Saturday, August 3, 2019
Weekly Commentary:
Trump's China Tariff Tweets
by Doug Noland
full column here:
Portions that
interested me
are shown below:
Ye Editor
For the
week ending
August 2, 2019:
GLOBAL STOCKS:
S&P500 dropped 3.1% (up 17.0% y-t-d)
Dow Industrials fell 2.6% (up 13.5%)
Dow Utilities added 0.5% (up 14.4%)
Dow Transports tumbled 3.7% (up 13.1%)
S&P 400 Midcaps slumped 3.5% (up 15.1%)
Small cap Russell 2000 dropped 2.9% (up 13.7%).
Nasdaq100 fell 4.0% (up 21.5%)
Biotechs slipped 0.4% (up 9.3%).
With gold bullion jumping $22,
the HUI gold stock index
added 0.8% (up 29.9%)
U.K.'s FTSE down 1.9% (up 10.1% year-to-date).
Japan's Nikkei down 2.6% (up 5.4% y-t-d).
France's CAC40 down 4.5% (up 13.3%)
German DAX down 4.4% (up 12.4%)
Spain's IBEX 35 down 3.6% (up 4.2%)
Italy's FTSE MIB down 3.6% (up 14.9%)
Brazil's Bovespa little changed (up 12.8%)
Mexico's Bolsa down 1.7% (down 4.0%)
South Korea's Kospi down 3.3% (down 2.1%)
India's Sensex down 2.0% (up 2.9%)
China's Shanghai down 2.6% (up 15.0%)
Turkey's Istanbul National 100 down 3.1% (up 9.2%)
Russia's MICEX down 1.5% (up 12.9%)
US BONDS:
Ten-year Treasury yields sank 22 bps to 1.85% (down 84bps).
Long bond yields dropped 21 bps to 2.38% (down 63bps).
Benchmark Fannie Mae MBS yields fell 21 bps to 2.60% (down 89bps).
US MORTGAGES:
Freddie Mac 30-year fixed mortgage rates were unchanged at 3.75% (down 85bps y-o-y).
Fifteen-year added two bps to 3.20% (down 88bps).
Five-year hybrid ARM rates slipped a basis point to 3.46% (down 47bps).
Jumbo mortgage 30-yr fixed rates unchanged at 4.04% (down 56bps).
Federal Reserve Bank:
Fed Credit
declined 11.4%
over the past year,
M2 money supply gained
5.2%, over the past year.
Currency Watch:
The U.S. dollar index
was little changed at 98.096
(up 2.0% y-t-d).
Commodities Watch:
Bloomberg Commodities Index declined 1.9% this week (up 0.3% y-t-d).
Spot Gold jumped 1.5% to $1,441 (up 12.3%).
Silver declined 0.8% to $16.27 (up 4.7%).
WTI crude declined 54 cents to $55.66 (up 23%).
Gasoline sank 5.0% (up 35%)
Natural Gas fell 2.0% (down 28%).
Copper dropped 4.2% (down 2%).
Wheat declined 1.1% (down 3%).
Corn tumbled 3.5% (up 9%).
Market Instability Watch:
August 1 – Bloomberg (Samuel Potter):
“On the day Jerome Powell attempted to moderate market expectations for further easing, the world’s stockpile of negative-yielding bonds notched another remarkable record. The Federal Reserve’s rate cut helped swell the total of all debt with sub-zero yields to more than $14 trillion for the first time. The market value of the Bloomberg Barclays Global Negative Yielding Debt Index closed at $14.1 trillion on Wednesday, after the biggest one-day jump in a month… The value of bonds yielding less than zero now makes up more than a quarter of the entire investment-grade market… They comprise 25.68% of the Bloomberg Barclays Global Aggregate Index, a gauge which includes government, corporate and securitized debt. That’s a whisker away from the record 25.99% posted in 2016.”
Trump Administration Watch:
July 30 – Financial Times (Lucy Hornby and James Politi):
“Donald Trump said there were ‘no signs’ that China was moving ahead with promised purchases of US farm goods, adding to a barrage of mutual criticism as a new round of trade talks began in Shanghai. ‘That is the problem with China, they just don’t come through,’ Mr Trump wrote in a tweet… ‘My team is negotiating with them now, but they always change the deal in the end to their benefit.’”
