By Doug Noland
“U.S. Stocks Tumble 11% in Worst Week Since Crisis,” read the Friday evening Bloomberg headline. A Wall Street Journal caption asked the apt question: “U.S. Stocks Were at Records Last Week. What Happened?”
A Friday Bloomberg article (Lu Wang) is a reasonable place to start: “It’s a stat so shocking that it’s difficult to believe: In a century spanning the Great Depression and Financial Crisis, the current correction is the fastest ever. To understand how it happened, you need to recall how euphoric markets very recently were. Hard as it is to remember now, as recently as two Wednesdays ago, with coronavirus headlines everywhere, Apple Inc. was capping off a rally that had added $600 billion to its value in eight months. Lookalike runups in all manner of tech megacaps pushed valuations in the Nasdaq 100 to a two-decade high. In just three months, Tesla’s market cap shot from $40 billion to $170 billion, while a pack of dodgy microcaps, hawking space vacations and fuels cells, were trading hundreds of millions of shares a day.”
Manias are accidents in the making. And after an agonizing week, markets crave for emergency central bank stimulus - yet another rash morning shot of the “Hair of the Dog.”
“The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy.” Statement from Fed Chair Jay Powell, Friday, February 28, 2020
February 28 – CNBC (Jeff Cox): “Former Federal Reserve Governor Kevin Warsh said Friday he expects the Fed and other central banks around the world to act soon in response to the coronavirus outbreak. Warsh, occasionally rumored to be a candidate for Fed chairman after Jerome Powell’s term expires, spoke Friday morning to CNBC… He recommended the Fed act as quickly as Sunday to assuage financial markets that have been in an aggressive swoon all week as the virus has spread. ‘This thing’s moving pretty darn quickly,’ he said. ‘At the very least, a statement on Sunday night before Asian markets open would buy them a little time and let us all learn a little bit more about where things are.’”
Friday afternoon saw the President weighed in: “I hope the Fed gets involved, and I hope they get involved soon… They’re all going in, they’re all putting in a lot of money. Our Fed sits there, doesn’t do what they’re supposed to do. They’ve done this country a great disservice.”
Central bankers have done the world incredible disservice. I have referred to 2019 as a “monetary fiasco.” The Fed and global central banks applied aggressive monetary stimulus in the midst of historic “Terminal Phase” financial excess. This misguided stimulus propelled speculative “blow-off” dynamics that significantly exacerbated underlying financial and economic fragilities. Not only making the problem more acute, so-called “insurance” rate cuts reduced stimulus measures available for when speculative Bubbles burst, Credit stumbles and economies falter.
The initial fallout is upon us. The so-called Fed (and global central bank) “put” created dangerous market distortions. Markets were emboldened to disregard risk, while the gaping divergence between inflating asset markets and deflating fundamental prospects grew only more outrageous.
Suddenly so much has changed. For one, markets began to appreciate that a coronavirus pandemic has the clear potential to incite severe global financial and economic upheaval. With markets under pressure, President Trump held a Wednesday afternoon news conference to calm fears. In contrast to well-timed market placation throughout Chinese trade negotiations, his comments fell flat. Coronavirus fears were immune to the Trump “put.”
Of course, the coronavirus will be similarly immune to central bank stimulus, with the short half-life of Chairman Powell’s Friday market-supporting statement worth noting. Yet markets still resolutely embrace the notion central bank rate cuts and QE will eventually spur buying while restoring confidence. And while most of the attention is focused on the Fed’s equities market “put”, probably the more consequential central bank-induced market distortions have flourished throughout the derivatives markets. Why not sell flood insurance when central banks ensure drought? And with insurance so cheap, why not indulge in risk-taking – build that dream home on the riverbank? Why not leverage in higher-yielding debt instruments with global central banks vowing to keep booming markets highly liquid?
Major cracks emerged this week in key global derivatives markets, as de-risking/deleveraging dynamics took hold (with lightning speed).
Investment-grade corporate Credit default swaps (CDS) surged 20 bps this week to 66.5 bps, trading to the highest level since June 3rd. It was the largest weekly gain in data going back to 2011. High-yield CDS jumped 75 to 370 bps, trading intraday Friday at the highest level (390) since June 4th. It was the largest weekly gain since the week of December 11, 2015. With derivatives markets dislocating, liquidity vanished and corporate bond issuance came to a screeching halt. There were no investment-grade deals for the first time in 18 months, as $25bn of sales were postponed awaiting more favorable market conditions.
Goldman Sachs (5yr) CDS jumped 23 this week to 71 bps, the high since October. After trading on February 14th to the low since 2007 (28bps), JPMorgan CDS closed this week at 52.5 bps (highest close since February ’19). Citigroup CDS jumped 20 bps this week to a four-month high 67.5 bps. Morgan Stanley CDS rose 21 to 76 bps.
With derivatives in disarray and “risk off” rapidly attaining powerful momentum, safe haven sovereign bonds went into panic-buying melt-up. Two-year Treasury yields collapsed a stunning 44 bps to 0.915%. Ten-year Treasury yields sank 32 bps to a record low 1.15%. Chaotic Friday trading saw ten-year yields drop 11 bps. Spreads to Treasuries widened significantly – for investment-grade and high-yield corporates, as well as mortgage-backed securities.
German 10-year bund yields sank 18 bps this week to negative 0.61%. Indicative of de-risking/deleveraging, European “Periphery” yields rose – wreaking havoc for “carry trades” (i.e. short bunds to finance levered holdings in higher-yielding Italian bonds). With Italian 10-year yields jumping 19 bps and Greek yields surging 35 bps, the spread to bunds widened a notable 37 bps in Italy and 53 bps in Greece. Yields rose 12 bps in Portugal and six bps in Spain (with spreads widening 29 and 23 bps).
