Saturday, April 6, 2019
Market Commentary:
Faux Statesmanship
by Doug Noland
full column here:
My summary follows:
For the week
ending April 5, 2019:
GLOBAL STOCKS:
S&P500 rose 2.1% (up 15.4% year-to-date)
Dow Industrials gained 1.9% (up 13.3%)
Dow Utilities slipped 0.2% (up 10.3%)
Dow Transports rose 3.1% (up 17.1%)
S&P 400 Midcaps rose 2.8% (up 17.2%)
Small cap Russell 2000 rose 2.8% (up 17.4%)
Nasdaq100 rose 2.7% (up 19.7%)
Biotechs gained 2.6% (up 24.7%).
With bullion little changed,
the HUI gold stock index
increased 0.7% (up 6.6%).
U.K.'s FTSE gained 2.3% (up 10.7% y-t-d).
Japan's Nikkei 225 jumped 2.8% (up 9.0%).
France's CAC40 gained 2.3% (up 15.8%)
German DAX surged 4.2% (up 13.7%).
Spain's IBEX 35 jumped 2.9% (up 11.4%).
Italy's FTSE MIB gained 2.2% (up 18.7%)
Brazil's Bovespa gained 1.8% (up 6.7%)
Mexico's Bolsa surged 3.9% (up 8.0%)
South Korea's Kospi index rose 3.2% (up 8.3%).
India's Sensex increased 0.5% (up 7.7%).
China's Shanghai surged 5.0% (up 30.2%).
Turkey's Istanbul National 100 jumped 5.3% (up 8.2%).
Russia's MICEX gained 1.8% (up 7.2%).
US BONDS & MORTGAGES
Ten-year Treasury yields
jumped nine bps to 2.50% (down 19bps).
Ten-year Treasury yields
jumped nine bps to 2.50% (down 19bps).
Treasury long bond yields
rose nine bps to 2.90% (down 11bps).
rose nine bps to 2.90% (down 11bps).
Benchmark Fannie Mae MBS yields
gained six bps to 3.17% (down 33bps).
gained six bps to 3.17% (down 33bps).
Freddie Mac 30-year fixed mortgage rates
increased two bps to 4.08% (down 32bps y-o-y).
Fifteen-year rates
slipped one basis point to 3.56% (down 31bps).
Five-year hybrid ARM rates
dropped nine bps to 3.66% (up 4bps).
Jumbo mortgage 30-yr fixed rates
up 14 bps to 4.30% (down 22bps).
Federal Reserve Credit
over the past year,
contracted 10.2%.
M2 (narrow) "money" supply
rose 4.1%, over the past year.
Currency Watch:
The U.S. dollar index was little changed at 97.395
(up 1.3% y-t-d).
Commodities Watch:
Bloomberg Commodities Index gained 1.6% this week
(up 7.0% year-to-date).
(up 7.0% year-to-date).
Spot Gold was about unchanged at $1,292 (up 0.7%).
Silver slipped 0.2% to $15.086 (down 2.9%).
Crude oil surged
another $2.94 to $63.08
(up 39% y-t-d).
another $2.94 to $63.08
(up 39% y-t-d).
Gasoline
jumped 4.6%
(up 49% y-t-d)
jumped 4.6%
(up 49% y-t-d)
Natural Gas was little changed (down 9%).
Copper declined 1.4% (up 10%).
Wheat rallied 2.2% (down 7%).
Corn recovered 1.7% (down 3%).
Market Instability Watch:
April 4 – Bloomberg (Michelle Davis):
“Jamie Dimon warned investors to get ready for more wild rides like the one that upended markets at the end of last year. ‘The fourth quarter of 2018 might be a harbinger of things to come,’ the chief executive officer of JPMorgan… said… in his 51-page annual letter to shareholders. Dimon cited a raft of issues driving the more pessimistic outlook, including uncertainty about the Federal Reserve’s interest-rate shifts, Germany’s economic slowdown, Brexit and the U.S.-China trade spat. Investors face a ‘new normal’ of liquidity constraints because of tighter regulations on banks and other market makers, Dimon said, adding that ‘there are growing geopolitical tensions -- with less certainty around American global leadership.’”
“Jamie Dimon warned investors to get ready for more wild rides like the one that upended markets at the end of last year. ‘The fourth quarter of 2018 might be a harbinger of things to come,’ the chief executive officer of JPMorgan… said… in his 51-page annual letter to shareholders. Dimon cited a raft of issues driving the more pessimistic outlook, including uncertainty about the Federal Reserve’s interest-rate shifts, Germany’s economic slowdown, Brexit and the U.S.-China trade spat. Investors face a ‘new normal’ of liquidity constraints because of tighter regulations on banks and other market makers, Dimon said, adding that ‘there are growing geopolitical tensions -- with less certainty around American global leadership.’”