July 27 – Associated Press (Angela Charlton):
“France is pushing ahead with a landmark tax on tech companies like Google and Facebook despite U.S. President Donald Trump’s threats of retaliatory tariffs on French wine. That’s rattling French vintners, who sold 1.6 billion euros ($1.78bn) worth of wine last year to American consumers. But neither Trump nor French President Emmanuel Macron appears ready to back down. After Trump slammed the ‘foolishness’ of the tax in a tweet… and promised reciprocal action…”
August 1 – Wall Street Journal (Ben Eisen):
“The Trump administration is moving to restrict mortgage refinancings in which borrowers withdraw cash, the latest effort to curb the federal government’s exposure to potential defaults. The Federal Housing Administration, an arm of the Department of Housing and Urban Development that insures loans for mostly first-time buyers, announced… it will limit cash-out refinancings in its program. Borrowers will be able to pull cash out only when the new loan amounts to 80% of the value of the home or less, down from 85%. The policy change, expected to take effect in September, follows a sharp rise in the use of cash-out refinancings over the past several years. Officials believe this has added risk to the $1.3 trillion government mortgage program.”
U.S. Bubble Watch:
July 29 – Wall Street Journal (Kate Davidson): “Borrowing by the federal government is set to top $1 trillion for the second year in a row as higher spending outpaces revenue growth and concern about budget deficits wanes in Washington and on Wall Street. The Treasury Department said… it expects to issue $814 billion in net marketable debt in the second half of this calendar year, bringing total debt issuance to $1.23 trillion in 2019. That would represent a slight decline from borrowing in 2018, when the Treasury issued $1.34 trillion in debt—more than twice as much as the $546 billion it issued in 2017.”
July 29 – CNBC (Jeff Cox):
“U.S. companies are on pace to break another record for share repurchases in 2019, using a combination of cash and debt to push the total to close to $1 trillion. For the first time since the financial crisis, companies have given back more to shareholders than they are making in cash net of capital expenditures and interest payments, or free cash flow, according to Goldman Sachs... The level of buybacks to free cash flow hit 104% for the 12 months ending in the first quarter of 2019, the first time that number has topped 100% during the economic recovery that started in 2009. In 2017, the level was 82%. Goldman projects buybacks for S&P 500 companies to total $940 billion, a 13% increase over the previous year and a new high for a number that has continued to increase through much of the post-financial crisis period. Total buyback executions among all companies this year were up 26% through mid-July.”
China Watch:
July 31 – Associated Press:
“China’s factory activity contracted in July for a third month amid a tariff war with Washington and weak domestic demand. A monthly index… stood at 49.7 on a 100-point scale. That was up 0.3 points from the previous month but still below the 50-point mark that shows activity contracting.”
July 30 – Reuters (Lusha Zhang):
“China’s services sector activity grew at a slower pace in July…, heaping pressure on Beijing which is counting on the sector to help weather a sharp hit to its manufacturers and the economy from the Sino-U.S. trade war. The official non-manufacturing Purchasing Managers’ Index (PMI) fell to 53.7 from 54.2 in June, but stayed well above the 50-point mark that separates growth from contraction.”
July 30 – Bloomberg:
“For anyone checking the health of China’s economy, corporate earnings are providing the latest bad news. Of the more than 1,600 firms to give first-half guidance, 40% have predicted a drop in earnings from a year earlier… That’s the most since 2016 in terms of companies reporting smaller profits, deeper losses or swings into loss… The warnings indicate pain is spreading across the economy after domestic output expanded at the slowest pace on record in the second quarter.”
July 30 – Financial Times (Don Weinland):
“An accounting scandal rocking corporate China is drawing comparisons with the collapse of US firm Arthur Andersen as dozens of Chinese companies are forced to halt public listing work. Ruihua Certified Public Accountants, one of China’s largest accounting firms, was investigated by the country’s securities regulator early this month after a listed company it audited was found to have inflated profits by about Rmb12bn ($1.74bn) over four years. The probe has caused an unprecedented disruption in fundraising activities for Chinese companies, with more than 50 Ruihua clients halting initial public offerings and private capital raising, according to state media. The China Securities Regulatory Commission has suspended IPO approvals for at least 20 Ruihua clients. Several listings on China’s new Star Market board have also been delayed.”
