There were no Thanksgiving surprises from markets this year as stocks made new all-time highs and bonds continued their recent slide.
All four major U.S. equity indexes - the Dow Jones Industrial Average, Standard & Poor's 500, Nasdaq Composite and Russell 2000 - set record highs this week, the first time that's happened since the last millennium (December 31, 1999). Treasuries continue to head in the opposite direction as investors anticipate higher inflation under President-elect Donald Trump. Yield on 10-year U.S. government debt added another eight basis points this week up to 2.29%.
While the recent bond sell-off has punished investors chasing the long-end of the curve, it has also produced big winners. Pension funds struggling to find yield instruments matching long-term liabilities are due for a $100 billion reprieve.
Providing the impetus for this week's risk-on sentiment was another bullish piece of U.S. economic data. Durable goods orders, a measure of business investment in long-lasting manufactured goods like construction equipment and computers, rose 4.8% in October, the fastest growth in a year. Economists had predicted a 2.7% gain.
With economic growth and inflation already showing signs of picking up, President-elect Trump's pro-growth infrastructure plan and tax reform proposals are seen forcing the Federal Reserve into accelerating its current pace of monetary tightening. Futures markets are now pricing in 100% odds of a December interest rate hike, up from 95% a week ago.
Oil Rallies On Opec Deal Hopes
Oil prices surged this week as reporting on a potential Organization of the Petroleum Exporting Countries (OPEC) production cut followed a similar pattern.
OPEC members are meeting next week in Vienna for another crack at agreeing on a compromise to cut crude production levels. Saudi Arabia, the group's largest oil producer and most influential voice, wants to curb global oversupply to ease pressure on its domestic budget. However, Iran and Iraq, OPEC's second and third largest producers, want to open the spigots to make up for disruptions over the past decade. Iran was just recently allowed to re-enter global crude markets after having economic sanctions lifted while Iraq's ongoing wars have hindered production.
Leading up to each OPEC meeting this year, delegates from countries supporting a cut have expressed optimism over a deal. Leaked reports of productive talks trigger a spike in oil prices, only for non-cooperation from Iran and Iraq to derail any agreement, leading to a sharp sell-off. Rinse, repeat. The first act of the drama played out Monday when a delegate from Nigeria said negotiations on assigning quotas to individual countries made good progress. West Texas Intermediate (WTI) crude prices climbed 6.9% to more than $49/barrel Tuesday, the biggest two-day gain since September, before paring gains back to $47.50 by week's end.
The issue is Iran and Iraq hold greater leverage. While both would like to see higher oil prices, their greater priority is short-term revenue maximization. The two countries, which together account for a quarter of OPEC crude production, also want an equal relationship with Saudi Arabia, which may ultimately have to make significant concessions to get a deal done. And then there is the matter of enforcing quotas, which historically is very difficult.
IMF Warns Over Chinese Bank Debt Securitization
With the dollar climbing to new 14-year highs, the yuan fell to fresh eight-year lows this week. Meanwhile, Chinese companies continue to buy up foreign-currency denominated assets.
The International Monetary Fund (IMF) is concerned Chinese banks are hiding bad debts through securitization much like American banks did with sour mortgages prior to the 2008 financial crisis. The resulting illiquid shadow credit, they warn, could soon become an untradeable ticking time-bomb.
"The real issue isn't the volume of debt but rather the liability-side 'plumbing' that underlies the debt boom. If there's going to be financial crisis in China, this is where it will come from," said Jonathan Anderson, a principal at Emerging Advisors Group, in an interview with the Financial Times.
One way to help Chinese banks cope with mounting bad debts would be a large currency devaluation, which the communist government insists is not necessary and will not happen. But as we've noted before: watch what they do, not what they say.
China's Anbang Insurance Group, which has opaque ties high up in the Chinese government, continues to diversify its global real estate holdings. The company is reportedly set to pay Blackstone Group up to $2.3 billion for a portfolio of residential properties in Japan. Anbang already owns New York's famous Waldorf Astoria Hotel, which it bought for $1.95 billion in 2014, and Strategic Hotels & Resorts Group, which it purchased earlier this year for $6.5 billion (also from Blackstone). The Chinese insurance giant agreed a $14 billion deal earlier this year to buy Starwood Hotels & Resorts only for the transaction to fall apart when Starwood sought clarity on the company's funding sources. Anbang's latest deal with Blackstone would be its first foray into Japanese real estate.
President-elect Trump's decision to pull the U.S. out of the Trans-Pacific Partnership (TPP) could allow China to further dictate the free trade agenda in Asia and Latin America. China's delegate to recent trade talks in Peru said several countries previously party to TPP have expressed interest in joining the 16-country China-led Regional Comprehensive Economic Partnership (RCEP).