Saturday, October 1, 2016

Weekly Commentary: A Take on Deutsche Bank

September 30 – Wall Street Journal (James Mackintosh): “Lehman failed the way all banks fail: It ran out of cash and liquid assets it could quickly sell to pay clients and counterparties as they ran for the exit. In principle, the same could happen to any bank, as they never have enough easy-to-sell assets to pay back every depositor immediately. Deutsche is now in focus in part because clients have been spooked by its plummeting shares… But Lehman was particularly vulnerable, due to its reliance on the overnight repurchase, or repo, market and on hedge funds to finance itself. Billions of dollars of cash and other assets from its so-called prime brokerage business drained away in its final few days, while repos couldn’t be renewed and banks and other counterparties demanded extra collateral to back derivatives trades. Deutsche is different. It has a far more diversified client base, sourced from German retail banking and multiple institutional business lines. It has a lot more liquidity, amounting to $246.8 billion at the end of June, equal to 12% of assets, against the $45 billion Lehman had a month before its downfall, 7.5% of assets.”

Deutsche Bank comparisons to Lehman Brothers resonate with bulls and bears alike. The bulls are comforted that policymakers readily admit their mistake allowing Lehman to fail back in 2008. As revisionist thinking goes, no Lehman failure would have meant no “worst financial crisis since the Great Depression.”

Learning from the crisis, Deutsche Bank’s balance sheet is these days heavy on liquid assets. There are as well various emergency liquidity facilities available from the ECB and Bundesbank. Deutsche Bank is better prepared, policymakers are better prepared and the world is better prepared. From the bullish perspective, it’s almost unthinkable that global policymakers would sit back and watch the collapse of the “world’s most systemically risky bank.”

The sanguine bullish view is supported by Deutsche Bank (senior debt) Credit default swaps. Despite Friday’s morning’s 20 bps surge, CDS closed at 240 bps, still below trading highs from February. While elevated, these are not levels indicative of a looming Lehman-style collapse. Moreover, there’s the U.S. equities VIX index. Closing the week at 13.29, a level suggesting nothing but blue skies ahead. Moreover, the S&P ended Q3 only about 1% below record highs.

The bears, well, they’re convinced the bulls are nuts. More important than whimsical CDS pricing, the naysayers point to an incipient exodus of Deutsche Bank clients. Global markets were shaken Thursday by a Bloomberg article discussing how some key hedge funds were abandoning ship. Not yet faded from memory, Lehman Brothers proved a prime brokerage and counter-party exposure nightmare. Those who panicked first panicked best.

It’s perfectly rational for hedge funds in particular to shift assets, collateral and derivative business away from the slow-motion train wreck, Deutsche Bank. The bears see an approaching point of no return: a crisis of confidence and “run” on Deutsche that will necessitate a bailout and restructuring.

September 30 – Financial Times (James Shotter, Martin Arnold and Laura Noonan): “Hedge funds have started to pull some of their business from Deutsche Bank, setting up a potential showdown with German authorities over the future of the country’s largest lender. As its shares fell sharply in New York trading, Deutsche recirculated a statement emphasising its strong financial position. European regulators and government officials have kept a low profile in public over Deutsche’s deepening woes. However, in private they have struck a sanguine tone, stressing that in extremis there is scope under European regulation to inject state funds to support the bank, provided it is done in line with market conditions.”

I’ll take a somewhat different tack. Deutsche Bank is to the global government finance Bubble what Lehman was to the U.S. mortgage finance Bubble. Lehman may have been the catalyst, but the root of the problem was Trillions of mispriced securities, unsustainable home prices and deep structural impairment (financial and economic). Deutsche Bank is much larger today than Lehman was in 2008, and its tentacles are everywhere. The scope of the global government finance Bubble is multiples of the mortgage finance Bubble. Mispriced securities are in the tens of Trillions. Global structural impairment is unprecedented. There were lessons learned from 2008 – though most now work to bolster and prolong history’s greatest Bubble.

Deutsche Bank is rather clearly in trouble. But it is unclear if a crisis of confidence is imminent. This institution desperately needs to raise capital. Transparency is lacking with regard to Deutsche Bank’s massive derivatives portfolio. Their investment banking, prime brokerage and derivatives businesses, already thin on profits, will suffer. But as Germany’s largest bank, it is not clear that as an institution it’s today as vulnerable to a run as Lehman was in 2008.

Rumor of a Department of Justice settlement saw Deutsche Bank shares rally 10% intraday to close Friday’s session up 14%. Italian stocks rallied 6% intraday. European stocks recovered 4.5%. Even with Friday’s gains, it was another rough week for global financial stocks. Notably, Japan’s TOPIX Bank index sank 7.5%, increasing 2016 losses to 30%. Hong Kong’s Hang Seng Financials dropped 2.7%. Italian stocks declined another 1.7% this week, taking its y-t-d decline to 50%. Europe’s STOXX 600 Bank index declined 1.0%, increasing 2016 losses to 23%. The wild volatility in financial shares is reminiscent of 2008.

Deutsche Bank is a potential catalyst for the bursting of the global Bubble. It has company. Though it is almost unique as a poster child of the mess global policymaking has made of things. After the 2008 crisis, Deutsche Bank had the opportunity to take market share in global prime brokerage, derivatives and investment banking – and couldn’t resist. As a German institution, it benefitted from European economic and banking system fragility. Not surprisingly, all the abundant cheap finance ensured the bank found myriad avenues to get itself into trouble. And then the Draghi ECB, along with global central bankers, lost their minds, with massive QE and negative rates inciting dislocation throughout the massive global bond and derivatives markets.

Deutsche Bank exemplifies the fragility of the global financial system. And this vulnerability is associated directly with egregious monetary stimulus – past and present. Trouble at Deutsche Bank comes at an inopportune for the unsound European banking system. It comes at a tough time for Merkel, the Bundesbank and the German government more generally. The political backdrop makes it difficult for the German government to support its largest bank. A faltering Deutsche Bank will only toughen German public enmity toward ECB policymaking.

To be sure, Deutsche Bank is illuminating the serious predicament associated these days with being a highly leveraged financial institution in a world of acute monetary disorder and price instability. They are certainly not alone. Sinking global bank stocks provide another important crack in global confidence – confidence in finance and confidence in policymaking.  Importantly, the Deutsche Bank imbroglio comes as faith in central banking is waning.  It comes with geopolitical tensions running high.

The VIX is about 13. Meanwhile, the costs of all types of market derivative insurance are rising – especially in currency swaps markets. Deutsche Bank will have little option than to back away from derivatives market-making activities. This comes at the expense of already susceptible marketplace liquidity, ensuring heightened caution from other major derivatives players. The cost of market insurance is on the rise, with negative ramifications for risk-taking and market liquidity more generally. While convenient, don’t blame it all on Deutsche Bank. It’s becoming increasingly systemic.

September 30 – Bloomberg (Liz McCormick): “Quarter-end is often a tumultuous period. Banks typically rein in collateral lending as they shore up balance sheets, driving up rates on repurchase agreements. When banks curb repo activity, money funds -- the key cash providers in the transactions -- need alternative places to invest. In the past few years, one option they’ve turned to is directing more money into the Federal Reserve’s reverse repos, the tool the central bank uses to put a floor under its target for overnight rates. But this quarter, the movements are out of the ordinary, partly because of the looming Oct. 14 deadline for the overhaul of rules governing money funds. Treasury repo rates have reached the highest since 2008. Meanwhile, the amount of money piling into the Fed’s overnight reverse repos surpassed $270 billion, one of the highest levels since officials began testing the program in 2013.”

September 30 – Bloomberg (Lukanyo Mnyanda and Liz McCormick): “Banks borrowing dollars are paying the most since the height of the euro region’s sovereign-debt crisis as concerns mount about the health of Germany’s largest lender, just as new money-market rules are disrupting U.S. short-term financing markets. The three-month cross-currency basis swap, the rate for banks to convert euro payments into dollars, fell to 58 bps, or 0.58 percentage point, below the euro interbank-offered rate. That’s the most negative reading on a closing basis since July 2012, when the debt crisis was seen threatening the very existence of the euro. It widened to 210 bps below Euribor as banks refused to lend to one another in 2008 after the collapse of Lehman Brothers…”

For the Week:

The S&P500 added 0.2% (up 6.1% y-t-d), and the Dow increased 0.3% (up 5.1%). The Utilities sank 3.9% (up 13.7%). The Banks declined 0.5% (down 3.1%), while the Broker/Dealers were little changed (down 2.5%). The Transports rose 1.8% (up 7.6%). The S&P 400 Midcaps was little changed (up 11.0%), while the small cap Russell 2000 slipped 0.2% (up 10.2%). The Nasdaq100 added 0.3% (up 6.1%), and the Morgan Stanley High Tech index gained 1.2% (up 11.2%). The Semiconductors surged 3.9% (up 25.9%). The Biotechs declined 2.1% (down 11.6%). With bullion down $26, the HUI gold index fell 1.7% (up 108%).

Three-month Treasury bill rates ended the week at 28 bps. Two-year government yields slipped a basis point to 0.76% (down 29bps y-t-d). Five-year T-note yields declined a basis point to 1.15% (down 60bps). Ten-year Treasury yields fell three bps to 1.59% (down 66bps). Long bond yields declined three bps to 2.32% (down 70bps).

Greek 10-year yields dropped 13 bps to 8.10% (up 78bps y-t-d). Ten-year Portuguese yields declined five bps to 3.30% (up 78bps). Italian 10-year yields dipped three bps to 1.18% (down 41bps). Spain's 10-year yields fell eight bps to a record low 0.88% (down 89bps). German bund yields declined four bps to negative 0.12% (down 74bps). French yields slipped three bps to 0.18% (down 81bps). The French to German 10-year bond spread widened one to 30 bps. U.K. 10-year gilt yields added a basis point to 0.74% (down 122bps). U.K.'s FTSE equities index was little changed (up 10.5%).

Japan's Nikkei 225 equities index fell 1.8% (down 13.6% y-t-d). Japanese 10-year "JGB" yields dropped five bps to negative 0.10% (down 36bps y-t-d). The German DAX equities index declined 1.1% (down 2.2%). Spain's IBEX 35 equities index slipped 0.5% (down 8.0%). Italy's FTSE MIB index slipped 0.3% (down 23%). EM equities were lower. Brazil's Bovespa index lost 0.6% (up 35%). Mexico's Bolsa declined 1.1% (up 9.9%). South Korea's Kospi slipped 0.5% (up 4.2%). India’s Sensex equities sank 2.8% (up 6.7%). China’s Shanghai Exchange declined 1.0% (down 15.1%). Turkey's Borsa Istanbul National 100 index sank 4.1% (up 6.6%). Russia's MICEX equities index fell 1.7% (up 12.3%).

Junk bond mutual funds saw inflows surge to $2.0 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates dropped six bps to 3.42% (down 43bps y-o-y). Fifteen-year rates declined four bps to 2.72% (down 35bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down nine bps to 3.54% (down 33bps).

Federal Reserve Credit last week declined $1.6bn to $4.425 TN. Over the past year, Fed Credit contracted $6.8bn. Fed Credit inflated $1.614 TN, or 57%, over the past 203 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $6.8bn last week to a six-year low $3.144 TN. "Custody holdings" were down $190bn y-o-y, or 5.7%.

M2 (narrow) "money" supply last week expanded $10.9bn to a record $13.089 TN. "Narrow money" expanded $865bn, or 7.1%, over the past year. For the week, Currency increased $1.0bn. Total Checkable Deposits dropped $27.8bn, while Savings Deposits jumped $41.3bn. Small Time Deposits were about unchanged. Retail Money Funds fell $3.4bn.

