Scott Barlow
A roundup of what The Globe and Mail's market strategist Scott Barlow is reading this morning on the Web
What a mess. This period of excess volatility will pass, but, for now, there are so many potential portfolio-crushing sinkholes in global markets that it's hard to know where to start.
Selling started in Hong Kong as the Hang Seng sold off sharply and finished the session down 3.9 per cent. I suspect global portfolio managers interpreted this as a sign that selling pressure in China will be intense once the New Years' holiday is over.
Things got worse in Europe. Societe Generale plummeted 12 per cent after warning on profits, providing proof that the stress in the region's banking sector is spreading from Deutsche Bank and Credit Suisse into France.
Central bank news also didn't help.
Sweden's Riksbank dropped benchmark interest rates even deeper into negative territory only two days after Report on Business alumni Luke Kawa wrote a 'negative rates aren't working in Sweden' column for Bloomberg. There has been a creeping suspicion in the past few weeks that central banks were losing control of events temporarily as monetary policy tools prove visibly ineffective. This thought extends to Tokyo where the Bank of Japan pushed some rates into negative territory, in part to weaken the yen for export growth purposes, only to see the country's currency rally hard against the U.S. dollar last night.
The U.S. dollar to Japanese yen cross is extremely important for global investors. It's very hard to quantify, but it is taken for granted that sophisticated investors have borrowed large sums of yen, converted it to dollars and invested in U.S. equities and treasury bonds. Strength in the yen could signal a repayment of some of these loans, which would also entail that the U.S. assets were sold to provide the funds. Again, the data on the extent of this trend is very hard to find, so it's difficult to assess how important the strong yen will be outside of Asia.
It's a day ending in 'y' so, of course, the oil price has been kicked in the head repeatedly and now stands almost four per cent lower near the $26.50 level.
"How European banks are scaring away their investors" – The Economist
"Sweden Cuts Rates Deeper Into Negative Territory, Says May Go Further" – Bloomberg
"HSBC: Sweden's Experience Shows Negative Rates Haven't Worked" – Kawa, Bloomberg
"JPY, it wasn't meant to be this way" – Keohane, FT Alphaville
"The Fed won't be able to save stocks: Traders" – CNBC
"Oil Extends Loss to Trade Near 12-Year Low on Cushing Supplies" – Bloomberg
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The links above detail the subjective reasons for recent weak markets, but the more direct culprit is that most major speculative investors – those with the fast money that determines day to day changes in asset values – were positioned wrong at the beginning of the year.
Merrill Lynch research identified "'long U.S. dollar" as the most popular portfolio position among global fund managers. Virtually every sell-side research firm was bullish on U.S. banks and rising U.S. interest rates was also expected. To a lesser extent, portfolio managers were banking on a recovery in emerging markets assets. None of these trades worked, quite the contrary.
"Goldman Sachs abandons five of six 'top trade' calls for 2016" – Report on Business
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As if we didn't have enough to worry about, prominent hedge fund manager Kyle Bass is predicting an imminent credit crisis in China,
"In the near future the yuan could lose a third of its value against the dollar, the government would need to print more than $10 trillion to keep banks liquid, and financial institutions are set lose trillions of dollars in equity value.
"That's according to a forecast by Kyle Bass, a US hedge fund manager who predicted the 2008 subprime mortgage crisis. In the end, he's betting, China's banking system will suffer a loss four times greater than that suffered by US banks during the great recession.
"What we are witnessing is the resetting of the largest macro imbalance the world has ever seen," Bass wrote in a note to clients, seen by Bloomberg. "The problems China faces have no precedent… They are so large that it will take every ounce of commitment by the Chinese government to rectify the imbalances.""
Mr. Bass famously predicted the financial crisis and profited tremendously from that call. He also, however, lost a lot of money shorting Japanese bonds in thepost-crisis period.
"China's coming crash could dwarf the great recession—says an investor who called 2008" – Quartz
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Tweet of the day: "@BTabrum German CDS shoots up... to 0.19% a year. Anyone who suggests this is real concern about credit is a charlatan. pic.twitter.com/8uRYKgoxJZ " – Twitter
Diversion: I was simultaneously transfixed and disturbed by this video: "Cheer on This 3D-Printed Stop-Motion Baby As it Runs All Over the World" – Gizmodo
Scott Barlow