(Reuters) – 1/REPO RUCTIONS
As end-December approaches, money market players’ thoughts may be turning to a September scare, when rates in the $2.2 trillion U.S. repurchase or repo market spiked to 10%, boosting the premium to borrow dollars. The fear is a bigger crunch may erupt in the $2.2 trillion U.S. repo market towards year-end, a period when banks lend less and trading volumes fall.
Recent government bond sales and quarterly tax payments may have already sucked up to $100 billion out of the banking system. And coming days may see big lenders scaling back repo lending and reducing deposits at the Fed to comply with rules requiring them to show sufficient cash buffers.
Sure, the Fed is pumping tens of billions of dollars into overnight lending markets and buying $60 billion in Treasury bills every month to increase banking sector reserves. But worries remain — the Fed’s repo operations, aimed at helping companies shore up cash levels, have seen heavy demand. A possible sign dealers are snapping up whatever cash they can to avoid year-end shortages.
(Graphic: The Fed’s Treasury holdings by maturity – here)
2/WAR TO PEACE
Not peace maybe, but it looks like detente at least on the Sino-U.S. trade war front. That’s driven Wall Street sprinting to record highs again; barring a shakeout in the last few trading days of the year, the U.S. benchmark S&P 500 index should end with a gain of 30%. In China too, equity returns are neck-and-neck with U.S. markets, around 33% in yuan terms.
But few — in Shenzen or New York — expect such gains in 2020. For one, high-pitched recriminations may resume in 2020, with Chinese tech firms such as Huawei and video-sharing app TikTok seen coming into the U.S. crosshairs.
In both countries, monetary authorities show no enthusiasm for further policy easing — Beijing’s tacit acceptance of slower economic growth should warn investors to curb the exuberance. As for the S&P500 rally, many credit interest rate cuts by the Federal Reserve – and it has pressed pause on those. And analysts at Bespoke Investments point out the index has returned an average 6.6% in years following a 20%-plus rally.
But all that’s next year. For now, let seasonal cheer prevail!
(Graphic: S&P 500 vs US bonds – here)
(Graphic: China stocks on a tear as trade truce nears – here)
A Christmas break from Brexit? Don’t bank on it. Britain’s newly-emboldened Prime Minister Boris Johnson will be busy readying the legislation required to ratify his Brexit deal through the UK parliament by Jan. 9.
That will finalize Britain’s EU leave date as Jan. 31 and start an 11-month countdown to strike a new trade deal that avoids the UK toppling over a Brexit cliff-edge at the end of 2020.
What other dates should you put in your shiny new 2020 Brexit calendar? Well here’s a few.
February or March – UK budget that sets out the government’s spending and tax plans.
March – Talks with the EU on a free trade agreement expected to begin and the March 26/27 European Council meeting should be a good point to gauge the mood music.
June – Britain and the EU plan to hold “high level” talks to take stock of progress in the negotiations. Although Johnson is committed not to extend the transition period, if he changes his mind the extension has to be requested by the end of June.
Dec 31 – Transition period ends.
(Graphic: Pound’s Brexit jinx – here)
4/EUROPE INC: DARE TO HOPE
After putting up a dismal show for three consecutive quarters, Europe Inc looks poised to come out of earnings recession as the continent’s economy stabilizes, a Brexit outcome seems within reach and trade war worries diminish.
The pan-European STOXX 600 benchmark posted its worst earnings performance in 3-1/2 years during the July-September quarter with a decline of 4.4%. But the October-December quarter is expected to show earnings growth of 3.7%, outshining U.S. earnings for the first time in two years.
So far, despite the earnings slump, European share prices have held up fairly well. That’s led to some stretched valuations, and investors reckon that any further upside would need to be driven primarily by earnings growth.
(Graphic: Europe earnings growth – here)
Not much Christmas cheer this year for Lebanon and Argentina, the twin troublespots of emerging markets.
Lebanon’s shopping malls are devoid of their usual December bustle as hard currency shortages make it tricky for consumers to access cash. Mired in economic recession, the country has also endured months of political turmoil as the main parties feuded over forming a government.
A sliver of hope has finally emerged with the appointment of new prime minister Hassan Diab who has vowed to quickly form a government to pass reforms and stave off debt default.
Fellow sufferer Argentina at least has a government – Alberto Fernandez was sworn in as president this month but recession is biting, inflation is above 50% and poverty rates are approaching 40%. Fernandez now faces tough talks with the IMF and creditors on restructuring about $100 billion in sovereign debt.
(Graphic: Lebanon and Argentina CDS – here)
Reporting by Sujata Rao, Marc Jones, Tom Arnold and Thyagaraju Adinarayan in London; Vidya Ranaganathan in Singapore and David Randall in New York, Editing by William Maclean