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The King of EM

June 14, 2013

Global de-risking and de-leveraging have gained important momentum.

No respectable “flow of funds” analysis would be complete without examining “Rest of World” (ROW) data. I’ll try to make amends for a shortcoming of last week’s CBB.

Well, let’s take a brief look at Q1 2013 and then dive into the bigger picture. ROW gross holdings of U.S. assets declined $70bn during Q1 to $20.091 TN. But with U.S. ROW liabilities (foreign borrowing in U.S. markets) down $267bn, net asset holdings jumped nominal $197bn during the quarter to a record $10.034 TN.

On a seasonally-adjusted and annualized (SAAR) basis, ROW holdings of U.S. Credit Market Instruments jumped $682bn during Q1 (to $9.82 TN). Breaking that down, almost the entire increase was in ROW Treasury holdings that rose SAAR $655bn (to $5.701 TN), up from Q4’s $382bn increase. Security Repos jumped an unusually large SAAR $292bn. Corporate Bond holdings increased $162bn (to $2.619 TN), up from Q4’s $76bn. Agency/MBS holdings declined SAAR $166bn (to $1.087 TN) during Q1 (Q4 up $47bn). Net Interbank Assets jumped $530bn (to $340bn), almost fully reversing the Q4 decline. Other Misc. Assets dropped SAAR $330bn (to $1.157 TN).

ROW (gross) holdings of U.S. assets began the nineties at $1.9 TN. Expanding Current Account Deficits and “King Dollar” speculative flow dynamics were instrumental in the surge of ROW holdings to $5.78 TN by the end of the decade. Then during the four Bubble years 2004-2007, ROW holdings surged another $7.19 TN, or 81%. ROW holdings actually contracted $798bn during 2008 and then increased only $567bn during 2009. ROW holdings began expanding rapidly again in 2010, with annual increases of $1.60 TN, $1.40 TN and $1.36 TN. Gross holdings ended Q1 2013 above $20 TN, a more than ten-fold jump since 1990.

Since the end of 2007, ROW Treasury holdings have jumped $3.325 TN, or 140%, to $5.70 TN, in the process accounting for almost half of total Treasury issuance. During this period, the U.S. has run Current Account Deficits of about $2.4 TN. There have also been huge flows (capital and financial investments, along with untold speculative flows), especially to the “emerging” markets. The U.S. Credit system has literally flooded the world with dollar financial balances (“liquidity”). Developing central banks absorbed much of this liquidity, in the process recycling dollar balances back into U.S. debt markets while spurring huge domestic Credit expansions throughout the developing world.

Let’s transition from “flow of funds” data to today’s extraordinary market backdrop. “Emerging” markets (EM) have recently come under significant stress – currencies, bonds and equities. Importantly, some key EM economies have begun to suffer meaningful capital outflows and associated market instability. I have posited that the “developing” world in general today suffers from years of Credit Bubble excess. It has been central to my thesis that many of these economies are now suffering from rapid economic slowdowns in the face of ongoing rampant Credit excess. The associated financial and economic vulnerability created acute susceptibility to an abrupt and problematic reversal of “hot money” flows. This dynamic is now gathering momentum.

For years on a weekly basis, I’ve been noting the size and growth of International Reserve Assets (that exclude gold). From my perspective, this data series singularly best illustrates global Bubble dynamics. Back in an April 2009 CBB, I proposed that unprecedented (post-mortgage finance Bubble) U.S. and global fiscal and monetary stimulus had likely unleashed a “global government finance Bubble.” At that point, global International Reserve Assets totaled $6.663 TN (International Reserve data accumulated by Bloomberg). In just over four years, International Reserve Assets have ballooned $4.466 TN, or 67%, to $11.129 TN. Total BRICS (Brazil, Russia, India, China, and South Africa) International Reserves swelled $1.784 TN in just over four years to $2.766 TN.

Especially pertinent to current unstable global markets, much of this increase has occurred in a handful of booming “developing” economies, many of which have been at the center of heightened market instability. Brazil's International Reserves have doubled from about $190bn to $375bn over the past four years, and Mexico’s Reserves have grown from about $80bn to $168bn. South Korean reserves have jumped from $212bn to $328bn - and Indonesia from $57bn to $105bn. Russian reserves increased from $368bn to $480bn - and Turkey from $64bn to $109bn. South African reserves rose from $30bn to $41bn. It’s worth noting that Philippines reserves doubled to $72bn; Indonesia’s almost doubled to $105bn; and Thailand’s jumped about 50% to $166bn.

While many countries’ reserve expansions have been phenomenal, nothing is comparable to China – The King of EM. Chinese International Reserves surpassed $2.0 TN for the first time in April 2009. In just over four years, China’s reserves inflated $1.434 TN, or 71%, to $3.443 TN. Chinese reserves started the year 2000 at $150bn.

It’s fair to note that the conventional view pays no attention to the historic expansion of reserves and central bank balance sheets. From the perspective of the bullish U.S. investor, what’s happening in Thailand, the Philippines, Indonesia, Brazil or the overall currency market is largely irrelative to strong U.S. fundamentals. From my analytical framework, these reserves are at the heart of the unprecedented global monetary inflation and resulting global government finance Bubble. Most analysts believe these reserves will just keep expanding – with little attention paid to the potential consequences of a sharp reversal. I fear that an abrupt reversal of “hot money” flows – and resulting de-leveraging - from the “developing” economies has the potential to reignite global crisis.

