Global “Risk Off” has been Making Some Headway. This week saw ten-year Treasury yields drop 15 bps to 2.23%, the low since the week following the election. German bund yields declined another four bps to a 2017 low 19 bps. The Crowded Trade hedging against higher rates is blowing apart. The Crowded yen short has similarly been blown to pieces, with the Japanese currency surging an additional 2.3% this week (increasing 2017 gains to an impressive 7.7%). Japan’s Nikkei equities index dropped 1.8% this week, with y-t-d losses rising to 4.1%.
Meanwhile, this week Gold surged 2.5%, Silver jumped 2.9% and Platinum gained 1.9%. In contrast to the safe haven precious metals, Copper dropped 2.8%, Aluminum fell 2.7% and nickel sank 4.2%.
European periphery spreads (to bunds) widened meaningfully. Italian spreads widened 14 to 213 bps, the widest since early-2014. Spanish spreads widened 13 to an eight-month high 152 bps. Portuguese spreads widened six bps and French spreads seven. Italy’s stocks fell 2.6%, with Italian banks down 5.9%. Spanish stocks lost 1.9%. European bank stocks dropped 2.6% this week.
A little air began to leak from the EM Bubble. Russian stocks were hammered 5.9% to an eight-month low, increasing 2017 losses to 14.2%. Brazilian stocks lost 2.5%. Chinese equities suffered moderate declines, while appearing increasingly vulnerable. For the most part, however, EM held its own. The weak dollar helped. EM equites (EEM) declined only 0.6% for the week, while EM bonds (EMB) gained 0.4%.
U.S. equities trade unimpressively. The VIX rose slightly above 16 Thursday to the highest level since the election. The banks (BKX) sank 3.2%, increasing 2017 losses to 4.1%. The broker/dealers also lost 3.2% (down 0.7% y-t-d). The Transports were hit 2.5% (down 1.9%). The broader market continues to struggle. The mid-caps dropped 1.5% (up 1.2%), and the small caps fell 1.4% (down 0.9%). Even the beloved tech sector has started to roll over. At the same time, high-yield and investment grade debt for the most part cling to “Risk On.”
A number of articles this week pronounced the death of the “reflation trade.” It’s worth noting that the GSCI Commodities index gained 2.2% this week, trading to a six-week high and back to positive y-t-d. Rising geopolitical tensions helped Crude rise to almost $54, before closing the week at $53.18. President Trump talked down the U.S. dollar, and I’ll add “careful what you wish for.” The dollar index declined 0.6% this week. Is it a coincidence that the President calls the dollar “too strong” only a few days after meeting with Chinese President Xi Jinping? China is no currency manipulator, not if it can rein in a psycho North Korean despot.
When it comes to global reflation, China continues to play a leading role. Chinese Credit enjoyed a historic 2016 – and, after a record first quarter, China’s Credit growth is on track to surpass $3.5 Trillion in 2017.
For March, China’s Total Social Finance (TSM) increased a much stronger-than-expected $308 billion. This put first quarter consumer and corporate Credit growth at $1.014 TN, a record exceeding even 2016’s unprecedented Q1. For comparison, China’s Q1 2017 TSM growth was 50% greater than Q1 2015. TSM ended March at $23.65 TN, up 12.5% y-o-y – expanding at a rate almost double the real economy.
And while Chinese bank loan growth slowed to a 12.4% rate in March, there were notable trends that must worry officials. First, shadow banking components expanded a much stronger-than-expected almost $110 billion during the month. Meanwhile, China’s mortgage finance Bubble continues to prove resilient in the face of various efforts to cool overheated housing markets.
April 14 – Reuters (Elias Glenn): “Loans to households surged to 797.7 billion yuan ($115bn) in March, …accounting for 78% of all new loans in the month. That was much higher than either January or February and even the 50% of new loans in 2016. The rise likely was due to a surge in short-term lending to households, as individuals may be turning to alternative types of loans as banks tighten rules on traditional mortgages, said Wendy Chen, an economist at Nomura in Shanghai. ‘We think (the increase in short-term loans) is possibly due to attempts to circumvent strict regulations on mortgages… The high loans to households reflect that property sales are still very hot, and likely shifting from top tier cities to more third or fourth tier cities.’”
In a precarious “Terminal Phase” Credit Bubble Dynamic, Chinese shadow banking has gone parabolic. Over the past five months, shadow banking assets (compiled by Bloomberg) have expanded $472 billion, or about 35% annualized. For comparison, shadow banking increased about $70 billion for all of 2015. Chinese shadow banking increased $300 billion during Q1.
April 11 – Wall Street Journal (Shen Hong): “China’s battle to counter rising stress in its financial system has escalated this week, with regulators making a fresh warning to banks not to engage in speculation that creates unhealthy asset bubbles and prevents money from flowing to more productive parts of the economy. In a directive circulated to banks Monday, the country’s banking regulator instructed banks to carry out self-checks by late November on their involvement in what it termed ‘irregularities.’ The seven-page document… said such actions include making highly leveraged bets on markets via popular investment products, and the excessive use of a newly popular form of short-term debt that banks are increasingly relying on for funding.”
