Saturday, July 28, 2018
Weekly Commentary:
Latent Fragilities
by Doug Noland
full column here:
My summary follows:
The week saw declines of
16.7% in Facebook,
21.4% in Twitter,
9.5% in Electronic Arts and
8.2% for Intel.
For the week
ending July 28:
S&P500 added 0.6% (up 5.4% y-t-d)
Dow Industrials rose 1.6% (up 3.0%).
Dow Utilities increased 0.6% (down 0.3%).
Dow Transports rose 2.0% (up 3.2%)
S&P 400 Midcaps fell 1.2% (up 3.9%)
Small cap Russell 2000 dropped 2.0% (up 8.3%)
Nasdaq100 declined 0.7% (up 14.1%)
Biotechs lost 1.5% (up 19.3%).
With bullion down $9,
the HUI gold stock index
sank 3.7% (down 13.9%).
Dow Industrials rose 1.6% (up 3.0%).
Dow Utilities increased 0.6% (down 0.3%).
Dow Transports rose 2.0% (up 3.2%)
S&P 400 Midcaps fell 1.2% (up 3.9%)
Small cap Russell 2000 dropped 2.0% (up 8.3%)
Nasdaq100 declined 0.7% (up 14.1%)
Biotechs lost 1.5% (up 19.3%).
With bullion down $9,
the HUI gold stock index
sank 3.7% (down 13.9%).
U.K.'s FTSE added 0.3% (up 0.3%).
Japan's Nikkei 225 was little changed (down 0.2% y-t-d).
France's CAC40 rallied 2.1% (up 3.7%)
German DAX jumped 2.4% (down 0.4%).
Spain's IBEX 35 rose 1.5% (down 1.8%).
Italy's FTSE MIB increased 0.7% (up 0.5%).
Brazil's Bovespa gained 1.6% (up 4.5%)
Mexico's Bolsa advanced 1.5% (up 0.6%)
South Korea's Kospi added 0.3% (down 7.0%)
India’s Sensex rose 2.3% (up 9.3%)
China’s Shanghai rallied 1.6% (down 13.1%)
Turkey's Istanbul National 100 gained 1.6% (down 17.1%).
Russia's MICEX rose 2.0% (up 8.7%).
US BONDS:
US Ten-year Treasury yields gained six bps to 2.96% (up 55bps).
Long bond yields rose six bps to 3.08% (up 34bps).
Benchmark Fannie Mae MBS yields gained seven bps to 3.68% (up 68bps).
Freddie Mac 30-year fixed mortgage rates gained two bps to 4.54% (up 62bps y-o-y). Fifteen-year rates added two bps to 4.02% (up 82bps).
Five-year hybrid ARM rates were unchanged at 3.87% (up 69bps).
Jumbo mortgage 30-yr fixed rates up four bps to 4.58% (up 47bps).
Over the past year, Fed Credit contracted or 4.2%. .
M2 "Narrow money" gained 3.8%, over the past year.
Currency Watch:
The U.S. dollar index added 0.2% to 94.669 (up 2.8% y-t-d).
Commodities Watch:
Goldman Sachs Commodities Index rallied 1.5% (up 5.0% y-t-d).
Spot Gold declined 0.7% to $1,223 (down 6.1%).
Silver slipped 0.4% to $15.493 (down 9.6%).
Crude recovered 43 cents to $68.69 (up 14%).
Gasoline rallied 4.5% (up 20%),
Natural Gas gained 0.9% (down 5.8%).
Copper jumped 1.7% (down 15%).
Wheat rose 2.8% (up 24%).
Corn gained 2.0% (up 7%).
Trump Administration Watch:
July 25 - Wall Street Journal (Valentina Pop, Vivian Salama and Bob Davis): "President Donald Trump and European Commission President Jean-Claude Juncker turned down the heat on a trade dispute between two of the world's largest economic powers, suggesting… they would hold off on further tariffs while they talk through their differences. Speaking in a joint news conference…, the two leaders agreed to begin discussions on eliminating the tariffs and subsidies that hamper trade across the Atlantic, and to resolve the steel and aluminum tariffs the Trump administration had imposed this year as well as the retaliatory tariffs the European Union imposed in response."
