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Fear is Still on Holiday

Fear is Still on Holiday

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Overview: The heightened tensions between the US and China sapped risk-appetites before the weekend, but appear to be missing in action today.  Equity markets have rebounded strongly. Nearly all the equity markets in the Asia Pacific region rose (India was a laggard) led by an almost 3% rally in Australia, which was seen as particularly vulnerable to the Sino-American fissure.  The Nikkei is approaching its 200-day moving average as it reached the best level since March 5.  Europe's Dow Jones Stoxx 600 is up around 1% after a 1.5% gain yesterday.  It is at its best level since March 10.  The S&P 500 is set to gap sharply higher, above 3000, and its 200-day moving average for the first time since March 5.  Benchmark 10-year bond yields are mostly firmer (US ~70 bp), but peripheral yields in Europe are softer, which is also consistent with the risk-on mood.  Germany sold a two-year bond today with a yield of minus 66 bp and saw the strongest bid-cover in 13 years.  The dollar is heavy.  Among the majors, the Antipodean and Norwegian krone lead the way.  The yen is least favored and is struggling to gain in the softer dollar environment.  Emerging market currencies are higher, led by more than 1% gains by the Mexican peso, South African rand, and Polish zloty.  Gold is consolidating at softer levels (~$1725-$1735), while oil prices continue to recover.  July WTI is probing the recent highs around $34 a barrel.  

Asia Pacific

The risk-on mood has not been sparked by any sign of a thaw in the US-Chinese tensions.   Indeed, the PBOC set the dollar's reference rate against the yuan a little higher than the bank models suggested (CNY7.1293 vs. CNY7.1277).  It was the second successive fix that was the highest since 2008.  Still, the yuan snapped a three-day decline and rose less than 0.1%.  

Legislation that makes it easier to crack down on dissent pressured Hong Kong, where the stock market fell more than 5.5% before the weekend, and forward points for the Hong Kong dollar exploded.  The Hang Seng stabilized yesterday and gained more than 1.8% today.  The 3-month and 12-month forward points are more than double what they were a week ago, but have eased from the extreme readings before the weekend.   The situation is far from resolved despite the market moves.  

The focus in Japan is on the government's second supplementary budget for nearly JPY1 trillion.  It could be approved by the Cabinet as early as tomorrow and would nearly double the government's efforts.  Japan is lifting the national state of emergency.  

The dollar is firm against the yen but held just short of JPY108.00 (last week's high was ~JPY108.10).  There is an option for a little more than $400 mln struck at JPY107.90 that expires today.  The market looks poised to challenge the highs in North America today.  Note that the 200-day moving average is found near JPY108.35, and the greenback has not traded above it since mid-April.  The Australian dollar is punching above $0.6600 and is at its best level since March 9. Its 200-day moving average is found near $0.6660. The dollar peaked against the Chinese yuan at the end of last week near CNY7.1437.  It rose against the offshore yuan on the same day near CNH7.1646, just below the high set on March 19.  

Europe

The EU responded to Germany's proposal to take at least a 20% equity stake (~9 bln euros) in Lufthansa by requiring it to give up some slots at airports in Frankfurt and Munich.  Meanwhile, the larger focus is on the EC's proposal for a recovery plan now that the German-French proposal has been countered by Austria, Denmark, Sweden, and the Netherlands.  However, the basis for a compromise does appear to exist in the form of some combination of grants, loans, and guarantees and in terms of access.  With the European Stabilization Mechanism and the European Investment Bank issuing bonds for which there is a collective responsibility, we are not convinced that an EU bond is a step toward mutualization of existing debt or a fiscal union.   In fact, such claims do little more than antagonize the opposition.   

The ECB's Pandemic Emergency Purchase Program (PEPP) has spent a little more than a quarter of its 750 bln euro facility in the first two months.  Hints from some officials suggest that this could be expanded as early as next week when the ECB meets.  At the current pace, PEPP will be out of funds toward the end of Q3 or early Q4.  Talk in the market is that a 250-500 bln euro expansion is possible.  

