U.K. Bank Credit Rallies as Johnson Strikes Brexit Deal With EU (UK CoCo Prices Jump, But Not Deutsche Bank’s 6% CoCo)

While the UK Parliament has to sign off on the Brexit agreement, bank credit rallies after Boris Johnson reached an agreement with the EU.

U.K. lenders’ riskiest notes jumped, leading a credit rally, after Prime Minister Boris Johnson reached a Brexit agreement with the European Union.

Barclays Plc’s 1.25 billion pound ($1.6 billion) 5.875% CoCo reversed earlier losses and hit 99.5 pence on the pound, the highest since May 2018, according to data compiled by Bloomberg.

barccoco

Nationwide Building Society’s 600 million-pound perpetual bond, sold last month, hit a record. Oddly, NBS’s perpetual bond started rising on October 10th, well before PM Boris Johnson announced his Brexit agreement.

nbsperp.png

A contingent convertible bond (CoCo), also known as an enhanced capital note (ECN) is a fixed-income instrument that is convertible into equity if a pre-specified trigger event occurs.

Screen Shot 2019-10-17 at 11.29.04 AM

A famous CoCo bond is the Deutsche Bank 6% Perpetual.

db6descrp

While issued at par (100), the G-spread on the Deutsche’s 6% CoCo bond is … 11%.

db6relsp.png

Odd, that DB’s CoCo bond remained relatively calm after the Brexit deal was announced.

skynews-boris-johnson-boris-johnson-pm_4771678.jpg

Is that UK PM Boris Johnson or Martin Kernsten, the Nipple King from Parks and Recreation?

Martin_Kernston2.jpg

Its always sunny in the UK!

Iron Man! Copper And Iron Futures Prices Decline As Global Growth Continues Slowing (Gold-Copper Ratio Similar To 10Y Treasury Yield)

Iron Man!

As a sign of continued slowing global growth, essential dry commodities like iron ore and copper have been declining since April/May of 2019.

ironcopper.png

The copper-gold ratio has shown a decline after peaking in June 2018.

goldcopperratio.png

The copper-gold chart looks similar to the 10Y US Treasury yield chart.

gt10trump.png

Is the global economy paranoid about China-US trade and Brexit impacts?

 

Minneapolis Fed’s Kashkari Says Banks Didn’t Plan Well for Liquidity Needs (Did The Fed??) Bank Excess Reserves Positively Correlated With Home Price Growth

Neel Kashkari was one of the Godfathers of TARP when he was at Treasury under Henry Paulson,  Here is the longer version of the hearing in which I testified (you can see the back of my head at the beginning of the video).

(Bloomberg) — Minneapolis Fed President Neel Kashkari says banks don’t like to use a so-called discount window for emergency funding because “they think it makes them look weak,” according to an interview with Axios.

Says banks are supposed to plan for their own liquidity needs

Says banks did not do that adequately, “And now they’re complaining because they failed to plan”

Neel, one reason that banks may not want to use the discount window is that is 50 basis points higher than the upper bound of The Fed Funds Target Rate.

feddisrepo

What Mr. Kashkari may be saying is bank excess reserves are positively with home price growth. As US home price growth is shrinking, so are bank excess reserves.

cs20res

The good news for banks is that mortgage originations are a smaller part of their business models. Take JP Morgan Chase, for example. They went from over $60 billion in mortgage originations at the peak of the housing bubble in 2005 to $24.5 billion in Q1 2019.

jpmcorg

JP Morgan Chase shifted away from residential mortgages to business loans, credit cards, etc. That is, shorter maturity loans.

jpmcloans

Commercial bank credit continues to grow, but no where near the levels of the 2005-2007  credit boom years.

Screen Shot 2019-10-14 at 12.00.16 PM

So, Kashkari bashes banks, but The Fed certainly has their own history of policy errors.

1570945809563blob

Oyster Stew! Baltic Dry And Cass Freight Indices Still Above 2014-2017 Levels

The Trump Administration’s partial tariff truce with China drew swift criticism for not being enough. For example, from Bloomberg Economics, …

“Past experience is that U.S.–China trade agreements aren’t worth the paper they are written on, and this one hasn’t even been written down. For now, though, indications on trade are a little more positive. If that persists, it could help put a floor under sliding global growth.”

Tom Orlik and Yelena Shulyatyeva, Bloomberg Economics

Take two important shipping indices, the Cass Corp Freight Index (Shipments) and the Baltic Dry Shipping Index. Both indices are still higher today than at any time between 2014-2017.

cassbaltica

Sure, the Baltic Dry Index is lower than it was in was in September 2019, just a month ago (white line). But it is still higher than at any time in the 2014-2017 time frame.

The same for the Cass Corp Freight Shipment index (green line) is below its peak in 2018, but still higher than at any point from 2012 to 2017.

So while trade tariff progress is moving along, the media and economists conveniently forget that shipping is still stronger than it was from 2014-2017.

Hence, the media’s negativity about the US-China trade negotiations is just a bowl of oyster stew.

