Saturday, November 18, 2017

Saturday's News Links

[Bloomberg] China Home Prices Stop Three-Month Drop as Market Stabilizes

[Reuters] Global banks flag concerns over U.S. Senate tax proposal

[Reuters] German parties regroup for last-ditch coalition push

[Reuters] Zimbabwe protesters begin marching towards Mugabe residence

Weekly Commentary: "Not Clear What That Means"

November 15 – Bloomberg (Nishant Kumar and Suzy Waite): “Hedge-fund manager David Einhorn said the problems that caused the global financial crisis a decade ago still haven’t been resolved. ‘Have we learned our lesson? It depends what the lesson was…’ Einhorn said he identified several issues at the time of the crisis, including the fact that institutions that could have gone under were deemed too big to fail. The scarcity of major credit-rating agencies was and remains a factor, Einhorn said, while problems in the derivatives market ‘could have been dealt with differently.’ And in the ‘so-called structured-credit market, risk was transferred, but not really being transferred, and not properly valued.’ ‘If you took all of the obvious problems from the financial crisis, we kind of solved none of them,’ Einhorn said… Instead, the world ‘went the bailout route.’ ‘We sweep as much under the rug as we can and move on as quickly as we can,’ he said.”

October 12 – ANSA: “European Central Bank President Mario Draghi defended quantitative easing at a conference with former Fed chief Ben Bernanke, saying the policy had helped create seven million jobs in four years. Bernanke chided the idea that QE distorted the markets, saying ‘It's not clear what that means’.”

Once you provide a benefit it’s just very difficult to take it way. This sure seems to have become a bigger and more complex issue than it had been in the past. Taking away benefits is certainly front and center in contentious Washington with tax and healthcare reform. It is fundamental to the dilemma confronting central bankers these days.

As I read David Einhorn’s above analysis, my thoughts returned to Ben Bernanke’s comment last month regarding distorted markets: “It’s Not Clear What That Means.” Einhorn attended one of those paid dinners with Bernanke back in 2014, and then shared thoughts on Bloomberg television: “I got to ask him all these questions that had been on my mind for a very long period of time. And then on the other side, it was, like, sort of frightening, because the answers weren’t any better than I thought that they might be.” A successful hedge fund manager such a Mr. Einhorn is keen to decipher market distortions. Dr. Bernanke was keen to benefit markets – to inflate them.

During the mortgage finance Bubble period, I often referred to “The Moneyness of Credit” and “Wall Street Alchemy.” Various risk intermediation processes were basically transforming endless (increasingly) risky loans into perceived safe and liquid money-like instruments. Throughout history, insatiable demand for money created great power and peril. I can’t conceptualize a more far-reaching market distortion than conferring money attributes to risky financial instruments. Pandora’s Box. For a while now, I’ve been astounded that the Federal Reserve has no issue with epic market distortions.

Fannie and Freddie were on the hook for insuring Trillions of mortgage securities. These GSEs essentially had no reserves or equity in the event of a significant downturn, a fact that had no bearing whatsoever on the safe haven pricing of their perceived money-like securities. Insurers of Credit were on the hook for Trillions, with minimal reserves. So, investors held (and leveraged) Trillions of “AAA” with little concern for losses or illiquid trading. Meanwhile, there was the gargantuan derivatives marketplace thriving on the assumption of liquid and continuous markets, despite hundreds of years of market history replete with recurring bouts of illiquidity and dislocation.

There were as well myriad variations of cheap market “insurance” readily available, bolstering risk-taking with the misperception that risks (equities, Credit, interest-rates, etc.) could always be easily hedged. And so long as Credit expanded rapidly (risky loans into “money”), the economy boomed and markets inflated, the pricing for market insurance remained low (or went lower).

As Einhorn stated, “risk was transferred, but not really being transferred, and not properly valued.” It amounted to a historic market Bubble distortion. Underlying risks were being grossly distorted and mispriced in the marketplace. Distortions fostered a massive expansion of risky Credit and untenable financial intermediation – a powerful boom and bust dynamic that culminated in a crash. Amazingly, catastrophic market distortions evolved gradually enough over years so to barely garnered attention. Can’t worry about risk when there’s easy “money” to amass.

Central bankers learned the wrong lessons from that modern-day market crisis. The post-crisis focus was on traditional lending and bank capital. As the thinking goes, so long as banks avoid reckless lending and remain well-capitalized, the risk of a repeat crisis remains negligible. Central banks did come to appreciate the risk of institutional Too Big to Fail, but again the solution was additional bank capital. Market distortions behind the Bubble and crash didn’t even enter into the discussion. Indeed, the Fed moved aggressively to reflate market prices, employing various measures that specifically manipulated market perceptions, prices and dynamics. There was no recognition that this course would elevate the entire structure of global market Bubbles to Too Big to Fail.

“Moneyness of Credit” evolved into the “Moneyness of Risk Assets.” It moved so far beyond Fannie, Freddie, and Wall Street structured finance distorting perceptions of risk in mortgage securities. The Federal Reserve and global central bankers turned to brazenly distorting risk perceptions throughout equities, corporate Credit, sovereign debt, EM and the rest. Slash rates and force savers into the risk asset marketplace. Inject new “money” into the securities markets and guarantee liquid, continuous and levitated markets. Who wouldn’t write flood insurance during a predetermined drought? And then, why not reach for risk, speculate and leverage with prices rising and market insurance remaining so cheap? History’s Greatest Market Distortions.

The VIX ended Friday’s session at 11.43, only somewhat above recent historic lows. The Fed is only a few weeks from what will likely be its fifth “tightening” move of this cycle. And with rather conspicuous market excesses facing a tightening cycle, why does market insurance remain so cheap? For one, markets assume that central bankers will not actually impose a tightening of market or financial conditions. Second, the greater risk asset Bubbles inflate the more confident the markets become that central bankers have no alternative than to backstop market liquidity and prices.

“The West will never allow a Russian collapse.” Then, after the LTCM bailout and the “committee to save the world,” the powers that be would surely not allow a crisis in 1999. Then it was “Washington will never allow a housing bust.” Later it was 2008 as the “100-year flood.” Global central bankers will simply not tolerate another crisis. And it is always these types of pervasive market misperceptions that ensure far-reaching distortions – risk-taking, lending, speculating, leveraging, investing, etc. – that inevitably ensure problematic market “adjustments.”

One of the Capitalism’s great virtues is the capacity for a well-functioning pricing mechanism to promote self-adjustment and self-correction. And I would argue that the pricing of finance is absolutely critical to system adjustment and sustainability. Increasing demands for finance should induce higher borrowing costs that work to temper demand. But the proliferation of non-traditional non-bank and market-based finance essentially generates unlimited supply. It may have been subtle, though consequences were earth-shattering.

With Wall Street intermediation leading the charge, the mortgage finance Bubble period experienced a huge surge in demand for Credit accommodated at declining borrowing costs. This was transformative particularly for home and securities price inflation dynamics, where rising asset prices generally tend to incite heightened speculative demand. The critical pricing mechanisms that promote self-adjustment and correction became inoperable.

There is a special place in market hell for long-term price distortions. Given sufficient time, an enterprising Wall Street will ensure a proliferation of new products and strategies meant to profit from upward price trends and ingrained market perceptions. As central banks punished savers and “helped” the markets with low rates, QE and liquidity assurances, The Street ensured an onslaught of enticing new investment vehicles and approaches. Why not just buy a corporate Credit ETF instead of holding zero-rate deposits or T-bills? Of course it’s perfectly rational to own equities index ETFs, especially with central bankers ensuring underperformance by active managers conscious of risk. And after a number of years, with markets booming and economies humming along, don’t fundamentals beckon for participating in the junk bond ETF bonanza?

From my perspective, there are two key areas where central banker-induced market distortions have been precariously exacerbated by (fed and fed by) structural developments. First, the perception of “moneyness” has spurred Trillions of flows into the ETF complex. Indeed, the perception of safety and liquidity has created a structural vulnerability to a destabilizing reversal of flows. Everyone perceives they can easily – and almost instantaneously - get out of the market with a couple mouse clicks. And in a rehash of Wall Street Alchemy, hundreds of billions (Trillions?) of illiquid securities have been intermediated through the ETF complex - transformed into perceived liquid ETF shares. This has been a particularly momentous development for corporate Credit and critical as well for mid- and small cap equities.

A second perilous structural development has been within the Wild West of Derivatives. The perception that there are no limits to what central bankers will do to bolster the markets has fostered an explosion of derivative strategies - variations of writing market protection or “selling flood insurance during a drought”. The availability of cheap risk protection became fundamental to financial excess on a systemic basis.

I would add, as well, that over the years a powerful interplay has evolved between the ETF complex and derivatives markets. The perception of highly liquid ETF shares – especially in corporate Credit and liquidity-challenged equities – has been integral to “dynamic” derivative hedging strategies. Why not leverage in corporate Credit and outperforming small cap stocks when cheap derivative protection is so readily available? Better yet, why not leverage a “diversified” portfolio of multiple asset classes (i.e. “risk parity”)? And, likewise, why not garner easy returns from selling such insurance on the low-probability of a market decline? After all, liquid markets in ETF shares are available for shorting in the unlikely event the seller of market protection decides to hedge risk.

November 17 – CNBC (Jeff Cox): “Though stock market prices have held up in November, investors generally are running from risk at a near-record pace. Judging from the flow of money out of high-yield bonds, investors are getting increasingly leery of a market that continues to hover around record levels, despite a handful of rough trading sessions in November and a rocky start Friday. Funds that track junk bonds saw $6.8 billion of outflows over the past week through Wednesday, according to Bank of America Merrill Lynch. That's the third-highest on record.”

Just a very interesting week in the markets. There was a Risk Off feel to junk bond flows. Risk aversion also appeared to be gaining some momentum early in the week. The S&P500 fell to a two-week low in early-Wednesday trading, confirmed by a safe haven bid to Treasuries. Equities then rallied sharply Thursday, in what appeared a habitual final jam prior to option expiration (conveniently crushing the value of puts). For the week, the safe haven yen gained 1.1%, while the euro increased 1.1% and the Swiss franc rose 0.7%. Gold gained 1.5%. The Treasury yield curve flattened notably, with two-year yields up seven bps and ten-year yields down five bps (62 bps spread a 10-year low).

There were other dynamics not necessarily inconsistent with incipient Risk Off. The small caps rallied 1.2% this week. There also appeared a squeeze in some of the popularly shorted stocks and sectors. The Retail Sector ETF (XRT) surged 3.9%. Footlocker jumped 34.5% and Abercrombie & Fitch rose 23.8%. And speaking of popular shorts, Mattel jumped 27.8% and Buffalo Wild Wings gained 16.3%.

It would not be extraordinary for a market to succumb to Risk Off at the conclusion of a short squeeze. In the initial phase of Risk Off, the leveraged speculating community pares back both longs and shorts. The upward bias on popular short positions fuels disappointing performance generally on the short side, spurring short covering, frustration and position adjustments. The market had that kind of feel this week. Definitely some instability beneath the markets’ surface, while complacency generally held sway.

