Turning Points: Credit Spreads Historically Tight, Interest Rates Low
Iraq is in chaos, Ukraine remains on the brink of all-out war, the Fed continues its taper, and China continues to struggle with its housing/mortgage complex. This period in history is shaping up to be a great test of current thinking about monetary policy. Low rates on sovereign bonds have pushed many investors farther and farther out on the risk spectrum into equities, junk bonds, and other more speculative investments — including the central banks themselves who apparently are big buyers of equities too. Credit spreads are now at all-time lows since the onset of the crisis.
Japan’s economy is showing signs of sputtering as they deal with the onset of a retail sales tax hike in 2q 2014. Europe is also teetering on the brink, with France looking like it is beginning a recession. Housing markets the world over are looking a little frothy, with significant areas of concern in Brazil, Germany, France, the United Kingdom, Canada, and Australia, among others.
Yet, all is not lost. Innovation continues to solve problems and enhance our lives. Bitcoin continues to gain remarkable momentum, and new energy breakthroughs may render renewable energy cost competitive with fossil fuels.
Here’s a wrap-up of key issues affecting global markets for fundamental investors.
Currencies
- The Chinese renminbi has fallen 2.6% year to date as speculative capital into China has slowed. (Wall Street Journal)
- “Citi Worried about a Short Squeeze in EUR/USD” (Forex Live)
- “Death of US Dollar Is Greatly Exaggerated” (Financial Times)
Commodities
- “Copper Caps Longest Slump Since March on China Imports” (Bloomberg)
- “Copper Set for Second Straight Monthly Gain on Supply” (Bloomberg)
- “Farmland Prices Buck Economists Predictions” (AgWeb)
China’s Direction
- “How a Slumping Property Market Could Drag Down China’s GDP” (Wall Street Journal)
- China bank loans up, shadow banking down. (Wall Street Journal)
- “Barclays Raises China Growth Forecast, Sees Upside Risks” (Forbes)
Credit Markets
- Spreads on low-quality auto loan bonds have tightened versus one year ago. (Bloomberg)
- Credit spreads lowest since before the crisis. (Learn Bonds)
- “Credit Alternatives in Government-Backed Debt” (ValueWalk)
Derivatives
- ISDA asked to rule on whether or not Argentina defaulted. (Bloomberg)
- “Inching Towards Bitcoin Derivatives ” (CoinDesk)
- Bond derivatives explode as liquidity deteriorates. (Bloomberg)
Energy
- IEA predicts oil demand will rise. (USA Today)
- Renewable battery breakthrough from Harvard. (Harvard Gazette)
- “CSRIO’s Supercritical Solar Is a Clean Energy Breakthrough” (Gizmodo)
Euro Crisis
- Ailing France heading back to recession. (Mail Online)
- “The Paris and France Housing Bubble” (The Bubble Bubble)
- German Finance Minister Wolfgang Schaeuble warns low rates causing dangerous increases in property prices. (Reuters)
- “Spain Still Suffering Fallout from Housing Bust” (Wall Street Journal)
Hedge Fund Money
- “Imminent Risk of Default as Battle between Argentina and Paul Singer’s Elliott Continues” (Forbes)
- The fascinating case of Einhorn shorting Athenahealth. (Fortune)
- What Icahn sees in Family Dollar. (Wall Street Journal)
Interest Rates and Central Banks
- “Why Were Some Emerging-Market Countries Hit Harder by Taper Talk?” (Wall Street Journal)
- Fed seen hiking rates in second half of 2015. (Reuters)
Japanese Debt and Inflation
- Investors worried about debt levels in the United States should be petrified of the levels in Japan. (CNBC)
- Abenomics is looking like a catastrophe as retail sales since the tax hike are cratering. (Global Research)
Stock Market
- “Why the Stock Market Isn’t a Bubble” (Seeking Alpha)
- “Bubble Fears as US Stocks Break Records” (Financial Times)
Follow the Bubble
- UK Business Secretary Vince Cable demands action to tackle London housing bubble. (Yorkshire Post)
- “Junk-Bond Fund Manager Warns of High Risk” (Wall Street Journal)
- “Brazilian Housing Bubble Begins to Deflate” (El País)
Time Capsule
- The Fed recently released archive reports about monetary policy in Belgium just after World War II. In particular, the report focuses on how Belgium refused to let the banking system from redeem treasury securities or rediscount treasury securities with the national bank (i.e., central bank), illustrating that the interests of private banking are starkly at odds with the interests of central bankers when it comes to the amount and availability of credit.
Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.