The market selloff

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Share buybacks in the US are on pace for their biggest year since 2007, he adds, estimating $561bn for full-year 2015 (net of share issuance) and a decline to $400bn in full-year 2016. Aside from shares repurchases already scheduled under 10b5-1 plans, the markets will have to wait until February for the buyback taps to start flowing again properly.

Share buybacks, the markets miss you | FT Alphaville

An increasingly messy divorce between market participants and monetary policymakers might be responsible for the market turmoil in 2016, according to Richard Koo. The "January correction was driven by realization that rate hikes could come faster than expected," he claims... He says the Federal Reserve's desire to calm markets prior to liftoff quickly gave way to rounds of commentary beating market participants over the head with the idea that the pace of tightening would be less gradual than they anticipate.

Koo: The Fed's Communication Shift is Behind January's Selloff - Bloomberg Business

Financial markets are undergoing two consequential transitions, which not only amplify the impact of even the smallest developments in China and oil, but also increase risk aversion overall and create the conditions for more unpredictable developments. The first has to do with the shift from a prolonged regime of repressed financial volatility to an environment in which such instability is higher and less predictable. The primary reason is that central banks are less willing (in the case of the Federal Reserve) or less able (in the case of the European Central Bank and the People’s Bank of China) to act as suppressors of volatility. In the short term, this transition inevitably leads to higher risk aversion, deleveraging and lower portfolio risk-taking, especially affecting risk-based models and asset allocations that use volatility as a major input. The second transition involves liquidity, and a move away from counter-cyclical balance sheets. Facing tighter regulation and sharply reduced market appetite for short-term earnings deviations, broker-dealers are a lot less willing to take on inventory when the market overshoots. Other pools of capital, including sovereign wealth funds, also face constraints in increasing their risk-taking.

The Deeper Causes of the Global Stocks Rout - Bloomberg View

Meanwhile, the price of the underlying equities in index funds is rising, though no one is sure exactly why. Research by S&P Capital IQ, as of Dec. 31, found stocks that were in the Russell 2000 were trading at a 50 percent premium to stocks that were not, up from 12 percent in 2006. The statistics are based on median price-to-book ratio.

Watch out for this $1 trillion stock bubble

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Financial markets seem to be bracing for a global recession. One example of this in action is the bond market, which has "recessionary" fund flows as investors shift their money out of high-yield funds and into government bonds.  The economic fundamentals, however, do not signal a recession with such certainty, as my colleague Myles Udland has pointed out.

There's really only one question on Wall Street right now - Business Insider

According to JPMorgan strategist Jan Loeys, US stocks fall on average 30% from their cycle peak in a recession, putting the recession-level S&P500 at 1,500. If there is no recession, stocks should hit 2,200, he said.

There's really only one question on Wall Street right now - Business Insider

After getting off to the worst start to a new calendar year in history, U.S. stocks on Friday finally posted the first winning week of 2016. So did stocks bottom or is this just a bounce within a bigger pullback that could yet turn into a full-blown bear market? For the average, long-term investor, the best advice during times of market turmoil is to remain calm and stick to a long-term investing plan. Calling a bottom—or a top—is a challenge even for professional investors.

These signs will mark the bottom for the stock market - MarketWatch

Since the end of World War Two, all 11 recessions have coincided with falling stock prices. But not every bear market has been omen of an impending recession. The bears have run wild on Wall Street in a number of instances — 1962, 1965, 1971, 1976-78, 1987, 1998, 2002 and 2011 — without any ill effects on Main Street.

Bear market unlikely to trigger U.S. recession, history shows - MarketWatch

The global financial system has become dangerously unstable and faces an avalanche of bankruptcies that will test social and political stability, a leading monetary theorist has warned. "The situation is worse than it was in 2007. Our macroeconomic ammunition to fight downturns is essentially all used up," said William White, the Swiss-based chairman of the OECD's review committee and former chief economist of the Bank for International Settlements (BIS).

World faces wave of epic debt defaults, fears central bank veteran - Telegraph

"What is driving this is that the central banks are not coming to the rescue," he said, speaking at a Fox Business event hosted by Maria Bartiromo. Rates are already zero or below in Europe and Japan, and quantitative easing is largely exhausted, leaving it unclear what they could do next if the situation deteriorates.

