Saturday, June 1, 2019
Weekly Commentary:
So Much for the Trump Put
by Doug Noland
full column here:
My Summary:
Portions of the Noland column
that interested me, are below:
For the week
ending
May 31, 2019:
GLOBAL STOCKS:
S&P500 dropped 2.6% (up 9.8% y-t-d)
Dow Industrials fell 3.0% (up 6.4%)
Dow Utilities lost 2.7% (up 10.3%)
Dow Transports were hit 3.9% (up 6.2%)
S&P 400 Midcaps declined 2.8% (up 8.9%)
Small cap Russell 2000 fell 3.2% (up 8.7%)
Nasdaq100 lost 2.4% (up 12.6%)
Biotechs slumped 3.2% (up 3.4%).
With gold bullion jumping $21,
the HUI gold stock index rallied 5.4%
(down 2.2%)
U.K.'s FTSE fell 1.6% (up 6.4% y-t-d).
Japan's Nikkei dropped 2.4% (up 2.9% y-t-d).
France's CAC40 fell 2.0% (up 10.1%)
German DAX dropped 2.4% (up 11.1%).
Spain's IBEX 35 slumped 1.9% (up 5.4%).
Italy's FTSE MIB sank 2.8% (up 8.1%)
Brazil's Bovespa surged 3.6% (up 6.6%)
Mexico's Bolsa added 0.3% (up 2.7%).
South Korea's Kospi index slipped 0.2% (unchanged).
India's Sensex added 0.7% (up 10.1%).
China's Shanghai rallied 1.6% (up 16.2%).
Turkey's Istanbul National 100 jumped 5.2% (down 0.7%).
Russia's MICEX gained 1.8% (up 12.5%).
US BONDS:
Three-month Treasury bill rates
ended the week at 2.30%.
Ten-year Treasury yields
dropped 20 bps to 2.12%
(down 56bps).
Thirty-year Treasury yields
declined 18 bps to 2.57%
(down 45bps).
Benchmark Fannie Mae MBS yields
sank 24 bps to 2.86%
(down 64bps).
US MORTGAGES:
Freddie Mac 30-year fixed rates
dropped seven bps to 3.99%
(down 57bps y-o-y).
Fifteen-year rates
declined five bps to 3.46%
(down 60bps).
Five-year hybrid ARM rates
fell eight bps to 3.06%
(down 20bps).
Jumbo mortgage 30-yr fixed rates
down two bps to 4.19%
(down 45bps).
Federal Reserve Bank
Federal Reserve Credit
over the past year,
contracted 10.9%.
M2 (narrow) "money" supply
rose 4.0%, over the past year.
Currency Watch:
The U.S. dollar index added 0.2% to 97.75
(up 1.6% y-t-d).
Commodities Watch:
Bloomberg Commodities Index
declined 1.3% this week (up 0.9% y-t-d).
Spot Gold jumped 1.6% to $1,305 (up 1.8%).
Silver increased 0.2% to $14.567 (down 6.3%).
WTI crude sank $5.13 to $53.50 (up 18%).
Gasoline slumped 8.9% (up 34%)
Natural Gas dropped 5.5% (down 17%).
Copper fell 2.2% (unchanged).
Wheat jumped 2.8% (unchanged).
Corn surged 5.6% (up 14%).
Market Instability Watch:
May 28 – Bloomberg:
“The Chinese government’s first seizure of a bank in more than two decades reverberated through markets for a second day, driving up funding costs for smaller lenders and adding pressure to shares that already trade at rock-bottom valuations. A Bloomberg index of Hong Kong-listed Chinese banks is set for its biggest monthly loss this year after regulators assumed control of Baoshang Bank Co. on Friday citing ‘serious’ credit risks ... .”
