There's been talk that the Federal Reserve will slam interest rates to zero or even negative when the next recession strikes. President Trump's support for negative interest rates has quickly increased in the last several months as the latest tracking estimates for Q4 GDP have tumbled to sub 0.4%.
It seems that policy rates in the US are too high -- and will likely conform to the rest of the world, which is near zero to negative territory. This has undoubtedly alarmed UBS CEO Sergio Ermotti, who said banks have "no choice" but to pass on the negative rate pain to customers.
Ermotti said UBS "will not pass negative rates to smaller clients, the personal banking clients," that's because if UBS and other EU banks actually passed along negative rates to poor and middle-class families -- that would quickly spark unwanted social unrest that could crash the entire system.
"Right now, the threshold is very high still," Ermotti said. "It's difficult to make a prediction right now, but we are quite convinced it's not going to go down to smaller investors."
And of course, banking elites are smart enough not to pass on negative rates to poor people, but as per the Bloomberg interview, Ermotti will be targeting high-net-worth investors with more than 500,000 euros or 2 million Swiss francs.
G4 policy rates are near zero, with the exclusion of the US. But with the Federal Reserve embarking on a new interest rate cut cycle in response to collapsing global growth, it seems that policy rates across the world could go deeper into the negative territory through 2020.
The ECB and SNB have slammed rates into negative territory in recent years in hopes to stimulate domestic and regional growth by charging banks to deposit funds, rather than lending to consumers or businesses, Bloomberg noted.
Negative interest rates have been in an absolute disaster in Europe, with Germany teetering on the edge of a recession.
Though Trump on Twitter has been begging for negative rates for the last several months as the US economy grinds to halt in Q4. Trump could see negative rates, but it will be for all the wrong reasons, and then US banks will have to make the decision that European banks are currently going through, which is how to pass along negative rates to customers.
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DAILY BUSINESS REPORT - Financial Updates, International Markets and Business News
Showing posts with label Interest Rates. Show all posts
Showing posts with label Interest Rates. Show all posts
November 22, 2019
October 31, 2019
China's Bond Market Faces Turmoil Amid Maturity Deluge
While the US bond market has had its share of harrowing slumps and vomit-inducing short squeezes in the past year as consensus shifted from one of "the neutral rate is far away" to "here comes NIRP", China's bonds have been a bastion of stability, trading in a tight range between 3% and 3.50% for the past year.
hat may be about to change.
The reason: a wall of bond maturities is about to flood across China’s sovereign-bond market, which in the past three months has already been reeling from a global sell-off and rising inflation.
According to Bloomberg, more than 2 trillion yuan ($283 billion) of local-government notes will mature in 2020, a record and 58% more than this year’s level. This means fresh debt to refinance upcoming maturities will start hitting the market soon, with a the southern province of Guangdong expected to sell notes as early as November.
This is happening as China's 10-year yield rose 3 basis points to 3.31%. the highest since late May, while the cost on 12-month interest rate swaps jumped 5 basis points to 2.92%. The yield on China Development Bank’s 3-year bonds due January 2022 rose 10 basis points to 3.25%.
Despite trading in a narrow range, China’s government bonds have been sliding for nearly two months, starting around the time a "growth shock" hit US rates and sparked the infamous quantastrophe, with the 10-year yield hitting the highest since May as selling momentum accelerated. Naturally, a flood of new supply will only exacerbate the weakness, especially as real, inflation-adjusted yields are barely above zero, a rarity for emerging markets.
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October 23, 2019
China Just Injected The Most Liquidity Since January... And It's Not Enough
Just days after China's GDP unexpectedly dropped to a sub-consensus 6.0%, the lowest in three decades (with Beijing now set to reveal a 5-handle GDP in the coming months), China watchers were convinced that this week would start with Beijing again lowering its "Libor rate", i.e., the previously discussed Loan Prime Rate, especially with the Fed expected to cut rates once again next week. However, that did not happen as China kept its one-year prime rate for new corporate loans unchanged in October, at 4.2%, and above the 4.15% consensus estimate. The five-year benchmark was also kept unchanged at 4.85%.
As we reported previously, the Loan Prime Rate, also called China's "Libor", is a revamped market indicator of the price that lenders charge clients for new loans, and is linked to the rate at which the central bank will lend financial institutions cash for a year. The rate, which is updated once a month, is made up of submissions from a panel of 18 banks, although ultimately it is Beijing that sets the final rate.
Analysts were quick to step in and "explain" away the unexpected move: Commerzbank's Zhou Hao said that a static one-year rate shows China “may be trying to balance the shrinking margins of banks with support to the real economy,” adding that "the PBOC remains restrained on policy easing.”
The market, however, was less sanguine, as the PBOC's lack of easing was promptly taken as an ill-omen: China's government bonds dropped while money-market rates climbed, amid bets that the policy makers are not in a rush to loosen monetary policy (why? perhaps China's gargantuan debt load and rapidly devaluing currency have something to do with it). On Monday, the yield on 10-year sovereign notes rose three basis points to 3.22%, the highest since July 1, while the costs on 12-month interest-rate swaps advanced to the highest level since late May.