Fears of global liquidity crunch haunt Davos elites - Telegraph

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Bill Gross says central bankers are “increasingly addled” as their low and negative-interest rate policies fail to produce sustainable growth, with even U.S. Federal Reserve leaders showing uncertainty about their next steps. “ ‘How’s it workin’ for ya?’ -- would be a curt, logical summary of the impotency of low interest rates to generate acceptable economic growth worldwide,” Gross wrote in his monthly investment outlook Wednesday. “The fact is that global markets and individual economies are increasingly ‘addled’ and distorted.”

Gross Asks World's Central Bankers: ‘How's It Workin' for Ya?’ - Bloomberg Business

"So many of these [bank stocks] are falling so sharply. I think people haven't even caught up with what is going on, and that really concerns me," the founder of Global Macro Investor told CNBC's "Fast Money" on Tuesday. "I look at the big long-term share charts of them, and I think this looks very terrifying indeed. I have not seen anything like this for a long time." For Pal, negative interest rates are the chief reason why the bank stocks are in trouble. He said European banks have a tougher time coping in the environment than U.S. banks.

European banks near 'terrifying' crisis: Raoul Pal

There’s been endless speculation in recent weeks about whether the U.S., and the whole world for that matter, are about to sink into recession. Underpinning much of the angst is an unprecedented $29 trillion corporate bond binge that has left many companies more indebted than ever. Whether this debt overhang proves to be a catalyst for recession or not, one thing is clear in talking to credit-market observers: It’s a problem that won’t go away any time soon.

The $29 Trillion Corporate Debt Hangover That Could Spark a Recession - Bloomberg Business

Economists are used to linear models, in which changes follow a relatively gradual and predictable path. But thanks in part to the political and economic shocks of recent years, we live in a highly non-linear world. The late Danish physicist Per Bak explained that after long absences, earthquakes come in quick succession. A breached fault line sends shockwaves that weaken other fault lines, spreading the vulnerabilities.

The market’s troubling message | Bruegel

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The global economy seems trapped in a "death spiral" that could lead to further weakness in oil prices, recession and a serious equity bear market, Citi strategists have warned. Some analysts — including those at Citi — have turned bearish on the world economy this year, following an equity rout in January and weaker economic data out of China and the U.S.

Citi: World economy trapped in 'death spiral'

The surge in lending to emerging markets that helped fuel their own — and much of the world's — growth over the past 15 years has come to a halt, and may now give way to a "vicious circle" of deleveraging, financial market turmoil and a global economic downturn, the Bank for International Settlements has warned.

Lending to emerging markets comes to a halt

Caruana is implicitly saying Greenspan made three mistakes, although the “maestro” was by no means unique in making them. First, Greenspan et al thought the bulk of the spending financed by the extra debt enhanced productivity. If they were correct, you’d think real incomes generally grow at a faster rate after debt is incurred than before. But we now know private borrowing binges, defined as rapid increases in the ratio of debt to national income, invariable precede periods of slower growth, if not severe recessions. This shouldn’t be too surprising considering essentially all the increase in private debt to income has come from lending against housing.

“It’s the stocks, not the shocks” | FT Alphaville

The current environment for European banks is very, very bad. Over a full business cycle, I think it’s very questionable whether banks on average are able to cover their cost of equity. And as a result that makes it an unattractive investment for long-term investors.... “And its worrisome, because banks are much more important for the credit mechanism in the economy here in Europe than it is in the U.S. There, you have a capital market where it’s easier to issue corporate bonds and get funding outside the commercial banking system. We don’t have that to the same extent in Europe, and therefore [the current weakness] is a little bit scary,” he said.

Why a selloff in European banks is ominous - MarketWatch

“If the Schengen zone is going to be demolished or destroyed, then it will cause such serious economic damage that I don’t know how Europe is going to handle it", Mr Szijjarto told The Telegraph. His warning comes amid fears that abolishing Europe's open borders would wipe €110bn off the EU's economies in 10 years. Around 0.8pc of the EU’s total economic output would be lost within a decade if Schengen were fully dismantled, according to Strategie, a think-tank funded by the French government.