The political controversy of UK's Cummings violation of the lockdown seems to have little impact for investors.  Sterling, the worst performing of the major currencies this month, is bouncing back smartly today, and while the UK stock market was closed yesterday, it is playing a little catch-up today.  The benchmark 10-year Gilt yield is a few basis points higher, but faring better than German Bunds and French bonds (where the 10-year yield is now back into positive territory, albeit slightly). 

The euro has bounced a full cent from yesterday's low near $1.0875. The market has its sights on last week's high just shy of $1.1010 and the 200-day moving average a little above there.  The euro has not traded above its 200-day moving average since the end of March.  Above there, the $1.1065 area corresponds to about the middle of this year's range.  Sterling is near its best level in a couple of weeks.  After finding support near $1.2160 in the past two sessions, it bounced to about $1.2325 today to toy with the 20-day moving average (~$1.2315).  The short-covering rally has stretched the intraday technical readings, and it may be difficult for the North American session to extend the gains very much before some consolidation.   

America

The US reports some April data (Chicago Fed's National Economic Activity Index) and new home sales.  The reports typically are not market-movers even in the best of times.  Moreover, it is fully taken on board that the economy was still imploding.  May data is more interesting.  The Dallas Fed's manufacturing survey and the Conference Board's consumer confidence surveys will attract more attention and are expected to be consistent with other survey data suggesting the pace of decline is moderating.  This is thought to be setting the stage for a recovery in H2.   

Canada's economic diary is light today, and Mexico is expected to confirm that Q1 GDP contracted by 1.6%.  Yesterday Mexico surprised by with a nearly $3.1 bln trade April deficit.  The median forecast in the Bloomberg survey was for a $2 bln trade surplus.   Apparently, none of the economists surveyed expected a deficit. Exports fell by nearly 41%, and imports tumbled by 30.5%. Many economists are revising forecast for Mexico's GDP lower toward a double-digit contraction this year.  

Nevertheless, the peso is flying.  It is the strongest currency here in May.  The 1.75% gain today brings the month's advance to a dramatic 9%+ gain.  The US dollar is near MXN22.10, giving back about half of this year's appreciation.  A break of the MXN22.00 area would target the MXN21.30 area. The intraday momentum indicators are stretched.  The US dollar is heavy against the Canadian dollar as well.  It is approaching the lower end of its two-month trading range near CAD1.3850.  The next important chart point is around CAD1.3800.  Here too, the greenback's slide in Asia and Europe is leaving intraday technicals indicators stretched as North American dealers resume their posts.  



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Spread & Containment

Las Vegas Strip faces growing bed bug problem

With huge events including Formula 1, CES, and the Super Bowl looming, the Las Vegas Strip faces an issue that could be a major cause for concern.

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Las Vegas beat the covid pandemic.

It wasn't that long ago when the Las Vegas Strip went dark and people questioned whether Caesars Entertainment, MGM Resorts International, Wynn Resorts, and other Strip players would emerge from the crisis intact. 

Related: Las Vegas Strip report shares surprising F1 race news

In the darkest days, the entire Las Vegas Strip was closed down and when it reopened, it was not business as usual. Caesars Entertainment (CZR) - Get Free Report and MGM reopened slowly with all sorts of government-mandated restrictions in place.

The first months of the Strip's comeback featured temperature checks, a lot of plexiglass, gaming tables with limited numbers of players, masks, and social distancing. It was an odd mix of celebration and restraint as people were happy to be in Las Vegas, but the Strip was oddly empty, some casinos remained closed, and gaming floors were sparsely filled. 

When vaccines became available, the Las Vegas Strip benefitted quickly. Business and international travelers were slow to return, but leisure travelers began bringing crowds back to pre-pandemic levels. 

The comeback, however, was very fragile. CES 2022 was supposed to be Las Vegas's return to normal, the first major convention since covid. In reality, surging cases of the covid omicron variant caused most major companies to pull out.