Total money market fund assets increased $10.5bn to $2.680 TN. Money Funds increased $12bn y-o-y (0.4%).

Total Commercial Paper recovered $3.9bn to $479bn. CP declined $11bn y-o-y, or 1.2%.

Currency Watch:

September 29 – Bloomberg (Kyoungwha Kim): “Hedging against further declines in Asia’s worst-performing currency has become so expensive that some global investors are throwing in the towel on yuan bonds. The cost of swapping dollars for China’s currency has risen above the yields on onshore sovereign notes as depreciation extends into a third year. Daily trading in yuan derivatives, which accounts for more than 40% of the total for the currency, slumped 30% from three years earlier…”

The U.S. dollar index was little changed at 95.42 (down 3.3% y-t-d). For the week on the upside, the Mexican peso increased 2.0%, the Norwegian krone 1.6%, the New Zealand dollar 0.6%, the Australian dollar 0.5%, the Canadian dollar 0.3%, and the euro 0.1%. For the week on the downside, the Brazilian real declined 0.6%, the Swedish krona 0.4%, the Japanese yen 0.3%, and the Swiss franc 0.1%. The Chinese yuan was unchanged versus the dollar (down 2.7% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index surged 3.7% (up 16.9% y-t-d). Spot Gold dropped 1.9% to $1,316 (up 24%). Silver sank 2.7% to $19.25 (up 40%). Volatile Crude jumped $3.76 to $48.24 (up 30%). Gasoline surged 8.0% (up 17%), while Natural Gas declined 1.7% (up 24%). Copper added 0.4% (up 4%). Wheat slipped 0.7% (down 15%). Corn was about unchanged (down 6%).

China Bubble Watch:

September 29 – Bloomberg: “Even amid the slowest economic growth in a quarter century, China’s homeowners are enjoying returns that put other asset classes to shame - on paper, anyway. Home prices rose the most in six years last month, defying new policies to curb excessive speculation in big cities and government warnings about asset bubbles. While gains have been most pronounced in big cities like Shenzhen, where home prices are up about 60% in the past year, smaller cities such as Xiamen have also seen runaway growth, where prices have risen more than 38%.”

September 29 – Bloomberg (Luke Kawa): “Speculative buyers have eschewed Chinese stocks in favor of property, prompting even the chief economist at the central bank of the world's second largest economy to declare that housing was in a ‘bubble.’ But when strategists at UBS AG recently compiled a list of bubblicious housing markets, there weren't any selections from mainland China due to the lack of reliable data on the subject… But Deutsche Bank AG Chief China Economist Zhiwei Zhang thinks he's pinpointed ‘a clear sign of a bubble’ in the market… After analyzing how much developers were willing to spend to win land auctions in 10 major Chinese cities in which values are already up 23% year-over-year, the economist found that the business case for these bids evaporates unless property prices continue to increase.”

September 25 – Bloomberg: “China’s smaller banks have never been more reliant on each other for funding, prompting rating companies to warn of contagion risks in any crisis. Wholesale funds, including those raised in the interbank market, accounted for a record 34% of small- and medium-sized bank financing as of June 30, compared with 29% on Jan. 31 last year, Moody’s… estimated… Shanghai Pudong Development Bank Co.’s first-half earnings showed its short-term borrowings and repurchase agreements surged by 75% in the past three years, while its consumer deposits rose just 24%.”

September 25 – Bloomberg (Alfred Liu): “China’s banking regulator told the nation’s city banks to learn the lesson of the global financial crisis and get back to their traditional businesses, building pressure for the lenders to curb opaque shadow financing. ‘City commercial banks should change as soon as possible the situation of allocating more funds into investing than lending, and developing their off-balance-sheet businesses too fast,’ Shang Fulin, the chairman of the China Banking Regulatory Commission, said… Dotted across China from Harbin in the north to the tropical island of Hainan in the south, the nation’s more than 130 city commercial banks have piled into shadow lending just as bad loans are rising. Shang’s comments add to efforts by the government to contain the risks.”

September 28 – Bloomberg: “China is turning Japanese. That’s the increasingly held view of observers comparing China’s frenzied real-estate market with the epic bust that more than two decades ago hobbled one of its biggest economic rivals. While the two scenarios aren’t a carbon copy, similarities between China’s record credit boom in recent years and Japan’s bubble era have been made at various times… What’s triggering concern is a surge in total debt since 2008 to 2.5 times gross domestic product, as authorities unleashed cheap bank loans to shore up China’s expansion. Now, much of the credit is finding its way into property -- helping fuel a 33% surge in house prices in major cities from a year ago. Meantime, regulators have been slow to force banks to recognize bad loans and to shut zombie companies. The government has put off a string of corporate defaults this year in an effort to sustain confidence.”

September 30 – Bloomberg (Lukanyo Mnyanda and Liz McCormick): “China’s capital city told home buyers to put more money as down payment as part of a wider effort by the world’s second-biggest economy to rein in prices and cool the property market. The Beijing administration raised the down payment for first-time purchasers to a minimum 35% of the price, from the 30% earlier, while it increased it to at least 50% for second-time buyers… The decision by Beijing came a day after similar measures by Hangzhou…”

September 27 – Bloomberg (Lianting Tu, Viren Vaghela and Carrie Hong): “China’s wealthy are flocking to investment products that buy bank capital securities and soup up returns by using borrowed funds. Elm BV, a special purpose vehicle used by UBS Group AG, has sold 3.7 billion yuan ($555 million) of structured notes in 18 offerings since 2015 with yields as high as 15%... Goldman Sachs Group Inc., Societe Generale SA and Guotai Junan Securities Hong Kong Ltd. have also designed such products, which often use leverage to invest in U.S. currency capital securities. Chinese banks sold at least $27.7 billion of Basel III notes offshore since the first issuance in 2014.”

Europe Watch:

September 24 – Bloomberg (Patrick Donahue): “German Finance Minister Wolfgang Schaeuble has urged lawmakers to take a tough stance with European Central Bank President Mario Draghi when he goes before legislators in the lower house of parliament next week, Bild reported. Schaeuble told lawmakers… to push Draghi to defend the central bank’s low interest rates when he speaks to them on Sept. 28… Schaeuble expressed irritation at Draghi’s criticism of Germany’s trade surplus, saying it’s the ECB that’s at fault…”

September 28 – Bloomberg (Carolynn Look, Patrick Donahue and Alessandro Speciale): “Mario Draghi acknowledged the pain European Central Bank policies are bringing to some of Europe’s savers and banks while vowing to press on with his efforts to bring back inflation. ‘The volume of these concerns, the vocality of these concerns is definitely higher in Germany,’ the ECB president told a press conference at the end of an almost two-hour closed-doors meeting with German lawmakers in Berlin… ‘That doesn’t make any difference to us really in the sense that we are sensitive, we do share these concerns and we are also aware that it is only in reaching our objective of price stability that these concerns can be addressed forever.’”

September 27 – Reuters (Francois Murphy and Francesco Canepa): “Political support for Europe's oversized banking sector must stop, a top official at Germany's central bank said…, comparing banks to dinosaurs facing a threat of extinction. Concerns about German banks are mounting, with top lender Deutsche Bank forced to reassure investors this week that it did not need government support… Andreas Dombret, the Bundesbank board member in charge of supervision, said banks' deficiencies should be tackled and the sector should be allowed to shrink further. ‘Political support for the banking sector must finally come to an end - something that unfortunately I've only seen to a limited extent,’ he told an audience… ‘Crucially, we cannot discuss away the structural deficiencies of the banking sector.’”

September 26 – Bloomberg (John Follain): “Prime Minister Matteo Renzi picked Dec. 4 for a referendum on constitutional changes that aims to streamline the way Italy is run, setting the clock ticking on a ballot that will seal his political fate. In a vote with echoes of the Brexit referendum that cost David Cameron his job, Renzi’s push for ‘the mother of all reforms’ is being closely watched by financial markets because it feeds political instability just as the third-biggest economy in the euro area struggles to boost sluggish growth.”

September 27 – Bloomberg (Marianna Duarte De Aragao): “Renewed turmoil in Europe’s banking shares is splitting the region’s bond market. Securities from higher-rated nations climbed as investor uneasiness about Deutsche Bank AG’s financial footing sparked demand for the safest assets at the expense of those from more indebted nations. Germany’s 10-year bond yield fell to the lowest since July and Finland’s dipped below zero for the first time. The euro area’s periphery missed out on the rally as traders focused on political risk in these nations.”

September 29 – Reuters (Jonathan Gould): “Germany's Commerzbank will cut more than a fifth of its workforce and suspend its dividend as it tackles the challenges of low interest rates, weak profits and the shift to online banking. Germany's second biggest lender said… it plans to cut 9,600 of its 45,000 full-time positions, a more drastic move than the 10% staff reduction at larger rival Deutsche Bank, which remains under pressure for deeper cost cuts.”

September 29 – Financial Times (Eric Platt): “Redemptions from European equity funds have approached $100bn as investors race out of an asset class rattled by the uncertain health of the continent’s financial sector. Funds invested in European stocks suffered $1.9bn of withdrawals in the week to September 28, the 34th consecutive week of outflows…”

September 29 – Wall Street Journal (Tom Fairless): “It’s absurd to ask Germany’s government to spend more to bolster eurozone growth, German Central Bank President Jens Weidmann said…, rejecting growing pressure on Berlin to loosen its purse strings. Speaking in the German capital, Mr. Weidmann said a fiscal stimulus program in Germany was unnecessary given the nation’s robust economy, and would have few positive effects for other countries anyway.”

Brexit Watch:

September 25 – Financial Times (Stefan Wagstyl and Alex Barker): “Germany is growing increasingly exasperated with Britain’s bravado over Brexit, prompting a rethink in Berlin over how hard to push London during negotiations on leaving the EU. Top officials, ministers and diplomats in Berlin are anxious that Chancellor Angela Merkel’s desire to maintain good relations with Britain should not be seen as a green light for unrealistic UK negotiating demands... The hardening mood is a warning that Germany’s relative patience and equanimity with Britain is not endless. A top EU diplomat signalled that other EU states might retaliate if British politicians persisted with their rhetoric.”

September 25 – Wall Street Journal (: Patrick Jenkins, George Parker and Laura Noonan): “Senior financiers are alarmed at growing political momentum behind a so-called ‘hard Brexit’ that they fear will erode business confidence, trigger corporate departures and damage the City of London. Leading bankers who have held talks with government ministers have told the Financial Times they believe Theresa May, the prime minister, will end up taking Britain out of the EU’s single market and customs union. They fear policy is being shaped by pro-Brexit ministers like Liam Fox, international trade secretary, who said in July that Britain would probably leave the customs union, and Brexit minister David Davis, who says it is ‘improbable’ that Britain would stay in the single market.”

Fixed-Income Bubble Watch:

September 26 – Bloomberg (Ian C Sayson and Maria Levitov): “They’ve long been one of the most reliable sources of demand for U.S. government debt. But these days, foreign central banks have become yet another worry for investors in the world’s most important bond market. Holders like China and Japan have culled their stakes in Treasuries for three consecutive quarters, the most sustained pullback on record… The decline has accelerated in the past three months, coinciding with the recent backup in U.S. bond yields… Overseas creditors have played a key role in financing America’s debt as the U.S. borrowed heavily in the aftermath of the financial crisis to revive the economy. Since 2008, foreigners have more than doubled their investments in Treasuries and now own about $6.25 trillion. Central banks have led the way… The amount of U.S. government debt held in custody at the Fed has decreased by $78 billion this quarter, following a decline of almost $100 billion over the first six months of the year.”

