Weekly Commentary: The King Of Sovereign Subprime
The past week witnessed 6.6 million new U.S. unemployment claims, pushing the two-week surge to a sickening almost 10 million. The U.S. economy is sliding into the steepest of downturns, with awful consequences for society, economic structure and financial stability. But this week’s CBB will focus more on the global economy.
April 2 – Bloomberg (Emily Barrett): “Foreign official holdings of Treasuries stashed at the Federal Reserve fell $109 billion in March, the largest monthly drop on record, as international governments and central banks struggled with the economic fallout from the new coronavirus. The decline showed up in the Fed’s weekly custody data, with the latest figure released Thursday showing a $24 billion drop in the week to April 1. The sales amid the past month’s pandemic-fueled turmoil are a further signal of the global rush to raise U.S. dollars…”
The Greenspan Fed in the early nineties collapsed short-term rates to (at that time) an unprecedented 3.0%. With the banking system severely impaired following late-eighties excess – and exploding fiscal deficits exacerbated by saving & loans and bank bailouts – Greenspan orchestrated a covert banking system bailout. The capacity of banks to borrow cheap (3.0%) and lend dear (7-8%) provided a powerful mechanism for replenishing depleted capital.
Aggressive reflationary policy measures come with consequences. Federal Reserve policies were a godsend to the fledging leveraged speculating community. The “government carry trade” (borrow at 3% to lever in higher-yielding Treasury and Agency securities) was tantamount to free money. With speculative leverage boosting liquidity and securities prices – along with hedge fund assets – speculative excess soon gravitated to corporate credit, derivatives and, importantly, the emerging markets.
The Fed’s 25 bps rate increase in February 1994 pierced the speculative bubble. Mexico, having been on the receiving end of large speculative flows, was in deep crisis by the end of the year. The peso, which had essentially been pegged to the U.S. dollar, collapsed in December. The “Tequila Crisis” saw contagion effects ripple throughout Latin America and other developing markets.
I thought at the time the destabilizing flow of speculative bubble “Wall Street Finance” to EM had run its course. But the Clinton administration partnered with the IMF for a $50 billion Mexican bailout. Emboldened, the hedge fund industry bounced back strongly from the 1994 bond and derivatives market dislocation. The inflationary boom in securitizations, GSE credit, and market-based finance more generally didn’t miss a beat. Rather quickly, powerful speculative flows (and underlying leverage) to the emerging markets resumed – with the booming Southeast Asian “Tiger Economies” a prime target.
Pegged currencies (“fixed currency regimes”) were an integral facet of 1990s’ boom and bust dynamics. Why not borrow cheap in these exciting new Wall Street funding markets to lever in higher-yielding EM debt instruments with currencies pegged to the U.S. dollar. At the same time, the booming U.S. derivatives industry was cranking out term sheets, making EM speculation easier than ever before. If you weren’t playing the melt-up in late-1996, you were a nobody.
By early-1997, booms were overheating. The Thai baht suffered huge speculative outflows in the spring and was forced to devalue by the summer. A devastating regional collapse had begun – Indonesia, Malaysia, Philippines, South Korea and beyond. The pegged currencies regime suffered a spectacular domino collapse. It was a catastrophic crisis – utter financial, economic and social meltdown. I most recall the deplorable ethnic strife that erupted in Indonesia (specifically, attacks on ethnic Chinese businesses). Currency collapse in South Korea provoked its citizens to donate $2 billion of its gold to be melted down and used to service the nation’s international debt obligations.
EM contagion made it to the ruble and Russia’s bond market in 1998, with the spectacular Russia/LTCM collapse pushing a severely impaired global financial to the edge. The dangers of New Age speculative finance were conspicuous. So was the extent global policymakers were willing to go to backstop this financial apparatus. The Fed orchestrated another bailout in 1998 – providing powerful stimulus to U.S. Bubble Dynamics that had attained critical momentum. It was off to the races (Nasdaq almost doubling in 1999).
Speculative finance is just too enticing to resist. After the dreadful 1990s experience, I expected EM economies to adopt measures to insulate their systems from “hot money” flows. What unfolded was something altogether different – and fundamental to the current unfolding collapse of the global bubble.
Following the nineties’ episode, EM economies came to believe (or were convinced) that holding large stockpiles of dollar reserves was key to currency and system stability. And stockpile they did. After beginning 2003 at $2.3 TN, total International Reserve Assets held globally surpassed $12 TN by 2014. Over this period, Chinese reserves jumped from $300 million to $4.0 TN. South Korean reserves rose four-fold to $400 billion. Brazil $36 billion to $390 billion; Mexico $40 billion to $200 billion; Russia $42 billion to about $500 billion; Indonesia $30 billion to $130 billion; Taiwan $15 billion to $480 billion; Thailand $12 billion to $45 billion; and Turkey $20 billion to $110 billion.
I’ve long had issues with this global Financial Structure. For one, unrelenting demand for dollar reserves accommodated persistent U.S. trade and Current Account Deficits – with attendant domestic and international imbalances. There was no market mechanism to discipline U.S. over-borrowing and spending. Dollar liquidity flowed to EM, where companies would exchange dollars for local currency from their local central bank – with these dollars immediately recycled into U.S. Treasury, agency and other debt securities. The lack of market discipline was also fundamental to U.S. deindustrialization, with our fateful shift into consumption and “services” (why produce, among other things, ventilators, face masks and other “PPE” when they can be cheaply acquired from China).
The flooding of dollars globally ensured mounting excess and deepening complacency. Levered speculative finance flowed freely into EM, spurring protracted booms and New Paradigm thinking by EM policymakers. For China and EM more generally, 2008 was but a hiccup. Reflationary finance flooded the world, pushing fledgling bubbles to unprecedented extremes. In the U.S., the recycling of “bubble dollars” back into Treasurys was instrumental in bolstering the view that any amount of debt issuance could be financed at low yields (“deficits don’t matter”).
This dysfunctional global Financial Structure ensured a protracted period of self-reinforcing credit and speculative excess coupled with deep structural impairment. The massive accumulation of non-productive debt and speculative leverage was always an accident in the making. A momentous consequence of today’s unfolding crisis is a likely breakdown of this global financial arrangement.
Federal Reserve Assets expanded another $557 billion this week, with a five-week gain of $1.653 TN. The Fed has been aggressively buying Treasury and Agency securities, along with announcing a program to purchase U.S. corporate bonds (and bond ETFs). The Fed is employing a long list of lending facilities – backstopping the banking system, primary dealers, commercial paper, municipal debt, corporate Credit and, soon, even “main street.”
The Federal Reserve has also expanded international swap arrangements, where it exchanges dollars for foreign currencies with its global central bank partners. This week the Fed announced a new program that allows central banks to borrow against Treasury holdings held in custody at the New York Fed.
Unprecedented policy measures undoubtedly come with unintended consequences. There have already been complaints that Fed purchases have worsened instability and market distortions throughout the MBS marketplace. I fear more momentous market dynamics are unfolding globally.
In all the late-nineties global market chaos, U.S. securities provided a bastion of stability. The Fed and Treasury Department’s capacity to employ system-stabilizing measures was unmatched. Thus the Fed’s ability to stabilize U.S. securities markets provided a momentous competitive advantage over other regions and nations. Resulting U.S. market and economic resiliency were fundamental to late-nineties “king dollar” strength – that came at the expense of deflating EM bubbles.
The dollar index gained 2.2% this week to 100.576, just below recent multi-year highs. I fear “king dollar” dynamics are exacerbating an unfolding EM crisis poised to dwarf the nineties. Of the more than $16 TN foreign currency-denominated debt globally, $11.9 TN is denominated in U.S. dollars (BIS, June 2019). Estimates vary, with EM dollar-denominated debt as high as $5.8 TN (Barron’s).
One unintended consequence of massive U.S. fiscal and monetary stimulus has been an escalation of flight out of EM currencies. Especially over recent years, the combination of rampant dollar liquidity and sizable troves of EM international reserves underpinned massive “hot money” flows into EM financial systems and economies. And with the dollar The International Currency of Leveraged Speculation, EM economies responded to intense demand for their higher-yielding securities with unprecedented debt issuance – way too much dollar-denominated.
This week from the Wall Street Journal (Avantika Chilkoti and Caitlin Ostroff): “Emerging markets borrowed $122.6 billion through sovereign dollar-denominated bonds last year, according to… Dealogic… up from $63.3 billion in 2009. Nearly $24 billion of sovereign emerging market dollar-denominated bonds are set to mature this year.” From the Financial Times: “The overall debt burden of so-called ‘frontier’ markets – the smaller, lesser-developed countries – reached a record $3.2tn last year, equal to 114% of their annual economic output.” And from Bloomberg: “Households around the world now have $12 trillion more debt than they did during the run-up to the 2008 financial crisis.”
