Saturday, February 2, 2019
Weekly Commentary:
No Mystery
by Doug Noland
full column here:
My summary follows:
For the week ending
February 1, 2019:
STOCKS:
S&P500 gained 1.6% (up 8.0% y-t-d)
Dow Industrials increased 1.3% (up 7.4%)
Dow Utilities rose 2.4% (up 3.1%)
Dow Transports gained 2.0% (up 10.4%)
S&P 400 Midcaps (up 10.7%)
and the Small cap Russell 2000 (up 11.4%)
both increased 1.3%.
Nasdaq100 advanced 1.3% (up 8.6%)
Biotechs increased 0.8% (up 16.3%).
With bullion up $14.50,
the HUI gold stock index surged 6.7%
(up 5.4%).
U.K.'s FTSE equities index rallied 3.1% (up 4.3% y-t-d).
Japan's Nikkei 225 little changed (up 3.9% y-t-d)
France's CAC40 rose 1.9% (up 6.1%)
German DAX declined 0.9% (up 5.9%).
Spain's IBEX 35 fell 1.8% (up 5.6%). I
taly's FTSE MIB lost 1.2% (up 6.8%).
Brazil's Bovespa added 0.2% (up 11.3%)
Mexico's Bolsa increased 0.2% (up 5.0%).
South Korea's Kospi gained 1.2% (up 8.0%).
India's Sensex rose 1.2% (up 1.1%).
China's Shanghai increased 0.6% (up 5.0%).
Turkey's Istanbul National 100 rose 1.1% (up 12.8%).
Russia's MICEX added 0.9% (up 6.9%).
US BONDS & MORTGAGES:
Ten-year US Treasury yields
declined seven bps to 2.69% (unchanged).
Thirty-year US Treasury yields
fell four bps to 3.03% (up 1bp).
Benchmark Fannie Mae MBS yields
dropped nine bps to 3.47% (down 3bps).
Freddie Mac 30-year fixed mortgage rates
added a basis point to 4.46% (up 24bps y-o-y).
Fifteen-year rates increased one basis point to 3.89% (up 21bps).
Five-year hybrid ARM rates gained six bps to 3.96% (up 43bps).
Jumbo mortgage 30-yr fixed rates down six bps to 4.42% (up 7bps).
Over the past year,
Fed Credit contracted 8.8%.
M2 (narrow) "money" supply
gained 4.9%, over the past year.
Currency Watch:
The U.S. dollar index slipped 0.2% to 95.579
(down 0.6% y-t-d).
Commodities Watch:
Goldman Sachs Commodities Index added 0.9% (up 10.4% y-t-d).
Spot Gold gained 1.1% to $1,318 (up 2.7%).
Silver rose 1.5% to $15.931 (up 2.5%).
Crude gained $1.57 to $55.26 (up 22%).
Gasoline jumped 3.4% (up 10%),
Natural Gas dropped 14.0% (down 7%).
Copper rose 1.6% (up 5%).
Wheat increased 0.8% (up 4%).
Corn declined 0.5% (up 1%).
Trump Administration Watch:
January 31 – Financial Times (James Politi):
“Robert Lighthizer, the US trade representative, said his talks with Liu He, China’s vice-premier, had finally centred on US demands for structural reforms by Beijing — such as ending the forced transfer of technology from US companies or reining in the use of industrial subsidies. But Mr Lighthizer failed to report a specific concession made by Beijing, and said he and Steven Mnuchin, US Treasury secretary, were considering a trip to Beijing after the Chinese new year celebration in early February to resume negotiations.”
January 27 – Wall Street Journal (Peter Nicholas and Kristina Peterson):
“President Trump said Sunday he doesn’t believe congressional negotiators will strike a deal over border-wall funding that he could accept and vowed that he would build a wall anyway, using emergency powers if need be. Mr. Trump… assessed the chances of whether a newly formed group of 17 lawmakers could craft a deal before the next government-funding lapse, in less than three weeks: ‘I personally think it’s less than 50-50, but you have a lot of very good people on that board.’”