April 1 – CNBC (Diana Olick):
“A sharp drop in interest rates last week suddenly made millions more borrowers eligible to refinance their mortgages. With the average rate on the 30-year fixed now close to 4%, 4.9 million borrowers could likely qualify for a refinance that could reduce their interest rates by at least three-quarters of a percentage point, according to Black Knight, a mortgage data and analytics company. That’s a nearly 50% increase in the size of that population in a single week.”
“A sharp drop in interest rates last week suddenly made millions more borrowers eligible to refinance their mortgages. With the average rate on the 30-year fixed now close to 4%, 4.9 million borrowers could likely qualify for a refinance that could reduce their interest rates by at least three-quarters of a percentage point, according to Black Knight, a mortgage data and analytics company. That’s a nearly 50% increase in the size of that population in a single week.”
Trump Administration Watch:
April 2 – CNBC (Patti Domm):
“When the U.S. escalated the trade war by slapping tariffs on $200 billion in Chinese goods last September, China’s economy was struggling and its stock market was in a deep slide, giving the U.S. a seeming advantage in a trans-Pacific trade rift. But months later, the U.S. has lost some of that edge. China’s Shanghai stock market has surged more than 27% in 2019 and is the best performer of major markets globally, while China’s economy is finally showing early signs of stabilizing. When the September tariffs were announced, President Donald Trump was seen as emboldened by the best two quarters of more than 3% U.S. growth in years and a stock market that was hitting all-time highs. While the U.S. is still seen as having an advantage, economic growth has faltered, to a below trend 1.5% pace in the first quarter.”
“When the U.S. escalated the trade war by slapping tariffs on $200 billion in Chinese goods last September, China’s economy was struggling and its stock market was in a deep slide, giving the U.S. a seeming advantage in a trans-Pacific trade rift. But months later, the U.S. has lost some of that edge. China’s Shanghai stock market has surged more than 27% in 2019 and is the best performer of major markets globally, while China’s economy is finally showing early signs of stabilizing. When the September tariffs were announced, President Donald Trump was seen as emboldened by the best two quarters of more than 3% U.S. growth in years and a stock market that was hitting all-time highs. While the U.S. is still seen as having an advantage, economic growth has faltered, to a below trend 1.5% pace in the first quarter.”
April 3 – Wall Street Journal (Nick Timiraos and Alex Leary):
“President Trump is blaming the Federal Reserve for holding back the economy and stock market despite the central bank’s recent decision to do two things he wanted—halt rate increases and stop shrinking its asset portfolio. The president blasted the Fed and Chairman Jerome Powell at three meetings in the past week alone, telling Republican senators, supporters and staffers that if it wasn’t for the central bank’s past rate increases, economic output and stocks would be higher and the U.S. budget deficit would be rising less. ‘He was pretty rough,’ said one person… Mr. Trump also blamed Treasury Secretary Steven Mnuchin for recommending Mr. Powell for the top Fed job. ‘Mnuchin gave me this guy,’ Mr. Trump said. Mr. Trump recalled a recent phone conversation he had with Mr. Powell, this person said. ‘I guess I’m stuck with you,’ the president recalled telling Mr. Powell.”
“President Trump is blaming the Federal Reserve for holding back the economy and stock market despite the central bank’s recent decision to do two things he wanted—halt rate increases and stop shrinking its asset portfolio. The president blasted the Fed and Chairman Jerome Powell at three meetings in the past week alone, telling Republican senators, supporters and staffers that if it wasn’t for the central bank’s past rate increases, economic output and stocks would be higher and the U.S. budget deficit would be rising less. ‘He was pretty rough,’ said one person… Mr. Trump also blamed Treasury Secretary Steven Mnuchin for recommending Mr. Powell for the top Fed job. ‘Mnuchin gave me this guy,’ Mr. Trump said. Mr. Trump recalled a recent phone conversation he had with Mr. Powell, this person said. ‘I guess I’m stuck with you,’ the president recalled telling Mr. Powell.”
April 1 – Politico (Sarah Ferris):
“A looming battle between President Donald Trump and Democrats over government spending and the debt limit could make the 35-day government shutdown look like a blip. A series of budget deadlines converge in the coming months that could leave Washington on the precipice of another shutdown, $100 billion in automatic spending cuts and a full-scale credit crisis. And lawmakers are openly worried about stumbling over the edge. Some top Democrats have begun quietly pushing for a grand bargain to simultaneously raise the debt ceiling and Congress’ stiff budget caps — avoiding market turmoil and staving off harsh cuts to domestic and defense programs… But the White House, focused on Trump’s reelection bid, is resisting talk of another massive deal that could cost as much as $350 billion over two years.”
