October 19, 2018

European Markets Sink On Italian Fears, China Surges After GDP Miss; S&P Futs Flat

After another turbulent week for markets, which saw violent reversals in US stocks which soared on Tuesday on the back of the biggest short squeeze since the Trump election only to tumble on Thursday on a combination of fears about the hawkish Fed, Chinese margin calls, the Italian standoff with the EU, and concerns about slowing profits, Friday has so far been a relatively quiet session with US equity futures fading the initial move higher and trading close to unchanged.

Markets in Europe were far more downbeat, with the Stoxx 600 falling as much as 0.6% around 6am ET, retreating for a third session in a row...

... with the auto sector down 2.8%, while renewed concerns about Rome's showdown with Brussels over the 2019 budget sent Italy's FTSE MIB to a 19-month low, down 1.6%, and Italian bond yields to new multi year highs as EU nations warned Italy’s populist government its budget won’t fly, with signs of contagion apparent as yields on Spain’s 10-year bonds climb to the highest level since October 2017.

The European auto sector was the biggest loser as the stoxx autos & parts index tumbled after Michelin issued a warning of declining 2H sales in Europe and China,

The latest weekly flow data showed that European equity funds suffered outflows of $4.8b in week ending Oct. 17, the biggest redemption in 27 weeks, and bringing the year-to-date outflows now at $50.4bn.

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October 18, 2018

China Crashes As Flood Of Margin Calls Sparks "Liquidity Crisis", Panic Selling

The Treasury's latest semiannual FX report may have spared China the designation of currency manipulator (for now... in a new twist, there was a section dedicated exclusively to China in the Executive Summary, a clear signal from the Treasury that China is the disproportionate focus of the report stating that 'it is is clear that China is not resisting depreciation through intervention as it had in the recent past'), but the market was not as forgiving.

In the latest shock to Chinese confidence and stability, overnight Chinese shares extended the world’s worst slump as the yuan touched its weakest level in almost two years, testing the government’s ability to maintain market stability and calm as risks continued to mount for Asia’s largest economy.

Two days after we reported that concerns about pledged shares, in which major investors put up stock as collateral for personal loans - a disastrous practice when stock prices are dropping, emerged as a key pressure point for China's market, overnight Bloomberg reported that "rising fears of widespread margin calls fueled a 3 percent tumble in the Shanghai Composite Index, which sank to a nearly four-year low as more than 13 stocks fell for each that rose."

The concentrated selloff, sent the Shanghai Composite down 2.9%, closing at session lows of 2,486, the lowest level since November 2014, as China's plunge-protecting "National Team" was nowhere to be seen.

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October 17, 2018

Forced Buy-Ins Spark "Liquidity Crisis" In China's 'Nasdaq'

Marking the worst year since 2008, China's tech-heavy (Nasdaq-equivalent) Shenzhen Composite index is down a shocking 35% year-to-date, and it's starting to become a self-feeding vicious circle...

As Bloomberg reports, the most recent slump in the teach-heavy index comes despite regulators' efforts to rein in risks of share-backed loans following reports over the weekend that insurers are being 'encouraged' to invest in listed companies to reduce liquidity risks connected to such loans.

Share pledges, where company founders and other major investors put up stock as collateral, have emerged as a pressure point in China’s debt-laden economy, especially as the stock market tumbles.

There’s a liquidity crisis in the stock market, and pledged shares are again starting to sound the alarm,” said Yang Hai, analyst at Kaiyuan Securities Co.

"Stocks in Shenzhen typically bear the brunt of loss of confidence in the stock market because of their higher valuations.”

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October 16, 2018

Zero-Down Subprime Mortgages Are Back, What Could Possibly Go Wrong?

Ten years after the collapse of Lehman Brothers, banks are once again taking bets on the same type of loans that nearly collapsed the economy amid a flurry of emergency bailouts and unprecedented consolidations. 

Bank of America has backed a $10 billion program from Boston-based brokerage Neighborhood Assistance Corporation of America (NACA), to offer zero-down mortgages to low-income borrowers with poor credit scores, according to CNBC. NACA has been conducting four-day events in cities across America to educate subprime borrowers and then lend them money - with a 90% approval rate and interest rates around 4.5%

"It's total upside," said AJ Barkley, senior vice president of consumer lending at BofA. "We have seen significant wins in this partnership. Just to be clear, when we get those loans with all the heavy lifting here, we're over a 90 percent approval, meaning 90 percent of the people who go through this program that we actually underwrite the loans."