“President Trump said Sunday he doesn’t believe congressional negotiators will strike a deal over border-wall funding that he could accept and vowed that he would build a wall anyway, using emergency powers if need be. Mr. Trump… assessed the chances of whether a newly formed group of 17 lawmakers could craft a deal before the next government-funding lapse, in less than three weeks: ‘I personally think it’s less than 50-50, but you have a lot of very good people on that board.’”
U.S. Bubble Watch:
January 29 – Reuters (Lucia Mutikani):
“U.S consumer confidence fell to a 1-1/2 year-low in January as a partial shutdown of the government and financial markets turmoil left households a bit nervous about the economy’s prospects. The drop in confidence reported by the Conference Board… mirrors another survey earlier this month showing sentiment tumbling to its lowest level since President Donald Trump was elected more than two years ago, strengthening analysts expectations that the economy was losing momentum.”
“U.S consumer confidence fell to a 1-1/2 year-low in January as a partial shutdown of the government and financial markets turmoil left households a bit nervous about the economy’s prospects. The drop in confidence reported by the Conference Board… mirrors another survey earlier this month showing sentiment tumbling to its lowest level since President Donald Trump was elected more than two years ago, strengthening analysts expectations that the economy was losing momentum.”
January 28 – Bloomberg (Brendan Murray):
“The U.S. Treasury Department ... expects to issue $365 billion in net marketable debt from January through March, up $8 billion from its estimate in October… The Treasury sees an end-of-March cash balance of $320 billion, unchanged from its forecast three months ago. In its first estimate of the April-June period this year, the department estimated borrowing of $83 billion, $11 billion more than in the same period last year and the most for that quarter since 2012.”
“The U.S. Treasury Department ... expects to issue $365 billion in net marketable debt from January through March, up $8 billion from its estimate in October… The Treasury sees an end-of-March cash balance of $320 billion, unchanged from its forecast three months ago. In its first estimate of the April-June period this year, the department estimated borrowing of $83 billion, $11 billion more than in the same period last year and the most for that quarter since 2012.”
January 30 – Bloomberg (Liz Capo McCormick and Saleha Mohsin):
“The U.S. Treasury Department announced plans to issue another record-breaking amount of debt, giving President Donald Trump’s re-election opponents more ammunition as they question whether his tax cuts will pay for themselves. The federal budget shortfall is set to swell, driven by tax cuts, spending increases and an aging American population. As a result, the Treasury is raising its long-term debt issuance at its quarterly refunding auctions to $84 billion…, $1 billion more than three months ago. Such elevated levels of borrowing will finance the widening deficit, with Wall Street strategists projecting new debt issuance will top $1 trillion for a second straight year.”
“The U.S. Treasury Department announced plans to issue another record-breaking amount of debt, giving President Donald Trump’s re-election opponents more ammunition as they question whether his tax cuts will pay for themselves. The federal budget shortfall is set to swell, driven by tax cuts, spending increases and an aging American population. As a result, the Treasury is raising its long-term debt issuance at its quarterly refunding auctions to $84 billion…, $1 billion more than three months ago. Such elevated levels of borrowing will finance the widening deficit, with Wall Street strategists projecting new debt issuance will top $1 trillion for a second straight year.”
January 29 – CNBC (Diana Olick):
“Home values increased 5.2% annually in November, slowing from 5.3% in October, according to the… S&P CoreLogic Case-Shiller National Home Price Index. The 10-city composite annual increase also fell to 4.3%, down from 4.7% in the previous month. The 20-city composite saw a 4.7% annual gain, down from 5.0% in October. Home price gains have been slowing since last spring, as higher mortgage interest rates cut sharply into affordability. The gains are slowing the most in large metropolitan markets, where home prices had overheated over the past three years.”
“Home values increased 5.2% annually in November, slowing from 5.3% in October, according to the… S&P CoreLogic Case-Shiller National Home Price Index. The 10-city composite annual increase also fell to 4.3%, down from 4.7% in the previous month. The 20-city composite saw a 4.7% annual gain, down from 5.0% in October. Home price gains have been slowing since last spring, as higher mortgage interest rates cut sharply into affordability. The gains are slowing the most in large metropolitan markets, where home prices had overheated over the past three years.”
