Saturday, July 1, 2017
Weekly Commentary:
The Road to Normalization
by Doug Noland
full column here:
My summary is below:
The S&P500 returned (price + dividends)
almost 10% for the first half of 2017
The Nasdaq Composite gained 14.1% in the first-half,
with the large company Nasdaq 100 (NDX) rising 16.1%.
Biotechs (BTK) surged 9.7% during Q2,
boosting y-t-d gains to 25.6%.
June 27 – Reuters (William Schomberg, Marc Jones, Jason Lange and Lindsay Dunsmuir):
“U.S. Federal Reserve Chair Janet Yellen said on Tuesday that she does not believe that there will be another financial crisis for at least as long as she lives, thanks largely to reforms of the banking system since the 2007-09 crash. ‘Would I say there will never, ever be another financial crisis?’ Yellen said… ‘You know probably that would be going too far but I do think we're much safer and I hope that it will not be in our lifetimes and I don't believe it will be,’ she said.”
While headlines somewhat paraphrased Yellen’s actual comment,
“We Will not see Another Crisis in Our Lifetime” is reminiscent of Irving Fisher’s “permanent plateau” just weeks before the great crash of 1929.
For the Week ending June 30, 2017:
S&P500 dipped 0.6% (up 8.2% y-t-d)
Dow Industrials slipped 0.2% (up 8.0%)
Dow Utilities fell 2.5% (up 6.2%)
Dow Transports rose 1.9% (up 5.7%)
S&P 400 Midcaps added 0.2% (up 5.2%)
Small cap Russell 2000 was unchanged (up 4.3%)
Nasdaq100 dropped 2.7% (up 16.1%)
Biotechs dropped 3.9% (up 25.5%)
With GOLD bullion dropping $15,
the HUI gold stock index sank 4.5%
(up 1.9%)
U.K.'s FTSE fell 1.5% (up 11.2% y-t-d).
Japan's Nikkei 225 declined 0.5% (up 4.8% y-t-d)
France's CAC40 sank 2.8% (up 5.3%)
German DAX was hit 3.2% (up 7.4%)
Spain's IBEX 35 fell 1.8% (up 11.7%)
Italy's FTSE MIB declined 1.2% (up 7.0%)
Brazil's Bovespa rallied 3.0% (up 4.4%)
Mexico's Bolsa gained 1.8% (up 9.2%)
South Korea's Kospi increased 0.6% (up 18%)
India’s Sensex declined 0.7% (up 16.1%)
China’s Shanghai Exchange rose 1.1% (up 2.9%)
Turkey's Istanbul National 100 added 0.8% (up 28.5%)
Russia's MICEX gained 0.6% (down 15.8%).
Ten-year US Treasury yields jumped 16 bps to 2.30% (down 14bps).
US Long bond yields increased 12 bps to 2.84% (down 23bps).
German bund yields surged 21 bps to 0.47% (up 26bps)
Japanese 10-year "JGB" yields gained three bps to 0.09% (up 5bps).
U.K. 10-year gilt yields jumped 23 bps to 1.26% (up 2bps)
Freddie Mac 30-year fixed mortgage rates
dipped two bps to 3.88% (up 40bps y-o-y).
Fifteen-year rates
were unchanged at 3.17% (up 39bps).
The five-year hybrid ARM rate
gained three bps to 3.17% (up 47bps). \\
Jumbo mortgage 30-yr fixed rates
up a basis point to 4.01% (up 34bps).
Over the past year, Fed Credit declined $5.0bn.
M2 money supply expanded 5.4%, over the past year.
Currency Watch:
The U.S. dollar index fell 1.7% to 95.628 (down 6.6% y-t-d).
Commodities Watch:
Goldman Sachs Commodities Index surged 5.3% (down 6.5% y-t-d).
Spot Gold declined 1.2% to $1,242 (up 7.7%).
Silver slipped 0.5% to $16.627 (up 4.0%).
Crude rallied $3.03 to $46.04 (down 15%).
Gasoline jumped 5.6% (down 9%)
Natural Gas rose 3.6% (down 19%)
Copper gained 2.9% (up 8%)
Wheat surged 11.1% (up 29%)
Corn jumped 4.2% (up 8%).
Trump Administration Watch:
June 29 – Reuters:
“Congress will need to raise the nation's debt limit and avoid defaulting on loan payments by ‘early to mid-October,’ the Congressional Budget Office said in a report…
Treasury Secretary Steve Mnuchin has encouraged Congress to raise the limit before the legislative body leaves for their August recess.
But it remains unclear if a bipartisan agreement has been struck to allow the limit to be raised, as both chambers continue to be weighed down by health care and tax reform and trying to find an agreement to fund the government after the September 30 deadline.”