May 28 – Financial Times (Don Weinland and Sherry Fei Ju):
“When Baoshang Bank published its most recent annual financial statement in mid-2017, it claimed to have a non-performing loan ratio of just 1.68%. Two years later, Baoshang, which has Rmb576bn ($83bn) in assets, has been taken over by the government because of its ‘serious credit risk’, the first such move in 18 years and a reminder of the hidden perils lurking within China’s financial system. The need for a state rescue has raised questions about financial contagion. It has also led to worries that regulators may have allowed a destabilising build-up in bad debt to go unchecked for far too long. ‘Is Baoshang part of a corruption-related clean-up or the start of what could become a series of bank failures?’
J Capital, an independent research house focused on China, wrote in a research note.”
May 28 – Bloomberg:
“Beijing’s threat to use its dominance of rare earths in the trade war risks serious disruption to U.S. industry,
by starving manufacturers of components commonplace in everything from cars to dishwashers and military equipment. And, it’s a stranglehold that might take years to break. China could wreak maximum havoc by squeezing supplies of the magnets and motors that use the elements, said Jack Lifton, co-founder of Technology Metals Research LLC, who’s been involved with rare earths since 1962. The impact on American industry could be ‘devastating,’ he said from Michigan.”
Trump Administration Watch:
May 31 – Bloomberg (Felice Maranz):
“President Trump’s promise to impose tariffs on goods until Mexico halts a flow of undocumented immigrants is being panned by analysts and economists…
AGF Investments, Greg Valliere: ‘These tariffs break new ground’ …because ‘they’re political, a punishment to Mexico for not stopping the surge of immigrants from Central America.’ He listed five ‘enormous implications’: Damage to USMCA ratification process; potential that a ‘slumbering’ Congress may awaken; Trump may not be finished with new tariffs, triggering higher prices for products…; Trump doesn’t seem to be listening to advisers, appears unconcerned by market and economic damage; Federal Reserve may now be forced to cut rates, but that may not be enough to reverse the damage.’”
May 29 – Reuters (Ernest Scheyder):
“U.S. companies are years away from challenging Chinese dominance of rare earth minerals due to a lack of domestic processing facilities, ensuring the Asian nation will maintain its near-monopoly on refining and powerful leverage in trade talks… Although, according to U.S. Geological Survey data, China contains only a third of the world’s rare earth reserves, it accounts for 80% of U.S. imports of the group of 17 minerals used in military equipment and high-tech consumer electronics.”
May 29 – Bloomberg (Pratish Narayanan and Joe Deaux):
“China’s grip on the global market for rare-earth metals gives it the ability to target American weaponry in its trade war with the U.S. Everything from Lockheed Martin Corp.’s F-35 Joint Strike Fighter jet to guided missiles and lasers used to determine targets rely on the elements to perform key functions. China accounts for as much as 95% of global output and the U.S. relies on the Asian nation for 80% of its rare-earths requirement.”
May 29 – Bloomberg:
“China, the world’s largest soybean buyer, has put purchases of American supplies on hold after the trade war between Washington and Beijing escalated, according to people familiar with the matter.
State-grain buyers haven’t received any further orders to continue with the so-called goodwill buying and don’t expect that to happen given the lack of agreement in trade negotiations… Still, China currently has no plans to cancel previous purchases of American soybeans, the people said.”
May 28 – Bloomberg (Bruce Einhorn):
“U.S. companies counting on China for a major part of their growth have targets on their backs as Beijing and Washington ratchet up trade-war tensions.
President Donald Trump’s decision to blacklist Huawei Technologies Co., the Chinese maker of smartphones, while also threatening bans on other Chinese technology companies, could open the door to retaliation against U.S. brands from hotels to sportswear to even Captain America. State media last week said China is ‘well armed to deliver counterpunches,’ without giving specific details.”
U.S. Bubble Watch:
May 30 – Bloomberg (Katia Dmitrieva):
“The U.S. merchandise-trade deficit widened for a second month to the highest level since a record in December as exports dipped.
