Saturday, June 30, 2018
Weekly Commentary:
A Decisive Quarter
by Doug Noland
full column here:
My summary is below:
For second quarter 2018:
China stocks
Shanghai Composite fell 10.1%.
Small cap CSI 500 lost 14.7%,
CSI Midcap 200 fell 12.5%.
China's growth/tech ChiNext index was slammed 15.5%.
Hong Kong's Hang Seng financials index dropped 10.7%
US stocks
S&P500 rose 2.9% during the quarter.
Nasdaq Composite jumped 6.3%
Nasdaq100 up 7.0%
Biotechs (BTK) up 5.5%
Small cap Russell 2000 jumped 7.4%
S&P400 Midcaps rose 3.9%
Retail stocks (XRT) surged 9.6%.
REITs gained 6.8%.
NYSE Financials fell 3.1%.
US large quarterly gains included:
Twitter (50.5%),
AMD (49.2%),
Under Armour (46.9%),
Trip Advisor (36.2%),
Chipotle (33.5%),
Netflix (32.5%),
Tesla (28.9%), and
Facebook (21.6%)
New York Arca Oil index
surged 14.3%.
Chesapeake Energy gained 73.5%,
Ensco gained 65.4%,
Oasis Petroleum gained 60.1%,
Diamond Offshore Drilling gained 42.3% and
Hess gained 32.1%.
U.S. Treasury bonds:
Ten-year yields began the quarter at 2.73%,
jumped to 3.13% on May 17th,
before reversing back down to 2.78% on May 29th
- before ending the quarter at 2.86%.
Commodities:
WTI crude rose 14.2%,
NYMEX gasoline rose 8.0%.
Gold fell 5.5%,
Silver fell 1.5%
Platinum fell 8.5%.
Copper fell 1.3%.
Wheat rose 0.3%
Corn fell 9.7%.
Soybeans fell 17.8%.
For the week
ending June 29, 2018:
STOCKS:
S&P500 declined 1.3% (up 1.7% year-to-date)
Dow Industrials fell 1.3% (down 1.8%)
Dow Utilities jumped 2.2% (down 1.8%)
Dow Transports fell 4.0% (down 2.5%)
S&P 400 Midcaps dropped 1.9% (up 2.7%)
Small cap Russell 2000 sank 2.5% (up 7.0%)
Nasdaq100 lost 2.2% (up 10.1%)
Biotechs dropped 3.5% (up 12.5%).
With gold bullion down $16,
the HUI gold stock index
declined 1.4%
(down 9.3%)
U.K.'s FTSE slipped 0.6% (down 0.7% year-to-date).
Japan's Nikkei 225 declined 0.9% (down 2.0%)
France's CAC40 fell 1.2% (up 0.2%).
German DAX sank 2.2% (down 4.7%).
Spain's IBEX 35 fell 1.7% (down 4.2%).
Italy's FTSE MIB declined 1.2% (down 1.0%)
Brazil's Bovespa rallied 3.0% (down 4.8%)
Mexico's Bolsa recovered 2.0% (down 3.4%).
South Korea's Kospi fell 1.3% (down 5.7%).
India’s Sensex slipped 0.7% (up 4.0%).
China’s Shanghai dropped 1.5% (down 13.9%).
Turkey's Istanbul National 100 increased 0.7% (down 16.3%).
Russia's MICEX gained 2.1% (up 8.8%).
BONDS & MORTGAGES:
US Ten-year Treasury yields fell four bps to 2.86%
(up 45bps).
Long bond yields dropped five bps to 2.99%
(up 25bps).
Benchmark Fannie Mae MBS yields declined four bps to 3.60%
(up 57bps).
Freddie Mac 30-year fixed mortgage rates
slipped two bps to 4.55%
(up 67bps y-o-y).
Fifteen-year rates were unchanged at 4.04%
(up 87bps).
Five-year hybrid ARM rates
gained four bps to 3.87%
(up 70bps)
Jumbo mortgage 30-yr fixed rates
down a basis point to 4.60%
(up 59bps).
M2 (narrow) "money" supply jumped $19.8bn last week
to a record $14.118 TN.
M2 gained $605bn, or 4.5%, over the past year.
Currency Watch:
The U.S. dollar index was little changed at 94.512
(up 2.6% y-t-d).
Commodities Watch:
Goldman Sachs Commodities Index jumped 2.1% (up 8.8% y-t-d).
