Saturday, January 21, 2017

Saturday's News Links

[Reuters] Wall Street Week Ahead: Optimism among S&P 500 CEOs as Trump takes power

[Reuters] Merkel vows compromise with U.S. on trade, military spending

[Bloomberg] Merkel Scours Trump Archive for Clues on How to Read Him

[Reuters] French far-right leader Le Pen calls on Europeans to 'wake up'

[Bloomberg] EU Populists See Trump Victory as Beginning of End for Old Order

[Reuters] Asian media decry isolationist Trump, fear economic, diplomatic turmoil

[The Hill] Five takeaways from Trump's inauguration

[UK Independent] Chinese media warns of 'dramatic changes' and 'fires being lit' as President takes office

[Spiegel] Donald Trump and the New World Order

[NYT, Irwin] Presidents Have Less Power Over the Economy Than You Might Think

[WSJ] President Trump Issues Directives on Regulatory Freeze, Affordable Care Act

[Washington Post] Europe’s nationalist leaders kick off year of election hopes

Weekly Commentary: Just the Facts

My sincere apologies. I'll be back with a complete CBB next week. doug

For the Week:

The S&P500 was little changed (up 1.5% y-t-d), while the Dow slipped 0.3% (up 0.3%). The Utilities increased 0.2% (down 0.3%). The Banks dropped 2.8% (down 1.4%), and the Broker/Dealers fell 1.5% (up 2.4%). The Transports added 0.5% (up 2.2%). The S&P 400 Midcaps declined 0.7% (up 0.9%), and the small cap Russell 2000 fell 1.5% (down 0.4%). The Nasdaq100 (up 4.1%) and Morgan Stanley High Tech indices were little changed (up 4.4%). The Semiconductors added 0.6% (up 2.6%). The Biotechs fell 2.3% (up 3.3%). With bullion up $13, the HUI gold index gained 1.7% (up 11.1%).

Three-month Treasury bill rates ended the week at 50 bps. Two-year government yields were unchanged at 1.19% (unchanged y-t-d). Five-year T-note yields rose four bps to 1.94% (up one basis point). Ten-year Treasury yields gained seven bps to 2.47% (up 3bps). Long bond yields rose six bps to 3.05% (down 2bps).

Greek 10-year yields rose seven bps to 6.96% (down 6bps y-t-d). Ten-year Portuguese yields declined nine bps to 3.82% (up 7bps). Italian 10-year yields jumped 11 bps to 2.01% (up 20bps). Spain's 10-year yields increased six bps to 1.49% (up 11bps). German bund yields rose eight bps to 0.42% (up 22bps). French yields jumped nine bps to 0.90% (up 22bps). The French to German 10-year bond spread widened one to 48 bps. U.K. 10-year gilt yields gained seven bps to 1.43% (up 20bps). U.K.'s FTSE equities index fell 1.9% (up 0.8%).

Japan's Nikkei 225 equities index slipped 0.8% (up 0.1% y-t-d). Japanese 10-year "JGB" yields were unchanged at 0.05% (up one basis point). The German DAX equities index was unchanged (up 1.3%). Spain's IBEX 35 equities index dropped 1.4% (up 0.3%). Italy's FTSE MIB index slipped 0.2% (up 1.3%). EM equities were mixed. Brazil's Bovespa index gained 1.4% (up 7.1%). Mexico's Bolsa added 0.3% (up 1.5%). South Korea's Kospi declined 0.5% (up 1.9%). India’s Sensex equities index fell 0.7% (up 1.5%). China’s Shanghai Exchange increased 0.3% (up 0.6%). Turkey's Borsa Istanbul National 100 index jumped 1.9% (up 6.3%). Russia's MICEX equities index fell 1.6% (down 3.3%).

Junk bond mutual funds saw inflows of $887 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates slipped three bps to 4.09% (up 28bps y-o-y). Fifteen-year rates were unchanged at 3.37% (up 27bps). The five-year hybrid ARM rate declined two bps to 3.21% (up 30 bps).

Federal Reserve Credit last week dipped $0.4bn to $4.413 TN. Over the past year, Fed Credit contracted $42.9bn (down 1.0%). Fed Credit inflated $1.602 TN, or 57%, over the past 219 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $11.9bn last week to $3.170 TN. "Custody holdings" were down $96.2bn y-o-y, or 2.9%.

M2 (narrow) "money" supply last week jumped $39.1bn to a record $13.307 TN. "Narrow money" expanded $906bn, or 7.3%, over the past year. For the week, Currency increased $4.1bn. Total Checkable Deposits surged $51.5bn, while Savings Deposits declined $16.8bn. Small Time Deposits were little changed. Retail Money Funds were about unchanged.

Total money market fund assets sank $24.8bn to $2.666 TN. Money Funds declined $77bn y-o-y (2.8%).

Total Commercial Paper expanded $7.9bn to $967bn. CP declined $85bn y-o-y, or 8.1%.

Currency Watch:

January 17 – CNBC (Patti Domm): “President-elect Donald Trump's shock comment that the dollar is too strong suggests the U.S. is about to declare as dead a two-decade policy of publicly favoring a strong currency. ‘There's no question that the Trump administration would not want a strong dollar. A strong dollar does nothing good for whatever Trump is basically trying to do,’ said David Woo, Bank of America Merrill Lynch's head of global rates and foreign exchange research. ‘Yes, the U.S. fundamental story is bullish for the U.S. dollar, but the problem here is they actually don't want a strong dollar. I think it's going to go up. However, it's going to be a much more volatile climb.’ Trump's remarks also took a shot at one of the most crowded trades on the planet — long wagers on the dollar.”

January 19 – Bloomberg (Michelle Jamrisko and Saleha Mohsin): “Treasury Secretary nominee Steven Mnuchin said a strong dollar is important over the long term, noting that it’s currently ‘very, very strong,’ and that avoiding U.S. default on the debt would be a top priority if he’s confirmed. Mnuchin also defended his personal record as a founder of OneWest Bank amid the housing crisis, and pushed for tax reform as a key way to lift economic growth as promised by President-elect Donald Trump.”

January 17 – Bloomberg (Samuel Potter and Natasha Doff): “Politics dominated global markets as the dollar weakened after the president-elect called the U.S. currency ‘too strong’ and the pound rallied on British Prime Minister Theresa May’s plans to leave the European Union. Bonds advanced with gold. The greenback fell against most peers after Donald Trump told the Wall Street Journal its value is too high in part because China holds down its own currency. Sterling posted its biggest rally against the dollar since the global financial crisis and the Bloomberg Commodity Index rose to the highest since July.”

The U.S. dollar index slipped 0.4% to 100.74 (down 1.6% y-t-d). For the week on the upside, the British pound increased 1.6%, the Brazilian real 1.4%, the Norwegian krone 1.1%, the Australian dollar 0.7%, the Swiss franc 0.7%, the euro 0.6%, the New Zealand dollar 0.6%, the South Korean won 0.5%, the Swedish krona 0.4% and the Singapore dollar 0.1%. For the week on the downside, the Canadian dollar declined 1.6%, the South African rand 0.6% and the Mexican peso 0.5%. The Chinese yuan increased 0.4% versus the dollar (up 1.0% y-t-d).

Commodities Watch:

January 20 – Bloomberg (Susanne Barton): “Gold bulls wagering the bullion rally has more room to run may have history on their side with the arrival of a new U.S. president. A look at recent presidential transitions supports optimism among traders over the metal’s prospects. Gold has averaged gains of almost 15% in years marking the inauguration of a new president since the 1970s, advancing in five of those seven years. In contrast, the S&P 500 index of equities declined in four of those years for an average loss over the period of 0.9%.”

The Goldman Sachs Commodities Index was little changed (up 0.2% y-t-d). Spot Gold gained 1.1% to $1,211 (up 5.1%). Silver rose 1.2% to $17.03 (up 6.6%). Crude gained 85 cents to $53.22 (down 1.1%). Gasoline dropped 2.8% (down 6.3%), and Natural Gas sank 6.3% (down 14.3%). Copper dropped 2.4% (up 4.7%). Wheat added 0.5% (up 5.0%). Corn jumped 3.1% (up 5.0%).

Trump Administration Watch:

January 20 – Wall Street Journal (Gerald F. Seib): “Donald J. Trump took the oath of office as president at noon Friday, having at last been embraced by the bipartisan Washington establishment gathered around him on the steps of the Capitol. Two minutes later, he went on the attack against that same establishment. In an inaugural address unlike any in recent memory, he indicted the political system he now leads. He also signaled that he will be an entirely new kind of president—and the closest thing to a political independent in the White House since Dwight Eisenhower. ‘For too long, a small group in our nation’s capital has reaped the rewards of government while the people have borne the cost,’ he declared. Lest anyone wonder about his view of the politicians gathered around, he declared: ‘The establishment protected itself, but not the citizens of our country.’ That, he said, will change immediately. The harsh words seemed directed nearly as much at his own Republican Party…”

January 20 – Bloomberg (Margaret Talev): “Donald Trump began his presidency with a combative, populist address aimed squarely at his aggrieved supporters, making little effort to reach beyond his political base or reassure foreign leaders. His inaugural speech on Friday painted an ominous portrait of the nation at the cusp of his administration: a place of violent ‘American carnage’ where ‘rusted-out factories’ are ‘scattered like tombstones’ and the middle class’s wealth is ‘ripped from their homes.’ His predecessor, Barack Obama, sat steps away. Trump promised an unapologetic nationalism that would protect U.S. jobs and a foreign policy that would eradicate Islamic terrorism and put the country’s interests ahead of all others.”

January 14 – Reuters (David Brunnstrom and Matt Spetalnick): “The incoming U.S. administration’s tough talk against China has set the stage for showdowns on everything from security to trade and cyberspace, but contradictory signals are sowing uncertainty over how far President-elect Donald Trump is prepared to go in confronting Beijing. Highlighting the contested South China Sea as a potential flashpoint, Trump’s Secretary of State nominee Rex Tillerson threw out an explosive challenge to Beijing on Wednesday by calling for it be denied access to artificial islands it is building in the strategic waterway. A Trump transition adviser told Reuters that Tillerson, Trump’s pick to be America's top diplomat, did not mean to suggest the new administration would impose a naval blockade, which would risk armed confrontation with China, something the new administration was not seeking. But another official authorized to speak on behalf of the transition team pushed back on that view, saying Tillerson ‘did not misspeak’ when he said China should be barred from its man-made islands.”

January 18 – Financial Times (Shawn Donnan): “The billionaire businessman set to oversee trade policy for Donald Trump has hit back at Chinese leader Xi Jinping and his bid to become the leading advocate for globalisation, calling China the ‘most protectionist’ major economy in the world. The criticism by Wilbur Ross, made at his confirmation hearing to become Mr Trump’s commerce secretary, is the latest in an escalating torrent from the president-elect and his closest economic advisers against Beijing which has already sparked concerns of a US-China trade war. ‘They talk much more about free trade than they actually practise,’ Mr Ross told the Senate commerce committee… ‘China is the most protectionist country of very large countries.’”

