Saturday, August 31, 2019
Weekly Commentary:
Dudley Sticks His Neck Out
by Doug Noland
full column here:
Portions that
interested me
are shown below
Ye Editor
For the Week Ending
August 30, 2019:
S&P 500 rallied 2.8% (up 16.7% y-t-d)
Dow Industrials rose 3.0% (up 13.2%)
Dow Utilities gained 1.7% (up 18.1%)
Dow Transports surged 4.0% (up 10.4%)
S&P 400 Midcaps gained 2.4% (up 13.1%)
Small cap Russell 2000 rose 2.4% (up 10.8%).
Nasdaq100 advanced 3.0% (up 21.5%)
Biotechs were little changed (up 3.9%).
Though GOLD bullion slipped $7,
the HUI gold index increased 0.9%
(up 42.1%)
U.K.'s FTSE recovered 1.6% (up 7.1% y-t-d).
Japan's Nikkei little changed (up 3.4% y-t-d).
France's CAC40 jumped 2.9% (up 15.8%)
German DAX rose 2.8% (up 13.1%)
Spain's IBEX 35 gained 1.9% (up 3.2%).
Italy's FTSE MIB surged 4.1% (up 16.4%)
Brazil's Bovespa rallied 3.5% (up 11.1%)
Mexico's Bolsa surged 6.9% (up 2.4%).
South Korea's Kospi gained 1.0% (down 3.6%).
India's Sensex rose 1.7% (up 3.5%).
China's Shanghai slipped 0.4% (up 15.7%).
Turkey's Istanbul National 100 dipped 0.4% (up 6.0%).
Russia's MICEX jumped 3.0% (up 15.6%).
Ten-year Treasury yields fell four bps to 1.50% (down 119bps).
Long bond yields dropped six bps to 1.96% (down 105bps).
Benchmark Fannie Mae MBS yields fell eight bps to 2.39% (down 111bps).
Freddie Mac 30-year fixed mortgage rates rose three bps to 3.58%
(down 94bps y-o-y).
Fifteen-year rates gained three bps to 3.06% (down 91bps).
Five-year hybrid ARM rates dipped one basis point to 3.31% (down 54bps).
Jumbo mortgage 30-year fixed rates jumping 15 bps to 4.20% (down 36bps).
Federal Reserve Credit
Over the past year
contracted 11.0%.
M2 money supply
gained 5.1%,
over the past year.
Currency Watch:
The U.S. dollar index
jumped 1.7% to 98.807
(up 2.7% y-t-d).
Commodities Watch:
Bloomberg Commodities Index rallied 1.2% this week (unchanged y-t-d).
Spot Gold dipped 0.4% to $1,520 (up 18.5%).
Silver surged 4.5% to $18.342 (up 18%).
WTI crude recovered 93 cents to $55.10 (up 21%).
Gasoline added 0.2% (up 16%)
Natural Gas rallied 6.2% (down 22%).
Copper increased 0.6% (down 3%).
Wheat dropped 3.2% (down 8%).
Corn gained 0.5% (down 1%).
Market Instability Watch:
August 29 – Reuters (Dhara Ranasinghe, Ritvik Carvalho, Tom Arnold):
“Some $16 trillion of global debt, including corporate and sovereign bonds, now yield less than 0%, up from almost $13 trillion in early July. Investors, desperate to grab any yield, have rushed into longer-dated bonds: U.S. 30-year borrowing costs are down 60 bps in August, set for their biggest monthly decline since the 2011 euro debt crisis. Long-dated Japanese bond yields have also hit three-year lows and are set for their biggest monthly declines in more than three years.”
August 28 – Reuters (Eliana Raszewski and Hugh Bronstein):
“Argentina will negotiate with holders of its sovereign bonds and the International Monetary Fund to extend the maturities of its debt obligations as a way of ensuring the country’s ability to pay, Treasury Minister Hernan Lacunza said… …Lacunza said the government would ‘re-profile’ the maturities of debt owed to the IMF under a $57 billion standby agreement. Interest and principal payments on bonds issued under international and local law will not be altered in the re-profiling. The changes in maturities would be aimed at obligations held by institutional, rather than individual investors, he said.”
