Monetary Policy (management of money supply and interest rates)

AUSTRALIA

This week I would like to start with Australia, as there is more and more talk about the potential use of 'unconventional monetary policy'. Sounds sophisticated but it is not, there are four different types of unconventional measures conducted by central banks:

- Liquidity injections, especially for commercial banks during the times of financial distress (look at the current issues on the U.S. repo market). Central banks create cash in order to facilitate market operations of commercial banks.

- Negative interest rates, so far implemented in Europe and Japan.

-Quantitative Easing (QE) or massive asset scale purchases of government and corporate bonds,  Mortgage-Backed Securities (MBSs, assets similar to bonds built from a pack of home loans and issued by banks), passive investment funds (Exchanged Traded Funds - ETFs), real estate investment trusts (REITs).

- Forward guidance, comments by the central bank about their possible future moves.

After three 0.25% rate cuts this year, the Reserve Bank of Australia's cash rate stands at a 0.75% level.



The biggest players on the market such as JP Morgan Chase and Citigroup forecast in Australia the third option from the aforementioned measures as a feasible scenario in 2020. On the flip side, Goldman Sachs argues that the central bank will cut rates in the next year and avoid implementing QE.

RBA's Governor, Philip Lowe said this week that negative interest rates are “extraordinarily unlikely to be used in Australia, nor are any other unconventional policies." However, their perception of QE is that they see it as an option at a cash rate of 0.25% (which means after two 0.25% cuts).

Thus, from my point of view, the central bank is certainly preparing for that scenario in case of a deeper slowdown in Australia.

Lowe also said that Australia’s economic growth (measured as GDP) should rebound and accelerate to 2.5% in 2020 from 1.75% this year and unemployment should fall to about 5% by the end of next year from the current 5.3%.


UNITED STATES

In the U.S. some shocking comments came from Neel Kashkari, the President of the Federal Reserve Bank of Minneapolis who said that "monetary policy can play the kind of redistributing role once thought to be the preserve of elected officials."  and adding later "We had historically said: distributional outcomes, monetary policy has no role to play. That was kind of the standard view at the Fed, and I came in assuming that. I now think that’s wrong."
It has been first reported by Bloomberg which asked in the title: "Can the Fed fight inequality?". If you have read my post from November 17, you probably know the answer.

On Monday, Jerome Powell, the Fed Chairman delivered a speech in Providence, Rhode Island. In his remarks, Powell simply reiterated the language the Fed has been delivering since their last meeting saying "the current stance of monetary policy as likely to remain appropriate and well-positioned so long as current generally good conditions persist."


He also emphasized that the current labor force participation level is low (63% vs 66% before the last recession) compared to other countries and it is another area to focus by the central bank. Labor Force Participation Rate is showed in the chart below.



For clarification, labor force rate participation is the number of all workers and people actively seeking employment divided by working-age population (18-64 in the U.S.), excluding Armed Forces and inmates of institutions (penal, mental facilities, homes for the aged).

In subsequent comments on Tuesday, Fed Governor Lael Brainard recommended using caps on interest rates the next time their rates fall near-zero level. What does it mean? It means buying short-term and medium-term U.S. Treasury Bonds whenever the Fed would think their yields are too high (purchasing bonds increase their prices, as a consequence their yields fall - inverse relationship). In other words, it is control of the yield curve, similar to that in Japan. It is worth to remind that loan rates follow bond yields, so they would be able to bring those rates down if necessary. You can see the U.S. yield curve in different points in time in the chart below.


The blue line shows the yield curve at the current date, starting from 1-month bond yields (1M) and ending at 30-year bond yields (the longest available maturity in the U.S.)

To me, it is just the next idea which if implemented will increase the market interference of the Fed, and if looking at Japan it is really questionable whether that actually works. One of the main objectives - inflation has never reached its target since the 'Yield Curve Control' has been implemented in Japan (September 2016).

The last U.S. monetary policy-wise development came on Wednesday, and it was the Fed Beige Book. This is a report summarizing economic conditions of each Federal Reserve district (chart below), published eight times a year on their website.
https://www.federalreserve.gov/monetarypolicy/beige-book-default.htm

source: federalreserve.gov

As you can see. there are 12 districts. In the most recent report, the Fed has not included anything revealing, saying that the economy expanded modestly from October to mid-November, while labor markets remained strong. They also emphasized that after 16 months of U.S.-China trade war "manufacturing activity has softened and business investment has cooled as firms delay making decisions due to the uncertainty over tariffs. Retailers mentioned higher costs, with contacts in some districts attributing the rises to tariffs."

