Saturday, April 7, 2018
Weekly Commentary:
Market Realities
by Doug Noland
full column here:
My summary is below:
For the week ending
April 6, 2018:
STOCKS:
S&P500 declined 1.4% (down 2.6% year-to-date)
Dow Industrials slipped 0.7% (down 3.2%)
Dow Utilities were about unchanged (down 4.6%)
Dow Transports dropped 2.4% (down 4.4%)
S&P 400 Midcaps fell 1.3% (down 2.4%)
Small cap Russell 2000 declined 1.1% (down 1.4%)
Nasdaq100 dropped 2.2% (up 0.6%)
Biotechs fell 5.5% (up 0.8%).
With gold bullion up $9,
the HUI gold stock index rallied 1.2%
(down 7.7%).
U.K.'s FTSE gained 1.8% (down 6.6%).
Japan's Nikkei 225 increased 0.5% (down 5.3% y-t-d).
France's CAC40 rose 1.8% (down 1.0%).
The German DAX gained 1.2% (down 5.2%).
Spain's IBEX 35 increased 0.9% (down 3.6%).
Italy's FTSE MIB jumped 2.3% (up 4.9%)
Brazil's Bovespa slipped 0.6% (up 11.0%)
Mexico's Bolsa surged 3.9% (down 2.9%).
South Korea's Kospi dipped 0.7% (down 1.5%).
India’s Sensex rose 2.0% (down 1.3%).
China’s Shanghai Exchange fell 1.2% (down 5.3%).
Turkey's Istanbul National 100 dipped 0.2% (down 0.5%).
Russia's MICEX added 0.5% (up 8.1%).
US BONDS & MORTGAGES:
Ten-year Treasury yields rose three bps to 2.77% (up 37bps).
Long bond yields rose four bps to 3.02% (up 28bps).
Freddie Mac 30-year fixed mortgage rates fell four bps to 4.40% (up 30bps y-o-y). Fifteen-year rates declined three bps to 3.87% (up 51bps). Five-year hybrid ARM rates dropped four bps to 3.62% (up 43bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates unchanged at 4.49% (up 30bps).
M2 money supply jumped $34.8bn last week
to a record $13.936 TN.
M2 gained $534bn, or 4.0%,
over the past year.
Currency Watch:
The U.S. dollar index
was little changed at 90.108
(down 2.2% y-o-y).
Commodities Watch:
Goldman Sachs Commodities Index dropped 2.0% (up 0.3% y-t-d).
Spot Gold gained 0.7% to $1,334 (up 2.3%).
Silver increased 0.6% to $16.362 (down 4.6%).
Crude sank $2.88 to $62.06 (up 3%).
Gasoline dropped 3.3% (up 9%)
Natural Gas fell 1.2% (down 9%).
Copper gained 1.1% (down 7%).
Wheat surged 4.7% (up 11%).
Corn jumped 2.4% (up 13%).
Market Dislocation Watch:
April 2 - Bloomberg (Sarah Ponczek):
"Trend-following momentum stocks are starting the second quarter the same way they ended the first -- with little momentum. The iShares Edge MSCI USA Momentum Factor ETF, ticker MTUM, fell 3.2% Monday, more than the 2.2% decline in the S&P 500 Index. It's the exchange-traded fund's seventh drop of more than 2% in a single day this year. In 2017, a loss of that magnitude never happened. '[Momentum] was the strongest part of the market for the last two to three years -- now they're the weakest part,' said Paul Nolte, a portfolio manager at Kingsview Asset Management…"
Trump Administration Watch:
April 4 - Bloomberg:
"Chinese state media hailed their leaders' quick counteroffensive in the brewing trade war with the U.S. and said America would learn a 'painful lesson' by tangling with China. The articles and editorials across the Communist Party's media stable came even as the country started a long holiday weekend. They emphasized that China was acting only in self-defense, and that the Trump administration's move to levy a 25% tariff on about 1,300 types of Chinese imports was opposed by many in the U.S. 'As China deploys its counterattack, the pleasure that the U.S. achieved from those tariffs will now cause them suffering as their financial and political gains diminish to zero,' the Global Times wrote… The tabloid, which sometimes takes more hawkish positions, has run five editorials on the trade issue since Monday."
April 6 - Bloomberg (Lyubov Pronina):
"China called on the European Union to aid the Asian nation in rejecting protectionism from the U.S. and upholding the international trade order. China and the EU 'need to stand up together with a clear-cut position against protectionism, and need to work with each other to uphold the rules-based multilateral trade order,' Zhang Ming, the head of the Chinese Mission to the EU, said… Recent U.S. actions go 'completely against the fundamental principles and values of the World Trade Organization,' he said."
