Saturday, August 10, 2019
Weekly Commentary:
"Hot Money" Watch
by Doug Noland
full column is here:
Portions that
interest me
are below.
For the week
ending
August 9, 2019
GLOBAL STOCKS:
S&P500 declined 0.5% (up 16.4% y-t-d)
Dow Industrials fell 0.7% (up 12.7%)
Dow Utilities rose 1.0% (up 15.5%)
Dow Transports lost 1.6% (up 11.3%)
S&P 400 Midcaps declined 0.7% (up 14.3%)
Small cap Russell 2000 fell 1.3% (up 12.2%)
Nasdaq100 slipped 0.6% (up 20.8%)
Biotechs declined 0.3% (up 9.0%).
With gold bullion surging $52,
the HUI gold stock index jumped 5.2%
(up 36.7%).
U.K.'s FTSE lost 2.1% (up 7.8% y-t-d).
Japan's Nikkei slumped 1.9% (up 3.3% y-t-d).
France's CAC40 declined 0.6% (up 12.6%)
German DAX fell 1.5% (up 10.7%).
Spain's IBEX 35 lost 1.6% (up 2.6%).
Italy's FTSE MIB dropped 3.4% (up 10.9%)
Brazil's Bovespa gained 1.3% (up 14.3%)
Mexico's Bolsa rose 1.1% (down 2.9%).
South Korea's Kospi dropped 3.0% (down 5.1%).
India's Sensex advanced 1.2% (up 4.2%).
China's Shanghai sank 3.2% (up 11.3%).
Turkey's Istanbul National 100 slipped 0.3% (up 8.9%).
Russia's MICEX added 0.2% (up 13.1%).
U.S. BONDS:
Ten-year Treasury yields
dropped 10 bps to 1.75% (down 94bps).
Long bond yields
sank 12 bps to 2.26% (down 76bps).
Benchmark Fannie Mae MBS yields
dropped 11 bps to 2.49% (down 100bps).
U.S. MORTGAGE RATES:
Freddie Mac 30-year fixed mortgage rates sank 15 bps to 3.60% (down 99bps y-o-y).
Fifteen-year rates dropped 15 bps to 3.05% (down 100bps).
Five-year hybrid ARM rates fell 10 bps to 3.36% (down 54bps).
Jumbo mortgage 30-yr fixed rates down four bps 4.00% (down 53bps).
FEDERAL RESERVE BANK:
Over the past year, Fed Credit contracted 11.3%.
M2 money supply expanded 5.4%, over the past year.
Currency Watch:
August 6 – Bloomberg:
“Senior People’s Bank of China officials reassured foreign companies that the currency won’t continue to weaken significantly, after the yuan fell below 7 per dollar for the first time since 2008. The central bank held a meeting with a number of foreign exporters in Beijing Tuesday, at which officials also said that companies’ ability to buy and sell dollars would remain normal…”
The U.S. dollar index declined 0.6% to 97.491 (up 1.4% y-t-d).
Commodities Watch:
The Bloomberg Commodities Index increased 0.3% this week (up 0.6% y-t-d).
Spot Gold jumped 3.6% to $1,492 (up 16.4%).
Silver surged 4.1% to $16.931 (up 9.0%).
WTI crude declined $1.16 to $54.50 (up 20%).
Gasoline sank 6.0% (up 28%)
Natural Gas was little changed (down 28%).
Copper recovered 0.7% (down 2%).
Wheat rallied 2.2% (unchanged).
Corn rose 2.0% (up 11%).
Market Instability Watch:
August 7 – Bloomberg (John Ainger):
“The global bond market is sounding the alarm that things won’t be able to carry on much longer before a recession strikes. Germany’s yield curve is now at its flattest since the financial crisis -- and yields across the world are slumping to fresh lows -- in a cacophony of signs that investors are growing increasingly pessimistic about the outlook for the world economy. Central banks from New Zealand to India have responded by surprising markets with their efforts to boost stimulus. ‘This is all setting up for something very disruptive,’ said Marc Ostwald, a global strategist at ADM Investor Services. ‘What exactly is difficult to enumerate, but the flattening will continue as long as people believe that bunds are a safe haven.’”