While there are of course differences, there are important similarities between the “developing” market Bubble and U.S. subprime. Government market interventions played integral roles in both historic booms. Both involved the issuance of gigantic quantities of increasingly risky Credits - marketable debt mispriced by the marketplace during the boom period. And, in both cases, as long as this suspect debt was growing rapidly, fundamentals appeared strong and supportive of inflated debt prices (and continued strong issuance). In both cases, I would argue, systemic risk expanded exponentially late in the boom with rapidly growing issuance of increasingly risky Credit – in an environment of acute economic maladjustment and compounding financial imbalances.

Even with the benefit of hindsight, it is not easy to explain exactly why the subprime Bubble began to lose air when it did. Today, it’s not easy to pinpoint exactly why the “developing” Bubble has begun to falter. But in both Bubbles, leverage and speculation played integral roles. From my perspective, there reaches a point of acute excess where the most sophisticated market operators recognize trouble on the horizon and begin to reverse their leveraged positions (and/or begin building speculative bearish bets) and exit the Bubble. This move by the sophisticated speculators works to change the market liquidity backdrop at the margin, leading to higher financing costs and waning Credit Availability.

Importantly, it is the nature of major Bubbles to become acutely dependent upon ongoing cheap finance and rapid Credit expansion. As such, the marginally higher costs and tightened finance engendered by the reversal of speculative activities begins to weigh on asset prices, financial flows and general Credit Availability. This then weakens the fundamental backdrop – one that had only recently appeared so promising in the midst of abundantly flowing Credit and “investor” euphoria – which works to accelerate pressure on asset prices, waning confidence, the exit of speculators and investors from the sector, and the tightening of overall financial conditions.

Few in the spring of 2007 appreciated the ramifications for the market reversal in subprime finance. Very few recognized the significance of that initial crack in the mortgage finance Bubble. I believe the more sophisticated hedge fund and global market operators are beginning to appreciate the importance of what is unfolding in the global marketplace. On the margin, de-risking and de-leveraging dynamics have commenced with an immediate impact on marketplace liquidity. It is not clear that central bank liquidity can stabilize the situation. Surely, the Bank of Japan has exacerbated instability.

Of course, Federal Reserve QE remains a very important variable. I just don’t believe “tapering” is the real story. Rather, “tapering” is more the convenient straw man. “The market has overreacted to the prospect for tapering.” “The Fed won’t taper if the markets are weak.” Or the headline from Jon Hilsenrath’s timely Thursday afternoon Wall Street Journal article: “Fed Likely to Push Back on Market Expectations of Rate Increase.” As long as the market stays focused on the Fed and their proclivity to give the markets what they want, then the raging bull market can remain on track – the bulls believe.

Meanwhile, the “developing” market Bubble continues to unwind. And leverage comes out the commodities, currency “carry trades” and developing stocks and bonds. And as capital flight becomes a more serious issue, the marketplace must ponder the consequences not only of what a faltering Bubble means for scores of markets and economies, there is as well the issue of developing central banks having to sell from their trove of Treasuries and bunds and such to finance a surge in outflows (“hot” and otherwise). There’s even this new dynamic where Treasury yields rise on days of global currency and equity market tumult. It’s been awhile…

I suspect that the global jump in yields (and CDS and risk premiums) has more to do with de-leveraging than it does with tapering worries. This dynamic has caught many by surprise. The speculators anticipated cleverly exiting their leveraged MBS and other trades based on their expectations for Fed policy. Now, there’s a tremendous amount of unanticipated market uncertainty.

Japanese policymakers have really mucked things up. The Nikkei sank 6.5% Thursday and was down 1.5% for the week. Perhaps it’s a little early to pronounce the BOJ’s “shock and awe” monetary experiment a failure. The yen rallied 3.5% this week against the dollar. Against the Philippine peso it was up 4.5%, versus the South Korean won 4.1%, the Indian ruppee 4.3%, the Malaysian ringgit 4.0%, the Indonesian rupiah 3.2%, the Argentine peso 3.9% and the Brazilian real 4.2%. Indonesia raised rates to support its weak currency. The yen “carry trade” (sell yen and use proceeds to buy higher-yielding instruments globally) is doling out painful losses – forcing the unwind of leveraged trades across many markets. I wouldn’t be surprised if the yen short is the largest short position in modern history. The yen bears are now running for cover – causing all kinds of havoc in the currencies and securities markets.

“Emerging” Asian markets are in the middle of an unfolding financial storm. Friday’s 2.1% gain cut the Philippine equities loss for the week to 9.2%. Even with Friday’s 4.4% recovery, the Thailand stock exchange ended the week down 3.4%. South Korea’s Kospi dropped another 1.8%.

Latin America is as well caught in troubling dynamics. Brazil’s currency (real) trade to a four-year low against the dollar this week – despite currency interventions and the removal of taxes on financial flows and currency derivatives. Brazilian equities were hit for 4.4% this week, increasing y-t-d losses to 19.1%. Mexican stocks dropped 2.4%, boosting y-t-d losses to 10.2%.

