The  forced deleveraging of China' s WMP-driven excess  was not helped overnight by disappointing trade data as  both import and export growth slumped.

April Imports grew at just 11.9% YoY (in USD terms),  dramatically less than the 18.0% expectations  and well down from March' s 20.3% growth.

April Exports grew at 8.0% YoY (in USD terms),  less than half the growth of March (16.4% YoY)  and well below the 11.3% expectations.



 

Bad news also hit the energy space after Saudi officials desperately triued to talk up OPEC production cut deal extensions, China' s trade data showed a  collapse in oil demand in April (down almost 12%)...



 

And the result was clear...



As Bloomberg details,  April trade data add to the impression of a deceleration in China' s economy heading toward 2H.  Export and import growth slowed, and missed expectations, despite a lower base for comparison. Trade data are volatile, but the latest numbers are  consistent with signs of a slowdown from April business  surveys.  If the peak for 2017 growth is already in the past, China&rsquo s space for progress on a challenging deleveraging agenda will be limited.  Diminished scope for higher interest rates will also add pressure for yuan weakness.

This piled on the pressure across the entire China capital markets space with commodities (4 month lows), stocks (7 month lows), and bonds (22 month high yields) all tumbling further...



 

The soaring cost of debt has created yet  another vicious circle as China bond issuance has collapsed. In April, the number of  aborted issues rose to 154, up from 94 in March, 32 in February and 31 in January.



These  signs of mounting stress in China&rsquo s $9.3tn bond market  come less than a month after the country&rsquo s banking regulator, Guo Shuqing, was quoted as supporting a campaign to sort out chaotic practices, and  threatening to resign if the banking system became &ldquo a complete mess&rdquo .

As The FT concludes,  April&rsquo s increase in cancelled bond issues continues a trend of collapsing bond issuance volumes in the first four months of the year:

 

 

&ldquo The collapse in domestic bond issuance is a clear consequence of efforts to rein in shadow banking generally and wealth management products specifically,&rdquo   said Gene Frieda, global strategist for Pimco, the US investment management firm.

 

&ldquo This adds to an already sizeable credit tightening impulse baked into the cake for the second half of this year.&rdquo

 

&ldquo The question now is not if China&rsquo s economy will slow, but rather how fast,&rdquo   Mr Frieda added.

As we noted previously,  one wonders how long implied vol for the Yuan can decline (and spot remain stable)...



And we know what happens after that.

 

Authored by Mark Melin via ValueWalk.com,

There is a slow creep in delinquent credit that is  starting to get noticed.  The special-servicing and delinquency rates for securitized commercial mortgages  rose again last month,  Commercial Mortgage Alert first reported. While the rise was reasonably contained,  it is the trend of commercial  underperformance that is causing a mild degree of concern.  The data on Commercial Real Estate comes as investors are closely watching the prospects for  retail malls  across the country.

Commercial Real Estate &ndash More distress

The percentage of commercial mortgage-backed security (MBS) loans in special servicing hit 6.6% to close April, Commercial Mortgage Alert reported, citing Trepp data. The five basis point move higher from March came as  the past-due rate on Fitch-rated commercial mortgage-backed securities (CMBS) climbed by nine basis points to end April at to 3.5%.

Both MBS and CMBS rates hit their  highest levels since 2015.

&ldquo The shrinking CMBS universe, which has long contributed to a  steady rise  in both rates, had a far more substantial impact on Trepp&rsquo s tally,&rdquo the Commercial Mortgage Alert analysis pointed out.

Special services loan volume dropped by $438.4 million, to $27.2 billion, a drop that was &ldquo overshadowed by a $9.5 billion plunge in the aggregate balance of outstanding CMBS.&rdquo This plunge, as a result, reduced the denominator in Trepp&rsquo s calculation to $411.9 billion as of April 30.

Big office property delinquencies in the Southwest also drive the numbers

Driving that data was a number of idiosyncratic situations.

The biggest mortgage added to the CMBS reporting involved  office properties  in the Southwest. The $198.5 million fixed-rate loan to Crystal River Capital of New York was noted on three properties in Arizona and Texas: a 724,000-square-foot office building and an adjacent 1,905-space garage in Phoenix and a 429,000-sf office building in Houston.

The 10-year loan was transferred to special servicer C-III Asset Management on  March 16, Commercial Mortgage Alert noted, following the warning it would default at maturity on  April 1. The debt is now classified as nonperforming beyond maturity and was originated by Deutsche Bank and offered as a $4 billion pool offering.

Fully $819 million of mortgages were added to Fitch&rsquo s  past-due roll  last month. That number was notably greater than the $544 million of loans that moved off the list after being sold, modified or otherwise resolved.  When paydowns are considered, Fitch&rsquo s tally of 60-day late loans payments or deals in foreclosure or maturity default rose to $12.4 billion, higher by $283 million during April.

 

 

Authored by John Dizard via The FT,

The mania for average returns has been suppressing short term losses, or corrections

 

 

A sound banker, alas! is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him.
&mdash John Maynard Keynes

We have created a bubble in average.  Waiters and childhood friends are no longer telling us about what miracle gold, oil, or tech stocks they bought at the right time. They are exchanging stories about low management fees on their index-tracking exchange traded funds.