January 18 – Bloomberg (Andrew Mayeda): “Billionaire Wilbur Ross, nominated by Donald Trump to serve as Commerce secretary, called China the most protectionist of the world’s major economies and vowed to level the playing field with the Chinese on trade, especially in reducing overcapacity in its steel industry. ‘China is the most protectionist country of very large countries,’ Ross said in testimony… ‘They have both very high tariff barriers and very high non-tariff trade barriers. So they talk much more about free trade than they actually practice.’ Ross, 79, also said the Trump administration will quickly move to redefine relations with Mexico and Canada under the North American Free Trade Agreement.”

January 20 – Reuters (David Brunnstrom): “The new U.S. administration of President Donald Trump said on Friday its trade strategy to protect American jobs would start with withdrawal from the 12-nation Trans-Pacific Partnership (TPP) trade pact. A White House statement issued soon after Trump's inauguration said the United States would also ‘crack down on those nations that violate trade agreements and harm American workers in the process.’ The statement said Trump was committed to renegotiating another trade deal, the North American Free Trade Agreement (NAFTA), which was signed in 1994 by the United States, Canada and Mexico. ‘For too long, Americans have been forced to accept trade deals that put the interests of insiders and the Washington elite over the hard-working men and women of this country,’ it said.”

January 17 – Financial Times (Sam Fleming and Shawn Donnan): “Donald Trump has threatened to overturn two decades of US economic policy by questioning the strong value of the dollar, raising fears that his presidency could set off a new round of currency wars between the world’s major economies. On Monday the president-elect appeared to break from the longstanding ‘strong dollar’ policy of successive administrations, declaring that the currency was too high and that this was preventing US companies from competing with Chinese counterparts. ‘It’s killing us,’ he said in an interview with the Wall Street Journal. Speaking in Switzerland after Mr Trump’s comments, Anthony Scaramucci, a leading figure in the transition team, said the administration would need to take heed of the problems of a buoyant currency.”

January 19 – Wall Street Journal (Aaron Back): “Steven Mnuchin backed away in his confirmation hearing Thursday from some of the more extreme policies suggested by president-elect Donald Trump. But the nominee for Treasury secretary also was vague on major areas of economic and financial policy. He said Mr. Trump doesn't in fact favor a blanket border tax on all imports, instead saying there should be some kind of penalty for companies that move jobs abroad, but Mr. Mnuchin didn’t elaborate. Mr. Mnuchin said he supports in principle the so-called Volcker rule, which bars banks with federally insured deposits from engaging in proprietary trading. But he also approvingly cited a recent Federal Reserve study that found the rule has damaged liquidity in corporate bond markets. He didn’t explain how he would mitigate this impact while keeping the rule in place.”

January 19 – Bloomberg (Saleha Mohsin, Michelle Jamrisko, and Austin Weinstein): “U.S. Treasury Secretary nominee Steven Mnuchin said during his Senate confirmation hearing he’s willing to label China as a currency manipulator if warranted, after President-elect Donald Trump backed away from his pledge to do so immediately. Mnuchin said ‘I would’ when asked by Senator Robert Casey… whether he would recommend naming the Asian country a manipulator if it deserved that label. Trump had already softened his stance on China’s currency policy, saying in an interview this month with the Wall Street Journal that he wouldn’t name the country a manipulator on his first day in office, as previously promised.”

January 19 – Bloomberg (Jesse Hamilton): “Steven Mnuchin indicated he might not give Wall Street everything it wants as Treasury Secretary, saying at his confirmation hearing Thursday that he supports the controversial Volcker Rule and that there might be merit in bringing back some version of the Glass-Steagall Act. Donald Trump’s nominee for Treasury said the Volcker Rule limits on banks’ speculative investments make sense because ‘the concept of proprietary trading does not belong’ in lenders that have a government backstop through deposit insurance. Mnuchin said he opposes reinstating Glass-Steagall, a law Congress repealed almost two decades ago that required a strict firewall between commercial and investment banking. But he conceded that a ‘21st century Glass-Steagall’ is something that policy makers should consider.”

January 16 – Financial Times (Henry Mance, Shawn Donnan and James Shotter): “Donald Trump has taken his strongest swipe yet at the EU, labelling it ‘a vehicle for Germany’ and predicting that other countries will follow Britain in leaving the bloc. The president-elect also warned that his trust for Angela Merkel ‘may not last long at all’, ranking the German chancellor alongside Vladimir Putin as a potentially problematic ally.”

January 17 – Reuters (Edward Taylor and Andreas Rinke): “U.S President-elect Donald Trump warned German car companies he would impose a border tax of 35% on vehicles imported to the U.S. market, a plan that drew sharp rebukes from Berlin and hit the automakers' shares. In an interview with German newspaper Bild, …Trump criticized German carmakers such as BMW, Daimler and Volkswagen for failing to produce more cars on U.S. soil. ‘If you want to build cars in the world, then I wish you all the best. You can build cars for the United States, but for every car that comes to the USA, you will pay 35% tax,’ Trump said… ‘I would tell BMW that if you are building a factory in Mexico and plan to sell cars to the USA, without a 35% tax, then you can forget that,’ Trump said.”

January 15 – Reuters (William James): “U.S. President-elect Donald Trump said that Brexit would turn out to be a great thing and other countries would follow Britain out of the European Union but promised to strike a swift bilateral trade deal with the United Kingdom. Speaking in an interview with The Times of London newspaper…, Trump described himself as a big fan of Britain and endorsed last year's vote to leave the European Union. ‘I think Brexit is going to end up being a great thing,’ Trump said. ‘I’ll tell you, the fact that your pound sterling has gone down? Great. Because business is unbelievable in a lot of parts in the UK.’”

January 20 – Wall Street Journal (AnnaMaria Andriotis): “Less than an hour after Donald Trump became U.S. president, the new administration said it was suspending a recent move to lower charges for borrowers on a risky mortgage backed by the government. The step is the first sign of what is likely to be a changing landscape for housing finance under the new administration. Republicans have long been wary of the government’s role as the major backer of mortgages being originated in the U.S. since the housing bust, arguing too much risk has shifted from the private markets to taxpayers.”

China Bubble Watch:

January 20 – Reuters (Kevin Yao and Elias Glenn): “China's economy grew a faster-than-expected 6.8% in the fourth quarter, boosted by higher government spending and record bank lending, giving it a tailwind heading into what is expected to be a turbulent year. But Beijing's decision to prioritize its official growth target could exact a high price, as policymakers grapple with financial risks created by an explosive growth in debt. China's debt to GDP ratio rose to 277% at the end of 2016 from 254% the previous year, with an increasing share of new credit being used to pay debt servicing costs, UBS analysts said…”

January 17 – Bloomberg: “Volatility in Chinese shares waned amid speculated state efforts to ensure market stability during President Xi Jinping’s appearance at the World Economic Forum in Davos. The Shanghai Composite Index added 0.1% at the close, with 10-day volatility at the lowest level since September. State-owned investors bought shares to steady the market on Monday, while some funds were guided on Tuesday not to sell holdings with big weightings in benchmark indexes, people familiar with the matter said…”

January 17 – Wall Street Journal (Shen Hong): “The turmoil at a Chinese midsized brokerage firm that exacerbated China’s recent bond-market rout also highlighted a little-regulated practice that companies have used to borrow hundreds of billions of dollars and move risky assets temporarily off their books. Called ‘dai chi’ in Chinese—literally, holding something on someone’s behalf—the trading practice resembles a short-term loan backed by bonds, and it has boomed as China’s bond market rallied during the past three years… Typically, sellers pledge to buy the bonds back after terms ranging from a few days to a few months, paying interest on the value of the securities as well as an added fee, the people said. The trade lets the buyer lock in a higher price, while the seller hopes that by the time it buys the bonds back, market prices will have appreciated even further. The risk is that ‘dai chi’ agreements tend to be informal and often don’t leave a paper trail. Several of the executives familiar with the practice said they have conducted the transactions over instant messaging services like China’s QQ, labeling them with the code ‘DC.’ These transactions also, by one estimate, may easily top $1 trillion in value. The practice is just one of the many unexpected risks that have sprouted up in China’s long credit boom.”

January 19 – Bloomberg: “A default storm is brewing for China’s lower-rated corporate bonds with a record amount maturing just as borrowing costs surge. Regulators are curbing leverage, pushing up the cost of capital and adding to challenges for weaker borrowers, according to China Citic Bank… On Jan. 16 alone, two companies missed payments. About 29 notes defaulted last year, up from seven in 2015. ‘Bond issuers are facing huge redemption pressure,’ said Meng Xiangjuan, an analyst at Shenwan Hongyuan Group… ‘Investors should watch out for risks.’ About 211 billion yuan ($31bn) of company notes rated AA or lower, often considered junk in the onshore market, will mature in 2017, up from 155 billion yuan last year... Bond issuance in December by Chinese firms plunged to 205 billion yuan less than the amount of notes they had to repay that month, the lowest on record…”

January 18 – Bloomberg: “China’s benchmark money-market rate jumped the most in two years, with record central bank cash injections being overwhelmed by demand before the Lunar New Year holidays. The People’s Bank of China put in a net 410 billion yuan ($60bn) through open-market operations on Wednesday, the biggest daily addition since Bloomberg began compiling the data in 2004. That brings the total injections so far this week to 845 billion yuan. The interbank seven-day repurchase rate jumped 35 bps, the most since December 2014, to 2.76%...”

January 18 – CNBC (Evelyn Cheng): “If trade frictions increase between the U.S. and China that could have significant fallout for China as it struggles with debt, and weigh on the global economy. President-elect Donald Trump has threatened to take a tougher stance — including imposing tariffs and labeling China a currency manipulator. Meanwhile, with China's Communist Party congress set to meet this fall, the country's ‘leadership cannot afford to be perceived as weak,’ said David Cui, head of China equity strategy at Bank of America Merrill Lynch. ‘That's why the market has grossly underestimated trade frictions,’ Cui said… China was the biggest source of goods imported to the U.S. in 2015… If the U.S. trade deficit — $367 billion in 2015 — with China is cut by a third, Cui estimates the Asian giant's GDP growth could be hurt by 1 to 2%.”

January 18 – Reuters (Samuel Shen and John Ruwitch): “China's efforts to support its currency and cool its hot property market are encouraging more Chinese companies, including many state firms, to take on extra cost and risk by raising foreign-currency bonds in Hong Kong and other offshore locations. Despite the yuan's nearly 7% slump against the dollar in 2016, Chinese companies including state-owned Bank of China raised a record $111 billion in offshore dollar bonds, according to… Dealogic, up from $88 billion in 2015… The list includes issuers who need dollars to pay for overseas acquisitions and deals but are unable to use their yuan after China tightened its grip on capital outflows last year to support the currency.”

January 17 – Bloomberg: “China home prices increased last month in the fewest cities since January last year, signaling property curbs to deflate a potential housing bubble are taking effect. New-home prices, excluding government-subsidized housing, gained last month in 46 of the 70 cities tracked by the government, compared with 55 in November… Prices dropped in four cities… They were unchanged in 20 cities.”