The EU's €110bn problem: slow death of Schengen risks new crisis for Europe's battered economies - Telegraph

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Credit bubbles are corrosive. They gobble up resources on the upswing, diverting workers into low-productivity sectors and building booms. In Spain the construction share of GDP reached 16pc at the height of the "burbuja" in 2007, when teenagers abandoned school en masse to earn instant money erecting ghost towns. Parasitical wastage creeps in. "Financial institutions' high demand for skilled labour may crowd out more productive sectors," said the paper, acidly. The bubbles leave a long toxic legacy after the bust hits. This takes eight years or so to clear. "The occurrence of a crisis greatly amplifies the impact of previous misallocations," said the paper, racily titled "Labour reallocation and productivity dynamics: financial causes, real consequences". Crippled economies have to make the switch back to healthier sectors against the headwinds of a credit crunch and a broken financial system, and typically amid austerity cuts in public investment.

Is the whole theory of secular stagnation a hoax? - Telegraph

The prospect of four straight quarters of earnings declines is staring investors in the face on top of the worst multiweek selloff for stocks in years, and the worst start of the year ever.

Woeful earnings threaten to intensify stock-market bloodbath - MarketWatch

Fears of a British exit from the European Union are adding to the list of concerns causing turbulence on global financial markets, the IMF’s managing director Christine Lagarde said on Saturday.

Brexit fears are fuelling market turmoil, says IMF chief | Business | The Guardian

Euro zone economic growth was probably a paltry 0.3 percent in the final quarter of 2015, data are likely to show on Feb. 12, matching the third quarter's pace and with inflation nowhere near the ECB's 2 percent target ceiling, expectations are high for more easing. "The economy in the euro zone is not gathering momentum. For a long time we have been expecting the ECB to loosen its monetary policy again, presumably now in March," said Jorg Kramer at Commerzbank.

China data may put cat among global central bank doves | Reuters

The euro has rocketed by more than 3pc this week to $1.12 against the dollar. In trade-weighted terms the euro is 5pc higher than it was in March, when the ECB began quantitative easing, showing just how difficult it has become for authorities to drive down their exchange rates. Everybody is playing the same game.

Dollar tumbles as Fed rescues China in the nick of time - Telegraph

the reality of Europe’s own woes hit home as companies reported dismal earnings, and policy makers and institutions lined up to cut economic forecasts and warn of further risks. The European Commission cut its prediction for 2016 growth in the 19-nation bloc to 1.7 percent from 1.8 percent and said the largest economies of Germany, France and Italy will all perform worse than predicted just three months ago. While the European Central Bank may spur into action again, moves in the euro and stocks suggest President Mario Draghi may be losing his ability to convince investors he can anesthetize the region from risks.

Europe's Economic Outlook Darkens, Sends Shudder Through Markets - Bloomberg Business

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“While QE will push assets prices somewhat higher, investors/savers will still want to save, lenders will still be cautious lenders, and cautious borrowers will remain cautious, so we will still have ‘pushing on a string,’” says Dalio. Investors should expect to experience lower than normal returns with greater than normal risk, he says.

There’s a cold central-bank wind coming, warns Ray Dalio - MarketWatch

Portugal only grew by 0.2% in the last quarter, down from 0.4% in the third quarter. That’s a blow to Lisbon’s new leftwing government, as it tried to unwind some of the austerity measures implemented by its predecessors. Italy was the big disappointment, with expansion slowing to just 0.1% against predictions of 0.3% growth. Italian growth has slowed steadily through 2015, since managing growth of 0.4% in the first three months.

Eurozone recovery falters as Greece slips back into recession | Business | The Guardian

The dollar has languished below ¥115 this week, even as Japanese officials warned of more monetary and fiscal stimulus, and weak data showed economic growth in the world’s third-largest economy has remained sluggish — all of which would typically cause a currency to weaken. The Japanese yen is a popular safe haven, so its continued strength suggests that investors remain apprehensive about the prospects for global equities. But given the strong historical correlation between U.S. stocks and the dollar-yen exchange rate — which can be observed in this chart — it’s likely that one of the two markets will capitulate, analysts said.

This indicator suggests this week’s stock-market rally won’t last - MarketWatch

Greece was the worst performing member of the eurozone, with GDP falling by 0.6% in the last three months of last year. That followed a steep contraction of 1.4% between July and September, when capital controls were imposed and its banks were shut.

Eurozone recovery falters as Greece slips back into recession | Business | The Guardian

Europe is still trying to crawl back to where it was in 2008. That was the subtext of the economic data for the eurozone published on Friday. The 19-country eurozone, the core of Europe’s economy, grew at an annual rate of 1.1 percent in the last quarter of 2015. But total economic output remained just slightly lower than when the global economic crisis began, in 2008. Since then, much of the rest of the world, including the United States, has bounced back, however fitfully.

