This commentary was issued recently by money managers, research firms, and market newsletter writers and has been edited by Barron’s.
Trouble at China’s Banks?
July 9: The Chinese government has unexpectedly announced a broad-based RRR [reserve requirement rate] cut to be effective July 15. This isn’t the targeted cut mentioned in an important government meeting, and it sends a bad signal. So why does China need this cut? What’s wrong with the economy?
My own view is that the main intention of this cut is to help banks with their capital and liquidity requirements. From the Q&A written by the People’s Bank of China, we understand that this RRR cut aims to increase financial institutions’ capital and liquidity, and lower their cost of doing lending business.
This gives me a sense of unease. Are banks under stress? If this is the case, it implies there could be more bad loans. These bad loans could stem from the recent deleveraging reform. Banks haven’t been able to lend to real estate developers as easily as before and have shrunk their mortgage business. Fintechs, which banks also lend to, have also been subject to deleveraging reform.
After this RRR cut, banks should have more breathing room on capital and liquidity. But what’s next for the PBoC and banks? Banks cannot change the lending framework for real estate developers. But they could step into microlending left by fintechs, though this is a risky business. This means banks will continue to suffer from the same issues. And while they have some breathing room for now, this may only last for another quarter or so given that the release of liquidity is quite small compared to loans outstanding.
China may need another RRR cut in the fourth quarter.
A Technician’s Take on Bitcoin
Bitcoin Money Flow
The Brogan Group Equity Research
July 9: The Apex is the location where two lines converge to form a point. In this case, it is the point of the wedge-consolidation formation that Bitcoin’s price has established. When price reaches close to the Apex, we see price volatility diminish substantially. What occurs next is an explosion in volatility with a big price movement. The tricky part to this pattern is predicting which way price is going to spike. Typically, according to the textbooks, with a bullish declining wedge we should see price resume/breakout in the direction of the primary trend, which in Bitcoin’s case is up. Currently, we are still stuck in this low-volatility position with money flows still negatively trending, so we are still sitting on our hands and waiting for the money-flow breakout to tell us to get long.
Yield Slide Isn’t What It Seems
July 8: We are witnessing another classic battle between facts and perception. Many equity investors perceive that the 10-year U.S. Treasury’s [yield] move from 1.75% to 1.30% signifies that the outlooks for growth and inflation have peaked, and that their deceleration will be rapid. As a result (the perceived story goes), the “value love affair” and cyclical rotation are over. Now, a few facts:
- The 45-basis-point drop in nominal yields since March has been associated with a nearly 1:1 slide in real rates, which have slumped ~40 basis points [hundredths of a percentage point] and now stand at roughly -100 basis points. In other words, inflation expectations have been stable, suggesting economic forces aren’t at the heart of the slide.
- Rate players and our macro team inform us that technical issues related to liquidity, positioning, and forced buying are “driving the bus.”
- On liquidity, the last Treasury issuance was June 24—and we won’t see any new paper until next week. Further, there is limited secondary liquidity due to investors taking time off around the holiday.
- On positioning, a competitor’s survey implied significant short interest in the rates market—providing scope for Treasury rallies catalyzed by short squeezes/covering.
- Notably, there is a large and systematic buyer in the market: the Fed, to the tune of $80 billion a month, or approximately $20 billion a week.
- Combining a lack of liquidity with weak hands and a large systematic buyer, a slump in rates isn’t surprising. Many equity investors don’t get granular when analyzing the rates market, believing the move in nominal rates is driven strictly by inflation expectations; that hasn’t been true recently. Further, inflation expectations baked into the 10-year Treasury remain in the 2.0-2.5% range—not what one would expect if the economy were rolling over and investors felt inflation was about to cascade down.
—Christopher P. Harvey, Gary S. Liebowitz, Anna Han
State Credit Ratings Improve
Q2 2021 Credit Commentary
July 6: A number of the states that recently had their outlooks or ratings moved to stable or positive are states that have had a history of rating downgrades, mostly because of pension funding issues and gridlocked government. The recent ratings improvements show the resiliency of the states and reflect the substantial federal aid that has been extended. However, pension and OPEB [other postemployment benefits] funding continues to be a long-term concern, and it can take a long time or large outlays to turn around an inadequately funded position.
Illinois was upgraded by
to Baa2 from Baa3 on a material improvement in the state’s finances. Fitch rates Illinois BBB- and on June 23 assigned a positive outlook, while S&P rates Illinois BBB- stable.
Connecticut was upgraded to A+ from A by S&P (Moody’s upgraded to Aa3 in March). The state has made progress on reducing debt and addressing its pension and OPEB underfunding.
New Jersey’s A3 outlook was changed to stable by Moody’s, reflecting better-than-expected revenue performance in fiscal 2021 and the expectation that large resulting fund balances will support budget flexibility through the coronavirus-pandemic recovery. New Jersey is well positioned for the next 12-18 months as the state continues to manage historic budget challenges, including large structural budget gaps and growing pension contributions. S&P rates New Jersey BBB+ stable, and Fitch rates the state A- with a negative outlook.
Misery Index Sends a Warning
July 6: Our misery index is surging to fresh highs. Whenever a combination of rising inflation, high unemployment, and rising house prices was in play, this was a warning salvo that the policy mix might become a toxic cocktail for longer-term asset prices.
BCA remains cyclically bullish on equities over a 12- to 18-month horizon. However, that doesn’t insulate asset prices from a hiccup in the coming months.
According to our misery index, rising inflation might prove a more durable threat than most expect, especially if the Delta variant of the Covid virus starts sabotaging supply chains around the world. Employment gains have been drifting higher in most countries, but the rise in productivity suggests frictional unemployment might be a more durable phenomenon. Finally, rising house prices and rising unaffordability will prove extremely detrimental to financial stability, nudging more central bankers on the hawkish side.
The above scenarios are hypotheses and not our baseline view. However, buying some insurance in the form of VIX calls could pay off handsomely for the prudent investor.
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