June 30 – CNBC (Fred Imbert):
“President Donald Trump's White House is ‘hell-bent’ on imposing tariffs on steel and other imports, Axios reported Friday.
The plan — which was pushed by Commerce Secretary Wilbur Ross and was supported by National Trade Council Peter Navarro, and policy adviser Stephen Miller — would potentially impose tariffs in the 20% range… During a ‘tense’ meeting Monday, the president made it clear he favors tariffs, yet the plan was met with heavy opposition by most officials in the room, with one telling Axios about 22 were against it and only three in favor, including Trump.”
China Bubble Watch:
June 25 – Financial Times (Minxin Pei):
“The Chinese government has just launched an apparent crackdown on a small number of large conglomerates known in the west chiefly for their aggressive dealmaking.
The list includes Dalian Wanda, Anbang, Fosun and HNA Group. The news that Chinese banking regulators have asked lenders to examine their exposure to these companies has sent the stocks of groups wholly or partly owned by these conglomerates tumbling in Shanghai and Hong Kong.”
June 26 – Wall Street Journal (Anjani Trivedi):
“As Beijing looks to rein in companies that have splurged on overseas deals, it is talking up the systemic risks to its financial system.
But just how serious is the problem? After all, for years Beijing has urged leading companies to ‘go global,’ and encouraged banks to support them with lending.
Its words were taken to heart: Companies like sprawling conglomerate HNA Group and insurer Anbang pushed the country’s outbound acquisitions to more than $200 billion last year…
Now… regulators are investigating leverage and risks at banks associated with China Inc.’s bulging overseas deals.
It’s clear that Chinese banks are already heavily exposed to China’s big deal makers through basic lending.
Chinese lenders had extended more than 500 billion yuan ($73.14bn) of loans to HNA alone as of last year…”
June 29 – Reuters (Yawen Chen and Thomas Peter):
“The struggles of China's small and medium-sized firms have grown so acute that many are expected to become unprofitable or even go belly-up this year, boding ill for an economy running short on strong growth drivers.
The companies - which account for over 60% of China's $11 trillion gross domestic product - have entered the most challenging funding environment in years as Beijing cracks down on easy credit to contain a dangerous debt build-up.
Many of the firms - mostly in the industrial, transport, wholesale, retail, catering and accommodation sectors - are already grappling with soaring costs, fierce competition and thinning profits.
The strains faced by small and medium-sized enterprises (SMEs) are expected to grow more visible as Beijing deflates a real estate bubble and eases infrastructure spending to dial back its fiscal stimulus.”
June 28 – Bloomberg (Joe Ryan):
“As Elon Musk races to finish building the world’s biggest battery factory in the Nevada desert, China is poised to leave him in the dust.
Chinese companies have plans for additional factories with the capacity to pump out more than 120 gigawatt-hours a year by 2021, according to a report… by Bloomberg Intelligence.
That’s enough to supply batteries for around 1.5 million Tesla Model S vehicles or 13.7 million Toyota Prius Plug-in Hybrids per year…
By comparison, when completed in 2018, Tesla Inc.’s Gigafactory will crank out up to 35 gigawatt-hours of battery cells annually.”
Europe Watch:
June 26 – Bloomberg (Sonia Sirletti and Alexander Weber):
Italy orchestrated its biggest bank rescue on record, committing as much as 17 billion euros ($19bn) to clean up two failed banks in one of its wealthiest regions, a deal that raises questions about the consistency of Europe’s bank regulations.
The intervention at Banca Popolare di Vicenza SpA and Veneto Banca SpA includes state support for Intesa Sanpaolo SpA to acquire their good assets for a token amount…
Milan-based Intesa can initially tap about 5.2 billion euros to take on some assets without hurting capital ratios, Padoan said. The European Commission approved the plan.”
June 26 – Bloomberg (Carolynn Look):
“It seems the sky is the limit for Germany’s economy.
Business confidence -- logging its fifth consecutive increase -- jumped to the highest since 1991 this month, underpinning optimism by the Bundesbank that the upswing in Europe’s largest economy is set to continue.
With domestic demand supported by a buoyant labor market, risks to growth stem almost exclusively from global forces.
‘Sentiment among German businesses is jubilant,’ Ifo President Clemens Fuest said…
‘Germany’s economy is performing very strongly.’”
Global Bubble Watch:
June 28 – Reuters (Sujata Rao):
“Global debt levels have climbed $500 billion in the past year to a record $217 trillion, a new study shows, just as major central banks prepare to end years of super-cheap credit policies.
World markets were jarred this week by a chorus of central bankers warning about overpriced assets, excessive consumer borrowing and the need to begin the process of normalizing world interest rates from the extraordinarily low levels introduced to offset the fallout of the 2009 credit crash.