August 5 – Financial Times (Tom Mitchell and Xinning Liu):
“The Trump administration’s formal designation of China as a currency ‘manipulator’ on Monday night was dramatic, coming just hours after Beijing finally allowed the renminbi to slip through seven to the dollar — a level it had flirted with repeatedly since 2016 but never breached. It was also largely symbolic. For now US President Donald Trump’s Treasury department will seek consultations with the IMF over possible remedies to what it believes is a rigged system. The designation did, however, highlight one of the central conflicts bedevilling Chinese and US trade negotiators… In area after area, the US is demanding structural reforms that the Chinese Communist party believes would undermine the stability of the world’s second-largest economy.”
August 5 – Bloomberg (Enda Curran and Claire Che): “The biggest slide in China’s yuan since 2015 threatens to revive concerns about the capital flight back then that helped spur the country to spend $1 trillion of its reserves. For all its perceived success in tightening regulations and strengthening scrutiny of funds moving abroad, the trauma of that period poses a big reason to avoid any continuous depreciation. An even more-important financial consideration could be the stockpile of Chinese dollar debt, which has more than doubled since the end of 2015 to $729.8 billion… Issuance so far this year is a record $138 billion. ‘Capital flight is still a major concern,’ said Fraser Howie, who has two decades of experience in China’s financial markets and co-wrote the 2010 book ‘Red Capitalism.’ ‘They are not going to be doing anything foolish.’”
August 6 – Reuters (Thyagaraju Adinarayan):
“Goldman Sachs said it no longer expects the United States and China to agree on a deal to end their prolonged trade dispute before the November 2020 presidential election as policymakers from the world’s largest economies are ‘taking a harder line’. The bank now expects two back-to-back rate cuts from the U.S. Federal Reserve (Fed) ‘in light of growing trade policy risks, market expectations for much deeper rate cuts, and an increase in global risk related to the possibility of a no-deal Brexit’.”
Trump Administration Watch:
August 8 – Bloomberg (Jenny Leonard, Ian King and Jennifer Jacobs):
“The White House is holding off on a decision about licences for U.S. companies to restart business with Huawei Technologies Co. after Beijing said it was halting purchases of U.S. farming goods… Commerce Secretary Wilbur Ross… said last week he’s received 50 requests and that a decision on them was pending. American businesses require a special license to supply goods to Huawei after the U.S. added the Chinese telecommunications giant to a trade blacklist in May over national-security concerns.”
August 5 – Bloomberg (Shawn Donnan):
“Donald Trump’s trade battle with China is starting to look like a forever war -- a quagmire with no end in sight, no clear path to a resolution and more potential land mines for an already weakening global economy. With his move last week to announce his biggest tariff hike yet on imports from China, the president made clear he was exasperated with counterpart Xi Jinping and a perceived lack of Chinese urgency. While Trump portrayed the threat as a move to pressure Beijing to cut a deal, China responded with a painful measure of its own -- letting its currency tumble to the lowest in more than a decade.”
August 4 – Wall Street Journal (Vivian Salama and Josh Zumbrun):
“President Trump overruled advisers to ramp up tariffs on China after a heated exchange in which he insisted levies were the best way to make Beijing comply with U.S. demands, according to people familiar with the matter. Barring a break in the impasse, the U.S. is now poised to impose 10% tariffs on roughly $300 billion in Chinese imports that aren’t currently taxed starting Sept. 1. Battle lines are hardening in Beijing as well… After returning [from China], the trade negotiators and other top advisers congregated early Thursday afternoon in the Oval Office to brief Mr. Trump on the talks. Messrs. Lighthizer and Mnuchin conveyed that they didn’t yield the kind of results that Mr. Trump had intended… ‘Tariffs,’ Mr. Trump said to his team… Those present included his national-security adviser John Bolton, top economic adviser Lawrence Kudlow, China adviser Peter Navarro and acting chief of staff Mick Mulvaney. All of them, save Mr. Navarro, a China hawk, adamantly objected to the tariffs, the people said. That spurred a debate lasting nearly two hours… Beijing insists that tariffs must be dropped in return for concessions demanded by the U.S. The president said his patience had worn thin and stood by his argument that tariffs were the best form of leverage…”
U.S. Bubble Watch:
August 5 – Reuters (Richard Leong):
“Growth in the U.S. services sectors decelerated in July to its weakest level in three years as trade worries weighed on business orders and the outlook for the overall economy, a private survey… showed. The Institute for Supply Management (ISM) said its non-manufacturing activity index fell to 53.7 from 55.1 the month before. Analysts… had forecast a reading of 55.5 for July.”