While the Chinese economy has been under pressure amid a prolonged trade dispute with the US, many have expected that the central bank would match the Fed's easing and lower corporate borrowing costs and further cut bank reserve ratios. However, so far the PBOC hasn’t embarked on an aggressive stimulus program as some market watchers had hoped.
Read the entire article
As we reported previously, the Loan Prime Rate, also called China's "Libor", is a revamped market indicator of the price that lenders charge clients for new loans, and is linked to the rate at which the central bank will lend financial institutions cash for a year. The rate, which is updated once a month, is made up of submissions from a panel of 18 banks, although ultimately it is Beijing that sets the final rate.
Analysts were quick to step in and "explain" away the unexpected move: Commerzbank's Zhou Hao said that a static one-year rate shows China “may be trying to balance the shrinking margins of banks with support to the real economy,” adding that "the PBOC remains restrained on policy easing.”
The market, however, was less sanguine, as the PBOC's lack of easing was promptly taken as an ill-omen: China's government bonds dropped while money-market rates climbed, amid bets that the policy makers are not in a rush to loosen monetary policy (why? perhaps China's gargantuan debt load and rapidly devaluing currency have something to do with it). On Monday, the yield on 10-year sovereign notes rose three basis points to 3.22%, the highest since July 1, while the costs on 12-month interest-rate swaps advanced to the highest level since late May.
While the Chinese economy has been under pressure amid a prolonged trade dispute with the US, many have expected that the central bank would match the Fed's easing and lower corporate borrowing costs and further cut bank reserve ratios. However, so far the PBOC hasn’t embarked on an aggressive stimulus program as some market watchers had hoped.
Read the entire article
October 11, 2019
After Unveiling 'NotQE', Fed Eases Liquidity Rules For Foreign Banks (Rescues Deutsche)
Having cracked down on Deutsche Bank in the past, The Fed appears to be playing good-regulator/bad-regulator as The FT reports that Deutsche is expected to benefit most from an imminent change in The Fed's liquidity rules.
Specifically, US banking regulators have dropped an idea to subject local branches of foreign banks to tough new liquidity rules (forcing US branches of foreign banks to hold a minimum level of liquid assets to protect them from a cash crunch).
As The FT further details, people familiar with his thinking say Randal Quarles, the vice-chair for banking supervision at the Fed, accepts the banks’ argument that any liquidity rules on bank branches should only be imposed in conjunction with foreign regulators.
“Without some international agreement, we could have the situation where each country is trying to grab whatever isn’t nailed down if there is another scare.”
And Deutsche Bank benefits most (or rescued from major liquidity needs) since it has by far the largest assets in US branches...
Read the entire article
Specifically, US banking regulators have dropped an idea to subject local branches of foreign banks to tough new liquidity rules (forcing US branches of foreign banks to hold a minimum level of liquid assets to protect them from a cash crunch).
As The FT further details, people familiar with his thinking say Randal Quarles, the vice-chair for banking supervision at the Fed, accepts the banks’ argument that any liquidity rules on bank branches should only be imposed in conjunction with foreign regulators.
“Without some international agreement, we could have the situation where each country is trying to grab whatever isn’t nailed down if there is another scare.”
And Deutsche Bank benefits most (or rescued from major liquidity needs) since it has by far the largest assets in US branches...
Read the entire article
October 3, 2019
We Finally Understand How Destructive Negative Interest Rates Actually Are
We are in the midst of a strange economic experiment. Vast quantities of negative-yielding debt are currently sloshing around the global economy. While the amount of negative-yielding bonds has dropped recently from a mind-boggling number in excess of $17 trillion, reinvigorated central bank easing across the globe ensures that this reduction is only temporary.
We are slowly starting to understand how destructive negative interest rates actually are. Central banks control short-term interest rates in an economy by setting the rate banks receive on their deposits, that is, on the reserves they hold at the central bank. A new development is the control central banks now exert over long-term rates through their asset purchase, or “QE” programs.
Banks profit from the interest rate differential between “lending long” but “borrowing short”. Essentially, the difference between lending and deposit rates determine a bank’s profitability. However, with today’s very low interest rates, this difference becomes almost non-existent, and with negative rates, inverts completely.
When a central bank pushes rates to negative, banks need to pay interest on the reserves they hold there. But they are not relieved of the obligation they have to pay interest on customer deposits, who are understandably reluctant to pay interest on money they place at a bank. Consequently, the whole earnings logic of banking goes haywire if banks are required to pay interest on loans and receive interest on deposits. As profit margins of banks are squeezed, profitability falls and lending activities suffer.
Read the entire article
We are slowly starting to understand how destructive negative interest rates actually are. Central banks control short-term interest rates in an economy by setting the rate banks receive on their deposits, that is, on the reserves they hold at the central bank. A new development is the control central banks now exert over long-term rates through their asset purchase, or “QE” programs.
Banks profit from the interest rate differential between “lending long” but “borrowing short”. Essentially, the difference between lending and deposit rates determine a bank’s profitability. However, with today’s very low interest rates, this difference becomes almost non-existent, and with negative rates, inverts completely.
