rather than from customer deposits has grown rapidly in recent years, mostly in the form of short-term funding, which was a central problem of the 2008 financial crisis… However, that growing use has been spread unevenly around the globe. Banks in the U.S., U.K. and Canada have become among the biggest lenders into short-term financing markets, while banks in France and Japan are now the biggest borrowers after rapid growth in all these markets in 2017 and 2018. Short-term market funding is risky because it can suddenly disappear when lenders—typically money-market funds, fund managers or cash-rich banks—get concerned about the creditworthiness of borrowers, who can then be forced into a fire-sale of assets if the lenders pull back.”
January 21 – Associated Press (Elaine Kurtenbach): “News that a new virus that has afflicted hundreds of people in central China can spread between humans has rattled financial markets and raised concern it might wallop the economy just as it might be regaining momentum. Health authorities across Asia have been stepping up surveillance and other precautions to prevent a repeat of the disruptions and deaths during the 2003 SARS crisis, which caused $40 billion to $50 billion in losses from reduced travel and spending.”
January 22 – Bloomberg (Ken McCallum): “After years of falling debt yields and new technologies enabling one-click purchases of complex financial products, mom and pop investors around the world are making bets that put them at danger of getting burned. In South Korea, regulators are investigating sales of derivative-linked products that caused individuals to lose almost all their invested money. Chinese savers have ignored government warnings about possible losses on so-called wealth management products. In India, shadow banks whose woes have triggered a credit crisis have sold bonds to the public. The list goes on.”
January 23 – Bloomberg (Luke Kawa and Lananh Nguyen): “In 30 years at the premier U.S. options exchange, Ed Tilly has never seen an election sow more anxiety than the 2020 presidential race. The chief executive officer of Cboe Global Markets Inc. made the observation… Thursday. Tilly highlighted elevated demand for protection around important dates in the primary campaign and general vote showing up in the term structure of implied volatility.”
Trump Administration Watch:
January 21 – Reuters (Shubham Kalia): “The Phase 2 trade deal with China would not necessarily be a ‘big bang’ that removes all existing tariffs, U.S. Treasury Secretary Steven Mnuchin told the Wall Street Journal… ‘We may do 2A and some of the tariffs come off. We can do this sequentially along the way,’ he added. Mnuchin also warned that Italy and Britain will face U.S. tariffs if they proceed with a tax on digital companies like Alphabet Inc's Google and Facebook…”
January 23 – CNBC (Jeff Cox): “The White House has started work on a second round of tax cuts even as the budget deficit continues to grow, Treasury Secretary Steven Mnuchin said… ‘The president has asked us to start working on what we call ‘tax 2.0,’ and that will be additional tax cuts,” Mnuchin told CNBC... ‘They’ll be tax cuts for the middle class, and we’ll also be looking at other incentives to stimulate economic growth.’ Talk of election-year tax cuts comes amid a swelling budget deficit that eclipsed $1 trillion for the 2019 calendar year. In addition, the total government debt recently passed $23 trillion, despite President Donald Trump’s promises that economic growth would wipe out the deficit and pull down the federal IOU.”
January 23 – Reuters (Susan Heavey and Doina Chiacu): “Treasury Secretary Steven Mnuchin said… the U.S. government cannot sustain federal deficits growing at current levels and will have to slow the rate of spending. As he acknowledged the administration of Republican President Donald Trump was considering additional tax cuts to stimulate the economy, Mnuchin blamed government spending - and Democrats in Congress - for the federal deficit.”
January 22 – CNBC (Mike Calia): “President Donald Trump told CNBC… that U.S. economic growth would have been closer to 4% if it weren’t for the lingering effect of Federal Reserve rate hikes… The president also suggested that the stock market would be even higher than its already record-setting highs if the Fed hadn’t raised rates so quickly before cutting them three times during 2019. ‘Now, with all of that, had we not done the big raise on interest, I think we would have been close to 4%,’ Trump said of the U.S. gross domestic product. ‘And I – I could see 5,000 to 10,000 points more on the Dow. But that was a killer when they raised the rate. It was just a big mistake.’”
January 22 – Bloomberg (Alfred Cang, Javier Blas, and Isis Almeida): “Donald Trump’s trade truce with Beijing included a pledge to buy billions of dollars of U.S. foodstuffs over the next two years, reopening one of the most important export markets for America’s farm belt. ‘The farmers are really happy with the new China Trade Deal,’ the president tweeted the day after a signing ceremony in the White House. The euphoria is fading fast. The dispute with Washington exposed Beijing’s vulnerability when it comes to food imports -- especially the soybeans needed to feed its massive herd of livestock -- and the Communist Party leadership will now do all it can to wean itself off the U.S. ‘Anytime you have a disruption in your supply chain, and especially with something as sensitive as food, they have to diversify their supply chain,’ said David MacLennan, chief executive of Cargill…”
January 22 – Reuters (Aziz El Yaakoubi and Ahmed Rasheed): “Iranian-backed Shi’ite factions have exhorted Iraqis to turn out for a ‘million-strong’ march on Friday aimed at whipping up anti-American sentiment as the United States’ struggle with Iran plays out on the streets of Baghdad. Those behind the rally have two goals in mind - to pressure Washington to pull its troops out of Iraq, and to eclipse the mass anti-government protests that have challenged their grip on power.”
January 21 – Reuters (Stephanie Nebehay): “North Korea said… it was no longer bound by commitments to halt nuclear and missile testing, blaming the United States’ failure to meet a year-end deadline for nuclear talks and ‘brutal and inhumane’ U.S. sanctions. North Korean leader Kim Jong Un set an end-December deadline for denuclearization talks with the United States and White House national security adviser Robert O’Brien said at the time the United States had opened channels of communication.”
Federal Reserve Watch:
January 17 – Bloomberg (Jesse Hamilton): “The Federal Reserve is shifting its focus from writing and revising rules aimed at limiting risk in the banking system to a concentration on how lenders interpret the restrictions, the agency’s supervision chief said… ‘Supervisors promote good risk management and thus help banks preemptively avert excessive risk-taking that would be costly and inefficient to correct after the fact,’ Quarles said. ‘Where banks fall materially out of compliance with a regulatory framework or act in a manner that poses a threat to their safety and soundness, supervisors can act rapidly to address the failures.’”
U.S. Bubble Watch:
January 24 – Dow Jones (Orla McCaffrey): “The mortgage market in 2019 had its best year since the height of the precrisis boom, the latest sign that housing is firming up after showing signs of weakness early last year. Lenders extended $2.4 trillion in home loans last year, the most since 2006, according to… Inside Mortgage Finance. That was also a 46% increase from 2018.”
January 21 – Wall Street Journal (Jean Eaglesham): “A brewing battle over how to treat more than $5.5 trillion in assets on company books is pitting investors against businesses, investment advisers against academics and even banks against their own trade association. At issue is an accounting term known as goodwill, which is the premium a company pays when it buys another for more than the value of its net assets. An unprecedented five-year boom in mergers and acquisitions has added urgency over how to account for the financial concept. When Amazon.com Inc. bought Whole Foods Market Inc. for $13.7 billion in 2017, the e-commerce giant paid $9 billion more than the value of the supermarket’s stores and other net assets. That amount was added to Amazon’s books as goodwill.”
Fixed-Income Bubble Watch:
January 21 – Financial Times (Joe Rennison, Robert Armstrong and Robin Wigglesworth): “When Josh Barrickman became known as the new ‘bond king’, his colleagues teased the taciturn fund manager by leaving paper crowns from Burger King at his desk. The low-key Ohio native may not have the high profile of bond market stars such as Bill Gross but he has earned his title. The fund he runs, the Vanguard Total Bond Market, is the world’s biggest fixed income fund, with $247bn in assets under management. The fund’s table-topping position exemplifies the revolution under way in the $9tn US bond market. Unlike the freewheeling, actively-managed Total Return fund once run by Mr Gross, Vanguard’s flagship bond fund is a passive, index-tracking fund. It takes a smaller fee from investors and tries to track the market, not beat it.”
January 24 – Bloomberg (Lisa Lee and Olivia Raimonde): “Investors, eager to snatch up higher-
yielding corporate debt, are buying even the leveraged loans they shied away from for most of 2019. Some of the riskiest companies are now jumping at the opportunity to borrow. Private equity firms are piling bigger loads of debt onto buyout targets. Junk-rated corporations, including one that exited bankruptcy not long ago, are managing to cut interest rates on loans at the fastest pace since November 2017 by one measure… Money managers are looking to buy new loans now that the chances of recession seem to be falling and the Federal Reserve is evidently on hold.”
January 20 – Wall Street Journal (Anna Hirtenstein and Pat Minczeski): “U.S. blue-chip companies raised an unprecedented sum in eurozone debt markets last year, reflecting the region’s ultralow interest rates and global investors’ thirst for securities issued by highly rated companies. Coca-Cola Co. and International Business Machines Corp. were among the companies that raised a total of €101.7 billion ($113.5bn)—a record… by selling corporate bonds denominated in euros in the past year, according to… Dealogic. That was more than double the €42.2 billion raised the previous year…”
January 23 – Bloomberg (Laura Benitez): “One of the riskiest corners of the European bond market is enjoying its busiest January ever as companies rush to grab ultra-cheap yields and some of the more dubious instruments popular ahead of the financial crisis resurface. Junk-rated borrowers lined up close to 7 billion euros of issuance into the market this week, with sales nearing the 10 billion euro mark ($11bn) this month… ‘We’re definitely in peak greed territory,’ Olivier Monnoyeur, a portfolio manager at BNP Paribas Asset Management… ‘We’ve seen this movie before, and it doesn’t end well.’”
China Watch:
January 24 – Reuters (Judy Hua and Cate Cadell): “China shut part of the Great Wall and suspended public transport in 10 cities, stranding millions of people at the start of the Lunar New Year holiday… as authorities rush to contain a virus that has killed 26 people and infected more than 800. The World Health Organization (WHO) has declared the new coronavirus an “emergency in China” but stopped short of declaring it of international concern.”
January 23 – Bloomberg: “China is struggling to contain rising public anger over its response to a spreading coronavirus even as it took unprecedented steps to slow the outbreak, restricting travel for 40 million people on the eve of Lunar New Year.”
January 22 – Bloomberg (Jeanny Yu): “From a gas supplier to a shopping mall operator, stocks with ties to the Chinese city at the heart of a virus outbreak are falling. Wuhan Department Store Group Co., which operates several malls in Wuhan, lost 3.1% to head for a weekly drop of 16%. Hubei Heyuan Gas Co., which generates all of its revenue from Hubei province, extended its two-day drop to 10%, the biggest on record.”
January 20 – Bloomberg: “Most of China’s provinces are expecting slower economic growth in 2020, underlining the nationwide trend which is expected to result in a tweaking of the formal goal when the legislature meets in March. Twenty-two of 31 major cities, provinces and autonomous regions have so far cut their 2020 target for gross domestic product expansion… Twelve provinces, which made up 42% of China’s economic output at the end of September last year, expect growth at around 6% or lower this year. Another nine provinces forecast their economy would expand between 6%-6.5% this year.”
January 21 – Wall Street Journal (Chao Deng): “For years, China’s small banks had a field day. They lent to overstretched borrowers, disguised loans as investment products and fueled their business with short-term funds. One chairman dined out on delicacies like sea cucumber while ramping up lending to politically connected borrowers. Some banks funneled money to their own shareholders, others hid debt with financial engineering and haven’t reported complete information for years. Regulators used a light touch, eager to keep credit flowing to areas ignored by big national lenders. The country’s years of rapid economic growth papered over shoddy practices. Now, the bill is coming due. China’s growth rate is down by more than half from its peak a decade ago, nonperforming loans have expanded and the government is reining in banking risk. China is confronting a bank cleanup that could require hundreds of billions of dollars in bailouts.”
January 19 – Reuters (Shen Yan and Brenda Goh): “China expects the country’s vehicle sales to remain at around 25 million units in 2020, and could be flat or decline, Industry Minister Miao Wei said…”
January 22 – Bloomberg: “Investors will be closely watching HNA Group Co. as $500 million of dollar bonds mature this week, testing the debt-laden Chinese conglomerate’s repayment ability. A $200 million bond issued by HNA Group International will come due Jan. 23, while its $300 million note is set to mature a day later…”
January 20 – Reuters (Akshay Balan and Donny Kwok): “Moody’s downgraded Hong Kong’s credit rating one notch to ‘Aa3’ from ‘Aa2’ …, saying its view on the strength in the Chinese-ruled city’s institutions and governance is ‘lower than previously estimated.’ …‘The absence of tangible plans to address either the political or economic and social concerns of the Hong Kong population that have come to the fore in the past nine months may reflect weaker inherent institutional capacity than Moody’s had previously assessed,’ the agency said…”
Central Bank Watch:
January 22 – Financial Times (Martin Arnold and Mehreen Khan): “Every good central banker needs a legacy. Mario Draghi, the former head of the European Central Bank, is widely credited with rescuing the eurozone from a debt crisis. Today his successor, Christine Lagarde, will kick off the search for a defining cause of her own. Ms Lagarde will launch the second strategic review in the 20-year history of the ECB — a process that she has said will last until December as it turns ‘every stone’ in search of ways to fine tune its monetary policy toolkit.”
January 23 – Financial Times (David Crow): “Eurozone bank executives have launched a fresh lobbying push to convince policymakers of the dangers of long-term negative interest rates, warning they will hurt savers and pensioners while fuelling price bubbles in riskier assets. Bank chief executives have spent the past two years trying to force the European Central Bank to reverse its negative interest rates, which were first introduced in 2014. Other European central banks including Switzerland and Denmark also have negative rates. Rates below zero have slashed the amount that the region’s lenders earn from bread-and-butter lending and crushed their profit margins.”
January 20 – Reuters (Leika Kihara and Takahiko Wada): “The Bank of Japan nudged up its economic growth forecasts… and was cautiously optimistic about the global outlook, though it said ongoing risks meant it was far too soon to consider scaling down its massive stimulus program. The central bank signaled an expected domestic boost from a government fiscal spending package and Governor Haruhiko Kuroda, citing the U.S.-China Phase 1 trade deal, said overseas risks have subsided somewhat.”
January 20 – Reuters (Marc Jones and John Revill): “Central banks can’t be expected to save the world from climate change, a new book by the Bank for International Settlement said…, urging instead global co-ordination ranging from government policy to financial regulation. The book, titled ‘the Green Swan’, in a play on the idea of ‘black swan’ events, warned of the potentially seismic effects of climate change on the world’s financial system.”
EM Watch:
January 21 – Wall Street Journal (Santiago Pérez and Ryan Dube): “A far-left governor of Argentina’s most populous province is rattling investors with plans to hold off paying back foreign debt, raising fears that his faction of the ruling Peronist coalition could push the rest of the federal government into a messy new debt default. Axel Kicillof, Argentina’s former finance minister and new governor of Buenos Aires province, has given creditors until Wednesday night to accept a three-month delay in the repayment of $250 million in foreign debt issued by the Buenos Aires province due this coming Sunday. Prices of those bonds plunged after his announcement last week… The move comes as Argentina’s federal government prepares for negotiations with creditors to try to restructure more than $100 billion in debt that the government says it can’t repay.”
January 19 – Financial Times (Colby Smith and Robin Wigglesworth): “The developing world’s rapidly swelling corporate debt market is an accident waiting to happen, according to a prominent emerging-markets hedge fund that says a lack of liquidity could lead to violent price declines in a crisis. In a letter to investors…, Gramercy Funds Management wrote that the risk of sudden dislocations has been increased by a wave of bond buying by mutual funds and exchange traded funds that allow investors to pull out money quickly. ‘We are convinced that ‘liquid markets’ are not necessarily liquid,’ Robert Koenigsberger, chief investment officer, wrote… ‘The ‘perfect dislocation storm’ [is] waiting to happen.’”
January 19 – Bloomberg (Paul Wallace): “The yield on Lebanon’s next Eurobond to mature rocketed to more than 200% last week as the government’s prospects of avoiding a default diminished. Fitch… warned it may downgrade the country if it pushed ahead with a plan to get local holders of $1.2 billion of debt due on March 9 to swap into longer-dated bonds, instead of repaying it. The Arab nation has been wracked by protests since October over corruption and worsening living standards.”
January 22 – Reuters (Karin Strohecker, Tom Arnold and Tom Perry): “Lebanon’s new government faces huge upcoming debt repayments and a currency peg at breaking point, but it may already have run out of the hard cash firepower it needs to tackle these problems. The heavily indebted country faces hefty bond repayments coming up in March and April, when $1.34 billion and $842 million of interest and principal respectively come due. Analysts expect the central bank to be able to foot the bill, for now, though some in Beirut believe a rescheduling or restructuring is preferable.”
India Watch:
January 21 – Associated Press (Sheikh Saaliq): “A decision by the International Monetary Fund to downgrade its economic growth forecast for India is adding to pressure on Indian Prime Minister Narendra Modi over his policies. Opposition leaders and economists… blasted the government for failing to deliver on promises to reform the economy and keep growth on track. On Monday, the IMF slashed its growth estimate for the current fiscal year to 4.8% from 6.1% in the last fiscal year. It said India’s slowing growth was the single biggest drag on its global growth forecast in the past two years.”
January 21 – Bloomberg (Subhadip Sircar): “Global funds have turned net sellers of India’s sovereign bonds for the first time in four months, as expectations grow of a wider budget deficit. Foreign investors sold 110.2 billion rupees ($1.5bn) of government bonds so far in January, set for its first sell-off in four months, according to… Clearing Corp. of India… An increasing number of analysts predict that Prime Minister Narendra Modi will again announce a record borrowing plan at the Feb. 1 budget.”
January 23 – Bloomberg (Kartik Goyal): “A bond fund manager who correctly predicted that India’s central bank would introduce a U.S. Federal Reserve style Operation Twist, now says that the nation needs more foreign capital to fund its record borrowing. India’s borrowing may rise to 7.6 trillion rupees ($107bn) for the fiscal year starting April. 1, according to Suyash Choudhary, head of fixed income at IDFC Asset Management Co.”
January 22 – Bloomberg (Jeanette Rodrigues and Haslinda Amin): “The head of India’s biggest lender said he’s certain ‘some solutions will emerge’ to steady Yes Bank Ltd., which has been on a prolonged quest to raise new capital. ‘Yes Bank is a significant player in the market with an almost $40 billion balance sheet,’ State Bank of India Chairman Rajnish Kumar told Bloomberg… ‘I have a feeling that it will not be allowed to fail,’ he added. Kumar’s statement follows speculation that the government, which controls State Bank of India, may ask the lender to play a role in bailiing out the private-sector Yes Bank.”