January 15 – Reuters (Winni Zhou and John Ruwitch): “China should stop intervening in the foreign exchange market, devalue the yuan and let it float freely to restore stability, a senior researcher at a government-backed think tank said. Xiao Lisheng, a finance expert with the Chinese Academy of Social Sciences, made the remarks… in the official China Securities Journal amid a growing debate among the country's economists on whether authorities should let the closely-managed currency trade more freely. The yuan lost 6.6% against the dollar last year, the biggest annual loss since 1994. ‘The more the government delays the release of depreciation pressure, the greater the impact and destructive power of the release of depreciation pressure will be,’ Xiao wrote. The authorities should ‘let the yuan exchange rate have a one-off adjustment to realize a free float’ of the currency, he said.”

Brexit Watch:

January 17 – Reuters (Kylie MacLellan and William James): “Britain will quit the EU single market when it leaves the European Union, Prime Minister Theresa May said on Tuesday in a decisive speech that set a course for a clean break with the world's largest trading bloc. Setting out a vision that could determine Britain's future for generations and the shape of the EU itself, May answered criticism that she has been coy about her strategy with a 12-point plan for what has been dubbed a ‘hard Brexit’. May promised to seek the greatest possible access to European markets but said Britain would aim to establish its own free trade deals with countries far beyond Europe, and impose limits on immigration from the continent.”

Europe Watch:

January 16 – Financial Times: “Donald Trump’s latest verbal assault on Germany, Nato and the EU is forcing the continent’s politicians to consider a challenge they hoped never to confront: dealing with the first US president since the war to champion European disintegration. Weeks of wait-and-see thinking in Europe’s diplomatic capitals were blown away on Monday with a gust of plain-speaking rhetoric disparaging the pillars of the transatlantic relationship, and one of Washington’s closest traditional allies. While Angela Merkel’s government tried to turn down the political temperature after Mr Trump’s interviews with The Times and Bild, it was impossible to contain the anger in Berlin at their chancellor being mentioned in the same breath as Vladimir Putin of Russia, let alone being blamed for co-opting the EU and accelerating its destruction with her refugee policy. Frank-Walter Steinmeier, Germany’s foreign minister, said Mr Trump’s comments were met with ‘astonishment’, adding that he heard first-hand the ‘concern’ of Jens Stoltenberg, the Nato secretary-general. Norbert Röttgen, chairman of the Bundestag’s foreign affairs committee, told the Financial Times that Mr Trump’s remarks showed ‘the west’s political unity doesn’t play any role for him’.”

January 16 – Financial Times (Stefan Wagstyl): “Donald Trump’s latest sweeping criticism of Germany, the EU and Nato came under attack in Berlin on Monday even as Angela Merkel’s government tried to turn down the political temperature. Norbert Röttgen, chairman of the Bundestag’s foreign affairs committee, told the Financial Times that Mr Trump’s remarks showed ‘the west’s political unity doesn’t play any role for him’. Mr Röttgen said he had previously hoped that Mr Trump would soften the approach he had taken during the election campaign once he was on the verge of taking office. ‘But he hasn’t changed at all. He says what he said on the campaign trail . . . The fact that he regards Nato as obsolete and that it doesn’t bother him if the EU is split shows he doesn’t care about the west’s unity.’”

January 16 – Washington Post (Michael Birnbaum): “European leaders grappled with the jolting reality of President-elect Donald Trump’s skepticism of the European Union on Monday, saying they might have to stand without the United States at their side during the Trump presidency. The possibility of an unprecedented breach in transatlantic relations came after Trump — who embraced anti-E.U. insurgents during his campaign and following his victory — said in weekend remarks that the 28-nation European Union was bound for a breakup and that he was indifferent to its fate. He also said NATO’s current configuration is ‘obsolete,’ even as he professed commitment to Europe’s defense. Trump’s attitudes have raised alarm bells across Europe, which is facing a wave of elections this year in which anti-immigrant, Euroskeptic leaders could gain power.”

January 19 – Bloomberg (Piotr Skolimowski): “Mario Draghi called on Germany to be calm as the European Central Bank keeps pumping stimulus into the euro area, saying rising inflation will eventually bring higher interest rates for savers. ‘As the recovery will firm up, rates will go up as well,’ the ECB president told reporters… after the Governing Council reaffirmed its intention to keep its bond-buying program going until at least the end of the year. Asked about German criticism of the strategy, he said ‘the honest answer would be: Just be patient.’ German Finance Minister Wolfgang Schaeuble earlier responded to the ECB’s decision by saying his government will face ‘political problems’ explaining the policy to the public. A surge in headline inflation last month in his country, Europe’s largest economy, sparked a media outcry and calls for the central bank to pull back on its stimulus. ‘I trust the ECB will always do the right thing,’ Schaeuble said... He also warned that Draghi’s loose monetary policy encourages leaders to delay the structural economic reforms the region needs, saying ‘you give the political leaders some way to go around.’”

January 19 – Bloomberg (Alessandro Speciale): “The European Central Bank left its quantitative-easing program unchanged as policy makers wait to see if a pickup in inflation will be sustained. The Governing Council reaffirmed its December decision that asset purchases will be reduced to 60 billion euros ($64bn) a month from April, from 80 billion euros currently. Policy makers also kept the main refinancing rate at zero and the deposit rate at minus 0.4%... The first policy decision of 2017 comes six weeks after Draghi declared the threat of deflation to be almost vanquished.”

January 19 – Bloomberg (Rainer Buergin, Birgit Jennen, and Patrick Donahue): “German Finance Minister Wolfgang Schaeuble said he wouldn’t support a new Greek bailout if the International Monetary Fund declines to join the current program, saying Germany is sticking to its ground rules for the country’s financial lifeline. ‘The Greek program is based from the very beginning in 2010 on the participation of the IMF,’ Schaeuble said… He said that if the IMF refuses to join, it will be a sign the Greeks aren’t sticking to their commitments and ‘the program will be ended because the precondition of the program, the basis, is destroyed.’”

Fixed-Income Bubble Watch:

January 18 – Bloomberg (Austin Weinstein and Andrea Wong): “China’s holdings of U.S. Treasuries declined in November for a sixth straight month, as the world’s second-largest economy uses its foreign-exchange reserves to support the yuan. Japan’s holdings also dropped but the country kept its spot as America’s largest foreign creditor. A monthly Treasury Department report… showed China held $1.05 trillion in U.S. government bonds, notes and bills in November, a drop of $66.4 billion from the prior month that was the steepest since December 2011. Japan’s portfolio decreased for fourth consecutive month, falling by $23.3 billion to $1.11 trillion…”

January 19 – CNBC (Evelyn Cheng): “China is selling U.S. Treasurys at a record pace, indicating continued pressure to support the yuan and keep money from leaving the country. In continuous selling over the six months through November, China sold $194.66 billion of Treasurys and over the previous 12 months, sold $215.11 billion. Both figures are records… The People's Bank of China ‘is intervening in this particular case for a very specific reason, that they want to mitigate the downside pressure on the RMB [Chinese yuan] coming from capital flows,’ said Benn Steil, senior fellow and director of international economics at the Council on Foreign Relations…”

January 19 – Wall Street Journal (AnnaMaria Andriotis): “Bonds backed by certain risky single-family mortgages topped $1 trillion for the first time in November, crossing that threshold amid rising warnings for one corner of the housing market. These mortgages are insured by the Federal Housing Administration and typically go to borrowers with small down payments and lower credit scores. Banks have pulled back from issuing those loans and from packaging them into bonds sold to investors. The result: In the first three quarters of 2016, banks accounted for 9% of mortgage dollars originated by the FHA’s top 50 lenders, versus 62% for all of 2010… Nonbank lenders accounted for 80% of mortgage bonds backed by single-family FHA loans in July 2016, versus 9% the same month in 2010… Ginnie Mae head Ted Tozer… has said nonbank lenders may lack the financial wherewithal to withstand future stress in housing… ‘This is the biggest shift in mortgage lending since the savings-and-loans debacle in the 1980s,’ Mr. Tozer said…”

January 17 – Reuters (Karen Freifeld): “Deutsche Bank finalized a $7.2 billion settlement with the U.S. Department of Justice over its sale of toxic mortgage securities in the run-up to the 2008 financial crisis, the government agency said… Deutsche's agreement represents the largest resolution for the conduct of a single entity in misleading investors in residential mortgage-backed securities… The settlement was higher than the $7 billion paid by Citigroup to federal and state authorities in 2014. ‘Deutsche Bank did not merely mislead investors: it contributed directly to an international financial crisis,’ Attorney General Loretta Lynch said…”

Global Bubble Watch:

January 19 – New York Times (Alexandria Stevenson): “For the investors and market-movers at the annual World Economic Forum here, a threat lurks. At cocktail parties where the Champagne flows, financiers have expressed bewilderment over the rise of populist groups that are feeding a backlash against globalization. In the halls of the Davos Congress Center, where many of the meetings this week are taking place, investors have tried to make sense of the political upheaval. The world order has been upended. As the United States retreats from the promise of free trade, China is taking up the mantle. The stark shift leaves investors trying to assess the new risk and opportunities in the global economy. ‘This is the first time there is absolutely no consensus,’ said William F. Browder, a co-founder of Hermitage Capital Management who has been coming to Davos for 21 years. ‘Everyone is looking into the abyss.’”

January 16 – Reuters (Ben Hirschler): “Just eight individuals, all men, own as much wealth as the poorest half of the world's population, Oxfam said... As decision makers and many of the super-rich gather for this week's World Economic Forum (WEF) annual meeting in Davos, the charity's report suggests the wealth gap is wider than ever, with new data for China and India indicating that the poorest half of the world owns less than previously estimated.”

U.S. Bubble Watch:

January 17 – CNBC (Evelyn Cheng): “Financial stocks led market declines Tuesday as Treasury yields fell and traders grew anxious about government policy ahead of Friday's inauguration. The SPDR S&P Bank ETF (KBE) fell nearly 3.4% in its worst day since June 27, 2016. Financials declined nearly 2.3% as the greatest laggard in the S&P 500... ‘I think financials are way, way ahead of themselves,’ said Jeremy Klein, chief market strategist at FBN Securities. The sector is up more than 17% since the election as the top performer in the S&P 500.”

January 18 – Bloomberg (Andrew Mayeda): “The cost of living in the U.S. climbed for a fifth month on the back of shelter and fuel prices, pushing inflation closer to the Federal Reserve’s goal. The consumer-price index rose 0.3% in December, matching the median projection of economists, after a 0.2% gain the previous month… Prices were up 2.1% from a year earlier, the most since June 2014.”

January 19 – Reuters (Lucia Mutikani): “U.S. homebuilding rebounded more than expected in December as a strengthening economy boosts demand for rental housing. Other data… showed the number of Americans filing for unemployment benefits unexpectedly falling last week to a near 43-year low… Housing starts jumped 11.3% to a seasonally adjusted annual rate of 1.23 million units last month…”

January 19 – Bloomberg (Austin Weinstein): “American consumers this month were the most upbeat about the economy than at any time in almost 15 years, according to Bloomberg Consumer Comfort Index… Monthly consumer expectations index climbed to 56 in January, the strongest reading since March 2002, from 53.5…”

January 18 – Reuters (Patrick Rucker and Sarah N. Lynch): “Early optimism among business lobbyists and executives that Donald Trump's election heralded better days has slowly given way to uncertainty as the president-elect fires off mixed and sometimes confusing messages on healthcare, taxes and trade. An initial euphoria in the business world fueled a powerful post-election stock rally. Some of that has frayed as questions arise over the nuts and bolts of Trump's campaign promises, although many in the business community said they remained optimistic. Doubts deepened over the weekend as Trump declared he would replace President Barack Obama's signature healthcare plan known as Obamacare with ‘insurance for everybody’ - a goal far beyond Republican designs - and criticized a key component of a plan in Congress to overhaul corporate taxes. In a later interview, he appeared to adjust both stances, possibly adding to the confusion. ‘It is fair to say that since the election, there has been mounting uncertainty about exactly what the specific policies are likely to be with regard to tax reform and replacing Obamacare,’ a financial industry official said.”

