By Doug Noland
The S&P500 rallied 3.2% this week (trading to all-time highs Thursday), more than reversing (by 1.5 times) the previous week’s 2.1% decline. Ten-year Treasury yields rebounded as well, yet the eight bps rise was less than half the previous week’s 18 bps drop. Commodities markets couldn’t muster any recovery this week. WTI crude fell another $1.24 (2.4%) to $50.32, a fifth straight weekly decline (“longest weekly losing streak since 2018”). The Bloomberg Commodities Index was little changed on the week. Copper did recover 1.4% - a mere fraction of the previous week’s 6.2% drubbing. Ominously, the Singapore (small country, big financial sector) dollar dropped 1.8% this week, while the Japanese yen, Chinese renminbi and Malaysian ringgit all declined about 1.0%.
Sometimes it’s difficult to gauge which has the stronger underlying momentum – the safe havens or the risk markets (i.e. equities and corporate Credit). Ten-year Treasury yields are already down a notable 33 bps early in 2020. The iShares long-term Treasury ETF (“TLT”) has a noteworthy 6.78% y-t-d return, outpacing the 3.16% return for the S&P500. It’s a remarkable dynamic that no longer rouses much interest. Both markets look at the world and really like what they see.
It’s worth noting 10-year Treasury yields began the week at 1.51%, not far from the 1.46% closing low from September 3rd. Treasury and global yields collapsed throughout the summer, with Treasury yields dropping over 100 bps in about four months. The U.S. yield curve briefly inverted in late-August, eliciting talk of U.S. recession and global downturn. January’s 225k gain in non-farm payrolls is just the latest economic indictor making those recession forecasts look goofy.
I saw summer market developments as much more about China and global monetary policy than economic prospects. I believe vulnerable Chinese financial and economic Bubbles are the predominant factor behind the irrepressible demand for global sovereign debt. China has evolved into the marginal source of global Credit along with global demand for commodities and much more.
China was in a particularly fragile state over the summer, with escalating financial stress in the face of deteriorating U.S./China trade negotiations. China’s aggressive stimulus measures along with a “phase 1” trade deal reduced near-term crisis risk. Global yields then somewhat normalized. Ten-year Treasury yields ended the year at 1.92%, up almost 50 bps from early-September lows. Bund yields ended 2019 at negative 0.19%, up from negative 0.72% on August 28th. Swiss bond yields jumped 66 bps off lows to end the year at negative 0.54%.
Then arrived the coronavirus outbreak. Suddenly, Chinese economic prospects look highly uncertain at best. Even if the outbreak somehow comes under control in the coming weeks, the economy will take a significant hit. There’s a scenario where the situation continues to deteriorate and takes on longer-term significance. Global markets rallied this week on the PBOC’s aggressive liquidity injections, along with other stimulus measures. There’s no doubting Beijing’s commitment to aggressive fiscal and monetary stimulus. I just believe almost everyone is too optimistic – drowning in central bank liquidity complacency. China is confronting an unprecedented predicament, while concurrently facing acute financial and economic fragilities associated with a faltering Bubble.
Safe haven bonds and commodities have this right. Risk markets are simply playing a different game – an especially dangerous one at that. The Fed’s dual 2019 “U-turns” have profoundly altered risk market perceptions and behavior. Rates were cut and liquidity injected despite loose financial conditions, speculative markets and record stock prices. Understandably, risk market participants have been emboldened to believe the Fed and global central bankers have minimal tolerance for market instability.
To argue that the Fed’s $400 billion balance sheet expansion is neither QE nor culpable for surging stock prices completely misses the point. The Fed’s operations solidified the view that securities prices are the priority – even more so than the real economy. This fundamentally altered perceptions of market risk and, accordingly, price dynamics throughout equities, corporate Credit and derivatives.
Goldman Sachs Credit default swap (CDS) prices (5yr) ended the week at 45.7 bps. This was down from a high of 76 bps in October and compares to the 135 bps high on January 4th, 2019 – just minutes before Chairman Powell’s dramatic “U-turn”. Over the past five years, Goldman CDS have averaged 79 bps. Indeed, Thursday’s 45.08 price was the low since September 2007. JPMorgan CDS closed the week near the low going back to 2007. Investment-grade corporate CDS prices also dropped back down to the lows since before the crisis. Friday’s closing price of 46 bps compares to the five-year average of 67 bps.
Is systemic risk really at the lowest point this week since before the crisis? Of course not. For starters, China poses a clear and present danger to both the global economy and financial system. China has added a scary amount of debt over the past decade – its “miracle” economy surely the poster child for Credit excess-induced structural maladjustment. Debt has grown tremendously across the globe. Today’s global market and financial excesses are unprecedented. Risk is extraordinarily high, certainly owing to central bank stimulus and these wacky securities and derivatives prices.
In this context, it’s not difficult to explain global safe haven yields. And it is actually not much of a challenge to define the factors behind booming risk markets. Markets have become precariously distorted and dysfunctional. Central bank monetary stimulus has succeeded in completely turning risk analysis on its head. In all the craziness, China fragilities are a positive. The coronavirus is likely constructive to the U.S. economy. Even risky political and geopolitical dynamics are seen in positive light. They all ensure monetary stimulus as far as the eye can see.
And the obvious retort would be: “Doug, what’s new here?” What’s changed is the degree to which the risk markets are conditioned to disregard risk. Even a development with the clear potential to be highly disruptive to global economies and finance can be ignored. Market commentary is the most detached from reality that I can recall. In my 30 plus years following the markets, I’ve never seen such a divergence between market risk perceptions and reality.
The 2019 policy and monetary fiasco fundamentally altered market behavior. Risk markets have become incapable of adjusting for uncertainty and elevated risks. Markets instead fixate on the certainty of ongoing monetary stimulus and liquidity abundance. This incapacity for well-founded risk assessment and healthy market corrections is today a major source of systemic risk. How can eventual market adjustments not be violent and destabilizing?