The Shanghai composite dropped 2.2% in a holiday-shortened week. China pegs its currency to the U.S. dollar, so we can’t look to the performance of the renminbi for much of an indication of flows or mounting financial market stress.

I have posited that China is in the midst of an historic Credit Bubble. I have over the years tried to explain how interrelated their Bubble is to ours. Our mismanagement of the world’s reserve currency led to 20 years of huge Current Account Deficits. A significant portion of the Trillions of associated IOU’s have made it onto the balance sheet of the People’s Bank of China, especially over recent years. And no Credit system and economy has gone to greater excess during the post-2008 global reflation. It was the “fledgling” Credit Bubble spurred to “terminal phase” excess.

Over the coming weeks and months, China will be an analytical focal point. If the “developing” economy Bubble has passed an important inflection point, then China is vulnerable. If “hot money” is leaving EM, then China should be susceptible. And, let there be no doubt, when China finally succumbs global economic prospects really dim – and prospects for some fellow EM economies turn downright dismal. Recall how the tightening of subprime finance gravitated to “Alt-A” and then worked its way to the “conventional” core. And when housing in general began to falter the bottom fell out of subprime.

This week provided a bevy of notable China-related headlines: From the Financial Times: “China Debt Auction Failure Raises Liquidity Fears;” “Fresh Data Highlight China’s Sluggish Growth.” From Bloomberg: “China Debt Sale Fails for First Time in 23 Months on Cash Crunch;” “China Local Debt Audit ‘Credit Negative,’ Moody’s Says;” “China’s Leaders Face Test of Growth Resolve After May Slowdown;” “China Export Growth Plummets Amid Fake-Shipment Crackdown.” From Reuters: “Fitch Warns on Risks from Shadow Banking in China;” “China Estimates Fake Trade Invoicing at $75 billion in Jan-April;” “China State Auditor Warns Over Local Government Debt Levels.”

The price of Chinese sovereign Credit default swap (CDS) “insurance” jumped from 92 to 113 in three sessions, before dropping back down to 98 on Friday. Chinese interbank lending rates have recently spiked higher – and there were even reports of several borrowers forced to pay up for increasingly scarce liquidity. There were debt auctions that did not go smoothly. The currency forwards market is showing some atypical downward pressure on the renminbi.

Many believe this newfound tightness in Chinese money markets can be easily resolved by liquidity injections from the People’s Bank of China. And perhaps Chinese monetary and economic managers still have things under control. If so, the same clearly cannot be said for many of their fellow “developing” policymakers. Capital flight is always extremely difficult to manage. I worry that the world has never faced the possibility for such destabilizing flows and speculative de-leveraging. To be sure, global markets have never been as dependent upon the power of central bankers. And in my mental tallies of risk and complacency, I never envisaged they could so elevate in tandem.

For the Week:


The S&P500 declined 1.0% (up 14.1% y-t-d), and the Dow fell 1.2% (up 15.0%). The Banks dropped 2.3% (up 17.3%), and the Broker/Dealers fell 1.8% (up 31.4%). The Morgan Stanley Consumer index slipped 0.1% (up 20.1%), and the Utilities dipped 0.2% (up 7.3). The Morgan Stanley Cyclicals were about unchanged (up 15.9%), while the Transports lost 0.5% (up 18.9%). The S&P 400 MidCaps declined 0.8% (up 14.9%), and the small cap Russell 2000 fell 0.6% (up 15.5%). The Nasdaq100 dropped 1.6% (up 10.6%), and the Morgan Stanley High Tech index fell 1.2% (up 10.1%). The Semiconductors declined 1.3% (up 21.2%). The InteractiveWeek Internet index dropped 1.3% (up 15.7%). The Biotechs sank 2.4% (up 23.3%). Although bullion was up $8, the HUI gold index closed the week down 3.1% (down 41.2%).

One-month Treasury bill rates ended the week at 3 bps and three-month bill rates ended at 4 bps. Two-year government yields were down 3 bps to 0.27%. Five-year T-note yields ended the week down 6.5 bps to 1.03%. Ten-year yields declined 4 bps to 2.13%. Long bond yields slipped 3 bps to 3.31%. Benchmark Fannie MBS yields dropped 8 bps to 2.94%. The spread between benchmark MBS and 10-year Treasury yields narrowed 4 to 81 bps. The implied yield on December 2014 eurodollar futures fell 8.5 bps to 0.57%. The two-year dollar swap spread declined 2 to 16 bps, and the 10-year swap spread declined 2 to 18 bps. Corporate bond spreads widened further. An index of investment grade bond risk rose 3 to 84 bps. An index of junk bond risk jumped 8 to 412 bps. An index of emerging market debt risk increased 6 to 319 bps.

Debt issuance remained relatively slow.  Investment grade issuers included Pacific Gas & Electric $750 million, Liberty Mutual $600 million, Duke Energy $500 million, Ascension Health $425 million, South Carolina E&G $400 million, Baltimore Gas & Electric $300 million, Zions Bancorp $300 million, EPR Properties $275 million, Caterpillar $250 million, Wisconsin Electric Power $250 million and Rice University $114 million.

