Friday, May 28, 2021
Weekly Commentary:
by Doug Noland
My edited easy to read version follows:
Ye Editor
For the Week Ending
May 28, 2021:
STOCK INDEXES,
BOND YIELDS and
MORTGAGE RATES:
Dow added 0.9% (up 12.8%)
Utilities fell 1.6% (up 3.0%)
Transports advanced 1.8% (up 25.9%)
S&P 400 Midcaps rose 1.4% (up 18.2%)
Small cap Russell 2000 jumped 2.4%
(up 14.9%)
Nasdaq100 advanced 2.0% (up 6.2%)
Semiconductors surged 4.4% (up 14.0%)
Biotechs slipped 0.4% (down 2.9%).
With GOLD bullion jumping $23,
the HUI gold stock index dipped 0.4% (up 6.4%).
U.K.'s FTSE little changed (up 8.7% y-t-d).
Japan's Nikkei surged 2.9% (up 6.2% y-t-d).
German DAX added 0.5% (up 13.1%)
Brazil's Bovespa jumped 2.5% (up 5.5%)
India's Sensex rose 1.7% (up 7.7%)
China's Shanghai surged 3.3% (up 3.7%)
US three-month Treasury bill rates
ended the week at negative 0.0025%.
US ten-year Treasury yields
fell about three bps to 1.60% (up 68bps).
to a record $7.889 TN.
Fed Credit expanded
Fifteen-year rates
declined two bps to 2.27%
(down 35bps).
Five-year hybrid ARM rates
were unchanged at 2.59%
(down 54bps).
Jumbo mortgage 30-year fixed rates
down a basis point to 3.10%
(down 60bps).
COMMODITIES:
Spot Gold gained 1.2% to $1,904
(up 0.3%).
Silver rose 1.3% to $27.94
(up 5.8%).
WTI crude surged $2.74 to $66.32
(up 37%).
Gasoline jumped 3.5%
(up 52%)
Natural Gas rose 2.8%
(up 18%).
Copper surged 4.4%
(up 33%).
Wheat fell 1.6%
(up 4%).
Corn slipped 0.4%
(up 36%).
Bitcoin dropped $2,328,
or 6.2%, this week
to $34,986
(up 20%).
NEWS FROM LAST WEEK:
May 21 – Reuters:
“The death toll from COVID-19 in Latin America and the Caribbean passed 1 million people…, with the pandemic worsening in the part of the world with the highest per capita death rate. From the dusty highlands of Bolivia to the Brazilian metropolis of São Paulo, the pandemic has swamped underfunded healthcare systems after spreading fast across nations where many people survive hand-to-mouth and have been unable to enter lockdown.”
Market Mania Watch:
May 24 – CNBC (Yun Li):
“Bitcoin is still in a stretch of double-digit intraday moves after briefly halving its value last week, and Wall Street strategists say this crazy run won’t be over anytime soon. It’s been a rude awakening for bitcoin investors who thought they could handle the crypto volatility. The world’s largest digital currency suffered a 30% one-day drop last Wednesday, falling to about $30,000 apiece. Just in mid-April, bitcoin hit a record high of $64,829. The turbulence was dramatic even by crypto’s standards.”
May 24 – CNBC (Stephanie Landsman):
“Nobel prize-winning economist Robert Shiller is worried a bubble is forming in some of the market’s hottest trades. He’s notably concerned about housing, stocks and cryptocurrencies, where he sees a ‘Wild West’ mentality among investors… ‘In real terms, the home prices have never been so high. My data goes back over 100 years, so this is something,’ said Shiller… ‘I don’t think that the whole thing is explained by central bank policy. There is something about the sociology of markets that’s happening.’”
May 23 – Reuters:
“Cryptocurrency miners, including HashCow and BTC.TOP, have halted all or part of their China operations after Beijing intensified a crackdown on bitcoin mining and trading, hammering digital currencies amid heightened global regulatory scrutiny. A State Council committee led by Vice Premier Liu He announced the crackdown late on Friday as part of efforts to fend off financial risks. It was the first time China's cabinet has targeted virtual currency mining, a sizable business in the world's second-biggest economy that some estimates say accounts for as much as 70% of the global crypto supply.”
Market Instability Watch:
May 25 – CNBC (Kate Rooney and Maggie Fitzgerald): “Bitcoin’s aggressive moves are being driven by much more than the next China crackdown or Elon Musk headline. Traders taking excessive risk in the unregulated cryptocurrency market being forced to sell when prices go down were in large part responsible for last week’s 30% drop in prices and outages for major exchanges, according to analysts. A burgeoning bitcoin lending market is also adding to the volatility… When traders use margin, they essentially borrow from their brokerage firm to take a bigger position in bitcoin. If prices go down, they have to pay the brokerage firm back in what’s known as a ‘margin call.’ As part of that, there’s often a set price that triggers selling in order to make sure traders can pay the exchange back. Brian Kelly, CEO of BKCM, pointed to firms in Asia such as BitMEX allowing 100-to-1 leverage for cryptocurrency trades.”