January 27 – Financial Times (Richard Armstrong):
“Fourth-quarter results from US regional banks
— which finance many of America’s small and mid-sized businesses — revealed a robust domestic economy, despite worries about unsteady markets, global trade talks and slowdowns in China and Europe. At the 10 largest regional banks, or ‘super-regionals,’ which have combined assets of more than $2tn, business and credit-card loan portfolios grew 6%, in aggregate, accelerating from earlier in the year and surprising industry analysts. ‘There’s certainly a lot of chatter about the government shutdown, Brexit, trade talk, all of that . . . But so far, on Main Street, we don’t see that,’ said Kelly King, chief executive of BB&T…”
“Fourth-quarter results from US regional banks
— which finance many of America’s small and mid-sized businesses — revealed a robust domestic economy, despite worries about unsteady markets, global trade talks and slowdowns in China and Europe. At the 10 largest regional banks, or ‘super-regionals,’ which have combined assets of more than $2tn, business and credit-card loan portfolios grew 6%, in aggregate, accelerating from earlier in the year and surprising industry analysts. ‘There’s certainly a lot of chatter about the government shutdown, Brexit, trade talk, all of that . . . But so far, on Main Street, we don’t see that,’ said Kelly King, chief executive of BB&T…”
January 29 – Reuters:
“Power provider PG&E filed for voluntary Chapter 11 bankruptcy protection on Tuesday, succumbing to liabilities stemming from wildfires in Northern California in 2017 and 2018… The owner of the biggest U.S. power utility has filed a motion seeking court approval for a $5.5 billion debtor-in-possession financing… PG&E listed assets of $71.39 billion and liabilities of $51.69 billion, in a court document…”
“Power provider PG&E filed for voluntary Chapter 11 bankruptcy protection on Tuesday, succumbing to liabilities stemming from wildfires in Northern California in 2017 and 2018… The owner of the biggest U.S. power utility has filed a motion seeking court approval for a $5.5 billion debtor-in-possession financing… PG&E listed assets of $71.39 billion and liabilities of $51.69 billion, in a court document…”
January 28 – Financial Times (Robert Armstrong):
“In the years after the financial crisis, small businesses that needed credit were stuck. New capital rules discouraged big banks from touching any borrower perceived as risky. The bond and loan markets, where larger businesses flocked for inexpensive debt capital, have little use for sums under $100,000 — which is what most small enterprises need. A handful of non-bank lenders, payment and e-commerce companies have leapt into the gap. In an environment of easy money and economic expansion, small business lending operations at OnDeck, Kabbage, PayPal, Square and others have grown fast. The question now is whether these new, branchless business models can thrive in a market where credit is tightening and the economy slowing. The interest rates on the loans are high — often the equivalent of a 30-40% annual rate, or higher — and the borrowers tend to have short credit histories. There are some signs of vulnerability. Morgan Stanley analyst James Faucette notes that in periods where credit has tightened in recent years, the online lenders ‘have done worse than traditional lenders . . . they have all had to rework their underwriting in a significant way. Once they have done that, they try to re-engage during an expansion and take advantage of what they have learnt.’”
“In the years after the financial crisis, small businesses that needed credit were stuck. New capital rules discouraged big banks from touching any borrower perceived as risky. The bond and loan markets, where larger businesses flocked for inexpensive debt capital, have little use for sums under $100,000 — which is what most small enterprises need. A handful of non-bank lenders, payment and e-commerce companies have leapt into the gap. In an environment of easy money and economic expansion, small business lending operations at OnDeck, Kabbage, PayPal, Square and others have grown fast. The question now is whether these new, branchless business models can thrive in a market where credit is tightening and the economy slowing. The interest rates on the loans are high — often the equivalent of a 30-40% annual rate, or higher — and the borrowers tend to have short credit histories. There are some signs of vulnerability. Morgan Stanley analyst James Faucette notes that in periods where credit has tightened in recent years, the online lenders ‘have done worse than traditional lenders . . . they have all had to rework their underwriting in a significant way. Once they have done that, they try to re-engage during an expansion and take advantage of what they have learnt.’”