This week, U.S. Federal Reserve chief Janet Yellen has warned of expensive asset price valuations, Bank of England Governor Mark Carney has tightened controls on bank credit and European Central Bank head Mario Draghi has opened the door to cutting back stimulus, possibly as soon as September.
Years of cheap central bank cash has delivered a sugar rush to world equity markets, pushing them to successive record highs.
But another side effect has been explosive credit growth as households, companies and governments rushed to take advantage of rock-bottom borrowing costs.
Global debt, as a result, now amounts to 327% of the world's annual economic output, the Institute of International Finance (IIF) said in a report…”
June 26 – Bloomberg (Garfield Clinton Reynolds and Adam Haigh):
“Greed seems to be running the show in global markets. Fear has fled, and that may be the biggest risk of all.
Currency volatility just hit a 20-month low, Treasury yields are in their narrowest half-year trading range since the 1970s and the U.S. equities fear gauge, the VIX, is stuck near a two-decade nadir.
While markets have signaled complacency in the face of Middle East tensions, the withdrawal of Federal Reserve stimulus and President Donald Trump’s tweetstorms, the Bank for International Settlements flagged on Sunday that low volatility can spur risk-taking with the potential to unwind quickly.”
Fixed Income Bubble Watch:
June 27 – CNBC (Ann Saphir):
“Bond investors may soon pay a hefty price for being too pessimistic about the economy, according to portfolio manager Joe Zidle.
Zidle, who is with Richard Bernstein Advisors, believes the vast amount of money flowing into long-duration bonds is signaling a costly mistake.
‘Last week alone, there is a 20-year plus treasury bond ETF that in one week got more inflows than all domestic equity mutual funds, and all domestic equity ETFs combined year-to-date,’ he said…
He added: ‘I think investors are going to be in a real painful trade.’”
June 26 – Bloomberg (Mary Williams Walsh):
“The United States Virgin Islands ... the mood is ominous, as government officials scramble to stave off the same kind of fiscal collapse that has already engulfed its neighbor Puerto Rico.
The public debts of the Virgin Islands are much smaller than those of Puerto Rico, which effectively declared bankruptcy in May.
But so is its population, and therefore its ability to pay.
This tropical territory of roughly 100,000 people owes some $6.5 billion to pensioners and creditors.”
Federal Reserve Watch:
June 27 – Reuters (Guy Faulconbridge and Kate Holton):
“With the U.S. economy at full employment and inflation set to hit the Federal Reserve's 2% target next year, the U.S. central bank needs to keep raising rates gradually to keep the economy on an even keel, a Fed policymaker said…
‘If we delay too long, the economy will eventually overheat, causing inflation or some other problem,’ San Francisco Fed President John Williams said…
‘Gradually raising interest rates to bring monetary policy back to normal helps us keep the economy growing at a rate that can be sustained for a longer time.’
June 29 – Financial Times (Alistair Gray and Barney Jopson):
“Regulators have given US banks the go-ahead to pay out almost all their earnings to shareholders this year in a signal of their confidence in the health of the financial system.
The Federal Reserve has given the green light to a record level of post-crisis distributions, including an estimated total of almost $100bn from the six largest banks.
All 34 institutions passed the second part of its annual stress test, although the Fed did call out weaknesses in capital planning at Capital One…
The big six US banks — Bank of America, Citigroup, Goldman Sachs, Morgan Stanley, JPMorgan Chase and Wells Fargo — are set to return to shareholders between $95bn and $97bn over the next four quarters, according to RBC Capital Markets analyst Gerard Cassidy.
That is about 50% more than they were able to hand out after last year’s exam.”
U.S. Bubble Watch:
June 27 – Wall Street Journal (Shibani Mahtani and Douglas Belkin):
“This is what happens when a major American state lets its bills stack up for two years.
Hospitals, doctors and dentists don’t get paid for hundreds of millions of dollars of patient care.
Social-service agencies help fewer people.
Public universities and the towns that surround them suffer.
The state’s bond rating falls to near junk status.
People move out.
A standoff in Illinois between Republican Governor Bruce Rauner and Democratic Speaker of the House Michael Madigan over spending and term limits has left Illinois without a budget for two years.
State workers and some others are still getting paid because of court orders and other stopgap measures, but bills for many others are piling up. The unpaid backlog is now $14.6 billion and growing.”
June 28 – Bloomberg Business Week (Elizabeth Campbell and John McCormick):
“Two years ago, Illinois’s budget impasse meant that the state’s lottery winners had to wait for months to get their winnings.
Now, with $15 billion in unpaid bills, Illinois is on the brink of being unable to even sell Powerball tickets.
For the third year in a row, the state is poised to begin its fiscal year on July 1 with no state budget and billions of dollars in the red.
If that happens, S&P Global Ratings says Illinois will probably lose its investment-grade status and become the first U.S. state on record to have its general obligation debt rated as junk.