For the Week:

The S&P500 slipped 0.1% (up 15.2% y-t-d), and the Dow declined 0.3% (up 18.2%). The Utilities added 0.3% (up 14.2%). The Banks rallied 1.6% (up 8.1%), and the Broker/Dealers added 0.1% (up 19.4%). The Transports dipped 0.2% (up 4.9%). The S&P 400 Midcaps gained 0.8% (up 10.8%), and the small cap Russell 2000 jumped 1.2% (up 10.0%). The Nasdaq100 added 0.1% (up 29.8%).The Semiconductors increased 0.3% (up 44.2%). The Biotechs recovered 1.5% (up 35.0%). With bullion up $19, the HUI gold index added 0.5% (up 3.1%).

Three-month Treasury bill rates ended the week at 124 bps. Two-year government yields jumped seven bps to 1.72% (up 53bps y-t-d). Five-year T-note yields added a basis point to 2.06% (up 13bps). Ten-year Treasury yields fell five bps to 2.34% (down 10bps). Long bond yields dropped ten bps to 2.78% (down 29bps).

Greek 10-year yields rose five bps to 5.18% (down 184bps y-t-d). Ten-year Portuguese yields fell another eight bps to 1.98% (down 176bps). Italian 10-year yields slipped a basis point to 1.84% (up 2bps). Spain's 10-year yields dipped two bps to 1.56% (up 18bps). German bund yields fell five bps to 0.36% (up 16bps). French yields dropped seven bps to 0.71% (up 3bps). The French to German 10-year bond spread narrowed two to 35 bps. U.K. 10-year gilt yields declined five bps to 1.29% (up 6bps). U.K.'s FTSE equities declined 0.7% (up 3.3%).

Japan's Nikkei 225 equities index fell 1.3% (up 17.2% y-t-d). Japanese 10-year "JGB" yields declined less than a basis point to 0.036% (unchanged). France's CAC40 fell 1.1% (up 9.4%). The German DAX equities index lost 1.0% (up 13.2%). Spain's IBEX 35 equities index declined 0.8% (up 7.0%). Italy's FTSE MIB index dropped 2.1% (up 14.9%). EM markets were mostly. Brazil's Bovespa index rallied 1.8% (up 21.9%), while Mexico's Bolsa slipped 0.4% (up 4.9%). India’s Sensex equities index was little changed (up 25.2%). China’s Shanghai Exchange dropped 1.4% (up 9.0%). Turkey's Borsa Istanbul National 100 index sank 2.5% (up 36%). Russia's MICEX equities index lost 1.7% (down 4.5%).

Junk bond mutual funds saw outflows surged to $4.442 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates rose five bps to 3.95% (up 1bp y-o-y). Fifteen-year rates jumped seven bps to 3.31% (up 17bps). Five-year hybrid ARM rates slipped a basis point to 3.21% (up 14bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up 12 bps to 4.13% (up 12bps).

Federal Reserve Credit last week gained $4.5bn to $4.423 TN. Over the past year, Fed Credit increased $2.9bn. Fed Credit inflated $1.603 TN, or 57%, over the past 262 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt fell $4.2bn last week to $3.369 TN. "Custody holdings" were up $250bn y-o-y, or 8.0%.

M2 (narrow) "money" supply increased $8.2bn last week to $13.758 TN. "Narrow money" expanded $667bn, or 5.1%, over the past year. For the week, Currency slippped $0.5bn. Total Checkable Deposits fell $15.0bn, while Savings Deposits jumped $23.1bn. Small Time Deposits were little changed. Retail Money Funds gained $3.7bn.

Total money market fund assets slipped $1.4bn to $2.739 TN. Money Funds rose $52.4bn y-o-y, or 2.0%.

Total Commercial Paper dropped $18.8bn to $1.033 TN. CP gained $120bn y-o-y, or 13.2%.

Currency Watch:

The U.S. dollar index declined 0.8% to 93.662 (down 8.5% y-t-d). For the week on the upside, the South African rand increased 2.7%, the South Korean won 1.8%, the Japanese yen 1.1%, the euro 1.1%, the Mexican peso 0.8%, the Brazilian real 0.8%, the Swiss franc 0.7%, the Singapore dollar 0.3%, and the British pound 0.1%. For the week on the downside, the New Zealand dollar declined 1.9%, the Norwegian krone 1.3%, the Australian dollar 1.3%, the Swedish krona 0.9% and the Canadian dollar 0.6%. The Chinese renminbi increased 0.22% versus the dollar this week (up 4.81% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index declined 0.8% (up 6.7% y-t-d). Spot Gold gained 1.5% to $1,294 (up 12.3%). Silver jumped 3.0% to $17.373 (up 8.7%). Crude slipped 19 cents to $56.55 (up 5%). Gasoline dropped 3.7% (up 4%), and Natural Gas declined 0.8% (down 17%). Copper added 0.5% (up 23%). Wheat jumped 2.8% (up 9%). Corn surged 3.3% (up 1%).

Trump Administration Watch:

November 15 – Reuters (Stephanie Armour and Richard Rubin): “Senate Republicans attached a provision to their tax overhaul that would repeal the requirement that all Americans have health insurance, a new twist in the GOP lawmakers’ efforts to rewrite much of the U.S. tax code. The insurance mandate is a centerpiece of the 2010 Affordable Care Act, also known as Obamacare. Repealing it is a long-sought goal of Republicans, who see it as onerous. Moreover, eliminating the mandate could free up federal tax revenue because it would mean fewer households buying insurance and thus fewer applying for federal health-care subsidies or for Medicaid.”

November 13 – Bloomberg (Ben Brody and Mark Niquette): “The House of Representatives wouldn’t accept a tax bill that, like the Senate’s, eliminates deductions for all state and local taxes, the chairman of the House’s tax-writing committee said. The comments from House Ways and Means Chairman Kevin Brady show that although both the House and Senate are moving forward with plans to overhaul the U.S. tax code under tight, self-imposed deadlines, the path forward remains difficult because of differences in their legislation.”

November 15 – Bloomberg (Jacob Pramuk): “The Republican tax plan appears to have a public opinion problem. Most American voters — 52% — disapprove of the GOP proposals to overhaul the tax system, according to a Quinnipiac University poll… Only 25% of respondents approve of the Republican effort. The GOP says its push to chop taxes on businesses and individuals by year-end is designed to trim the burden on middle-class taxpayers while boosting job creation and wage growth. Voters largely have not bought into the message, the Quinnipiac poll found.”

China Watch:

November 16 – Financial Times (Don Weinland and Yuan Yang): “China’s central bank injected the largest amount of reserves since January into the financial system on Thursday, a move that stemmed recent weakness in government bond prices that has driven the 10-year benchmark yield to its highest level since late 2014. Bond market concerns have intensified this past week as China’s policymakers reiterated their determination to reduce the economy’s reliance on debt-fuelled growth. Jitters have been accompanied by global investors cutting their exposure across emerging markets, with notable swings seen in prices for commodities such as metals and oil. China’s benchmark 10-year yield has steadily climbed from 3.60% since late September to above 4% this week…”

November 13 – Bloomberg: “China’s new home sales fell by the most in almost three years last month, adding to signs of cooling as local governments keep rolling out curbs to limit price increases. Sales by value dropped 3.4% from a year earlier to 909 billion yuan ($137bn)… That was the biggest year-on-year decline since November 2014.”

November 14 – Bloomberg: “China’s economic expansion dialed back a notch in October, as a campaign to manage credit risks took hold and the Communist Party signaled a less stringent approach to hitting growth targets. Industrial output rose 6.2% from a year earlier in October, versus a median projection of 6.3% and September’s 6.6%. Retail sales expanded 10% from a year earlier, versus an estimated 10.5 percent and 10.3 percent the prior month. That’s the slowest pace in a year.”

November 15 – Bloomberg (Heesu Lee and Luzi-Ann Javier): “A slowdown in the world’s biggest consumer of most commodities is reviving fears over a glut in raw materials. The Bloomberg Commodity Index extended declines after sliding the most in six months on Tuesday. Futures in China also plunged in overnight trading. Concern is increasing that demand will weaken as the world’s second-biggest economy dials back amid a pledge by President Xi Jinping to focus on the quality of expansion rather than the pace of it. Nickel, iron ore and oil all dropped, and shares of resources companies slipped… The Chinese slowdown is seen hurting metals use.”

November 14 – Reuters (David Stanway, Matthew Miller and Michael Martina): “China will continue to ‘deepen’ reform of state-owned enterprises (SOE) and experiment with new ownership structures, but strengthening ruling Communist Party leadership remains the guiding principle, the head of the state asset regulator said. Imposing party discipline on state firms remains a key part of China’s goals in its effort to fight graft, ‘upgrade’ domestic industry and dominate overseas markets, Xiao Yaqing, chairman of the State-Owned Asset Supervision and Administration Commission (SASAC), said.”

November 13 – Financial Times (Eric Platt): “Asset-backed securities still suffer an image hangover in the west from the days of the 2008 financial crisis. But China’s issuance of the financial products is soaring this year as Beijing places a big bet on securitisation as a salve for its huge credit risks. Though only a few years old, the Chinese debt securitisation market — in which pools of debt like mortgages, auto loans and credit-card loans are repackaged and sold to investors — is growing like topsy. Issuance of securitised assets rose 61% in the first half of this year and could climb to $170bn for the full year, according to… Bank of America Merrill Lynch. But are foreign investors ready to dive in? The answer appears to be a qualified yes. Given memories of how the US collateralised debt obligation (CDOs) market imploded 10 years ago, it is not surprising that foreign investors are cautious and generally avoid local issuers.”

November 14 – Bloomberg: “Chinese developers facing a looming wall of debt repayments have been thrown a lifeline by regulators easing access to offshore financing. That won’t solve all their problems… Amid the slowdown, developers still face restrictions on borrowing in the local bond market, rising costs for domestic financing -- including shadow loans -- and a record $30 billion in onshore and offshore bonds coming due in 2018. That figure balloons to $71 billion if put options are exercised…”

Federal Reserve Watch:

November 15 – Bloomberg (Jeanna Smialek and Matthew Boesler): “Federal Reserve officials are pushing for a potentially radical revamp of the playbook for guiding U.S. monetary policy, hoping to seize a moment of economic calm and leadership change to prepare for the next storm. While the country is enjoying its third-longest expansion on record, inflation and interest rates are still low, meaning the central bank has little room to ease policy in a downturn before hitting zero again. With Jerome Powell nominated to take over as Fed chairman in February, influential officials including San Francisco Fed chief John Williams and the Chicago Fed’s Charles Evans have taken the lead in calling for reconsidering policy maker’s 2% inflation target.”

