Saturday, June 23, 2018
Weekly Commentary:
Performance Chase
by Doug Noland
full column here:
My summary is below:
"The Nasdaq Composite, Nasdaq 100, small cap Russell 2000,
Value Line Arithmetic and the NYSE Arca Biotechnology
were among U.S. indices trading to all-time highs
during Wednesday's session."
"The Shanghai Composite sank 4.4% this week to two-year lows."
For the week ending June 22, 2018:
STOCKS:
S&P500 declined 0.9% (up 3.0% year to date)
Dow Industrials fell 2.0% (down 0.6%)
Dow Utilities jumped 2.6% (down 4.0%)
Dow Transports dropped 2.7% (up 1.5%)
S&P 400 Midcaps were little changed (up 4.7%)
Small cap Russell 2000 added 0.1% (up 9.8%)
Nasdaq100 declined 0.8% (up 12.5%)
Biotechs slipped 0.2% (up 16.7%).
With bullion down $10,
the HUI gold stock index
declined 0.5%
(down 8.0%)
U.K.'s FTSE gained 0.6% (down 0.1% year to date).
Japan's Nikkei 225 fell 1.5% (down 1.1%).
France's CAC40 dropped 2.1% (up 1.4%)
German DAX sank 3.3% (down 2.6%)
Spain's IBEX 35 declined 0.6% (down 2.5%)
Italy's FTSE MIB fell 1.4% (up 0.2%)
Brazil's Bovespa slipped 0.2% (down 7.5%)
Mexico's Bolsa declined 0.4% (down 5.3%)
South Korea's Kospi dropped 1.9% (down 4.5%)
India’s Sensex added 0.2% (up 4.8%)
China’s Shanghai sank 4.4% (down 12.6%)
Turkey's Istanbul National 100 recovered 1.4% (down 16.9%).
Russia's MICEX gained 0.5% (up 6.6%).
BONDS & MORTGAGES
Ten-year Treasury yields fell three bps to 2.90% (up 49bps).
Long bond yields slipped a basis point to 3.04% (up 30bps).
Benchmark Fannie Mae MBS yields
dipped one basis point to 3.64% (up 65bps).
Freddie Mac 30-year fixed mortgage rates
fell five bps to 4.57% (up 67bps y-o-y).
Fifteen-year rates
declined three bps to 4.04% (up 87bps).
Five-year hybrid ARM rates
were unchanged at 3.83% (up 69bps)
Jumbo mortgage 30-yr fixed rates
down five bps to 4.61% (up 61bps).
M2 (narrow) "money" supply
gained $580bn, or 4.3%,
over the past year.
Currency Watch:
The U.S. dollar index slipped 0.3% to 94.52 (up 2.6% y-t-d)
Commodities Watch:
Goldman Sachs Commodities Index gained 1.7% (up 6.6% y-t-d).
Spot Gold declined 0.8% to $1,269 (down 2.6%).
Silver increased 0.4% to $16.539 (down 3.5%).
Crude surged $3.52 to $68.58 (up 14%).
Gasoline rallied 2.3% (up 15%)
Natural Gas fell 2.5% (unchanged).
Copper sank 3.0% (down 4%).
Wheat fell 1.8% (up 18%).
Corn declined 1.2% (up 8%).
Market Dislocation Watch:
June 21 - Wall Street Journal (Jon Sindreu):
"As a full blown trade war between the U.S. and China looms, investors are already picking winners: Shares of small companies that are insulated from overseas turmoil. The S&P Small Cap 600 is on a tear, up 12.4% since the start of the year to a fresh record high, compared with a 3.5% gain for the S&P 500. The Russell 2000, another index of small U.S. companies, has gained 11.2%. A rising dollar and concerns about weaker global growth are also driving investors into the relative safety of smaller companies, as measured by market capitalization, that tend to earn most of their money at home."
"As a full blown trade war between the U.S. and China looms, investors are already picking winners: Shares of small companies that are insulated from overseas turmoil. The S&P Small Cap 600 is on a tear, up 12.4% since the start of the year to a fresh record high, compared with a 3.5% gain for the S&P 500. The Russell 2000, another index of small U.S. companies, has gained 11.2%. A rising dollar and concerns about weaker global growth are also driving investors into the relative safety of smaller companies, as measured by market capitalization, that tend to earn most of their money at home."
