Financial and economic news for the week ending February 21, 2020

Saturday, February 22, 2020

Weekly Commentary: 

Pandemic Risk Rising

by Doug Noland

full article here:
http://creditbubblebulletin.blogspot.com/2020/02/weekly-commentary-pandemic-risk-rising.html

Portions that 

interested me

are below:

Ye Editor

Coronavirus cases in China surpassed 76,000. 

Deaths have reached 2,345. 

The number of new cases has slowed markedly, perhaps owing to repeated changes in the methodology of counting infections. 

February 21 – Bloomberg: 
“China car sales plunged 92% during the first two weeks of February as the coronavirus outbreak kept buyers away from showrooms. It was even worse in the first week, when nationwide sales tumbled 96% to a daily average of only 811 units, the China Passenger Car Association said in a report released earlier this week. Deliveries this month may slide by about 70%, resulting in a roughly 40% drop in the first two months of 2020, the association said.”

For the week ending
February 21, 2020:

S&P500 fell 1.3% (up 3.3% y-t-d)

Dow Industrials lost 1.4% (up 1.6%)

Dow Utilities little changed (up 9.0%). 

Dow Transports gained 0.4% (up 0.1%)

S&P 400 Midcaps dipped 0.6% (up 1.0%)

Small cap Russell 2000 declined 0.5% (up 0.6%). 

Nasdaq100 dropped 1.8% (up 8.2%). 

Biotechs rose 0.9% (up 4.6%). 

With gold bullion jumping $59, 
the HUI gold stock index surged 10.8% 
   (up 3.2%).

 U.K.'s FTSE was little changed (down 1.8%).

Japan's Nikkei declined 1.3% (down 1.1% y-t-d). 

France's CAC40 declined 0.7% (up 0.9%)

German DAX fell 1.2% (up 2.5%). 

Spain's IBEX 35 dipped 0.7% (up 3.5%). 

Italy's FTSE MIB slipped 0.4% (up 5.4%)

Brazil's Bovespa declined 0.6% (down 1.7%)

Mexico's Bolsa slipped 0.4% (up 2.9%). 

South Korea's Kospi index sank 3.6% (down 1.6%). 

India's Sensex dipped 0.2% (down 0.2%). 

China's Shanghai Exchange rallied 4.2% (down 0.3%). 

Turkey's Istanbul National 100 sank 2.8% (up 2.1%). 

Russia's MICEX added 0.3% (up 2.0%).

 US Ten-year Treasury yields
 sank 12 bps to 1.47% 
   (down 45bps).
Long bond yields 
dropped 12 bps to 1.915% 
   (down 47bps).

Freddie Mac 30-year fixed mortgage rates 
added two bps to 3.49% (down 86bps y-o-y). 

Fifteen-year rates
 gained two bps to 2.99% (down 79bps). 

Five-year hybrid ARM rates 
declined three bps to 3.25% (down 59bps). 

Jumbo mortgage 30-year fixed rates 
up 13 bps to 3.74% (down 64bps).

Federal Reserve Credit
last week gained $9.8bn 
to $4.145 TN, 
with a 23-week gain 
of $418 billion. 
Over the past year, 
Fed Credit expanded 
$193bn, or 4.9%. 

M2 (narrow) "money" supply 
rose $18.9bn last week 
to a record $15.509 TN. 
"Narrow money" 
surged $1.040 TN, 
or 7.2%, over the past year. 

Commodities Watch:

Bloomberg Commodities Index up 1.1%
    (down 5.7% y-t-d). 

Spot Gold jumped 3.7% to $1,643 
   (up 8.2%). 

Silver surged 5.0% to $18.613 
     (up 3.9%). 

WTI crude recovered $1.41 to $53.46 
    (down 12%). 

Gasoline rallied 4.3% 
   (down 2%)

Natural Gas jumped 3.7% 
   (down 13%). 

Copper increased 0.3% 
   (down 7%). 

Wheat gained 1.9% 
   (down 1%). 

Corn dipped 0.3% 
   (down 2%).

NEWS  FROM  LAST  WEEK

February 18 – Reuters (Gertrude Chavez-Dreyfuss): 
“Foreign buying of Treasuries in 2019 hit their largest level in seven years…, as Japanese and euro zone investors sought higher-yielding U.S. government debt in a world of negative interest rates. Overall foreign inflows into U.S. Treasuries hit $6.696 trillion in December, up about $425 billion from a year earlier. That was the largest foreign inflow since 2012… Japanese investors bought $115 billion in U.S. Treasuries in 2019, while euro zone investors were net buyers of more than $100 billion, accounting for half of foreign buying last year.”