Even with vaccines and covid tests required, an event that was supposed to be close to normal, ended up with 25% of 2020's pre-covid attendance. That CES showed just how quickly public sentiment — not actual danger — can ruin an event in Las Vegas.

Now, with November's Formula 1 Race, CES in January, and the Super Bowl in February all slated for Las Vegas, a rising health crisis threatens all of those events.

The Arena Media Brands, LLC and respective content providers to this website may receive compensation for some links to products and services on this website.

Covid left Las Vegas casinos empty for months.

Image source: Palms Casino

The Las Vegas Strip has a bed bug problem   

While bed bugs may not be as dangerous as covid, Respiratory Syncytial Virus (RSV),  Legionnaires’ disease, and some of the other infectious diseases that the Las Vegas Strip has faced over the past few years, they're still problematic. Bed bugs spread easily and a small infestation can become a large one quickly.

The sores caused by bed bugs are also a social media nightmare for the Las Vegas Strip. If even a few Las Vegas Strip visitors wake up covered in bed bug bites, that could become a viral nightmare for the entire city.

In late-August, reports came out the bed bugs had been at seven Las Vegas hotel, mostly on the Strip over the past two years. The impacted properties includes Caesars Planet Hollywood and Caesars Palace as well as MGM Resort International's (MGM) - Get Free Report MGM Grand, and others including Circus Circus, The Palazzo, Tropicana, and Sahara.

VISIT LAS VEGAS: Are you ready to plan your dream Las Vegas Strip getaway?

"Now, that number is nine with the addition of The Venetian and Park MGM. According to the health department report, a Venetian guest reported seeing the bloodsuckers on July 29 and was moved to another room. An inspection three days later confirmed their presence," Casino.org reported.

The Park MGM bed bug incident took place on Aug. 14.

Bed bugs remain a Las Vegas Strip problem

Only Tropicana, which is soon going to be demolished, and Sahara, responded to Casino.org about their bed bug issues. Caesars and MGM have not commented publicly or responded to requests from KLAS or Casino.org.

That makes sense because the resorts do not want news to spread about potential bed bug problems when the actual incidents have so far been minimal. The problem is that unreported bed bug issues can rapidly snowball.

The Environmental Protection Agency (EPA) shares some guidelines on bed bug bites on its website that hint at the depth of the problem facing Las Vegas Strip resorts.

"Regularly wash and heat-dry your bed sheets, blankets, bedspreads and any clothing that touches the floor. This reduces the number of bed bugs. Bed bugs and their eggs can hide in laundry containers/hampers. Remember to clean them when you do the laundry," the agency shared.

Normally, that would not be an issue in Las Vegas as rooms are cleaned daily. Since the covid pandemic, however, some people have opted out of daily cleaning and some resorts have encouraged that.

F1? SUPER BOWL? MARCH MADNESS? Plan a dream Las Vegas getaway.

Not having daily room cleaning in just a few rooms could lead to quick spread.

"Bed bugs spread so easily and so quickly, that the University of Kentucky's entomology department notes that "it often seems that bed bugs arise from nowhere."

"Once bed bugs are introduced, they can crawl from room to room, or floor to floor via cracks and openings in walls, floors and ceilings," warned the University's researchers.  

 

       

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Americans are having a tough time repaying pandemic-era loans received with inflated credit scores

Borrowers are realizing the responsibility of new debts too late.

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With the economy of the United States at a standstill during the Covid-19 pandemic, the efforts to stimulate the economy brought many opportunities to people who may have not had them otherwise. 

However, the extension of these opportunities to those who took advantage of the times has had its consequences.

Related: American Express reveals record profits, 'robust' spending in Q3 earnings report

Credit Crunch

GLASTONBURY, UNITED KINGDOM - JANUARY 12: In this photo illustration the Visa, Mastercard and American Express logos are seen on credit and debit cards on March 14, 2022 in Somerset, England. Visa, American Express and Mastercard have all announced they are suspending operations in Russia and credit and debit cards issued by Russian banks will no longer work outside of the country. (Photo by Matt Cardy/Getty Images)

Matt Cardy/Getty Images

A report by the Financial Times states that borrowers in the United States that took advantage of lending opportunities during the Covid-19 pandemic are falling behind on actually paying back their debt.

