Monday, February 29, 2016

Monday Evening Links

[Bloomberg] China's PMI Reports Show Slowdown Deepening as Services Slip

[Bloomberg] China Reserve-Ratio Cut Signals Growth Is Priority Over Yuan

[FT] Markets face $1tn Asian EM debt worries

[Bloomberg] Valeant's $31 Billion of Debt May Be Cut From Ba3 by Moody's

[Bloomberg] Citi: There's Been a Worrisome Change in the Market for New Corporate Debt

[Bloomberg] Lula Under Investigation in Brazil Carwash Case, Prosecutor Says

Monday's News Links

[Bloomberg] U.S. Stocks Erase Gains as Yen Advances With Treasuries, Gold

[Dow Jones] Dollar Drops Vs. Yen As Weak Data Feed Recession Fears

[Bloomberg] China Cuts Banks' Reserve Requirement Ratio

[Bloomberg] China Stocks Tumble Toward 15-Month Low as Stimulus Bets Unwind

[Bloomberg] Yen Set for Best Month Since 2008 on China Stocks, G-20 Meeting

[Bloomberg] Yuan Weakens for Seventh Day as PBOC Cuts Fixing, Dollar Climbs

[Bloomberg] It's Getting Harder for Currency Traders to Make Money, Market Veteran Says

[WSJ] Why Auto Lenders Are in for a Rougher Ride

[Reuters] New Year hangover: Strains show in China's factory heartland

[WSJ] How China’s Big Lending Push Comes Up Short

[FT] China halts overseas investment schemes

[Bloomberg] Jockeying Begins as China's State Firms Brace for Shakeup

[Bloomberg] Emerging Assets in Fourth Monthly Decline as China Rout Extends

[Bloomberg] Three Former Tepco Executives Indicted for Fukushima Negligence

Friday, February 26, 2016

Weekly Commentary: Just the Facts

For the Week:

The S&P500 gained 1.6% (down 4.7% y-t-d), and the Dow rose 1.5% (down 4.5%). The Utilities were little changed (up 6.5%). The Banks increased 1.3% (down 15.6%), and the Broker/Dealers rallied 2.9% (down 15.7%). The Transports gained 1.6% (down 1.4%). The broader market outperformed. The S&P 400 Midcaps jumped 2.6% (down 4.2%), and the small cap Russell 2000 rose 2.7% (down 8.7%). The Nasdaq100 gained 1.7% (down 7.8%), and the Morgan Stanley High Tech index jumped 3.5% (down 8.9%). The Semiconductors surged 3.2% (down 5.9%). The volatile Biotechs ended the week unchanged (down 24.7%). Though bullion was down $3, the HUI gold index added 1.8% (up 45.3%).

Three-month Treasury bill rates ended the week at 31 bps. Two-year government yields rose five bps to 0.79% (down 26bps y-t-d). Five-year T-note yields increased a basis point to 1.24% (down 51bps). Ten-year Treasury yields dipped a basis point to 1.74% (down 51bps). Long bond yields added three bps to 2.64% (down 38bps).

Greek 10-year yields fell 25 bps to 10.00% (up 268bps y-t-d). Ten-year Portuguese yields sank 35 bps to 3.05% (up 53bps). Italian 10-year yields fell nine bps to 1.47% (down 12bps). Spain's 10-year yields dropped 13 bps to 1.57% (down 20bps). German bund yields declined five bps to 0.15% (down 47bps). French yields fell six bps to 0.50% (down 49bps). The French to German 10-year bond spread narrowed one to 35 bps. U.K. 10-year gilt yields slipped a basis point to 1.40% (down 56bps).

Japan's Nikkei equities index recovered 1.4% (down 14.9% y-t-d). Japanese 10-year "JGB" yields fell eight bps to a record low negative 0.08% (down 41bps y-t-d). The German DAX equities index increased 1.3% (down 11.4%). Spain's IBEX 35 equities index gained 1.9% (down 12.5%). Italy's FTSE MIB index rose 3.4% (down 18.4%). EM equities were mixed. Brazil's Bovespa index was little changed (down 4.1%). Mexico's Bolsa added 0.2% (up 1.2%). South Korea's Kospi index increased 0.2% (down 2.1%). India’s Sensex equities index fell 2.3% (down 11.3%). China’s Shanghai Exchange dropped 3.2% (down 21.8%). Turkey's Borsa Istanbul National 100 index jumped 2.6% (up 4.5%). Russia's MICEX equities index gained 1.3% (up 3.1%).

Junk funds saw inflows surge to $2.7 billion (from Lipper). From Reuters (Trevor Hunnicutt) "Investment-grade corporate debt funds took in $142 million, offering relief from net withdrawals of $19 billion over the prior 13 weeks."

Freddie Mac 30-year fixed mortgage rates slipped three bps to a more than two-year low 3.62% (down 18bps y-o-y). Fifteen-year rates declined three bps to 2.93% (down 14bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down five bps to 3.70% (down 59bps).

Federal Reserve Credit last week declined $11.4bn to $4.448 TN. Over the past year, Fed Credit fell $11.7bn, or 0.3%. Fed Credit inflated $1.637 TN, or 58%, over the past 172 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week dropped $12.2bn to an 11-month low $3.254 TN. "Custody holdings" were down $12.2bn y-o-y, or 0.4%.

M2 (narrow) "money" supply last week recovered $48.8bn to $12.464 TN. "Narrow money" expanded $647bn, or 5.5%, over the past year. For the week, Currency increased $2.7bn. Total Checkable Deposits jumped $62.6bn, while Savings Deposits fell $15.2bn. Small Time Deposits were little changed. Retail Money Funds slipped $0.9bn.

Total money market fund assets jumped $15.1bn to $2.778 TN. Money Funds rose $87bn y-o-y (3.2%).

Total Commercial Paper fell $7.8bn to $1.076 TN. CP expanded $49.6 billion y-o-y, or 4.8%.

Currency Watch:

February 25 – Bloomberg (Lananh Nguyen): “The specter of shrinking liquidity gripping fixed-income desks globally is creeping its way into the world’s biggest, most liquid financial market. Amid conversations about central bank policy and algorithmic trading, it was concerns about diminishing liquidity -- or the prospects of it drying up entirely during times of market stress -- that dominated discussions this week at the TradeTech FX conference in Miami. Pension funds, hedge funds and other asset managers were seeking answers after a string of so-called flash crashes in recent months sent some of the world’s most-traded currencies plunging.”

The U.S. dollar index rallied 1.6% this week to 98.09 (down 0.6% y-t-d). For the week on the upside, the Canadian dollar increased 1.8% and the Brazilian real gained 0.5%. For the week on the downside, the South African rand declined 5.0%, the British pound 3.7%, the euro 1.8%, the Norwegian krone 1.5%, the Swedish krona 1.4%, the Japanese yen 1.2%, the Swiss franc 0.6% and the Australian dollar 0.3%. The Chinese yuan declined 0.3% versus the dollar.

Commodities Watch:

The Goldman Sachs Commodities Index rallied 2.1% (down 3.7% y-t-d). Spot Gold slipped 0.3% $1,223 (up 15.3%). March Silver dropped 4.2% to $14.71 (up 6.6%). April WTI Crude surged $3.14 to $32.78 (down 11.5%). March Gasoline rallied 6.0% (down 20%), while March Natural Gas lost 0.6% (down 24%). March Copper gained 1.9% (down 1%). May Wheat fell 3.1% (down 4%). May Corn dropped 2.6% (unchanged).

Fixed-Income Bubble Watch:

February 25 – Wall Street Journal (Sam Goldfarb and Liz Hoffman): “Goldman Sachs… is struggling to sell $2 billion in bonds backing the buyout of software firm Solera Holdings Inc., another sign of cracks in the market for the low-rated debt that has been a key driver of the takeover boom. Solera’s sale to Vista Equity Partners was one of the biggest leveraged buyouts of last year, at $6.5 billion including debt, and has been widely viewed as a test of the credit market. The bond sale comes at a time when U.S. junk-bond issuance has dropped more than 70% from a year ago and borrowing costs have increased... The pullback threatens a mergers-and-acquisitions boom that has been driven partly by cheap and available credit. It also comes as a wave of debt from the last buyout boom is coming due…”

February 21 – Wall Street Journal (Matt Wirz and Matt Jarzemsky): “Wall Street has long wondered what would happen if a wave of refinancing meets with a weakened junk-bond market. Toys “R” Us Inc. will be an early test case. The 68-year-old toy retailer is trying to replace $1.6 billion in junk-rated bonds coming due through 2018… Other heavily indebted borrowers face similar pressure to refinance amid risks of a prolonged swoon for the market. U.S. companies have a total of $1.32 trillion in junk debt maturing between now and 2020, according to Standard & Poor’s… That includes $92.3 billion coming due this year, followed by $160.9 billion in 2017 and $272.5 billion in 2018.”

February 25 – Bloomberg (Meenal Vamburkar and Cordell Eddings): “They have sold off hundreds of oil fields, eliminated thousands of jobs and slashed millions of dollars from capital spending and dividends. But in this unforgiving new world of $30-a-barrel oil, it’s barely been enough. As U.S. oil executives… take drastic measures to weather the worst slump in a generation and cling to their debt ratings, creditors are already writing some of them off. So much so that late last month, average borrowing costs for energy bonds with the lowest investment grades -- issues totaling $258 billion -- soared past those of the highest-rated U.S. junk borrowers for the first time. What’s more, debt issuance industry wide has all but ground to a halt after a record year in 2015.”

February 25 – Bloomberg (Asjylyn Loder, Donal Griffin and Jodi Xu Klein): “In less than a month, the U.S. oil bust could claim two of its biggest victims yet. Energy XXI Ltd. and SandRidge Energy Inc., oil and gas drillers with a combined $7.6 billion of debt, didn’t pay interest on their bonds last week. They have until the middle of next month to either pay the interest, work out a deal with their creditors or face a default that could tip them into bankruptcy… ‘We’re just beginning to see how bad 2016 is going to be,’ said Becky Roof, managing director… with consulting firm AlixPartners.”

February 23 – Reuters (Tom Hals): “Within weeks, two low-profile legal disputes may determine whether an unprecedented wave of bankruptcies expected to hit U.S. oil and gas producers this year will imperil the $500 billion pipeline sector as well. In the two court fights, U.S. energy producers are trying to use Chapter 11 bankruptcy protection to shed long-term contracts with the pipeline operators that gather and process shale gas before it is delivered to consumer markets.”

Global Bubble Watch:

February 24 – Reuters (Terry Wade and Anna Driver): “Germany's Minister of Finance Wolfgang Schaeuble said on Friday that the expansive fiscal and monetary policies implemented by governments to spur growth might have laid the foundation of the next economic crisis. Those debt-financed fiscal policies and accommodative monetary policies had been only moderately successful in promoting growth, with public and private debt levels in the world now too high, Schaeuble said. ‘Fiscal as well as monetary policies have reached their limits. If you want the real economy to grow there are no shortcuts which avoid reforms,’ Schaeuble said. ‘Talking about further stimulus just distracts from the real tasks at hand… We, therefore, do not agree on a G20 fiscal stimulus package as some argue in case outlook risks materialize… The debt-financed growth model has reached its limits. It is even causing new problems, raising debt, causing bubbles and excessive risk taking, zombifying the economy’.”

February 22 – Bloomberg (Matthew Philips): “One of the loudest creaking sounds coming from the markets right now is the global economy straining under a record pile of debt. The world has continued to borrow hand over fist since the financial crisis, adding nearly $60 trillion since 2007 in the process of pushing the worldwide debt load to $200 trillion, or nearly three times the size of the entire global economy. And that figure takes us only to 2014… But no matter how you measure, global debt levels are raising alarms over whether we're on the brink of another debt-fueled economic meltdown. The potential for disaster depends on how contagious a new round of defaults would prove and whether writedowns in one part of the world could cause losses in others. That's what happened in the last two major debt crises, which rippled through the global economy.”