January 17 – Reuters (Tom Anderson): “President-elect Donald Trump has said he will preserve Social Security, though if he and Congress do nothing to fix the funding, the financial reckoning will be huge — as much as $11.4 trillion down the road. The last time Congress changed Social Security in a significant way with a series of benefit cuts and payroll tax increases was in 1983 under President Ronald Reagan. Back then, the federal government needed to fill a funding gap of about 1% of taxable workers' wages. By the time Social Security's trust funds are projected to run out in the early 2030s, the federal government will have to plug a hole of more than 3%, according to estimates by Charles Blahous, a senior research fellow at George Mason University's Mercatus Center. ‘Just to keep the system afloat from year to year at that point they would have to inflict near-term pain over three times as severe as was the case in 1983,’ Blahous said.”

Federal Reserve Watch:

January 17 – Wall Street Journal (Jon Hilsenrath): “An epoch of exceptional monetary stimulus is drawing to a close. Central banks have exhausted themselves in their efforts to spur economic growth with low—even negative—short-term interest rates and bond-purchase programs meant to drive financial-asset prices higher. Now, a range of forces—including political blowback, whiffs of inflation, stirrings of fiscal stimulus, receding unemployment and worries that the policies themselves may backfire—are pressing them to push short-term interest rates no lower. The Federal Reserve is the first mover in this shift. It has nudged up short-term interest rates in two quarter-percentage-point increments in a little more than a year and penciled in three more moves in 2017. If all goes according to plan, its benchmark interest rate will rest at 1.375% by year-end, a level not seen in the U.S. since before Lehman Brothers collapsed in September 2008.”

January 18 – Financial Times (Sam Fleming): “Having taken two tentative steps towards more normal levels of interest rates, Federal Reserve policymakers are preparing to debate an even more fraught undertaking: paring back the vast holdings of securities they amassed when battling the financial crisis. A series of Fed speakers have sent up trial balloons in recent days talking of the possibility of reducing the size of the central bank’s $4.5tn balance sheet. Patrick Harker, Philadelphia Fed chief, suggested the topic would become central once short-term interest rates hit 1% — something the Fed is on course to achieve this year if its current forecasts are borne out. Lael Brainard, a normally ultra-dovish member of the board of governors, suggested… that a big fiscal stimulus by the Donald Trump administration could bring forward the day when the Fed starts trimming its balance sheet. “

January 18 – New York Times (Neil Irwin): “Janet L. Yellen… made it clear Wednesday that she believes that the American economy is pretty much back on track. And that, in turn, sets the stage for a potential conflict with the incoming Trump administration in the months and years ahead. Congress assigns the Fed two goals: seek maximum employment and maintain stable prices. Ms. Yellen, in a speech in San Francisco, rather explicitly made clear that the nation isn’t far from attaining those goals. ‘Now, it’s fair to say, the economy is near maximum employment, and inflation is moving toward our goal,’ she said. The unemployment rate, 4.7%, is back near where it was before the 2008 recession. And ‘although inflation has been running below our 2% objective for quite some time, we have seen it start inching back toward 2% last year.’”

January 18 – Bloomberg (Craig Torres): “Federal Reserve Chair Janet Yellen said the U.S. economy is ‘close’ to the central bank’s objectives of full employment and stable prices and she’s confident it will continue to improve. ‘It is fair to say the economy is near maximum employment and inflation is moving toward our goal,’ Yellen told the Commonwealth Club… While ‘it makes sense to gradually reduce the level of monetary policy support,’ the timing of the next interest-rate increase ‘will depend on how the economy actually evolves over coming months,’ she said.”

Central Bank Watch:

January 16 – Wall Street Journal (Richard Barley): “With central bankers veering into uncharted policy waters since the financial crisis, vacuuming up trillions of dollars in securities and pushing interest rates to zero and beyond, it is perhaps no surprise to see them drawing political attention. But investors should watch for any further deterioration in relations between politicians and central bankers; monetary policy is at a critical juncture. The biggest political events of 2016—Donald Trump’s U.S. election victory and the U.K.’s vote to leave the European Union—both raised questions around central-bank policy and independence. Mr. Trump said in May he would likely replace Federal Reserve Chairwoman Janet Yellen, and Republican lawmakers are reviving an effort to subject the Fed’s decisions to greater scrutiny.”

Leveraged Speculator Watch:

January 20 – Financial Times (Lindsay Fortado): “The hedge fund industry has surpassed $3tn in assets for the first time, despite investors redeeming $70bn during 2016 as they soured on high fees and some managers’ average returns, according to Hedge Fund Research. Redemptions slowed in the fourth quarter as investors pulled $18.7bn, less than the $28.2bn redeemed in the third quarter. The largest funds, which manage more than $5bn, were hit the hardest by redemptions as investors opted instead for funds with less than $250m. But those losses were mitigated by strengthening performance. HFR’s industry benchmark, which encompasses all strategies, gained 5.5% last year, the highest in three years.”

Geopolitical Watch:

January 15 – Reuters (Christian Shepherd): “China will ‘take off the gloves’ and take strong action if U.S. President-elect Donald Trump continues to provoke Beijing over Taiwan once he assumes office, two leading state-run newspapers said… In an interview with the Wall Street Journal…, Trump said the ‘One China’ policy was up for negotiation. China's foreign ministry, in response, said ‘One China’ was the foundation of China-U.S. ties and was non-negotiable. Trump broke with decades of precedent last month by taking a congratulatory telephone call from Taiwan President Tsai Ing-wen, angering Beijing, which sees Taiwan as part of China. ‘If Trump is determined to use this gambit in taking office, a period of fierce, damaging interactions will be unavoidable, as Beijing will have no choice but to take off the gloves,’ the… China Daily said.”

January 18 – Reuters (Ben Blanchard and J.R. Wu): “The United States should not allow a delegation from Taiwan to attend U.S. President-elect Donald Trump's inauguration, China's Foreign Ministry said…, raising a new bone of contention in Beijing's relations with the incoming government. Trump broke with decades of precedent last month by taking a congratulatory telephone call from Taiwan President Tsai Ing-wen… A Taiwan delegation, led by former premier and ex-ruling party leader Yu Shyi-kun, and including a Taiwan national security adviser and some lawmakers, will attend Friday's inauguration, Taiwan's Foreign Ministry said this week. It is typical for Taiwan to send a delegation to U.S. presidential inaugurations.”

January 16 – New York Times (Steven Erlanger): “The Germans are angry. The Chinese are downright furious. Leaders of NATO are nervous, while their counterparts at the European Union are alarmed. Just days before he is sworn into office, President-elect Donald J. Trump has again focused his penchant for unpredictable disruption on the rest of the world. His remarks in a string of discursive and sometimes contradictory interviews have escalated tensions with China while also infuriating allies and institutions critical to America’s traditional leadership of the West. No one knows where exactly he is headed… For now. And that he is an enthusiastic cheerleader of Brexit and an unaffiliated Britain. For now. Mr. Trump’s unpredictability is perhaps his most predictable characteristic. The world is accustomed to his provocative Twitter messages, but is less clear about whether his remarks represent meaningful new policy guidelines, personal judgments or passing whims.”

January 17 – Washington Post (Simon Denyer): “American companies don’t feel welcome in China any more. And while Chinese President Xi Jinping defended globalization at the World Economic Forum in Davos, U.S. companies say his government is not practicing what he preached. An annual survey of business conditions by the American Chamber of Commerce, or AmCham, in China found that 4 out 5 companies feel less welcome in China than before.”

January 18 – Financial Times (Pilita Clark): “The world has passed another global-warming milestone, according to new figures showing that temperatures rose to their hottest on record for the third year in a row in 2016. Global surface temperatures were nearly 1C warmer in 2016 than the mid-20th century average said scientists from Nasa and the National Oceanic and Atmospheric Administration in the US.”

January 19 – Bloomberg (Olga Kharif): “U.S. companies and government agencies suffered a record 1,093 data breaches last year, a 40% increase from 2015, according to the Identity Theft Resource Center. Headline-grabbing hacks… are increasing despite regulatory scrutiny and more aggressive cyber-security spending. Worldwide spending on security-related hardware, software and services rose to $73.7 billion in 2016 from $68.2 billion a year earlier… And that number is expected to approach $90 billion in 2018.”

Friday, January 20, 2017

Friday Evening Links

[Bloomberg] Trump’s Presidency Opens With Combative ‘America First’ Appeal

[Bloomberg] Inaugural Pomp Mixes With Whiff of Tear Gas on Day of Transition

[Reuters] Wall Street ends higher as Trump takes office

[Bloomberg] Haven Assets in Demand as Forceful Trump Sworn In: Markets Wrap

[Reuters] Trump trade strategy starts with quitting Asia pact: White House

[Reuters] Germany must prepare for 'rough ride' under Trump: Vice Chancellor

[Washington Post] Donald Trump is sworn in as president, vows to end ‘American carnage’

[CNBC] One thing about Trump's inaugural address surprised Carl Icahn

[WSJ] Donald Trump Sworn In as 45th President, Aims Sharp Rhetoric at Washington Establishment

[WSJ] Donald Trump Indicts Political System, Remains the Outsider

[WSJ] Trump Administration Suspends Insurance Cut for Risky Mortgages

[FT] America’s divisions on vivid display on streets of Capitol

Friday's News Links

[Bloomberg] Stocks Pare Gains, Treasury Losses Ease on Trump: Markets Wrap

[Bloomberg] Trump Takes Reins of Nation as Divisions Deprive Him of a Honeymoon

[Reuters] Executive actions ready to go as Trump prepares to take office

[Reuters] China GDP beats expectations but debt risks loom

[Bloomberg] China’s Yuan Outflows Plummet, Showing Capital Controls Pay Off

[Bloomberg] A Default Storm Is Brewing Over China Junk Bonds

[Bloomberg] Bullion Bulls Have History on Their Side as Trump Takes Helm

[Bloomberg] VVIX and VIX Go Opposite Ways for a Second Straight Week: Chart

[Bloomberg] Draghi’s Role in Elite Finance Group Comes Under EU Scrutiny

[Bloomberg] Schaeuble, Lagarde Seek to Bridge Greek Gap Amid Talks Deadlock

[Bloomberg] Ex-BOE’s King Raps Central Banks for Losing Focus, Humility

[WSJ] Donald Trump’s Presidency: A Look at His Proposed Policy Shifts

[FT] Trump’s vigorous and unexpected impact on markets — in charts

Thursday, January 19, 2017

Thursday Evening Links

[Reuters] Wall Street falls as investors ready for Trump's inauguration

[Bloomberg] Mnuchin Defends Banking Past, Advocates Strong U.S. Dollar

[Bloomberg] Mnuchin Puts Pressure on Banks Over Volcker Rule, Glass-Steagall

[Bloomberg] Mnuchin Says He’ll Tag China an FX-Manipulator If Warranted

[Bloomberg] Schaeuble Says He’d Balk at New Greek Bailout Without the IMF

[CNBC] China is working hard to support its currency — it sold US government bonds for six straight months