“A looming battle between President Donald Trump and Democrats over government spending and the debt limit could make the 35-day government shutdown look like a blip. A series of budget deadlines converge in the coming months that could leave Washington on the precipice of another shutdown, $100 billion in automatic spending cuts and a full-scale credit crisis. And lawmakers are openly worried about stumbling over the edge. Some top Democrats have begun quietly pushing for a grand bargain to simultaneously raise the debt ceiling and Congress’ stiff budget caps — avoiding market turmoil and staving off harsh cuts to domestic and defense programs… But the White House, focused on Trump’s reelection bid, is resisting talk of another massive deal that could cost as much as $350 billion over two years.”
March 30 – Reuters (Julia Harte and Tim Reid):
“The U.S. government cut aid to El Salvador, Guatemala and Honduras on Saturday after President Donald Trump blasted the Central American countries for sending migrants to the United States and threatened to shutter the U.S.-Mexico border... On Friday, Trump accused the nations of having ‘set up’ migrant caravans and sent them north. Trump said there was a ‘very good likelihood’ he would close the border this week if Mexico did not stop immigrants from reaching the United States.”
“The U.S. government cut aid to El Salvador, Guatemala and Honduras on Saturday after President Donald Trump blasted the Central American countries for sending migrants to the United States and threatened to shutter the U.S.-Mexico border... On Friday, Trump accused the nations of having ‘set up’ migrant caravans and sent them north. Trump said there was a ‘very good likelihood’ he would close the border this week if Mexico did not stop immigrants from reaching the United States.”
U.S. Bubble Watch:
April 4 – CNBC (Diana Olick):
“If you’re shopping for a cheap home this spring, good luck. The median value of homes listed for sale in March hit a record $300,000, according to realtor.com.
Home values overheated from 2016 to mid-2018, as demand outstripped supply, especially at the lower end of the market. Those gains began to shrink last summer, as mortgage rates rose. The difference this spring is that there continues to be a shortage of entry-level homes for sale, but the supply of higher-end homes is rising. ‘Despite a slowing growth rate, home prices will likely continue to set new records later this year,” said Danielle Hale, realtor.com’s chief economist. ‘Heading into spring, U.S. prices are expected to continue to rise and inventory is expected to continue to increase, but at a slower pace than we’ve seen the last few months…’”
“If you’re shopping for a cheap home this spring, good luck. The median value of homes listed for sale in March hit a record $300,000, according to realtor.com.
Home values overheated from 2016 to mid-2018, as demand outstripped supply, especially at the lower end of the market. Those gains began to shrink last summer, as mortgage rates rose. The difference this spring is that there continues to be a shortage of entry-level homes for sale, but the supply of higher-end homes is rising. ‘Despite a slowing growth rate, home prices will likely continue to set new records later this year,” said Danielle Hale, realtor.com’s chief economist. ‘Heading into spring, U.S. prices are expected to continue to rise and inventory is expected to continue to increase, but at a slower pace than we’ve seen the last few months…’”
March 30 – Wall Street Journal (Dana Cimilluca):
“Remember the last time investors went nuts for an IPO boom? In 1999, hundreds of companies made a madcap dash to the public markets, capturing the imaginations of everyday Americans who thought they could day-trade their way to fortunes. Startups like Webvan and eToys were suddenly household names. The Pets.com sock puppet was a guest on ‘Live With Regis and Kathie Lee.’ All told, 547 companies had initial public offerings in the U.S. that year, taking in a record haul of $107.9 billion, according to Dealogic.
This year could be even bigger.”
“Remember the last time investors went nuts for an IPO boom? In 1999, hundreds of companies made a madcap dash to the public markets, capturing the imaginations of everyday Americans who thought they could day-trade their way to fortunes. Startups like Webvan and eToys were suddenly household names. The Pets.com sock puppet was a guest on ‘Live With Regis and Kathie Lee.’ All told, 547 companies had initial public offerings in the U.S. that year, taking in a record haul of $107.9 billion, according to Dealogic.
This year could be even bigger.”
March 29 – Reuters (P.J. Huffstutter and Humeyra Pamuk):
“At least 1 million acres of U.S. farmland were flooded after the ‘bomb cyclone’ storm left wide swaths of nine major grain producing states under water this month, satellite data analyzed by Gro Intelligence for Reuters showed.”
“At least 1 million acres of U.S. farmland were flooded after the ‘bomb cyclone’ storm left wide swaths of nine major grain producing states under water this month, satellite data analyzed by Gro Intelligence for Reuters showed.”