November 14 – Reuters (Ann Saphir): “Chicago Federal Reserve Bank President Charles Evans… became the second Fed policymaker in recent days to call for a new approach to rate-setting that would allow the central bank to respond to shocks when interest-rate cuts alone are not enough. One option is so-called price-level targeting, Evans said in remarks prepared for a European Central Bank conference… Under such a strategy, a central bank combats bouts of too-low inflation by allowing inflation to run too high for a time. Evans championed this policy in 2010 to deal with sagging inflation, but ultimately the Fed rejected such an ‘extreme’ idea as too difficult to undertake during an economic crisis, Evans said…”

U.S. Bubble Watch:

November 14 – Bloomberg (Sho Chandra): “U.S. wholesale prices advanced more than forecast in October, boosted by higher margins at fuel retailers… Compared with a year earlier, producer prices rose the most in more than five years. Producer-price index rose 0.4% (est. 0.1% gain) for a second month. PPI climbed 2.8% from a year earlier, the most since February 2012, after 2.6% gain in prior 12-month period. Excluding food and energy, core gauge rose 0.4% from prior month and was up 2.4% from October 2016.”

November 15 – Bloomberg (Sho Chandra): “U.S. inflation excluding food and fuel accelerated on an annual basis for the first time since January, a pickup that will be welcomed by Federal Reserve officials debating the pace of interest-rate increases… Consumer-price index rose 0.1% m/m (matching est.) after 0.5% rise the prior month; increased 2% y/y (matching est.).
Excluding food and energy, so-called core CPI rose 0.2% m/m (matching est.) after rising 0.1%; climbed 1.8% y/y (est. 1.7%) after 1.7% advance.”

November 12 – Financial Times (John Authers and Joanna S Kao): “The year after Donald Trump’s surprise victory in the US presidential election have been the quietest months for the US stock market in more than half a century. Since election day, the daily change in the S&P 500, the most widely followed index of US stocks, has been only 0.31% as the blue-chip index has set new record highs. This is the lowest daily change in more than 50 years… A Financial Times analysis of historic returns for the S&P 500, dating back to its inception in 1927, shows only one previous period with lower average volatility. The quietest 12 months on record also followed a political shock, starting a week after the assassination of John F. Kennedy in 1963. The period saw an average daily movement of only 0.25%... Over the last half century, the index has moved by an average of 0.72% each day, more than double the volatility seen this year.”

November 14 – Bloomberg (Sid Verma): “Investors are riding a wave of ‘irrational exuberance’ as they extend bullish positions even as they fret over valuations, according to the latest fund-manager survey by Bank of America Merrill Lynch. While a record net 48% of investors say stocks are overvalued, a net 16% say they are taking on above-normal levels of risk, another all-time high. Investors are also taking out less downside protection and holding less cash, the survey shows. ‘Icarus is flying ever closer to the sun,’ said Michael Hartnett, the bank’s chief investment strategist. ‘And investors’ risk-taking has hit an all-time high.’”

November 15 – Wall Street Journal (Sarah Krouse): “Vanguard Group quadrupled in size over the last eight years. It is about to get even bigger. The money management giant is on pace to collect a record one-year total of about $350 billion in investor cash by the end of 2017… The expected haul, which would exceed Vanguard’s prior record by $27 billion, reinforces an industrywide shift away from money managers who specialize in handpicking winners.”

November 14 – Bloomberg (Gabrielle Coppola): “There’s a growing rift in car debt: Delinquent subprime loans are nearing crisis levels at auto finance companies, while loan performance at banks and credit unions has been improving… Almost 9.7% of subprime car loans made by non-bank lenders -- including private-equity-backed firms catering to car dealers -- became 90 or more days past due in the third quarter, the highest annualized rate in more than seven… That’s more than double the 4.4% rate for subprime loans made by traditional banks, a number that’s been falling pretty steadily since the end of the financial crisis. ‘The subprime delinquency rates are really where the pressure is,’ analysts and executives at the Fed wrote…’The delinquency rate -- even among borrowers in the same credit score bucket -- is considerably higher and rising on the auto finance side.’”

November 13 – Bloomberg (Rebecca Spalding): “Puerto Rico is seeking $94 billion in federal aid to help it recovery from the hurricane that devastated the territory in September, leaving much of the island still without power and worsening a financial crisis that had already pushed the government into bankruptcy. The biggest share of the funds, $31 billion, would be used to rebuild homes, with another $18 billion requested for the electric utility, Governor Ricardo Rossello said… ‘The scale and scope of the catastrophe in Puerto Rico in the aftermath of Hurricane Maria knows no historic precedent,’ Rossello wrote.’ We are calling upon your administration to request an emergency supplemental appropriation bill that addresses our unique unmet needs with strength and expediency.’”

November 13 – CNBC (John Melloy): “General Electric said… it is cutting its dividend in half, a move that could cause many long-time shareholders in the 125-year-old conglomerate to flee but also free up much-needed capital to fund a turnaround for the one-time American bellwether. GE said the quarterly payout is being cut to 12 cents a share from 24 cents... Shares, which are down more than 35% for the year, rose 0.3% in premarket trading.”

November 13 – Bloomberg: “China’s efforts to curb credit growth are increasingly showing signs of working. Aggregate financing stood at 1.04 trillion yuan ($156.6 bn) in October, the People’s Bank of China said…, versus an estimated 1.1 trillion yuan… New yuan loans stood at 663.2 billion yuan, versus a projected 783 billion yuan. The broad M2 money supply rose 8.8%, compared with a projected 9.2%. Broad money supply growth was the slowest since at least January 1996.”

Central Banker Watch:

November 14 – Reuters (Balazs Koranyi and Francesco Canepa): “Four of the world’s top central bankers promised… to keep openly guiding investors about future policy moves as they slowly withdraw the huge monetary stimulus rolled out during the financial crisis. After pumping some $10 trillion into financial markets since the 2008 crisis… the Federal Reserve, European Central Bank, Bank of England and Bank of Japan are now trying to wean investors off easy money without causing an upset. To do this, words will be key, the heads of the four central banks told an ECB conference on communication. It is called forward guidance in banker-speak, essentially warning gently of what is coming. ‘Forward guidance has become a full-fledged monetary policy instrument,’ ECB President Mario Draghi said. ‘Why discard a monetary policy instrument that has proved to be effective?’”

November 13 – Financial Times (Eric Platt): “As investors fret over the recent sell-off in US Treasuries, a reminder that the world is still awash in low yields. Nearly $11tn of sovereign and corporate bonds trade with a yield below zero… The $10.9tn figure includes notes and bonds in the benchmark global aggregate index as well as Bloomberg Barclays’ US, Euro, UK and Japanese short-Treasury indices at the end of October. Central bank stimulus upended the normal rules of fixed income markets after the financial crisis, when policymakers in Europe, the US, Japan and UK launched large-scale bond buying programmes and the European Central Bank and Bank of Japan cut interest rates below zero.”

November 16 – Reuters (Balazs Koranyi and Marja Novak): “Investors should not expect the European Central Bank to increase its bond purchases, ECB director Yves Mersch said on Thursday, adding such unconventional stimulus tools will be gradually phased out with the rise of inflation.”

Global Bubble Watch:

November 14 – CNBC (Robert Frank): “The wealthiest 1% of the world's population now owns more than half of the world's wealth, according to a new report. The total wealth in the world grew by 6% over the past 12 months to $280 trillion, marking the fastest wealth creation since 2012, according to… Credit Suisse… More than half of the $16.7 trillion in new wealth was in the U.S., which grew $8.5 trillion richer. But that wealth around the world is increasingly concentrated among those at the top. The top 1% now owns 50.1% of the world's wealth, up from 45.5% in 2001.”

November 15 – Bloomberg (Steven Church and Michelle Kaske): “The conundrum faced by Alan Greenspan is back -- and possibly worse. This time, the Federal Reserve is confronting a ‘far more dangerous’ backdrop in the bond market as it gears up to further raise interest rates. The prevailing dynamics in the Treasury market -- an ever-narrowing gap between short and longer-term U.S. Treasury yields, and record lows in forward rates for this point in the monetary cycle -- could derail the Fed’s tightening path, according to Bank of America Merrill Lynch. Though a flattening yield curve is seemingly a replay of previous rate-hike regimes -- including the one overseen by Greenspan and Ben Bernanke, which culminated in the financial crisis -- Bank of America sees extra cause for concern. A Fed that’s intent on raising rates four to five more times by the end of 2018 would risk ‘consciously putting short-term rates above five-year term rates,” strategists led by Shyam Rajan wrote… That’s something the central bank has never allowed to happen aside from a brief period in the last month of its 2004-2006 tightening cycle.”

November 13 – Wall Street Journal (Steven Russolillo and Corrie Driebusch): “A flood of Chinese companies is driving the biggest world-wide surge of initial public offerings in a decade. More than 1,450 companies globally have gone public so far in 2017, putting this year on track to become the busiest for new listings since 2007, according to Dealogic... Roughly two-thirds of the IPOs were in the Asia-Pacific region… Overall, the deals raised more than $170 billion globally, compared with the roughly 950 deals in the same period last year that raised around $120 billion… Nearly 170 private companies globally are valued at $1 billion or more, according to Dow Jones VentureSource. That is up from about 75 in November 2014.”

November 13 – Financial Times (Thomas Hale and Robert Smith): “Sales of corporate bonds is on course for a record year, as stimulus from the European Central Bank and extremely cheap borrowing costs propel companies into the capital markets. There have been €339bn of non-financial corporate bonds sold in euros so far in 2017, according to Dealogic…, putting issuance on course to surpass last year’s record of €345bn. A decade of monetary stimulus from major central banks, including the ECB, has swelled borrowing to levels few would have imagined before the global financial crisis. In 2007, corporate issuance in euros was less than half its current level.”

November 13 – Financial Times (Kate Allen): “The world’s riskiest countries are issuing debt at a record rate, buoyed by the global economic upturn and investors’ search for yield in a world of historically low returns. Junk-rated emerging market sovereigns have raised $75bn in syndicated bonds so far this year, up 50% year on year to the highest total on record, according to… Dealogic… The increase has buoyed the total volume of debt-raising by developing economies; non-investment grade issuance has made up 40% of the new debt syndicated in EM so far in 2017. These rare and new issuers have been lured into the market by attractive pricing…, making it one of the best-performing assets globally in 2017.”

November 14 – CNBC (Liz Moyer): “Sign of the times: It is shaping up to be the hottest year in a decade to raise investor money for companies in the development stage with no specific business plan or purpose. This week, a former hedge fund manager and a former real estate executive are raising $500 million to hunt for buyouts in the ‘blank check company’ in the hospitality and real estate sectors… It comes the same week as former Procter & Gamble executives prepare for their $345 million Legacy Acquisition to begin trading in the U.S., focused on snapping up companies in consumer packaged goods, food, retail and restaurant sectors. Blank check companies… raise money from investors first and use it to buy companies later… So far this year, 27 of them have begun trading in the U.S., raising $7.7 billion, the most active year since 2007, according to Renaissance Capital.”

November 15 – Bloomberg: “China’s non-financial outbound investment slumped to $86.3 billion in January to October, plunging 41% from a year earlier, as projects in some industries dried up. There were no new real estate, sports or entertainment deals for the period… Most outbound investment was in leasing and business services, manufacturing, wholesale and retail sales and information technology services.”