Spot Gold fell 1.3% to $1,253 (down 3.8%).
Silver fell 2.3% to $16.16 (down 5.7%).
Crude surged $5.67 to $74.25 (up 23%).
Gasoline rose 3.8% (up 20%)
Natural Gas slipped 0.9% (down 1%)
Copper dropped 2.8% (down 10%)
Wheat slipped 0.6% (up 17%)
Corn fell 1.8% (up 6%).
Market Dislocation Watch:
June 26 - CNBC (Jeff Cox):
"They may have to start passing out neck braces on trading floors if the White House's contradictions on trade policies continue much longer. Investors are getting whiplash from watching the back-and-forth happening among Trump administration officials who can't seem to agree on a trade policy. Monday's action featured a series of mixed messages about President Donald Trump's latest trade-related threat, resulting in volatile market action and confusion and frustration in the financial markets. 'I don't think the people in the White House have an ideal path for the way this is going to go. They're trying lots of different things,' said Rob Lutts, chief investment officer and president of Cabot Money Management. 'I actually believe they're making this up as they go along.'"
Trump Administration Watch:
June 25 - Wall Street Journal (Bob Davis):
"Bitter fights over trade within the Trump administration again broke into the open, driving wild swings in the stock market as the White House's top trade adviser clashed with the Treasury secretary over restrictions on foreign investment. For weeks, the administration has been planning a two-pronged effort to block Chinese companies from obtaining advanced U.S. technology. The U.S. would block Chinese companies from investing in U.S. technology companies, while restricting U.S. technology exports to China. Beijing has reacted strongly to the escalating tensions, with President Xi Jinping vowing to 'punch back' against the U.S. trade measures."
June 25 - CNBC (Javier E. David):
"President Donald Trump issued a stark warning to the United States' trading partners on Sunday, calling on global economies to end all protectionist barriers or face a new round of retaliatory measures. As fears mount over a trade war between the world's largest economy and major trading partners like China and the European Union, Trump renewed his call for 'fair trade' that reduced barriers to entry. On Twitter, the president insisted that 'all countries' with protectionist measures must remove those barriers, or be met with 'reciprocity' by the U.S."
June 26 - Bloomberg:
"China and the European Union vowed to oppose trade protectionism in an apparent rebuke to the U.S., saying unilateral actions risked pushing the world into a recession. Vice Premier Liu He -- President Xi Jinping's top economic adviser -- said China and the EU had agreed to defend the multilateral trading system, following talks Monday in Beijing. The comments… come as both sides prepare to face off against President Donald Trump's tariff threats. 'Unilateralism is on the rise and trade tensions have appeared in major economies,' Liu said. 'China and the EU firmly oppose trade unilateralism and protectionism and think these actions may bring recession and turbulence to the global economy.'"
June 26 - Reuters (Rajesh Kumar Singh):
"From global manufacturers such as Harley-Davidson Inc to small tech startups, companies are scrambling to rework supply chains built for an era of stable, open trade policy that is now under threat. As U.S. President Donald Trump pushes to upend the status quo of global trade, companies that initially took a wait-and-see stance are starting to take action to shield their businesses from shifting trade policy. On Monday, U.S. motorcycle maker Harley warned of higher costs because of retaliatory EU tariffs, and said it would shift production of bikes destined for the European Union out of the United States to factories it has built in India, Brazil and Thailand."
June 27 - Reuters (David Shepardson):
"Two major auto trade groups… warned the Trump administration that imposing up to 25% tariffs on imported vehicles would cost hundreds of thousands of auto jobs, dramatically hike prices on vehicles and threaten industry spending on self-driving cars. A coalition representing major foreign automakers including Toyota Motor Corp, Volkswagen AG, BMW AG, and Hyundai Motor Co, said the tariffs would harm automakers and U.S. consumers."
June 26 - Wall Street Journal (Ian Talley):
"The U.S. threatened to slap sanctions on countries that don't cut oil imports from Iran to 'zero' by Nov. 4, part of the Trump administration's push to further isolate Tehran both politically and economically… Buyers of Iranian crude had expected the U.S. would allow them time to reduce their oil imports over a much longer period, by issuing sanctions waivers for nations that made significant efforts to cut their purchases. That expectation was partly based on previous comments from top Trump officials, as well as the Obama administration's earlier effort to wean the world off Iranian oil over several years. But the senior State Department official said on Tuesday that President Donald Trump's administration doesn't plan to issue any waivers and would instead be asking other Middle Eastern crude exporters over the coming days to ensure oil supply to global markets."
