US equities lower: Dow (2.16%), S&P (1.79%), Nasdaq (1.36%), Russell (1.64%)
- US equities weaker in Thursday trading, near worst levels. Treasuries rallying across the curve. Dollar weaker, but off worst levels on yen cross (some loose intervention speculation). Gold up 4.5%. Oil lower, with Brent (2.7%) and WTI (4.0%).
- No break from the pervasive risk-off trade. Lot of intertwined concerns in focus. Monetary policy uncertainty and fatigue among widely cited overhangs. Growth slowdown, weak earnings, spillover from commodity weakness and China deflation fears also big headwinds.
- More central bank backlash as Riksbank pushed rates further into negative territory. Disappointing results from GLE-FR exacerbating recent European bank concerns. CSCO-US results/guidance better than feared, but warned about recent pause in enterprise spending.
Fed uncertainty:
- As usual, no shortage of analysis surrounding yesterday’s semiannual monetary policy report to Congress. Some thoughts testimony provided fodder for both hawkish and dovish camps. In terms of the former, Yellen reiterated expectations for gradual tightening cycle, talked up labor market momentum and downplayed recession risks. For the doves, she acknowledged tighter financial conditions and the potential spillover effects for the US economy. In an attempt to backfit the testimony to the pervasive negative sentiment in the markets, the balanced approach may have actually been the problem. This plays into both concerns about the gap between the Fed and market over the policy normalization path, as well as the broader volatility surrounding the policy support and fatigue themes.
Riksbank pushes rates further into negative territory:
- Riksbank cut rates by 15 bp to -0.50% and said will continue to purchase government bonds for the first six months of the year in order to safeguard its inflation target. Added it will also reinvest maturities and coupons from government bond portfolio in line with practice at other central banks. Reiterated that it is highly prepared to provide even more expansionary policy if needed. Noted that there is potential to cut rates further and reiterated need to intervene in FX market. Also lowered its repo rate path, with average rate now at -0.52% in Q2 2016 vs prior -0.41%, Q1 2017 at -0.53 vs -0.33% and Q1 2018 at 0.00% vs -0.26%. Swedish krona weakened and bond yields fell after the decision.
Bearish Bass call on China gets more attention:
- Hayman Capital’s Kyle Bass recently said in letter to clients we are witnessing the resetting of largest macro imbalance world has ever seen. Argued that China has reached its near-term limit, while its banking system will experience a loss cycle that will have meaningful spillover effects for the rest of the world. Pointed out that due to such concerns, his fund has sold most of its risk assets. Also told Bloomberg he has ~85% of portfolio in China-related trades. Report said that banking system losses, which could exceed 400% of the US banking losses incurred during subprime crisis, are starting to accelerate. Added that PBoC would need to $10T worth of yuan to recapitalize its banking system. Expects by time cycle has peaked, yuan will have depreciated in excess of 30% vs US dollar.
Amazon announces $5B buyback, other companies getting more aggressive:
- AMZN-US announced a new $5B share buyback program after close on Wednesday to replace a $2B program approved back in 2010. Fits with recent trend of companies getting more aggressive with both their buyback announcements and repurchase activity. Goldman Sachs had a note out earlier this week highlighting strongest start ever for repurchase authorizations with YTD buyback announcements at a record $90B. Firm added its buyback desk also seeing uptick in activity as windows reopen and companies engage in discretionary purchases. Bloomberg article pointed out buybacks not helping stocks this year, while strategists have also flagged recent underperformance of buyback strategies. Seems to fit with ramp in shareholder preference for capex and balance sheet protection.
Difficult for subprime auto to be next “Big Short”:
- With the widespread selloff in risk assets this year, lots of discussion about where next catastrophe may be. Subprime auto has been a source of concern for a while now. Bloomberg noted that according to S&P, losses on securitized loans rose to 7.5% in November, highest since 2010. Also highlighted concerns about longer loan repayment terms, ballooning loan balances and greater willingness to finance used cars. However, while hedge funds increasingly interested in betting against the space, banks largely unwilling to make market given reputational and regulatory risk. In addition, no derivatives exist to bet against subprime because few managers interested in using such securities to wager underlying securities will perform as originally expected.
Abenomics under more scrutiny:
- Amid the recent ramp in policy scrutiny, Abenomics has not gone unscathed. WSJ discussed this dynamic, but article really did not break much new ground. Noted failure of BoJ to generate a sustained upswing, even after taking radical step of embracing negative rates, suggests Abenomics has reached an impasse. Argued that big lesson in all of this for other major economies that have followed similar strategies is that changing psychology is much more difficult than just changing interest rates. While paper was not as critical as others about lack of any meaningful traction behind key third arrow of Abenomics, structural reform, it did point out that some of the measures were never designed to provide short-term support.