November 15 – CNBC (Everett Rosenfeld): “A Leonardo da Vinci painting sold for more than $450 million on Wednesday, according to auction house Christie's, which said that it topped a world record for any work of art sold at an auction. The painting, called ‘Salvator Mundi,’ Italian for ‘Savior of the World,’ is one of fewer than 20 paintings by Leonardo known to exist and the only one in private hands.”

November 14 – Reuters (Marc Jones): “The world’s top 60 economies have adopted more than 7,000 protectionist trade measures on a net basis since the financial crisis and tariffs are now worth more than $400 billion, a study of global data showed… The research, which drew from World Bank, Heritage index and Global Trade Alert figures, also found that the United States and European Union were each responsible for more than 1,000 of the restrictions.”

Fixed Income Bubble Watch:

November 15 – Financial Times (Eric Platt): “A sell-off in the $1.3tn high-yield bond sector is a worrying omen for the wider market, frequently signalling greater losses and broader contagion to come. This market for highly indebted companies, which has found little trouble raising money during the credit boom of recent years, is getting hit hard following a stirring run of gains. Junk-rated debt has already lost 1.1% in value so far during November, on pace for its worst month since January 2016, according to ICE BofAML indices… Gains by closely followed exchange traded funds have also been erased for the year, with both State Street’s $13bn high-yield ETF, which trades under the ticker JNK, and BlackRock’s $19bn iShares HYG fund sitting at seven-month lows.”

November 13 – Bloomberg (Dani Burger): “Trading in exchange-traded funds got a little crazy last week when it became clear that junk bonds were in for more pain. But the market was fortunate the consequences weren’t more severe, strategists warn. Though spared the worst, investors came close to creating a scenario where ETF activity drove prices. Calling it the ‘ETF spiral,’ Peter Tchir of Academy Securities Inc. describes a snowball effect where a dislocation develops between the fund price and the value of its underlying assets. The issue’s endemic to liquid ETFs that trade without dipping into the underlying market. In that case, the selling doesn’t affect the actual securities it holds right away, so for a time the fund is priced differently than the cumulative value of its assets, known as its NAV.”

November 12 – Bloomberg (Steven Church and Michelle Kaske): “Puerto Rico is considering suspending debt-service payments for five years, a lead lawyer for the territory’s federal oversight board said, in the first indication of how the devastation caused by Hurricane Maria will affect the restructuring of the island’s debt. A moratorium may be included as part of Puerto Rico’s plan to reduce what it owes through bankruptcy, Martin Bienenstock, a partner at Proskauer Rose LLP who represents the panel, said at a court hearing Wednesday in Manhattan. It wasn’t immediately clear whether such a step would apply to all of government’s $74 billion of debt."

November 16 – Wall Street Journal (Nick Timiraos): “The Treasury Department has unveiled a new strategy for managing federal debt that could ease pressures set to push up long-term interest rates and reduce a potential drag on the economy. Under the plan unveiled earlier this month by Treasury, the department would increase the share of shorter-term debt issuance and reduce the share of longer debt issuance, ending a yearslong trend that favored long-term debt issuance. Total issuance of government debt will still rise in coming years with growing federal budget deficits.”

November 13 – Bloomberg (Srinivasan Sivabalan): “Slowly but steadily, a selloff is taking hold in developing-nation bonds. A Bloomberg Barclays Index of hard-currency emerging-market bonds has fallen for six straight days, capping the biggest weekly yield jump since last year when Donald Trump’s victory spurred a selloff in risk assets. The gauge shows average borrowing costs for governments and companies in developing nations have risen to a four-month high of 4.68%.”

Europe Watch:

November 13 – Bloomberg (Piotr Skolimowski): “German growth steamed ahead in the third quarter, keeping Europe’s largest economy on track for its best year since 2011. The 0.8% jump in gross domestic product was an acceleration from the previous three months and topped the 0.6% median forecast…”

November 11 – Reuters (Valentina Za): “The outcome of local elections in Sicily has further weakened the ruling party of former Prime Minister Matteo Renzi and strengthened the populist 5-Star Movement’s lead… Based on the IPSOS poll published in Saturday’s Corriere della Sera, a center-right coalition would win next year’s general election with 253 seats while the 5-Star would have 173 and Renzi’s Democratic Party 164 together with a smaller ally, leading to a hung parliament.”

Brexit Watch:

November 12 – Bloomberg (Lucy Meakin): “Embattled U.K. Prime Minister Theresa May faced a fresh challenge as the Sunday Times said 40 Conservative members of Parliament, nearly enough to trigger action, have agreed to sign a letter of no confidence in her. May’s opponents are now eight lawmakers short of what’s needed for a leadership challenge… May is struggling to maintain her grip on power after the resignation of two cabinet ministers, mounting calls to sack Foreign Minister Boris Johnson and as the European Union raises the prospect of Brexit talks failing to reach a breakthrough by year-end.”

Japan Watch:

November 15 – BBC: “Japan's economy has expanded for seven quarters in a row in the longest period of growth in more than a decade. Data showed gross domestic product (GDP) grew at an annualised rate of 1.4% between July and September. The solid quarterly result comes after more than four years of economic stimulus by Prime Minister Shinzo Abe. Exports and stronger global demand for Japanese products has driven the expansion which helped offset a dip in consumer spending at home.”

Emerging Market Watch:

November 13 – Bloomberg (Ben Bartenstein, Katia Porzecanski, and Patricia Laya): “Venezuela’s grand gathering with creditors Monday lasted all of 30 minutes and didn’t produce anything of substance. To make matters worse, S&P Global Ratings declared the country in default while Fitch… cited missed payments by the state oil company prompting a fresh selloff in the nation’s bonds. The actions from the ratings companies came after an odd spectacle in Caracas, where bond investors who made the trek found a red-carpet welcome, an honor guard salute and gift bags stuffed with state-produced chocolate and coffee.”

November 12 – Financial Times (Ahmed Al Omran and Simeon Kerr): “When Saudi Crown Prince Mohammed bin Salman spoke to his nation six months ago, he pledged to crack down on corruption. ‘I assure you that nobody who is involved in corruption will escape, regardless if he was minister or a prince or anyone,’ he said. But few people could have expected the sudden storm this month when a new anti-graft committee ordered the arrest of more than 200 suspects, including princes, prominent businessmen and former senior officials, on allegations related to at least $100bn in corruption… But others have raised questions about the motivations behind a probe that also targeted a member of the royal family once seen as a contender for the throne. Critics of Saudi Arabia’s King Salman warn of the danger of ignoring the actions of the monarch’s own children, including the crown prince, who in 2015 reportedly bought a yacht for €420m. The Salman clan has extensive business interests, including media and financial services.”

Geopolitical Watch:

November 12 – Reuters (Mostafa Hashem): “Saudi Arabia has called for an urgent meeting of Arab League foreign ministers in Cairo next week to discuss Iran’s intervention in the region, an official league source told Egypt’s MENA state news agency… The call came after the resignation of Lebanon’s prime minister pushed Beirut back into the center of a rivalry between Sunni kingdom Saudi Arabia and Shi‘ite Iran and heightened regional tensions.”

November 15 – Bloomberg (MacDonald Dzirutwe): “Zimbabwe’s military seized power on Wednesday saying it was holding President Robert Mugabe and his family safe while targeting ‘criminals’ in the entourage of the man who has ruled the nation since independence 37 years ago. Soldiers seized the state broadcaster and a general appeared on television to announce the takeover. Armored vehicles blocked roads to the main government offices, parliament and the courts in central Harare, while taxis ferried commuters to work nearby.”

Friday, November 17, 2017

Friday Afternoon Links

[Reuters] Wall Street slips on doubts about tax plan's progress

[CNBC] Senate advances tax bill — but some Republicans have problems with it

[CNBC] Investors are fleeing junk bonds in near record numbers, a troubling signal for the stock market

[Bloomberg] Erdogan Ends Rates Truce, Decrying Central Bank's `Wrong Path'

Friday's News Links

[Bloomberg] U.S. Stocks Decline With Dollar as Treasuries Rise: Markets Wrap

[Bloomberg] Oil Climbs as Saudi Arabia Seeks to Dispel Doubts Over Russia

[Bloomberg] U.S. Home Starts Reach Highest Level in a Year, Permits Rise

[Bloomberg] Junk Bond Funds Post Third Biggest Outflow Ever Amid Risk Rout

[Bloomberg] The Business Tax Problem Causing Trouble for the GOP

[Bloomberg] The Chinese Government Just Triggered a Selloff in the Country's Shares

[Reuters] China overhauls $2.69 trillion public-private projects as debt fears rise

[Reuters] Images suggest North Korea 'aggressive' work on ballistic missile submarine: institute

[Reuters] North Korea rules out negotiations on nuclear weapons

[WSJ] House Passes GOP Bill to Overhaul Tax System

[WSJ] Strains Emerge in Asia’s Bond Market as Debt Issuers Cancel Sales

[WSJ] The Fed is Poisoning the Market. Here’s the Antidote.

[FT] Junk bond funds suffer biggest outflows since 2014

[FT] Emerging market jitters cast shadow over investment horizons

Thursday, November 16, 2017

Thursday Evening Links

[Bloomberg] Stocks in Asia to Climb in End to Tumultuous Week: Markets Wrap

[Bloomberg] House Passes Tax Bill in First Step Toward Historic Overhaul

[Bloomberg] Bitcoin Hits Record Just Days After a 29% Plunge

[Reuters] Supporters of a rules-based Fed lament an opportunity missed

[Bloomberg] Merkel Leads Marathon Coalition Talks as Obstacles Abound

[Reuters] Fed's Williams calls for global rethink of monetary policy

Thursday's News Links

[Bloomberg] Stocks Rebound on Tech Rally as Treasuries Weaken: Markets Wrap

[Bloomberg] U.S. Factory Output Surged in October on Hurricane Rebound

[Reuters] Congress poised for a major test on tax legislation

[AP] GOP muscling tax bill through House; hits senator roadblock

[Bloomberg] Fed Insiders Push for Radical Policy Review as Powell Era Dawns

[Bloomberg] China's Outbound Investment Plunges as Irrational Deals Curbed

[Reuters] China central bank adviser expects less forceful deleveraging in 2018

[Reuters] Markets should not expect ECB to beef up bond buys: Mersch

[Bloomberg] Bitcoin's Rivals Multiply Amid Battle for Crypto Dominance

[CNBC] Leonardo da Vinci painting sells for more than $450 million, breaking all-time art auction record

[Reuters] Zimbabwe on knife's edge after military seizes power

[WSJ] Treasury’s New Approach to Debt: Go Short

[FT] China bond yields fall after PBoC liquidity boost

Wednesday, November 15, 2017

Wednesday Evening Links

[Bloomberg] Stocks Fall, Treasuries Rise as Commodities Slump: Markets Wrap

[The Hill] Sen. Johnson first Republican opposed to tax bill

[Bloomberg] Puerto Rico May Need to Skip Bond Payments for Five Years

[Bloomberg] Fed on Collision Course With Bond Markets in Curve Conundrum

[CNBC] Most voters disapprove of GOP tax proposals, think they help the wealthy most, poll says

