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Daily Agenda: Investor Sentiment Remains Volatile

The yen reverses course after finance minister comments; Google, Verizon mull bids for Yahoo!; Cameron to release tax records in Panama scandal.

After a two-day surge, the Japanese yen retreated versus the dollar on public comments by Finance Minister Taro Aso that suggested further intervention may be on the way. Meanwhile global markets returned to a marginal bias towards risk assets with oil futures and Asian stock indices rising. As the week ends, investor sentiment remains confused. With a looming earnings season that many expect to be dismal, it appears likely that this uncertainty will persist.

Cameron to release tax records. The political fallout from the publishing of the so-called Panama Papers over the weekend continued around the globe. In the latest episode, U.K. Prime Minister David Cameron said he will release his tax returns after the revelation that he had held shares in an offshore fund created by his father. Cameron has insisted that the monetary value of his position in the fund was small and that he paid capital-gains taxes after selling the position.

Google, Verizon consider Yahoo! bids. On Thursday, multiple media outlets reported that several major companies are preparing to bid for Yahoo!’s non-Alibaba assets after the company opened itself to offers. Both New York wireless giant Verizon Communications and Palo Alto’s Alphabet, parent of Google, are reportedly preparing proposals for Yahoo’s core Internet franchise.

Pro-Fujimori protestors take to the streets in Peru. As the Peruvian presidential election enters the final stretch, Keiko Fujimori, daughter of jailed former president, Alberto Fujimori, has sparked increased controversy after tens of thousands participated in protests against the prospect of her ascending to the presidency. Keiko Fujimori was cleared of vote-buying charges after Peru’s electoral board eliminated two of her primary rivals in the race on similar charges.

Daily Agenda: Disappearing Money Is Likely to Fuel a More Intense Credit Boom

For the last year, we’ve detailed how new money-market rules are going into effect this October and how we believe that will trigger the movement of a half-trillion dollars. We have written that some of this money would seek out a safer home, but some will seek out a riskier home in the form of lightly regulated cash funds that take many multiples of the risk of money-market funds. This week saw another significant step in this process.

iMoneynet, the Lipper of money-market funds, reported yesterday that $68 billion exited institutional prime money-market funds in the week ended Tuesday. That is the third-largest weekly outflow in at least 10 years.

The new rules compel institutional prime funds (those that can buy corporate obligations like commercial paper) to switch from a fixed $1 net-asset value to a floating one and to install gates and fees in times of stress. Government funds are allowed to keep their fixed NAV, as are retail funds. When the rules were proposed, we felt that many clients would not like them. We originally thought a number of clients would switch to government funds, and some would opt for cash funds that take so much risk that they have a 2 percent yield, instead of the 0.2 percent yield offered by money-market funds.

Last year, in an example of unintended consequences, many fund companies announced that since the SEC’s new definition of institutional vs. retail was so complex, they would forcibly kick most of their customers out of institutional prime funds, rather than be on the wrong side of the SEC. The regulators had no idea their actions would prompt so much money to slosh around the system.

The largest weekly exit from institutional prime funds came in 2008 after Lehman Brothers went under, which in turn prompted a modern-day bank run on the funds. The second largest was the week that encompassed this past yearend. And now, the third largest was this past week, which encompassed the end of the quarter. We know from co-chairing the money-market conference last month that banks are in the process of forcing people out of prime funds, and that quarterends are a convenient time for banks to do this.

However, this week’s withdrawal differs from the one seen at yearend. We highlighted in March that most of the money leaving the prime funds has wound up in government funds. Of the $160 billion that had left the prime funds, $100 of it had gone into the government funds, leaving $60 billion that likely went into the cash funds.

This week’s redemption was very different. Of the $68 billion that left the prime funds, only $8 billion went into the government funds. That means that it is very likely that the missing $60 billion went into the cash funds. In September, we detailed how those lightly regulated cash funds help to fuel the credit boom. After this week’s movement, institutional prime funds are now down $243 billion since fund companies began forcibly moving clients out last October. That’s about half of what we ultimately expect, and we believe there will be two more large movements around the next two quarterends along with voluntary moves over the next five months. Of the money that has moved, only $127 billion has found its way into government funds, leaving $116 billion to help fuel the credit boom.

This is one more data point that supports our belief that the credit boom is likely going to intensify this year, which will lead to more debt-fueled buybacks and mergers designed to boost share prices.

Bryan Reynolds is the chief market strategist for New Albion Partners in New York.

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