Mortgage rates are soaring, but higher credit quality means there likely won’t be a default crisis like the 2008 crash, Goldman Sachs says

home for sale
  • Mortgage rates are up and home prices are down, but Goldman Sachs doesn’t see another default crisis.
  • The bank pointed to new credit regulation resulting from the 2008 housing crash, which will likely shelter the market from a wave of defaults.
  • “Our analysis suggests that a surge in delinquency rates is unlikely over the next year.”

Mortgage rates have soared and home prices have fallen this year, but don’t expect another default crisis like the 2008 housing crash, according to Goldman Sachs.

“Robust credit quality is likely the most important reason not to expect a mortgage default crisis. The 2008 housing and mortgage crisis led to a significant increase in mortgage credit quality,” economists at the investment bank said in a note on Tuesday, referring to regulations aimed at preventing risky subprime loans.

New rules, such as minimum credit scores required for mortgages and restrictions on loan levels, will likely shelter housing markets, said the note, which looked at the US and other top English-speaking countries.

That comes amid a shaky year for the housing market, with US mortgage rates soaring past 7% and experts sounding alarms for a potential housing crash. It’s largely been fueled by the aggressive rate hikes from the Federal Reserve and other central banks as they scramble to rein in inflation. 

Already, that’s lifted US mortgage rates nearly 400 basis point this year. But Goldman pointed out that since most mortgages in the US are at set fixed rates, as opposed to floating rates, the surge is unlikely to result in defaults.

It also puts the US housing market at a smaller risk of a rate shock compared to countries like the UK, Canada, and Australia, where floating rates are more common, according to the note.

There’s also concern the Fed’s rate hikes could push unemployment higher, which would lead to more defaults on mortgages, but those risks are also “quite small” compared to other countries, Goldman said. In the US, a 100-basis-point increase in unemployment would lead to just a 10-basis-point increase in mortgage delinquency – below levels estimated in Australia and Canada.

And while home prices have fallen, that’s also unlikely to lead to strategic defaults, a situation where a borrower walks away from mortgage payments due to the deteriorating value of the property. Goldman pointed to a study from the National Bureau of Economic Research that found only 6% of mortgage defaults in the US are strategic, meaning falling home prices are expected to only “moderately increase” mortgage defaults.

“Our analysis suggests that a surge in delinquency rates is unlikely over the next year,” the bank said.

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The Fed and other central banks could deliver a ‘Santa Pause’ rally for global stocks this year as they dial back the size of rate hikes, Schwab says

Santa Christmas Wall Street stocks
A “Santa Pause” rally may be on its way for 2022.

  • A “Santa Pause” rally for stocks may be taking shape as central banks signal a step-down in rate hikes, Charles Schwab said. 
  • The Fed and the BoE are among those indicating they’re considering less aggressive rate hikes in the future.
  • The MSCI EAFE Index of international stocks has gained nearly 10% since step-down signs began emerging in October.  

There are signs that central banks worldwide are tilting toward downshifting the size of interest rate hikes aimed at combatting inflation and that could support a jump in global stocks, says Charles Schwab’s top global investment strategist. 

“There can be no guarantee that central banks will continue to step down the pace of their hikes or pause them, but if they do it is possible a “Santa Pause” rally could be in store for markets as the year draws to a close,” Jeffrey Kleintop, chief global investment strategist at Charles Schwab, said in a note published Monday. 

The Federal Reserve is among the central banks over the past week that has indicated a slower pace of rate increases. The Fed, after raising rates by 75 basis points for a fourth consecutive time, appeared to point to a hike of 50 basis points in December, and Norges Bank of Norway raised its policy rate by a lower-than-expected 25 basis points.

Kleintop said the Bank of England issued an “unusually blunt comment” stressing the peak in rates will be lower than what was priced into financial markets. BoE’s comment came as it kicked up its benchmark rate by 75 basis points, the largest increase in 33 years. 

Kleintop noted the MSCI EAFE Index of international stocks has gained nearly 10% since step-down signs began emerging in October. 

“Stock markets outside the U.S. that are outperforming the S&P 500 Index this year include many countries where the central banks are stepping down,” Kleintop said. 

Those markets include Brazil’s, with the Bovespa Index up 24% in US dollar terms in the year through November 4. Banco Central do Brasil last month left its key  Selic rate unchanged for a second straight meeting, at 13.75%. 

The S&P 500 through early November had lost 20% while Norway’s OBX and Canada’s S&P/TSX Composite Index had declines of 10% and 14%, respectively. The Bank of Canada last month unexpectedly raised its overnight rate by 50 basis points instead of an anticipated 75 basis points. 