Junk bond funds saw further large outflows of $3.28bn (from Lipper). Junk issuers included Quicksilver Resources $550 million, Sanchez Energy $400 million, Summit Midstream Partners $300 million, Expo Event Transco $200 million and HudBay Minerals $150 million.

Convertible debt issuers included Allscripts Healthcare $300 million, Cornerstone Ondemand $253 million and Take-Two Interactive $250 million.

The short list of international dollar debt issuers included African Development Bank $1.7bn and Carry Callebaut Services $400 million.

Italian 10-yr yields jumped 9 bps to 4.28% (down 23bps y-t-d). Spain's 10-year yields increased 4 bps to 4.57% (down 70bps). German bund yields were down 3 bps to 1.51% (up 19bps), and French yields declined 4 bps to 2.08% (up 8bps). The French to German 10-year bond spread narrowed a basis point to 57 bps. Ten-year Portuguese yields rose 15 bps to 6.19% (down 56bps). Greek 10-year note yields jumped 49 bps to 9.70% (down 77bps). U.K. 10-year gilt yields dipped one basis point to 2.06% (up 24bps).

Japan's unstable Nikkei equities index fell 1.5% (up 22.0% y-t-d). Japanese 10-year "JGB" yields ended another volatile week down 3 bps to 0.81% (up 3bps). The German DAX equities index declined 1.5% for the week (up 6.8%). Spain's IBEX 35 equities index dropped 2.4% (down 1.2%). Italy's FTSE MIB sank 3.2% (down 0.7%). Emerging markets remained under pressure. Brazil's Bovespa index was hit for 4.4% (down 19.1%), and Mexico's Bolsa dropped 2.4% (down 10.2%). South Korea's Kospi index fell 1.8% (down 5.4%). India’s Sensex equities index declined 1.3% (down 1.3%). China’s Shanghai Exchange fell 2.2% (down 4.7%).

Freddie Mac 30-year fixed mortgage rates jumped 7 bps to 3.98% (14-month high), with a six-week gain of  63bps (up 27bps y-o-y). Fifteen-year fixed rates were up 7 bps to 3.10% (up 12bps). One-year ARM rates were unchanged at 2.58% (down 20bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up 4 bps to 4.35% (up 4bps).

Federal Reserve Credit jumped $14.2bn to a record $3.364 TN. Fed Credit expanded $578bn during the past 36 weeks. Over the past year, Fed Credit surged $528bn, or 18.6%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $722bn y-o-y, or 6.9%, to a record $11.129 TN. Over two years, reserves were $1.266 TN higher, for 13% growth. 

M2 (narrow) "money" supply jumped $21.5bn to $10.579 TN. "Narrow money" expanded 7.0% ($688bn) over the past year. For the week, Currency increased $1.2bn. Demand and Checkable Deposits jumped $83.7bn, while Savings Deposits dropped $63.4bn. Small Denominated Deposits declined $2.7bn. Retail Money Funds rose $2.9bn.

Money market fund assets increased $1.0bn to $2.612 TN. Money Fund assets were up $57bn from a year ago, or 2.2%.

Total Commercial Paper outstanding increased $3.9bn this week to $1.035 TN. CP has declined $31bn y-t-d, while having expanded $27bn, or 2.7%, over the past year.

Currency and 'Currency War' Watch:

The U.S. dollar index declined 1.2% to 80.67 (up 1.1% y-t-d). For the week on the upside, the Japanese yen increased 3.5%, the New Zealand dollar 2.0%, the Swedish krona 1.9%, Swiss franc 1.6%, the euro 1.0%, the British pound 1.0%, the Danish krone 0.9%, the Norwegian krone 0.9%, the Australian dollar 0.8%, the Mexican peso 0.4%, the Canadian dollar 0.3% and the South African rand 0.2%. For the week on the downside, the Brazilian real declined 0.9%, the South Korean won 0.8%, the Taiwanese dollar 0.3% and the Singapore dollar 0.2%.

Commodities Watch:

The CRB index declined 0.5% this week (down 3.0% y-t-d). The Goldman Sachs Commodities Index was unchanged (down 2.4%). Spot Gold increased 0.6% to $1,391 (down 17%). Silver gained 1.0% to $21.95 (down 27%). July Crude jumped $1.82 to $97.85 (up 7%). July Gasoline added 0.9% (up 5%), while July Natural Gas declined 2.5% (up 11%). July Copper fell 2.0% (down 12%). July Wheat dropped 2.2% (down 13%), and July Corn declined 1.7% (down 6%).

U.S. Bubble Economy Watch:

June 14 – Bloomberg (Brian Chappatta, Chris Christoff and Mark Niquette): “Detroit, on the brink of bankruptcy with $17 billion in liabilities, will suspend payments on $2bn of unsecured debt, beginning with an installment due today… With today’s missed $39.7 million payment on obligations issued to fund pensions, Detroit becomes the most populous U.S. city to default since Cleveland in 1978. Unsecured creditors may receive as much as 10 cents on the dollar under a deal Orr offered today to more than 100 creditors and union officials… Detroit also would spend $1.25bn over a decade to improve services, eliminate blight and create a more livable community.”