This sounds like the warning bell at the top of a mania.  Only now it is a mania in low transaction costs, average returns, and on-demand liquidity.

Most professional portfolio managers  sneer at the &ldquo technical analysis&rdquo momentum traders, who buy if price charts point up and sell when the charts point down.  These traders are seen as socially awkward eccentrics, picking magical price support and resistant lines up on home office trading screens.

True, the technical traders do not go to the same high level conferences as serious professional investors.  Without really noticing it, though, much, if not most, of the investment establishment has turned into the class they most despise, which is to say back-office &rsquo bot creators.

Index-based investment management, more sophisticated algorithmic trading, and even slow and steady buy-on-the-dips retail investing have all been  suppressing short term losses, or corrections.

Short term asset price declines have been reversed by the wall of money coming out of active investment managers and into the accounts of low-cost index products. But this comes at the expense of making the eventual decline in a broad range of asset values not just painful, but catastrophic.

There is no greedy banker in a corner office on Broad Street who created this constellation of algorithmic death stars. Unfortunately for the political class, Wall Street listened to the denunciations of the risky strategies that led to the 2008 crash. So it concentrated on marketing &ldquo low-risk&rdquo investment strategies that promise all the liquidity that Grandma would ever need.  In the event of another market crash, it will be harder to find convincing villains.

There was an interesting debate set up by Jim Grant of the Interest Rate Observer, a journal focused on financial markets, at his spring conference in New York last week. John Bogle, the founder of Vanguard, the fund house known for its low-cost ETFs, took the side of index investing.

On the other side, Steven Bregman of Horizon Kinetics, the New York-based investment advisory firm, made a serious case for stockpicking active management, including its social value of ensuring accurate price discovery.

Now, though, the ultra-low cost passive investing Mr Bogle pioneered is a few trillion dollars ahead. In the post-crisis world, his fundamental thesis that active management&rsquo s transaction costs eventually overcome any apparent performance edge has been reinforced by post-crisis monetary policy and slow growth.

As interest rates and returns are repressed, every basis point of extra transaction and portfolio management cost looms larger to the investor. And since every market dip is cushioned by central bank safety nets, the rise of index values has been looking ever more inexorable.

All those waiters and childhood friends will tell you they have liquidity, as in the right to cash in, whenever they want, at a low cost. The index fund managers get that liquidity by buying more of the most liquid securities, which then rise in price even faster.  However, on the way down, this virtuous cycle tends to reverse.

And it is not clear how a society with population growth below 1 per cent, and productivity growth below 2 per cent, provides long term returns of 4 per cent to an ever larger group of retirees.  Especially if it pulls back on international capital flows.

Serious-money portfolio managers will argue, correctly, that commodities and stock option buyers among the investing public usually lose their premium money. And yes, most amateur technical analysis investors eventually give up on charting their way to a fortune.

But professional portfolio managers have no day job to go back to. So they could be worse off than momentum traders working from home.

 

A  year ago, we noted  that The Bank of Japan (BoJ) was a  Top 10 holder in 90% of Japanese stocks. In  December, we showed  that BoJ was the  biggest buyer of Japanese stocks in 2016. And now,  as The FT reports,  the real " whale" of the Japanese markets is stepping up its buying (up over 70% YoY)  entering the market on down days more than half the time in the last four years.

Since the end of 2010,  The FT notes that  the BoJ has been buying exchange traded funds (ETFs) as part of its quantitative and qualitative easing programme. The biggest action began last July, when its annual acquisition target was doubled to ¥ 6tn. Since then, the whale designation has seemed pretty obvious: the central bank swallows a minimum of ¥ 1.2bn of ETFs every single trading day (tailored to support stocks that further &ldquo Abenomics&rdquo policies), and lumbers in with buying bursts of ¥ 72bn roughly once every three sessions.
 



Some traders say the bank&rsquo s supposedly targeted buying has  cushioned the whole market.  Last year, foreign investors were net sellers of ¥ 3tn of Japanese shares - a retreat that might have decimated benchmarks had the BoJ not swum in with ¥ 4.3tn of support via ETFs.

 

 

In the afternoon sessions on days the BoJ comes in big,  the average return on the index is about 14 basis points higher.

 

Since the annual quota was increased to ¥ 6tn, Nomura says, the  BoJ has provided a cumulative boost to the Nikkei of about 1,400 points.

But, as we' ve noted in the past, it appears to be the flow, not the stock, that is the big driver...



As in a casino,  The FT' s Joe Lewis concludes,  the whale definition may hinge less on the cash on the table and more on the psychological impact on other gamblers.  The BoJ has been at the game long enough for the market to know it reliably buys on weakness.

Of the 1,038 business days between April 2013 and March 2017 there were 449 sessions where the market was down: the BoJ bought on more than half of them.  Whale or not, investors are now primed to think they are swimming with one.

So given that we know SNB is extremely active in stock markets, and The BoJ is the Japanese stock market, does anyone realistically doubt The Fed is/has been active?