Saturday, September 7, 2019
Weekly Commentary:
$150 Billion Global Corporate Bond Binge
by Doug Noland
full column here:
Highlights from the column:
For the Week ending
September 6, 2019:
S&P500 jumped 1.8% (up 18.8% y-t-d)
Dow Industrials gained 1.5% (up 14.9%)
Dow Utilities added 0.6% (up 18.8%)
Dow Transports gained 1.7% (up 12.3%)
S&P 400 Midcaps rose 1.6% (up 14.9%)
Small cap Russell 2000 increased 0.7% (up 11.6%)
Nasdaq100 advanced 2.1% (up 24.1%)
Biotechs declined 2.6% (up 1.2%).
HUI gold stock index sank 4.9% (up 35.1%).
Ten-year Treasury yields jumped six bps to 1.56% (down 112bps).
Long bond yields rose six bps to 2.03% (down 99bps).
Benchmark Fannie Mae MBS yields declined a basis point to 2.38% (down 112bps).
U.K.'s FTSE jumped 1.0% (up 8.2% y-t-d).
Japan's Nikkei added 0.2% (up 5.9% y-t-d).
France's CAC40 jumped 2.3% (up 18.5%)
German DAX rose 2.1% (up 15.5%).
Spain's IBEX 35 gained 2.0% (up 5.3%).
Italy's FTSE MIB surged 2.9% (up 19.8%)
Brazil's Bovespa gained 1.8% (up 13.1%)
Mexico's Bolsa added 0.2% (up 2.6%).
South Korea's Kospi rose 2.1% (down 1.6%).
India's Sensex declined 0.9% (up 2.5%).
China's Shanghai surged 3.9% (up 20.3%).
Turkey's Istanbul National 100 rose 2.3% (up 8.5%).
Russia's MICEX gained 2.1% (up 18.1%).
Freddie Mac 30-year fixed mortgage rates dropped nine bps to 3.49% (down 105bps y-o-y).
Fifteen-year rates fell six bps to 3.00% (down 99bps).
Five-year hybrid ARM rates dipped a basis point to 3.30% (down 63bps).
Jumbo mortgage 30-year fixed rates up one basis point to 4.21% (down 21bps).
Federal Reserve Credit
Over the past year
contracted 10.7%.
M2 money supply
gained 5.0%,
over the past year.
Commodities Watch:
Bloomberg Commodities Index gained 1.1% this week (up 1.2% y-t-d).
Spot Gold declined 0.9% to $1,507 (up 17.5%).
Silver retreated 1.2% to $18.119 (up 16.6%).
WTI crude jumped $1.42 to $56.52 (up 25%).
Gasoline rose 2.9% (up 19%)
Natural Gas surged 9.2% (down 15%).
Copper gained 3.2% (unchanged).
Wheat added 0.3% (down 8%).
Corn sank 3.9% (down 5%).
IN THE NEWS:
August 30 – Reuters (John Ainger):
“The global stock of negative-yielding debt is now in excess of $17 trillion as rising market volatility lends extra force to this year’s unprecedented bond rally. Thirty percent of all investment-grade securities now bear sub-zero yields, meaning that investors who acquire the debt and hold it to maturity are guaranteed to make a loss. Yet buyers are still piling in, seeking to benefit from further increases in bond prices and favorable cross-currency hedging rates—or at least to avoid greater losses elsewhere.”
September 4 – CNBC (Kayla Tausche and Jacob Pramuk): “President Donald Trump wanted to double tariff rates on Chinese goods last month after Beijing’s latest retaliation in a boiling trade war before settling on a smaller increase, three sources told CNBC. The president was outraged after he learned Aug. 23 that China had formalized plans to slap duties on $75 billion in U.S. products in response to new tariffs from Washington… His initial reaction, communicated to aides on a White House trade call held that day, was to suggest doubling existing tariffs… Treasury Secretary Steven Mnuchin and U.S. Trade Representative Robert Lighthizer then enlisted multiple CEOs to call the president and warn him about the impact such a move would have on the stock market and the economy.”
September 2 – Associated Press:
“The Trump administration’s latest round of tariffs on Chinese imports took effect early Sunday, potentially raising prices Americans pay for some clothes, shoes, sporting goods and other consumer goods in advance of the holiday shopping season. The 15% taxes apply to about $112 billion of Chinese imports. All told, more than two-thirds of the consumer goods the United States imports from China now face higher taxes. The administration had largely avoided hitting consumer items in its earlier rounds of tariff hikes.”
September 5 – CNBC (Jeff Cox):
“Job growth continued at a tepid pace in August, with nonfarm payrolls increasing by just 130,000 thanks in large part to the temporary hiring of Census workers… The increase fell short of Wall Street estimates for 150,000, while the unemployment rate stayed at 3.7%, as expected… Wage growth remained solid, with average hourly earnings increasing by 0.4% for the month and 3.2% over the year; both numbers were one-tenth of a percentage point better than expected. Labor force participation also increased, rising to 63.2% and tying its highest level since August 2013. The total number of Americans considered employed surged by 590,000 to a record 157.9 million, according to the household survey…”
September 4 – Reuters (Lucia Mutikani):
“The U.S. trade deficit narrowed slightly in July, but the gap with China, a focus of the Trump administration’s ‘America First’ agenda, surged to a six-month high… The trade deficit dropped 2.7% to $54.0 billion as exports rebounded and imports fell… The monthly trade gap has swelled from $46.4 billion at the start of 2017… The politically sensitive goods trade deficit with China increased 9.4% to $32.8 billion on an unadjusted basis, the highest since January, with imports jumping 6.4%. Exports to China fell 3.3% in July.”