April 10 – Bloomberg: “Like many individual investors in China, Yang Mo has no idea what’s in the wealth management products that make up a big chunk of her net worth. She says there’s really no point in finding out. Sure, WMPs invest in all kinds of risky assets, but the government would never let a big one fail, she says. ‘It’s not how the Chinese government does things, and it’s not even Chinese culture,’ explains Yang, a 29-year-old public relations professional… Hers is a common refrain in Asia’s largest economy, where savers have poured $9 trillion into WMPs and similar products on the assumption that they’ll get bailed out if the investments sour. Even after news in February that policy makers are drafting rules to make it clear that state guarantees don’t exist, Yang is undaunted… ‘Cracking down on implicit guarantees is just like curbing home prices,’ she says. ‘It’s something that the government needs to say, but it’s not something they will eventually do.’”
For several years now, Chinese policymakers have made myriad attempts at the old “lean against the wind” approach to counter mounting financial excess. They’re now facing a Credit typhoon of their own making. At this point, Beijing must inflict pain if they intend to break what is now deeply ingrained inflationary psychology in housing finance as well as powerful speculative impulses throughout finance more generally. Apparently, everyone – from Chinese citizen to global investor – is confident that no dramatic policy measures will be employed prior to the autumn meetings of the National Congress of the Community Party.
Yet Chinese fragility is but one of what has become a litany of risks to the global Bubble. And while largely numb to Chinese risks, speculative global markets are having more difficulty disregarding the troubling geopolitical backdrop. With North Korea at the brink of another nuclear test and warning of nuclear war – and Trump sending an “armada” to the Korean peninsula and threatening a preemptive military strike if a “looking for trouble” North Korea test appears imminent – it’s enough to take some risk off the table and buy gold, Treasuries and bunds. That Trump would send a flurry of Tomahawk missiles into Syria, confront Russia on Assad and drop “the mother of all bombs” into the Afghan mountainside have some thinking it’s time to take geopolitical risks more seriously.
Assuming we make it through Easter weekend without tensions ratcheting up in Korea or elsewhere, market attention will turn to next Sunday’s first round French election.
April 12 – Reuters (Sudip Kar-Gupta and Sarah White): “France’s presidential race looked tighter than it has all year on Friday, nine days before voting begins, as two polls put the four frontrunners within reach of a two-person run-off vote. The latest voter surveys may raise investor concerns about the outside possibility of a second round that pits the far-right candidate Marine Le Pen against hard-left challenger Jean-Luc Melenchon. The election is one of the most unpredictable in modern French history, as a groundswell of anti-establishment feeling and frustration at France’s economic malaise has seen a growing number of voters turn their backs on the mainstream parties. An Ipsos-Sopra Sterna poll showed independent centrist Emmanuel Macron and Le Pen tied on 22% in the April 23 first round, with Melenchon and conservative Francois Fillon on 20 and 19% respectively.”
Basically, there are four candidates all within the margin of statistical error vying for two spots in the May 7th second round head-to-head. For months now, far-right candidate Marine Le Pen has led first round polling numbers. While somewhat unsettling to markets, the assumption has been that Le Pen would lose badly to the leading “establishment” candidate, presently Emmanuel Macron. But with just over a week to go, far-left candidate Jean-Luc Melenchon is enjoying a surge in popularity. This increases the odds that market favorite Macron might not make it out of the first round.
A Le Pen versus Melenchon second round would be a nightmare scenario for skittish markets. Concern would quickly turn to Italy, where the anti-euro 5-Star Party has been rapidly gaining in the polls ahead of next year’s general election.
Plenty of worries globally and here at home. Especially after last week’s release of weak March auto sales data, concern is growing that tightened Credit conditions have begun to restrain the U.S. economy. For the most part, quarterly earnings reports from the major banks confirmed a weakening of loan growth. Yet it isn’t clear how much of this is the result of tightened lending standards and waning demand for borrowings, or instead more a reflection of huge corporate debt issuance (issue bonds rather than borrow from banks) and a slowing of big M&A deals.
It’s worth noting that the recent drop in mortgage rates comes at a most opportune time for the peak home sales period. Mortgage purchase applications jumped last week to the high since last June – and were the third highest weekly level since 2009. Mortgage rates remain extraordinarily low, consumer confidence quite high and the inventory of homes for sale unusually low. A significant Treasury market squeeze could further stoke housing markets already demonstrating strong inflationary/Bubble biases.
April 13 – CNBC (Diana Olick): “Homes are flying off the shelves this spring, as demand rises and supply continues to drop. Record high prices in some local markets are not thwarting hungry buyers, as they rush to take advantage of the lowest mortgage rates of the year. Home sales jumped nearly 9% in March compared with March 2016, even as the number of homes for sale plunged 13%, according to… Redfin… That demand dynamic further increased competition in the market, resulting in the fastest average sales pace since Redfin began tracking in 2010. The typical home went under contract in just 49 days, down from 60 days a year ago. Steep competition also pushed the median price of a home sold in March to $273,000, up 7.5% year over year.”
