Brace for another bumpy ride
Traders start the week on edge, North Korea invites the South to talks and a far-reaching bank inquiry starts in Australia. Here are some of the things people in markets are talking about.
(Bloomberg)-Investors are bracing for another bumpy ride this week after volatility returned with a vengeance, delivering the biggest rout in Asian stocks since 2011. Futures point to a lower start to equity trading as Asia kicks off the week. While U.S. stocks ended their worst week in two years in the green on Friday, fears of interest rate hikes that pushed markets into a correction persist. The Cboe Volatility Index ended almost three times higher than its Jan. 26 level. Ten-year Treasury yields finished the week at 2.85 percent, near where they started. This week’s U.S. inflation report may be the next catalyst for the tug-of-war between stocks and bonds that underlies the market turbulence.
North Korea asked South Korean President Moon Jae-in to a summit in Pyongyang, possibly seeking to drive a wedge between Seoul and Washington. Kim Jong Un’s sister Kim Yo Jong delivered the invitation during weekend meetings at the Winter Olympics in Pyeongchang. U.S. Vice President Mike Pence didn’t discuss the issue in talks with Moon, and insisted there was “no daylight” between the two allies on sanctions against North Korea. Meanwhile, Kim Yo Jong shook hands with South Korean President Moon Jae-in at the Games and cheered enthusiastically for a unified Korean team.
Australian Bank Inquiry
Australia’s banks, rocked by years of scandals and wrongdoing, come under scrutiny as a yearlong sweeping government probe into the nation’s financial systems begins. The Royal Commission will examine the nation’s banks, insurers, financial services providers and pension funds, and consider whether regulators have enough power to tackle misconduct. Anger over bank conduct has grown as evidence of wrongdoing mounts — from rigging interest rates and ripping off customers, to allegations thatCommonwealth Bank of Australia breached anti-money laundering and terrorism financing laws more than 50,000 times — even as lenders rack up record profits.
India’s Hidden Bad Loans
The markets regulator unearthed about $3.6 billion of bad loans in the books of India’s biggest bank, amplifying questions about distress in the financial sector. State Bank of India on Friday said an audit by the central bank showed soured debt was about 232 billion rupees higher than what the state-run lender reported for the end of March 2017. The biggest private lender HDFC Bank Ltd. had a 20.5 billion rupee divergence. State Bank of India’s admission is particularly striking because the lender is often seen as a proxy for the nation’s economy, where the ratio of bad loanshas surged to be among the highest in the world.
Data to Watch
There isn’t much in the way of data Monday in Asia to distract markets, with Singapore retail sales and Indian figures on industrial production and CPI the key releases. Later, eyes will turn to the U.S. government’s spending plans as well as CPI and retail sales. U.S. CPI is forecast to have slowed last month on an annual basis. President Donald Trump expects to release a plan to generate $1.5 trillion in infrastructure upgrades and he will also deliver his 2019 budget blueprint, in which he’s expected to back a major Pentagon buildup. The earnings deluge continues with Credit Suisse, Credit Agricole and Japan Post Bank set to release results.
And finally, here’s what Cormac’s interested in this morning
After volatility came roaring back with a vengeance last week and knocked many stock markets back into correction territory, it’s worth pointing out the dog that didn’t bark: the high-yield bond market. If investors were reacting to the fear that inflation is back and, with it, higher interest rates, then the bonds of the world’s most leveraged companies should be the first things to sell off. Yet that didn’t really happen. It was equities that took the big hit, with only a minor rise in high-yield bond spreads.
As many commentators have noted, global economic fundamentals remain strong, and the current market wobble may indeed be just a technically-driven “healthy” setback. But keep an eye on our high-yield friends, particularly as leverage has soared since the financial crisis, from the U.S. to China and most everywhere in between. They are the canary in the coal mine for when investors really do need to worry.