April 1 – CNBC (Tom Polansek):
“There’s nothing the U.S. government can do about the millions of bushels of damaged crops here under current laws or disaster-aid programs, U.S. Agriculture Under Secretary Bill Northey told a Reuters reporter… The USDA has no mechanism to compensate farmers for damaged crops in storage, Northey said, a problem never before seen on this scale. That’s in part because U.S. farmers have never stored so much of their harvests, after years of oversupplied markets, low prices and the latest blow of lost sales from the U.S. trade war with China…”
“There’s nothing the U.S. government can do about the millions of bushels of damaged crops here under current laws or disaster-aid programs, U.S. Agriculture Under Secretary Bill Northey told a Reuters reporter… The USDA has no mechanism to compensate farmers for damaged crops in storage, Northey said, a problem never before seen on this scale. That’s in part because U.S. farmers have never stored so much of their harvests, after years of oversupplied markets, low prices and the latest blow of lost sales from the U.S. trade war with China…”
April 1 – Wall Street Journal (Dan Molinski): “Gasoline prices typically move higher this time of year. But the seasonal rise is even more pronounced thanks to flooding in the Midwest and dwindling oil production out of Venezuela.
U.S. drivers now pay $2.71 for a gallon on average, up 28 cents from a month ago and nearly 50 cents higher since early January… Prices are closing in on the $2.98-a-gallon level reached in May, which was the priciest level since October 2014.”
U.S. drivers now pay $2.71 for a gallon on average, up 28 cents from a month ago and nearly 50 cents higher since early January… Prices are closing in on the $2.98-a-gallon level reached in May, which was the priciest level since October 2014.”
April 2 – CNBC (Robert Frank):
“Manhattan real estate had its worst first quarter since the financial crisis, capping the longest losing streak for sales in over 30 years… Total sales fell 3% in the first quarter, according to… Douglas Elliman and Miller Samuel. That marked the sixth straight quarter of declines, which is the longest downturn in the three decades that the appraisal and research firm has been keeping data… Prices in Manhattan continue to remain soft. While the average sale price got a big boost from hedge fun billionaire Ken Griffin’s $238 million condo purchase, hitting $2.1 million, the median sales price in Manhattan declined slightly, to just over $1 million.”
“Manhattan real estate had its worst first quarter since the financial crisis, capping the longest losing streak for sales in over 30 years… Total sales fell 3% in the first quarter, according to… Douglas Elliman and Miller Samuel. That marked the sixth straight quarter of declines, which is the longest downturn in the three decades that the appraisal and research firm has been keeping data… Prices in Manhattan continue to remain soft. While the average sale price got a big boost from hedge fun billionaire Ken Griffin’s $238 million condo purchase, hitting $2.1 million, the median sales price in Manhattan declined slightly, to just over $1 million.”
China Watch:
March 30 – Reuters (Yawen Chen and Ryan Woo):
“Factory activity in China unexpectedly grew for the first time in four months in March, an official survey showed…, suggesting government stimulus measures may be starting to take hold in the world’s second largest economy… Factory output grew at its fastest pace in six months in March, reversing a brief contraction in the previous month. It rose to 52.7 from February’s 49.5, the highest level seen since September 2018. Total new orders also grew at a quicker pace, driving up factory-gate prices to a five-month high of 51.4, ending four months of contraction.”
“Factory activity in China unexpectedly grew for the first time in four months in March, an official survey showed…, suggesting government stimulus measures may be starting to take hold in the world’s second largest economy… Factory output grew at its fastest pace in six months in March, reversing a brief contraction in the previous month. It rose to 52.7 from February’s 49.5, the highest level seen since September 2018. Total new orders also grew at a quicker pace, driving up factory-gate prices to a five-month high of 51.4, ending four months of contraction.”
April 2 – Reuters (Yawen Chen and Ryan Woo):
“Activity in China’s services sector picked up to a 14-month high in March as demand improved at home and abroad…, adding to signs that government stimulus policies are gradually kicking in… The Caixin/Markit services purchasing managers’ index (PMI) rose to 54.4, the highest since January 2018 and up from February’s 51.1, a fourth-month low… Survey respondents said activity was being buoyed by stronger demand, new state policies and improved access to financing.”
“Activity in China’s services sector picked up to a 14-month high in March as demand improved at home and abroad…, adding to signs that government stimulus policies are gradually kicking in… The Caixin/Markit services purchasing managers’ index (PMI) rose to 54.4, the highest since January 2018 and up from February’s 51.1, a fourth-month low… Survey respondents said activity was being buoyed by stronger demand, new state policies and improved access to financing.”
