Saturday, August 18, 2018

Saturday's News Links

[Reuters] Turkey's Erdogan says to challenge 'games' on the economy

[Euromoney] Italian banks a bigger risk than Turkey

[BloombergQ] Gold Trading Volumes Double in Turkey Amid Currency Crisis

[Reuters] China complains about Pentagon report, says it is 'pure guesswork'

[NYT] The West Hoped for Democracy in Turkey. Erdogan Had Other Ideas.

[NYT] Merkel and Putin: A Long History of Distrust and Reconciliation

[WSJ] Freddie Mac Joins Rental-Home Boom

Weekly Commentary: Instability

With the Turkish lira down another 6.6% in Monday trading, global "Risk Off" market Instability was turning acute. The U.S. dollar index jumped to an almost 14-month high Monday, as the Turkish lira, Argentine peso, Indian rupee and others traded to record lows versus the greenback. The South African rand "flash crashed" 10%, before recovering to a 2.3% decline. Brazil's sovereign CDS jumped 14 bps Monday to a six-week high 252. Italian 10-year yields jumped 11 bps to 3.10%, near the high going back to June 2014, as the euro declined to one-year lows.

The Turkish lira surged 8.4% Tuesday, jumped another 6.8% Wednesday and then gained an additional 1.9% Thursday. Wild Instability then saw the Turkish lira drop 3.1% during Friday's session, ending the week up 6.9%. Qatar's $15 billion pledge, along with central bank measures, supported the tenuous lira recovery.

August 17 - Wall Street Journal (Lingling Wei and Bob Davis): "Chinese and U.S. negotiators are mapping out talks to try to end their trade impasse ahead of planned meetings between President Trump and Chinese leader Xi Jinping at multilateral summits in November, said officials in both nations. The planning represents an effort on both sides to keep a spiraling trade dispute-which already has involved billions of dollars in tariffs and comes with the threat of hundreds of billions more-from torpedoing the U.S.-China relationship and shaking global markets. Scheduled midlevel talks in Washington next week, which both sides announced on Thursday, will pave the way for November. A nine-member delegation from Beijing, led by Vice Commerce Minister Wang Shouwen, will meet with U.S. officials led by the Treasury undersecretary, David Malpass, on Aug. 22-23. The negotiations are aimed at finding a way for both sides to address the trade disputes, the officials said, and could lead to more rounds of talks."

Apparently, global "Risk Off" attained a level of momentum that compelled Chinese and Trump administration officials to jointly calm the markets. After trading as low as 24,966 in Wednesday trading, the Dow rallied more than 700 points to end the (option expiration!) week at 25,669. For yet another week, U.S. markets were rewarded for disregarding mounting risk. Extraordinary market complacency is at this point No Conundrum. A Trump and Xi trade-focused meeting in late-November is conveniently timed soon after the midterms.

And while U.S. stocks rallied on happy prospects, the same cannot be said for global markets. The South African rand sank 3.8% this week to the low versus the dollar since June 2016. Brazil's real declined another 1.2% this week, trading the weakest against the dollar going back to early-2016. The Colombian peso, Chilean peso and Argentine peso all fell at least 2.0% this week. European equities were under pressure. Italian banks fell 3.2%, with European banks down 3.0%. Hong Kong's Hang Seng Financial index lost 4.1%.

The Shanghai Composite sank 4.5% this week, trading Friday at the lowest closing level since December 2014. China's renminbi traded to 6.93 (vs. $) in Wednesday trading, rapidly approaching the 2016 low of 6.96 to the dollar. The renminbi has now declined 8.7% from March 30th trading highs and 6.9% since June 14th. Increasingly fearful of a disorderly devaluation, Chinese officials implemented measures this week to support their sickly currency.