[CNBC] China's climbing bond yields raise new concerns for markets

[Bloomberg] Why China's Bond Selloff Isn't Luring Back Their Biggest Holder

[Reuters] Strong U.S. economy calls for December rate hike: Fed's Rosengren

[Bloomberg] Greenlight's Einhorn Says Issues That Caused the Crisis Are Not Solved

[Bloomberg] Nafta Bickering Begins Again Today

[Bloomberg] The Hedge Fund Love Affair With Tech Is Souring

[NYT] Senators Clash Over Last-Minute Changes to Tax Bill

[WSJ] Vanguard’s 2017 Prediction: A Record $350 Billion In New Cash

[Reuters] Lebanon accuses Saudi Arabia of holding its PM hostage

Wednesday's News Links

[Bloomberg] Stocks Slide With Dollar as Treasuries Advance: Markets Wrap

[Reuters] Oil prices slide after IEA casts doubt over demand outlook

[Bloomberg] U.S. Core-Inflation Gauge Picks Up for First Time Since January

[Bloomberg] Here’s Where the GOP Tax Plan Stands Right Now

[Reuters] Zimbabwe military says seizes power to stop 'criminals', President Mugabe safe

[Bloomberg] Fear of Glut Grips Commodities as Xi Shifts China Economic Focus

[BBC] Japan's economy posts longest growth streak since 2001

[Reuters] Communist Party still at heart of China's state firm reform plans: regulator

[WSJ] Senate GOP Adds Health-Care Twist to Tax Overhaul Plan

[FT] Contagion worries rise after junk bond sell-off

[FT] China commodities sell-off continues as iron ore drops 4.6%


Tuesday, November 14, 2017

Tuesday Evening Links

[Bloomberg] Losses Deepen for Global Stocks, Commodities Drop: Markets Wrap

[Bloomberg] China Throws Lifeline to Developers Hitting Record Wall of Debt

[Bloomberg] White House Is Considering El-Erian as Fed Vice Chair: DJ

[CNBC] There's something weird going on that's worrying the markets

[Bloomberg] ‘Irrational Exuberance’ May Rule the Roost in Stock Markets

[Bloomberg] Subprime Auto Delinquency Is Near Crisis Levels at Non-Bank Lenders

[Reuters] World has racked up 7,000 protectionist measures since crisis: study

[CNBC] Richest 1% now own half the world's wealth

Tuesday's News Links

[Bloomberg] U.S. Stocks, Greenback Decline as Euro Advances: Markets Wrap

[Bloomberg] Wholesale Prices in U.S. Rose More Than Forecast in October

[Bloomberg] Here’s Where the GOP Tax Plan Stands Right Now

[Reuters] Risks ahead for U.S. tax push as disputes linger, Trump returns

[Bloomberg] China’s Economy Moderates as Retail, Factories, Investment Slow

[Bloomberg] More Pain Ahead for China Bonds After 10-Year Yield Breaches 4%

[Bloomberg] China Home Sales Fall by Most in Almost Three Years on Curbs

[Bloomberg] Venezuela’s Bondholder Meeting Is a Bust as S&P Declares Default

[Bloomberg] German Economy Beats Forecasts, Heads for Best Year Since 2011

[Reuters] Top central bankers vow to talk investors out of easy money

[CNBC] Investors thirsty for deals pump most money into quirky 'blank check' companies in a decade

[Bloomberg] Citigroup, UBS Are Among the Banks Most Exposed to Wealthy Saudi

[Reuters] Fed may need 'extreme' policy to deal with future shocks: Evans

[FT] ‘Irrational exuberance’: fund managers gorging on risky bets, says BAML

Monday, November 13, 2017

Monday Evening Links

[Bloomberg] U.S. Stocks, Treasuries Fluctuate as Dollar Gains: Markets Wrap

[Bloomberg] Investors Playing ETF Rout Pushed Junk Bonds to Brink of Chaos

[Bloomberg] Puerto Rico Seeks $94 Billion in U.S. Aid for Hurricane Recovery

[WSJ] Number of Systemically Important Banks to Decline Under Senate Deal

[FT] Pool of negative yielding debt swells to nearly $11tn

[FT] Chinese asset-backed securities grow like topsy

Monday's News Links

[Bloomberg] Stocks Drop as Bonds Gain; Sterling Under Pressure: Markets Wrap

[Bloomberg] Emerging-Market Bonds See Biggest Yield Jump Since Trump Victory

[Reuters] Bitcoin claws back over $1,000 after losing almost a third of value

[Bloomberg] China's Credit Data Show Signs Deleveraging Is Starting to Bite

[Bloomberg] The U.S. Yield Curve Is Flattening and Here's Why It Matters

[Reuters] Fed's Harker stands by call for rate hike next month

[CNBC] General Electric slashes dividend by 50% as new CEO tries to turnaround 125-year-old conglomerate

[CNBC] The 'second-most' important job at the Fed will soon be vacant. Here's who may get it

[Reuters] Fed policies won't have direct linkage to BOJ steps: BOJ official

[FT] Saudi Arabia confronts legacy of corruption

[FT] Trump era brings lowest stock market volatility since early 1960s

[FT] European corporate bond issuance set for record year

[FT] Riskiest countries are selling debt at record rate

[WSJ] IPOs Roar Back World-Wide, With Asia Driving the Boom

Saturday, November 11, 2017

Saturday's News Links

[Reuters] U.S. junk bond sector ends rough week on calmer note

[NYT, Morgenson] After 20 Years of Financial Turmoil, a Columnist’s Last Shot

[WSJ] Declines in Stocks, Junk Bonds Reveal Cracks in Global Rally

[WSJ] Why Investors Should Get Nervous About Tax Cuts

[FT] How Germany got its gold back

[Reuters] North Korea says Trump begged for a war during his Asia trip

[Reuters] Exclusive: How Saudi Arabia turned on Lebanon's Hariri

[Reuters] Protesters flood Barcelona demanding release of separatist leaders

[Reuters] Italy's populist 5-Star strengthens lead after Sicily vote: poll

Weekly Commentary: "Money" on the Move

It’s been awhile since I’ve used this terminology. But global markets this week recalled the old “Bubble in Search of a Pin.” It’s too early of course to call an end to the great global financial Bubble. But suddenly, right when everything looked so wonderful, there are indication of "Money" on the Move. And the issues appears to go beyond delays in implementing U.S. corporate tax cuts.

The S&P500 declined only 0.2%, ending eight consecutive weekly gains. But the more dramatic moves were elsewhere. Big European equities rallies reversed abruptly. Germany’s DAX index traded up to an all-time high 13,526 in early Tuesday trading before reversing course and sinking 2.9% to end the week at 13,127. France’s CAC40 index opened Tuesday at the high since January 2008, only to reverse and close the week down 2.5%. Italy’s MIB Index traded as high as 23,133 Tuesday before sinking 2.5% to end the week at 22,561. Similarly, Spain’s IBEX index rose to 10,376 and then dropped 2.7% to close Friday’s session at 10,093.

Having risen better than 20% since early September, Japanese equities have been in speculative blow-off mode. After trading to a 26-year high of 23,382 inter-day on Thursday, Japan’s Nikkei 225 index sank as much as 859 points, or 3.6%, in afternoon trading. The dollar/yen rose to an eight-month high 114.73 Monday and then ended the week lower at 113.53.  From Tokyo to New York, banks were hammered this week.

Perhaps the more important developments of the week unfolded in fixed-income. Despite the selloff in the region’s equities markets, European sovereign debt experienced no safe haven bid. German bund yields traded at 0.31% on Wednesday, before a backup in rates saw yields close the week at 0.41%. Italian bond yields traded as low as 1.69% on Wednesday before closing the week at 1.84%. Spain’s yields ended the week up 10 bps to 1.56%.

November 9 – Bloomberg (Molly Smith): “The run-up in junk bonds is showing signs of returning to earth. After a spate of bad news triggered sell-offs of a few big speculative-grade borrowers, the pain has spread and even led NRG Energy Inc. to pull a $870 million bond offering on Thursday. Exchange-traded funds that buy high-yield debt have plunged the most since August, with $563 million of retail outflows since the start of this week alone. Three of the biggest junk-rated borrowers, IHeartMedia Inc., CenturyLink Inc. and Community Health Systems Inc., posted disappointing earnings that sent their bonds plunging.”

November 10 – Wall Street Journal (Ben Eisen and Sam Goldfarb): “A red-hot bond market is turning more frosty toward junk-rated issuers. Investors demanded a 3.79 percentage point premium, or spread, over going rates to own junk bonds, the highest in nearly two months on Thursday… That’s up from 3.38 percentage point on Oct. 24, near its lowest since the financial crisis. The market gyrations suggest a shift away from particularly easy conditions that were on full display just a few months ago.”

November 9 – Bloomberg (Dani Burger): “As U.S. markets swim in sea of red, trading in the largest high-yield exchange-traded funds has skyrocketed to dizzying levels. The iShares iBoxx High Yield Corporate Bond ETF, Blackrock Inc.’s $18.7 billion fund, saw volume spike over five times higher than its average level… At more than 23.8 million shares, trading in the largest junk-bond fund has already surpassed its one-day average of 11 million for the past year -- outpacing volume notched in August amid saber-rattling between the U.S. and North Korea.”

NRG’s large refinancing was the first junk deal pulled since June. Friday then saw Canyon Consolidated Resources cancel its junk bond sale. Interestingly, Tesla’s $1.8 billion junk bond issue sold back in August now trades near 94, with yields up 50 bps in two weeks to 6.26%. Netflix’s 2018 bond saw yields jump 27 bps this week to 5.18%.

This week’s junk selloff was most pronounced in the telecom and healthcare sectors, buffeted by earnings disappointments and the failed Sprint/T-Mobile merger. Sprint CDS surged 120 bps this week to an 11-month high 342 bps. It’s worth noting that the telecommunications sector – making up about 20% of most junk indices – has suffered a flurry of earnings disappointments this quarter. CenturyLink (2039) bond yields surged 42 bps this week to 9.46%.

There were notable jumps in (high-yield) communication-related company CDS prices this week. CDS prices spiked 542 bps for Windstream, 223 bps for Frontier Communications, 175 bps for CenturyLink, 163 bps for Qwest, 88 bps for Level 3 Communications and 25 bps for Dish Corp. In the investment-grade communications arena, CBS, Viacom, Expedia and Bell South all saw CDS prices rise to near six-month highs.

Monitoring U.S. junk spreads by sector, Tech, Consumer Discretionary, Telecommunications and Healthcare all traded to three-month wides this week. One could argue that the strong performance of Energy over recent months has helped mask deteriorating performance in key high-yield sectors.