Screen Shot 2019-10-12 at 12.20.35 PM.png

Inversion Reversal! U.S. And China Reach Partial Agreement Setting Stage For Broader Trade Deal (Stock Market Soars And UST 10Y-3M Goes Positive)

The U.S. and China reached a partial agreement Friday that would broker a truce in the trade war and lay the groundwork for a broader deal that Presidents Donald Trump and Xi Jinping could sign later this year, according to people familiar with the matter.

As part of the deal, China would agree to some agricultural concessions and the U.S. would provide some tariff relief. The pact is tentative and subject to change as Trump prepares to sit down with China’s Vice Premier Liu He later Friday.

Equity markets rejoiced!

wem

And the US Treasury 10Y-3M curve went positive for the first time since end of July.

yc10y3m

Time for a victory dance?

Screen Shot 2019-10-11 at 1.53.56 PM.png

Trade Fog! UK Industrial Production Falls 1.8% YoY In August, China’s Offshore Currency Goes Bananas And Gold Price/ Volatility Rises, V2X Volatility Goes Haywire

This is an update on key economic news relating to US/China trade and UK/EU Brexit talks. Better known as Trade Fog … or simply “The Fog.” 

On the Brexit side, the UK avoided recession by posting of 0.3% in August. Unfortunately, UK industrial production tanked to -1.8% YoY signaling a slowdown for the UK economy.

ukipyoy

On the China/US trade arm wrestling match, China’s offshore currency is showing volatility as even the NBA is getting caught up in the trade scuffle.

offshoreren

The volatility surface for the CNH is quite steep.

yuanvol

Of course, trade fog helps assets such as gold to rise.

gold101519

The volatility surface for gold is similar to that of the Chinese offshore currency.

goldvol

Trade fog (or trade vacillation) is on the rise as seen in this chart of V2X volatility.

vixvpl

The V2X index is above its various historic moving averages.

tradefog

As Brexit negotiation crawl along and the US meets with China or tariffs, we continue to see “The Fog” until Brexit and tariffs are finalized. Throw in Federal Reserve policy errors and we have a party!

p3265_v_v8_at

A Horse Is A Horse … Fed Chair Powell Announces New QE … That Is Not QE?

A horse is a horse, of course, of course, but no one can talk to a horse, of course. Unless, of course, that certain horse is … Jerome Powell!

(Bloomberg) Federal Reserve Chairman Jerome Powell said the central bank will resume purchases of Treasury securities in an effort to avoid a repeat of recent turmoil in money markets, while hinting at the possibility of another interest rate cut.

“My colleagues and I will soon announce measures to add to the supply of reserves over time,” he told a National Association for Business Economics conference in Denver on Tuesday.

The Fed chief suggested that the purchases would be made up of Treasury bills and stressed the buying should not be seen as a return of the crisis-era quantitative easing programs that the Fed engaged in a decade ago to boost the economy. Three-month bill yields fell on the comments.

fedbalsheetoct19

“I want to emphasize that growth of our balance sheet for reserve management purposes should in no way be confused with the large-scale asset purchase programs that we deployed after the financial crisis,” he said. “Neither the recent technical issues nor the purchases of Treasury bills we are contemplating to resolve them should materially affect the stance of monetary policy.”

“In no sense, is this QE,” Powell said in a moderated discussion after delivering his speech.

The Fed has cut interest rates twice this year to shelter the U.S. economy from weak global growth and trade-policy uncertainty. Traders in federal funds futures are betting that the Federal Open Market Committee will reduce rates again at its Oct. 29-30 meeting from the current target range of 1.75% to 2%.

Another Cut
In the question and answer period after his speech, Powell compared the current period to two instances in the 1990’s when the Fed cut rates three times in a successful effort to keep an economic expansion on track.

Powell’s comments suggest the Fed is inching closer to reducing rates at the upcoming meeting “but it’s not a done deal,” said Michael Gapen, chief U.S. economist at Barclays Plc.

“Another rate cut as early as this month remains a real possibility,’’ agreed Sarah House, senior economist, Wells Fargo & Co., who attended the Denver conference.

Powell told the gathering that the actions the Fed has already taken “are providing support for the outlook,” which remains favorable but faces risks, principally from global developments such as trade and Brexit.

“The broader geopolitical risks are important right now,’’ Powell said. “You have to be watching those carefully and assess the implications.”

Slowing Economy
The economy has recently shown signs of slowing as weakness overseas has spread to the U.S. and moved from domestic manufacturing industries to services.

The job market has also downshifted, even as unemployment has fallen to a half-century low of 3.5%. Nonfarm payrolls grew by an average of 157,000 per month in the third quarter, compared with gains above 200,000 earlier in the expansion.

Powell said that work done by the Fed mining private-sector data suggested the most recent job gains may ultimately be revised lower, but that the pace would still be above the level needed to hold unemployment steady.

He voiced confidence though that the economic expansion would remain on track. “This feels very sustainable,’’ [That’s what she said!]

Repo Market
Money markets were roiled last month as a combination of corporate tax payments and the settlement of Treasury debt purchases temporarily sent short-term interest rates skyrocketing.

The Fed announced last week that it will extend through October the ad hoc liquidity lifeline that it’s been offering to U.S. funding markets since then.