September 27 – Financial Times (Eric Platt): “A global debt binge driven by record-low borrowing costs is bypassing risky US companies as investors reveal the limits to their desire for high-yielding securities. Companies with some of the lowest credit ratings have sold less than $12bn of debt in the US this year, the slowest pace since 2009, a sharp contrast to the reception Wall Street has given the highest-quality companies, according to… Dealogic… More than $5tn of debt has been sold both by companies and sovereigns this year, the busiest on record, as central banks in Europe and Japan pump stimulus through markets in an effort to spur economic activity and rekindle inflation.”

September 29 – Bloomberg (Yumi Ikeda): “Overseas investors cut their holdings of Japanese bonds at the fastest pace since at least 2014 last week as debt matured. They sold a net 2.8 trillion yen ($28bn) in bonds during the week ended Sept. 23… It was the third consecutive week that non-Japanese investors, who hold about 5% of the nation’s government bonds, pared their holdings.”

Global Bubble Watch:

September 29 – Bloomberg (Patrick Donahue): “Amid mounting concern about Deutsche Bank AG’s ability to withstand pending legal penalties, about 10 hedge funds that do business with the German lender have moved to reduce their financial exposure… The funds, a small subset of the more than 800 clients in the bank’s hedge fund business, have moved part of their listed derivatives holdings to other firms this week, according to an internal bank document…”

September 28 – Reuters (Arno Schuetze): “The German government denied that it was working on a rescue of Deutsche Bank after a newspaper report about such plans fueled fears over the future of the biggest lender in Europe's largest economy. European Central Bank President Mario Draghi said that the bank's low interest rate policies were not to blame for the German group's problems but declined comment on whether the state should step in to help.”

September 28 – Reuters (Jamie McGeever): “Trading in Deutsche Bank's so-called 'CoCo' bonds in September has soared to levels more than seven times those of the previous month as Germany's biggest lender struggles to allay investors' concerns over its funding needs. Speculation is mounting that the German government will provide some sort of support for the country's biggest lender, which faces a $14 billion U.S. fine and whose shares on Tuesday fell to a record-low of 10.18 euros… Contingent convertible bonds, known as CoCos, are converted into equity when a bank's capital level falls below a certain threshold.”

September 28 – New York Times (Landon Thomas Jr.): “In a market full of crowded trades, few have become as fashionable as the bet that Deutsche Bank’s stock price will keep on falling. Hedge funds, large and small, are shorting the stock. Long-term institutional investors are dumping their positions. And Wall Street’s secretive but influential community of independent research providers has been proclaiming for months that Germany’s largest bank does not have enough cash to survive. Even Tidjane Thiam, the chief executive of Credit Suisse, which itself has been the target of hedge funds, said at a conference on Wednesday that Europe’s banks were ‘not really investable.’”

September 29 – Bloomberg (Andrew Mayeda): “The growing role of shadow banks in the global financial system is enhancing the potency of monetary policy, according to the International Monetary Fund. Some economists have argued that the decline in traditional bank lending has dampened the impact of changes in interest rates by central banks. But in a paper released Thursday, the IMF said the opposite is true: the transmission of monetary policy actually appears to be slightly stronger in countries with large shadow banking sectors… Shadow banks -- or ‘non-banks’ as the IMF refers to them -- have played a growing role in providing liquidity since the global financial crisis, as weakened balance sheets and tougher regulations have forced conventional banks to restrict lending… The IMF noted the ‘remarkable’ growth of asset-management firms since the financial crisis.”

September 27 – Bloomberg (Anooja Debnath): “Investors are paying for the privilege of bailing European countries out of their various crises. The European Stability Mechanism, which acts as the euro region’s financial backstop, sold nine-year bonds, the longest-maturity debt they’ve issued at a negative yield. That shows how keen money managers are to find somewhere safe to invest their money -- even if this means they get back less on maturity than they paid in… More than half of the $6.4 trillion of securities on the Bloomberg Eurozone Sovereign Bond Index currently have negative yields.”

September 30 – Bloomberg (Chris Anstey): “Former U.S. Treasury Secretary Lawrence Summers floated the idea of continuous purchases of stocks as a potential ingredient in a recipe for the developed world to strengthen economies struggling with subdued growth and inflation. Among the proposals that deserve ‘serious reflection’ is the purchase of a ‘wider range of assets on a sustained and continuing basis,’ Summers said in a lecture at a Bank of Japan conference…”

September 27 – Bloomberg (Natalie Obiko Pearson and Katia Dmitrieva): “Vancouver, London and Stockholm rank as the cities most at risk of a housing bubble after a surge in prices in the past five years, according to a UBS Group AG analysis of 18 financial centers. Sydney, Munich and Hong Kong are also facing stretched valuations, UBS said... San Francisco ranked as the most overvalued housing market in the U.S., while not yet at bubble risk… House prices in the near-bubble cities have increased on average by almost 50% since 2011, compared with less than 15% in other financial centers, UBS said.”

September 26 – Bloomberg (Susanne Barton and Chikako Mogi): “A weaker currency, once the cure-all for ailing economies around the world, isn’t the panacea it once was. Just look at Japan, where the yen plunged 28% in the two years through 2014, yet net exports to America still fell by 10%. Or at the U.K., where the pound’s 19% tumble in the two years through 2009 couldn’t stave off a 26% decline in shipments to the U.S. In fact, since the turn of the century, the ability of exchange-rate movements to affect trade and growth in major economies has fallen by more than half, according to Goldman Sachs…”

U.S. Bubble Watch:

September 25 – Wall Street Journal (Corrie Driebusch): “The third quarter was supposed to be when earnings growth returned to U.S. companies. Not anymore. Companies in the S&P 500 are now expected to report an earnings decline for the sixth consecutive quarter in the coming weeks, according to analysts polled by FactSet. That slump would be the longest since FactSet began tracking the data in 2008… As recently as three months ago, analysts estimated U.S. corporate earnings growth would return to positive territory by the third quarter. As of Friday, they were predicting a 2.3% contraction from the year-earlier period.”

September 25 – Wall Street Journal (Nick Timiraos): “Donald Trump and Hillary Clinton are likely to recite their varied promises for fresh government spending at Monday’s first presidential debate. One reality they’re unlikely to note: Whoever wins in November will enjoy far less latitude to spend money or cut taxes than any president since World War II. Not since Harry Truman will a new leader enter office with a higher debt-to-GDP ratio. And for the first time in decades, the new president will face the specter of widening deficits despite a growing economy. ‘The next president, no doubt, is going to be very constrained,’ said Rep. Charlie Dent, a Pennsylvania Republican who sits on the House appropriations committee…”

September 27 – Bloomberg (Patricia Laya): “Consumer confidence rose in September to the highest level since before the last recession on optimism about the labor market, according to… the… Conference Board… Confidence index increased to 104.1 (forecast was 99.0), the highest since August 2007, from a revised 101.8. Present conditions gauge rose to 128.5, also highest since August 2007, from 125.3…”

September 29 – Bloomberg (Sid Verma and Luke Kawa): “Calculating risk is a calculated risk. Take low-volatility exchange-traded funds, which have gobbled up huge inflows over the past two years as investors seek exposure to U.S. stocks that won't exhibit price swings that are greater than the underlying market. However, low-volatility equity products failed that test earlier in the month… Here's one such example that underscores the swift reversal of fortunes: A basket of large-cap U.S. stocks compiled by Credit Suisse Group AG that has had the lowest realized volatility over the past year, has also had a higher volatility than the market at large over the past month — a development that has taken root just 3% of the time over the last 25 years.”

Federal Reserve Watch:

September 29 – Reuters (Jason Lange and Lindsay Dunsmuir): “The Federal Reserve might be able to help the U.S. economy in a future downturn if it could buy stocks and corporate bonds, Fed Chair Janet Yellen said… Speaking… with bankers in Kansas City, Yellen said the issue was not a pressing one right now and pointed out the U.S. central bank is currently barred by law from buying corporate assets. But the Fed's current toolkit might be insufficient in a downturn if it were to ‘reach the limits in terms of purchasing safe assets like longer-term government bonds.’”

September 28 – Bloomberg (Rebecca Spalding): “Traders see barely more than coin-flip odds that the Federal Reserve will raise interest rates by December, even as Chair Janet Yellen reiterated Wednesday that most members of its policy-setting committee expect a hike this year… ‘They say they’re data-dependent but in September they couldn’t even point to any data that suggest they should stand pat,’ Charles Plosser, former president of the Philadelphia Fed, said… ‘That does damage, I think, to their credibility about them being data-dependent.”

Central Bank Watch:

September 28 – Reuters (Jamie McGeever): “Armenia does not often take the global financial spotlight but a routine rate cut by the tiny former Soviet republic this week marked a global milestone - the 200th case of policy easing worldwide since the start of last year. Fifty seven central banks have cut rates or pumped stimulus into their economies since January 1, 2015…, highlighting the continued fragility of the global economy eight years after the financial crisis.”

Japan Watch:

September 29 – Reuters (Leika Kihara): “Bank of Japan Governor Haruhiko Kuroda said… the central bank will pursue the most appropriate yield curve to achieve its 2% inflation target. He also said the central bank is ready to ease policy further by cutting its short- and long-term interest rate targets, or expanding risky asset purchases. If necessary, the BOJ can also choose to expand the monetary base faster, Kuroda said. ‘Our new framework centered on yield curve control can respond to (economic) situations more flexibly compared with our past framework. As a result, our policies become more sustainable,’ Kuroda said… Kuroda said he did not see signs of excessive risk-taking or overheating in financial activity as a result of the central bank's ultra-loose monetary policy.”

EM Watch:

September 29 – Bloomberg (Eric Martin and Nacha Cattan): “Mexico raised borrowing costs for the third time this year on concern that the peso’s tumble to a record low may fuel faster inflation and threaten to roil the nation’s financial markets. Banco de Mexico increased the overnight rate a half point to 4.75% on Thursday, the highest level since 2009.”

September 26 – Bloomberg (Ian C Sayson and Maria Levitov): “Emerging-market assets fell for a second day, led by a plunge in Turkish stocks after Moody’s… cut the country’s credit rating to junk, underscoring political risks in developing nations. Turkish equities fell the most in the world and yields on the nation’s 10-year bonds surged…”

September 26 – Financial Times (Mehul Srivastava): “Turkish stocks fell more than 4% on Monday — their worst drop since a failed coup — after Moody’s cut the country’s credit rating to junk status. The decision, which also prompted a sharp fall in the lira, followed a similar move by S&P Global Ratings… The downgrade… prompted a furious government reaction, with President Recep Tayyip Erdogan’s chief adviser, Yigit Bulut, telling state-run television he considered the decision akin to the failed coup on July 15.”

September 25 – Bloomberg (Alaa Shahine, Stefania Bianchi and Zainab Fattah): “Saudi Arabia’s central bank stepped up efforts to support lenders in the Arab world’s biggest economy as they grapple with the effects of low oil prices… The Saudi Arabian Monetary Agency… is giving banks about 20 billion riyals ($5.3bn) of time deposits ‘on behalf of government entities.’ It’s also introducing seven-day and 28-day repurchase agreements, as part of its ‘supportive monetary policy.’”

September 26 – Bloomberg (Y-Sing Liau and Ian C Sayson): “The Philippine peso sank to a seven-year low and stocks declined as investors pulled money from the nation’s assets amid concerns about President Rodrigo Duterte’s policies. Global funds sold Philippine stocks for a 23rd straight day amid nervousness about the fallout from Duterte’s anti-drug war and his outbursts against the U.S. and the United Nations.”