July 30 – Bloomberg:
“China is blocking dozens of initial public offerings, intensifying a crackdown on suspect disclosures and alleged fraud that’s seen as essential to deepening its equity market. The China Securities Regulatory Commission suspended the IPO reviews of 33 companies that hired a scandal-hit accountant... ‘This is the biggest block of IPO suspensions I have seen so far,’ said Zhong Wentang, who has covered China’s financial sector for seven years, first as an accountant and now as partner in the compliance department of Shanghai-based Infaith Consulting. ‘That speaks volumes about CSRC’s determination to tighten regulations.’”
August 1 – Bloomberg:
“At least eight smaller Chinese banks had their credit ratings cut this week, a sign that the funding strain faced by the sector is far from over since the government’s seizure of a troubled lender in May. Shandong Yuncheng Rural Commercial Bank Co. and Changchun Development Rural Commercial Bank Co. were among the banks downgraded further into junk territory by local rating companies, which most of them cited deteriorating asset quality as reasons for the cuts. Investors have become increasingly cautious about smaller Chinese lenders after the government’s unexpected seizure of Baoshang Bank Co. in May.”
July 29 – Reuters (Hallie Gu and Shivani Singh):
“China’s pig herd could halve by the end of 2019 from a year earlier as an epidemic of African swine fever sweeps through the world’s top pork producer, analysts at Dutch bank Rabobank forecast… The bank said China’s herd, by far the world’s biggest, was already estimated to have shrunk by 40% from a year ago, well above official estimates which have ranged from 15% to 26%. The forecast comes amid industry speculation that the decline has been much worse than confirmed by agriculture officials…”
Brexit Watch:
July 29 – Wall Street Journal (Max Colchester):
“Prime Minister Boris Johnson refuses to hold face-to-face meetings with European Union leaders unless they agree to change key aspects to Britain’s divorce deal with the bloc, something the other 27 member states have rejected, a stance that jolted the British currency. Mr. Johnson’s statement was the opening salvo in what is likely to be a tense few months between the two sides over the terms of Britain’s divorce with the bloc, due to take place on Oct. 31. The prime minister’s position—and the possibility it could spark a chaotic split with the EU along with a fresh U.K. election—sent the pound down 1.3% to its lowest level against the euro since September 2017. His stance that ‘no deal’ was Britain’s default position fed fears over the economic hit the country faces if it leaves the EU without a pact to smooth the split.”
Asia Watch:
August 2 – Reuters (Makiko Yamazaki and Ju-min Park): “South Korea fired back at Japan over a deepening trade dispute on Friday, pledging it would not be ‘defeated again’ by its neighbor, laying bare decades-old animosity at the root of a row over fast-track export status. During a rare live television broadcast of his cabinet meeting, President Moon Jae-in threatened countermeasures after Japan’s cabinet approved the removal of South Korea’s fast-track export status from Aug. 28.”
Europe Watch:
July 31 – Bloomberg (Karin Matussek):
“Germany’s top judges again seem troubled by the European Central Bank’s 2.6 trillion-euro ($2.9 trillion) asset purchase program, openly saying the plan’s ‘collateral damage’ harms regular people. The Federal Constitutional Court judges in Karlsruhe asked highly critical questions about the program during two days of hearings this week. Several times the jurists mentioned how low interest rates caused by the ECB policy harms savers or raise real estate and rent prices. ‘We’re wondering if the ECB shouldn’t take these effects into account when making its decision and to also communicate how it does that,’ court President Andreas Vosskuhle said. ‘We’re not talking about a few euros. This is about people’s livelihood.’”
Japan Watch:
July 28 – Bloomberg (Min Jeong Lee and Masaki Kondo):
“As the world sinks into an era of ever-lower interest rates and a chasm of negative-yielding bonds, Japan’s experience offers investors an invaluable precedent. It’s two decades since the nation pioneered zero rates and more than six years into central bank chief Haruhiko Kuroda’s record stimulus. The money managers who’ve witnessed it all provide unique insights into strategies to survive such a regime. One legacy of Japan’s ultra-low interest-rate regime is that it has spurred massive investment into overseas assets. But even more telling is the extremes that Japanese investors have gone to in the hunt for yield. They’ve pushed deeper into stocks and real estate, amassed bonds from Europe’s periphery to emerging markets, and loaded up on opaque securities that bundle together hundreds of loans.”
Emerging Markets Watch:
July 29 – Bloomberg (Nacha Cattan and Eric Martin):
“Mexico’s interest rates are too high for a slowing economy, President Andres Manuel Lopez Obrador said…, though he added that he respects the central bank’s freedom to set them independently. ‘The Bank of Mexico is watching over inflation. That’s not bad,’ Lopez Obrador told Bloomberg… ‘But it’s important to lower rates to kickstart the economy.’”