Illinois is already the worst-rated state at BBB-, S&P’s lowest investment-grade rating.
The state owes at least $800 million in interest and late fees on its unpaid bills.”
June 26 – Wall Street Journal (Lev Borodovsky):
“Commercial real estate prices are starting to roll over after reaching record highs, capping a long post crisis rally.
While there is no sign that a decline would mean imminent danger for the economy, Federal Reserve Bank of Boston President Eric Rosengren recently warned that valuations represent a risk he ‘will continue to watch carefully.’
So far, prices have proven resilient, reflecting in part the unexpected 2017 decline of interest rates and the rising capital flows from diverse sources such as U.S. pensions and overseas investors.”
June 27 – Reuters (Kimberly Chin):
“U.S. single-family home prices rose in April due to tight inventory of houses on the market and low mortgage rates… and economists see no imminent change in the trend.
The S&P CoreLogic Case-Shiller composite index of 20metropolitan areas rose 5.7% in April on a year-over-year basis after a 5.9% gain in March, which matched the fastest pace in nearly three years.”
Japan Watch:
June 29 – Reuters (Leika Kihara and Stanley White):
“Japan's industrial output fell faster in May than at any time since the devastating earthquake of March 2011 while inventories hit their highest in almost a year, suggesting a nascent economic recovery may stall before it gets properly started.
Household spending also fell in May, leaving the Bank of Japan's 2% target seemingly out of reach.”
Emerging Markets Watch:
June 28 – Reuters (Brad Brooks and Silvio Cascione):
“President Michel Temer called a corruption charge filed against him by Brazil's top prosecutor a ‘fiction’ on Tuesday, as the nation's political crisis deepened under the second president faced with possible removal from office in just over a year.
Temer, who was charged Monday night with arranging to receive millions of dollars in bribes, said the move would hurt Brazil's economic recovery and possibly paralyze efforts at reform.
The conservative leader said executives of the world's biggest meatpacker, JBS SA , who accused him in plea-bargain testimony of arranging to take 38 million reais ($11.47 million) in bribes in the coming months, did so only to escape jail for their own crimes.”
Geopolitical Watch:
June 29 – New York Times (Nicole Perlroth and David E. Sanger):
“Twice in the past month, National Security Agency cyberweapons stolen from its arsenal have been turned against two very different partners of the United States — Britain and Ukraine.
The N.S.A. has kept quiet, not acknowledging its role in developing the weapons. White House officials have deflected many questions, and responded to others by arguing that the focus should be on the attackers themselves, not the manufacturer of their weapons.
But the silence is wearing thin for victims of the assaults, as a series of escalating attacks using N.S.A. cyberweapons have hit hospitals, a nuclear site and American businesses.
Now there is growing concern that United States intelligence agencies have rushed to create digital weapons that they cannot keep safe from adversaries or disable once they fall into the wrong hands.”
June 28 – New York Times (Sheera Frenkel, Mark Scott and Paul Mozur):
“As governments and organizations around the world grappled… with the impact of a cyberattack that froze computers and demanded a ransom for their release, victims received a clear warning from security experts not to pay a dime in the hopes of getting back their data.
The hackers’ email address was shut down and they had lost the ability to communicate with their victims, and by extension, to restore access to computers.
If the hackers had wanted to collect ransom money, said cybersecurity experts, their attack was an utter failure.
That is, if that was actually their goal. Increasingly sophisticated ransomware assaults now have cybersecurity experts questioning what the attackers are truly after.
Is it money?
Mayhem?
Delivering a political message?”
June 25 – Reuters:
“Qatar is reviewing a list of demands presented by four Arab states imposing a boycott on the wealthy Gulf country, but said on Saturday the list was not reasonable or actionable.
‘We are reviewing these demands out of respect for ... regional security and there will be an official response from our ministry of foreign affairs,’ Sheikh Saif al-Thani, the director of Qatar's government communications office, said…
Saudi Arabia, Egypt, Bahrain and the United Arab Emirates, which imposed a boycott on Qatar, issued an ultimatum to Doha to close Al Jazeera, curb ties with Iran, shut a Turkish military base and pay reparations among other demands.”
June 27 – Reuters (Foo Yun Chee):
“EU antitrust regulators hit Alphabet unit Google with a record 2.42-billion-euro ($2.7bn) fine on Tuesday, taking a tough line in the first of three investigations into the company's dominance in searches and smart phones.
It is the biggest fine the EU has ever imposed on a single company in an antitrust case, exceeding a 1.06-billion-euro sanction handed down to U.S. chipmaker Intel in 2009.
The European Commission said the world's most popular internet search engine has 90 days to stop favoring its own shopping service or face a further penalty per day of up to 5% of Alphabet's average daily global turnover.”
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