As for the U.S. stock market, it appears a decent amount of hedging has taken place over the past couple weeks. Previously such dynamics often created the firepower to squeeze the shorts and force the risk averse to unwind hedges and scamper back aboard the bull market. Complacent markets may have forgotten that put options and myriad “portfolio insurance” strategies can as well provide firepower for a self-reinforcing downside. North Korea, Syria, Russia and France provide potential for clear and present danger.
There is as well the risk of a U.S. government shutdown at the end of the month, along with all the ambiguity surrounding the Trump Administration’s shifting agenda. What appeared a united group determined to go right down the list of campaign promises – keen to focus on tax cuts/reform and infrastructure spending – these days appears confused, less than cohesive and without much of a list. If markets abhor uncertainty, it’s hard to see them enamored with the stunning degree of policy reversals and flip-flopping. Return to healthcare and deal with tax and spending legislation later? Roused from a state of deep depression, the Democrats now count down the days until next year’s mid-terms.
For the Week:
The S&P500 fell 1.1% (up 4.0% y-t-d), and the Dow declined 1.0% (up 3.5%). The Utilities added 0.5% (up 5.8%). The Banks (down 4.1%) and the Broker/Dealers (down 0.7%) sank 3.2%. The Transports were hit 2.5% (down 1.9%). The S&P 400 Midcaps fell 1.5% (up 1.2%), and the small cap Russell 2000 dropped 1.4% (down 0.9%). The Nasdaq100 declined 1.2% (up 10.1%), and the Morgan Stanley High Tech Index fell 1.3% (up 11.8%). The Semiconductors sank 3.9% (up 5.9%). The Biotechs gained 1.4% (up 14.7%). With bullion up $31, the HUI gold index jumped 4.5% (up 16.8%).
Three-month Treasury bill rates ended the week at 79 bps. Two-year government yields dropped eight bps to 1.21% (up 2bps y-t-d). Five-year T-note yields sank 15 bps to 1.77% (down 16bps). Ten-year Treasury yields fell 15 bps to 2.24% (down 21bps). Long bond yields dipped two bps to 2.98% (down 8bps).
Greek 10-year yields sank 21 bps to 6.57% (down 45bps y-t-d). Ten-year Portuguese yields added two bps to 3.89% (up 14bps). Italian 10-year yields jumped 10 bps to 2.32% (up 51bps). Spain’s 10-year yields rose nine bps to 1.71% (up 33bps). German bund yields fell four bps to 0.19% (down 2bps). French yields increased three bps to 0.92% (up 24bps). The French to German 10-year bond spread widened seven to 73 bps. U.K. 10-year gilt yields slipped three bps to 1.04% (down 19bps). U.K.’s FTSE equities index dipped 0.3% (up 2.6%).
Japan’s Nikkei 225 equities index dropped 1.8% (down 4.1% y-t-d). Japanese 10-year “JGB” yields fell four bps to 0.01% (down 3bps). The German DAX equities index declined 0.9% (up 5.5%). Spain’s IBEX 35 equities index fell 1.9% (up 10.4%). Italy’s FTSE MIB index sank 2.6% (up 2.8%). EM equities were mostly lower. Brazil’s Bovespa index was hit 2.5% (up 4.3%). Mexico’s Bolsa declined 0.8% (up 7.3%). South Korea’s Kospi dipped 0.8% (up 5.4%). India’s Sensex equities index fell 0.8% (up 10.6%). China’s Shanghai Exchange lost 1.2% (up 4.6%). Turkey’s Borsa Istanbul National 100 index gained 1.8% (up 15.3%). Russia’s MICEX equities index sank 5.1% (down 14.2%).
Junk bond mutual funds saw outflows of $348 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates declined two bps to a 19-week low 4.08% (up 50bps y-o-y). Fifteen-year rates dipped two bps to 3.34% (up 48bps). The five-year hybrid ARM rate declined a basis point to 3.18% (up 34bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-yr fixed rates down four bps to 4.15% (up 46bps).
Federal Reserve Credit last week was little changed at $4.434 TN. Over the past year, Fed Credit declined $13.6bn (down 0.3%). Fed Credit inflated $1.617 TN, or 58%, over the past 231 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $1.5bn last week to $3.213 TN. “Custody holdings” were down $30.8bn y-o-y, or 0.9%.
M2 (narrow) “money” supply last week declined $38.5bn to $13.379 TN. “Narrow money” expanded $773bn, or 6.1%, over the past year. For the week, Currency increased $1.9bn. Total Checkable Deposits surged $79.7bn, while Savings Deposits sank $126bn. Small Time Deposits increased $2.8bn. Retail Money Funds rose $3.4bn.
Total money market fund assets declined $4.1bn to $2.644 TN. Money Funds fell $88bn y-o-y (3.2%).
Total Commercial Paper contracted $7.8bn to $984.9bn. CP declined $108bn y-o-y, or 9.9%.