July 25 - Reuters:
"U.S. President Donald Trump accused China… of targeting American farmers in a vicious way and using them as leverage to get concessions from him on trade. 'China is targeting our farmers, who they know I love & respect, as a way of getting me to continue allowing them to take advantage of the U.S. They are being vicious in what will be their failed attempt. We were being nice - until now!' Trump wrote…"
"U.S. President Donald Trump accused China… of targeting American farmers in a vicious way and using them as leverage to get concessions from him on trade. 'China is targeting our farmers, who they know I love & respect, as a way of getting me to continue allowing them to take advantage of the U.S. They are being vicious in what will be their failed attempt. We were being nice - until now!' Trump wrote…"
July 21 - Wall Street Journal (Jeffrey T. Lewis):
"U.S. Treasury Secretary Steven Mnuchin said he 'wouldn't minimize' the possibility that the U.S. will impose tariffs on all $500 billion worth of goods that the U.S. imports from China, amplifying a threat President Donald Trump made… earlier in the week… Mr. Mnuchin stressed that the administration's goal is to achieve a 'more balanced' trade relationship with China, by getting the Asian country to open its economy and permitting U.S. exports there to increase."
"U.S. Treasury Secretary Steven Mnuchin said he 'wouldn't minimize' the possibility that the U.S. will impose tariffs on all $500 billion worth of goods that the U.S. imports from China, amplifying a threat President Donald Trump made… earlier in the week… Mr. Mnuchin stressed that the administration's goal is to achieve a 'more balanced' trade relationship with China, by getting the Asian country to open its economy and permitting U.S. exports there to increase."
July 21 - Wall Street Journal (Jamie Tarabay):
"The goal of China's influence operations around the world is to replace the United States as the world's leading superpower, the CIA's Michael Collins said Friday. Speaking at the Aspen Security Forum during a session on the rise of China, Collins, the deputy assistant director of the CIA's East Asia Mission Center, said Chinese President Xi Jinping and his regime are waging a 'cold war' against the US. 'By their own terms and what Xi enunciates I would argue by definition what they're waging against us is fundamentally a cold war, a cold war not like we saw during the Cold War, but a cold war by definition. A country that exploits all avenues of power licit and illicit, public and private, economic and military, to undermine the standing of your rival relative to your own standing without resorting to conflict. The Chinese do not want conflict,' Collins said."
"The goal of China's influence operations around the world is to replace the United States as the world's leading superpower, the CIA's Michael Collins said Friday. Speaking at the Aspen Security Forum during a session on the rise of China, Collins, the deputy assistant director of the CIA's East Asia Mission Center, said Chinese President Xi Jinping and his regime are waging a 'cold war' against the US. 'By their own terms and what Xi enunciates I would argue by definition what they're waging against us is fundamentally a cold war, a cold war not like we saw during the Cold War, but a cold war by definition. A country that exploits all avenues of power licit and illicit, public and private, economic and military, to undermine the standing of your rival relative to your own standing without resorting to conflict. The Chinese do not want conflict,' Collins said."
U.S. Bubble Watch:
July 26 - New York Times (Jim Tankersley):
"The amount of corporate taxes collected by the federal government has plunged to historically low levels in the first six months of the year, pushing up the federal budget deficit much faster than economists had predicted. The reason is President Trump's tax cuts. The law introduced a standard corporate rate of 21%, down from a high of 35%, and allowed companies to immediately deduct many new investments…The Office of Management and Budget said this month that it had revised its forecasts from earlier this year to account for nearly $1 trillion of additional debt over the next decade - on average, almost $100 billion more a year in deficits."
"The amount of corporate taxes collected by the federal government has plunged to historically low levels in the first six months of the year, pushing up the federal budget deficit much faster than economists had predicted. The reason is President Trump's tax cuts. The law introduced a standard corporate rate of 21%, down from a high of 35%, and allowed companies to immediately deduct many new investments…The Office of Management and Budget said this month that it had revised its forecasts from earlier this year to account for nearly $1 trillion of additional debt over the next decade - on average, almost $100 billion more a year in deficits."
