This might be the most fascinating market backdrop of my career. Not yet as dramatic as 1987, 1990, 1994, 1997, 1998, 1999, 2000, 2002, 2007, 2008, 2009 or 2012 – but, heck, we’re only two weeks into 2018 trading.
In the first nine trading sessions of the year, the DJIA tacked on almost 500 points. The S&P500 has advanced 4.2%, the Dow Transports 7.2%, the KBW Bank Index 6.0%, the Nasdaq100 5.7%, the Nasdaq Industrials 5.7%, the Nasdaq Bank Index 5.7%, the Nasdaq Composite 5.2%, the New York Arca Oil index 7.1%, the Philadelphia Oil Service Sector Index 9.8%, the Semiconductors (SOX) 5.5%, and the Biotechs (BTK) 6.3%.
It’s synchronized global speculation unlike anything I’ve witnessed. Italian stocks are up 7.2%, French 3.9%, Spanish 4.2%, German 2.5%, Portuguese 4.0%, Belgium 4.7%, Austrian 5.2%, Greek 6.1% and Icelandic 4.1%, European Bank stocks (STOXX600) have gained 5.4%, with Italian banks up double-digits. Hong Kong financials have gained 5.9%. Japan’s Topix Bank index is up 5.6%. Japan’s Nikkei has gained 3.9%, Hong Kong’s Hang Seng 5.0%, and China’s CSI 300 4.8%. Stocks are up 7.2% in Russia, 6.7% in Romania, 4.8% in Bulgaria and 5.8% in Ukraine. In Latin America, major equities indexes are up 3.9% in Brazil, 3.0% in Chile, 4.0% in Peru and 8.8% in Argentina.
It’s evolved into a full-fledged speculative Bubble and intense Mania. This type of euphoria, while fun and captivating, comes with unfortunate consequences. But there will be no worry for now. None of that. Once things have regressed to this point, negative news and troubling developments are easily disregarded. Speculation has detached from reality.
I recall the speculative market that culminated in manic trading in the summer of 1998 – just weeks before the global system convulsed with the collapses of Russia and Long-Term Capital Management. There was the first quarter 2000 technology stock speculative melt-up - right in the face of deteriorating industry fundamentals. And how can we forget the fateful “subprime doesn’t matter” speculative run to all-time highs in the Autumn of 2007.
The backdrop is extraordinarily fascinating because of the intensity of speculative excess in the face of key developments that hold the potential to bring this party to a conclusion. Headlines from the week: “China Weighs Slowing or Halting Purchases of U.S. Treasuries.” “ECB Hawks Take the Lead on QE Debate as Doves Stay Quiet.” “Japan’s Central Bank Trims Bond Purchases, Prompting Taper Talk.” “Yen’s Spike Shows Taste of What Comes When BOJ Really Does Shift.” “ECB Joins Central Bank Chorus Hinting at Faster Tightening.” “Fed’s Dudley Warns That Tax Cuts Putting Economy on an 'Unsustainable Path'.” “U.S. Core Consumer Prices Post Biggest Gain in 11 months.” “Investors Spooked at Specter of Central Banks Halting Bond-Buying Spree.”
Not all that spooked. “Junk-Bond Funds See Largest Cash Inflows Since December 2016.” Investment-grade funds saw inflows of $4.186bn. And while 10-year Treasury yields were up 7 bps this week – and 14 bps to begin 2018 – there’s certainly no panic. Even the so-called bonds bears forecast the mildest of bear markets. I haven’t seen any predictions of a big backup in yields. A 1994 tightening cycle – 10-year Treasury yields up 250 bps – is today unimaginable. Yet excesses during ‘91-93 barely register when compared to the last nine years.
A Bloomberg News article, based on unnamed “senior government officials,” reported that China was considering slowing or halting purchases of U.S. Treasury securities. Though denied by Chinese authorities, this news resonated in the marketplace. The Bloomberg report followed by two days a Politico article, “White House Preparing for Trade Crackdown.”
It’s worth an additional look at pertinent Q3 Z.1 “flow of funds” analysis: “Rest of World holdings of U.S. Financial Assets jumped $724 billion (nominal) during the quarter to a record $26.347 TN. This puts growth over the most recent three quarters at a staggering $2.124 TN (16% annualized). What part of these flows has been associated with ongoing rapid expansion of global central bank Credit? It’s worth recalling that ROW holdings ended 2007 at $14.705 TN and 1999 at $5.639 TN. As a percentage of GDP, ROW holdings of U.S. Financial Assets ended 1999 at 57%, 2007 at 100%, and Q3 2017 at a record 135%.”
In a world awash in finance, and foreign “money” has been pouring into U.S. securities markets. China has been a major purchaser of Treasuries, as it recycles a massive and growing trade surplus with the U.S. (around $300bn in ’17). And as financial flows inundated EM in 2017, emerging central banks also turned significant buyers of U.S. government debt. At an estimated $2.7 TN, global QE played a major role in global liquidity abundance, “money” that at least partially circulated into booming U.S. securities markets.