When a central bank pushes rates to negative, banks need to pay interest on the reserves they hold there. But they are not relieved of the obligation they have to pay interest on customer deposits, who are understandably reluctant to pay interest on money they place at a bank. Consequently, the whole earnings logic of banking goes haywire if banks are required to pay interest on loans and receive interest on deposits. As profit margins of banks are squeezed, profitability falls and lending activities suffer.
Read the entire article
September 25, 2019
Interest Rate Derivatives Trading Explodes to $6.5 Trillion/Day
The volume of over-the-counter (OTC) interest rate derivatives traded globally soared by 141% in three years to $6.5 trillion per day in April 2019, according to the Bank for International Settlements’ new Triennial Survey of Global Derivatives Markets. In the prior survey period, April 2016, $2.7 trillion per day in trades were executed. Since 2001, the magnitude of trading volume has multiplied by a factor of 13, from $490 billion per day to $6.5 trillion per day, with a gigantic spike over the past three years:
OTC derivatives are securities that are generally traded through a dealer network rather than on a centralized exchange such as the London Stock Exchange or the New York Stock Exchange.
Some derivatives can be explosive, such as the credit default swaps (CDS) that brought Lehman Brothers and AIG to their knees in the last crisis, and which still remain a threat today, especially with the U.S. government this week bowing to Wall Street pressure to dilute regulation that had been designed after the crisis to reduce the risks of these instruments.
Interest rate derivatives, whose value rises and falls depending on the movement of interest rates, or sets of interest rates, tend to be more straightforward. They are often used as hedges by institutional and retail investors, banks and companies to protect themselves against changes in market interest rates. If managed properly, they shouldn’t pose undue risks to the financial system.
The BIS attributed much of this 141% three-year surge in trading of these instruments to increased hedging and positioning “amid shifting prospects for growth and monetary policy.” It also cautioned that some of the turnover in April 2019 was in shorter-term contracts, which are rolled over more often, leading to higher volume of trades. The 2019 survey also featured more comprehensive reporting of related party trades than in previous surveys. After adjusting for these trades, the actual increase in trading volumes since the 2016 survey is more likely to be around 120%, the BIS concluded.
Read the entire article
OTC derivatives are securities that are generally traded through a dealer network rather than on a centralized exchange such as the London Stock Exchange or the New York Stock Exchange.
Some derivatives can be explosive, such as the credit default swaps (CDS) that brought Lehman Brothers and AIG to their knees in the last crisis, and which still remain a threat today, especially with the U.S. government this week bowing to Wall Street pressure to dilute regulation that had been designed after the crisis to reduce the risks of these instruments.
Interest rate derivatives, whose value rises and falls depending on the movement of interest rates, or sets of interest rates, tend to be more straightforward. They are often used as hedges by institutional and retail investors, banks and companies to protect themselves against changes in market interest rates. If managed properly, they shouldn’t pose undue risks to the financial system.
The BIS attributed much of this 141% three-year surge in trading of these instruments to increased hedging and positioning “amid shifting prospects for growth and monetary policy.” It also cautioned that some of the turnover in April 2019 was in shorter-term contracts, which are rolled over more often, leading to higher volume of trades. The 2019 survey also featured more comprehensive reporting of related party trades than in previous surveys. After adjusting for these trades, the actual increase in trading volumes since the 2016 survey is more likely to be around 120%, the BIS concluded.
Read the entire article
September 10, 2019
After $74BN Weekly Record, Bond Boom Continues With Another $14 Billion In New Debt Borrowing
Ever since a thunderous start to September's bond calendar, which saw a record 20 companies issue $26 billion in record cheap investment grade debt in a single day, corporate America has been on a historic bond selling spree to lock in ultra-low rates and refi existing debt (making Wall Street i-bankers quite happy in the process). For the entire week, companies borrowed a total of $75 billion in investment-grade paper, the most for any comparable period since records began in 1972. Since Tuesday, corporations including Coca-Cola, Walt Disney, and Apple sold notes as yields have dropped.
The frenzy isn’t letting up. According to Bloomberg and Bank of America, at least another $50 billion is projected for the rest of the month, with the activity expected to spill over to junk bonds and leveraged loans as well, and not even today's Ford downgrade to junk affecting $84 billion in debt, is expected to put a damper on the party.
The reason for the bond issuance frenzy? Rates have never been lower - according to Bloomberg Barclays index data, the average yield on bonds was 2.77% as of last week, effectively at all time lows, and almost 2% lower compared to late November, when that figure was above 4.3%. For a company selling $1 billion of debt, that amounts to $15.3 million of annual interest savings. Junk-bond yields have dropped too, with notes rated in the BB tier, the uppermost high-yield levels, paying a near record-low 4.07%.
"This is a great time for companies to refinance,” Christian Hoffmann, a portfolio manager at Thornburg Investment Management, told Bloomberg. "Financing costs are near all-time lows, so I would not be surprised to see better high-yield companies coming to market and treating debt capital markets like a cheap buffet."
As we noted last week, borrowers are taking advantage of the recent drop in rates to refinance their outstanding bonds at lower costs. As BofA noted last week, the new issuance "use of proceeds" has shifted from supporting re-leveraging activities to refinancing in the currently low interest rate environment.