Coronavirus infections have surged to 34,500, up 190% in a week. Friday’s cases increased 10% from Thursday, a slowing in the growth rate. The number of cases outside of China have increased, but there is reason for hope the outbreak to this point is largely confined to China.
There is, as well, justification for fear. Case in point: The Diamond Cruise ship now docked off Yokohama had 61 infections of the 273 passengers tested – now the largest outbreak outside of China. There are an additional 3,400 passengers that have yet to be tested. Japan’s Ministry of Defense will be prioritizing passengers for additional testing. Passengers originally believed they were subject to a 14-day quarantine. Now everything is unclear. There are even concerns that the virus may be transmitted through ventilation systems. It's clear many have tested positive for the virus despite being asymptomatic, leaving open the possibility that tens of thousands could be unknowingly infected. In Germany, a team of researchers this week reported that the coronavirus can remain infectious on surfaces for up to nine days.
But nothing compares to the nightmare unfolding in Wuhan.
February 6 – New York Times (Amy Qin, Steven Lee Myers and Elaine Yu): “The Chinese authorities resorted to increasingly extreme measures in Wuhan on Thursday to try to halt the spread of the deadly coronavirus, ordering house-to-house searches, rounding up the sick and warehousing them in enormous quarantine centers. The urgent, seemingly improvised steps come amid a worsening humanitarian crisis in Wuhan, one exacerbated by tactics that have left this city of 11 million with a death rate from the coronavirus of 4.1% as of Thursday — staggeringly higher than the rest of the country’s rate of 0.17%. With the sick being herded into makeshift quarantine camps, with minimal medical care, a growing sense of abandonment and fear has taken hold in Wuhan, fueling the sense that the city and surrounding province of Hubei are being sacrificed for the greater good of China.”
More from the NYT: “The steps were announced by the top official leading the country’s response to the virus, Vice Premier Sun Chunlan, as she visited Wuhan on Thursday. They evoked images of the emergency measures taken to combat the 1918 Spanish Flu pandemic that killed tens of millions people worldwide. Despite the severity of the new measures, however, they offered no guarantee of success. The city and country face ‘wartime conditions,’ Ms. Sun said. ‘There must be no deserters, or they will be nailed to the pillar of historical shame forever.’”
Just imagine being in Wuhan – panicked by the catastrophe overwhelming the local healthcare system – and having a medical worker arrive at your door, demand to take your temperature, and then force you leave your home to be warehoused in a stadium converted into a containment facility. While not as Draconian as Wuhan and Hubei Province, there are various degrees of quarantine in major cities throughout China.
February 6 – New York Times: “The doctor who was among the first to warn about the coronavirus outbreak in late December — only to be silenced by the police — died Friday after becoming infected with the virus… The death of the 34-year-old doctor, Li Wenliang, set off an outpouring of grief and anger on social media, with commenters on social media demanding an apology from the authorities to Dr. Li and his family…” Question last week from a NYT reporter: “How long will it take you to recover? What do you plan to do afterward?” Li: “I started coughing on Jan. 10. It will take me another 15 days or so to recover. I will join medical workers in fighting the epidemic. That’s where my responsibilities lie.”
The coronavirus will leave deep scars on the Chinese people. Trust in the government has been shaken. The future cannot appear as bright as a month ago. How could this experience not harbor deep-seated fear and insecurity? And it all crashes headlong into inflated expectations. We cannot comprehend ramifications at this point. But it goes so far beyond when automobile and technology manufacturing can return to a semblance of normality – or when western retailers will reopen their Chinese stores.
Most of all, this crisis transcends PBOC and global central bank monetary stimulus. The apt question, once again, is whether all this “money printing” is more the solution or the problem. Both the PBOC and Fed have recently expended huge amounts of stimulus in desperate measures to sustain booms. It leaves one contemplating how much stimulus will be employed when Bubbles start bursting. At this point, such stimulus measures are a losing game. They’re feeding the mania and exacerbating fragilities.
For the Week:
The S&P500 rallied 3.2% (up 3.0% y-t-d), and the Dow rose 3.0% (up 2.0%). The Utilities slipped 0.6% (up 6.3%). The Banks surged 3.7% (down 4.1%), and the Broker/Dealers recovered 2.4% (up 2.3%). The Transports rose 2.8% (down 0.4%). The S&P 400 Midcaps rose 2.1% (down 0.7%), and the small cap Russell 2000 jumped 2.6% (down 0.7%). The Nasdaq100 surged 4.6% (up 7.6%). The Semiconductors jumped 4.2% (up 0.8%). The Biotechs advanced 5.7% (up 0.8%). With bullion down $19, the HUI gold index dropped 3.4% (down 6.4%).
Three-month Treasury bill rates ended the week at 1.51%. Two-year government yields rose nine bps to 1.40% (down 17bps y-t-d). Five-year T-note yields jumped nine bps to 1.41% (down 29bps). Ten-year Treasury yields gained eight bps to 1.58% (down 33bps). Long bond yields increased five bps to 2.05% (down 34bps). Benchmark Fannie Mae MBS yields added three bps to 2.40% (down 31bps).
Greek 10-year yields dropped 12 bps to 1.04% (down 39bps y-t-d). Ten-year Portuguese yields gained five bps to 0.32% (down 12bps). Italian 10-year yields added a basis point to 0.94% (down 47bps). Spain's 10-year yields gained five bps to 0.28% (down 19bps). German bund yields rose five bps to negative 0.39% (down 20bps). French yields gained four bps to negative 0.14% (down 25bps). The French to German 10-year bond spread narrowed one to 25 bps. U.K. 10-year gilt yields rose five bps to 0.57% (down 25bps). U.K.'s FTSE equities index rallied 2.5% (down 1.0%).