The funding currencies (low-yielding currencies used as funding sources for leveraging in higher-yielding instruments) were on fire. The Japanese yen gained 3.5% versus the dollar, with the euro up 1.7% and the Swiss franc rising 1.4%.
Emerging markets were under intense pressure this week – especially for the higher-yielding currencies popular for “carry trade” leveraged speculation. The Russian ruble declined 4.2%, the South African rand 4.2%, the Colombian peso 4.2%, the Indonesian rupiah 3.9%, the Mexican peso 3.8%, the Turkish lira 2.4%, the Chilean peso 2.2% and the Brazilian real 1.9%.
De-leveraging dynamics abruptly altered the liquidity backdrop, with prospects for illiquid global markets inciting a major repricing of risk throughout the EM universe. CDS prices for a basket of EM bonds surged 60 bps this week to 255 bps, the high going back to December 2016. This was the largest weekly gain since December 2014.
In Asia, Indonesia CDS surged 35 bps (to 94), Malaysia 24 bps (59), Philippines 20 bps (55) and Vietnam 25 bps (109). China sovereign CDS jumped 16 to a six-month high 51 bps. Egypt CDS jumped 69 to 334 bps and Bahrain rose 28 to 201 bps. Latin America was under pressure, with CDS up 39 bps in Brazil (132), 34 bps in Colombia (103), 32 bps in Mexico (104), 21 bps to Peru (63), and 20 bps in Chile (65). Argentina CDS spiked 700 bps higher to 4,895, and Costa Rica jumped 49 to 300 bps. Ukraine CDS surged 107 to 408 bps.
Key higher-yielding “carry trade” EM local currency bond markets came under intense pressure. In chaotic Friday trading, 10-year yields surged 30 bps in South Africa, 26 bps in Colombia, 22 bps in Russia, 18 bps in Indonesia and 15 bps in Mexico. For the week, yields were up 43 bps in Turkey (to 12.46%), 37 bps in Indonesia (6.87%), 31 bps in Mexico (6.80%), 31 bps in Colombia (6.05%), and 28 bps in South Africa (9.10%). Turkish and Russian yields jumped to highs since November.
It was systematic global de-leveraging, the type of backdrop where members of the leveraged speculating community can quickly find themselves in trouble. Commodity markets succumbed to panic selling. WTI crude collapsed 16% to a 14-month low. The Bloomberg Commodities index sank 6.9% for the week to a 20-year low. Even gold was caught up in the liquidation frenzy, sinking $60 in disorderly Friday trading.
February 28 – New York Times: “From eastern Asia, Europe, the Middle East, the Americas and Africa, a steady stream of new cases on Friday fueled fears the new coronavirus epidemic may be turning into a global pandemic, with some health officials saying it may be inevitable. In South Korea, Italy and Iran — the countries with the biggest outbreaks outside China — the governments reported more than 3,500 infections on Friday, about twice as many as two days earlier.”
Since last Friday’s CBB, coronavirus cases in Italy have surged from nine to 889, with 21 deaths. South Korea saw infections jump from 346 to 2,931 (one death). Japanese (non-Diamond Princess) infections jumped from 92 to 234 (five deaths). Perhaps most alarming, cases in Iran jumped from 18 to 388. The 34 Iranian deaths (second only to China) suggest infections in the thousands. German cases jumped to 60, up from 18 on Wednesday. Germany’s health minister stated the country was at “the beginning of a coronavirus epidemic.” After detecting its first case Tuesday, infections had jumped to 38 in Spain by Friday.
U.S. cases rose to 66. In an alarming development, three “community transmission” cases were reported (two in California and one in Oregon).
Searching for historical comparisons, experts are increasingly referencing the 1918/19 “Spanish flu” pandemic. Meanwhile, financial market experts are struggling for historical precedent. There was an interesting discussion on Bloomberg Television highlighted in John Authers’ article: “But the stock market’s reaction appears more dramatic than after the two most recent comparable external shocks — the invasion of Kuwait by Iraq in 1990, and the 9/11 terrorist attacks of 2001. Stocks recovered after 9/11, and languished after the Kuwait invasion, so there is no clear precedent for what comes next.”
I wouldn’t dedicate much time studying past market shocks. We’re in the throes of something unique. Both the 1990 Kuwait invasion and the 2001 terrorist attacks were in post-Bubble backdrops. Moreover, they were pre-QE – prior to monetary stimulus dictating market perceptions, dynamics and prices. Today’s environment is incredibly precarious specifically due to myriad global Bubble fragilities – market, financial and economic. And especially after last year’s fiasco, Bubble markets are susceptible to waning confidence in central banks’ capacity to sustain liquidity excess and inflating securities and derivatives prices.
I believe there is a reasonably high probability the historic global Bubble has been pierced. The coronavirus had already demonstrated the potential to puncture China’s epic financial and economic Bubble. A faltering Chinese Bubble – the marginal source of Credit and demand for so many things globally - is a likely catalyst for piercing Bubbles around the world. Now the coronavirus has the capacity to directly strike at the heart of Bubble Delusions.
The central bank “put” – the capacity to slash rates and employ open-ended QE – has been fundamental to this environment’s incredible capacity to disregard risk. Virtually all market and economic issues would be papered over with monetary stimulus. And as more countries moved to participate in this incredible securities market, central bank and economic growth miracle, markets became even more commanding. The greater Bubbles inflated the more confident markets became that no country or leader would risk behavior upsetting to the markets. Markets rule – over populations, central banks and governments. Even geopolitical risks could now be ignored.
The past week has seen a momentous development. Markets, for the first time in a long while, must come face-to-face with the harsh reality they don’t in fact have everyone and everything obediently under their thumb. COVID-19 couldn’t give a rat’s ass about the financial markets. And there’s great risk that highly vulnerable markets will struggle with the process of repricing for rapidly mounting financial, economic, social, political and geopolitical risks. Throughout global markets, many must move to reduce risk. Leverage must be lowered. Risk intermediation will be severely challenged, as a colossal derivatives complex operating on the assumption of liquid and continuous markets will confront illiquidity and discontinuities. De-leveraging will face challenges associated with illiquid markets, likely exposing latent issues in the ETF complex.
