U.S. Financial News Summary of the Week ending November 11, 2022

 Market Instability Watch:

November 11 – CNBC (Joshua Oliver and Nikou Asgari): “The $1tn digital asset market faces a crisis akin to the 2008 financial crash, according to Binance chief Changpeng Zhao, who warned more companies might fail in the coming weeks following the troubles at FTX. Zhao, founder of the world’s biggest digital asset exchange, said the full impact of the meltdown at rival crypto exchange FTX had yet to be felt… He said the global financial crisis was ‘probably an accurate analogy’ to this week’s events. ‘With FTX going down, we will see cascading effects,’ Zhao said. ‘Especially for those close to the FTX ecosystem, they will be negatively affected.’”

November 11 – Bloomberg (Jack Pitcher and Caleb Mutua): “US credit markets surged by the most in two years on Thursday after inflation showed signs of moderating, boosting the prospects of corporate borrowers. A key measure of US credit risk -- the Markit CDX North American Investment Grade Index -- saw spreads tighten the most since September 2020, while the equivalent high-yield gauge rallied the most since November 2020.”

November 11 – Bloomberg (Sam Potter and Katie Greifeld): “Investors trying to gauge the strength of the risk-on shift that gripped markets Thursday should look no further than two of the biggest high-yield credit exchange-traded funds. As softer-than-anticipated inflation data sparked the best day for stocks in more than two years and sent around $13.4 billion into equity ETFs, products targeting junk bonds were seeing unprecedented demand.”

November 8 – Reuters (Gertrude Chavez-Dreyfuss): “The U.S. Federal Reserve's ongoing balance sheet drawdown has exacerbated low liquidity and high volatility in the $20-trillion U.S. Treasury debt market, raising questions on whether the Fed needs to re-think this strategy. Intended to drain stimulus pumped into the economy during the COVID-19 pandemic, the Fed's quantitative tightening (QT)… has been running for the last five months. The Fed's balance sheet though remains at a lofty $8.7 trillion, down modestly from a peak of nearly $9 trillion.”

November 8 – Wall Street Journal (Sam Goldfarb and Megumi Fujikawa): “Japan has been one of the world’s biggest buyers of U.S. Treasurys for years, helping to hold down borrowing costs for American businesses and consumers. Now that is changing. Signs are mounting that Japan’s government is selling short-term U.S. bonds, part of an effort to prop up its currency. At the same time, some Japanese institutional investors are racing to reduce their foreign bondholdings, including Treasurys. The shift is another example of inflation and rising rates altering investors’ long-held assumptions. The Federal Reserve’s interest-rate increases have weakened the yen and made it costlier for Japanese investors to hedge against currency fluctuations... As a result, instead of counting on Japanese investors’ demand for Treasurys, investors have become increasingly concerned about a potentially destabilizing shift in global capital flows.”

November 7 – Financial Times (Nicholas Megaw and Eric Platt): “Investors who poured money into funds aimed at protecting them from the sell-off in shares are finding many of the strategies have backfired, offering little or no safeguard from a drawdown that has sliced $13tn off the US stock market. Funds that focused on buying equity put options… have struggled to make gains even as the S&P 500 suffers its worst drawdown since the 2008 financial crisis. Those who prepared for violent swings by buying call options on the Cboe’s Vix index… have also been left wanting. A Cboe index that tracks a theoretical portfolio that buys both stocks within the S&P 500 and equity put options — known as the PPUT index — has fallen roughly 20% this year, not any better than the total return of the S&P 500.”

Bursting Bubble and Mania Watch:

November 9 – Bloomberg (Tom Maloney): “Just weeks ago, Sam Bankman-Fried was considered crypto’s version of John Pierpont Morgan, willing to throw around his massive fortune to save the industry. The curly-haired 30-year-old known as SBF was everywhere, backing flailing projects including BlockFi, Voyager Digital and Celsius. From the Bahamas, he invested in Robinhood Markets Inc., raising speculation that he’d take over the trading app. And why not? Just last year he said that once his FTX was big enough, it could swallow CME Group Inc. or Goldman Sachs... And he looked poised to leverage his fortune — $26 billion at its peak — to shape the world, donating millions to Democrats and promising that one day he’d give it all away to political causes and charity. Now, the future of all of it is in doubt.”