Europe Watch:
January 21 – Reuters (Angelo Amante and Gavin Jones): “Luigi Di Maio stepped down… as leader of Italy’s co-governing 5-Star movement, as it seeks to stem a wave of defections that threatens the government’s parliamentary majority. While his decision is not expected to bring down the government, it underscores deep divisions within 5-Star and injects further uncertainty into already fractious relations with its coalition partner, the center-left Democratic Party (PD).”
January 22 – Bloomberg (William Shaw and James Hirai): “The prospect of a comeback for the populist Italian firebrand Matteo Salvini was hanging over markets… after a key political rival stepped down, raising the chances of an early election that could pave the way for him to pursue his euroskeptic agenda. The resignation of Luigi Di Maio as leader of the Five Star Movement has unsettled investors wary of another standoff between Italy and the European Union. Bonds fell as much as eight basis points on fears about the government’s stability but then recovered as the fragile coalition held together.”
Japan Watch:
January 22 – Reuters (Tetsushi Kajimoto): “Japan’s exports fell for a 13th straight month in December, hurt by U.S.-bound shipments of cars, construction and mining machinery, suggesting weak external demand is likely to remain a drag on the trade-reliant economy for a while longer. The 6.3% year-on-year fall in exports was worse than a 4.2% decrease expected… It followed a revised 7.9% year-on-year decline in the previous month…”
Global Bubble Watch:
January 19 – Reuters (George Obulutsa): “The world’s richest 2,153 people controlled more money than the poorest 4.6 billion combined in 2019, while unpaid or underpaid work by women and girls adds three times more to the global economy each year than the technology industry, Oxfam said…”
January 20 – Wall Street Journal (Stu Woo and Asa Fitch): “In terms of technology, the world had been unifying for years. Now it is reverting back to the likes of the VHS-versus-Betamax era, with much bigger consequences. Imagine two countries with completely different sets of hardware and software for the internet, electronic devices, telecommunications, and even social media and dating apps. That is the direction the U.S. and China are headed in—a world where the two global powers have mutually exclusive technology systems. The wedge being driven between the two countries alarms tech’s biggest names…”
January 17 – Financial Times (Jennifer Ablan): “Everything worked in 2019. US stocks, junk bonds, silver, oil, bitcoin and even Greece-focused exchange traded funds posted stunning gains, boosted by easy central bank policies. Now new risks lurk, as the US Federal Reserve continues to keep interest rates low and pursue monthly liquidity injections, as well as purchases of Treasury bills at a similar magnitude as previous rounds of quantitative easing. Such efforts have helped to send nearly every asset class into ‘bubbly’ territory. But a growing band of voices on Wall Street is warning of a possible consequence of this ever-looser monetary policy: inflation, which could dominate headlines this year for the first time in many. Jeffrey Gundlach, chief executive of DoubleLine Capital, said it was a remarkable day for financial markets in late October, when Fed chair Jay Powell said he would need to see a ‘really significant move up in inflation that’s persistent, before we would even consider raising rates to address inflation concerns’.”
January 19 – Bloomberg (Jacqueline Poh and Ruth McGavin): “The whole financial world is working to move away from Libor and other interbank lending benchmarks, which for decades have been used to set borrowing costs on bonds and loans, as well as products ranging from derivatives to credit cards. Since 2018, more than $150 billion worth of bonds have been sold using rates set by a new generation of benchmarks. The syndicated loan market is lagging far behind, with at least $12 trillion of deals needing to be replaced or rewritten so they follow a Libor alternative. There are no easy fixes in sight despite potential deadlines as early as this year.”
January 23 – Reuters (Matthew Green): “Australia’s bushfires are contributing to one of the biggest annual increases in the concentration of carbon dioxide in the Earth’s atmosphere since record-keeping began more than 60 years ago, according to a forecast… by Britain’s Met Office…”
Leveraged Speculation Watch:
January 22 – CNBC (Fred Imbert): “Billionaire hedge fund manager Seth Klarman is warning this rally that has taken stocks to record highs could soon end. Klarman, who runs Baupost Group in Boston, wrote in a letter to investors that the ‘the rocket fuel that has propelled markets in 2019 will run out,’ according to a Bloomberg News report.”
January 22 – Bloomberg (Melissa Karsh): “Hedge funds suffered almost $98 billion in net outflows in 2019, the most in three years, as managers trailed the stock market rally. Investors pulled more than $16 billion from the industry in December alone, capping a year that saw the longest stretch of monthly client withdrawals since the 2008 financial crisis, according to… eVestment. The redemptions equal about 3% of industry assets and are almost triple the $37.2 billion in outflows seen in 2018. Hedge funds are under pressure as investors revolt after years of high fees and lackluster performance.”
January 19 – Bloomberg (Nishant Kumar): “Billionaire money managers Chris Hohn and Stephen Mandel led hedge fund gains last year as surging markets helped the $3 trillion market post its best performance in a decade. The industry racked up gains worth $178 billion after fees, according to… LCH Investments, a fund of hedge funds. Hohn’s TCI Fund Management made $8.4 billion for clients, while Mandel’s Lone Pine Capital enriched investors by $7.3 billion.”
Geopolitical Watch:
January 21 – Financial Times (Kathrin Hille): “Taiwan’s identity as an independent democracy crystallised with the landslide re-election of President Tsai Ing-wen on a platform to defend the country’s institutions against China. Ms Tsai’s victory has even sparked a heated debate within the defeated Kuomintang (KMT), the opposition party which once ruled China, over how it can recast its policy towards the mighty neighbour to become palatable to voters again. Ms Tsai has called on Beijing to face reality over Taiwan. But for the Chinese Communist party (CCP) some things cannot be allowed to change, including the goal that Taiwan… must come under its control.”
January 21 – Financial Times (James Politi): “Last month, Robert Zoellick, former president of the World Bank and US trade representative, addressed a group of top US executives with business in China with a warning and a challenge. …With Cui Tiankai, China’s ambassador to the US, in the audience, Mr Zoellick asked if the gathering was ‘ready’ for a slide into US-China conflict. ‘The 20th century painted a shocking picture of industrial-age destruction; do not assume that the cyber era of the 21st century is immune to crack-ups or catastrophes of equal or even greater scale,’ Mr Zoellick said. ‘You need to decide whether you think the United States can still co-operate with China to mutual benefit while managing differences, and if so, how.’ His words captured the fears — particularly within parts of Washington’s economic and foreign policy establishment — that US President Donald Trump’s trade war against Beijing has paved the way for an irreversible ‘decoupling’ of the world’s two largest economies.”
January 19 – Wall Street Journal (Kathryn Dill and Kurt Wilberding): “Worries about income inequality, jobs disappearing due to automation and environmental sustainability are all feeding wide-scale distrust in capitalism as the world knows it, according to a new study… Edelman, a public-relations firm, conducted its 20th annual analysis of public trust in major institutions, surveying 34,000 people in 27 countries and Hong Kong. The data reveal both skepticism about those institutions—including government, business, the media and nongovernmental organizations—and a hunger for leadership on important issues. Anxiety about future employment prospects, wage gaps between the rich and middle class and corruption have made many people question the very systems of capitalism and democracy, the study found.”
January 19 – Bloomberg (Dave Graham): “Mexico should move to deepen its economic ties with China after U.S. congressional approval of a new North American trade deal, a senior Mexican official said… Jesus Seade, the deputy foreign minister for North America and Mexico’s top trade negotiator, said that as the second year of President Andres Manuel Lopez Obrador’s six-year term got underway, boosting economic ties with China was vital.”
Friday Evening Links
[CNBC] Dow drops 200 points after a second US coronavirus case is confirmed, airline shares decline
[Reuters] Wall Street set for weekly loss on gathering virus fears
[Reuters] Oil drops more than 2%, approaches weekly loss on China virus fears
[CNBC] Bonds look like they are flashing a warning for global markets
[Reuters] China heads into Lunar New Year on shutdown as virus spreads
[Reuters] France declares first two confirmed cases of coronavirus
[Reuters] Financier doubts add to Boeing's MAX headaches
[Bloomberg] China’s Unproven Antiviral Solution: Quarantine of 40 Million
[Reuters] Wall Street set for weekly loss on gathering virus fears
[Reuters] Oil drops more than 2%, approaches weekly loss on China virus fears
[CNBC] Bonds look like they are flashing a warning for global markets
[Reuters] China heads into Lunar New Year on shutdown as virus spreads
[Reuters] France declares first two confirmed cases of coronavirus
[Reuters] Financier doubts add to Boeing's MAX headaches
[Bloomberg] China’s Unproven Antiviral Solution: Quarantine of 40 Million
Thursday, January 23, 2020
Friday's News Links
[Reuters] Wall Street bogged down by China virus fears, Intel limits losses
[Reuters] Shares hold ground as China virus fears persist; euro hits seven-week low after ECB
[Reuters] Copper set for biggest weekly drop in 17 months amid China virus scare
[CNBC] CDC confirms second US case of coronavirus and is monitoring 63 other possible infections
[Reuters] China shuts down transport, temples as virus death toll rises to 25
[Reuters] Bond, equity funds suck-in $25 billion as 'irrational' bull phase continues: BofA
[Reuters] NY Fed accepts all $55.3 bln in three-day repo bids
[CNBC] Era of mega-funded, money-losing unicorn start-ups is coming to an end
[Reuters] 'No, No America': Iraq protesters demand expulsion of U.S. troops
[Reuters] Australia bushfires contribute to big rise in global CO2 levels: UK's Met Office
[Bloomberg] China Locks Down 40 Million People as Anger Grows Over Virus
[Bloomberg] India Needs Foreign Capital to Fund Record Borrowing, IDFC Says
[WSJ] China Virus Overwhelms Wuhan’s Health System, as City Rushes to Build New Hospital
[WSJ] Yuan Falters as China Battles Wuhan Virus
[Reuters] Shares hold ground as China virus fears persist; euro hits seven-week low after ECB
[Reuters] Copper set for biggest weekly drop in 17 months amid China virus scare
[CNBC] CDC confirms second US case of coronavirus and is monitoring 63 other possible infections
[Reuters] China shuts down transport, temples as virus death toll rises to 25
[Reuters] Bond, equity funds suck-in $25 billion as 'irrational' bull phase continues: BofA
[Reuters] NY Fed accepts all $55.3 bln in three-day repo bids
[CNBC] Era of mega-funded, money-losing unicorn start-ups is coming to an end
[Reuters] 'No, No America': Iraq protesters demand expulsion of U.S. troops
[Reuters] Australia bushfires contribute to big rise in global CO2 levels: UK's Met Office
[Bloomberg] China Locks Down 40 Million People as Anger Grows Over Virus
[Bloomberg] India Needs Foreign Capital to Fund Record Borrowing, IDFC Says
[WSJ] China Virus Overwhelms Wuhan’s Health System, as City Rushes to Build New Hospital
[WSJ] Yuan Falters as China Battles Wuhan Virus
Thursday Evening Links
[Reuters] S&P 500 gains, Nasdaq hits new high as investors eye earnings, coronavirus
[CNBC] Coronavirus cases rise to more than 800 worldwide as China confirms death toll has risen to 25
[Reuters] Coronavirus fears weigh on global equity markets
[Reuters] 'This is an emergency in China' says WHO, as virus death toll rises to 18
[Reuters] Mnuchin says U.S. government must cut spending, shrink deficits: CNBC
[Bloomberg] Cboe Chief Says Early Hedging of U.S. Election Is ‘Unprecedented’
[FT] Alarm spreads over coronavirus outbreak despite China travel curbs
[CNBC] Coronavirus cases rise to more than 800 worldwide as China confirms death toll has risen to 25
[Reuters] Coronavirus fears weigh on global equity markets
[Reuters] 'This is an emergency in China' says WHO, as virus death toll rises to 18
[Reuters] Mnuchin says U.S. government must cut spending, shrink deficits: CNBC
[Bloomberg] Cboe Chief Says Early Hedging of U.S. Election Is ‘Unprecedented’
[FT] Alarm spreads over coronavirus outbreak despite China travel curbs
Wednesday, January 22, 2020
Thursday's News Links
[Reuters] Virus fears sap stocks; ECB gets ready for rethink
[CNBC] Mainland Chinese stocks drop as much as 3.5% as coronavirus fears grip investors
[Reuters] Oil slump deepens as China virus casts cloud over fuel demand, economy
[Reuters] China orders 'unprecedented' lockdown of two cities at virus epicenter
[CNBC] White House has started work on second round of tax cuts to boost growth, Mnuchin says
[CNBC] ECB launches review that will redefine its mission and tools
[Reuters] Japan exports shrink for 13th month in further blow to economy
[Reuters] China central bank to lower funding costs, prevent debt and inflation risks: adviser
[Reuters] After China trade deal, Europe and UK next on Trump's to-do list
[Reuters] Lebanon's new government may have little reserves left to stabilize economy
[Bloomberg] China Traders Dump Stocks With Any Link to Virus Epicenter Wuhan
[Bloomberg] Trump’s Trade Deal Hastens China’s Retreat From U.S. Farmers
[Bloomberg] ‘Peak Greed’ Fuels Record Junk Bond Sales in Europe
[Bloomberg] Amateur Investors Are Making Risky Bets That Could Wipe Them Out
[Bloomberg] HNA Faces $500 Million Debt Deadline Before Lunar New Year
[Bloomberg] State Bank Chairman Says Yes Bank ‘Will Not Be Allowed to Fail’
[Bloomberg] CLOs Are Packed With New Loopholes, Triggering Investor Backlash
[Bloomberg] Inside China’s Virus Zone, Unease Grips a City in Lockdown
[WSJ] Ebullient Mood in Davos Should Put Investors on Edge
[WSJ] Political Turmoil Triggers Slump in Italian Assets
[FT] Eurozone bankers launch fresh push against negative rates
[FT] Wuhan hospitals overwhelmed as China fights coronavirus
[CNBC] Mainland Chinese stocks drop as much as 3.5% as coronavirus fears grip investors
[Reuters] Oil slump deepens as China virus casts cloud over fuel demand, economy
[Reuters] China orders 'unprecedented' lockdown of two cities at virus epicenter
[CNBC] White House has started work on second round of tax cuts to boost growth, Mnuchin says
[CNBC] ECB launches review that will redefine its mission and tools
[Reuters] Japan exports shrink for 13th month in further blow to economy
[Reuters] China central bank to lower funding costs, prevent debt and inflation risks: adviser
[Reuters] After China trade deal, Europe and UK next on Trump's to-do list
[Reuters] Lebanon's new government may have little reserves left to stabilize economy
[Bloomberg] China Traders Dump Stocks With Any Link to Virus Epicenter Wuhan
[Bloomberg] Trump’s Trade Deal Hastens China’s Retreat From U.S. Farmers
[Bloomberg] ‘Peak Greed’ Fuels Record Junk Bond Sales in Europe
[Bloomberg] Amateur Investors Are Making Risky Bets That Could Wipe Them Out
[Bloomberg] HNA Faces $500 Million Debt Deadline Before Lunar New Year
[Bloomberg] State Bank Chairman Says Yes Bank ‘Will Not Be Allowed to Fail’
[Bloomberg] CLOs Are Packed With New Loopholes, Triggering Investor Backlash
[Bloomberg] Inside China’s Virus Zone, Unease Grips a City in Lockdown
[WSJ] Ebullient Mood in Davos Should Put Investors on Edge
[WSJ] Political Turmoil Triggers Slump in Italian Assets
[FT] Eurozone bankers launch fresh push against negative rates
[FT] Wuhan hospitals overwhelmed as China fights coronavirus
Wednesday Evening Links
[Reuters] Tech sector pushes the S&P 500 to slight gain
[MarketWatch] Oil prices at 7-week low on forecast for surplus in crude supplies
[Reuters] Treasuries - U.S. yields mixed as investors assess virus implications
[Reuters] China's Wuhan shuts down transport as global alarm mounts over virus spread
[AP] China virus outbreak may wallop economy, financial markets
[Reuters] Factbox: What we know about the new coronavirus spreading in China and beyond
[Reuters] Italy's Di Maio quits as 5-Star leader in blow to government
[CNBC] Hedge fund giant Seth Klarman says the ‘rocket fuel’ feeding this rally will soon ‘run out’
[Reuters] Fed may tighten in second half 2020 if inflation quickens: Guggenheim CIO Minerd
[Reuters] Soleimani killing adds dangerous new dimension to Iraq unrest
[Bloomberg] China’s Lunar New Year Nightmare: 3 Billion Trips and a Virus
[Bloomberg] Hedge Fund Outflows Neared $100 Billion in 2019, Most Since 2016
[FT] Embattled Hong Kong has no choice but to reset its US dollar peg
[MarketWatch] Oil prices at 7-week low on forecast for surplus in crude supplies
[Reuters] Treasuries - U.S. yields mixed as investors assess virus implications
[Reuters] China's Wuhan shuts down transport as global alarm mounts over virus spread
[AP] China virus outbreak may wallop economy, financial markets
[Reuters] Factbox: What we know about the new coronavirus spreading in China and beyond
[Reuters] Italy's Di Maio quits as 5-Star leader in blow to government
[CNBC] Hedge fund giant Seth Klarman says the ‘rocket fuel’ feeding this rally will soon ‘run out’
[Reuters] Fed may tighten in second half 2020 if inflation quickens: Guggenheim CIO Minerd
[Reuters] Soleimani killing adds dangerous new dimension to Iraq unrest
[Bloomberg] China’s Lunar New Year Nightmare: 3 Billion Trips and a Virus
[Bloomberg] Hedge Fund Outflows Neared $100 Billion in 2019, Most Since 2016
[FT] Embattled Hong Kong has no choice but to reset its US dollar peg
Tuesday, January 21, 2020
Wednesday's News Links
[Reuters] S&P 500 aims for record on IBM support, fading China virus fears
[Reuters] Oil falls as surplus forecast overshadows Libya disruption
[Reuters] Yuan, Australian dollar struggle to wipe off coronavirus concerns
[CNBC] U.S. existing home sales surge to near two-year high
[Reuters] China virus death toll rises to nine as pandemic fears mount
[Reuters] China says new virus adapting and mutating
[CNBC] Trump says GDP would be near 4% and the Dow could be 10,000 points higher if it weren’t for the Fed
[Bloomberg] A Fresh Bout of Italian Political Risk Puts Investors on Edge
[Bloomberg] Foreigners Dump Indian Bonds Fearing Widening Budget Deficit
[WSJ] Fancy Meals and Loans for Friends: China’s Banks Face Costly Cleanup
[WSJ] Argentine Governor Rattles Markets With Plans to Delay Bond Payment
[FT] China warns push to contain coronavirus reaches critical stage
[FT] The new kings of the bond market
[FT] Fears rise that US-China economic ‘decoupling’ is irreversible
[Reuters] Oil falls as surplus forecast overshadows Libya disruption
[Reuters] Yuan, Australian dollar struggle to wipe off coronavirus concerns
[CNBC] U.S. existing home sales surge to near two-year high
[Reuters] China virus death toll rises to nine as pandemic fears mount
[Reuters] China says new virus adapting and mutating
[CNBC] Trump says GDP would be near 4% and the Dow could be 10,000 points higher if it weren’t for the Fed
[Bloomberg] A Fresh Bout of Italian Political Risk Puts Investors on Edge
[Bloomberg] Foreigners Dump Indian Bonds Fearing Widening Budget Deficit
[WSJ] Fancy Meals and Loans for Friends: China’s Banks Face Costly Cleanup
[WSJ] Argentine Governor Rattles Markets With Plans to Delay Bond Payment
[FT] China warns push to contain coronavirus reaches critical stage
[FT] The new kings of the bond market
[FT] Fears rise that US-China economic ‘decoupling’ is irreversible
Tuesday Evening Links
[CNBC] Dow falls more than 100 points amid first US case of coronavirus, big decline in Boeing
[CNN] CDC confirms first US case of Wuhan coronavirus
[Reuters] Factbox: How a virus impacts the economy and markets
[Reuters] Factbox: Major severe coronavirus outbreaks in the past 20 years
[CNBC] Housing market falling short by nearly 4 million homes as demand grows
[CNBC] Boeing doesn’t expect regulators to sign off on 737 Max until June or July
[AP] IMF downgrade of growth outlook ups pressure on India’s Modi
[Reuters] North Korea abandons nuclear freeze pledge, blames 'brutal' U.S. sanctions
[CNN] CDC confirms first US case of Wuhan coronavirus
[Reuters] Factbox: How a virus impacts the economy and markets
[Reuters] Factbox: Major severe coronavirus outbreaks in the past 20 years
[CNBC] Housing market falling short by nearly 4 million homes as demand grows
[CNBC] Boeing doesn’t expect regulators to sign off on 737 Max until June or July
[AP] IMF downgrade of growth outlook ups pressure on India’s Modi
[Reuters] North Korea abandons nuclear freeze pledge, blames 'brutal' U.S. sanctions
Monday, January 20, 2020
Tuesday's News Links
[Reuters] Stocks lower as China virus outbreak, growth fears sour mood
[Reuters] China virus sends chill through markets as risks rise
[Reuters] Yuan slips, yen gains as spread of China virus unnerves markets
[CNBC] Hong Kong falls beyond 2%, leading losses among major markets following Moody’s downgrade
[Reuters] Mnuchin says Phase 2 trade deal may not remove all tariffs: WSJ
[Reuters] Trump says Fed has lowered rates too slowly
[CNBC] Paul Tudor Jones says this ‘crazy’ stock market run reminds him a lot of ‘early ’99’
[Reuters] BOJ holds fire, nudges up growth forecast on receding global risks
[Reuters] China mystery virus claims sixth victim as holiday travel stokes risk
[Bloomberg] Lebanon’s Default Likely After March Bond, Oxford Economics Says
[Bloomberg] Here’s What Market Watchers Are Saying About the China Virus
[Bloomberg] Most of China’s Provinces See Economy Slowing in 2020
[WSJ] The Great U.S.-China Tech Divide
[WSJ] Virus in China Is Part of a Growing Threat
[WSJ] Goodwill Sparks Deep Division, at Least on Balance Sheets
[FT] Beijing and Taipei headed for collision over democracy
[Reuters] China virus sends chill through markets as risks rise
[Reuters] Yuan slips, yen gains as spread of China virus unnerves markets
[CNBC] Hong Kong falls beyond 2%, leading losses among major markets following Moody’s downgrade
[Reuters] Mnuchin says Phase 2 trade deal may not remove all tariffs: WSJ
[Reuters] Trump says Fed has lowered rates too slowly
[CNBC] Paul Tudor Jones says this ‘crazy’ stock market run reminds him a lot of ‘early ’99’
[Reuters] BOJ holds fire, nudges up growth forecast on receding global risks
[Reuters] China mystery virus claims sixth victim as holiday travel stokes risk
[Bloomberg] Lebanon’s Default Likely After March Bond, Oxford Economics Says
[Bloomberg] Here’s What Market Watchers Are Saying About the China Virus
[Bloomberg] Most of China’s Provinces See Economy Slowing in 2020
[WSJ] The Great U.S.-China Tech Divide
[WSJ] Virus in China Is Part of a Growing Threat
[WSJ] Goodwill Sparks Deep Division, at Least on Balance Sheets
[FT] Beijing and Taipei headed for collision over democracy
Sunday, January 19, 2020
Tactical Short Q4 Recap Conference Call Today
Please join Doug Noland and David McAlvany Thursday, January 23rd, at 4:00PM Eastern/ 2:00pm Mountain time for the Tactical Short Q4 recap conference call, "Surviving an Equities Melt Up” Click here to register.