Eurozone Economy Grows, but Total Output Still Lags 2008 - The New York Times

The eurozone recovery remains disappointingly weak after Greece fell back into recession and Italy slowed to near stagnation. The single currency area grew by just 0.3% in the final quarter of 2015, statistics body Eurostat reported on Friday. On an annual basis, the eurozone expanded by 1.5%, down from 1.6% three months earlier, suggesting growth remains weak despite the European Central Bank’s stimulus measures and the positive impact of cheap oil.

Eurozone recovery falters as Greece slips back into recession | Business | The Guardian

Europe’s earnings season is only half-way through, but so far even stable profit generators are showing signs of capitulation. Banks, industrial companies and even health-care companies are surprising the market with the widest earnings misses since even before the financial crisis. Analysts are dialing back their 2015 outlooks -- they see zero income growth for Stoxx Europe 600 Index members on average, down from an estimate of more than 4 percent three months ago.

Worst Earnings Letdown Since Crisis Add to Europe Stock Woes - Bloomberg Business

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World growth has been drearily stable for years, shuffling along at 3.4pc in 2012, 3.3pc in 2013, and 3.4pc in 2014, and 3.1pc in 2015. The International Monetary Fund expects 3.4pc this year. The latest "GDPNow" tracker from the Atlanta Federal Reserve suggests that US growth is running at 2.5pc in the first quarter, smack in line with a typical late-cycle expansion in a mature economy. So, at the risk of sticking my neck out a long way, let me suggest that the equity bloodbath this year is little more than noise in the particular set of circumstances facing us. Students of the 1930s and the Keynesian liquidity trap might even argue that it is positively good for the world economy to the extent that it reflects an erosion of the global savings glut – the ultimate cause of our Long Slump – and entails a shift in spending power back to ordinary people.

This is a global stock market rout worth celebrating - Telegraph

The problem is the giant, stagnant pool of loans that companies and people around the world are struggling to pay back. Bad debts have been a drag on economic activity ever since the financial crisis of 2008, but in recent months, the threat posed by an overhang of bad loans appears to be rising. China is the biggest source of worry. Some analysts estimate that China’s troubled credit could exceed $5 trillion, a staggering number that is equivalent to half the size of the country’s annual economic output.

Toxic Loans Around the World Weigh on Global Growth - The New York Times

“The root cause of this debacle is the way the eurozone is designed. We don’t have a mutualisation of the risks. That is why this is escalating,” said Mr Guglielmi. Europe’s leaders agreed in June 2012 to break the “vicious circle between banks and sovereigns” but Germany, Holland, Austria and Finland later walked away from this crucial pledge. The chief cost of rescuing banks still falls on the shoulders of each sovereign state. The Sword of Damocles still hangs over the weakest countries.

Europe's 'doom-loop' returns as credit markets seize up - Telegraph

Peter Schaffrik, from RBC Capital Markets, said there is a nagging concern among investors that the ECB is running low on ammunition. “How much further can the ECB go before it becomes outright harmful?” Peter Schaffrik, from RBC Capital Markets It cannot usefully cut interest rates any deeper into negative territory since the current level of -0.3pc is already burning up the “net interest margin’ of lenders and eroding bank profits.

Europe's 'doom-loop' returns as credit markets seize up - Telegraph

By one measure, earnings in the world’s third-largest stock market are poised to retreat more than 20 percent this quarter, and for the first time since 2012 more Japanese companies are missing forecasts than beating them. Meanwhile, the yen just staged its biggest weekly rally since 2009 even though the Bank of Japan surprised the world by cutting interest rates to below zero.

The Magic Formula That Powered Japanese Stocks Is Falling Apart - Bloomberg Business

Earnings reports have disappointed. Even growth ex-energy is only 2.1% and sales growth barely positive. Earnings expert Brian Gilmartin provides data, analysis as well as a look at forward earnings. Bespoke notes that the overall stock reaction on earnings day has been slightly positive.

Weighing The Week Ahead: Is A Recession Looming? | Seeking Alpha

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While the world contends with the consequences of shrinking petrodollar flows, Emad Mostaque at consultancy Ecstrat provides an interesting take on the potential benefits of such reversals for petro sovereign Saudi Arabia. Tl;dr: It’s a blessing in disguise because it forces the kingdom to restructure its economy and reduce its dependency on foreign labour and hydrocarbon receipts.