November 11 – CNBC (Ari Levy and MacKenzie Sigalos): “A year ago this week, investors were describing bitcoin as the future of money and ethereum as the world’s most important developer tool. Non-fungible tokens were exploding, Coinbase was trading at a record and the NBA’s Miami Heat was just into its first full season in the newly renamed FTX Arena. As it turns out, that was peak crypto. In the 12 months since bitcoin topped out at over $68,000, the two largest digital currencies have lost three-quarters of their value, collapsing alongside the riskiest tech stocks. The industry, once valued at roughly $3 trillion, now sits at around $900 billion.”

November 10 – Bloomberg (Gillian Tan): “The crisis engulfing Sam Bankman-Fried’s FTX.com is rapidly worsening, with the onetime crypto wunderkind warning of bankruptcy if his firm can’t secure funds to cover a shortfall of as much as $8 billion. Bankman-Fried informed investors of the gap on Wednesday, shortly before rival exchange Binance abruptly scrapped a takeover offer. He said FTX.com needed $4 billion to remain solvent and is attempting to raise rescue financing in the form of debt, equity, or a combination of the two… ‘I f---ed up,’ Bankman-Fried told investors on the call… He said he would be ‘incredibly, unbelievably grateful’ if investors could help.’”

November 9 – CNBC (Tanaya Macheel): “Cryptocurrencies extended their slide for a second day Wednesday as the market absorbed the potential collapse of popular crypto exchange FTX. Prices were pressured to start the day and plunged by late afternoon as Binance, the largest global exchange by volume, abandoned plans to acquire Sam Bankman-Fried’s FTX… Bitcoin fell 12%... to just under $16,000, hitting a low not seen since November 2020… It reached its all-time high of $68,982.20 one year ago Thursday. Meanwhile, ether tumbled 14%, to $1,128.87.”

November 9 – New York Times (Kevin Roose): “The crypto industry is known for dramatic twists, roller-coaster prices and fortunes that appear and disappear overnight. But even by crypto standards, what happened this week was bonkers. To non-crypto watchers, the news — the collapse of FTX, one of the largest cryptocurrency exchanges in the world — might sound boring or esoteric… But within the crypto world, it is already being referred to as the industry’s ‘Lehman moment’ — a reference to the 2008 collapse of Lehman Brothers, which set off a global financial panic… Indeed, FTX’s fall... may turn out to be the most gripping crypto narrative of the year, a ‘Succession’-level drama involving feuding billionaires, rumors of sabotage and high-stakes battles over the future of the industry.”

November 9 – Bloomberg (Joanna Ossinger): “Crypto markets face weeks of deleveraging in the fallout from the crisis at digital-asset exchange FTX.com, a period of upheaval that could push Bitcoin down to $13,000, according to JPMorgan… A ‘cascade of margin calls’ is likely underway given the interplay between the exchange, its sister trading house Alameda Research and the rest of the crypto ecosystem, a team led by Nikolaos Panigirtzoglou wrote… ‘What makes this new phase of crypto deleveraging induced by the apparent collapse of Alameda Research and FTX more problematic is that the number of entities with stronger balance sheets able to rescue those with low capital and high leverage is shrinking’ in the crypto sphere, the team said…”

November 8 – Bloomberg (Justina Lee and Liz Capo McCormick): “Over the last decade, as rock-bottom interest rates depressed returns on fixed-income assets, the alchemists of Wall Street came up with a solution for investors who needed fatter yields: a whole series of complex products that spun extra basis points out of comatose markets. Now, amid the worst bond rout in at least five decades, firms have been scrambling to hedge their positions, piling into derivatives that benefit from higher volatility as they seek to limit the damage. In the process, they’re adding fuel to a fire that’s already sent one measure of rates volatility to near the highest level since the global financial crisis -- outpacing the violent swings in both stocks and currencies.”