Trump Administration Watch:
June 19 - Wall Street Journal (Chelsey Dulaney):
"The Trump administration's threat to slap tariffs on another $200 billion in Chinese goods has reignited fears that Beijing will turn to a powerful but risky weapon:
a depreciation of its currency. The latest salvo in the brewing trade conflict between the world's first and second-largest economies would raise the amount of Chinese goods taxed by the U.S. to $450 billion. That would mean tariffs on nearly all of the $505 billion in goods that China exported to the U.S. last year. Analysts say the tariff escalation could eventually lead China to depreciate its currency, the yuan-a maneuver that would help to offset the economic impact of the tariffs but also threatens to worsen trade tensions and rattle global markets."
"The Trump administration's threat to slap tariffs on another $200 billion in Chinese goods has reignited fears that Beijing will turn to a powerful but risky weapon:
a depreciation of its currency. The latest salvo in the brewing trade conflict between the world's first and second-largest economies would raise the amount of Chinese goods taxed by the U.S. to $450 billion. That would mean tariffs on nearly all of the $505 billion in goods that China exported to the U.S. last year. Analysts say the tariff escalation could eventually lead China to depreciate its currency, the yuan-a maneuver that would help to offset the economic impact of the tariffs but also threatens to worsen trade tensions and rattle global markets."
June 19 - Wall Street Journal (Bob Davis and Lingling Wei): "President Donald Trump's escalation of trade threats against China reflects his belief that Washington increasingly has the upper hand in the dispute, administration officials said, adding he is prepared to withstand pressure from U.S. businesses that might suffer from the conflict. Mr. Trump caught Chinese officials off guard with his announcement Monday evening about potential new tariffs. Should China retaliate against U.S. trade policies, the White House said, the U.S. would apply tariffs of 10% on as much as $400 billion in Chinese imports."
June 19 - New York Times (Ana Swanson):
"President Trump's threat to impose tariffs on almost every Chinese product that comes into the United States intensified the possibility of a damaging trade war, sending stock markets tumbling… The Trump administration remained unmoved by those concerns, with a top trade adviser, Peter Navarro, insisting that China has more to lose from a trade fight than the United States. He also declared that Mr. Trump would not allow Beijing to simply buy its way out of an economic dispute by promising to import more American goods. 'President Trump has given China every chance to change its aggressive behavior,' Mr. Navarro said… 'China does have much more to lose than we do.' In threatening tariffs on as much as $450 billion worth of Chinese goods, the administration is betting that Beijing will blink first. It's a risky gamble by a White House that appears ready to forgo diplomatic negotiations in favor of punishing tariffs that could pinch consumers and companies on both sides of the Pacific."
"President Trump's threat to impose tariffs on almost every Chinese product that comes into the United States intensified the possibility of a damaging trade war, sending stock markets tumbling… The Trump administration remained unmoved by those concerns, with a top trade adviser, Peter Navarro, insisting that China has more to lose from a trade fight than the United States. He also declared that Mr. Trump would not allow Beijing to simply buy its way out of an economic dispute by promising to import more American goods. 'President Trump has given China every chance to change its aggressive behavior,' Mr. Navarro said… 'China does have much more to lose than we do.' In threatening tariffs on as much as $450 billion worth of Chinese goods, the administration is betting that Beijing will blink first. It's a risky gamble by a White House that appears ready to forgo diplomatic negotiations in favor of punishing tariffs that could pinch consumers and companies on both sides of the Pacific."
June 19 - Bloomberg:
"China doesn't import enough from the U.S. to match Donald Trump's tariffs dollar for dollar, but President Xi Jinping can still squeeze American companies in other ways in retaliation. American businesses from Apple Inc. and Walmart Inc. to Boeing Co. and General Motors Co. all operate in China and are keen to expand. That hands Xi room to impose penalties such as customs delays, tax audits and increased regulatory scrutiny if Trump delivers on his threat of bigger duties on Chinese trade. U.S. shares slumped Tuesday as part of a broad sell-off in global markets in response to Trump's threat."
"China doesn't import enough from the U.S. to match Donald Trump's tariffs dollar for dollar, but President Xi Jinping can still squeeze American companies in other ways in retaliation. American businesses from Apple Inc. and Walmart Inc. to Boeing Co. and General Motors Co. all operate in China and are keen to expand. That hands Xi room to impose penalties such as customs delays, tax audits and increased regulatory scrutiny if Trump delivers on his threat of bigger duties on Chinese trade. U.S. shares slumped Tuesday as part of a broad sell-off in global markets in response to Trump's threat."