January 29 – Wall Street Journal (Esther Fung):
“Chinese net purchases of U.S. commercial real estate last year dwindled to their lowest level since 2012, as Beijing kept up the pressure on Chinese investors to bring cash home during a period of worsening economic growth. Insurers, conglomerates and other investors from mainland China were net sellers of $854 million of U.S. commercial property in the fourth quarter, according to Real Capital Analytics. That marked the third-straight quarter Chinese investors sold more U.S. property than they bought, the first time ever these investors have been sellers for that long a stretch. The selling during most of 2018 marked a powerful reversal from the previous five years, when Chinese investors went on a massive buying spree, often handily outbidding other investors for U.S. trophy properties.”
“Chinese net purchases of U.S. commercial real estate last year dwindled to their lowest level since 2012, as Beijing kept up the pressure on Chinese investors to bring cash home during a period of worsening economic growth. Insurers, conglomerates and other investors from mainland China were net sellers of $854 million of U.S. commercial property in the fourth quarter, according to Real Capital Analytics. That marked the third-straight quarter Chinese investors sold more U.S. property than they bought, the first time ever these investors have been sellers for that long a stretch. The selling during most of 2018 marked a powerful reversal from the previous five years, when Chinese investors went on a massive buying spree, often handily outbidding other investors for U.S. trophy properties.”
January 31 – Bloomberg (Arit John and Laura Davison):
“Independent Senator Bernie Sanders is proposing to expand the estate tax on wealthy Americans, including a rate of up to 77% on the value of estates above $1 billion. Sanders of Vermont… said… his plan would apply to the wealthiest 0.2% Americans. It would set a 45% tax on the value of estates between $3.5 million and $10 million, increasing gradually to 77% for amounts more than $1 billion. The current estate tax kicks in when an estate is worth about $11 million.”
“Independent Senator Bernie Sanders is proposing to expand the estate tax on wealthy Americans, including a rate of up to 77% on the value of estates above $1 billion. Sanders of Vermont… said… his plan would apply to the wealthiest 0.2% Americans. It would set a 45% tax on the value of estates between $3.5 million and $10 million, increasing gradually to 77% for amounts more than $1 billion. The current estate tax kicks in when an estate is worth about $11 million.”
China Watch:
January 27 – Bloomberg:
“The number of Chinese companies warning on earnings is turning into a flood, with no industry spared from worsening demand. Some 440 firms disclosed on Wednesday -- the day before a deadline to do so -- that their 2018 financial results deteriorated… Of the more than 2,400 mainland-listed firms that have announced preliminary numbers or issued guidance this season, some 373 said they’ll post a loss, the data show. About 86% of those were profitable in 2017.”
“The number of Chinese companies warning on earnings is turning into a flood, with no industry spared from worsening demand. Some 440 firms disclosed on Wednesday -- the day before a deadline to do so -- that their 2018 financial results deteriorated… Of the more than 2,400 mainland-listed firms that have announced preliminary numbers or issued guidance this season, some 373 said they’ll post a loss, the data show. About 86% of those were profitable in 2017.”
January 31 – Financial Times (Edward White):
“A private sector gauge of China’s manufacturing sector in January contracted to its lowest level since February 2016, in the latest sign of economic headwinds hitting the world’s second largest economy despite moves by Beijing to shore up growth. The Caixin manufacturing purchasing managers’ index slipped to 48.3 in January, from 49.7 a month earlier and marking the second-straight monthly decline after the index retreated into negative territory for the first time in 19 months in December.”
“A private sector gauge of China’s manufacturing sector in January contracted to its lowest level since February 2016, in the latest sign of economic headwinds hitting the world’s second largest economy despite moves by Beijing to shore up growth. The Caixin manufacturing purchasing managers’ index slipped to 48.3 in January, from 49.7 a month earlier and marking the second-straight monthly decline after the index retreated into negative territory for the first time in 19 months in December.”