February 18 – Financial Times (Joe Rennison): 
“The cost of insuring against the default of some of the world’s biggest corporate borrowers has dropped to its lowest levels since 2007, as investors bet that continued strong support from central banks will keep credit markets ticking over. The CDX North American Investment Grade index, which reflects the cost of default protection on bonds issued by 125 US companies, fell to 43.81 bps last week, implying a premium of $4.38 to insure a $1,000 portfolio of bonds. That was its lowest level since July 2007… An equivalent index tracking a group of European credit default swaps dropped to 41.26bp on Monday, also its lowest level since November 2007… One credit derivatives trader said the CDX index’s recent move lower had been driven in part by the strong investor appetite for corporate bonds. ‘The CDS indices are used as place-holders,’ said the trader. ‘If there aren’t enough individual corporate bonds to buy then people sell CDX. There are a tonne of people that want to buy corporate credit and it is driving the index lower.’”

February 18 – Bloomberg (Joanna Ossinger): 
“Trading in U.S. stock options has by at least one metric reached a level of bullishness not seen since the height of the dot-com boom. Investors bought to open almost 24 million call options last week, more than ever before, Sundial Capital’s Jason Goepfert wrote… At the same time, selling of calls to close dropped nearly 30% from its level a couple of weeks ago… That puts the difference between the two at a record high. ‘We’re seeing a level of leveraged speculation right now’ that ‘only has the early 2000s as a precedent,’ Goepfert wrote… In the past 20 years, any time calls bought to open minus calls sold to close hit 10 million, stocks struggled in the months that followed, he said.”

February 18 – Financial Times (Jennifer Alban): 
“While the S&P 500, Dow and Nasdaq have surged to record highs in recent weeks, another rally has taken hold. The US options market has been experiencing a huge jump in trading — led by large-capitalisation companies including Tesla, Amazon, Apple, Google, Microsoft and Disney, according to analysts at Goldman Sachs. Vishal Vivek, equity derivatives strategist…, noted that trading volumes in US options were now almost as high as volumes on the underlying stocks, at 91%. That is the highest level in at least the past 14 years, and about three times the equivalent percentage in 2016. The purchase of ‘call’ options… has been a particularly popular trade. If the stock increases in price over that period, the holder of the call option gains.”

February 19 – Wall Street Journal (Jon Sindreu):
“The stock market’s coronavirus wobbles may be overdone given the robustness of the U.S. economy, so it is tempting to say that ‘the only thing to fear is fear itself.’ What should be concerning, though, is that there is little of it. On Tuesday, February’s survey of global fund managers conducted between Feb. 6 and 11 by Bank of America Merrill Lynch showed that cash now makes up only 4% of portfolios, the lowest since March 2013. Little ‘cash on the sidelines’ is often a sign of investor confidence.”

February 19 – Financial Times (Mamta Badkar): 
“US and European stocks are at record levels, but analysts at Goldman Sachs have cautioned the risk of a correction in equity markets is ‘high’ as the impact of the coronavirus on earnings is being underestimated by investors. ‘We believe the greater risk is that the impact of the coronavirus on earnings may well be underestimated in current stock prices, suggesting that the risks of a correction are high,’ said Peter Oppenheimer, analyst at Goldman Sachs…”

February 19 – Reuters (Josh Horwitz and Chayut Setboonsarng):
“Blocked highways. Stranded workers. Dwindling supplies. Shipping and air freight companies also hamstrung. The Chinese manufacturing engine that powers much of the world economy is struggling to restart after an extended Lunar New Year break, hindered by travel and quarantine restrictions imposed to curb the coronavirus epidemic and still in place in many parts of the country. Case in point: in the southern China manufacturing hub of Dongguan, a factory that makes vaporizers and other products had just half of its workforce of 40 last week and was struggling to function without key personnel. ‘The quality inspectors, they’re all out,’ said Renaud Anjoran, who runs the factory. ‘One is stuck in Hubei, the other is in an area with no transportation open.’”

February 17 – Reuters (Stella Qiu, Hallie Gu, Dominique Patton, Tom Daly, Min Zhang, Yawen Chen and Lusha Zhang): 
“China will grant exemptions on retaliatory duties imposed against 696 U.S. goods, the most substantial tariff relief to be offered so far, as Beijing seeks to fulfill commitments made in its interim trade deal with the United States.”

