“Financial markets are headed for an unusually bad year, with the overall global bond and equity universe shrinking by a cumulative $5tn since the start of 2018 — the biggest contraction of capital markets since the financial crisis.
“Parallel declines in both bonds and equities are rare, as stocks tend to do better when growth is robust and fixed income thrives more in subdued or poor economic conditions. In 2008 the global equity market shrank by more than $18tn, even as the bond market was buoyed by investors desperate for the relative safety it offers.
“But 2018 is starting to look like an inflection point for the post-crisis market era, as central banks have started paring back monetary stimulus. The Federal Reserve has led the charge, lifting even three-month Treasury yields to a 10-year high of 2.37 per cent this week. That has left almost every major asset class nursing losses in 2018…”
“Signs of stress are mounting in the corporate-bond market, where rising interest rates and lackluster demand for new debt have investors questioning whether a long run of favorable borrowing conditions for U.S. companies is ending or merely hitting a rough patch. The amount of extra yield, or spread, that investors demand to hold investment-grade U.S. corporate bonds instead of benchmark U.S. Treasurys in recent days reached its highest level in nearly two years, while spreads on junk-rated bonds hit a 19-month high.”
“While the American economy is posting strong growth indicators and the lowest unemployment rates since the late 1960s, those improvements have yet to be felt among the nation’s working class, which is shouldering the highest debt load in American history. Last quarter, American household debt reached $13.5 trillion, shattering the previous high from 2008– just before the recession– by more than $800 billion…”
“Asia-Pacific leaders failed to agree on a communique at a summit in Papua New Guinea on Sunday for the first time in their history as deep divisions between the United States and China over trade and investment stymied cooperation.”
“These two countries [China and the US] were pushing each other so much that the chair couldn’t see an option to bridge them,” said the diplomat, speaking on condition of anonymity.”
“More Chinese companies could default on their debts issued in U.S. dollars, experts warn. They say that the rising cost of borrowing and a weakening Chinese yuan could see more firms fail to meet upcoming payments.
“Tai Hui, chief market strategist for Asia Pacific at J.P. Morgan Asset Management in Hong Kong, stressed that he currently sees no systemic risks, but noted that financial strains often begin in one area before spreading. “I think the government needs to be very mindful of some of these potential links,” he said, adding that the property sector should be foremost in mind.”
“China has fired an apparent trade warning shot at Australia by targeting one of its key grain exports in the wake of the weekend’s heated APEC meeting at which tensions between Beijing and Washington deepened, setting the stage for a showdown at the upcoming G20 summit. Beijing announced on Monday it would investigate Australia’s $1.8 billion barley exports to China under “anti-dumping” rules that forbid selling at artificially low prices.”
“President Moon Jae-in of South Korea on Sunday called on the International Monetary Fund to step up efforts to fend off growing instability in global financial markets, his office said. In a meeting with IMF Director Christine Lagarde in Papua New Guinea, Moon expressed concerns that capital outflows from emerging economies and lack of global liquidity may trigger a worldwide financial crisis.”
“… borrowing by governments and corporate entities on Wall Street reached US$6.8 trillion in 2017. Global total debt hit US$247 trillion in the first quarter of 2018. These are unprecedented numbers and the associated risks are high. An important financial barometer is the Damocles Index. The Index has called to attention the risk of exchange rate crises for Argentina, Egypt, Pakistan, South Africa, Sri Lanka, Turkey and Ukraine. Apart from South Africa, the other six countries are already in or facing a currency crisis and seeking assistance from the IMF.”
“Turkish economic activity is slowing rapidly following a currency crisis that peaked in August. The lira has lost about one third of its value this year, pushing up inflation to 25.2 percent, the highest level since 2003, and bringing a surge in interest rates on loans and credit cards.”
“Argentina’s economic crisis and runaway inflation has eroded most people’s purchasing-power to the point where they can’t make ends meet at the end of the month, let alone afford a lunchtime snack in Roberto’s shop.
“Even for those who have a declared, tax-paying job in a country with a massive black economy, it’s difficult to make wages last until the end of the month.”
“Theresa May has played down hopes of changing Britain’s draft withdrawal deal in a move that will concern Brexiteer cabinet ministers demanding it be rewritten…
“Ms May’s focus will ring alarm bells with Brexiteers who want key elements of the withdrawal agreement rewritten, including a number of ministers in her cabinet.”
“Germany needs a package of tax cuts and other measures to shore up economic growth in the long term, Economy Minister Peter Altmaier said in an interview published on Sunday, days after the country posted its first economic contraction since 2015.”
“Spanish government debt rose by almost €12 billion in September to around €1.18 trillion, a record high according to data from the country’s central bank. The Bank of Spain said the national debt was now equivalent to 98 per cent of Spain’s GDP. The September increase means that Spain’s debt has risen month-on-month twice consecutively. The €1.2 trillion figure also tops the previous record of €1.16 trillion set in June.”
Subscription only (and I’m maxed out); headline looks good though:
“No wonder the rise in oil prices has started to reverse. A slowdown in China followed by the US deprives the global economy of its two biggest engines. If the world economy is akin to an airliner, those two engines are not just necessary for lift-off – they are needed to keep the plane in the air.”