Leveraged Speculator Watch:

September 28 – Bloomberg (Katia Porzecanski): “Hedge funds are facing the most challenging time Tiger Management’s Julian Robertson said he’s seen in an investing career spanning several decades, and the industry pioneer cautioned that their days of charging hefty fees may be over. ‘That type of business hasn’t worked lately, and it’s a tough business,’ Robertson, 84, said… ‘It’s tougher to be a hedge fund investor than ever before.’”

September 26 – Wall Street Journal (Juliet Chung): “The hedge-fund business is getting so tough that two of its biggest names are taking radical steps. Europe’s Brevan Howard Asset Management LLP plans to charge 0% fees for some investors. New York stalwart Perry Capital LLC is going further. It is shutting down. The disclosures Monday are among the starkest signs yet of the pressure facing the industry. Hedge funds have minted billionaires by charging investors ‘two-and-twenty,’ 2% of assets invested and a 20% cut of any profits generated. But after years of falling short of the market, many funds are finding that fee structure a hard sell… The $2.9 trillion industry has underperformed broader financial markets since 2009. This year, hedge funds were, on average, up 3% through July, less than half the S&P 500’s total return…”

September 26 – Bloomberg (Katia Porzecanski and Katherine Burton): “Richard Perry, one of the biggest names in hedge funds, is calling it quits after 28 years. Perry, 61, is winding down his… flagship fund as the industry confronts one of the most tumultuous periods in its history. In a letter to investors…, he said his style of investing no longer worked. ‘Although I continue to believe very strongly in our investments, process and team, the industry and market headwinds against us have been strong, and the timing for success in our positions too unpredictable’…”

September 29 – Bloomberg (Nishant Kumar and Nejra Cehic): “Hedge fund veteran Richard Perry’s decision to quit after almost three decades betting on the success or failure of mergers and acquisitions couldn’t have come at a worse time for money managers following comparable strategies. Event-driven hedge funds speculating on corporate deals and restructurings are falling out of fashion, with investors withdrawing $31 billion from managers this year, the most of any hedge-fund strategy, according to… eVestment, and more funds are closing than opening… Speculating on M&A is becoming too hard, with more than 200 deals worth $251 billion collapsing this year, after $1.2 trillion were pulled in 2015. Companies have spent $2 trillion on acquisitions in 2016, 14% lower than the same period last year…”

September 29 – Reuters (Richard Leong and Jennifer Ablan): “The Federal Reserve and Bank of Japan's actions last week have given a second wind to an alternative investment strategy that relies on cheap money and low market volatility to produce outsized returns. Risk parity trades, which involve borrowing to take long positions in both stocks and bonds, have been favored by some big hedge funds and other institutional investors starved for yield by eight years of record low global interest rates. The funds had a rough 2015 when volatility spiked because of concerns about China's economy and tumbling oil prices… Since January, however, they have bounced back as volatility has fallen, delivering on balance returns more than twice as high as the mid-single-digit total returns from this year's sputtering U.S. equity and fixed-income markets.”

September 26 – Bloomberg (Oshrat Carmiel and Katia Porzecanski): “The lonely $250,000 S-Class coupe at Mercedes-Benz of Greenwich says it all. For six months, it’s been sitting in the showroom, shimmering in vain while models priced at only $70,000 fly out the door. ‘We haven’t had anyone come in and look at it,’ says Joey Licari, a sales consultant at the dealership... ‘I feel like normally they would, maybe a few years ago.’ Such is the state of affairs in Greenwich, the leafy Connecticut town famous for its cluster of hedge funds and the titans of Wall Street… The rich are being maddeningly frugal, as Barry Sternlicht complained when he assailed his former hometown as possibly the country’s worst housing market. ‘You can’t give away a house in Greenwich,’ the head of Starwood Capital Group said…”

Geopolitical Watch:

September 29 – Reuters (Jonathan Landay, John Walcott and Matt Spetalnick): “Obama administration officials have begun considering tougher responses to the Russian-backed Syrian government assault on Aleppo, including military options, as rising tensions with Moscow diminish hopes for diplomatic solutions from the Middle East to Ukraine and cyberspace, U.S. officials said… The new discussions were being held at ‘staff level,’ and have yet to produce any recommendations… But the deliberations coincide with Secretary of State John Kerry threatening to halt diplomacy with Russia on Syria and holding Moscow responsible for dropping incendiary bombs on rebel areas of Aleppo…”

September 26 – BBC: “Russia has criticised the US and UK for using ‘unacceptable’ tone and rhetoric in speeches on Syria at the UN, after being accused of ‘barbarism’. On Sunday, US permanent representative Samantha Power said Russian and Syrian forces were ‘laying waste’ to besieged rebel-held areas of the city of Aleppo.”

September 29 – Reuters (Sanjeev Miglani and Asad Hashim): “Indian officials said elite troops crossed into Pakistan-ruled Kashmir on Thursday and killed suspected militants preparing to infiltrate and carry out attacks on major cities, in a surprise raid that raised tensions between the nuclear-armed rivals. Pakistan said two of its soldiers had been killed in exchanges of fire, but denied India had made any targeted strikes across the de facto frontier that runs through the disputed Himalayan territory. Indian special forces crossed the heavily militarized border by foot just after midnight and hit about half a dozen ‘launching pads’, where the suspected militants were preparing to sneak across…”

September 29 – AFP: “China… warned Japan against ‘playing with fire’ in the contested waters of the South China Sea, after Tokyo announced it may patrol alongside the US in the region. China also sent fighter planes for the first time over a strait near Japan on Monday as part of a group of more than 40 jets headed to train in the West Pacific. The move followed remarks by Japanese Defence Minister Tomomi Inada this month that Tokyo would increase its engagement in the South China Sea through joint training with the US Navy…”

September 26 – Bloomberg (Ting Shi and Isabel Reynolds): “Japan scrambled jets Sunday after a fleet of Chinese aircraft flew into a strategically important strait near disputed islands in the East China Sea. Japan sent out the jets after eight of the Chinese planes crossed back and forth over waters between Okinawa’s main island and Miyako-jima island near Taiwan… While the Chinese planes didn’t cross into Japanese airspace, it was the first time that Japan saw Chinese fighter jets in the Miyako Strait…”

September 24 – Yahoo (Daniel Roberts): “If you still doubted the importance of stronger digital security to businesses even after the now-infamous Sony Pictures hack of 2014, Tom Ridge’s comments at the Concordia Summit… might convince you. The former… secretary of the Department of Homeland Security was part of a panel on cybersecurity, and opened his remarks by mentioning recent incidents in New York, New Jersey, and Paris. ‘Notwithstanding the pain and horror associated with a physical attack,’ Ridge said, ‘the potential for physical, human, and psychic impact with a cyber attack, I think, is far more serious.’”

September 28 – Wall Street Journal (Damian Paletta): “U.S. officials are increasingly confident that the hacker Guccifer 2.0 is part of a network of individuals and groups kept at arm’s length by Russia to mask its involvement in cyberintrusions such as the theft of thousands of Democratic Party documents, according to people familiar with the matter. While the hacker denies working on behalf of the Russian government, U.S. officials and independent security experts say the syndicate is one of the most striking elements of what looks like an intensifying Russian campaign to target prominent American athletes, party officials and military leaders.”

Friday, September 30, 2016

Friday Afternoon Links

[Bloomberg] Stocks Climb With Euro as Deutsche Bank Soars on DOJ Speculation

[Bloomberg] Deutsche Bank Jumps on Report of $5.4 Billion DOJ Settlement

[Bloomberg] Europe's Perfect Dollar Storm

[Bloomberg] Money Markets Are Facing the Most Tumultuous Quarter-End Since the Financial Crisis

[Bloomberg] Summers Floats Idea of Sustained Government Stock Purchases

[FT] Deutsche Bank puts CDS market to test

Friday's News Links

[Bloomberg] U.S. Stocks Rise as Deutsche Bank Erases Slump; Crude Rallies

[Bloomberg] Stocks, Euro Trim Losses as Deutsche Bank Climbs; Oil Fluctuates

[Bloomberg] Euro Money Markets Show Most Stress Since 2012 on Deutsche Bank

[Bloomberg] Bank Stocks Decline in Asia as Deutsche Bank Concerns Increase

[Bloomberg] Won, Ringgit Lead Drop in Emerging Currencies as Yield Bid Wanes

[Bloomberg] Gold Advances as Deutsche Bank Concerns Stoke Demand for Haven

[Bloomberg] Cryan Defends Deutsche Bank as Some Clients Pare Back Exposure

[Bloomberg] European Banks Are Asking the ECB for a Lot More Dollar Funding

[Bloomberg] Beijing Raises Home Down Payment in Bid to Cool Property Market

[Reuters] Fever spreads: China's property speculators descend on inland cities

[NYT] Concern Over Deutsche Bank’s Health Shakes Markets

[WSJ] The Ghost of Lehman Brothers Haunts Deutsche Bank

[FT] Hedge funds pull business from Deutsche Bank

[FT] Outflows from European equity funds approach $100bn

[WSJ] Bundesbank President Rejects Calls for German Stimulus

[FT] The return of Mao: a new threat to China’s politics

[Reuters] Three Chinese fishermen killed in confrontation with South Korea coastguard

Thursday, September 29, 2016

Thursday Evening Links

[Bloomberg] U.S. Stocks Fall as Deutsche Bank Woes Hit Financial Shares

[Bloomberg] Some Deutsche Bank Clients Reduce Collateral on Trades

[CNBC] Pressure is building for Germany to show it's ready to rescue Deutsche Bank

[Bloomberg] Ten People Who Will Be Key in Deciding Deutsche Bank’s Future

[Bloomberg] Mexico Raises Interest Rate After Peso Plunges to Record Low

[Bloomberg] Fed Divide Sharpens Between Washington Board and Regional Chiefs

[Reuters] Yellen says Fed purchases of stocks, corporate bonds could help in a downturn

[Bloomberg] Europe’s Repo Market, Vital to Financial System, Is Shrinking

[Bloomberg] A Bunch of 'Low Volatility' Stocks Just Failed to Live up to Their Label