August 13 - Bloomberg: "China's broadest measure of new credit slowed, underlining concerns about the economy that have prompted authorities to start doing more to support growth. Aggregate financing stood at 1.04 trillion yuan ($151bn) in July… That was slower than the 1.39 trillion yuan in June, using the central bank's new calculation method for this data. The new index includes more types of credit and so isn't comparable to Bloomberg's survey or the data reported in previous months. New yuan loans stood at 1.45 trillion yuan, versus a projected 1.275 trillion yuan and 1.84 trillion yuan the previous month. Broad M2 money supply rose 8.5%, rebounding from record low expansion in June."

The PBOC has somewhat tweaked China's aggregate Credit data. Total Aggregate Financing for July ($151bn) was down 13% from July 2017. After 2018's first seven months, y-t-d Total Aggregate Financing of 10.137 TN yuan ($1.475 TN at current exchange rates) is running 18% below last year's comparable period. Beijing's crackdown has stopped shadow banking in its tracks, with July seeing another contraction in key shadow lending components.

And while bank lending moderated somewhat from a huge June, New (bank) Loans continue to expand rapidly. At 1.450 TN yuan ($210bn), New Loans for the month were up 76% compared to July 2017's 826 billion yuan. New Loans have expanded 10.479 TN ($1.52 TN) y-t-d, up 19% from comparable 2017. To be sure, the household borrowing binge runs unabated. At 44.756 TN yuan, China's Household Debt was up 19% over the past year and 47% in two years.

August 14 - Bloomberg: "There's no stopping China's property market. New-home prices rose at the fastest pace in 22 months in July, climbing 1.2% from the previous month… The jump in values in third-tier cities was the biggest in data going back to 2009, signaling the potential for the government to roll out more housing curbs in a cooling campaign that began more than two years ago. The dilemma for officials is how to restrain prices without tanking the property sector during a broader economic slowdown. 'A persistently high home price is going to lead to a very strong response from the government,' Phillip Zhong, a Hong Kong-based equity analyst at Morningstar… Asia, said… 'We are going to expect to see more tightening measures being put in place.'"

"China's state planning authorities pledged on Wednesday to keep debt levels under control as it expressed confidence that the year's growth target will be achieved in spite of the trade war with the US."

Accepting that growth has slowed and recognizing trade risks, the bullish consensus view holds that China retains the tools to ensure uninterrupted steady growth. Most believe China is adeptly managing Credit growth. I believe their policy dilemma is in the process of turning much more challenging.

Seemingly lost in the discussion is the reality that China's historic economic boom is turning dangerously unbalanced. While Beijing has moved aggressively to contain high-risk "shadow" lending, it has remained too timid in restraining household borrowing. Indeed, China is now facing full-fledged mortgage finance and apartment Bubbles - in the face of rapidly waning prospects elsewhere. Beijing seeks to continue cracking down on risky Credit, while pursuing measures to stimulate a slowing economy. Chinese officials would hope to spur ample productive Credit and sound economic investment to sustain the boom. The harsh reality is that there are limited opportunities for both. They're stuck, for the duration, with risky non-productive Credit and additional malinvestment and overcapacity.

August 13 - Reuters (Yawen Chen and Kevin Yao): "China's property investment growth accelerated to its quickest pace in nearly two years in July, driven by faster transactions and stronger developer appetite for land as funding conditions improved. Real estate investment rose 13.2% in July from the same period a year earlier, the fastest pace since October 2016 and higher than June's 8.4% rise… It grew 10.2% in the first seven months of the year."

Runaway mortgage finance Bubbles turn increasingly precarious. Late in the cycle, systemic risk grows exponentially. As we saw unfold during the U.S. mortgage finance Bubble, there is a ("Terminal Phase") rapid acceleration of loan growth of rapidly deteriorating Credit quality. The unparalleled Chinese real estate Bubble is backed by, too commonly, poorly constructed residential complexes. If the P2P lending Bubble collapse is causing public angst, just wait until apartment prices start sinking.

While Beijing has over the years made numerous attempts to tighten real estate lending, mortgage rates have remained significantly below the rate of apartment price inflation. I would argue that China's real estate Bubble is today acutely vulnerable to an unexpected jump in rates and/or tightening of lending conditions.