November 8 – Wall Street Journal (Will Parker): “A major Chinese developer… disposed of the tallest rental apartment tower in downtown Los Angeles at a steep loss, the latest in a recent wave of Chinese investors unloading prized U.S. real-estate assets. The U.S. subsidiary of China’s Greenland Holding Group sold the 59-story apartment skyscraper for $504 million, according to the buyer, privately held apartment owner Northland. That sales amount was a record for a single rental property in Los Angeles, but it was still far less than Greenland had initially hoped to get for the building. Eighteen months ago, the asking price for the building was $695 million, which even at that price was less than what Greenland had paid in development costs…”

Inflation Watch:

November 10 – Bloomberg (Reade Pickert): “US inflation cooled in October by more than forecast, offering hope that the fastest price increases in decades are ebbing and giving Federal Reserve officials room to slow down their steep interest-rate hikes. The consumer price index was up 7.7% from a year earlier, the smallest annual advance since the start of the year and down from 8.2% in September… Core prices… are regarded as a better underlying indicator of inflation, advanced 6.3%, pulling back from a 40-year high. The core consumer price index increased 0.3% from the prior month, while the overall CPI advanced 0.4%. Both increases as well as the monthly rises were below the median economist estimates.”

November 8 – Bloomberg (Jenny Surane and Paige Smith): “US credit-card balances surged to a record in the third quarter as banks bet that consumers with less-than-stellar credit will be able to handle more debt. Balances soared 19% to $866 billion, with average credit lines also climbing to an all-time high, according to… TransUnion. The jump came after card originations to subprime consumers climbed more than 12% in the previous three-month period. ‘In this inflationary environment, consumers are increasingly turning to credit,’ Paul Siegfried, senior vice president and credit-card business leader at TransUnion, said… ‘This is particularly true among the subprime segment of consumers.’”

November 7 – Bloomberg (Gerson Freitas Jr, Naureen Malik and Chunzi Xu): “In the most densely populated corner of the US, temperatures are about to drop after a stretch of unusually warm weather. And the signs of a winter crisis are already multiplying. Heating oil delivered to New York is the priciest ever. Retailers in Connecticut are rationing it to prevent panic buying. New England’s stockpiles of diesel and heating oil… are a third of normal levels. Natural gas inventories are also below average. A Massachusetts-based utility is imploring President Joe Biden to prepare emergency measures to prevent a gas shortage. Add some cold to the mix, and in the best-case scenario, Northeast consumers will shoulder the highest energy bills in decades this winter.”

November 8 – Wall Street Journal (Leslie Scism): “Hurricane season is nearly over, though one more storm is potentially heading for Florida. For insurers, the worries won’t end on Nov. 30. Insurers are in the middle of negotiations with reinsurers, which are trying to boost rates by 10% to 30%... It is too soon to know if the reinsurers will get what they want… Insurers have already been boosting premium rates on their business, homeowner and auto policies to deal with higher costs due largely to inflation.”

U.S. Bubble Watch:

November 11 – Bloomberg (Augusta Saraiva): “US consumer inflation expectations in the short and long run increased in early November, while sentiment retreated to a four-month low amid rising borrowing costs. Consumers expect prices will climb at an annual rate of 3% over the next five to 10 years, up from 2.9% in October and the highest in five months, the University of Michigan’s preliminary November survey showed... They see costs rising 5.1% over the next year, compared to last month’s 5%. The sentiment index dropped to 54.7, worse than all forecasts…, from 59.9 in October. ‘Continued uncertainty over inflation expectations suggests that such entrenchment in the future is still possible,’ Joanne Hsu, director of the survey, said…”

November 9 – Bloomberg (Lizzie Kane): “First-time buyers are spending far more than recommended on mortgage payments after borrowing costs in the US surged. Those consumers typically spent 37.8% of their income on mortgage payments in the third quarter, up from 36.8% in the prior period, the National Association of Realtors said... The group said the payments are considered unaffordable if the monthly bill… is more than 25% of a family’s income. Potential buyers are facing an affordability crunch as mortgage rates have more than doubled this year… Now, the monthly mortgage bill on a typical existing single-family home with a 20% down payment totals $1,840, about $614 more than a year ago.”

November 9 – Bloomberg (Molly Smith): “US mortgage rates resumed an upward trend last week toward a two-decade high, pointing to further weakness in housing demand… The contract rate on a 30-year fixed mortgage increased to 7.14% in the week ended Nov. 4, near the highest since 2001… The overall measure of applications, which includes refinancing, slipped and is the weakest since 1997. An index of refinancing activity fell to a 22-year low.”

November 10 – Wall Street Journal (Nicole Friedman): “U.S. home-price growth slowed sharply in the third quarter, the National Association of Realtors said…, as home-buying affordability remained near its lowest level in decades. Nationwide, the median sales price of an existing single-family home last quarter was up 8.6% from a year earlier to $398,500, according to NAR, a slowdown from the second quarter’s 14.2% pace.”