[Bloomberg] China Homes Beat Stocks, Wine as Buying Frenzy Stokes Bubble

[Reuters] U.S. high-yield bond funds attract most cash since mid-July - Lipper

[Reuters] At United Nations, Pakistan flags rising tension with India

Thursday's News Links

[Bloomberg] Treasuries Fall as Dollar Climbs on Economic Data, Fed Remarks

[Bloomberg] Stocks Jump as OPEC Splits Markets; Indian Assets Drop on Attack

[Bloomberg] Asia Stocks Rise With Ringgit as OPEC Deal Boosts Oil; Yen Falls

[Bloomberg] Emerging-Market Assets Advance on Opec Deal as Ringgit Climbs

[Bloomberg] U.S. Economy Expanded at Revised 1.4% Rate in Second Quarter

[Reuters] Commerzbank says to cut nearly 10,000 jobs, halt dividend

[Bloomberg] With Deal Done, OPEC Faces Hurdles in Making Output Cuts Work

[Bloomberg] Rise of Shadow Banks Is Amplifying Monetary Policy, IMF Says

[Bloomberg] Overseas Investors Offload Most Japan Bonds Since at Least 2014

[Reuters] Fed, BOJ add shine to risk-parity strategy

[Bloomberg] Here's the Smoking Gun That China Has a Huge Housing Bubble

[Bloomberg] China Bond Defaults Tick Up After Lull as Dye Maker Delinquent

[Bloomberg] Yuan Derivatives Trade Dries Up as Drop Swells Hedging Costs

[Reuters] Kuroda says BOJ will pursue appropriate yield curve to hit price goal

[Bloomberg] Perry’s Retreat Piles Pressure on Hedge Funds Chasing Mergers

[NYT] Deutsche Bank Is the Darling of the Short-Sellers

[FT] Draghi and Berlin drawn into Deutsche Bank troubles

[Reuters] In escalation, India says launches strikes on militants in Pakistan

[Reuters] U.S. weighs tougher response to Russia over Syria crisis: officials

[Reuters] China armed forces warn Japan against South China sea patrols

[AFP] China warns Japan not to 'play with fire' in S. China Sea

Wednesday, September 28, 2016

Wednesday Evening Links

[Bloomberg] Oil Extends Rally as OPEC Said to Reach Output Deal; Stocks Rise

[Bloomberg] Yellen Sees Solid Job Growth, No Fixed Timetable for Rate Rise

[Bloomberg] Traders Doubt Yellen’s December Resolve as Credibility Attacked

[Bloomberg] California Suspends ‘Business Relationships’ With Wells Fargo

[Bloomberg] China's Red-Hot Property Market Risks Missing Lessons From Japan's Crash

Wednesday's News Links

[Bloomberg] S&P 500 Falls as Oil Erases Gain, Traders Assess Yellen Remarks

[Bloomberg] Why People Have Been Worrying About Deutsche Bank, in 12 Charts

[Reuters] Germany denies preparing Deutsche Bank rescue plan

[Reuters] Deutsche Bank CoCo bonds trading surges as crisis deepens

[Bloomberg] Deutsche Bank Troubles Cast Long Shadow Over European Banking

[Bloomberg] Plosser Says Fed Faces Troubling Credibility Problem on Rates

[Bloomberg] Hedge Funds Face Most Difficult Era Julian Robertson’s Ever Seen

[Bloomberg] China Bank Bond Leveraged Bets Lure Investors With 15% Yield

[Bloomberg] China’s Ambitious Plan to Make the Yuan the World’s Go-To Currency

[Bloomberg] Draghi Defends ECB Policy in Speech to German Critics in Berlin

[Reuters] Global monetary easing moves hit 200th milestone since Jan 2015

[FT] Credit Suisse chief Tidjane Thiam warns European banks fragile

[WSJ] U.S. Believes Hackers Are Shielded by Russia to Hide Its Role in Cyberintrusions

Tuesday, September 27, 2016

Tuesday Evening Links

[Bloomberg] U.S. Stocks Rise on Consumer Confidence After Debate; Oil Slumps

[Reuters] Political support for 'dinosaur' banks must end: Bundesbank's Dombret

[Reuters] Italy set to cut growth forecasts, hike deficit

[Bloomberg] Draghi Goes Head-to-Head With German Critics of ECB’s Low Rates

[Bloomberg] Europe’s Crisis-Fighting Fund Gets Paid to Borrow for Nine Years

[Bloomberg] Vancouver, London Top List of Cities at Risk of Housing Bubble

[WSJ] Deutsche Bank Puts Germany in a Bailout Bind

[WSJ] China’s Currency? That’s the Least of the Problems for the Next U.S. Leader

[FT] German financials face sustained market pressure

[FT] Deflation risk and trade slump cast chill over global economy

Tuesday's News Links

[Bloomberg] Stocks Erase Clinton Rally as Oil Tumbles; Mexico’s Peso Climbs

[Bloomberg] Europe’s Markets Miss Out on Clinton Rally as Banks, Crude Drop

[Bloomberg] Deutsche Bank Risk Measures Soar on Financial Health Concern

[Reuters] Worries over German banks sink bond issue, hit shares

[Bloomberg] Bond Market Split by Deutsche Bank Woe as Traders Shun Periphery

[Bloomberg] Oil Drops as Iran Says It Won’t Freeze Output at Current Level

[Bloomberg] Asian Stocks Pare Losses as Clinton, Trump Spar in U.S. Debate

[Bloomberg] China’s Shibor Climbs to Seven-Week High as PBOC Withdraws Funds

[Bloomberg] Consumer Confidence in U.S. Hits Nine-Year High on Job Optimism

[Dow Jones] U.S. Home Prices Continued Brisk Growth in July, Case-Shiller Says

[Bloomberg] Deutsche Bank Returns to Haunt Merkel in an Election Year

[Bloomberg] Wall Street Shrinks Further in Asia With Goldman, BofA Cuts

[WSJ] Hedge Funds Take Another Punch to Gut

[FT] German financials face sustained market pressure

[FT] Global debt binge eludes riskiest US companies

[WSJ] Bank of Japan Confesses: Even We Don’t Trust the Bank of Japan

Monday, September 26, 2016

Monday Evening Links

[Bloomberg] Asian Equities Drop Amid Haven Revival Before Debate; Oil Falls

[Bloomberg] Bonds Rally, Stocks Drop Before Debate as Deutsche Bank Tumbles

[Reuters] Oil up 4 percent as OPEC meets, volatility hits post-Doha high

[Bloomberg] Why Deutsche Bank’s Shares Are at a Record Low: QuickTake Q&A

[Bloomberg] A Viral Homebuyer Stampede Suggests China's Real Estate Policies Are Askew

[Bloomberg] Renzi Starts Ten-Week Fight for Italy Referendum and His Job

[CNBC] The hedge fund fee structure just took another blow

[Bloomberg] Pinching Pennies in the Hedge-Fund Capital of America

[Bloomberg] Perry Capital Closing Flagship Fund After Almost Three Decades

[FT] Deutsche Bank denies seeking help from Berlin over DoJ

[FT] Fed on ropes as Yellen seeks to fend off Trump blows

[FT] Turkey likens Moody’s downgrade to failed coup as stocks slide

Monday's News Links

[Bloomberg] Stocks Fall as Deutsche Bank Leads Rout in Lenders; Bonds Climb

[Bloomberg] Deutsche Bank Slumps as Investors Question Lender’s Health

[Bloomberg] Moody’s Cut Spurs Worst Rout for Turkey Assets Since Failed Coup

[Bloomberg] Emerging Assets Drop as Turkish Downgrade Reverberates in Market

[Bloomberg] Hong Kong Stocks Drop Most in Two Weeks as Financial Shares Fall

[Bloomberg] U.S. Bond Market’s Biggest Buyers Are Selling Like Never Before

[Bloomberg] A New Measure of China's Vulnerability

[Bloomberg] PBOC Drains Most Funds in Six Months Amid Debt Curb Speculation

[Bloomberg] Philippine Peso Slides to 2009 Low as Duterte Unnerves Investors

[Bloomberg] A Weaker Currency Is No Longer the Economic Elixir It Once Was

[NYT] Deutsche Bank Denies Seeking Germany’s Help in U.S. Dispute

[Bloomberg] Deutsche Bank's Pain Is Germany's Too

[WSJ] Profit Slump for S&P 500 Heads for a Sixth Straight Quarter

[WSJ] Fiscal Constraints Await the Next President

[WSJ] Bank of Japan Tries Another Way to Spur Inflation

[FT] City of London fears May government is shifting towards ‘hard’ Brexit

[BBC] Syria conflict: US and UK speeches 'unacceptable' - Russia

[Reuters] U.S., Russia trade blows over Syria as warplanes pound Aleppo

[Bloomberg] Japan Scrambles Jets as China Makes Show of Force in Key Strait

Saturday, September 24, 2016

Saturday's News Links

[Bloomberg] Merkel Rules out Assistance for Deutsche Bank, Focus Reports

[Bloomberg] Schaeuble Urges Lawmakers to Go Tough on Draghi, Bild Reports

[Reuters] U.S. presidential contest takes center stage for investors

[NYT] In Australia, China’s Appetite Shifts From Rocks to Real Estate

[Yahoo] Tom Ridge: Cyber attacks are now worse than physical attacks

Weekly Commentary: Like Old Times: Q2 2016 Flow of Funds

The beginning of the year seems ages ago.  Recall how securities markets fell under significant stress. Global central bankers responded (Pavlovian) with more QE and lower rates. Here at home, the Fed suspended its rate “normalization” plan after one single little baby-step. As for the Fed’s Q2 2016 “flow of funds” report, it was almost Like Old Times. Rapid GSE growth helped to liquefy U.S. securities markets, spurring speculative leveraging and Wall Street finance more generally, including securities firms balance sheets, “repos”, funding corps and, even, mortgage lending. Credit inflated, securities markets inflated, Household Net Worth inflated and the mirage of great wealth endured.

For the second quarter, Total Non-Financial Debt (NFD) expanded at a 4.4% rate, down from Q1’s 5.4% (while matching Q2 2015). Household debt growth jumped to a 4.4% pace (from Q1’s 2.7%), the strongest expansion in two years. Total Business (including financial) debt growth dropped to 4.1% from Q1’s 9.4% pace (and vs. Q2 2015’s 7.9%), the slowest expansion in 10 quarters (Q4 2013). State & Local borrowings expanded at a 2.2% rate, up from Q1’s 0.8% to the strongest rate since Q4 2010. Federal government borrowings slowed slightly from 5.6% to 5.0%, which was about double the growth from Q2 2015 (2.7%).

In seasonally-adjusted and annualized (SAAR) dollars, NFD expanded $1.999 TN, right at my theoretical bogey for Credit growth sufficient to sustain the U.S. Bubble. During Q2, Household debt expanded SAAR $622bn, surpassing Total Business ($540bn) for the first time since Q1 2011. State & Local borrowings expanded SAAR $66bn.

Leading the Credit charge – once again - was the federal government. Federal borrowing jumped SAAR $751bn, down from Q1’s $852 but still the strongest Q2 borrowings since 2012. Federal expenditures rose to a record SAAR $4.137 TN, up 41% compared to pre-crisis Q2 2007. At SAAR $3.470 TN, Q2 federal receipts were up 30% compared to Q2 2007. Deficits have this year been running at the fastest pace since 2012.

Also keeping quite occupied in Washington, GSE holdings jumped SAAR $348bn. This was up sharply from Q1’s $9.9bn growth and Q2 2015’s $70.9bn. GSE holdings enjoyed their strongest quarterly expansion since Q2 2008. The second quarter saw FHLB (Federal Home Loan Banks) Loans increase SAAR $168bn (up from Q1’s $51bn), the biggest quarterly growth since Q3 2008. (Worth noting from FHLB financial statements, Advances to Member Banks expanded almost 9% in the year’s first half to $690bn). Again, Like Old Times.

Total Agency- and GSE-backed Securities expanded SAAR $581bn (GSE debt $422bn and MBS $159bn) during Q2, up from Q1’s $60.4bn and Q2 2015’s $216bn. Here as well, Q2 saw the strongest expansion in GSE Securities since Q3 2008. For perspective, GSE Securities increased $293bn in (bond crisis) 1994, $474bn in (Russia/LTCM) 1998, $593bn in (Y2K) 1999, $642bn in (tech crash) 2001 and $547bn in (corporate Credit crisis) 2002. The big buyers of Agency securities during Q2? Money Market Mutual Funds increased GSE holdings by SAAR $403bn during the quarter. ROW snapped up SAAR $104bn.

Security Brokers/Dealer holdings expanded SAAR $301bn (strongest quarter since Q1 2012), up from Q1’s SAAR $195bn and Q2 2015’s SAAR $135bn contraction. Debt Security holdings rose SAAR $174bn and Repos surged SAAR $328bn. Miscellaneous Assets declined SAAR $250bn. On the Liability side, Repos rose SAAR $228bn and Misc. - Other increased SAAR $92bn.