Japan's Nikkei Equities Index recovered 2.7% (up 0.7% y-t-d). Japanese 10-year "JGB" yields increased three bps to negative 0.04% (down 3bps y-t-d). France's CAC40 surged 3.8% (up 0.9%). The German DAX equities index jumped 4.1% (up 2.0%). Spain's IBEX 35 equities index surged 4.7% (up 2.7%). Italy's FTSE MIB index rallied 5.3% (up 4.1%). EM equities were mixed. Brazil's Bovespa index was little changed (down 1.6%), and Mexico's Bolsa added 0.7% (up 2.0%). South Korea's Kospi index surged 4.4% (up 0.6%). India's Sensex equities index gained 1.0% (down 0.3%). China's Shanghai Exchange dropped 3.4% (down 5.7%). Turkey's Borsa Istanbul National 100 index recovered 1.6% (up 5.8%). Russia's MICEX equities index added 0.4% (up 1.4%).
Investment-grade bond funds saw inflows of $4.904 billion, while junk bond funds posted outflows of $784 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates fell six bps to 3.45% (down 96bps y-o-y). Fifteen-year rates slipped three bps to 2.97% (down 87bps). Five-year hybrid ARM rates rose eight bps to 3.32% (down 59bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down five bps to 3.69% (down 70bps).
Federal Reserve Credit last week increased $4.7bn to $4.120 TN, with a 21-week gain of $388 billion. Over the past year, Fed Credit expanded $133.6bn, or 3.4%. Fed Credit inflated $1.309 Trillion, or 47%, over the past 378 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $8.0 billion last week to $3.426 TN. "Custody holdings" were little changed y-o-y.
M2 (narrow) "money" supply jumped $34.9bn last week to a record $15.495 TN. "Narrow money" surged $1.003 TN, or 6.9%, over the past year. For the week, Currency increased $2.4bn. Total Checkable Deposits declined $16.1bn, and Savings Deposits surged $48.1bn. Small Time Deposits dipped $1.9bn. Retail Money Funds added $2.2bn.
Total money market fund assets slipped $3.9bn to $3.617 TN, with institutional money fund assets down $6.6bn to $2.276 TN. Total money funds jumped $554bn y-o-y, or 18.1%.
Total Commercial Paper slipped $0.3bn to $1.119 TN. CP was up $62.1bn, or 5.9% year-over-year.
For the week, the U.S. dollar index jumped 1.3% to 98.68 (up 2.3% y-t-d). For the week on the upside, the South Korean won increased 0.4% and the Mexican peso 0.4%. On the downside, the British pound declined 2.4%, the Singapore dollar 1.8%, the Swiss franc 1.5%, the euro 1.3%, the Japanese yen 1.3%, the Norwegian krone 1.1%, the Brazilian real 0.8%, the Canadian dollar 0.5%, the Swedish krona 0.4%, the Australian dollar 0.3% and the South African rand 0.2%. The Chinese renminbi declined 0.86% versus the dollar this week (down 0.56% y-t-d).
February 6 – Bloomberg (Stephen Stapczynski, Mark Burton and Jackie Davalos): “Global commodity trade plunged deeper into chaos as Chinese companies started walking away from purchase contracts because of the spread of the deadly coronavirus. A Chinese buyer of liquefied natural gas and a copper importer declared what’s known as force majeure -- meaning they are reneging on deals as the virus constrains their ability to take deliveries. The cancellations are among the first known cases of the legal clause being invoked in commodity contracts due to the epidemic. ‘Everything that we were afraid of, from trade wars or global growth, doesn’t compare,’ said Jan Stuart, global energy economist at Cornerstone Macro. ‘This virus is an entirely different risk, especially in commodities where China’s role dominates.’ China is the world’s biggest consumer of most raw materials, from energy products to industrial metals, and disruptions in its purchases create havoc across global supply chains.”
February 7 – Financial Times (Harry Dempsey, Derek Brower and David Sheppard in London and Sun Yu): “The coronavirus outbreak has thrown the global gas market into turmoil with Chinese importers threatening to cancel up to 70% of seaborne imports in February as demand collapses and companies struggle to staff ports. The move by China, the world’s second-largest importer of liquefied natural gas, has sent prices to their lowest level on record and sparked a row with suppliers, which claim the Chinese companies are breaching their contracts to secure lower prices on the spot market. The stand-off is the latest sign of the economic damage being wreaked by the coronavirus outbreak…”
February 4 – Financial Times (Emiko Terazono): “The coronavirus outbreak has unsettled global markets, hitting equity and commodity prices as concerns grow about its impact on economic growth. A less obvious casualty has been the humble coffee bean. The benchmark index for coffee futures has plunged more than one-fifth since the start of the year to around $1 a pound. This is a bigger dip than crude oil marker Brent, down 17%, and copper, which has lost 9% on the London Metal Exchange. China is an important participant in the global coffee industry, with imports more than tripling over the past decade.”
The Bloomberg Commodities Index slipped 0.1% (down 7.6% y-t-d). Spot Gold declined 1.2% to $1,570 (up 3.4%). Silver dropped 1.8% to $17.69 (down 1.3%). WTI crude dropped $1.24 to $50.32 (down 18%). Gasoline gained 1.5% (down 10%), and Natural Gas increased 0.9% (down 15%). Copper recovered 1.4% (down 9%). Wheat gained 0.9% (unchanged). Corn increased 0.6% (down 1%).
Market Instability Watch:
February 6 – Reuters (Kevin Yao): “China’s central bank will step up support for the economy to cushion the blow from a coronavirus outbreak, but activity is expected to recover once the virus is brought under control, one of its deputy governors said on Friday… The PBOC injected 1.7 trillion yuan ($242.74bn) via reverse repos earlier this week to shore up confidence and cut some key money market interest rates.”
