Saturday, January 19, 2019
Weekly Commentary:
Monetary Disorder 2019
by Doug Noland
Full column here:
My summary is below:
CHINA DEBT CONCERNS
There’s a strong consensus
that Beijing has things
under control.
Reality:
China in 2019 faces a ticking
credit time bomb. Bank loans
were up 13.5% over the past year.
and 28% higher over two years,
(which is) a precarious
late-cycle inflation of bank credit.
China’s Consumer Loans
expanded 18.2%
over the past year,
44% in two years,
77% in three years, and
141% in five years !
WORLD DEBT CONCERNS
January 16 – Washington Post (Robert J. Samuelson):
"According to the data from the IIF, emerging-market borrowers face $2 trillion of maturing debt in 2019, with about a quarter of those loans made in dollars. ... To avoid default, borrowers must somehow raise those dollars, either from a new loan, or from other sources.”
January 16 – Barron’s (Reshma Kapadia):
“A record $3.9 trillion of emerging market bonds and syndicated loans comes due through the end of 2020. Most of the redemptions in 2019 will be outside of the financial sector, mainly from large corporate borrowers in China, Turkey, and South Africa. The question will be if they can refinance the debt.”
For the week ending
January 18, 2019:
STOCKS:
S&P500 up 2.9% (up 6.5% year-to-date)
Dow Industrials up 3.0% (up 5.9%)
Dow Utilities down 0.4% (down 0.1%)
Dow Transports up 4.0% (up 9.2%)
S&P 400 Midcaps up 3.0% (up 9.3%)
Small cap Russell 2000 up 2.4% (up 9.9%)
Nasdaq100 up 2.8% (up 7.2%)
Biotechs up 2.9% (up 16.1%).
With gold bullion down $6,
the HUI gold stock index fell 5.4%
(down 6.1%)
U.K.'s FTSE up 0.7%
(up 3.6% y-t-d).
Japan's Nikkei 225 up 1.5%
(up 3.3% y-t-d).
France's CAC40 up 2.0%
(up 3.1% y-t-d)
German DAX up 2.9%
(up 6.1%)
Spain's IBEX 35 up 2.2%
(up 6.2%)
Italy's FTSE MIB up 2.2%
(up 7.6%)
Brazil's Bovespa up 2.6%
(up 9.3%)
Mexico's Bolsa up 1.6%
(up 6.2%)
South Korea's Kospi up 2.3%
(up 4.1%)
India's Sensex up 1.0%
(up 0.9%)
China's Shanghai up 1.7%
(up 4.1%)
Turkey's Istanbul National 100 up 7.4%
(up 7.9%)
Russia's MICEX up 1.2%
(up 4.9%).
BONDS:
Ten-year US Treasury bond yields
gained eight bps to 2.79% (up 10bps).
Thirty-year US Treasury bond yields
rose six bps to 3.10% (up 8bps).
Benchmark Fannie Mae MBS yields
jumped nine bps to 3.57% (up 7bps).
Freddie Mac 30-year fixed mortgage rates
were unchanged
near a nine-month low 4.45%
(up 41bps y-o-y).
Fifteen-year rates
slipped a basis point to 3.88% (up 39bps).
Five-year hybrid ARM rates
rose four bps to 3.87% (up 41bps).
Jumbo mortgage 30-yr fixed rates
up one basis point to 4.42% (up 14bps).
Federal Reserve Credit
over the past year
contracted 8.8%.
M2 (narrow) "money" supply
gained 4.9% over the past year.
Currency Watch:
The U.S. dollar index recovered 0.7% to 96.364
(up 0.2% y-t-d).
Commodities Watch:
Goldman Sachs Commodities Index gained 2.6%
(up 10.4% y-t-d).
Spot Gold slipped $5 to $1,282 (down 0.1%).
Silver fell 1.6% to $15.399 (down 0.9%).
Crude jumped $2.21 to $53.80 (up 19%).