After this relatively quiet week, the market gives a 98% chance for rates to stay at 1.50-1.75% level at 11 Dec 2019 Fed meeting.

source: cmegroup.com


EUROPE

In the case of Europe, we have had some mixed comments about the current stance of the economy as well as the monetary policy. Let's first go back to Saturday, November 23 when the European Central Bank’s chief economist Philip Lane said that their policies are in a "good shape" and
"The scenarios where more dramatic policies are required such as a severe negative shock, a big recession are not the baseline case." A recession for central bankers has never been a base case and it will never be. They simply do not forecast recessions, it would be perceived a failure of their policies. On the other hand, they always want to maintain positive public beliefs about the economy. Therefore, you have to often look at their positive comments with a grain of salt.

He also added that if necessary they will cut rates even further and they do not see the current level of rates as harmful (-0.50%). In my next article, titled "How negative interest rates are robbing us of hard-earned money" I will explain why this is not true. The article is almost done.

In the next comments on Monday, Lane also said that they are going to stay in the bond market for a long time (purchasing bonds) and sees decreasing the level of ECB balance sheet (see the chart below) far in the future.

source: Holger Zschaepitz, twitter

As you can see, the total assets on the ECB's balance sheet have climbed to 4.697 trillion euros or 40.6% of GDP.

In subsequent remarks on Tuesday, ECB's Governing Council Member Francois Villeroy de Galhau said that low rates will continue to support the economy and urged Germany and Netherlands to use their fiscal space (government spending). To sum up, nothing has changed. In the last week report, I referenced the fiscal space of the Eurozone countries.

On Wednesday, Financial Times published an article saying that Christine Lagarde, a fresh ECB president wants a key role for climate change in strategic review of the European Central Bank. This is just another excuse for continuing monetary madness in the form of money printing (and buying bonds) as well as lowering interest rates. They are going to finance government spending by buying their bonds in the name of the so-called "green deals". It will simply lead to more government interference in the economy giving less space for the private sector which will translate to lower productivity, especially because of the current high debt levels. The best example of possible consequences is the Japanese economy which has been struggling over the last four decades.

On Friday, in closing remarks, at the VIII High-level Policy Dialogue between Eurosystem and Latin American central banks in Cartagena, Luis de Guindos, Vice-President of the ECB outlined Global Risks threating financial stability of the system:

- High indebtedness
- Signs of mispricing of financial assets
- Increased risk-taking in the non-bank financial sector
- Political instability
- Capital flow volatility
- High levels of non-performing loans
- Low bank profitability

The problem is that their policies contributed to those developments, and they will likely continue.

As the last thing, I would like to reference, Governing Council Member Francois Villeroy de Galhau Friday's speech during which he claimed that ECB forecasting should incorporate climate change.

“Climate change can change the value of securities that we accept as guarantees in monetary policy -- the collateral -- depending on whether the asset is threatened or not by climate risk. This risk should now be taken into account,”

It looks like they are very determined to do that.



JAPAN

On Friday, Bank of Japan (BoJ) Governor Haruhiko Kuroda said "the central bank's ultra-loose monetary policy [ultra-low rates and asset purchases] is aimed at hitting its inflation target, not at funding government spending, warning against complacency in getting Japan's fiscal house in order"

He also emphasized that the BoJ has "ample room" for further monetary easing (cutting rates, money printing, and buying assets) if slowing global growth and the trade war prevent them in achieving a 2% inflation target but he is not considering further easing at the moment.

In further comments, he said that BoJ's bond holdings are not distorting market function and the bond market is functioning. That was in the context of the government bond market. Now, let's make a quick summary of Bank of Japan's market interference:

1. At the end of September 2019, the Bank of Japan held a total of 469.4 trillion yen ($4.29 trillion) of Japanese Government Bonds(JGBs), 51% of the Japanese Government Bond market.

2. Bank of Japan currently owns 80% of the domestic Exchange-Traded Funds(ETFs) and 5% of the Japanese Stock Market.

3. BoJ will be also the biggest holder of Tokyo-listed stocks in the mid-next year overtaking the Government Pension Investment Fund.

