Scott Barlow
A roundup of what The Globe and Mail's market strategist Scott Barlow is reading this morning on the Web
Chinese markets are closed for New Year's celebrations so the Shanghai Composite is not available as a scapegoat for what looks like another nasty day of trading ahead.
Equity and commodity markets headed abruptly south overnight and concerns appear to center around European financials. Deutsche Bank stock is again getting blasted and prices of its subordinate debt are plumbing new depths. Italian banks, notably Banca Monte dei Paschi di Siena, are also trading sharply lower.
Deutsche Bank analysts have recently published research showing that negative interest rates – German two year bonds are now yielding negative 0.5 per cent – are crushing bank profitability. With more and more central banks going to negative rates, this is an issue to keep an eye on.
"European Stocks Fall, Credit Weakens as Signs of Distress Abound" – Bloomberg
"Gloom gathers around European bank shares and CDS" – FastFT
"A Wounded Deutsche Bank Lashes Out At Central Bankers: Stop Easing, You Are Crushing Us" – Zerohedge (incl long excerpt from Deutsche Bank Research)
====
In related news, Citi strategists are planning for the end of the global credit cycle. It's difficult to over-estimate the importance of the credit cycle as declining credit is usually associated with low investment returns and economic growth,
"Citi's head of US credit strategy, Stephen Antczak, and team took a stab at [predicting the end of credit growth] late last week, comparing the performance of variables like the Fed lending survey, credit curves and consumer confidence during previous cycles with today… "Chuck in some more variables, like global equity, currency, rates and commodity levels and Antczak comes to the conclusion that we're about 80 per cent through the current cycle and "may only have until later part of 2017 before things sour"."
"A note for your calendars: the end of the credit cycle" - FT Alphaville
"Global growth now fraying at the edges" – Davies , Financial Times
====
The best read of the weekend (in my opinion, of course) was written on the relationship between debt levels and economic growth and has important ramifications for Canada's immediate economic future. FT Alphaville's Matthew Klein writes,
"Greenspan et al thought the bulk of the spending financed by the extra debt enhanced productivity. If they were correct, you'd think real incomes generally grow at a faster rate after debt is incurred than before.
"But we now know private borrowing binges, defined as rapid increases in the ratio of debt to national income, invariable precede periods of slower growth, if not severe recessions. This shouldn't be too surprising considering essentially all the increase in private debt to income has come from lending against housing."
The implications for Canada here are not great, suggesting that the de-leveraging process for the famously indebted domestic household will cause some severe problems. Paraphrasing Citi credit strategist Matt King, debt levels always seem fine as long as asset prices are rising, but become a nightmare when these assets start falling in value.
""It's the stocks, not the shocks"" – Klein, FT Alphaville
====
Lakehead University economist Livio Di Matteo describes the investment outlook for the Canadian economy on the always-useful Worthwhile Canadian Initiative blog,
"As a result of the crash in the resource sector, capital formation in Canada as a whole is taking a hit… capital formation growth in Canada for 2016 is going to be negative. Our performance with respect to capital formation is going to resemble Russia and Brazil more than the United States or Europe. Canada saw annual growth in gross fixed investment spending of 0.7 percent in 2014, -3.0 percent in 2015 and is expected to see -0.8 percent growth in 2016. Any pickup in business sector investment in other provinces sufficient to counter the drop out west does not seem to be happening yet."
"Resources, Investment and the Current Canadian Slowdown" – Worthwhile Canadian Initiative
====
Tweet of the Day: "@amberkanwar Despite -15% loonie last year, Canada still expensive manufacturing spot vs: China, Mexico , India , Taiwan , #chartattack pic.twitter.com/XaxHhYvZFe " – (includes important chart) Twitter
Diversion: "Morocco Switches on First Phase of the World's Largest Solar Plant" – Gizmodo
Scott Barlow