August 7 – Bloomberg (Christine Maurus):
“Home prices slipped in some of the costliest U.S. markets in the second quarter, a sign that would-be buyers are sitting out the competition for a scarcity of affordable properties. The median price for a previously owned single-family house increased 4.3% from a year earlier to $279,600, the National Association of Realtors said... Prices climbed in 162 of 178 metropolitan areas measured. The high-cost regions of San Jose, San Francisco and Honolulu were among those where prices fell. Americans are showing some resistance to overpaying for homes after years of price increases that have outpaced incomes.”
August 8 – Associated Press (Joe McDonald):
“Chinese imports of American goods plunged in July as a tariff war with Washington intensified. Imports of U.S. goods fell 19% from a year earlier to $10.9 billion…, though that was an improvement over June’s 31.4% fall. Exports to the United States declined 6.5% to $38.8 billion. Beijing has retaliated for U.S. tariff hikes in a dispute over trade and technology by imposing its own punitive duties and suspending purchases of American soybeans and other goods.”
August 6 – Wall Street Journal (Heather Gillers):
“Public pension plans fell short of their projected returns this year, adding to the burden on governments struggling to fund promised benefits to retired workers. Public plans with more than $1 billion in assets earned a median return of 6.79% for the year ended June 30, the lowest since 2016, according to Wilshire Trust Universe Comparison Service data... Public pension plans project a median long-term return of 7.25%, according to… Wilshire Associates in 2018.”
China Watch:
August 5 – Bloomberg (Katherine Greifeld and Liz McCormick):
“The yuan’s decline to a decade-low has analysts and investors casting a wary eye toward China’s $1.1 trillion pile of U.S. Treasuries. The idea that China -- America’s biggest foreign creditor -- would dump its U.S. debt holdings wholesale as a way to retaliate in the trade war is often dismissed as improbable… However, the yuan’s plunge on Monday past 7 per dollar -- long seen as a line in the sand for Chinese authorities -- shows the possibility can’t be ruled out, according to Stephen Roach, a senior lecturer at Yale University. China has ‘plenty of ammunition’ and is operating on a longer time-frame than U.S. President Donald Trump, he said. ‘Most people didn’t think they’d use the currency weapon and they’ve used that, and used it surgically.’ said Roach… ‘So conceivably, they might consider other options, and you can’t rule out the Treasuries option.’”
August 4 – Bloomberg:
“China’s ‘big four’ state-owned lenders, which together control more than $14 trillion of assets, tumbled to record-low valuations on Monday amid mounting concern that Beijing will encourage them to bail out smaller peers. Industrial & Commercial Bank of China Ltd., the world’s largest lender by assets, lost $11 billion of market value last week after injecting capital into a troubled regional bank as part of a government-orchestrated rescue. Big Chinese lenders have long sacrificed profits in the name of national service, but that prospect has become increasingly worrying as pressure builds on their regional, city and rural peers. Smaller Chinese banks tracked by UBS Group AG need an estimated $349 billion of fresh capital…”
August 8 – CNBC (Huileng Tan):
“China’s July food prices jumped 9.1% from a year ago, data from the National Bureau of Statistics showed on Friday, as the country battles soaring pork prices amid the spread of African swine fever. In particular, pork prices rose 27% from a year ago in July while fresh fruit prices rose 39.1%...”
August 9 – Bloomberg:
“Chinese auto sales returned to a downward trajectory last month after a brief uptick, showing the market’s historic rut is far from over. Retail sales of sedans, sport utility vehicles, minivans and multipurpose vehicles in July fell 5.3% from a year earlier to 1.51 million units... That’s the 13th decline in the past 14 months.”