Read the entire article
The frenzy isn’t letting up. According to Bloomberg and Bank of America, at least another $50 billion is projected for the rest of the month, with the activity expected to spill over to junk bonds and leveraged loans as well, and not even today's Ford downgrade to junk affecting $84 billion in debt, is expected to put a damper on the party.
The reason for the bond issuance frenzy? Rates have never been lower - according to Bloomberg Barclays index data, the average yield on bonds was 2.77% as of last week, effectively at all time lows, and almost 2% lower compared to late November, when that figure was above 4.3%. For a company selling $1 billion of debt, that amounts to $15.3 million of annual interest savings. Junk-bond yields have dropped too, with notes rated in the BB tier, the uppermost high-yield levels, paying a near record-low 4.07%.
"This is a great time for companies to refinance,” Christian Hoffmann, a portfolio manager at Thornburg Investment Management, told Bloomberg. "Financing costs are near all-time lows, so I would not be surprised to see better high-yield companies coming to market and treating debt capital markets like a cheap buffet."
As we noted last week, borrowers are taking advantage of the recent drop in rates to refinance their outstanding bonds at lower costs. As BofA noted last week, the new issuance "use of proceeds" has shifted from supporting re-leveraging activities to refinancing in the currently low interest rate environment.
Read the entire article
September 5, 2019
EU Bank Bosses Warn Of "Grave Consequences" If ECB Keeps Cutting Rates
The ECB's imposition of negative interest rates have created an "absurd situation" in which banks don't want to hold deposits, rages UBS CEO Sergio Ermotti, arguing that this policy is hurting social systems and savings rates.
Ermotti is not alone. As European bank bosses cast their eyes at their share prices, they are fighting back, some have said - biting the hand that feeds, in their attack on ECB policies, warning of severe consequences to asset prices and the broader economy.
As Bloomberg reports, Deutsche Bank CEO Christian Sewing warned that more monetary easing by the ECB, as widely expected next week, will have “grave side effects” for a region that has already lived with negative interest rates for half a decade.
“In the long run, negative rates ruin the financial system,” Sewing said at the event, organized by the Handelsblatt newspaper.
Another cut “may make refinancing cheaper for states, but has grave side effects.”
While incoming ECB head Christine Lagarde has claimed that the benefits of deeply negative rates outweigh the costs (stating just this week that “a highly accommodative policy is warranted for a prolonged period of time;" few economists believe another cut at this level would actually help the economy. According to Sewing, all it would achieve is to further divide society by lifting asset prices while punishing Europe’s savers who are already paying 160 billion euros ($176 billion) a year because of negative interest rates.
Read the entire article
Ermotti is not alone. As European bank bosses cast their eyes at their share prices, they are fighting back, some have said - biting the hand that feeds, in their attack on ECB policies, warning of severe consequences to asset prices and the broader economy.
As Bloomberg reports, Deutsche Bank CEO Christian Sewing warned that more monetary easing by the ECB, as widely expected next week, will have “grave side effects” for a region that has already lived with negative interest rates for half a decade.
“In the long run, negative rates ruin the financial system,” Sewing said at the event, organized by the Handelsblatt newspaper.
Another cut “may make refinancing cheaper for states, but has grave side effects.”
While incoming ECB head Christine Lagarde has claimed that the benefits of deeply negative rates outweigh the costs (stating just this week that “a highly accommodative policy is warranted for a prolonged period of time;" few economists believe another cut at this level would actually help the economy. According to Sewing, all it would achieve is to further divide society by lifting asset prices while punishing Europe’s savers who are already paying 160 billion euros ($176 billion) a year because of negative interest rates.
Read the entire article
September 4, 2019
Emerging Market Central Banks Panic With Most Rate Cuts Since Financial Crisis
The global growth outlook is the lowest since the last financial crisis, and central banks, especially ones in emerging markets, have already started to cut interest rates to make sure growth doesn't collapse.
Manufacturing across large parts of South America, Europe, Asia, and the Middle East are reeling from a global structural slowdown, amplified by the US and China trade war, have triggered emerging central banks to cut rates by the most in a decade, reported Reuters.
Emerging central banks took notice when major central banks including the US Federal Reserve and the European Central Bank started to cut interest rates this summer, all in an attempt to lessen the impact of a global synchronized slowdown.
Central banks across 37 emerging market economies recorded a net fourteen rate cuts in August, the most since policymakers dropped rates to zero after the global financial crash in 2008/09.
August marked the seventh straight month of net rate cuts followed by a tightening cycle that ended in early 2019. July recorded a net eight rate cuts. Cuts by Mexico and Thailand in August took markets by surprise.
After nine straight months of rate hikes in 2018, emerging central banks battled the fallout from a firm dollar, increasing inflation, and weaker local currencies.
Read the entire article
Manufacturing across large parts of South America, Europe, Asia, and the Middle East are reeling from a global structural slowdown, amplified by the US and China trade war, have triggered emerging central banks to cut rates by the most in a decade, reported Reuters.
Emerging central banks took notice when major central banks including the US Federal Reserve and the European Central Bank started to cut interest rates this summer, all in an attempt to lessen the impact of a global synchronized slowdown.
Central banks across 37 emerging market economies recorded a net fourteen rate cuts in August, the most since policymakers dropped rates to zero after the global financial crash in 2008/09.