4. The central bank is one of the top 10 shareholders in the majority of the largest companies of the Nikkei 225 index.

5. Its Balance Sheet accounts for more than 102% of Japanese GDP (Gross domestic product).

source: Holger Zschaepitz, twitter

Explain to me please, apart from the other things I mentioned, how the market could not be distorted when the central bank is holding more than half of government bonds?


Trade War Between the U.S. and China

This week was very intensive, as there were many developments around Hong Kong. Although, it seems like it would not have such a significant impact as many expect. As usual, here is the recap of the most important developments:

1. On Saturday, U.S. National Security Adviser Robert O’Brien said a 'phase one' trade deal with China is still possible by the end of the year.

2. On Sunday, China said it will raise penalties on violations of intellectual property rights and it's aiming to reduce those by 2020 as well as to make easier for victims to receive compensation. 

It is certainly, positive development if China fulfills its promises as it is one of the sticking points in China-U.S. trade talks.

3. On Monday, Reuters reported that "an ambitious "phase two" trade deal between the United States and China is looking less likely as the two countries struggle to strike a preliminary "phase one" agreement, according to U.S. and Beijing officials, lawmakers and trade experts." 

They have not done a 'phase one' deal yet and discuss things regarding the following steps, interesting.

4. Later that day, the Global Times, a tabloid run by the ruling Communist Party reported that China and the US are 'very close' to a phase one trade deal, reaching broad consensus and adding that the Middle Kingdom is committed to continuing talks for a phase to or even a phase three.

The report also noted that the White House and Beijing had not agreed on specifics or size of rollbacks of tariffs on Chinese goods. As we know, this is another sticking point in the talks.

It reminds me of something:

source: peakprosperity.com

5. Also on Monday, China’s foreign ministry spokesman Geng Shuang said it hopes the U.S. will work with Beijing "on a basis of equality and mutual respect".

In addition, China said it had summoned U.S. Ambassador Terry Branstad to protest the passage of the Hong Kong Human Rights and Democracy Act in the U.S. Congress, adding "the bill amounted to interference in a Chinese internal matter."

It is worth to note that in Hong Kong, pro-democracy parties won almost 90% of 452 district council seats in Sunday’s local elections.

6. On Tuesday morning in an online statement, China's Ministry of Commerce said that Liu He, China's top negotiator on trade, had a call with U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin.

"Both sides discussed resolving core issues of common concern, reached consensus on how to resolve related problems (and) agreed to stay in contact over remaining issues for a phase one agreement," the Chinese-language statement said, according to a CNBC translation.

7. United States Trade Representative official confirmed the call but declined to comment on the content of the call.

Xu Xijin, Global Times, Chinese daily tabloid editor commented the call in the following way:



8. Later in the day, Global Times tweeted that Yang Jiechi, a senior Chinese official said: "China urges the U.S. to have a clear picture of the situation, immediately prevent the bill [Hong Kong] from becoming a law, stop interfering with Hong Kong affairs and meddling with China's internal affairs."

9. Before Tuesday's stock market was closed in the U.S., the Wall Street Journal published an article titled: "China Raises Hopes for U.S. Trade Deal" saying that Tuesday's call was initiated by Liu He after U.S. negotiators passed on making plans to visit China this week.

10. Another voice of optimism came from White House adviser Kellyanne Conway who said on Tuesday that China trade is deal close but sticking points remain.

"We're getting really close and that first phase is significant," she said, adding that Donald Trump wanted to "do this in phases, in interim pieces because it's such a large, historic trade deal."

11. Global Times also commented on the call reporting that "An expert close to the trade talks said that topics [During the call] may have include tariff removals, agricultural purchases, a review mechanism for the implementation of a potential agreement as well as arrangements for a face-to-face meeting."

12. Subsequently, President Donald Trump told reporters at the White House that: “We’re in the final throes of a very important deal, I guess you could say one of the most important deals in trade ever. It’s going very well but at the same time we want to see it go well in Hong Kong,”

Trump also said that he has to make sure a deal with China is "good" which is why he is "holding it up".