January 29 – Bloomberg:
“At least 20 companies, including China Life Insurance Co. and Chongqing Changan Automobile Co., told investors late Tuesday that full-year earnings would fall well short of expectations. Reasons they cited included the country’s economic slowdown, as well as recent changes to accounting rules and the equity market’s $2.3 trillion rout last year, the world’s biggest loss of value.”
“At least 20 companies, including China Life Insurance Co. and Chongqing Changan Automobile Co., told investors late Tuesday that full-year earnings would fall well short of expectations. Reasons they cited included the country’s economic slowdown, as well as recent changes to accounting rules and the equity market’s $2.3 trillion rout last year, the world’s biggest loss of value.”
January 28 – Reuters (Michael Sheetz):
“Chinese representatives met with the World Trade Organization… to begin the process of legally challenging United States tariffs on China’s exports, Reuters reported, citing a transcript of the meeting’s discussion. ‘This is a blatant breach of the United States’ obligations under the WTO agreements and is posing a systemic challenge to the multilateral trading system,’ a Chinese representative said… ‘If the United States were free to continue infringing these principles without consequences, the future viability of this organization is in dire peril.’”
“Chinese representatives met with the World Trade Organization… to begin the process of legally challenging United States tariffs on China’s exports, Reuters reported, citing a transcript of the meeting’s discussion. ‘This is a blatant breach of the United States’ obligations under the WTO agreements and is posing a systemic challenge to the multilateral trading system,’ a Chinese representative said… ‘If the United States were free to continue infringing these principles without consequences, the future viability of this organization is in dire peril.’”
January 29 – Reuters (Associated Press):
“U.S. criminal charges against Chinese electronics giant Huawei have sparked a fresh round of trans-Pacific recriminations, with Beijing demanding… that Washington back off what it called an ‘unreasonable crackdown’ on the maker of smartphones and telecom gear. China’s foreign ministry said it would defend the ‘lawful rights and interests of Chinese companies’ but gave no details. Huawei is the No. 2 smartphone maker and an essential player in global communications networks.”
“U.S. criminal charges against Chinese electronics giant Huawei have sparked a fresh round of trans-Pacific recriminations, with Beijing demanding… that Washington back off what it called an ‘unreasonable crackdown’ on the maker of smartphones and telecom gear. China’s foreign ministry said it would defend the ‘lawful rights and interests of Chinese companies’ but gave no details. Huawei is the No. 2 smartphone maker and an essential player in global communications networks.”
January 27 – Bloomberg (Christopher Balding):
“In the past decade, China has relied primarily on credit growth to fund its economic ambitions. The country’s banks are now feeling the constraints of this lending binge and need to raise a lot of capital over the next couple of years… With 267 trillion yuan ($39.4 trillion) of total assets, and home to the world’s four largest banks by this measure, the country’s financial system doesn’t operate in isolation… Major Chinese banks raised or announced plans to raise 343 billion yuan in 2018, according to… Nomura Holdings Inc. That’s well below the estimates of UBS Group AG, which just last year said these firms would need 1 trillion to 3 trillion yuan… The fundamental problem is the conflicting pressures on the sector. Despite talk of deleveraging in 2018, as nominal GDP growth slowed to 9.7%, total loans outstanding grew 13.5%. To prop up the economy, Chinese banks have been lending well in excess of deposit growth. Since the beginning of 2016, as loans outstanding grew 41%, deposits rose just 29%...”
“In the past decade, China has relied primarily on credit growth to fund its economic ambitions. The country’s banks are now feeling the constraints of this lending binge and need to raise a lot of capital over the next couple of years… With 267 trillion yuan ($39.4 trillion) of total assets, and home to the world’s four largest banks by this measure, the country’s financial system doesn’t operate in isolation… Major Chinese banks raised or announced plans to raise 343 billion yuan in 2018, according to… Nomura Holdings Inc. That’s well below the estimates of UBS Group AG, which just last year said these firms would need 1 trillion to 3 trillion yuan… The fundamental problem is the conflicting pressures on the sector. Despite talk of deleveraging in 2018, as nominal GDP growth slowed to 9.7%, total loans outstanding grew 13.5%. To prop up the economy, Chinese banks have been lending well in excess of deposit growth. Since the beginning of 2016, as loans outstanding grew 41%, deposits rose just 29%...”