Gasoline rose 3.7% (up 12%)
Natural Gas surged 12.4% (up 18%)
Copper gained 2.1% (up 3%)
Wheat slipped 0.3% (up 3%)
Corn increased 0.9% (up 2%).
Market Dislocation Watch:
January 18 – Bloomberg (James Crombie and Gowri Gurumurthy):
“January is typically a good time for junk-rated companies to tap the bond market. But through Thursday, total speculative-grade U.S. bond issuance was just shy of $4 billion, less than half of the $11.2 billion that had been sold by this time last year, and the $8.4 billion during the same period in 2017.
Trump Administration Watch:
January 17 – Wall Street Journal (Ruth Simon):
“The longest government shutdown in modern U.S. history is choking the economic lifeblood of many entrepreneurs. The Small Business Administration has stopped approving routine small-business loans that the agency backs to ensure entrepreneurs have access to funds, halting their plans for expansion and repairs and forcing some owners to consider costlier sources of cash.”
January 17 – Reuters (David Shepardson):
“U.S. President Donald Trump is likely to move ahead with tariffs on imported vehicles, a move that could prompt the European Union to agree to a new trade deal, said Senate Finance Committee Chairman Charles Grassley…”
January 16 – CNBC (Kate Fazzini):
“The U.S. Justice Department will pursue a criminal case against Chinese tech giant Huawei for alleged ... theft of trade secrets related to a robotic device called ‘Tappy’ made by T-Mobile, which was used in testing smart phones, according to the report.”
U.S. Bubble Watch:
January 14 – CNBC (Jeff Cox):
“After years of U.S. companies taking advantage of low interest rates to pile up cheap debt ... Corporate debt outstanding ended 2018 at just over $9 trillion, a 64% increase over a decade’s time … Jeffrey Gundlach, founder of DoubleLine Capital, said ... the debt load is about to become a bigger problem. ‘We are talking about the creation of an ocean of debt,’ Gundlach told Barron’s…, during which he noted that the Fed is engaging in ‘quantitative tightening’ that will create ‘a problem for the stock market.’”
January 13 – Wall Street Journal (Akane Otani):
“The U.S.’s biggest public companies are warning that their earnings may not be as strong as they hoped this year ... Firms in the S&P 500 were projected back in September to report fourth-quarter earnings growth of 17% from the year earlier. But dimmer expectations for global growth and disappointing holiday sales have forced many companies to slash their forecasts, pushing the estimated earnings-growth rate for the quarter closer to 11%, according to FactSet. The drop-off in estimates is the steepest since 2017.”
January 18 – Wall Street Journal (Peter Loftus):
“Drugmakers have sharply boosted prices of some older, low-cost prescription medicines amid supply shortages and recalls—in some cases, by threefold and more. At least three sellers of a widely used blood-pressure medication, valsartan, have raised prices since a series of safety-related recalls of the drug by other manufacturers began in the summer of 2018.”
January 11 – CNBC (Diana Olick):
“The government shutdown hasn't completely stopped the flow of stunningly bad housing data. Sales of newly built homes fell 18% in December compared with December of 2017, according to John Burns Real Estate Consulting … Sales were also down a steep 19% annually in November, according to JBRC's analysts. The firm counts 373 market ratings by local builders overseeing more than 3,500 new home communities, estimated to be 16% of U.S. new home sales. JBRC's figures correlate closely with government readings.”
January 13 – Reuters (Douglas Busvine):
“Chinese foreign direct investment (FDI) into North America and Europe fell by 73% to a six-year low last year as the United States tightened scrutiny of deals and Chinese restrictions on outbound investment bit, law firm Baker & McKenzie said. ... After taking divestitures into account, net Chinese FDI flows into the United States actually turned negative. Investment into the United States fell by 83% but, by contrast, grew by +80% into Canada.”
China Watch:
January 15 – Bloomberg:
“China’s credit growth exceeded expectations in December ... Aggregate financing was 1.59 trillion ($235 billion) in December, the People’s Bank of China said on Tuesday. That compares with an estimated 1.3 trillion yuan in a Bloomberg survey.”
