China GDP

October 20th, 2014 10:08 pm

Via WSJ:

China’s Economy Grew at a Slower Pace in the Third Quarter

BEIJING—China’s economy grew at a slower pace in the third quarter, suggesting that the government’s targeted easing measures to boost economic growth have not yielded expected results, official data showed Tuesday.

China’s gross domestic product rose 7.3% from a year earlier in the third quarter, down from 7.5% growth in the second quarter of this year, China’s National Bureau of Statistics said.

The third quarter economic growth rate is the slowest since the first quarter of 2009, when it rose 6.6%.

The increase was faster than a median 7.2% gain forecast by 15 economists in a Wall Street Journal survey.

The Chinese economy expanded 1.9% from the previous quarter on a seasonally adjusted basis, and was up 7.4% in the January-September period.

The government’s goal was for the economy to grow about around 7.5% in 2014. Policy makers have stepped up their efforts to nurture economic growth over the past few months, including easing mortgage restrictions and accelerating infrastructure investment.

Maybe Breaking Up Isn’t Hard to Do

October 20th, 2014 8:30 pm

The WSJ reports a gathering today of bankers, regulators and law enforcement folk at which senior regulators took the financial solons to task for bad behavior. Federal Reserve Bank of New York President (and Goldman alum) William Dudley raised the specter of regulators breaking up banks which did not toe the regulatory line.

Via the WSJ:

Fed to Banks: Shape Up or Risk Breakup

Closed-Door Event Included Executives, Law-Enforcement Officials

WASHINGTON—Federal Reserve officials sent a warning shot across Wall Street on Monday, telling bank executives they must do more to curb excessive risk-taking and improve employee behavior at their firms or face stiff repercussions, including being broken into smaller pieces.

Federal Reserve Gov. Daniel Tarullo and Federal Reserve Bank of New York President William Dudley , in closed-door speeches Monday to bank executives gathered at the New York Fed, said Wall Street must clean up its behavior and image, according to copies of their remarks provided by the Fed. The regulators made it clear they aren’t satisfied with bank’s efforts in the six years since the financial crisis shattered public trust in big banks, citing ongoing probes of banks for currency-market and interest-rate manipulation, tax evasion and efforts to skirt international sanctions.

Mr. Dudley raised the specter of breaking up big banks, saying if firms don’t prove they can comply with the law, “the inevitable conclusion will be reached that your firms are too big and complex to manage effectively. In that case, financial-stability concerns would dictate that your firms need to be dramatically downsized and simplified so they can be managed effectively.”

Regulators, law-enforcement officials and bank executives were among the roughly 90 people who attended, according to a list provided by the New York Fed. They included Morgan Stanley Chief Executive James Gorman, J.P. Morgan Chase & Co. General Counsel Stephen Cutler and Chief Operating Officer Matt Zames, and executives from Credit Suisse Group AG and Goldman Sachs Group Inc.

Board members from several major firms attended, as did the chief executives of American International Group Inc. and GE Capital, two nonbanks that U.S. regulators have singled out for tougher Fed oversight by because of the threat they pose to the financial system.

Also in the room were law-enforcement officials including Cyrus Vance, the Manhattan district attorney, and Leslie Caldwell, the Justice Department’s assistant attorney general for the criminal division.

The group dined on chicken and salmon for lunch, according to those in attendance.

One attendee characterized the tone of the day as “collegial, probably a little too collegial,” in that the panelists and those in the audience appeared to pull punches and avoid harsh criticism. “This was an establishment crowd,” the person said, noting the cadre of senior bank executives, regulators, and academics there. “There was not a lot of heated controversy.”

Wall Street executives have been unsure of the Fed’s intentions regarding ethical issues, and have been working on how to respond and head off new regulations. The Clearing House Association, a trade group, circulated “messaging themes” among executives at its member banks, according to people familiar with the document. The memo suggested executives should emphasize that they view a strong internal culture as essential to banks’ success, and that the industry has been focused on the topic since the financial crisis.

The talking points also said banks themselves should take the lead in initiating changes rather than having them come from the outside. Privately, bank executives have discussed an industry-led body that would set ethical standards, according to a person familiar with the discussions.

A similar independent-standards board has been set up in the U.K., but is struggling to find its legs. The Wall Street Journal reported Monday that firms such as Goldman Sachs have been reluctant to join, in part because the council’s standards could overlap with regulatory requirements.