Currency Watch:
The U.S. dollar index declined 0.6% to 100.51 (down 1.8% y-t-d). For the week on the upside, the South African rand increased 2.4%, the Japanese yen 2.3%, the British pound 1.2%, the Australian dollar 1.1%, the Norwegian krone 0.9%, the New Zealand dollar 0.8%, the Mexican peso 0.8%, the Canadian dollar 0.6%, the Singapore dollar 0.5%, the Swedish krona 0.4%, the Swiss franc 0.4% and the euro 0.3%. For the week on the downside, the South Korean won declined 0.5%. The Chinese renminbi increased .22% versus the dollar this week (up 0.87% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index jumped 2.2% (up 0.8% y-t-d). Spot Gold surged 2.5% to $1,286 (up 11.6%). Silver rose 2.9% to $18.51 (up 15.8%). Crude gained 89 cents to $53.18 (down 1.2%). Gasoline slipped 0.5% (up 4%), and Natural Gas declined 0.7% (down 14%). Copper dropped 2.8% (up 3%). Wheat gained 1.5% (up 9%). Corn jumped 2.9% (up 7%).
Trump Administration Watch:
April 12 – New York Times (Alan Rappeport): “President Trump made three startling economic policy reversals on Wednesday, stepping away from pledges he made as a candidate and even policies he supported only days ago. The shifts confounded many of Mr. Trump’s supporters and suggested that the moderate financiers he brought from Wall Street are eclipsing the White House populist wing led by Stephen K. Bannon… In a series of interviews, Mr. Trump said he no longer wanted to label China a currency manipulator — a week after telling The Financial Times that the Chinese were the ‘world champions’ of currency manipulation. In an interview with The Wall Street Journal, the president said he no longer wanted to eliminate the Export-Import Bank. And he said that he might consider reappointing Janet Yellen as chairwoman of the Federal Reserve when her term ends next year.”
April 14 – NBC (William M. Arkin, Cynthia McFadden, Courtney Kube and Kenzi Abou-Sabe): “The U.S. is prepared to launch a preemptive strike with conventional weapons against North Korea should officials become convinced that North Korea is about to follow through with a nuclear weapons test, multiple senior U.S. intelligence officials told NBC News. North Korea has warned that a ‘big event’ is near, and U.S. officials say signs point to a nuclear test that could come as early as this weekend. The intelligence officials told NBC News that the U.S. has positioned two destroyers capable of shooting Tomahawk cruise missiles in the region, one just 300 miles from the North Korean nuclear test site.”
April 11 – Reuters (Sue-Lin Wong and David Brunnstrom): “North Korean state media warned… of a nuclear attack on the United States at any sign of American aggression, as a U.S. Navy strike group steamed toward the western Pacific – a force U.S. President Donald Trump described as an ‘armada’. Trump, who has urged China to do more to rein in its impoverished ally and neighbor, said in a tweet that North Korea was ‘looking for trouble’ and the United States would ‘solve the problem’ with or without Beijing’s help.”
April 12 – New York Times (Julie Hirschfeld Davis and David E. Sanger): “President Trump and Secretary of State Rex W. Tillerson sought… to isolate President Vladimir V. Putin of Russia for backing the Syrian government in the wake of its lethal chemical weapons attack on civilians, and worked to build international pressure on Moscow to change course. In Washington, Moscow and New York, the Trump administration publicly chastised Mr. Putin but privately worked to hash out increasingly bitter differences with him. At the same time, Mr. Trump embraced NATO — a military alliance he had previously derided as obsolete — as an effective and vital force for peace and security in a region where Russia has been an aggressive actor.”
April 9 – CNBC (Nyshka Chandran): “As of last week, President Donald Trump’s foreign policy vision remained mired in fog. Now, recent developments show an administration that’s ready to go on offense. From attacking a Syrian government airfield on Thursday to moving an aircraft carrier group closer to North Korea on Sunday, the White House seems to be pursuing an aggressive approach to reign in rogue nations. ‘Clearly, what the Syrian situation does is illustrate that the Trump administration is willing to use force,’ Adrian Mowat, managing director and chief Asian/EM equity strategist at J.P. Morgan, told CNBC…”
April 14 – Financial Times (Sam Fleming): “The US Treasury warned China that it is closely scrutinising its foreign exchange and trade practices after past interventions caused “significant and long-lasting hardship” for American workers. But it declined to brand the country a currency manipulator despite Donald Trump’s campaign pledges. The Treasury’s twice-annual report on foreign exchange policies lashed the People’s Republic of China for its ‘long track record of engaging in persistent, large-scale, one-way foreign exchange intervention’ but acknowledged that its more recent practices have aimed to prevent excessive depreciation in its exchange rate.”
April 12 – Wall Street Journal (Gunjan Banerji): “Volatility watchers are circling a new date on their calendars: April 28. That is when the U.S. government’s current funding ends. Lawmakers need to pass a new spending bill by then or they risk triggering a partial government shutdown. The CBOE Volatility Index, or VIX, has jumped 29% since April 6 to its highest level since November. The volatility measure is based on options prices and tends to move in the opposite direction of stocks.”