It is difficult to envisage this terrible pandemic attacking a global financial system and economy at more fragile states. A heavily indebted world is heading into the worst crisis since World War II. I fear the emerging markets are at the epicenter, with dollar-denominated debt the Achilles’ heel.
The South African rand sank 7.4% this week. Currencies were down 6.7% in Mexico, 5.8% in Hungary, 4.7% in Brazil, 4.5% in the Czech Republic, 4.1% in Turkey, 4.0% in Poland, and 3.5% in Chile. In the changed environment, scores of companies, financial institutions and countries will struggle mightily to service large debt loads. For many, dollar-denominated liabilities will prove unmanageable.
No nation has accumulated more dollar-denominated debt than China. With its trove of international reserves, large trade surpluses with the U.S., and a quasi-pegged currency, Chinese companies and financial institutions have enjoyed unlimited access to cheap dollar funding markets. Notably, China’s now fragile banks and homebuilders have accumulated enormous dollar-denominated liabilities. This debt mismatch heightens systemic vulnerability to disorderly renminbi devaluation. How large is the levered China “carry trade”?
From the “Periphery to Core” analytical framework, China remains the “Core” of this problematic global currency mismatch. Crisis Dynamics have engulfed the “Periphery,” with key EM economies now succumbing to a “contagion” of illiquidity and market dislocation. Expanded Federal Reserve swap facilities worked to arrest global collapse. I expect effects to prove fleeting.
That China appeared to gain the upper hand on the virus has provided hope. Beijing’s aggressive efforts both to bolster its markets and restart its economy support the constructive view of China pulling EM economies and markets back from the brink. But with pandemic conditions rapidly deteriorating around the world, it may prove more a case of EM pushing a wavering China toward the precipice.
Over this incredible boom cycle, China became banker to the world. As financier to “frontier” economies, the Chinese banking system evolved into the King of Sovereign Subprime. Funding “belt and road” and other initiatives, China formulated a massive “captive finance” operation for nations previously starved of finance and investment. It now faces the prospect of a dramatic drop in capital goods export orders and thousands of customers lacking wherewithal to pay their bills.
As an analogy, automobile manufacturers repeatedly succumb to the urge to “go subprime.” Lending to buyers previously unable to obtain financing is a sure way of boosting revenues. And so long as the general economy holds up, manufacturers report booming profits both on auto sales and from “captive finance” operations lending at above-market rates.
Unfortunately, things invariably turn really sour when the bust arrives. Not only do auto sales tank and used car prices sink (vast buildup of used-car inventories). The finance business turns into an unmitigated disaster. The perils of subprime surface as soon as growth slows. Before long, massive losses wipe out all previously reported “profits,” as bad loan charge-offs and servicing costs spiral.
Years of Federal Reserve market interventions and the perception global central bankers have everything under control are coming home to roost. The same can said for the belief that the great Beijing meritocracy can handle any crisis. The deeply-embedded view that Chinese officials could adeptly and, when necessary, forcefully manage their economy, financial system and currency created precarious fragilities that are in the process of being exposed.
China’s economy is today acutely vulnerable to collapsing demand, both domestically and internationally. Its $40 TN plus banking system Goliath (plus “shadow” lending) is a spectacular accident in the making. In the past, I’ve made the point that China’s huge international reserve position appears relatively less impressive with each passing year (of booming credit and financial system expansion). With China’s reserves at $4.0 TN and Total Banking System Assets at $26.9 TN, reserves were about 15% of bank assets in mid-2014. Today, with reserves down to $3.1 TN and Bank Assets up to $41.7 TN, this ratio has been cut in half to 7.4%. There is also the issue of the liquidity, availability and transparency of these reserve holdings.
“The West will never allow Russia to collapse.” “Washington will never tolerate a housing bust.” “Central banks have everything under control.” I greatly fret ramifications for the day markets question Beijing’s capacity to stabilize China’s currency and credit system. Perhaps they have the coronavirus situation contained. Yet it’s foolhardy to disregard the reality that Chinese officials have lost control of their economic and financial systems. Sure, massive liquidity injections and “national team” support have bolstered securities market prices (Shanghai Composite down only 9.4% y-t-d). Yet I believe this only ensures more destabilizing adjustments in the near future. Beijing is losing its bet that the coronavirus is a short-term financial and economic phenomenon.
I’m comfortable with the analysis that the Chinese economy suffers from epic maladjustment. Running trade deficits with many EM economies, there is no doubt that weakness in Chinese demand will hit many economies hard. And the EM and global downturn will be one more blow to the already disabled Chinese export machine. With my view of no near-term return to normalcy, spiraling bad debt problems are a certainty. The Chinese banking system hangs in the balance.
From Henry Kissinger’s Friday evening Wall Street Journal op-ed: “Nations cohere and flourish on the belief that their institutions can foresee calamity, arrest its impact and restore stability. When the Covid-19 pandemic is over, many countries’ institutions will be perceived as having failed. Whether this judgment is objectively fair is irrelevant. The reality is the world will never be the same after the coronavirus. To argue now about the past only makes it harder to do what has to be done.”
That the coronavirus crisis is a catalyst for piercing history’s greatest bubble greatly broadens the scope of institutional failure. “The Coronavirus Pandemic Will Forever Alter the World Order,” is the title of Mr. Kissinger’s insightful piece. “While the assault on human health will – hopefully – be temporary, the political and economic upheaval it has unleashed could last for generations.”
Confidence in governments will be shattered for years to come. Here in the U.S., we run up national debt past $21 TN – and fail to accumulate a reasonable stockpile of ventilators, masks and PPG. No preparation for a pandemic? After the downfall, it will take generations to restore faith in central banking. If trust in Wall Street has been thin, just wait. And right now Washington is hell-bent on destroying trust in government finances. We continue to witness behavior ensuring a systemic crisis of confidence in the financial markets and policymaking.
It’s a different world now. The chasm that developed between inflated expectations and deflating economic prospects gapped wider than ever. Prospects for a ravaging EM meltdown now keep me awake at night. The existing Financial Structure, dominated by unsound debt, leveraged speculation, derivatives and free-flowing finance – I don’t see how it works going forward.
When EM citizens come to appreciate their boom experience has left them with unmanageable debt loads – and watch their nation’s reserve holdings depleted in fruitless currency support operations – there’s going to be hell to pay. The house of cards is being exposed – and a crisis of confidence is at this point unavoidable. A domino collapse of currencies, credit and banking systems, and economies has become a frighteningly high probability outcome.
In such a scenario, how would a crisis of confidence in Chinese finance be held at bay? Will Beijing turn more insular as it confronts calamitous domestic issues? Or would a more aggressive global stance be considered advantageous in the face of mounting domestic insecurity and dissent? The upside of bubbles, buoyed by an optimistic view of an expanding “pie,” is conducive to cooperation, assimilation and integration. The downside unleashes a demoralizing slide into antipathy, disintegration and confrontation.
Kissinger: “We went on from the Battle of the Bulge into a world of growing prosperity and enhanced human dignity. Now, we live an epochal period. The historic challenge for leaders is to manage the crisis while building the future. Failure could set the world on fire.”
For the Week
The S&P 500 declined 2.1% (down 23.0% y-t-d), and the Dow fell 2.7% (down 26.2%). The Utilities dropped 6.5% (down 18.6%). The Banks sank 11.0% (down 46.9%), and the Broker/Dealers declined 3.0% (down 28.3%). The Transports fell 5.0% (down 33.0%). The S&P 400 Midcaps dropped 6.0% (down 35.1%), and the small cap Russell 2000 sank 7.1% (down 36.9%). The Nasdaq100 dipped 0.8% (down 13.8%). The Semiconductors declined 3.1% (down 22.0%). The Biotechs rose 1.6% (down 13.0%). While bullion dipped $7, the HUI gold index gained 3.2% (down 17.2%).
Three-month Treasury bill rates ended the week at negative 0.0575%. Two-year government yields slipped a basis point to 0.23% (down 134bps y-t-d). Five-year T-note yields declined one basis point to 0.39% (down 131bps). Ten-year Treasury yields fell eight bps to 0.60% (down 132bps). Long bond yields dropped five bps to 1.21% (down 118bps). Benchmark Fannie Mae MBS yields surged 30 bps to 1.765% (down 95bps).
Greek 10-year yields jumped 39 bps to 1.92% (up 48bps y-t-d). Ten-year Portuguese yields rose 23 bps to 0.89% (up 45bps). Italian 10-year yields gained 22 bps to 1.55% (up 14bps). Spain’s 10-year yields rose 20 bps to 0.74% (up 27bps). German bund yields added three bps to negative 0.44% (down 26bps). French yields jumped 10 bps to 0.08% (down 1bps). The French to German 10-year bond spread widened seven to 52 bps. U.K. 10-year gilt yields declined six bps to 0.31% (down 51bps). U.K.’s FTSE equities index fell 1.7% (down 28.2%).