Last month, the European Central Bank “sounded more cautious about the economy and eliminated the word ‘several’ from the number of hikes remaining,” said Kleintop. The ECB at its October meeting raised its key rate by 75 basis points.

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Japan’s foreign reserves fall again as Tokyo carries on dumping dollars and buying the yen

japan yen
Japan has been buying up yen and selling dollars in a bid to support its struggling currency.

  • Japan’s foreign currency holdings fell for a third straight month in October, official data show.
  • Tokyo is battling to prop up the yen, which has tumbled 27% against the dollar in 2022.
  • Japan has been offloading its dollars and buying the yen in a bid to stabilize its struggling currency.

Japan’s foreign reserves fell again in October as Tokyo battled to prop up the yen by dumping its holdings of the US dollar.

The value of the country’s reserve assets dropped by $43.5 billion to $1.19 trillion at the end of October, according to Japanese Ministry of Finance data published Tuesday.

It’s the second month of declines in foreign reserves in a row for Japan, after they sank by a record $54 billion in September. That’s when Japanese authorities intervened in currency markets for the first time since 1998, selling some dollar holdings in a bid to prop up the struggling yen.

The yen has plunged 27% this year as aggressive Federal Reserve interest rate hikes help drive a surge in the dollar against other currencies. Rising interest rates tend to support a currency because foreign investors attracted by the higher yields need to buy it.

In the US, the Fed has hiked rates by 75 basis points four times in a row to combat soaring inflation. Meanwhile, the Bank of Japan has kept its interest rates in negative territory, currently at –0.1%.

But Tokyo has still been drawn into an ongoing “reverse currency war“, which has had countries around the world  battling to prop up their currencies against the dollar. They are attempting to keep a lid on import costs — which rise as their currency weakens against its US counterpart — and in turn, on inflation.

Japan spent 2.84 trillion yen ($19 billion) on September 22 in an intervention to prop up the struggling currency, according to further Ministry of Finance data released Tuesday.

That failed to stop the yen from continuing to slide. It has fallen another 2.7% since that date to 146.22 yen per dollar, at last check Tuesday.

The official figures also confirmed the September sale remains Tokyo’s first and only foray into currency markets since 1998, despite traders’ speculation that the ministry has subsequently stealthily intervened.

Read more: Decades-high inflation has triggered a ‘reverse currency war’ as a soaring dollar leaves central banks scrambling to catch up

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Biden administration encourages Wall Street banks to keep doing business with certain strategic Russian firms, report says

Jamie Dimon, CEO, JPMorgan Chase
JPMorgan CEO Jamie Dimon

  • Some firms on Wall Street are continuing their relationship with Russia despite Congress’ public opposition, Bloomberg says. 
  • The US is reportedly encouraging banks like Citi Group and JPMorgan Chase to keep the status quo. 
  • Meanwhile Congress is posturing that the Kremlin should be condemned further. 

Some Wall Street firms are continuing to do business with Russia at the behest of the US government despite Congress publicly condemning the Kremlin. 

Bloomberg first reported on Tuesday that banks including Citi and JPMorgan Chase are caught in the middle of the Biden administration’s attempts to toe the line of simultaneously condemning Russia for its invasion of Ukraine without causing more global economic damage. 

According to the report, the Biden administration has encouraged US banks to continue business ties with sections of the Russian economy that aren’t subject to Western sanctions, but the scope of the conversations between the White House and Wall Street was previously unknown. 

The goal, the report says, is to adequately punish Russian president Vladimir Putin for his invasion of Ukraine and stave off Moscow’s access to cash while shielding the global economy from more pain. The war in Ukraine has already caused an energy crisis in Europe and upended oil prices as Russia shifts its business partners away from countries seeking to punish them. 

The Biden administration has yet to issue a full-scale embargo of the Russian economy, and there’s still a slew of businesses that are allowed to deal with the US under the current rules, the report added. 

Both Citigroup and JPMorgan said earlier this year that they would wind down operations in Russia. But both firms have to be cautious, the report says, and subject their exits to a lengthy review process that target specific Russian businesses while maintaining ties with others. 

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Lyft plunges 18% after disappointing 3rd-quarter earnings suggest Uber is taking share from the ride-hailing company

Lyft bus
  • Lyft plunged 18% after its third-quarter earnings report missed investor expectations on revenue and ridership.
  • The weakness suggested that Uber is taking market share away from the ride hailing company.
  • “We believe Uber has done a much better job at rebuilding driver supply, likely leaving Lyft with a structurally smaller share of the market than it had pre-pandemic.”