Whether it’s Sunday, next week or next month, more monetary stimulus is on the way. There’s simply no one else to accommodate de-leveraging (i.e. “buyers of last resort”). And markets will surely rally on the prospect of more QE. But this is turning dangerous. The coronavirus doesn’t care about the central bank “put” either.
If central bank measures don’t immediately resuscitate speculative Bubbles, faith in almighty central bankers might dissolve right along with market confidence. After last year’s melt-up, central banks may be hesitant to move quickly with huge QE programs. But following years of mounting speculative leverage across the globe, I expect central bankers will be shocked by the scope of QE necessary to keep the global system from deflating.
This unsettling week provided important confirmation of the Bubble thesis. I believe unprecedented global speculative leverage creates a high probability of a major accident – a “seizing up” of global markets. And from my experience analyzing market Bubbles throughout the nineties and up to 2008, things are surely even worse than I think.
February 26 – Bloomberg (Hannah Benjamin, Tasos Vossos and Molly Smith): “The global credit machine is grinding to a halt. The $2.6 trillion international bond market, where the world’s biggest companies raise money to fund everything from acquisitions to factory upgrades, has come to a virtual standstill as the coronavirus spreads fear through company boardrooms. In the U.S., Wall Street banks are facing their third straight day without any bond offerings, a rarity outside of holiday and seasonal slowdowns. European debt bankers had their first day of 2020 without a deal... And bond issuance in Asia… has slowed to a trickle. It’s a remarkable turn of events for a market where investors had been snapping up almost anything on offer amid a global dash for yield. Europe had been enjoying its strongest ever start to a year for issuance, and sales of U.S. junk bonds have been on the busiest pace in at least a decade.”
For the Week:
The S&P500 sank 11.5% (down 8.6% y-t-d), and the Dow dropped 12.4% (down 11.0%). The Utilities were crushed 11.6% (down 3.7%). The Banks were hit 15.2% (down 19.2%), and the Broker/Dealers fell 11.9% (down 8.3%). The Transports sank 13.9% (down 13.9%). The S&P 400 Midcaps slumped 13.0% (down 12.1%), and the small cap Russell 2000 were pummeled 12.0% (down 11.5%). The Nasdaq100 fell 10.4% (down 3.1%). The Semiconductors dropped 9.8% (down 7.8%). The Biotechs lost 7.8% (down 3.5%). With bullion sinking $58, the HUI gold index fell 13.7% (down 10.9%).
Three-month Treasury bill rates ended the week at 1.24%. Two-year government yields collapsed 44 bps to 0.915% (down 65bps y-t-d). Five-year T-note yields sank 39 bps to 0.94% (down 76bps). Ten-year Treasury yields fell 32 bps to 1.15% (down 77bps). Long bond yields dropped 24 bps to 1.68% (down 71bps). Benchmark Fannie Mae MBS yields fell 20 bps to 2.18% (down 53bps).
Greek 10-year yields surged 35 bps to 1.30% (down 9bps y-t-d). Ten-year Portuguese yields rose 12 bps to 0.35% (down 9bps). Italian 10-year yields jumped 19 bps to 1.10% (down 31bps). Spain's 10-year yields increased six bps to 0.28% (down 19bps). German bund yields sank 18 bps to negative 0.61% (down 42bps). French yields fell nine bps to negative 0.29% (down 41bps). The French to German 10-year bond spread widened nine to 32 bps. U.K. 10-year gilt yields dropped 13 bps to 0.44% (down 38bps). U.K.'s FTSE equities index sank 11.1% (down 12.8%).
Japan's Nikkei Equities Index lost 9.6% (down 10.6% y-t-d). Japanese 10-year "JGB" yields dropped 10 bps to negative 0.15% (down 14bps y-t-d). France's CAC40 sank 11.9% (down 11.2%). The German DAX equities index fell 12.4% (down 10.3%). Spain's IBEX 35 equities index dropped 11.8% (down 8.6%). Italy's FTSE MIB index sank 11.3% (down 6.5%). EM equities were under pressure. Brazil's Bovespa index fell 8.4% (down 9.9%), and Mexico's Bolsa slumped 7.8% (down 5.1%). South Korea's Kospi index dropped 8.1% (down 9.6%). India's Sensex equities index lost 7.0% (down 7.2%). China's Shanghai Exchange declined 5.2% (down 5.6%). Turkey's Borsa Istanbul National 100 index fell 9.3% (down 7.4%). Russia's MICEX equities index sank 10.3% (up 8.6%).
Investment-grade bond funds saw inflows of $3.649 billion, while junk bond funds posted outflows of $4.198 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates declined four bps to 3.45% (down 90bps y-o-y). Fifteen-year rates fell four bps to 2.95% (down 82bps). Five-year hybrid ARM rates dropped five bps to 3.20% (down 64bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down four bps to 3.70% (down 42bps).
Federal Reserve Credit last week declined $25.3bn to $4.119 TN, with a 24-week gain of $393 billion. Over the past year, Fed Credit expanded $180bn, or 4.6%. Fed Credit inflated $1.309 Trillion, or 47%, over the past 381 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt slipped $2.2 billion last week to $3.460 TN. "Custody holdings" were up $18bn, or 0.5%, y-o-y.
M2 (narrow) "money" supply rose $21.3bn last week to a record $15.530 TN. "Narrow money" surged $1.085 TN, or 7.5%, over the past year. For the week, Currency dipped $1.3bn. Total Checkable Deposits fell $25.3bn, while Savings Deposits jumped $48.7bn. Small Time Deposits dipped $1.2bn. Retail Money Funds added $2.3bn.