November 7 – CNBC (Diana Olick): “Rising mortgage rates, high home prices and uncertainty in the overall economy have Americans feeling more pessimistic about the state of the housing market. In October, just 16% of consumers said they thought now is a good time to buy a home, according to a monthly survey by Fannie Mae. That is the lowest share since the survey began in 2011… Fannie Mae’s survey looks not just at buying and selling but tests sentiment about home prices, mortgage rates and the job market. It combines them all into one number, which also fell for the eighth straight month and now sits at a new low.”

November 7 – Bloomberg (Reade Pickert): “US consumer borrowing rose in September by less than expected… Total credit increased $25 billion from the prior month, Federal Reserve figures showed… The median forecast… called for a $30 billion advance. Revolving credit outstanding, which includes credit cards, rose $8.3 billion, the smallest increase in four months. Non-revolving credit, such as loans for school tuition and vehicle purchases, increased $16.7 billion, the most in three months.”

November 8 – CNBC (Phil LeBeau): “With inflation cutting into the budgets of Americans, a growing percentage of people with auto loans are struggling to make their monthly payments. TransUnion, which tracks more than 81 million auto loans in the U.S., said… the percentage of loans that are at least 60 days delinquent hit 1.65% in the third quarter, the highest rate for 60-day delinquencies in more than a decade… In September, the average transaction price for a new vehicle was $47,138, up almost $2,600 compared with the year-earlier period… The average price paid for a used vehicle was $30,566, a jump of almost $2,500 from September 2021.”

November 8 – Reuters (Lindsay Dunsmuir): “U.S. small-business confidence edged down in October as stubbornly high inflation weighed on sentiment and more owners forecast a deteriorating outlook for the economy… The National Federation of Independent Business (NFIB) said its Small Business Optimism Index fell 0.8 point to 91.3 last month to the lowest level since July… Thirty-three percent of owners reported that inflation was the single most important issue in operating their business, up three points from September and four points below July's reading, which was the highest share since the fourth quarter of 1979.”

November 8 – CNBC (Diana Olick): “The historic run-up in home prices during the first two years of the pandemic gave homeowners record amounts of new home equity. Since May, however, about $1.5 trillion of that has vanished, according to Black Knight… The average borrower has lost $30,000 in equity. Homeowner equity peaked at $17.6 trillion collectively last May, after home prices jumped 45% since the start of the pandemic. At the end of September, prices were still up 41%, and equity was still quite strong. Borrowers who bought their homes before the pandemic collectively have $5 trillion more than they did before the pandemic hit. That translates to a gain of $92,000 more equity per borrower than in February of 2020.”

November 10 – Bloomberg (David Brooke): “New players raising money for private credit funds face a tough battle for market share, and are often focusing on small niche areas instead of fighting for the biggest deals. Big-name asset managers have an outsized proportion of the capital in the $1.3 trillion private credit industry because they’ve been managing funds in the space for years. That gives them an edge in developing relationships with private-equity firms, a key way to find loans to invest in. This risk isn’t stopping the relative newbies. It’s too hard to pass up the opportunity to offer loans on far better terms than just a few years ago, as higher interest rates tilts the balance of power shifts back to credit providers.”

Fixed Income Watch:

November 6 – Wall Street Journal (Matt Wirz): “It is quiet on Wall Street. Too quiet. Autumn is usually one of the busiest times of the year in finance but new stock sales, debt raises and corporate mergers all slowed to a trickle in recent weeks. The supply of cash that fuels such deals is evaporating and the slowdown likely is here to stay, bankers, investors and corporate lawyers say. Markets are stalling because the price of borrowed money is spiking… The policy has yet to damp consumer spending. But it is punishing U.S. companies that have accumulated a debt mountain exceeding $10 trillion, much of it in the past decade when the Fed kept interest rates near zero. North American companies will have to come up with at least $155 billion in 2022 and 2023 to cover rising interest expenses…”

November 7 – Bloomberg (Paula Seligson): “Equity Residential, one of the biggest apartment landlords in the US, normally finds refinancing its bank loans to be easy. This year, it was a longer journey. For the company’s $2.5 billion backup line of credit known as a revolver, lenders have historically treated the process like a formality or an administrative task, Chief Financial Officer Robert Garechana said… This time, there were many more discussions, often focusing on what business banks would get from the company in return, he said.”