Japan’s Nikkei Equities Index sank 8.0% (down 24.7% y-t-d). Japanese 10-year “JGB” yields declined three bps to negative 0.01% (unchanged y-t-d). France’s CAC40 % (down 2%). The German DAX equities index dipped 1.1% (down 28.1%). Spain’s IBEX 35 equities index fell 2.9% (down 31.1%). Italy’s FTSE MIB index dropped 2.6% (down 30.3%). EM equities were mixed to lower. Brazil’s Bovespa index sank 5.3% (down 39.9%), and Mexico’s Bolsa declined 2.1% (down 24.0%). South Korea’s Kospi index increased 0.4% (down 21.5%). India’s Sensex equities index sank 7.5% (down 33.1%). China’s Shanghai Exchange slipped 0.3% (down 9.4%). Turkey’s Borsa Istanbul National 100 index gained 1.6% (down 21.7%). Russia’s MICEX equities index surged 7.1% (down 15.6%).
Investment-grade bond funds saw outflows of $8.467 billion, while junk bond funds enjoyed inflows of $7.092 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates sank 17 bps to 3.33% (down 75bps y-o-y). Fifteen-year rates dropped eight bps to 2.82% (down 74bps). Five-year hybrid ARM rates rose six bps to 3.40% (down 26bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up 13 bps to 3.97% (down 33bps).
Federal Reserve Credit last week surged $604.4bn to a record $5.575 TN, with a 30-week gain of $1.653 TN. Over the past year, Fed Credit expanded $1.666 TN, or 42.6%. Fed Credit inflated $2.764 Trillion, or 98%, over the past 386 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt fell $16.9 billion last week to $3.338 TN, with a four-week drop of $119bn. “Custody holdings” were down $121bn, or 3.5%, y-o-y.
M2 (narrow) “money” supply expanded $436bn last week to a record $16.298 TN. “Narrow money” surged $1.791 TN, or 12.3%, over the past year. For the week, Currency increased $16.0bn. Total Checkable Deposits surged $171bn, and Savings Deposits jumped $224bn. Small Time Deposits declined $6.3bn. Retail Money Funds rose $30.7bn.
Total money market fund assets jumped $175bn to a record $4.397 TN. Total money funds jumped $1.290 TN y-o-y, or 42%.
Total Commercial Paper declined $6.1bn to $1.106 TN. CP was up $18bn, or 1.7% year-over-year.
For the week, the U.S. dollar index gained 2.2% to 100.576 (up 4.2% y-t-d). For the week on the downside, the South African rand declined 7.4%, the Mexican peso 6.7%, the Brazilian real 4.7%, the euro 3.1%, the Swedish krona 3.0%, the Australian dollar 2.8%, the Swiss franc 2.6%, the New Zealand dollar 2.6%, the South Korean won 1.6%, the Canadian dollar 1.6%, the British pound 1.5%, the Norwegian krone 1.2%, the Singapore dollar 0.9%, and the Japanese yen 0.6%. The Chinese renminbi increased 0.07% versus the dollar this week (down 1.81% y-t-d).
The Bloomberg Commodities Index declined 0.8% (down 23.1% y-t-d). Spot Gold slipped 0.5% to $1,621 (up 6.8%). Silver declined 0.3% to $14.494 (down 19%). WTI crude rallied $6.83 to $28.34 (down 54%). Gasoline surged 20.6% (down 59%), while Natural Gas dropped 3.0% (down 26%). Copper gained 0.9% (down 22%). Wheat fell 3.9% (down 2%). Corn sank 4.4% (down 15%).
March 31 – Financial Times (Berkeley Lovelace Jr. and Dan Mangan): “President Donald Trump prepared Americans for a coming surge in coronavirus cases, calling COVID-19 a plague and saying the U.S. is facing a ‘very, very painful two weeks.’ ‘This could be a hell of a bad two weeks. This is going to be a very bad two, and maybe three weeks. This is going to be three weeks like we’ve never seen before,’ Trump said… White House officials are projecting between 100,000 and 240,000 deaths in the U.S. with coronavirus fatalities peaking over the next two weeks. ‘When you look at night, the kind of death that has been caused by this invisible enemy, it’s incredible.'”
March 31 – CNBC (William Feuer): “New York just became the coronavirus epicenter of the world as the number of confirmed COVID-19 cases across the state surpassed China’s Hubei province, where the outbreak originated about three months ago. Gov. Andrew Cuomo said the state confirmed 9,298 new COVID-19 cases overnight, bringing the total to 75,795…. With 43,139 confirmed cases, New York City accounts for more than half of all cases in New York state. ‘We have been behind it from day one since it got here. We have been playing catch up… We underestimated this virus. It’s more powerful, it’s more dangerous than we expected.”
March 29 – CNBC (Emma Newburger): “President Donald Trump reversed himself on Sunday, extending national social-distancing guidelines to April 30 in effort to keep the projected coronavirus death toll in the U.S. from reaching a catastrophic, worst-case scenario. Trump’ previously said he wanted the country to reopen for business by Easter. Public health experts have warned that loosening restrictions by Easter, on April 12, would result in unnecessary death and economic damage.”
March 30 – Wall Street Journal (Jennifer Calfas, Chong Koh Ping and Ann M. Simmons): “A U.S. Navy ship outfitted with 1,000 hospital beds pulled into New York Harbor. Tents sprung up in New York City’s Central Park. The Javits Center, a 1.8 million-square-foot convention center in Manhattan, opened its doors as a makeshift hospital. They are part of a striking new reality in New York City and across America, as state and federal leaders take steps unprecedented in modern times to fight the global coronavirus pandemic… With nearly half of states now reporting more than 1,000 confirmed infections, governors and mayors across the U.S. are working to secure more medical supplies, adding restrictions and asking the federal government for better coordination.”
March 31 – Reuters (Idrees Ali and Phil Stewart): “The captain of the U.S. aircraft carrier Theodore Roosevelt, in a blunt letter, has called on Navy leadership for stronger measures to save the lives of his sailors and stop the spread of the coronavirus aboard the huge ship. The four-page letter, the contents of which were confirmed by U.S. officials…, described a bleak situation onboard the nuclear-powered carrier as more sailors test positive for the virus. The Navy puts the ship’s complement at 5,000, the equivalent of a small American town.”
April 2 – Reuters (Idrees Ali and Phil Stewart): “The U.S. Navy… relieved the commander of the aircraft carrier Theodore Roosevelt, who wrote a scathing letter that leaked to the public asking for stronger measures to control a coronavirus outbreak onboard his warship.”
March 29 – Financial Times (David Pilling): “Africa has reached a ‘break the glass moment’, an emergency in which international actors need to take drastic action if the world’s poorest continent is to avoid a human and economic catastrophe, Ken Ofori-Atta, Ghana’s finance minister, told the Financial Times. Mr Ofori-Atta, who is also chairman of the joint World Bank-IMF Development Committee, said the two institutions had acted swiftly, but would need to do much more. They should provide governments with liquidity support as well as money to fight the virus and debt relief, he said, adding that the coronavirus threatened to overwhelm Africa’s inadequate health systems.”
March 30 – Reuters (Saurabh Sharma, Devjyot Ghoshal, Alasdair Pal, Nivedita Bhattacharjee, Gopal Sharma and Asif Shahzad): “Police in India fired tear gas to disperse a stone-pelting crowd of migrant workers defying a three-week lockdown against the coronavirus that has left hundreds of thousands of poor without jobs and hungry, authorities said…”
April 1 – Washington Post (Katie Shepherd): “As stores and offices closed throughout March, many people watched with anger as thousands of college students poured into tropical locales, crowding beaches and bars to party during their regularly scheduled spring breaks. Now, as the pandemic has spread further, many people’s fears have been realized as college students by the dozen have tested positive for covid-19, the disease caused by the novel coronavirus.”
Market Instability Watch
March 30 – Bloomberg (Justina Lee): “Market tremors from this once-in-a-generation volatility shock are whipsawing risk models across Wall Street, suppressing the appetite of fast-money investors to buy the dip for potentially months to come. The coronavirus crisis is spurring an epic spree of deleveraging among those wedded to a stable value-at-risk measure, a model pioneered by JPMorgan… which projects the vulnerability of a portfolio by estimating trading losses based on historical data. While the formulas vary, in general the models require investment firms to rein in risk when market turbulence increases.”
April 1 – Bloomberg (Danielle Moran, Amanda Albright and Martin Z. Braun): “Municipal-bond prices tumbled sharply, retreating from the rally triggered last week by the federal government’s more than $2 trillion stimulus plan, as the growing economic shutdown to stem the coronavirus deals a deep financial hit to states, cities and other agencies that borrow in the $3.9 trillion market. The drop underscores the never-before-seen volatility that has whipsawed the state and local government debt market for the past three weeks…”
March 31 – New York Times (Kate Kelly and Peter Eavis): “In a single week in March, as financial markets convulsed and major parts of the economy began shutting down, banks made over $240 billion in new loans to companies – twice as much in new lending as they would ordinarily extend in a full year. Brian Foran, an analyst at Autonomous, a research firm that did the calculations, initially thought it was a typo. ‘That’s really an unprecedented figure,’ he said. ‘I’ve never seen anything like it.'”