August 13 - Bloomberg (Yalman Onaran): "In 1988, 9 of the 10 largest banks in the world were Japanese. Three years later the country's financial system, along with its lenders, collapsed, sending Japan into its infamous lost decade (or three, considering the country is still struggling to escape deflation and low growth). The nine Japanese companies in the top ranks by assets 30 years ago have since consolidated into four successors. Only one turns up in this year's ranking. By 2007 all of the top 10 slots were filled by U.S. and European lenders. A year later the subprime mortgage meltdown hit the U.S. The sovereign debt crisis followed in Europe. Four of the 10 had to be bailed out by their respective governments… U.S. and European economies, like Japan's, have contended for most of the past decade with low growth. It's 2018, and the rankings teem with Asian banks again. This time the top four by assets are Chinese."

There was further confirmation this week of the faltering global Bubble thesis. Monday saw acute instability in EM currencies, in particular. With the Argentine peso down as much as 4.4%, the Argentine central bank hiked interest rates 500 bps (to 45%) to support the peso. Indonesia Wednesday unexpectedly raised rates another 25 bps (to 5.5%) after the rupiah sank to almost three-year lows. And with "hot money" fleeing EM, worries for the sustainability of the Hong Kong dollar peg returned.

August 13 - Bloomberg (Emma Dai): "Hong Kong's interbank borrowing costs climbed across the curve, as the city's currency interventions continued overnight, taking this week's total to HK$16.8 billion ($2.1bn). The three-month Hong Kong dollar interbank offered rate, known as Hibor, jumped by the most in more than two months… The Hong Kong Monetary Authority bought HK$14.6 billion of local dollars Wednesday…, after the currency declined to the weak end of its trading band."

At $432 billion, the Hong Kong Monetary Authority is viewed by the markets as having sufficient resources to indefinitely maintain the peg to the U.S. dollar. But with faltering global markets and increasingly nervous officials in Beijing, analysis has turned more complex. With a massive and vulnerable financial sector, along with its own formidable real estate Bubble, Hong Kong could find itself in the crosshairs of faltering global, EM and Chinese Bubbles.

August 13 - UK Telegraph (Ambrose Evans-Pritchard): "Hong Kong's housing boom is starting to fray as monetary tightening by the US Federal Reserve forces the enclave's authorities to tighten credit. A rash of home buyers has pulled out of purchases at the last moment despite losing large deposits, a sign that financial stress is biting harder or that fear is creeping into the market… This is happening as regulators in mainland China clamp down on capital outflows through interbank accounts using the Hong Kong-Shanghai Connect, aiming to stem any further fall in the yuan. The People's Bank (PBOC) is squeezing liquidity in the offshore Hong Kong market and has lifted the risk requirement ratio for forward yuan contracts to 20pc. This makes it harder to short the Chinese currency."

The late-week rally in U.S. equities did not pull the metals out of their deep funk. Copper sank 4.2% this week, pushing 2018 losses to almost 20%. "Zinc heads for Worst Week Since 2011," closing Friday down 6.2%. Lead dropped 5.2%, and Tin fell 4.1%. Aluminum declined 3.6%. Precious metals were only somewhat firmer. Platinum fell 4.7%, Silver 3.3% and Gold 2.2%.

The metals are surely not responding to currency issues in Turkey. Turkey is, after all, only symptomatic of the faltering global Bubble. This week provided important evidence of "Risk Off" dynamics turning more systemic for the emerging markets. With China's stocks and currency under heavy pressure again this week, the negative feedback loop between EM and China has turned quite threatening.

August 17 - Bloomberg: "China's government bonds declined as funding costs rebounded amid expectations of rising supply, giving the 10-year yield its biggest two-week advance since December 2016. The yield on notes due in a decade rose four bps to 3.65% Friday, taking its two-week increase to 19 bps… Bond futures also declined… The Ministry of Finance on Tuesday urged local governments to accelerate bond issuance to support economic expansion, spurring speculation that supply will jump in the coming weeks. The overnight repurchase rate surged 76 bps this week, after the People's Bank of China suspended reverse-repurchase operations for 18 days in a row… 'The previous market-supportive factors such as ample liquidity and gloomy economic outlook seem to have waned this week,' said Li Qilin, chief macroeconomic researcher at Lianxun Securities Co."