There is a prevailing view in the U.S. that QE doesn’t matter. The Fed ended balance sheet expansion a few years back, and financial markets didn’t miss a beat. Better yet, the Fed is now contracting its balance sheet holdings and stock market gains have only accelerated. The reality is that it’s a global Bubble fueled by globalized liquidity. Central bank QE liquidity is fungible - $14 TN and counting.
Ten-year Treasury yields jumped to 2.60% on Wednesday’s China story, although they drifted back down on Chinese denials. And while the attention was on market yields, the more fascinating moves were in the currencies. The euro gained 1.4% this week on the rising prospect of an early end to the ECB’s QE program.
January 7 – Reuters (Sam Edwards): “The European Central Bank should set a date to end its asset-buying program, the head of Germany’s Bundesbank, Jens Weidmann, told Spanish newspaper El Mundo. Tipped as a potential candidate to succeed ECB President Mario Draghi when his term expires at the end of October 2019, Weidmann is a vocal critic of the bank’s quantitative easing program. ‘The prospects for the evolution of prices correspond to a return of inflation to a level sufficient to maintain the stability of prices. For this reason, in my opinion, it would be justifiable to put a clear end to the buying of debt bonds by establishing a concrete date (for ending the program),’ Weidmann said…”
The euro’s gain this week was overshadowed by the 1.8% surge in the Japanese yen.
January 8 – Bloomberg (Chris Anstey): “A minor tweak in a regular Bank of Japan bond-purchase operation on Tuesday was enough to send the yen climbing the most in almost a month, even though evidence weighs overwhelmingly against the adjustment signifying anything meaningful. What the yen’s spike does show is just how big a move will come whenever the central bank does telegraph a fine-tuning in its stimulus program. Tuesday’s gain was as big as 0.5% against the dollar, in wake of the BOJ trimming purchases of bonds dated in 10-to-25 years by 10 billion yen ($89 million) compared with its previous operation.”
By their nature, speculative Bubbles and melt-ups are at heightened risk to unexpected developments. The current environment is so fascinating specifically because there are anticipated developments capable of bringing this long party to an end. The Trump administration appears determined to focus on trade in 2018, with China in the crosshairs. China has more than ample Treasury holdings to sell if it decides to make a point.
Meanwhile, it’s no coincidence that with global markets going nuts we are beginning to hear more decisive hawkish talk from around the world of central banking. Bundesbank president Jens Weidmann’s preference for a “clear end” to bond purchases should not be dismissed. The likelihood that ECB purchases end completely in October are rising. Moreover, I would expect growing momentum within the executive board for ending the open-ended nature of Draghi’s stimulus doctrine. Mr. Weidmann is a leading candidate to head the ECB next year at the completion of Draghi’s term. Even if a German is not soon at the helm of the European Central Bank, expect a push to return to traditional monetary management. I’m not anticipating an immediate return to “the ECB does not pre-commit.” But perhaps it’s time for the markets to become less complacent with regard to assurances of open-ended market support and permanently very low rates.
Prospects are growing for a 2018 tightening of global financial conditions. But with stocks rising percentage points by the week, there’s great incentive to focus on the here and now of over-liquefied market conditions. Besides, won’t the potential for a destabilizing spike in the yen keep Kuroda on full throttle? Don’t the doves still hold the majority at the ECB? Won’t the risk of a looming trade war with China (and others) ensure the Fed remains cautious, placing a lid on Treasury yields? Besides, the Chinese are too smart for the type of wound to be self-inflicted from threatening to dump Treasuries – aren’t they?
Markets are sure willing to assume a lot and ignore even more. There remains overwhelming confidence that global central bankers will work in concert to ensure markets don’t buckle, at least so long as inflation stays well-contained. Rising inflationary pressures are one of my Themes 2018. WTI crude traded to $64.30, up 6.4% in two weeks to a near three-year high. The GSCI Commodities Index rose 2.1% this week. The dollar index has declined 1.2% to begin the new year. Interestingly, Gold is up a quick 2.7%.
General inflationary pressures have gained some momentum. The global economy has attained strong momentum. And markets these days are left to contemplate how a runaway global risk market melt-up could impact economic activity and what an outright boom might mean to inflation dynamics.
German 10-year bund yields jumped 15 bps this week to a near two-year high 58 bps. Yields rose 11 bps in Switzerland, and 10 bps in Sweden, the UK, and Australia. Mexico yields surged 22 bps, Russia 27 bps and Brazil eight bps. There’s the old market adage that you know you’re commencing a bear market when prices decline yet people are feeling pretty good about it.
For the Week:
The S&P500 rose 1.6% (up 4.2% y-t-d), and the Dow gained 2.0% (up 4.4%). The Utilities fell 2.2% (down 5.0%). The Banks surged 3.8% (up 5.9%), and the Broker/Dealers rose 3.4% (up 6.0%). The Transports surged 4.2% (up 7.2%). The S&P 400 Midcaps gained 1.5% (up 3.4%), and the small cap Russell 2000 jumped 2.0% (up 3.7%). The Nasdaq100 increased 1.6% (up 5.7%). The Semiconductors slipped 0.3% (up 5.5%). The Biotechs jumped 3.6% (up 6.3%). With bullion up $19, the HUI gold index rose 1.6% (up 4.7%).