August marked the seventh straight month of net rate cuts followed by a tightening cycle that ended in early 2019. July recorded a net eight rate cuts. Cuts by Mexico and Thailand in August took markets by surprise.
After nine straight months of rate hikes in 2018, emerging central banks battled the fallout from a firm dollar, increasing inflation, and weaker local currencies.
Read the entire article
August 19, 2019
12 Reasons Why Negative Rates Will Devastate The World
It has been a thesis over 20 years in the making, but with every passing day, SocGen's Albert Edwards - who first coined the term "Ice Age" to describe the state of the world in which every debt issue ends up with a negative yield as capital markets and economies collapse into a deflationary singularity - is that much closer to having the victory lap of a lifetime. Although, we doubt he is happy about it.
Commenting on the interest rate collapse he has been (correctly) predicting ever since he first observed Japan's great bubble bust of the 1980s and which resulted in both NIRP and QE, and which he (correctly) expected would spread across the rest of the world, leading to a "Japanification" of every major bond market...
... Edwards said that what bond markets are telling us is "that the cycle is ending with the central banks having failed to drive core CPI inflation higher. So Japanese-style outright deflation lies ahead at a time when western economies have piled debt sky high."
Needless to say that's not good, not least of all because we now live in a world in which the bond universe with negative yields continues to grow at an exponential pace, rising rapidly over the past two weeks and reaching a record $16.4 trillion...
Read the entire article
Commenting on the interest rate collapse he has been (correctly) predicting ever since he first observed Japan's great bubble bust of the 1980s and which resulted in both NIRP and QE, and which he (correctly) expected would spread across the rest of the world, leading to a "Japanification" of every major bond market...
... Edwards said that what bond markets are telling us is "that the cycle is ending with the central banks having failed to drive core CPI inflation higher. So Japanese-style outright deflation lies ahead at a time when western economies have piled debt sky high."
Needless to say that's not good, not least of all because we now live in a world in which the bond universe with negative yields continues to grow at an exponential pace, rising rapidly over the past two weeks and reaching a record $16.4 trillion...
Read the entire article
August 7, 2019
Gold Hits Record Highs!
Gold hit record highs in a number of currencies this week as trade war worries, geopolitical uncertainty and expectations of a slowing economy drove investors to seek safe haven.
While the yellow metal has soared in USD terms in recent weeks, as global geopolitical tensions rise and the "policy-maker idiocy" proxy spikes ($15 trillion of negative-yielding debt)...
More trade war tension was a big driver in the gold rally, but the recent surge in gold prices isn’t an isolated event. The yellow metal has been rallying for months. The yellow metal is up 17% since last December when plunging stock markets drove the Fed to initiate the “Powell Pause.”
The trade war isn’t the only factor pushing gold higher. For instance, Brexit uncertainty is driving the yellow metal up in the United Kingdom. The gold price in British pounds has skyrocketed 25% since May.
Generally weak economic data is also driving investor worry. Despite assurances from Powell and US government officials that the American economy is strong, the data tells a different story. Even as Powell was assuring us the domestic economy is fine, and the Fed’s worries are all global, we got more gloomy economic numbers. Data showed the ISM manufacturing index dropped to 51.2% in July. That’s the lowest level since mid-2016. Construction spending also declined by 1.3% in June. Meanwhile, jobless claims climbed modestly by 8,000 to 215,000 at the end of July.
Philips Futures analyst Benjamin Lu told CNBC he thinks all of the uncertainty will lead to more Fed rate cuts.
Read the entire article
While the yellow metal has soared in USD terms in recent weeks, as global geopolitical tensions rise and the "policy-maker idiocy" proxy spikes ($15 trillion of negative-yielding debt)...
More trade war tension was a big driver in the gold rally, but the recent surge in gold prices isn’t an isolated event. The yellow metal has been rallying for months. The yellow metal is up 17% since last December when plunging stock markets drove the Fed to initiate the “Powell Pause.”
The trade war isn’t the only factor pushing gold higher. For instance, Brexit uncertainty is driving the yellow metal up in the United Kingdom. The gold price in British pounds has skyrocketed 25% since May.
Generally weak economic data is also driving investor worry. Despite assurances from Powell and US government officials that the American economy is strong, the data tells a different story. Even as Powell was assuring us the domestic economy is fine, and the Fed’s worries are all global, we got more gloomy economic numbers. Data showed the ISM manufacturing index dropped to 51.2% in July. That’s the lowest level since mid-2016. Construction spending also declined by 1.3% in June. Meanwhile, jobless claims climbed modestly by 8,000 to 215,000 at the end of July.
Philips Futures analyst Benjamin Lu told CNBC he thinks all of the uncertainty will lead to more Fed rate cuts.
Read the entire article
August 5, 2019
Fed Rate Cut – Too Little, Too Late, As Trump Hikes Tariffs
We had also warned previously the current extension of the market, combined with overbought conditions, was due for a reversal. That reversal has indeed begun, and short-term sell signals have been triggered.
“As we have noted over the last few weeks, the very tight trading range combined with negative divergences also does not historically suggest continued bullish runs higher without some type of corrective action first.”