April 3 - CNBC (Liz Moyer and Jacob Pramuk):
"President Donald Trump unveiled a list Tuesday of Chinese imports his administration aims to target as part of a crackdown on what the president deems unfair trade practices. Sectors covered by the proposed tariffs include products used for robotics, information technology, communication technology and aerospace. The U.S. Trade Representative, which announced the list, says it targets products that benefit China's industrial plans 'while minimizing the impact on the U.S. economy.' Specifically, it takes aim at China policies that 'coerce' American companies from transferring technology and intellectual property to local Chinese companies."
April 4 - Financial Times:
"The good news is that both sides still have time to back down. Neither the latest round of tariffs proposed by the Trump administration (a 25% levy on $50bn-worth of industrial and technology products) nor the retaliatory move China announced on Wednesday (a matching 25% on $50bn-worth of soyabeans, cars, chemicals and other products) have been imposed yet. The US has said it will consult with businesses for a month before instituting the tariffs. China has indicated it will wait for the US. The bad news is that, according to US president Donald Trump's team, the two sides were already at the negotiating table, and purportedly making progress, before the latest escalations were announced. And there is reason to think that there may not be much regress from here, given the conflicting objectives and preconceptions of the two nations."
April 2 - Bloomberg (Eric Martin):
"The Trump administration is pushing for a preliminary Nafta deal to announce at a summit in Peru next week and will host cabinet ministers in Washington to try to achieve a breakthrough, according to three people familiar with the talks. The White House wants leaders from Canada and Mexico to join in unveiling the broad outlines of an updated pact at the Summit of the Americas that begins April 13, while technical talks to hammer out the finer details and legal text could continue…"
April 5 - CNBC (Jeff Daniels):
"Fears of an expanded trade war with China are spreading across the farm economy after Beijing announced it might slap a 25% tariff on American soybeans and other farm products. Affected agricultural products also include U.S. corn, beef, cotton, tobacco, sorghum and orange juice. However, China's Ministry of Commerce is targeting not only U.S. agriculture but other items such as automobiles on its wide-ranging list of more than 100 American products."
Federal Reserve Watch:
April 3 - CNBC (Jeff Cox):
"Even with this year's correction, stocks and other assets are still high by historical standards, Fed Governor Lael Brainard said… Brainard became the latest central bank official to express caution about the level of the 9-year-old bull market. 'Valuations in a broad set of markets appear elevated relative to historical norms, even after taking into account recent movements,' Brainard said during a speech… Prices for multi-family homes and commercial real estate also have risen, while capitalization rates, a key determinant for how properties are performing value wise, 'have reached historical lows,' she added."
U.S. Bubble Watch:
April 5 - Bloomberg (Katia Dmitrieva):
"The U.S. trade deficit widened by more than forecast to a fresh nine-year high in February amid broad-based demand for imports, ahead of Trump administration tariffs that have raised the specter of a trade war. The gap increased 1.6% in February to $57.6 billion, compared with the median estimate of economists for $56.8 billion… It was the sixth straight month with a wider deficit, the longest streak since 2000. Imports and exports both registered gains of 1.7%..."
April 1 - Bloomberg (Vince Golle):
"More American consumers than at any time in 27 years are convinced that it's better to make big purchases now because retailer discounts and deals won't be around much longer. Some 21%, the largest share since November 1990, said in March that conditions to buy appliances, electronics and other household durable goods are currently 'good' because prices won't fall further, according to the University of Michigan's latest survey of consumer sentiment. 'When asked about buying conditions, the appeal of low prices has largely disappeared,' Richard Curtin, director of the Michigan survey, said… 'For durables, it has been replaced by favoring buying in advance of anticipated price increases.'"
April 5 - USA Today (Paul Davidson):
"This spring home-buying season should be a coming-out party for Millennials, many of whom are finally ready to make a purchase after hunkering down for years in their parents' basements or expensive apartments. The only problem: Much of the food at the party is gone, and what's left is priced like caviar. Although solid job and income growth is emboldening many prospective home buyers, record low housing supplies are driving up prices and curbing sales, especially for Millennials looking to buy starter homes. 'For home buyers, this is shaping up to be one of the most difficult years in recent memory,' says Ralph McLaughlin, chief economist of Veritas Urbis Economics, which studies the housing market."
April 5 - Bloomberg (Vince Golle):
"Small-business owners in the U.S. are becoming more aggressive with their pay packages as the tight job market makes it difficult to attract talent. The National Federation of Independent Business said… a net 33% of small firms raised compensation in March, the largest share since November 2000, as hiring plans picked up."
April 2 - Bloomberg (John Lippert and Jamie Butters):
"The American consumers who were stretching themselves to buy or lease a new car are starting to go missing from showrooms. Rising interest rates and new-vehicle prices are squeezing shoppers with shaky credit and tight budgets out of the market. In the first two months of this year, sales were flat among the highest-rated borrowers, while deliveries to those with subprime scores slumped 9%, according to J.D. Power. The researcher's data highlights what's happening beneath the surface of a U.S. auto market in its second year of decline after a historic run of gains."