April 1 – Financial Times (Colby Smith, Eric Platt and Joe Rennison): “A crucial $1.1tn financing source for blue-chip US companies remains strained despite efforts by the Federal Reserve to stabilise the market, prompting groups like cigarette maker Altria and hotel operator Marriott to search for other sources of funding. Financing costs in the commercial paper market… have soared since the coronavirus pandemic reached US shores. For some companies, the rate now sits at the highest level since the global financial crisis. Costs rose in part because money market funds that are typically big buyers of the debt have had to sell to meet a wave of redemptions.”
March 30 – Financial Times (James Fontanella-Khan and Arash Massoudi): “A multiyear boom in mergers and acquisitions activity came to a halt by the end of March, as the fallout from the coronavirus pandemic ravaged corporate share prices… Deal activity last week totalled just $12.5bn, the lowest weekly total since the nadir of the financial crisis in April 2009. The overall value of deals in the first quarter fell 28% from a year ago to $698bn, the weakest year-opening period since 2016. The quarterly decline was led by a sudden reduction in US activity.”
April 2 – Bloomberg (Davide Scigliuzzo and Tatiana Darie): “Banks that agreed to help finance leveraged buyouts are starting to feel the pain from a freeze in the market for risky corporate debt. Lenders including Morgan Stanley, Bank of Ireland Group Plc and Citizens Financial Group Inc. have been forced to self-fund at least $1 billion of loans in recent weeks to ensure private-equity led acquisitions close as planned… Unable to syndicate the debt to institutional investors, the banks have become unintentional holders of speculative-grade loans…”
March 30 – Financial Times (Robert Smith and Joe Rennison): “Big banks that help asset managers package risky loans into investment products are sitting on billions of dollars of debt linked to companies most exposed to an economic downturn. Lenders on both sides of the Atlantic have upwards of 100 open credit lines to vehicles known as collateralised loan obligations, which are among the biggest sources of funds for businesses that do not have top-quality credit ratings… Funds such as the debt-investing arms of private equity powerhouses Blackstone and Carlyle are the biggest managers of these CLOs, which have made great strides since the last financial crisis as traditional lenders retreated from making riskier loans. Investment banks still have exposure, however, as they provide so-called ‘warehouse lines’ to CLO managers that help them build portfolios of loans. Such assets have plummeted in value… The effects in the CLO market have been ‘a disaster,’ said Chris Acito, chief executive of Gapstow Capital Partners, which invests in these vehicles.”
March 31 – Financial Times (Billy Nauman and Eric Platt): “Western Asset, one of the biggest bond managers in the US, is trying to avoid a fire sale of assets from a corporate bond portfolio after several companies hit hard by the coronavirus outbreak had their credit ratings cut to junk. The $460bn investment manager this week requested a waiver from a Fresno County, California public pension fund seeking extra time to get its institutional investment grade credit portfolio in order after the downgrades of Occidental Petroleum and American Airlines pushed it over its limit of junk-rated holdings. Without the waiver, Western would be forced to quickly sell some of the downgraded companies’ debt with no guarantee it could get a good price.”
April 1 – Bloomberg (Katherine Greifeld and Brandon Kochkodin): “A tumultuous start to 2020 saw exchange-traded funds shutter at the fastest pace in almost three years. A total of 72 ETFs with $1.4 billion in assets shut down and returned their money to investors in the first quarter as the coronavirus outbreak roiled markets… That’s the most since the third quarter of 2017, which saw 73 funds close.”
March 31 – Bloomberg (Ishika Mookerjee): “As global stocks attempt to recover from their biggest quarterly loss since the global financial crisis, veteran investor Jim Rogers says there’s worse to come. The current rebound in markets may continue for a while following a bout of extreme pessimism, but another rout is imminent, according to the chairman of Rogers Holdings Inc. That’s because of a triple whammy of coronavirus-fulled economic damage, high debt levels and interest rates that are low, which will hurt when they rise. ‘I expect in the next couple of years we’re going to have the worst bear market in my lifetime,’ Rogers said…”
Global Bubble Watch
March 31 – Financial Times (Tommy Stubbington and Laurence Fletcher): “Governments across the world are embarking on the biggest borrowing spree in history, as they look to tackle the coronavirus crisis. That should, in theory, be a happy hunting ground for ‘bond vigilantes’ – hedge funds and other investors that punish free-spending states by betting against their debt, in the expectation that higher issuance will push bond prices down and yields up. But investors trying the same trick today look set to get crushed. Faced with unprecedented levels of bond buying by central banks, even those investors who worry about sharp rises in government debt levels are reluctant to take them on. ‘In the short term, the idea of being a bond vigilante is dead,’ said Iain Stealey, international chief investment officer… at JPMorgan Asset Management. ‘There’s going to be massive support for bond markets from central banks for the foreseeable future. You don’t want to fight that, so we’re happy to own [long-dated government bonds].'”
March 31 – Financial Times (Delphine Strauss and Jonathan Wheatley): “As the coronavirus pandemic reaches the developing world, governments are turning to the IMF for help in record numbers – and warnings are mounting that multilateral institutions will need to bolster their resources to meet demand. Low and middle-income countries have already been hard hit by record capital outflows, a falling oil price, a collapse in tourism revenues and a steep fall in demand for their exports; few have fiscal space to cope with the health and economic crisis that is unfolding. Eighty-five countries have approached the IMF for short-term emergency assistance in recent weeks – around double the number that called on the fund in the immediate aftermath of the 2008 financial crisis. Then, the IMF tripled its lending capacity to $750bn and allocated just over $270bn in special drawing rights (SDRs)… Last week Kristalina Georgieva, IMF managing director, said a ‘very conservative, low-end estimate’ of emerging economies’ financial need was $2.5tn.”
March 29 – Wall Street Journal (Avantika Chilkoti and Caitlin Ostroff): “An unprecedented withdrawal of capital from emerging markets is threatening to create a wave of debt defaults as governments struggle with the double whammy of falling oil prices and the rapidly spreading coronavirus outbreak. As investors fled emerging-market bonds in recent weeks in favor of haven assets, bond yields for the most vulnerable economies have skyrocketed. In one example, the yield on a dollar-denominated Angolan government bond maturing in November 2025 jumped to nearly 30% on Friday, from under 7% at the beginning of March. And the yield on a comparable Nigerian bond maturing in June 2022 has jumped to almost 12% from 4%. They are among 18 countries whose dollar-denominated bonds are now trading at distressed levels, with yields that are more than 10 percentage points above U.S. Treasurys…”
April 1 – Bloomberg (Ben Sharples): “Oil is entering a period of unparalleled demand destruction this month that promises to transform the industry for years to come. Daily consumption will plummet by 15 million to 22 million barrels in April from a year earlier, according to estimates from some of the world’s most influential energy analysts. The crash has already led to refiners slashing processing, drillers halting output and storage tanks swelling across the world. ‘This will likely be a game-changer for the industry,’ Goldman Sachs… analysts including Jeffrey Currie and Damien Courvalin said… ‘It is impossible to shut down that much demand without large and persistent ramifications to supply.'”
March 31 – Bloomberg (Heesu Lee): “Panic buying at supermarkets and hoarding have raised fears over food supplies, and governments for their part are acutely aware that keeping everyone fed at affordable prices is crucial for political stability. Russia, Kazakhstan and Ukraine have already announced plans to limit wheat exports, and in Asia worries over making sure there’s enough food for everyone have now spread to rice, the main staple for billions of people in the region. China and India are the biggest global producers and consumers.”
March 29 – Reuters (Costas Pitas and Kylie MacLellan): “Some lockdown measures to combat coronavirus in Britain could last months and only be gradually lifted, a senior medical official said on Sunday as Prime Minister Boris Johnson warned the situation will get worse before it gets better.”
March 30 – Reuters (Swati Pandey): “Australia’s coveted ‘AAA’ sovereign rating faces growing risks from ballooning debt as the government ramps up spending to support an economy on the brink of its first recession in three decades. While analysts mostly expect Australia to retain the pristine ‘AAA’ rating for now, they say the surge in debt could see the ratings outlook cut to ‘negative’ from ‘stable’.”
Trump Administration Watch
April 1 – MarketWatch (Jeffry Bartash): “The trillions of dollars Washington is spending to combat the COVID-19 epidemic are likely to push annual fiscal deficits relative to the size of the U.S. economy close to levels last seen during World War II. President Donald Trump last weekend signed a $2.2 trillion bipartisan financial-rescue package, but he and congressional leaders are already talking about another huge spending bill to keep the economy on life support. Even before the coronavirus crisis exploded, the U.S. was on track in fiscal 2020 to post a deficit of slightly over $1 trillion… Now there’s no telling just how high the deficit will go. A new study by Morgan Stanley estimates the deficit will total at least $3.7 trillion in calendar year 2020 and an additional $3 trillion in calendar year 2021. That suggests nearly $5 trillion in extra deficit spending in the next two years, financed by the sale of Treasurys, largely to the Federal Reserve.”