[NYT] In Davos, Financiers Bewildered by Global Uncertainty

[WSJ] Mnuchin Hearing Does Little to Clear Trump Fog of Uncertainty

[WSJ] New Wall Street Conflict: Analysts Say ‘Buy’ to Win Special Access for Their Clients

[FT] Currency traders see tug of war over the dollar

Thursday's News Links

[Reuters] Wall Street flat as countdown to Trump's swearing-in begins

[Bloomberg] Draghi Says ECB Unconvinced on Inflation as Pickup Driven by Oil

[Bloomberg] ECB Leaves Bond-Buying Program Unchanged as Inflation Gains]

[Bloomberg] American Consumers’ Economic Expectations Are The Highest Since 2002

[Reuters] U.S housing starts surge in December; jobless claims near 43-year low

[Bloomberg] Stemming the Tide: Six Things China Can Do Next to Curb Outflows

[Reuters] China says FX reserves ample, has plan to deal with outflows

[Bloomberg] Draghi Bingo Is ECB Watchers’ Game as Stimulus Pumps Up Prices

[CNBC] As market counts down to inauguration, markets want to see what Trump Treasury pick says about dollar, bonds

[Bloomberg] How Deutsche Bank Made −$462 Million Disappear

[Politico] Donald Trump and China’s Year of the Hawk

[WSJ] The Mortgage Market’s $1 Trillion Pocket of Worry

[WSJ] What to Watch at Today’s ECB Meeting

[FT] Trump’s government: the people who will matter for markets

[Bloomberg] 2016 Was a Record Year for Data Breaches

Wednesday, January 18, 2017

Wednesday Evening Links

[Bloomberg] Yellen Says Economy Near Goals Warrants Gradual Rate Hikes

[Bloomberg] Risk-On Stance Awaits Asia After Yellen Remarks: Markets Wrap

[Bloomberg] China’s Holdings of U.S. Treasuries Drop by Most Since 2011

[Bloomberg] Commerce Pick Ross Calls China ‘Most Protectionist’ Major Nation

[CNBC] Trump's trade policies could make things much worse for debt-ridden China

[NYT] Donald Trump and Janet Yellen Look to Be on a Collision Course

[Bloomberg] Wall Street's Year in Charts: Trading Gains, Job Cuts and More

[FT] Ross escalates Trump trade criticism against Beijing

[FT] Fed officials prepare ground to cut bank’s $4.5tn balance sheet

[FT] Global temperatures in 2016 break record for third year in a row

Wednesday's News Links

[Bloomberg] Havens Slip in Tussle of Politics Versus Inflation: Markets Wrap

[Reuters] Asia stocks up as Trump's dollar comment boosts exporters; sterling shines

[Bloomberg] Consumer Prices in U.S. Rise for Fifth Month on Shelter, Fuel

[Bloomberg] Trump’s Options for Weakening Dollar Extend Far Beyond Tweeting

[Reuters] Business euphoria over Trump gives way to caution, confusion

[Bloomberg] Goldman Sachs Earnings Climb as Trading Outpaces Expectations

[Bloomberg] China's Central Bank Pumps Out a Record $60 Billion Before Holidays

[Reuters] China 2016 home prices surge most in 5 years, but moderating, easing bubble fears

[Bloomberg] China Home Prices Rose in Fewest Cities in 11 Months Amid Curbs

[Reuters] Capital curbs push Chinese firms to risky, costly dollar bonds

[NYT] Run-Up Since Election Slows as Investors Consider Risks

[Washington Post] No longer welcome? American companies fear China’s turning its back on them.

[FT] ECB bond buying slide raises taper questions

[Reuters] China urges U.S. to bar Taiwan delegation from Trump inauguration

Tuesday, January 17, 2017

Tuesday Evening Links

[Bloomberg] Japan to Join Global Stock Selloff as Yen Jumps: Markets Wrap

[Bloomberg] Banks Lead U.S. Stock Declines as Dollar Weakens, VIX Jumps

[CNBC] Bank stocks post worst day in half a year as Trump uncertainties grow

[Bloomberg] Dollar Drops on Trump Comments as May Boosts Pound: Markets Wrap

[Bloomberg] China Spawns New Debt Market to Ease Burden on Local Governments

[CNBC] Trump just signaled the death of Clinton-era strong dollar policy

[Reuters] Deutsche Bank signs $7.2 billion deal with U.S. over risky mortgages

[CNBC] Social Security has a looming $11 trillion shortfall

[Bloomberg] These Are the Biggest Global Risks for 2017

[FT] Trump team questions the almighty dollar

[WSJ] Behind China’s Bond Selloff, a Risky Twist on the Repo Trade

Tuesday's News Links

[Bloomberg] Dollar Drops on Trump Comments as May Boosts Pound: Markets Wrap

[Bloomberg] Chinese Stocks Decline in Longest Losing Streak for Three Years

[Bloomberg] Asian Stocks Drop on Concerns Over ‘Hard’ Brexit, U.S. Policies

[Reuters] Britain will leave EU single market, May says

[BBC] Brexit at-a-glance: What we learned from Theresa May

[Reuters] Trump adviser warns of risks from strong dollar

[Bloomberg] May Ready to Announce Britain Will Leave EU Single Market

[Bloomberg] China Said to Intervene in Stock Market as Xi Attends Davos

[Bloomberg] Be Skeptical of the Fed's Rate Signals

[WSJ] Central Banks Drop Their Bazookas

[WSJ] Donald Trump Warns on House Republican Tax Plan

[WSJ] Amped Up Politics and the Future of Central Banking

[NYT] As Trump Era Arrives, a Sense of Uncertainty Grips the World

[FT] Trump flexes muscle against pillars of postwar order

Saturday, January 14, 2017

Saturday's News Links

[Reuters] U.S. banks to stay in fashion as earnings kick off

[Bloomberg] Merkel Cites Risks in 2017, Including ‘Protectionist Tendencies’

[Reuters] Trump suggests he may do away with Russia sanctions if Moscow helpful: WSJ

[CNN] China: No negotiation on 'One China' policy despite Trump remarks

[Forbes] At Davos; China Seeks The Limelight As Trump Takes Charge

[Reuters] Merkel urges United States to stick to international cooperation

[Reuters] Trump team struggles for cohesion on tougher China policy

[WSJ] Trump Open to Shift on Russia Sanctions, ‘One China’ Policy

Weekly Commentary: Off to an Interesting Start

It’s been only two weeks, yet 2017 is off to an interesting start. It’s certainly quite a contrast to last year’s “worst market start in decades.” Fear and risk aversion held sway a year ago. The great Chinese Bubble was at risk of imploding, and such a cataclysmic event could have pulled global markets and the economy right along with it. Moreover, central banks were running low of ammunition.

New year 2017 begins with an astonishing degree of optimism and risk embracement. The S&P 500 has advanced 1.6% in the first two weeks of the year, although those gains are overshadowed by the higher-risk NDX (up 4.0%), Morgan Stanley High Tech index (up 4.4%), biotechs (up 5.7%) and broker/dealers (up 4.0%). From the FT: “‘Fang’ stocks add $83bn to their market value over 7 days.” Facebook sports a 2017 gain of 11.6%, Apple 2.8%, Netflix 8.0% and Google 4.7%.

Enthusiasm goes beyond just a bout of central bank-induced market euphoria. Confidence at this point has made strong inroads throughout the real economy – consumers, small business and company management. It’s been awhile since I’ve heard such positive sentiments conveyed during big bank quarterly conference calls. Inflationism has worked its magic, for now. Folks have really bought in.

Bubble analysis for a while now has highlighted the divergence between inflating securities prices and deflating economic prospects. A case could be made these days that this gap is in the process of narrowing. I would counter that economic prospects have brightened only due to prolonged extraordinary global monetary inflation and resulting asset inflation.

It’s an especially challenging period to put into perspective. From the Bubble (global government finance – Granddaddy of All Bubbles) perspective, all the pieces are fitting into place. Things certainly do turn crazy near the end – and 2016 was consistent with such a thesis. Record stock prices were spurred by central bank responses to early-2016 market fragilities. Brexit and the Trump phenomenon arose from deep public dissatisfaction. Today’s confidence may have notable breadth, yet I question its depth.

Global markets are unstable, economies are unstable, societies are unstable, democracies are unstable and the geopolitical backdrop is unstable. Yet for going on nine years (incredible or what?) instabilities have been harnessed by the powerful triad of low borrowing costs, central bank electronic printing presses and literally Trillions of “money” with apparently no other purpose than to inflate securities and asset prices. Moreover, monetary disorder on such an unprecedented global scale has been around for so long that it passes as normal. And with so much uncertainty in the world the only thing certain is that global central banks will soldier on with QE and near zero rates. That’s been enough for the markets, trumping myriad uncertainties and fragilities.

January 11 – CNBC (Patti Domm): “The corporate debt market is kicking off the new year with a bang. Companies have issued a whopping $65 billion in high-grade debt so far since Jan. 2, the most ever for this time of year. The beginning of the year is normally an active period, but the amount issued so far is already more than half the $125.6 billion issued during the full month of January 2016 — and that was also a record… As of last Friday, the first week of the year saw $52 billion in investment-grade issuance, a record first week. ‘It was led by financials,’ said Informa analyst Chris Reich. ‘Financials accounted for 85% of the total of weekly volume.’”

It’s not that markets are oblivious to risk. After only two trading weeks, the Turkish lira is already down 5.4%, the Mexican peso 3.5% and the British pound 1.3%. Turkey and Mexico confront difficult geopolitical challenges, and both are on the list of EM economies with large quantities of dollar-denominated debt. For the most part, however, EM has maintained the momentum it enjoyed later in 2016. In general, and despite king dollar, EM is viewed as benefitting from heightened global inflationary impulses.

It’s only been a couple weeks, but things have already turned intriguing in China. The bursting of the Chinese Bubble was held at bay by record 2016 Credit expansion (December growth in total social financing a stronger-than-expected $236bn). Such reckless late-cycle (“Terminal Phase”) excess comes with dire consequences – a perilous real estate Bubble, “shadow banking” pandemonium, deeper economic maladjustment and acute currency vulnerability. Chinese officials have some very tough decisions to make.

January 8 – Bloomberg: “As China’s top leaders tallied the cost of another year of debt-fueled growth at a December meeting, the imperative for stability as a leadership reshuffle loomed later this year prompted an unexpected conclusion. The price was too high, the leaders agreed, according to a person familiar with the situation. The buildup of debt used to fuel smokestack industries from steel to cement had helped win the short-term battle for growth, but the triumph itself undermined the foundations of long-term expansion, the leaders decided… What followed was an order to central and local government officials that if they are forced to choose this year, stability must be the priority while everything else, including the growth target and economic reform, is secondary, said another four people familiar with the situation.”