Beijing faces a huge dilemma. The faltering EM Bubble poses significant risk to the unbalanced Chinese economy. Moreover, global de-risking/deleveraging dynamics exacerbate risk to Chinese finance and the renminbi. Of course, the policymaker impulse is to orchestrate another round of fiscal and monetary stimulus. Meanwhile, China's historic mortgage finance and apartment Bubbles maintain powerful momentum. Stimulus measures at this stage of the cycle pose extreme risk. For one, it would surely push non-productive Credit growth to perilous extremes. Second, the combination of additional system liquidity and escalating systemic instability would exacerbate already significant risk of a disorderly Chinese currency devaluation.

That things look "terrible" in China, in contrast to obvious greatness in the U.S., is to provide the Trump administration a decisive trade negotiation advantage. And I can see the perceived benefits of scheduling low-level trade discussions ahead of a big trade meeting with the Chinese after the midterms. A temporary "truce" would be viewed as bolstering U.S. equities and supporting "great again" campaigning into November. I'm not, however, convinced this gambit will reverse the bursting of the EM Bubble. And I don't believe pushing serious negotiations out to November will in anyway resolve China's deteriorating financial and economic positions.

All in all, it was another ominous week for highly unstable global financial markets. Bubbles bursting, Bubbles faltering and Bubbles inflating. Global financial and economic prospects are dimming rapidly. I would be less apprehensive if U.S. equities (and Chinese apartment prices!) were adjusting to new realities. But it's not as if Bubble resilience is without precedent.

The S&P500 peaked on July 20, 1998, just weeks prior to near global financial meltdown. Back on August 25, 1987, the S&P hit a record high about six weeks before the "Black Monday" market crash. And looking back to fateful 1929, the DJIA traded to a record high on September 1st, with the Great Crash erupting the following month. Those that have studied the late-twenties should recognize ominous parallels. How on earth were they so completely blindsided?

For the Week:

The S&P500 gained 0.6% (up 6.6% y-t-d), and the Dow rose 1.4% (up 3.8%). The Utilities rallied 2.7% (up 2.8%). The Banks gained 0.9% (up 3.1%), and the Broker/Dealers added 0.6% (up 3.5%). The Transports rose 1.2% (up 5.8%). The S&P 400 Midcaps increased 0.7% (up 5.8%), and the small cap Russell 2000 added 0.4% (up 10.3%). The Nasdaq100 slipped 0.4% (up 15.3%). The Semiconductors fell 2.3% (up 5.6%). The Biotechs declined 1.0% (up 20.3%). With bullion down $27, the HUI gold index sank 10.9% (down 25.9%).

Three-month Treasury bill rates ended the week at 1.99%. Two-year government yields were little changed at 2.61% (up 72bps y-t-d). Five-year T-note yields were about unchanged at 2.74% (up 53bps). Ten-year Treasury yields slipped a basis point to 2.86% (up 45bps). Long bond yields declined one basis point to 3.02% (up 28bps). Benchmark Fannie Mae MBS yields were unchanged at 3.60% (up 61bps).

Greek 10-year yields jumped 13 bps to 4.31% (up 24bps y-t-d). Ten-year Portuguese yields rose eight bps to 1.86% (down 9bps). Italian 10-year yields jumped 13 bps to 3.12% (up 111bps). Spain's 10-year yields increased four bps to 1.45% (down 12bps). German bund yields slipped a basis point to 0.31% (down 12bps). French yields were unchanged at 0.67% (down 12bps). The French to German 10-year bond spread widened one to 36 bps. U.K. 10-year gilt yields declined one basis point to 1.24% (up 5bps). U.K.'s FTSE equities index fell 1.4% (down 1.7%).