March 31 – Reuters (Lisa Lambert and Tim Ahmann): “President Donald Trump… said the U.S. Congress should pass a $2 trillion spending plan to update the country’s roads, bridges and other infrastructure, calling for it to be included in the next bill lawmakers are currently drafting to respond to the coronavirus crisis, which they refer to as ‘Phase 4.’ ‘With interest rates for the United States being at ZERO, this is the time to do our decades long awaited Infrastructure Bill. It should be VERY BIG & BOLD, Two Trillion Dollars, and be focused solely on jobs and rebuilding the once great infrastructure of our Country! Phase 4,’ Trump wrote in a tweet.”
March 30 – Bloomberg (Alaa Shahine): “The White House and congressional Democrats are preparing for a fourth round of economic stimulus to get the U.S. through its coronavirus outbreak, even while they’re still arguing over the $2 trillion measure President Donald Trump signed Friday. White House officials have compiled lists of requests from government agencies totaling roughly $600 billion, according to people familiar with the matter. The proposals include more state aid as well as financial assistance for mortgage markets and the travel industries.”
March 28 – Associated Press (Steve Peoples): “Republicans who have spent the past decade howling about the danger of ballooning deficits embraced the coronavirus rescue package…, shrugging off past concerns about spending in the face of a public health crisis. In many cases, the conservatives who backed the $2 trillion bill – the largest economic relief measure in U.S. history – were the very same who raged against the nearly $800 billion economic stimulus package backed by the Obama administration… Leading budget hawk Sen. Pat Toomey, R-Pa., who insisted in 2009 that government cannot spend its way out of a recession, this week joined a unanimous Senate majority that approved what he described as ‘the biggest government intervention in the economy in the history of the world.'”
April 2 – Wall Street Journal (Ruth Simon, Peter Rudegeair and Amara Omeokwe): “Hours before small businesses can apply for forgivable loans from the $2 trillion financial relief package, some of the biggest U.S. banks aren’t ready to handle an expected flood of applications from potential borrowers. JPMorgan… told its small-business customers Thursday that it doesn’t expect to start accepting loan applications on Friday. Bank of America Corp. plans to limit the loans to customers with existing deposit accounts and loans at the bank as of mid-February, according to people familiar with the matter.”
March 31 – Reuters (David Lawder): “The United States’ new $350 billion small-business coronavirus rescue loan program could see millions of applications when it launches on Friday, senior Trump administration officials said… Officials from the U.S. Treasury and Small Business Administration, which are jointly administering the so-called Paycheck Protection Program, said they were working to ensure that processing capabilities, both in person at SBA lenders and online, would be able to handle high volumes of applications on Friday. Funds will be allocated on a first-come, first-serve basis, the officials told reporters… Banks and other SBA lenders have ‘delegated authority’ to approve loans starting on Friday without a review from the agency.”
March 31 – Financial Times (James Fontanella-Khan, Mark Vandevelde and Sujeet Indap and James Politi): “Some of the most powerful groups on Wall Street are pressing the Trump administration to allow private equity-owned companies to access hundreds of billions of dollars in loan funds earmarked for US small businesses hit by the coronavirus pandemic. White House and Treasury officials have been contacted about the issue by industry lobbyists and executives from major investment firms… Congress last week authorised the Small Business Administration to dispense $350bn worth of rescue loans to companies with fewer than 500 workers that have been affected by the coronavirus pandemic.”
March 31 – Reuters (Brian Schwartz): “Lobbyists representing the private equity industry pushed the Trump administration and members of Congress to provide hundreds of billions of dollars in relief for businesses hammered by the spread of coronavirus. The American Investment Council, which lobbies on behalf of the private equity industry, spoke to congressional leaders from both sides of the aisle and Treasury Department officials… The organization pushed to make sure the Treasury’s economic stabilization fund would provide enough liquidity to businesses especially hampered by the coronavirus pandemic, these people added.”
April 1 – CNBC (Karen Freifeld, Alexandra Alper, Mike Stone and Tom Daly): “The Trump administration is tightening rules to prevent China from obtaining advanced U.S. technology for commercial purposes and then diverting it to military use, several sources told Reuters.”
March 31 – Wall Street Journal (Dan Strumpf): “The chairman of Huawei Technologies Co. warned the U.S. to expect countermeasures from the Chinese government if it further restricts the technology giant’s access to suppliers, as the company’s profit last year grew at the slowest pace in three years.”
April 1 – Bloomberg (Ari Natter, Jennifer A Dlouhy, and Stephen Cunningham): “The U.S. Energy Department is considering renting space in the nation’s emergency oil reserve to domestic producers awash in crude… The move would help drillers running out of space to stash their product amid cheap prices and low demand. With storage space and pipelines filling up with crude, domestic producers could begin to curtail drilling. Pipeline operators have begun asking producers to scale back output as tanks fill.”
Federal Reserve Watch
April 2 – Reuters (Dan Burns and Jonnelle Marte): “The Federal Reserve’s balance sheet increased to a record $5.86 trillion this week and the central bank reported greater use of some of its newly launched liquidity facilities, all part of its efforts to keep markets functioning smoothly amid heightened volatility related to the coronavirus pandemic. In the three weeks since the Fed’s effort to limit the economic damage from the outbreak kicked into overdrive, the central bank’s balance sheet has mushroomed by roughly $1.5 trillion.”
April 1 – Bloomberg (Stephen Spratt and Liz Capo McCormick): “The Federal Reserve is trying to call time on a fire sale of Treasuries by foreign governments and central banks. Foreign official holders of Treasuries dumped more than $100 billion in the three weeks to March 25, on course for the biggest monthly drop on record… They joined others seeking to unload government debt globally to raise cash amid the volatility, according to traders and market makers familiar with the transactions. Countries reliant on oil exports and smaller Asian economies have been selling U.S. debt, and central banks have been primarily offloading older, less-liquid Treasuries… The Fed on Tuesday rolled out its latest effort to restore proper functioning in markets, on top of moves to ramp up debt purchases and backstop several market sectors.”
March 31 – Wall Street Journal (Nick Timiraos): “The Federal Reserve said… it would launch a temporary lending facility that for the first time will allow foreign central banks to convert their holdings of Treasury securities into dollars, its latest bid to alleviate strains in global markets. The program is designed to alleviate stresses in currency markets that had prompted more foreign central banks to sell their holdings of Treasurys. The Fed has been aggressively purchasing Treasury and mortgage securities to reduce market strains, and the latest move could reduce the supply of those securities hitting the market if foreign central banks can more easily exchange them for dollars. The program could allow around 170 foreign central banks and other international monetary authorities that maintain accounts at the New York Fed and aren’t subject to U.S. sanctions to enter a lending arrangement called a repurchase agreement, or repo, in which borrowers temporarily exchange their Treasury securities for dollars.”
April 1 – Wall Street Journal (Andrew Ackerman and Ben Eisen): “The Federal Reserve on Wednesday eased rules around how banks account for their supersafe assets, a move meant to boost the flow of credit to cash-strapped consumers and businesses during the coronavirus slowdown. The Fed said it would exclude for one-year Treasurys and deposits held at the central bank from banks’ supplementary leverage ratio calculation. The ratio measures capital-funds that banks raise from investors, earn through profits and use to absorb losses-as a percentage of loans and other assets. Big U.S. banks must maintain capital equal to at least 3% of all of their assets, including loans, investments and real estate.”
March 29 – Financial Times (James Politi): “The US Treasury department and the Federal Reserve are facing calls to clarify how companies can access $454bn of government funds set aside to help corporate America access capital during the coronavirus pandemic. Nearly a quarter of a $2tn stimulus package signed into law by Donald Trump… is aimed at offering companies loans, loan guarantees and debt purchases from the government. But while the financial lifeline from Washington – to be jointly arranged by the Fed and Treasury – has already attracted huge interest from companies in urgent need of tapping the funds, the precise timing, mechanics and conditions attached to the government aid are still hazy… Mike Crapo, the Republican chairman of the Senate banking committee, wrote a letter to Steven Mnuchin… and Jay Powell… late on Saturday asking them to ‘work quickly to issue guidance’ on the plan, highlighting uncertainty over its implementation.”
March 30 – Bloomberg (Steve Matthews): “Adding trillions of dollars of borrowing to the U.S. national debt is necessary fiscal support because of coronavirus-related shutdowns and won’t hamper the country’s ability to grow in the future, says Federal Reserve Bank of St. Louis President James Bullard. ‘We are taking it on at very low interest rates,’ Bullard said…, noting that rates will ‘probably stay very low for quite a while.’ ‘It is a big country. We can carry 10% more debt. It is not ideal but we can certainly do it. And if there was ever a time where you wanted to do something like this, now is that time.'”