June 13 – Los Angeles Times (Lee Romney): “What’s eight feet wide and 12 feet deep and sells for $82,000? As it turns out, a parking spot near San Francisco’s AT&T Park. The enclosed parking spot in a condo building in the South Park neighborhood is creating buzz in a town where the housing market is so hot most things fail to startle… The spot was sold last week by Sean Sullivan, an agent with Climb Real Estate who had some experience: He sold another one in the same building for $95,000 during San Francisco’s last boom.”

Federal Reserve Watch:

June 14 – Bloomberg (Sandrine Rastello): “The International Monetary Fund sees the Federal Reserve maintaining large monthly bond purchases until at least the end of this year and urged the central bank to carefully manage its exit plan to avoid disrupting financial markets. Unwinding a policy of record-low interest rates and $85bn in monthly bond-buying known as quantitative easing will be challenging even though the Fed has ‘a range of tools’ to withdraw the stimulus, the IMF staff wrote… ‘Effective communication on the exit strategy and a careful calibration of its timing will be critical for reducing the risk of abrupt and sustained moves in long-term interest rates and excessive interest-rate volatility as the exit nears,’ according to the… released… Such moves ‘could have adverse global implications, including a reversal of capital flows to emerging markets and higher international financial market volatility,’ the staff said in the report.”

Global Bubble Watch:

June 13 – Bloomberg (Shamim Adam): “Emerging markets from Brazil to India took steps to stem an outflow of capital as concern mounts that developed nations are approaching the beginning of the end of an era pumping unprecedented liquidity. India’s central bank sold dollars the past two days to stem the rupee’s slide…, while Indonesia unexpectedly raised its benchmark interest rate… Brazil said… it would unwind some of the capital controls it began putting in place in 2010 -- when the Federal Reserve was embarking on its second round of quantitative easing, known as QE2. Thailand said it sold dollars in the past week.”

June 13 – Bloomberg (Rachel Evans and Paulina Duran): “The cost of insuring Asian corporate and sovereign bonds against non-payment jumped to the highest in nine months after the World Bank cut forecasts for global economic growth. The Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan surged 12 bps to 152.5 bps… The World Bank… cut its forecast for 2013 global growth to 2.2% from a January prediction of 2.4%. Borrowing costs for Asian issuers of dollar notes are surging for a second month as investor risk-tolerance wanes…”

June 12 – Bloomberg (Ben Bain and Boris Korby): “Mexico’s 100-year bonds, the world’s longest-dated government debt, are plummeting to an almost two-year low… The $2.7 billion of notes due in 2110 have plunged 18.35 cents in the past month to 98.93 cents … lifting yields by 0.92 percentage point. The notes have lost 15% in that span, the most among sovereign dollar-denominated bonds in Latin America… Mexican corporate debt… fell 5.5%, versus a 4.1% drop in emerging markets, Bank of America Corp. data show.”

June 12 – Bloomberg (Liam Vaughan, Gavin Finch and Ambereen Choudhury): “Traders at some of the world’s biggest banks manipulated benchmark foreign-exchange rates used to set the value of trillions of dollars of investments, according to five dealers with knowledge of the practice. Employees have been front-running client orders and rigging WM/Reuters rates by pushing through trades before and during the 60-second windows when the benchmarks are set, said the current and former traders… Dealers colluded with counterparts to boost chances of moving the rates, said two of the people, who worked in the industry for a total of more than 20 years. The behavior occurred daily in the spot foreign-exchange market and has been going on for at least a decade, affecting the value of funds and derivatives, the two traders said.”

June 12 – Bloomberg (Michelle Kaske): “Mutual-fund investors pulling the most funds since December from the $3.7 trillion municipal market are creating an opportunity for buyers of individual local bonds as tax-exempt yields reach a 15-month high. Municipal funds saw $1.5 billion of withdrawals last week, the largest outflow of 2013…”

June 11 – Financial Times (Stephen Foley and Michael Mackenzie): “Investors are nursing losses of up to 9% on Apple’s record-breaking $17bn bond offering, less than six weeks after the securities landed in their portfolios. The technology giant tapped the white-hot bond market for the largest debt fundraising to date on April 30, but a sharp turn in interest rates has caused a sell-off in corporate bonds and wiped hundreds of millions of dollars off the value of the offering.”

Global Credit Watch: 

June 12 – Reuters (Sujata Rao): “The $1 trillion market in emerging corporate bonds could be headed for a surge in defaults if company earnings in swiftly depreciating roubles or pesos fail to keep pace with dollar-based debt repayments. As the U.S. Federal Reserve considers when to turn off its printing presses, emerging currencies have crashed to multi-year lows against the dollar. That rout is a big risk for corporate debt, which has gone from being a sideshow of the sovereign bond market to an asset class that surpasses U.S. junk debt in size.”