At a time when stimulus checks were handed out and loan repayments were frozen to help those affected by the economic shock of Covid-19, many consumers in the States saw that lenders became more willing to provide consumer credit.

According to a report by credit reporting agency TransUnion, the median consumer credit score jumped 20% to a peak of 676 in the first quarter of 2021, allowing many to finally have “good” credit scores. However, their data also showed that those who took out loans and credit from 2021 to early 2023 are having an hard time managing these debts.

“Consumer finance companies used this opportunity to juice up their growth at a time when funding was ample and consumers’ finances had gotten an artificial boost,” Chief economist of Moody’s Analytics Mark Zandi told FT. “Certainly a lot of lower-income households that got caught up in all of this will feel financial pain.”

Moody’s data shows that new credit cards accounts that were opened in the first quarter of 2023 have a 4% delinquency rate, while the same rate in September 2022 was 4.5%. According to the analysts, these levels were the highest for the same point of the year since 2008.

Additionally, a study by credit scoring company VantageScore found that credit cards issued in March 2022 had higher delinquency rates than cards issued at the same time during the prior four years.

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Credit cards were not the only debts that American consumers took on. As per S&P Global Ratings data, riskier car loans taken on during the height of the pandemic have more repayment problems than in previous years. In 2022, subprime borrowers were becoming delinquent on new cars loans at twice the rate of pre-pandemic levels.

S&P auto loan tracker Amy Martin told FT that lenders during the pandemic were “rather aggressive” in terms of signing new loans.

Bill Moreland of research group BankRegData has warned about these rising delinquencies in the past and had recently estimated that by late 2022, there were hundreds of billions of dollars in what he calls “excess lending based upon artificially inflated credit scores”.

The Government's Role

WASHINGTON, DC - APRIL 29: U.S. President Donald Trump's name appears on the coronavirus economic assistance checks that were sent to citizens across the country April 29, 2020 in Washington, DC. The initial 88 million payments totaling nearly $158 billion were sent by the Treasury Department last week as most of the country remains under stay-at-home orders due to the COVID-19 pandemic. (Photo by Chip Somodevilla/Getty Images)

Chip Somodevilla/Getty Images

Because so many are failing to pay their bills, many are wary that the government assistance may have been a financial double-edged sword; as they were meant to alleviate financial stress during lockdown, while it led some of them to financial difficulty.

The $2.2 trillion Cares Act federal aid package passed in the early stages of the pandemic not only put cash in the American consumer’s pocket, but also protected borrowers from foreclosure, default and in some instances, lenders were barred from reporting late payments to credit bureaus.

Yeshiva University law professor Pam Foohey specializes in consumer bankruptcy and believes that the Cares Act was good policy, however she shifts the blame away from the consumers and borrowers.

“I fault lenders and the market structure for not having a longer-term perspective. That’s not something that the Cares Act should have solved and it still exists and still needs to be addressed.”

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Inflation: raising interest rates was never the right medicine – here’s why central bankers did it anyway

We need to start cutting rates, but there’s something that has to happen first.

Pain, no gain? Bank of England Governor Andrew Bailey. IMF, CC BY-SA

Inflation remains too high in the UK. The annual rate of consumer price inflation to September was 6.7%, the same as a month earlier. This is well below the 11.1% peak reached in October 2022, but the failure of inflation to keep falling indicates it is proving far more stubborn than anticipated.

This may prompt the Bank of England’s Monetary Policy Committee (MPC) to raise the benchmark interest rate yet again when it meets in November, but in my view this would not be entirely justified.

In reality, the rate hikes that began two years ago have not been very helpful in tackling inflation, at least not directly. So what’s the problem and is there a better alternative?

Right policy, wrong inflation

Raising interest rates is the MPC’s main tool for trying to get inflation back to its target rate of 2%. The idea is that this makes it more expensive to borrow money, which should reduce consumer demand for goods and services.