April 1 – Bloomberg:
“Chinese companies have missed payments on 26.2 billion yuan ($3.9bn) of local bonds in the first quarter, almost quadruple the same period in 2018. It was also the third highest quarter for bond delinquencies in China’s history…”
“Chinese companies have missed payments on 26.2 billion yuan ($3.9bn) of local bonds in the first quarter, almost quadruple the same period in 2018. It was also the third highest quarter for bond delinquencies in China’s history…”
April 3 – Bloomberg:
“A series of bankruptcy filings by major private-sector bond issuers in China’s third-wealthiest province is shining a spotlight on aggressive efforts by local governments to manage unsustainable debt loads. Four debtors have entered bankruptcy procedures since the start of November in Dongying, a city of 2 million in the eastern province of Shandong that once thrived with a booming tire-making industry. While China sees thousands of bankruptcies each year, instances of court-led restructuring of publicly issued bonds have been rare.”
“A series of bankruptcy filings by major private-sector bond issuers in China’s third-wealthiest province is shining a spotlight on aggressive efforts by local governments to manage unsustainable debt loads. Four debtors have entered bankruptcy procedures since the start of November in Dongying, a city of 2 million in the eastern province of Shandong that once thrived with a booming tire-making industry. While China sees thousands of bankruptcies each year, instances of court-led restructuring of publicly issued bonds have been rare.”
Brexit Watch:
March 30 – Reuters (William Schomberg and David Milliken):
“British Prime Minister Theresa May risks the ‘total collapse’ of her government if she fails to get her battered Brexit deal through parliament, the Sunday Times newspaper said, amid growing speculation that she might call an early election. Underscoring the tough choices facing May to break the Brexit impasse, the newspaper said at least six pro-European Union senior ministers will resign if she opts for a potentially damaging no-deal departure from the EU.”
“British Prime Minister Theresa May risks the ‘total collapse’ of her government if she fails to get her battered Brexit deal through parliament, the Sunday Times newspaper said, amid growing speculation that she might call an early election. Underscoring the tough choices facing May to break the Brexit impasse, the newspaper said at least six pro-European Union senior ministers will resign if she opts for a potentially damaging no-deal departure from the EU.”
April 3 – Financial Times (Lucy Meakin):
“The risk of a no-deal Brexit is now ‘alarmingly high,’ according to Bank of England Governor Mark Carney, who described some claims about how the U.K. could manage such a situation as ‘absolute nonsense.’ Leaving the European Union without an agreement has become the ‘default’ outcome despite being opposed by Parliament, and could happen by accident, he said…”
“The risk of a no-deal Brexit is now ‘alarmingly high,’ according to Bank of England Governor Mark Carney, who described some claims about how the U.K. could manage such a situation as ‘absolute nonsense.’ Leaving the European Union without an agreement has become the ‘default’ outcome despite being opposed by Parliament, and could happen by accident, he said…”
Europe Watch:
April 4 – Associated Press (David Rising):
“A group of leading German economic research institutes slashed their growth forecast for the country…, warning that if Britain leaves the European Union without a deal, it could get even worse. In a joint statement, the five institutes said they were reducing their autumn forecast of 1.9% growth for Europe’s largest economy downward to 0.8% after concluding ‘political risks have further clouded the global economic environment.’”
“A group of leading German economic research institutes slashed their growth forecast for the country…, warning that if Britain leaves the European Union without a deal, it could get even worse. In a joint statement, the five institutes said they were reducing their autumn forecast of 1.9% growth for Europe’s largest economy downward to 0.8% after concluding ‘political risks have further clouded the global economic environment.’”
April 1 – Reuters (Gavin Jones):
“Italy’s finances will deteriorate this year and next, with debt and the budget deficit both rising because of recession and higher public spending, the Organisation for Economic Cooperation and Development said… In a special report on Italy, the… OECD said the deficit would rise to 2.5% of gross domestic product this year, above the 2% target Rome agreed in December… The economy will shrink by 0.2% this year, the OECD said, confirming a forecast last month, before expanding 0.5% in 2020.”
“Italy’s finances will deteriorate this year and next, with debt and the budget deficit both rising because of recession and higher public spending, the Organisation for Economic Cooperation and Development said… In a special report on Italy, the… OECD said the deficit would rise to 2.5% of gross domestic product this year, above the 2% target Rome agreed in December… The economy will shrink by 0.2% this year, the OECD said, confirming a forecast last month, before expanding 0.5% in 2020.”
Emerging Markets Watch:
April 2 – Financial Times (Editorial Board):
“It is hard to overstate the blow to Turkey’s president Recep Tayyip Erdogan represented by losing political control not just of Ankara but — most likely — Istanbul too. It was victories in Turkey’s two biggest cities 25 years ago that gave him his real political start; as he told party activists in 2017: ‘If we stumble in Istanbul, we lose our footing in Turkey.’ Sunday’s shock regional election setbacks bring Mr Erdogan to a fork in the road — where he must choose between the pragmatism he is capable of, and his instinct to double down against opposition.”