April 10 – Bloomberg (Billy House): “Members of Congress are back home for a two-week recess after one of the most bitterly divided and least productive starts in recent history. A new, urgent challenge is waiting for them when they return: finding a way to set aside their anger and mistrust long enough to keep the federal government open. Government funding expires on April 28, which will give Congress five days to unveil, debate and pass an enormous spending bill, or trigger a government shutdown. ‘What a mess,’ said Paul Brace, a congressional expert at Rice University…”
April 11 – Wall Street Journal (Jacob M. Schlesinger): “The Trump administration moved Wednesday to ramp up its tougher new trade policy, adding another trade hawk to its policy team, while invoking new import penalties against South Korean steelmakers. The steps help kick into gear a trade agenda that has had a slow start compared with the robust trade rhetoric President Donald Trump used on the campaign trail. Democrats in recent days have sought to capitalize on that delay, portraying Mr. Trump as slow to implement his new ‘America First’ approach to global commerce…”
April 11 – New York Times (Neil Irwin): “As Congress and the Trump administration turn their sights on overhauling the tax code, it’s a good time to think about the great three-dimensional brain twister of the 1980s, the Rubik’s Cube. That’s partly because the first and last time there was a comprehensive rewrite of the tax code, it was 1986. But there is more than that. What makes trying to solve a Rubik’s Cube so exasperating is that every rotation you make to align the colors on one side messes up something on one of the other sides. Nothing moves in isolation; everything affects everything else, and rarely for the better. The 1986 tax overhaul took two years. Despite bipartisan backing from the Reagan administration and congressional Democrats, it had many false starts and reversals in its voyage to becoming a law.”
April 12 – Reuters (David Morgan): “U.S. House Speaker Paul Ryan’s tax reform blueprint appears to be losing its status as the likely framework for the first major tax overhaul since 1986, with rival approaches emerging from the White House, Senate and other quarters in Congress. Congressional aides, lobbyists and analysts say the changing focus could delay passage of a tax bill until late 2017 or 2018… Like the healthcare bill, the House Republican tax blueprint stems from Ryan’s ‘A Better Way’ legislative agenda launched during the 2016 election campaign.”
April 11 – Reuters (Jeff Mason and Sarah N. Lynch): “President Donald Trump told a group of chief executives on Tuesday that his administration was revamping the Wall Street reform law known as Dodd-Frank and might eliminate the rules and replace them with ‘something else.’ At the beginning of his administration, Trump ordered reviews of the major banking rules put in place after the 2008 financial crisis, and last week he said officials were planning a “major haircut” for them. ‘For the bankers in the room, they’ll be very happy because we’re really doing a major streamlining and, perhaps, elimination, and replacing it with something else,’ Trump said… ‘That will be the minimum. But we’re doing a major elimination of the horrendous Dodd-Frank regulations, keeping some obviously, but getting rid of many,’ he said.”
China Bubble Watch:
April 14 – Reuters (Elias Glenn): “China’s banks unexpectedly extended less credit in March than in the previous month as the government tries to contain the risks from an explosive build-up in debt and an overheating housing market. But aggregate financing, which includes bank loans as well as off-balance sheet lending, surged in March and was a record in the first quarter, raising doubts about the effectiveness of official efforts so far to clamp down on risks in the financial system. A surge in household lending in March also added to worries about whether authorities will be able to get the frenzied property market under control… China’s total social financing (TSF), a broad measure of credit and liquidity in the economy, rocketed to 2.12 trillion yuan in March from 1.15 trillion yuan in February. For the first quarter, TSF reached a record 6.93 trillion yuan — roughly equivalent to the size of Mexico’s economy — and well above last year’s first quarter total.”
April 12 – Bloomberg: “China’s overseas shipments last month jumped the most in two years as global demand held up. Imports moderated after a holiday-season surge in February and the trade balance rose. Exports rose 16.4% in dollar terms, reversing a 1.3% drop a month earlier… Imports increased 20.3%, pulling back after soaring 38.1% the prior month, to leave a trade surplus of $23.93 billion.”
April 13 – Wall Street Journal (Lingling Wei): “President Xi Jinping gathered with his economic mandarins in December for their annual strategy meeting at a heavily guarded government hotel. In closed-door sessions, say people familiar with the confab, he made clear what their mandate was for 2017: He would tolerate no wobbliness in the economy. The communiqué coming out of the session singled out one policy objective in particular—keep the yuan stable. What followed has been the marked acceleration of a shift in priorities at the People’s Bank of China, the central bank, toward preventing the currency from cratering above all else.”
April 12 – Bloomberg: “China’s bond issuers, faced with 9.7 trillion yuan ($1.4 trillion) of maturing debt this year, are stepping on the gas. Companies and governments sold 1.3 trillion yuan of onshore notes in March, about as much as in the first two months of the year combined… Fitch Ratings expects refinancing needs to drive issuance in the coming months, with corporate debt sales for the year forecast to match or even exceed last year’s total. Chinese companies issued a record 9.8 trillion yuan of bonds in 2016.”
April 11 – Bloomberg: “People’s Bank of China Governor Zhou Xiaochuan’s shift toward new tools to steer the economy has swollen a targeted lending program to such a level that outstanding funds are now worth more than the annual output of the Malaysian and Danish economies combined. The Medium-term Lending Facility has increased to 4.1 trillion yuan ($594 billion), with 3.2 trillion yuan coming due from April to December this year, according to data compiled by Bloomberg. About 2 trillion yuan matured in the same period last year. While the monetary authority has shown a willingness to roll over the funds, with new loans extending maturities in each of the first three months of 2017, the ballooning amount illustrates the challenge Zhou faces as he tries to reduce leverage in the financial system while keeping the monetary base big enough to avoid a credit crunch.”
