ASTONISHING

Chart posted without words other than ASTONISHING:

Bitcoin

Unlike buying sovereign debt in one’s QE program, wading into the corporate bond side brings much greater risks. That reality is now dawning on the ECB I’m assuming after what happened to the bonds of Steinhoff International Holdings NV the past two days which the ECB owns. The retailer/distributor of a variety of household furniture, particularly beds, has lost almost all of its equity worth this week (down 78%) and a chunk of its bond value after an accounting scandal erupted a few days ago where the CEO was forced to resign. The 1.875% coupon bond they issued back in July for this investment grade Baa3 credit (but not for long) was .90 cents on the euro one week ago and trades today at .60 (plunged intraday yesterday to almost .40). While this holding is a pimple on the ECB 150b ish euro corporate bond portfolio, I read that the count of companies that were once IG when purchased by the ECB that have now become junk rated companies stands at 26. The ECB is not allowed to purchases junk rated bonds when initially added to its portfolio. I wonder what they do when they become one. The politics of this becomes potentially messy at some point but again its more optics as corporate bonds are less than 5% of the ECB balance sheet. Also, we are just 3 ½ weeks away from their monthly purchases getting sliced in half anyway.

I’ll repeat again, this is what European bond investors, both sovereign and corporate, have to look forward to: 1)An end to QE in 2018 which was 7 times net issuance on the sovereign side, 2)To be followed by an end to negative interest rates, especially if a German takes the top spot of the ECB in 2019. I’m pretty confident on how this will end over the next two years. Here is a chart on the European high yield index I’ve posted a few times. It looks like we’ve seen the lows in yields with the potential break in the downward trend:

CREDIT SUISSE WESTERN EUROPEAN HY YIELD

The yen has weakened to a 3 week low vs the US dollar after BoJ Governor Kuroda spoke overnight and didn’t give any hints as to when he will allow the yield curve to steepen. He was bombarded with questions about the ‘reversal rate’ he mentioned weeks ago and while he admitted the shape of the curve could change, it will remain in place for now. He still is defending his policy because of the growing criticism about its impact on bank profitability and its intermediary function but he did say they “must carefully watch the potential impact of prolonged easing.” Kuroda unfortunately is still living with the fallacious belief that higher inflation would lead to faster economic growth and the real irony is that Japan has truly had price stability over the past 20 years. The misinterpretation of Japanese inflation/deflation during this time period is what spawned QE, ZIRP and NIRP. Crazy. The 10 yr JGB yield was unchanged in response but the 40 yr yield fell by 1.5 bps to a hair back below 1.00%. The Nikkei rallied 1.5% on the yen weakness but the bank stocks didn’t like the Kuroda comments as they closed red for the 3^rd day in 4.

Of note as we approach another Fed rate hike next week and a further draining of liquidity in 3 ½ weeks, it is getting more expensive to hedge out US dollar exposure if you are an investor based in Japan or Europe. For a yen based buyer of US assets, it is now the most expensive to hedge out the dollar since late January. For European investors, go back about one year. See chart, the more negative, the more expensive.

EURO BASIS SWAP

China’s FX reserves rose for the 10^th straight month and by $10b m/o/m to $3.119T. That is the most since last October. A weaker US dollar in November helped to revalue higher the PBOC holdings of non dollar currencies and that was the main reason for the increase in the value of the reserves. The State Administration of FX also added ‘stability in capital flows’ and more market liberalization of trading as reasons. The yuan was little changed in response. We did see another fall in Chinese bond yields with the 5 yr yield in particular falling to the lowest since late October. Interbank rates though still remain at 2 ½ year highs. Interbank rates again rose in Hong Kong. Quietly, the Shanghai index closed at its weakest level since August 24^th. The H share index fell slightly to a 2 month low.

After an upside beat in German factory orders seen yesterday, they did the reverse with industrial production reported today for October. They fell 1.4% m/o/m vs the estimate of a rise of .9%. This was only partially offset by a 7 tenths upward revision to September. The y/o/y gain of 2.7% slowed from 4.1% in September. I’ll give this miss the benefit of the doubt however as the German Economic Ministry is blaming it on two extended weekends that many in German industry were given in October. They remained optimistic on underlying growth: “The favorable situation concerning orders, and above all, more optimistic business expectations promise a continuation of good economic activity.” The euro is down slightly with sovereign bonds are mixed with modest upside in European bourses. For those watching, the Euro STOXX 600 stock index is at the same level today as it stood in April.

A few days after seeing that the Greek economy grew for the 3^rd straight quarter, today they announced that their unemployment rate in September fell to 20.5% from 20.7% in August. It still is painfully high but is at the lowest level since October 2011. It peaked at 27.9% in July 2013 but was at just 7.3% pre crisis in 2008. Greece is an intriguing investment opportunity and much more so if Alexis Tsipras loses a hoped for snap election in 2018 to the New Democracy party led by Kyriakos Mitsotakis. The Athens stock market is 86% below its 2007 peak.

US Initial jobless claims totaled 236k vs 238k last week. The estimate was 240k. While things are definitely improved in Puerto Rico and the US Virgin Islands in terms of claims processing, the Labor Department said there are still issues. Either way, the level of firing’s remains historically low for reasons stated many times. The 4 week average fell slightly to 242k. Continuing claims, delayed by a week, fell by 52k after two weeks of gains.

The estimate for tomorrow’s private sector payroll figure is 198k (headline 195k) and the 2s/10s spread has broken below 53 bps today, another new decade low.