If reports are accurate, Chinese officials have decided to (at least somewhat) bite the bullet and (again) attempt to get their financial Bubble under control. This would typically have global markets (stocks, Credit, commodities and currencies) on edge. Yet we’ve heard it all before – repeatedly. A broken record: “talk tough and lose nerve.” And they could very well be seriously determined this round to stick with tough measures. Perhaps they finally accept that timid not only doesn’t work – it makes things worse. But after last year’s panicky heavy-handed government interventions, markets are understandably skeptical. Does the Chinese government have the stomach for the type of dislocation that reining in excess at this stage of the Bubble would entail?

They’re going to have to do something. Curiously, Chinese officials ushered in the new year with a decent currency short squeeze (echoes of Thailand, June 1997?). After ending the year at 6.945 and trading as high as 6.964 on January 3, the renminbi (vs. dollar) rallied 1.3% to 6.869 on January 4th. The renminbi closed this week at 6.90, up 0.6% y-t-d.

January 8 – Bloomberg: “China’s foreign currency holdings fell for a sixth month in December, bringing last year’s drop to $320 billion as the yuan posted its steepest annual slide in more than two decades. Reserves decreased $41.1 billion to a fresh five-year low of $3.01 trillion… The central bank’s effort to stabilize the yuan was the main reason for the drop last year, the State Administration of Foreign Exchange said… The world’s largest stockpile has fallen for 10 straight quarters from a record $4 trillion in June 2014…”

January 12 – Bloomberg: “China has asked some banks to stop processing cross-border yuan payments until they balance inflows and outflows, people familiar with the matter said, as authorities step up a campaign to curb a record amount of money leaving the nation in the local currency. The directions, given verbally on Wednesday, require the lenders to show at the end of every month that the amount of outgoing yuan matches the sum that comes in… The People’s Bank of China guidance will apply to transactions involving both companies and individuals, the people said.”

Chinese officials are tiptoeing guardedly toward capital controls. Chinese international reserves will fall below $3.0 TN this month, and it’s just very difficult to see what will cool the desire to get “money” out of the country. Money and Credit continue their historic inflation, leading to only deeper maladjustment while creating added liquidity for outflows. And while the Chinese economic expansion for now continues to feed off record Credit growth and asset inflation, their entire system is acutely vulnerable to any slowing of lending and speculative leveraging.

Chinese officials appear to understand the gravity of tolerating ongoing financial excess, though I’m not convinced they appreciate the degree of lurking fragility. They must look with dismay at the monthly drawdown in their international reserve position. Beijing would prefer a weaker currency to stimulate their vast export engine, but they must increasingly fear an avalanche of destabilizing outflows and speculation against the renminbi. There’s increasing chatter of a “free-floating yuan.” A surprise major devaluation – along with capital controls – may look increasingly tempting compared to the ineffective gradual devaluation approach. But Chinese leadership has the new Trump Administration – that is already aghast with the current level of the renminbi - to contend with.

January 8 – Bloomberg (Narae Kim): “Donald Trump wasn't the first U.S. presidential candidate since the century began to blast China for manipulating its currency for trade advantage, but it's increasingly likely he'll be the first to follow through on the threat… That's the perspective of economists at Bank of America Merrill Lynch, led by Helen Qiao, chief Greater China economist at the bank in Hong Kong… ‘It has been increasingly difficult to dismiss concerns that President-elect Trump will adopt protectionist trade policies that may hurt trading partners as well as the U.S. itself,’ Qiao and her colleagues wrote… While designating China an official manipulator of its exchange rate for the first time since 1994 poses some technical hurdles… it may be a more appealing option than some of the alternatives. Trump once broached the idea of a 45% tariff on imports from the largest Asian economy, something the president has the power to do…”

January 12 – Bloomberg (David Tweed): “China’s state media rebuffed a suggestion by President-elect Donald Trump’s nominee for secretary of state that Beijing must be denied access to reclaimed reefs in the disputed waters of the South China Sea. ‘Unless Washington plans to wage a large-scale war in the South China Sea, any other approaches to prevent China access to the islands will be foolish,’ the Communist Party-run Global Times newspaper wrote… The English-language China Daily took a similar line: ‘It is certainly no small matter for a man intended to be the U.S. diplomat in chief to display such undisguised animosity toward China.’"

The media may be fixated on some Trump and Putin bromance, but the key relationship for 2017 is that of President Trump and President Xi Jinping. China is uncharacteristically vulnerable. Trump is emboldened. China will surely be even more belligerent than usual. Does Trump ever back down? Early indications have the Trump Administration taking a hard line on both Chinese trade and the South China Sea islands. I fully expect China to push back hard. Taiwan, the South China Sea and trade are hot buttons, surely to stoke rising nationalism. And while the Chinese media somewhat erupted this week, Chinese officials have thus far reacted cautiously.

Considering the major issues that China must confront, perhaps top leadership will see some potential advantage in confronting the Trump Administration. For a while now they’ve been laying the groundwork to point fingers at Japan, the U.S. and the “West”. Blame the foreigners! A trade war initiated by Donald Trump, or perhaps even a skirmish in the South China Sea, might actually play well in China. The rising nationalistic tide in China coupled with a seemingly small U.S. constituency advocating the importance of the China/America relationship leaves me concerned that this is a flash-point in the making.

But similar to rising rates and waning QE, a potential confrontation with China (trade and/or otherwise) is something ebullient markets are happy to disregard for now. With highly speculative markets currently over-liquefied, the focus is on opportunities and all things Trump. Still, this week saw an initial crack in market confidence in the Trump agenda (or at least his unconventional approach). Traders will certainly tune in whenever our new President nears a microphone. Will President Trump continue to tweet? How often and how inflammatory? No President has ever enjoyed such a bully pulpit. Powerful.

Markets prefer stability, predictability and the status quo. They, at least traditionally, loath uncertainty. The markets were fearful of Trump for a reason. Change, perhaps even radical change. Drain the swap. Make America Great Again – My Way. Incredible unpredictability. So many issues that come with such a personality.

Dow futures were down about 1,000 points election night. Trump said kind things about Hillary and emphasized a major infrastructure spending plan. Markets took off, and the bullish narrative immediately turned to de-regulation, tax cuts and a comprehensive pro-growth agenda. You either turned optimistic or were run over. The view took hold that securities markets would hold the same sway (or more!) under Trump as they did under Obama, Bush and Clinton.

For a while now I’ve believed that to make America great again would for starters require a rebuilding of our nation’s depleted manufacturing base. Decades of trading new financial claims for imports has been a recipe for economic maladjustment, serial boom and bust cycles and societal restiveness. Over time it passed for sustainable only through monetary inflation the likes the world had never experienced.

I have expected financial and economic crisis would likely be the impetus for major economic restructuring. I hope the Trump plan works, rather than my expectations coming to fruition. But markets are delusional if they believe there will be a free lunch. Trump’s focus will be on the real economy, rather than the financial economy that has risen to incredible prominence throughout this prolonged period of deindustrialization and inflationism. To make America Great Again will require the U.S. retaking a bigger slice of the global pie. Not coincidently, countries around the globe are as well keenly focused on the size of their respective slices. And decades of inflationism and maladjustment ensure that the pie is not expanding as it once did.

Trump is surely tickled that markets have rallied on his election win. But I’ll assume he senses that it’s unsustainable. Team Trump at this point seems to have a real determination to do what they said they’d do. Candidate Trump often referred to the “Bubble”. He is clearly no fan of Yellen or Federal Reserve monetary policies more generally. They’re a big part of the problem he’s endeavoring to fix.

And today none of this matters a lick to the markets. The marketplace assumes they’ll hold Trump hostage just like they did those before him. If he wants infrastructure, he needs the bull market. If he wants growth and jobs… The threat of financial crisis has for some time now hamstrung Presidents, central bankers and policymakers more generally on a global basis. But my hunch is that Trump and his inner-circle are determined to move forward whether the markets like it or now.

It could be a short honeymoon. Things will get interesting when the markets decide to protest or throw a tantrum. I wouldn’t be surprised if Team Trump believes a crisis-type backdrop might even provide an environment more conducive to radical change, but let’s not get ahead of ourselves. I’m ready for a fascinating year.

For the Week:

The S&P500 was little changed (up 1.6% y-t-d), while the Dow slipped 0.4% (up 0.6%). The Utilities declined 0.7% (down 0.4%). The Banks added 0.4% (up 1.4%), while the Broker/Dealers slipped 0.4% (up 4.0%). The Transports gained 1.1% (up 1.8%). The S&P 400 Midcaps (up 1.6%) and the small cap Russell 2000 (up 1.1%) each gained 0.3%. The Nasdaq100 rose 1.0% (up 4.0%), and the Morgan Stanley High Tech index added 0.9% (up 4.4%). The Semiconductors jumped 1.8% (up 2.0%). The Biotechs declined 1.0% (up 5.7%). With bullion jumping $24, the HUI gold index gained 1.4% (up 9.3%).

Three-month Treasury bill rates ended the week at 52 bps. Two-year government yields slipped two bps to 1.19% (unchanged y-t-d). Five-year T-note yields declined two bps to 1.90% (down 3bps). Ten-year Treasury yields fell two bps to 2.40% (down 4bps). Long bond yields declined two bps to 2.99% (down 8bps).

Greek 10-year yields gained 11 bps to 6.89% (down 13bps y-t-d). Ten-year Portuguese yields fell 15 bps to 3.91% (up 16bps). Italian 10-year yields declined seven bps to 1.90% (up 8bps). Spain's 10-year yields dropped 11 bps to 1.43% (up 5bps). German bund yields rose four bps to 0.34% (up 13bps). French yields increased three bps to 0.80% (up 12bps). The French to German 10-year bond spread widened one to 46 bps. U.K. 10-year gilt yields gained two bps to 1.36% (up 13bps). U.K.'s FTSE equities index gained 1.8% (up 2.7%).

Japan's Nikkei 225 equities index lost 0.9% (up 0.9% y-t-d). Japanese 10-year "JGB" yields slipped a basis point to 0.05% (up one basis point). The German DAX equities index added 0.3% (up 1.3%). Spain's IBEX 35 equities index was unchanged (up 1.7%). Italy's FTSE MIB index fell 0.9% (up 1.5%). EM equities were mixed. Brazil's Bovespa index jumped 3.2% (up 5.7%). Mexico's Bolsa increased 0.2% (up 1.2%). South Korea's Kospi rose 1.4% (up 2.5%). India’s Sensex equities index gained 1.8% (up 2.3%). China’s Shanghai Exchange dropped 1.3% (up 0.3%). Turkey's Borsa Istanbul National 100 index jumped 5.7% (up 4.3%). Russia's MICEX equities index declined 0.8% (down 1.7%).

Junk bond mutual funds saw inflows of $564 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates dropped eight bps to 4.12% (up 20bps y-o-y). Fifteen-year rates fell seven bps to 3.37% (up 18bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down four bps to 4.24% (up 31bps).

Federal Reserve Credit last week slipped $0.7bn to $4.414 TN. Over the past year, Fed Credit contracted $37.3bn (down 0.8%). Fed Credit inflated $1.603 TN, or 57%, over the past 218 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt were little changed last week to $3.182 TN. "Custody holdings" were down $95.3bn y-o-y, or 2.9%.