13. And then, on Wednesday, White House released a statement that President Trump signed two bills backing Hong Kong protesters, in spite of Beijing opposition. In the statement he said:

“I signed these bills out of respect for President Xi, China, and the people of Hong Kong. They are being enacted in the hope that Leaders and Representatives of China and Hong Kong will be able to amicably settle their differences leading to long term peace and prosperity for all,”

14. Now I am going to include a few attachments showing Chinese opposition and reaction to signing the bills:



Lijian Zhao, Deputy Director General, Information Department, Ministry of Foreign Affairs, China:





Also, China's Ministry of Foreign Affairs said on Thursday the U.S. "has sinister intentions and its plot is "doomed to fail,"



For the second time this week China summoned the U.S. ambassador to “strongly protest" President Trump's signing the Hong Kong Bills.

And also the tweet about possible retaliation:



As you can see, a tough language has ended at just a tough language, the question is what real retaliation awaits the U.S. in the coming days.

15. In the meantime, the United States Trade Representative office has granted exclusions for tariffs imposed in September 2018 on $200 billion Chinese goods. The exclusions will apply from Sep. 24, 2018 to Aug. 7, 2020.
Link:
https://www.federalregister.gov/documents/2019/11/29/2019-25820/notice-of-product-exclusions-chinas-acts-policies-and-practices-related-to-technology-transfer

16. Then, the U.S. press has started to publish positive toned articles.

First, the New York Times wrote that "Behind the harsh rhetoric, China has few options for striking back at the United States in a meaningful way." and Beijing wants to end the punishing trade war.
They also emphasized that the Chinese main trade agency has not commented on the bill as other officials, which may suggest an openness to a trade deal.

After that, the Wall Street Journal reported that China and the U.S. officials remained confident about a 'phase one' deal and this is the reason why Beijing has not retaliated Donald Trump signing the bill supporting anti-China protesters in Hong Kong.

17. This may not be true, according to Lijian Zhao, Deputy Director General, Information Department, Ministry of Foreign Affairs, China,





But it looks like remaining sticking points in the talks are still the biggest issue, not Hong Kong.

18. In the meantime, the Wall Street Journal reported that Huawei, the Chinese giant telecommunication company is preparing a lawsuit against U.S. efforts to restrict its business. They have also significantly increased spending on Washington lobbyists.

Huawei Technologies has been placed on a trade blacklist by the U.S. Commerce Department in May due to national security concerns, restricting sales of U.S. products to the company.

19. As the latest news, Reuters reported that two sources said the U.S. government may restrict even more foreign shipments of products with U.S. technology to Huawei as putting the company on a blacklist failed to cut supplies to the Chinese telecom giant.

As you can see, there is no end in sight of the ongoing dispute, even for a 'phase one' deal. I personally think that China will retaliate in some way which will prolong talks for the next year. The question is, how far. It is worth to note that if they will not reach a deal in two months then the U.S. farmers will miss a great chance for selling soybeans to China for the benefit of Brazilian and Argentine farmers. Agriculture purchases are a big part of a deal. The question is how much the U.S. cares about the farmers or whether they want to subsidize them even more.

In terms of probabilities, the market still sees a 54% chance of a deal.

source: zero hedge


STOCK MARKET

The S&P 500 index has reached another all-time high, increasing 1.21% for the week.


As you can see, it moves within the red channel. This week, even though it has had much-mixed trade war news, the market moved downwards only slightly on the last day, mainly due to Thanksgiving on Thursday (cash market was close) and limited trading on Friday. Many traders, highly likely extended their weekend, not coming to their trading desks.

If you still wonder what has driven the market over the last weeks, here is the graphic showing the answer:

source: zero hedge

"It's the Fed stupid!" Since the U.S. central bank has started to increase its balance sheet, the S&P 500 index moves exactly in the same way. Last week the Fed slightly decreased their amount of assets, as the bottom part of the above chart shows and as a result stocks followed, recording a small decrease.

As a little reminder, I would like to point out that the Fed balance sheet has grown by $293 billion in less than three months (chart below).

source: zero hedge

Going back to the S&P 500 index. If on Monday the index rejects the upper red line, consolidation/correction will likely follow. Otherwise, if it breaks to the upside we may see a continuation. Again, much depends on the Fed as well as the trade war developments.

Looking at VIX or the fear index, it seems like it found support just below $12. First chart covers only 2019 year (I took it from the last week's report).



The second chart starts at the beginning of 2018 and its the most current. Volatility is recording new lows not only in the U.S. (as chart shows) but also around the world. Does that mean we will have a volatile December?

Going further, we have a similar situation on the German Dax index which advanced 0.75% on the week, declining on Thursday and Friday.