Three-month Treasury bill rates ended the week at 141 bps. Two-year government yields gained four bps to 2.00% (up 11bps y-t-d). Five-year T-note yields rose six bps to 2.35% (up 14bps). Ten-year Treasury yields jumped seven bps to 2.55% (up 14bps). Long bond yields gained four bps to 2.85% (up 11bps).
Greek 10-year yields rose 13 bps to 3.86% (down 21bps y-t-d). Ten-year Portuguese yields dropped 15 bps to 1.75% (down 15bps). Italian 10-year yields slipped two bps to 1.98% (down 3bps). Spain's 10-year yields declined two bps to 1.50% (down 7bps). German bund yields jumped 14 bps to 0.58% (up 15bps). French yields gained five bps to 0.85% (up 7bps). The French to German 10-year bond spread narrowed nine to 27 bps. U.K. 10-year gilt yields jumped 10 bps to 1.34% (up 15bps). U.K.'s FTSE equities index increased 0.7% (up 1.2%).
Japan's Nikkei 225 equities index slipped 0.3% (up 3.9% y-o-y). Japanese 10-year "JGB" yields increased two bps 0.078% (up 3bps). France's CAC40 added 0.8% (up 3.8%). The German DAX equities index slipped 0.8% (up 2.5%). Spain's IBEX 35 equities index increased 0.5% (up 4.2%). Italy's FTSE MIB index surged 2.9% (up 7.2%). EM markets were mostly higher. Brazil's Bovespa index added 0.4% (up 3.9%), while Mexico's Bolsa dropped 1.5% (down 0.4%). South Korea's Kospi index was little changed (up 1.2%). India’s Sensex equities index gained 1.3% (up 1.6%). China’s Shanghai Exchange rose 1.1% (up 3.7%). Turkey's Borsa Istanbul National 100 index dropped 1.7% (down 0.6%). Russia's MICEX equities index jumped 2.5% (up 7.2%).
Junk bond mutual funds saw inflows of $2.651 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates gained four bps to 3.99% (down 13bps y-o-y). Fifteen-year rates rose six bps to 3.44% (up 7bps). Five-year hybrid ARM rates added a basis point to 3.46% (up 23bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up 20 bps to 4.33% (up 9bps).
Federal Reserve Credit last week declined $10.1bn to $4.405 TN. Over the past year, Fed Credit contracted $8.4bn. Fed Credit inflated $1.595 TN, or 57%, over the past 271 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $6.2bn last week to $3.352 TN. "Custody holdings" were up $170bn y-o-y, or %.
M2 (narrow) "money" supply declined $5.3bn last week to $13.838 TN. "Narrow money" expanded $637bn, or 4.8%, over the past year. For the week, Currency increased $8.5bn. Total Checkable Deposits dropped $59.5bn, while Savings Deposits jumped $45bn. Small Time Deposits gained $1.5bn. Retail Money Funds were little changed.
Total money market fund assets slipped $1.9bn to $2.836 TN. Money Funds gained $145bn y-o-y, or 5.4%.
Total Commercial Paper surged $24.9bn to a 19-month high $1.111 TN. CP gained $152bn y-o-y, or 15.8%.
The U.S. dollar index dropped 1.1% to 90.74 (down 1.2% y-o-y). For the week on the upside, the Japanese yen increased 1.8%, the Norwegian krone 1.7%, the euro 1.4%, the Swedish krone 1.4%, the British pound 1.2%, the New Zealand dollar 1.0%, the Swiss franc 0.8%, the Mexican peso 0.8%, the Brazilian real 0.7%, the Australian dollar 0.7%, the Singapore dollar 0.7%, and the Singapore dollar 0.2%. For the week on the downside, the South African rand declined 0.4%, the Canadian dollar 0.4% and the South Korean won 0.2%. The Chinese renminbi declined 0.3% versus the dollar this week (up 0.58% y-t-d).
January 10 – Bloomberg (Jessica Summers): “Oil closed above $63 a barrel for the first time in over three years as crude stockpiles stowed in American tanks and terminals dwindled for an eighth straight week.”
The Goldman Sachs Commodities Index increased jumped 2.1% (up 2.4% y-t-d). Spot Gold rose 1.4% to $1,338 (up 2.7%). Silver slipped 0.8% to $17.141 (unchanged). Crude jumped $2.86 to $64.30 (up 6.4%). Gasoline rose 3.6% (up 3%), and Natural Gas surged 14.5% (up 8%). Copper slipped 0.3% (down 3%). Wheat was little changed (up 1%). Corn declined 1.4% (down 1.3%).