August 29 – Reuters (Noah Sin and Tom Westbrook):
“Three months of anti-government protests have thrown Hong Kong into its deepest crisis in decades… The Hong Kong dollar is pegged in a narrow band around HK$7.8 per U.S. dollar, but has for weeks languished at the weak end as unrest has deepened, shedding 0.8% since early July. Bets in the market suggest some think the peg could falter… The forwards market suggests speculative bets on the peg breaking are building. Twelve-month forwards recently traded outside the currency’s range. Spreads in option markets have spiked to their widest in three years this month, in favor of dollar calls, suggesting investors are paying a high premium to bet on the Hong Kong dollar’s drop.”
Trump Administration Watch:
August 28 – Reuters (David Lawder and Rajesh Kumar Singh):
“The Trump administration… made official its extra 5% tariff on $300 billion in Chinese imports and set collection dates of Sept. 1 and Dec. 15, prompting hundreds of U.S. retail, footwear, toy and technology companies to warn of price hikes. The U.S. Trade Representative’s office said in an official notice that collections of a 15% tariff will begin… Sunday on a portion of the list covering over $125 billion of targeted goods from China. This initial tranche includes smartwatches, Bluetooth headphones, flat panel televisions and many types of footwear.”
August 25 – Reuters (Jeff Mason):
“The United States and Japan agreed in principle on Sunday to core elements of a trade deal that U.S. President Donald Trump and Prime Minister Shinzo Abe said they hoped to sign in New York next month. The agreement, if finalized, would cool a trade dispute between the two allies just as a trade war between the United States and China escalates.”
U.S. Bubble Watch:
August 30 – Reuters (Lucia Mutikani):
“U.S. consumer spending increased solidly in July as households bought a range of goods and services, which could further allay financial market fears of a recession, but the strong pace of consumption is unlikely to be sustained amid tepid income gains… Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.6% last month after an unrevised 0.3% gain in June. Economists… had forecast consumer spending advancing 0.5% last month.”
August 27 – CNN (Matt Egan):
“Corporate insiders have sold an average of $600 million of stock per day in August, according to TrimTabs… August is on track to be the fifth month of the year in which insider selling tops $10 billion. The only other times that has happened was 2006 and 2007… Investors often view insider buying and selling… as a signal of confidence. Even though the stock market is much larger than it was in 2007, so the $10 billion mark may not mean as much now as it did then, the acceleration of insiders heading for the exits could indicate concern about the challenges ahead, especially as the US-China trade war threatens to set off a recession.”
August 27 – CNBC (Diana Olick):
“Home prices are still gaining nationally, but not nearly as much as they have been over the past few years. Prices in June rose 3.1% annually, according to the S&P CoreLogic Case-Shiller national home price index. That’s down from 3.3% annual gain in May. The 10-City Composite annual increase came in at 1.8%, down from 2.2% in May. The 20-City Composite rose 2.1% annually, down from 2.4% in the previous month. ‘Home price gains continue to trend down, but may be leveling off to a sustainable level,’ S&P Dow Jones Indices’ Philip Murphy said… Fewer cities (12) experienced lower YOY price gains than in May (13). Phoenix, Las Vegas and Tampa reported the highest annual gains among the 20 cities.”
August 30 – Wall Street Journal (Rebecca Elliott and Christopher M. Matthews):
“Bankruptcies are rising in the U.S. oil patch as Wall Street’s disaffection with shale companies reverberates through the industry. Twenty-six U.S. oil-and-gas producers… have filed for bankruptcy this year, according to an August report by the law firm Haynes & Boone LLP. That nearly matches the 28 producer bankruptcies in all of 2018, and the number is expected to rise as companies face mounting debt maturities. Energy companies with junk-rated bonds were defaulting at a rate of 5.7% as of August, according to Fitch Ratings, the highest level since 2017.”