Monday's News Links
[Reuters] Global stocks stay near record highs; focus turns to central banks, earnings
[Reuters] Gold gains on heightened safe-haven interest; palladium soars
[Reuters] Oil jumps to highest in more than a week after Libyan shutdowns
[Reuters] IMF cuts global growth forecasts as India falters, says bottom may be near
[Reuters] China forecasts vehicle sales at flat or falling in 2020
[Reuters] World's richest 2,000 people hold more than poorest 4.6 billion combined: Oxfam
[CNBC] Tenuous US-China trade deal comes as Beijing and Washington remain on a permanent collision course
[Reuters] Moody's cuts Hong Kong's rating to 'Aa3' as protests continue
[Reuters] Central banks can't save the world from climate change, BIS says
[Reuters] Virus spreads to more Chinese cities, President Xi says containment is priority
[Bloomberg] JPMorgan Says Analysts Are ‘Unusually’ Pessimistic on Earnings
[Bloomberg] The End of Libor Is a $12 Trillion Headache for Loan Bankers
[Bloomberg] Hedge-Fund Titans Hohn, Mandel Lead $178 Billion Year of Profits
[Bloomberg] Lebanon's Bond Yields Surpass 200% as Default Risk Rises: Chart
[WSJ] Global Banks Rush Back Into Repo Markets
[WSJ] Europe’s Cheap Debt Draws Record Borrowing by U.S. Companies
[FT] QE or not QE? Why the Fed is struggling with its message
[Reuters] Gold gains on heightened safe-haven interest; palladium soars
[Reuters] Oil jumps to highest in more than a week after Libyan shutdowns
[Reuters] IMF cuts global growth forecasts as India falters, says bottom may be near
[Reuters] China forecasts vehicle sales at flat or falling in 2020
[Reuters] World's richest 2,000 people hold more than poorest 4.6 billion combined: Oxfam
[CNBC] Tenuous US-China trade deal comes as Beijing and Washington remain on a permanent collision course
[Reuters] Moody's cuts Hong Kong's rating to 'Aa3' as protests continue
[Reuters] Central banks can't save the world from climate change, BIS says
[Reuters] Virus spreads to more Chinese cities, President Xi says containment is priority
[Bloomberg] JPMorgan Says Analysts Are ‘Unusually’ Pessimistic on Earnings
[Bloomberg] The End of Libor Is a $12 Trillion Headache for Loan Bankers
[Bloomberg] Hedge-Fund Titans Hohn, Mandel Lead $178 Billion Year of Profits
[Bloomberg] Lebanon's Bond Yields Surpass 200% as Default Risk Rises: Chart
[WSJ] Global Banks Rush Back Into Repo Markets
[WSJ] Europe’s Cheap Debt Draws Record Borrowing by U.S. Companies
[FT] QE or not QE? Why the Fed is struggling with its message
Sunday Evening Links
[Reuters] Mexican official eyes stronger ties with China after U.S. trade deal
[Reuters] Lebanese security forces, protesters clash for second night
[WSJ] Capitalism Draws Fire, Despite Strong Global Economy
[FT] Boom in emerging market corporate debt stirs fears
[FT] China’s falling birth rate creates timebomb for economy
[Reuters] Lebanese security forces, protesters clash for second night
[WSJ] Capitalism Draws Fire, Despite Strong Global Economy
[FT] Boom in emerging market corporate debt stirs fears
[FT] China’s falling birth rate creates timebomb for economy
Sunday's News Links
[Reuters] China will increase imports from U.S. according to 'market principles': official
[Reuters] China to step up countermeasures as virus outbreak grows
[Reuters] Libya peace summit struggles to draw eastern commander Haftar back into diplomacy
[Bloomberg] America Is Awash With Natural Gas and It’s About to Get Worse
[Bloomberg] Libya’s Biggest Oil Field Starts to Shut as Peace Talks Loom
[Reuters] China to step up countermeasures as virus outbreak grows
[Reuters] Libya peace summit struggles to draw eastern commander Haftar back into diplomacy
[Bloomberg] America Is Awash With Natural Gas and It’s About to Get Worse
[Bloomberg] Libya’s Biggest Oil Field Starts to Shut as Peace Talks Loom
Saturday, January 18, 2020
Saturday's News Links
[MarketWatch] Stock market is “eerily reminiscent of January 2018” when stocks suffered rapid correction, technical analyst says
[Reuters] Erdogan calls on Europe to support Turkey's moves in Libya: Politico
[Bloomberg] Fed Plans Shift From Writing Rules to Watching How Banks Behave
[Bloomberg] U.S. Home Prices Rise the Most in 19 Months
[WSJ] China’s Slowing Growth Underlines Stress Facing Its Economy in 2020
[FT] Federal Reserve’s embrace of higher inflation is ‘momentous’ for markets
[FT] Largest US banks double profits in past decade
[Reuters] Erdogan calls on Europe to support Turkey's moves in Libya: Politico
[Bloomberg] Fed Plans Shift From Writing Rules to Watching How Banks Behave
[Bloomberg] U.S. Home Prices Rise the Most in 19 Months
[WSJ] China’s Slowing Growth Underlines Stress Facing Its Economy in 2020
[FT] Federal Reserve’s embrace of higher inflation is ‘momentous’ for markets
[FT] Largest US banks double profits in past decade
Friday, January 17, 2020
Weekly Commentary: "This is Insane"
Please join Doug Noland and David McAlvany this coming Thursday, January 23rd, at 4:00PM Eastern/ 2:00pm Mountain time for the Tactical Short Q4 recap conference call, "Surviving an Equities Melt Up” Click here to register.
ETF.com: “...Investors kept plowing money into U.S.-listed ETFs. A cool $13.4 billion flowed into the space during the week…, sending year-to-date inflows to $35.2 billion, well ahead of year-ago levels of $8.4 billion.”
Bloomberg: “Global currency volatility has dropped to the lowest level ever recorded.”
Bloomberg: “Bond managers are starting to contemplate the prospect of another decade without a Federal Reserve interest-rate hike.”
Bloomberg: “Forward price-to-earnings ratios for U.S. growth stocks have reached levels only seen in eight months over a span of three decades of data…”
Reuters: “J.P. Morgan Chase posted profit and revenue that smashed through analysts’ expectations on a strong rebound in trading revenue… Bond trading revenue surged 86% to $3.4 billion…”
Bloomberg: “‘This is Insane’: Muni Yields at the Lowest Since Elvis was King.”
We’re witness to historic developments across global financial markets extending far beyond an equities melt-up. U.S. corporate Credit this week traded near the narrowest spreads (to Treasuries) since 2007. Popular Credit default swap (CDS) indices priced this week at pre-crisis lows – investment-grade and high yield. At 46 bps, Goldman Sachs (5-yr) CDS closed the week at the low since 2007. JPMorgan CDS fell five bps this week to 30.6 bps, the low going back to October 2007. A Leveraged Loans index closed Friday at a record high price. European fixed-income CDS ended the week at or near multi-year lows – investment-grade, high-yield and financial. And this week from Bloomberg: “U.S. High-Grade Market Devours Nearly $100 Billion in New Debt.”
This historic financial Bubble is a manifestation of Monetary Disorder and a direct inflationary consequence of an unprecedented global Credit Bubble. There were new data this week from the Institute of International Finance (IIF).
January 13 – Reuters (Marc Jones): “Global debt is expected to climb to a new all-time high of more than $257 trillion in the coming months, the Institute of International Finance estimated…, adding there was no sign of it retreating either. The amount works out at around $32,500 for each of the 7.7 billion people on planet and more than 3.2 times the world’s annual economic output, but the staggering numbers don’t stop there. Total debt across the household, government, financial and non-financial corporate sectors surged by some $9 trillion in the first three quarters of 2019 alone. In mature markets total debt now tops $180 trillion or 383% of these countries’ combined GDP, while in emerging markets it is double what it was in 2010 at $72 trillion, driven mainly by a $20 trillion surge in corporate debt.”
Global debt has been expanding at the most rapid clip since 2016. After ending 2015 at about $210 Trillion, global debt growth has been in parabolic rise to the IIF’s Q1 2020 estimate of $257 Trillion. This historic debt expansion has been across the board, household, corporate, government and financial – “emerging” and developed economies. From Reuters: “All parts of the world are loading up... Household debt-to-GDP have reached a record high in Belgium, Finland, France, Lebanon, New Zealand, Nigeria, Norway, Sweden and Switzerland. Non-financial corporate debt to GDP topped in Canada, France, Singapore, Sweden, Switzerland and the United States. Government debt-to-GDP has also hit an all-time high in Australia and the United States.”
Total global debt ended Q3 2019 at 322% of GDP, up from the year ago 319%. Global government debt rose to 88.3% of GDP, up from 86%. Corporate debt increased to 92.5% from 91.6%, and Household to 60.2% from 59.6%.
Emerging Asia continues to pile it on, boosting Total Debt-to-GDP to 271% (from the previous year’s 262%). China’s Credit Bubble saw Total Debt expand from 297.4% to 308.5% of GDP. China’s Corporate Debt-to-GDP ratio rose to 156.7% from 154.4%, while rapidly expanding government Debt increased from 49% to 53.6%. From Reuters (Marc Jones): “China’s government debt also grew at its fastest annual pace last year since 2009…, and household debt and general government debt are now at all-time highs of 55% of GDP.”
Asia’s debt boom is a particularly alarming accident in the making. With corporate debt rising to a staggering 227% of GDP, total Hong Kong Debt exceeds 500% of GDP (Financial Debt declining to 133.5% of GDP). Singapore’s financial Bubble continues to inflate, with Financial sector borrowings increasing to 187.7% of GDP (up from 184%). Total Singapore debt inflated to 473.5% of GDP from 462.3%. South Korea is also worthy of special attention. With corporate debt jumping to 101.6% from 95.3%, total South Korean debt surged to 325.6% of GDP (up from 304.5%).
From Reuters: “Another potentially risky trend is that the amount of emerging market ‘hard currency’ debt - debt sold in a major currency like the dollar that can become hard to pay back if a crisis hits a local currency’s value - reached $8.3 trillion in Q3 2019, $4 trillion higher than a decade ago.”
The IIF used salient language: “Spurred by low interest rates and loose financial conditions…” Pondering the data, one thought repeatedly comes to mind: These central banks have really done it this time.
January 16 - Bloomberg (Chang Shu and David Qu): “China’s December supply of credit was steady, taking into account a boost from a widening in the data coverage. The headline figure now includes all government bonds, broadened from the previous definition of special government bonds. New loans and other categories of aggregate social financing were broadly stable -- boding well for economic growth support. The monthly increase in aggregate social financing was 2.1 trillion yuan, up slightly from 1.9 trillion yuan in December 2018 on a comparable basis.”
The People’s Bank of China (PBOC) has, once again, revised its tabulation of system Credit, now to include China’s “Treasury” and local government bonds. With the new components, Aggregate Financing expanded $307 billion in December, up from November’s $291 billion and 9% ahead of December 2018 (and up 10.7% y-o-y). For the year, Aggregate Financing surged a historic $3.728 TN, 13.7% ahead of growth from 2018.
By the main categories, Bank (“yuan-denominated”) Loans expanded 12.5% for the year. Booming capital markets continue to provide a stiff tailwind powering huge bond issuance. Corporate Bonds expanded 13.4% in 2019, with Government Bond growth at 14.3% and Asset-Backed Securities surging 31.5%. The contraction of key “shadow banking” categories runs unabated, with Entrusted Loans down 7.6%, Foreign Currency Loans contracting 4.6%, Undiscounted Bankers Acceptances sinking 12.5%, and Trust Loans declining 4.4%.
New Bank Loans expanded $166 billion during December, down from November’s $202 billion but 5% ahead of December 2018. For the year, Loans expanded $2.451 TN – about 4% ahead of 2018 growth. Consumer (chiefly mortgage) Loans continue to power ahead. At $95 billion, Consumer Loans were down slightly from November’s $100 billion expansion but were 40% ahead of December 2018 growth. For the year, Consumer Loans expanded $1.084 TN, or 15.5% - slightly ahead of 2018’s annual expansion. Consumer Loans surged 37% over two years, 66% over three and 139% over five years.
It’s worth noting China’s M2 money supply growth accelerated to 8.7% y-o-y in December, higher than Bloomberg’s consensus estimate of 8.3%. December saw the largest monthly expansion since January, with y-o-y M2 growth the strongest since February 2018’s 8.8%. With Credit booming, China’s economic resilience is no surprise. Ominously, economic growth has slowed markedly in the face of ongoing excess of increasingly unsound money and Credit.
Here at home, further indications of a housing market poised for a big year:
January 17 – Bloomberg (Ana Monteiro): “Groundbreakings on new U.S. homes surged in December to a 13-year high, giving the housing market momentum heading into the new year amid low mortgage rates, solid job growth and optimistic buyers and builders. Residential starts rose 16.9% to a 1.61 million annualized rate after an upwardly revised 1.375 million pace in the prior month… The gain was the biggest in three years and well above all estimates…”
January 16 – CNBC (Diana Olick): “The nation’s single-family homebuilders are feeling very confident about their business in the new year, as high demand and low supply make for a profitable mix. Yet, sentiment in January did slip 1 point on the National Association of Home Builders/ Wells Fargo Housing Market Index to 75, but that is considerably higher than last January, when it was 58. Last month’s reading was a 20-year high.”
January 15 – CNBC (Diana Olick): “It was a seriously strong start to 2020 in the mortgage business for new home loans and refinances. Total mortgage application volume surged 30.2% last week from the previous week… Refinancing led the surge, thanks to a drop in mortgage rates. Those applications jumped 43% for the week and were 109% higher than a year ago… Homebuyers also rushed in, sending purchase application volume up 16% for the week and up 8% from one year ago. Purchase mortgage activity hit the highest level since October 2009.”
And with stocks at record highs and housing markets bubbling, no surprise that the U.S. consumer is both confident and spending.
January 16 – Bloomberg (Max Reyes): “U.S. consumer confidence advanced last week to the highest level in more than 19 years on increased optimism about the economy, personal finances and the buying climate. Bloomberg’s index of consumer comfort rose to 66 in the week ended Jan. 12, the best reading since October 2000, from 65.1… The gain was the eighth in the last nine weeks. A measure of Americans’ views of the economy climbed to the highest since early 2001.”