April 10 – Bloomberg (Alfred Liu): “Hong Kong’s de facto central bank expressed concern about the riskiness of mortgages with high loan-to-value ratios issued by developers… ‘The accumulation of these high LTV mortgages may change the risk profiles of these property developers to which banks may have exposures,’ Raymond Chan, executive director for banking supervision at the Hong Kong Monetary Authority, said… The HKMA said it may ask banks to take additional steps to manage their exposure to the sector.”
Global Bubble Watch:
April 12 – Bloomberg (Brian Chappatta): “Gold and the yen rallied to five-month highs while Treasury note yields approached the lowest levels of the year as investors sought out traditional havens from geopolitical risks. The U.S. equity market’s standard fear gauge rose to the highest since November. The yen strengthened versus all of its G-10 peers as tensions in Asia ratcheted higher… U.S. Secretary of State Rex Tillerson said during a Group of Seven meeting in Italy that Russia must abandon its support of Syrian President Bashar al-Assad’s regime.”
April 11 – Financial Times (Philip Stafford): “The Bank for International Settlements has recommended that central banks become more active participants in the plumbing system that underpins the trading of government bonds to offset increasing market volatility. The bank… said… it had become concerned about the functioning of repo markets because of the effect of accommodative monetary policy and post-crisis regulation, and planned a two-year study to better understand them. The comments from the… institution echo market fears that regulation and expansive policy are collectively having serious repercussions within the $12tn global repo market… Volatility in repo has become more frequent around the end of quarterly reporting periods for financial institutions.”
April 9 – Wall Street Journal (Ben Eisen, Chris Dieterich and Sam Goldfarb): “Investors are buying record volumes of new bonds… Companies and governments in emerging markets sold $178.5 billion of dollar-denominated debt in the first three months of the year, the best first quarter on record, according to… Dealogic. U.S. companies with junk-bond ratings issued $79.6 billion, double from a year earlier. Highly rated U.S. companies also issued $414.5 billion of debt during the first three months of the year. That was a record for any quarter.”
April 9 – Wall Street Journal (Chuin-Wei Yap): “Big Chinese banks are lending record volumes abroad in a bid to tap new growth, helped by state-backed ambitions to build infrastructure around the world. For banks, the timing of one of President Xi Jinping’s showpiece initiatives—known as ‘One Belt, One Road’—is fortuitous: Loans to finance hundreds of projects along ancient trade routes promise oases of profitability amid faltering returns at home. For the first time, three of the country’s four largest lenders last year posted larger increases in overseas lending than in domestic corporate loans… Bank of China, the fourth-biggest Chinese lender by assets, was the top originator of overseas corporate loans last year, with 1.7 trillion yuan ($246.8bn) in such lending…”
April 10 – Bloomberg (Greg Quinn): “Canadian housing starts surged to the fastest pace in a decade, led by apartments and condominiums. Housing starts soared 18% to an annualized 253,720 units in March, from 214,253 units in February… Multiple-unit starts in urban areas surged 30% to 160,989 units. Housing has been one of the main drivers of Canada’s economy over the last several years, as interest rates remain at historically low levels.”
April 12 – Bloomberg (Michael Heath): “Australia’s central bank signaled deeper concern amid ‘heightened risks’ from rising household debt and escalating property prices in Sydney and Melbourne. The Reserve Bank of Australia… said interest-only loans are rising and now account for almost a quarter of owner-occupier mortgages. It also noted about one-third of mortgage holders have either no buffer or less than one month’s repayments.”
April 10 – Bloomberg (Michael Heath): “Australian business conditions jumped to the highest level since February 2008, signaling the economy could be set to strengthen. A gauge of business conditions — measuring hiring, sales and profits — jumped to 14 in March from 9 in February, the highest reading since January 2008…”
Fixed Income Bubble Watch:
April 10 – Bloomberg (Liz McCormick and Brian Chappatta): “These days, it seems like everyone in the bond market is obsessed over what will happen when the Federal Reserve starts whittling down its mammoth, crisis-era investments in U.S. government bonds. Yet lost in the hullabaloo is one little-noticed fact: there’s an even bigger debt pile that could draw buyers away from Treasuries at just the wrong time. In overseas markets, more than $3 trillion of negative-yielding government bonds — which all but guarantee losses for buy-and-hold investors — have turned positive in recent months… Foreigners currently own 43% of the $13.9 trillion Treasury market. With the Trump administration’s pro-growth agenda likely to swell the public debt burden in coming years, they’ll be crucial in helping hold down long-term borrowing costs as the Fed raises interest rates.”
April 12 – Reuters (Nick Brown): “Bankruptcy for Puerto Rico is looking ever more likely as the clock ticks down toward a May 1 deadline to restructure $70 billion in debt, ramping up uncertainty for anyone betting on returns from the island’s widely held U.S. municipal bonds. When U.S. Congress last year passed the Puerto Rico rescue law dubbed PROMESA, it froze creditor lawsuits against the island so its federally appointed oversight board and creditors could negotiate out of court on the biggest debt restructuring in U.S. municipal history. The freeze expires on May 1, however, and an extension by Congress is “not going to happen,” said a Republican aide to the House Committee on Natural Resources, which is in charge of territory matters.”