February 5 – Bloomberg (Iain Marlow): “Citigroup Inc. strategists are warning about a sense of euphoria and ‘substantive’ complacency in financial markets, when the impact of the coronavirus is not yet clear. ‘Pretty much every client we talk to wants to buy the dip, and that is not comforting,’ wrote Tobias Levkovich, chief U.S. equity strategist… ‘While there may be some good news on a potential slowing of the outbreak’s spread outside of the Hubei province, we are reticent to think that the impact is behind us now.’”
February 4 – Bloomberg (Claire Ballentine): “Investors can’t seem to make up their minds on whether U.S. stocks are headed for new highs -- or poised for a correction. Traders poured almost $5 billion into the Vanguard S&P 500 ETF on Friday, the biggest one-day inflow for the $138 billion fund since its inception in 2010, data compiled by Bloomberg show. But just three days after that vote of confidence, more than $3.7 billion exited the $307 billion SPDR S&P 500 ETF Trust, which follows the same broad index of large American companies.”
February 6 – Bloomberg (Lu Wang): “The list of warning signs for the rally that pushed U.S. stocks to another record is growing longer. As the S&P 500 Index embarked on a torrid four-day advance, corporate executives and officers have stepped up selling shares in their own companies -- so much so that there were five insider sales for every one buy, according to data compiled by Washington Service. That’s poised to be the highest since early 2017. Insiders have been stepping up the pace of sales all year…”
February 3 – Wall Street Journal (James T. Areddy): “China’s isolation amid the coronavirus outbreak, a rare freeze out for such a vital economic center, is rippling across the world. Uncertainty over the virus… has disrupted world-wide trade and supply chains, depressed asset prices, and forced multinational businesses to make hard decisions with limited information. The U.S., and governments in Europe and Asia are enforcing new regulations to block visitors from China and screen returning U.S. citizens, while major airlines suspended flights to the country and companies pulled out expatriate executives. ‘The calls that I get are: ‘We don’t know what to do. Our employees are panicking,’’ says Rachel Conn, an employment attorney… at Nixon Peabody LLP. ‘They’ve never dealt with a situation like this.’”
February 4 – Bloomberg (Drew Armstrong): “In the last two weeks, China locked down some 50 million people in more than a dozen cities to try and stop the new coronavirus that has sickened thousands in the province of Hubei. It may take as long as 14 days for the flu-like symptoms of the virus, dubbed 2019-nCov, to appear. Soon, China will find out if the largest mass quarantine in history has worked, or if undiscovered cases have quietly dispersed and seeded a far wider epidemic.”
February 3 – Bloomberg (Iain Marlow and Dandan Li): “Chinese President Xi Jinping called on all officials to quickly work together to contain a deadly new virus at a rare meeting of top leaders, saying the outcome would directly impact social stability in the country. The effort to contain the virus directly affects people’s health, China’s economic and social stability, and the country’s process of opening up, he told a meeting of the Communist Party’s powerful Politburo Standing Committee on Monday. Leaders also urged officials ‘to achieve the targets of economic and social development this year’ and ‘promote stable consumer spending.’”
February 3 – Bloomberg: “China’s stock market opened to the most savage wave of selling in years, with thousands of shares falling by the daily limit after just minutes of trading. Though investors turned on computers hours early to tee up their sell orders, many of them couldn’t exit the market fast enough. All but 162 of the almost 4,000 stocks in Shanghai and Shenzhen recorded losses, with about 90% dropping the maximum allowed by the country’s exchanges. Health-care shares comprised most of Monday’s gainers on speculation they will benefit from the virus outbreak.”
February 4 – Financial Times (Hudson Lockett and Sun Yu): “As the biggest sell-off in more than four years hit Chinese equities on Monday, speculation grew that China’s so-called ‘national team’ of state-backed buyers would enter the market and cushion the blow from the coronavirus-driven drop. But traders at brokerages and asset managers in China said the team mostly kept its powder dry on Monday. It was not until after market close that state media confirmed the cavalry was prepped and ready — specifically, a group of Chinese insurers with Rmb100bn ($14.3bn) ready to plough into the stock market if necessary. That helped bolster investor sentiment, with the benchmark CSI 300 index of Shanghai and Shenzhen-listed stocks climbing 2.6% on Tuesday after dropping about 8% during the previous session. But longtime observers chalked the gains up mostly due to faith in the buying power of the national team…”
February 6 – Financial Times (Don Weinland and George Hammond): “The coronavirus outbreak is delivering a painful blow to China’s $43tn property market as developers close sales centres and potential homebuyers delay the search for new flats. The impact of the crisis on China’s property market, which some estimate makes up 25% of gross domestic product, is threatening to weigh down the country’s economic growth to 4% in the first quarter, according to several analysts. That would bring the growth rate close to the full-year low of 3.9% experienced in 1990, in the wake of the Tiananmen Square massacre. ‘After four years of upcycle, the property sector was already at a turning point even before coronavirus hit,’ said Larry Hu, head of China economics at Macquarie Capital. ‘Therefore, the risk is high for the property sector, which is the single most important part of the Chinese economy.’”
February 4 – Reuters (Kevin Yao): “Chinese policymakers are readying measures to support an economy jolted by a coronavirus outbreak that is expected to have a devastating impact on first-quarter growth, policy sources said… ‘Currently, monetary policy is being loosened, but the central bank will follow a step-by-step approach and watch the virus situation,’ said a policy insider. The People’s Bank of China (PBOC) has already pumped in hundreds of billions of dollars into the financial system this week as it attempted to restore investor confidence and as global markets shuddered at the potentially damaging impact of the virus on world growth. In the past two days, the PBOC has injected 1.7 trillion yuan ($242.74bn) through open market operations.”