Total money market fund assets were little changed at $3.634 TN, with institutional money fund assets slipping $4.1bn to $2.256 TN. Total money funds jumped $555bn y-o-y, or 18.0%.
Total Commercial Paper gained $5.3bn to $1.129 TN. CP was up $58bn, or 5.4% year-over-year.
For the week, the U.S. dollar index declined 1.1% to 98.132 (up 1.7% y-t-d). For the week on the upside, the Japanese yen increased 3.5%, the euro 1.7%, the Swiss franc 1.4%, the Swedish krona 1.2%, and the Singapore dollar 0.3%. For the week on the downside, the South African rand declined 4.2%, the Mexican peso 3.8%, the Brazilian real 1.9%, the Australian dollar 1.7%, the New Zealand dollar 1.6%, the Canadian dollar 1.4%, the Norwegian krone 1.2%, the British pound 1.1% and the South Korean won 0.4%. The Chinese renminbi increased 0.51% versus the dollar this week (down 0.41% y-t-d).
February 26 – Bloomberg (Justina Vasquez): “Goldman Sachs… boosted its gold forecast to $1,800 an ounce as the coronavirus, depressed real rates and increased focus on the U.S. election continue to drive demand for the metal as a haven. The bank raised its 12-month projection by $200, and said ‘in the event that the virus effect spreads to Q2, we could see gold top $1800/oz already on a 3-month basis.’”
The Bloomberg Commodities Index sank 6.9% (down 12.2% y-t-d). Spot Gold declined 3.5% to $1,586 (up 4.4%). Silver sank 11.6% to $16.457 (up 8.2%). WTI crude collapsed $8.70 to $44.76 (down 27%). Gasoline dropped 10.2% (down 12%), and Natural Gas sank 11.6% (down 23%). Copper fell 2.9% (down 9%). Wheat dropped 4.9% (down 6%). Corn declined 3.3% (down 8%).
February 24 – Reuters (Hyonhee Shin, Josh Smith and Jane Chung): “South Korean health authorities aim to test more than 200,000 members of a church at the center of a surge of new coronavirus cases as President Moon Jae-in said… the situation was ‘very grave’.”
February 26 – Reuters (David Stanway and Josh Smith): “The number of new coronavirus infections inside China - the source of the outbreak - was for the first time overtaken by fresh cases elsewhere on Wednesday, as U.S. markets turned negative on fears over the rapid global spread of the disease. Asia reported hundreds of new cases, Brazil confirmed Latin America’s first infection and the new disease - COVID-19 - also hit Pakistan, Greece and Algeria. Global food conglomerate Nestle suspended all business travel until March 15.”
February 24 – Financial Times (Song Jung-a): “South Korea has placed more than 7,000 soldiers under quarantine to prevent the coronavirus from spreading further into barracks after 11 soldiers were confirmed to have tested positive for the virus, the defence ministry said… The ministry added that about 350 soldiers were believed to have been in contact with the infected or were showing symptoms, raising fears that the number of new cases could increase sharply in barracks.”
February 25 – Bloomberg: “The U.S. Centers for Disease Control and Prevention warned Americans to prepare for a coronavirus outbreak at home that could lead to significant disruptions of daily life, though the warnings were downplayed by the White House. Congress was told that there’s shortage of masks needed for health workers if one occurs.”
February 25 – CNBC (Berkeley Lovelace Jr. and William Feuer): “The Centers for Disease Control and Prevention stepped up its call Tuesday for the public to start preparing for a possible pandemic outbreak in the U.S. of the coronavirus that’s infected more than 80,000 people and killed at least 2,700 overseas in less than two months. ‘We are asking the American public to work with us to prepare for the expectation that this could be bad,’ a top CDC officials told reporters in a conference call outlining what schools and businesses will likely need to do if the COVID-19 virus starts to spread throughout the U.S.”
February 25 – The Hill: “San Francisco Mayor London Breed (D) declared a state of emergency for the city on Tuesday amid concerns over the international coronavirus outbreak. While no coronavirus cases have been confirmed in San Francisco, ‘the global picture is changing rapidly, and we need to step-up preparedness,’ Breed said… ‘We see the virus spreading in new parts of the world every day, and we are taking the necessary steps to protect San Franciscans from harm,’ she added.”
February 26 – Wall Street Journal (Chun Han Wong): “As the coronavirus epidemic takes hold in more countries around the world, China is trying to stop the disease from being repatriated by travelers arriving from abroad. A number of Chinese municipal governments are imposing stricter health screenings on people entering China and, in some cases, even quarantine measures on those arriving from coronavirus-afflicted countries. These controls come after Beijing waged a concerted campaign urging other governments not to impose restrictions on travel to and from China, saying such measures were out of line with World Health Organization guidance.”
Market Instability Watch:
February 27 – Wall Street Journal (Gunjan Banerji): “The rapid spread of the coronavirus outside China spurred turmoil in financial markets this week. Investors say hedging activity by options traders might have made it even worse. Market volatility has roared back, smashing a streak of tranquility that helped pull major U.S. stock indexes to records just days earlier… Derivatives activity and heavy selling from funds that tend to make knee-jerk buying and selling decisions based on the level of market volatility created a perfect storm for the Wall Street selloff, analysts said.”
February 28 – Bloomberg (Alex Harris): “The three-month London interbank offered rate for dollars -- a benchmark for trillions of dollars in financial products globally -- sank 11.8 bps to 1.46275%. That’s the biggest one-day slide since December 2008 at the height of the global financial crisis. The move Friday reflects a market that’s pricing a more aggressive pace of monetary-policy easing from the U.S. central bank to cope with the economic impact of the coronavirus.”