Emerging Markets Watch:
February 1 – Bloomberg (Kartik Goyal and Subhadip Sircar):
“Sovereign Indian bonds yields surged the most in eight months and rupee weakened after Prime Minister Narendra Modi’s government announced record borrowings to fund populist policies before elections by May. The administration plans to borrow 7.1 trillion rupees ($100bn) in the year starting April 1… That compares with a 6.4-trillion rupee forecast in a Bloomberg News survey and a revised 5.71 trillion rupees for the current fiscal period.”
“Sovereign Indian bonds yields surged the most in eight months and rupee weakened after Prime Minister Narendra Modi’s government announced record borrowings to fund populist policies before elections by May. The administration plans to borrow 7.1 trillion rupees ($100bn) in the year starting April 1… That compares with a 6.4-trillion rupee forecast in a Bloomberg News survey and a revised 5.71 trillion rupees for the current fiscal period.”
Global Bubble Watch:
January 31 – Bloomberg (Jonathan Cable and Marius Zaharia):
“Factory activity was at its weakest in years across much of the world during January, adding to worries trade tariffs, political uncertainty and cooling demand poses an increasing threat to global growth… Trade-focused Asia appears to be suffering the most visible loss of momentum so far, with activity shrinking in China, although European economies are stuck in low gear and many emerging markets are sputtering. The euro zone has been rocked by protests in France, an auto sector struggling to regain momentum, political strife and rising trade protectionism. Manufacturing growth in the bloc was minimal last month, at a four-year low, and forward looking indicators suggest there will be no turnaround soon.”
“Factory activity was at its weakest in years across much of the world during January, adding to worries trade tariffs, political uncertainty and cooling demand poses an increasing threat to global growth… Trade-focused Asia appears to be suffering the most visible loss of momentum so far, with activity shrinking in China, although European economies are stuck in low gear and many emerging markets are sputtering. The euro zone has been rocked by protests in France, an auto sector struggling to regain momentum, political strife and rising trade protectionism. Manufacturing growth in the bloc was minimal last month, at a four-year low, and forward looking indicators suggest there will be no turnaround soon.”
January 28 – Bloomberg (Michael Heath):
“Australian firms suffered the worst slump in conditions since the 2008 global financial crisis as evidence mounts that the economy slowed in the latter part of last year. The business conditions index -- measuring hiring, sales and profits -- dropped to 2 in December from 11 a month earlier, a National Australia Bank Ltd. report showed Tuesday. A gauge of employment fell to 4 from 9 in November, while profitability plunged to zero from 8. A separate confidence index was unchanged at 3.”
“Australian firms suffered the worst slump in conditions since the 2008 global financial crisis as evidence mounts that the economy slowed in the latter part of last year. The business conditions index -- measuring hiring, sales and profits -- dropped to 2 in December from 11 a month earlier, a National Australia Bank Ltd. report showed Tuesday. A gauge of employment fell to 4 from 9 in November, while profitability plunged to zero from 8. A separate confidence index was unchanged at 3.”
January 31 – Bloomberg (Jackie Edwards):
“Sydney property values continued to fall in January, driving nationwide house prices back to levels last seen in October 2016, amid tighter lending conditions and high levels of housing supply. Nationwide home values dropped 1% last month, led by a 1.3% decline in Sydney and a 1.6% slide in Melbourne, according to CoreLogic…”
“Sydney property values continued to fall in January, driving nationwide house prices back to levels last seen in October 2016, amid tighter lending conditions and high levels of housing supply. Nationwide home values dropped 1% last month, led by a 1.3% decline in Sydney and a 1.6% slide in Melbourne, according to CoreLogic…”
Europe Watch:
February 1 – Bloomberg (Carolynn Look):
“Italy’s recession isn’t seeing any signs of a turnaround at the start of the year, as a drop in manufacturing orders weighed on output and forced companies to cut jobs. Manufacturing conditions worsened in January to the greatest extent in almost six years, a purchasing managers’ index showed on Friday. At 47.8, it’s well below the 50 level that marks the crossover between expansion and contraction. Growth in the euro area as a whole slowed, led by a contraction in Germany, the region’s biggest economy, a separate PMI report showed.”