June 20 - CNBC (Philip Blenkinsop):
"The European Union will begin charging import duties of 25% on a range of U.S. products on Friday, in response to U.S tariffs imposed on EU steel and aluminum early this month, the European Commission said…
"The European Union will begin charging import duties of 25% on a range of U.S. products on Friday, in response to U.S tariffs imposed on EU steel and aluminum early this month, the European Commission said…
June 16 - CNBC (Andrea Hopkins):
"Seventy percent of Canadians say they will start looking for ways to avoid buying U.S.-made goods in a threat to ratchet up a trade dispute between Prime Minister Justin Trudeau and U.S. President Donald Trump, an Ipsos Poll showed…"
"Seventy percent of Canadians say they will start looking for ways to avoid buying U.S.-made goods in a threat to ratchet up a trade dispute between Prime Minister Justin Trudeau and U.S. President Donald Trump, an Ipsos Poll showed…"
Federal Reserve Watch:
June 20 - Wall Street Journal (Nick Timiraos):
"Federal Reserve Chairman Jerome Powell said sturdy U.S. economic growth has built a strong case for continuing to gradually lift interest rates, and he warned against policy complacency now that the central bank has nearly achieved its employment and price stability goals. 'Today, with the economy strong and risks to the outlook balanced, the case for continued gradual increases in the federal-funds rate remains strong and broadly supported among' participants on the Fed's rate-setting committee, Mr. Powell said…"
"Federal Reserve Chairman Jerome Powell said sturdy U.S. economic growth has built a strong case for continuing to gradually lift interest rates, and he warned against policy complacency now that the central bank has nearly achieved its employment and price stability goals. 'Today, with the economy strong and risks to the outlook balanced, the case for continued gradual increases in the federal-funds rate remains strong and broadly supported among' participants on the Fed's rate-setting committee, Mr. Powell said…"
June 19 - Wall Street Journal (Daniel Kruger): "The Federal Reserve's move to trim the size of its bond holdings has exacerbated recent declines in prices for risky assets around the world, investors say. The central bank has scaled back its mountain of Treasury and mortgage debt by $111.9 billion since the policy was announced in September. More than half the reduction has taken place since the end of March, and the process of withdrawing money from the economy is scheduled to reach $50 billion a month in October."
U.S. Bubble Watch:
June 21 - Reuters (Se Young Lee and Yawen Chen):
"Chinese acquisitions and investments in the U.S. fell 92% to just $1.8 billion in the first five months of this year, consulting and research firm Rhodium Group [reported]… Counting divestitures, net Chinese deal flow to the U.S. during that time was a negative $7.8 billion, the report said. The decline follows a sharp drop in the second half of last year as pressure from both Beijing and the Trump administration curbed a recent surge in cross-border investment. Completed Chinese deals in the U.S. hit a record $46 billion in 2016, and dropped to $29 billion in 2017…"
"Chinese acquisitions and investments in the U.S. fell 92% to just $1.8 billion in the first five months of this year, consulting and research firm Rhodium Group [reported]… Counting divestitures, net Chinese deal flow to the U.S. during that time was a negative $7.8 billion, the report said. The decline follows a sharp drop in the second half of last year as pressure from both Beijing and the Trump administration curbed a recent surge in cross-border investment. Completed Chinese deals in the U.S. hit a record $46 billion in 2016, and dropped to $29 billion in 2017…"
June 19 - Bloomberg (Riley Griffin):
"Despite recent job gains, rising wages and falling unemployment, almost a quarter of Americans said they still have no emergency savings, according to an annual Bankrate.com report… The number of Americans who said they have no money readily available in either a checking, savings or money market account fell to a seven-year low of 23%, down from 24% last year… The percentage of Americans with some savings, but not enough to cover three months' worth of expenses, rose to 22% from 20% last year… And the percentage with enough to cover expenses for three to five months ticked up to 18%, from 17% last year. Still, only 29% of Americans have enough emergency savings to cover at least six months' of expenses. This is down from 31% in 2017."
"Despite recent job gains, rising wages and falling unemployment, almost a quarter of Americans said they still have no emergency savings, according to an annual Bankrate.com report… The number of Americans who said they have no money readily available in either a checking, savings or money market account fell to a seven-year low of 23%, down from 24% last year… The percentage of Americans with some savings, but not enough to cover three months' worth of expenses, rose to 22% from 20% last year… And the percentage with enough to cover expenses for three to five months ticked up to 18%, from 17% last year. Still, only 29% of Americans have enough emergency savings to cover at least six months' of expenses. This is down from 31% in 2017."