February 3 – Wall Street Journal (Mike Bird): “China’s major real-estate companies have shut sales centers across several cities as the number of reported coronavirus cases grows. Disruption to travel and work will slow property sales nationally, halting them fully in some of the most heavily affected areas. Exactly how big an impact the sudden halt in much economic activity will have on developers remains to be seen, but a prolonged freeze will hit a funding mechanism that has become much more important in recent years. Deposits and advance payments now make up the greatest portion of funding for real-estate developers. Almost all sales in China are made before construction is finished. The inability to build or sell properties at a normal pace will eventually put a strain on this risky funding model.”
February 4 – New York Times (Raymond Zhong): “Along the roads leading into the small eastern city of Shouguang, workers in hazmat suits stop cars and take passengers’ temperatures. The fever checks are mandatory at offices, too. Whole neighborhoods have been barricaded off to nonresidents. All the hotels are shut. Shouguang is 500 miles from the epicenter of the coronavirus. But the tight precautions reflect the city’s vital importance to China: This is where the country gets its vegetables. The virus crisis is testing China’s ability to feed its 1.4 billion people, one of the Communist Party’s proudest achievements. Cooped up at home and fearful that the epidemic could last weeks or even months, families across China are hoarding provisions, making it harder for shops and supermarkets to keep fresh food in stock.”
February 4 – Bloomberg: “China’s biggest health crisis since at least 2003 has worsened the outlook for defaults in the world’s second-biggest bond market, likely tipping a raft of distressed borrowers over the edge this year. With scores of millions of citizens barred from travel, and companies, factories and retail outlets shuttered for a period of weeks, strains on cash flow add an unexpected layer of stress on Chinese borrowers. Market participants had already anticipated that defaults in 2020 would be on par with 2019, which saw a second straight annual record high. Old-line industrial companies with excess capacity and over-leveraged firms with grand ambitions are among those that etched their names in China’s relatively recent default history.”
February 6 – Bloomberg (Krystal Chia): “The most influential mills’ group in the world’s largest steelmaker has sounded the alarm about the outlook as the coronavirus crisis rips through China’s economy, warning of transport snarls, weaker demand, and a situation this quarter that ‘does not look optimistic.’ ‘Companies are facing restrictions in logistics and transport, trades have been muted, prices of raw materials and steel have slid, which is causing the market’s value to decline,’ the China Iron & Steel Association said.”
February 5 – Reuters (Weizhen Tan): “Following its pork crisis, China’s poultry farmers are now in dire straits because of the coronavirus outbreak. Millions of chickens may soon perish in coming days as much-needed feed is not getting to them in time. The shutdowns in China’s provinces have hit supply chains, with transport restrictions preventing much needed animal feed such as soybean meal from getting delivered to poultry farms, according to analysts and Chinese state media.”
February 6 – Reuters (Donny Kwok, Greg Torode, Pak Yiu, Jessie Pang and Clare Jim): “Panicky Hong Kong residents scooped noodles, rice, meat and toilet rolls into supermarket trolleys on Friday despite government assurances of ample supplies during an outbreak of a new coronavirus that has killed 637 people in mainland China… ‘Everyone’s snatching whatever they can get. I don’t even know what’s going on,’ said a 72-year-old woman surnamed Li as she clutched two bags of toilet rolls.”
February 6 – Bloomberg: “A formula is emerging for Chinese state-run firms to resolve offshore debt failures after a major commodities trader and a prominent aluminum producer imposed nearly identical losses on holders of their defaulted bonds. The decisions by Tewoo Group Co. and Qinghai Provincial Investment Group Co., which have since December committed the two biggest dollar-bond defaults from China’s state sector in 20 years, could offer a roadmap to investors as Beijing allows more ailing state firms to go bust. The development also comes as Chinese policymakers explore ways to ensure more orderly bond defaults now that a weakening economy and trade tensions have unleashed a record wave of debt failures.”
February 2 – Wall Street Journal (Chao Deng and Xie Yu): “China’s peer-to-peer lending industry, once a world-beater, is on its last legs. Entrepreneurs had hoped to fill a gap in the Chinese financial system ignored by state-backed banks. Thousands of peer lenders flourished, gathering funds from small investors and extending credit to family restaurants, parents with tuition bills to pay and other small borrowers. Several larger players such as Yirendai Ltd., PPDAI Group Inc. and Qudian Inc. went public in the U.S. But a dramatic reversal in official attitudes has made life much harder for peer-lending entrepreneurs…”
February 6 – Bloomberg: “China will halve tariffs on some $75 billion of imports from the U.S. later this month, reciprocating a U.S. action and likely satisfying part of the interim trade deal. The cut will be effective… on Feb. 14 in Beijing…, the same time as when the U.S. will implement reductions in tariffs on Chinese products… Both nations agreed to cut tariffs on each others’ goods as part of the phase-one deal signed last month.”
February 4 – Wall Street Journal (Liza Lin): “In January, a person infected with the dangerous new Wuhan coronavirus used public transportation to crisscross the eastern Chinese city of Nanjing, potentially exposing those along the way to the highly contagious pathogen. Using the country’s pervasive digital-surveillance apparatus, authorities were able to track—down to the minute—the sick person’s exact journey through the city’s subway system.”
February 5 – Bloomberg: “Some Chinese car dealers are offering hard-to-get face masks and vegetables to encourage consumers to purchase automobiles in the wake of the coronavirus outbreak. Dealerships for the electric-vehicle unit of Guangzhou Automobile Group Co. started the service Tuesday…”
Global Bubble Watch:
February 6 – Reuters (Joseph White): “The threat from the coronavirus crisis closed in on the global auto industry on Thursday, as Fiat Chrysler Automobiles NV warned that a European plant could shut down within two to four weeks if Chinese parts suppliers cannot get back to work. The next several weeks will be critical for automakers. Parts made in China are used in millions of vehicles assembled elsewhere, and China’s Hubei province, epicenter of the coronavirus outbreak, is a major hub for vehicle parts production and shipments.”