For the Week:
The S&P500 jumped 2.0% (up 3.1% y-t-d), and the Dow rose 1.8% (up 2.8%). The Utilities surged 3.7% (up 3.4%). The Banks slipped 0.2% (down 2.2%), while the Broker/Dealers jumped 2.5% (up 4.0%). The Transports rose 2.8% (up 3.5%). The S&P 400 Midcaps gained 2.2% (up 1.6%), and the small cap Russell 2000 surged 2.5% (up 1.9%). The Nasdaq100 advanced 2.3% (up 5.0%). The Semiconductors rose 2.7% (up 3.6%). The Biotechs declined 0.5% (up 2.2%). With bullion slipping $5, the HUI gold index fell 1.0% (down 5.4%).
Three-month Treasury bill rates ended the week at 1.5225%. Two-year government yields slipped a basis point to 1.56% (down 1bp y-t-d). Five-year T-note yields declined one basis point to 1.62% (down 7bps). Ten-year Treasury yields were unchanged at 1.82% (down 10bps). Long bond yields were unchanged at 2.28% (down 11bps). Benchmark Fannie Mae MBS yields were little changed at 2.62% (down 9bps).
Greek 10-year yields rose six bps to 1.41% (down 2bps y-t-d). Ten-year Portuguese yields jumped 11 bps to 0.50% (up 6bps). Italian 10-year yields rose five bps to 1.38% (down 4bps). Spain's 10-year yields increased two bps to 0.46% (down 1bp). German bund yields dipped two bps to negative 0.22% (down 3bps). French yields were unchanged at 0.04% (down 7bps). The French to German 10-year bond spread widened two to 26 bps. U.K. 10-year gilt yields sank 14 bps to 0.63% (down 19bps). U.K.'s FTSE equities index rose 1.1% (up 1.8%).
Japan's Nikkei Equities Index gained 0.8% (up 1.6% y-t-d). Japanese 10-year "JGB" yields were little changed at zero (up 1bp y-t-d). France's CAC40 rose 1.1% (up 2.1%). The German DAX equities index added 0.3% (up 2.1%). Spain's IBEX 35 equities index gained 1.1% (up 1.4%). Italy's FTSE MIB index increased 0.5% (up 2.7%). EM equities were mostly higher. Brazil's Bovespa index jumped 2.6% (up 2.4%), and Mexico's Bolsa rose 2.6% (up 5.2%). South Korea's Kospi index advanced 2.0% (up 2.4%). India's Sensex equities index gained 0.8% (up 1.7%). China's Shanghai Exchange declined 0.5% (up 0.8%). Turkey's Borsa Istanbul National 100 index jumped 2.4% (up 6.2%). Russia's MICEX equities index rose 2.3% (up 5.0%).
Investment-grade bond funds saw inflows of $6.624 billion, and junk bond funds posted inflows of $1.730 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates added a basis point to 3.65% (down 80bps y-o-y). Fifteen-year rates increased two bps to 3.09% (down 79bps). Five-year hybrid ARM rates jumped nine bps to 3.39% (down 48bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up four bps to 3.99% (down 47bps).
Federal Reserve Credit last week expanded $4.4bn to $4.133 TN, with an 18-week gain of $406 billion. Over the past year, Fed Credit expanded $117bn, or 2.9%. Fed Credit inflated $1.322 Trillion, or 47%, over the past 375 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt jumped $11.9 billion last week to $3.420 TN. "Custody holdings" increased $16.5 billion, or 0.5%, y-o-y.
M2 (narrow) "money" supply increased $1.9bn last week to a record $15.432 TN. "Narrow money" surged $1.022 TN, or 7.1%, over the past year. For the week, Currency increased $4.1bn. Total Checkable Deposits fell $37.0bn, while Savings Deposits jumped $32.1bn. Small Time Deposits increased $0.6bn. Retail Money Funds gained $2.0bn.
Total money market fund assets fell $7.2bn to $3.630 TN, with institutional money fund assets down $6.6bn to $2.251 TN. Total money funds gained $581bn y-o-y, or 19.1%.
Total Commercial Paper declined $4.6bn to $1.121 TN. CP was up $55.7bn, or 5.2% year-over-year.
Currency Watch:
For the week, the U.S. dollar index increased 0.3% to 97.606 (up 1.1% y-t-d). For the week on the upside, the Mexican peso increased 0.7%, the Swiss franc 0.4%, the South Korean won 0.2% and the Singapore dollar 0.1%. On the downside, the Brazilian real declined 1.5%, the South African rand 0.7%, the Japanese yen 0.6%, the British pound 0.4%, the Australian dollar 0.3%, the Norwegian krone 0.3%, the euro 0.3%, the New Zealand dollar 0.2%, the Swedish krona 0.2% and the Canadian dollar 0.1%. The Chinese renminbi increased 0.87% versus the dollar this week (up 1.51% y-t-d).
Commodities Watch:
The Bloomberg Commodities Index declined 1.1% (down 1.3% y-t-d). Spot Gold slipped 0.3% to $1,557 (up 2.6%). Silver dipped 0.2% to $18.073 (up 0.8%). WTI crude fell 50 cents to $58.54 (down 4%). Gasoline declined 0.8% (down 3%), while Natural Gas sank 9.0% (down 9%). Copper gained 1.1% (up 2%). Wheat rose 1.1% (up 2%). Corn increased 0.9% (unchanged).
Market Instability Watch:
January 14 – Wall Street Journal (Daniel Kruger): “One hurdle to a possible fix for recent volatility in the short-term cash markets: hedge funds. Federal Reserve officials are considering a new tool to ease stresses in the market for Treasury repurchase agreements, or repos. Through the repo market, banks and hedge funds borrow cash overnight, while pledging safe securities such as government bonds as collateral. In September, an unexpected shortage of available cash to lend sparked a surge in the cost of repo-market borrowing, prompting the Fed to intervene for the first time since the financial crisis. One potential solution is to lend cash directly to smaller banks, securities dealers and hedge funds through the repo market’s clearinghouse, the Fixed Income Clearing Corp., or FICC. Hedge funds currently borrow through a process called sponsored repo, in which they ask a large bank to act as a middleman…”
January 17 – Bloomberg (Sam Potter and Anchalee Worrachate): “Stocks may be grabbing most of the headlines, but equities aren’t the only asset class in uncharted territory. Global currency volatility has dropped to the lowest level ever recorded. Less than 48 hours after the U.S. and China put pen to paper on a trade deal that reaffirmed an agreement not to devalue their currencies, the JPMorgan Global FX Volatility Index -- which tracks the options market to measure expected price swings -- is trading lower than at any point since it was created almost three decades ago.”
January 14 – Bloomberg (Vivien Lou Chen): “Bond managers are starting to contemplate the prospect of another decade without a Federal Reserve interest-rate hike. Forecasting that far out may seem like a fool’s errand. But the central bank’s inability to push inflation sustainably above its 2% target, even after three 2019 rate cuts amid the strongest job market in 50 years, gives that outlook more weight, they said. The scenario rejects the notion that last year’s easing was a sort of insurance move that could be quickly reversed under an improving economy.”
January 14 – Reuters (High Son): “J.P. Morgan Chase posted profit and revenue that smashed through analysts’ expectations on a strong rebound in trading revenue at the end of 2019. …Fourth-quarter profit rose 21% to $8.52 billion… Profit in the investment bank climbed 48% to $2.9 billion, mainly on trading results. Bond trading revenue surged 86% to $3.4 billion, exceeding the $2.61 billion estimate by roughly $800 million, as fixed-income desks were humming, particularly in securitized products and rates. Stock traders posted a 15% increase in revenue to $1.5 billion, compared with the $1.37 billion estimate.”
January 13 – Wall Street Journal (Akane Otani): “Money managers aren’t expecting much when U.S. companies report their latest quarterly results over the next several weeks. But for the bull market to continue its more than decadelong ascent, they are leaning on one crucial assumption: that corporate earnings growth will pick up over the next couple of quarters… Companies in the S&P 500 are projected to report a 2% decline in earnings in the fourth quarter from the year-earlier period, according to FactSet… If that pans out, it would mark the fourth straight quarter of declining earnings—the longest such streak since a period from 2015-16.”
January 15 – CNBC (Yun Li): “Gold prices, which briefly topped $1,600 last week, could rally to $2,000 an ounce amid heightened political risks, Bridgewater’s co-chief investment officer Greg Jensen told the Financial Times… The manager from the world’s biggest hedge fund cited increased income inequality in the U.S. and rising tensions with China and Iran as uncertainties ahead that will prompt more safe-haven buying… ‘There is so much boiling conflict,’ Jensen told the paper. ‘People should be prepared for a much wider range of potentially more volatile set of circumstances than we are mostly accustomed to.’”
January 14 – Bloomberg (Gregor Stuart Hunter): “The risk-on rally that rolled from December right on into the start of 2020 may be due for a breather, according to an increasing number of market analysts… Forward price-to-earnings ratios for U.S. growth stocks have reached levels only seen in eight months over a span of three decades of data, according to Lapthorne… Sundial Capital Research analysts flagged another warning sign in recent days: options buying has overwhelmingly favored calls over puts in U.S. markets this month. ‘As a percentage of total volume, speculative-call buying last week hit a level never seen in the past 20 years, and there was little in the way of protective-strategy volume as an offset,’ said Sundial president Jason Goepfert.”
Trump Administration Watch:
January 15 – Financial Times (Editorial Board): “For a self-declared master dealmaker such as US president Donald Trump, being able to flaunt a trade truce with Beijing may have been the main goal of his long and damaging trade war. For everyone else, it amounts to little more than a hope — and a weak one at that — that things will not get worse. The agreement, signed in Washington…, is billed as ‘phase one’ of a bigger deal. On its own, however, it leaves the US-China trade relationship in a much worse state than when Mr Trump took office. It leaves average tariff levels on both sides at around 20%. Two years ago the average US tariff on Chinese imports stood at 3%; in the other direction it was 8%.”
January 14 – Reuters (Makini Brice and Andrea Shalal): “The United States will maintain tariffs on Chinese goods until the completion of a second phase of a U.S.-China trade agreement, U.S. Treasury Secretary Steven Mnuchin said…, a day before the two sides are to sign an interim deal. Mnuchin told reporters that President Donald Trump could consider easing tariffs if the world’s two largest economies move quickly to seal a follow-up agreement. ‘If the president gets a Phase 2 in place quickly, he’ll consider releasing tariffs as part of Phase 2,’ Mnuchin said.”
January 15 – Associated Press (Paul Wiseman and Joe McDonald): “After 18 months of economic combat, the United States and China are set to take a step toward peace Wednesday. At least for now. President Donald Trump and China’s chief negotiator, Liu He, are scheduled to sign a modest trade agreement in which the administration will ease some sanctions on China and Beijing will step up its purchases of U.S. farm products and other goods. Above all, the deal will defuse a conflict that has slowed global growth, hurt American manufacturers and weighed on the Chinese economy. But the so-called Phase 1 pact does little to force China to make the major economic reforms — such as reducing unfair subsidies for its own companies —that the Trump administration sought when it started the trade war by imposing tariffs on Chinese imports in July 2018.”
January 16 – CNBC: “White House trade advisor Peter Navarro told CNBC… the Trump administration is looking to make progress in ‘phase two’ trade talks with China on U.S. demands that fell short in phase one. The U.S. wants to work on getting China to stop subsidizing its state-owned enterprises, Navarro said…, a day after the U.S. and China signed their phase one deal. Navarro said China needs to stop ‘cyber intrusions.’ ‘It’s just insane that Chinese government officials continue to hack into American businesses and steal trade secrets,’ he added. ‘It’s very destructive to our businesses.’ Navarro said China also needs to curb the flow of illicit fentanyl.”
January 14 – Reuters (Philip Blenkinsop): “The United States, the European Union and Japan proposed new global trade rules… to curb subsidies they say are distorting the worldwide economy, with China their clear target… After meeting in Washington, Japanese Economy Minister Hiroshi Kajiyama, U.S. Trade Representative Robert Lighthizer and EU trade commissioner Phil Hogan said in a joint statement that existing World Trade Organization (WTO) rules were insufficient to tackle market distortions from subsidies.”
January 14 – Wall Street Journal (Bob Davis and Katy Stech Ferek): “The U.S. and China are about to declare a pause in their trade war by signing an initial pact this week, but a continuing battle over technology is bound to keep relations between the two superpowers on edge. The Trump administration’s immediate focus is tightening restrictions on Huawei… The Commerce Department recently sent regulations to the Office of Management and Budget that would largely eliminate a loophole that allowed U.S. companies to sell to Huawei from their overseas facilities, people familiar with the matter said.”
January 11 – Bloomberg (Glen Carey and David Wainer): “Iran and the U.S. stepped back from the brink of open military conflict this week, but underlying tensions that led to a spate of violence in the past month aren’t going away and sanctions pressure on Tehran is climbing even higher. Despite a modest easing of tensions… the Islamic Republic won’t back down from its goal of making the U.S. pay for killing a top general and for the crippling sanctions imposed since 2018, according to a senior Western diplomat. Instead, current and former diplomats and senior Pentagon officials predict the conflict is likely to return to a more common historic pattern: strikes by proxies on the U.S. and allies, cyber attacks and harassment of ships in the Persian Gulf.”
January 15 – Reuters (Andrea Shalal and Susan Heavey): “The U.S. economy is coping with large budget deficits at the moment, but government spending cannot continue to expand at the current rate indefinitely, Treasury Secretary Steven Mnuchin said… ‘At this point the economy can handle these deficits, but there’s no question over time we need to look at these government spending issues. We can’t continue to expand government spending at the rate that we are,’ Mnuchin said.”
January 13 – Reuters (Andrea Shalal, Alexandra Alper, David Lawder, Eric Beech and Kanishka Singh): “The U.S. Treasury Department… dropped its designation of China as a currency manipulator days before top officials of the world’s two largest economies were due to sign a preliminary trade agreement to ease an 18-month-old tariff war. The widely expected decision came in a long-delayed semi-annual currency report, reversing an unexpected move by Treasury Secretary Steven Mnuchin last August at the height of U.S.-China trade tensions.”
January 12 – Reuters (Steve Holland): “The United States and China have agreed to restart semi-annual talks aimed at resolving economic disputes between the two countries, a process abandoned at the start of the Trump administration as a trade conflict between the countries escalated.”
Federal Reserve Watch:
January 14 – Financial Times (Colby Smith): “The Federal Reserve signalled that it plans to maintain its interventions in short-term funding markets at an elevated level, even after a year-end cash squeeze passed without any jump in borrowing costs. The New York arm of the US central bank said… it would only start to cut back its cash injections for the repo market next month, and even then the reduction will be modest. Traders have been wondering when and how the market will be weaned off central bank loans, which began after a surprising jump in overnight borrowing costs in September and were expanded in size in December before the traditionally volatile end to the year… ‘History has shown us that whenever these sorts of programmes are introduced, they tend to last longer than what the Fed expects,’ said Nick Maroutsos, co-head of global bonds at Janus Henderson…”
January 15 – Bloomberg (Steve Matthews and Craig Torres): “The Federal Reserve’s low interest rates, the perception that there is a high bar to future increases and expansion of its balance sheet are helping to lift asset prices, Federal Reserve Bank of Dallas President Robert Kaplan said. ‘All three of those actions are contributing to elevated risk-asset valuations,’ Kaplan told Michael McKee… on Bloomberg Television. ‘And I think we ought to be sensitive to that.’ Kaplan’s views contrast with those of many of his colleagues, who insist the Fed’s resumption of purchases of assets is a technical change that has little or no effect on the value of asset prices.”
January 14 – Reuters (Jonnelle Marte): “U.S. Federal Reserve policymakers are forecasting an ‘almost ideal’ outcome in 2020 where the U.S. labor market will stay strong and inflation will approach the central bank’s 2% target, but officials should remember to consider potential risks, Boston Federal Reserve Bank President Eric Rosengren said…”
January 14 – Bloomberg (Christopher Condon): “Federal Reserve Bank of Kansas City President Esther George, one of the U.S. central bank’s most consistently hawkish officials, said she’s comfortable keeping interest rates on hold ‘for now’ amid a positive outlook for 2020. ‘The U.S. economy is currently doing well, with real GDP growth near trend, unemployment near record lows, and inflation low and stable,] George said… ‘Keeping rates on hold for now is appropriate in my view as we assess the economy’s response to last year’s rate cuts and monitor incoming data.’”
January 12 – Wall Street Journal (Sarah Chaney): “Federal Reserve payments to the U.S. Treasury declined in 2019 to a decade low, as the central bank’s expenses rose and income declined. The Fed sent about $54.9 billion to the government last year, down from $65.3 billion in 2018… The Fed payments to Treasury, called remittances, hit a record in 2015 due to swelling interest income from its huge bondholdings.”
U.S. Bubble Watch:
January 13 – Associated Press (Martin Crutsinger): “The U.S. budget deficit through the first three months of this budget year is up 11.8% from the same period a year ago… The… deficit from October through December totaled $356.6 billion, up from $318.9 billion for the same period last year. Both government spending and revenues set records for the first three months of this budget year but spending rose at a faster clip than tax collections… The Congressional Budget Office is projecting that the deficit for the current 2020 budget year will hit $1 trillion and will remain over $1 trillion for the next decade.”
January 13 – CNBC (Jeff Cox): “The U.S. fiscal deficit topped $1 trillion in 2019, the first time it has passed that level in a calendar year since 2012… The budget shortfall hit $1.02 trillion for the January-to-December period, a 17.1% increase from 2018, which itself had seen a 28.2% jump from the previous year.”
January 11 – Wall Street Journal (Jacob M. Schlesinger): “As Democrats embrace a more activist government, some are flirting with an idea that hasn’t received serious attention since the 1970s: a minimum guaranteed income for all Americans. Entrepreneur Andrew Yang’s presidential candidacy has gained traction with a proposal to give a $1,000 monthly ‘freedom dividend’ to all Americans… No mainstream officeholder has joined Mr. Yang’s call for a universal basic income. But policies to create a kind of basic income—albeit not universal—in the form of a new financial floor for millions of households have drawn backing from other Democrats seeking the White House and many lawmakers. Party leaders are embracing a range of federally backed economic rights, including universal access to health care, college, child care, and broadband.”
January 16 – Reuters: “U.S. retail sales rose for a third straight month in December, with households buying a range of goods even as they cut back on purchases of motor vehicles, which could strengthen the view that the economy maintained a moderate growth pace at the end of 2019. …Retail sales increased 0.3% last month. Data for November was revised up to show retail sales gaining 0.3%... Economists… Compared to December last year, retail sales accelerated 5.8%. Excluding automobiles, gasoline, building materials and food services, retail sales jumped 0.5% last month…”
January 16 – MarketWatch (Keith Jurow): “The U.S. housing-market crash a dozen years ago is evidently ancient history for many mortgage lenders. Mortgage underwriting standards have eased considerably in the past couple of years; one of the largest U.S. mortgage originators now offers a jumbo mortgage of up to $1 million with only 10% down if you have a FICO score of at least 760. Borrowers who can scrape up a down payment of between 30% and 40% might be able to receive up to $3 million. One smaller lender is now offering home buyers a loan as high as $2 million with a FICO score as low as 640. This score was considered sub-prime during the bubble years… Such favorable terms indicate a confidence that housing markets are in decent shape and there is nothing on the horizon to worry about… In reality, jumbo mortgages — loans that exceed the guarantees set by Fannie Mae and Freddie Mac — are a jumbo-sized problem.”