July 24 - Bloomberg (Shobhana Chandra):
"Sales of previously owned U.S. homes unexpectedly fell in June, indicating a shortage of affordable listings and rising prices continue to limit demand… Contract closings fell 0.6% m/m to a 5.38m annual rate (est. 5.44m), a third straight decline, after a revised 5.41m (prev. 5.43m). Median sales price increased 5.2% y/y to a record $276,900. Inventory of available properties rose 0.5% y/y to 1.95m for first increase since mid-2015."
"Sales of previously owned U.S. homes unexpectedly fell in June, indicating a shortage of affordable listings and rising prices continue to limit demand… Contract closings fell 0.6% m/m to a 5.38m annual rate (est. 5.44m), a third straight decline, after a revised 5.41m (prev. 5.43m). Median sales price increased 5.2% y/y to a record $276,900. Inventory of available properties rose 0.5% y/y to 1.95m for first increase since mid-2015."
July 24 - Wall Street Journal (Esther Fung):
"Chinese real-estate investors, facing pressure from Beijing, are reversing a yearslong buying spree in the U.S. where they often paid record prices for marquee properties like New York's Waldorf Astoria hotel. Chinese insurers, conglomerates, and other investors have turned net sellers of U.S. commercial real estate for the first time in a decade. They have spent tens of billions of dollars to acquire hotels, office buildings, and vast swaths of empty land to build residential towers. But Chinese investors sold $1.29 billion worth of U.S. commercial real estate in the second quarter, while purchasing only $126.2 million of property, according to… Real Capital Analytics. This marked the first time that these investors were net sellers for a quarter since 2008."
"Chinese real-estate investors, facing pressure from Beijing, are reversing a yearslong buying spree in the U.S. where they often paid record prices for marquee properties like New York's Waldorf Astoria hotel. Chinese insurers, conglomerates, and other investors have turned net sellers of U.S. commercial real estate for the first time in a decade. They have spent tens of billions of dollars to acquire hotels, office buildings, and vast swaths of empty land to build residential towers. But Chinese investors sold $1.29 billion worth of U.S. commercial real estate in the second quarter, while purchasing only $126.2 million of property, according to… Real Capital Analytics. This marked the first time that these investors were net sellers for a quarter since 2008."
July 24 - CNBC (Diana Olick):
"Southern California home sales hit the brakes in June, falling to the lowest reading for the month in four years. Sales of both new and existing houses and condominiums dropped 11.8% year over year, as prices shot up to a record high, according to CoreLogic. The report covers Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties. Sales fell 1.1% compared with May… The weakness was especially apparent in sales of newly built homes, which were 47% below the June average. Part of that is that builders are putting up fewer homes, so there is simply less to sell."
"Southern California home sales hit the brakes in June, falling to the lowest reading for the month in four years. Sales of both new and existing houses and condominiums dropped 11.8% year over year, as prices shot up to a record high, according to CoreLogic. The report covers Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties. Sales fell 1.1% compared with May… The weakness was especially apparent in sales of newly built homes, which were 47% below the June average. Part of that is that builders are putting up fewer homes, so there is simply less to sell."
China Watch:
July 22 - Financial Times (Gabriel Wildau and Yizhen Jia):
"A wave of defaults is sweeping across China's Rmb1.3tn ($190bn) peer-to-peer lending industry, causing investors to withdraw funds and platforms to collapse, the latest casualties of Beijing's broader crackdown on debt and financial risk. About 150 online lending platforms have suffered 'problems' since the beginning of June this year, compared with 217 such cases in all of 2017, according to Online Lending House, a research group… The group defines 'problems' as investors being unable to withdraw money, police investigating a platform, or owners running away. In the wealthy city of Hangzhou, local officials converted two sporting stadiums into makeshift welcome centres where various district-level petition bureaus - the traditional channel for Chinese citizens to file miscellaneous grievances - could receive complaints from P2P investors."