February 6 – CNBC (Leslie Josephs): “One by one, air carriers have cut service after demand fell sharply and governments took more drastic measures that they say aim to curb the spread of the disease… These steps have left China, the world’s second-largest air travel market after the U.S., more isolated… U.S. Customs and Border Protection says it processed an average of 371,780 people at U.S. airports each day in the last fiscal year, although February travel demand is much lower than in the summer. Some 14,000 people flew into the U.S. from China each day — almost 5 million for that year. At stake are more than 165,000 scheduled flights in and out of China between Jan. 29 and March 28 that would affect 27 million travelers…”
February 5 – Associated Press (Dee-Ann Durbin): “This should have been a good year for global tourism, with trade tensions gradually easing, certain economies growing and banner events like the Summer Olympics taking place in Tokyo. But the viral outbreak in China has thrown the travel industry into chaos, threatening billions in losses and keeping millions of would-be travelers at home… Thirty airlines have suspended service to China and 25,000 flights were cancelled this week alone, according to OAG, a travel data company. Hotel rooms in China are largely empty; Chinese hotel occupancy plummeted 75% in the last two weeks of January…”
February 6 – Wall Street Journal (Ryan Dezember): “Liquefied natural gas is fetching the lowest price on record in Asia, a troubling sign for U.S. energy producers who have relied on overseas shipments of shale gas to buoy the sagging domestic market. The main price gauge for liquefied natural gas, or LNG, in Asia fell to $3 per million British thermal units Thursday, down sharply from more than $20 six years ago as U.S. deliveries have swamped markets around the world. As recently as Jan. 15, the Asian benchmark, called the Japan Korea Marker, was comfortably above $5.”
February 3 – Bloomberg: “China is preparing steps to adjust to a slower rate of economic growth as the coronavirus outbreak shows few signs of abating. Officials are evaluating whether to soften the economic-growth target for 2020, while state-owned liquefied natural gas importers are considering declaring themselves unable to fulfill some obligations on cargo deliveries -- known as force majeure -- according to people familiar with the matter. And authorities in Beijing are hoping the U.S. will agree to some flexibility on pledges in their phase-one trade deal, people close to the situation said.”
February 7 – Bloomberg: “Hon Hai Precision Industry Co. told employees at its Shenzhen facility not to return to work when the extended Lunar New Year break ends Feb. 10… The moratorium represents an extreme effort by Apple Inc.’s most important partner to curb the spread of the novel coronavirus that’s paralyzed much of China’s manufacturing. Foxconn’s main iPhone-making base is farther north in Zhengzhou but coastal Shenzhen serves as its Chinese headquarters and the majority of the tens of thousands employed there are out-of-towners.”
February 4 – Associated Press (Paul Wiseman and Anne D’Innocenzio): “Hyundai Motors is suspending production in South Korea, a sign that the economic fallout from China’s viral outbreak is spreading. For other companies bracing for losses from coronavirus, the damage has so far been delayed, thanks to a stroke of timing: The outbreak hit just when Chinese factories and many businesses were closed anyway to let workers travel home for the week-long Lunar New Year holiday. But the respite won’t last. If much of industrial China remains on lockdown for the next few weeks, a very real possibility, Western retailers, auto companies and manufacturers that depend on Chinese imports will start to run out of the goods they depend on.”
February 6 – Reuters (Paul Carrel): “German industrial output suffered its biggest fall in December since the recession-hit year of 2009, a shock drop highlighting the weakness in manufacturing that risks dragging Europe’s largest economy into contraction again. Industrial production tumbled by 3.5% on the month, undershooting expectations for a 0.2% fall…”
February 5 – Reuters (Swati Pandey): “The hit to Australia’s economy from a viral epidemic spreading from China is likely to be ‘significant’, Prime Minister Scott Morrison said on Thursday, as the country’s states and territories work out scenarios to gauge the overall impact. Morrison said the effect of the virus, which has so far killed 563 people in China, will be ‘a real weight on the economy’…”
February 3 – Bloomberg (Eric Roston): “There are dozens of climate models, and for decades they’ve agreed on what it would take to heat the planet by about 3° Celsius. It’s an outcome that would be disastrous—flooded cities, agricultural failures, deadly heat—but there’s been a grim steadiness in the consensus among these complicated climate simulations. Then last year, unnoticed in plain view, some of the models started running very hot. The scientists who hone these systems used the same assumptions about greenhouse-gas emissions as before and came back with far worse outcomes. Some produced projections in excess of 5°C, a nightmare scenario. The scientists involved couldn’t agree on why—or if the results should be trusted. Climatologists began ‘talking to each other like, ‘What’d you get?’, ‘What’d you get?’ said Andrew Gettelman, a senior scientist at the National Center for Atmospheric Research…”
Trump Administration Watch:
February 7 – NBC News (Shannon Pettypiece): “President Donald Trump said… that his impeachment should be invalidated, and he gave an ominous warning when asked how he'll pay back those responsible, saying, ‘You'll see.’ ‘Should they expunge the impeachment in the House? They should because it was a hoax,’ Trump told reporters… When asked about his press secretary's comments that the president was suggesting in his remarks Thursday on impeachment that his Democratic political opponents ‘should be held accountable,’ Trump said, ‘Well, you'll see. I mean, we'll see what happens.’”
February 4 – Reuters (Alexandra Alper and Karen Freifeld): “The Trump administration plans to meet this month to discuss further curbing technology exports to China and its flagship telecoms company Huawei, two sources said, in a bid to resolve differences within the government over the possible crackdown… The meeting, which is expected to include cabinet-level officials including Commerce Department Secretary Wilbur Ross, Defense Secretary Mark Esper and State Department Secretary Mike Pompeo, is aimed at addressing how best to approach the blacklisted Chinese company and the broader war with China over technological dominance.”