January 15 – South China Morning Post (Amanda Lee):
“China’s banks extended a record 16.17 trillion yuan (US $2.4 trillion) in net new loans last year… to prop up the slowing economy ... well above the previous record of 13.53 trillion yuan in 2017.”
January 13 – Reuters (Yawen Chen and Martin Quin Pollard):
“China’s exports unexpectedly fell the most in two years in December, while imports also contracted, pointing to further weakness in the world’s second-largest economy in 2019 and deteriorating global demand. … (but) China’s politically-sensitive surplus with the U.S. widened by 17.2% to $323.32 billion last year, the highest on record going back to 2006.”
January 13 – Reuters (Yilei Sun and Brenda Goh):
“The world’s biggest auto market (China) contracted for the first time in more than two decades, the country’s top auto industry association said… China car sales fell 13% in December, the sixth straight month of declines, bringing annual sales to 28.1 million, down 2.8% from a year earlier… This was against a 3% annual growth forecast set at the start of 2018.”
Emerging Markets Watch:
January 16 – Financial Times (Jonathan Wheatley):
The IIF’s data show total global debt — owed by households, governments, non-financial corporates and the financial sector — at $244trillion, or 318% of gross domestic product at the end of September, down from a peak of 320% two years earlier. ... Of particular concern is the non-financial corporate sector in emerging markets (EMs), where debts are equal to 93.6% of GDP. That is more than among the same group in developed markets, at 91.1% of GDP.”
Global Bubble Watch:
January 14 – Bloomberg (William Horobin):
“The Organization for Economic Co-Operation and Development's Composite Leading Indicator is the latest sign of a synchronized slowdown in global growth, adding to recession warnings sparked by industrial figures in Germany last week, and slumping trade figures for China… The indicator, which is designed to anticipate turning points six-to-nine months ahead, has been ticking down since the start of 2018 and fell again in November. The OECD singled out the U.S. and Germany, where it said ‘tentative signs’ of easing momentum are now confirmed.”
Brexit Watch:
January 14 – Financial Times (Philip Stafford):
“As investors wait for the UK’s vote on the Brexit withdrawal agreement, banks and brokers have already accepted that, from March 29, Europe will be split into two distinct capital markets. For most of them, the priority has been to ensure that EU-based clients have access to crucial market plumbing in London. "
Fixed-Income Bubble Watch:
January 14 – Wall Street Journal (Juliet Chung and Nicole Friedman):
“PG&E said that it intends to seek chapter 11 bankruptcy protection by the end of the month due to more than $30 billion it faces related to its role in sparking deadly California wildfires in 2017 and 2018.
January 12 – Bloomberg (Hailey Waller and James Ludden):
“Jeffrey Gundlach ... highlighted the dangers especially posed by the U.S. corporate bond market. Prolific sales of junk bonds and significant growth in investment grade corporate debt, coupled with the Federal Reserve weaning the market off quantitative easing, have resulted in what the DoubleLine Capital LP boss called ‘an ocean of debt.’ ... countering President Donald Trump’s claim that he’s presiding over the strongest economy ever. The growth is debt-based, he said … ‘We have floated incremental debt when we should be doing the opposite if the economy is so strong.’”
Geopolitical Watch:
January 17 – Wall Street Journal (Benoit Faucon):
“China’s state-run energy giant is making a new approach to strike a $3 billion Iranian oil field, seeking to take advantage of waivers allowed under U.S. sanctions even as two European nations have ended crude purchases ... China’s decision to pursue lucrative deals with Tehran, and deepen its presence there, contrasts with a retreat by Italy and Greece stemming from fear that financial transactions and physical trade with Iran have become too difficult.”
January 16 – CNBC (Kate Fazzini):
“Iranian hackers have congregated since at least 2002 in online forums to share tips ... that have given birth to some of the most significant global cyber security incidents, including devastating attacks on Saudi Aramco, attacks against the public-facing websites of large banks and espionage campaigns on a wide range of Western targets, according to new research by cyber security intelligence firm Recorded Future.”
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