M12 BARRON’S July 12, 2021
MarketView
Trouble at China’s Banks?
ING Snaps
ING
think.ing.com
July 9: The Chinese government has unex-
pectedly announced a broad-based RRR [re-
serve requirement rate] cut to be effective
July 15. This isn’t the targeted cut mentioned
in an important government meeting, and
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 writ-
ten by the People’s Bank of China, we under-
stand that this RRR cut aims to increase fi-
nancial 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 im-
plies there could be more bad loans. These
bad loans could stem from the recent delever-
aging reform. Banks haven’t been able to
lend to real estate developers as easily as be-
fore and have shrunk their mortgage busi-
ness. 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.
—IRISPANG
A Technician’s Take on Bitcoin
Bitcoin Money Flow
The Brogan Group Equity Research
wellingtonshields.com
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 for-
mation 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 di-
rection of the primary trend, which in Bit-
coin’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.
—TERENCEBROGAN
Yield Slide Isn’t What It Seems
Equity Strategy
Wells Fargo
wellsfargo.com
July8: We are witnessing another classic bat-
tle between facts and perception. Many eq-
uity 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 in-
flation have peaked, and that their decelera-
tion will be rapid. As a result (the perceived
story goes), the “value love affair” and cycli-
cal 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 ex-
pectations have been stable, suggesting eco-
nomic 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 pa-
per until next week. Further, there is lim-
ited secondary liquidity due to investors
taking time off around the holiday.
On positioning, a competitor’s survey im-
plied significant short interest in the rates
market—providing scope for Treasury ral-
lies 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 inves-
tors don’t get granular when analyzing the
rates market, believing the move in nominal
rates is driven strictly by inflation expecta-
tions; that hasn’t been true recently. Fur-
ther, 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.
—CHRISTOPHERP.HARVEY,GARYS.LIEBOWITZ,
ANNAHAN
State Credit Ratings Improve
Q2 2021 Credit Commentary
Cumberland Advisors
cumber.com
July6: 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 pen-
sion funding issues and gridlocked govern-
ment. The recent ratings improvements show
the resiliency of the states and reflect the
substantial federal aid that has been ex-
tended. 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 Moody’s 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 re-
ducing debt and addressing its pension and
OPEB underfunding.
New Jersey’s A3 outlook was changed to
stable by Moody’s, reflecting better-than-ex-
pected 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 man-
age historic budget challenges, including
large structural budget gaps and growing
pension contributions. S&P rates New Jer-
sey BBB+ stable, and Fitch rates the state
A- with a negative outlook.
—PATRICIAHEALY
Misery Index Sends a Warning
Daily Insights
BCA Research
bcaresearch.com
July6: Our misery index is surging to fresh
highs. Whenever a combination of rising in-
flation, 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 equi-
ties over a 12- to 18-month horizon. How-
ever, that doesn’t insulate asset prices from
a hiccup in the coming months.
According to our misery index, rising infla-
tion 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 phe-
nomenon. Finally, rising house prices and ris-
ing unaffordability will prove extremely detri-
mental 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.
—ROUKAYAIBRAHIM
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”FromtheQ&AwrittenbythePeople’sBankofChina,weunderstandthatthis[reserverequirement
rate]cutaimstoincreasefinancialinstitutions’capitalandliquidity,andlowertheircostofdoing
lendingbusiness.Thisgivesmeasenseofunease.Arebanksunderstress?” —IRISPANG,ING
This commentary was issued recently by money managers, research firms,
and market newsletter writers and has been edited by Barron’s.