This past week, a disappointing cut by the Fed, and increased tariffs on China from the White House, provided the catalysts needed for a very quick market rout.
Again, this is something we discussed over the last couple of weeks with our RIAPRO subscribers previously (30-Day Free Trial). The analysis led us to previously trimming our long positions slightly, and increasing our cash holdings, heading into the Fed announcement.
Read the entire article
“As we have noted over the last few weeks, the very tight trading range combined with negative divergences also does not historically suggest continued bullish runs higher without some type of corrective action first.”
This past week, a disappointing cut by the Fed, and increased tariffs on China from the White House, provided the catalysts needed for a very quick market rout.
Again, this is something we discussed over the last couple of weeks with our RIAPRO subscribers previously (30-Day Free Trial). The analysis led us to previously trimming our long positions slightly, and increasing our cash holdings, heading into the Fed announcement.
Read the entire article
August 2, 2019
Mission Accomplished: Rate Cut Odds Surge After Tariff Announcement, Just As Trump Wanted
Earlier today, we wrote a post titled "What Would It Take For The Fed To Not Cut Again?", with Goldman providing a stylized answer, although in retrospect, the post should have been titled "What Would It Take For The Fed To Cut Again", as that is what the market was far more concerned about after yesterday's hawkish Powell press conference.
In any case, Goldman hinted at the one specific catalyst that could force the Fed to cut more: "We also see risks in the other direction, especially on a significant escalation of tariffs against China."
To this, we said that "if an acceleration in the trade war with China is what the Fed will need to cut more, it's pretty clear what that means for the chances of any trade deal between Washington and Beijing, since even Trump now understands that if he keeps escalating trade war with China, Powell will have no choice but to eventually cut to 0% (and lower)."
Just a few hours later, we were proven right in suggesting that an escalation in the trade war is inevitable and imminent when Trump tweeted that he would hike tariffs on $300BN in Chinese imports to 10% starting September 1, ending the tentative ceasefire with Beijing with a bang, and sending risk prices sharply lower.
Read the entire article
In any case, Goldman hinted at the one specific catalyst that could force the Fed to cut more: "We also see risks in the other direction, especially on a significant escalation of tariffs against China."
To this, we said that "if an acceleration in the trade war with China is what the Fed will need to cut more, it's pretty clear what that means for the chances of any trade deal between Washington and Beijing, since even Trump now understands that if he keeps escalating trade war with China, Powell will have no choice but to eventually cut to 0% (and lower)."
Just a few hours later, we were proven right in suggesting that an escalation in the trade war is inevitable and imminent when Trump tweeted that he would hike tariffs on $300BN in Chinese imports to 10% starting September 1, ending the tentative ceasefire with Beijing with a bang, and sending risk prices sharply lower.
Read the entire article
August 1, 2019
“The Stock Market Started To Fall In July…”
Will we look back on the month of July as a critical turning point for the stock market? During the first half of 2019, stock prices soared to record high after record high even though we just kept getting one number after another that indicated that a new economic slowdown was starting. Because of the disappointing performance of the U.S. economy, it was believed that we would see a rate cut from the Federal Reserve on Wednesday, and that is precisely what happened. But instead of rejoicing, investors started to panic a bit, and the Dow Jones Industrial Average ended the day down 333 points. We will get into why that happened in just a little bit. But without a doubt it seems quite odd that the Fed’s very first rate cut since December 2008 actually caused stocks to go down. On a historical basis, interest rates are already very low right now, and so this greatly limits what the Fed will be able to do once the next recession officially begins. Of course most investors are not concerned with such considerations. What they really want is for interest rates to be pushed all the way to the floor as quickly as possible, and so they were quite disappointed with what they heard from Fed Chairman Jay Powell on Wednesday.
But considering the fact that we haven’t seen a rate cut in more than a decade, the truth is that investors should have been thrilled by what happened. When interest rates go down, that tends to promote more economic activity…
As expected, the Fed lowered its federal funds rate by a quarter-percentage point to a range of 2% to 2.25%. The move is likely to ripple through the economy and financial system, nudging down rates for credit cards, home equity lines and auto loans and theoretically sparking more economic activity. While the rate cut should aid borrowers, it will frustrate savers who were just starting to benefit from higher bank account yields.
Read the entire article
But considering the fact that we haven’t seen a rate cut in more than a decade, the truth is that investors should have been thrilled by what happened. When interest rates go down, that tends to promote more economic activity…
As expected, the Fed lowered its federal funds rate by a quarter-percentage point to a range of 2% to 2.25%. The move is likely to ripple through the economy and financial system, nudging down rates for credit cards, home equity lines and auto loans and theoretically sparking more economic activity. While the rate cut should aid borrowers, it will frustrate savers who were just starting to benefit from higher bank account yields.
Read the entire article
July 17, 2019
Insanity: Now Even Junk Bonds Have Negative Yields
Think about this: a junk bond is basically debt issued by a company with financials so risky that analysts expect there’s a good chance the company won’t pay its debts.
Hell, the company might not even be in business by the time the debt matures.
And yet, despite these substantial risks, investors are willing to loan money to these companies… at NEGATIVE rates of return.
Seriously?? You take all that risk and then GUARANTEE that you’ll lose money.