February 4 – Financial Times (Diana Choyleva): “Financial markets welcomed last month’s truce in the long-running trade war between Washington and Beijing. But the ‘phase one’ deal should fool no one. By parking core US complaints, including China’s weak intellectual property protection, forced technology transfer and pervasive state subsidies, the ceasefire merely drew attention to the difficulty of reconciling two fundamentally opposed systems. This comprehensive contest for supremacy between the two nations demands a fundamental rethink of the approach to global investment. Two issues stand out: which economic and political model offers higher returns, and where will the underlying assets be more secure. China’s handling of the coronavirus epidemic only accelerates this ‘great decoupling’ between the incumbent superpower and its rising challenger.”
February 3 – Reuters (Lindsay Dunsmuir): “The U.S. Treasury Department… said it plans to borrow less in the first quarter of this year than it previously forecast. …Treasury said it would borrow $367 billion during the January-March quarter, $22 billion less than its previous estimate, assuming an end-March cash balance of $400 billion.”
Federal Reserve Watch:
February 4 – Bloomberg (Alexandra Harris): “The Federal Reserve Bank of New York’s $30 billion operation to inject cash into the financial system for the next two weeks attracted bids of almost double that amount… Dealers submitted $59.05 billion of bids for the 14-day repurchase agreement operation, at a rate of 1.59%. That compares with a rate of about 1.64% for two-week repo funding in the open market, based on ICAP data. ‘It’s still a cheap source of funding,’ said NatWest strategist Blake Gwinn.”
U.S. Bubble Watch:
February 4 – New York Times (Clifford Krauss): “At a time when they are already cutting jobs and weighed down by debt, American oil producers are bracing for the latest shock to hit world energy markets: the economic effects of the coronavirus outbreak on China and beyond. Oil and natural gas producers have been suffering from low commodity prices for the past year and now expect a sharp drop in global prices for their products. As a result, they are preparing to slash investments in exploration and production. The price of West Texas intermediate crude, a key benchmark, fell below $50 on Monday, a 20% decline in less than a month.”
February 5 – CNBC (Jeff Cox): “The jobs market kicked off 2020 in grand fashion, adding 291,000 in private payrolls for the best monthly gain since May 2015, according to… ADP and Moody’s Analytics. That was well above the 150,000 estimate from economists…”
January 31 – Reuters (Akshay Balan and Josh Horwitz): “Apple Inc on Saturday said it would shut all of its official stores and corporate offices in mainland China until Feb 9. as fears over the coronavirus outbreak mounted and the death toll more than doubled to over 250 from a week ago.”
February 3 – Reuters (Makiko Yamazaki, Hyunjoo Jin and Munsif Vengattil): “Shares of Tesla Inc surged 20% on Tuesday to hit $940, extending a stunning rally that has more than doubled the company’s market value since the start of the year as more investors bet on Chief Executive Elon Musk’s vision.”
February 4 – Wall Street Journal (Esther Fung): “Chinese investors sold off billions more in U.S. commercial property last year than they bought, as other foreigners start to sour on the U.S. market as well. Foreign investors were net sellers of U.S. commercial real estate last year for the first time since 2012, posing a fresh setback for a market that is already showing signs of strain. Chinese were by far the biggest foreign sellers of U.S. office towers, retail centers, hotels and other commercial property last year, unloading $20 billion more than they bought, according to… Real Capital Analytics.”
February 4 – Wall Street Journal (Andrew Ackerman): “On the second floor of a squat office building in a quiet Washington suburb, workers ensconced in cubicles sell millions of dollars of bonds each day, money that later flows to a range of borrowers, from community lenders to global megabanks. The trading room, 250 miles from Wall Street, is the nerve center of the Federal Home Loan Banks, a $1.1 trillion network of government-chartered cooperatives that is so obscure there isn’t even a sign on the front of the building… Founded during the Great Depression to support housing finance, the system’s role has evolved. It was an important source of liquidity during the crisis of 2008 to commercial banks. Since then, it has become a supplier of cheap funding to the likes of Wells Fargo... and JPMorgan... Now the system’s federal regulator is considering whether to allow further growth, via lending to nonbank mortgage institutions and real-estate investment trusts…”
February 5 – Reuters (Bharath Manjesh and Joshua Franklin): “Casper Sleep Inc… sold shares in its initial public offering (IPO) at the bottom end of a targeted range it had already lowered, slashing the online mattress retailer’s valuation by more than half in less than a year. The outcome of the IPO underscores the growing mismatch between the valuations that start-ups have attained in private fundraising rounds from venture capital funds and the valuations that stock market investors are willing to assign to them.”
Fixed-Income Bubble Watch:
February 6 – Bloomberg (Danielle Moran): “There’s so much money chasing after the bonds sold by America’s high-tax states that buyers don’t seem to care too much about what credit-rating companies think. The heavy demand overall has driven municipal yields to their lowest in more than six-decades. And with rates so low, the yield penalties that would typically differentiate a deeply indebted state from a thrifty one have become little more than rounding errors that in some cases contrast with their standing in the ratings pecking order. California’s general-obligation debt, for example, is yielding about 1 basis point less than the AAA benchmark, even though the state is rated as many as four steps below that…”
February 3 – Bloomberg (Liz McCormick): “It’s been more than six years since the U.S. bond market’s purest read on the global growth outlook was signaling this much concern. The so-called real yield on 10-year inflation-linked Treasuries fell on Friday to negative 0.147%, its lowest since 2013, when Europe’s sovereign debt crisis was raging. Now it’s the spread of the Wuhan coronavirus that’s fueling worries about the potential hit to the world economy.”