Trump Administration Watch:
January 10 – Bloomberg (Sarah McGregor): “The possibility that China may taper its purchases of U.S. Treasuries sends a message that America could pay a price for imposing new trade barriers. There’s been more tough talk than action from President Donald Trump’s year-old administration about cracking down on China’s unfair trading practices to reduce the deficit. But Trump is facing decision time as deadlines approach over whether to slap tariffs on imports from steel and aluminum to solar panels -- which would be clearly aimed at China.”
January 8 – Bloomberg (Andrew Restuccia and Doug Palmer): “President Donald Trump’s administration is preparing to unveil an aggressive trade crackdown in the coming weeks that is likely to include new tariffs aimed at countering China’s and other economic competitors’ alleged unfair trade practices, according to three administration officials. Trump is tentatively scheduled to meet with Cabinet secretaries and senior advisers as soon as this week to begin finalizing decisions on a slew of pending trade fights involving everything from imports of steel and solar panels to Chinese policies regarding intellectual property… Senior aides are also laying plans to use Trump’s State of the Union address at the end of the month to flesh out the president’s trade vision and potentially preview a more aggressive posture toward China…”
January 10 – Bloomberg (Josh Wingrove): “Canadian government officials said there’s an increasing likelihood U.S. President Donald Trump will give six-months’ notice to withdraw from Nafta, dragging down the loonie, yields on government bonds and Mexico’s peso… The comments have raised worries the Nafta countries -- the U.S., Canada and Mexico, who trade more than $1 trillion annually -- are further apart on coming to an agreement than feared. The Canadian officials said a U.S. withdrawal notice could come at any time…”
January 10 – CNBC (Nyshka Chandran): “The U.S. House Foreign Affairs Committee passed two bills on Tuesday aimed at bolstering ‘the critical U.S.-Taiwan partnership,’ according to a statement. One bill, called the Taiwan Travel Act, encouraged high-level visits between Washington and Taipei ‘at all levels of government’ while the second addressed Taiwan's exclusion from the World Health Organization. Currently, the State Department enforces self-imposed restrictions on official travel due to the unofficial nature of the bilateral alliance… A state-run Chinese newspaper denounced the bill's passage, saying it could shake political ties with Chinese President Xi Jinping's administration.”
January 11 – Reuters (Roberta Rampton and Makini Brice): “Steven Mnuchin, the U.S. treasury secretary, said… that he expects the United States to renegotiate the North American Free Trade Agreement (NAFTA) with Canada and Mexico or to pull out of the deal. ‘Ambassador (Robert) Lighthizer is doing an amazing job renegotiating NAFTA, and we expect that will be renegotiated or we’ll pull out,’ Mnuchin told journalists.”
January 10 – The Hill (Jordain Carney): “Lawmakers are scrambling to avoid a government shutdown as they barrel toward another funding deadline without a clear path forward. GOP leadership is remaining tightlipped about their plan, with Senate Majority Leader Mitch McConnell (R-Ky.) and Speaker Paul Ryan (R-Wis.) declining to outline their next steps before a Jan. 19 deadline. They are expected to offer a short-term stopgap measure given the fast-approaching deadline and a failure to lockdown a deal on raising spending ceilings for defense and nondefense.”
Federal Reserve Watch:
January 11 – CNBC (Jeff Cox): “New York Fed President Bill Dudley painted an unflattering picture for future growth, saying in a speech Thursday that the recently passed tax cuts pose an ominous threat down the road. While he said the reforms that slash corporate taxes and lower rates for many earners will boost the economy in the near term, that ‘will come at a cost.’ ‘After all, there is no such thing as a free lunch,’ Dudley said… ‘The legislation will increase the nation's longer-term fiscal burden, which is already facing other pressures, such as higher debt service costs and entitlement spending as the baby-boom generation retires.’”
January 8 – MarketWatch (Greg Robb): “The economic outlook, if not the weather, was sunny in Philadelphia this weekend, where the economics profession gathered for its annual conference and job fair. Federal Reserve officials appearing here chose to spend little time stressing the positives like low unemployment and eight years of slow-but-steady economic growth. Instead, officials started a serious conversation about what new tools they might need to combat the next downturn. The issue is likely going to be at the top of the agenda for new Fed chairman Jerome Powell. Whenever the economy stumbles, it is taken pretty much as a given by economists here that the Fed will have to slash interest rates back to zero. That means it may also have to restart quantitative easing, or asset purchases, that was so unpopular on Main Street and in Congress… ‘The Fed knows it will probably revisit the zero lower bound sometime in the future and it is a matter of prudent planning to shore up their tool kit now,’ said Julia Coronado, president of Macropolicy Perspectives.”
January 10 – CNBC (Steve Liesman): “Even while the economy and markets are booming, Federal Reserve officials are worrying about how they'll respond to the next recession, and they don't especially like the picture they see. It's one where the economy starts contracting but the Fed, still at a low interest rate, has little ability to respond. It lowers rates to zero but that amounts to only a fraction of the stimulus it has provided in past downturns. Once again, the Fed faces the quandary of what more it can do when it's at zero and can't cut anymore and is forced to contemplate extraordinary, uncertain and controversial measures like quantitative easing. More and more, Fed officials and academic economists are wondering if there's a better way and beginning to think seriously about a dramatic change to monetary policy that would revise or even scrap its current, flailing 2% inflation target.”
