Month: February 2020

Authored by Richard Breslow via Bloomberg,

On days like today, it’s easy to fall into one of two camps.

You can either look at every move that risk makes and declare it horribly important. Portending something lasting, momentous and dispositive. And demanding to know why someone isn’t doing something to propel stocks higher. Bounces are taken as a blow struck for justice and the wholesome functioning of asset markets as they are meant to be experienced. Sell-offs are seen as unfair.

Or you can be taken as a scold for suggesting that traders, and commentators, get a grip.

This is a moment when we should accept that the calming financial measures taken by the authorities in China were wholly appropriate for their markets and everyone else should stand down.They are trying to do what they think they need to do to prevent panic in their markets and have the ability, and willingness, to do more if it isn’t enough. But that doesn’t mean every other central bank must proactively adjust policy lest their stock markets gets antsy. I wish more people would talk about whether enough is being done to eradicate the illness and what might help rather than what can be done to keep traders mollified. As an aside, traders should take comfort from measures such as travel restrictions rather than think this incites panic as some have suggested.

On Friday, Fed Vice Chairman Richard Clarida, while acknowledging that the virus scare is a wild card for the economic outlook, reiterated that the U.S. economy “is in a good place.” And the current interest-rate stance can keep things “humming.” This morning, ECB Vice President Luis de Guidnos said that the euro area economy’s risks are tilted less to the downside and that the bank believes that economic activity should start to accelerate in the second or third quarter of the year. It’s doubtful they just said these things to cheerlead.

And I’m sure we all take comfort that they both made clear that their institutions are monitoring the situation. Who would expect anything less. Don’t they always do that? But expecting, let alone demanding, a monetary policy response at this point is ridiculous. If S&P 500 futures open near where they are trading this morning, the index will be up small year-to-date. Not as good a start as some had hoped, but hardly a disaster.

A look at the monthly charts shows an equity market that has been moving up impulsively. Some sort of correction could hardly come as a surprise, no matter what the news. But as futures bounced overnight, right from the get-go mind you, my inbox read like catastrophe has been, narrowly, averted. And, laughably, that traders had somehow decided that the negative price action in China’s markets wouldn’t have lasting spillover elsewhere. With the subtext being, however, as long as rate cuts remain a possibility.

China is said to be reviewing its economic growth targets and may downgrade its forecast of 2020 growth. They won’t do that today, as it’s usually something officially set in March. It makes logical sense, in any case, that they give themselves a chance to evaluate the fall-out. That’s an approach traders might consider themselves. We can’t all be experts on disease control and containment.

Last Friday, the Bloomberg Dollar Spot Index had a bit of a washout. Today, it’s bid and has risen right into its resistance zone 1,198 to 1,200. It’s worth watching.

Ten-year Treasury yields got close to the meaningful 1.50% level. It was big in October and will be so now. A lot of people are looking to fade the move down here. It’s a level that is very much in play. Very hard not to nibble. Equally hard to give away your protection.

But perhaps the most important market to watch for guidance will be commodities.

The Bloomberg Commodity Index looks awful.

Whether it bounces or continues on its way may be the best indicator of where we make the next move from here in everything else.

Last night, when we reported the plunge in the yuan below 7.00 vs the dollar – traditionally a level that has been seen as triggering the US Treasury into screaming fx manipulation – we noted that it is only a matter of time before the US and China sat down to discuss just how viable the terms of the Phase 1 remain, especially with China’s economy now expected to slow below a 5% GDP if only in the short term, as the country reels from the fallout of the Coronavirus epidemic which has led to tens of millions of Chinese citizens living under mandatory or self-imposed quarantine.

We didn’t have long to wait, because moments ago, Bloomberg reported that Chinese officials “are hoping the U.S. will agree to some flexibility on pledges in their phase-one trade deal” as Beijing tries to contain the fallout from the health crisis that has infected over 17,500 and killed over 360.

The Phase 1 trade deal which was signed on Jan. 15 – just one day before China finally started reporting virus data – and is supposed to take effect in mid-February, has a clause that states the U.S. and China will consult “in the event that a natural disaster or other unforeseeable event” delays either from complying with the agreement. It’s unclear whether China has formally requested such a consultation yet, but according to Bloomberg sources the plan “is to ask for it at some point.”

As the report goes on to note, Chinese officials are evaluating whether the target for economic growth this year should be softened as part of a broader review of how the government’s plans will be affected by the deadly virus outbreak. However, so far it does not appear that the US is rushing to concede to Chinese demands, especially since Larry Kudlow last week said that the U.S. hasn’t seen any major effects on its economy from the epidemic.

“This is principally a public health problem and the pandemic of course is in China, not the U.S.,” Kudlow said Thursday in an interview on Fox Business Network. “Insofar as the economy, we see no material impact.”

Curiously, the Bloomberg report comes about an hour after the WSJ reported that the Trump administration has been granting fewer exemptions to tariffs on Chinese imports, with the approval rate recently plunging to 3% in the third round of levies from 35% in the first two.  More from the source below:

Requests for exemptions have been made by more than 4,500 companies, which typically say they have no viable or cost-effective alternatives to Chinese products. Many companies seek more than one exemption. For just the fourth round alone, more than 8,700 requests for exemptions were made by Friday, the filing deadline.