Japan's Nikkei 225 equities index was about unchanged (down 2.2% y-t-d). Japanese 10-year "JGB" yields were little changed at 0.10% (up 5bps). France's CAC40 fell 1.3% (up 0.6%). The German DAX equities index dropped 1.7% (down 5.5%). Spain's IBEX 35 equities index lost 1.9% (down 6.2%). Italy's FTSE MIB index sank 3.2% (down 6.6%). EM equities were under pressure. Brazil's Bovespa index declined 0.9% (down 0.5%), and Mexico's Bolsa slipped 0.2% (down 2.2%). South Korea's Kospi index fell 1.6% (down 8.9%). India’s Sensex equities index added 0.2% (up 11.4%). China’s Shanghai Exchange sank 4.5% (down 19.3%). Turkey's Borsa Istanbul National 100 index fell 6.5% (down 23.1%). Russia's MICEX equities index declined 0.9% (up 6.9%).

Investment-grade bond funds saw inflows of $1.453 billion, and junk bond funds had inflows of $197 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates dropped six bps to 4.53% (up 64bps y-o-y). Fifteen-year rates declined four bps to 4.01% (up 85bps). Five-year hybrid ARM rates slipped three bps to 3.87% (up 71bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down seven bps to 4.52% (up 45bps).

Federal Reserve Credit last week dipped $0.6bn to $4.217 TN. Over the past year, Fed Credit contracted $211bn, or 4.8%. Fed Credit inflated $1.406 TN, or 50%, over the past 302 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt fell $10bn last week to $3.432 TN. "Custody holdings" were up $106bn y-o-y, or 3.2%.

M2 (narrow) "money" supply declined $8.2bn last week to $14.148 TN. "Narrow money" gained $526bn, or 3.9%, over the past year. For the week, Currency was little changed. Total Checkable Deposits declined $20.2bn, while Savings Deposits gained $8.2bn. Small Time Deposits rose $5.2bn. Retail Money Funds slipped $1.2bn.

Total money market fund assets slipped $3.7bn to $2.860 TN. Money Funds gained $154bn y-o-y, or 5.7%.

Total Commercial Paper dropped $16.8bn to $1.055 TN. CP gained $92bn y-o-y, or 9.4%.

Currency Watch:

The U.S. dollar index slipped 0.3% to 96.116 (up 4.3% y-t-d). For the week on the upside, the New Zealand dollar increased 0.7%, the Canadian dollar 0.6%, the South Korean won 0.4%, the Japanese yen 0.3%, the euro 0.2%, the Singapore dollar 0.2%, the Australian dollar 0.2% and the Mexican peso 0.1%. For the week on the downside, the South African rand declined 3.7%, the Brazilian real 1.2%, the Norwegian krone 1.1%, the Swedish krona 0.3%, the British pound 0.1% and the Swiss franc 0.1%. The Chinese renminbi declined 0.45% versus the dollar this week (down 5.39% y-t-d).

Commodities Watch:

August 16 - Reuters (Winni Zhou, Zheng Li and Andrew Galbraith): "China has banned banks in its ground-breaking free trade zones from certain lending activities to ease pressure on the yuan currency in offshore markets, two sources with direct knowledge of the matter said… The restrictions, announced by the Shanghai branch of the People's Bank of China (PBOC) on Thursday morning, have closed off channels used to deposit and lend yuan offshore through the trade zones as the currency plumbs 15-month lows, the sources said."

The Goldman Sachs Commodities Index fell 1.9% (up 1.6% y-t-d). Spot Gold dropped 2.2% to $1,185 (down 9.1%). Silver sank 3.4% to $14.775 (down 13.8%). Crude fell $1.71 to $65.93 (up 9%). Gasoline dropped 3.0% (up 10%), while Natural Gas was little changed (unchanged). Copper fell 2.3% (down 19%). Wheat gained 1.8% (up 36%). Corn jumped 1.9% (up 8%).