January 14 – Wall Street Journal (David Benoit and Ben Eisen): “A healthy U.S. economy pushed up profits at America’s biggest banks, allowing them to grow even though falling interest rates made lending less profitable. Consumer borrowing and a rebound in investment-banking revenues propelled JPMorgan… and Citigroup Inc. to double-digit earnings growth in the final three months of 2019. JPMorgan… reported its most profitable year on record. For a while, companies and consumers were telling different stories about the state of the economy. Consumers continued to borrow and spend at a brisk pace, while companies were holding back due to fears that growth was on the wane. A trade deal with China and an improved outlook for the U.S. economy have eased those fears, boosting banks’ businesses that serve corporate clients.”
January 14 – Reuters (Lucia Mutikani): “U.S. consumer prices rose slightly in December even as households paid more for healthcare, and monthly underlying inflation slowed… The… consumer price index increased 0.2% last month after climbing 0.3% in November. The monthly increase in the CPI has been slowing since jumping 0.4% in October. In the 12 months through December, the CPI rose 2.3%. That was the largest increase since October 2018 and followed a 2.1% gain year-on-year in November. The CPI accelerated 2.3% in 2019, the largest rise since 2011, after increasing 1.9% in 2018.”
January 15 – Reuters: “U.S. producer prices edged up in December as a rise in the cost of goods was offset by weakness in services… The producer price index for final demand ticked up 0.1% last month after being unchanged in November… In the 12 months through December, the PPI increased 1.3% after gaining 1.1% in November.”
January 12 – Wall Street Journal (Austen Hufford): “Manufacturers are paying relocation costs and bonuses to move new hires across the country at a time of record-low unemployment and intense competition for skilled workers. Half a million U.S. factory jobs are unfilled, the most in nearly two decades, and the unemployment rate is hovering at a 50-year low… At the same time, Americans are moving around the country at the lowest rate in at least 70 years. To entice workers to move, manufacturers are raising wages, offering signing bonuses and covering relocation costs, including for some hourly positions.”
January 16 – CNBC (Jeff Cox): “The rapid increase of student loan debt has slowed over the past few years, but individual borrower balances aren’t going down mostly because hardly anybody is paying down their loans. Total indebtedness over the past year or so has stopped its meteoric rise, according to a study that Moody’s… Nevertheless, the study showed a number of factors are constraining borrowers from lightening their loads. Outstanding loans total more than $1.6 trillion, more than doubling over the last decade and tripling since 2006.”
January 13 – Wall Street Journal (Marc Vartabedian, Sara Castellanos and Steven Rosenbush): “Large technology companies have long maintained startup-investment programs, but now corporations across many non-tech industries are plowing more money into startups. The increased activity allows companies to keep tabs on nascent technology, have early looks at potential acquisitions and hopefully stave off technological disruption. The number of non-tech corporate venture deals last year reached 256 through Dec. 6, up from 152 in 2009, according to… PitchBook Data Inc. The total value of those deals rose to $8.8 billion from $2.7 billion over the same period…”
January 13 – Reuters (Anirban Sen and Jane Lanhee Lee): “In the months since office-sharing startup WeWork’s botched public debut, mid- and late-stage investors in big start-ups have been pushing for more safeguards in case their firms fail to go public or sell shares at a lower valuation than pre-IPO financing rounds. Fundraising terms are rarely made public, but more than a dozen Silicon Valley-based lawyers, entrepreneurs and venture-capital investors told Reuters that since WeWork’s canceled public offering and other ill-fated IPOs, investors have been securing protections of their original investments in ‘unicorns’ - private companies valued at $1 billion or more.”
January 15 – Bloomberg (Luke Kawa and Sonali Basak): “A private equity giant is warning that more untested companies are due for a reckoning in repeats of WeWork’s abrupt fall from grace. Henry McVey, the head of global macro and asset allocation at KKR & Co., recommends investors stay underweight many high-flying yet unprofitable companies funded by venture-capital firms or in the early stages of growth. The WeWork situation was not a ‘one-off’ occurrence,’ he added in a 2020 outlook report, which didn’t reference any specific companies. A growing number of the co-working company’s peers ‘may have difficulty funding in 2020.’”
January 14 – Bloomberg (Simon Casey): “Such is the extent of the shakeout in the U.S. shale industry that Permian Basin oil production is closer to peaking than many forecasts suggest, according to one energy investor. Adam Waterous, who runs Waterous Energy Fund, regards the sector’s financial position as unsustainable after years of disappointing returns for investors and negative free cash flow. With capital markets now largely shunning shale producers, the impact will begin to show in oil and natural gas output from the largest U.S. oil patch, he said. ‘We think we are at or near peak Permian’ production, Waterous said… ‘The North American oil market has been grossly overcapitalized, which is not sustainable.’”
January 15 – Bloomberg (Martin Z Braun): “New York City is reaping the benefits of a construction boom. The city set a value of $1.38 trillion for its more than one million properties for the fiscal year beginning in July, a $62 billion increase from the prior period, as the value of new construction reached the highest level in the last 10 years… New construction boosted the market value of city property by $14 billion, more than 20% of the increase in market value. Rental apartments account for $4.4 billion, or about 32%, of citywide construction activity.”
January 10 – Bloomberg (Nic Querolo): “The Bay Area’s housing market is cooling off after years of growth fueled by the tech boom. The median price of a house in San Francisco increased just 1.3% from a year earlier to $1.6 million, the smallest gain since 2012, according to… Compass. Prices in Santa Clara County, which includes San Jose and Palo Alto, declined almost 6% to $1.26 million. The housing market in the Bay Area has exploded in recent years, with the tech industry driving a wealth boom that pushed up prices, particularly in San Francisco. A flurry of IPOs in 2019 was expected to continue the momentum…”
Fixed-Income Bubble Watch:
January 15 – Bloomberg: “Investments in fixed income mutual funds expanded in the week ended Jan. 8 for the 31st straight week of inflows, according to the Investment Company Institute. Inflows totaled $20.4 billion, compared with $5.74 billion the prior week.”
January 17 – Bloomberg (Danielle Moran and Mallika Mitra): “The last time municipal-bond yields were this low Dwight D. Eisenhower was the president, Elvis Presley released his second studio album and Grace Kelly married Monaco’s Prince Rainier III. The Bond Buyer’s 20-year index of general-obligation bonds reset at 2.56% this week, the lowest since June 1956... And for some context, that year some $5.4 billion of new long-term bonds were sold, a sum that’s now considered a somewhat slow week… ‘That is insane,’ said Nisha Patel, the director of portfolio management at Parametric…”
January 14 – Reuters (Kate Duguid): “The dawn of the new decade has brought a reprieve for debt-laden companies in the energy sector: Investors are throwing money their way again, for now. Having been largely shut out of capital markets in 2019, low-rated energy firms, some on the brink of default, are racing to secure financing. They are finding willing lenders. Indeed, the first two weeks of the year have brought as many energy junk bond sales as in the last half of 2019, according to… Dealogic… In addition, total return in the oil and gas sector is broadly outperforming the wider high-yield debt market after getting walloped last year.”
January 14 – Wall Street Journal (Julia-Ambra Verlaine and Sam Goldfarb): “A surprise rally in riskier corporate bonds is providing much-needed help to some energy companies with lower credit ratings, allowing them to issue new bonds to push back looming repayment dates. Seven energy companies with speculative-grade ratings sold roughly $6 billion of bonds last week. That is the largest weekly total since September 2014, just before oil prices crashed that November, and it amounted to nearly 60% of total high-yield bond issuance over the five-day period…”
January 17 – Bloomberg (Molly Smith, Tasos Vossos and Olivia Raimonde): “Money managers like KKR & Co. and Guggenheim Partners fear that the party may be nearing an end for the weakest investment-grade corporate bonds. With economic growth relatively stagnant in major global economies, and heightened risk of disappointing earnings and greater regulation in areas like technology, a wave of investment-grade companies could get cut to junk over the next 12 to 18 months… Because BBBs make up more than half the $8.4 trillion investment-grade corporate markets in both the U.S. and Europe, there’s that much more debt at risk of possibly falling to speculative grade. In 1993, BBBs were more like a quarter of the market.”
January 16 – Bloomberg (Adam Tempkin): “Bonds backed by riskier mortgage collateral are set to see issuance double in 2020 for the sixth straight year, according to Angel Oak Capital Advisors. Sales of securities backed by collateral known as non-qualified mortgages should increase to close to $50 billion this year from roughly $25 billion in 2019, Sam Dunlap, senior portfolio manager at the Atlanta-based investment management firm, said… ‘If supply reaches this high, it would indicate the sixth straight year of 100% growth in non-QM issuance,’ Dunlap said.”
China Watch:
January 15 – Reuters (Ryan Woo, Jeff Mason, Andrea Shalal and Dave Lawder): “China will boost purchases of U.S. goods and services by $200 billion over two years in exchange for the rolling back of some tariffs under an initial trade deal signed by the world’s two largest economies, defusing an 18-month row that has hit global growth. While acknowledging the need for further negotiations with China to solve a host of other problems, President Donald Trump hailed the agreement as a win for the U.S. economy and his administration’s trade policies.”
January 13 – Wall Street Journal (Yoko Kubota): “The wheels are coming off the world’s biggest auto market after decades of blistering growth, as a prolonged and unprecedented sales slump partly induced by policy changes closes thousands of dealerships, idles factories and weighs on an already slowing economy. In Tangshan, a city of about 7.6 million in the country’s north known for its steel producers and heavy industry, around five of the 30 dealerships in the Lunan Car Culture Industrial Park have closed in the past year, dealers said. Abandoned furniture sits in empty showrooms, while ‘For Rent’ signs appear behind shuttered glass doors. Similar scenes are unfolding across small and midsize cities like Tangshan that supercharged China’s auto-market expansion in recent years, even as growth was capped in megalopolises like Beijing and Shanghai, where congestion and pollution led the government to place quotas on license-plate issuance.”
January 15 – Reuters (Yawen Chen, Ryan Woo and Lusha Zhang): “China’s new home prices grew at their weakest pace in 17 months in December, with broader curbs on the sector continuing to cool the market in a further blow to the sputtering economy. Average new home prices in China’s 70 major cities rose 6.6% in December, slowing from a 7.1% gain in the previous month... It was the slowest pace since July 2018, and significantly weaker than the 9.7% gain seen in December 2018.”
January 14 – Reuters (Winni Zhou and Andrew Galbraith): “China’s central bank extended fresh short- and medium-term loans on Wednesday but kept the borrowing cost unchanged, as it seeks to maintain adequate liquidity in a slowing economy and ease a potential crunch ahead of the Lunar New Year… It injected 300 billion yuan ($43.51 billion) via the liquidity tool.”
January 14 – Reuters (Gabriel Crossley): “China’s exports in December rose 7.6% from a year earlier…, signaling a modest recovery in demand as a preliminary trade deal with the United States raised hopes that a prolonged tariff war will be de-escalated. It was the first rise in China’s exports since July 2019 and the fastest growth rate since March 2019.”
January 16 – Reuters (Yawen Chen, Ryan Woo and Stella Qiu): “China’s property investment hit a two-year low in December even as it grew at a solid pace in 2019, adding to recent signs of a slackening in the sector and suggested Beijing might need to offer more stimulus to stabilize a cooling economy. Real estate investment… increased 9.9% in 2019 from the year-earlier period, down from 10.2% in the first 11 months but still outpaced a 9.5% gain in 2018. In December alone, year-on-year growth slowed to 7.3% from 8.4% in November, the weakest pace since December 2017…”
January 12 – Bloomberg: “A distressed Chinese fertilizer company said it may report one of the nation’s biggest-ever annual losses, sparking a slump in its shares and underscoring the challenges faced by some pockets of corporate China… State-owned Qinghai Salt Lake Industry Co. expects to record a 2019 net loss of as much as 47.2 billion yuan ($6.8bn) largely due to asset writedowns, an amount that’s nearly twice as big as the company’s market value and one-seventh the size of its home province in northwest China.”
January 12 – Reuters (David Stanway): “China disposed of around 2 trillion yuan ($289.11bn) in non-performing loans over the whole of last year amid a national campaign to restrict high-risk lending, the country’s banking regulator said… The China Banking and Insurance Regulatory Commission (CBIRC) said… that the total assets of the country’s shadow banking sector had fallen by 16 trillion yuan over the past three years. It said it would continue to ‘dismantle’ the shadow banking sector in 2020 and step up punishments for those that violate regulations.”
January 14 – Reuters (Yimou Lee and Felice Wu): “Taiwan President Tsai Ing-wen urged China… to review its policy towards the island, days after she won a landslide re-election victory, in a rebuke that could fuel further tensions with China. ‘We hope China can understand the opinion and will expressed by Taiwanese people in this election and review their current policies,’ Tsai told reporters…”
January 12 – Financial Times (Editorial Board): “The crushing victory for Tsai Ing-wen in Taiwan’s presidential election has just provided an unwelcome New Year’s present for Xi Jinping… Under Mr Xi, Beijing has stepped up its efforts to end Taiwan’s de facto independence, and to incorporate the island into the mainland. At the weekend, Taiwanese voters delivered their response by re-electing President Tsai — who has enraged Beijing by putting the defence of her country’s sovereignty and democracy at the very centre of her electoral campaign. A year ago, Ms Tsai was in political trouble. But events in Hong Kong have provided the Taiwanese leader with a compelling theme. Hong Kong’s relationship with the PRC — known as ‘one country, two systems’ — was originally held out as a model for the incorporation of Taiwan into the Chinese state, as Mr Xi has noted. However, the popular revolt in Hong Kong allowed Ms Tsai to argue that ‘one country, two systems’ has clearly failed…”
January 13 – Reuters (Huizhong Wu, Lusha Zhang, Judy Hua and Ben Blanchard): “Separatists will ‘leave a stink for 10,000 years’, the Chinese government’s top diplomat said…, in Beijing’s most strongly worded reaction yet to Taiwan President Tsai Ing-wen’s re-election on the back of a message of standing up to Beijing… Chinese State Councillor Wang Yi said the ‘one China’ principle that recognizes Taiwan as being part of China had long since become the common consensus of the international community. ‘This consensus won’t alter a bit because of a local election on Taiwan, and will not be shaken because of the wrong words and actions of certain Western politicians,’ Wang added, in an apparent reference to U.S. Secretary of State Mike Pompeo.”
Central Bank Watch:
January 12 – Financial Times (Martin Arnold): “When the European Central Bank holds its first rate-setting meeting of 2020 this month, almost half of its governing council will have been members for less than a year… The arrival of former IMF managing director Christine Lagarde to replace Mario Draghi as ECB president in November is only the most obvious part of a changing of the guard at the bank… ‘We are moving from a dovish and experienced team of central bankers to a less dovish and less experienced team of central bankers, so that is a risk for markets,’ said Frederik Ducrozet, global strategist at Pictet Wealth Management.”
EM Watch:
January 13 – Bloomberg (Anirban Nag): “Just two years ago, Prime Minister Narendra Modi was helming an economy expanding 8%, spurring optimism India was on a path to become a major global growth driver. Now, stagflation looms as the economy grinds toward its slowest expansion in more than a decade and inflation spikes above the central bank’s target, driven by higher food prices. Social unrest against a restrictive new citizenship law is yet another challenge.”
January 14 – Financial Times (Arvind Subramanian): “India’s economy is experiencing a sharp slowdown… For several years, analysts and organisations such as the IMF and World Bank have touted India as the fastest-growing major economy, with the world’s brightest medium-term outlook. But in December the Reserve Bank of India, the central bank, cut its forecast for 2019 growth in gross domestic product to 5%. That headline figure actually understates the slowdown. High-frequency indicators show that in the first eight months of the current fiscal year, non-oil exports and imports have fallen, as has production of investment goods. Production of consumer goods and real government tax receipts have both grown by only 1%. And a savage credit crunch has reduced commercial lending to less than Rs1tn in the first six months of this fiscal year, one-seventh its level the previous year.”
January 13 – Reuters: “India’s retail inflation accelerated to 7.35% in December due to high food prices… December inflation was higher than 6.20% forecast…”
January 12 – Bloomberg (Dana Khraiche): “Lebanon’s central bank wants local holders of a $1.2 billion sovereign Eurobond maturing in March to swap into new notes as part of an effort to manage the country’s debt crisis. ‘We are making preemptive proposals that are voluntary’ and dependent on the consent of Lebanese banks, Governor Riad Salameh said… ‘We haven’t taken any decision yet because we don’t have a government.’”
Europe Watch:
January 16 – Financial Times (Tommy Stubbington): “Records have tumbled across eurozone bond markets this week as investors queue to lend to governments, betting that interest rates in the currency bloc will stay at rock bottom for the foreseeable future. Spain amassed €53bn of bids for its new 10-year bond on Tuesday — the most ever for any euro bond — in a sale that raised €10bn. Italy came close to breaking that record with €47bn of orders for its new €7bn 30-year bond, while Belgium, Cyprus and Ireland have all racked up their biggest-ever order books in recent days.”
Global Bubble Watch:
January 15 – Bloomberg (Eric Roston): “The planet is warming faster than at any time in the history of civilization. Five major independent assessments of global temperatures in 2019 each concluded that last year was the second hottest in 140 years of data. The record in 2016 came along with one of the most intense El Nino events ever measured, which has the tendency to push up the average. This year attained the second highest reading without being juiced by major natural variability.”
January 16 – Financial Times (Camilla Hodgson and Billy Nauman): “Financial markets could face upheaval if the risks of climate change are not taken more seriously, McKinsey warned in a report… Even climate-conscious investors, companies and regulators could be wrongfooted as slight increases in global temperatures threaten to create havoc, said the consultancy’s research arm, the McKinsey Global Institute. ‘Markets have been premised on the context of a relatively stable climate,’ said Jonathan Woetzel, one of the report’s authors. ‘But there is an edge where risks can spike, which calls into question the capacity of the system.’”