March 31 – Bloomberg (Ruth Carson): “The Federal Reserve may need to include secondary purchases of a ‘broader range of securitized products,’ according to Pacific Investment Management Co. The goal of the various facilities the Fed has introduced so far ‘is to indirectly improve market functioning across a wider range of markets. However, that has so far yet to be seen,’ Tiffany Wilding, U.S. economist and Libby Cantrill, head of public policy, wrote..”
U.S. Bubble Watch
March 30 – CNBC (Jeff Cox): “Millions of Americans already have lost their jobs due to the coronavirus crisis and the worst of the damage is yet to come, according to a Federal Reserve estimate. Economists at the Fed’s St. Louis district project total employment reductions of 47 million, which would translate to a 32.1% unemployment rate, according to a recent analysis of how bad things could get. The projections are even worse than St. Louis Fed President James Bullard’s much-publicized estimate of 30%.”
April 3 – CNBC (Jeff Cox): “Nonfarm payrolls dropped by 701,000 in March… It was the first decline in payrolls since September 2010 and came close to the May 2009 financial crisis peak of 800,000. Some two-thirds of the drop came in the hospitality industry, particularly bars and restaurants forced to close during the economic shutdown. The unemployment rate rose to 4.4% – from 3.5% – its highest level since August 2017… An alternative measure that captures discouraged workers and those holding jobs part time for economic reasons jumped from 7% to 8.7%, its highest since March 2017.”
March 31 – Bloomberg (Alaa Shahine): “Goldman Sachs… expects the U.S. economy to experience a far deeper slump than previously anticipated as the coronavirus pandemic hammers businesses, causing a wave of mass unemployment. The world’s largest economy will shrink an annualized 34% in the second quarter, compared with an earlier estimate of 24%, economists led by Jan Hatzius wrote… Unemployment will soar to 15% by mid-year, up from a previous forecast of 9%… The economists, however, now expect a stronger recovery in the third quarter, with gross domestic product expanding 19%.”
March 29 – Financial Times (Gavyn Davies): “The fiscal and monetary stimulus announced by the world’s major economies over the past month is a global policy event without precedent in peacetime. The increase in fiscal spending and loans in the US this year alone will reach more than 10% of gross domestic product, larger than the rise in the federal deficit through 2008 and 2009. Although this is probably not as big as the financial stimulus implemented by China after the financial crash 12 years ago, most big economies could see government debt to GDP ratios rising by 10-20 percentage points. The impact of central bank injections will be equally enormous. For example, the US Federal Reserve may finance part of the country’s fiscal stimulus by buying Treasuries. On top of that, its balance sheet will grow from purchases of mortgage bonds and packages of private loan assets. It would not be surprising if the Fed’s balance sheet increased by $2tn-$3tn this year, up from $4.2tn at the end of 2019.”
April 2 – New York Times (Mary Williams Walsh): “For years, the country’s public pension plans have faced a yawning gap between what they owe and what they can pay. From the State of California’s public employees’ retirement plan, with more than 1.6 million participants, to tiny funds for employees of local mosquito-control programs in Illinois, public pensions are the time bomb of government finance. Now the coronavirus pandemic has it ticking faster. Already chronically underfunded, pension programs have taken huge hits to their investment portfolios… The outbreak has also triggered widespread job losses and business closures that threaten to wipe out state and local tax revenues. That one-two punch has staggered these funds, most of which are required by law to keep sending checks every month to about 11 million Americans. Last week, Moody’s… estimated that state and local pension funds had lost $1 trillion in the market sell-off that began in February.”
March 28 – CNBC (Natasha Turak): “Wednesday’s Chapter 11 bankruptcy filing for Colorado-based Whiting Petroleum is a grim omen of things to come… The company is the first U.S. shale producer to go under since the start of the year, when oil prices began to fall. ‘I don’t want to be a doomsayer, but I think Whiting is just simply the first domino that’s going to fall,’ John Driscoll, chief strategist at JTD Energy Services, told CNBC… ‘It’s a fairly substantial company, but the smaller producers, if they don’t have the hedging in place, it’s going to be a tough route – Chapter 11 might be the only way to go.'”
March 29 – CNBC (Sam Meredith): “The coronavirus pandemic will likely be a ‘game-changer’ for energy markets, according to analysts at Goldman Sachs, with carbon-based industries such as oil thought to be sitting ‘in the cross-hairs’… ‘With social distancing measures now impacting 92% of global GDP, the ultimate magnitude of these shut-ins which is still unknown will likely permanently alter the energy industry and its geopolitics, restrict demand as economic activity normalizes and shift the debate around climate change,’ analysts at Goldman said…”
April 2 – Bloomberg (Lananh Nguyen, Shahien Nasiripour, and Michelle F Davis): “Market condition: severe. That’s Bank of America Corp.’s new assessment of a corner of the U.S. mortgage industry facing a deluge of applications from homeowners looking to shore up their finances. The coronavirus pandemic, which is prompting nervous Americans to tap into record amounts of home equity as a buffer against an economy tipping into recession, has also led Bank of America to aggressively tighten its standards for home equity lines of credit, or Helocs. Wells Fargo & Co. has taken similar actions, and JPMorgan & Co. may change its policies too.”
March 30 – Reuters (Ann Saphir): “Business conditions in Texas, the second-biggest U.S. state by economic output, deteriorated precipitously this month as the coronavirus pandemic slowed both supply and demand for a wide range of industries, surveys conducted by the Dallas Federal Reserve Bank show. The Dallas Fed’s general business activity index… fell to a record low, as did an index tracking their outlook for the sector.”
March 30 – Reuters (Nick Carey): “U.S. new vehicle sales likely drove off a cliff in March as the coronavirus pandemic pounded consumer confidence and shuttered dealerships across much of the country, and sales are likely to take a further beating in April as social distancing guidelines remain in place… TrueCar has forecast a sales drop for March of 37% and Lyman said sales in April could also be off between 50% to 60%.”
March 31 – CNBC (Diana Olick): “Home prices were seeing even bigger gains in January than all of last year, but that was before the coronavirus hit… Now there are forecasts that home values will weaken significantly. Nationally, home prices rose 3.9% annually, up from 3.7% in December, according to the S&P CoreLogic Case-Shiller Indices.”
April 1 – CNBC (Diana Olick): “The coronavirus appears to be splitting the mortgage market: More borrowers are refinancing to save money on monthly payments, while potential homebuyers are backing away fast… Mortgage applications to purchase a home fell 11% last week and were 24% lower than a year ago. Real estate agents and homebuilders have reported a sharp drop in buyer interest, and open houses and model homes are shuttering.”
April 1 – New York Times (Erin Griffith): “After a crush of travel cancellations in March, WanderJaunt, a short-term home rental start-up in San Francisco, laid off 56 of its 240 employees last week. Demand for services from Wonderschool, a start-up that helps people find day care and preschool providers, dropped by half, leading it to cut most of its 60-person staff. And at ClassPass, which offers a membership program for fitness classes, over 95% of revenue evaporated in just 10 days as studios and gyms around the world shut down. To survive, the start-up slashed spending, froze hiring and rushed to build a video streaming service for virtual workouts. ‘This is the great unwinding,’ said Martin Pichinson, head of Sherwood Partners, a Silicon Valley advisory firm that restructures failed start-ups. In recent weeks, he said, his firm has fielded a ‘firestorm’ of calls – a volume three or four times the highest he had ever seen.”
March 30 – Bloomberg (Sarah Ponczek and Vildana Hajric): “Data compiled by Goldman Sachs… shows that almost 50 U.S. firms have suspended existing authorizations in the past two weeks, according to a note from its strategists. The firm’s buyback desk estimates that $190 billion has been suspended by S&P 500 companies overall — roughly 25% of last year’s buyback total.”
April 1 – Bloomberg (Lananh Nguyen): “The biggest banks have ramped up their commercial lending to U.S. companies wrestling with the impact of the coronavirus. Lenders made about $400 billion in commercial loans to small and large American businesses in the first quarter, up 12.7% from a year earlier…”
April 1 – Bloomberg (Christopher Maloney): “Fannie Mae and Freddie Mac released lender letters on Tuesday and what they outlined shows an intent to tighten up lending standards, wrote Wells Fargo MBS analysts led by Vipul Jain. The new standards tighten income/asset documentation, verification of self-employment and usage of market-based assets.”
April 1 – Bloomberg (Amanda Albright, Shruti Date Singh and Danielle Moran): “The coronavirus is threatening to blow a massive hole in U.S. state and city budgets as millions of people stay home, workers are idled and the stock market flounders. New York… is projected to lose between $10 billion and $15 billion of revenue in the fiscal year that starts Wednesday.”