February 3 – Wall Street Journal (Sam Goldfarb and Alexander Gladstone): “The economic threat posed by the coronavirus is helping erode demand for energy-company debt just weeks after bond issuance in the sector surged, highlighting the virus’s far-reaching effects on companies and financial markets. Early last month, a surprise rally in the debt of energy companies allowed oil and gas businesses to issue the largest amount of speculative-grade bonds in one week since just before oil prices crashed in the fall of 2014. No sooner had companies issued the bonds, however, than fears that the coronavirus will slow global growth sapped appetite for riskier debt…”
Central Bank Watch:
February 5 – Bloomberg (Michelle Jamrisko): “Southeast Asian central banks signaled strong policy action this week to counter a hit to their economies from the new coronavirus. The Bank of Thailand cut its benchmark interest rate Wednesday to a record-low 1%, while Singapore policy makers indicated there was room for further easing in the currency. The Philippines underscored its willingness to ease…”
January 31 – Bloomberg (Abhijit Roy Chowdhury, Vrishti Beniwal, and Shruti Srivastava): “India’s finance minister slashed taxes for individuals, scrapped a levy on dividends and widened budget deficit targets to help spur a slowing economy… The government will miss its deficit goals for a third year, pushing the shortfall to 3.8% of gross domestic product from a planned 3.3% in the year ending March, Finance Minister Nirmala Sitharaman said… The deficit target for the coming fiscal year starting April 1 was widened to 3.5%.”
February 4 – Bloomberg (Divya Patil): “The creditworthiness of Indian companies has deteriorated to the lowest in eight years as the economy slows, and there are signs their financial health will worsen further. The quickening ratio of downgrades versus upgrades suggests that relief from the credit crisis may be hard to find. The liquidity crunch has crimped lending and hobbled plans to improve infrastructure in Asia’s third-largest economy. With the fallout from the deadly coronavirus likely to hurt global expansion, it will be harder for India to kick-start economic growth. The credit scores of 188 Indian borrowers were lowered in the nine months through December, compared with 103 upgrades…”
February 6 – Reuters (Paul Carrel): “German industrial output suffered its biggest fall in December since the recession-hit year of 2009, a shock drop highlighting the weakness in manufacturing that risks dragging Europe’s largest economy into contraction again. Industrial production tumbled by 3.5% on the month, undershooting expectations for a 0.2% fall…”
Global Debt Bubble Watch:
February 3 – Financial Times (Jennifer Ablan and Colby Smith): “New bond sales by the riskiest borrowers around the world set a monthly record in January, as businesses and other issuers sought to lock in financing while rates are low. Bond issuance is typically heavy at the start of the year, when corporations try to raise as much of their annual financing as possible, but the wave of deals this year was unusually large, according to Dealogic. New issuance through to January 31 amounted to $73.6bn, exceeding any monthly total over the past 25 years, according to Dealogic. Of that, $57.1bn was issued by companies.”
February 3 – Financial Times (Tommy Stubbington): “Emerging-market governments and companies embarked on a record borrowing spree in January, hoping to lock in very low interest costs. Issuers including Indonesia, Mexico and Saudi Arabia sold $118bn of new foreign-currency debt in the first month of 2020, up from $70bn in the same period last year and an all-time high for the month, according to… Dealogic. The record borrowing — mostly in dollars or euros — was broad-based across Latin America, the Middle East and Asia, according to Jean-Marc Mercier, vice-chairman of capital markets at HSBC.”
Leveraged Speculation Watch:
February 3 – Financial Times (Richard Henderson): “Investors betting against Tesla were still reeling from their worst monthly losses in January when they got hit again on Monday, as shares in the electric carmaker surged 20% in a single day. On top of the record dollar loss of $5.8bn in January, short-sellers lost a further $3.2bn as the extraordinary share price rally accelerated on the first day’s trading of the new month. It was the worst dollar loss for the shorts on a single day…”
February 6 – Bloomberg (Danielle Moran): “U.S. markets are ‘utterly and completely unprepared’ for the possibility that inflation might pick up after years of subdued price gains, hedge fund manager Ken Griffin said. ‘In the United States there is absolutely no preparedness for an inflationary environment,’ Griffin, founder of $30 billion hedge fund Citadel, said at an Economic Club of New York luncheon…”
February 6 – Bloomberg (Iain Marlow): “Beijing is growing increasingly angry at countries imposing harsh travel restrictions on visitors from China as the world tries to contain the spread of a deadly coronavirus. Authorities have registered ‘strong objections’ with countries who have cut flights to China during the outbreak, foreign ministry spokeswoman Hua Chunying said Thursday. She said countries were ignoring recommendations from the World Health Organization and International Civil Aviation Organization, which have advised against canceling flight routes and limiting travel to affected nations.”
February 3 – Reuters (Ben Blanchard): “Taiwan’s foreign ministry said on Tuesday China is ‘vile’ for restricting the island’s access to WHO during the coronavirus outbreak, adding to tensions with Beijing over the growing health crisis.”
February 3 – Financial Times (Kathrin Hille): “Taiwan’s vice-president-elect is visiting Washington and New York in the highest-level visit by a politician from the island to the US capital since the country cut diplomatic relations with Taipei in 1979. In a trip that will probably enrage Beijing, Lai Ching-te flew to the US on Sunday night to attend the National Prayer Breakfast…”
February 4 – Reuters (Tuvan Gumrukcu and Ece Toksabay): “Turkey will not allow the Syrian government to gain territory in the northwestern region of Idlib, President Tayyip Erdogan was quoted as saying…, a day after eight Turkish personnel were killed in an attack Ankara blamed on Syrian troops. Earlier, Turkey urged Russia to rein in Syrian government forces in Idlib, after the attack rattled a fragile cooperation between the two countries, which back opposing sides in the war.”