August 28 – Bloomberg (Isis Almeida):
“Crazy weather that disrupted U.S. Midwest plantings is adding to farmer stress, with growers ranking 2019 as their hardest year ever. A survey conducted by Farm Futures showed that 53% of respondents said 2019 is the most difficult year they’ve faced as farmers -- that includes 49% of baby boomers and mature growers, who lived through the 1980s farm crisis, according to the poll of 711 growers…”
China Watch:
August 28 – Reuters (Pete Sweeney):
“China’s Big Four lenders are feeling the pressure. Beijing, trying to slash a $310 billion pile of officially recognised bad debt, is pushing giants like China Construction Bank to help troubled smaller rivals, or rescue them outright. First-half earnings look healthy enough, but softer credit figures suggest they are already moving to shield their balance sheets. CCB, the country’s second-largest lender with 24 trillion yuan in assets, is a leader in efforts to rescue troubled state-owned borrowers through debt-for-equity swaps. In May, it was brought in to help the government’s takeover of Baoshang Bank, by handling its day-to-day business. That move was quickly followed by similar interventions at the Bank of Jinzhou and Hengfeng Bank involving other central institutions. There are almost certainly more to come.”
August 25 – Financial Times (Don Weinland and Sherry Fei Ju):
“A big source of easy financing for Chinese companies is coming under pressure, leaving in its wake a string of corporate defaults. Starting in 2015, China’s asset management industry became a booming centre for ‘shadow finance’, lending outside the formal banking sector. Banks, securities houses and trust companies were able to raise cash from wealthy investors and structure lending products through accounts at asset management companies. Loans linked to asset management companies, and structured finance products called asset management plans became hugely popular. By the end of March, securities companies had Rmb1.99tn ($280bn) in funds linked to asset managers that had been lent out through such arrangements… Meanwhile, global asset managers have been allocating more money than ever to Chinese stocks and fixed-income products.”
August 25 – Bloomberg:
“The foreign debt built up by Chinese companies is about a third bigger than official data show, adding to the pressure on the country’s currency reserves as a wave of repayment obligations approaches in 2020. On top of the $2 trillion in liabilities to foreigners captured in official data, mainland Chinese firms have around another $650 billion in debts built up by subsidiaries overseas… About 70% of that debt is guaranteed by entities such as onshore parent companies and their subsidiaries… The amount of maturing debt will rise in coming quarters, with $63 billion due in the first half of 2020 alone.”
Brexit Watch:
August 26 – Reuters (William James):
“Prime Minister Boris Johnson said he was prepared to take Brexit talks with the European Union down to the very last minute before the Oct. 31 exit deadline, and if necessary to take a decision to leave without a deal on that day. Johnson has 68 days to convince the EU to give him a new Brexit deal, with neither side so far willing to compromise on the most contentious issues. If he can’t get a deal, he says Britain will leave the bloc anyway. That leaves Britain, with the world’s fifth largest economy, heading for a messy divorce with the EU that critics fear could lead to food shortages and major border disruption in the short term and undermine the country’s prosperity in the long term.”
Asia Watch:
August 27 – Financial Times (Song Jung-a and Kana Inagaki):
“Japan’s trade and diplomatic dispute with South Korea has escalated sharply. Seoul terminated its intelligence-sharing pact with Tokyo last week and on Sunday went ahead with its postponed two-day military drills around the Dokdo islands, known in Japan as Takeshima, that are controlled by Seoul but claimed by Japan. Analysts remain sceptical that the stand-off can be resolved quickly and a further escalation could disrupt global supply chains as the world wrestles with the intensifying US-China trade war. The dispute originally stems from a ruling by South Korea’s supreme court last autumn that awarded damages against Japanese companies for forced labour during the second world war. According to Tokyo, all such claims were ‘settled completely and finally’ by a 1965 treaty under which it paid compensation to the South Korean government. Seoul, however, maintains the deal does not preclude individual victims from suing for damages. The row flared up in July after Japan imposed controls on three chemicals crucial to South Korea’s semiconductor industry.”