Shares of Lyft plunged 18% on Tuesday after the company’s third-quarter earnings report missed investor expectations on revenue and ridership.

The weak results came on the heels of a solid earnings report from Uber last week, suggesting that Lyft is losing market share to its larger rival.

Here were the key numbers of Lyft’s earnings report:

Revenue: $1.05 billion versus estimates of $1.06 billion
Adjusted EBITDA: $66.2 million, versus estimates of $62.1 million
Total Active Riders: 20.3 million, versus estimates of 21.2 million

While Lyft saw a decline in total active riders, Uber saw a more than 20% surge in active riders last quarter, bolstering the idea that Uber is taking share from Lyft. 

“We believe Uber has done a much better job at rebuilding driver supply, likely leaving Lyft with a structurally smaller share of the market than it had pre-pandemic,” Atlantic Equities analyst James Cordwell said.

Tuesday’s decline sent shares of Lyft within reach of testing its all-time low of $10.83. The stock traded at $11.68 in early Tuesday trades. 

According to Wedbush analyst Dan Ives, Lyft could still see upside as consumers return to travel and head back into the office in a post-pandemic period. He maintained an “Outperform” rating on Lyft but lowered his price target to $17 from $25.

“We believe that this is a short-term headwind and the company will continue to grow its profit margins throughout FY23. In a nutshell, we believe while this was a modestly disappointing quarter for Lyft, we believe as consumers continue to return to travel, shifting to the office, and other post-pandemic trends take hold Lyft will continue to capture market share in North America heading into 2023,” Ives said. 

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US stocks edge higher as investors brace for midterm election results

Virginia voters
Voters in Midlothian, Va., hold their ballots as they vote in the Virginia gubernatorial election on November 2, 2021. Midlothian is located in Chesterfield County, a key Richmond suburb that supported Republican Glenn Youngkin over Terry McAuliffe.

  • US stocks moved higher Tuesday as polls opened for the 2022 midterm elections.  
  • Analysts say a Republican victory would cement expectations of no large policy shifts, boosting stocks. 
  • Morgan Stanley’s Mike Wilson said the S&P 500 could surge this week in a decisive Republican win. 

US stocks climbed Tuesday as voting in the 2022 midterm elections kicked off, with traders bracing for election results that could bring political gridlock should Republicans gain seats in Congress. 

Analysts say gridlock could bode well for investors, as a Republican victory would make major policy shifts less likely. That would give more predictability to markets, and the S&P 500 could climb as high as 4,150 this week if the results favor Republican candidates. 

“[T]he Republicans have talked about freezing spending via the debt ceiling much like they did in 2011 (the Budget Control Act),” Morgan Stanley’s Mike Wilson wrote in a Monday note to clients. “This would be a sharp reversal from the past few years when budget deficits reached levels not seen since WWII. In our view, a clean sweep by the Republicans on Tuesday could greatly raise the odds of such an outcome.”  

Here’s where US indexes stood as the market opened 9:30 a.m. on Tuesday: 

Here’s what else is happening:

In commodities, bonds, and crypto: 

  • Oil prices slipped, with West Texas Intermediate down 0.29% to $91.52 a barrel. Brent crude, the international benchmark, inched lower 0.04% to $97.88 a barrel.
  • Gold edged lower 0.15% to 1,678.40 per ounce. The 10-year yield ticked lower 2.8 basis points to 4.186%.
  • Bitcoin dropped 6.22% to $19,534.01.
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The Fed’s path to a soft landing of the economy is a ‘fanciful magic carpet ride’ as its inflation fight is a lose-lose scenario, research firm says

Jerome Powell
Federal Reserve Board Chair Jerome Powell.

  • The Fed’s goals of bringing down prices while avoiding a recession is a “fanciful magic carpet ride,” Ned Davis Research warned.
  • The research firm pointed to the Fed’s delicate balancing act between those goals, calling it a “lose-lose scenario.”
  • Even if the Fed drives the economy into a recession, inflation could easily rebound if demand rises, it warned.

The Federal Reserve’s path to steering the economy to a soft landing is looking more unlikely as its inflation fight is growing bleak, according to a Ned Davis Research note titled “The Fed’s fanciful magic carpet ride.”

The note pointed to the central bank’s delicate balancing act between bringing down high prices and avoiding a recession, warning that it was increasingly a “lose-lose scenario.”