Do not forget that in Europe, the European Central Bank is printing as much as 20 billion euros per month (started on Nov 1), purchasing bonds and pumping liquidity into the system.

This is also one of the reasons why European equities are on track for their best year since 2009, in the aftermath of the global financial crisis.

source: zero hedge

In Australia, the S&P/ASX 200 Composite, consisting of 200 largest companies has reached its all-time high, closing 2.59% higher for the week.


From the technical perspective, the index is in an upward trend (bottom red line) and found resistance on the upper red line. If there will be a pullback, a potential entry could appear on the bottom red line and may coincidence with 200-moving average (yellow line), unless the macro picture deteriorates dramatically.

It is worth to note, that stocks in Asia dropped from -0.42% in China to -2.03% in Hong Kong, amid Hong Kong health-care sector drop and the trade war anxiety.

source: investing.com

It promises to be an interesting week ahead. If Asian stocks continue falling on Monday, then we may see the entire world to follow.


GOLD

In terms of Gold, nothing has changed over the week. Let me bring then the comments from the last week:

" I see gold drop to around $1400 and it may be a good entry if the economic slowdown and central banks' easing continues. From a technical perspective, I see a possibility to enter when the RSI falls below 30 and coincides with the gold price being close or touching a 200-day moving average or breaking the wedge to the upside."


And it looks like RSI may be testing falling trend (bottom part of the chart). Watch it closely for the potential break.


DOLLAR

The dollar is still trading in the channel after bouncing from its 200-day moving average.






WTI CRUDE OIL

WTI Crude oil sharply dropped on Friday, recording a 5.82% decline for the week.


It has also broken the short-term upside trend (bottom red line), as well as its 200-day moving average.



The reason behind the drop was Saudi Arabia signalling that it has enough OPEC+ quota cheats, as Bloomberg reported:

"Prince Abdulaziz bin Salman, who took over from Khalid Al-Falih in September, will likely use his first OPEC meeting as Saudi oil minister next week to signal OPEC’s dominant producer is no longer willing to compensate for other members’ non-compliance, according to people familiar with the kingdom’s thinking."


It consequently may mean more oil supply in the future if the OPEC allies will be still averse to production cuts. The next OPEC meeting is set in Vienna on December 5, and on the following day, Russia will join for the OPEC+ discussions.

In the next week, expect continuation of the move, unless something fundamentally will change.


BITCOIN

Bitcoin is trading in a downside trend, recently finding support at $6630. 


Cryptocurrency recorded almost 20% drop in November, the biggest since November 2018. After bouncing up a few hundred because of RSI being in the oversold territory (below 30) it is falling again. I think that there is still some room to the downside, potentially ending at $6630 or even $5900.


GLOBAL ECONOMY (and others)

1. First, a warning from the head of investments at Finland’s Ilmarinen Mutual Pension Insurance Co., one of the biggest Nordic pension funds. Due to negative interest rates in the Eurozone (-0.5%) many funds are looking for higher yields or higher returns in more risky investments. It is worth to note that there are more than $12 trillion negative-yielding bonds around the world (when one buys that bond and holds it to maturity, then simply loses money). In August, they have even reached a value of $17 trillion.


As an alternative, funds managers are looking for returns in real estate and infrastructure investments or private equity, which are less liquid investments and much riskier. The fund says that out of roughly $55 billion assets under management they hold 8-10% in private equity, adding that the low returns in bonds are not the only one problem. There is also the scarcity of bonds as the European Central Bank owns significant portion of them as a result of the Quantitative Easing program (massive asset purchases). Before the start of the next QE program in November, the percentage of ECB government bonds holdings looked in the following way:


FI- Finland, NL - Netherlands, PT - Portugal, SP - Spain, GE - Germany, AT- Austria, IE - Ireland, BE- Belgium, FR- France, IT - Italy

As you can see, the ECB holds 30% of Finland's and Netherlands' government bonds, and so on. The limit is 33% but it is likely that in some way they will bypass the limit if needed.


2. German Business Sentiment (Business Climate Index) came in line with expectations in October, recording 95 points versus 94.6 in the previous month. But the most important were expectations at 92.1 level versus 92.5 expected. On the chart, you can see German GDP Growth (yellow) as well as mentioned business expectations (white line).



Germany’s Ifo institute commented on the data saying that although its headline business climate index rose slightly in November, Germany’s manufacturing sector is still stuck in recession.