April 10 – Wall Street Journal (Ben Eisen): “The market for risky bonds sold by U.S. companies is showing a never-seen-before pattern, one sign of how expensive that corner of the market has become. BB-rated junk bonds are now characterized by so-called negative convexity, suggesting that junk bonds become more rate-sensitive as rates rise and less rate-sensitive as rates fall, according to Bank of America Merrill Lynch. That’s something that had never happened until last fall. The upside-down condition is happening largely because many high-yield bonds now have provisions built into them to allow the issuer to redeem them early at a set price.”
Europe Watch:
April 11 – Bloomberg (Stefania Spezzati): “The impending French presidential election is rippling across Europe’s bond markets. French bonds fell on Tuesday, increasing the yield spread over Germany to 74 bps. Italian 10-year yields climbed to 2.27%, widening the spread over bunds to the highest level since 2014. Jitters are increasing before the first round of voting on April 23, with polls indicating the stage may be set for a four-way race.”
April 12 – Wall Street Journal (Gunjan Banerji): “Investors have exuded sangfroid about the French presidential election, largely ignoring the risk of Marine Le Pen’s far-right Front National riding on the populist wave that propelled Brexiters and Donald Trump to victory. Such market composure always seemed too good to be true, and this week it showed signs of cracking. As the first round of election on April 23 nears, the cost of insuring against a volatile swing in the euro has jumped. One-month options contracts on the euro-dollar pair have risen to their highest level since the fortnight before the Brexit vote.”
April 12 – Financial Times (Joël Gombin): “Could Marine Le Pen, leader of the far-right National Front (FN), become the next president of France? Since January, opinion polls have consistently suggested that she will win around 26% of the vote in the first round of the presidential election at the end of April, a score in line with those the FN achieved in the European Parliament elections in 2014 and the regional elections in 2015. More recent polls have her at between 23 and 24%, but this would still be enough to ensure she makes it into the run-off in early May. But once there, her chances of prevailing are slim to non-existent. Since President François Hollande withdrew from the race in December, no poll has had Ms Le Pen winning in the second round against the independent centrist Emmanuel Macron or indeed any other opponent. Most surveys give her a second-round score of around 40%.”
April 11 – Wall Street Journal (Christopher Whittall and Riva Gold): “Investors’ next political test is the French election, but many are zeroing in on a different European risk for global markets: Italy. French bonds and shares sold off this week as investors focused again on the country’s presidential election, a two-round vote that begins on April 23 and has triggered concerns of a win for anti-euro candidate Marine Le Pen. Italian bonds also came under pressure and continued to weaken on Wednesday, even as French debt rallied. Those moves came as investors looked beyond France’s election to the problems of Italy, the third-largest economy in the eurozone.”
April 12 – Reuters (Jeremy Gaunt): “The euro zone’s greatest existential threat may no longer center on small, peripheral countries such as Greece and Portugal dragging it down, but instead on the prospect that its third largest economy, Italy, could abandon ship. Two recent economic reports show what the euro has meant to Italians and why polls suggest they are no longer keen. One suggests they are poorer as a result of being part of the currency bloc, the other that they are falling further behind their counterparts in main trading partner Germany. It is a distant risk to the currency bloc that Italy will actually walk away, but not beyond imagination. Italy’s 5-Star movement, which wants to dump the euro through a referendum, has been surging in opinion polls recently, getting as much as a third of the vote in a March Corriere Della Sera poll. The anti-European Union Northern League got another 12 or so percent – and there are others.”
Federal Reserve Watch:
April 11 – Wall Street Journal (David Harrison): “Federal Reserve Chairwoman Janet Yellen indicated… that the era of extremely stimulative monetary policy was coming to an end. …Ms. Yellen said the Fed was moving away from its efforts to revive a recession-scarred economy and focusing instead on maintaining the gains of the past few years. That will change the central bank’s policy-making stance, she said, noting that Fed officials plan to continue gradually raising interest rates unless the economy begins to deteriorate. ‘Where before we had our foot pressed down on the gas pedal trying to give the economy all the oomph we possibly could, now [we’re] allowing the economy to kind of coast and remain on an even keel… To give it some gas, but not so much that we’re pressing down hard on the accelerator.’”
U.S. Bubble Watch:
April 13 – Reuters (David Henry): “Big U.S. banks revealed more evidence of a slowdown in loan growth in their earnings reports…, though executives assured there is still healthy demand from borrowers and no reason to worry about the state of the economy. JPMorgan… and Citigroup Inc posted higher first-quarter earnings that beat analysts’ expectations on large gains in trading revenue. Wells Fargo… reported a slight dip in profit due to a slowdown in mortgage banking. The results underscored concerns expressed recently by analysts and investors that higher interest rates, combined with uncertainty about geopolitical events, could hurt economic growth – and therefore crimp lenders’ bottom lines.”