February 25 – Wall Street Journal (Chuin-Wei Yap and Mark Magnier): “A surge of corporate bonds is adding to China’s already-high debt levels, amplifying risks to the economy as Beijing persistently encourages borrowing to fuel growth. The new rounds of corporate funding deepen anxieties among investors and analysts that China’s debt, already expanding at twice the pace of its gross domestic product, is feeding a nascent credit crisis… Corporate debt now amounts to 160% of China’s gross domestic product, compared with 98% in 2008, according to Standard & Poor’s… The level in the U.S. is 70%. Outstanding corporate bonds in China last year surged 25% to 14.6 trillion yuan ($2.2 trillion)…”

February 21 – Financial Times (Attracta Mooney and Madison Marriage): “Asset managers suffered record outflows from sovereign wealth funds in 2015 and have been warned to expect even greater redemptions this year as the oil price collapse drives governments to raid their state-owned investment vehicles. State funds pulled at least $46.5bn from asset managers in 2015 — far greater than the sovereign outflows recorded at the height of the financial crisis — in a bid to prop up their economies, according to… eVestment…”

U.S. Bubble Watch:

February 20 – Financial Times (Barney Jopson): “Fannie Mae, the state-sponsored U.S. mortgage backer, is at risk of needing a government bailout that could shake confidence in the housing finance market, senior officials have warned. Fannie Mae's chief executive and its regulator are sounding the alarm on a decline in the institution's capital cushion, which is on course to vanish in 2018, when it would have to ask the US Treasury for emergency funds. Their warnings highlight Washington's inaction on housing policy and its failure to reform the institution, which guarantees nearly $3 trillion of securities and enables 30-year fixed rate loans, following the last financial crisis.”

February 24 – Reuters (Terry Wade and Anna Driver): “Prices for mansions in Houston's swankiest neighborhood have tumbled in lock step with crude prices. The Houston Opera has offered free season tickets to patrons who lost their jobs in the oil bust. A fancy restaurant offers cut-price dinners. Twenty months into the worst oil price crash since the 1980s, well-heeled residents of the world's oil capital are among the hardest hit largely because tanking energy firm shares make up much of oil and gas executives' compensation… While Houston's economy is far more diversified now than in the 1980s when the city lost 13% of its jobs, it remains home to 5,000 energy-related firms and the fortunes of oil and gas executives are tied more than ever to the energy market.”

February 24 – Wall Street Journal (Katy McLaughlin): “Los Angeles’ luxury market is blazing—and it has nothing to do with droughts or fires. Median sale prices of single-family homes increased by 37% in Beverly Hills and 12% in Bel Air and Holmby Hills in 2015 compared with the year before, according to Jonathan Miller, a real-estate appraiser… Even in this heady market, some deals stand out. Josh Flagg, executive sales director at Rodeo Realty, sold three houses on behalf of clients last year—twice. In each instance, he sold the homes the second time for roughly $1 million more than the first time—even though no or few improvements were made to the properties, according to Mr. Flagg.”

February 26 – Wall Street Journal (Ryan Dezember and Matt Jarzemsky): “Blackstone Group LP co-founder and Chief Executive Stephen Schwarzman collected $799.2 million in 2015, up from $689.3 million in 2014, despite market turmoil that battered the firm’s stock and threatened to slow a frenzied stretch of selling that has driven big profits.”

February 23 – Reuters (Carmel Crimmins): “Cash-strapped energy firms are coming under increasing pressure from U.S. bank lenders and, on average, could see a 15% to 20% cut in their credit lines, the head of JP Morgan's commercial bank told investors… Until now, banks could be more lenient with their energy clients despite a prolonged slump in the price of oil, but Doug Petno, the head of JP Morgan's commercial bank, said that is changing. Moves, disclosed in securities filings, by oil and gas companies… to max out revolving credit lines - designed to cover short-term funding gaps - have prompted banks to take action.”

February 22 – Bloomberg (Matt Scully): “More borrowers with spotty credit are failing to make monthly car payments on time, a troubling sign for investors who have snapped up billions of dollars of securities backed by risky auto debt. Delinquencies on subprime auto loans packaged into bonds rose in January to 4.7%, a level not seen since 2010… What may be most troubling, however, is that the default rate is already climbing, up to 12.3% in January from 11.3% the prior month. That is the highest rate since 2010…”

China Bubble Watch:

February 24 – New York Times (Edward Wong and Neil Gough): “This month, Chinese banking officials omitted currency data from closely watched economic reports. Weeks earlier, Chinese regulators fined a journalist $23,000 for reposting a message that said a big securities firm had told elite clients to sell stock. Before that, officials pressed two companies to stop releasing early results from a survey of Chinese factories that often moved markets. Chinese leaders are taking increasingly bold steps to stop rising pessimism about turbulent markets and the slowing of the country’s growth. As financial and economic troubles threaten to undermine confidence in the Communist Party, Beijing is tightening the flow of economic information and even criminalizing commentary that officials believe could hurt stocks or the currency.”

February 25 – Bloomberg (Dexter Roberts): “China has had an overcapacity problem in its aluminum, chemical, cement, and steel industries for years. Now it’s reaching crisis levels. ‘The situation has gone so dramatically bad that action has to happen very soon,’ said Jörg Wuttke, president of the European Union Chamber of Commerce in China… That report’s conclusion: ‘The Chinese government’s current role in the economy is part of the problem,’ while overcapacity has become ‘an impediment to the party’s reform agenda.’ Many of the unneeded mills, smelters, and plants were built or expanded after China’s policymakers unleashed cheap credit during the global financial crisis in 2009. The situation in steel is especially dire. China produces more than double the steel of Japan, India, the U.S., and Russia—the four next-largest producers—combined…”

Central Bank Watch:

February 24 – Bloomberg (Jeanna Smialek and Lucy Meakin): “Mario Draghi has two weeks left to decide how to ramp up stimulus in a way that doesn’t upset either his colleagues or investors. When European Central Bank policy makers meet in Frankfurt from March 9-10, they’ll consider whether negative interest rates and 60 billion euros ($67bn) a month of debt purchases is enough to revive consumer prices… The ECB president has said there are no limits to how far policy makers will go within their mandate, yet sub-zero rates carry risks and expanding QE is easier said than done.”

February 24 – Bloomberg (Paul Gordon and Hans Nichols): “The European Central Bank must be wary of introducing fresh stimulus that could backfire and weaken the transmission of policy to the economy, Governing Council member Jens Weidmann said. ‘What matters for us is that we don’t produce counterproductive effects,’ Weidmann, who heads Germany’s Bundesbank, said… ‘If through the effect on, for instance, the stability of banks our measures produce the opposite of what we want then it wouldn’t be smart to embrace them in the first place.’”

February 24 – Reuters (John O'Donnell): “Bank profits will shrink if rock-bottom interest rates stay in place for too long, the head of Germany's central bank warned…, signaling that he favors an eventual change in tack. The remarks from the Bundesbank's influential president, Jens Weidmann, illustrate how seriously Germany is taking the fallout from years of low borrowing rates after a recent crash in bank stocks sucked in the country's flagship Deutsche Bank . ‘The low interest-rate environment particularly weighs on banks' earnings potential,’ Weidmann told journalists.... ‘The longer the low-interest-rate phase stays, the steeper interest rates fall, the ... smaller banks' profit,’ said Weidmann…”

February 23 – Bloomberg (Toru Fujioka Masahiro Hidaka): “Almost three years after taking the helm at Japan’s central bank, Governor Haruhiko Kuroda has hinted that his view on the power of monetary policy has shifted, after an unprecedented stimulus program failed to achieve his inflation target. ‘It’s not that the monetary base alone will pull up inflation or inflation expectations promptly,’ Kuroda said in parliament… ‘We aim to raise prices through an increase in inflation expectations and a tighter gap in supply and demand under QQE,’ he said, referring to qualitative and quantitative easing measures.”

February 21 – Reuters (Leika Kihara): “Bank of Japan Governor Haruhiko Kuroda… blamed investors' ‘excessive’ risk aversion for persistent market volatility, and defended the central bank's decision to adopt a negative interest rate policy in the face of questions about its effectiveness. The BOJ chief also shrugged off criticism that the radical stimulus policy risked destabilizing Japan's banking system by squeezing returns on lending…”

EM Bubble Watch:

February 26 – Bloomberg (Nacha Cattan and Isabella Cota): “Mexico’s surging debt load is raising red flags for Deutsche Bank AG and Barclays Plc. The broadest measure of debt as a percentage of gross domestic product has swelled to 46% from 38% in President Enrique Pena Nieto’s first three years in office as plunging oil prices eroded government revenue and a weak peso made it more expensive to borrow in dollars… According to the Bank of International Settlements, the debt burden is the highest since 1995, during the so-called Tequila Crisis, when panicked investors sold off their short-term debt and sparked a peso depreciation. The International Monetary Fund estimates that the figure is at least as high as 1996.”

Brazil Watch:

February 23 – Bloomberg (David Biller): “Brazil’s annual inflation surprised analysts by accelerating in the month through mid-February after the central bank refrained from raising borrowing costs and the government proposed loosening its fiscal targets. Annual inflation… quickened to 10.84% -- its highest level since November 2003. Inflation accelerated to 1.42% from 0.92% a month earlier…”

February 24 – Bloomberg (Paula Sambo and Filipe Pacheco): “Brazil’s sovereign rating was cut to junk by Moody’s…, the last of the major ratings companies to strip the country of its investment grade, as President Dilma Rousseff struggles to shore up fiscal accounts amid deepening political turmoil.”

February 24 – Bloomberg (Filipe Pacheco and Chiara Vasarri): “Banco do Brasil SA is getting crushed in the bond market because of its government ties. Contingent-convertible notes issued by the state-controlled bank, which are vulnerable to being written down to zero if capital ratios fall too low, have fallen the most among 133 similar CoCo securities denominated in euros or dollars. The bank’s $1.64 billion of bonds sold in 2012 have tumbled 25% in 2016, seven times the average.”

Leveraged Speculation Watch:

February 25 – Bloomberg (Matthew Philips): “Assets managed by hedge funds globally last month fell to less than $3 trillion for the first time since the industry hit the milestone in May 2014, according to… eVestment. Investors pulled a net $21.5 billion, the most in the opening month of a year since 2009, while losses led to a $43.2 billion drop in assets under management. The industry managed $2.96 trillion at the end of January. Hedge funds that suffered losses last year were hit by redemptions worth $24.8 billion in January. Equity, fixed-income and multistrategy hedge funds suffered net outflows…”

February 23 – Bloomberg (Julie Verhage): “While hedge funds have slightly outperformed the S&P 500 so far in the dire start to 2016, it turns out stocks with the lowest amount of ownership by the industry are performing better than the ones it loves. According to the most recent ‘Hedge Fund Monitor’ from David Kostin, chief U.S. equity strategist for Goldman…, which analyzes 860 hedge funds with $1.6 trillion is gross equity positions, the most popular stocks have continued to lag the market. The stocks with the lowest concentration of hedge fund ownership beat the S&P 500 53% of the time, Kostin says. This year, the basket outperformed the broader index by 541 bps.”

Europe Watch:

February 20 – Bloomberg (Alex Morales and Robert Hutton): “Prime Minister David Cameron said he’ll hold a long-pledged referendum on the U.K.’s membership of the European Union on June 23, signaling the start of a four-month campaign that immediately exposed rifts in his Conservative Party. ‘Leaving Europe would threaten our economic and our national security,’ Cameron said… ‘The choice is in your hands, but my recommendation is clear. I believe that Britain will be safer, stronger, and better off in a reformed European Union.”

February 23 – Reuters (Marius Zaharia and Dhara Ranasinghe): “The European Central Bank could run out of government bonds to buy within a year if it does not relax its own restrictions on purchases, dealing a blow to its mission to boost growth in the euro zone and lift inflation. The central bank may have to consider measures such as scrapping its ban on buying bonds yielding less than its deposit rate or even extending the scheme to include corporate debt, particularly if it increases the size of the 60 billion euros ($66bn) a month program… Otherwise it risks running out of the bonds it can buy from some countries, including Germany… The quantitative easing (QE) scheme, launched in March last year, is restricted by several rules aimed at limiting its risks…”

Japan Watch:

February 21 – Reuters (Stanley White): “Growth in Japan's manufacturing activity slowed sharply in February as new export orders contracted at the fastest pace in three years… The Markit/Nikkei Flash Japan Manufacturing Purchasing Managers Index (PMI) fell to 50.2 in February on a seasonally adjusted basis from a final 52.3 in January.”

Geopolitical Watch:

February 23 – Reuters (David Brunnstrom and Arshad Mohammed): “China is ‘changing the operational landscape’ in the South China Sea by deploying missiles and radar as part of an effort to militarily dominate East Asia, a senior U.S. military official said… China is ‘clearly militarizing the South China (Sea),’ said Admiral Harry Harris, head of the U.S. Pacific Command, adding: ‘You'd have to believe in a flat Earth to think otherwise.’ Harris said he believed China's deployment of surface-to-air missiles on Woody Island in the South China Sea's Paracel chain, new radars on Cuarteron Reef in the Spratlys and its building of airstrips were ‘actions that are changing in my opinion the operational landscape in the South China Sea.’”