U.S. Bubble Watch:
June 26 - Reuters (David Morgan):
"Republican plans to make President Donald Trump's tax cuts permanent for individuals and many private businesses would worsen an already rising U.S. debt burden, congressional researchers said… In its annual long-term budget outlook, the nonpartisan Congressional Budget Office (CBO) said the debt will equal 78% of U.S. gross domestic product by the end of the year and a record 152% by 2048, a trajectory that it said would hurt the economy, increase the likelihood of a fiscal crisis and make it harder for the government to respond. Trump's $1.5 trillion tax cuts and a $1.3 trillion spending bill enacted by Congress in March have already helped push CBO's debt projections higher through 2041…"
June 27 - Reuters (Kane Wu): "The rapidly deteriorating trade and investment relationship between Washington and Beijing is sending a further chill through Chinese dealmakers who have already seen the number of Chinese acquisitions of American assets take a big hit. So far this year, Chinese companies have spent just $1.6 billion on U.S. assets, down almost 80% from the year-earlier period… By contrast the amount China has spent on European assets has risen 39% from last year to $45.1 billion."
June 27 - Reuters (Adam Jourdan):
"As Beijing and Washington veer towards a full-blown trade war, American brands in China face what may be an even bigger threat: local rivals armed with innovative products and the Chinese government's blessing.
American household names like Apple, Starbucks and Procter & Gamble's Pampers are seeing their dominance challenged, a potential threat to the hundreds of billions of dollars U.S. firms make in China. According to an analysis of data from Bain and Kantar, local brands snatched almost three-quarters of China's 639 billion yuan ($97bn) market for fast-moving consumer goods - a category that includes items like soft drinks and shampoo - last year, up from two-thirds in 2013."
June 22 - Wall Street Journal (Heather Gillers, Anne Tergesen and Leslie Scism): "Americans are reaching retirement age in worse financial shape than the prior generation, for the first time since Harry Truman was president.
This cohort should be on the cusp of their golden years. Instead, their median incomes including Social Security and retirement-fund receipts haven't risen in years, after having increased steadily from the 1950s. They have high average debt, are often paying off children's educations and are dipping into savings to care for aging parents. Their paltry 401(k) retirement funds will bring in a median income of under $8,000 a year for a household of two. In total, more than 40% of households headed by people aged 55 through 70 lack sufficient resources to maintain their living standard in retirement… That is around 15 million American households. Things are likely to get worse for a broader swath of America."
China Watch:
June 27 - Bloomberg:
"A leaked report from a Chinese government-backed think tank has warned of a potential 'financial panic' in the world's second-largest economy, a sign that some members of the nation's policy elite are growing concerned as market turbulence and trade tensions increase. Bond defaults, liquidity shortages and the recent plunge in financial markets pose particular dangers at a time of rising U.S. interest rates and a trade spat with Washington, according to a study by the National Institution for Finance & Development… The think tank warned that leveraged purchases of shares have reached levels last seen in 2015 -- when a market crash erased $5 trillion of value. 'We think China is currently very likely to see a financial panic,' NIFD said in the study, which appeared briefly on the Internet on Monday, before being removed. 'Preventing its occurrence and spread should be the top priority for our financial and macroeconomic regulators over the next few years.'"
June 26 - Reuters (Evelyn Cheng):
"Chinese President Xi Jinping said last week that he will not hesitate to retaliate against the U.S. on trade, The Wall Street Journal reported Monday, citing sources.
'In the West you have the notion that if somebody hits you on the left cheek, you turn the other cheek,' Xi said in the report... 'In our culture, we punch back.'"
June 26 - Bloomberg:
"In recent weeks, prominent academics have begun to question if China's slowing, trade-dependent economy can withstand a sustained attack from Trump, which has already started to weigh on stock prices. The sentiments are being expressed in carefully worded essays circulated on China's heavily censored internet and… repeated in the halls of government offices, too. The essays have raised concerns that the ruling Communist Party underestimated the depth of anti-China sentiment in Washington and risked a premature showdown with the world's sole superpower… 'It seems like Chinese officials were mentally unprepared for the approaching trade friction or trade war,' Gao Shanwen, chief economist for Beijing-based Essence Securities Co… wrote in one widely circulated commentary. 'Anti-China views are becoming the consensus among the U.S. public and its ruling party.'"