Riding a nice GSE tailwind, securities finance enjoyed a banner quarter. Federal Funds and Security Repurchase Agreements increased SAAR $627bn, the biggest quarterly increase since Q1 2008. This reversed two quarters of Repo contraction, in what has been extraordinary quarter-to-quarter volatility. Funding Corps expanded SAAR $27bn during Q2, increasing one-year growth to $233bn, or 16.8%.

Corporate (and Foreign) Bond issuance slowed to $90.5bn during the quarter, down from Q1’s booming $494bn and Q2 2015’s $591bn. And while there may have been some temporary tightening of corporate Credit, the opposite was true elsewhere. Consumer Credit expanded SAAR $230bn, up from Q1’s SAAR $199bn and compared to Q2 2015’s SAAR $267bn. Trade Credit surged SAAR $250bn, up from Q1’s $53.1bn and Q2 2015’s SAAR $170bn.

Private Depository Institutions (banks) increased Debt Securities holdings SAAR $316bn, up from Q1’s $148bn and Q2 2015’s $142bn. Loans expanded SAAR $679bn, down from Q1’s $783bn and compared to Q2 2015’s $639bn. For comparison, Loans increased $261bn in 2013, $579bn in 2014 and $676bn in 2015. Notably, mortgage loans, held as bank assets, jumped SAAR $390bn during Q2, the strongest mortgage lending since Q3 2007 ($433bn).

Total Mortgage Debt expanded SAAR $521bn, the biggest mortgage debt increase since before the crisis (Q1 2008). Total Home Mortgage Debt increased SAAR $259bn (up from Q1’s $205bn and Q2 2015’s $215bn), matched by an almost equal amount of Multifamily and Commercial mortgage debt growth.

Rest of World (ROW) increased holdings of U.S. Financial Assets by a notable SAAR $1.193 TN during Q2, up from Q1’s $444bn to the highest level since Q1 2015. ROW Debt Securities holdings increased SAAR $417bn, led by a SAAR $324bn increase in U.S. Corporate Bonds. Foreign Direct Investment (FDI) jumped SAAR $606bn. Also noteworthy, ROW U.S. Liabilities jumped SAAR $1.061 TN, led by a SAAR $383bn increase in Repos. Like Old - 2006 and 2007 - Times.

Total Debt Securities (Fed’s compilation) ended Q2 at a record $40.581 TN, up a nominal $252bn for the quarter and $1.618 TN (4.2%) over four quarters. Total Debt Securities expanded $9.635 TN, or 31%, since the end of 2007. Over this period, Treasury Securities increased to $15.385 TN from $6.051 TN, for growth of 154%. The increase in Treasuries accounted for 84% of the growth of Total Debt Securities. Outstanding GSE Securities increased $926bn (13%) over this period to $8.324 TN. As such, the combined growth of “Washington finance” (Treasury & GSE) amounted to 92% of the Total Debt Securities expansion since the beginning of 2008.

Total Debt Securities ended Q2 at 220% of GDP. This compares to 200% to end 2007. Equities ended Q2 at $36.112 TN (down $1.415 TN y-o-y), or 196% of GDP. Equities peaked at $26.433 TN, or 181% of GDP, during Q3 2007.

Total (Debt and Equities) Securities ended Q2 at $76.693 TN, or 416% of GDP. Total Securities to GDP began the eighties at 117% ($3.086 TN) and the nineties at 193% ($10.937 TN). This ratio ended Bubble year 1999 at 360% ($34.753 TN) and Bubble year 2007 at 378% ($54.768 TN) - (peaked Q3 2007 at 379%).

The Household balance sheet remains fundamental to Bubble Analysis. Household Assets inflated $1.238 TN during Q2 to a record $103.750 TN, with both Real Estate ($25.6 TN) and Financial Assets ($72.3 TN) at record highs. Household Assets increased $3.053 TN (3.0%) y-o-y and were up $8.023 TN (8.4%) in two years. With Household Liabilities increasing $163bn during Q2, Household Net Worth jumped $1.075 TN during the period to a record $89.063 TN. Since the end of 2008, Household Net Worth has inflated $33.30 TN, or 60%. Household Net Worth had peaked previously at $67.744 TN during Q2 2007.

The ratio of Household Net Worth to GDP increased two percentage points to 483%. Net Worth to GDP peaked at 379% (1989) during the eighties Bubble; 435% (Q4 1999) during the “Tech” Bubble; and 473% (Q1 2007) during the mortgage finance Bubble period.

September 21 - Reuters (Leika Kihara and Stanley White): “The Bank of Japan made an abrupt shift on Wednesday to targeting interest rates on government bonds to achieve its elusive inflation target, after years of massive money printing failed to jolt the economy out of decades-long stagnation. While the BOJ reassured markets it would continue to buy large amounts of bonds and riskier assets, the policy reboot appeared to open the door for an eventual winding down of its huge asset purchases, and tried to repair some of the damage caused by its shock move to negative rates early this year. ‘The impression is that the BOJ is starting to pull back some of its troops from the battlefront,’ said Katsutoshi Inadome, senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities. The BOJ's increasingly radical stimulus efforts are being closely watched by other global central banks which are also struggling to revive growth…"

It was another interesting week. No meaningful surprises from the Fed or the Bank of Japan (BOJ). A Bloomberg headline capture market sentiment: “Kuroda’s Journey From Shock-And-Awe to Bond Market Fine-Tuning.” The Fed again refrained from a second baby step, while forewarning the markets of a likely hike in December. Market participants chuckled as they bought stocks, risk assets and precious metals.

And it’s all been fun and games. Except for the harsh reality that QE hasn’t been working, and the markets know that policymakers know. Policymakers will never admit as much, but they’ve run short of options. Japan is an absolute policy debacle in the making. European bank problems continue to fester – in Italy, Germany and elsewhere. Here in the U.S., a potentially destabilizing election is now just about six weeks away. And let’s not forget the historic Chinese Credit Bubble that gets scarier by the week.

September 23 - CNBC (Katy Barnato): “Toxic loans in the Chinese financial system could be 10 times as high as official estimates suggest, Fitch Ratings has warned. The international ratings agency said in a report on Thursday that, as a proportion of China's total loan pool, non-performing loans (NPLs) could be as high as 15-21 percent. By comparison, official data put the NPL ratio for commercial banks at 1.8%... ‘There seems a high likelihood that banks' NPL ratios will continue rising over the medium term, in light of this discrepancy. There are already signs of stress, most obviously in the increased frequency with which banks are writing off or offloading loans, such as those to asset-management companies’… Solving China's bad loan problem would result in a capital shortfall of 7.4 trillion-13.6 trillion yuan ($1.1-2.1 trillion), equivalent to around 11-20% of China's economy, Fitch said.”

For the Week:

The S&P500 rallied 1.2% (up 5.9% y-t-d), and the Dow increased 0.8% (up 4.8%). The Utilities surged 3.4% (up 18.3%). The Banks gained 1.3% (down 2.5%), and the Broker/Dealers jumped 1.8% (down 2.4%). The Transports rose 2.1% (up 5.7%). The broader market was strong. The S&P 400 Midcaps rallied 2.0% (up 10.9%), and the small cap Russell 2000 surged 2.4% (up 10.5%). The Nasdaq100 increased 0.8% (up 5.8%), and the Morgan Stanley High Tech index added 0.7% (up 9.9%). The Semiconductors increased 0.4% (up 21.3%). The Biotechs jumped 2.6% (down 9.7%). With bullion jumping $31, the HUI gold index rallied 4.2% (up 1%).

Three-month Treasury bill rates ended the week at 17 bps. Two-year government yields declined a basis point to 0.75% (down 30bps y-t-d). Five-year T-note yields fell four bps to 1.16% (down 59bps). Ten-year Treasury yields declined seven bps to 1.62% (down 63bps). Long bond yields dropped 10 bps to 2.35% (down 67bps).

Greek 10-year yields dropped 22 bps to 8.23% (up 91bps y-t-d). Ten-year Portuguese yields declined four bps to 3.35% (up 83bps). Italian 10-year yields fell 13 bps to 1.21% (down 38bps). Spain's 10-year yields dropped 11 bps to 0.96% (down 81bps). German bund yields declined eight bps to negative 0.08% (down 70bps). French yields fell nine bps to 0.21% (down 78bps). The French to German 10-year bond spread narrowed one to 29 bps. U.K. 10-year gilt yields dropped 14 bps to 0.73% (down 123bps). U.K.'s FTSE equities index jumped 3.0% (up 10.7%).

Japan's Nikkei 225 equities index increased 1.4% (down 12% y-t-d). Japanese 10-year "JGB" yields were unchanged at negative 0.05% (down 31bps y-t-d). The German DAX equities index surged 3.4% (down 1.1%). Spain's IBEX 35 equities index rose 2.2% (down 7.6%). Italy's FTSE MIB index recovered 1.6% (down 23.2%). EM equities were higher. Brazil's Bovespa index jumped 2.9% (up 35.4%). Mexico's Bolsa surged 4.0% (up 11.2%). South Korea's Kospi rallied 2.7% (up 4.7%). India’s Sensex equities added 0.2% (up 9.8%). China’s Shanghai Exchange gained 1.0% (down 14.3%). Turkey's Borsa Istanbul National 100 index surged 4.9% (up 11.2%). Russia's MICEX equities index gained 1.5% (up 14.2%).

Junk bond mutual funds saw outflows of $274 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates dipped two bps to 3.48% (down 38bps y-o-y). Fifteen-year rates slipped a basis point to 2.76% (down 32bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up a basis point to 3.63% (down 26bps).

Federal Reserve Credit last week expanded $2.9bn to $4.426 TN. Over the past year, Fed Credit declined $30.4bn. Fed Credit inflated $1.615 TN, or 57%, over the past 202 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $14.3bn last week to a new two-year low $3.150 TN. "Custody holdings" were down $201bn y-o-y, or 6.0%.

M2 (narrow) "money" supply last week surged another $37.4bn to a record $13.077 TN. "Narrow money" expanded $885bn, or 7.3%, over the past year. For the week, Currency increased $2.5bn. Total Checkable Deposits jumped $39bn, while Savings Deposits declined $4.5bn. Small Time Deposits added $0.9bn. Retail Money Funds were little changed.

Total money market fund assets rose $10.7bn to $2.670 TN. Money Funds increased $10bn y-o-y (0.4%).

Total Commercial Paper dropped another $21.1bn to a multi-year low $942.6bn. CP declined $88bn y-o-y, or 8.5%.

Currency Watch:

September 19 - Bloomberg: “China’s desire to stabilize the yuan risks undermining its future as a global reserve currency. For the second time this year, the overnight cost to borrow the offshore currency in Hong Kong surged above 20% amid speculation the People’s Bank of China is mopping up liquidity to boost the exchange rate. The volatility comes less than two weeks before the yuan’s inclusion in the International Monetary Fund’s Special Drawing Rights -- an event seen as a validation of President Xi Jinping’s efforts to promote its standing on the world stage.”