April 2 - Bloomberg (Luke Kawa and Lu Wang):
"The stock market's missing a key participant as the second quarter kicks off with a rout. Corporate America is stuck on the sidelines as the S&P 500 Index plunges to its lowest level since early February. That's to comply with regulations under which companies refrain from discretionary stock buybacks for about five weeks before reporting earnings through the 48 hours that follow. So, with first-quarter reporting season kicking into high gear in two weeks, companies must sit on their hands while the market fizzles. The timing of discretionary buybacks has gained traction in recent years with corporate appetite dwarfing all other investors as the biggest source of demand for U.S. stocks… S&P 500 firms have bought back almost $4 trillion of their own shares since the bull market began nine years ago…"
April 3 - Bloomberg (Elizabeth Campbell):
"Illinois's finances are so troubled that investors can make nearly as much money betting on the worst-rated U.S. state as they can on the American Dream mall project, perhaps the most despised structure in New Jersey. An unfinished, multicolored hulk in the Meadowlands beside the Turnpike, former Governor Chris Christie called it 'the ugliest damn building in New Jersey, and maybe America.' Yet bondholders are asking to get paid nearly as much to own Illinois's debt as they are demanding in return for holding the long-delayed mall's unrated revenue bonds… The yield on Illinois general-obligation bonds that mature in 2028 averaged 4.5% in March…"
April 2 - Bloomberg (Oshrat Carmiel):
"Home sales in Manhattan plunged by the most since the recession as buyers at all price levels drove hard bargains and were in no rush to close deals. Sales of all condos and co-ops fell 25% in the first quarter from a year earlier to 2,180, according to… appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate. It was the biggest annual decline since the second quarter of 2009, when Manhattan's property market froze in the wake of Lehman Brothers Holdings Inc.'s bankruptcy filing and the global financial crisis that followed. The drop in sales spanned from the highest reaches of the luxury market to workaday studios and one-bedrooms."
China Watch:
April 6 - Associated Press (Jill Colvin and Gillian Wong):
"China's government vowed Friday to 'counterattack with great strength' if President Donald Trump goes ahead with plans to raise U.S. tariffs on an additional $100 billion worth of Chinese goods and said negotiations were impossible under current conditions. Trump's surprise move Thursday to instruct the U.S. trade representative to consider additional tariffs came a day after Beijing said it would tax $50 billion in American products, including soybeans and small aircraft, in response to a U.S. move this week to impose tariffs on $50 billion in Chinese imports… In Beijing, a Commerce Ministry spokesman said China doesn't want a trade war - but isn't afraid to fight one. 'If the U.S. side announces the list of products for $100 billion in tariffs, the Chinese side has fully prepared and will without hesitation counterattack with great strength,' spokesman Gao Feng said."
April 5 - New York Times (Steven Lee Myers):
"China's leaders sound supremely confident that they can win a trade war with President Trump. The state news media has depicted him as a reckless bully intent on undermining the global trading system, while presenting the Chinese government as a fair-minded champion of free trade. And China's leader, Xi Jinping, has used the standoff to reinforce the Communist Party's message that the United States is determined to stop China's rise - but that it no longer can. China is already too strong, its economy too big. 'China is not afraid of a trade war,' the vice minister of finance, Zhu Guangyao, declared at a news conference to discuss possible countermeasures. More than once, he cited the history of the 'new China' - which began its extraordinary economic revival four decades ago - as evidence that it would 'never succumb to external pressure.'"
April 5 - Reuters (Michael Martina and Susan Heavey):
"It took China just 11 hours to retaliate against the United States for proposing tariffs on some 1,300 Chinese products, but Chinese officials are holding back on taking aim at their largest American import: government debt. In a tit-for-tat response to the Trump administration's plan for 25% duties on $50 billion of Chinese imports, China hit back with its own list of similar duties on key American imports including soybeans, planes, cars, beef and chemicals… China held around $1.17 trillion of Treasuries as of the end of January, making it the largest of America's foreign creditors and the No. 2 overall owner of U.S. government bonds after the Federal Reserve. Any move by China to chop its Treasury portfolio could inflict significant harm on U.S. finances and global investors, driving bond yields higher and making it more costly to finance the federal government."
April 5 - Reuters (Michael Martina and Susan Heavey):
"China would win any trade war with the United States, the country's state media said on Thursday, as U.S. officials sought to ease market jitters over escalating tensions between the world's two biggest economies. After Washington and Beijing targeted each other with planned steep tariffs, Chinese state media declared that the country never surrendered to external pressure and would prevail in any tit-for-tat on trade. In Washington, U.S. officials publicly encouraged negotiations as a way to ease or avert punishing tariffs and get the two countries off a trade war footing."