June 26 - Bloomberg (Sofia Horta e Costa):
"A deepening sense of unease is rippling through China's financial markets.
The benchmark Shanghai stock index has tumbled 20% in just five months to enter a bear market. The yuan is heading for its longest losing streak in four years in Hong Kong. Corporate defaults are mounting. There are homegrown reasons for the concern: the nation's deleveraging campaign is reducing the amount of liquidity available -- threatening growth in the world's second-largest economy. Then throw in an unpredictable trade war with the U.S., and investors are facing a long list of reasons to sell. Official efforts to calm nerves, from cutting reserve ratios to publishing upbeat editorials in financial newspapers, have had little effect so far."
June 27 - Financial Times (Don Weinland and Roger Blitz):
"Blame for the sell-off of China's stock market has been levelled at the Sino-US trade war but Beijing's problems have been evident for some time and run much deeper. Long before US president Donald Trump imposed billions of dollars in tariffs against China, a steady drip of credit tightening and middling Chinese economic data underpinned the selling… China's key stock market index, the Shanghai Composite, has now tumbled into bear market territory for the first time in more than two years… The last major sell-off at the start of 2016 was driven by a clutch of bad economic indicators. This time analysts say a multitude of concerns for China - from a mounting trade war with the US and failing overseas projects, to tighter credit and a pullback from institutional investors - has spurred the abrupt cooling of investor sentiment for shares."
June 24 - New York Times (Keith Bradsher):
"China gave its economy a shot in the arm on Sunday amid signs of a slowdown, as it freed up more than $100 billion for banks to use to help small businesses and heavily indebted companies. The money is intended to help Beijing dance a complicated two-step. China is trying to curb the country's addiction to borrowing, which over the past decade has mired vast areas of the economy in debt. But that effort is showing signs of hurting growth. China is hoping it can help spur growth by steering loans where they are needed and blocking them where they are not."
June 25 - Bloomberg (Christopher Balding):
"Real estate is the driver of the Chinese economy. By some estimates, it accounts (directly and indirectly) for as much as 30% of gross domestic product. Keeping housing prices buoyant and development robust is thus an overriding imperative for China - one that is distorting policymaking and worsening its other economic imbalances. Despite reforms in recent years, there's little question that Chinese real estate is in bubble territory. From June 2015 through the end of last year, the 100 City Price Index, published by SouFun Holdings Ltd., rose 31% to nearly $202 per square foot. That's 38% higher than the median price per square foot in the U.S… Not surprisingly, this has put homeownership out of reach for most Chinese. Worried about these prices, and about growing indebtedness among developers, China's State Council has hatched a plan to encourage rentals."
June 25 - Reuters (Michael Martina, Kevin Yao and Yawen Chen):
"Beijing has begun downplaying Made in China 2025, the state-backed industrial policy that has provoked alarm in the West and is core to Washington's complaints about the country's technological ambitions, diplomatic and Chinese state media sources said. With a full-blown trade war looming amid U.S. President Donald Trump's threats to impose tariffs on up to $450 billion in Chinese imports, his administration has fixed on Beijing's signature effort to deploy state support to close a technology gap in 10 key sectors. Beijing is increasingly mindful that its rollout of the ambitious plan has triggered U.S. backlash."
Global Bubble Watch:
June 27 - Bloomberg (Cormac Mullen and Eric Lam):
"That whooshing sound you hear is the draining of $1.4 trillion worth of global liquidity. Quantitative tightening, or the unwinding of central banks' extraordinary stimulus, has been the primary driver of asset-class performance this year, Bank of America Merrill Lynch analysts say. The march higher in U.S. interest rates and tighter financial conditions mean securities that did well during quantitative easing, such as corporate bonds and emerging-market debt, are now underperforming, while 'QE losers' have become stars. The year marks a shift in a tide of global liquidity that helped push up asset prices, according to Merrill Lynch's analysis. Securities purchases from the Fed, European Central Bank and Bank of Japan are just $125 billion year-to-date, well below the $1.5 trillion run-rate of 2017, they estimate. That suggests markets are missing an injection of some $1.38 trillion thanks to policy makers changing tack."