3. Global Trade Volume dropped in September by 1.3% from a year earlier, although 3-month change slightly rose (white line)


Sign of stabilization? We will see over the next months

4. China central bank issued draft guidelines on the evaluation of systemically important banks, in other words, banks too big to fail. 

The guidelines will help regulators to identify lenders that are crucial to financial system, and thus reduce and fend off major financial risks...
Therefore, in the case of financial distress, they will be bailed out either by the central bank or the government.


5. Dallas Federal Reserve President Robert Kaplan expressed concerns about increasing corporate debt levels.

He said that BBB rating bonds have tripled over the last 10 years, adding that leveraged loans, as well as BB and B bonds, have also surged dramatically.

Let's recall that the BBB rating is actually the first investment-grade in terms of bonds, or above the "junk status". See the chart below


Kaplan also said that "if you get two or three BBB credit downgrades to BB or B, that could lead to a rapid widening in credit spreads, which could then lead to a rapid tightening in financial condition"

What does it mean? Basically, regulations require financial institutions like pension funds or insurance companies to hold a significant proportion of high-quality assets, and most of them are investment-grade bonds (starting from BBB-, above the red line in the table). If they would have been downgraded as Kaplan said, it would trigger a cascade of selling, which would increase yields (and in consequence credit spreads = in this case, the difference between corporate bond yields and Treasury bond yields). To realize the scale of the problem look at the chart below.


It shows that BBB-rated bonds (BBB-, BBB, and BBB+) account for 55% of the Investment Grade Bond Index (High-quality bonds, everything above the red line in the previous table)!!! If economic conditions substantially deteriorate and then also the credit quality of companies (so their bonds), as a consequence we may see carnage on the credit market, eventually leading to massive bankruptcies (as subtly described by Kaplan "rapid tightening in financial condition"). Imagine now the pressure put on the credit agencies employees... 



Risk is very substantial. According to Morgan Stanley, 55% of BBB bonds would have a high-yield (junk, below the red line in the table) rating based on leverage alone. In simple words, 55% of BBB bonds are actually junk and should not be held by pension funds and insurance companies, among others.


6. Chinese economy slowing further. Industrial profits in China fell in October by 9.9% from a year ago, the most on record, data from the National Bureau of Statistics showed on Wednesday.



According to Bloomberg early indicators, the Chinese economy slows for the 7th month in a row. 
And this is despite massive money injections into the economy (green line on the chart).

source: zero hedge

China Credit Impulse is a measure of the change in new credit issued as a % of GDP, which leads the real economy by 9 to 12 months. It looks like it has stopped working for enterprises. Lack of external demand and overcapacity (inability to sell as much as produced) have dominated Chinese companies in the industrial sector.


7. Volksbank F├╝rstenfeldbruck, small German bank with 1.8 billion euros in assets, said that it will charge new clients of -0.5% rates on savings accounts with deposits of 1 EURO and above. This is the first German lender passing costs of negative rates on retail customers. 

As I reported in one of the posts, at the end of September, Bundesbank (German central bank) surveyed 220 commercial banks asking whether they are charging negative rates on the clients' deposits, that was two weeks after the ECB cut its rate from -0.4% to -0.5%. In response, 58% of German banks said that they imposed negative interest rates on the deposits of corporate clients and 23% are doing the same for retail customers. 

The trend is really worrying and German authorities even started to consider banning negative rates imposed on small retail consumers.


8. United States Gross Domestic Product (GDP) in the third quarter has been unexpectedly revised from 1.9% to 2.1%.

source: zero hedge

According to the Bureau of Economic Analysis (BEA), the revision to GDP reflected upward revisions to inventory investment, business investment, and consumer spending.

9. Fitch Ratings reported that global car sales are expected to decline by about 3.1 million in 2019, more than in 2008. This is one of the main reasons for the global manufacturing downturn.


Worldwide sales in 2019 likely to fall by roughly 4% to around 77.5 million new vehicle sales.


10. Japan Retail sales fell 14.4% in October (versus 10.4% expected) from a month earlier, more than the drop after a similar tax increase five years ago and the worst drop on record according to the economy ministry data stretching back to 2002.



The reasons behind the drop were the sales tax hike from 8% to 10% on October 1, applied to nearly all goods and services, apart from most food as well as larger than expected typhoon. If Japanese authorities wanted to limit consumption by increasing taxes (but probably they wanted higher government revenues), then well done, they've made it.