March 30 - Bloomberg:
"A gauge of activity at China's manufacturers posted its first gain since November, as factories recovered from a seasonal dip at the start of the year and export demand shrugged off threats of a trade war. The manufacturing purchasing managers index rose to 51.5 in March versus the 50.6 estimate in Bloomberg's survey and 50.3 last month. The non-manufacturing PMI, covering services and construction, stood at 54.6… compared with 54.4 in February."
Global Bubble Watch:
April 3 - Wall Street Journal (Jean Eaglesham and Coulter Jones):
"When the messaging app Telegram set out to raise billions of dollars this year for a project to launch a cryptocurrency, it shunned the stock market and instead invited a select group of firms to invest in its virtual coins. These investors would be backing a project yet to be built. Little was known about the private company's ownership or finances. Even so, 81 investors stepped forward to pour in $850 million, with other financing rounds still to come. It was a mark of the dramatic rise of private capital markets, which have leapfrogged public markets to become the most popular way for companies to raise money… Private markets have 'reshaped the financial landscape,' said Jason Thomas, director of research at private-equity firm Carlyle Group LP. 'The growth of private capital is across the economy.' … At least $2.4 trillion was raised privately in the U.S. last year. That widened a gap that emerged in 2011 with the public markets, which raised $2.1 trillion…"
Fixed-Income Bubble Watch:
April 5 - Financial Times (Michael Mackenzie):
"A key lesson of the financial crisis was that the credit market matters more than others. Equities and credit have endured a tough year so far as global trade tension, the gradual unwinding of central bank support and the risk of a regulatory hand around the throat of the tech sector, leave investors wary. Several measures of the credit market are flashing amber. The Markit CDX index - an indicator of what investors must pay to insure against a default in the US investment-grade market - is back up at levels previously seen a year ago. There has been a bigger breakdown in US high yield, the speculative area of the debt market."
April 3 - Bloomberg (Brian W Smith):
"The high-grade bond market has turned from borrower paradise to borrower purgatory. Investors have forced investment grade-bond issuers in the U.S. to pony up more money to sell top-notch bonds over the past month. After paying little in so-called new issue concessions, borrowers are now regularly forking over a premium of more than 10 bps as more investors become choosy about the debt they buy. This is a major shift that has put buyers in the driver's seat after companies paid almost nothing to sell a massive amount of debt over the last two years."
April 1 - Wall Street Journal (Asjylyn Loder and Sam Goldfarb):
"The exodus from junk-rated debt funds accelerated in the first quarter as rising interest rates cut into investors' appetite for taking on greater credit risk. Investors in the first three months of 2018 yanked $6.5 billion from the five largest exchange-traded funds that invest in bonds issued by less creditworthy companies… March was the fifth consecutive month of outflows from high-yield ETFs."
Japan Watch:
April 3 - CNBC (David Reid):
"The Bank of Japan (BOJ) is currently discussing how to exit its massive stimulus program, but it's too early to reveal any of the details. That was the statement made by Governor Haruhiko Kuroda to Japanese lawmakers in parliament Tuesday. 'Internally we're conducting various discussions,' said Kuroda…, when asked about an exit strategy from its easy monetary policy. However, he quickly noted that Japanese inflation was still running well below target. He added that any 'open talk' of tapering or ending its stimulus would confuse markets."
EM Bubble Watch:
April 1 - Financial Times (Kate Allen):
"Emerging market investors are showing signs of caution as the hefty pace of debt sales by companies, banks and governments has combined with a negative performance for bond prices since the start of the year. EM syndicated borrowing totalled $382bn in the year to March 23, according to… Dealogic - just $35bn below the record amount issued in the first quarter of 2017. Once last week's deals are finalised, banks expect a record total. 'We are set for a record-breaking Q1,' said Nick Darrant, executive director of fixed income syndicate at JPMorgan. Persistent dollar weakness has buoyed dealmaking in recent months, but flows of money into EM are slowing…"
Geopolitical Watch:
April 2 - Reuters (Jeanny Kao):
"Taiwan's government said… that China was stirring up its media to threaten the self-ruled island after a major state-run newspaper said China should issue an international arrest warrant for Taiwan's premier for his comments on independence. Taiwan is one of China's most sensitive issues. The island is claimed by Beijing as its sacred territory and China has never renounced the use of force to bring under Chinese control what it considers to be a wayward province."
April 5 - Reuters (Michelle Nichols):
"Russia told Britain at the United Nations Security Council on Thursday that 'you're playing with fire and you'll be sorry' over its accusations that Moscow was to blame for poisoning a former Russian spy and his daughter."
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