June 14 – Wall Street Journal (Katy Burne): “Funds dedicated to low or ‘junk’ rated U.S. company debt saw $3.28bn of withdrawals in the week ended Wednesday, according to… Lipper, as investors reacted to uncertainty about the interest rate outlook. The big outflow came on the heels of record redemptions the data provider reported last week to the tune of $4.63bn. Also Thursday, Yankee Candle Company said it had canceled a previously announced plan to offer $450 million of junk-rated senior notes… The consecutive drop underscores how investors are yanking money out of bond funds out of fear that prices will fall on expectations that the Federal Reserve may begin winding down its monetary stimulus programs… About $935 million came out of junk exchange-traded funds in the latest week…”

June 11 – Bloomberg (Cecile Vannucci and Nikolaj Gammeltoft): “The cost of hedging against swings in a security tracking U.S. high-yield debt rose a three-year high relative to equities on concern the bond market will extend losses should the Federal Reserve begin curtailing its stimulus.”

June 11 – Bloomberg (Alex Cuadros): “Brazilian billionaire Eike Batista sold shares of his flagship oil producer OGX Petroleo & Gas Participacoes SA for the first time, after plowing almost $1 billion of his own cash into the company… ‘For him to sell at this level, he must really need the cash,’ said Fabio Cardoso, a partner at… Adinvest Consultoria… ‘It’s not a good sign.’”

June 11 – Bloomberg (Brendan Case): “Bonds sold by Empresas ICA SAB are posting a record decline as a failed asset sale deepens concern that Mexico’s largest construction company may struggle to repay almost $1 billion of debt due in the next year. ICA’s $500 million in bonds maturing in 2021 have tumbled 16.6 cents in the past month… and reached a record low 83 cents on the dollar June 5, five days after the company said it canceled the sale of housing units to homebuilder Servicios Corporativos Javer SAPI.”

China Bubble Watch: 

June 10 – Bloomberg: “China’s new leaders face a test of their resolve to forgo short-term stimulus for slower, more- sustainable growth after May trade, inflation and lending data trailed estimates, signaling weaker global and domestic demand. Industrial production rose a less-than-forecast 9.2% from a year earlier and factory-gate prices fell for a 15th month… Export gains were at a 10-month low and imports dropped after a crackdown on fake trade invoices while fixed-asset investment growth moderated and new yuan loans declined.”

June 14 – Bloomberg: “China’s one-year interest-rate swap climbed to a 20-month high on speculation banks are hoarding funds to meet quarter-end capital requirements, prolonging a cash shortage… The one-year swap rate has increased every day since May 28, barring the three-day holiday at the start of the week. ‘We are still bearish on the liquidity outlook because banks need to set aside cash for the mid-year accounting period and we will head into another tax payment season in July,’ said Pin Ru Tan… strategist at HSBC… in Hong Kong.”

June 14 – Bloomberg (Sungwoo Park): “China’s Finance Ministry failed to sell all of the debt offered at an auction for the first time in 23 months owing to a cash squeeze that threatens to exacerbate a slowdown in the world’s second-largest economy. The ministry sold 9.53 billion yuan ($1.55bn) of 273- day bills, less than the 15 billion yuan target… Agricultural Development Bank of China Co. raised 11.51 billion yuan in a sale of six-month bills last week, less than its 20 billion yuan goal. Banks are hoarding money to meet quarter-end capital requirements at the same time as capital inflows are easing amid a worsening economic outlook… The seven-day repurchase rate, a gauge of interbank funding availability, has more than doubled in the past month… ‘The cash crunch is curbing demand for bonds,’ said Chen Ying, a fixed-income analyst at Sealand Securities Co. in Shenzhen. ‘The crunch may persist if the central bank doesn’t come out to inject more capital into the financial system. If it lasts longer, it may affect issuance of both government and corporate bonds.’”

June 13 – Bloomberg: “China’s central bank refrained from draining funds from the financial system for the first time in three months as a cash squeeze pushed interest-rate swaps up by the most since August… The monetary authority conducted repo operations every week since February and resumed sales of bills in May for the first time since December 2011. The overnight repo rate, which measures interbank funding availability, touched 9.78% on June 8… That is the highest level in data going back to May 2006. The rate climbed 62 bps to 6.94%... today, while the seven-day repo rate rose 42 bps to 6.39%... ‘If the PBOC sold repos or bills today, the market would have collapsed,’ said Liu Junyu, a bond analyst at China Merchants Bank… ‘The cash shortage hasn’t eased and banks are still busy borrowing money.’”

June 13 – Bloomberg (Fion Li): “Yuan forwards are trading at the biggest discount to the spot rate in four years… Contracts that fix the currency in 12 months were 2.42% weaker than the current rate in Shanghai today, the most since February 2009… The average yield on offshore yuan-denominated debt climbed to a five-month high of 3.8% on June 10…”

June 10 – Reuters: “China’s unregulated shadow banking sector poses an increasing risk to the country’s financial stability that could spread to other countries, credit rating agency Fitch said… China has tens of thousands of non-bank lenders that are providing increasing amounts of credit to businesses and government outside the mainstream, regulated banking sector, a situation that is stoking systemic risk, Fitch said. There is little visibility on where the money is going, who is lending it or what the credit quality of assets is, meaning traditional warning signs of trouble will not function properly. ‘It is a wild west atmosphere in many respects and that is one of the reasons why we are so worried,’ Fitch Senior Director Charlene Chu told a conference… Regulators had little insight into the non-bank sector. ‘It is a material risk because a growing amount of credit is being extended through channels that they don't have transparency or control over,’ Chu said.”