The U.S. dollar index declined 0.6% to 95.51 (down 3.2% y-t-d). For the week on the upside, the South African rand increased 3.3%, the Norwegian krone 2.4%, the Australian dollar 1.8%, the Japanese yen 1.2%, the Swiss franc 1.0%, the euro 0.6%, the Brazilian real 0.6%, the Swedish krona 0.3%, Canadian dollar 0.3% and the New Zealand dollar 0.3%. For the week on the downside, the Mexican peso declined 0.9% and the British pound slipped another 0.3%. The Chinese yuan was little changed versus the dollar (down 2.7% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index gained 1.0% (up 12.8% y-t-d). Spot Gold jumped 2.4% to $1,342 (up 26%). Silver surged 5.0% to $19.78 (up 43%). Volatile Crude recovered $1.45 to $44.48 (up 20%). Gasoline gave back 5.8% (up 8%), while Natural Gas added 0.3% (up 27%). Copper jumped 1.9% (up 3%). Wheat increased 0.4% (down 14%). Corn was little changed (down 6%).

China Bubble Watch:

September 22 - Bloomberg (Kyoungwha Kim): “A spike in yuan borrowing costs offshore is spreading to mainland China, with rates in Shanghai climbing to seven-month highs amid speculation policy makers are looking to reduce leverage and keep the currency steady. The one-day Shanghai Interbank Offered Rate rose to 2.17% on Thursday, the highest since Feb. 6… The comparable cost in Hong Kong surged to 23.7% on Monday, the highest since suspected central bank meddling roiled global markets in January.”

September 22 - Bloomberg (Yashaswini Swamynathan): “The lines between China's financial sector and property market are getting blurrier still. While the degree to which China's banking system is exposed to its red-hot real estate sector has long concerned analysts, a new report from CreditSights Inc. suggests a fresh link is growing. Chinese property developers such as Greenland Hong Kong Holdings Ltd., Country Garden Holdings Co., and China Evergrande Group have been bulking up their online finance businesses, offering loans and other financial products to retail investors as a way to drive revenue, diversify their business, or repay debt. ‘Internet finance has become a new growth area for Chinese developers, to our surprise and concern,’ the analysts wrote… ‘The deviation from the core real estate business and the opaque nature of internet finance worry us.’”

September 19 - Wall Street Journal (Jacky Wong): “China’s attempts to contain property prices have been halfhearted. If anything, they may have made the bubble grow even bigger. Average new-home prices in August were up 1.3% from July, …the 17th straight increase and the biggest since at least January 2011…. The latest leg of China’s property boom, which began last year in the biggest cities—such as Shenzhen and Shanghai—has recently spread to smaller cities, driving local governments to roll out tightening measures.”

September 18 - Bloomberg: “Chinese home prices rose the most in more than six years last month, suggesting local government efforts to avert a housing bubble are having only a limited effect. New-home prices… in August gained in 64 of the 70 cities the government tracks, compared with 51 in July… Average new-home prices in the 70 cities rose 1.2% in August from July, the biggest increase since January 2010… The value of home sales jumped 33% last month from a year earlier, the fastest pace in four months.”

September 21 - Reuters (Yawen Chen and Nathaniel Taplin): “China's listed property developers issued 960 billion yuan (110.8bn pounds) in bonds as of Sept. 19, more than three times the amount in the same period last year, financial magazine Caixin reported… At this pace, there is no suspense that bond sales by property developers would reach over 1 trillion yuan ($149.91bn) this year,’ the report said… Average new home prices in China climbed 9.2% in August from a year earlier, up from 7.9% in July as buyers piled into the market…”

September 19 - Bloomberg: “China’s shadow banking could lead to losses of $375 billion, according to CLSA Ltd. Estimates… The brokerage estimated the potential bad debt ratio for ‘bank-related shadow financing’ at 16.4%, or 4.2 trillion yuan, in a report… Assuming a 40% recovery rate left a potential loss of 2.5 trillion yuan. ‘Shadow financing is banking reform gone wrong given that the key driver of growth has been the banks circumventing regulations to protect their margins,’ analyst Francis Cheung wrote… ‘Shadow financing has grown rapidly, benefiting from implicit government guarantees despite being a channel for credit to higher-risk industries.’”

September 23 - Bloomberg: “China’s approval of credit-default swap trading for the first time is fueling speculation authorities will allow more bond delinquencies as the economy slows. The People’s Bank of China has approved rules governing CDS trading in the nation’s interbank market, according to a statement from the National Association of Financial Market Institutional Investors, a unit under the central bank. The purpose is to help diversify credit risks and facilitate healthy development of the market, the statement said.”

Europe Watch:

September 23 - Bloomberg (Tom Beardsworth): “Junior bonds of Banca Monte dei Paschi di Siena SpA fell to an eight-month low after a media report said the troubled Italian bank may require state support. Monte Paschi’s 379 million euros ($424 million) of 5.6% notes due in September 2020 fell 1.6 cents on the euro to 62.6 cents, the lowest since Jan. 21…The worst-performing lender in euro-area stress tests this year may have to turn to the government as it struggles to raise 5 billion euros in capital…”

September 22 - Reuters (John O'Donnell): “European regulators expect Italian bank Monte dei Paschi di Siena will have to turn to the government for support, three euro zone officials with knowledge of the matter said, although Rome would strongly resist such a move if bondholders suffered losses. Less than two months after the Tuscan lender announced an emergency plan to raise 5 billion euros of fresh capital, having come last in a health check of 51 European banks, there is growing concern among European regulators that the cash bid will fall short.”

September 22 - Bloomberg (Birgit Jennen): “Deutsche Bank AG’s finances, weakened by low profitability and mounting legal costs, are raising concern among German politicians after the U.S. sought $14 billion to settle claims related to the sale of mortgage-backed securities. At a closed session of Social Democratic finance lawmakers this week, Deutsche Bank’s woes came up alongside a debate over Basel financial rules, according to two people familiar with the matter. Participants discussed the U.S. fine and the financial reserves at Deutsche Bank’s disposal if it had to cover the full amount…”

September 22 - Bloomberg (Boris Groendahl): “The euro area’s biggest banks will be asked to earmark funds equivalent to more than twice their minimum capital requirements to make sure a possible emergency doesn’t cost taxpayers, according to Elke Koenig, head of the Single Resolution Board. The Brussels-based SRB, the resolution authority for 142 banks including Deutsche Bank AG and BNP Paribas SA, will use the minimum capital requirement set by the European Central Bank as a proxy for funds that would be needed to absorb losses and allow recapitalization in a crisis… The European Banking Authority said in July that the region’s banks may need as much as 470 billion euros ($524bn) in additional MREL-eligible funding under conditions similar to those cited by Koenig.”

September 23 - Bloomberg (Matt Clinch): “There was more bad news for euro zone on Friday with the latest flash purchasing manager's index (PMI) falling to a near two-year low, indicating that the economic upturn in the region is fragile and failing to achieve any real traction. The preliminary PMI from Markit showed that business activity in the 19-country region fell to 52.6 in September versus 52.9 in August and below market expectations.”

September 18 - Reuters (Gavin Jones): “Italian Prime Minister Matteo Renzi stepped up his attacks against other European Union leaders on Sunday after an EU summit in Bratislava which he said amounted to no more than ‘a nice cruise on the Danube.’ In a fiery interview… Renzi - who has staked his career on a referendum this year on his plan for constitutional reform - intensified his criticisms… ‘If we want to pass the afternoon writing documents without any soul or any horizon they can do it on their own,’ Renzi said… ‘I don't know what Merkel is referring to when she talks about the 'spirit of Bratislava'… If things go on like this, instead of the spirit of Bratislava we'll be talking about the ghost of Europe.’”

Brexit Watch:

September 22 - Bloomberg (Gavin Finch and John Detrixhe): “Executives at global investment banks in London expect France and Germany will prevail in a tussle over the clearing of $570 billion of euro derivatives and are making plans to deal with the fallout, according to people at four of the biggest firms. They assume the City of London will eventually be stripped of the ability to clear euro denominated swaps after Britain formally exits the European Union… While that might take years to happen, employees and operations central to the clearing function will be among the first moved to the continent once Brexit is triggered…”

Fixed-Income Bubble Watch:

September 18 – Financial Times (Eric Platt): “Global bond issuance is running at its fastest pace in nearly a decade as companies, countries and US agencies such as Fannie Mae and Freddie Mac binge on debt in an era of historically low interest rates. A total of $4.88tn of debt has been sold since the year began… according to… Dealogic. The figure is a hair below that of 2007, when $4.91tn of bonds were issued during the same period… Debt sales this year are running 9% ahead of the pace in 2006, when banks underwrote a record $6.6tn of debt. The figures do not include sovereign bonds sold at auction… ‘The leverage increase is significant,’ said Rick Rieder, BlackRock’s fixed income chief investment officer. ‘There is a long discussion about if this is a shift in the credit cycle. It’s something we’ve never seen before.’”

September 20 - Bloomberg (Claire Boston and Harvard Zhang): “Investors are cooling on one of the hottest U.S. corporate bond trades this year. Corporate bonds maturing in 10 years or more have fallen 2.9% in September…, a drop that is nearly five times as large as the broader bond market’s decline and that erases some of the double-digit gains of the previous eight months… Even with recent declines, long-dated bonds are still up more than 14% for 2016 through Monday’s close, including price gains and interest payments.”

September 20 - Bloomberg (Tracy Alloway): “Would you like to supersize that corporate bond sale? Companies selling their debt to eager investors have replied with a collective 'yes.' They've opted to increase their issuance of mega-sized bonds of $5 billion or more to a record $330 billion in 2015, according to data from HSBC Holdings Plc.”

Global Bubble Watch:

September 22 - Reuters (Yashaswini Swamynathan): “U.S. stocks marched higher on Thursday, with the Nasdaq hitting a record intraday high, as investors cheered the Federal Reserve's decision to not raise interest rates. While the Fed said the risks to economic outlook were roughly ‘balanced’, it left rates unchanged for want of ‘further evidence of continued progress’. Inflation remains below the central bank's target of 2% and members saw room for improvement in the labor market. The Fed also slowed the pace of future hikes and cut its longer run interest rate forecast, but sent a strong signal for a rate hike by the end of this year.”

September 20 - Bloomberg (Tom Beardsworth): “Deutsche Bank AG’s riskiest bonds dropped to the lowest since a marketwide rout in February as a potential $14 billion bill to settle a U.S. probe into mortgage-backed securities reignited capital concerns. The lender’s 1.75 billion euros ($2bn) of 6% additional Tier 1 bonds, the first notes to take losses in a crisis, fell four cents on the euro to 72 cents… That extended the decline since the U.S. Department of Justice’s initial settlement figure was announced last week to 11 cents.”

September 19 – Financial Times (Henny Sender): “Mid-Autumn Festival, which honours the full moon and is supposed to bring peace and prosperity in China, is a time for reflection. It is also a time for normally non-reflective types such as hedge fund managers to tally up their gains and losses as the final quarter of the year approaches. ‘The biggest mistake many made,’ says one Singapore-based investor, ‘was to believe the Fed would raise rates four times and all go long the dollar. That was the pain trade of this year.’ In fact, contrary to those who naively took the Fed at its word, liquidity continued to drive financial markets, saving those that seemed near death not long ago. Thus Glencore, the object of many short bets on the belief that it would prove insolvent less than a year ago, was able to borrow for virtually nothing, despite its less than stellar rating. Similarly, faith that Vedanta, an Indian commodities and energy group, would not go bust helped the bottom line of many distressed players.”