January 8 – Bloomberg (Craig Torres): “Former Federal Reserve Chairman Ben Bernanke predicted that the central bank’s new leadership will study alternate regimes for monetary policy over the next year to 18 months. ‘There will be some pretty serious discussions’ on policy frameworks at the Fed under the chairmanship of Jerome Powell, Bernanke said… He said Powell is likely to assign a subcommittee of officials to study the subject. ‘I imagine this will come up for serious debate in the next year to 18 months.’ Bernanke made the comments on a panel with San Francisco Fed President John Williams at the Brookings Institution in Washington on whether the central bank should keep its 2% inflation target or rethink it. Williams advocated a price-level target, while other scholars on the panel argued in favor of a nominal target for gross domestic product.”
January 8 – Wall Street Journal (Nick Timiraos): “Two Federal Reserve officials said… the U.S. central bank should consider changes in its inflation-targeting framework to create more ammunition to respond to future downturns. The Fed established a formal 2% inflation target six years ago, but in recent months some officials and other economists, including former Fed Chairman Ben Bernanke, have said the central bank should revisit the framework because interest rates now appear likely to remain much lower for longer. As a result, the Fed could find itself with less room to stimulate economic growth during the next downturn. The idea of revisiting the Fed’s inflation target also has gained new attention because inflation has confounded officials’ forecasts for years by consistently falling below the 2% target.”
January 9 – New York Times (Binyamin Appelbaum): “In the wake of a deep economic crisis and a disappointingly slow recovery, a growing number of experts, including some Federal Reserve officials, say it is time for the Fed to consider a new approach to managing the economy. Since the mid-1990s, the Fed has focused on keeping inflation slow and steady, at about 2% a year, in the belief that it was the best way to nurture economic growth and avoid painful downturns. Those pushing for a new approach do not agree on the best alternative — the ideas range from minor tweaks to tossing the current rule book — but there is broad agreement that the Fed should seize the moment now, before the next crisis hits. ‘Monetary policy has not been as successful as we might like over the last decade,’ Christina Romer, an economist at the University of California, Berkeley, said… ‘Now really is the time for every monetary economist to say, ‘Is there something better?’’”
U.S. Bubble Watch:
January 11 – CNBC (Huileng Tan): “U.S. bonds sold off on Wednesday — and that may have been the point. Markets took a hit following a Bloomberg News report that cited unnamed sources as saying that officials in Beijing have recommended China, the largest holder of U.S. Treasurys, to slow or even halt its purchases of that debt. U.S. stocks on Wednesday snapped a six-day winning streak, and Treasury yields, already in an upswing, moved higher with the 10-year reaching 2.597%, their highest level since March 15… China's foreign exchange regulator publicly refuted the Bloomberg report on Thursday, saying it cited ‘false information.’ But the jolt to markets may have been designed as a warning to Washington, which is clashing with China over trade and other issues. China holds $1.2 trillion of U.S. debt — more than any country.”
January 8 – Bloomberg (Matthew Boesler): “The last time Goldman Sachs Group Inc.’s financial conditions index was pointing to a market environment this good, its then-chief economist was using the gauge to analyze the effects of Federal Reserve decisions that he now helps make. New York Fed President William Dudley developed the index in the 1990s while at Goldman to create an alternative way to measure the impact of monetary policy on the economy. Now, with the index signaling the easiest conditions since 2000 after a big run-up in U.S. stocks, Fed officials are starting to wonder if they will need to address inflated asset prices in order to avoid over-inflated consumer prices.”
January 11 – Bloomberg (Sarah McGregor): “The U.S. budget deficit is widening on increased spending, just as tax cuts look set to knock the other side of the government’s ledger: revenue. The U.S. budget gap rose 7% to $225 billion in the first quarter of the government’s fiscal year from a year earlier, the Treasury Department reported on Thursday. Spending rose at a slightly higher pace than revenue, increasing 5% to $994.5 billion between October and December. Receipts gained 4% to $769.5 billion.”
January 5 – CNBC (Diana Olick): “All signs and numbers point to a huge year for the construction industry. Even in December, with much of the nation frozen, the construction industry added 30,000 jobs… For all of 2017, construction added 210,000 jobs, a 35% increase over 2016. Construction spending is also soaring, rising more than expected in November to a record $1.257 trillion… Spending increased across all sectors of real estate, commercial and residential, with particular strength in private construction projects… Construction firms are clearly looking to hire more workers. Three-quarters of them said they plan to increase payrolls in 2018... Industry optimism for all types of construction, measured by the ratio of those who expected the market to expand versus those who expected it to contract, hit a record high.”
January 8 – Bloomberg (Vince Golle): “U.S. consumer credit outstanding rose in November by the most in 16 years as credit-card balances surged, Federal Reserve data showed… Total credit rose $28b (est. $18b) or at an 8.8% annualized rate after a $20.5b gain.”