Inflation Watch:
May 22 – CNBC (Patti Domm):
“Workers are getting higher wages, but at some point that could bite into companies’ profits. As the economy reopens, costs are climbing for everything from packaging and raw materials to shipping. In addition to these expenses, companies are also paying more to get workers to come in the door…. McDonald’s said last week that it was boosting wages for the 36,500 hourly workers at company-owned stores by 10%, and Chipotle announced it will raise wages to an average of $15 an hour by the end of June. Bank of America said it would raise minimum wages for its hourly workers to $25 an hour, from the current $20, by 2025.”
May 24 – Wall Street Journal (Telis Demos):
“Investors hunting for signs of inflation pressure should keep an eye on something they might not usually think about: the cost of insuring a car or home. Last year insurers were often lowering premiums for auto customers who were driving a lot less and therefore getting into fewer accidents. Now… consumers’ motor-vehicle insurance costs are again rising. The recent U.S. consumer-price index update had that component up 6.1% in April from a year earlier… The question for insurers is whether premium increases will be big enough. Part of the cost of covering a claim to repair or replace a car or home is under pressure.”
Biden Administration Watch:
May 24 – Bloomberg (David R. Baker and Keith Laing): “Three times this year, major pieces of U.S. infrastructure have failed: first the Texas power grid, then the East Coast’s main gasoline pipeline, then a freeway bridge over the Mississippi River. The crises disrupted businesses and lives, cost billions and left more than 150 Texans dead. President Joe Biden’s $1.7 trillion infrastructure package wouldn’t necessarily have prevented any of those failures. It wouldn’t have stopped the hackers who shut down the Colonial Pipeline for days, closing gas stations across the Southeast. While the hack may push the federal government to enforce pipelines’ cybersecurity, the administration bill is silent on that issue.”
U.S. Bubble Watch:
May 25 – CNBC (Diana Olick):
“Home prices were 13.2% higher in March, compared with March 2020, according to the S&P CoreLogic Case-Shiller National Home Price Index. That’s up from the 12% annual gain in February, and it marks the 10th straight month of accelerating home prices. The March gain is the largest since December 2005 and is one of the largest in the index’s 30-year history… High demand is butting up against near record-low supply, resulting in bidding wars for the vast majority of listings. The 10-city composite rose 12.8% year over year, up from 11.7% in the previous month. The 20-city composite increased 13.3%, up from 12% in February.”
May 25 – Wall Street Journal (Nicole Friedman):
“Prices for new and previously owned U.S. homes are surging, as strong demand continues to overwhelm the housing supply. The S&P CoreLogic Case-Shiller National Home Price Index… rose 13.2% in the year that ended in March, up from a 12% annual rate the prior month. March marked the highest annual rate of price growth since December 2005. Also…, the Commerce Department said the median price of a new home sold in April was $372,400, up 20.1% from a year earlier, the strongest annual gain since 1988. The median sales price for existing homes rose 19.1% in April to $341,600…”
May 27 – Reuters (Joe White):
“U.S. consumers borrowed more for longer in the first quarter of 2021 so they could drive more expensive trucks and sport utility vehicles, according to a new Experian study… The average amount financed to buy a new vehicle rose to $35,392 in the first quarter from $33,833 a year earlier. The share of new vehicle loans longer than 72 months rose to just over 35% of the total from just under 32% a year earlier.”
Fixed Income Watch:
May 28 – Bloomberg (Alex Wittenberg):
“U.S. high-grade bond spreads fell to a 14-year low Friday as investors temper their inflation projections and grow bullish on a reopening economy. The risk premium on investment-grade debt tightened one basis point to close at 84 bps over Treasuries, a level last seen in 2007…”
May 24 – Wall Street Journal (Sebastian Pellejero): “Sales of securities backed by bundles of risky corporate loans are hitting records, lifted by a recovering economy and demand from yield-starved investors. Issuance of new collateralized loan obligations, which buy up loans to companies with junk credit ratings and package them into securities, totaled over $59 billion as of May 20, according to… S&P Global Market Intelligence’s’ LCD. That is the highest ever figure for that period in data going back to 2005.”