“Italy’s recession isn’t seeing any signs of a turnaround at the start of the year, as a drop in manufacturing orders weighed on output and forced companies to cut jobs. Manufacturing conditions worsened in January to the greatest extent in almost six years, a purchasing managers’ index showed on Friday. At 47.8, it’s well below the 50 level that marks the crossover between expansion and contraction. Growth in the euro area as a whole slowed, led by a contraction in Germany, the region’s biggest economy, a separate PMI report showed.”
February 1 – Bloomberg (Simbarashe Gumbo):
“IHS Markit releases manufacturing purchasing managers’ index for Eurozone in January. Index falls to 50.5 from 51.4 in Dec.; Year ago 59.6. Lowest reading since Nov. 2014. New Orders fall to 47.8 vs 48.8 in Dec. Lowest reading since April 2013. Fourth consecutive month of contraction.”
“IHS Markit releases manufacturing purchasing managers’ index for Eurozone in January. Index falls to 50.5 from 51.4 in Dec.; Year ago 59.6. Lowest reading since Nov. 2014. New Orders fall to 47.8 vs 48.8 in Dec. Lowest reading since April 2013. Fourth consecutive month of contraction.”
Japan Watch:
February 1 – Bloomberg (Dave McCombs and Kazunori Takada):
“The slowdown in China that’s rattled global stocks is hitting the earnings of Japanese manufacturers as the world’s third-biggest economy fights to bounce back from a contraction. The health of the Chinese economy reverberates through many countries but is especially important for export-reliant Japan. China is Japan’s top trading partner, easily eclipsing the U.S. and the Europe. Following the biggest contraction since 2014 in the three months through September, Japan’s economy is unlikely to see anything more than a tepid return to growth. Factory output dropped again in December, falling for the seventh time in the last nine months.”
“The slowdown in China that’s rattled global stocks is hitting the earnings of Japanese manufacturers as the world’s third-biggest economy fights to bounce back from a contraction. The health of the Chinese economy reverberates through many countries but is especially important for export-reliant Japan. China is Japan’s top trading partner, easily eclipsing the U.S. and the Europe. Following the biggest contraction since 2014 in the three months through September, Japan’s economy is unlikely to see anything more than a tepid return to growth. Factory output dropped again in December, falling for the seventh time in the last nine months.”
Fixed-Income Bubble Watch:
January 27 – Financial Times (Joe Rennison):
“Wall Street’s debt machine is being powered by a familiar engine: securitisation. As scrutiny of the $1.2tn leveraged loan market has increased, focus has turned to the market’s main source of support: collateralised loan obligations. CLOs are vehicles which take a group of risky loans and then use them to back a series of bonds of varying degrees of safety. Investors in the most perilous, lowest-rated ‘tranches’, as they are known, are rewarded with higher returns but are hit first if the underlying loans — issued to low-rated or heavily indebted companies across the US — begin to default. As such, CLOs resemble other structures that rocked the financial system a decade ago, such as CDOs, which issued debt backed by bundles of (what turned out to be) junk mortgage bonds. But both investors and CLO managers say this time is different.”
“Wall Street’s debt machine is being powered by a familiar engine: securitisation. As scrutiny of the $1.2tn leveraged loan market has increased, focus has turned to the market’s main source of support: collateralised loan obligations. CLOs are vehicles which take a group of risky loans and then use them to back a series of bonds of varying degrees of safety. Investors in the most perilous, lowest-rated ‘tranches’, as they are known, are rewarded with higher returns but are hit first if the underlying loans — issued to low-rated or heavily indebted companies across the US — begin to default. As such, CLOs resemble other structures that rocked the financial system a decade ago, such as CDOs, which issued debt backed by bundles of (what turned out to be) junk mortgage bonds. But both investors and CLO managers say this time is different.”