January 12 – Reuters (Shubham Kalia): “Bank of England Deputy Governor Sam Woods… said that Britain’s financial sector could face a crackdown by regulators seeking to enforce their rules more tightly. ‘I think it’s possible that as we come out of the reform phase, and enter a phase where we’re defending the reforms that have been put in place, that you may see more enforcement activity,’ Woods told the Telegraph…”
January 14 – Bloomberg (Gabriel Crossley): “South Korean leader Moon Jae-in ramped up his commitment to rein in rising property prices…, pledging an ‘endless’ stream of stronger measures if soaring housing prices in some neighborhoods don’t cool. ‘Excess liquidity and low rates around the globe are behind the rise in property prices, drawing speculative money into real estate and causing large price jumps in many countries,’ Moon said. ‘South Korea is showing the same trend.’”
Leveraged Speculation Watch:
January 17 – Bloomberg (Ksenia Galouchko): “A breed of systematic trader acutely sensitive to volatility is charging into U.S. stocks at the kind of pace last seen before ‘volmageddon’ rocked Wall Street almost two years ago. Volatility-targeting funds are doubling down on equities after geopolitical turmoil that threatened to derail the bull market in the end barely slowed it down. These players buy and sell based on price swings, and their leverage -- a measure of exposure to stocks -- now sits at its 81st percentile since 2011, according to Morgan Stanley.”
Geopolitical Watch:
January 15 – Bloomberg (Iain Marlow and Hannah Dormido): “The violent protests and political upheaval that marked 2019 and challenged governments from Hong Kong to Chile is set to stay and is now the ‘new normal,’ according to a global risk firm. Verisk Maplecroft… said in a new report… that it predicts ‘continued turmoil in 2020’ as administrations around the world continue to be surprised by demonstrators and ill-prepared to address the underlying social grievances that spur them. ‘We all need to buckle up for 2020,’ said Miha Hribernik, …head of Asia risk insight for Verisk Maplecroft. ‘The rage that caught many governments off-guard last year isn’t going anywhere and we’d all better adapt.’”
January 12 – Reuters (Parisa Hafezi): “Protests erupted across Iran for a second day on Sunday, increasing pressure on the Islamic Republic’s leadership after it admitted its military shot down a Ukrainian airliner by accident, despite days of denials that Iranian forces were to blame. ‘They are lying that our enemy is America, our enemy is right here,’ one group of protesters chanted outside a university in Tehran…”
January 13 – CNBC (Abigail Ng): “Beijing has been forthcoming about its long-term goals and is the ‘most serious threat’ to the U.S., according to a former U.S. national security advisor. ‘China has been very clear about what its long-term goals are strategically,’ James Jones, who served as NSA under former President Barack Obama, told CNBC’s Hadley Gamble. ‘We need to take that very seriously.’ One Chinese goal is “total control of their own people using technology,’ he said… ‘They’re making astonishing progress to control every single citizen, whatever he or she does.’”
January 16 – Reuters (Ben Blanchard): “A U.S. warship sailed through the Taiwan Strait on Thursday, the island’s defense ministry said, less than a week after Taiwan President Tsai Ing-wen won re-election by a landslide on a platform of standing up to China which claims the island. The ship sailed in a northerly direction through the sensitive waterway and Taiwan’s armed forces monitored it throughout, the ministry said…”
January 16 – CNBC (Holly Ellyatt): “Russia saw extreme political upheaval on Wednesday with constitutional reforms announced by President Vladimir Putin leading to the resignation of government. By the end of the day, Putin had also proposed a new prime minister and political commentary was rife with speculation over the strongman’s strategy and grip on power. The day started with Putin giving his annual address to lawmakers and members of the elite in which he announced a national referendum on the reforms that would seek to limit presidential power and hand more control to parliament. One notable change would be that the Duma (Russia’s parliament), rather than the president, would appoint any prime minister.”
January 16 – Reuters (Tuvan Gumrukcu and Ece Toksabay): “Turkey is beginning to send troops into Libya in support of the internationally recognized government in Tripoli, President Tayyip Erdogan said on Thursday, days before a summit in Berlin which will address the Libyan conflict.”
January 14 – Bloomberg (Karl Maier): “Once again, a U.S.-backed toppling of a longstanding dictator has led to a power vacuum and widespread violence that’s been exploited by a revolving door of militant groups. The scenario that unfolded in Iraq after the 2003 U.S. invasion is replaying in Libya, where warring factions are battling for control of the capital, Tripoli. The conflict has killed more than 2,000 people, forced tens of thousands to flee and opened up the oil-rich country to traffickers of African migrants to Europe. It’s been a mess since NATO helped oust dictator Moammar Qaddafi in 2011.”
January 14 – Financial Times (Michael Peel): “Talks between Libya’s warring parties are finally due to happen in Berlin on Sunday — but it is a sign of the EU’s struggle for relevance that Moscow this week hosted the first international negotiations on the oil-rich country’s fate. Europeans were nowhere to be seen as Russian diplomats sat down with Turkish counterparts on Monday in an attempt to seal a fragile ceasefire in Libya. The gathering foundered on Tuesday after Khalifa Haftar, the military strongman seeking to win control of the country, walked out. But the meeting had already stoked fears that, as in Syria, the EU risks being shut out of efforts to deal with a crisis it sees as crucial to its own security. ‘We do have this pattern emerging: Russia and regional powers are playing us in our own neighbourhood,’ said Kristina Kausch, senior fellow at the Brussels office of the German Marshall Fund of the US, a think-tank.”
ETF.com: “...Investors kept plowing money into U.S.-listed ETFs. A cool $13.4 billion flowed into the space during the week…, sending year-to-date inflows to $35.2 billion, well ahead of year-ago levels of $8.4 billion.”
Bloomberg: “Global currency volatility has dropped to the lowest level ever recorded.”
Bloomberg: “Bond managers are starting to contemplate the prospect of another decade without a Federal Reserve interest-rate hike.”
Bloomberg: “Forward price-to-earnings ratios for U.S. growth stocks have reached levels only seen in eight months over a span of three decades of data…”
Reuters: “J.P. Morgan Chase posted profit and revenue that smashed through analysts’ expectations on a strong rebound in trading revenue… Bond trading revenue surged 86% to $3.4 billion…”
Bloomberg: “‘This is Insane’: Muni Yields at the Lowest Since Elvis was King.”
We’re witness to historic developments across global financial markets extending far beyond an equities melt-up. U.S. corporate Credit this week traded near the narrowest spreads (to Treasuries) since 2007. Popular Credit default swap (CDS) indices priced this week at pre-crisis lows – investment-grade and high yield. At 46 bps, Goldman Sachs (5-yr) CDS closed the week at the low since 2007. JPMorgan CDS fell five bps this week to 30.6 bps, the low going back to October 2007. A Leveraged Loans index closed Friday at a record high price. European fixed-income CDS ended the week at or near multi-year lows – investment-grade, high-yield and financial. And this week from Bloomberg: “U.S. High-Grade Market Devours Nearly $100 Billion in New Debt.”
This historic financial Bubble is a manifestation of Monetary Disorder and a direct inflationary consequence of an unprecedented global Credit Bubble. There were new data this week from the Institute of International Finance (IIF).
January 13 – Reuters (Marc Jones): “Global debt is expected to climb to a new all-time high of more than $257 trillion in the coming months, the Institute of International Finance estimated…, adding there was no sign of it retreating either. The amount works out at around $32,500 for each of the 7.7 billion people on planet and more than 3.2 times the world’s annual economic output, but the staggering numbers don’t stop there. Total debt across the household, government, financial and non-financial corporate sectors surged by some $9 trillion in the first three quarters of 2019 alone. In mature markets total debt now tops $180 trillion or 383% of these countries’ combined GDP, while in emerging markets it is double what it was in 2010 at $72 trillion, driven mainly by a $20 trillion surge in corporate debt.”
Global debt has been expanding at the most rapid clip since 2016. After ending 2015 at about $210 Trillion, global debt growth has been in parabolic rise to the IIF’s Q1 2020 estimate of $257 Trillion. This historic debt expansion has been across the board, household, corporate, government and financial – “emerging” and developed economies. From Reuters: “All parts of the world are loading up... Household debt-to-GDP have reached a record high in Belgium, Finland, France, Lebanon, New Zealand, Nigeria, Norway, Sweden and Switzerland. Non-financial corporate debt to GDP topped in Canada, France, Singapore, Sweden, Switzerland and the United States. Government debt-to-GDP has also hit an all-time high in Australia and the United States.”
Total global debt ended Q3 2019 at 322% of GDP, up from the year ago 319%. Global government debt rose to 88.3% of GDP, up from 86%. Corporate debt increased to 92.5% from 91.6%, and Household to 60.2% from 59.6%.
Emerging Asia continues to pile it on, boosting Total Debt-to-GDP to 271% (from the previous year’s 262%). China’s Credit Bubble saw Total Debt expand from 297.4% to 308.5% of GDP. China’s Corporate Debt-to-GDP ratio rose to 156.7% from 154.4%, while rapidly expanding government Debt increased from 49% to 53.6%. From Reuters (Marc Jones): “China’s government debt also grew at its fastest annual pace last year since 2009…, and household debt and general government debt are now at all-time highs of 55% of GDP.”
Asia’s debt boom is a particularly alarming accident in the making. With corporate debt rising to a staggering 227% of GDP, total Hong Kong Debt exceeds 500% of GDP (Financial Debt declining to 133.5% of GDP). Singapore’s financial Bubble continues to inflate, with Financial sector borrowings increasing to 187.7% of GDP (up from 184%). Total Singapore debt inflated to 473.5% of GDP from 462.3%. South Korea is also worthy of special attention. With corporate debt jumping to 101.6% from 95.3%, total South Korean debt surged to 325.6% of GDP (up from 304.5%).
From Reuters: “Another potentially risky trend is that the amount of emerging market ‘hard currency’ debt - debt sold in a major currency like the dollar that can become hard to pay back if a crisis hits a local currency’s value - reached $8.3 trillion in Q3 2019, $4 trillion higher than a decade ago.”
The IIF used salient language: “Spurred by low interest rates and loose financial conditions…” Pondering the data, one thought repeatedly comes to mind: These central banks have really done it this time.
January 16 - Bloomberg (Chang Shu and David Qu): “China’s December supply of credit was steady, taking into account a boost from a widening in the data coverage. The headline figure now includes all government bonds, broadened from the previous definition of special government bonds. New loans and other categories of aggregate social financing were broadly stable -- boding well for economic growth support. The monthly increase in aggregate social financing was 2.1 trillion yuan, up slightly from 1.9 trillion yuan in December 2018 on a comparable basis.”
The People’s Bank of China (PBOC) has, once again, revised its tabulation of system Credit, now to include China’s “Treasury” and local government bonds. With the new components, Aggregate Financing expanded $307 billion in December, up from November’s $291 billion and 9% ahead of December 2018 (and up 10.7% y-o-y). For the year, Aggregate Financing surged a historic $3.728 TN, 13.7% ahead of growth from 2018.
By the main categories, Bank (“yuan-denominated”) Loans expanded 12.5% for the year. Booming capital markets continue to provide a stiff tailwind powering huge bond issuance. Corporate Bonds expanded 13.4% in 2019, with Government Bond growth at 14.3% and Asset-Backed Securities surging 31.5%. The contraction of key “shadow banking” categories runs unabated, with Entrusted Loans down 7.6%, Foreign Currency Loans contracting 4.6%, Undiscounted Bankers Acceptances sinking 12.5%, and Trust Loans declining 4.4%.
New Bank Loans expanded $166 billion during December, down from November’s $202 billion but 5% ahead of December 2018. For the year, Loans expanded $2.451 TN – about 4% ahead of 2018 growth. Consumer (chiefly mortgage) Loans continue to power ahead. At $95 billion, Consumer Loans were down slightly from November’s $100 billion expansion but were 40% ahead of December 2018 growth. For the year, Consumer Loans expanded $1.084 TN, or 15.5% - slightly ahead of 2018’s annual expansion. Consumer Loans surged 37% over two years, 66% over three and 139% over five years.
It’s worth noting China’s M2 money supply growth accelerated to 8.7% y-o-y in December, higher than Bloomberg’s consensus estimate of 8.3%. December saw the largest monthly expansion since January, with y-o-y M2 growth the strongest since February 2018’s 8.8%. With Credit booming, China’s economic resilience is no surprise. Ominously, economic growth has slowed markedly in the face of ongoing excess of increasingly unsound money and Credit.
Here at home, further indications of a housing market poised for a big year:
January 17 – Bloomberg (Ana Monteiro): “Groundbreakings on new U.S. homes surged in December to a 13-year high, giving the housing market momentum heading into the new year amid low mortgage rates, solid job growth and optimistic buyers and builders. Residential starts rose 16.9% to a 1.61 million annualized rate after an upwardly revised 1.375 million pace in the prior month… The gain was the biggest in three years and well above all estimates…”
January 16 – CNBC (Diana Olick): “The nation’s single-family homebuilders are feeling very confident about their business in the new year, as high demand and low supply make for a profitable mix. Yet, sentiment in January did slip 1 point on the National Association of Home Builders/ Wells Fargo Housing Market Index to 75, but that is considerably higher than last January, when it was 58. Last month’s reading was a 20-year high.”
January 15 – CNBC (Diana Olick): “It was a seriously strong start to 2020 in the mortgage business for new home loans and refinances. Total mortgage application volume surged 30.2% last week from the previous week… Refinancing led the surge, thanks to a drop in mortgage rates. Those applications jumped 43% for the week and were 109% higher than a year ago… Homebuyers also rushed in, sending purchase application volume up 16% for the week and up 8% from one year ago. Purchase mortgage activity hit the highest level since October 2009.”
And with stocks at record highs and housing markets bubbling, no surprise that the U.S. consumer is both confident and spending.
January 16 – Bloomberg (Max Reyes): “U.S. consumer confidence advanced last week to the highest level in more than 19 years on increased optimism about the economy, personal finances and the buying climate. Bloomberg’s index of consumer comfort rose to 66 in the week ended Jan. 12, the best reading since October 2000, from 65.1… The gain was the eighth in the last nine weeks. A measure of Americans’ views of the economy climbed to the highest since early 2001.”
For the Week:
The S&P500 jumped 2.0% (up 3.1% y-t-d), and the Dow rose 1.8% (up 2.8%). The Utilities surged 3.7% (up 3.4%). The Banks slipped 0.2% (down 2.2%), while the Broker/Dealers jumped 2.5% (up 4.0%). The Transports rose 2.8% (up 3.5%). The S&P 400 Midcaps gained 2.2% (up 1.6%), and the small cap Russell 2000 surged 2.5% (up 1.9%). The Nasdaq100 advanced 2.3% (up 5.0%). The Semiconductors rose 2.7% (up 3.6%). The Biotechs declined 0.5% (up 2.2%). With bullion slipping $5, the HUI gold index fell 1.0% (down 5.4%).
Three-month Treasury bill rates ended the week at 1.5225%. Two-year government yields slipped a basis point to 1.56% (down 1bp y-t-d). Five-year T-note yields declined one basis point to 1.62% (down 7bps). Ten-year Treasury yields were unchanged at 1.82% (down 10bps). Long bond yields were unchanged at 2.28% (down 11bps). Benchmark Fannie Mae MBS yields were little changed at 2.62% (down 9bps).
Greek 10-year yields rose six bps to 1.41% (down 2bps y-t-d). Ten-year Portuguese yields jumped 11 bps to 0.50% (up 6bps). Italian 10-year yields rose five bps to 1.38% (down 4bps). Spain's 10-year yields increased two bps to 0.46% (down 1bp). German bund yields dipped two bps to negative 0.22% (down 3bps). French yields were unchanged at 0.04% (down 7bps). The French to German 10-year bond spread widened two to 26 bps. U.K. 10-year gilt yields sank 14 bps to 0.63% (down 19bps). U.K.'s FTSE equities index rose 1.1% (up 1.8%).
Japan's Nikkei Equities Index gained 0.8% (up 1.6% y-t-d). Japanese 10-year "JGB" yields were little changed at zero (up 1bp y-t-d). France's CAC40 rose 1.1% (up 2.1%). The German DAX equities index added 0.3% (up 2.1%). Spain's IBEX 35 equities index gained 1.1% (up 1.4%). Italy's FTSE MIB index increased 0.5% (up 2.7%). EM equities were mostly higher. Brazil's Bovespa index jumped 2.6% (up 2.4%), and Mexico's Bolsa rose 2.6% (up 5.2%). South Korea's Kospi index advanced 2.0% (up 2.4%). India's Sensex equities index gained 0.8% (up 1.7%). China's Shanghai Exchange declined 0.5% (up 0.8%). Turkey's Borsa Istanbul National 100 index jumped 2.4% (up 6.2%). Russia's MICEX equities index rose 2.3% (up 5.0%).
Investment-grade bond funds saw inflows of $6.624 billion, and junk bond funds posted inflows of $1.730 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates added a basis point to 3.65% (down 80bps y-o-y). Fifteen-year rates increased two bps to 3.09% (down 79bps). Five-year hybrid ARM rates jumped nine bps to 3.39% (down 48bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up four bps to 3.99% (down 47bps).
Federal Reserve Credit last week expanded $4.4bn to $4.133 TN, with an 18-week gain of $406 billion. Over the past year, Fed Credit expanded $117bn, or 2.9%. Fed Credit inflated $1.322 Trillion, or 47%, over the past 375 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt jumped $11.9 billion last week to $3.420 TN. "Custody holdings" increased $16.5 billion, or 0.5%, y-o-y.
M2 (narrow) "money" supply increased $1.9bn last week to a record $15.432 TN. "Narrow money" surged $1.022 TN, or 7.1%, over the past year. For the week, Currency increased $4.1bn. Total Checkable Deposits fell $37.0bn, while Savings Deposits jumped $32.1bn. Small Time Deposits increased $0.6bn. Retail Money Funds gained $2.0bn.
Total money market fund assets fell $7.2bn to $3.630 TN, with institutional money fund assets down $6.6bn to $2.251 TN. Total money funds gained $581bn y-o-y, or 19.1%.
Total Commercial Paper declined $4.6bn to $1.121 TN. CP was up $55.7bn, or 5.2% year-over-year.
Currency Watch:
For the week, the U.S. dollar index increased 0.3% to 97.606 (up 1.1% y-t-d). For the week on the upside, the Mexican peso increased 0.7%, the Swiss franc 0.4%, the South Korean won 0.2% and the Singapore dollar 0.1%. On the downside, the Brazilian real declined 1.5%, the South African rand 0.7%, the Japanese yen 0.6%, the British pound 0.4%, the Australian dollar 0.3%, the Norwegian krone 0.3%, the euro 0.3%, the New Zealand dollar 0.2%, the Swedish krona 0.2% and the Canadian dollar 0.1%. The Chinese renminbi increased 0.87% versus the dollar this week (up 1.51% y-t-d).
Commodities Watch:
The Bloomberg Commodities Index declined 1.1% (down 1.3% y-t-d). Spot Gold slipped 0.3% to $1,557 (up 2.6%). Silver dipped 0.2% to $18.073 (up 0.8%). WTI crude fell 50 cents to $58.54 (down 4%). Gasoline declined 0.8% (down 3%), while Natural Gas sank 9.0% (down 9%). Copper gained 1.1% (up 2%). Wheat rose 1.1% (up 2%). Corn increased 0.9% (unchanged).