February 23 – Bloomberg (Anthony Capaccio): “The U.S. should deploy a new anti-ship missile made by Lockheed Martin Corp. as quickly as possible to counter improved Chinese and Russian naval capabilities in Asian waters, the top U.S. Pacific commander said. Lockheed’s air-launched Long Range Anti-Ship Missile is a ‘great capability we need to bring on line fast,’ Admiral Harry Harris told the Senate Armed Services Committee… He spoke hours before Secretary of State John Kerry was to meet at the State Department with China’s Foreign Minister Wang Yi, as each country has accused the other of escalating military tensions in the western Pacific.”

February 23 – Reuters (Idrees Ali): “The head of the U.S. Navy's Pacific Command told a congressional committee… he will carry out more, and more complex, freedom of navigation operations in the South China Sea. ‘We will be doing them more, and we'll be doing them with greater complexity in the future and as the Secretary has said, we'll fly, sail and operate wherever international law allows,’ Admiral Harry Harris told a House Armed Services Committee hearing, referring to U.S. Defense Secretary Ash Carter. ‘We must continue to operate in the South China Sea to demonstrate that that water space and the air above it is international,’ Harris reiterated to lawmakers…”

Weekly Commentary: Just the Facts

For the Week:

The S&P500 gained 1.6% (down 4.7% y-t-d), and the Dow rose 1.5% (down 4.5%). The Utilities were little changed (up 6.5%). The Banks increased 1.3% (down 15.6%), and the Broker/Dealers rallied 2.9% (down 15.7%). The Transports gained 1.6% (down 1.4%). The broader market outperformed. The S&P 400 Midcaps jumped 2.6% (down 4.2%), and the small cap Russell 2000 rose 2.7% (down 8.7%). The Nasdaq100 gained 1.7% (down 7.8%), and the Morgan Stanley High Tech index jumped 3.5% (down 8.9%). The Semiconductors surged 3.2% (down 5.9%). The volatile Biotechs ended the week unchanged (down 24.7%). Though bullion was down $3, the HUI gold index added 1.8% (up 45.3%).

Three-month Treasury bill rates ended the week at 31 bps. Two-year government yields rose five bps to 0.79% (down 26bps y-t-d). Five-year T-note yields increased a basis point to 1.24% (down 51bps). Ten-year Treasury yields dipped a basis point to 1.74% (down 51bps). Long bond yields added three bps to 2.64% (down 38bps).

Greek 10-year yields fell 25 bps to 10.00% (up 268bps y-t-d). Ten-year Portuguese yields sank 35 bps to 3.05% (up 53bps). Italian 10-year yields fell nine bps to 1.47% (down 12bps). Spain's 10-year yields dropped 13 bps to 1.57% (down 20bps). German bund yields declined five bps to 0.15% (down 47bps). French yields fell six bps to 0.50% (down 49bps). The French to German 10-year bond spread narrowed one to 35 bps. U.K. 10-year gilt yields slipped a basis point to 1.40% (down 56bps).

Japan's Nikkei equities index recovered 1.4% (down 14.9% y-t-d). Japanese 10-year "JGB" yields fell eight bps to a record low negative 0.08% (down 41bps y-t-d). The German DAX equities index increased 1.3% (down 11.4%). Spain's IBEX 35 equities index gained 1.9% (down 12.5%). Italy's FTSE MIB index rose 3.4% (down 18.4%). EM equities were mixed. Brazil's Bovespa index was little changed (down 4.1%). Mexico's Bolsa added 0.2% (up 1.2%). South Korea's Kospi index increased 0.2% (down 2.1%). India’s Sensex equities index fell 2.3% (down 11.3%). China’s Shanghai Exchange dropped 3.2% (down 21.8%). Turkey's Borsa Istanbul National 100 index jumped 2.6% (up 4.5%). Russia's MICEX equities index gained 1.3% (up 3.1%).

Junk funds saw inflows surge to $2.7 billion (from Lipper). From Reuters (Trevor Hunnicutt) "Investment-grade corporate debt funds took in $142 million, offering relief from net withdrawals of $19 billion over the prior 13 weeks."

Freddie Mac 30-year fixed mortgage rates slipped three bps to a more than two-year low 3.62% (down 18bps y-o-y). Fifteen-year rates declined three bps to 2.93% (down 14bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down five bps to 3.70% (down 59bps).

Federal Reserve Credit last week declined $11.4bn to $4.448 TN. Over the past year, Fed Credit fell $11.7bn, or 0.3%. Fed Credit inflated $1.637 TN, or 58%, over the past 172 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week dropped $12.2bn to an 11-month low $3.254 TN. "Custody holdings" were down $12.2bn y-o-y, or 0.4%.

M2 (narrow) "money" supply last week recovered $48.8bn to $12.464 TN. "Narrow money" expanded $647bn, or 5.5%, over the past year. For the week, Currency increased $2.7bn. Total Checkable Deposits jumped $62.6bn, while Savings Deposits fell $15.2bn. Small Time Deposits were little changed. Retail Money Funds slipped $0.9bn.

Total money market fund assets jumped $15.1bn to $2.778 TN. Money Funds rose $87bn y-o-y (3.2%).

Total Commercial Paper fell $7.8bn to $1.076 TN. CP expanded $49.6 billion y-o-y, or 4.8%.

Currency Watch:

February 25 – Bloomberg (Lananh Nguyen): “The specter of shrinking liquidity gripping fixed-income desks globally is creeping its way into the world’s biggest, most liquid financial market. Amid conversations about central bank policy and algorithmic trading, it was concerns about diminishing liquidity -- or the prospects of it drying up entirely during times of market stress -- that dominated discussions this week at the TradeTech FX conference in Miami. Pension funds, hedge funds and other asset managers were seeking answers after a string of so-called flash crashes in recent months sent some of the world’s most-traded currencies plunging.”

The U.S. dollar index rallied 1.6% this week to 98.09 (down 0.6% y-t-d). For the week on the upside, the Canadian dollar increased 1.8% and the Brazilian real gained 0.5%. For the week on the downside, the South African rand declined 5.0%, the British pound 3.7%, the euro 1.8%, the Norwegian krone 1.5%, the Swedish krona 1.4%, the Japanese yen 1.2%, the Swiss franc 0.6% and the Australian dollar 0.3%. The Chinese yuan declined 0.3% versus the dollar.

Commodities Watch:

The Goldman Sachs Commodities Index rallied 2.1% (down 3.7% y-t-d). Spot Gold slipped 0.3% $1,223 (up 15.3%). March Silver dropped 4.2% to $14.71 (up 6.6%). April WTI Crude surged $3.14 to $32.78 (down 11.5%). March Gasoline rallied 6.0% (down 20%), while March Natural Gas lost 0.6% (down 24%). March Copper gained 1.9% (down 1%). May Wheat fell 3.1% (down 4%). May Corn dropped 2.6% (unchanged).

Fixed-Income Bubble Watch:

February 25 – Wall Street Journal (Sam Goldfarb and Liz Hoffman): “Goldman Sachs… is struggling to sell $2 billion in bonds backing the buyout of software firm Solera Holdings Inc., another sign of cracks in the market for the low-rated debt that has been a key driver of the takeover boom. Solera’s sale to Vista Equity Partners was one of the biggest leveraged buyouts of last year, at $6.5 billion including debt, and has been widely viewed as a test of the credit market. The bond sale comes at a time when U.S. junk-bond issuance has dropped more than 70% from a year ago and borrowing costs have increased... The pullback threatens a mergers-and-acquisitions boom that has been driven partly by cheap and available credit. It also comes as a wave of debt from the last buyout boom is coming due…”

February 21 – Wall Street Journal (Matt Wirz and Matt Jarzemsky): “Wall Street has long wondered what would happen if a wave of refinancing meets with a weakened junk-bond market. Toys “R” Us Inc. will be an early test case. The 68-year-old toy retailer is trying to replace $1.6 billion in junk-rated bonds coming due through 2018… Other heavily indebted borrowers face similar pressure to refinance amid risks of a prolonged swoon for the market. U.S. companies have a total of $1.32 trillion in junk debt maturing between now and 2020, according to Standard & Poor’s… That includes $92.3 billion coming due this year, followed by $160.9 billion in 2017 and $272.5 billion in 2018.”

February 25 – Bloomberg (Meenal Vamburkar and Cordell Eddings): “They have sold off hundreds of oil fields, eliminated thousands of jobs and slashed millions of dollars from capital spending and dividends. But in this unforgiving new world of $30-a-barrel oil, it’s barely been enough. As U.S. oil executives… take drastic measures to weather the worst slump in a generation and cling to their debt ratings, creditors are already writing some of them off. So much so that late last month, average borrowing costs for energy bonds with the lowest investment grades -- issues totaling $258 billion -- soared past those of the highest-rated U.S. junk borrowers for the first time. What’s more, debt issuance industry wide has all but ground to a halt after a record year in 2015.”

February 25 – Bloomberg (Asjylyn Loder, Donal Griffin and Jodi Xu Klein): “In less than a month, the U.S. oil bust could claim two of its biggest victims yet. Energy XXI Ltd. and SandRidge Energy Inc., oil and gas drillers with a combined $7.6 billion of debt, didn’t pay interest on their bonds last week. They have until the middle of next month to either pay the interest, work out a deal with their creditors or face a default that could tip them into bankruptcy… ‘We’re just beginning to see how bad 2016 is going to be,’ said Becky Roof, managing director… with consulting firm AlixPartners.”

February 23 – Reuters (Tom Hals): “Within weeks, two low-profile legal disputes may determine whether an unprecedented wave of bankruptcies expected to hit U.S. oil and gas producers this year will imperil the $500 billion pipeline sector as well. In the two court fights, U.S. energy producers are trying to use Chapter 11 bankruptcy protection to shed long-term contracts with the pipeline operators that gather and process shale gas before it is delivered to consumer markets.”

Global Bubble Watch:

February 24 – Reuters (Terry Wade and Anna Driver): “Germany's Minister of Finance Wolfgang Schaeuble said on Friday that the expansive fiscal and monetary policies implemented by governments to spur growth might have laid the foundation of the next economic crisis. Those debt-financed fiscal policies and accommodative monetary policies had been only moderately successful in promoting growth, with public and private debt levels in the world now too high, Schaeuble said. ‘Fiscal as well as monetary policies have reached their limits. If you want the real economy to grow there are no shortcuts which avoid reforms,’ Schaeuble said. ‘Talking about further stimulus just distracts from the real tasks at hand… We, therefore, do not agree on a G20 fiscal stimulus package as some argue in case outlook risks materialize… The debt-financed growth model has reached its limits. It is even causing new problems, raising debt, causing bubbles and excessive risk taking, zombifying the economy’.”

February 22 – Bloomberg (Matthew Philips): “One of the loudest creaking sounds coming from the markets right now is the global economy straining under a record pile of debt. The world has continued to borrow hand over fist since the financial crisis, adding nearly $60 trillion since 2007 in the process of pushing the worldwide debt load to $200 trillion, or nearly three times the size of the entire global economy. And that figure takes us only to 2014… But no matter how you measure, global debt levels are raising alarms over whether we're on the brink of another debt-fueled economic meltdown. The potential for disaster depends on how contagious a new round of defaults would prove and whether writedowns in one part of the world could cause losses in others. That's what happened in the last two major debt crises, which rippled through the global economy.”

February 25 – Wall Street Journal (Chuin-Wei Yap and Mark Magnier): “A surge of corporate bonds is adding to China’s already-high debt levels, amplifying risks to the economy as Beijing persistently encourages borrowing to fuel growth. The new rounds of corporate funding deepen anxieties among investors and analysts that China’s debt, already expanding at twice the pace of its gross domestic product, is feeding a nascent credit crisis… Corporate debt now amounts to 160% of China’s gross domestic product, compared with 98% in 2008, according to Standard & Poor’s… The level in the U.S. is 70%. Outstanding corporate bonds in China last year surged 25% to 14.6 trillion yuan ($2.2 trillion)…”

February 21 – Financial Times (Attracta Mooney and Madison Marriage): “Asset managers suffered record outflows from sovereign wealth funds in 2015 and have been warned to expect even greater redemptions this year as the oil price collapse drives governments to raid their state-owned investment vehicles. State funds pulled at least $46.5bn from asset managers in 2015 — far greater than the sovereign outflows recorded at the height of the financial crisis — in a bid to prop up their economies, according to… eVestment…”

U.S. Bubble Watch:

February 20 – Financial Times (Barney Jopson): “Fannie Mae, the state-sponsored U.S. mortgage backer, is at risk of needing a government bailout that could shake confidence in the housing finance market, senior officials have warned. Fannie Mae's chief executive and its regulator are sounding the alarm on a decline in the institution's capital cushion, which is on course to vanish in 2018, when it would have to ask the US Treasury for emergency funds. Their warnings highlight Washington's inaction on housing policy and its failure to reform the institution, which guarantees nearly $3 trillion of securities and enables 30-year fixed rate loans, following the last financial crisis.”