Trump Administration Watch:

August 16 - Reuters (Michael Martina and Elias Glenn): "China will hold a fresh round of trade talks with the United States in Washington later this month, Beijing said on Thursday, offering a glimmer of hope for progress in resolving a conflict that has set world financial markets on edge. While the engagement was seen by analysts and business officials as positive, they cautioned that the talks were unlikely to lead to a breakthrough given they are among lower level officials and led on the U.S. side by the Treasury Department, not the U.S. Trade Representative (USTR)."

August 11 - Wall Street Journal (Jacob M. Schlesinger): "President Trump's decision to double steel tariffs on Turkey as its government battled a currency collapse marked a departure for the U.S. from how it traditionally handles financial turmoil hitting emerging markets. Washington has generally tried to calm global markets in such moments, especially when investors are gripped by fear of contagion. Mr. Trump instead squeezed Ankara further, raising tariffs on Turkish steel imports to 50% and aluminum to 20%, which deepened the Turkish lira's drop and worsened market fears that its banks could be shaken. Administration officials didn't clarify Mr. Trump's motives."

August 16 - Financial Times (Katie Martin): "Mr Trump certainly picked his moment. While the lira was crashing on Friday (that is not hyperbole - it dropped by 16% on that day alone), he swooped in to declare that he was doubling tariffs on steel and aluminium imports from the country. What is more, he suggested with his own special logic that this was a specific response to the slide in the lira 'against our very strong Dollar!' Mr Trump did not start the lira's slide, far from it. He briefly made it worse, though. And crucially, he provided President Recep Tayyip Erdogan with precisely the cover he has been seeking. Turkey's problems have been bubbling up for years."

August 15 - Reuters (Tim Ahmann and Lesley Wroughton): "The United States imposed sanctions on a Russian port service agency and Chinese firms for aiding North Korean ships and selling alcohol and tobacco to Pyongyang in breach of U.S. sanctions… 'The tactics that these entities based in China, Singapore, and Russia are using to attempt to evade sanctions are prohibited under U.S. law, and all facets of the shipping industry have a responsibility to abide by them or expose themselves to serious risks,' U.S. Treasury Secretary Steven Mnuchin said…"

August 16 - Financial Times (Laura Pitel): "Mike Pence, the US vice-president, has warned Turkey not to test America's resolve in an escalating row between the two countries, as Qatar announced $15bn in support for Ankara. Mr Pence said Andrew Brunson, an evangelical pastor whose detention in Turkey has triggered tit-for-tat sanctions between the two Nato allies, must be released immediately and hinted at further punitive steps if he was not allowed to go free. 'Pastor Andrew Brunson is an innocent man held in Turkey & justice demands that he be released,' Mr Pence, who is himself an evangelical Christian, wrote… 'Turkey would do well not to test @POTUS Trump's resolve to see Americans who are wrongfully imprisoned in foreign lands returned home to the United States.'"

Turkey Watch:

August 11 - Reuters (Humeyra Pamuk): "President Tayyip Erdogan denied on Saturday that Turkey is in a currency crisis, dismissing a plunge in the lira as 'fluctuations' which have nothing to do with economic fundamentals. Speaking after U.S. President Donald Trump doubled tariffs on Turkish steel and aluminum imports, Erdogan described Friday's 18% fall in the lira to a record low as the 'missiles' of an economic war waged against Turkey. Erdogan said those who plotted against Turkey in a failed coup attempt in July 2016 were now trying to target the country through its economy, and pledged to fight back… 'Those who can't compete with us on the ground have brought online fictional currency plots that have nothing to with the realities of our country, production and real economy,' Erdogan told a provincial meeting of his AK Party…"

August 14 - Bloomberg (Onur Ant): "President Recep Tayyip Erdogan vowed to boycott iPhones in a demonstration of defiance as the U.S. held firm to its demand that Turkey release an evangelical pastor and Turkish executives called for action to bolster the lira. Erdogan said the nation of 80 million people would stop buying American electronics, condemning the 'explicit economic attack' against his country."