February 16 – Bloomberg:
 “Most U.S. factories in China’s manufacturing hub around Shanghai will be back at work this week, but the ‘severe’ shortage of workers due to the coronavirus will hit production and global supply chains, according to the American Chamber of Commerce in Shanghai. While about 90% of the 109 U.S. manufacturers in the Yangtze River delta expect to resume production this week, 78% of them said they don’t have sufficient staff to run at full speed, according to a survey by AmCham.”

February 14 – Bloomberg (Alex Longley): 
“February 2020 will come to be remembered as a period of historic disruption to physical supply chains the world over, as the coronavirus wrecks trade. Dozens of export sailings to ship China-made goods to consumers from the U.S. to Europe -- think handbags, flat-screen TVs, and plastic toys -- have been canned since the coronavirus crisis escalated last month. Those non-shipments are part of a much bigger picture in which every aspect of global shipping -- from oil and gas through to dry-bulk commodities -- has been upended. The unprecedented gyrations caused by the virus matter because 90% of all trade moves by sea and China has grown into the maritime industry’s main source of cargoes.”

February 17 – Wall Street Journal (Asa Fitch and Bob Davis): 
“The Trump administration is weighing new trade restrictions on China that would limit the use of American chip-making equipment, as it seeks to cut off Chinese access to key semiconductor technology, according to people familiar with the plan. The Commerce Department is drafting changes to the so-called foreign direct product rule, which restricts foreign companies’ use of U.S. technology for military or national-security products. The changes could allow the agency to require chip factories world-wide to get licenses if they intend to use American equipment to produce chips for Huawei… Chinese companies are bound to see the action as a threat to them too, which is a goal of the proposed rule… The move is aimed at slowing China’s technological advancement but could risk disrupting the global supply chain for semiconductors…”

February 18 – Reuters (Jonathan Landay): 
“The Trump administration said… it will begin treating five major Chinese state-run media entities with U.S. operations the same as foreign embassies, requiring them to register their employees and U.S. properties with the State Department. Two senior state department officials said the decision was made because China has been tightening state control over its media and President Xi Jinping has made more aggressive use of them to spread pro-Beijing propaganda. ‘The control over both the content and editorial control have only strengthened over the course of Xi Jinping’s term in power,’ said one official. ‘These guys are in fact arms of the CCP’s (Chinese Community Party’s) propaganda apparatus.’”

February 19 – Reuters (Lucia Mutikani): 
“U.S. homebuilding fell less than expected in January while permits surged to a near 13-year high, pointing to sustained housing market strength amid lower mortgage rates. Housing starts dropped 3.6% to a seasonally adjusted annual rate of 1.567 million units last month… That followed three straight monthly increases. Data for December was revised up to show homebuilding rising to a pace of 1.626 million units, the highest level since December 2006, instead of surging to a rate of 1.608 million units as previously reported.”

February 18 – Bloomberg (Prashant Gopal):
 “U.S. homebuilders are off to a hot start in 2020. In January, the average number of new home orders per community surged 34% to the highest level for the month since the housing recovery began in 2012, according to a survey by John Burns Real Estate Consulting. The January surge comes after sales ticked up in the second half of 2019… The credit goes to job growth, consumer confidence, a strong stock market and, most importantly, a plunge in mortgage rates, according to Rick Palacios Jr., the firm’s director of research.”

February 18 – Bloomberg (Max Reyes): 
“U.S. homebuilder sentiment in February remained near the highest level since 1999 as lower borrowing costs kept construction firms upbeat about sales prospects. The National Association of Home Builders/Wells Fargo Housing Market Index in February edged down 1 point to 74… Readings above 50 indicate more builders view conditions as good than poor…”

February 21 – Reuters: 
“The National Association of Realtors said on Friday existing home sales declined 1.3% to a seasonally adjusted annual rate of 5.46 million units last month. December’s sales pace was revised down to 5.53 million units from the previously reported 5.54 million units.”

February 21 – Reuters (Dan Burns):
 “U.S. business activity in both the manufacturing and services sectors stalled in February as companies have grown increasingly concerned about the coronavirus, a survey of purchasing managers showed… The IHS Markit flash services sector Purchasing Managers’ Index dropped to 49.4 this month, the lowest since October 2013 and signaling that a sector accounting for roughly two-thirds of the U.S. economy was in contraction for the first time since 2016.”