China Watch:
May 23 – Bloomberg:
“Even by the standards of a record-breaking global credit binge, China’s corporate bond tab stands out: $1.3 trillion of domestic debt payable in the next 12 months. That’s 30% more than what U.S. companies owe, 63% more than in all of Europe and enough money to buy Tesla Inc. twice over. What’s more, it’s all coming due at a time when Chinese borrowers are defaulting on onshore debt at an unprecedented pace. The combination has investors bracing for another turbulent stretch for the world’s second-largest credit market. It’s also underscoring the challenge for Chinese authorities as they work toward two conflicting goals: reducing moral hazard by allowing more defaults, and turning the domestic bond market into a more reliable source of long-term funding.”
May 25 – Bloomberg:
“China’s escalating push to rein in cryptocurrency mining was triggered in part by concern that the practice has stoked a surge in illicit coal extraction, endangering lives and undermining Xi Jinping’s ambitious environmental goals. Authorities decided to act after concluding the spike in electricity consumption from server farms underpinning Bitcoin and other tokens was a key factor behind rising demand for coal in certain parts of China…”
Global Bubble Watch:
May 24 – Financial Times (Chris Giles and James Politi): “The Group of Seven top advanced economies are close to an accord on the corporate taxation of multinationals, paving the way for a global deal later in the year to create new rules for the imposition of levies on the world’s largest companies. A G7 pact could be sealed as early as Friday after progress was made among top officials in recent days — and would be a powerful force and prerequisite for a deal in the formal negotiations taking place at the OECD in Paris and directed by the wider G20. An OECD agreement would probably lead to the largest shake-up in international corporate taxation for a century, severely curtailing the ability of companies to shift profits to low tax jurisdictions and ensuring that US digital giants paid more tax in the countries where they made sales.”
May 26 – Financial Times (Song Jung-a):
“Many of South Korea’s 200 crypto exchanges face an ‘existential crisis’ as they struggle to meet conditions for regulatory approval, in a shake-up for one of the world’s biggest cryptocurrency markets. To win a business licence as a legal trading platform, Korean exchanges are required to partner with local banks to open real-name bank accounts for customers. But banks are concerned that this could leave them liable for any money laundering in digital currencies. Now, a deadline of September 24 from the Financial Services Commission is looming, and only a handful of exchanges are expected to meet the requirements…”
Europe Watch:
May 24 – Bloomberg (Laura Benitez and Irene García Pérez): “It’s the latest sign of leveraged mania hitting bondholders: Companies across Europe are piling on debt at the fastest pace in at least four years to enrich their private-equity owners. The controversial practice known as dividend recaps is growing as investors gorge on every credit risk, handing a windfall to buyout pros… Private equity firms have always borrowed to buy companies. But they’re layering on extra debt to write themselves dividend checks at a time when central banks have driven borrowing costs to all-time lows… ‘If people want to put capital to work they’re just buying anything with a bit of yield, regardless of what proceeds are for,’ said Mark Benbow… manager at Aegon Asset Management. ‘Perhaps the market is just too complacent or perhaps believes the central bankers will always be there as a backstop. Whatever the reason, these deals are getting done very easily.’”
Environmental Watch:
May 26 – Reuters (Scott DiSavino):
“Extreme heat this summer could create energy shortfalls in California, Texas, New England and the U.S. West and Central regions, the organization responsible for North American electric reliability warned… California is most at risk of power shortages this summer as the state increasingly relies on intermittent energy sources like wind and solar, and as climate change causes more extreme heat events, drought and wildfires across the U.S. West.”
Geopolitical Watch:
May 23 – Wall Street Journal (Michael R. Gordon, Warren P. Strobel and Drew Hinshaw): “Three researchers from China’s Wuhan Institute of Virology became sick enough in November 2019 that they sought hospital care, according to a previously undisclosed U.S. intelligence report that could add weight to growing calls for a fuller probe of whether the Covid-19 virus may have escaped from the laboratory. The details of the reporting go beyond a State Department fact sheet, issued during the final days of the Trump administration, which said that several researchers at the lab, a center for the study of coronaviruses and other pathogens, became sick in autumn 2019 ‘with symptoms consistent with both Covid-19 and common seasonal illness.’”
May 25 – Wall Street Journal (Thomas Grove):
“Last year, on one of the northernmost air bases in the world, Russia’s military laid the final stretch of reinforced concrete on a runway to make it long enough to handle modern jet fighters and strategic bombers. The finishing touches to Nagurskoye Airbase, located on a largely ice-locked archipelago in the Arctic Ocean, are turning a once-abandoned staging point for Soviet aircraft into one of Russia’s most advanced military outposts. It is one in a string of new and refurbished bases meant to service the Kremlin’s ambitions in the resource-rich Arctic. Those bases were combined to form a new military district in January under the command of the Northern Fleet, Russia’s foremost Arctic naval force.”
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