Borrowers can have low credit scores, but have to go through an education session about the program and submit all necessary documents, from income statements to phone bills. Then they go through counseling to understand their monthly budget and ensure they can afford the mortgage payment. The loans are 15- or 30-year fixed with interest rates below market, about 4.5 percent. -CNBC

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October 15, 2018

The Inevitable De-Industrialization Of Europe

EU ministers agreed to binding cuts in CO2 emissions of 35% by 2030. The German auto industry won't be able to deliver.

The Telegraph reports Berlin court orders German capital to ban most diesel vehicles on 11 major roads to counter pollution.

Hamburg was first in May. Stuttgart, home of Mercedes and Porsche, was second in July.

A diesel ban in Frankfurt came third.

Only older cars that do not meet emission standards are banned, but diesel is now toxic. No one wants to buy diesel.

Merkel Can No Longer Protect Car Makers

Adding to the woes, Merkel has lost control. She is no longer able to protect German industry.

The European Parliament just voted to cut CO2 emissions by 40%. The European ministers voted for a 35% reduction. The latter is binding.

Car sales dropped sharply in September.

Eurointelligence on Autos and German Industry

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October 12, 2018

Whalen: Donald Trump Is Right About The Fed

President Donald Trump has been criticizing the Federal Open Market Committee for raising interest rates.  The reaction of the US equity markets is self explanatory.  But while the economist love cult in the Big Media may take umbrage at President Trump’s critique of the central bank, in fact Trump is dead right.

First, the Fed’s actions in terms of buying $4 trillion in Treasury debt and mortgage paper has badly crippled the value of the fixed income market as a measure of risk.  The Treasury yield curve no longer accurately describes the term structure of interest rates or risk premiums. This means that the Treasury yield curve is useless as an indicator of or guide for policy.  Nobody at the Federal Reserve Board understands this issue or cares.

Second, Operation Twist further manipulated and distorted the Treasury market.  By selling short-term paper and buying long dated securities, the Fed suppressed long-term interest rates, again making indicators like the 10-year Treasury bond useless as an measure of risk. Without QE 2-3 and Operation Twist, the 10-Year Treasury would be well over 4% by now.  Instead it is 3% and change and will probably rally to test 3% between now and year end.

Third is the real issuing bothering President Trump, even if he cannot find the precise words, namely liquidity.  We have the illusion of liquidity in the financial markets today.  Sell Side firms are prohibited by Dodd-Frank and the Volcker Rule from deploying capital in the cash equity and debt markets.  All bank portfolios are now passive.  No trading, no market making.  There is nobody to catch the falling knife.

The only credit being extended today in the short-term markets is with collateral.  There is no longer any unsecured lending between banks and, especially, non-banks. As we noted in The Institutional Risk Analyst earlier this week, there are scores of nonbank lenders in mortgages, autos and consumer unsecured lending that are ready to go belly up.  Half of the non-bank mortgage lenders in the US are in default on their bank credit lines.  As in 2007, the model builders at the Fed in Washington have no idea nor do they care to hear outside opinions.

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October 11, 2018

Sears Creditors Push For Bankruptcy Liquidation As Vendors No Longer Paid

Amid recent reports that Sears is set to file for bankruptcy as soon as this weekend ahead of a $134 million debt payment due on Monday, the only question is whether the filing will be a Chapter 11 debt for equity reorganization or a Chapter 7 liquidation. And contrary to the desires of Sears CEO and biggest creditor, Eddie Lampert, who would like to preserve the core business, others are pushing for an outright liquidation.

According to the WSJ, a group of Sears' biggest lenders, including Bank of America Corp., Wells Fargo & Co. and Citigroup Inc., are pushing for the company to liquidate its assets under a chapter 7 bankruptcy filing, as opposed to reorganizing the business under chapter 11, this person said.

The consensus reportedly emerged after Sears met with its lenders Wednesday night to discuss emergency financing for the embattled retailer. The meeting ended without an agreement that would keep Sears operating as a going concern, the WSJ reports.

At Wednesday’s meeting, Sears proposed a restructuring plan to shrink its store base dramatically, at which point it expected to be profitable, the person said. But the banks argued the safest way for them to recoup their money is to sell all of the remaining stores and liquidate the inventory, the person said.

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October 10, 2018

Sears Preparing To File Bankruptcy As Soon As This Week

The neverending saga of the world's longest melting ice cube, that of Sears Holdings which has flirted with bankruptcy for years only to get bailed out in the 11th hour by its biggest investor and CEO Eddie Lampert each and every time, is finally coming to its logical end.

With its stock crashing to a new all time low, and with a $134 million in debt due on Monday on a bond issue that is currently yielding over 1,000% in the 3 or so business days left to maturity...