"A wave of defaults is sweeping across China's Rmb1.3tn ($190bn) peer-to-peer lending industry, causing investors to withdraw funds and platforms to collapse, the latest casualties of Beijing's broader crackdown on debt and financial risk. About 150 online lending platforms have suffered 'problems' since the beginning of June this year, compared with 217 such cases in all of 2017, according to Online Lending House, a research group… The group defines 'problems' as investors being unable to withdraw money, police investigating a platform, or owners running away. In the wealthy city of Hangzhou, local officials converted two sporting stadiums into makeshift welcome centres where various district-level petition bureaus - the traditional channel for Chinese citizens to file miscellaneous grievances - could receive complaints from P2P investors."
July 24 - Bloomberg:
"China's record-pacing defaults this year have exposed more than just which borrowers took on too much debt. It's also putting a spotlight on the nation's sluggish credit raters. Any investor relying on domestic Chinese rating firms would have been ill served with Wintime Energy Co., which had not a single rating downgrade before it this month descended into China's biggest default of 2018. It's one of several examples where debt raters have failed to telegraph deteriorating credit quality this year. The problem: until the past few years, China didn't let any company default… Now, without clear guidelines on which firms still have implicit guarantees, ratings companies are operating in a tricky new environment."
"China's record-pacing defaults this year have exposed more than just which borrowers took on too much debt. It's also putting a spotlight on the nation's sluggish credit raters. Any investor relying on domestic Chinese rating firms would have been ill served with Wintime Energy Co., which had not a single rating downgrade before it this month descended into China's biggest default of 2018. It's one of several examples where debt raters have failed to telegraph deteriorating credit quality this year. The problem: until the past few years, China didn't let any company default… Now, without clear guidelines on which firms still have implicit guarantees, ratings companies are operating in a tricky new environment."
Emerging Markets Watch:
July 24 - Bloomberg (Andrew Rosati):
"Venezuela's inflation will skyrocket to 1 million percent by the end of the year as the government continues to print money to cover a growing budget hole, the International Monetary Fund predicted… The crisis is comparable to that of Germany in 1923 or Zimbabwe in the late 2000s, said Alejandro Werner, head of the IMF's Western Hemisphere department… 'The collapse in economic activity, hyperinflation, and increasing deterioration in the provision of public goods as well as shortages of food at subsidized prices have resulted in large migration flows, which will lead to intensifying spillover effects on neighboring countries,' Werner wrote…"
"Venezuela's inflation will skyrocket to 1 million percent by the end of the year as the government continues to print money to cover a growing budget hole, the International Monetary Fund predicted… The crisis is comparable to that of Germany in 1923 or Zimbabwe in the late 2000s, said Alejandro Werner, head of the IMF's Western Hemisphere department… 'The collapse in economic activity, hyperinflation, and increasing deterioration in the provision of public goods as well as shortages of food at subsidized prices have resulted in large migration flows, which will lead to intensifying spillover effects on neighboring countries,' Werner wrote…"
Global Bubble Watch:
July 22 - Financial Times (Jennifer Thompson):
"Global assets under management are on track to hit the $80tn mark this year, with China and Latin America the fastest-growing regions for investment managers. Assets were $48.2tn on the eve of the financial crisis having grown at a compound annual rate of 12% in the preceding years, according to Boston Consulting Group. The rate fell to 4% between 2007 and 2016 but is now back at the pre-crisis pace. The main drivers are record net inflows to asset managers amid a bull market for both bonds and equities... The market growing at the fastest rate is China, with assets increasing 22% between 2016 and 2017 to $4.2tn."
"Global assets under management are on track to hit the $80tn mark this year, with China and Latin America the fastest-growing regions for investment managers. Assets were $48.2tn on the eve of the financial crisis having grown at a compound annual rate of 12% in the preceding years, according to Boston Consulting Group. The rate fell to 4% between 2007 and 2016 but is now back at the pre-crisis pace. The main drivers are record net inflows to asset managers amid a bull market for both bonds and equities... The market growing at the fastest rate is China, with assets increasing 22% between 2016 and 2017 to $4.2tn."