February 24 – Reuters (Terry Wade and Anna Driver): “Prices for mansions in Houston's swankiest neighborhood have tumbled in lock step with crude prices. The Houston Opera has offered free season tickets to patrons who lost their jobs in the oil bust. A fancy restaurant offers cut-price dinners. Twenty months into the worst oil price crash since the 1980s, well-heeled residents of the world's oil capital are among the hardest hit largely because tanking energy firm shares make up much of oil and gas executives' compensation… While Houston's economy is far more diversified now than in the 1980s when the city lost 13% of its jobs, it remains home to 5,000 energy-related firms and the fortunes of oil and gas executives are tied more than ever to the energy market.”

February 24 – Wall Street Journal (Katy McLaughlin): “Los Angeles’ luxury market is blazing—and it has nothing to do with droughts or fires. Median sale prices of single-family homes increased by 37% in Beverly Hills and 12% in Bel Air and Holmby Hills in 2015 compared with the year before, according to Jonathan Miller, a real-estate appraiser… Even in this heady market, some deals stand out. Josh Flagg, executive sales director at Rodeo Realty, sold three houses on behalf of clients last year—twice. In each instance, he sold the homes the second time for roughly $1 million more than the first time—even though no or few improvements were made to the properties, according to Mr. Flagg.”

February 26 – Wall Street Journal (Ryan Dezember and Matt Jarzemsky): “Blackstone Group LP co-founder and Chief Executive Stephen Schwarzman collected $799.2 million in 2015, up from $689.3 million in 2014, despite market turmoil that battered the firm’s stock and threatened to slow a frenzied stretch of selling that has driven big profits.”

February 23 – Reuters (Carmel Crimmins): “Cash-strapped energy firms are coming under increasing pressure from U.S. bank lenders and, on average, could see a 15% to 20% cut in their credit lines, the head of JP Morgan's commercial bank told investors… Until now, banks could be more lenient with their energy clients despite a prolonged slump in the price of oil, but Doug Petno, the head of JP Morgan's commercial bank, said that is changing. Moves, disclosed in securities filings, by oil and gas companies… to max out revolving credit lines - designed to cover short-term funding gaps - have prompted banks to take action.”

February 22 – Bloomberg (Matt Scully): “More borrowers with spotty credit are failing to make monthly car payments on time, a troubling sign for investors who have snapped up billions of dollars of securities backed by risky auto debt. Delinquencies on subprime auto loans packaged into bonds rose in January to 4.7%, a level not seen since 2010… What may be most troubling, however, is that the default rate is already climbing, up to 12.3% in January from 11.3% the prior month. That is the highest rate since 2010…”

China Bubble Watch:

February 24 – New York Times (Edward Wong and Neil Gough): “This month, Chinese banking officials omitted currency data from closely watched economic reports. Weeks earlier, Chinese regulators fined a journalist $23,000 for reposting a message that said a big securities firm had told elite clients to sell stock. Before that, officials pressed two companies to stop releasing early results from a survey of Chinese factories that often moved markets. Chinese leaders are taking increasingly bold steps to stop rising pessimism about turbulent markets and the slowing of the country’s growth. As financial and economic troubles threaten to undermine confidence in the Communist Party, Beijing is tightening the flow of economic information and even criminalizing commentary that officials believe could hurt stocks or the currency.”

February 25 – Bloomberg (Dexter Roberts): “China has had an overcapacity problem in its aluminum, chemical, cement, and steel industries for years. Now it’s reaching crisis levels. ‘The situation has gone so dramatically bad that action has to happen very soon,’ said Jörg Wuttke, president of the European Union Chamber of Commerce in China… That report’s conclusion: ‘The Chinese government’s current role in the economy is part of the problem,’ while overcapacity has become ‘an impediment to the party’s reform agenda.’ Many of the unneeded mills, smelters, and plants were built or expanded after China’s policymakers unleashed cheap credit during the global financial crisis in 2009. The situation in steel is especially dire. China produces more than double the steel of Japan, India, the U.S., and Russia—the four next-largest producers—combined…”

Central Bank Watch:

February 24 – Bloomberg (Jeanna Smialek and Lucy Meakin): “Mario Draghi has two weeks left to decide how to ramp up stimulus in a way that doesn’t upset either his colleagues or investors. When European Central Bank policy makers meet in Frankfurt from March 9-10, they’ll consider whether negative interest rates and 60 billion euros ($67bn) a month of debt purchases is enough to revive consumer prices… The ECB president has said there are no limits to how far policy makers will go within their mandate, yet sub-zero rates carry risks and expanding QE is easier said than done.”

February 24 – Bloomberg (Paul Gordon and Hans Nichols): “The European Central Bank must be wary of introducing fresh stimulus that could backfire and weaken the transmission of policy to the economy, Governing Council member Jens Weidmann said. ‘What matters for us is that we don’t produce counterproductive effects,’ Weidmann, who heads Germany’s Bundesbank, said… ‘If through the effect on, for instance, the stability of banks our measures produce the opposite of what we want then it wouldn’t be smart to embrace them in the first place.’”

February 24 – Reuters (John O'Donnell): “Bank profits will shrink if rock-bottom interest rates stay in place for too long, the head of Germany's central bank warned…, signaling that he favors an eventual change in tack. The remarks from the Bundesbank's influential president, Jens Weidmann, illustrate how seriously Germany is taking the fallout from years of low borrowing rates after a recent crash in bank stocks sucked in the country's flagship Deutsche Bank . ‘The low interest-rate environment particularly weighs on banks' earnings potential,’ Weidmann told journalists.... ‘The longer the low-interest-rate phase stays, the steeper interest rates fall, the ... smaller banks' profit,’ said Weidmann…”

February 23 – Bloomberg (Toru Fujioka Masahiro Hidaka): “Almost three years after taking the helm at Japan’s central bank, Governor Haruhiko Kuroda has hinted that his view on the power of monetary policy has shifted, after an unprecedented stimulus program failed to achieve his inflation target. ‘It’s not that the monetary base alone will pull up inflation or inflation expectations promptly,’ Kuroda said in parliament… ‘We aim to raise prices through an increase in inflation expectations and a tighter gap in supply and demand under QQE,’ he said, referring to qualitative and quantitative easing measures.”

February 21 – Reuters (Leika Kihara): “Bank of Japan Governor Haruhiko Kuroda… blamed investors' ‘excessive’ risk aversion for persistent market volatility, and defended the central bank's decision to adopt a negative interest rate policy in the face of questions about its effectiveness. The BOJ chief also shrugged off criticism that the radical stimulus policy risked destabilizing Japan's banking system by squeezing returns on lending…”

EM Bubble Watch:

February 26 – Bloomberg (Nacha Cattan and Isabella Cota): “Mexico’s surging debt load is raising red flags for Deutsche Bank AG and Barclays Plc. The broadest measure of debt as a percentage of gross domestic product has swelled to 46% from 38% in President Enrique Pena Nieto’s first three years in office as plunging oil prices eroded government revenue and a weak peso made it more expensive to borrow in dollars… According to the Bank of International Settlements, the debt burden is the highest since 1995, during the so-called Tequila Crisis, when panicked investors sold off their short-term debt and sparked a peso depreciation. The International Monetary Fund estimates that the figure is at least as high as 1996.”

Brazil Watch:

February 23 – Bloomberg (David Biller): “Brazil’s annual inflation surprised analysts by accelerating in the month through mid-February after the central bank refrained from raising borrowing costs and the government proposed loosening its fiscal targets. Annual inflation… quickened to 10.84% -- its highest level since November 2003. Inflation accelerated to 1.42% from 0.92% a month earlier…”

February 24 – Bloomberg (Paula Sambo and Filipe Pacheco): “Brazil’s sovereign rating was cut to junk by Moody’s…, the last of the major ratings companies to strip the country of its investment grade, as President Dilma Rousseff struggles to shore up fiscal accounts amid deepening political turmoil.”

February 24 – Bloomberg (Filipe Pacheco and Chiara Vasarri): “Banco do Brasil SA is getting crushed in the bond market because of its government ties. Contingent-convertible notes issued by the state-controlled bank, which are vulnerable to being written down to zero if capital ratios fall too low, have fallen the most among 133 similar CoCo securities denominated in euros or dollars. The bank’s $1.64 billion of bonds sold in 2012 have tumbled 25% in 2016, seven times the average.”

Leveraged Speculation Watch:

February 25 – Bloomberg (Matthew Philips): “Assets managed by hedge funds globally last month fell to less than $3 trillion for the first time since the industry hit the milestone in May 2014, according to… eVestment. Investors pulled a net $21.5 billion, the most in the opening month of a year since 2009, while losses led to a $43.2 billion drop in assets under management. The industry managed $2.96 trillion at the end of January. Hedge funds that suffered losses last year were hit by redemptions worth $24.8 billion in January. Equity, fixed-income and multistrategy hedge funds suffered net outflows…”

February 23 – Bloomberg (Julie Verhage): “While hedge funds have slightly outperformed the S&P 500 so far in the dire start to 2016, it turns out stocks with the lowest amount of ownership by the industry are performing better than the ones it loves. According to the most recent ‘Hedge Fund Monitor’ from David Kostin, chief U.S. equity strategist for Goldman…, which analyzes 860 hedge funds with $1.6 trillion is gross equity positions, the most popular stocks have continued to lag the market. The stocks with the lowest concentration of hedge fund ownership beat the S&P 500 53% of the time, Kostin says. This year, the basket outperformed the broader index by 541 bps.”

Europe Watch:

February 20 – Bloomberg (Alex Morales and Robert Hutton): “Prime Minister David Cameron said he’ll hold a long-pledged referendum on the U.K.’s membership of the European Union on June 23, signaling the start of a four-month campaign that immediately exposed rifts in his Conservative Party. ‘Leaving Europe would threaten our economic and our national security,’ Cameron said… ‘The choice is in your hands, but my recommendation is clear. I believe that Britain will be safer, stronger, and better off in a reformed European Union.”

February 23 – Reuters (Marius Zaharia and Dhara Ranasinghe): “The European Central Bank could run out of government bonds to buy within a year if it does not relax its own restrictions on purchases, dealing a blow to its mission to boost growth in the euro zone and lift inflation. The central bank may have to consider measures such as scrapping its ban on buying bonds yielding less than its deposit rate or even extending the scheme to include corporate debt, particularly if it increases the size of the 60 billion euros ($66bn) a month program… Otherwise it risks running out of the bonds it can buy from some countries, including Germany… The quantitative easing (QE) scheme, launched in March last year, is restricted by several rules aimed at limiting its risks…”

Japan Watch:

February 21 – Reuters (Stanley White): “Growth in Japan's manufacturing activity slowed sharply in February as new export orders contracted at the fastest pace in three years… The Markit/Nikkei Flash Japan Manufacturing Purchasing Managers Index (PMI) fell to 50.2 in February on a seasonally adjusted basis from a final 52.3 in January.”

Geopolitical Watch:

February 23 – Reuters (David Brunnstrom and Arshad Mohammed): “China is ‘changing the operational landscape’ in the South China Sea by deploying missiles and radar as part of an effort to militarily dominate East Asia, a senior U.S. military official said… China is ‘clearly militarizing the South China (Sea),’ said Admiral Harry Harris, head of the U.S. Pacific Command, adding: ‘You'd have to believe in a flat Earth to think otherwise.’ Harris said he believed China's deployment of surface-to-air missiles on Woody Island in the South China Sea's Paracel chain, new radars on Cuarteron Reef in the Spratlys and its building of airstrips were ‘actions that are changing in my opinion the operational landscape in the South China Sea.’”