In other words, as John Rubino recently noted, investors are now extrapolating falling interest rates into the future and playing junk bonds for the capital gains they’ll generate when their future borrowing costs go down. This is one of those sentiment shifts that financial historians will single out for special attention when sifting through the rubble of the coming crash.
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Hell, the company might not even be in business by the time the debt matures.
And yet, despite these substantial risks, investors are willing to loan money to these companies… at NEGATIVE rates of return.
Seriously?? You take all that risk and then GUARANTEE that you’ll lose money.
In other words, as John Rubino recently noted, investors are now extrapolating falling interest rates into the future and playing junk bonds for the capital gains they’ll generate when their future borrowing costs go down. This is one of those sentiment shifts that financial historians will single out for special attention when sifting through the rubble of the coming crash.
Read the entire article
July 16, 2019
Congress courageously sticks US taxpayers with a $6 trillion liability
SECURE stands for “Setting Every Community Up for Retirement Enhancement”, which is pretty clever when you think about it.
People want to associate their retirement with a word like ‘secure’. So even without knowing anything about the law, most people will probably have good feelings about it based solely on the name.
But if you actually read the legislation, SECURE contains a number of predictably terrible consequences.
For starters, SECURE is a basically a gigantic tax increase. And it’s a tax increase that will particularly affect your children when you pass away.
Under current law, you could leave your IRA to your children in a fairly tax efficient way. That’s actually one of the nice things about an IRA.
Read the entire article
People want to associate their retirement with a word like ‘secure’. So even without knowing anything about the law, most people will probably have good feelings about it based solely on the name.
But if you actually read the legislation, SECURE contains a number of predictably terrible consequences.
For starters, SECURE is a basically a gigantic tax increase. And it’s a tax increase that will particularly affect your children when you pass away.
Under current law, you could leave your IRA to your children in a fairly tax efficient way. That’s actually one of the nice things about an IRA.
Read the entire article
June 19, 2019
CEO Of Germany's 2nd Largest Bank: In A Few Years We Will Notice The ECB's Experiment Was A Historical Mistake
“The cultural level of a nation is mirrored by its rate of interest: the higher a people’s intelligence and moral strength, the lower the rate of interest.” Thus declared economist Eugen von Böhm Bawerk, according to Richard Sylla and Sidney Homer’s classic tome A History of Interest Rates. By that logic, Europe is the domain of superhumans, as the overnight deposit rate has resided below zero since June 2014 and at negative 40 basis points since March 2016.
The M.D. overseeing Europe’s monetary affairs has his own version of the Hippocratic Oath. Speaking at the ECB’s annual forum at the resort town of Sintra, Portugal today, ECB president Mario Draghi made waves by suggesting the central bank will impose still lower interest rates:
Further cuts in policy interest rates and mitigating measures to contain any side effects remain part of our tools. . . Negative rates have proven to be a very important tool in the euro area.
In the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required.
The implications are clear. Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, told Bloomberg: “Draghi is going to finish his tenure [set to end on Oct. 31] with a cut. The door is now open and I don’t see how they can not walk through it.” Mike Riddell, fund manager at Allianz Global Investors, noted: “The ECB has just handed the bond bulls an ammunition dump.”
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The M.D. overseeing Europe’s monetary affairs has his own version of the Hippocratic Oath. Speaking at the ECB’s annual forum at the resort town of Sintra, Portugal today, ECB president Mario Draghi made waves by suggesting the central bank will impose still lower interest rates:
Further cuts in policy interest rates and mitigating measures to contain any side effects remain part of our tools. . . Negative rates have proven to be a very important tool in the euro area.
In the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required.
The implications are clear. Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, told Bloomberg: “Draghi is going to finish his tenure [set to end on Oct. 31] with a cut. The door is now open and I don’t see how they can not walk through it.” Mike Riddell, fund manager at Allianz Global Investors, noted: “The ECB has just handed the bond bulls an ammunition dump.”
Read the entire article
June 11, 2019
For The Equity Markets To Keep Rallying, This Has To Happen...
With markets now pricing in at least three rate-cuts and expectations for a July cut surging to over 80%, belief in a pre-emptive "insurance" cut is now consensus - and The Fed had better not disappoint.
However, as Bloomberg's Ye Xie warns, while, historically, preemptive Fed rate cuts have tended to boost the stock market, this time may be different.
Any student of stock market history would tell you that the Fed’s "insurance" cuts in 1995-1996 and 1998 did extend the bull market and economic expansion.
What’s different this time is that the front-end of the yield curve is much more deeply inverted than in the 1990s. In other words, markets have more aggressively discounted policy easing. With Fed fund futures pricing in about 70 basis points of cuts by year-end, the FOMC has a high bar to keep equity investors happy without fomenting recession fears
Read the entire article
However, as Bloomberg's Ye Xie warns, while, historically, preemptive Fed rate cuts have tended to boost the stock market, this time may be different.
Any student of stock market history would tell you that the Fed’s "insurance" cuts in 1995-1996 and 1998 did extend the bull market and economic expansion.