April 9 – Financial Times (Rana Foroohar): “Rapid run-ups in debt are the single biggest predictor of market trouble. So it is worth noting that over the past 10 years the amount of student loan debt in the US has grown by 170%, to a whopping $1.4tn — more than car loans, or credit card debt. Indeed, as an expert at the Consumer Financial Protection Bureau recently pointed out to me, since 2008 we have basically swapped a housing debt bubble for a student loan bubble… In America, 44m people have student debt. Eight million of those borrowers are in default… While the headline consumer price index is 2.7%, between 2016 and 2017 published tuition and fee prices rose by 9% at four-year state institutions, and 13% at posher private colleges.”
April 11 – Wall Street Journal (Gunjan Banerji): “The popular Wall Street trade of shorting volatility stumbled this week as a sharp reversal in markets forced investors to unwind their bets. Concerns over U.S. policy changes and geopolitical developments across the globe sparked a flight to safety on Tuesday, sending stocks and government bond yields lower. The CBOE Volatility Index, or VIX — a gauge that tracks investor anxiety — bounced back sharply, jumping 8% to 15.17, on track for the highest close since the U.S. presidential election on Nov. 8.”
April 11 – Financial Times (Alistair Gray): “More than a million new apartments have sprung up across the US in a post-crisis construction surge. Now bankers who funded the boom are worried: have developers built too much? As concerns grow about a supply glut, financial watchdogs this month began scrutinising how the largest lenders would cope with a property market crash. Officials at the Federal Reserve ordered banks to set out how they would fare if commercial real estate (CRE) prices dropped 35% and rental apartment values collapsed by more… Almost a decade since the financial crisis — when CRE prices dropped as much as 40%, even more than residential housing — bankers as well as regulators are again growing nervous about the sector.”
April 11 – Wall Street Journal (Peter Grant): “Commercial real-estate lending by banks, insurance companies and other financial institutions is declining as sales activity slows and regulators voice concern about the sector. Lenders closed roughly $491 billion of mortgage loans backed by U.S. property in 2016, down 3% from 2015… Most of the decline occurred in the fourth quarter, when volume was 7% lower than the same quarter in 2015… Despite the decrease, the new-volume number was the third highest since the association began doing the survey, behind 2015 and the record year of 2007.”
April 10 – Bloomberg (Romy Varghese): “California cities and counties will see their required contributions to the largest U.S. pension fund almost double in five years, according to an analysis by the California Policy Center. In the fiscal year beginning in July, local payments to the California Public Employees’ Retirement System will total $5.3 billion and rise to $9.8 billion in fiscal 2023… The increase reflects Calpers’ decision in December to roll back the expected rate of return on its investments. That means the system’s 3,000 cities, counties, school districts and other public agencies will have to put more taxpayer money into the fund because they can’t count as heavily on anticipated investment income to cover future benefit checks.”
Japan Watch:
April 10 – Bloomberg (Pavel Alpeyev and Takako Taniguchi): “The troubles at Japan’s Toshiba Corp. grew deeper as the 142-year-old conglomerate warned it may not be able to continue as a going concern because of losses from its Westinghouse Electric nuclear business… The disclosure came… as the… company took the unusual step of reporting third quarter earnings without approval from its auditors. Toshiba said losses last year had left it with negative shareholders equity of 225.6 billion yen ($2.1bn)…”
EM Watch:
April 12 – Bloomberg (Michael Heath): “Brazil’s central bank signaled further aggressive key rate cuts are in store after slashing borrowing costs by the most in nearly eight years to help boost growth. Policy makers… voted unanimously to reduce the benchmark rate by a full percentage point to 11.25% following two 75 bps cuts. The monetary authority has lowered borrowing costs 300 bps since beginning the easing cycle in October.”
Geopolitical Watch:
April 12 – Reuters (Nobuhiro Kubo): “Japan’s navy plans a joint show of force with the U.S. Navy’s USS Carl Vinson aircraft carrier strike group as it steams towards the Korean peninsula aimed at deterring secretive North Korean regime from further missile tests, two sources said. With tension growing markedly, the Korean peninsula is the closest it has been to a ‘military clash’ since Pyongyang’s first nuclear test in 2006, an influential state-run Chinese newspaper said…”
April 12 – Reuters (Sue-Lin Wong and David Brunnstrom): “North Korean state media warned… of a nuclear attack on the United States at any sign of American aggression, as a U.S. Navy strike group steamed toward the western Pacific – a force U.S. President Donald Trump described as an ‘armada’. Trump, who has urged China to do more to rein in its impoverished ally and neighbor, said in a tweet that North Korea was ‘looking for trouble’ and the United States would ‘solve the problem’ with or without Beijing’s help.”
April 8 – Wall Street Journal (Asa Fitch): “Following a U.S. strike on a Syrian air base, Iran has sought to buttress ties with a key ally: Russia. On Saturday, several Iranian military officials and diplomats discussed the conflict in Syria with Russian counterparts, after dozens of U.S. Tomahawk cruise missile strikes on Thursday targeted the Shayrat Airfield near Homs, Syria. The U.S. strikes marked the first time during Syria’s civil war that the U.S. directly targeted the regime of Iran’s close ally, Syrian President Bashar al-Assad…”