If Fed chief Jerome Powell pivots from rate hikes too early, inflation expectations could become entrenched in the economy, which would affect companies’ decision-making and potentially lead to higher unemployment. But pressing forward with rate hikes could overtighten the economy, leading to a recession of “unknown magnitude and duration,” NDR said on Tuesday.

“As Powell noted during his press conference, the soft-landing strip is narrower. The Fed’s magic carpet ride to a soft landing relies on the spontaneous combustion of job openings without many workers getting fired and inflation easing back toward target,” the research firm said. 

And even if the Fed brings inflation down to its 2% target, it could easily rebound, as supply-chain issues in the economy could reappear, NDR added.

The Fed has already hiked rates by 375 basis points this year in its scramble to put out the inflation fire. Some experts have urged the central bank to pause it on aggressive rate hikes, but at a recent press conference, Powell pointed to the still-hot labor market as one of the reasons why he didn’t see a “case for real softening just yet.” That prompted some investors to price in another 75-basis-point rate hike in December amid

Meanwhile, recession fears are growing on Wall Street: JPMorgan’s chief global strategist David Kelly told Insider the US could easily see a recession in 2023, and “Dr. Doom” economist Nouriel Roubini sounded the alarm for a painful recession ahead.

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China’s super-rich like Alibaba’s Jack Ma see billions of dollars wiped from their fortunes as the economy slumps

Jack Ma.
Alibaba founder Jack Ma.

  • China’s super-wealthy have seen their fortunes tumble by the most in 24 years, per the Hurun Rich List. 
  • Alibaba founder Jack Ma’s net worth dropped 29% to $25.7 billion, as tech bosses took a hit. 
  • China’s zero-COVID policy and the Ukraine war fallout are among factors that hit the economy and stocks.

Chinese super-rich billionaires like Alibaba’s Jack Ma have seen their wealth plunge the most in over 20 years as a combination of the impact of the Ukraine war and COVID-19 curbs slow down China’s economy. 

The total wealth of the most affluent people in China dropped 18% year-on-year to $3.5 trillion, according to the Hurun China Rich List 2022 published Tuesday. 

Only 1,305 people made the cut for the list, which ranks people with a minimum net worth of 5 billion yuan ($690 million) — a drop of 11%.

“This year has seen the biggest fall in the Hurun China Rich List of the last 24 years,” the list’s chief researcher Rupert Hoogewerf said in a statement. He noted the drop was driven mainly by losses for real estate and healthcare entrepreneurs.

“Part of the reason has been a global economy downturn, led by the fallout from the Russia-Ukraine war, a sharp drop in tech prices and the generally slow post-COVID economic recovery, but also at the national level, the continued disruptions to the economy from localized COVID outbreaks,” the Hurun Report chairman said.

China’s strict zero-COVID policy of using lockdowns, mass testing and quarantines to curb the spread of the virus has hampered its economic growth. At the same time, a real estate crisis has added to recession fears.

More recently, President Xi Jinping’s consolidation of power and signs that Beijing’s focus has turned to ideology rather than the economy in its decision making have sparked pessimism about the economy.

Chinese stocks have taken a battering over the past year. The Shanghai Composite Index has lost 12.6%, while Hong Kong’s Hang Seng Index has dropped 33%.

A crackdown by Beijing’s regulators has weighed on big Chinese tech stocks, many of which are listed in Hong Kong.

Ma, founder of Chinese e-commerce giant Alibaba, was one of the tech bosses whose wealth took a hit, with a 29% drop in his net worth to $25.7 billion. His ranking on the rich list sank four places to ninth.

ByteDance founder Zhang Yiming’s wealth tumbled 28% to $35 billion, while Tencent founder Pony Ma’s fortune dropped 32% to $30.7 billion, according to Hurun’s research. 

Overall, the number of people with a net worth of $10 billion dropped by 29 to 56, while the number of dollar billionaires fell by 239 to 946.

But Hoogewerf said that despite the declines, the rich list is still 50% bigger than five years ago. Entrepreneurs in the industrial products and energy sectors were among those who saw their wealth grow in the past 12 months, he said.

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Americans’ confidence in home buying has fallen to its lowest level since Fannie Mae’s survey began

home for sale
Rising mortgage rates and high house prices are driving potential homebuyers away, according to Fannie Mae’s chief economist.

  • Just 16% of Americans believe now is a good time to buy a home, a Fannie Mae survey found.
  • Rising mortgage rates now at 7% and high house prices are putting off potential buyers.
  • “We expect home sales to slow even further in the coming months,” Fannie Mae’s chief economist said.

Americans haven’t felt this gloomy about the US housing market since Fannie Mae first started surveying the sector over a decade ago.