September 5 – Reuters (Lucia Mutikani):
“The Institute for Supply Management said its non-manufacturing activity index increased to a reading of 56.4 in August from 53.7 in July.”
September 5 – Financial Times (Richard Henderson):
“As the second-quarter earnings season draws to a close, profits at US blue-chips have fallen 0.3% on a per-share basis, according to FactSet data. The drop means that, following a first-quarter contraction of 0.2%, companies are officially in an ‘earnings recession’…”
September 3 – Bloomberg (Richard Leong):
“The Institute for Supply Management (ISM) said its index of national factory activity decreased to 49.1, the lowest level since January 2016. This compared with a figure of 51.2 in July.”
September 5 – Reuters (Jason Lange and P.J. Huffstutter):
“Farm loan delinquencies rose to a record high in June at Wisconsin’s community banks…, a sign President Donald Trump’s trade conflicts with China and other countries are hitting farmers hard in a state that could be crucial for his chances of re-election in 2020. The share of farm loans that are long past-due rose to 2.9% at community banks in Wisconsin as of June 30…”
September 1 – Reuters:
“China’s factory activity unexpectedly expanded in August as production edged up…, but orders remained weak and business confidence faltered as the Sino-U.S. trade war continued to escalate. Export orders fell for the third month in a row and at the sharpest pace since November 2018, amid slowing global demand… The Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) for August rose to a five-month high of 50.4 from 49.9 in July, after two months of contraction.”
September 4 – Reuters (Roxanne Liu and Se Young Lee): “Activity in China’s services sector expanded at the fastest pace in three months in August as new orders rose, prompting the biggest increase in hiring in over a year… The Caixin/Markit services purchasing managers’ index (PMI) picked up to 52.1 last month, the highest since May, compared with July’s 51.6.”
September 5 – Financial Times (Don Weinland): “Provincial auditors across China are sounding the alarm on a wave of fast-approaching local government debt maturities that analysts think could amount to at least Rmb3.8tn ($560bn) within the next two and half years, presenting a risk to China’s financial system. The auditing office of Shaanxi province in northwestern China is the latest authority to release a worrying report on the level of debt repayments facing the local government. The office… warned this week that the province bears heavy repayment pressure over the next five years and that 34% of its so-called ‘hidden debt’ must be paid back before the end of the year… Hidden debt for Chinese local governments often refers to debt obligations that do not fall directly onto government books but are still considered liabilities. Local government financing vehicles (LGFVs), or companies operated by municipal or provincial officials, are a primary source of the hidden debt load.”
September 4 – Bloomberg:
“More Chinese companies are defaulting on private bonds this year as the slowing economy weighs on weaker companies and firms seek to repay publicly traded debt first. The nation’s issuers have missed repayments on a record 31.8 billion yuan ($4.4bn) of private bonds this year through August, compared with 26.7 billion yuan for all of 2017 and 2018 combined, according to data by China Chengxin International Credit Rating Co., one of China’s biggest rating firms.”
September 2 – South China Morning Post (Teddy Ng and Wendy Wu): “Chinese state media and government advisers have said Beijing is in no rush for a trade deal, instead warning that any concessions made to the United States would be a grave error. A commentary in the Communist Party mouthpiece People’s Daily… said Beijing needed to stand up to the US and not give in to pressure. ‘If China appears weak and gives concessions under hegemony, it will have committed a subversive historical error,’ said the commentary… ‘Facing extreme pressure and bullying behaviour, being weak and taking a step back will not get sympathy. We can only protect the core interest of the nation and the people by upholding rational and favourable struggle at the right pace.’”
September 4 – Reuters (Elizabeth Piper, William James and Kylie MacLellan): “The British parliament voted on Wednesday to prevent Prime Minister Boris Johnson taking Britain out of the European Union without a deal on Oct. 31, but rejected his first bid to call a snap election two weeks before the scheduled exit. After wresting control of the day’s parliamentary agenda from Johnson, the House of Commons backed a bill that would force the government to request a three-month Brexit delay rather than leave without a divorce agreement. Opposition Labour party leader Jeremy Corbyn said he would agree to hold an early election once the bill passed the upper house of parliament…”
September 4 – Reuters (Michael Nienaber):
“Weaker demand from abroad drove a bigger-than-expected drop in German industrial orders in July… Contracts for ‘Made in Germany’ goods fell 2.7% from the previous month in July, data showed on Thursday, driven by a big drop in bookings from non-euro zone countries, the economy ministry said. That undershot a… forecast for a 1.5% drop.”
September 2 – Financial Times (Michael Stott and Benedict Mander): “The decision to seek what became the biggest bailout in the IMF’s history took only a few minutes. A loss of faith in Argentina’s reform programme had been visibly demonstrated by a two-week run on the peso in spring last year. President Mauricio Macri had few options left. A long-mooted contingency plan went into action. ‘When it came to it, we had discussed it so much, for Macri it was no problem,’ says one senior government official recalling the events of last May. ‘The decision took five minutes . . . back then, Macri was fine and he was very happy with the agreement . . . after all, we had managed to get $50bn.’”
September 3 – Reuters (Wayne Cole):
“Australia’s much-vaunted economy grew at its slowest pace in a decade last quarter as cash-strapped consumers went on strike, an urgent argument for more monetary and fiscal stimulus as headwinds mount globally. Gross domestic product (GDP) rose just 1.4% in the June quarter from a year earlier…”
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