February 26 – Bloomberg (Elena Mazneva, Ranjeetha Pakiam, and Justina Vasquez): “Even with gold at seven-year highs, there’s still room for more gains if history is anything to go by. Prices have surged this year as haven-seeking investors pour in… Assets in bullion-backed exchange-traded funds are at the highest ever and money managers are holding a near-record bullish bet. Yet gold remains a relatively small percentage of portfolios by historic standards. And as investors assess the virus threat to the world’s biggest economies, it’s worth remembering that the metal’s haven qualities are especially evident during recessionary periods.”
February 26 – Bloomberg (Hannah Benjamin, Tasos Vossos, and Molly Smith): “In the U.S., Wall Street banks recorded their third straight day without any bond offerings, a rarity outside of holiday and seasonal slowdowns. European debt bankers had their first day of 2020 without a deal on Wednesday. And bond issuance in Asia, where the virus first emerged, has slowed to a trickle. It has been a remarkable turn of events for a market where investors had been snapping up almost anything on offer amid a global dash for yield.”
February 25 – Bloomberg (Michael Gambale): “At least four U.S. investment-grade debt issuers stood down Tuesday morning as investors seek a better understanding of the market impact of the coronavirus outbreak. This is the second straight day that potential borrowers decided not to proceed. It’s not uncommon to see sales pause, however, it is unusual to see no deals on a Monday and Tuesday. Excluding the December holidays and the typical two-week summer hiatus in late August, there hasn’t been a two-day break to start the week since July 1 and July 2. Before that, the market hasn’t missed debt sales on a Monday or Tuesday since July 10, 2018, when the trade war flared following very heavy supply…”
February 26 – Bloomberg (Katherine Greifeld): “The freeze gripping international credit has spread to exchange-traded funds that track junk bonds. Investors have pulled over $4 billion from high-yield bond ETFs in the past week, after pouring about $13.4 billion into the funds in the last year… The biggest U.S. junk-bond fund -- BlackRock Inc.’s $15.2 iShares iBoxx High Yield Corporate Bond ETF, ticker HYG -- posted record outflows of nearly $1.6 billion on Tuesday.”
February 26 – Bloomberg (James Hirai and John Ainger): “Italian and Greek bonds are sliding as the coronavirus spreads in Europe, bucking a global debt rally to show the securities have returned to being considered risky. Both nations’ bonds posted the biggest weekly rise in yields this year as Italy struggled to contain the spread of the virus in its northern economic heartland. That is a turnaround from their strong showing in January, when they shrugged off virus fears to be the region’s top performers.”
February 28 – Bloomberg (David Qu and Chang Shu): “China continues to crawl back to work, but still has a long way to go to get fully back in business. The economy is running at 60-70% of its normal level, up from 50-60% a week ago, according to our latest estimates. More service-sector firms are starting to resume operations, and the government’s effort to kickstart activity more broadly has intensified… Data on passenger transportation suggest that more staff are returning to their working cities. The end of a two-week quarantine period for people who traveled over the extended Lunar New Year holiday means more workers are able to get back on the job.”
February 26 – Wall Street Journal (Lingling Wei): “Deepening economic damage from China’s coronavirus outbreak is forcing its leadership to confront an agonizing decision: when to ease quarantine restrictions that are strangling growth, even as they help contain the virus’s spread. Business executives and some local leaders are becoming more vocal about the need to streamline rules to reopen factories and get workers and supplies moving again in many parts of the country where activity remains at a standstill. But many local officials fear doing so could risk a resurgence of infections… Many privately complain that President Xi Jinping has put them in an impossible position, demanding they keep growth on track while also ensuring the virus doesn’t spread.”
February 23 – Bloomberg: “A monthly survey on the health of China’s small and medium-sized businesses plummeted to a record-low in February, highlighting the negative economic impact brought by the ongoing coronavirus outbreak. The SMEI index complied by Standard Chartered Plc economists Lan Shen and Ding Shuang fell to 40.5 this month, the lowest since the gauge was created in 2014… A sub-index evaluating ‘current performance’ dropped even more sharply to 31.3, while the reading for the outlook was better than the headline number, signaling some hope for recovery once the outbreak is contained.”
February 26 – Reuters (Brenda Goh and Yilei Sun): “Auto sales in China fell 18.7% in January, more than expected and marking the industry’s 19th consecutive month of sales decline, data from the country’s biggest auto industry association showed…”
February 25 – Bloomberg: “A range of early indicators of China’s economy in February confirm that the coronavirus outbreak has crippled production and consumption, as factories remain below capacity and transport is curtailed. Five of the eight indicators tracked by Bloomberg dropped in February from January, with two indicators of business confidence plunging to the lowest on record.”
February 27 – Bloomberg: “Chinese banks are taking extraordinary measures to avoid recognizing bad loans, seeking to shield themselves and cash-strapped borrowers from the economic fallout of the coronavirus outbreak. Some of the measures, which include rolling over loans to companies at risk of missing payment deadlines and relaxing guidelines on how to categorize overdue debt, have the explicit approval of regulators in Beijing. Some lenders are also refraining from reporting delinquencies to the country’s centralized credit-scoring system and allowing borrowers to skip interest payments for as long as six months, according to people familiar…”
February 23 – Bloomberg: “China’s debt-laden developers are facing a cash-crunch as the coronavirus outbreak brings the property market to its knees. Most builders have a cash buffer of just three months, according to the China Real Estate Chamber of Commerce, one of the nation’s largest developer associations. With lockdowns and travel restrictions entering their second month in some cities, the clock is starting to tick. ‘The property market has ground to a halt everywhere,’ said Zhang Dawei, a research director at Centaline Group in Beijing. ‘If developers can’t resume normal sales quickly, funding stress will emerge as a widespread issue in March.’”