“It is hard to overstate the blow to Turkey’s president Recep Tayyip Erdogan represented by losing political control not just of Ankara but — most likely — Istanbul too. It was victories in Turkey’s two biggest cities 25 years ago that gave him his real political start; as he told party activists in 2017: ‘If we stumble in Istanbul, we lose our footing in Turkey.’ Sunday’s shock regional election setbacks bring Mr Erdogan to a fork in the road — where he must choose between the pragmatism he is capable of, and his instinct to double down against opposition.”
April 3 – Financial Times (Adam Samson):
“Turkey’s inflation rate remained a whisker below 20% last month… Consumer prices rose 19.71% in March from the same month in 2018…, from 19.67% in February… The collapse last year in the value of the lira against other world currencies ignited a boom in price growth that has had wide-ranging implications across the economy.”
“Turkey’s inflation rate remained a whisker below 20% last month… Consumer prices rose 19.71% in March from the same month in 2018…, from 19.67% in February… The collapse last year in the value of the lira against other world currencies ignited a boom in price growth that has had wide-ranging implications across the economy.”
Global Bubble Watch:
April 2 – Bloomberg (John Authers and Lauren Leatherby):
“This was the decade of de-leveraging that wasn’t. A decade ago, as the world began to piece the financial system back together after an epic credit crisis, there was agreement on one thing: Too much debt had caused the crisis, and so there must be a huge de-leveraging. It has not worked out like that. Everyone knew that leverage was too high. In 2007, as subprime lenders went bankrupt and the crisis took hold, sinister charts circulated around Wall Street. Shooting upwards, on one side, was U.S. household debt as a proportion of total GDP. Shooting downwards, on the other side, was the U.S. savings rate, plunging near zero… Behold the result of their labors: Leverage has increased. U.S. consumers and the Western banking system have cut back somewhat, but leverage has just moved elsewhere. Their retrenchment was far outstripped by a rise in borrowing by companies and particularly by governments.”
“This was the decade of de-leveraging that wasn’t. A decade ago, as the world began to piece the financial system back together after an epic credit crisis, there was agreement on one thing: Too much debt had caused the crisis, and so there must be a huge de-leveraging. It has not worked out like that. Everyone knew that leverage was too high. In 2007, as subprime lenders went bankrupt and the crisis took hold, sinister charts circulated around Wall Street. Shooting upwards, on one side, was U.S. household debt as a proportion of total GDP. Shooting downwards, on the other side, was the U.S. savings rate, plunging near zero… Behold the result of their labors: Leverage has increased. U.S. consumers and the Western banking system have cut back somewhat, but leverage has just moved elsewhere. Their retrenchment was far outstripped by a rise in borrowing by companies and particularly by governments.”
April 3 – Wall Street Journal (Laura Kusisto and Peter Grant):
“Cities around the world, from New York to London to Stockholm to Sydney, are struggling to solve growing affordable housing crises. Acute shortages are persisting despite millions of dollars invested and hundreds of thousands of units built. Some countries have focused on solutions promoting unshackled free markets while others have turned more to rent control and subsidies. But no approach has solved the crises and most have other negative ripple effects. Across 32 major cities around the world, real home prices on average grew 24% over the last five years, while average real income grew by only 8%..., according to Knight Frank, a… real-estate consulting firm. Economists say it is striking that affordability has worsened even during a period of global prosperity over the last six years.”
“Cities around the world, from New York to London to Stockholm to Sydney, are struggling to solve growing affordable housing crises. Acute shortages are persisting despite millions of dollars invested and hundreds of thousands of units built. Some countries have focused on solutions promoting unshackled free markets while others have turned more to rent control and subsidies. But no approach has solved the crises and most have other negative ripple effects. Across 32 major cities around the world, real home prices on average grew 24% over the last five years, while average real income grew by only 8%..., according to Knight Frank, a… real-estate consulting firm. Economists say it is striking that affordability has worsened even during a period of global prosperity over the last six years.”
March 31 – Financial Times (Don Weinland):
“A global real estate boom fueled by China’s ambitious Belt and Road Initiative has slowed to a crawl, as Beijing seeks to rein in rogue building projects across the developing world. So far this year, less than $1bn has been invested into overseas commercial property projects by Chinese developers in designated BRI countries. That puts this year’s total on track to be far below last year’s figure of about $14bn, and marks another sharp drop from the peak of $23.6bn in 2016… When China announced its $1tn plan to build bridges, roads and ports in emerging markets starting in 2013, it also unleashed a wave of investments into hotels, office buildings and casinos from Mongolia to Montenegro — an unintended consequence of the plan.”
