Bank funding costs are blowing out. Should we be concerned?

Dear readers,

 Even the Federal Reserve is concerned.  In a recent Dealer survey they asked specifically about the reasons for the widening of the spread between the three-month LIBOR rate and the Overnight Index Swap rate (OIS).  The spread between these indexes is a gauge of funding costs for banks and has blown out beyond the last banking crisis highs.  Should we be concerned? 

On Friday, ZeroHedge reported, “Until two days ago, the critical level for both the Libor-OIS and FRA-OIS spread was the “psychological level” of 50bps. This, however, was breached on Wednesday when as we reported Libor pushed significantly higher without a matching move in swaps. And yet, despite the sharp push wider, both spreads remained below the peak levels observed during the European sovereign debt crisis of 2011/2012, with some speculating that open central bank swap lines at OIS+50bps would limit the move wider.

That changed this morning when the day’s 3M USD Libor fixing jumped higher for the 27th consecutive session, rising to 2.2018% from 2.1775%, and the highest since December 2008. And, as has been the case for the past two months, the move was again not matched by OIS, resulting in the Libor-OIS spread jumping to 51.4bp, surpassing the 2011/2012 highs and the widest level since May 2009.”

VIX bounced out of its Master Cycle low but closed beneath Short-term resistance at 16.49. A rally above Short-term support/resistance may put the VIX back on a buy signal. The next Cycle Top may occur in the next 2 weeks.

(Bloomberg) Look out below.

Risk parity funds, a popular strategy that was battered during the volatility shock that rocked financial markets in February, are still the most vulnerable around, said Paul Britton, founder of Capstone Investment Advisors LLC.

“That strategy has been so successful and deserves credit for providing the returns it’s provided, but it’s the weakest hand in the market,” he said in an interview on the sidelines of Wednesday’s Global Volatility Summit in New York. “The strategy has gotten to a size — whether it’s publicly available numbers or what’s embedded within institutions — it’s so enormous that the market’s going to take a run at trying to stress that position.”

SPX is repelled at the Cycle Top and Upper Trendline.

SPX made another run up to challenge the upper long-term trendline and Cycle Top resistance at 2804.43. It closed beneath Short-term support/resistance at 2756.04 and at a loss for the week./ The Model now calls for a new challenge of the lower supports with possibly different results.

(ZeroHedge) One week after US stocks suffered “massive” outflows despite a net inflow into global equity funds while the S&P jumped, everyone is back in the pool as a “wall of money” returned with a vengeance” this week, driving record inflows into both global and US-focused equity funds as concerns around trade dissipated, while billions more were plowed into tech stocks according to the latest weekly fund flow report from Bank of America.

According to BofA CIO Michael Hartnett, a record $43.3 billion was put into equities this week as investors shrugged off trade war risks that had initially sent stocks reeling, even as those very risks returned in the subsequent week and have pressured the S&P lower on four consecutive days.

NDX makes another new all-time high.

The NDX peaked at a new all-time high on Tuesday, but sold off the remainder of the week, closing just above round number support (7000).  Investors are giddy, but the NASDAQ is neither confirmed by the other indexes nor by its own indicators.  The Cycle Model is cautionary should the NDX decline beneath its Cycle Top at 6971.00.

(Bloomberg)  The rally in the FANG block of tech shares and its megacap brethren just surpassed a dubious milestone.

An index of 10 tech growth shares pushed its advance to 23 percent so far this year, giving the group an annualized return since early 2016 of 67 percent. That frenzied pace tops the Nasdaq Composite Index’s 66 percent return in the final two years of the dot-com bubble.

“Lately, it seems, these stocks can do no wrong,” George Pearkes, a macro strategist at Bespoke Investment Group, wrote in a note. It makes “us wonder if this is a mini-1999 all over again,” he said.

High Yield Bond Index is repelled at a double resistance.