Market Instability Watch:
January 14 – Wall Street Journal (Daniel Kruger): “One hurdle to a possible fix for recent volatility in the short-term cash markets: hedge funds. Federal Reserve officials are considering a new tool to ease stresses in the market for Treasury repurchase agreements, or repos. Through the repo market, banks and hedge funds borrow cash overnight, while pledging safe securities such as government bonds as collateral. In September, an unexpected shortage of available cash to lend sparked a surge in the cost of repo-market borrowing, prompting the Fed to intervene for the first time since the financial crisis. One potential solution is to lend cash directly to smaller banks, securities dealers and hedge funds through the repo market’s clearinghouse, the Fixed Income Clearing Corp., or FICC. Hedge funds currently borrow through a process called sponsored repo, in which they ask a large bank to act as a middleman…”
January 17 – Bloomberg (Sam Potter and Anchalee Worrachate): “Stocks may be grabbing most of the headlines, but equities aren’t the only asset class in uncharted territory. Global currency volatility has dropped to the lowest level ever recorded. Less than 48 hours after the U.S. and China put pen to paper on a trade deal that reaffirmed an agreement not to devalue their currencies, the JPMorgan Global FX Volatility Index -- which tracks the options market to measure expected price swings -- is trading lower than at any point since it was created almost three decades ago.”
January 14 – Bloomberg (Vivien Lou Chen): “Bond managers are starting to contemplate the prospect of another decade without a Federal Reserve interest-rate hike. Forecasting that far out may seem like a fool’s errand. But the central bank’s inability to push inflation sustainably above its 2% target, even after three 2019 rate cuts amid the strongest job market in 50 years, gives that outlook more weight, they said. The scenario rejects the notion that last year’s easing was a sort of insurance move that could be quickly reversed under an improving economy.”
January 14 – Reuters (High Son): “J.P. Morgan Chase posted profit and revenue that smashed through analysts’ expectations on a strong rebound in trading revenue at the end of 2019. …Fourth-quarter profit rose 21% to $8.52 billion… Profit in the investment bank climbed 48% to $2.9 billion, mainly on trading results. Bond trading revenue surged 86% to $3.4 billion, exceeding the $2.61 billion estimate by roughly $800 million, as fixed-income desks were humming, particularly in securitized products and rates. Stock traders posted a 15% increase in revenue to $1.5 billion, compared with the $1.37 billion estimate.”
January 13 – Wall Street Journal (Akane Otani): “Money managers aren’t expecting much when U.S. companies report their latest quarterly results over the next several weeks. But for the bull market to continue its more than decadelong ascent, they are leaning on one crucial assumption: that corporate earnings growth will pick up over the next couple of quarters… Companies in the S&P 500 are projected to report a 2% decline in earnings in the fourth quarter from the year-earlier period, according to FactSet… If that pans out, it would mark the fourth straight quarter of declining earnings—the longest such streak since a period from 2015-16.”
January 15 – CNBC (Yun Li): “Gold prices, which briefly topped $1,600 last week, could rally to $2,000 an ounce amid heightened political risks, Bridgewater’s co-chief investment officer Greg Jensen told the Financial Times… The manager from the world’s biggest hedge fund cited increased income inequality in the U.S. and rising tensions with China and Iran as uncertainties ahead that will prompt more safe-haven buying… ‘There is so much boiling conflict,’ Jensen told the paper. ‘People should be prepared for a much wider range of potentially more volatile set of circumstances than we are mostly accustomed to.’”
January 14 – Bloomberg (Gregor Stuart Hunter): “The risk-on rally that rolled from December right on into the start of 2020 may be due for a breather, according to an increasing number of market analysts… Forward price-to-earnings ratios for U.S. growth stocks have reached levels only seen in eight months over a span of three decades of data, according to Lapthorne… Sundial Capital Research analysts flagged another warning sign in recent days: options buying has overwhelmingly favored calls over puts in U.S. markets this month. ‘As a percentage of total volume, speculative-call buying last week hit a level never seen in the past 20 years, and there was little in the way of protective-strategy volume as an offset,’ said Sundial president Jason Goepfert.”
Trump Administration Watch:
January 15 – Financial Times (Editorial Board): “For a self-declared master dealmaker such as US president Donald Trump, being able to flaunt a trade truce with Beijing may have been the main goal of his long and damaging trade war. For everyone else, it amounts to little more than a hope — and a weak one at that — that things will not get worse. The agreement, signed in Washington…, is billed as ‘phase one’ of a bigger deal. On its own, however, it leaves the US-China trade relationship in a much worse state than when Mr Trump took office. It leaves average tariff levels on both sides at around 20%. Two years ago the average US tariff on Chinese imports stood at 3%; in the other direction it was 8%.”
January 14 – Reuters (Makini Brice and Andrea Shalal): “The United States will maintain tariffs on Chinese goods until the completion of a second phase of a U.S.-China trade agreement, U.S. Treasury Secretary Steven Mnuchin said…, a day before the two sides are to sign an interim deal. Mnuchin told reporters that President Donald Trump could consider easing tariffs if the world’s two largest economies move quickly to seal a follow-up agreement. ‘If the president gets a Phase 2 in place quickly, he’ll consider releasing tariffs as part of Phase 2,’ Mnuchin said.”
January 15 – Associated Press (Paul Wiseman and Joe McDonald): “After 18 months of economic combat, the United States and China are set to take a step toward peace Wednesday. At least for now. President Donald Trump and China’s chief negotiator, Liu He, are scheduled to sign a modest trade agreement in which the administration will ease some sanctions on China and Beijing will step up its purchases of U.S. farm products and other goods. Above all, the deal will defuse a conflict that has slowed global growth, hurt American manufacturers and weighed on the Chinese economy. But the so-called Phase 1 pact does little to force China to make the major economic reforms — such as reducing unfair subsidies for its own companies —that the Trump administration sought when it started the trade war by imposing tariffs on Chinese imports in July 2018.”
January 16 – CNBC: “White House trade advisor Peter Navarro told CNBC… the Trump administration is looking to make progress in ‘phase two’ trade talks with China on U.S. demands that fell short in phase one. The U.S. wants to work on getting China to stop subsidizing its state-owned enterprises, Navarro said…, a day after the U.S. and China signed their phase one deal. Navarro said China needs to stop ‘cyber intrusions.’ ‘It’s just insane that Chinese government officials continue to hack into American businesses and steal trade secrets,’ he added. ‘It’s very destructive to our businesses.’ Navarro said China also needs to curb the flow of illicit fentanyl.”
January 14 – Reuters (Philip Blenkinsop): “The United States, the European Union and Japan proposed new global trade rules… to curb subsidies they say are distorting the worldwide economy, with China their clear target… After meeting in Washington, Japanese Economy Minister Hiroshi Kajiyama, U.S. Trade Representative Robert Lighthizer and EU trade commissioner Phil Hogan said in a joint statement that existing World Trade Organization (WTO) rules were insufficient to tackle market distortions from subsidies.”
January 14 – Wall Street Journal (Bob Davis and Katy Stech Ferek): “The U.S. and China are about to declare a pause in their trade war by signing an initial pact this week, but a continuing battle over technology is bound to keep relations between the two superpowers on edge. The Trump administration’s immediate focus is tightening restrictions on Huawei… The Commerce Department recently sent regulations to the Office of Management and Budget that would largely eliminate a loophole that allowed U.S. companies to sell to Huawei from their overseas facilities, people familiar with the matter said.”
January 11 – Bloomberg (Glen Carey and David Wainer): “Iran and the U.S. stepped back from the brink of open military conflict this week, but underlying tensions that led to a spate of violence in the past month aren’t going away and sanctions pressure on Tehran is climbing even higher. Despite a modest easing of tensions… the Islamic Republic won’t back down from its goal of making the U.S. pay for killing a top general and for the crippling sanctions imposed since 2018, according to a senior Western diplomat. Instead, current and former diplomats and senior Pentagon officials predict the conflict is likely to return to a more common historic pattern: strikes by proxies on the U.S. and allies, cyber attacks and harassment of ships in the Persian Gulf.”
January 15 – Reuters (Andrea Shalal and Susan Heavey): “The U.S. economy is coping with large budget deficits at the moment, but government spending cannot continue to expand at the current rate indefinitely, Treasury Secretary Steven Mnuchin said… ‘At this point the economy can handle these deficits, but there’s no question over time we need to look at these government spending issues. We can’t continue to expand government spending at the rate that we are,’ Mnuchin said.”
January 13 – Reuters (Andrea Shalal, Alexandra Alper, David Lawder, Eric Beech and Kanishka Singh): “The U.S. Treasury Department… dropped its designation of China as a currency manipulator days before top officials of the world’s two largest economies were due to sign a preliminary trade agreement to ease an 18-month-old tariff war. The widely expected decision came in a long-delayed semi-annual currency report, reversing an unexpected move by Treasury Secretary Steven Mnuchin last August at the height of U.S.-China trade tensions.”
January 12 – Reuters (Steve Holland): “The United States and China have agreed to restart semi-annual talks aimed at resolving economic disputes between the two countries, a process abandoned at the start of the Trump administration as a trade conflict between the countries escalated.”
Federal Reserve Watch:
January 14 – Financial Times (Colby Smith): “The Federal Reserve signalled that it plans to maintain its interventions in short-term funding markets at an elevated level, even after a year-end cash squeeze passed without any jump in borrowing costs. The New York arm of the US central bank said… it would only start to cut back its cash injections for the repo market next month, and even then the reduction will be modest. Traders have been wondering when and how the market will be weaned off central bank loans, which began after a surprising jump in overnight borrowing costs in September and were expanded in size in December before the traditionally volatile end to the year… ‘History has shown us that whenever these sorts of programmes are introduced, they tend to last longer than what the Fed expects,’ said Nick Maroutsos, co-head of global bonds at Janus Henderson…”
January 15 – Bloomberg (Steve Matthews and Craig Torres): “The Federal Reserve’s low interest rates, the perception that there is a high bar to future increases and expansion of its balance sheet are helping to lift asset prices, Federal Reserve Bank of Dallas President Robert Kaplan said. ‘All three of those actions are contributing to elevated risk-asset valuations,’ Kaplan told Michael McKee… on Bloomberg Television. ‘And I think we ought to be sensitive to that.’ Kaplan’s views contrast with those of many of his colleagues, who insist the Fed’s resumption of purchases of assets is a technical change that has little or no effect on the value of asset prices.”
January 14 – Reuters (Jonnelle Marte): “U.S. Federal Reserve policymakers are forecasting an ‘almost ideal’ outcome in 2020 where the U.S. labor market will stay strong and inflation will approach the central bank’s 2% target, but officials should remember to consider potential risks, Boston Federal Reserve Bank President Eric Rosengren said…”
January 14 – Bloomberg (Christopher Condon): “Federal Reserve Bank of Kansas City President Esther George, one of the U.S. central bank’s most consistently hawkish officials, said she’s comfortable keeping interest rates on hold ‘for now’ amid a positive outlook for 2020. ‘The U.S. economy is currently doing well, with real GDP growth near trend, unemployment near record lows, and inflation low and stable,] George said… ‘Keeping rates on hold for now is appropriate in my view as we assess the economy’s response to last year’s rate cuts and monitor incoming data.’”
January 12 – Wall Street Journal (Sarah Chaney): “Federal Reserve payments to the U.S. Treasury declined in 2019 to a decade low, as the central bank’s expenses rose and income declined. The Fed sent about $54.9 billion to the government last year, down from $65.3 billion in 2018… The Fed payments to Treasury, called remittances, hit a record in 2015 due to swelling interest income from its huge bondholdings.”
U.S. Bubble Watch:
January 13 – Associated Press (Martin Crutsinger): “The U.S. budget deficit through the first three months of this budget year is up 11.8% from the same period a year ago… The… deficit from October through December totaled $356.6 billion, up from $318.9 billion for the same period last year. Both government spending and revenues set records for the first three months of this budget year but spending rose at a faster clip than tax collections… The Congressional Budget Office is projecting that the deficit for the current 2020 budget year will hit $1 trillion and will remain over $1 trillion for the next decade.”
January 13 – CNBC (Jeff Cox): “The U.S. fiscal deficit topped $1 trillion in 2019, the first time it has passed that level in a calendar year since 2012… The budget shortfall hit $1.02 trillion for the January-to-December period, a 17.1% increase from 2018, which itself had seen a 28.2% jump from the previous year.”
January 11 – Wall Street Journal (Jacob M. Schlesinger): “As Democrats embrace a more activist government, some are flirting with an idea that hasn’t received serious attention since the 1970s: a minimum guaranteed income for all Americans. Entrepreneur Andrew Yang’s presidential candidacy has gained traction with a proposal to give a $1,000 monthly ‘freedom dividend’ to all Americans… No mainstream officeholder has joined Mr. Yang’s call for a universal basic income. But policies to create a kind of basic income—albeit not universal—in the form of a new financial floor for millions of households have drawn backing from other Democrats seeking the White House and many lawmakers. Party leaders are embracing a range of federally backed economic rights, including universal access to health care, college, child care, and broadband.”
January 16 – Reuters: “U.S. retail sales rose for a third straight month in December, with households buying a range of goods even as they cut back on purchases of motor vehicles, which could strengthen the view that the economy maintained a moderate growth pace at the end of 2019. …Retail sales increased 0.3% last month. Data for November was revised up to show retail sales gaining 0.3%... Economists… Compared to December last year, retail sales accelerated 5.8%. Excluding automobiles, gasoline, building materials and food services, retail sales jumped 0.5% last month…”
January 16 – MarketWatch (Keith Jurow): “The U.S. housing-market crash a dozen years ago is evidently ancient history for many mortgage lenders. Mortgage underwriting standards have eased considerably in the past couple of years; one of the largest U.S. mortgage originators now offers a jumbo mortgage of up to $1 million with only 10% down if you have a FICO score of at least 760. Borrowers who can scrape up a down payment of between 30% and 40% might be able to receive up to $3 million. One smaller lender is now offering home buyers a loan as high as $2 million with a FICO score as low as 640. This score was considered sub-prime during the bubble years… Such favorable terms indicate a confidence that housing markets are in decent shape and there is nothing on the horizon to worry about… In reality, jumbo mortgages — loans that exceed the guarantees set by Fannie Mae and Freddie Mac — are a jumbo-sized problem.”
January 14 – Wall Street Journal (David Benoit and Ben Eisen): “A healthy U.S. economy pushed up profits at America’s biggest banks, allowing them to grow even though falling interest rates made lending less profitable. Consumer borrowing and a rebound in investment-banking revenues propelled JPMorgan… and Citigroup Inc. to double-digit earnings growth in the final three months of 2019. JPMorgan… reported its most profitable year on record. For a while, companies and consumers were telling different stories about the state of the economy. Consumers continued to borrow and spend at a brisk pace, while companies were holding back due to fears that growth was on the wane. A trade deal with China and an improved outlook for the U.S. economy have eased those fears, boosting banks’ businesses that serve corporate clients.”
January 14 – Reuters (Lucia Mutikani): “U.S. consumer prices rose slightly in December even as households paid more for healthcare, and monthly underlying inflation slowed… The… consumer price index increased 0.2% last month after climbing 0.3% in November. The monthly increase in the CPI has been slowing since jumping 0.4% in October. In the 12 months through December, the CPI rose 2.3%. That was the largest increase since October 2018 and followed a 2.1% gain year-on-year in November. The CPI accelerated 2.3% in 2019, the largest rise since 2011, after increasing 1.9% in 2018.”
January 15 – Reuters: “U.S. producer prices edged up in December as a rise in the cost of goods was offset by weakness in services… The producer price index for final demand ticked up 0.1% last month after being unchanged in November… In the 12 months through December, the PPI increased 1.3% after gaining 1.1% in November.”
January 12 – Wall Street Journal (Austen Hufford): “Manufacturers are paying relocation costs and bonuses to move new hires across the country at a time of record-low unemployment and intense competition for skilled workers. Half a million U.S. factory jobs are unfilled, the most in nearly two decades, and the unemployment rate is hovering at a 50-year low… At the same time, Americans are moving around the country at the lowest rate in at least 70 years. To entice workers to move, manufacturers are raising wages, offering signing bonuses and covering relocation costs, including for some hourly positions.”
January 16 – CNBC (Jeff Cox): “The rapid increase of student loan debt has slowed over the past few years, but individual borrower balances aren’t going down mostly because hardly anybody is paying down their loans. Total indebtedness over the past year or so has stopped its meteoric rise, according to a study that Moody’s… Nevertheless, the study showed a number of factors are constraining borrowers from lightening their loads. Outstanding loans total more than $1.6 trillion, more than doubling over the last decade and tripling since 2006.”
January 13 – Wall Street Journal (Marc Vartabedian, Sara Castellanos and Steven Rosenbush): “Large technology companies have long maintained startup-investment programs, but now corporations across many non-tech industries are plowing more money into startups. The increased activity allows companies to keep tabs on nascent technology, have early looks at potential acquisitions and hopefully stave off technological disruption. The number of non-tech corporate venture deals last year reached 256 through Dec. 6, up from 152 in 2009, according to… PitchBook Data Inc. The total value of those deals rose to $8.8 billion from $2.7 billion over the same period…”
January 13 – Reuters (Anirban Sen and Jane Lanhee Lee): “In the months since office-sharing startup WeWork’s botched public debut, mid- and late-stage investors in big start-ups have been pushing for more safeguards in case their firms fail to go public or sell shares at a lower valuation than pre-IPO financing rounds. Fundraising terms are rarely made public, but more than a dozen Silicon Valley-based lawyers, entrepreneurs and venture-capital investors told Reuters that since WeWork’s canceled public offering and other ill-fated IPOs, investors have been securing protections of their original investments in ‘unicorns’ - private companies valued at $1 billion or more.”
January 15 – Bloomberg (Luke Kawa and Sonali Basak): “A private equity giant is warning that more untested companies are due for a reckoning in repeats of WeWork’s abrupt fall from grace. Henry McVey, the head of global macro and asset allocation at KKR & Co., recommends investors stay underweight many high-flying yet unprofitable companies funded by venture-capital firms or in the early stages of growth. The WeWork situation was not a ‘one-off’ occurrence,’ he added in a 2020 outlook report, which didn’t reference any specific companies. A growing number of the co-working company’s peers ‘may have difficulty funding in 2020.’”
January 14 – Bloomberg (Simon Casey): “Such is the extent of the shakeout in the U.S. shale industry that Permian Basin oil production is closer to peaking than many forecasts suggest, according to one energy investor. Adam Waterous, who runs Waterous Energy Fund, regards the sector’s financial position as unsustainable after years of disappointing returns for investors and negative free cash flow. With capital markets now largely shunning shale producers, the impact will begin to show in oil and natural gas output from the largest U.S. oil patch, he said. ‘We think we are at or near peak Permian’ production, Waterous said… ‘The North American oil market has been grossly overcapitalized, which is not sustainable.’”