HealthWay Family of Brands filed for 11 exemptions on electronic and other parts it imports from China to build air cleaners in Pulaski, N.Y. When the U.S. Trade Representative denied all its requests, the company was forced to lay off eight of its 48 workers and sideline plans to expand, said Vinny Lobdell Jr., the company’s global president.

“We were set to build a $2 million expansion,” said Mr. Lobdell. “We had looked at bringing 30 to 40 more jobs to the area as the Intellipure product line was growing.”

With the Trump admin playing hardball with US demands for easier tariffs, it is hard to see just why he would concede, even if China were to wrap its request as a “force majeure.”

Meanwhile, the market’s verdict on the US-China trade deal remains one of pervasive skepticism, with soybean prices – one of the main commodities Beijing agreed to purchase – reflecting rising concern about weaker demand from China. Soybeans traded in Chicago were little changed after nine straight days of declines, the longest losing streak since July 2014.

And in more bad news for Beijing, if it is indeed hoping for mercy from Trump, when asked if the virus will give the U.S. more leverage in the second phase of trade discussions with the Asian nation, Kudlow said the outbreak is “completely separate from trade, jobs and all the rest.”

“This is an issue of helping them if we can, offering our assistance, engaging with them, this is a humanitarian effort on our part — nothing to do with economic rivalries,” he said.

Ironically, so far China has refused every US proposal to help with the coronavirus epidemic: one wonders why – is it to prevent US observers from seeing just how China “handles” the flood of deaths resulting from the disease, which according to numerous sources, is far, far greater than the official number, and that Chinese officials are merely rushing to burn the bodies to avoid having to specify the true cause of death, in order to keep mortality rate calculations low and prevent an even greater panic within Chinese society.

The Iowa caucuses begin tonight at 8 p.m. ET, marking the first nominating contest of the 2020 election cycle. Democrats across the states will head to their local precinct caucus locations to vote for their desired candidate to take on Donald Trump in the November election.

There are 1,678 neighborhood locations and 87 “satellite caucuses” around the world, where delegates will be chosen for the Iowa state party convention who will be sent on to the Democratic National Convention in Milwaukee July 13-16 to represent their candidates.

How it works

During each caucus meeting, attendees physically group themselves by candidate, in what’s known as the “first alignment.” Any candidate who fails to garner at least 15% of the vote is declared non-viable, and their supporters can either join other groups or try to appeal to others to join them. Then, a second vote known as the “final alignment” is held to determine how delegates are awarded.

On Sunday, Democratic presidential candidates competed with the Super Bowl in a last-minute bid to appeal to Iowans. And while a Saturday night pre-caucus poll which has historically shed light on where the candidates stand was canceled due to a ‘survey error,’ Sen. Bernie Sanders (I-VT) is largely seen as the frontrunner going into Mondays contest, after an Emerson College poll on Sunday showed him with 28% support followed by Joe Biden at 21%, Pete Buttigieg at 15%, and Elizabeth Warren at 14%. That said, 34% of those polled said they could change their vote.

Notably, President Trump lost the Iowa caucus in 2016.

And if Sanders takes Iowa, he will have a good shot at carrying that momentum into New Hampshire’s primary next week – where he is already considered to have the top spot – and then on to Nevada on February 22.

That said, as the Times notes, “there is still widespread concern among Democratic Party leaders and center-left primary voters about the implications of nominating a self-described democratic socialist to take on President Trump.”

His chief opponents are unlikely to give way easily: Even if he is defeated here, Mr. Biden has a strong national following among moderate voters and African-Americans, while Ms. Warren retains a sizable base among educated liberals and women. And Michael R. Bloomberg, the former mayor of New York City, is looming as a competitor in the March primary states. –New York Times

Meanwhile, 2020 candidate Mike Bloomberg – who just got into a fight with President Trump over his height, is skipping Iowa and will instead engage in a massive advertising campaign in later-voting states.

According to the betting lines, Bloomberg is gaining ground as Biden collapses, but it’s Bernie that is becoming the strong favorite to get the Dem nod…

No wonder the DNC is working so hard against him.

Just like with China’s “surprising” PMI beat, it is hard to know if the respondents for this morning’s US manufacturing surveys were interviewed before or since the coronavirus pandemic has collapsed global supply chains.

• Markit’s Manufacturing PMI beat expectations, printing 51.9 vs 51.7 exp, but fell to 3-month lows.

• ISM’s Manufacturing survey smashed expectations, surging back into expansion at 50.9 – highest in 6 months.

So you decide which you believe…

Source: Bloomberg

Under the hood, PMI was broadly positive…

• Production rose to 54.3 vs 44.8; highest index since April

• New orders rose to 52 vs 47.6; best measure since May

• Employment rose to 46.6 vs 45.2

• Supplier deliveries fell to 52.9 vs 54.6

• Inventories fell to 48.8 vs 49.2

• Customer inventories rose to 43.8 vs 41.1

• Prices paid rose to 53.3 vs 51.7

• Backlog of orders rose to 45.7 vs 43.3

• New export orders rose to 53.3 vs 47.3

• Imports rose to 51.3 vs 48.8

For context this is the biggest MoM jump in ISM since July 2013 – does that make any sense to you?