One banker who attended Monday’s event said financial firms and regulators already have adopted a number of new rules and policies, and that the focus now should be on ensuring that bankers comply with those standards and are disciplined if they don’t.

But Mr. Tarullo, who sits on the Washington-based Fed board that writes regulations, suggested that some on Wall Street aren’t taking the Fed’s efforts seriously, and lamented what he sees as continuing efforts by some banks to do the bare minimum to improve their ability to police risk.

“My expectation is that if banks do not take more effective steps to control the behavior of those who work for them, there will be both increased pressure and propensity on the part of regulators and law enforcers to impose more requirements, constraints and punishments,” he said.

Some firms “address the deficiencies identified by the Fed in a discrete, almost check-the-box fashion,” he said, adding, “The supervisory reaction in such cases is quite likely to be an inclination toward greater scrutiny.”

“I sense a new and I think higher bar for behaviors and outcomes” at financial firms, said Eugene Ludwig, chief executive at Promontory Financial Group, which advises banks on regulatory matters. “While the area of culture has gotten attention, it hasn’t gotten as much attention” as other regulatory requirements adopted since the crisis, he said.

Mr. Dudley, whose reserve bank oversees many of the largest U.S. banks, reiterated his view that Wall Street is plagued by cultural problems even after the excessive risk-taking that contributed to the financial crisis, and the slew of regulatory changes that followed. “I reject the narrative that the current state of affairs is simply the result of actions of isolated rogue traders or a few bad actors within these firms,” he said.

He said big banks might more readily change behavior if senior management bears the financial brunt of regulatory fines levied for wrongdoing, and suggested the creation of a sort of “performance bond” that would put senior management on the hook for a sizable portion of any fines. Such an arrangement would increase the incentive for senior management to ferret out and expose “bad activities” early on or prevent them from happening at all, he said.

For lower-level employees, Mr. Dudley suggested the creation of a central database, maintained by regulators, that would track the hiring and firing of traders and other financial officials across the industry. The goal: to stop an employee fired for ethical problems at one firm from quickly getting a job at another firm. Mr. Dudley pointed to a similar registry in the broker-dealer industry and suggested regulators explore adopting the model in the banking industry.

Eclectic Topics

October 20th, 2014 7:14 pm

Via Merrill Lynch Research:

  • Small caps outperformance means the market is starting to discount the global weakness story as impacting the US economy.
  • For now we retain our tactical long credit risk stance on the IG market, which we have held since Tuesday night.
  • We are still cautious about credit spreads in the longer term and remain strategically market weight (neutral).
  • Think small. Last week rates volatility finally caught up with credit and equity vol on global weakness, and what initially appeared at the time signs that the weakness was spreading to the US economy as well (September retail sales).   However, subsequent US data (such as jobless claims, manufacturing and consumer confidence) show how truly resilient the US economy is to global weakness, given that exports accounts for only 13.5% of GDP (see: Situation Room: One step forward, two steps back 14 October 2014).  Thus, after having underperformed to start October, this week small cap equities finally outperformed significantly leaving them down just 1.5% for the month, compared with 4.3% for the S&P 500. – Hans Mikkelsen (Page 4)
  • Rates vol finally catches up. Concerns that the recent global growth weakness could spill over into the US triggered extreme market moves this week and led to a spike in implied volatilities in rates, equities and credit. Notably, both credit and rates vols jumped to levels comparable to those during the “taper tantrum” in the summer of last year, although interest rate vol has subsequently declined over the last two days. Hence, rates vol has finally caught up with credit vol. – Yuriy Shchuchinov (Page 6)
  • EM Corporate Strategy Weekly: Relative value in the EM energy sector. In Focus: Where’s the value in EM energy? The dramatic drop in oil prices in recent weeks has been a major concern for investors, and along with Treasury volatility, soft economic data and slowing growth concerns, among other fears, has contributed to significant weakness and volatility across most major markets since mid-September. The energy sector represents just 7% of the total US market compared to 23% of the EM corporate market, and below we take a look at which markets in EM have the highest energy sector concentrations as well as where the most value in the EM energy sector lies. – Christopher Hays, Anne Milne (Page 8)
  • Earnings Season Update: Week 2: Financials lift EPS. EPS looks to have bottomed, but estimates still falling ex-Fins. 79 companies representing 25% of S&P 500 3Q earnings have reported. Bottom-up EPS ticked up to $29.21 from $29.03 the prior week, driven by generally better than expected results from the mega-cap banks. Regional banks’ results were mixed amid margin pressure and tepid loan growth. Industrials began reporting with all meeting or beating expectations, driving the sector to last week’s top performer. Reporting will broaden out to all ten sectors next week, shedding more light on global demand and outlooks for 4Q and 2015. But so far, results so far, as well as BofAML global indicators, generally indicate stable global growth in 3Q. Multi-industrials bellwether HON actually cited strength in China and stability in Europe, and so far, nearly half of companies with >30% foreign sales have beaten on the top and bottom line, vs. just over one-fourth of pure domestics. - Savita Subramanian, Dan Suzuki, CFA, Alex Makedon, Jill Carey, CFA (Page 10)
  • GPIF: a disappointment for foreign bonds?. Reported GPIF allocations disappointing for foreign bonds. Late Friday, the Nikkei reported that the GPIF is considering raising its domestic equity allocation target from 12% to mid-20%, foreign securities target to roughly 30% (from 23%) and reducing its Japanese government bond allocation to around 40% (from 60%). While the news was better than expected for domestic Japanese equities (~25% vs. 20% expectation), we read it as modestly disappointing for US and European fixed income. The possible 30% allocation is slightly lower than the Bloomberg May consensus of 31% and much lower than the 40% allocation in the aggressive Ito portfolio. – Shyam S.Rajan, Sphia Salim (Page 9)
  • China Economic Watch: The PBoC to inject another RMB200bn to support markets. Liquidity for both the real economy and stock markets. China’s PBoC will inject a total of RMB200bn in its Standard Lending Facility (SLF) to about 20 large banks other than the five biggest banks which have already received RMB100bn each a month earlier (see “The PBoC injects RMB500bn to five major banks”, 16-Sep-2014). Like the previous RMB500bn injection, we believe this RMB200bn injection will be rolled over after three months, and the interest rate on these loans will be close to the ongoing PBoC 14-day repo rate at 3.4%, and we thus believe the impact of the RMB200bn injection will be close to a 20bp RRR cut

End of Day Analysis

October 20th, 2014 7:07 pm

Via Richard Gilhooly of TDSecurities:

Bonds kicked off the week with a timid start after last week’s challenging volatility, with investors’ perceptions of risk altered in a lasting manner by the violence of last Wednesday’s moves. The equity markets have shown similar price action albeit on rare occasions, most recently the Flash Crash of May 6th 2010, but bonds have typically been more liquid and not subject to the volatility of risk assets, a characteristic which helps define the status of the risk-free asset. If the rates markets were expected to exhibit such volatility, most would have expected the direction to be yields gapping higher as the Fed ended QE or started the process of hiking the funds rate. The fact that it happened in a rallying market would suggest that a strong concentration of positions were betting on the former and were most likely encouraged in that direction by the transparency of the Fed’s ‘dots’.

A similar development was witnessed in the TIPs market last May/June, when the Beta was well over 100% for a lasting period and in a rising rate environment, a scenario that would have been envisioned by few and one that was difficult to manage in an increasingly illiquid market. A vast majority of players in TIPs had been persuaded that holding TIPs at increasingly negative real yields was a sound investment, acquiescing to ‘financial repression’ in the belief that the Fed would deliver an inflation outcome that justified the concession in yield.

That same realisation process since September 17, when CPI surprised to the downside and the FOMC later announced hawkish dots, finally led to a gap lower in nominal yields as the continued bleed in inflation expectations ultimately led to a re-pricing of rate expectations. While there were other ingredients in the cocktail, such as Ebola fears, the rates market has re-priced and the bearish calls of 3% 10yr note yields have fallen silent for the first time this year.  With bond yields reaching a spike low of 2.66% and just 16bp above the historic lows, it is unlikely that appetite for a significant short base will be re-energised by a strong NFP report or other economic data releases, at least until the new year kicks off and balance sheet concerns have passed.