February 23 – Bloomberg (Anthony Capaccio): “The U.S. should deploy a new anti-ship missile made by Lockheed Martin Corp. as quickly as possible to counter improved Chinese and Russian naval capabilities in Asian waters, the top U.S. Pacific commander said. Lockheed’s air-launched Long Range Anti-Ship Missile is a ‘great capability we need to bring on line fast,’ Admiral Harry Harris told the Senate Armed Services Committee… He spoke hours before Secretary of State John Kerry was to meet at the State Department with China’s Foreign Minister Wang Yi, as each country has accused the other of escalating military tensions in the western Pacific.”

February 23 – Reuters (Idrees Ali): “The head of the U.S. Navy's Pacific Command told a congressional committee… he will carry out more, and more complex, freedom of navigation operations in the South China Sea. ‘We will be doing them more, and we'll be doing them with greater complexity in the future and as the Secretary has said, we'll fly, sail and operate wherever international law allows,’ Admiral Harry Harris told a House Armed Services Committee hearing, referring to U.S. Defense Secretary Ash Carter. ‘We must continue to operate in the South China Sea to demonstrate that that water space and the air above it is international,’ Harris reiterated to lawmakers…”

Friday Evening Links

[Bloomberg] G-20 to Use All Policy Tools to Support Growth: Draft Statement

[Bloomberg] Global Slowdown Concerns Policy Makers as Fed, ECB Ponder Rates

[Bloomberg] The Jungle of the $2 Trillion ETF Market Is Getting Even Denser

[Bloomberg] Corus Pulls $221 Million Junk Bond Deal Backing Shaw Takeover

[Bloomberg] SkyBridge Withdraws $1 Billion From Paulson, Loeb and Rosenstein

[Bloomberg] Nearing Tequila Crisis-Era Debt Levels Gives Mexico a Hangover

Friday's News Links

[Bloomberg] Stocks Rise With Commodities on China; Dollar Gains as GDP Beats

[Bloomberg] Treasuries Fall as U.S. Economic Growth Pace Exceeds Forecasts

[Bloomberg] Euro-Area Disappointments Mount as Inflation Rates Slip Back

[Bloomberg] Germany Opposes Any G-20 Fiscal Stimulus; Focuses on Reform

[Reuters] German finmin: expansive policies may have laid foundation of next crisis

[Bloomberg] Citigroup Warns of More Market Turmoil If G-20 Fails to Deliver

[Reuters] China Capital Outflows Pose Risk to Global Growth: IMF Chief

[NYT, Bradsher] In Rare Appearance, China’s Central Bank Chief Says All Is Well

[Reuters] U.S.-based stock funds post eighth straight week of outflows: Lipper

[Bloomberg] Hedge-Fund Assets Below $3 Trillion for First Time Since 2014

[NY Post] Banks backing Dell’s EMC deal hit reset button

[WSJ] Goldman Struggling to Sell $2 Billion in Bonds Backing Solera Buyout

[Reuters] S&P downgrades Noble Group's rating further into junk, outlook negative

Wednesday, February 24, 2016

Wednesday Evening Links

[Bloomberg] Most Asian Stocks Rise After Crude Rally as Japan Leads Advance

[WSJ] Why Did These Homes Sell for $1 Million More Within a Year?

[WSJ] Funds Clobbered by Rout in Financial Stocks

[WSJ] U.S. Warns Banks Off Russian Bonds

[Bloomberg] PBOC Officials Say China Can Handle Raising Budget Deficit to 4%

[Time] U.S.-China Showdown Keeps Inching Closer

Wednesday's News Links

[Bloomberg] Global Stocks Extend Drop With Oil as `Brexit' Risk Roils Pound

[Bloomberg] Pound Sinks Below $1.39 as Traders Brace for More Volatility

[Bloomberg] Brazil Credit Ratings Cut to Junk by Moody’s

[Bloomberg] Brazil Stocks Lead Americas Losses as Real Sinks on Moody's Cut

[Bloomberg] World's Worst CoCo Bonds Come Courtesy of Brazil's Government

[FBN] Gold Jumps Above $1,240 an Ounce as Investors Seek Refuge

[Reuters] U.S. new home sales tumble; services sector weakens

[Bloomberg] Emerging Stocks to Currencies Decline as Oil Curbs Risk Appetite

[Bloomberg] South African Rand, Bonds Plunge as Gordhan's Budget Disappoints

[Bloomberg] Draghi Has Two Weeks to Map ECB Plan That Won't Let You Down

[Bloomberg] Weidmann Says Any New ECB Measures Mustn't Be Counterproductive

[Bloomberg] Yuan Falls a Fourth Day as Fix Cut After Data Suggests Outflows

[Reuters] How long before the cracks show in China's great currency wall?

[Bloomberg] China's New Economy Leads to Deepening Export Slump in Asia

[Reuters] ECB risks running out of bonds to buy unless rewrites rules

[Bloomberg] Chinese Stocks in Hong Kong Head for Steepest Loss in Two Weeks

[Reuters] U.S. Navy plans more freedom of navigation moves in South China Sea: Admiral

Tuesday, February 23, 2016

Tuesday Afternoon Links

[Bloomberg] U.S. Stocks Slip From 6-Week High as Recent Rally Leaders Falter

[Reuters] U.S. banks to cut credit lines for energy firms -JP Morgan

[Bloomberg] JPMorgan Trading Revenue Drops 20% This Year in Global Rout

[Reuters] Former JPMorgan trader says 'London Whale' debacle not his fault

[Bloomberg] Key Takeaways From a Brutal Year for Hedge Funds

[Reuters] China 'changing operational landscape' for East Asia dominance -US commander

[Bloomberg] U.S. Must Deploy Anti-Ship Missile Soon in Asia, Admiral Says

Tuesday's News Links

[Bloomberg] U.S. Stocks Fall as Yen Gains With Gold on China Yuan Fixing

[Bloomberg] Emerging Stocks Retreat on China Concerns as Oil Resumes Slide

[Bloomberg] Yen Climbs as China's Yuan Fix Surprises Market, Spurs Haven Bid

[Bloomberg] Kuroda Hints at Shift in Thinking on Power of Monetary Policy

[Reuters] BoE's Carney says "considerable room" for further stimulus if needed

[Bloomberg] If Sterling Goes Down on `Brexit,' It's Taking the Euro With It

[Bloomberg] Goldman: Hedge Funds' Most Loved Stocks Are Struggling

[Bloomberg] More Subprime Borrowers Are Falling Behind on Their Auto Loans

[Bloomberg] Consumer Confidence in U.S. Sank More Than Forecast in February

[Bloomberg] Home Prices in 20 U.S. Cities Increase at Steady Pace

[Bloomberg] Trudeau Drops Campaign Promises and Goes All In With Deficits

[FT] Emerging market bonds hit as foreign investors dump debt

[Reuters] Brazil police target Rousseff campaign chief in corruption probe

[Bloomberg] China's Island Radar Bigger Threat Than Missiles, CSIS Says

Sunday, February 21, 2016

Monday's News Links

[Bloomberg] Pound Sinks on `Brexit' Risks as Global Shares Rally With Crude

[Bloomberg] Pound Slides Most Since 2009 as Johnson Backs ‘Brexit’ Campaign

[Bloomberg] Yuan Forwards Rise on Bets PBOC to Support Currency Before G-20

[Reuters] Japan February flash manufacturing PMI shows growth slowing sharply as export orders shrink

[Reuters] BOJ's Kuroda blames 'excessive' risk aversion for market tumult

[Bloomberg] Goldman Sachs Says 40% of Lending to Oil and Gas Firms Is Junk

[Reuters] As U.S. shale sinks, pipeline fight sends woes downstream

[Reuters] Investment banks' trading revenue declined 9 percent in 2015: survey

[NYT] Toys ‘R’ Us Poses a Test for Junk-Bond Markets

[Bloomberg] Europe’s Economy Strains as Global Slowdown Takes its Toll

[FT] Sovereign wealth funds pull at least $46.5bn from asset managers

[Bloomberg] China Tensions Fuel Acceleration in Military Spending in Asia

[NYT] Truce Unravels as Fighting Picks Up in Ukraine

[Reuters] China signals no South China Sea backdown as foreign minister goes to U.S.

[Reuters] U.S. urges wider challenge to China's claims in South China Sea

Sunday Evening Links

[Bloomberg] Pound Sinks Amid `Brexit' Showdown While Asian Stocks Fluctuate

[Bloomberg] Biggest Banks' Commodity Revenue Slid to Lowest in Over a Decade

[Bloomberg] Fixed-Income Revenue Dropped Last Year to Lowest Since 2008

Sunday's News Links

[BBC] Boris Johnson to campaign to leave the EU

[Bloomberg] New market storm could catch euro zone unprepared

[Bloomberg] OPEC's Path From Oil Freeze to Output Cuts Is Far From Clear

[Reuters] RPT-Saudi oil minister to face rival U.S. producers as price rout bites

[Bloomberg] China's Yuan Bears See More Trouble Ahead

[Bloomberg] China's Debt Seen Rising Through 2019, Peaking at 283% of GDP

[CNBC/NYT] High-Risk Deals on Shabby Homes Ensnare Buyers

Saturday, February 20, 2016

Saturday's News Links

[Bloomberg] Cameron Calls June 23 EU Referendum as Cabinet Fractures

[Bloomberg] ‘Brexit’ Fears Fuel U.K. Credit Premium to Historic Highs: Chart

[Bloomberg] Pro-‘Brexit’ U.K. Ministers Show Their Colors Straight Away

[CNBC/FT] Fannie Mae at risk of needing a bailout

[Reuters] Kremlin says concerned by Turkey shelling Syrian territory

[Reuters] Turkey calls for unconditional U.S. support against Kurdish YPG

[CNBC] North Korea's arsenal raises the stakes for US grid security: Experts

[Reuters] Paracels build-up a pointer to China's broader South China Sea ambitions

Weekly Commentary: Crisis Management

The current global backdrop remains alarming and, especially on bad days, darn right frightening. Yet as a macro analyst of Credit, money and the markets, I’m the proverbial kid in a candy store.

De-risking/de-leveraging and attendant market tumult (once again) reached the point of provoking concerted global crisis management measures (see “Global Bubble Watch”). Japanese stocks surged 6.8% this week, with Chinese shares up 3.5%. The Mexican peso rallied 3.6%.

This week saw the People’s Bank of China revalue the yuan currency higher (“biggest one-day advance” in more than a decade), a surprise move clearly meant to inflict pain upon the speculator community. One of China’s internationally respected officials reemerged in the public stoplight, with PBOC “Governor Zhou Xiaochuan breaking his long silence to argue there’s no basis for continued yuan depreciation” (Bloomberg). And what would Crisis Management be without talk of boosting government stimulus: “China is stepping up support for the economy by ramping up spending and considering new measures to boost bank lending” (Bloomberg).

With their economy apparently slipping back into recession in the face of ongoing massive QE, Japanese officials are keen to jump on the concerted global crisis management bandwagon. “Bank of Japan Gov. Haruhiko Kuroda… called on finance chiefs from the world’s major economies to find ways to stabilize global financial markets…” (WSJ). And a Thursday headline from the Financial Times: “Japan will have to double down on stimulus to save Abenomics.”

After witnessing a distressing bank stock collapse, European officials are desperate to (again) do “whatever it takes.” “The European Central Bank won't hesitate to boost its stimulus in March if it believes recent financial-market turmoil or lower oil prices could weigh further on stubbornly low inflation, ECB President Mario Draghi said” (Dow Jones). The ECB “is calling for European Union banking law to change to allow supervisors the option of permitting banks to make discretionary payments to investors… rules currently block payments of dividends, bonuses or coupons on contingent convertible bonds, known as CoCos, if a lender posts losses…” (Bloomberg).

The Chinese were not alone in seeking to ambush currency speculators. Mexico’s central bank stunned the markets by boosting rates 50 bps to 3.75%, while the Finance Ministry at the same time announced spending cuts. The peso surged almost 4%, “best daily gain since 2008.”

Here at home, as Federal Reserve officials advance dovish rhetoric, “one and done” looks closer to winning the day. Most notably, “Hawkish Bullard Moves Into Dove Camp,” stating that it’s now “unwise” to follow through with additional hikes. “Two important pillars of the 2015 case for U.S. monetary policy normalization have changed. These data-dependent changes likely give the FMOC more leeway in its normalization program.”

February 17 – Wall Street Journal (Paul Hannon): “Governments in the U.S., Europe and elsewhere should take ‘urgent’ and ‘collective’ steps to raise their investment spending and deliver a fresh boost to flagging economic growth, the Organization for Economic Growth and Development said… In its most forceful call to action since the financial crisis, the OECD said the global economy is suffering from a weakness of demand that can’t be remedied through stimulus from central banks alone.”