The goods-trade gap grew to $72.1 billion in April from $71.9 billion the month earlier…”
May 28 – Reuters (Lucia Mutikani):
“Consumer confidence jumped in May as households grew more upbeat about the labor market, suggesting the economy remained on solid ground despite signs that activity was slowing after being temporarily boosted by exports and a build-up of inventories…
The Conference Board said its index of consumer attitudes increased 4.9 points to a reading of 134.1 this month, climbing up to levels seen last November when the index was hovering near 18-year highs.”
May 28 – Associated Press (Dee-Ann Durbin):
“After more than a decade of rapid growth, Chinese travel to the U.S. is falling. And that has cities, malls and other tourist spots scrambling to reverse the trend. Travel from China to the U.S. fell 5.7% in 2018 to 2.9 million visitors… It was the first time since 2003 that Chinese travel to the U.S. slipped from the prior year. Friction between the U.S. and China is one reason for the slowdown.”
May 28 – Bloomberg (Katia Dmitrieva and Alexandre Tanzi):
“In the U.S., ... Americans with a bachelor’s degree earned less in real terms last year than in 1990, according to New York Fed data. That’s likely contributed to one of the findings from the Federal Reserve Board’s sixth annual survey of household economics: Just two-thirds of those graduates believe their investment in education paid off.”
China Watch:
May 31 – Bloomberg (Michelle Jamrisko and Enda Curra):
"A U.S.-China trade deal will be even less likely,’ said Khoon Goh, head of research at Australia & New Zealand Banking Group… ‘At the end of the day, what’s the point of doing a deal if the U.S. can just impose tariffs arbitrarily? (as in Mexico) ’ ... One potential beneficiary of the impasse was likely to be Mexico as companies considered shifting supply chains away from China toward lower-cost markets closer to American consumers. The latest escalation of Trump tariffs threatens that process.”
May 31 – Bloomberg (Michael R. Bloomberg):
“ ... The administration plans to harm businesses north and south of the border, and to impose additional new taxes on U.S. consumers, not to remedy a real or imagined trade grievance but to force Mexico to curb migration to the U.S. This is a radical and disturbing development. The administration is invoking a law that allows it to impose emergency economic sanctions.
It’s safe to say that Congress never envisaged that those powers would be used in a case like this.”
May 31 – New York Times (Alexandra Stevenson and Paul Mozur):
“The Chinese government said on Friday that it was putting together an ‘unreliable entities list’ of foreign companies and people, an apparent first step toward retaliating against the United States for denying vital American technology to Chinese companies. China’s Ministry of Commerce said the list would contain foreign companies, individuals and organizations that ‘do not follow market rules, violate the spirit of contracts, blockade and stop supplying Chinese companies for noncommercial reasons, and seriously damage the legitimate rights and interests of Chinese companies.’”
The “Unreliably Entities List” follows reports earlier in the week that China is preparing to restrict the export of rare earth minerals.
Friday from the New York Times:
“As China Takes Aim, Silicon Valley Braces for Pain.”
Another Friday headline,
“U.S. is Dependent on China for Almost 80% of Its Medicine,”
May 29 – Reuters (Ben Blanchard, Michael Martina and Tom Daly): “
... In a commentary headlined ‘United States, don’t underestimate China’s ability to strike back’, the official People’s Daily noted the United States’ ‘uncomfortable’ dependence on rare earths from China. ‘Will rare earths become a counter weapon for China to hit back against the pressure the United States has put on for no reason at all? The answer is no mystery,’ it said. ‘Undoubtedly, the U.S. side wants to use the products made by China’s exported rare earths to counter and suppress China’s development. The Chinese people will never accept this!’ the ruling Communist Party newspaper added. ‘We advise the U.S. side not to underestimate the Chinese side’s ability to safeguard its development rights and interests. Don’t say we didn’t warn you!’”
May 25 – Reuters (Yawen Chen and Ryan Woo):
“The United States has called on China to curb the development of its state-owned enterprises (SOEs),
a demand that China sees as an ‘invasion’ on its economic sovereignty, Chinese state news agency Xinhua said… Trade tensions between Washington and Beijing escalated sharply earlier this month after the Trump administration accused China of having ‘reneged’ on its previous promises to make structural changes to its economic practices… As trade talks stalled, both sides have appeared to be digging in. China has denied it had walked back on its promises but reiterated it would not make concessions to ‘matters of principles’ to defend its core interests… ‘At the negotiating table, the U.S. government presented a number of arrogant demands to China, including restricting the development of state-owned enterprises,’ Xinhua said in a commentary.”