The High Yield Bond Index rose early in the week but was stalled under Short-term and Intermediate-term resistance at 194.21.  The sell signal remains and the Cycles Model suggests that the trendline and Long-term support at 182.30 may be broken this week. This action is a glaring non-confirmation of the bull market, since high yield bonds normally have had a high correlation with equities.

(Reuters) – Cracks have been surfacing in the junk bond market.

Returns on leading high-yield indexes are down and cash outflows are rising, as are short interest bets against the asset class. In addition, investor protections have shown signs of improvement, suggesting junk bond issuers are being forced to offer better terms to attract interest.

“Valuations are, in aggregate, stretched,” Greg Peters, senior portfolio manager at PGIM Fixed Income, which has $709 billion in assets, said on Monday. “We have definitely taken down our overall risk profile.”

UST emerges above Cycle Bottom support.

The 10-year Treasury Note Index emerged above Cycle Bottom support at 120.05 to test Short-term resistance at 120.70. Normally we may expect a retest of the Head & Shoulders neckline near 123.00.   However, the Model shows extreme weakness that may turn into a rout for bonds over the next two or more weeks.

(CNBC) U.S. government debt yields ticked upward Friday, with the 2-year Treasury note notching a nine-year high ahead of a Federal Open Market Committee meeting next week. The Federal Reserve is widely expected to hike rates at its monthly meeting.

The yield on the short-term 2-year Treasury note hit a high of 2.295 percent, its highest level since Sept. 19, 2008, when the note yielded as high as 2.313 percent.

Long-term debt rates, however, remained lower for the week following softer economic data and turmoil in Washington.

The Euro may be forming a Triangle.

The Euro appears to be forming a Triangle pattern that may allow a final probe higher.  Should that be the case, XEU may make a false decline to the Diagonal trendline near 122.00 before making its final peak.  Critical support is at 121.42. A break of that support may imply the decline is underway.

(Bloomberg) French and German leaders pledged to present a road map for a stronger euro area by June, signaling a push to overcome historic differences as Chancellor Angela Merkel begins her new term.

“For many years, Europe has waited for the French-German couple to move forward,” French President Emmanuel Macron said alongside Merkel in Paris on Friday. “That’s where we’re at and this is the road that’s now ahead of us.”

Macron’s sweeping proposals last year for deeper ties between the 19 euro-area countries have received a guarded response in Germany and were effectively put on ice by almost six months of post-election stalemate in Berlin, which ended Wednesday with Merkel’s swearing-in. Differences, including over risk-sharing within the euro area, remained on the table as the two leaders met at the Elysee presidential palace.

EuroStoxx completes the right shoulder.

The EuroStoxx 50 Index appears to have completed the right shoulder of a probable Head & Shoulders formation.  European stocks remain on a sell signal.  The Cycles Model suggests the decline may resume through the end of March.

(CNBC) European stocks finished Friday’s session in the black, as investors tried to shake off concerns surrounding trade and political disruption in the White House.

The pan-European STOXX 600 provisionally ended 0.22 percent higher, with sectors pointing in different directions by the market close. On the week, the STOXX 600 finished slightly under pressure, closing down 0.14 percent.

Britain’s FTSE 100 closed up 0.34 percent, while France’s CAC 40 rose 0.29 percent and Germany’s DAX 0.36 percent. The German index opened late on Friday morning as Eurex reported the index had experienced delays.

The Yen retests the neckline.

The Yen retested the potential Head & Shoulders neckline on waning strength, suggesting a pullback to form a possible right shoulder.  Short-term support is at 92.84, while trend support is at the mid-Cycle and Intermediate-term at 91.08.  The Cycles Model suggests a two-week pullback.  However, should a crisis develop, the Cycle may invert to a new high and nullify the Head & Shoulders formation.  An inverted Cycle is likely to run to the Cycle Top resistance at 98.50.

(Bloomberg)  The scandal embroiling Prime Minister Shinzo Abe’s administration may be more serious than some investors realize, raising the potential for a rapid move in Japanese markets to discount the potential for a surprise end to the champions of Abenomics.

