Page 2 of 3 CREDIT BUBBLE BULLETIN Italy And "Ro, Ro"
Commentary and weekly watch by Doug Noland
Disconcerting economic developments were not limited last week to continental Europe. Talk turned to ''triple dip recession'' after the UK manufacturing index for February unexpectedly dropped to 47.9. Canada reported the weakest GDP growth (0.6%) in almost two years. China's manufacturing indices were weaker-than-expected, perhaps indicating an economy more vulnerable than generally assumed. There were also more rumblings of rising
home prices and Chinese resolve to tighten mortgage finance.
India reported weaker-than-expected Q4 GDP (4.5% vs estimates of 4.9%). Meanwhile, automatic ''sequester'' budget cuts went into effect Friday in the US And whether it is the US, China, India, Brazil or ''developing'' economies more generally, I remain troubled by this dynamic of marginal economic growth in the face of ongoing rapid Credit expansion. I believe this creates heightened vulnerability to a reemergence of global de-risking/de-leveraging dynamics.
The world's markets have enjoyed six months of powerful ''risk on'' gains. There has been a veritable flood of ''money'' into equities and global risk markets more generally. In the US, in particular, talk of a new bull market has coaxed previously cautious holdouts back into equities. And I have no reason to believe the bulls will give up their strong market position/domination without one heck of a fight. Yet markets do have an inflection point - ''risk on'' succumbing to ''risk off'' - tone to them.
Indicative of a change in trend, volatility has become more pronounced throughout the markets. It has become particularly treacherous throughout the currencies. And after gaining almost 10% in January, Italian stocks now post a 2013 decline of 3.7%. With the exception of the UK, most European bourses have given back much or all of early-year advances. The same can be said for many key ''developing'' markets. India's Sensex index is now down 2.6% y-t-d. Brazil's Bovespa has lost 6.7%, while Mexico's Bolsa is up just 70 bps.
Most ''emerging'' currencies were under pressure last week - and thus far for 2013 overall. Eastern Europe's equities and currencies were on the defensive again. The Goldman Sachs Commodities index fell 2.4% (up 0.3% y-d-t) and is now about 5% below mid-February trading highs.
US stocks again held their own, as the chasm between fundamental prospects and securities market prices widens further. ''Safe haven'' Treasuries and bunds (and gilts?) enjoyed notably robust demand. The bulls were pleased with assurances that Federal Reserve chairman Ben Bernanke is not about to flinch on his ''money'' printing operation. And, you know, I see no reason not to expect this week to provide another ''new and exciting adventure'' in the workings of speculative ''high'' finance.
In a volatile week for equities and risk markets, the S&P500 added 0.2% (up 6.5% y-t-d), and the Dow gained 0.6% (up 7.5% y-t-d). The Banks slipped 0.6% (up 5.6%), and the Broker/Dealers fell 1.5% (up 12.2%). The Morgan Stanley Cyclicals gained 0.5% (up 7.2%), and Transports rose 0.7% (up 12.8%). The Morgan Stanley Consumer index increased 0.3% (up 10.9%), and the Utilities rose 0.8% (up 6.3%). The S&P 400 MidCaps declined 0.5% (up 7.6%), and the small cap Russell 2000 slipped 0.2% (up 7.7%). The Nasdaq100 gained 0.4% (up 3.3%), and the Morgan Stanley High Tech index added 0.2% (up 5.8%). The Semiconductors were unchanged (up 10.7%). The InteractiveWeek Internet index increased 0.2% (up 9.6%). The Biotechs surged 3.5% (up 11.7%). With bullion down $5, the HUI gold index fell 2.2% (down 20.8%).
One-month Treasury bill rates ended the week at 6 bps and 3-month rates closed at 10 bps. Two-year government yields were down about a basis point to 0.24%. Five-year T-note yields ended the week down 8 bps to 0.74%. Ten-year yields sank 12 bps to 1.84% (low since 1/23). Long bond yields fell 10 bps to a one-month low 3.05%. Benchmark Fannie MBS yields were down 10 bps to 2.52%. The spread between benchmark MBS and 10-year Treasury yields widened another 2 bps to a five-month high 68 bps. The implied yield on December 2014 eurodollar futures fell another 6 bps to 0.525%. The two-year dollar swap spread was down one to 14 bps, while the 10-year swap spread rose one to 9 bps. Corporate bond spreads ended the week mixed. An index of investment grade bond risk was unchanged at 85.5 bps. An index of junk bond risk declined 4 to 432 bps.
Debt issuance was pretty strong. Investment grade issuers included Freeport-McMoran $6.5bn, Pepsico $2.5bn, Coca-Cola $2.5bn, United Health $2.2bn, AT&T $2.0bn, Fifth Third Bank $1.3bn, Caterpillar $1.1bn, Philip Morris $1.85bn, Con Ed New York $700 million, Spectra Energy Capital $650 million, Motorola $600 million, Praxair $500 million, Cytec Industries $400 million, Mayo Clinic $300 million, Noranda Aluminum $175 million, Shands Teaching Hospital $125 million, and Maimonides Medical Center $100 million.
Junk bond funds saw outflows of $267 million (from Lipper), the fourth straight week of negative flows. Junk issuers included Equinix $1.5bn, CCO Holdings $1.0bn, First Energy $1.5bn, Cedar Fair $500 million, Donnelley & Sons $450 million, Lexmark International $400 million, TRW Automotive $400 million, Isle of Capri Casinos $350 million, Huntsman Intl $250 million, Associated Asphalt $185 million, and Meritage Homes $175 million.
Convertible debt issuers included Radian Group $400 million and Redwood Trust $250 million.
International issuers included National Bank Australia $1.75bn, Council of Europe $1.25bn, BNP Paribas $1.0bn, ING Bank $1.0bn, Rogers Communications $1.0bn, Korea Housing Finance $500 million and Eole Finance $190 million.
Italian 10-yr yields last week jumped 34 bps to 4.78% (up 28bps y-t-d). Spain's 10-year yields declined 5 bps to 5.08% (down 19bps). German bund yields sank 16 bps to 1.41% (up 9bps), and French yields fell 12 bps to 2.11% (up 11bps). The French to German 10-year bond spread widened 4 to 70 bps (wide since November). Ten-year Portuguese yields rose 6 bps to 6.22% (down 53bps). The Greek 10-year note yield slipped 3 bps to 10.80% (up 33bps). U.K. 10-year gilt yields were down 24 bps to 1.87% (up 5bps).
Italy's FTSE MIB fell 3.4% (down 3.7% y-t-d). The German DAX equities index recovered 0.6% for the week (up 1.3%). Spain's IBEX 35 equities index was little changed (up 0.2%). Japanese 10-year "JGB" yields dropped 7 bps to 0.65% (down 13bps). Japan's volatile Nikkei jumped 1.9% (up 11.7%). Emerging markets remained mostly on the defensive. Brazil's Bovespa equities index gained 0.3% (down 6.7%), and Mexico's Bolsa rose 0.3% (up 0.7%). South Korea's Kospi index increased 0.4% (up 1.5%). India's Sensex equities index dropped 2.1% (down 2.6%). China's Shanghai Exchange recovered 2.0% (up 4.0%).