“A global real estate boom fueled by China’s ambitious Belt and Road Initiative has slowed to a crawl, as Beijing seeks to rein in rogue building projects across the developing world. So far this year, less than $1bn has been invested into overseas commercial property projects by Chinese developers in designated BRI countries. That puts this year’s total on track to be far below last year’s figure of about $14bn, and marks another sharp drop from the peak of $23.6bn in 2016… When China announced its $1tn plan to build bridges, roads and ports in emerging markets starting in 2013, it also unleashed a wave of investments into hotels, office buildings and casinos from Mongolia to Montenegro — an unintended consequence of the plan.”
April 3 – Bloomberg (Wendy Tan):
“Asian junk bonds suffered the worst downgrade-upgrade ratio from Fitch Ratings in seven years last quarter, led by Chinese issuers. That makes it vital to understand an issuer’s position in a business group. Distressed-debt cases including China’s HNA Group Co. have highlighted the risk of owning debt issued by a holding entity rather than its operating arms.”
“Asian junk bonds suffered the worst downgrade-upgrade ratio from Fitch Ratings in seven years last quarter, led by Chinese issuers. That makes it vital to understand an issuer’s position in a business group. Distressed-debt cases including China’s HNA Group Co. have highlighted the risk of owning debt issued by a holding entity rather than its operating arms.”
March 31 – Bloomberg (Peter Vercoe):
“Australian property prices continued their slide last month, as prospective buyers delay purchases until after national elections, and tougher lending standards make it harder to obtain financing. Housing values in the combined state and territory capitals fell 0.7% in March, to be down 8.2% from a year earlier, according to CoreLogic… The nation’s two biggest cities remained at the forefront of the slump. Sydney prices fell 0.9% last month, and are now down 13.9% from their mid-2017 peak, while Melbourne values dropped 0.8% to be 10.3% below their peak.”
“Australian property prices continued their slide last month, as prospective buyers delay purchases until after national elections, and tougher lending standards make it harder to obtain financing. Housing values in the combined state and territory capitals fell 0.7% in March, to be down 8.2% from a year earlier, according to CoreLogic… The nation’s two biggest cities remained at the forefront of the slump. Sydney prices fell 0.9% last month, and are now down 13.9% from their mid-2017 peak, while Melbourne values dropped 0.8% to be 10.3% below their peak.”
Japan Watch:
March 31 – Financial Times (Andrew Whiffin):
“The Bank of Japan is now in its tenth year of domestic stock buying through exchange traded funds and is showing little sign of winding the programme down. With the stated inflation target of 2% still elusive, Bank governor Haruhiko Kuroda rejected criticisms of the programme in an address to Japan’s parliament in December and dismissed the notion that an exit should be considered anytime soon. Last year the Bank bought just over Y6tn ($55bn) of ETFs in line with its target for 2018 and now holds close to 80% of outstanding Japanese ETF equity assets. Total purchases to date represent around 5% of the country’s total market capitalisation. The Bank also owns close to half of all outstanding Japanese government bonds.”
“The Bank of Japan is now in its tenth year of domestic stock buying through exchange traded funds and is showing little sign of winding the programme down. With the stated inflation target of 2% still elusive, Bank governor Haruhiko Kuroda rejected criticisms of the programme in an address to Japan’s parliament in December and dismissed the notion that an exit should be considered anytime soon. Last year the Bank bought just over Y6tn ($55bn) of ETFs in line with its target for 2018 and now holds close to 80% of outstanding Japanese ETF equity assets. Total purchases to date represent around 5% of the country’s total market capitalisation. The Bank also owns close to half of all outstanding Japanese government bonds.”
March 31 – Reuters (Leika Kihara and Tetsushi Kajimoto):
“Japan’s business mood slumped to a two-year low in the March quarter, a central bank survey showed, underscoring concerns that Sino-U.S. trade tensions and softening global demand were taking a toll on the export-reliant economy. The gloom was most pronounced among big manufacturers, where sentiment soured at the fastest pace in more than six years… Separately…, a private business survey showed manufacturing activity in Japan contracted for a second straight month in March, with output down at the sharpest rate in nearly three years.”
“Japan’s business mood slumped to a two-year low in the March quarter, a central bank survey showed, underscoring concerns that Sino-U.S. trade tensions and softening global demand were taking a toll on the export-reliant economy. The gloom was most pronounced among big manufacturers, where sentiment soured at the fastest pace in more than six years… Separately…, a private business survey showed manufacturing activity in Japan contracted for a second straight month in March, with output down at the sharpest rate in nearly three years.”