While Abe has faced down political controversy and public protests repeatedly in his more-than-five-years in power, the doctoring of a Finance Ministry document relating to a controversial land sale presents a more serious threat, according to political analysts. And at this point, markets haven’t priced in the idea of a resignation by stalwart Abe supporter Taro Aso, the finance minister, or the potential for Abe to lose office later this year.

Nikkei fails to make a new high.

The Nikkei found support at the two-year trendline to make another run at resistance. However, it reversed at mid-week and now runs the risk of a potential sell­-off. A further decline beneath Long-term support at 21278.25 raises the potential for a decline to the Cycle Bottom. Note: consolidations are hard to report by the media.

U.S. Dollar tests the Cycle Bottom.

USD tested the Cycle Bottom support at 88.99, then rose to close on Short-term support/resistance at 89.80.  The last week should have been strong for the USD, but seems to be stuck at Short-term resistance.  This suggests that the Broadening Top “Point 7” target near the weekly mid-Cycle resistance at 95.94 may be compromised.  The next two weeks show uncertainty, which may leave the USD flat, provided no new crisis appears.

(Reuters) – The dollar rose against most currencies on Friday, bolstered by solid U.S. economic data that further supported consensus expectations that the Federal Reserve will raise interest rates at next week’s monetary policy meeting.

“The gains in the dollar were a positive reaction to the data,” said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington. “The reports show that the dollar’s fundamental backdrop remains strong.”

.Gold challenges Intermediate-term support.

Gold challenged Intermediate-term support at 1312.07, closing just above it.  The decline may extend for another two weeks, according to the Cycles Model.  This may be the beginning of a panic Cycle in precious metals.

(NYT) Yakutsk, a city 5,000 miles from Moscow where temperatures can plummet to minus 85 degrees Fahrenheit, is not the sort of place where people normally spend winter nights searching the bushes by torch light. But it is not every day that 3.4 tons of gold falls out of the sky.

The unusual scene unfolded this week after a door on a Soviet-era cargo plane sprang open on takeoff, spewing dozens of what seemed to be gold bars into the frosty air. (They turned out to be doré, a semi-pure alloy composed of gold and silver, not pure gold, but close enough.)

The Antonov AN-12’s lower hatch was forced open when more than nine tons of precious metal, worth a reported $156 million, broke loose on takeoff, Russia’s Investigative Committee said in a statement.

Crude is still consolidating.

Crude again found its feet at Intermediate-term support at 61.27, giving it the ability to rally toward Short-term resistance at 62.67.  The Cycle Model suggests that this may be the last swing high.  A break of this week’s low may propel gold beneath its Broadening Wedge formation.

(CNBC) U.S. crude oil futures suddenly spiked more than 1 percent late Friday morning, erasing losses for the week, as tensions rose in the Middle East.

West Texas Intermediate (WTI) oil futures settled 1.88 percent higher at $62.34 a barrel, recouping weekly losses to post a gain of about half a percent for the week.

Earlier in the session, WTI hit a high of $62.54, its highest since March 7

Shanghai Index turns back at overhead resistance.

The Shanghai Index rallied up on Monday to the two-year trendline at 3330.00 but turned down the remainder of the week.  The trend has been due to change down again per last week’s commentary.  This may set up the Shanghai to retest the February low and possibly the Cycle Bottom at 2796.90 in the coming weeks.

(ZeroHedge) Recent concerns about a Chinese liquidation of its Treasury holdings in advance of, or in response to, a trade war appeared to have been greatly exaggerated one month ago, because according to the Treasury International Capital data from one month ago, China had actually added $8.3 Billion to its holdings in December, bringing the total to $1184.9BN, $26 billion more than a year ago. Meanwhile, we reported  that the real seller was Japan, which dumped $22.6 billion in TSYs, bringing its total to just over $1.061 trillion, the lowest since the start of 2012.