Risks remain that the yield curve experiences the same sort of volatility, for now fairly well behaved at 157bp on 5-30s and less than 20bp from the lows. Similarly, risks of Euro government spread compression unwinds remain into year-end and took another step wider today as Euro equities moved lower before the US market regained its poise. Japan and China will also play a part into the year-end trade, with GDP data from China tonight and the Nikkei’s second response to GPIF news (+4% last night) important in either reversing last week’s moves or seeing a relapse to the illiquidity and volatility that peaked last Wednesday but can return on any mis-step at short notice.

Corporate Issuance Today

October 20th, 2014 3:35 pm

Via Bloomberg:


IG CREDIT: Domestic Financials Lead Today’s Issuance
2014-10-20 18:05:51.294 GMT

By Lisa Loray
Oct. 20 (Bloomberg) — $7.6b is expected to price from four
issuers today, highest daily volume since $8.6b priced on Oct.
6.  Monthly volume to $48.4b, YTD $1.141t.
* One FRN to price, $500m GS 5Y FRN at 3mL+102, the first FRN
since Oct. 9.  YTD FRN volume $129.95b
* Today’s trades tightened an average ~8bp from IPT to pricing
* Financials
* $3.0b Goldman Sachs (GS) Baa1/A-/A 2-part
* $2.5b GS 5Y at T+120 (IPT T+125-130, guidance T+120#)
* $500m GS 5Y FRN at 3mL+102 (guidance 3mL+102#)
* $500m GS 5Y FRN at 3mL+102 (guidance 3mL+102#)</li></ul>
* $3.0b Morgan Stanley (MS) Baa2/A-/A 10Y at T+155
* IPT T+low 160sA
* IPT T+low 160sA</li></ul>
* $1.4b Bank of America (BAC) Ba3/BB/BB Perp NC 10 Preferred
at 6.50%
* IPT 6.50%A
* IPT 6.50%A</li></ul>
* Corporates
* $200m Virginia Electric & Power (D) A2/A-/A- tap 4.25%
02/15/44 at T+105
* IPT T+120-125
* original issue $400m at T+90 on Feb. 4
* original issue $400m at T+90 on Feb. 4</li></ul>

Treasury Market Update

October 20th, 2014 11:03 am

The Treasury market is reasonably quiet and orderly as the frantic trading pace of last week subsides. I have heard of heavy end user selling of the six year point on the Treasury curve. One trader noted that this is the third consecutive day in which the six year sector has been drilled (his verb).

The Treasury curve has steepened with the 5s 30s spread moving out to 156.5 from 155 at the open this morning. There are some natural supply and demand flows which should have the curve in a steepening trend this week. The Fed has bought the 5 year sector this morning and will buy 7s and 10s later in the week. There is a 30 Year TIPS auction this week ($7 billion) and 2 billion 30 year Bunds in Germany as well as 6 billion 10 year Gilts in the UK.

There is also the deal flow in the belly of the curve today which is likely to take Treasuries from the street at pricing.

Swap Spreads

October 20th, 2014 10:36 am

Swap spreads are unchanged in the 2 year sector and 3/4 basis point tighter in the 5 year sector. Ten year spreads have narrowed 1 1/2 basis points and thirty year spreads are 1 basis point tighter.

The spread tightening is motivated by heavy issuance by financial institutions who are likely to swap that issuance.

Goldman Sachs Analyst Mimics Roberto Duran’s “No Mas”

October 20th, 2014 10:27 am

Goldman Sachs analysts have locked the barn door with the horse miles from the barn as they lower their forecast for the year end level on the 10 year note to 2.50 from 3.00 percent.

Via Bloomberg:

RATES: Goldman Sachs Cuts 10Y Yield Year-End Estimate to 2.50%
2014-10-20 14:06:03.295 GMT

By Monika Grabek
Oct. 20 (Bloomberg) — Est. lowered from 3.00% based on a
“mark to market exercise” and “reflecting the downside
inflation risks and some uncertainties coming from the Euro
area,” Goldman Sachs strategists led by Francesco Garzarelli
write in Oct. 18 report.
* “Growth scare” seen recently in financial markets has
extended and been amplified by positioning
* Recent price action has “all the hallmarks of a self-
reinforcing episode of ‘endogenous risk’”
* “Levered positions (in USD and rates) had continued to
build in a low volatility environment, leaving the
market exposed to relatively small shifts in fundamental
assumptions” and “discontinuity in liquidity in
secondary markets has compounded the volatility”
* “Levered positions (in USD and rates) had continued to
build in a low volatility environment, leaving the
market exposed to relatively small shifts in fundamental
assumptions” and “discontinuity in liquidity in
secondary markets has compounded the volatility”</li></ul>
* “Our measure of the global bond premium on 10Y yields of G4
government bonds has fallen back to levels observed in June
2013 at the beginning of the ‘taper tantrum’ period”
* Year-end 10Y German bund forecast lowered to 1% vs.
* Year-end 10Y German bund forecast lowered to 1% vs.