“We will not hesitate to conduct temporary operations if needed to foster trading in the federal funds market at rates within the target range,” Powell said.

“As we indicated in our March statement on balance sheet normalization, at some point, we will begin increasing our securities holdings to maintain an appropriate level of reserves,” he added. “That time is now upon us.”

Well, maybe not right now.

recessyc

The NEW logo for The Federal Reserve.

51P8FFADGJL

Free Cat? World’s Best-Run Pension Funds Say It’s Time to Start Worrying (Not Enough Revenue Thanks To ECB Policies And Inflated Liabilities)

State and Federal pension funds are plagued by extravagant promises to pensioners and low yields on pension assets caused, in part, by Central Banks, like the European Central Bank and Federal Reserve.

(Bloomberg) Back in 2012, the world’s best-managed pension market was thrown a lifeline by the Danish government to help contain liabilities. That was when interest rates were still positive.

Seven years later, with rates now well below zero, even Denmark’s $440 billion pension system says the environment has become so punishing that it may be time for a change in European rules.

Henrik Munck, a senior consultant at Insurance & Pension Denmark, an umbrella organization, says the way liabilities are currently calculated “could cause a negative spiral” that forces funds to keep buying low-risk assets, drive yields lower and the value of liabilities even higher.

The warning comes as pension firms across Europe struggle to generate the returns they need to cover their growing obligations. In Denmark, some funds saddled with legacy policies guaranteeing returns as high as 4.5% have had to use equity to meet their obligations.

To calculate liabilities, pension firms use a complex mathematical formula constructed by the European Insurance and Occupational Pensions Authority (EIOPA). The formula is intended to shield funds from erratic market swings that artificially inflate or hollow out balance sheets. But with negative rates more entrenched, there are signs the EIOPA curve, as it’s called, may not be working as intended.

“When pension funds across Europe de-risk simultaneously, it may actually become pro-cyclical: it increases the price movements, and it could result in yet more downward pressure on the EIOPA yield curve, exacerbating the problem,” Munck said.

The curve is comprised of several elements. Its backbone — the euro interest-rate swap curve — has sunk since its implementation about four years ago, driving up the value of liabilities.

swapseuro

PFA, like many Danish pension funds, started scaling back guaranteed products for retirees many years ago. That’s given it a buffer to help absorb some of the shock of growing liabilities. But not everyone’s as well prepared. “If the discount curve is more volatile and you can’t hedge it, you can — if you don’t have enough capital — be forced to lower risk on the more hedgeable space, to compensate,” Damgaard said.

danevol

Low volatility assets like sovereign debt?? Pretty soon, government pensions will have to deliver cheaper payments to pensioners.

Screen Shot 2019-10-06 at 2.18.22 PM

US Unemployment Rate Falls To Lowest Since 1969, Yield Curve Rises At Short-end (The Great Technology Disruption?)

Despite the hysteria over global warming and Presidential impeachment, the US economy keeps chugging along and now has the lowest U-3 unemployment rate since 1969. 

u3rec

While the Dow rose more than 200 points on the employment news …

dowu3

the US Treasury yield curve actually steepened in the very short end (but still lower than on October 1st).

tyx

Two of the top three industries for jobs added are 1) education and health, and 3) government. Leisure and hospitality (bartenders and waitstaff) are in 4th place.

Sept 2019 industry

The good news about bartending is that it is difficult to be replaced by technology. Waitstaff can be replaced, just ask the waitstaff at The Olive Garden and numerous fast food restaurants. Education can also be replaced by technology (Northwestern and MIT are two high profile universities offering on-line certificate programs). Healthcare is already being rocked by technology.

So, let’s see how US unemployment and jobs added changes over time with growing technology disruption.

Author Kurt Vonnegut predicted this automated dystopia in 1952 in his novel “Player Piano.”

PlayerPianoFirstEd

An automated burger machine!

https---blogs-images.forbes.com-christinatroitino-files-2018-06-Creator-Device_2-1200x797

Alarm! VIX Futures Curve Inverts As Dow Drops >500 Points (Tech Stocks Hammered)

It’s NOT always sunny in financial markets.

Today, the Dow dropped >500 points (2%) as of 12:2pm EST. Europe is even worse with the FTSE 100 down 3.23%.

dowqww

Meanwhile, the VIX futures curve has inverted!

(Bloomberg) — The front of the VIX futures curve has inverted, pointing to acute concern about the near-term outlook for a stock market that’s come under considerable pressure the last two days.

vixcurve.png

Some traders use a VIX curve inversion as a “take cover” signal, noting that would have helped avoid much of the damage associated with risk routs in Q4 2018, during the February 2018 Volmageddon, and amid the August 2015 devaluation of the yuan. On the other hand, it’s also produced numerous false positives. For instance, the Aug. 5 inversion on a closing basis also marked an intermediate bottom for the S&P 500.

For investors in long/short volatility exchange-traded products, this is when the term structure starts to act as a headwind or tailwind for performance.

Tech stocks are getting blasted (Microsoft, Apple, Cisco, Intel).

apple

Green man strikes again!

gg