... the iconic if cash-strapped Sears Holdings, whose predecessor was the de facto originator of "online" retail with its innovative mail order catalogues, and which has been losing money for years, has hired M-III Partners to prepare a bankruptcy filing that could come as soon as this week, the WSJ reported citing people familiar with the situation, as the cash-strapped company that once dominated American retailing faces a debt payment deadline.

The WSJ reports that employees at M-III Partners, a boutique advisory firm, have spent the past few weeks working on the potential filing, with M-III staff seen at the retailer’s headquarters in Hoffman Estates, Illinois. That said, a Chapter 11 may still be avoided as Sears "continues to discuss other options and could still avert an in-court restructuring."

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October 9, 2018

IMF Slashes US Growth Outlook, Blames Rates & Trade; Sees Venezuelan Inflation 10-Million-Percent

Confirming Director Lagarde's warning that "clouds on the horizon have materialized," The International Monetary Fund is downgrading its outlook for the world economy, citing rising interest rates and growing tensions over trade.

The IMF said Monday that the global economy will grow 3.7 percent this year, the same as in 2017 but down from the 3.9 percent it was forecasting for 2018 in July.

It slashed its outlook for the 19 countries that use the euro currency and for Central and Eastern Europe, Latin America, the Middle East and Sub-Saharan Africa.

Furthermore, The IMF expects the U.S. economy to grow 2.9 percent this year, the fastest pace since 2005 and unchanged from the July forecast.

But it predicts that U.S. growth will slow to 2.5 percent next year as the effect of recent tax cuts wears off and as President Donald Trump's trade war with China takes a toll.

As The IMF blog details, there are clouds on the horizon. Growth has proven to be less balanced than hoped. Not only have some downside risks that the last WEO identified been realized, the likelihood of further negative shocks to our growth forecast has risen. In several key economies, moreover, growth is being supported by policies that seem unsustainable over the long term. These concerns raise the urgency for policymakers to act.

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October 8, 2018

Italian Stocks, Bonds Collapse After EU Rejects Rome's Budget Plans

Italian stocks tumbled with the FTSE MIB dropping 2.3% - the worst performer among major European markets on Monday - and hitting its lowest level since April 2017, while the country's bonds plunged to the lowest level since February 2014 amid what now appears to be an inevitable showdown between Italy and the EU, after the European Commission said Italy’s budget plans are in breach of common rules.

Over the weekend, the European Commission told Italy it is concerned about its budget deficit plans for the next three years since they breach what the EU asked the country to do in July, but a defiant Rome insisted on Saturday it would “not retreat” from its spending plans.

In a letter to Italy’s Economy Minister Giovanni Tria, the Commission said that with a planned headline deficit of 2.4 percent of GDP in 2019, Italy’s structural deficit, which excludes one-offs and business cycle effects, would rise by 0.8 percent of GDP. Under EU rules Italy, which has a public debt to GDP ratio of 133 percent and the highest debt servicing costs in Europe, should cut the structural deficit every year until balance.

“Italy’s revised budgetary targets appear prima facie to point to a significant deviation from the fiscal path” commonly agreed by European Union governments, EU Commissioners Valdis Dombrovskis and Pierre Moscovici wrote in a letter to Italian Finance Minister Giovanni Tria. “This is therefore a source of serious concern,” the commission’s finance chiefs said in their letter Friday responding to a note sent by Tria the day before.

“We call on the Italian authorities to ensure that the Draft Budgetary Plan will be in compliance with the common fiscal rules,” the letter added at the same time as the council of EU ministers asked Italy in July to reduce that structural deficit by 0.6% of GDP next year, which means the deficit would be 1.4 points off track, Reuters reported.

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October 5, 2018

Inverted Global Yield Curve Creates “The Perfect Cocktail For A Liquidity Crunch” As The IMF Warns Of “A Second Great Depression”

Why would the IMF use the phrase “a second Great Depression” in a report that they know the entire world will read?  To be more precise, the IMF stated that “large challenges loom for the global economy to prevent a second Great Depression”.  Are they saying that if we do not change our ways that we are going to be heading into a horrific economic depression?  Because if that is what they are trying to communicate, they would be exactly correct.  At this moment, global debt levels are higher than they have ever been before in all of human history, and in their report the IMF specifically identified “global debt levels” as one of the key problems that could lead to “another financial meltdown”…

The world economy is at risk of another financial meltdown, following the failure of governments and regulators to push through all the reforms needed to protect the system from reckless behaviour, the International Monetary Fund has warned.

With global debt levels well above those at the time of the last crash in 2008, the risk remains that unregulated parts of the financial system could trigger a global panic, the Washington-based lender of last resort said.

And the IMF report also seemed to indicate that global central banks were responsible for the situation in which we now find ourselves.