January 8 – Wall Street Journal (Gunjan Banerji): “Big stock-market gains are leading a number of investors to abandon defensive positions taken to protect against a market downturn, the latest sign that many doubters are shedding caution as the long rally rolls on. Investors with significant positions in stocks often look to offset that risk by buying put options on stocks or major stock indexes, like the S&P 500. These contracts are a form of insurance… But with the Dow Jones Industrial Average breaking through 25000 for the first time, the Nasdaq Composite crossing 7,000 and with market volatility falling to near all-time lows, many investors have decided that spending money to hedge against big declines is a waste of money.”
January 8 – Bloomberg (Sarah Ponczek): “Retail investors in the U.S. are showing the most enthusiasm for stocks since the nine-year bull market began, another signal of growing optimism as financial markets hit new highs. Clients at TD Ameritrade added to stock holdings for a 11th straight month in December, one of the longest buying streaks for retail investors ever recorded by the brokerage. That helped push the firm’s Investor Movement Index (IMX)…to a new record for the second month in a row.”
January 11 – Reuters (Howard Schneider): “Walmart’s tit-for-tat minimum wage battle with Target, ratcheting to $11 an hour for the least experienced workers with likely pressure to move higher, may signal broader gains to come for workers in a tightening U.S. labor market - a moment politicians and policymakers have been hoping for.”
January 9 – Reuters (Robin Respaut): “U.S. states could see revenue growth in 2018 from improving national economics, but difficult demographics and macroeconomic challenges are on the horizon, according to… S&P Global Ratings. States have benefited from continued economic expansion and strong capital markets in recent years, which helped to bring in greater tax revenues. The robust stock market performance in 2017 could also produce windfall capital gains tax revenues to state treasuries in April 2018. But ominous clouds could be looming on the horizon. Periods of faster revenue growth linked to soaring equity markets, while favorable, lend the potential for revenue instability, S&P reported.”
January 8 – CNBC (Robert Ferris): “Major hurricanes and wildfires fueled a record year for costs related to natural disasters in the United States, according to… the National Oceanic and Atmospheric Administration. That report also said 2017 was the third-warmest year in 123 years of record keeping, behind only 2014 and 2012. Natural disasters in the United States cost more than $300 billion last year, far surpassing the previous record of $214.8 billion set in 2005…”
January 7 – Bloomberg (Alfred Liu): “China took another step to clamp down on leverage in the financial system, ordering banks to ensure they aren’t exposed to risks from their entrusted loan business. Banks can only act as intermediaries when arranging entrusted loans, and must not provide guarantees or get involved in decision-making, according to new rules… on the China Banking Regulatory Commission’s website… The CBRC’s measure is the latest attempt by China to curb the threat that excessive leverage in the financial system poses to the nation’s economy. President Xi Jinping and his senior economic officials have vowed to make controlling financial risks a top priority…”
January 9 – Bloomberg: “As the end of People’s Bank of China Governor Zhou Xiaochuan’s term approaches, a firmer yuan and calm markets are providing a window to get some of his long-term reforms back on track. The latest news in the two-steps forward, one-step back move to a more freely traded currency came Tuesday, as Bloomberg reported the central bank has tweaked its management of the daily currency fixing, removing a hurdle to the influence of market forces. PBOC adviser Huang Yiping says that shows authorities’ desire to further liberalize the exchange rate.”
January 8 – Bloomberg: “After selling billions of dollars of debt backed by consumer loans last year, Chinese billionaire Jack Ma’s Ant Financial is pausing such fundraising as the government steps up curbs on micro lending. The company hasn’t sold any asset-backed securities since early December… That marks an abrupt shift after it issued a record 238 billion yuan ($37bn) in 2017 of such securities backed by consumer loans.”
January 6 – Reuters (Josephine Mason, Meng Meng and Cheng Fang): “China’s foreign exchange reserves rose to their highest in more than a year in December, blowing past economists’ estimates, as tight regulations and a strong yuan continued to discourage capital outflows… Notching up their 11th straight month of gains, reserves rose $20.2 billion in December to $3.14 trillion, the highest since September 2016 and the biggest monthly increase since July.”
January 7 – Financial Times (Hudson Lockett): “Researchers at China’s central bank have agreed that higher interest rates could be appropriate in the near future thanks to improvements in industrial prices and enterprise profitability, according to state media. State-run newspaper China Daily said… that top researchers at the People’s Bank of China had recently agreed that higher rates would ‘help to squeeze asset bubbles and restrain debt expansion, as a tool to be used with broader oversight of financial activities.’”