But, PMI was not, as Chris Williamson, Chief Business Economist at IHS Markit said:

“US manufacturing limped into 2020, with falling exports dampening output growth and causing a pull-back in hiring. The survey data are consistent with factory production falling moderately, meaning the manufacturing sector looks set to act as a drag on the overall economy once again in the first quarter.

“Weakness looks broad-based. Rising demand from households has helped support production in recent months, but January saw a marked slowing in new orders for consumer goods. Production of capital goods such as business equipment, plant and machinery meanwhile fell for the first time in almost four years, hinting at weakened business investment.

“More encouragingly, business expectations for the year ahead perked up, coinciding with an easing of trade tensions and the signing of new North American and Chinese trade deals. Companies are therefore expecting the soft patch to be short-lived, though fears surrounding the Wuhan coronavirus and any further potential escalation of trade tensions could erode this optimism.”

So it seems like a global pandemic is great for US manufacturing!!!! We suspect ISM will see one of its biggest drops in Feb after the hopes of the trade deal crash on the shores of coronavirus.

Authored by Bruce Wilds via Advancing Time blog,

It is impossible to predict what lays ahead! The coronavirus outbreak could be a nothing burger or become a watershed event. A mountain of debt has formed over the years and whether countries and central banks can hurl enough resources at this crisis to calm a growing fear remains to be seen. It is fear versus more promises of stimulus and at some point, all bets are off. To highlight the vulnerability of the financial markets we can always turn the spotlight back upon derivatives. Hundreds of billions of dollars do not matter when we are talking about death or something like the derivative markets.

Currently, China is looking to dump a wagon full of stimulus into an already highly leveraged market to offset the toll taken from virus fear. China said that billions of dollars will start flowing into markets at the opening and the Chinese government has ordered that short-selling of shares be halted. This instability makes it important to revisit issues that have been swept under the rug or simply overlooked. For most people, the derivatives market falls into this category, partly because they don’t understand exactly what derivatives are or why this market is so important. Everyone paying attention knows that the size of the derivatives market dwarfs the global economy. Several books on derivatives have been written and the size of the derivatives market could be larger than $1.2 quadrillion. To put this in perspective it is about 20 times the size of the world economy.

Attempting to regulate and control our complex global markets is easier said than done. This can be seen in derivatives which are usually lengthy complex legally binding agreements that are very difficult to dissect and often reek with potential contagion. Derivatives fall into many categories from futures, options, credit default swaps, and any complex combinations of these. They can also be used to wager, bet, and spectate on a market move or direction. Regulation is difficult and spotty at best in that a derivative transaction in one country might be considered a simple spot trade in another. I have become convinced after studying derivatives that QE following the 2008 financial crisis may have been geared to hold up the underlying value of assets that feed into and support the massive derivative market rather than help the economy.

Derivatives Could Explode Like A Bomb!

Way back in the middle of 2014, the Bank for International Settlements revealed that the amount of over-the-counter (OTC) derivatives outstanding was around 710 trillion dollars at the end of 2013. Most of that exposure is held by banks. The US Office of the Comptroller of the Currency at the time reported the exposure of US banks to derivatives totaling 237 trillion dollars. Of that, four big banks, JP Morgan Chase, Citibank, Goldman Sachs and Bank of America accounted for over 219 trillion dollars. The staggering size of this market is beyond anything that can be comprehended.

When I tried to get more recent numbers I ran into fairly stiff resistance which I contribute to the fact nobody knows the true exposure that is difficult to assess. Hopefully, much of the derivative exposure somehow nets out so that real exposure is far less than the hundreds of trillions of dollars on the books. This is only part of a much larger market that includes hundreds of trillions of dollars in non-reported agreements and private contracts. The efforts to achieve more reporting, more platform trading and central clearing of derivatives have fallen behind because of the complexity of crafting mutually consistent regulations at the jurisdiction level, for a highly globalized market.

While This Is Not A Current Chart Note The Trend Line!

Many derivative writers should be called “too clever by half” if they think they have successfully controlled the risk or removed the implications and problems massive defaults would cause. They pump these out because they make money in the process of structuring and selling these agreements. A derivative is in many cases an insurance policy covered by collateral. Sadly, those who buy and write derivatives often play fast and loose with the value of the collateral or flat out lie about it. This moves them from an insurance policy and into the area of high risk.

Those of us skeptical of the market wonder whether the coronavirus will be dismissed as another over-hyped hysteria or devastate economies. The potential that things could get ugly does exist. If at some point, a “mob mentality” takes over logic could get tossed out the window. This is when claims their actions are for the “greater good” becomes irrelevant. Temporarily, we are on hold while events unfold around us. The window has gone dark and our vision is limited. Just remember those in government generally take care of themselves first, in their minds they are the priority.