August 16 - Financial Times (Colby Smith): "Last June Saudi Arabia, Egypt and other Arab states severed ties with Qatar. Turkey offered food and military aid. Now Qatar has returned the favour, with a pledge of $15bn in direct investment. Turkey desperately needs the help. But Qatar's lifeline… simply isn't going to cut it. Over the next year, the country's external financing needs will approach $238bn, according to HSBC. The lira has only barely stabilised after weakening as much as 24% in a week, and foreign reserves are dwindling. There is no way around it. Turkey will need the IMF. In recent days, Erdogan has hinted that a distinctly non-Western list of countries including Russia and China could come to his aid."

August 14 - Bloomberg (Selcuk Gokoluk): "Bonds of Turkish banks plunged deeper into stressed territory as the lira's 45% slump this year makes it more costly for lenders to repay dollar debts. Nine bonds issued by Turkish banks listed in a Bloomberg Barclays index were trading below 80 cents on the dollar as of Monday, compared with just one a month ago. Bonds of Yapi Kredi Bankasi AS maturing in March 2026 were among the hardest hit, losing almost 30 cents on the dollar in the past week."

August 14 - Wall Street Journal (Patricia Kowsmann): "Turkey's banks are feeling the brunt of the country's steep currency slide. Their health will be a barometer of how deeply the pain will be felt in the economy. The banking system is chock-full of foreign-currency debt to companies and, to a lesser extent, consumers. Borrowers who took out loans in U.S. dollars and euros will see the value of their payment obligations skyrocket in lira terms. A slowing economy will also intensify the pain. The country's banking regulator moved Tuesday to ease banks' burden of souring loans to consumers and companies. Measures include allowing lenders to extend loan maturities and facilitate debt restructuring."

August 16 - Wall Street Journal (Jon Sindreu and Sarah McFarlane): "Turkey faces another big problem after it deals with the immediate impact of its currency crisis: How is it going to pay for its dependence on imported oil and natural gas? Turkey imports the vast majority of its fuel needs. Its devalued lira makes paying for such imports more expensive. Meanwhile, the economy is rapidly running out of hard currency to pay for that imported energy and support all its other foreign-currency needs, especially among Turkish companies who have borrowed heavily in U.S. dollars. While oil is roughly 6% more expensive year to date for international traders, its price tag has risen more than 60% for Turkish buyers because of the plunge in their currency against the dollar."

August 12 - Financial Times (Ayla Jean Yackley): "Recep Erdogan has warned the US that Turkey would seek new friends and allies as it looked for help to halt a full blown currency crisis that has been made worse by an intensifying row with its Nato ally. He also ruled out raising the interest rate, saying it would hurt the poor. 'Turkey will emerge in a very short time from this exchange rate, interest rate, inflation spiral they are trying to force it into,' the Turkish president told a rally for members of his ruling Justice and Development Party… 'I am telling you the real formula: If we don't minimise this interest rate, it is a vehicle of exploitation that will make the rich richer and the poor poorer.'"

August 13 - Reuters (Tuvan Gumrukcu): "President Tayyip Erdogan on Monday accused 'economic terrorists' of plotting to harm Turkey by spreading false reports and said they would face the full force of the law, as authorities launched investigations of those suspected of involvement."

Federal Reserve Watch:

August 17 - Financial Times (Sam Fleming): "The potential for swelling corporate power to depress workers' wages will be debated by central bankers from around the world next week when policymakers gather for their annual meetings in Jackson Hole, Wyoming. The agenda for the event, titled 'Changing Market Structure and Implications for Monetary Policy', takes the symposium into some of the more politically charged areas of modern economics. Scholars have been asking whether the massive market power of big companies is having malign effects on the broader economy, including by depressing labour's share of income, and whether antitrust authorities need to take a tougher line."