The government-sponsored mortgage provider’s Home Purchase Sentiment Index, which tracks attitudes towards both buying and renting, fell 4.1 points to 56.7 in October for its lowest reading since it began in 2011.

Just 16% of respondents believe now is a good time to buy a home, down from 19% last month.

Meanwhile, the percentage who feel it is a bad time to buy rose from 75% in September to a record 80% in October.

Rising mortgage rates and elevated home prices are both pushing potential buyers away from the housing market, according to Fannie Mae’s chief economist.

“Consumers are increasingly pessimistic about both homebuying and home-selling conditions,” the firm’s senior vice president Doug Duncan said.

“Amid persistently high home prices and unfavorable mortgage rates, the ‘bad time to buy’ component increased to a new survey high this month, while the ‘good time to sell’ component continued its downward trend.”

Mortgage rates have soared this year as the Federal Reserve hikes interest rates to try to curb red-hot inflation, with higher borrowing costs making it harder for homebuyers to enter the market.

The 30-year mortgage rate averaged 6.95% as of Thursday, according to Freddie Mac, compared with 3.09% a year ago.

High home prices are also alienating potential buyers, with the national average house price jumping 40% since the start of the pandemic in March 2020 due to fiscal stimulus fueled demand clashing with tight supply, according to ING.

Fannie Mae forecast home sales – which have already fallen for eight consecutive months – to carry on slumping as the market becomes even less affordable.

“As continued affordability constraints reduce homebuyer demand, and homeowners become reluctant to sell at potentially reduced prices, we expect home sales to slow even further in the coming months,” Duncan said.

Some experts believe the downturn in the US housing market could prompt the Fed to re-evaluate its policy on monetary tightening. Wharton professor Jeremy Siegel has said the US central bank is overlooking how significantly home prices are declining, as the available data is backward-looking.

Read more: The Fed’s latest jumbo hike will put ‘lead into the heels’ of the US housing market, Freddie Mac says

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Russia’s liquefied natural gas exports are near a record high, as the realities of a harsh winter eat away at countries’ promises to curb their dependence on Moscow

Vladimir Putin smiles.
Russian President Vladimir Putin.

  • Russia’s LNG exports rose 1.1% on-year to a record high of nearly 4.3 billion cubic meters in October.
  • The EU is replacing piped Russian gas with imported LNG cargoes, which could pose a political risk.
  • LNG shipments from Russia to the EU rose by 46% in the first nine months of 2022 from 2021, per Politico.

Europe has vowed to wean itself off energy from Russia and aims to replace piped natural gas from the country with liquefied natural gas, or LNG. By doing this, it can hamstring Russia’s energy coffers, as the war in Ukraine drags on.

There’s just one problem — Moscow is also a major exporter of LNG, meaning the EU might end up replacing piped Russian gas with imported Russian LNG cargoes — the very thing it was hoping to avoid.

Exports of Russian LNG — the supercooled version of natural gas that can be transported by ships — rose 1.1% year-on-year to 4.3 billion cubic meters in October, marking their highest level since March, according to a Bloomberg compilation of ship-tracking data from 2016 onwards. Top importing countries were France, China, and Japan, according to Bloomberg’s data.

Some of the supply likely made it to other EU countries, as European demand for natural gas typically surges as the bloc heads into winter. 

In the first nine months of 2022, LNG shipments from Russia to the EU rose by 46% from a year ago to about about 16.5 billion cubic meters, Politico reported on Sunday, citing data from the Europe Commission.

This was in the aftermath of Russia slowing gas supply to the EU via the key Nord Stream 1 pipeline, due to the war in Ukraine. This gas supply has ceased indefinitely after an ‘unprecedented sabotage’ of the pipelines that transport natural gas from Russia to Germany.

Admittedly, the imported LNG is only a fraction of the EU’s piped gas imports, so the LNG is not serving as a total replacement. The EU imported 54.2 billion cubic meters of Russian piped gas in the first nine months of 2022 and 105.7 billion cubic meters in the same period of 2021, per Politico.

But the EU snapping up Russian LNG still still leaves it vulnerable potential political ramifications from the Russia-Ukraine war. 

Russia could now use LNG as a weapon, canceling contracts should relationships with importing countries deteriorate, wrote Anne-Sophie Corbeau and Diego Rivera Rivota, researchers at Columbia University’s Center on Global Energy Policy on September 27.

“Continued dependency on Russian LNG comes with the risk of energy supplies being used as a political tool of blackmail in the current geopolitical environment,” they added.

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