Global Bubble Watch:
July 31 – Reuters (Jonathan Cable and Marius Zaharia): “Factory activity contracted across Asia and Europe in July, fuelling worries a prolonged U.S.-China trade war and an economic slowdown could tilt the world toward recession, which central banks would have to fight with depleted ammunition. Manufacturing activity in the euro zone fell at its steepest rate since late 2012 last month as demand sank, a survey compiled by IHS Markit showed… Forward-looking indicators… suggest manufacturing won’t rebound anytime soon and is likely to embolden policymakers at the European Central Bank… Earlier figures from Germany, Europe’s largest economy, showed a recession among its manufacturers deepened. France and much of the rest of the euro zone also faltered.”
July 29 – Bloomberg (Randy Thanthong-Knight):
“In a year when record heat is scorching Europe and the heaviest rain in decades has inundated parts of the U.S. Midwest, the Asia Pacific region is suffering from its own maelstrom of extreme weather. Drought, and floods in some areas, have devastated the livelihoods of thousands of people, and damaged crops in an area that produces most of the world’s palm oil, natural rubber and rice, and more than a third of its sugar. While parts of China endured the most rain in almost 60 years, water levels on the Mekong, one of Asia’s largest river systems, have fallen to among the lowest ever, and areas of southern India are battling relentless drought.”
July 28 – Financial Times (Tom Hancock and Wang Xueqiao):
“China’s shrinking car market is hitting foreign manufacturing groups hard, with some companies operating at a fraction of their potential output, sparking fears a number will be forced to quit the world’s biggest market. Ford and Peugeot owner PSA have suffered the most, with their factories running well below full capacity at historic lows because of plunging sales… Ford’s plants in China operated at 11% of their potential output in the first half of the year, according to a Financial Times analysis… Ford’s China sales fell 27% year on year in the first half.”
July 30 – CNBC (Yen Nee Lee):
“While investors look for clues about the health of the global economy, a research and analytics unit under S&P Global said a ‘hidden’ segment of debtors is flashing early signs of trouble. Those borrowers are small companies that are not rated by S&P Global Ratings, according to… S&P Global Market Intelligence… Generally, though, many entities without an S&P credit rating are small companies that are likely to be the first victims in an economic downturn, said Michelle Cheong, director and global product development lead for credit solutions data at S&P Global Market Intelligence. That group is ‘very much a hidden, under the radar’ segment, Cheong told CNBC… ‘The unrated entities are like the canary in the mine. They are the ones that usually start to default first — before you see trouble happening among the rated entities — because they are the weaker link,’ she added.”
Fixed-Income Bubble Watch:
July 29 – Wall Street Journal (Ben Eisen):
“The mortgage market had one of its most significant quarters since the financial crisis as falling rates prompted a flurry of refinancing and an uptick in purchases. The 30-year mortgage rate unexpectedly dropped to below 4% in May and has remained near its lowest level in three years, opening a window for borrowers… Lenders made $565 billion of mortgage loans in the second quarter, the most in more than two years. At that pace, originations could exceed $2 trillion for only the third year since the financial crisis, according to Inside Mortgage Finance.”
Geopolitical Watch:
July 30 – Reuters (Se Young Lee, Ryan Woo, Stella Qiu and Yimou Lee):
“China will stop issuing individual travel permits for Taiwan to people in 47 mainland cities from Aug. 1, its culture and tourism ministry said on Wednesday, citing the state of ties with the self-ruled island, but gave no details.”
July 30 – Bloomberg:
“China said recent violence in Hong Kong protests was the ‘creation of the U.S.,’ for the first time laying direct blame on Washington as their dispute over the unrest escalates. Chinese Foreign Ministry spokeswoman Hua Chunying made the remark… in response to comments by U.S. Secretary of State Michael Pompeo. The top American diplomat had said Monday that he hoped ‘the Chinese will do the right thing’ in managing the protests in Hong Kong. ‘It’s clear that Mr. Pompeo has put himself in the wrong position and still regards himself as the head of the CIA,’ Hua said…”
July 30 – Reuters (Josh Smith and Hyonhee Shin): “North Korea fired two short-range ballistic missiles early on Wednesday, the South Korean military said, only days after it launched two similar missiles intended to pressure South Korea and the United States to stop upcoming military drills.”
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