January 15 – Bloomberg (Martin Z Braun): “New York City is reaping the benefits of a construction boom. The city set a value of $1.38 trillion for its more than one million properties for the fiscal year beginning in July, a $62 billion increase from the prior period, as the value of new construction reached the highest level in the last 10 years… New construction boosted the market value of city property by $14 billion, more than 20% of the increase in market value. Rental apartments account for $4.4 billion, or about 32%, of citywide construction activity.”
January 10 – Bloomberg (Nic Querolo): “The Bay Area’s housing market is cooling off after years of growth fueled by the tech boom. The median price of a house in San Francisco increased just 1.3% from a year earlier to $1.6 million, the smallest gain since 2012, according to… Compass. Prices in Santa Clara County, which includes San Jose and Palo Alto, declined almost 6% to $1.26 million. The housing market in the Bay Area has exploded in recent years, with the tech industry driving a wealth boom that pushed up prices, particularly in San Francisco. A flurry of IPOs in 2019 was expected to continue the momentum…”
Fixed-Income Bubble Watch:
January 15 – Bloomberg: “Investments in fixed income mutual funds expanded in the week ended Jan. 8 for the 31st straight week of inflows, according to the Investment Company Institute. Inflows totaled $20.4 billion, compared with $5.74 billion the prior week.”
January 17 – Bloomberg (Danielle Moran and Mallika Mitra): “The last time municipal-bond yields were this low Dwight D. Eisenhower was the president, Elvis Presley released his second studio album and Grace Kelly married Monaco’s Prince Rainier III. The Bond Buyer’s 20-year index of general-obligation bonds reset at 2.56% this week, the lowest since June 1956... And for some context, that year some $5.4 billion of new long-term bonds were sold, a sum that’s now considered a somewhat slow week… ‘That is insane,’ said Nisha Patel, the director of portfolio management at Parametric…”
January 14 – Reuters (Kate Duguid): “The dawn of the new decade has brought a reprieve for debt-laden companies in the energy sector: Investors are throwing money their way again, for now. Having been largely shut out of capital markets in 2019, low-rated energy firms, some on the brink of default, are racing to secure financing. They are finding willing lenders. Indeed, the first two weeks of the year have brought as many energy junk bond sales as in the last half of 2019, according to… Dealogic… In addition, total return in the oil and gas sector is broadly outperforming the wider high-yield debt market after getting walloped last year.”
January 14 – Wall Street Journal (Julia-Ambra Verlaine and Sam Goldfarb): “A surprise rally in riskier corporate bonds is providing much-needed help to some energy companies with lower credit ratings, allowing them to issue new bonds to push back looming repayment dates. Seven energy companies with speculative-grade ratings sold roughly $6 billion of bonds last week. That is the largest weekly total since September 2014, just before oil prices crashed that November, and it amounted to nearly 60% of total high-yield bond issuance over the five-day period…”
January 17 – Bloomberg (Molly Smith, Tasos Vossos and Olivia Raimonde): “Money managers like KKR & Co. and Guggenheim Partners fear that the party may be nearing an end for the weakest investment-grade corporate bonds. With economic growth relatively stagnant in major global economies, and heightened risk of disappointing earnings and greater regulation in areas like technology, a wave of investment-grade companies could get cut to junk over the next 12 to 18 months… Because BBBs make up more than half the $8.4 trillion investment-grade corporate markets in both the U.S. and Europe, there’s that much more debt at risk of possibly falling to speculative grade. In 1993, BBBs were more like a quarter of the market.”
January 16 – Bloomberg (Adam Tempkin): “Bonds backed by riskier mortgage collateral are set to see issuance double in 2020 for the sixth straight year, according to Angel Oak Capital Advisors. Sales of securities backed by collateral known as non-qualified mortgages should increase to close to $50 billion this year from roughly $25 billion in 2019, Sam Dunlap, senior portfolio manager at the Atlanta-based investment management firm, said… ‘If supply reaches this high, it would indicate the sixth straight year of 100% growth in non-QM issuance,’ Dunlap said.”
China Watch:
January 15 – Reuters (Ryan Woo, Jeff Mason, Andrea Shalal and Dave Lawder): “China will boost purchases of U.S. goods and services by $200 billion over two years in exchange for the rolling back of some tariffs under an initial trade deal signed by the world’s two largest economies, defusing an 18-month row that has hit global growth. While acknowledging the need for further negotiations with China to solve a host of other problems, President Donald Trump hailed the agreement as a win for the U.S. economy and his administration’s trade policies.”
January 13 – Wall Street Journal (Yoko Kubota): “The wheels are coming off the world’s biggest auto market after decades of blistering growth, as a prolonged and unprecedented sales slump partly induced by policy changes closes thousands of dealerships, idles factories and weighs on an already slowing economy. In Tangshan, a city of about 7.6 million in the country’s north known for its steel producers and heavy industry, around five of the 30 dealerships in the Lunan Car Culture Industrial Park have closed in the past year, dealers said. Abandoned furniture sits in empty showrooms, while ‘For Rent’ signs appear behind shuttered glass doors. Similar scenes are unfolding across small and midsize cities like Tangshan that supercharged China’s auto-market expansion in recent years, even as growth was capped in megalopolises like Beijing and Shanghai, where congestion and pollution led the government to place quotas on license-plate issuance.”
January 15 – Reuters (Yawen Chen, Ryan Woo and Lusha Zhang): “China’s new home prices grew at their weakest pace in 17 months in December, with broader curbs on the sector continuing to cool the market in a further blow to the sputtering economy. Average new home prices in China’s 70 major cities rose 6.6% in December, slowing from a 7.1% gain in the previous month... It was the slowest pace since July 2018, and significantly weaker than the 9.7% gain seen in December 2018.”
January 14 – Reuters (Winni Zhou and Andrew Galbraith): “China’s central bank extended fresh short- and medium-term loans on Wednesday but kept the borrowing cost unchanged, as it seeks to maintain adequate liquidity in a slowing economy and ease a potential crunch ahead of the Lunar New Year… It injected 300 billion yuan ($43.51 billion) via the liquidity tool.”
January 14 – Reuters (Gabriel Crossley): “China’s exports in December rose 7.6% from a year earlier…, signaling a modest recovery in demand as a preliminary trade deal with the United States raised hopes that a prolonged tariff war will be de-escalated. It was the first rise in China’s exports since July 2019 and the fastest growth rate since March 2019.”
January 16 – Reuters (Yawen Chen, Ryan Woo and Stella Qiu): “China’s property investment hit a two-year low in December even as it grew at a solid pace in 2019, adding to recent signs of a slackening in the sector and suggested Beijing might need to offer more stimulus to stabilize a cooling economy. Real estate investment… increased 9.9% in 2019 from the year-earlier period, down from 10.2% in the first 11 months but still outpaced a 9.5% gain in 2018. In December alone, year-on-year growth slowed to 7.3% from 8.4% in November, the weakest pace since December 2017…”
January 12 – Bloomberg: “A distressed Chinese fertilizer company said it may report one of the nation’s biggest-ever annual losses, sparking a slump in its shares and underscoring the challenges faced by some pockets of corporate China… State-owned Qinghai Salt Lake Industry Co. expects to record a 2019 net loss of as much as 47.2 billion yuan ($6.8bn) largely due to asset writedowns, an amount that’s nearly twice as big as the company’s market value and one-seventh the size of its home province in northwest China.”
January 12 – Reuters (David Stanway): “China disposed of around 2 trillion yuan ($289.11bn) in non-performing loans over the whole of last year amid a national campaign to restrict high-risk lending, the country’s banking regulator said… The China Banking and Insurance Regulatory Commission (CBIRC) said… that the total assets of the country’s shadow banking sector had fallen by 16 trillion yuan over the past three years. It said it would continue to ‘dismantle’ the shadow banking sector in 2020 and step up punishments for those that violate regulations.”
January 14 – Reuters (Yimou Lee and Felice Wu): “Taiwan President Tsai Ing-wen urged China… to review its policy towards the island, days after she won a landslide re-election victory, in a rebuke that could fuel further tensions with China. ‘We hope China can understand the opinion and will expressed by Taiwanese people in this election and review their current policies,’ Tsai told reporters…”
January 12 – Financial Times (Editorial Board): “The crushing victory for Tsai Ing-wen in Taiwan’s presidential election has just provided an unwelcome New Year’s present for Xi Jinping… Under Mr Xi, Beijing has stepped up its efforts to end Taiwan’s de facto independence, and to incorporate the island into the mainland. At the weekend, Taiwanese voters delivered their response by re-electing President Tsai — who has enraged Beijing by putting the defence of her country’s sovereignty and democracy at the very centre of her electoral campaign. A year ago, Ms Tsai was in political trouble. But events in Hong Kong have provided the Taiwanese leader with a compelling theme. Hong Kong’s relationship with the PRC — known as ‘one country, two systems’ — was originally held out as a model for the incorporation of Taiwan into the Chinese state, as Mr Xi has noted. However, the popular revolt in Hong Kong allowed Ms Tsai to argue that ‘one country, two systems’ has clearly failed…”
January 13 – Reuters (Huizhong Wu, Lusha Zhang, Judy Hua and Ben Blanchard): “Separatists will ‘leave a stink for 10,000 years’, the Chinese government’s top diplomat said…, in Beijing’s most strongly worded reaction yet to Taiwan President Tsai Ing-wen’s re-election on the back of a message of standing up to Beijing… Chinese State Councillor Wang Yi said the ‘one China’ principle that recognizes Taiwan as being part of China had long since become the common consensus of the international community. ‘This consensus won’t alter a bit because of a local election on Taiwan, and will not be shaken because of the wrong words and actions of certain Western politicians,’ Wang added, in an apparent reference to U.S. Secretary of State Mike Pompeo.”
Central Bank Watch:
January 12 – Financial Times (Martin Arnold): “When the European Central Bank holds its first rate-setting meeting of 2020 this month, almost half of its governing council will have been members for less than a year… The arrival of former IMF managing director Christine Lagarde to replace Mario Draghi as ECB president in November is only the most obvious part of a changing of the guard at the bank… ‘We are moving from a dovish and experienced team of central bankers to a less dovish and less experienced team of central bankers, so that is a risk for markets,’ said Frederik Ducrozet, global strategist at Pictet Wealth Management.”
EM Watch:
January 13 – Bloomberg (Anirban Nag): “Just two years ago, Prime Minister Narendra Modi was helming an economy expanding 8%, spurring optimism India was on a path to become a major global growth driver. Now, stagflation looms as the economy grinds toward its slowest expansion in more than a decade and inflation spikes above the central bank’s target, driven by higher food prices. Social unrest against a restrictive new citizenship law is yet another challenge.”
January 14 – Financial Times (Arvind Subramanian): “India’s economy is experiencing a sharp slowdown… For several years, analysts and organisations such as the IMF and World Bank have touted India as the fastest-growing major economy, with the world’s brightest medium-term outlook. But in December the Reserve Bank of India, the central bank, cut its forecast for 2019 growth in gross domestic product to 5%. That headline figure actually understates the slowdown. High-frequency indicators show that in the first eight months of the current fiscal year, non-oil exports and imports have fallen, as has production of investment goods. Production of consumer goods and real government tax receipts have both grown by only 1%. And a savage credit crunch has reduced commercial lending to less than Rs1tn in the first six months of this fiscal year, one-seventh its level the previous year.”
January 13 – Reuters: “India’s retail inflation accelerated to 7.35% in December due to high food prices… December inflation was higher than 6.20% forecast…”
January 12 – Bloomberg (Dana Khraiche): “Lebanon’s central bank wants local holders of a $1.2 billion sovereign Eurobond maturing in March to swap into new notes as part of an effort to manage the country’s debt crisis. ‘We are making preemptive proposals that are voluntary’ and dependent on the consent of Lebanese banks, Governor Riad Salameh said… ‘We haven’t taken any decision yet because we don’t have a government.’”
Europe Watch:
January 16 – Financial Times (Tommy Stubbington): “Records have tumbled across eurozone bond markets this week as investors queue to lend to governments, betting that interest rates in the currency bloc will stay at rock bottom for the foreseeable future. Spain amassed €53bn of bids for its new 10-year bond on Tuesday — the most ever for any euro bond — in a sale that raised €10bn. Italy came close to breaking that record with €47bn of orders for its new €7bn 30-year bond, while Belgium, Cyprus and Ireland have all racked up their biggest-ever order books in recent days.”
Global Bubble Watch:
January 15 – Bloomberg (Eric Roston): “The planet is warming faster than at any time in the history of civilization. Five major independent assessments of global temperatures in 2019 each concluded that last year was the second hottest in 140 years of data. The record in 2016 came along with one of the most intense El Nino events ever measured, which has the tendency to push up the average. This year attained the second highest reading without being juiced by major natural variability.”
January 16 – Financial Times (Camilla Hodgson and Billy Nauman): “Financial markets could face upheaval if the risks of climate change are not taken more seriously, McKinsey warned in a report… Even climate-conscious investors, companies and regulators could be wrongfooted as slight increases in global temperatures threaten to create havoc, said the consultancy’s research arm, the McKinsey Global Institute. ‘Markets have been premised on the context of a relatively stable climate,’ said Jonathan Woetzel, one of the report’s authors. ‘But there is an edge where risks can spike, which calls into question the capacity of the system.’”
January 12 – Reuters (Shubham Kalia): “Bank of England Deputy Governor Sam Woods… said that Britain’s financial sector could face a crackdown by regulators seeking to enforce their rules more tightly. ‘I think it’s possible that as we come out of the reform phase, and enter a phase where we’re defending the reforms that have been put in place, that you may see more enforcement activity,’ Woods told the Telegraph…”
January 14 – Bloomberg (Gabriel Crossley): “South Korean leader Moon Jae-in ramped up his commitment to rein in rising property prices…, pledging an ‘endless’ stream of stronger measures if soaring housing prices in some neighborhoods don’t cool. ‘Excess liquidity and low rates around the globe are behind the rise in property prices, drawing speculative money into real estate and causing large price jumps in many countries,’ Moon said. ‘South Korea is showing the same trend.’”
Leveraged Speculation Watch:
January 17 – Bloomberg (Ksenia Galouchko): “A breed of systematic trader acutely sensitive to volatility is charging into U.S. stocks at the kind of pace last seen before ‘volmageddon’ rocked Wall Street almost two years ago. Volatility-targeting funds are doubling down on equities after geopolitical turmoil that threatened to derail the bull market in the end barely slowed it down. These players buy and sell based on price swings, and their leverage -- a measure of exposure to stocks -- now sits at its 81st percentile since 2011, according to Morgan Stanley.”
Geopolitical Watch:
January 15 – Bloomberg (Iain Marlow and Hannah Dormido): “The violent protests and political upheaval that marked 2019 and challenged governments from Hong Kong to Chile is set to stay and is now the ‘new normal,’ according to a global risk firm. Verisk Maplecroft… said in a new report… that it predicts ‘continued turmoil in 2020’ as administrations around the world continue to be surprised by demonstrators and ill-prepared to address the underlying social grievances that spur them. ‘We all need to buckle up for 2020,’ said Miha Hribernik, …head of Asia risk insight for Verisk Maplecroft. ‘The rage that caught many governments off-guard last year isn’t going anywhere and we’d all better adapt.’”
January 12 – Reuters (Parisa Hafezi): “Protests erupted across Iran for a second day on Sunday, increasing pressure on the Islamic Republic’s leadership after it admitted its military shot down a Ukrainian airliner by accident, despite days of denials that Iranian forces were to blame. ‘They are lying that our enemy is America, our enemy is right here,’ one group of protesters chanted outside a university in Tehran…”
January 13 – CNBC (Abigail Ng): “Beijing has been forthcoming about its long-term goals and is the ‘most serious threat’ to the U.S., according to a former U.S. national security advisor. ‘China has been very clear about what its long-term goals are strategically,’ James Jones, who served as NSA under former President Barack Obama, told CNBC’s Hadley Gamble. ‘We need to take that very seriously.’ One Chinese goal is “total control of their own people using technology,’ he said… ‘They’re making astonishing progress to control every single citizen, whatever he or she does.’”
January 16 – Reuters (Ben Blanchard): “A U.S. warship sailed through the Taiwan Strait on Thursday, the island’s defense ministry said, less than a week after Taiwan President Tsai Ing-wen won re-election by a landslide on a platform of standing up to China which claims the island. The ship sailed in a northerly direction through the sensitive waterway and Taiwan’s armed forces monitored it throughout, the ministry said…”
January 16 – CNBC (Holly Ellyatt): “Russia saw extreme political upheaval on Wednesday with constitutional reforms announced by President Vladimir Putin leading to the resignation of government. By the end of the day, Putin had also proposed a new prime minister and political commentary was rife with speculation over the strongman’s strategy and grip on power. The day started with Putin giving his annual address to lawmakers and members of the elite in which he announced a national referendum on the reforms that would seek to limit presidential power and hand more control to parliament. One notable change would be that the Duma (Russia’s parliament), rather than the president, would appoint any prime minister.”
January 16 – Reuters (Tuvan Gumrukcu and Ece Toksabay): “Turkey is beginning to send troops into Libya in support of the internationally recognized government in Tripoli, President Tayyip Erdogan said on Thursday, days before a summit in Berlin which will address the Libyan conflict.”
January 14 – Bloomberg (Karl Maier): “Once again, a U.S.-backed toppling of a longstanding dictator has led to a power vacuum and widespread violence that’s been exploited by a revolving door of militant groups. The scenario that unfolded in Iraq after the 2003 U.S. invasion is replaying in Libya, where warring factions are battling for control of the capital, Tripoli. The conflict has killed more than 2,000 people, forced tens of thousands to flee and opened up the oil-rich country to traffickers of African migrants to Europe. It’s been a mess since NATO helped oust dictator Moammar Qaddafi in 2011.”
January 14 – Financial Times (Michael Peel): “Talks between Libya’s warring parties are finally due to happen in Berlin on Sunday — but it is a sign of the EU’s struggle for relevance that Moscow this week hosted the first international negotiations on the oil-rich country’s fate. Europeans were nowhere to be seen as Russian diplomats sat down with Turkish counterparts on Monday in an attempt to seal a fragile ceasefire in Libya. The gathering foundered on Tuesday after Khalifa Haftar, the military strongman seeking to win control of the country, walked out. But the meeting had already stoked fears that, as in Syria, the EU risks being shut out of efforts to deal with a crisis it sees as crucial to its own security. ‘We do have this pattern emerging: Russia and regional powers are playing us in our own neighbourhood,’ said Kristina Kausch, senior fellow at the Brussels office of the German Marshall Fund of the US, a think-tank.”
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