Calling home the petrodollars! | FT Alphaville

SOVEREIGN WEALTH FUNDS HAVE BEEN LIQUIDATING ASSETS at the same time as the central banks of China and other nations, also with significant impacts on capital markets. Their sizes give an indication of their potential effects. Norway’s is the largest at about $825 billion, as of last month, according to Statista.com. It’s followed by Abu Dhabi, at $773 billion; the China Investment Corp., at $747 billion; SAMA Foreign Holdings of Saudi Arabia, at $669 billion; and the Kuwait Investment Authority, at $592 billion. Given the opacity of many of these organizations, estimating their flows is tough, but JPMorgan economist Nikolaos Panigirtzoglou makes a valiant effort. (Thanks to our colleague Chris Dieterich for bringing this to light in his Focus on Funds blog on Barrons.com.)

Markets Suffer as China Depletes Reserves - Barron's 

The BIS calculates that debt in US dollars outside the United States has surged to $9.8 trillion, a fivefold rise since 2000 and an unprecedented level for the global monetary system as a whole. While some of this dollar debt is matched by dollar assets and dollar earnings, a big chunk has been used to play the local property markets of east Asia, Latin America or eastern Europe, and another chunk has been gobbled up by “non-tradable” sectors that have no natural currency hedge if it all goes wrong. The BIS estimates that 23pc of every dollar raised in bonds by emerging market companies has been diverted into the “carry trade”, stoking internal credit bubbles. The average level of private credit in these countries has jumped from 75pc to 125pc of GDP since 2009. Corporate leverage is now more extreme than in the US and Europe. Profit ratios have dropped from 16pc to 9pc in four years, a clear warning sign.

Oil market spiral threatens to prick global debt bubble, warns BIS - Telegraph

Corporate profits have been weak since late in 2014 due to a number of factors. Pricing was very soft while unit labor costs (labor compensation adjusted for labor productivity) increased. And the stronger dollar weighed on profits from abroad while the drop in energy prices hurt profits for the energy sector (although it likely helped profits for other sectors).

Little hope of profit 'recession' ending - Business Insider

China has released its trade figures for January and they’re not good. Exports down 6.6% (year-on-year in yuan terms) compared with forecasts of +3.6% Imports down 14.4% compared with 1.8% Trade surplus up to 406bn yuan against a forecast of 389bn... The China trade figures look even worse in dollar terms which put exports down 11.2% in January compared with the same month in 2015, while imports were down a thumping 16.6%, the General Customs Administration said today. However, officials said they expected the downward pressure on exports would begin to ease by the second quarter of this year.

Market turmoil: Asian stocks bounce despite steep fall in Chinese trade - live | Business | The Guardian

Economy shrank at an annualised rate of 1.4% in the last quarter of 2015 – a contraction that was more severe than many had forecast

Japan's economy shrinks again as Abenomics is blown off course | World news | The Guardian

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Investors are running out of patience with European bank chieftains, and no wonder. Since the fall of Lehman Brothers in September 2008, eight of Europe’s biggest banks have announced layoffs adding up to about 100,000 employees, paid $63 billion in legal penalties, and lost $420 billion in market value. In 2015, Deutsche Bank lost a record €6.8 billion ($7.6 billion). In mid-February the industry suffered an epic selloff as subzero interest rates, China’s slowdown, the oil crash, and looming regulatory and litigation costs triggered an outbreak of fear not seen since the fall of 2008.

European Bank Nightmare Far From Over as Fines and Fintech Loom - Bloomberg Business

UK and European banks have failed to sell any so-called Coco bonds this year amid worries about the health of the banking sector. Cocos - short for contingent convertible bonds - are turned into shares if a bank starts to struggle. European banks raised around €45bn from the bonds last year. But in 2016 none have been issued, according to data company Dealogic, amid wider investor fears about investing in banks.

European banks fail to sell Coco bonds - BBC News

In early February, the premium that investors charge to hold Portuguese, Spanish and Italian government debt rather than German bonds hit some of the highest levels since the euro zone crisis that peaked in 2011-2012. European bank shares have been badly hit by concerns over their high stock of non-performing loans, new regulatory burdens and a squeeze on profits due to sub-zero official interest rates. New EU banking regulations that force shareholders and bondholders to take first losses if a bank needs rescuing are further spooking the market, notably in Italy.

Sovereign bond markets flashing warning lights in eurozone - Business Insider