Brexit Watch:
August 8 – Reuters (Kylie MacLellan):
“Parliament should honour the 2016 Brexit referendum and leave the European Union on Oct. 31, British Prime Minister Boris Johnson said…
when asked if he would resign if his government lost a vote of no-confidence. Johnson has pledged to take Britain out of the EU at the end of October, with or without a deal, setting himself up for a clash with lawmakers who have vowed to try and stop a no-deal Brexit, including by trying to collapse the government.”
August 8 – Associated Press (Pan Pylas):
“The British economy unexpectedly shrank in the second quarter for the first time since 2012 as Brexit uncertainties heaped pressure on firms… The decline is set to raise alarm that the economy could experience its first recession in a decade… The drop illustrates the market disappointment to the quarterly contraction, which lowered the annual growth rate to 1.2% from 1.8% in the first quarter.”
Europe Watch:
August 6 – Reuters (Michael Nienaber):
“German industrial output fell more than expected in June driven by weaker production of intermediate and capital goods, in a further sign that Europe’s biggest economy contracted in the second quarter… Industrial output dropped by 1.5% on the month - a far steeper decline than the 0.4% fall forecast… ‘The continued plunge in production is scary,’ Bankhaus Lampe economist Alexander Krueger said…”
August 8 – Reuters (Michael Nienaber):
“Germany is considering ditching its long-cherished balanced budget policy to help finance a costly climate protection program with new debt, a senior government official said. Chancellor Angela Merkel’s government has managed to raise public spending without incurring new debt since 2014 thanks to an unusually long growth cycle, record-high employment, buoyant tax revenues and the European Central Bank’s bond-buying plan.”
Global Bubble Watch:
August 7 – Bloomberg (Sybilla Gross):
“After a two-year slide, Australian house prices look to have bottomed out, sending buyers flocking back to the market. Case in point: An auction for a four-bedroom house in the Sydney suburb of Ryde on Saturday attracted about 100 people. Spirited bidding pushed offers A$226,000 above the reserve price, before it finally sold for almost A$1.5 million ($1 million) -- a buzz last seen during the boom years.”
Fixed-Income Bubble Watch:
August 6 – Bloomberg (Charles Williams):
“Some cracks are appearing in health-care loans, a sector that accounts for nearly 12% of exposure in CLO portfolios, according to JPMorgan. The development comes after a decades-long boom in spending and revenues with modest restraint on volume or price, analysts led by Rishad Ahluwalia wrote… Fortunately, the health-care sector is generally ‘creditor-friendly’ in its diversity…”
Geopolitical Watch:
August 5 – Reuters (Matt Spetalnick and Roberta Rampton):
“U.S. President Donald Trump imposed a freeze on all Venezuelan government assets in the United States…, sharply escalating an economic and diplomatic pressure campaign aimed at removing socialist President Nicolas Maduro from power.”
August 8 – Reuters (Chen Aizhu, Shu Zhang, Florence Tan, Muyu Xu, Timothy Gardner and Jeff Mason):
“China imported Iranian crude oil in July for the second month since a U.S. sanctions waiver ended, according to research from three data firms, with one estimate showing some oil entered tanks holding the country’s strategic reserves.”
August 8 – Bloomberg (Iain Marlow and Dandan Li):
“China has singled out a U.S. diplomat’s meeting with Hong Kong pro-democracy activists as evidence of allegations that foreign interference is to blame for historic unrest in Asia’s main financial hub. Beijing ‘lodged solemn representations’ with the U.S… after reports emerged of a meeting between Julie Eadeh, the political unit chief for the American consulate in Hong Kong, and activist Joshua Wong, who served a brief jail term for his prominent role leading an earlier wave of pro-democracy protests in 2014.”
August 5 – Reuters (Josh Smith and Joyce Lee):
“North Korea fired missiles into the sea off its east coast for the fourth time in less than two weeks, South Korea said…, as Pyongyang warned that hostile moves against it ‘have reached the danger line.’”
August 7 – Reuters (Asif Shahzad and Fayaz Bukhari): “Pakistan halted its main train service to India… and banned Indian films as it exerted diplomatic pressure on New Delhi for revoking the special status of Kashmir, the region at the heart of 70 years of hostility between them. Seeking to tighten its grip over the contested region, Prime Minister Narendra Modi’s government this week withdrew Muslim-majority Jammu and Kashmir’s right to frame its own laws and allowed people from outside the state to buy property there.”
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