The trouble is that the type of inflation recently witnessed in the UK seems less a problem of excessive demand than because costs have been rising for manufacturers and service providers. It’s known as “cost-push inflation” as opposed to “demand-pull inflation”.

Inflation rates (UK, US, eurozone)

Graph comparing inflation rates of UK, US and eurozone
UK = dark blue; eurozone = turquoise; US = orange. Trading View

Production costs have risen for several reasons. During the COVID-19 pandemic, central banks “created money” through quantitative easing to enable their governments to run large spending deficits to pay for furloughs and other interventions to help citizens through the crisis.

When countries started reopening, it meant people had money in their pockets to buy more goods and services. Yet with China still in lockdown, global supply chains could not keep pace with the resurgent demand so prices went up – most notably oil.

Oil price (Brent crude, US$)

Chart showing price of Brent crude oil
Trading View

Then came the Ukraine war, which further drove up prices of fundamental commodities, such as energy. This made inflation much worse than it would otherwise have been. You can see this reflected in consumer price inflation (CPI): it was just 0.6% in the year to June 2020, then rose to 2.5% in the year to June 2021, reflecting the supply constraints at the end of lockdown. By June 2022, four months after Russia’s invasion of Ukraine, CPI was 9.4%.

The policy problem

This begs the question, why has the Bank of England (BoE) been raising rates if it’s unlikely to be effective? One answer is that other central banks have been raising rates. If the BoE doesn’t mirror rate rises in the US and eurozone, investors in the UK may move their money to these other areas because they’ll get better returns on bonds. This would see the pound depreciating against the US dollar and euro, in turn increasing import prices and aggravating inflation.

Part of the problem has been that the US has arguably faced more of the sort of demand-led inflation against which interest rates are effective. For one thing, the US has been less at the mercy of rising energy prices because it is energy self-sufficient. It also didn’t lock down as uniformly as other major economies during the pandemic, so had a little more space to grow.

At the same time, the US has been more effective at bringing down inflation than the UK, which again suggests it was fighting demand-driven price rises. In other words, the UK and other countries may to some extent have been forced to follow suit with raising interest rates to protect their currencies, not to fight inflation.

What next

How harmful have the rate rises been in the UK? They have not brought about a recession yet, but growth remains very weak. Lots of people are struggling with the cost of living, as well as rent or mortgage costs. Several million people are due to be hit by much higher mortgage rates as their fixed-rate deals end between now and the end of 2024.

UK GDP growth (%)

Chart showing the annual rate of GDP growth
Trading View

If hiking interest rates is not really helping to curb inflation, it makes sense to start moving in the opposite direction before the economic situation gets any worse. To avoid any damage to the pound, the answer is for the leading central banks to coordinate their policies so that they cut rates in lockstep.

Unless and until this happens, there would seem to be no quick fix available. One piece of good news is that the energy price cap for typical domestic consumption was reduced from October 1 from £1,976 to £1,834 a year. That 7% reduction should lead to consumer price inflation coming down significantly towards the end of 2023.

More generally, the Bank of England may simply have to hope that world events move inflation in the desired direction. A key question is going to be whether the wars in Ukraine and Israel/Gaza result in further cost pressures.

Unfortunately there is a precedent for a Middle East conflict leading to a global economic crisis: following the joint assault on Israel by Syria and Egypt in 1973, Israel’s retaliation prompted petroleum cartel OPEC to impose an oil embargo. This led to an almost fourfold increase in the price of crude oil.

Since oil was fundamental to the costs of production, inflation in the UK rose to over 16% in 1974. There followed high unemployment, resulting in an unwelcome combination that economists referred to as stagflation.

These days, global production is in fact less reliant on oil as renewables have become a growing part of the energy mix. Nonetheless, an oil price hike would still drive inflation higher and weaken economic growth. So if the Middle East crisis does spiral, we may be stuck with stubborn, untreatable inflation for even longer.

Robert Gausden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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