Especially late in Bubble periods, the marginal (“junk”) borrower plays an increasingly instrumental role in both Financial and Real Economy booms. Loose financial conditions and intense speculation ensure abundant cheap finance. And so long as cheap “money” remains readily available, it will be borrowed (irrespective of the trend in fundamental factors).

A tech-heavy Nasdaq surged to record highs during the first quarter of 2000, seemingly oblivious to the rout that was unfolding in telecom debt. In all the exuberance, it’s easy to forget that “tech” Bubbles are fueled by infrastructure spending by scores of negative cash flow enterprises dependent on junk bonds, leveraged lending, speculative sector flows and loose finance more generally. Especially after securities prices have succumbed to speculative blow-off dynamics, few are prepared for how rapidly liquidity abundance can disappear.

Over the past year, enormous worldwide issuance of high-yield debt has been integral to the global Bubble. From Bloomberg Intelligence: “Emerging market primary market activity remains red-hot, with benchmark-eligible hard-currency debt issuance surpassing $500 billion this year for the first time on record.” China is currently enveloped in a (higher-yielding) corporate debt issuance boom. Europe has been enjoying a spectacular boom, with junk yields sinking all the way to a ridiculous 2%.

At this point, junk bond weakness is relatively confined. And in the recent past we’ve witnessed pullbacks that refreshed. Speculators were emboldened, as financial conditions loosened only further. Yet could sector concerns prove a harbinger of asset class issues and a problematic Risk Off backdrop?

When markets turn highly speculative – and especially when in “melt-up mode” – underlying fundamentals are not all that relevant to securities prices. News and analysis will invariably focus on the positive, while surging markets create their own liquidity and self-reinforcing bullish psychology (“greed”). It’s also true that markets can enjoy speculative blow-offs even in the face of underlying fundamental deterioration. The years 1999 and 2007 are not yet ancient history.

I’m beginning to think it might not take all that much to wake folks up to risk. And by the looks of Japanese and European equities (along with junk ETFs) this week, there may be some big players with fingers hovering over sell buttons. The Fed will likely raise rates next month, and I’ve already read some analysis that chairman Powell may not be the dovish pushover he’s been portrayed. There was also news out this week shedding further light on the growing split at the ECB. Meanwhile, the esteemed head of the People's Bank of China was publicly warning of ‘hidden, complex, sudden, contagious and hazardous’ risks within the Chinese financial system.

General financial conditions seemed to tighten marginally this week. And, curiously, as global risk markets were indicating some vulnerability, sovereign yields did something anomalous: they rose. A jump in yields concurrent with widening Credit spreads puts pressure on leveraged trades. It’s worth noting as well that the yen, euro and swissy all posted modest gains this week, perhaps putting pressure on global leveraged “carry trades.”

Recent highflyer EM equities markets fell under some pressure. Stocks were down 2.4% in Brazil and 2.1% in Turkey. Stocks retreated about 1% in India and Mexico. Geopolitical issues hammered markets in the Middle East. In general, Latin American equities were under notable selling pressure. There was also upward pressure on local currency EM bond markets. Yields were up 65 bps in Lebanon, 55 bps in Argentina and 19 bps in Brazil. Many EM yields traded to six-month highs this week. Most dollar-denominated EM yields moved to three-month highs.

From Bloomberg: “Mysterious Gold Trades of 4 Million Ounces Spur Price Plunge.” I haven’t a clue who might want to dump gold. But it was a week that saw losses in stocks, Treasuries and corporate debt. I would venture that it was not a particularly good performance week for the so-called “risk parity” crowd. Few groups have benefitted more from the float-all-boats, massive monetary stimulus of the past (going on) nine years. There are scores of investment models that have worked brilliantly during the most prolonged of bull markets. A tightening of financial conditions would expose a lot of genius swimming naked.

So how might we get from the recent “Risk On” to a problematic “Risk Off”?

Imagine a flurry of outflows from junk ETFs spurring illiquidity in the underlying securities holdings. This begins to spook some players leveraged in investment-grade corporate Credit. The more sophisticated players begin to take some risk off the table, as financial conditions tighten. Fears of outflows from the - now massive - passive investment-grade funds complex spur incipient risk aversion in equities. De-risking/de-leveraging dynamics begin to take hold – at home and abroad (spike in the yen pressuring global “carry”?). And with everyone now Crowded so nice and tight into the big tech names, an abrupt reversal of the leadership technology stocks would further rattle the leveraged lending market that has been operating in overdrive. Fears of a bursting “tech” Bubble overwhelm greed. Sinking tech would take down the indices, unleashing a bit of harsh reality upon the tsunami of “money” that has disregarded risk to participate in the passive index mania. The short volatility Crowd gets crushed.


For the Week:

The S&P500 dipped 0.2% (up 15.3% y-t-d), and the Dow declined 0.5% (up 18.5%). The Utilities gained 0.4% (up 13.9%). The Banks sank 4.4% (up 6.3%), while the Broker/Dealers added 0.3% (up 19.3%). The Transports dropped 2.6% (up 5.1%). The S&P 400 Midcaps declined 0.6% (up 9.9%), and the small cap Russell 2000 fell 1.3% (up 8.7%). The Nasdaq100 added 0.2% (up 29.7%). The Semiconductors increased 0.2% (up 43.8%). The Biotechs fell 2.8% (up 32.9%). With bullion up $6, the HUI gold index gained 0.5% (up 2.6%).

Three-month Treasury bill rates ended the week at 120 bps. Two-year government yields increased four bps to 1.66% (up 47bps y-t-d). Five-year T-note yields rose six bps to 2.05% (up 12bps). Ten-year Treasury yields gained seven bps to 2.40% (down 5bps). Long bond yields jumped nine bps to 2.88% (down 19bps).

Greek 10-year yields gained three bps to 5.12% (down 190bps y-t-d). Ten-year Portuguese yields slipped a basis point to 2.06% (down 169bps). Italian 10-year yields rose five bps to 1.85% (up 3bps). Spain's 10-year yields jumped 10 bps to 1.58% (up 20bps). German bund yields gained five bps to 0.41% (up 21bps). French yields increased three bps to 0.78% (up 10bps). The French to German 10-year bond spread narrowed two to 37 bps. U.K. 10-year gilt yields rose eight bps to 1.34% (up 11bps). U.K.'s FTSE equities dropped 1.7% (up 4.1%).

Japan's Nikkei 225 equities index added 0.6% to a 26-year high (up 18.7% y-t-d). Japanese 10-year "JGB" yields slipped a basis point to 0.04% (unchanged). France's CAC40 dropped 2.5% (up 10.7%). The German DAX equities index sank 2.6% (up 14.3%). Spain's IBEX 35 equities index fell 2.6% (up 7.9%). Italy's FTSE MIB index lost 2.0% (up 17.3%). EM markets were mostly lower. Brazil's Bovespa index dropped 2.4% (up 19.8%), and Mexico's Bolsa declined 1.0% (up 5.2%). India’s Sensex equities index fell 1.1% (up 25.1%). China’s Shanghai Exchange rose 1.8% (up 10.6%). Turkey's Borsa Istanbul National 100 index dropped 2.1% (up 39.4%). Russia's MICEX equities index surged 4.2% (down 2.8%).

Junk bond mutual funds saw outflows of $622 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates fell four bps to 3.90% (up 33bps y-o-y). Fifteen-year rates declined three bps to 3.24% (up 35bps). Five-year hybrid ARM rates slipped a basis point to 3.22% (up 34bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down eight bps to 4.10% (up 37bps).

Federal Reserve Credit last week declined $2.6bn to $4.418 TN. Over the past year, Fed Credit increased $3.5bn. Fed Credit inflated $1.599 TN, or 57%, over the past 261 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $7.6bn last week to $3.373 TN. "Custody holdings" were up $262bn y-o-y, or 8.4%.

M2 (narrow) "money" supply last week was little changed at $13.746 TN. "Narrow money" expanded $652bn, or 5.0%, over the past year. For the week, Currency increased $0.9bn. Total Checkable Deposits fell $43.7bn, while Savings Deposits jumped $40.1bn. Small Time Deposits were little changed. Retail Money Funds gained $1.4bn.

Total money market fund assets gained $10.6bn to $2.740 TN. Money Funds rose $57bn y-o-y, or 2.1%.

Total Commercial Paper added $3.9bn to $1.051 TN. CP gained $144bn y-o-y, or 15.8%.

Currency Watch:

The U.S. dollar index declined 0.6% 94.391 (down 7.8% y-t-d). For the week on the upside, the Swedish krona increased 1.0%, the Brazilian real 0.9%, the British pound 0.9%, the Canadian dollar 0.7%, the Mexican peso 0.5%, the Norwegian krone 0.5%, the euro 0.5%, the Japanese yen 0.5%, the Swiss franc 0.5%, the New Zealand dollar 0.4%, the Singapore dollar 0.4%, and the Australian dollar 0.1%. For the week on the downside, the South African rand declined 1.1% and the South Korean won dipped 0.3%. The Chinese renminbi was little changed versus the dollar this week (up 4.58% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index jumped 1.9% (up 7.6% y-t-d). Spot Gold added 0.5% to $1,275 (up 10.7%). Silver added 0.2% to $16.871 (up 5.6%). Crude gained another $1.10 to $56.74 (up 5%). Gasoline rose 1.1% (up 9%), while Natural Gas slipped 0.6% (down 14%). Copper fell 1.3% (up 23%). Wheat gained 1.4% (up 5.8%). Corn fell 1.4% (down 2%).

Trump Administration Watch:

November 6 – Wall Street Journal (Richard Rubin and Siobhan Hughes): “A House committee began considering a bill Monday that would reduce taxes by $1.4 trillion over 10 years, but disagreements over key pieces of the measure could force the GOP to make changes and slow down plans to pass it by year’s end. House Republicans are at odds over plans to eliminate deductions for state and local taxes. Senate Republicans disagree on child tax credits and whether to accept significantly bigger budget deficits. Narrow margins in both chambers leave the party little room to maneuver.”

November 7 – CNBC (Jacob Pramuk): “The House Republican tax plan may have a deficit problem. The GOP bill including some changes would increase federal budget deficits by $1.7 trillion over 10 years, according to Joint Committee on Taxation estimates shared by the nonpartisan Congressional Budget Office. That includes money for additional debt service payments due to the bill. Under the plan, U.S. debt would rise to 97.1% of gross domestic product in 2027, up from 91.2% under current CBO projections.”

November 7 – Bloomberg (Lynnley Browning): “Multinational companies including Apple Inc., Pfizer Inc. and others would face a new tax on payments they make to offshore affiliates under the House Republicans’ tax bill -- a surprise provision that has stunned tax experts. The new 20% tax is ‘the atomic bomb in the draft’ legislation, said Ray Beeman, co-leader of Ernst & Young’s Washington Council advisory services group. ‘We’re trying to get our arms around the implications.’ So far, many big U.S. companies have kept quiet on the proposal. But already, House Ways and Means Chairman Kevin Brady has tweaked the provision to lessen its impact, part of a package of changes the tax-writing panel adopted Monday night.”