Central Bank Watch:
January 10 – Bloomberg (Alessandro Speciale): “As the European Central Bank enters 2018, the debate over its stimulus plans is being dominated by policy makers warning against keeping policy ultra-loose for too long. With the euro-area economy expanding solidly after three years of negative interest rates and quantitative easing, hawks such as Bundesbank President Jens Weidmann have stepped up calls for a definite end-date to bond purchases. Even Executive Board member Benoit Coeure, a leading proponent of QE when the region faced deflation, now sees a ‘reasonable chance’ the latest extension of the program to September will be the last. The key though is whether President Mario Draghi and doves such as chief economist Peter Praet also adjust their positions. They’ve stayed quiet this year…”
January 11 – Bloomberg (Alessandro Speciale): “European Central Bank policy makers said they’re open to tweaking their policy guidance soon to align it with a strengthening economy, spurring a rise in the euro as traders bet bond-buying will end in September. In the account of its December meeting, the Governing Council said there was a ‘widely shared’ view among officials that communication would need to evolve gradually based on the outlook for growth and inflation. But the language on the monetary-policy stance could be revisited early this year.”
January 9 – Bloomberg (Katherine Greifeld, Robert Fullem, and Liz McCormick): “Dollar bears take heed: Asian central banks may be putting the brakes on the greenback’s slide. After working for three years to staunch the yuan’s slump, China is now moving to combat the opposite problem. The People’s Bank of China has stopped using a component of its daily fixing formula that had been widely interpreted as a tool to support the currency… The yuan sank on the news. Meanwhile, South Korea’s government has been warning about the ascent in the won, Asia’s best-performing currency in 2017. And Taiwan’s central bank also sought to curb gains in its dollar. With emerging-market currencies adding to last year’s rally, Asia’s exporting nations are fretting about the repercussions for their economies.”
Global Bubble Watch:
January 9 – Bloomberg (Nikolaj Gammeltoft and Cecile Vannucci): “It made for quite a chart. On the morning of Dec. 20, just as billions of dollars of futures tied to the Cboe Volatility Index were set to expire, the index plunged. The result was a settlement price, a weekly value critical to holders of some the most heavily traded derivatives in the country, that was 13% below the prior day’s close. A nice break, if you were short. For much of last year, the Cboe had to defend itself after an academic study purported to show the VIX settlement is subject to manipulation. While the exchange has seen nothing to alter its view that the claims are baseless, December’s events gave the conversation another stir. ‘There couldn’t have been a more appropriate cherry on top of the 2017 cake,’ said Patrick Hennessy, head trader at IPS Strategic Capital… ‘The VIX settlement in December was one for the books.’”
January 8 – Bloomberg (Luke Kawa): “The most hated rally this is not. Equity euphoria has gripped most of the world to kick off 2018, with the 14-day relative strength index for major stock markets surging to overbought levels. The S&P 500 Index, MSCI Asia Pacific Index, MSCI World Index, Nikkei 225 Index, and MSCI Emerging Markets Index are all in overbought territory, while the Euro Stoxx 600 Index lingers just shy of such a level.”
January 9 – Bloomberg (Dani Burger): “The sound of euphoria just got a bit louder. The new year isn’t even two weeks old, and already $2.1 trillion has been added to the market capitalization of global equities. The market is verging on such overbought levels that not even reliably bullish analysts can keep up with the new highs… The bull market, now in its ninth year, has finally reached the point of euphoria, said Morgan Stanley’s U.S. equity strategists. ‘Now, we have seen a total reversal with people having a hard time even imagining how the market could decline,’ they wrote… ‘We must admit the speed and relentlessness of the move is a bit troubling.’”
January 9 – Bloomberg (Dina Bass): “Microsoft Corp. said fixes for security flaws present in most processors may significantly slow down certain servers and dent the performance of some personal computers, the software maker’s first assessment of a global problem that Intel Corp. initially downplayed. Microsoft’s statement suggests slowdowns could be more substantial than Intel previously indicated. While Intel Chief Executive Officer Brian Krzanich on Monday said the problem may be more pervasive than first thought, he didn’t discuss the degree of impact -- only that some machines would be more affected than others.”
January 10 – Bloomberg (Yuji Nakamura and Haidi Lun): “The world’s biggest cryptocurrency exchange keeps getting bigger. Hong Kong-based Binance.com is adding ‘a couple of million’ registered users every week, with 240,000 people signing up in just an hour on Wednesday, Chief Executive Officer Zhao Changpeng said… Demand is so high that the company is limiting new customers, he said, though Binance may fully reopen in the coming weeks. ‘We did not expect this kind of growth to be honest,’ Zhao said…”
January 7 – Financial Times (Nicholas Megaw): “The short-term outlook for global sovereign and corporate borrowers is at its healthiest level in a decade, according to Fitch, but the ratings agency warned that rising interest rates and political uncertainty will threaten credit quality over the longer term. In its quarterly credit outlook report, …Fitch said the number of governments and organisations with positive credit outlooks now outnumbered the number with negative outlooks for the first time since the financial crisis. The ratings agency is forecasting global GDP expansion of 3.3% in 2018…”
Fixed Income Watch:
January 10 – Bloomberg: “China added to bond investors’ jitters on Wednesday as traders braced for what they feared could be the end of a three-decade bull market. Senior government officials in Beijing reviewing the nation’s foreign-exchange holdings have recommended slowing or halting purchases of U.S. Treasuries, according to people familiar with the matter. The news comes as global debt markets were already selling off amid signs that central banks are starting to step back after years of bond-buying stimulus. Yields on 10-year Treasuries rose for a fifth day, touching the highest since March. China holds the world’s largest foreign-exchange reserves, at $3.1 trillion, and regularly assesses its strategy for investing them. It isn’t clear whether the officials’ recommendations have been adopted.”