June 13 – Bloomberg: “China’s government risks being forced to bail out some local authorities and take over their liabilities after a report from the nation’s audit office showed a jump in borrowings, Moody’s… said. The National Audit Office review indicates that total local government direct and guaranteed debt may have risen 13% to 12.1 trillion yuan ($2 trillion) by end-2012 from end-2010, Moody’s said… ‘Both the amount of debt among the sampled local governments and the limited scope of the report are credit negative for China,’ Moody’s said…, referring to the National Audit Office report. ‘The amount of local government debt makes it more likely its burden will eventually fall upon the central government and the limited scope of the report makes the size of that potential burden uncertain.”

June 13 – Reuters: “Fake invoicing inflated China’s official import and export totals by $75 billion in the first four months of 2013, local media reported…, citing an internal review by China's commerce ministry. An alternate estimate found that actual year-on-year export growth for January to April was only around 7%, while import growth was about 6%... The second estimate was based on excluding data from the port of Shenzhen, where much of the fraud is suspected to have occurred. Evidence has been growing in recent weeks that the world's second-largest economy is fast losing momentum, but suspect trade data has clouded the picture for global investors.”

June 10 – Bloomberg: “China’s passenger-vehicle sales rose at a slower pace in May as consumer confidence waned amid signs that momentum for economic growth is slowing. Wholesale deliveries of cars, multipurpose and sport utility vehicles increased 9% to 1.4 million units in May… That compares with growth of 13% in April and 13.3 percent in March… ‘Strong inventory building in the first four months of 2013 and a softer GDP in 2Q13 lead us to expect gradually slower sales growth for the rest of the year,’ Ole Hui… analyst with Mizuho Financial Group Inc., wrote…”

June 13 – Bloomberg: “China is surveying soil nationwide to ascertain levels of heavy metals pollution after the discovery of rice tainted with cadmium spurred concern that crops may be unsafe, the official Xinhua News Agency reported… Authorities have pledged to reduce pollution and ensure food safety as they seek to assuage public anger sparked by incidents including chemical spills into supplies of drinking water and the sale of tainted baby formula.”

Japan Bubble Watch:

June 10 – Bloomberg (Keiko Ujikane): “Japan’s economy grew more than the government initially estimated in the first quarter, helping Prime Minister Shinzo Abe to sustain confidence in his campaign to defeat deflation. Gross domestic product expanded an annualized 4.1%, compared with a preliminary calculation of 3.5%...”

India Watch:

June 13 – Financial Times (Amy Kazmin): “India’s finance minister has urged investors not to panic over the sharp weakening of the rupee, saying that India’s economy is stronger today than last year and its long-term prospects are good. Seeking to stem a tide of pessimism over India’s battered currency, P. Chidambaram also promised new measures in the coming days to revive investment flows, including the increase – or outright elimination – of caps on foreign direct investment in many sectors of the economy.”

Latin America Watch: 

June 10 – Bloomberg (Gabrielle Coppola and Boris Korby): “Standard & Poor’s decision to cut Brazil’s rating outlook to negative is magnifying the decline in the country’s creditworthiness as a global bond rout foils a government bid to lure foreign debt investors. The cost to protect Brazil’s dollar-denominated government bonds against losses for five years has soared 53 bps in the past month, the most since March 2009, to an 11-month high of 159.5 bps…”

June 12 – Reuters (Carl Patchen): “Brazil will hand out 17 billion reais ($8bn) in cheap loans for home appliance purchases, the government said…, in a move to bolster Brazilians' buying power as a lackluster economy and high inflation erode its approval rating. President Dilma Rousseff, a leftist economist who plans to run for re-election next year, saw her high popularity edge lower for the first time in months as Brazilians grow wary of high inflation and slow growth… The new credit line underlines the administration's efforts to cast a positive light after weeks of non-stop negative news ranging from violence between Indians and farmers to protests over a hike in bus fares and Standard & Poor's warning of a rating downgrade.”

June 12 – Bloomberg (Stephan Nielsen): “Brazil’s national cities council, an advisory group created by the government, approved a 508.5 billion-real ($237bn) sanitation plan aimed at boosting water-supply and sewage-treatment infrastructure investments. The goal is to provide potable water supplies to all urban areas of Brazil over the next 10 years…”

June 13 – Dow Jones (Amy Kazmin): “Brazil's retail sales in April rose less than economists had expected in a worrisome sign for the nation’s economy… Retail sales rose a seasonally adjusted 0.5% in April from the previous month and 1.6% from a year earlier…”

June 10 – Bloomberg (Jonathan Levin): “Foreign holdings of peso bonds are sinking from record levels as prospects that the Federal Reserve will scale back unprecedented stimulus push up U.S. yields and reduce the relative attractiveness of Mexican debt… Yields on the country’s benchmark peso bonds due in 2024 have jumped 0.83 percentage point in the past month and touched 5.46% May 31… Peso bonds have tumbled 10.6% in dollar terms in the past month…”