November 8 – Financial Times (Demetri Sevastopulo and Tom Mitchell): “Donald Trump blamed his predecessors for the US’s widening trade deficit with China, praising Xi Jinping and telling an audience in Beijing he did not ‘blame’ Chinese leaders for ‘taking advantage’ of Washington. In a striking change of tone from the US president…, Mr Trump appeared at pains to rekindle the bonhomie that characterised the leaders’ first meeting at his Florida compound in April, a tenor that quickly deteriorated over North Korea. Although Mr Trump has been welcomed with a state dinner and extensive pomp, Mr Trump’s personal warmth towards Mr Xi was not reciprocated, with the Chinese leader using far more restrained language in his own comments.”

November 6 – Financial Times (Demetri Sevastopulo and Robin Harding): “Donald Trump accused Japan of engaging in unfair trade practices on the first leg of his five-nation Asia tour, during which the American president will focus on improving the US trade balance and efforts to press North Korea to give up its nuclear weapons. Speaking in Tokyo on the second day of his visit to Japan, Mr Trump reprised some of the economic themes that dominated his presidential campaign by telling Japanese and US business executives that trade with Japan was ‘not free or reciprocal’. ‘We want fair and open trade. But right now, our trade with Japan is not fair and it’s not open,’ said Mr Trump. ‘The US has suffered massive trade deficits with Japan for many, many years. Many millions of cars are sold by Japan into the United States, whereas virtually no cars go from the US into Japan.”

November 7 – New York Times (Jane Perlez, Paul Mozur and Jonathan Ansfield): “When President Trump arrives in Beijing on Wednesday, he will most likely complain about traditional areas of dispute like steel and cars. But Washington officials and major global companies increasingly worry about a new generation of deals that could give China a firmer grip on the technology of tomorrow. Under an ambitious plan unveiled two years ago called Made in China 2025, Beijing has designs to dominate cutting-edge technologies like advanced microchips, artificial intelligence and electric cars, among many others, in a decade. And China is enlisting some of the world’s biggest technology players in its push. Sometimes it demands partnerships or intellectual property as the price of admission to the world’s second-largest economy. Sometimes it woos foreign giants with money and market access in ways that elude American and global trade rules.”

November 7 – Bloomberg (Michelle Jamrisko and Andrew Janes): “Trade tensions between the U.S. and China pose a greater worry to the global economy than a nuclear North Korea, said National Australia Bank Ltd. chief economist Alan Oster. The probability that the world’s two largest economies enter into a destructive trade war is around one-in-five, Oster said... It’s the biggest risk to global growth that’s otherwise chugging along at a decent rate and should rise to 3.6% in 2018 from 3.4% this year, he said. ‘It would kill Asia, and it would kill commodities,’ and have flow-through effects to the world, said Oster, a former senior adviser to Federal Treasury in Australia… ‘Overall, I think the world’s okay. Geopolitical risk is there a lot -- who knows about North Korea -- but I’m more worried about Trump and China.’”

Federal Reserve Watch:

November 8 – Bloomberg (Christopher Condon and Craig Torres): “Years before he was tapped to lead the Federal Reserve, Jerome Powell brought to the world’s most powerful central bank a lesson he learned in the business world: manage or be managed. On everything from the payments system to monetary policy, he noticed the Fed’s brainy staff of economists would hash out their differences among themselves and then present governors with a unified policy recommendation, expecting them mostly to follow their advice. That didn’t sit well with a lawyer who cut his teeth in private-equity investing. In that line of work, proposed deals must survive a gauntlet of scrutiny in front of top decision makers… So Powell the Fed governor pushed back. He insisted on some occasions that staff members debate policy ideas in front of him… He also pored over mountains of academic studies and asked questions. In his five-plus years at the Fed, he’s managed to gain the staff’s respect even as he challenged their ready-made recommendations.”

November 6 – CNBC (Jeff Cox): “The Federal Reserve will not only lose its three top-ranking officials in the months ahead but also the more than three decades of experience they brought to policymaking. In their place will be central bankers who could take quite a different approach to policy, a change the financial markets may not fully appreciate yet. New York Fed President William Dudley became the latest Fed official to say he'll be leaving soon… That comes just days after President Donald Trump said he will nominate Fed Governor Jerome Powell to take over the chairman's seat from Janet Yellen in February, and less than a month after the departure of Vice Chairman Stanley Fischer. That in effect takes out the ruling troika of monetary policy since early 2014, a group that holds some 35 years of monetary policy experience.”

U.S. Bubble Watch:

November 8 – Bloomberg: “Donald Trump touched down in China to news on one of his favorite topics: the trade deficit. But it mightn’t be the news he’s wanting. For the first 10 months of the year, China’s trade surplus with the U.S. was $223 billion… That pace should mean the full-year gap between China’s sales to the U.S. and its imports is about the same as in 2016, at around $250 billion… China’s trade data… showed: Exports increased 6.9% in dollar terms in October from a year earlier. Imports advanced 17.2% year-on-year. The total trade surplus was $38.2 billion.”

November 8 – CNBC (Diana Olick): “The steady rise in home prices is so far showing no boundaries, and that is turning up the heat on some already overheated housing markets. Home prices rose 7% nationally in September, compared with September 2016… according to CoreLogic, a real estate data firm. As a result, 48% of the nation's top 50 housing markets are now considered ‘overvalued,’ up from 46% in August. A market is considered overvalued when home prices are at least 10% higher than the long-term, sustainable level.”

November 8 – Wall Street Journal (Laura Kusisto): “California’s biggest housing markets figure to be among the losers if a Republican-sponsored tax overhaul becomes law, according to two analyses of local market data. The House bill would cap the size of mortgage loans for which taxpayers can deduct interest payments at $500,000. In most regions of the U.S., that represents a small fraction of properties. But in the priciest markets, concentrated in some of the nation’s largest coastal cities, the impact could be significant. In the San Jose, Calif., metropolitan area, 75% of new mortgage loans thus far in 2017 were for more than $500,000… The median home price there is more than $1 million, and even small starter homes can climb well above the proposed cap.”

November 7 – Wall Street Journal (Peter Grant and Laura Kusisto): “Rising homeownership is adding to the jitters in the residential rental market, which has slumped recently after a long stretch near the top of the commercial real-estate industry. For most of the current economic expansion, declining ownership rates have enabled landlords of apartments and single-family homes to raise rents far faster than the pace of inflation. Demand has been fueled by the millions of people who haven’t had the money, credit or desire to pursue the traditional American dream. But amid a hot housing market, the homeownership rate is now rising, in part because millennials are reaching the age when they’re forming families and settling down.”

November 8 – Wall Street Journal (Gordon Lubold): “U.S. wars in Afghanistan, Iraq, Syria and Pakistan have cost American taxpayers $5.6 trillion since they began in 2001, according to a new study, a figure more than three times that of the Pentagon’s own estimates. The Defense Department earlier this year estimated that the total cost of the conflicts since the 2001 attacks has amounted to about $1.5 trillion. The new study, by the Watson Institute of International and Public Affairs at Brown University, aims to reflect costs the Pentagon doesn’t include in its own calculations…”

November 6 – Bloomberg (Ben Steverman): “One of the hottest tickets in New York City this weekend was a discussion on whether to overthrow capitalism. The first run of tickets to ‘Capitalism: A Debate’ sold out in a day… The crowd waiting in a long line to get inside on Friday night was mostly young and mostly male. Asher Kaplan and Gabriel Gutierrez, both 24, hoped the event would be a real-life version of the humorous, anarchic political debates on social media. ‘So much of this stuff is a battle that’s waged online,’ said Gutierrez, who identifies, along with Kaplan, as a ‘leftist,’ if not quite a socialist. These days, among young people, socialism is ‘both a political identity and a culture,’ Kaplan said. And it looks increasingly attractive. Young Americans have soured on capitalism. In a Harvard University poll conducted last year, 51% of 18-to-29 year-olds in the U.S. said they opposed capitalism; only 42% expressed support… A poll released last month found American millennials closely split on the question of what type of society they would prefer to live in: 44% picked a socialist country, 42% a capitalist one.”

China Bubble Watch:

November 5 – Bloomberg: “China’s financial system is becoming significantly more vulnerable due to high leverage, according to central bank governor Zhou Xiaochuan, who has made a series of blunt warnings in recent weeks about debt levels… Latent risks are accumulating, including some that are ‘hidden, complex, sudden, contagious and hazardous,’ even as the overall health of the financial system remains good, Zhou wrote in a lengthy article published on the People’s Bank of China’s website… ‘High leverage is the ultimate origin of macro financial vulnerability,’ wrote Zhou, 69, who is widely expected to retire soon after a record 15-year tenure. ‘In sectors of the real economy, this is reflected as excessive debt, and in the financial system, this is reflected as credit that has been expanding too quickly.’”

November 5 – Bloomberg: “China’s financial system is becoming significantly more vulnerable due to high leverage, according to central bank governor Zhou Xiaochuan, who has made a series of blunt warnings in recent weeks about debt levels in the world’s second-largest economy. Latent risks are accumulating, including some that are ‘hidden, complex, sudden, contagious and hazardous,’ even as the overall health of the financial system remains good, Zhou wrote in a lengthy article published on the People’s Bank of China’s website… The nation should toughen regulation and let markets serve the real economy better, according to Zhou. The government should also open up markets by relaxing capital controls and reducing restrictions on non-Chinese financial institutions that want to operate on the mainland, he wrote.”

November 8 – Bloomberg: “China’s factory prices kept surging last month as authorities curb production in smokestack industries to combat pollution. The producer price index rose 6.9% in October from a year earlier, versus a projected 6.6% rise… and matching September’s pace. The consumer price index climbed 1.9%.”

November 8 – New York Times (Keith Bradsher): “China on Wednesday released fresh details about a new financial regulatory body intended to calm a financial system that in recent years has endured a stock market crash, a huge exodus of money outside the country and the rapid accumulation of debt. But the details may raise more questions than they answer, and could disappoint those looking for a strong hand to rein in the financial system underpinning the world’s second-largest economy. Official Chinese media reported… that a new Financial Stability and Development Committee had held its first meeting, nearly four months after President Xi Jinping ordered its creation. It said the meeting was led by Ma Kai, a 71-year-old vice premier. At the meeting, Mr. Ma stressed that China’s financial system should serve the real economy… namely, making money available to businesses that need it. He also stressed financial security, the report said.”

November 5 – Bloomberg: “China’s shadow banking sector, estimated by some analysts to be worth 122.8 trillion yuan ($18.5 trillion), stopped growing in the first half of the year as issuance of wealth management products declined, according to Moody’s… For the first time since 2012, China’s gross domestic product grew faster than shadow banking assets in the six-month period… Following last month’s Communist Party Congress, further regulation will continue to rein in shadow banking and address some of the key systemic imbalances, Moody’s said. While Moody’s assessment offers some evidence that China’s crackdown on shadow financing is starting to bite, authorities continue to sound the alarm on high debt levels.”