Inflationism was never going to work. And here we are after seven years of ongoing monetary stimulus and deficit spending – and the calls for more grow only louder. QE had no chance of success. Here we are in 2016 and inflated global securities and derivatives markets are more dangerous than ever. Inflating away debt problems was destined for failure. The world has added tens of Trillions of additional debt since 2008 and global Credit is more fragile than ever.

The precarious nature of “Terminal Phase” Credit Bubble excess is a fundamental CBB tenet. At this point, China is putting the historic U.S. mortgage finance Bubble to shame. The “Terminal Phase” sees underlying systemic risk expand exponentially. Not only does the quantity of Credit expand rapidly. The underlying quality of this Credit suffers progressive late-cycle deterioration. Think of 2006’s Trillion dollars of subprime mortgage derivatives. There’s just no escaping Credit Bubble reality: the more protracted the Terminal Phase, the more disastrous the consequences.

Total Chinese New Credit (aggregate “social financing”) expanded $525 billion in January. This was more than 50% above estimates. It was also a record for Chinese Credit expansion and, surely, one of the biggest months of Credit growth in the history of mankind. There are important seasonal and special factors at play. Nonetheless, January Credit data support/confirm the view that China’s financial system has succumbed to a precarious self-destruction phase. Such egregious Credit creation may help meet 2016 growth goals. It will do anything but bolster flagging confidence in policymaking and China’s financial system.

February 19 – Washington Post (Didi Tang): “Chinese President Xi Jinping made a rare, high-profile tour of the country’s top three state-run media outlets Friday, telling editors and reporters they must pledge absolute loyalty to the party and closely follow its leadership in ‘thought, politics and action.’ The remarks by Xi… are the latest sign of the party’s increasingly tighter control over all media and Xi’s unceasing efforts to consolidate his powers… At CCTV, Xi was welcomed by a placard pledging loyalty to the party. ‘The central television’s family name is the party,’ the sign read… ‘The media run by the party and the government are the propaganda fronts and must have the party as their family name,’ Xi told the propaganda workers at the meeting…”

Chinese officials have apparently settled on a strategy: hold economic crisis at bay by stimulating rampant system Credit growth, while stabilizing the yuan currency with currency controls and heavy-handed market intervention. The flaw in this plan can be traced back to a loss of faith in China’s financial and economic model, along with waning confidence in Chinese policies. “Money” wants out of China - and the more “money” created the more finance available to seek the exits. Chinese officials are determined to make life more challenging for those betting again the yuan. At the end of the day, however, massive “Terminal Phase” excess will ensure a highly destabilizing currency devaluation.

Policymakers retain the capacity to incite short squeezes. I don’t recall much official protest while the speculating community was positioned leveraged long global risk markets. But to place bets against China, Europe or on “risk off” more generally, well, these days such acts provoke aggressive responses. In the past, this competitive advantage afforded to “risk on” proved instrumental in prolonging the global Bubble.

It was a big squeeze week – stocks, corporate bonds, currencies and EM. The Morgan Stanley High Tech index jumped 6.3% and U.S. biotechs surged 4.4%. The small caps rose 3.9%. The broker/dealers recovered 5.1%. The German DAX rallied 4.7%. Brazilian stocks rallied 4.4% and Russian stocks were up 3.9%.

With the caveat that short squeezes do tend to take on lives of their own, the key question remains whether concerted policy measures and attendant squeeze dynamics have the capacity to resuscitate the global Bubble. I believe the Bubble has burst and reflationary measures at this point only work to further destabilize.

It was one of those “dogs that didn’t bark” weeks. It’s worth noting that Italian bank stocks completely missed out on this week’s global equities rally. For that matter, U.S. bank stocks were none too impressive. Treasuries gave up very little of recent strong gains. Commodities as well were in no hurry to price in a resurgent global economy. The Brazilian real slipped 0.5%, the Turkish lira declined 0.7% and the South Korean won dropped 1.9% - despite a decent squeeze in EM currencies. German bund yields fell another six bps. European periphery spreads reversed little of recent widening. Curiously, the yen added to recent strong gains, completely disregarding the rally in risk assets.

At this stage of the cycle, policy-induced squeezes and market volatility only work to further derail market stability. There is increased chatter of mounting losses at some of the prominent hedge fund complexes. The pressure to further de-risk/de-leverage has turned intense. The market, economic, policy and geopolitical backdrops are too uncertain. Correlations between markets are too disjointed and unpredictable to leverage various sectors, assets classes or global markets. I’m sticking with the analysis that leveraged currency “carry trade” liquidity evolved into a powerful source of global market and economic fuel over recent years.

It is as well my view that acute currency market volatility – certainly spurred by policy experimentation and confusion – is a serious detriment to saving this faltering Credit cycle. Global policies appear too gimmicky for my taste. In short, market participants still have a lot of confidence in official willingness and ability to punish those betting on – or hedging against – “risk off.” Much more importantly, confidence is waning in the capacity of policymakers to manage the unfolding global bust. Confidence is waning in the leveraged speculating community’s ability to provide attractive returns while accepting reasonable risk. In general, confidence in leverage has evaporated – which changes so many things. At the same time, confidence is waning in political processes around the globe. And confidence is beginning to wane in the ability to keep the peace.

For the Week:

The S&P500 rallied 2.8% (down 6.2% y-t-d), and the Dow recovered 2.6% (down 5.9%). The Utilities increased 1.3% (up 6.4%). The Banks gained 2.2% (down 16.7%), and the Broker/Dealers rallied 5.1% (down 18.0%). The Transports jumped 3.4% (down 3.0%). The S&P 400 Midcaps gained 3.5% (down 6.6%), and the small cap Russell 2000 jumped 3.9% (down 11.1%). The Nasdaq100 rallied 3.6% (down 9.3%), and the Morgan Stanley High Tech index surged 6.3% (down 11.9%). The Semiconductors jumped 5.9% (down 8.7%). The Biotechs surged 4.4% (down 24.7%). With bullion down $11, the HUI gold index fell 3.0% (up 42.8%).

Three-month Treasury bill rates ended the week at 29 bps. Two-year government yields increased three bps to 0.74% (down 31bps y-t-d). Five-year T-note yields gained three bps to 1.23% (down 52bps). Ten-year Treasury yields added a basis point to 1.75% (down 50bps). Long bond yields increased a basis point to 2.61% (down 41bps).

Greek 10-year yields fell back 78bps to 10.25% (up 293bps y-t-d). Ten-year Portuguese yields dropped 29bps to 3.40% (up 88bps). Italian 10-year yields declined eight bps to 1.56% (down 3bps). Spain's 10-year yields slipped three bps to 1.70% (down 7bps). German bund yields fell six bps to 0.20% (down 42bps). French yields declined nine bps to 0.56% (down 43bps). The French to German 10-year bond spread narrowed three to 36 bps. U.K. 10-year gilt yields were unchanged at 1.41% (down 54bps).

Japan's Nikkei equities index rallied 6.8% (down 16.1% y-t-d). Japanese 10-year "JGB" yields dropped seven bps to a record low 0.00% (down 26bps y-t-d). The German DAX equities index rallied 4.7% (down 12.6%). Spain's IBEX 35 equities index rose 3.5% (down 14.1%). Italy's FTSE MIB index gained 2.4% (down 21.1%). EM equities rallied. Brazil's Bovespa index rose 4.3% (down 4.2%). Mexico's Bolsa gained 2.3% (up 0.9%). South Korea's Kospi index jumped 4.4% (down 2.3%). India’s Sensex equities index rose 3.1% (down 9.2%). China’s Shanghai Exchange recovered 3.5% (down 19.2%). Turkey's Borsa Istanbul National 100 index jumped 2.9% (up 1.8%). Russia's MICEX equities index surged 3.9% (up 1.8%).

Junk funds saw inflows of $66 million (from Lipper). After a one-week hiatus, investment-grade bond funds saw outflows of $1.122 billion.

Freddie Mac 30-year fixed mortgage rates were unchanged at an eight-month low 3.65% (down 11bps y-o-y). Fifteen-year rates were unchanged at 2.95% (down 10bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up seven bps to 3.75% (down 58bps).

Federal Reserve Credit last week expanded $12.6bn to a two-month high $4.459 TN. Over the past year, Fed Credit slipped $14.8bn, or 0.3%. Fed Credit inflated $1.648 TN, or 58%, over the past 171 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week dropped $12.0bn to an almost 11-month low $3.255 TN. "Custody holdings" were down $7.6bn y-o-y, or 0.2%.

M2 (narrow) "money" supply last week sank $73.1bn to $12.415 TN. "Narrow money" expanded $628bn, or 5.3%, over the past year. For the week, Currency declined $1.0bn. Total Checkable Deposits fell $9.0bn, and Savings Deposits dropped $61.1bn. Small Time Deposits were little changed. Retail Money Funds declined $1.4bn.

Total money market fund assets gained $7.5bn to $2.763 TN. Money Funds rose $82bn y-o-y (3.1%).

Total Commercial Paper rose $7.2bn to a 14-month high $1.084 TN. CP expanded $92bn y-o-y, or 9.3%.

Currency Watch:

February 19 – Financial Times (Gabriel Wildau): “China’s central bank has removed a closely watched foreign exchange data series from its website in a move likely to provoke suspicion that the government is attempting to conceal the extent of capital outflow. In a regular monthly data table published late on Thursday, the People’s Bank of China removed the data category ‘Position for forex purchase’, which tracked total foreign exchange purchases by both the central bank and other financial institutions. In its place, a separate series that captures only central bank forex purchases is substituted. A rise in forex purchases is considered a sign of capital inflows, while a drop suggests outflows. Analysts expressed puzzlement at the change…”

The U.S. dollar index gained 0.6% this week to 96.59 (down 2.1% y-t-d). For the week on the upside, the Mexican peso increased 3.6%, the South African rand 3.0%, the Canadian dollar 0.6%, Australian dollar 0.5%, Japanese yen 0.5%, Norwegian krone 0.5% and the New Zealand dollar 0.1%. For the week on the downside, the Swiss franc declined 1.4%, the euro 1.1%, the British pound 0.7%, the Swedish krona 0.6%, and the Brazilian real 0.5%. Chinese yuan gained 0.8% versus the dollar.

Commodities Watch:

The Goldman Sachs Commodities Index slipped 0.4% (down 5.8% y-t-d). Spot Gold lost 0.9% $1,227 (up 15.6%). March Silver fell 2.5% to $15.36 (up 11.3%). March WTI Crude increased 50 cents to $29.64 (down 20%). March Gasoline dropped 8.0% (down 24%), while March Natural Gas sank 8.6% (down 23%). March Copper recovered 2.6% (down 2.3%). March Wheat gained 0.9% (down 1%). March Corn rose 1.6% (up 3%).

Fixed-Income Bubble Watch:

February 17 – Bloomberg (Rich Miller): “Federal Reserve policy makers are beginning to worry that a corporate-credit squeeze will constrict the economic expansion. With banks tightening standards on business loans and investors demanding higher yields on some corporate debt, companies may find it harder and more expensive to raise the money they need to grow. The concern is that could prompt them to cut back on spending and hiring, hurting the U.S. economy in the process. …Janet Yellen flagged the Fed’s focus on credit availability for businesses in an appearance before Congress last week. ‘That is an important factor’ in assessing the outlook for the economy and Fed interest-rate policy, she said on Feb. 10.”

February 16 – CNBC (Tom DiChristopher): “A growing number of energy firms are at risk of filing for bankruptcy this year as debt pressure mounts, Deloitte's John England said… Nearly 35% of publicly traded oil and gas exploration and production companies around the world — about 175 firms — are at high risk of falling into bankruptcy, the… firm reported. Not only do these companies have high debt levels, but their ability to pay interest on those loans has deteriorated, according to the firm.”

February 19 – Reuters (Anjuli Davies): “Worldwide mergers and acquisitions deals have fallen 23% to $336 billion so far this year compared with last year, but cross-border activity by amount targeting U.S.-based companies reached a record high, Thomson Reuters data shows. After hitting a record high by deals value in 2015, worldwide M&A activity has been hurt this year by falling oil prices, worries about slowing growth in China and the health of the financial sector.”