CLOs started coming out of the woodwork in mid-January, with $5.1 billion in supply so far this month, though less than the $8 billion seen in January 2018.”
Geopolitical Watch:
February 1 – Reuters (Lesley Wroughton and Arshad Mohammed):
“The United States will suspend compliance with the Intermediate-range Nuclear Forces Treaty with Russia on Saturday and formally withdraw in six months if Moscow does not end its alleged violation of the pact, Secretary of State Mike Pompeo said…”
“The United States will suspend compliance with the Intermediate-range Nuclear Forces Treaty with Russia on Saturday and formally withdraw in six months if Moscow does not end its alleged violation of the pact, Secretary of State Mike Pompeo said…”
January 29 – Wall Street Journal (Dustin Volz and Warren P. Strobel):
“U.S. intelligence officials warned Tuesday of increased threats to national security from tighter cooperation between China and Russia, while also differing with President Trump in their analysis of North Korea’s nuclear intentions and the current danger posed by Islamic State. The warnings were contained in an annual threat assessment that accompanied testimony by Director of National Intelligence Dan Coats, Federal Bureau of Investigation Director Chris Wray, Central Intelligence Agency Director Gina Haspel and other leaders of the U.S. intelligence community, who appeared Tuesday before a Senate panel. The annual exercise affords the public a look at imminent challenges facing the country, such as cyberattacks, nuclear proliferation and terrorism. The assessment cautioned that Beijing and Moscow are pouring resources into a ‘race for technological and military superiority’ that will define the 21st century. It said the two countries are more aligned than at any point since the mid-1950s.”
“U.S. intelligence officials warned Tuesday of increased threats to national security from tighter cooperation between China and Russia, while also differing with President Trump in their analysis of North Korea’s nuclear intentions and the current danger posed by Islamic State. The warnings were contained in an annual threat assessment that accompanied testimony by Director of National Intelligence Dan Coats, Federal Bureau of Investigation Director Chris Wray, Central Intelligence Agency Director Gina Haspel and other leaders of the U.S. intelligence community, who appeared Tuesday before a Senate panel. The annual exercise affords the public a look at imminent challenges facing the country, such as cyberattacks, nuclear proliferation and terrorism. The assessment cautioned that Beijing and Moscow are pouring resources into a ‘race for technological and military superiority’ that will define the 21st century. It said the two countries are more aligned than at any point since the mid-1950s.”
January 28 – Reuters (Matt Spetalnick and Brian Ellsworth):
“The Trump administration on Monday imposed sweeping sanctions on Venezuelan state-owned oil firm PDVSA, aimed at severely curbing the OPEC member’s crude exports to the United States and at pressuring socialist President Nicolas Maduro to step down. Russia, a close ally of Venezuela, denounced the move as illegal interference in Venezuela’s affairs and said the curbs meant Venezuela would probably have problems servicing its $3.15 billion sovereign debt to Moscow.”
“The Trump administration on Monday imposed sweeping sanctions on Venezuelan state-owned oil firm PDVSA, aimed at severely curbing the OPEC member’s crude exports to the United States and at pressuring socialist President Nicolas Maduro to step down. Russia, a close ally of Venezuela, denounced the move as illegal interference in Venezuela’s affairs and said the curbs meant Venezuela would probably have problems servicing its $3.15 billion sovereign debt to Moscow.”
January 28 – Reuters (Parisa Hafezi):
“A senior Iranian Revolutionary Guards commander… threatened Israel with destruction if it attacks Iran, state media reported. The comments by Brigadier General Hossein Salami, deputy head of the elite Islamic Revolutionary Guard Corps, followed an Israeli attack on Iranian targets in Syria last week - the latest in a series of assaults targeting Tehran’s presence there in support of President Bashar al-Assad’s government.”
“A senior Iranian Revolutionary Guards commander… threatened Israel with destruction if it attacks Iran, state media reported. The comments by Brigadier General Hossein Salami, deputy head of the elite Islamic Revolutionary Guard Corps, followed an Israeli attack on Iranian targets in Syria last week - the latest in a series of assaults targeting Tehran’s presence there in support of President Bashar al-Assad’s government.”
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