June 19 - Reuters (Karen Pierog):
"U.S. state and local government tax revenue climbed to $350.2 billion in the first quarter of 2018, a rise of 5.8% compared with the same time period in 2017, the U.S. Census Bureau reported…"
"U.S. state and local government tax revenue climbed to $350.2 billion in the first quarter of 2018, a rise of 5.8% compared with the same time period in 2017, the U.S. Census Bureau reported…"
June 21 - Reuters (Alex Tanzi):
"Housing affordability dropped this quarter to the lowest since late 2008, according to… the National Association of Realtors. In May, the median price of a previously owned homes rose to a record $264,800… A separate report from ATTOM Data Solutions shows average wage earners would need to spend 31.2% of income to buy a median-priced home this quarter -- above the historic average of 29.6%. Home price appreciation, coupled with rising mortgage rates, have pushed three-quarters of average wage earners out of the market with property costs rising faster than wages in 64% of regions surveyed, ATTOM reported."
"Housing affordability dropped this quarter to the lowest since late 2008, according to… the National Association of Realtors. In May, the median price of a previously owned homes rose to a record $264,800… A separate report from ATTOM Data Solutions shows average wage earners would need to spend 31.2% of income to buy a median-priced home this quarter -- above the historic average of 29.6%. Home price appreciation, coupled with rising mortgage rates, have pushed three-quarters of average wage earners out of the market with property costs rising faster than wages in 64% of regions surveyed, ATTOM reported."
June 21 - Wall Street Journal (Janet Adamy and Paul Overberg):
"The surge of retiring baby boomers is reshaping the U.S. into a country with fewer workers to support the elderly-a shift that will add to strains on retirement programs such as Social Security and sharpen the national debate on the role of immigration… For most of the past few decades, the ratio of retiree-aged adults to those of working age barely budged. In 1980, there were 19 U.S. adults age 65 and over for every 100 Americans between 18 and 64… That number-called the old-age dependency ratio-barely edged up over the next 30 years, rising to just 21 retiree-aged Americans for every 100 of working age in 2010. But there has been a rapid shift since then. By 2017, there were 25 Americans 65 and older for every 100 people in their working years… The ratio would climb to 35 retiree-age Americans for every 100 of working age by 2030…"
"The surge of retiring baby boomers is reshaping the U.S. into a country with fewer workers to support the elderly-a shift that will add to strains on retirement programs such as Social Security and sharpen the national debate on the role of immigration… For most of the past few decades, the ratio of retiree-aged adults to those of working age barely budged. In 1980, there were 19 U.S. adults age 65 and over for every 100 Americans between 18 and 64… That number-called the old-age dependency ratio-barely edged up over the next 30 years, rising to just 21 retiree-aged Americans for every 100 of working age in 2010. But there has been a rapid shift since then. By 2017, there were 25 Americans 65 and older for every 100 people in their working years… The ratio would climb to 35 retiree-age Americans for every 100 of working age by 2030…"
China Watch:
June 19 - Bloomberg:
"China's benchmark equity gauge tumbled to a two-year low and the yuan weakened as a worsening trade dispute with the U.S. spurred panic selling. Bonds gained. The Shanghai Composite Index plummeted almost 5% in intraday trading before paring losses, while a gauge of technology shares sank the most in two years. China's currency fell to a five-month low against the dollar and the 10 year-yield on government debt dropped two bps."
"China's benchmark equity gauge tumbled to a two-year low and the yuan weakened as a worsening trade dispute with the U.S. spurred panic selling. Bonds gained. The Shanghai Composite Index plummeted almost 5% in intraday trading before paring losses, while a gauge of technology shares sank the most in two years. China's currency fell to a five-month low against the dollar and the 10 year-yield on government debt dropped two bps."
June 20 - Bloomberg (Sandy Hendry and Jeffrey Hernandez):
"The debt load of China's 100 biggest companies is escalating despite the government's de-leveraging campaign, with seven property developers having liabilities exceeding 10 times equity… While stronger revenues are boosting Chinese companies' ability to repay debt, there's no de-leveraging in sight, Natixis SA concluded after analyzing 2017 data from 3,000 non-financial companies. The liabilities to equity ratio climbed strongly for the biggest 100 companies by assets."
"The debt load of China's 100 biggest companies is escalating despite the government's de-leveraging campaign, with seven property developers having liabilities exceeding 10 times equity… While stronger revenues are boosting Chinese companies' ability to repay debt, there's no de-leveraging in sight, Natixis SA concluded after analyzing 2017 data from 3,000 non-financial companies. The liabilities to equity ratio climbed strongly for the biggest 100 companies by assets."