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October 4, 2018

Chinese Imports Of US Crude Have "Totally Stopped" As Tariff Threats Persist

It has been roughly two months since China threatened to impose a 25% tariff on US energy imports (it eventually went back on those threats), and less than two weeks since the latest round of tariffs has been implemented. But even as China has shied away from its threats to punish the US energy industry, Reuters data are showing that imports of US oil to China have ground to a halt.

Confirming the data, Xie Chunlin, the president of China Merchants Energy Shipping Co, said on Wednesday that crude oil shipments to China have "totally stopped" as the trade war has taken its toll, reversing growth in what had been a rapidly expanding market for US shale producers.

"We are one of the major carriers for crude oil from the U.S. to China. Before (the trade war) we had a nice business, but now it’s totally stopped," Chunlin said on the sidelines of the Global Maritime Forum’s Annual Summit in Hong Kong.

"It’s unfortunately happened, the trade war between the U.S. and China. Surely for the shipping business, it’s not good," the CMES president said.

He also said the trade dispute was forcing China to seek soybeans from suppliers other than the United States, adding that China now bought most its soybeans from South America.

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October 3, 2018

The Retail Apocalypse Picks Up Speed As Sears, JCPenney, Brookstone And Mattress Firm Spiral Toward Bankruptcy

Over 20 major retailers have filed for bankruptcy since the beginning of last year, and in 2018 we may break the all-time record for annual store closings that was established just last year.  We are in the midst of the worst retail apocalypse in American history, and it appears to be picking up speed as retail giants such as Sears, JCPenney, Brookstone and Mattress Firm spiral toward bankruptcy.  We live at a time when the middle class is being systematically destroyed, and so the truth is that U.S. consumers simply do not have as much discretionary income as they once did.  Many large retailers believed that things would eventually turn around, and they have been fighting very hard to survive, but now time has run out for quite a few of them.

Mattress Firm

Everyone knew that Mattress Firm was in deep trouble, but it still surprised many of us when it was announced that they are officially planning to file for bankruptcy.  The following comes from Reuters

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October 2, 2018

"They Are Worried About Panic": China Blocks Bad Economic News As Economy Slumps

China's Shadow-banking system is collapsing (and with its China's economic-fuel - the credit impulse), it's equity market has become a slow-motion train-wreck, its economic data has been serially disappointing for two years, and its bond market is starting to show signs of serious systemic risk as corporate defaults in 2018 hit a record high.

But, if you were to read the Chinese press, none of that would be evident, as The New York Times reports a government directive sent to journalists in China on Friday named six economic topics to be "managed," as the long hand of China's 'Ministry of Truth' have now reached the business media in an effort to censor negative news about the economy.

The New York Times lists the topics that are to be "managed" as:

  • Worse-than-expected data that could show the economy is slowing.
  • Local government debt risks.
  • The impact of the trade war with the United States.
  • Signs of declining consumer confidence
  • The risks of stagflation, or rising prices coupled with slowing economic growth
  • “Hot-button issues to show the difficulties of people’s lives.”

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October 1, 2018

Goodbye Nafta, Hello USMCA, Trump's "Wonderful New Trade Deal"

Out with the old, in with the new...

Just hours before the end-of-month deadline, US trade rep Robert Lighthizer and Canadian Foreign Affairs Minister Chrystia Freeland announced last night that Canada and the US had successfully agreed on a sweeping revision of the Nafta trade accord (an agreement that had been reached with Mexico's outgoing PRI government weeks ago), maneuvering the final leg of the new trilateral deal, which will henceforth be known as the US-Mexico-Canada Agreement, or USMCA, into place. The US heralded the deal by proclaiming that it would mean "freer markets, fairer trade and robust economic growth." After both President Trump and Canadian Prime Minister reportedly approved the agreement, markets rejoiced, sparking rallies in the loonie, Mexican peso and US stock futures.

The preliminary terms reflected a resolution of the dairy-market problem, which had proved to be an intractable point of contention, with Canada offering access to roughly 3.5% of domestic dairy market to the US and will agree to a vehicle export quota of 2.6 million vehicles that could be exported to the US tariff free or near tariff free. Meanwhile, as reported previously, the Chapter 19 dispute resolution process - something that Canada demanded be preserved in the final accord - will remain unchanged.

Given that, in the Trump era, nothing is done until it's done, Trump lauded the agreement on Twitter Monday morning, saying it would correct "deficiencies and mistakes in NAFTA, greatly opens markets to our Farmers and Manufacturers, reduces Trade Barriers to the U.S. and will bring all three Great Nations together in competition with the rest of the world."

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