May 28 – Bloomberg:
“China’s credit investors are demanding to be paid for risk - and that’s leading to explosive growth in the nation’s high-yield bond market. There are about 1.1 trillion yuan ($159 billion) of local company bonds outstanding that offer investors more than 8%, the local cutoff for what’s considered high-yield, according to AJ Securities Co. By late last year, the market was seven times larger than it was at the start of 2015, Guosen Securities Co. data show. A record wave of company defaults is forcing asset managers to spend more time doing due diligence on issuers, and account for those risks in bond-market pricing.”
May 26 – Bloomberg:
“Huawei Technologies Co. founder Ren Zhengfei struck a defiant tone in the face of U.S. sanctions that threaten his company’s very survival. In an interview with Bloomberg Television, the billionaire founder of China’s largest technology company conceded that Trump administration export curbs will cut into a two-year lead Huawei had painstakingly built over rivals like Ericsson AB and Nokia Oyj. But the company will either ramp up its own chip supply or find alternatives to keep its edge in smartphones and 5G.”
May 28 – CNBC (Fred Imbert):
“China’s true pace of economic growth is always hard to decipher, but the country’s lagging diesel demand
could be a sign that the world’s second-largest economy is in a much more dire state than official numbers indicate. Diesel demand in China fell 14% and 19% in March and April, respectively, reaching levels not seen in a decade, according to data compiled by Wells Fargo. Monthly demand has also been falling every month since December 2017…”
It’s a testament to the incredible growth of China’s banking system (from about $7 TN to $40 TN since the ’08 crisis) that Baoshang, with its $80 billion of assets, is one of a very large group of “small banks.”
The first Chinese government bank seizure in 20 years is further notable for Beijing’s decision to impose losses on some Baoshang creditors. While retail depositors are to receive 100% of their funds, corporate and financial creditors face painful haircuts.
May 31 – Bloomberg:
“Holders of bankers’ acceptances worth more than 50m yuan ($7.2m) issued by Baoshang Bank will be repaid at least 80% of the principal, said people familiar with the matter. Investors were told on Friday that while they will be repaid 80% initially, they may still have recourse to the rest of the repayment as regulators progress in resolving Baoshang’s finances…”
Europe Watch:
May 28 – Bloomberg (Arne Delfs and Patrick Donahue):
“Angela Merkel has given up hope on her heir apparent and is hunkering down in office in the face of growing turmoil in Germany’s ruling party. Merkel has decided that Annegret Kramp-Karrenbauer, who took over as leader of the Christian Democratic Union in December, is not up to the country’s top job, according to two officials… As a result, the chancellor has become more determined than ever to stay in power until her term ends in 2021, the officials said.”
May 28 – Financial Times (Valentina Romei):
“Lending growth to businesses in the eurozone accelerated in April but was not broad-based, with a worrying contraction in weaker economies. Lending to eurozone businesses, adjusted for securitisation, rose by an annual rate of 3.9%, stronger than the 3.6% in March. Lending growth to households remained solid and improved marginally to 3.4%... Lending growth in France and Germany continued at a strong pace above 6%, but it contracted in Italy and Spain.”
Japan Watch:
May 27 – Reuters (Tim Kelly and Malcolm Foster):
“U.S. President Donald Trump expects that Japan’s military will reinforce U.S. forces throughout Asia and elsewhere, he said…, as the key U.S. ally upgrades the ability of its forces to operate further from its shores. Trump’s comments followed his inspection of Japan’s largest warship, the Kaga, a helicopter carrier designed to carry submarine-hunting helicopters to distant waters.”