Global Bubble Watch:

February 14 – Bloomberg: “China’s central bank handed investors a confidence booster, strengthening the yuan’s fixing by the most in three months and talking up the currency as markets reopened after the week-long Lunar New Year break. The yuan had its biggest one-day advance since a peg to the dollar was scrapped more than a decade ago…”

February 14 – Bloomberg (Enda Curran): “China’s central bank has stepped up efforts to restore stability to the nation’s currency and economy, with Governor Zhou Xiaochuan breaking his long silence to argue there’s no basis for continued yuan depreciation. The nation’s balance of payments is good, capital outflows are normal and the exchange rate is basically stable against a basket of currencies, Zhou said in an interview… That’s an escalation in verbal support after such comments have been left in recent months to deputies and the central bank research department’s chief economist. Zhou dismissed speculation that China plans to tighten capital controls and said there’s no need to worry about a short-term decline in foreign-exchange reserves. The country has ample holdings for payments and to defend stability, he said.”

February 16 – Bloomberg: “China is stepping up support for the economy by ramping up spending and considering new measures to boost bank lending. The nation’s chief planning agency is making more money available to local governments to fund new infrastructure projects, according to people familiar with the matter. Meantime, China’s cabinet has discussed lowering the minimum ratio of provisions that banks must set aside for bad loans, a move that would free up additional cash for lending. Officials are upping their rhetoric too. Premier Li Keqiang said policy makers ‘still have a lot of tools in the box’ to combat the slowdown in the world’s No. 2 economy…”

February 18 – Wall Street Journal (Takashi Nakamichi): “Bank of Japan Gov. Haruhiko Kuroda… called on finance chiefs from the world’s major economies to find ways to stabilize global financial markets at a planned gathering later this month, highlighting Tokyo’s struggle to fight headwinds from overseas. ‘It is quite important for the U.S. and China---the world’s largest and second largest economies---and other major economies such as the eurozone and Japan to coordinate their actions when necessary,’ Mr. Kuroda said… ‘It is desirable that the G-20 will do as much as it can to help stabilize the international financial markets.’”

February 15 – Dow Jones (Tom Fairless and Todd Buell): “The European Central Bank won't hesitate to boost its stimulus in March if it believes recent financial-market turmoil or lower oil prices could weigh further on stubbornly low inflation, ECB President Mario Draghi said. ‘The ECB is ready to do its part’ to bolster the eurozone's economy, Mr. Draghi told European lawmakers in Brussels, underlining the bank's readiness to reconsider its €1.5 trillion stimulus at its next policy meeting on March 10.”

February 19 – Bloomberg (Boris Groendahl): “The European Central Bank is calling for European Union banking law to change to allow supervisors the option of permitting banks to make discretionary payments to investors and staff even when a lender loses money in a given year. EU rules currently block payments of dividends, bonuses or coupons on contingent convertible bonds, known as CoCos, if a lender posts losses or reports zero profit, and breaches regulatory buffers.”

February 17 – Wall Street Journal (Paul Hannon): “Governments in the U.S., Europe and elsewhere should take ‘urgent’ and ‘collective’ steps to raise their investment spending and deliver a fresh boost to flagging economic growth, the Organization for Economic Growth and Development said… In its most forceful call to action since the financial crisis, the OECD said the global economy is suffering from a weakness of demand that can’t be remedied through stimulus from central banks alone.”

U.S. Bubble Watch:

February 16 – MarketWatch (Ellie Ismailidou): “The fourth-quarter earnings season, currently wrapping up, is shaping up as the worst quarter for earnings growth since the financial crisis, Bank of America analysts said… With 87% of companies in the S&P 500 SPX, having reported results for the last three months of 2015, overall earnings per share are slated to show a drop of 4% from a year earlier, making it the worst quarter for growth since the third quarter of 2009, according to the B. of A. report.”

February 18 – Wall Street Journal (Corrie Driebusch and Deborah Gage): “The IPO market is foundering. Of the almost 175 companies that made their U.S. stock-market debuts in 2015, more than 70% are now trading below their IPO prices. On average their stocks are down about 20%. Nine of last year’s 10 largest U.S.-listed IPOs are now trading below their initial sale price. On average, those 10 stocks are down about 25%. That has created a hostile environment for new IPOs, a shift that could have far-reaching effects across Silicon Valley, which breeds many of these new companies… There were no U.S. initial public offerings in January, and so far in February there have been only four new listings…”

February 18 – Bloomberg (Charles Stein): “Mutual funds are vulnerable to runs that can spill over and cause problems in the broader financial system, according to a blog post published… on Liberty Street Economics by staffers at the Federal Reserve Bank of New York. The authors, Nicola Cetorelli, Fernando Duarte and Thomas Eisenbach, argue that a run can occur when heavy withdrawals from a mutual fund cause the fund company to sell illiquid assets at fire sale prices. In that situation, the post says, investors will have an incentive to get their money out early, triggering a race for the door that can have a ripple effect beyond the original fund. ‘Redemption runs at the fund level trigger fire sales that depress market prices and spread losses to the broader financial system,’ the authors wrote.”

Federal Reserve Watch:

February 17 – Bloomberg (Steve Matthews): “Federal Reserve Bank of St. Louis President James Bullard said recent financial-market turmoil and a further decline in investors’ expectations for inflation have given the central bank scope to delay interest-rate increases. ‘I regard it as unwise to continue a normalization strategy in an environment of declining market-based inflation expectations,’ Bullard, who votes on the policy-setting Federal Open Market Committee this year, said…”

February 16 – Bloomberg (Christopher Condon): “The former U.S. Treasury official who led the 2008 bailout program for the nation’s biggest banks says in his new role at the Federal Reserve that Congress and regulators should consider breaking them up to protect the financial system from another crisis. Federal Reserve Bank of Minneapolis President Neel Kashkari… said his regional Fed bank will study ways to toughen U.S. banking laws to prevent another financial crisis. Regulators should consider options including breaking up the nation’s largest financial institutions, loading them up with ‘so much capital that they virtually can’t fail’ and taxing leverage to make the system safer, he said. Tougher oversight will require new legislation, he added.”

China Bubble Watch:

February 16 – Bloomberg: “China’s broadest measure of new credit surged to a record as a seasonal lending binge coincided with a recovery in property prices. Aggregate financing rose to 3.42 trillion yuan ($525bn) in January, according to… the People’s Bank of China…, compared with the median forecast of 2.2 trillion yuan… New yuan loans jumped to 2.51 trillion yuan, also a record and beating the median estimate of 1.9 trillion yuan… ‘Chinese banks expanded their balance sheet aggressively in the first month of this year, which implies an implicit support from the government to counter the economic slowdown,’ said Zhou Hao, senior economist at Commerzbank… ‘In addition, Chinese corporates should have turned to onshore for funding, while offloading some external borrowing.’”

February 17 – Financial Times (Don Weinland): “Fraudulent loans are on the rise in China as economic growth slows, threatening to further undermine the country’s $29tn banking system, which is already under pressure from an indebted corporate sector. A series of loan frauds has ripped holes in the balance sheets of a range of lenders… The latest victim to emerge is Bank of Liuzhou where $4.9bn (Rmb32.8bn) in fraudulent loans were discovered by the bank late last year… That represents more than 40% of the bank’s total assets of Rmb80bn at the end of 2014 — a dent so large on the bank’s balance sheet that it is likely to require government intervention… Fraud, which often takes the form of forging collateral, is also a result of corruption, where local government enterprises bribe small banks to grant them huge loans… In the case of Liuzhou, a new chairman at the bank in 2014 discovered the massive pile of debt accrued by one borrower during the tenure of the previous bank head. Upon that revelation, the borrower, a businessman, allegedly ordered the murder of the chairman, China Business Journal reported. An investigation by the bank reportedly showed that the businessman and certain relatives had forged collateral and proof of business operations to borrow $4.9bn.”

February 13 – New York Times (Keith Bradsher): “As the Chinese economy stumbles, wealthy families are increasingly trying to move large sums of money out of the country… To get around the country’s cash controls, individuals are asking friends or family members to carry or transfer out $50,000 apiece, the annual legal limit in China. A group of 100 people can move $5 million overseas. The practice is called Smurfing, named after the blue, mushroom-dwelling cartoon characters, and it is part of an exodus of capital that is casting doubt on China’s economic prospects and shaking global markets. Over the last year, companies and individuals have moved nearly $1 trillion from China.”

February 17 – Bloomberg (Lianting Tu): “Chinese lenders are reacting to a regulatory crackdown on shadow financing by increasing activity in their more opaque receivables accounts, a practice Commerzbank AG estimates may result in losses of as much as 1 trillion yuan ($153bn) over five years. Banks are increasingly using trusts or asset management plans to lend and recording them as funds to be received rather than as loans, which are subject to stricter regulatory oversight and capital limits… ‘Chinese banks haven’t provisioned for receivables and those are essentially riskier loans,’ said Xuanlai He, credit analyst at Commerzbank… ‘The eventual losses will have significant impact on China’s economy because you could have contagion risk in banking sector.’”

February 14 – Bloomberg (Enda Curran): “A surge in China’s imports from Hong Kong has raised fresh concern trade invoices are being manipulated to get capital out of the country. January data… show imports from the territory leaped 108% from a year earlier even as total imports dropped by 18.8% and inbound shipments from other major trading partners fell.”

February 16 – Bloomberg: “Soured loans at Chinese commercial banks rose to the highest level since June 2006 as the nation’s economic expansion slowed to the weakest pace in a quarter century. Nonperforming loans rose 7% from September to 1.27 trillion yuan ($196bn) by December… Including ‘special-mention’ loans, where future repayment is at risk but yet to become nonperforming, the industry’s total troubled loans swelled to 4.2 trillion yuan, representing 5.46% of total advances. Concern over borrowers’ ability to service debt has weighed on Chinese lenders, with shares of the nation’s four largest banks trading at valuations at least 35% below a gauge of their emerging-nation peers.”

February 16 – Financial Times (Gabriel Wildau): “A high-stakes battle between China’s central bank and speculators taking aim at the renminbi escalated last week with US hedge fund manager Kyle Bass’s starkly worded letter to investors predicting a Chinese debt and currency crisis. Zhou Xiaochuan, People’s Bank of China governor, broke months of silence at the weekend with comments playing down the decline of China’s foreign exchange reserves to a more than three-year low and stressing that Beijing was not seeking to devalue its currency. This came a few weeks after state media warned George Soros against ‘declaring war’ on the renminbi.”

February 14 – Bloomberg: “A slide in China’s exports in January was eclipsed by an even bigger tumble in imports… Overseas shipments declined 11.2% in January in U.S. dollar terms from a year earlier…, compared with a 1.4% drop in December. Imports extended a stretch of declines to 15 months, tumbling 18.8%, leaving a record trade surplus of $63.3 billion.”

February 16 – Bloomberg: “China’s unprecedented jump in new loans at the start of 2016 is fueling concern that excessive credit growth is piling up risks in the nation’s financial system. The increase in China’s debt relative to gross domestic product could pressure the country’s credit rating, Standard & Poor’s said…, less than a week after the cost to insure Chinese bonds against default rose to a four-year high. Credit growth is storing up ‘big problems’ in the economy that will weigh on the yuan and stocks, said George Magnus, an economic adviser to UBS Group AG.”

February 14 – Bloomberg (Frederik Balfour): “In the latest sign that Hong Kong’s property correction is deepening, a parcel of land sold by the government in the New Territories went for nearly 70% less per square foot than a similar transaction in September.”

Central Bank Watch:

February 15 – Financial Times (Henny Sender): “Ahead of a recent appearance in Hong Kong, one minder for Ben Bernanke suggested the former chairman of the Federal Reserve be asked not about the cost of quantitative easing, but about the impact of the policy instead. For years, central bankers have been reluctant to suggest that unconventional monetary policies even had costs. But while developed markets plunge ever deeper into uncharted financial territory as a result of central bank actions, the drawbacks and the limitations of such policies are finally becoming apparent. The negative effects will become even more obvious over time. This will occur as asset price inflation — the main consequence of central bank policies — goes into reverse, robbing financial engineering of its efficacy and flattening the yield curve. Suddenly, the success of central bankers in lifting financial asset prices through unconventional monetary policies seems to be coming to an end.”

EM Bubble Watch:

February 15 – Reuters (Sujata Rao): “Turkish sovereign dollar bonds sold off heavily on Monday and default insurance costs rose amid escalating military tensions around its border with Syria. Turkey vowed the ‘harshest reaction’ against Kurdish militia if they approach the northern Syrian town of Azaz.”

February 18 – Reuters (Alexandra Ulmer and Girish Gupta): “Venezuela's central bank… released long-awaited data showing the depth of the OPEC country's recession, a day after President Nicolas Maduro announced a package of measures seen as insufficient to salvage the unraveling economy. The bank reported that Venezuelan inflation hit 180.9% in 2015, one of the highest rates in the world, while the economy contracted 5.7%.”