November 7 – Bloomberg: “Under pressure to trim borrowings, China’s companies have found a way to reduce their lofty debt burdens -- even if some of the risk remains. Sales of perpetual notes -- long-dated securities that can be listed as equity rather than debt on balance sheets given that in theory they could never mature -- have soared to a record this year as Beijing zeros in on leverage and the threat it poses to the financial system. The bonds are so popular that issuance by non-bank firms has jumped to the equivalent of 433 billion yuan ($65bn), more than seven times sales by companies in the U.S. ‘Chinese issuers love perpetual bonds because they are under great pressure to deleverage,’ said Wang Ying, a senior director at Fitch… ‘Sophisticated investors should do their homework and shouldn’t be misled by the numbers in accounting books.’”

November 5 – Financial Times (Charles Clover): “China has unveiled a ‘magical’ island-building ship on the eve of Donald Trump’s visit in a move likely to renew fears about its claims to territory in the South China Sea. At 140 metres the Tiankun is the biggest dredger in Asia, with cutters and pumps capable of smashing the equivalent of three Olympic pools of rock an hour from the sea floor and shooting it 15km away to create land. During the past five years, China has used similar vessels to create a string of strategic islands to support its claims to 85% of the sea.”

Central Banker Watch:

November 7 – Bloomberg (Alessandro Speciale and Piotr Skolimowski): “Three of the European Central Bank’s top policy makers pushed last month to alter a commitment to keep buying bonds until inflation improves, signaling challenges ahead for President Mario Draghi as the bank seeks to slow quantitative easing. Board member Benoit Coeure, Bundesbank President Jens Weidmann and Bank of France Governor Francois Villeroy de Galhau were the heavyweights who recommended tying the overall level of monetary stimulus -- rather than just asset purchases -- to the outlook for prices…”

Global Bubble Watch:


November 8 – Bloomberg (Luke Kawa): “The best way to crush the crowd in 2017? Buy the things everyone insisted would never keep going up. A portfolio stuffed with allegedly over-inflated assets would have returned more than 120% so far in 2017, trouncing the S&P 500 Index... The hypothetical ‘Bubblicious’ portfolio includes Chinese real estate and internet names, a pair of U.S. tech behemoths, a cryptocurrency fund, the ETF industry, bonds that mature decades from now, and a dash of short volatility bets just to make things more interesting. The out-performance is a testament to the momentum mania prevalent in today’s markets, a dynamic which has prompted the likes of Greenlight Capital’s David Einhorn, Goldman Sachs…, and Sanford C Bernstein… to mull whether value investing is in the midst of an existential crisis given ultra-low interest rates and abundant liquidity.”

November 6 – Bloomberg (Ian King): “Broadcom Ltd. offered about $105 billion for Qualcomm Inc., kicking off an ambitious attempt at the largest technology takeover ever in a deal that would rock the electronics industry. Broadcom made an offer of $70 a share in cash and stock for Qualcomm, the world’s largest maker of mobile phone chips. That’s a 28% premium over the stock’s closing price on Nov. 2… The proposed transaction is valued at approximately $130 billion on a pro forma basis, including $25 billion of net debt. Buying Qualcomm would make Broadcom the third-largest chipmaker, behind Intel Corp. and Samsung Electronics Co. The combined business would instantly become the default provider of a set of components needed to build each of the more than a billion smartphones sold every year. The deal would dwarf Dell Inc.’s $67 billion acquisition of EMC in 2015 -- then the biggest in the technology industry.”

Fixed Income Bubble Watch:

November 7 – Bloomberg (Cormac Mullen): “It’s one step forward, two steps back for bond volatility. Bank of America Merrill Lynch’s MOVE Index, a gauge of price swings in the U.S. Treasury market, fell to a record low on Monday, bucking last month’s uptrend. Renewed expectations that the Federal Reserve will stay the course on monetary policy in the midst of a leadership transition and the unveiling of the Republican tax plan have spurred an eight-day decline in the volatility of the world’s largest bond market.”

November 6 – Bloomberg (Lisa Lee and Adam Tempkin): “One of the last hurdles preventing riskier companies from slashing borrowing costs in an already red-hot leveraged loan market is crumbling. Managers of collateralized loan obligations, the biggest buyers of U.S. leveraged loans, have started to give in to an unprecedented surge of repricings of the debt they hold in their portfolios. More than $175 billion of CLOs have refinanced in the last 12 months, up from less than $10 billion in the prior one-year period… These refinancings could further strengthen the hands of borrowers, allowing them to demand even more rate cuts from their creditors who have little choice other than to say yes. Unlike junk bonds, loans are relatively easy to prepay, giving companies the option to refinance with a new group of investors. About $525 billion of loans have repriced during the last 12 months, compared to $130 billion in the prior one-year period…”

November 7 – Wall Street Journal (Paul J. Davies): “The hunt for yield is taking Wall Street and investors into exotic territory, and that means an appetite for credit assets that are private, not easily tradable and often complex. Putting together deals in what some dub ‘nonlinear finance’ is a growth business for investment banks’ big bond-trading arms and is helping clear unwanted assets off some balance sheets. However, such private deals, which aren’t publicly traded and don’t have public credit ratings, are a challenge for regulators keeping track of the growth of shadow banking and understanding whether such activity is driven by regulation or its avoidance. The business isn’t new, but it is heating up as banks hire specialists and commit balance-sheet capacity to feed investor demand.”

November 7 – Financial Times (Nicholas Megaw): “Record high prices combined with more risky corporate bond supply is creating ‘increasing uncertainty’ and raising the chances of a sharp turnround in the European high-yield credit market, Fitch… warned. Yields on the most popular benchmark for European junk bonds fell below 2% for the first time ever last week, but Fitch warned that recent market calm and the distorting impact of central bank monetary policy ‘obscure the true risk-return dynamics faced by investors’. The ratings agency said the proportion of newly-issued bonds with the lowest credit ratings – CCC+ or below – has risen to its highest level since 2013, when average yields were more than 5%.”

Europe Watch:

November 7 – Reuters (Thomas Escritt): “The German economy is at risk of overheating, according to a leaked advisory council report that follows pressure from the Bundesbank for a swifter end to the European Central Bank’s expansive monetary policy. In their annual report… the five ‘wise men’ who advise the German government on economic policy said the economy, which they expected to expand strongly this year and next, was moving gradually into a ‘boom phase’. ‘There are clear signs that economic capacity is over-utilised,’ read the report…”

November 8 – Bloomberg (Lorenzo Totaro): “Italy’s ratio of debt to economic output will rise slightly this year and won’t fall below 130% through 2019 as the pace of recovery slows, the European Commission said. The ratio will increase to 132.1% of gross domestic product from 132% in 2016, the Brussels-based EU executive arm said…”

Emerging Market Watch:

November 6 – Bloomberg (Daniel Cancel): “Venezuelan debt is teetering toward default with average prices near 30 cents on the dollar. As investors ponder an invite from the government to come to Caracas next week to discuss a restructuring…, they now demand a record 40.8 percentage points of extra yield over U.S. Treasury bills to hold the country’s bonds. No one really expects those yields to pay out as Venezuela seeks debt relief, but they do give an idea as to just how distressed the securities have become.”

Leveraged Speculation Watch:

November 7 – Bloomberg (Cecile Gutscher): “Hedge funds are headed for their best year since 2013 thanks to a gravity-defying stock market. Improving performance may go some way to assuaging criticism for fees that are hard to justify with mediocre returns, even though on average the funds underperformed equity benchmarks including the S&P 500 Index, which is up 15.7% year-to-date. 2017’s winning strategies were deployed by equity funds skewed toward health care and technology, according to… Hedge Fund Research Inc. through September. Over the same period, the S&P 500 Tech Index returned 26%...”

Geopolitical Watch:

November 7 – BBC (Suzy Waite and Nishant Kumar): “Saudi Arabia's Crown Prince Mohammed bin Salman has accused Iran of an act of ‘direct military aggression’ by supplying missiles to rebels in Yemen. This ‘may be considered an act of war’, state media quoted the prince as telling UK Foreign Secretary Boris Johnson…”

November 7 – Reuters (Tom Perry and Laila Bassam): “Saudi Arabia has opened a new front in its regional proxy war with Iran, threatening Tehran’s powerful ally Hezbollah and its home country Lebanon to try to regain the upper hand. With Iranian power winning out in Iraq and Syria, and Riyadh bogged down in a war with Iran-allied groups in Yemen, the new Saudi approach could bring lasting political and economic turmoil to a country where Tehran had appeared ascendant. The resignation on Saturday of the Saudi-allied Lebanese prime minister Saad al-Hariri, announced from Riyadh and blamed on Iran and Hezbollah, is seen by many as the first step in an unprecedented Saudi intervention in Lebanese politics.”

November 7 – Bloomberg (Suzy Waite and Nishant Kumar): “Cheap money may have buoyed emerging-market macro hedge funds toward their ninth straight annual advance, but that doesn’t mean investors are expecting an exodus as the world’s central bankers start turning off the taps. Demand for these funds remains so brisk, in fact, that some are turning new money away.”

November 7 – Financial Times (Erika Solomon): “A string of escalatory moves in the Gulf in recent days suggests the long-brewing cold war between Saudi Arabia and its regional arch-rival Iran could soon grow hot. It began with the surprise resignation of the Lebanese prime minister, Saad al-Hariri, announced on Saturday from Saudi Arabia. Riyadh is believed to have pressed him to step down in frustration that Mr Hariri, a long-time Saudi ally, had in effect given cover to the Lebanese Shia force Hizbollah, Iran’s top regional proxy, by sharing control of government with them. Hours later, in Yemen, a ballistic missile was fired by Iran-backed Houthi rebels towards Riyadh airport. Saudi Arabia accused Iran… of an ‘act of war’ over the incident; the same day King Salman of Saudi Arabia summoned Mahmoud Abbas, president of the Palestinian Territories, to a meeting. It raised suspicions that Mr Abbas too was coming under pressure from Riyadh after reaching a power-sharing deal with Hamas, the Iran-backed militant group.”

November 6 – AFP (Alison Tahmizian Meuse and Mohamed Hasni): “Saudi Arabia and Iran traded fierce accusations over Yemen…, with Riyadh saying a rebel missile attack ‘may amount to an act of war’ and Tehran accusing its rival of war crimes. Tensions have been rising between Sunni-ruled Saudi Arabia and predominantly Shiite Iran, which are opposed in disputes and conflicts across the Middle East from Yemen and Syria to Qatar and Lebanon. On Monday, a Saudi-led military coalition battling Tehran-backed rebels in Yemen said it reserved the ‘right to respond’ to the missile attack on Riyadh at the weekend, calling it a ‘blatant military aggression by the Iranian regime which may amount to an act of war’. Saudi Foreign Minister Adel al-Jubeir also warned Tehran. ‘Iranian interventions in the region are detrimental to the security of neighbouring countries and affect international peace and security. We will not allow any infringement on our national security,’ Jubeir tweeted.”