March 31 – Bloomberg (Romy Varghese): “San Francisco is forecasting that it may lose as much as $1.26 billion of tax revenue over the next two years because of the severe economic shutdown imposed to slow the spread of the coronavirus pandemic.”
March 30 – Associated Press (Jim Salter): “With millions of people suddenly out of work and rent due at the first of the month, some tenants are vowing to go on a rent strike until the coronavirus pandemic subsides. New York, Boston, Los Angeles, San Francisco and St. Louis are among many cities that have temporarily banned evictions, but advocates for the strike are demanding that rent payments be waived, not delayed, for those in need during the crisis. The rent strike idea has taken root in parts of North America and as far away as London.”
March 30 – Wall Street Journal (Leslie Scism): “Lawmakers and regulators are pressuring insurers to go beyond the legal language of policies to get cash to Americans amid the mounting cost of shutdowns from the coronavirus pandemic. In at least three states, lawmakers have proposed legislation to force insurers to pay billions of dollars for business losses tied to government-ordered shutdowns. In other states, regulators are pushing insurers to expand coverage under personal-car policies to also cover certain commercial activity, such as delivery of takeout meals… Some regulators have declared moratoriums on cancellations and nonrenewals of policies. And some are urging car insurers to lower people’s bills.”
March 28 – Financial Times (Gregory Meyer): “Steaks and oysters Rockefeller were once served to oil executives at Opal’s Table restaurant in Midland, Texas. This week, the business, on the ground floor of an office building housing oil companies, closed its doors to customers to cook kerbside meals for the needy. ‘It appears that the winds are going to change very drastically,’ said owner Chip Hight. An economic cyclone is ripping through Midland and the rest of Texas, a $1.8tn economy and the leading oil-producing state in the US. Texas’s oil output quadrupled in the past decade, with the Permian basin surrounding Midland at the heart of the shale boom.”
March 30 – Bloomberg (Ben Stupples and Kevin Varley): “David Geffen’s picture-perfect self-seclusion is highlighting ugly divisions in the age of the coronavirus pandemic. ‘Isolated in the Grenadines avoiding the virus,’ the billionaire, 77, said in an Instagram post. ‘I’m hoping everybody is staying safe.’ The photos of his luxury confinement aboard the 454-foot Rising Sun, one of the world’s biggest private vessels, triggered an immediate social-media backlash over the weekend. ‘This is just shameful and grotesque,’ Meghan McCain tweeted…, one of thousands of critical comments.”
Fixed-Income Bubble Watch
April 2 – Wall Street Journal (Heather Gillers and Gunjan Banerji): “The coronavirus triggered a liquidity crisis in municipal bonds, but the volatility that resulted has been brewing for a decade. Desperate sellers across most markets sold assets at deep discounts last month as the spreading new coronavirus left investors fearful and hungry for cash. Perhaps no investment flipped from coveted haven to spurned hot potato as quickly as municipal bonds. Prices have started to recover as U.S. lawmakers authorized the Federal Reserve to prop up a wide swath of state and local government debt. But the marketwide breakdown exposed a new vulnerability in the nearly $4 trillion municipal market: a concentration of power and risk resulting from a fundamental shift in how muni bonds are bought and sold on Wall Street and on Main Street.”
April 2 – Reuters (Kate Duguid): “Highly rated U.S. corporate bond issuers raised a record $110.502 billion this week, according to Refinitiv IFR data, as fears that the coronavirus pandemic may limit access to capital markets stoked borrowing.”
March 31 – Financial Times (Laura Noonan and Robert Armstrong): “Big Wall Street banks have quietly joined with US home lenders in calling for regulatory action to prevent the Federal Reserve’s emergency purchases of mortgage-backed securities from unintentionally upending the hedging strategies of mortgage originators. The Mortgage Bankers Association kicked off the lobbying effort on Sunday, asking the Securities and Exchange Commission to discourage securities firms from making margin calls on mortgage lenders for hedges they bought to protect themselves from a fall in the value of their loans.”
April 1 – Bloomberg (Christine Buurma): “Oil producer Whiting Petroleum Corp. filed for bankruptcy, the first big casualty of a global collapse in crude prices that’s leaving debt-laden shale explorers struggling to survive… The company listed debt of $3.6 billion and assets worth $7.6 billion in its Chapter 11 petition… As many as 40% of U.S. oil and gas companies could crater into bankruptcy or distress over the next two years as they grapple with a market crash and the coronavirus outbreak, according to asset manager Pickering Energy Partners LP.”
March 30 – Bloomberg (Finbarr Flynn): “A Moody’s analysis based on three scenarios shows speculative-grade default rate for companies globally could rise to 6.8% to 20.8% in a year depending on the severity and length of the coronavirus-driven economic downturn…”
April 1 – Bloomberg (Adam Haigh): “The worst is likely yet to come for high-yield bonds as more defaults loom, according to Goldman Sachs… Such debt faces numerous headwinds, analyst Lotfi Karoui wrote… ‘Despite the strength of the policy support, the cyclical challenges for corporate borrowers remain substantial… As has been the case in past downturns, financial distress will continue to increase, leading to higher defaults and downgrades.'”
April 1 – Bloomberg (James Crombie): “Leveraged loans just took their biggest monthly and quarterly losses since 2008 and there may be more pain to come as damage to the economy spreads. The 13% first quarter plunge for U.S. loans followed a 12% drop in March, the worst since October 2008. The decline exceeded that of U.S. junk bonds, which lost 11.5% in March and are down 12.7% year-to-date.”
April 1 – Bloomberg (Lisa Lee): “An unprecedented amount of leveraged loan downgrades could wreak havoc on collateralized loan obligations. Take the once high-flying Cirque Du Soleil Inc. Within weeks of the acrobatic-entertainment company canceling Las Vegas and touring shows, Moody’s… and S&P Global Ratings slashed ratings on about $1 billion of the company’s debt, the majority of which is held by CLOs… While an individual loan downgrade likely wouldn’t damage a CLO’s ability to pay investors, a deluge of them around the same time certainly could. S&P has cut or put on negative watch at least $45 billion of the average portfolio of leveraged loans in CLOs since late February amid the fallout from the coronavirus which has shuttered businesses…”
April 1 – Reuters (Aaron Weinman): “Participants in the US leveraged loan market are revising the landscape for deal-making in the aftermath of the coronavirus pandemic, which has rocked financial markets over the last month and brought new syndicated loan issuance to a halt. With new issuance frozen, mergers and acquisitions-related transactions are pending as bankers and investors grapple with a significantly different environment from which they originally committed to lend.”
March 30 – Reuters (Joshua Franklin): “Yum Brands Inc, owner of Pizza Hut, KFC and Taco Bell restaurant chains, sold $600 million in bonds on Monday, reopening the U.S. market for junk-rated debt issues after its longest lull since the 2008 financial crisis.”
April 1 – Financial Times (Tom Mitchell): “For Xi Jinping, the good news is that China’s economy appears to have performed slightly better in March than in February. The bad news is, that is about as far as the good news goes for now. If the world’s second-largest economy is not performing markedly better by the end of June, China’s powerful president could face unprecedented economic and political challenges… ‘The real unemployment rate in China is likely to go higher than 10% for sure,’ said Diana Choyleva, chief economist at Enodo Economics… ‘Q2 [economic activity] is shaping up to be very weak as disruptions to production in China linger and, more importantly, demand from the rest of the world evaporates.'”
March 29 – Bloomberg: “The two-decade run of record profits at China’s biggest banks, which even survived the financial crisis, is facing its biggest test. Banks such as Industrial & Commercial Bank of China Ltd., the world’s largest by assets, are caught in a vise as their operations are hammered by the outbreak of the deadly coronavirus. At the same time, they are being called on to help rescue the world’s second-largest economy now facing its slowest growth in four decades… The $41 trillion banking industry, more than twice as large as the U.S. sector, is depleting its capital and bad-loan reserves as it rolls over delinquent debt to keep millions of businesses afloat, adding to woes that built up in 2019.”
March 29 – Financial Times (Don Weinland): “Capital levels at some Chinese banks risk falling below a crucial threshold meant to buffer them against financial contagion, as lenders face an incoming surge of bad debts due to coronavirus. Beijing has called on banks to play a key role in supporting companies that are struggling to survive following the Covid-19 outbreak. Regulators have instructed lenders to brace for much higher levels of non-performing loans… But many Chinese banks are already struggling with asset quality problems, and lack the capital and profitability for the new lending needed to fuel a recovery.”
March 29 – Reuters (Winni Zhou, Lusha Zhang and Andrew Galbraith): “China’s central bank unexpectedly cut the rate on reverse repurchase agreements by 20 bps on Monday, the largest in nearly five years, as authorities ramped up steps to relieve pressure on an economy ravaged by the coronavirus pandemic.”