What’s different this time is that the front-end of the yield curve is much more deeply inverted than in the 1990s. In other words, markets have more aggressively discounted policy easing. With Fed fund futures pricing in about 70 basis points of cuts by year-end, the FOMC has a high bar to keep equity investors happy without fomenting recession fears
Read the entire article
June 6, 2019
The US Economy's Dirty Big Secret
There is a dirty little secret in economics today: the United States has benefited – and continues to benefit – from the global slump.
The US economy is humming along, even while protesters in the United Kingdom hurl milkshakes at Brexiteers, French President Emmanuel Macron confronts nihilist yellow-vested marchers, and Chinese tech firms such as Huawei fear being frozen out of foreign markets.
Last year, the US economy grew by 2.9%, while the eurozone expanded by just 1.8%, giving President Donald Trump even more confidence in his confrontational style. But relatively strong US growth amid sluggishness elsewhere is not what economics textbooks would predict. Whatever happened to the tightly integrated world economy that the International Monetary Fund and the World Bank have been advocating – and more recently extolling – since World War II?
The US economy is in a temporary but potent phase in which weakness abroad lifts spirits at home. But this economic euphoria has nothing to do with Trump-era spite and malice, and much to do with interest rates.
Borrowing costs are currently lower than at any time since the founding of the US Federal Reserve in 1913, or in the UK’s case since the Bank of England was established in 1694. The ten-year US Treasury bond is yielding about 2.123%, and in April, the streaming service Netflix issued junk bonds at a rate of just 5.4%.
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The US economy is humming along, even while protesters in the United Kingdom hurl milkshakes at Brexiteers, French President Emmanuel Macron confronts nihilist yellow-vested marchers, and Chinese tech firms such as Huawei fear being frozen out of foreign markets.
Last year, the US economy grew by 2.9%, while the eurozone expanded by just 1.8%, giving President Donald Trump even more confidence in his confrontational style. But relatively strong US growth amid sluggishness elsewhere is not what economics textbooks would predict. Whatever happened to the tightly integrated world economy that the International Monetary Fund and the World Bank have been advocating – and more recently extolling – since World War II?
The US economy is in a temporary but potent phase in which weakness abroad lifts spirits at home. But this economic euphoria has nothing to do with Trump-era spite and malice, and much to do with interest rates.
Borrowing costs are currently lower than at any time since the founding of the US Federal Reserve in 1913, or in the UK’s case since the Bank of England was established in 1694. The ten-year US Treasury bond is yielding about 2.123%, and in April, the streaming service Netflix issued junk bonds at a rate of just 5.4%.
Read the entire article
June 5, 2019
The Fed Has No Choice But To Return To Ultra-Low Interest Rates
The current boom is heavily built on credit. This is because in today’s fiat money regime central banks, in close cooperation with commercial banks, increase the quantity of money by extending loans – loans that are not backed by ‘real savings’. The artificial increase in the supply of credit pushes market interest rates downwards – that is, below the levels that would prevail had there been no artificial increase in bank credit supply.
As a result, savings decline, consumption increases and, investment takes off, and a “boom” gets going. However, such a boom can only last so long. Its continuation rests on more and more credit being fed into the system, provided at ever lower interest rates. The last ten years provide a good illustration: The Fed’s lowering of interest rates and monetary expansion in the financial and economic crisis 2008/2009 has helped the banking industry to get back to its business of churning out more and more credit (see chart a).
As credit recovered, and stock and housing prices began to rise again (see chart b). The Fed succeeded in re-establishing the ‘asset price inflation regime’. In December 2015, however, the monetary policy makers in Washington D. C. decided to take away the punch bowl by beginning to raise interest rates. Until December 2018, the Fed had brought back the Federal Funds Rate to a band of between 2.25 to 2.5 per cent. Where to go from here?
The Fed has signaled recently that it wants to take a break as far as any further interest rate decisions are concerned. Financial markets have their own view, though: They seem to expect that the Fed’s hiking cycle is already over, and that the central bank will sooner or later lower interest rates again. The likelihood that this expectation will turn out to be correct is quite high: As the Fed wishes to keep the boom going, it has no choice but to return to the policy of suppressing interest rates.
Read the entire article
As a result, savings decline, consumption increases and, investment takes off, and a “boom” gets going. However, such a boom can only last so long. Its continuation rests on more and more credit being fed into the system, provided at ever lower interest rates. The last ten years provide a good illustration: The Fed’s lowering of interest rates and monetary expansion in the financial and economic crisis 2008/2009 has helped the banking industry to get back to its business of churning out more and more credit (see chart a).
As credit recovered, and stock and housing prices began to rise again (see chart b). The Fed succeeded in re-establishing the ‘asset price inflation regime’. In December 2015, however, the monetary policy makers in Washington D. C. decided to take away the punch bowl by beginning to raise interest rates. Until December 2018, the Fed had brought back the Federal Funds Rate to a band of between 2.25 to 2.5 per cent. Where to go from here?
The Fed has signaled recently that it wants to take a break as far as any further interest rate decisions are concerned. Financial markets have their own view, though: They seem to expect that the Fed’s hiking cycle is already over, and that the central bank will sooner or later lower interest rates again. The likelihood that this expectation will turn out to be correct is quite high: As the Fed wishes to keep the boom going, it has no choice but to return to the policy of suppressing interest rates.
Read the entire article
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