M2 (narrow) "money" supply last week added $7.0bn to a record $13.267 TN. "Narrow money" expanded $965bn, or 7.8%, over the past year. For the week, Currency increased $3.3bn. Total Checkable Deposits declined $12.1bn, while Savings Deposits rose $13.6bn. Small Time Deposits gained $2.4bn. Retail Money Funds were little changed.

Total money market fund assets dropped $22.5bn to $2.691 TN. Money Funds declined $52bn y-o-y (1.9%).

Total Commercial Paper gained $9.3bn to $959bn. CP declined $85bn y-o-y, or 8.2%.

Currency Watch:

January 11 – Reuters (Miguel Angel Gutierrez, Paulina Osorio and David Alire Garcia): “The Mexican peso weakened to a historic low of 22.04 per dollar and the country's stock index fell on Wednesday, after U.S. President-elect Donald Trump warned U.S. auto companies would face a high tax for products made south of the border. Speaking at a news conference in New York, Trump also reiterated that the United States would start building a southern border wall after he took office next week. He said Mexico would reimburse the cost either through a tax or a payment.”

January 12 – Bloomberg (Justina Lee): “As China’s yuan swings back into the global spotlight, it might seem like an odd time for authorities in Beijing to loosen their grip on the tightly-managed currency. Yet for a growing number of analysts and investors, the prospect of a freely floating yuan -- a Chinese exchange rate wholly determined by market forces -- is no longer a distant possibility. Advocates include a government-backed researcher and a former central bank adviser, while bond-market powerhouse Pacific Investment Management Co. says the chances of a free float are rising.”

The U.S. dollar index dropped 1.0% to 101.18 (down 1.2% y-t-d). For the week on the upside, the Australian dollar increased 2.8%, the New Zealand dollar 2.5%, the Japanese yen 2.2%, the South African rand 1.8%, the Swedish krona 1.6%, the South Korean won 1.5%, the euro 1.1%, the Swiss franc 1.0%, the Canadian dollar 0.9%, the Norwegian krone 0.4% and the Brazilian real 0.1%. For the week on the downside, the Mexican peso declined 1.2% and the British pound fell 0.9%. The Chinese yuan declined 0.1% versus the dollar (up 0.6% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index added 0.5% (up 0.3% y-t-d). Spot Gold jumped 2.1% to $1,198 (up 3.9%). Silver rose 1.9% to $16.84 (up 5.4%). Crude fell $1.33 to $52.37 (down 2.7%). Gasoline slipped 0.9% (down 3.5%), while Natural Gas rose 4.8% (down 8.6%). Copper jumped 5.7% (up 7.3%). Wheat increased 0.6% (up 4.4%). Corn was little changed (up 1.8%).

Trump Administration Watch:

January 12 – Bloomberg: “China said it had the right to act in its own territory in the disputed South China Sea, pushing back after President-elect Donald Trump’s nominee for secretary of state said Beijing must be denied access to reclaimed reefs. While China’s foreign ministry issued a relatively measured response to the remarks, the threat from former Exxon Mobil Corp. chief Rex Tillerson raises the prospect of a more antagonistic U.S. approach to Beijing’s military buildup in the area. In recent years China has reclaimed thousands of acres of land and shooed away boats from other claimant states like the Philippines and Vietnam. Hours into a confirmation hearing before the Senate Foreign Relations Committee, Tillerson compared China’s actions to those of Russia in Crimea, saying a failure to respond had allowed it to ‘keep pushing the envelope’ in the South China Sea. ‘We’re going to have to send China a clear signal that first the island-building stops and second your access to those islands is also not going to be allowed.’”

January 12 – Reuters (Phil Stewart and Patricia Zengerle): “Donald Trump's pick to lead the Pentagon put Russia at the top of a list of threats to U.S. interests on Thursday and told Congress that America must be ready to confront Moscow where necessary, even as he backed Trump's bid for better relations. The remarks by retired Marine General James Mattis were the latest by one of Trump's Cabinet picks that veered away from the president-elect's campaign rhetoric…”

January 12 – Financial Times: “Global investors sold the dollar and sought security in government bonds and gold on Thursday as the Trumpflation rally that has dominated global markets since early November soured. In the wake of Mr Trump becoming president-elect in November, global markets have seen one of the best post-election rallies in history. Plans to cut taxes, ease regulation and deliver infrastructure spending invigorated an ageing bull market and sent stock indices to fresh highs. However, the tone in some of the best performing areas of markets has shown signs of fatigue in recent weeks and Mr Trump’s tumultuous briefing with the media on Wednesday ignited a stronger reaction across currencies, equities, gold and bonds that was still resonating 24 hours later.”

January 12 – Bloomberg (Robert Langreth, Caroline Chen and Jared S Hopkins): “In a hallway of a San Francisco luxury hotel, investors huddled around a computer screen watching dozens of drug stocks plummet as President-elect Donald Trump lit into pharma companies, declaring that ‘they’re getting away with murder.’ As for Obamacare, he said, ‘it’ll be repeal and replace.’ The mood was shock and disbelief as thousands of health-care investors, bankers and executives gathered at the cramped Westin St. Francis Hotel. Many had paid thousands of dollars to attend the industry’s biggest investing get-together of the year, the four-day J.P. Morgan Healthcare Conference. And they had spent the last days speculating about what policies Trump would push in health care. Then the bomb dropped. ‘It’s horrible,’ David MacCallum of Outer Islands Capital, a small hedge fund in New York, said over the phone to his wife as he watched the tickers tilt downward.”

January 9 – Reuters (Brenda Goh, J.R. Wu in Taipei and Michael Martina): “State-run Chinese tabloid Global Times warned U.S. President-elect Donald Trump that China would ‘take revenge’ if he reneged on the one-China policy, only hours after Taiwan's president made a controversial stopover in Houston. Taiwan President Tsai Ing-wen met senior U.S. Republican lawmakers during her stopover in Houston on Sunday en route to Central America, where she will visit Honduras, Nicaragua, Guatemala and El Salvador.”

January 11 – Reuters (Davie Graham): “Mexico said… it would throw its relationship with the United States wide open in talks with the incoming Trump administration, putting security, migration and trade on the table as it seeks to avoid a major economic shock. U.S. President-elect Donald Trump has threatened to tear up a trade agreement that underpins Mexico's export model if he cannot renegotiate its terms in his favor, battering the peso currency and fueling uncertainty over foreign investment. President Enrique Pena Nieto said Mexico would take a broad approach to the challenge, seeking a settlement that would benefit both Mexico and the United States as he looks to carve out a platform that gives him room for maneuver in talks. ‘All the issues that define our bilateral relationship are on the table, including security, migration and trade,’ Pena Nieto said…”

China Bubble Watch:

January 12 – Bloomberg: “China’s broadest measure of new credit expanded faster than expected, bringing the total of new loans extended last year to roughly equal the size of Italy’s $1.8 trillion economy. Aggregate financing remained robust at 1.63 trillion yuan ($236bn) in December, compared with a median estimate of 1.3 trillion yuan… and 1.74 trillion yuan the prior month. New yuan loans stood at 1.04 trillion yuan, exceeding all 37 estimates in the survey. The broad M2 money supply increased 11.3% from a year earlier after climbing 11.4% in November.”

January 11 – Reuters (Engen Tham and Samuel Shen): “China's forex regulator is telling banks to keep its instructions about curbing capital outflows secret and to ensure that research analysts keep any negative views about the yuan's prospects to themselves, several bankers said. Both demands are seen as an attempt by the authorities to prevent alarm that could trigger further declines in the yuan, the bankers from local and foreign banks said… In a statement.., SAFE's Shanghai branch said it had not adopted new measures to control forex conversions and cross-border payments, but had urged banks to strengthen checks on compliance and deal authenticity. SAFE also said a media report about it telling banks to keep its instructions secret was ‘inaccurate, and is misleading public opinion and disturbing normal operations of the Forex market’.”

January 11 – Bloomberg (Sarah McBride): “China's bond market is facing more turbulence as banks scramble to avoid losses on wealth management products that raised US$3.8 trillion from the nation's savers. The investment plans typically use leverage to boost returns on the 56% of their holdings parked in fixed-income securities. That model is under threat after Chinese corporate notes plunged the most in nine years in the fourth quarter. Banks may have to use their own money to repay holders of maturing WMPs because it will be hard to sell bond holdings during an extended rout or to raise cash by issuing new products, Citigroup wrote… The risk of a vicious cycle of bond losses, cash shortages, payment failures and further debt-market declines has prompted China's policy makers to step in… What makes such products particularly risky are their short time frames. Chinese company bonds have an average maturity of 7.7 years, while the most-recent government data show a typical WMP matures in 127 days. China International Capital Corp estimates such plans hold more than 50% of all outstanding Chinese corporate bonds.”

January 11 – Bloomberg (Chris Anstey, Cynthia Li and Narae Kim): “Call it China’s Great Ball of Money, Whac-a-Mole Finance, or simply a whole lot of liquidity. Whatever term you use for the excess credit trapped in China’s financial system, few would deny that predicting its sometimes erratic movements can be a money-maker for analysts, traders and investors. After a string of market bubbles in recent years, China will again see assets threatened in 2017 by prices detaching from fundamentals. That’s the opinion of all but one of 14 economists surveyed by Bloomberg late last month. Half penciled in the risk of a real-estate bubble inflating, despite efforts by policy makers in recent months to avoid exactly that outcome. An additional four saw the corporate bond market as most vulnerable to becoming a bubble, again even as officials take steps to raise costs and reduce a build-up in debt.”

January 10 – Bloomberg: “China’s producer price index rose at the fastest pace in more than five years in December as the factory to the world swings from being a drag on global inflation to another potential force pushing prices higher. PPI jumped 5.5% last month from a year earlier, compared to the median estimate of 4.6% in a Bloomberg survey and the 3.3% gain in November. Consumer-price index rose 2.1%...”

January 12 – Bloomberg: “China’s exports remained subdued as soft global demand weighed on sales, raising uncertainties for the nation’s external sector as it braces for potential trade frictions with the U.S. under a Donald Trump presidency. Overseas shipments dropped 6.1% from a year earlier in December, the customs administration said Friday. Imports rose 3.1%, leaving a $40.8 billion trade surplus.”

January 7 – Reuters (Winni Zhou, Yawen Chen and Alexandra Harney): “Municipal authorities in Shanghai suspended sales of commercial office projects from Jan. 6, in the latest move to crack down on irregularities in the property market amid concerns about soaring prices. The suspension came after the municipality's housing and urban-rural development committee received increasing complaints about ‘illegal sales and unauthorized alterations’ to commercial housing projects, it said…”

Europe Watch:

January 12 – Wall Street Journal (Nina Adam and Andrea Thomas): “Germany’s economy grew strongly in 2016, propelled by a buoyant labor market and a pickup in government spending, likely making it one of the fastest-growing of the Group of Seven industrialized nations. Gross domestic product expanded 1.9% in 2016 in inflation-adjusted terms… This is the highest rate since 2011, beating the government’s own prediction of 1.8% growth. There was a pickup in economic activity late in the year.”