Brazil Watch:

February 17 – Bloomberg (Steve Dickson): “Banco do Brasil SA, Itau Unibanco Holding SA and Banco Bradesco SA were among more than two dozen Brazilian financial-services firms that had credit grades lowered by Standard & Poor’s because of a downgrade of the government’s debt. S&P reduced global scale credit ratings on 17 companies and national scale ratings on 27 firms… Such ratings take into account the strength of a company’s country, triggering reviews and adjustments when sovereign grades move. S&P lowered Brazil’s long-term foreign-currency rating one level Wednesday to BB, two-steps below investment grade, and said more downgrades are possible. Brazil is in its worst recession in more than a century…”

February 14 – Bloomberg (Ben Bartenstein and Filipe Pacheco): “In his two decades covering Brazil, Fitch Ratings’s Joe Bormann says he’s never seen the nation’s companies in such a dire state. To appreciate just how bad things are, consider this: Brazilian courts granted more than 5,500 bankruptcy filings in 2015, the most since 2008… Brazil’s deepest two-year recession in more than a century and plummeting commodity prices are leaving businesses in industries from steel to air travel among the most at risk of default, according to Fitch. And more pain is looming in Latin America’s biggest economy as borrowing costs soar, predicts Bormann…”

Leveraged Speculation Watch:

February 14 – Financial Times (Mary Childs and Miles Johnson): “Some of the largest and well known US hedge funds have suffered further sharp losses from this year’s rout in equities and commodities, raising the prospect that investors pull more money from the industry. Popular bets in equities, currencies and commodities have backfired on a number of hedge funds this year, confounding some of the industry’s highest profile investors… The current market turmoil follows poor results for many hedge funds during 2015, increasing worries for managers about rising redemptions, a process that intensifies further selling of assets like equities.”

February 16 – Bloomberg (Suzy Waite and Bei Hu): “Hedge funds in Asia, which navigated turbulent markets to post gains in 2015, had nowhere to hide in January. As global stocks, currencies, commodities and risky bonds were roiled in a renewed frenzy of selling in January, hedge funds including those from Quam Asset Management Ltd. and Greenwoods Asset Management Ltd. fell more than 10% last month, while one from Springs Capital fell more than 20%. As a group, Asia-focused hedge funds declined 3.1%, their worst start to a year since 2008, according to… Eurekahedge Pte… ‘January was a bloodbath to the whole world,’ Chris Choy, chief investment officer for the Quam China Focus Segregated Portfolio, said…”

February 18 – Wall Street Journal (Rob Copeland): “Hedge-fund giant Citadel cut more than a dozen members of its investment staff this week in the wake of early losses for the firm in 2016. The Chicago-based firm, led by billionaire Kenneth Griffin, parted ways with analysts, associates and portfolio managers in its multibillion dollar Surveyor Capital arm. Surveyor is one of Citadel’s three internal units that bet on and against stocks worldwide… The moves come as Mr. Griffin grapples with a money-losing stretch unusual for one of the hedge-fund world’s marquee names.”

February 19 – Bloomberg (Beth Jinks): “Icahn Enterprises LP, billionaire investor Carl Icahn’s publicly traded holding company, may be cut to junk after losing ‘a significant amount of value in the last several months,’ Standard & Poor’s Ratings Services said… Icahn Enterprises shares have tumbled about 50% in the past 12 months, with sharp declines in its commodity holdings… Icahn Enterprises has more than $12 billion in total debt.”

Europe Watch:

February 15 – Reuters (Giuseppe Fonte and Francesco Canepa): “The European Central Bank is in talks with the Italian government about buying bundles of bad loans as part of its asset-purchase program and accepting them as collateral from banks in return for cash, the Italian Treasury said. The move could give a big boost to a recently approved Italian scheme aimed at helping banks offload some of their 200 billion euros ($225bn) of soured credit and free up resources for new loans. Nonetheless, it would likely fuel a debate in other countries about whether the ECB is taking on too much risk by buying asset-backed securities (ABS) based on loans that have not been repaid for roughly three months.”

February 16 – Bloomberg (Karin Matussek and Alessandro Speciale): “The European Central Bank was likened to a dictatorship as Germany’s top court began re-examining whether a bond-buying program underpinning Mario Draghi’s 2012 pledge to do ‘whatever it takes’ to save the euro complies with the nation’s constitution. Just eight months after the European Union’s highest tribunal backed ECB President Draghi’s proposals, Germany’s Federal Constitutional Court is revisiting the nation’s role in the Outright Monetary Transactions mechanism, or OMT. Critics… are trying to convince the German judges to issue a ruling limiting the role of Germany’s central bank in the program. ‘The ECB is like a financial dictator,’ said Markus Kerber, a lawyer teaching finance in Berlin who is a plaintiff in the case. The Bundesbank, Germany’s central bank, ‘is obliged to oppose the program.’ The court in Karlsruhe is reviewing lawsuits filed in 2012 that attack the OMT and are part of a long-running national dispute over the program, which has never been implemented.”

February 15 – Financial Times (James Politi): “To celebrate the looming two-year anniversary of his time as Italy’s prime minister, Matteo Renzi has chosen a slideshow to tout his accomplishments in office. The self-congratulatory presentation seems to suggest that Italians have dozens of reasons to rejoice… But Mr Renzi’s slideshow carefully shields the harsher reality: luck recently seems to have turned against him… On Friday, figures from Italy’s statistical agency showed that the economy grew by just 0.1% in the fourth quarter of 2015. The data raised the worrying possibility that Italy’s fragile and sluggish recovery is not poised to accelerate as expected…, and may be slowing again. Meanwhile, Italian banks have been among the hardest hit in the recent global market rout, sparking concerns the country could be vulnerable in a new financial crisis. That is not all: Italy is confronting a strategic dilemma over how to respond to the growing threat of Isis, just 200 miles south of the Sicilian island of Lampedusa.”

Japan Watch:

February 14 – Bloomberg (Keiko Ujikane): “Japan’s economy contracted in the final three months of 2015 as the nation struggles to break free of a cycle of expansion and contraction despite more than three years of the Abenomics program. Gross domestic product shrank an annualized 1.4% in the three months ended Dec. 31, following a revised 1.3% gain in the third quarter…”

February 13 – Financial Times (Ben McLannahan): “The deputy governor of the Bank of Japan has called on the country’s government to pull its weight, as the central bank strains to haul the world’s third-largest economy decisively out of deflation. Last month the BoJ embarked on its latest round of easing, saying it would start charging for excess reserves deposited at the central bank. At the time, it said it wanted to provide a shot of stimulus at a critical moment, just ahead of the annual Spring round of wage negotiations between companies and workers’ groups. In a speech in New York on Friday, deputy governor Hiroshi Nakaso said the government needed to do more to boost Japan’s growth potential.”

Geopolitical Watch:

February 14 – Bloomberg (Henry Meyer, Ian Wishart and Andrey Biryukov): “Russian Prime Minister Dmitry Medvedev said his country is in a new Cold War with the U.S. and its allies, underscoring the tenuous level of trust that’s putting a day-old plan for a truce in Syria at risk. The clash, with echoes of superpower rhetoric during the 20th century, played out at the Munich Security Conference on Saturday even as Russia, Europe and the U.S. say they’re seeking cooperation to end Syria’s civil war, resolve the armed standoff in eastern Ukraine and make progress toward lifting European economic sanctions against Russia… ‘The political line of NATO toward Russia remains unfriendly and closed,’ Medvedev said… ‘It can be said more sharply: We have slid into a time of a new Cold War.’”

February 15 – Financial Times: “Tension between Russia and Turkey has reached a new peak as the two countries step up military action in Syria in support of opposing sides, edging closer to direct confrontation in the country’s increasingly internationalised war. The growing rift between the two countries — with each now attacking rebels the other supports — has alarmed Western diplomats amid fears Russia is seeking to undermine Nato by ramping up its clash with Ankara. ‘It seems to us that just like in the Baltics, Russia wants to try and push at Nato’s ability to stand behind all its members,’ said a Nato official. A senior European official said Russian President Vladimir Putin was seeking to destabilise Recep Tayyip Erdogan, his Turkish opposite number.”

February 16 – Bloomberg (Selcan Hacaoglu): “There’s only one major group of combatants in the Syrian war that’s backed by both Russia and the U.S. -- and now Turkey is attacking it. Since the weekend, Turkey has unleashed its 155-millimeter heavy guns across the border with Syria. The targets are Kurdish forces, whose recent advance is a key part of the Russian plan to extend President Bashar al-Assad’s control over Syria. Turkish President Recep Tayyip Erdogan… refused to stop the shelling and said Turkey was acting in self-defense. Syria’s five-year war has turned into a tangled web of proxy conflicts between global and regional powers, with a growing risk that some of them could clash directly. Right now the most dangerous flashpoint is between Russia and NATO member Turkey, which shot down a Russian plane in November. Since then tensions have steadily built as the Assad-Russia alliance -- with help from the Kurds -- threatens to surround Turkish-backed rebels in Aleppo, Syria’s biggest city.”

February 18 – Reuters (Ercan Gurses and Humeyra Pamuk): “Turkish Prime Minister Ahmet Davutoglu blamed a Syrian Kurdish militia fighter working with Kurdish militants inside Turkey for a suicide car bombing that killed 28 people in the capital Ankara, and he vowed retaliation in both Syria and Iraq. A car laden with explosives detonated next to military buses as they waited at traffic lights near Turkey's armed forces' headquarters, parliament and government buildings in the administrative heart of Ankara… Davutoglu said the attack was clear evidence that the YPG, a Syrian Kurdish militia that has been supported by the United States in the fight against Islamic State in northern Syria, was a terrorist organization and that Turkey, a NATO member, expected cooperation from its allies in combating the group. Within hours, Turkish warplanes bombed bases in northern Iraq of the Kurdistan Workers Party (PKK)…”

February 17 – Wall Street Journal (Gordon Lubold and Chun Han Wong): “China has positioned surface-to-air missiles on a disputed island in the South China Sea, …one of the most aggressive military steps so far by Beijing in a burgeoning standoff with Washington involving warplanes, naval destroyers and increasingly frequent public warnings. The placement and timing of the missile deployment carried significance, coming as U.S. President Barack Obama met in California on Tuesday with leaders of Southeast Asian nations embroiled in territorial disputes with China.”

February 17 – Wall Street Journal (Chun Han Wong and Gordon Lubold): “The Obama administration sharply criticized Chinese President Xi Jinping… after charging that China’s military had deployed batteries of advanced missiles on a disputed South China Sea island. Secretary of State John Kerry said the missile deployment was at odds with a pledge made by Mr. Xi while visiting the White House last year to refrain from militarizing clusters of disputed islands throughout the South China Sea. Chinese officials… said they plan to keep strengthening defensive capabilities in the South China Sea.”

February 15 – Reuters (Rujun Shen): “Any move by China to fly jet fighters from runways on its new man-made islands in the disputed South China Sea would be destabilizing and would not deter U.S. flights over the area, a senior U.S. naval officer said… Vice Admiral Joseph Aucoin, the commander of the U.S. Navy's Seventh Fleet, also urged Beijing to be more open over its intentions in the South China Sea, saying it would relieve ‘some of the angst we are now seeing’.”

February 15 – Reuters (Ben Blanchard): “China will likely announce another large rise in defence spending next month, as the ruling Communist Party seeks to assuage the military's unhappiness at sweeping reforms and as worries over the South China Sea and Taiwan weigh on Beijing. Military spending last year was budgeted to jump by 10.1%, outpacing slowing, single-digit GDP growth, and another double-digit rise looks set to be announced… One source with ties to the military who meets regularly with senior officers told Reuters a 30% increase in spending this year had been mooted in military circles…”

February 18 – Bloomberg (Aliaksandr Kudrytski Volodymyr Verbyany): “Two years after Ukrainians shed blood on the streets of Kiev to crush a Kremlin-backed kleptocracy, the country of more than 40 million people is back on the brink of failed-state status. The government’s long descent into chaos reached a new nadir this week, when amid reform delays and a cacophony of corruption claims President Petro Poroshenko sought Prime Minister Arseniy Yatsenyuk’s removal in parliament, only to be rejected by a majority that included two dozen members of his own bloc. More defections followed as Yuliya Tymoshenko, the darling of the Orange Revolution a dozen years ago, pulled her party out of the ruling coalition."