April 3 – Reuters (Yawen Chen and Ryan Woo): “China’s services sector struggled to get back on its feet in March after a brutal month of unprecedented shop closures and public lockdowns amid the coronavirus outbreak, a private survey showed… Services companies cut jobs at the fastest pace on record as orders plunged for the second straight month and businesses scrambled to reduce their operating costs. Export orders also slumped again…”
March 31 – Bloomberg: “Chinese companies sold a record amount of domestic bonds this month, after Beijing flooded markets with cash and lowered the threshold for corporate debt sales. Onshore corporate bond issuance surged to 1.7 trillion yuan ($240bn) in March, up 21% from 1.4 trillion yuan a year earlier… It’s also higher than a combined 1.6 trillion yuan from the first two holiday-shortened months of this year.”
Central Bank Watch
March 31 – Bloomberg (Stephen Spratt, Takashi Nakamichi and Taiga Uranaka): “The Bank of Japan went to such lengths to ensure local banks had enough dollars to weather a global liquidity crunch that it may have inadvertently contributed to a surge in repo-market rates to a record. The BOJ offered Japanese banks cheap access to dollars, and encouraged them to borrow as much as they wanted… When the lenders complied – to the tune of $185 billion net and counting — the collateral they posted was sucked straight out of the repurchase markets, another key link in the financial plumbing.”
March 30 – Bloomberg (Piotr Skolimowski and John Ainger): “The European Central Bank boosted its asset purchases by a record last week as it tried to calm financial markets reeling from the impact of the coronavirus pandemic. Purchases climbed by around 40 billion euros ($44bn) as the central bank ramped up quantitative easing and kicked off its new Pandemic Emergency Purchase Program…”
March 31 – Bloomberg (Alessandra Migliaccio and John Ainger): “Two decades since the euro began, one of the principal worries of its founders is materializing as the coronavirus rages through the region’s third-largest economy. The longstanding suspicion that Italy’s profligate borrowing could ultimately become the whole of Europe’s problem was the recurring nightmare of German finance officials throughout the 1990s. Now, as the crisis forces Giuseppe Conte’s government to jettison a decade of tightly capped Italian budget deficits, the country’s strategy for the future is once again built on piling up debt, sending its public borrowings swelling toward or even beyond 150% of gross domestic product.”
March 29 – Associated Press (Joseph Wilson and Angela Charlton): “Europe’s fractured union came under new pressure this weekend, as Italy and Spain pleaded for urgent European help to withstand the virus ordeal but Germany showed reluctance to plunge into any radical new solutions. The north-south divide that has dogged the European Union for years has resurfaced as the virus has galloped across the continent, claiming more deaths than any other region in the world.”
March 29 – Reuters (Richard Lough and Kirsti Knolle): “How the European Union responds to the coronavirus outbreak will determine its future credibility, a French minister said…, after the bloc failed to agree last week on measures to cushion the economic blow… ‘If Europe is just a single market when times are good, then it has no sense,’ European Affairs minister Amelie de Montchalin told France Inter radio.”
March 30 – Bloomberg (John Follain): “As Prime Minister Giuseppe Conte fights to hold Italian society together through a crippling nationwide lockdown, the depressed south is turning into a powder keg. Police have been deployed on the streets of Sicily’s capital, Palermo, amid reports gangs are using social media to plot attacks on stores. A bankrupt ferry company halted service to the island, including vital supplies of food and medicines. As the state creaks under the strain of the coronavirus pandemic, officials worry the mafia may be preparing to step in. Preventing unrest in the so-called Mezzogiorno, the underdeveloped southern region that’s long lagged behind the wealthy north, has become the government’s top priority…”
March 30 – Financial Times (Jonathan Wheatley): “Central banks across the developing world are pushing policy to extremes that would have been unimaginable a few weeks ago, as the coronavirus crisis sends debt markets into turmoil and governments prepare for an unprecedented expansion of public spending. The central banks of Poland, Colombia, the Philippines and South Africa have all begun to buy government and private sector bonds on secondary markets, while the central banks of Brazil and the Czech Republic have asked for new laws to allow them to do so.”
March 30 – Wall Street Journal (Brian Spegele and Anna Isaac): “A hidden pile of debt threatens dozens of emerging-market countries as the global economy stalls and commodity prices tumble. An estimated $200 billion of emerging-market debt owed to China has gone unreported in official statistics in recent years. The money is upending assumptions made by yield-hungry investors who have poured roughly $2 trillion into risky emerging markets over the last decade. Even before the market crash, some borrowers were buckling under their debts to China. Pakistan turned to the International Monetary Fund in 2018 for a bailout. Sri Lanka was forced to cede China control of a strategically located port to shore up state finances.”
March 31 – Reuters (Tatiana Bautzer and Carolina Mandl): “Latin American companies from oil behemoth Petrobras to cement maker Cemex, facing drastic coronavirus-linked revenue declines, are rushing to draw down credit lines amid a shutdown in local bond markets and a paucity of state aid. The dash for cash is in line with a broader move by businesses worldwide amid a plunge in demand. But a paucity of quantitative-easing style monetary policies or other state support for companies is emerging as an added regional stress factor. ‘In my entire career, I’ve never seen companies seeking so much money as now. Not even in the 2008 financial crisis,” said an experienced executive at one of Brazil’s top lenders.'”
March 30 – Financial Times (Joseph Cotterill): “The South African rand hit a record low against the US dollar after Moody’s removed the last investment-grade credit rating for Africa’s most industrialised economy, citing the hit to economic growth from the coronavirus pandemic. The rand weakened as much as 2%…”
March 30 – Reuters (Jamie McGeever): “Brazil’s jobless rate rose to 11.6% in the three months through February… This marked a 0.4 percentage point increase from the 11.2% rate recorded in the three months through November.”
April 2 – Reuters (Lisandra Paraguassu, Ricardo Brito, Maria Carolina Marcello and Anthony Boadle): “At a tense cabinet meeting on Saturday in the Brazilian president’s official residence, Jair Bolsonaro found himself isolated. The far-right leader convened the emergency meeting in Brasilia’s modernist Alvorada Palace to resolve a dispute with Health Minister Luiz Henrique Mandetta, who publicly opposed the president’s calls to loosen quarantine restrictions for Brazil’s 210 million people. But, with Mandetta unwilling to back down, Bolsonaro’s closest aides refused to support his plan to relax coronavirus rules to keep the economy going…”
March 31 – Bloomberg (Faris Mokhtar): “Singapore home prices fell the most in more than three years in the first quarter as the coronavirus outbreak slammed the economy. Property values declined 1.2% in the three months ended March 31…”
April 1 – Reuters (Davide Barbuscia, Marwa Rashad and Hadeel Al Sayegh): “Gulf banks are limiting their lending to minimize potential losses from the coronavirus crisis and an expected squeeze in dollar liquidity in the oil reliant region, some bankers say. Like banks around the world, Gulf lenders face an expected drop in loan growth in crisis-affected industries such as retail, tourism and transport, but they must also navigate the impact of plunging crude prices on the region. Restricting lending is expected to hit small businesses most vulnerable to lower demand and supply chain disruptions hardest.”
April 1 – Reuters (Leika Kihara and Tetsushi Kajimoto): “Japan’s business confidence soured to levels not seen since 2013, a closely watched survey showed, as the coronavirus pandemic hit sectors from hotels to carmakers and pushed the economy closer to recession.”
Leveraged Speculation Watch
March 31 – Wall Street Journal (Juliet Chung): “Hedge fund EJF Capital LLC told clients it was suspending redemptions from one of its funds for the foreseeable future because it didn’t want to be a forced seller in what it called ‘dysfunctional’ credit markets. The $7 billion EJF… told clients in a letter Friday it was preventing investors from withdrawing their money from its Debt Opportunities Fund.”
April 3 – CNBC (Huileng Tan): “In the last few weeks, Chinese President Xi Jinping has been busy calling leaders across the world and rallying for global coordination in managing the coronavirus outbreak. Chinese health experts have hosted video conferences with those from other countries to share experiences. ‘This is the first international crisis where China is actively taking a global leadership role and it stands in particular contrast to the US, which has disdained international cooperation and invested more political capital in criticizing China for its role in allowing the outbreak to spread,’ said analysts from the Eurasia Group…”
April 1 – Bloomberg (Nick Wadhams and Jennifer Jacobs): “China has concealed the extent of the coronavirus outbreak in its country, under-reporting both total cases and deaths it’s suffered from the disease, the U.S. intelligence community concluded in a classified report to the White House, according to three U.S. officials…. But the thrust, they said, is that China’s public reporting on cases and deaths is intentionally incomplete. Two of the officials said the report concludes that China’s numbers are fake.”
April 1 – Reuters (Anthony Esposito and Ana Isabel Martinez): “Mexico’s top diplomat thanked two Chinese charities for donating medical supplies to help stem the coronavirus outbreak in an online message that went viral. ‘Thank you China!!!’ Foreign Minister Marcelo Ebrard wrote in a Twitter post…
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.