Emerging Markets Watch:
June 18 - Bloomberg (Yumi Teso, Garfield Reynolds and Adam Haigh):
"Overseas funds are pulling out of six major Asian emerging equity markets at a pace unseen since the global financial crisis of 2008 -- withdrawing $19 billion from India, Indonesia, the Philippines, South Korea, Taiwan and Thailand so far this year…"
"Overseas funds are pulling out of six major Asian emerging equity markets at a pace unseen since the global financial crisis of 2008 -- withdrawing $19 billion from India, Indonesia, the Philippines, South Korea, Taiwan and Thailand so far this year…"
June 18 - Bloomberg (Walter Brandimarte):
"Brazil's growth forecasts fell for a seventh consecutive week as economists assessed the impact of a nationwide trucker strike, growing emerging market turbulence and domestic uncertainty ahead of the October presidential election. Economists in a weekly central bank survey lowered their 2018 estimate for gross domestic product to 1.76%, the lowest level for the year since President Michel Temer took office in May 2016 and fueled hopes of faster economic recovery."
"Brazil's growth forecasts fell for a seventh consecutive week as economists assessed the impact of a nationwide trucker strike, growing emerging market turbulence and domestic uncertainty ahead of the October presidential election. Economists in a weekly central bank survey lowered their 2018 estimate for gross domestic product to 1.76%, the lowest level for the year since President Michel Temer took office in May 2016 and fueled hopes of faster economic recovery."
Global Bubble Watch:
June 20 - Financial Times (Michael Mackenzie):
"The global value of corporate bonds outstanding has risen 2.7 times since 2007 to $11.7tn, doubling as a share of gross domestic product alongside a deterioration in credit ratings, noted McKinsey & Co. 'The average quality of blue-chip borrowers has declined, growth in speculative-grade corporate bonds has been particularly strong and bond issuance by companies in China and other developing countries - often denominated in foreign currency - has soared,' said the consultancy."
"The global value of corporate bonds outstanding has risen 2.7 times since 2007 to $11.7tn, doubling as a share of gross domestic product alongside a deterioration in credit ratings, noted McKinsey & Co. 'The average quality of blue-chip borrowers has declined, growth in speculative-grade corporate bonds has been particularly strong and bond issuance by companies in China and other developing countries - often denominated in foreign currency - has soared,' said the consultancy."
June 20 - Financial Times (Robin Wigglesworth):
"The yield curve ... has become flat and inverted … ahead of most economic downturns in most major countries since the second world war.
This is why some analysts and investors are worryingly eyeing the US yield curve, where the difference between the two and 10-year Treasury yields has narrowed to just 37 bps. That is the slimmest spread since September 2007. But interestingly, and worryingly,
the global yield curve has now already inverted."
"The yield curve ... has become flat and inverted … ahead of most economic downturns in most major countries since the second world war.
This is why some analysts and investors are worryingly eyeing the US yield curve, where the difference between the two and 10-year Treasury yields has narrowed to just 37 bps. That is the slimmest spread since September 2007. But interestingly, and worryingly,
the global yield curve has now already inverted."
June 16 - Bloomberg (Randall Woods):
"China remained the largest foreign owner of Treasuries in April ($1.18 trillion)
... The second-biggest foreign holder, Japan, is at $1.03 trillion, the lowest since 2011". ."
"China remained the largest foreign owner of Treasuries in April ($1.18 trillion)
... The second-biggest foreign holder, Japan, is at $1.03 trillion, the lowest since 2011". ."
Europe Watch:
June 17 - Wall Street Journal (Eric Sylvers):
"A youth revolt is upending Italian politics, and it could be a harbinger of things to come. ... Almost 30% of Italians age 20 to 34 aren't working, studying or in a training program…, more than in any other European Union country. Greece is second at 29%, while Spain's rate is 21%."
"A youth revolt is upending Italian politics, and it could be a harbinger of things to come. ... Almost 30% of Italians age 20 to 34 aren't working, studying or in a training program…, more than in any other European Union country. Greece is second at 29%, while Spain's rate is 21%."
Geopolitical Watch:
June 19 - Reuters:
"A sophisticated hacking campaign launched from computers in China burrowed deeply into satellite operators, defense contractors and telecommunications companies in the United States and southeast Asia, security researchers at Symantec Corp said… Symantec said the effort appeared to be driven by national espionage goals, such as the interception of military and civilian communications."
"A sophisticated hacking campaign launched from computers in China burrowed deeply into satellite operators, defense contractors and telecommunications companies in the United States and southeast Asia, security researchers at Symantec Corp said… Symantec said the effort appeared to be driven by national espionage goals, such as the interception of military and civilian communications."
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