February 19 – Reuters (Lucia Mutikani):
 “U.S. producer prices increased by the most in more than a year in January, boosted by rises in the costs of services such as healthcare and hotel accommodation. The… producer price index for final demand jumped 0.5% last month, the largest gain since October 2018, after climbing 0.2% in December. In the 12 months through January, the PPI advanced 2.1%, the biggest increase since May…”

February 18 – CNBC (Jeff Cox): 
“A recent survey from the Manpower Group… exemplifies the chasm: reported talent shortages in 2019, the worst level ever and a jump of 17 percentage points from just a year ago. It’s also more than three times higher than a decade ago. The data comes as the Labor Department reports that there are still about 670,000 more job vacancies than there are unemployed potential workers.”

February 19 – Financial Times (Derek Brower): 
“Bankruptcy risks in the US shale sector are rising, with weak oil prices and tightening access to credit worsening the outlook for some producers just as a ‘staggering’ $86bn in debt maturities start to come due. Speculative-grade, or subinvestment, debt makes up more than 60% of the total to be repaid between now and 2024, ‘implying a higher degree of default risk for the industry’, said Moody’s… Speculative-grade maturities will peak in 2022, dwarfing investment-grade maturities by almost two to one that year, Moody’s said.”

February 18 – Wall Street Journal (Konrad Putzier):
“More New York City hotel owners are defaulting on their mortgages, succumbing to a crush of new supply and rising expenses. The surge in new development has pressured room rates, while short-term rental-listing websites such as Airbnb Inc. have also gained market share. New York’s average daily room rate fell to $255.16 last year, according to research firm STR. That is down from $271.15 in 2014 and the lowest figure since at least 2013. A continued construction boom could push these numbers down further: 22,117 new hotel rooms were under construction or in planning as of January, according to STR.”

February 19 – Bloomberg (Paula Seligson):
 “Junk bonds are starting to look a little like leveraged loans in a new sign of investor fever for higher-yielding debt. Private-equity owned companies Zayo Group Holdings Inc. and LifePoint Health Inc. have torn up the rule book when it comes to a high-yield bond structure known as the non-call period, which makes it harder for borrowers to redeem debt early without paying a penalty to investors. Zayo’s planned offering trims the period to just a year, bringing it closer in line to the structure in leveraged loans. Some analysts have sounded the alarm that the deals could set a new precedent in a market that’s seen years of eroding investor protections. Yet demand has stayed strong with orders for Zayo’s $1 billion secured bond swelling to twice that amount before marketing even began on Tuesday, as investors clamor for deals…”

February 20 – UK Guardian: 
“The South Korean city of Daegu was facing an ‘unprecedented crisis’ after coronavirus infections that centered on a controversial ‘cult’ church surged to 38 cases, accounting for nearly half of the country’s total. The city of 2.5 million people, which is two hours south of the capital Seoul, was turned into a ghost town after health officials said the bulk of country’s 31 new cases announced on Thursday were linked to a branch of the Shincheonji Church of Jesus. ‘We are in an unprecedented crisis,’ Daegu’s mayor, Kwon Young-jin, told reporters.”

February 19 – Bloomberg (Gearoid Reidy): 
“Japan is emerging as one of the riskiest places for the spread of the coronavirus, prompting criticism that Prime Minister Shinzo Abe’s government has misfired on its policies to block the outbreak. The number of infections in Japan has more than doubled in the past week to 84, tying Singapore as the country outside mainland China with the most cases. The government is being faulted for being too slow to bar visitors from China and too lax in its quarantine of the Diamond Princess cruise ship, where infections surged during two weeks docked in Yokohama.”

February 16 – Reuters (Leika Kihara and Daniel Leussink): 
“Japan’s economy shrank at the fastest pace in almost six years in the December quarter as a sales tax hike hit consumer and business spending, raising the risk of a recession as China’s coronavirus outbreak chills global activity… Japan’s gross domestic product (GDP) shrank an annualized 6.3% in the October-December period…, much faster than a median market forecast for a 3.7% drop and the first decline in five quarters.”

February 18 – Reuters (Tetsushi Kajimoto):
 “Japan’s machinery orders tumbled at their fastest pace since 2018 while exports posted a 14th straight month of decline as the world’s third-largest economy grappled with the widening impact of the coronavirus outbreak and a recent sales tax hike. …Exports fell 2.6% year-on-year in January, smaller than a 6.9% decrease expected by economists and dragged by U.S-bound shipments of cars and construction and mining machinery. It followed a 6.3% fall in December. Separate data… showed core machinery orders, a highly volatile data series regarded as an indicator of capital spending in the coming six to nine months, fell 12.5% month-on-month in December…