Fixed-Income Bubble Watch:
April 2 – CNBC (Jeff Cox):
“Debt market activity slowed to a comparative crawl to start out 2019… Issuance plummeted across the board, from syndicated loans to mergers and acquisitions to institutional lending. Securitized products such as collateralized loan obligations also saw a huge drop in activity as did leveraged buyouts, according to… Refinitiv. First-quarter syndicated lending overall declined 36% to about $400 billion. Leveraged loans… fell 56% to $152 billion. Institutional loans dropped to a three-year low of $58.8 billion, and investment grade and leveraged buyout funding slid 11% apiece… Bond issuance across the board fell 14.5% through February, with declines particularly sharp in mortgage-related bonds (off 32.5%) and asset-backed securities (down 55.6%), according to Securities Industry and Financial Markets Association data. Total bond market debt outstanding closed 2018 just shy of $43 trillion, up 4.7% from the year before.”
“Debt market activity slowed to a comparative crawl to start out 2019… Issuance plummeted across the board, from syndicated loans to mergers and acquisitions to institutional lending. Securitized products such as collateralized loan obligations also saw a huge drop in activity as did leveraged buyouts, according to… Refinitiv. First-quarter syndicated lending overall declined 36% to about $400 billion. Leveraged loans… fell 56% to $152 billion. Institutional loans dropped to a three-year low of $58.8 billion, and investment grade and leveraged buyout funding slid 11% apiece… Bond issuance across the board fell 14.5% through February, with declines particularly sharp in mortgage-related bonds (off 32.5%) and asset-backed securities (down 55.6%), according to Securities Industry and Financial Markets Association data. Total bond market debt outstanding closed 2018 just shy of $43 trillion, up 4.7% from the year before.”
April 2 – Financial Times (Editorial Board):
“This week, Jonathan Lavine, co-managing partner of Bain Capital, signalled his concern about private equity groups’ appetite for debt. This time is — slightly — different from the prelude to the financial crisis of 2008… In any case, the worrying similarities with 2007-08 outweigh the differences. Debt levels are high. Loan quality is low. Leveraged buyout loans rate predominantly at B2 or below — the most speculative end of speculative-grade debt — Moody’s says. In a repeat of the breakneck yield-chase before the crisis, investors are eager to grab the higher returns available on such loans. More than 80% of loans are also ‘covenant-lite’, according to LCD… Cov-lite loans may allow ailing companies to survive for longer, but traditional loan conditions are also an effective signal of trouble ahead.”
“This week, Jonathan Lavine, co-managing partner of Bain Capital, signalled his concern about private equity groups’ appetite for debt. This time is — slightly — different from the prelude to the financial crisis of 2008… In any case, the worrying similarities with 2007-08 outweigh the differences. Debt levels are high. Loan quality is low. Leveraged buyout loans rate predominantly at B2 or below — the most speculative end of speculative-grade debt — Moody’s says. In a repeat of the breakneck yield-chase before the crisis, investors are eager to grab the higher returns available on such loans. More than 80% of loans are also ‘covenant-lite’, according to LCD… Cov-lite loans may allow ailing companies to survive for longer, but traditional loan conditions are also an effective signal of trouble ahead.”
Geopolitical Watch:
April 2 – Reuters (Angus Berwick and Vivian Sequera):
“Venezuela’s Constituent Assembly, an all-powerful legislature controlled by the ruling Socialist Party, …approved a measure allowing for a trial of opposition leader Juan Guaido, in what appeared to be a step toward having him arrested. Guaido, leader of the opposition-controlled National Assembly, in January invoked the country’s constitution to assume the interim presidency after declaring President Nicolas Maduro’s 2018 re-election a fraud. He has been recognized by the United States and most other Western nations as Venezuela’s legitimate leader, and has said he does not recognize decisions emanating from the Maduro government.”
“Venezuela’s Constituent Assembly, an all-powerful legislature controlled by the ruling Socialist Party, …approved a measure allowing for a trial of opposition leader Juan Guaido, in what appeared to be a step toward having him arrested. Guaido, leader of the opposition-controlled National Assembly, in January invoked the country’s constitution to assume the interim presidency after declaring President Nicolas Maduro’s 2018 re-election a fraud. He has been recognized by the United States and most other Western nations as Venezuela’s legitimate leader, and has said he does not recognize decisions emanating from the Maduro government.”
March 31 – Reuters (Yimou Lee and Ben Blanchard):
“Taiwan on Sunday condemned what it called a ‘provocative’ move by China after two Chinese fighter jets crossed a maritime border separating the two sides amid growing friction between Taipei and Beijing. Earlier on Sunday Taiwan scrambled aircraft to drive away the two Chinese planes, the self-ruled island’s defence ministry said.”
“Taiwan on Sunday condemned what it called a ‘provocative’ move by China after two Chinese fighter jets crossed a maritime border separating the two sides amid growing friction between Taipei and Beijing. Earlier on Sunday Taiwan scrambled aircraft to drive away the two Chinese planes, the self-ruled island’s defence ministry said.”
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