Moreover, the aforementioned factors plus global slowdown contributed to a 4.2% fall in Japanese factory output from a month earlier, the worst drop in the last 5.5 years, declining twice more than expected.


11. Meanwhile, Q4 US GDP Atlanta Fed forecast increased from 0.4% on November 19 to 1.7% on November 27.



12. Oxford Economics forecasts for 2020:



China GDP Growth below 6%,
US GDP Growth below 2%,
World Excluding US & China just above 2%.

13. Mexico has fallen into a technical recession, recording at least two consecutive quarters of negative GDP growth.



Is this a harbinger for the U.S.? Probably not

https://www.bloomberg.com/opinion/articles/2019-11-26/recession-in-mexico-may-presage-trouble-for-u-s-economy-k3fe7m7m

14. Mercedes-Benz and Audi announced plans to fire roughly 20,000 people.

According to Stefan Bratzel, director of the Center of Automotive Management near Cologne in German, there might around 150,000 jobs at risk in the coming years in the German automotive sector (including local operations of foreign manufacturers).

https://www.bloomberg.com/news/articles/2019-11-29/daimler-to-cut-thousands-of-jobs-in-1-5-billion-savings-plan

15. People’s Bank of China (PBOC) warns about high financial risks due to global trade tensions and rising global liquidity uncertainties.

In their annual financial stability review, they said that at the end of 2018, "13.5% of China’s 4,379 financial institutions, mostly rural and smaller institutions, were rated as “high-risk” by the PBOC in the annual review of the industry. That compared with an about 10.58% of institutions that failed the PBOC’s 2018 test."

They also pointed out at high consumer indebtedness accounting for 60.4% of China's GDP.

https://www.bloomberg.com/news/articles/2019-11-28/china-s-financial-warning-signs-are-flashing-almost-everywhere
https://www.reuters.com/article/us-china-economy-pboc-idUSKBN1XZ151

16. Companies have sold a record $2.43 trillion value of bonds amid record low-interest rates (historically low cost of debt).


Graphic below shows that we currently have historically low interest rates, which translate to record low bond yields.


This is example based on the United States and the United Kingdom, where the U.S. has the highest rates among each developed country in the world. Fantastic Graphic.

Now imagine that the economy improves, which may lead to increased rates (yields). It can cause financial shocks due to greater debt financing costs, especially for weaker companies with high leverage.

According to Bloomberg "There are plenty such borrowers after bond issuance in Asia and Europe marched ahead at record pace this year, and U.S. debt sales remained high."

On the chart below you can see a corporate credit composition in the U.S. and Europe.



As you can see, the United States corporate market is based more on corporate bonds (red, green, blue) and leverage loans (grey), whereas the Eurozone on bank loans (yellow).

https://www.bloomberg.com/news/articles/2019-11-30/record-2-4-trillion-bond-binge-is-threatening-investor-returns

17. Some interesting charts.


This chart shows the number of assets in US dollars held by the major central banks. Very informative. It is expected that in 2020 it may increase even to $23 trillion.


Change of total seats as a percentage share across Hong Kong districts from 2015 to 2019.


Year to date returns across different asset classes in the world. HY bonds stand for High Yield (below the red line in the table of credit ratings)., IG bonds for Investment Grade (above the red line).


10-year government bond yields adjusted for inflation across different countries. Even the United States has real negative rates.


Car sales in the United States to drop even further?


Euro Area unemployment rate stood at 7.5% in October; the lowest rate since July 2008.

European Union unemployment at 6.3% - lowest since the start of the series.

Source: Eurostat


Light blue line shows CEO Confidence Survey and their economic expectations leading by 4 months (right scale), the survey is based on roughly 100 CEOs across different industries in the United States. The blue line shows the S&P 500 percentage change year on year (left scale). If the correlation holds then we will experience more than 30% drop in the U.S. equities in the coming months. Would you believe that?

18. As we are in the theme of surveys, I would like to conclude this report with the survey conducted by Genesis Mining of 1,000 English-speaking Americans asking what the U.S. dollar is backed by:

Here are the answers:

29.3% believes the dollar is backed by gold
30.1% say the government backs it
7.1% said nothing
5.8% said bonds
4.1% said oil
23.6% said they had no idea


Have a wonderful week!
Seb.

Disclaimer: This content includes only personal opinion and that should not be considered professional financial investment advice.