June 12 – Bloomberg (Veronica Navarro Espinosa and Boris Korby): “Brazilian billionaire Eike Batista’s increasingly frenetic search for cash is unnerving bond investors. OGX’s $2.56 billion of notes due in 2018 fell 8.69 cents on the dollar to a record 48.11 cents yesterday, a day after he said in a filing he had sold 70.5 million shares… for 121.8 million reais ($56.7 million) at an average price that’s more than 90% below its all-time high. The bonds have lost 41.9% this year…”

Asian Bubble Watch:

June 14 – Bloomberg (Fox Hu and Joyce Koh): “Slumping stock markets are threatening to disrupt as much as $10 billion of initial public offerings across Asia… Companies are gauging demand or taking orders for as much as $2.5 billion of IPOs in Southeast Asia and $2.3bn of deals in Hong Kong… Hopewell Hong Kong Properties Ltd. scrapped a $780 million offering in the city yesterday while China Harmony Auto Holding Ltd. plunged 16% in the worst Hong Kong debut since February 2012.”

June 14 – Bloomberg (Sungwoo Park): “South Korean corporate bond sales this year are the slowest since 2008 as borrowing costs near a five-month high keep issuers sidelined… Offerings total 16 trillion won this year to date, the least since 15 trillion won of issuance the same period of 2008 and 25.8 trillion won last year. The cost of selling debt for the country’s corporate issuers has surged 28 bps points since Bank of Korea’s unexpected interest rate cut on May 9… ‘Yields are rising too high too fast,’ said Shin Dong Jun, a strategist at… Dongbu Securities Co. ‘High yields keep issuers from selling debt, while investors don’t want to buy bonds today because rates will rise tomorrow.’”

June 12 – Bloomberg (Shamim Adam): “Bank Indonesia raised the rate it pays lenders on overnight deposits and said it’s ready to buy government debt in the secondary market as Governor Agus Martowardojo moves to boost confidence in the rupiah weeks after taking charge. The central bank raised the deposit facility rate… by a quarter of a percentage point to 4.25%... The increase is a preemptive step to maintain stability after the rupiah weakened and Bank Indonesia will ensure sufficient liquidity in the market…”

June 12 – Bloomberg (Lilian Karunungan and Kyoungwha Kim): “Indonesia is consuming foreign- currency reserves at the fastest pace in Asia as policy makers struggle to contain the rupiah’s plunge, a sign to PT Mandiri Sekuritas that the central bank will pare intervention. Reserves dropped 5.7% in a year to $105 billion in May as Bank Indonesia sold dollars to bolster the rupiah… The rupiah fell to 5.6% below the local spot rate in the offshore non-deliverable forward market yesterday… Defending the currency helped reduce reserves to the equivalent of 6.6 months of imports, the worst ratio in Asia after India, according to Australia & New Zealand Banking Group Ltd.”

Europe Watch:

June 10 – MarketNews International (Jack Duffy): “France and Germany are on a collision-course with the European Commission as EU leaders approach a crucial summit that could decide key questions about the future of the Eurozone. With leaders scheduled to meet in Brussels on June 27-28 to decide details of the EU's proposed banking union, the Eurozone's two largest economies are determined to ensure that final decisions over when and how insolvent banks are shut down remains with national governments. The Commission is putting forth its own plan to consolidate such power in Brussels. ‘There is a real confrontation here,’ said Zsolt Darvas, research fellow at… think tank Bruegel. ‘While it may make sense to do this at the European level, nothing is going to happen without the participation of France and Germany,’ he said.”

June 12 – Associated Press: “Damage from the past week’s flooding in Germany likely will lead to insurance claims of up to 3 billion euros ($4bn), a credit rating agency said… as flood levels on the Elbe river in the country's north appeared to stabilize… Fitch Ratings said that the total cost to insurers of the floods in Germany alone is likely to total between 2.5 billion and 3 billion euros. That's well below the expected total cost of the flood damage, which Fitch put at about 12 billion euros.”

June 12 – Bloomberg (Tom Stoukas and Sherine El Madany): “Greece became the first developed nation to be cut to emerging-market status by MSCI Inc. after the local stock index plunged 83% since 2007. Greece failed to meet criteria regarding securities borrowing and lending facilities, short selling and transferability, said MSCI…”

Germany Watch:

June 12 – MarketNews International: “The European Central Bank's OMT bond programme has no official limit, but rather an effective one, Executive Board member Joerg Asmussen said… in introductory remarks to the German Constitutional Court's hearing on the ECB's crisis measures. The Court has been asked to assess whether any of the ECB's polices - most notably the OMT - violate EU treaties, force the Bundesbank to act beyond its mandate or infringe on the Bundestag’s budget rights. ‘We announced that our OMT interventions would be ex-ante ‘unlimited’. We have no doubt that this strong signal was required in order to convince market participants of our seriousness and decisiveness in pursuing the objective of price stability,’ Asmussen said.”

Italy Watch:

June 10 – Bloomberg (Lorenzo Totaro): “Italy’s economy shrank more than initially reported in the first quarter as the country’s longest recession in at least two decades sapped household spending and exports fell for the first time in almost four years. Gross domestic product dropped 0.6% from the previous three months… From a year earlier, economic activity contracted 2.4%...”


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