September 22 - Bloomberg: “The explosive growth of spending overseas by Chinese tourists dwarfs the increase in the number of Chinese traveling abroad. The most likely reason? Disguised capital outflows. So says former U.S. Treasury official Brad Setser, who drilled into the spending data provided by some of the most popular destinations for Chinese travelers. The nation’s tourism deficit -- a measure of foreign visitor expenditure in China minus what its citizens spend overseas -- soared to $206 billion in the 12 months through June 30, up from $77 billion in 2013…”

September 20 - Wall Street Journal (Jon Sindreu): “In their efforts to stimulate economies, central banks have been swelling government coffers. Last year, the central banks of eight large developed economies remitted about $149 billion to their respective governments, more than triple the $40 billion they sent along in 2005…”

September 19 - Bloomberg (Katya Kazakina): “Art dealer and collector Niels Kantor paid $100,000 two years ago for an abstract canvas by Hugh Scott-Douglas with the idea of quickly reselling it for a tidy profit. Instead, he is returning the 28-year-old artist’s work to the market this week at an 80% discount. Such is the new art season. At auction houses in London and New York, sellers are preparing to bail on their investments after the emerging-art bubble burst and the resale market for once sought-after artists dried up. ‘I’d rather take a loss,’ said Kantor… ‘I feel like it can go to zero. It’s like a stock that crashed.’”

September 19 - Wall Street Journal (Bob Tita): “Used machinery is flooding the secondhand market, piling more pain on equipment makers battling slack demand from any customer that mines, moves or refines commodities amid a global slump in the value of everything from coal to corn. Instead of buying a new $500,000 bulldozer or $300,000 excavator, many construction firms and other equipment users are renting or entering longer-term leases for machines to expand their fleets or replace worn out equipment, dealers and analysts say. Dealers, in turn, are keeping smaller inventories of new wheel loaders, backhoes and other machinery.”

U.S. Bubble Watch:

September 22 - Bloomberg (Yashaswini Swamynathan): “Sales of previously owned U.S. homes unexpectedly declined to a six-month low in August, signaling buyers are getting discouraged by a limited selection of properties that’s kept prices high… Sales rose 7.3% from August 2015… Median price of an existing home increased 5.1% from August 2015 to $240,200. Inventory of available properties fell 10.1% from a year earlier to 2.04 million.”

September 20 - Bloomberg (Sho Chandra): “New U.S. home construction fell more than projected in August as a plunge in the South, the biggest region for building, more than offset gains in the rest of the country. Residential starts declined 5.8% to a 1.14 million annualized rate, from the prior month’s revised 1.21 million pace…”

September 22 - Wall Street Journal (Maureen Farrell): “The battered IPO market and a flood of cheap funding for companies have cut so deeply into the business of selling stocks that some on Wall Street worry the pillar of investment banking may never fully recover. U.S. equity-capital-markets revenue for banks is lower than it has been in more than 20 years, according to Dealogic. So far this year, banks have taken in just $3.7 billion in fees from U.S.-listed equity deals…”

Federal Reserve Watch:

September 22 - Wall Street Journal (Jon Hilsenrath and David Harrison): “The Federal Reserve left short-term interest rates unchanged Wednesday but signaled it still expected to raise them before year-end, reaching a temporary truce among officials divided over when to withdraw financial stimulus from the economy. Fed Chairwoman Janet Yellen offered an upbeat assessment of the economic outlook, noting that growth has picked up after a dismal first half, with household incomes growing solidly and workers rejoining the labor force in search of jobs after years of not looking.”

September 22 - Financial Times (Robin Wigglesworth and Joe Rennison): “Washington’s ‘Mighty Doves’ once again vanquished the ‘Regional Hawks’ at this week’s monetary policy fixture, with the Federal Reserve electing to keep interest rates on hold spurring a rally across equities, bonds and emerging market assets. Three regional Fed heads voted to raise rates while the central bank’s customarily more dovish board members voted to stay on hold. This is only the fifth case of a three-vote dissent in 30 years but fund managers say ‘lower for longer’ remains the leitmotif for financial markets.”

September 21 - Bloomberg (Anchalee Worrachate and Chikako Mogi): “The dollar fell against most of its major peers, extending a slide toward its biggest annual decline in seven years, after the Federal Reserve delayed raising interest rates.”

Central Bank Watch:

September 23 - Reuters (Balazs Koranyi): “European Central Bank interest rates are probably close to the bottom, even though the bank had hoped the euro zone economy would respond better to its stimulus measures, two top policymakers said on Friday. With ECB rates now well into negative territory, the potential for detrimental side effects are increasing as they cut into banking profitability and raise the risk of asset bubbles and market distortions, the policymakers said.”

September 21 - Financial Times (Claire Jones): “Officials at the European Central Bank fear they could be hemmed in by legal action as they look for ways to extend their quantitative easing programme to help fuel the eurozone’s fragile recovery. The €80bn-a-month bond buying plan is already the subject of a legal challenge and officials fear that its problems in court will increase if the ECB relaxes the conditions of the scheme — a move staff are considering. Peter Gauweiler, a conservative German politician who has sued the ECB in the past, told the Financial Times that changes to QE would ‘increase the chances of success’ of a case he and others are trying to bring against the asset purchase programme… Mr Gauweiler believes that QE ‘already violates rules on the prohibition of monetary financing [of eurozone governments] by the ECB’ — even before any alteration of its conditions. He said that softening the rules could redistribute the risk of a member state default, ‘which is clearly incompatible with European law’.”

September 18 - Reuters (Paul Carrel): “The European Central Bank suffers from a conflict of interests due to its dual responsibilities for setting monetary policy in the euro zone and for supervising banks, ECB policymaker Jens Weidmann said. ‘As a banking supervisor, it could find it difficult to be tough with a bank or even wind it down if it knows that, because of its monetary policy measures, it is its biggest creditor,’ Weidmann told Germany's Sueddeutsche Zeitung…”

Japan Watch:

September 21 - Bloomberg (Toru Fujioka): “The Bank of Japan shifted the focus of its monetary stimulus Wednesday from expanding the money supply to controlling interest rates, which some economists deemed as further evidence that BOJ policy had reached the limits of its effectiveness. The central bank said it would adjust the volume of its asset purchases, the core of its framework until now, as necessary in the short term to control bond yields, while keeping it at about 80 trillion yen ($780bn) annually over the long term. The BOJ also scrapped a target for the average maturity of its holdings of government bonds.”

September 21 - Bloomberg (Enda Curran and Toru Fujioka): “Bank of Japan Governor Haruhiko Kuroda stormed onto the global stage back in 2013 with the subtlety of a Metallica concert, electrifying markets with a shock-and-awe monetary expansion powered by increased purchases of Japanese government bonds. On Wednesday, Kuroda seemed a little bit more like a jazz musician, riffing variations on established themes. It’s not the sort of stuff that quickens the hearts of investors. The BOJ refrained from another interest rate cut and instead pledged to bolster the long-end of the bond market’s yield curve. It’s a move that will help Japanese banks, pension funds and insurers cope in a less-than-zero rate environment, but disappointing to economists who had hoped for more dramatic action.”

September 20 - Bloomberg (Connor Cislo): “Japan’s poor exports performance continued in August, with shipments falling for an 11th straight month as a strong yen and tepid global economy undercut demand. Exports dropped 9.6% in August from a year earlier…”

EM Watch:

September 18 - Bloomberg (Lyubov Pronina): “Emerging-market issuers are exposing themselves to greater currency volatility by letting dollar borrowings outstrip their buffer of reserves, according to the Bank for International Settlements. Developing-nation companies including state-owned enterprises have accumulated $3.2 trillion of dollar debt… ‘In many cases, rising foreign currency debt has not been matched with FX assets and revenues,’ according to the report by the BIS, which acts as a global forum for as many as 60 central banks. ‘There is a great risk that booms and busts in capital flows will cause large shifts in exchange rates.’”

September 23 - CNBC (Isobel Finkel and Benjamin Harvey): “Turkey’s sovereign credit rating was cut to junk by Moody’s…, which concluded a review initiated after an unsuccessful coup attempt on July 15. Moody’s cited rising risks related to Turkey’s external financing needs and a weakening in credit fundamentals as economic growth slows… ‘The risk of a sudden, disruptive reversal in foreign capital flows, a more rapid fall in reserves and, in a worst-case scenario, a balance of payments crisis has increased,’ Moody’s said…”

September 22 - Bloomberg (John Micklethwait and Sangwon Yoon): “Turkey’s President Recep Tayyip Erdogan said he is not worried if his country is rated below investment grade as credit rating firms are making wrong decisions because of their political bias. ‘I don’t care at all, they’re making mistakes and they’re doing it intentionally,’ Erdogan said in an interview in New York… ‘Whether you’re honest or not, Turkey’s economy is strong.’”

Brazil Watch:

September 22 - Bloomberg (Sabrina Valle and Mario Sergio Lima): “Brazil’s former Finance Minister Guido Mantega was released a few hours after being arrested on Thursday in connection to the so-called Carwash corruption probe that has shaken the nation’s business and political elite… Mantega, Brazil’s longest-serving finance minister, was arrested based on testimony and banking documents from Brazilian former billionaire Eike Batista… Mantega had requested a payment of 5 million reais, worth $2.35 million at the time, to a political marketing company linked to the ruling Workers’ Party…”

Leveraged Speculator Watch:

September 21 - CNBC (Joe Marino): “Billionaire Leon Cooperman and his Omega Advisors hedge fund were charged Wednesday with insider trading, the Securities and Exchange Commission announced. The SEC accused Cooperman of buying into Atlas Pipeline Partners ahead of a deal, using his status as one of its largest shareholders to acquire nonpublic information about an upcoming transaction. ‘We allege that hedge fund manager Cooperman, who as a large APL shareholder obtained access to confidential corporate information, abused that access by trading on this information,’ said Andrew J. Ceresney, director of the SEC's Division of Enforcement. ‘By doing so, he allegedly undermined the public confidence in the securities markets and took advantage of other investors who did not have this information.’”

September 22 - Bloomberg (Dani Burger): “For once, the trend was nobody’s friend. Commodity trading advisers, the catch-all phrase for a breed of quantitative investors who use trends in asset prices and volatility as trading signals, posted some of the hedge fund industry’s worst losses in August -- and it isn’t getting better. The group is down between 1% to 1.5% this month, according to Credit Suisse… Wrong-way bets on everything from Treasury rates to commodities have cost trend followers as market correlation whipped up before this week’s meeting of the Federal Reserve. In particular, CTAs paid a price for betting interest rates would fall in the second half of the year, Credit Suisse said. ‘The trend-following CTAs have given back the vast majority of a profitable first half of 2016 as their long equities, long rates and short crude gambit results in losses,’ wrote Mark Connors, Credit Suisse’s global head of risk advisory in New York…”

Geopolitical Watch:

September 18 - Reuters (Paul Carrel and Michael Nienaber): “Chancellor Angela Merkel's conservatives suffered their second electoral blow in two weeks on Sunday, with support for her Christian Democrats (CDU) plunging to a post-reunification low in a Berlin state vote due to unease with her migrant policy. The anti-immigrant Alternative for Germany (AfD) polled 11.5%, gaining from a popular backlash… The result means the AfD will enter a 10th state assembly, out of 16 in total. Merkel's CDU polled 18%, down from 23.3% at the last election in 2011…”

September 23 - Bloomberg (Andre Tartar): “Syria’s civil war. North Korean nuclear tests. Brexit. Turkey’s failed coup. A volatile U.S. election. This jarring backdrop was hard to miss as world leaders stepped up to the familiar green marble dais during this week's United Nations General Assembly. Heads of state and government representing the world’s largest economies used words like ‘fear,’ ‘uncertainty,’ ‘risk,’ and ‘terror’ 87 percent more often on average than during last year's gathering, according to an analysis by Adam Tiouririne, a leadership communication adviser at Logos Consulting Group.”