Europe Watch:
July 24 - Financial Times (Kate Allen):
"Foreign investors shed record volumes of Italian debt in May as a sharp sell-off hit the country's bond market… Italy's governing coalition is set to bring forward a contentious budget this autumn, which some investors fear could threaten the country's fiscal outlook. Earlier this month the new government said it would not take any further measures to cut its deficit this year and warned of a possible downgrade to growth forecasts. The country's bond yields have settled back from the highs they hit at the peak of the sell-off in late May… Two-year Italian debt is yielding about 0.7%, having been in negative territory until mid-May, while 10-year paper is yielding around 2.7%, up from 1.9% before the sell-off."
"Foreign investors shed record volumes of Italian debt in May as a sharp sell-off hit the country's bond market… Italy's governing coalition is set to bring forward a contentious budget this autumn, which some investors fear could threaten the country's fiscal outlook. Earlier this month the new government said it would not take any further measures to cut its deficit this year and warned of a possible downgrade to growth forecasts. The country's bond yields have settled back from the highs they hit at the peak of the sell-off in late May… Two-year Italian debt is yielding about 0.7%, having been in negative territory until mid-May, while 10-year paper is yielding around 2.7%, up from 1.9% before the sell-off."
Japan Watch:
July 22 - Bloomberg (Masaki Kondo and Chikafumi Hodo):
"A dramatic day for Japan's debt market saw yields surge on media reports of possible changes to the nation's ultra-loose monetary policy, spurring the central bank to offer to buy an unlimited amount of bonds. The yield on 10-year government securities soared as much as six basis points to 0.09%, its biggest increase in almost two years, pulling the yen higher and weighing on stocks. While the yield came down after the purchase offer by the Bank of Japan, it then bounced back to just one basis point below the day's high."
"A dramatic day for Japan's debt market saw yields surge on media reports of possible changes to the nation's ultra-loose monetary policy, spurring the central bank to offer to buy an unlimited amount of bonds. The yield on 10-year government securities soared as much as six basis points to 0.09%, its biggest increase in almost two years, pulling the yen higher and weighing on stocks. While the yield came down after the purchase offer by the Bank of Japan, it then bounced back to just one basis point below the day's high."
Fixed Income Bubble Watch:
July 24 - Financial Times (Alexandra Scaggs):
"Protections for lenders to junk-rated companies have been the weakest on record this year, according to… Moody's, which could hamper recovery rates if a downturn prompts a string of bankruptcies or defaults. The erosion of strength in leveraged-loan covenants, meant to protect lenders' collateral, has been fuelled by rising demand for floating-rate securities such as loans… The vast majority of leveraged loans - roughly 80%, said Moody's - issued in the first quarter were considered to be 'covenant-lite'. These are loans that do not have maintenance covenants requiring borrowers to uphold certain financial standards, such as maximum levels of indebtedness."
"Protections for lenders to junk-rated companies have been the weakest on record this year, according to… Moody's, which could hamper recovery rates if a downturn prompts a string of bankruptcies or defaults. The erosion of strength in leveraged-loan covenants, meant to protect lenders' collateral, has been fuelled by rising demand for floating-rate securities such as loans… The vast majority of leveraged loans - roughly 80%, said Moody's - issued in the first quarter were considered to be 'covenant-lite'. These are loans that do not have maintenance covenants requiring borrowers to uphold certain financial standards, such as maximum levels of indebtedness."
Geopolitical Watch:
July 22 - CNBC (Everett Rosenfeld and Kevin Breuninger): "President Donald Trump threatened his Iranian counterpart in a Sunday night Twitter post: To Iranian President Rouhani: 'NEVER, EVER THREATEN THE UNITED STATES AGAIN OR YOU WILL SUFFER CONSEQUENCES THE LIKES OF WHICH FEW THROUGHOUT HISTORY HAVE EVER SUFFERED BEFORE. WE ARE NO LONGER A COUNTRY THAT WILL STAND FOR YOUR DEMENTED WORDS OF VIOLENCE & DEATH. BE CAUTIOUS!' Trump's tweet followed Iranian President Hassan Rouhani cautioning the American leader on Sunday about pursuing hostile policies against Tehran, saying: 'War with Iran is the mother of all wars.' 'You are not in a position to incite the Iranian nation against Iran's security and interests,' the Iranian leader said, in an apparent reference to reports of efforts by Washington to destabilize Iran's Islamic government."
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