Corporate issuance Today: Financial Led

October 20th, 2014 10:23 am

Via Bloomberg:

IG CREDIT: Domestic Financials Lead Today’s List of Four Issuers
2014-10-20 14:10:19.141 GMT

By Lisa Loray
Oct. 20 (Bloomberg) — Domestic financials lead today’s
list of four issuers start the second to last week of October.
Last week’s issuance failed to top $10b for just the fourth time
this year; Oct. volume at $40b, YTD $1.133t.
* JPM kicked off post-earnings self-led issuance last
Wednesday, followed by BAC last Friday; today GS, MS and BAC
are in the market with self-led issues after reporting
earnings last week

Liquidity and the Lack Thereof

October 20th, 2014 9:54 am

This a Bloomberg article which cites a piece written by Sean Keane of TripleT Consulting. I know nothing of the author or that firm. The Bloomberg story says that CS distributed the piece to clients.

The main point of the piece is that the market is now too big to provide adequate liquidity in the highly regulated post crisis Dodd Frank world.

Via Bloomberg:

Lack of Bank Facilitation May Trigger Next Crisis, CS Says
2014-10-20 13:43:23.817 GMT

By Alexandra Harris
Oct. 20 (Bloomberg) — Catalyst likely to come from those
who hold most of risk and who will not have realized how
difficult it will be to manage positions in “such illiquid
markets,” Triple T Consulting’s Sean Keane writes in note
distributed to Credit Suisse clients.
* Some will be assuming liquidity, price competition that
existed on way into a trade “will also be there on the way
* Those responsible for financial stability should have been
terrified by last week’s price action in Treasury market as
“huge moves” indicative of changed environment
* Degree of change “meaningful enough” that banks
themselves “are not likely to be sources of the next
financial crisis”
* Degree of change “meaningful enough” that banks
themselves “are not likely to be sources of the next
financial crisis”</li></ul>
* Post-2008 regulatory response to global financial crisis
“has been misguided” as world’s regulators have forced
banks to “substantially downsize” role as conduit of
“financial market interactions”
* While it may be a good thing in reducing specific risks
that exist in specific parts of infrastructure, markets
are now faced with managing more assets than ever before
and are less able to do so because of reduced role of
largest banks
* While it may be a good thing in reducing specific risks
that exist in specific parts of infrastructure, markets
are now faced with managing more assets than ever before
and are less able to do so because of reduced role of
largest banks</li></ul>
* Regulatory environment has made entire investment structure
more risky as fund managers who want to move, hedge huge
positions now find it more difficult to access liquidity
from banks who have traditionally acted as price makers,
book runners
* For fund management community in fast markets, spreads widen
very quickly to levels that wouldn’t have been imagined 10
years ago as everyone “takes a step back and waits to see
where the next clearing price appears”
* “Price leadership is abandoned with everyone waiting to
see what everyone else will do”
* “Price leadership is abandoned with everyone waiting to
see what everyone else will do”</li></ul>
* When markets fracture, those in the business of providing
liquidity “retreat into their shelters” as market makers
“pull down their shutters”; amplifies volatility, worsens
way asset prices trade
* Wednesday’s range in 10Y was third largest since Oct. 2008
only difference this time was that “nobody appeared very
clear about what the real drivers of the move were other
than bad positioning and terrible market liquidity”
* Eurodollar strip liquidity “simply vanished” as price
makers withdrew, various suggestions black box algo’s had
been switched off amid “incredibly volatile conditions”
* Sobering to see eurodollar contracts that usually trade
with narrow bid/offer, contract sizes around 20k,
reduced to markets that showed less than 1k lots on
* Sobering to see eurodollar contracts that usually trade
with narrow bid/offer, contract sizes around 20k,
reduced to markets that showed less than 1k lots on