Fast forward to today when the “China is liquidating treasurys” narrative is set for a comeback, because according to the latest just released TIC data, in the first month of 2018, Chinese Treasury holdings declined by $16.7 billion (a number which recall is price adjusted), to $1.168 trillion, the lowest since July of 2017 and the biggest monthly drop since September.

The Banking Index reverses from a lower high.

— BKX made a lower high on Monday, then reversed down for the week at a loss.  The Cycles Model suggests that the Banking Index may have a three week decline ahead of it.  A break of Intermediate-term support at 110.30 gives a sell signal.

(CNNMoney)  It’s taken nearly a decade, but the regulatory pendulum is swinging back in favor of banks.

Safeguards designed to prevent another crisis could be removed if the just-passed Senate banking bill becomes law. The legislation, which received support from 17 Democrats, loosens regulations for community banks, regional lenders and mortgage companies.

The deregulation push illustrates a role reversal for the banking industry. In the aftermath of the 2008 meltdown, they were villainized. Now they’re casting themselves as the victims of government regulation run amok.

(CNBC) The fate of bank regulation rests with the House after the Senate approved a bill that would relieve smaller banks of some of the restrictions put in place after the financial crisis 10 years ago.

The bill has the support of moderate Democrats, but some Republican members of the House have said it doesn’t go far enough and have threatened to tie up a vote by trying to add more provisions. It is considered the biggest rewrite of financial regulation since the Dodd-Frank Act of 2010.

One of the main provisions would raise the threshold for banks to be considered so vital to the financial system that they must be subjected to extra oversight and submit to mandatory annual stress tests. The current asset level is $50 billion, and the bill would raise that to $250 billion. That would spell regulatory relief for more than two dozen banks, including SunTrust, Regions and even Goldman Sachs.

(ZeroHedge) In August 2017 we noted Russia’s largest private lender was in trouble and required a bailout. Then a month later, a second bank hit the wall and was bailed out. And now, five months later, Russia’s central bank is mulling a further capital injection of a trillion rubles to rescue Otkritie and B&N Banks.

In August, Otkritie Bank, which according to Interfax, “ranks 1st among privately-owned banks and 4th by assets among banking groups in Russia,” was rescued by the central bank because “the bank is a systemically important credit organization, it occupies the 8th place in terms of assets. The Bank’s infrastructure includes 22 branches and more than 400 internal structural subdivisions.”

(ZeroHedge) Some weeks, it seems like barely a day goes by without learning about some new nefarious activity perpetrated by Wells Fargo, or their repercussions.

Case in point, yesterday, Reuters reported that the Office of the Comptroller of the Currency was preparing to sanction the bank for charging customers for auto insurance they didn’t really need. The bank has blamed a third party for wrongly layering the insurance policies on its auto borrowers.

Wells Fargo’s auto insurance woes stem from a policy drivers must carry when they borrow money to buy a new car. It pays out to the bank when a car is stolen or destroyed.

Wells Fargo required drivers to carry their own policies, but had a right to “force-place” a policy on borrowers who let insurance lapse. Insurers working for Wells Fargo pushed policies onto 570,000 customers who already had coverage and then delivered profits for the bank.

Have a great weekend!

 Anthony M. Cherniawski                                                                                                                                 The Practical Investor, LLC                                                                                                                             2205 Hopkins Avenue                                                                                                                                                                      Lansing, MI 48912

Office: (517) 331-5200

 Disclaimer: Nothing in this email should be construed as a personal recommendation to buy, hold or sell short any security.  The Practical Investor, LLC (TPI) may provide a status report of certain indexes or their proxies using a proprietary model.  At no time shall a reader be justified in inferring that personal investment advice is intended.  Investing carries certain risks of losses and leveraged products and futures may be especially volatile.  Information provided by TPI is expressed in good faith, but is not guaranteed.  A perfect market service does not exist.  Long-term success in the market demands recognition that error and uncertainty are a part of any effort to assess the probable outcome of any given investment.  Please consult your financial advisor to explain all risks before making any investment decision.  It is not possible to invest in any index. 

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