February 23 – Bloomberg (Frederick Zhang and Gwenda Chew): “China’s junk developers’ dollar bonds have priced in a blow to sales from the coronavirus, with average yields nearing 11%. Yet larger developers -- potential white knights -- are rallying as the central bank cuts interest rates. New apartment sales dropped 90% in the first week of February due to the virus, with showrooms forced to close amid quarantine efforts. China’s policy makers have responded by cutting the benchmark loan prime rate and easing credit curbs.”
February 27 – Financial Times (Ryan McMorrow and Nian Liu): “China’s start-ups are slashing jobs, cutting pay and appealing for government bailouts after the shutdown caused by the coronavirus outbreak cut off their access to funding. The dynamic but fragile sector was already suffering from a ‘capital winter’ that began last year as a venture capital boom turned into a bust. Now many start-ups have been hit by the long pause imposed on China's economy, with most face-to-face meetings with investors put on hold because of the risk of coronavirus contagion.”
February 26 – Financial Times (Claire Jones): “Amid the border closures and flight cancellations, comes one trip that — were it not for the coronavirus — might never have happened. The money helicopter has arrived. Via the South China Morning Post: Hong Kong permanent residents aged 18 and above will each receive a cash handout of HK$10,000 (US$1,200) in a HK$120 billion (US$15bn) relief deal rolled out by the government to ease the burden on individuals and companies… Financial Secretary Paul Chan Mo-po… unveiled the payment during his budget speech…, along with a full guarantee on loans taken out by companies to pay wages and taxes. This follows similar efforts by Macau, which will offer residents shopping vouchers, and Singapore, which will give people between $100 and $300 in a one-off payment.”
February 25 – Reuters (Pak Yiu, Twinnie Siu, Sarah Wu, Anne Marie Roantree): “Hong Kong unveiled a record budget deficit…, pledging cash handouts to residents and business tax breaks to soften the blow to the recession-hit economy from often-violent protests and the coronavirus… For the 2020/21 fiscal year, Chan expected a budget deficit of 4.8% of GDP or HK$139.1 billion, a record in nominal terms. In 2003-04, when Hong Kong faced a recession caused by the Severe Acute Respiratory Syndrome, the deficit reached 5.3% of GDP…”
February 26 – Associated Press (Joe McDonald): “Factories that make the world’s smartphones, toys and other goods are struggling to reopen after a virus outbreak idled China’s economy. But even with the ruling Communist Party promising help, companies and economists say it may be months before production is back to normal. The problem is supply chains — the thousands of companies that provide components, from auto parts to zippers to microchips. China’s are famously nimble and resourceful, but they lack raw materials and workers after the most intensive anti-disease measures ever imposed closed factories, cut off most access to cities with more than 60 million people and imposed travel curbs.”
February 26 – New York Times (Li Yuan): “Exhausted medical workers with faces lined from hours of wearing goggles and surgical masks. Women with shaved heads, a gesture of devotion. Retirees who donate their life savings anonymously in government offices. Beijing is tapping its old propaganda playbook as it battles the relentless coronavirus outbreak, the biggest challenge to its legitimacy in decades. State media is filling smartphones and airwaves with images and tales of unity and sacrifice aimed at uniting the people behind Beijing’s rule. It even briefly offered up cartoon mascots named Jiangshan Jiao and Hongqi Man, characters meant to stir patriotic feelings among the young during the crisis. The problem for China’s leaders: This time, it isn’t working so well. Online, people are openly criticizing state media.”
Global Bubble Watch:
February 27 – New York Times (Keith Bradsher and Niraj Chokshi): “Some docks in China are clogged with arriving shipping containers or iron ore. Warehouses overflow with goods that cannot be exported for lack of trucks. And many factories are idle because components are not reaching them. As Beijing tries to jump-start an economy hobbled by its coronavirus epidemic, one of the biggest obstacles lies in the country’s half-paralyzed logistics industry. China has some of the world’s biggest and newest seaports and airports, but using them has become a lot harder because of roadblocks, quarantines and factory closings. Global shipping has been one of the biggest casualties. More tonnage of container ships is idled around the world now than during the global financial crisis, according to Alphaliner, a shipping data service. Daily charter rates for tankers and bulk freighters have plummeted more than 70% since early January…”
February 24 – Wall Street Journal (Mike Bird): “The rapid spread of coronavirus in South Korea is bleak news for global manufacturers. China-style industrial shutdowns look increasingly likely in a country that punches above its weight—perhaps more than any other—in global supply chains. On Sunday South Korean president Moon Jae-in raised the country’s virus alert to red after a surge in cases in the city of Daegu. A Samsung Electronics facility near the city has already closed after an employee was diagnosed with the disease. The Kospi stock index dropped nearly 4% Monday and the Korean won was down more than 1% against the U.S. dollar. South Korea is a medium-size country, but a mammoth in trade. The country’s exports are equivalent to 44% of its GDP, second only to Germany among major advanced economies.”
February 26 – Reuters (Rachit Vats): “Credit ratings agency Moody’s… cut its 2020 outlook for global auto sales, with China taking the biggest hit as the coronavirus outbreak worsens. The agency said here it expects global auto sales to fall 2.5% in 2020, more than its previous estimate of about 0.9% drop. Moody’s retained a ‘negative’ outlook on the sector and said it expects global sales to rebound only modestly in 2021 with growth of 1.5%.”
Trump Administration Watch:
February 23 – Reuters (Jan Strupczewski): “U.S. Treasury Secretary Steven Mnuchin said… central bankers will look at options for responding to the fast-spreading coronavirus as needed. Mnuchin told reporters after a meeting of finance officials from the world’s 20 largest economies that it was too early to speculate about the longer-term impact of the deadly outbreak, but more would be known in three to four weeks. ‘I’m not going to comment on monetary policy, but obviously central bankers will look at various different options as this has an impact on the economy,’ Mnuchin said.”