Emerging Markets Watch:
May 29 – Reuters:
“Brazil’s economy shrank in the first quarter of this year, contracting 0.2% from the prior quarter…, the first contraction since 2016.”
Global Bubble Watch:
May 29 – Bloomberg (James Crombie and Jonathan Ferro):
“Credit market risk is at an all-time high, according to Scott Mather, chief investment officer of U.S. core strategies at Pacific Investment Management Co…
‘We have probably the riskiest credit market that we have ever had,’ Mather said… The increased size, lower quality and lack of liquidity in corporate bond markets are all red flags, Mather said.”
Fixed-Income Bubble Watch:
May 30 – CNBC (Jeff Cox):
“Low-rated companies are the biggest accumulators of debt, prompting a major credit agency to warn of significant troubles if current conditions deteriorate. The alert from Moody’s… comes as worries mount over a looming economic downturn… Should conditions continue to deteriorate, it could mean trouble for companies that are rated at the lower end of the spectrum, a group that rang up $695 billion in new debt during 2018. The danger is that these ‘B3’ companies only need to decline one notch to fall into the junk category, which would make their debt loads even more onerous… New issuers in B3 debt comprised 44% of all new paper that came to market in 2018, double the level in 2007…”
May 28 – Wall Street Journal (Sam Goldfarb and Avantika Chilkoti):
“A decade long rise in corporate borrowing is prompting new scrutiny about how debt markets might hold up in an economic downturn. ... As of the end of last year, the ratio of business debt to U.S. gross domestic product had reached 73.1%, according to Federal Reserve data, just short of the high of 73.7% set in 2009. Meanwhile, the amount of triple-B rate U.S. corporate debt… has more than doubled since the crisis.”
May 27 – Wall Street Journal (Gunjan Banerji):
“Investors seeking yield ... have poured $8 billion into funds that deal in high-yield muni bonds—or junk munis—this year, the most through May since at least 1992… Muni-bond funds overall have attracted $37 billion during that same period, the most in almost three decades. There is ‘more demand than at any time in recent memory,’ said Jeff Burger, a portfolio manager at Mellon Investments…”
May 28 – Wall Street Journal (Ben Eisen):
“Mortgage real-estate investment trusts were once small players in housing finance, but they’ve increased their mortgage-bond portfolios by almost 28% to $308 billion over the 12 months through March. It was the largest stockpile in a half-dozen years… Annaly Capital Management Inc. and AGNC Investment Corp., the two biggest companies in the sector, accounted for the majority of the growth.”
Geopolitical Watch:
May 29 – Wall Street Journal (Arthur Herman):
“Iran sabotages ships in the Persian Gulf and threatens to resume enrichment of uranium for its nuclear program. Russia dispatches troops to beleaguered dictator Nicolás Maduro of Venezuela, while China sends logistical support. China resists a trade truce with the U.S. and seeks to drive a wedge between the U.S. and allies like Jordan and Saudi Arabia by selling them armed drones. Russia sends bombers and fighters into Alaska’s Air Defense Identification Zone. Iran, Russia and China all work tirelessly to keep Syrian dictator Bashar Assad in power. In the aftermath of the Iran nuclear deal in August 2015, I warned of a Moscow-Beijing-Tehran axis. Since then, these three authoritarian and revisionist powers have become bolder, more sophisticated and more global. Their effort to diminish and disrupt the influence of the U.S. and its allies extends from Syria and the Strait of Hormuz to North Korea and Latin America, as well as Central Asia and even the South Pacific.”
May 26 – Reuters (Yimou Lee and Ben Blanchard):
“China responded angrily… as Taiwan confirmed the first meeting in more than four decades between senior U.S. and Taiwanese security officials. Taiwan’s national security chief David Lee met White House national security adviser John Bolton earlier this month… The official Central News Agency said the meeting was the first since the island and the United States ended formal diplomatic ties in 1979… ‘China is extremely dissatisfied and resolutely opposed to this,’ Foreign Ministry spokesman Lu Kang told a daily news briefing, adding China was against any form of official exchanges between the United States and Taiwan.”
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