Emerging Markets Watch
August 29 – Financial Times (Editorial Board):
“Argentina is hurtling towards another disorderly debt default. It would be the ninth in the country’s history.
The timing is highly unusual, coming two months before a presidential election and less than a year into an IMF bailout that had already been increased. But it is also a recognition of reality. IMF assumptions on Argentina’s ability to roll over its short-term debt proved wildly optimistic in the face of political uncertainty. A recent central-bank auction that covered only a fraction of the debt falling due highlighted how much Argentina is struggling to refinance its vast and largely US dollar-denominated debt pile.”
August 30 – Bloomberg (Suvashree Ghosh, Siddhartha Singh, and Shruti Srivastava):
“India announced its most sweeping bank overhaul in decades, minutes before data showed economic growth in Asia’s No. 3 economy slumped to a six-year low. Four new lenders that result from a series of state-bank mergers will hold business worth 55.8 trillion rupees ($781bn), or about 56% of the Indian banking industry… The government will inject a combined 552.5 billion rupees of capital into these entities, she said.”
August 28 – Bloomberg (Ameya Karve and Divya Patil):
“Credit analysts are keeping a watchful eye on signs of stress in Indian household debt after unemployment rose to a 45-year high and as lenders grapple with the worst soured debt levels of any major economy. India’s bad debt malaise has centered on corporate debt, and loans to individuals have been seen as safer and a growth opportunity for banks. Given the slowdown in the economy and a drying-up of credit from shadow banks, analysts are signaling potential risks…”
Global Bubble Watch:
August 27 – Bloomberg (Enda Curran):
“Manufacturing engines around the world are turning gloomier by the day. A collapse in exports pushed Germany to the brink of a recession in the second quarter with total economic output contracting. At the same time, business confidence in Europe’s largest economy is at its weakest in almost seven years. On the other side of the globe, South Koreans are at their most pessimistic since January 2017… There was a warning for Singapore, too, with debt restructuring experts predicting a tide of bad corporate debt in the city-state that serves as a large hub of international shipping. Those three bellwethers of global trade are all taking hits tied to the U.S.-China tariff battle that shows few signs of cooling off.”
August 27 – Bloomberg (Anchalee Worrachate):
“A once-unthinkable collapse in global bond yields is forcing pension funds to buy bonds that offer negative returns -- putting the financial security of future retirees in jeopardy. U.S. institutions managing trillions of dollars in retirement savings… have been ratcheting down return expectations. Japan’s Government Pension Investment Fund, the world’s largest, has warned that money managers risk losses across asset classes. In Europe, pension funds may be forced to cut benefits in part thanks to the decline in rates. Investors were already taking on more credit risk to make up for dwindling income elsewhere, with some chasing less liquid markets like private debt. Now, negative yields on over a quarter of investment-grade bonds… are increasing the urgency for portfolio managers to find new sources of returns.”
Fixed-Income Bubble Watch:
August 28 – Bloomberg (Claire Boston):
“As borrowing costs plunge for the highest-quality companies, there’s a growing incentive for riskier businesses like fast-food chains to mortgage virtually all their assets. Franchised companies like burger restaurant Jack in the Box Inc. and massage provider Massage Envy are increasingly selling unusual bonds backed by most of their business. By pledging key assets like royalties, fees, and intellectual property to bondholders, companies can win investment-grade credit ratings on their debt and slash their financing costs, making their bonds higher quality even if their overall companies are still relatively risky. This year borrowers have sold more than $6.9 billion of these securities, known as whole-business securitizations, approaching the most on record... Fast-food restaurants used to be the main issuers of this debt, but a wider array of companies are jumping in.”
Geopolitical Watch:
August 25 – Reuters (Jeffrey Heller, Maayan Lubell, Stephen Farrell, Lisa Barrington, Ellen Francis and Laila Bassam):
“Israel said on Sunday an air strike against an arm of Iran’s Revolutionary Guards in Syria that it accused of planning ‘killer drone attacks’ showed Tehran that its forces were vulnerable anywhere.”
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