February 22 – Associated Press (Paul Wiseman): “American dairy farmers, distillers and drugmakers have been eager to break into India, the world’s seventh-biggest economy but a tough-to-penetrate colossus of 1.3 billion people. Looks like they’ll have to wait. Talks between the Trump administration and New Delhi, intended to forge at least a modest deal in time for President Donald Trump’s visit that begins Monday, appear to have fizzled. Barring some last-minute dramatics — always possible with the Trump White House — a U.S.-India trade pact is months away, if not longer. ‘I’m really saving the big deal for later on,’ Trump said... ‘I don’t know if it will be done before the election, but we’ll have a very big deal with India.’”
February 24 – Bloomberg (Nick Wadhams, Jennifer Jacobs, and Saleha Mohsin): “The U.S. is weighing whether to expel Chinese journalists after China kicked out three Wall Street Journal reporters, part of a push by the Trump administration to show leaders in Beijing that it will resist restrictions on Americans working in China. The administration’s options were to be discussed in a meeting of senior administration leaders at the White House on Monday led by Matt Pottinger, the deputy national security adviser who was once a Wall Street Journal reporter in Beijing, according to U.S. officials familiar with the deliberations.”
Federal Reserve Watch:
February 28 – Bloomberg (Steve Matthews): “Federal Reserve Bank of St. Louis President James Bullard said he would back interest-rate reductions if the coronavirus develops into a global pandemic, but made clear he viewed that judgment to be premature. ‘Further policy rate cuts are a possibility if a global pandemic actually develops with health effects approaching the scale of ordinary influenza, but this is not the baseline case at this time,’ Bullard, who doesn’t vote on monetary policy this year, said Friday…”
U.S. Bubble Watch:
February 26 – Reuters (Lucia Mutikani): “Sales of new U.S. single-family homes raced to a 12-1/2-year high in January… New home sales jumped 30.3% in the Midwest to their highest level since October 2007. They soared 23.5% in the West to levels last seen in July 2006 and rose 4.8% in the Northeast to more than a 1-1/2-year high… The median new house price surged 14.0% to a record $348,200 in January from a year ago. Sales last month were concentrated in the $200,000-$749,000 price range. New homes priced below $200,000, the most sought after, accounted for less than 10% of sales. There were 324,000 new homes on the market in January, up 0.3% from December. At January’s sales pace it would take 5.1 months to clear the supply of houses on the market, down from 5.5 months in December.”
February 25 – CNBC (Diana Olick): “The housing market heated up at the end of 2019, and that was reflected in growing gains in home values. In December, home prices rose 3.8% annually on the S&P CoreLogic Case-Shiller National Home Price Index. That is up from the 3.5% gain in November… The 20-city composite rose 2.9%, up from 2.5% in the previous month. Leading the list of cities with the largest gains were Phoenix, Charlotte and Tampa. Home prices in Phoenix were up 6.5% year over year, followed by Charlotte with a 5.3% increase and Tampa, where prices were 5.2% higher.”
February 24 – New York Times (Erin Griffith): “Over the past decade, technology start-ups grew so quickly that they couldn’t hire people fast enough. Now the layoffs have started coming in droves. Last month, the robot pizza start-up Zume and the car-sharing company Getaround slashed more than 500 jobs. Then the DNA testing company 23andMe, the logistics start-up Flexport, the Firefox maker Mozilla and the question-and-answer website Quora did their own cuts. ‘It feels like a reckoning is here,’ said Josh Wolfe, a venture capitalist at Lux Capital... It’s a humbling shift for an industry that long saw itself as an engine of job creation and innovation, producing the ride-hailing giant Uber, the hospitality company Airbnb and other now well-known brands that often disrupted entrenched industries.”
February 22 – CNBC (Michael Sheetz): “As the longest ever U.S. bull market continues, investors are looking for stocks that will continue to outperform — but pure speculation is pushing some stocks inexplicably higher in the past few weeks. But this phenomenon is not new, as it is characteristic of a ‘late cycle’ market, explained Peter Boockvar, chief investment officer at Bleakley Advisory Group. ‘In the history of the stock market there are always names that pop up and are the poster boys for speculation — companies that could cure cancer, take us to the Moon or Mars… For the broader market it’s reflective of risk appetite and people willing to roll the dice.’”
February 26 – Bloomberg (Patrick Clark): “Investors have checked out of the New York lodging market. No Manhattan hotels changed hands in the three months through January, according to Real Capital Analytics, as a growing supply of the properties limited owners’ ability to raise room rates. By comparison, about $1 billion worth of hotels traded in January 2019 alone. Excluding Manhattan, transaction volume declined about 25% nationwide last month, reflecting a growing consensus that the hospitality business has run out of easy growth.”
Fixed-Income Bubble Watch:
February 21 – Financial Times (Joe Rennison): “When S&P withdrew General Motors’ top-quality credit rating in May 2005, sending $41.5bn of debt crashing into junk territory and creating the largest ever ‘fallen angel’, it triggered the biggest sell-off in corporate bond markets since the dotcom bust. Along with the simultaneous downgrade of Ford, which remains the second-largest fallen angel after its $40.8bn of debt was docked, the bedrock of corporate America shook. ‘It is not just they that have a problem,’ Gary Jenkins, a credit strategist at Deutsche Bank, said at the time. ‘We all have a problem.’”
Central Bank Watch:
February 23 – Reuters (Leika Kihara): “The Bank of Japan will be fully prepared to take necessary action to mitigate the impact of the coronavirus on the world’s third-largest economy, its Governor Haruhiko Kuroda said… ‘If the outbreak persists, it could have a big impact on the Japanese and global economies,’ Kuroda told a news conference…”
February 28 – Reuters (Manoj Kumar): “India’s economy expanded by 4.7% in the December quarter compared with the same period a year earlier, the slowest pace in more than six years, and analysts see the global impact of the coronavirus further stifling growth in Asia’s third-largest economy.”