Europe Watch:
June 23 - Reuters (Valentina Za, Marine Pennetier and Mathieu Rosemain):
"Italy on Saturday said 'arrogant' France risked becoming its 'No.1 enemy' on migration issues, a day before European leaders convene in Brussels for a hastily arranged meeting on the divisive topic. In answer to comments by French President Emmanuel Macron, who said migration flows toward Europe had reduced compared with a few years ago, Italy's Deputy Prime Minister Luigi Di Maio said Macron's words showed he was out of touch. 'Italy indeed faces a migration emergency and it's partly because France keeps pushing back people at the border. Macron risks making his country Italy's No.1 enemy on this emergency,' Di Maio wrote…"
June 23 - Reuters (Gabriela Baczynska and Robert-Jan Bartunek):
"German Chancellor Angela Merkel said… she would seek direct deals with separate European Union states on migration, conceding the bloc had failed to find a joint solution to the issue threatening her government. Since Mediterranean arrivals spiked in 2015, when more than a million refugees and migrants reached the bloc, EU leaders have been at odds over how to handle them. The feud has weakened their unity and undermined Europe's Schengen free-travel area."
June 23 - Reuters (Mathieu Rosemain):
"The European Union will respond to any U.S. move to raise tariffs on cars made in the bloc, a senior European Commission official said, the latest comments in an escalating trade row… 'If they decide to raise their import tariffs, we'll have no choice, again, but to react,' EU Commission Vice President Jyrki Katainen told French newspaper Le Monde. 'We don't want to fight (over trade) in public via Twitter. We should end the escalation,' he said…"
Fixed Income Bubble Watch:
June 27 - Wall Street Journal (Daniel Kruger):
"Intensifying trade tensions have U.S. investors parsing China's possible responses to the latest Trump administration salvos, concerned about everything from escalating tariffs to currency devaluation. One thing nervous investors shouldn't worry about, some analysts say, is China dumping its $1.18 trillion of U.S. government bonds. The nightmare scenario is that China, which owns about 8% of the U.S. government's public debt, could drive down bond prices by unloading even part of its hoard of Treasurys. Such a move would likely send interest rates paid by the U.S. sharply higher. Because Treasurys are a benchmark that help set rates for mortgages, business loans and consumer debt, such a move could drive up borrowing costs throughout the economy. A decision by China to sell Treasurys could be the economic equivalent of 'mutually assured destruction,' said Mark McCormick, head of currency strategy at TD Securities."
Geopolitical Watch:
June 26 - Reuters (Phil Stewart and Ben Blanchard):
"China is committed to peace but cannot give up 'even one inch' of territory that the country's ancestors left behind, Chinese President Xi Jinping told U.S. Defense Secretary Jim Mattis… during his first visit to Beijing. Xi's remarks underscored deep-rooted areas of tension in Sino-U.S. ties, particularly over what the Pentagon views as China's militarization of the South China Sea, a vital transit route for world trade. But irritants in U.S.-China relations extend to other sensitive areas, including fears of a full-blown trade war between the world economic heavyweights. Beijing is also deeply suspicious of U.S. intentions toward self-governing and democratic Taiwan, which is armed by the United States. China views the island as a sacred part of its territory."
June 24 - Financial Times (Edward White):
"Taiwan has been hit by a jump in serious cyber attacks from China during the past two years in the latest sign that Beijing is only increasing its pressure as the US reaffirms its support for the self-ruled island. Taiwan's government departments are bombarded by tens of millions of hacking attempts each month but the number of 'high-impact incidents' - which include targeted attacks aimed at stealing sensitive government data and personal information - tripled from four in 2015 to 12 in 2017…"
June 26 - Reuters (Pavel Polityuk):
"Hackers from Russia are infecting Ukrainian companies with malicious software to create 'back doors' for a large, coordinated attack, Ukraine's cyber police chief told Reuters… The hackers are targeting companies, including banks and energy infrastructure firms, in a roll out that suggests they are preparing to activate the malware in one massive strike… Ukrainian police are working with foreign authorities to identify the hackers, Demedyuk added."
June 25 - CNBC (Nyshka Chandran):
"The South China Sea and Indian Ocean have been the principal theaters for Beijing's naval ambitions in Asia. The Pacific Ocean and Mekong River, each rife with strategic advantages, could soon be next. For the world's second-largest economy, maritime expansion is a major means of achieving superpower stature and cementing its military, political and economic influence in Asia. Nowhere has that been more evident than the disputed South China Sea, where Beijing has reportedly installed anti-ship cruise missiles and surface-to-air missile systems on several outposts… Going forward, experts predict, Chinese President Xi Jinping's government will ramp up its presence in neighboring waterways as it pursues regional supremacy."
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