January 12 – Reuters (Gernot Heller and Madeline Chambers): “German Finance Minister Wolfgang Schaeuble told The European magazine that he favoured a normalisation of the inflation rate so that the European Central Bank could gradually withdraw from its 'unusual monetary policy'. Schaeuble said it would be better if Europeans increased competitiveness by introducing structural reforms. ‘A normalisation of the inflation rate is also desirable so that we gradually get out of the 'unusual monetary policy',’ Schaeuble told the magazine…”

Fixed-Income Bubble Watch:

January 11 – Bloomberg (Alex Morales): “Jeffrey Gundlach said the 10-year Treasury yield topping 3% would signal the end of the three-decade long rally in bonds. ‘Almost for sure we’re going to take a look at 3% on the 10-year during 2017,’ Gundlach, the chief executive officer of DoubleLine Capital, said… ‘And if we take out 3% in 2017, it’s bye-bye bond bull market. Rest in peace.”

January 12 – Reuters (John Geddie): “U.S. President-elect Donald Trump's plans to slash taxes could threaten the country's triple-A credit rating over the medium term, the head of EMEA sovereign ratings at the Fitch agency said… We do see increasing medium-term pressures (on the U.S. rating),’ Ed Parker said… ‘Even before elections the U.S had the highest level of government debt of any triple-A country. If we add on top of that Trump's plans to cut taxes by $6.2 trillion over the next 10 years that could add around 33% to U.S. government debt,’ he added.”

Global Bubble Watch:

January 10 – Financial Times (Nicholas Megaw): “S&P downgraded almost three times as many countries’ sovereign credit ratings as it upgraded in 2016, and the ratings agency has predicted that the trend is likely to accelerate this year. Of the 130 countries with a rating from S&P, 30 started 2017 with a ‘negative’outlook compared with only seven with a positive outlook.”

U.S. Bubble Watch:

January 10 – Bloomberg (Vince Golle): “Optimism among America’s small businesses soared in December by the most since 1980 as expectations about the economy’s prospects improved dramatically in the aftermath of the presidential election. The National Federation of Independent Business’s index jumped 7.4 points last month to 105.8, the highest since the end of 2004, from 98.4.”

January 9 – Bloomberg (Cecile Vannucci): “Anxiety in financial markets just keeps on waning. A Bank of America Corp. risk gauge tracking hedging demand and investor flows across global asset classes has fallen to levels not seen since China’s devaluation of the yuan in August 2015 set off a wave of risk aversion.”

January 11 – Financial Times (Mamta Badkar and Adam Samson): “Facebook, Amazon, Netflix and Google-parent Alphabet — the so-called Fang stocks — have collectively added $83.4bn to their market value over the first seven trading days this year… Fang stocks hit the ground running, advancing, on average, 6.6%, compared with a 4% drop over the same period in 2016 as fears of a US recession and skittishness about the Chinese economy drove broader US equities and the Fangs lower at the start of last year.”

January 12 – Bloomberg (Dani Burger): “Stock exchanges are increasingly getting out of the stock trading business. As weird as it may seem, individual shares no longer are the most actively traded securities in the market. That distinction goes to exchange-traded funds, which took in a record $400 billion in the past year to become a $3.8 trillion industry… Each day, a vast majority of trades are in ETFs, such as the SPDR Financial Select Sector Fund, or XLF, which has an average daily volume of 105 million shares, making it fifth-most traded fund. That’s 24% more than the second-most traded stock, Chesapeake Energy Corp. Of the 15 most heavily traded securities in 2016, only three were stocks…”

January 8 – CNBC (Jeff Cox): “Professional stock pickers just wrapped up one of their worst years ever, and the look ahead doesn't seem a whole lot better. By now it's becoming a familiar refrain: This will be the year of the stock picker, right along with the ‘Great Rotation’ of investor money from bonds to stocks. Neither has happened during the course of the bull market, however, and 2016 was no exception. Fewer than 1 in 5 large-cap active managers… produced returns that beat the Russell 1000 market index, according to Bank of America Merrill Lynch. The average fund had an 8.4% return for the full year; the index rose 9.7%.”

January 11 – Bloomberg (Dani Burger): “What happens when you take the ‘short’ out of a long-short trading strategy? Some hedge funds are about to find out. Equity long-short fund managers, the biggest category in hedge funds, hold the fewest bearish stock bets on record, data compiled by Credit Suisse Group AG show. The shift reflects their abysmal performance in 2016, when the S&P 500 advanced 9.5% as the long-short managers tracked by Credit Suisse fell 4.3%, their worst year since 2011. With the market continuing to rally, many hedge funds have decided to toss the short side of these pairs and stick with the long side to avoid getting singed in a hot market.”

January 11 – Bloomberg (Sarah McBride): “Venture capital funds in the U.S. received the most money since the heady dot-com days, but they’re moving more cautiously as their investments are slow to realize returns. The U.S. venture industry raised $41.6 billion last year, the highest since 2001… However, startup investing slowed last year, while the number of venture-backed businesses that were acquired or went public fell to the lowest level since 2010…”

January 12 – Reuters (Sharon Bernstein): “Foreclosure proceedings affected nearly a million U.S. homes and other real estate last year, down 14% from 2015 and down 70% from the worst of the housing crisis in 2009… Foreclosures hit a 10-year low and property owners in all but 15 states experienced fewer of the early stages of foreclosure, usually begun after owners have missed four mortgage payments…”

January 12 – Reuters (Brenda Goh): “The U.S. government posted a $28 billion budget deficit in December, with both receipts and outlays falling from the same month a year earlier… The budget gap was $14 billion in December 2015…”

Federal Reserve Watch:

January 9 – Bloomberg (Rich Miller): “Potential candidates to head the Federal Reserve in 2018 suggested that monetary policy would be tighter if they were in charge. Speaking at the annual American Economic Association meeting that ended Sunday, Glenn Hubbard of Columbia University, along with Stanford University’s John Taylor and Kevin Warsh, criticized the central bank for trying to do too much to help an economy struggling with problems that monetary policy can’t solve.”

EM Watch:

January 11 – Wall Street Journal (Ira Iosebashvili and Robbie Whelan): “Global investors are fleeing Mexico’s financial markets, sending the peso to record lows on mounting concerns that Donald Trump’s trade policy could end the country’s privileged status among developing countries. The peso on Wednesday tumbled to another all-time low against the dollar as Mr. Trump pledged to change U.S. trade policy with Mexico. ‘Mexico has taken advantage of the United States,’ he said during his press conference. ‘It’s not going to happen anymore.’”

January 11 – Bloomberg (Mario Sergio Lima): “Brazil slashed its benchmark interest rate in a surprisingly aggressive move, as policy makers ratcheted up their efforts to jumpstart the country’s shrinking economy. The central bank… unanimously voted… to lower the benchmark Selic rate by three quarters of a point to 13% -- a move that was predicted by just four of 48 analysts…”

January 12 – Financial Times (Mehreen Khan): “Talking up the lira. OK, maybe shouting it up. Turkey’s president Recep Tayyip Erdogan has been in typically combative mood today, comparing foreign exchange traders to terrorists targeting the country after a record busting slide in the lira. Mr Erdogan, who has form when it comes to bombast over the exchange rate, said there was ‘no difference between people with weapons and those with foreign currency’, adding that speculators used the exchange rate ‘like a weapon’ against the country.”

January 8 – Financial Times (Paul McNamara): “The once-moderate Islamist AK Party, which came to power in 2002, won plaudits for a programme of economic reform and peace in restive Kurdish regions. Inflation fell from 68% in 2001 to 7.4% in 10 years, and stayed largely in single digits. Returns to investors were spectacular… Even the global financial crisis of 2008 constituted only a one-year setback. But Ankara enters 2017 little-loved by investors. A Bloomberg survey of investors in December named the country as by far the most popular underweight or short of the major emerging markets. “

Geopolitical Watch:

January 12 – Reuters (Brenda Goh): “China and Russia have agreed to take further unspecified ‘countermeasures’ in response to a U.S. plan to deploy an anti-missile system in South Korea, state news agency Xinhua reported… The countermeasures ‘will be aimed at safeguarding interests of China and Russia and the strategic balance in the region", Xinhua said, citing a statement released after a China-Russia security meeting.”

January 11 – Reuters (Idrees Ali and David Brunnstrom): “A Chinese H-6 strategic bomber flew around the Spratly Islands over the weekend in a new show of force in the contested South China Sea, a U.S. official said… It was the second such flight by a Chinese bomber in the South China Sea this year… The flight could be seen as a show of ‘strategic force’ by the Chinese, the official said. It comes after U.S. President-elect Donald Trump has signaled a tougher approach to China when he takes office…”

January 11 – Reuters (J.R. Wu and Faith Hung): “Taiwan scrambled jets and navy ships on Wednesday as a group of Chinese warships, led by its sole aircraft carrier, sailed through the Taiwan Strait, the latest sign of heightened tension between Beijing and the self-ruled island. China's Soviet-built Liaoning aircraft carrier, returning from exercises in the South China Sea, was not encroaching in Taiwan's territorial waters but entered its air defense identification zone in the southwest…”

January 8 – Financial Times (Lucy Hornby): “When Taiwan last year elected a president eager to reduce the island’s reliance on China, tens of thousands of Chinese netizens attacked Taiwanese websites in a co-ordinated action that was as much a surprise to Beijing as it was to its targets. In what they called a ‘sacred war’, online nationalists plastered pro-Chinese propaganda on Taiwanese Facebook pages. Now, as US President-elect Donald Trump shakes up international diplomatic pieties, the volatile reaction of Chinese nationalists and the ability of China’s assertive president Xi Jinping to keep them on his side is one of the many uncertainties facing Asia. In the past, a small group of hardcore nationalists in mainland China focused exclusively on Japan. Now a younger and more vocal generation is weighing in on new fronts, including relations with Taiwan, the US and the Muslim world. ‘There are lots of historic questions still unresolved but we can’t just look at Japan. We need to change US-China relations,’ says Sima Pingbang, a vocal ‘red’ or nationalist blogger. ‘The real problem is the US.’”

January 11 – Bloomberg (Alex Morales): “Rising inequality and social polarization are set to shape world developments for the next decade after contributing to Britain’s decision to leave the European Union and the ballot-box success of U.S. President-elect Donald Trump, the World Economic Forum said. Climate change was underlined as the third major global trend in the WEF’s annual assessment of global risks... It said world leaders must work together to avoid ‘further hardship and volatility in the coming decade.’ ‘There’s a wide array of potential threats; growing social and political turmoil, potential business interruptions which could stem from inter-state conflict, from social instability, terrorist attacks,’ John Drzik, president of global risk at Marsh USA Inc…’This whole social and political context creates the potential for disruption.’”

January 6 – Wall Street Journal (Greg Ip): “Late on a Sunday evening a little more than a year ago, Marine Le Pen took the stage in a depressed working-class town in northern France. She had just lost an election for the region’s top office, but the leader of France’s anti-immigrant, anti-euro National Front did not deliver a concession speech. Instead, Ms. Le Pen proclaimed a new ideological struggle. ‘Now, the dividing line is not between left and right but globalists and patriots,’ she declared… Globalists, she charged, want France to be subsumed in a vast, world-encircling ‘magma.’ She and other patriots, by contrast, were determined to retain the nation-state as the ‘protective space’ for French citizens. Ms. Le Pen’s remarks foreshadowed the tectonic forces that would shake the world in 2016.”