February 28 – Reuters (Ami Miyazaki and Karolos Grohmann): “Tokyo has no Plan B for this year’s Summer Olympics despite alarm over the spread of the coronavirus in Japan and elsewhere with under five months before the event, a senior official said on Friday. ‘There will not be one bit of change in holding the Games as planned,’ Katsura Enyo, deputy director general of the Tokyo 2020 Preparation Bureau at the city government, told Reuters.”
February 28 – Bloomberg (Isabel Reynolds, Shiho Takezawa and Emi Nobuhiro): “Japan is becoming a center of concern as the coronavirus spreads globally, with the country’s official infection tally suspected to be the tip of the iceberg of a much wider outbreak. As of Friday, Japan had about 200 confirmed cases…, excluding those that erupted on the Diamond Princess… In neighboring South Korea, however, the number of infections has swelled rapidly, topping 2,000 after the government tested tens of thousands of people to get a clearer picture of the deadly outbreak. That divergence has experts -- and members of the public -- concerned about Japan’s approach to diagnosis. ‘For every one who tests positive there are probably hundreds with mild symptoms,’ said Masahiro Kami, chair of the Medical Governance Research Institute… ‘Those with mild symptoms are not being tested.’”
February 24 – Financial Times (Miles Johnson and Valentina Romei): “Italy is facing a rising likelihood of a technical recession in the first quarter of this year as the rapidly worsening coronavirus outbreak threatens to further damage an economy that was already shrinking. The Italian economy contracted 0.3% quarter on quarter in the final three months of 2019, the steepest decline in six years, and the global economic impact of coronavirus could drive a further contraction in the succeeding quarter… ‘The first-quarter hit to China from the coronavirus will probably drive further weakness in Italy’s manufacturing-sensitive economy,’ said Nadia Gharbi, senior economist at Pictet Wealth Management.”
February 26 – Bloomberg (Nikos Chrysoloras and Viktoria Dendrinou): “Italy is living on the edge, the European Commission warned… Risks to its ability to refinance its mountain of debt in the medium to long term are ‘high,’ the EU’s executive arm said… Even in the short term, Italy is exposed to market swings, according to an assessment of macroeconomic imbalances across the bloc’s members. The warnings are not new, and Rome has traditionally resisted instructions from Brussels to rein in its budget deficit. But it’s now at risk of a recession as the spread of the deadly coronavirus clouds an outlook that was already far from positive… Italy’s debt ratio is close to 140% of GDP, the highest in the euro area after Greece.”
February 25 – Financial Times (Miles Johnson, Myles McCormick and Daniel Dombey): “Italy has warned that the EU should offer flexibility on its budget targets should the country’s sudden coronavirus outbreak in its industrialised northern regions have a prolonged impact on an economy already teetering on edge of a recession.”
February 25 – Reuters (Madeline Chambers and Michael Nienaber): “Shrinking exports held back German economic activity in the fourth quarter of last year…, confirming that Europe’s largest economy was stagnating even before the coronavirus outbreak began… Exports fell by 0.2% in the fourth quarter from the third, which meant that net trade took off 0.6 percentage points from gross domestic product growth.”
February 23 – Reuters (Madeline Chambers): “Voters handed German Chancellor Angela Merkel’s conservatives their worst-ever result in Hamburg on Sunday, punishing them for flirting with the far-right in an eastern state and descending into a messy leadership battle.”
Leveraged Speculation Watch:
February 27 – Financial Times (Joe Rennison): “When prices rise in a near-straight line for more than a decade, the clear temptation is simply to bet on them moving higher still. The market fallout from the coronavirus is now exposing investors who overcommitted themselves to these long positions. US and European stock indices tumbled into correction territory on Thursday, down 10% from intraday highs reached earlier in the month, as investors took fright at the growing international reach of the coronavirus outbreak. The falls provide a stark reminder to investors, anaesthetised by years of central bank stimulus, that markets can fall as well as rise. Hedge funds are among the big losers. Some equity-focused funds, frustrated in their attempts to pick falling stocks in a long bull market, have been running sizeable bets on rising prices in recent months. On Monday, they suffered their biggest daily losses since December 2018, according to a Goldman Sachs client note…”
February 27 – BBC: “At least 29 Turkish soldiers have been killed in an air strike by Syrian ‘regime forces’ in north-western Syria, a senior Turkish official has said. More were hurt in Idlib province, said Rahmi Dogan, the governor of Turkey's Hatay province. Other reports put the death toll higher. Turkey is now retaliating against Syrian troops government targets. Syrian forces supported by Russia are trying to retake Idlib from rebels who are backed by Turkish soldiers.”
February 25 – Reuters (Ben Blanchard): “Taiwan should continue to show goodwill to China during the outbreak of the new coronavirus and not give Beijing an excuse to attack the island as a way of relieving ‘internal pressure’, advisers to Taiwan’s China-policy making body said. Taiwan… has repeatedly lambasted Beijing over the virus, worsening already poor ties, even as President Tsai Ing-wen and other officials have offered to help China fight the outbreak. Much of the anger has been focused on China blocking Taiwan’s participation at the World Health Organization…”
February 25 – Wall Street Journal (Feliz Solomon): “Last June, the Myanmar subsidiary of telecom Telenor Group received an urgent government order it was told it must not disclose. Turn off the internet in nine townships. Hans Martin, a senior executive at the Norwegian company, saw red flags. He said Myanmar’s justification—that people were using the internet to ‘coordinate illegal activities’—was vague, and no end-date was given. The telecom said it had little legal basis to refuse the order, and complied. Nearly 250 days later, western Myanmar has become the site of one of the longest internet shutdowns documented anywhere in the world. From autocratic Iran to democratic India, governments are cutting people off from the global web with growing frequency and little scrutiny. Parts or all of the internet were shut down at least 213 times in 33 countries last year…”