January 11 – Bloomberg (Eliza Ronalds-Hannon and Sally Bakewell): “More than $2.6 billion flowed into high-yield bond funds during the week ended Jan. 10, according to Lipper Fund Flows…, as investors looked to get a piece of a junk-debt rally already blowing through year-end forecasts. The inflows, which were the sector’s highest since December 2016… come as junk spreads narrowed to the tightest since 2007.”
January 8 – Bloomberg (Sally Bakewell): “When a group of banks led by Credit Suisse and including Barclays cut a $1 billion check to finance a buyout by Apollo Global Management back in mid-2015, they pocketed as much as $25 million in fees. Not an insignificant nugget in its own right but it was, it turns out, just the beginning for the banks. Some of them would make a new loan for Apollo the following April and then proceed to rework the terms of that debt with the firm four separate times over the next 14 months. The dizzying succession of follow-up deals -- aimed at locking in falling borrowing costs and boosting the size of the loan -- handed the banks as much as another $45 million in fees… The torrent of leveraged lending last year generated a record $12.4 billion in bank fees, a 41% surge over 2016, said Freeman Consulting Services.”
January 8 – Bloomberg (Adam Tempkin and Charles E Williams): “Citigroup Inc. led in U.S. collateralized loan obligations by market share last year as sales surged 65% from 2016 to about $120 billion… The momentum in CLO sales is expected to continue this year as global demand for the floating-rate product grows amid investors’ hunt for yield.”
January 11 – Reuters (Richard Leong): “Issuance of U.S. investment-grade corporate bonds in the first seven days of 2018 totaled $53.38 billion for its slowest start to the year since 2015, according to strategists at Bank of America Merrill Lynch. The amount of high-grade debt supply was down 38% from a sum of $86.09 billion a year earlier…”
January 8 – Bloomberg (Catherine Bosley): “Confidence in the euro area continued its advance at the end of 2017, capping what was probably the strongest year for the economy in a decade. The European Commission’s measure of sentiment touched its highest since late 2000 in December.”
January 9 – Bloomberg (Catherine Bosley): “Joblessness in the euro area declined to the lowest level since early 2009, raising the prospect of a tighter jobs market finally putting the upward pressure on wages keenly anticipated by the European Central Bank. The unemployment rate dropped to 8.7% in November from 8.8% the previous month…”
January 9 – Reuters (Joseph Nasr and Michael Nienaber): “Industrial production and exports from Germany rose more than expected in November, prompting the government to raise its estimate of growth for 2017 and signaling that its expansion would carry on this year. Industrial output jumped 3.4% for the month, the biggest increase since September 2009…”
January 9 – CNBC (Patti Domm): “The Bank of Japan is seen as the last grown-up in the room actively filling the global liquidity punch bowl with both hands. That's why a slight tweak to its bond-buying program caused a flurry across financial markets Tuesday, sparking speculation it was joining the Federal Reserve and European Central Bank in cutting back on asset purchases, a move that could ultimately help drive up global interest rates. On Tuesday, the BOJ modestly trimmed its purchases of Japanese government bonds by about $10 billion in the 10- to 25-year maturities and another $10 billion in maturities of more than 25 years.”
Leveraged Speculation Watch:
January 8 – Bloomberg (Nico Grant): “Two hedge funds tell the up and down story for the industry in 2017. Equity fund Coatue Qualified Partners soared 24% on its tech bets while the Caxton Global macro fund dropped 13.4%... The equity and macro strategies served as bookends for the industry, which delivered a lukewarm overall performance for the year. Hedge funds last year returned 6.5% on average on an asset-weighted basis, the best annual performance since 2013, according to a Hedge Fund Research report… That good news has been overshadowed by the broader stock market rally and flood of money into passive products by investors no longer willing to pay high hedge fund fees.”
January 7 – Financial Times (Hudson Lockett): “The quantitative hedge fund industry is on the brink of surpassing $1tn of assets under management this year after breakneck growth from rising interest in more systematic, computer-powered investment strategies. The amount of money managed by quant hedge funds tracked by HFR, …rose to more than $940bn by the end of October 2017 — nearly double the level of 2010 — and flows have continued to be strong in the fourth quarter… An explosion of interest in automated, algorithmic investment approaches, ranging from the simple to high-octane strategies powered by artificial intelligence, has driven the surge.”
January 11 – Reuters (Vladimir Soldatkin and Christian Lowe): “Russian President Vladimir Putin said… North Korean leader Kim Jong Un was ‘shrewd and mature’ and had won the latest standoff with the West over his nuclear and missile programs. ‘I think that Mr Kim Jong Un has obviously won this round. He has completed his strategic task: he has a nuclear weapon, he has missiles of global reach, up to 13,000 km, which can reach almost any point of the globe,’ Putin told Russian journalists…”