U.S. Bubble Watch:

August 12 - Bloomberg (Sarah McGregor): "The U.S. budget deficit widened in the first four months of the fiscal year as growth in spending exceeded revenue. The U.S. fiscal gap increased by 11% to $175.7 billion between October and January from the same period a year earlier… Outlays rose by 5% to $1.3 trillion, while receipts increased by 4% to $1.1 trillion. The budget deficit widened the last fiscal year to the largest since 2013. The gap is expected to keep increasing as an aging population boosts spending on healthcare and retirement programs and from tax cuts enacted this year that are expected to cut revenue by up to $1.5 trillion over the next decade… The Trump administration's proposed budget released Monday shows the 2019 deficit widening to nearly $984 billion and totaling $7.1 trillion over the next decade."

August 14 - Bloomberg (Matthew Boesler): "U.S. household debt continued to increase in the second quarter, propelled by an advance in mortgage borrowing… Total household debt rose 3.5% from a year earlier in the April-to-June period to a record $13.3 trillion, while mortgage debt rose 3.5% to $9 trillion. The majority of newly originated mortgages continued to go to borrowers with the highest credit scores… As borrowing advanced, borrower stress continued to decline. Loans slipping into delinquency fell to 4.52% in the second quarter, the lowest in data from 2003."

August 14 - Bloomberg (Matthew Boyle): "It's getting more expensive for retailers like Walmart Inc. to stock its shelves with household staples like diapers, paper towels and bottled water. The question now is whether that translates into more pain at the check-out line. Soaring costs for transportation and raw materials -- some related to tariffs -- have prompted Procter & Gamble Co., Nestle SA, Coca-Cola Co. and others to announce price increases this summer on a wide swath of consumer staples. The companies are betting that demand will remain steady even though wage growth is tepid and Americans' wallets are already getting pinched by higher gas prices…"

August 15 - Reuters (Lucia Mutikani): "U.S. retail sales rose more than expected in July as households boosted purchases of motor vehicles and clothing, suggesting the economy remained strong early in the third quarter… Retail sales in July increased 6.4% from a year ago."

August 15 - Bloomberg (Reade Pickert and Scott Lanman): "Spending at U.S. restaurants surged over the past three months by the most on record, making it both a bright spot for the economy and a risk if appetites for eating out return to normal. Sales at food-service and drinking establishments rose 1.3% in July to $61.6 billion... That brought the three-month annualized gain to 25.3%, the fastest pace in figures going back to 1992."

August 14 - New York Times (Erin Griffith): "In late April, when Mike Massaro set out to get $40 million to $75 million in funding for his payments start-up, Flywire, he contacted a small group of investors he already knew. But word quickly got around, and other investors flooded his inbox with $200 million of investment offers... Gusto, a payroll and benefits software company, raised $140 million in July, but could have done five times that, according to Joshua Reeves, its chief executive and founder. Convene, a real estate services start-up, recently obtained $152 million and turned away more than $100 million… Soon after, another wave of hopeful investors called… Start-ups raising $100 million or more from investors - known as a mega-round in Silicon Valley - used to be a rarity. But now, they are practically routine, producing a frenzy around tech companies with enough scale and momentum to absorb a large check."

August 15 - Reuters (Lucia Mutikani): "U.S. worker productivity increased at its fastest pace in more than three years in the second quarter, depressing labor costs, but the trend in productivity growth remained moderate. …Nonfarm productivity, which measures hourly output per worker, rose at a 2.9% annualized rate in the April-June quarter."

August 13 - CNBC (Annie Nova): "More than 1 million student loan borrowers each year go into default. Outstanding education debt in the U.S. has tripled over the last decade and now exceeds $1.5 trillion, posing a greater burden to Americans than auto or credit card debt. For many, the payments are proving unmanageable. By 2023, nearly 40% of borrowers are expected to default on their student loans."

August 12 - Wall Street Journal (Rebecca Elliott and Bradley Olson): "American oil companies-primed to reap the benefits of rising prices after years of wringing more from wells for less-are seeing profits erode in the face of rising costs. Those operational challenges make balancing lofty growth objectives and demands for fiscal restraint increasingly difficult. If the companies continue to stumble, the result could be a higher cost of capital to finance the ongoing U.S. energy boom or a slower pace of growth. Two-thirds of U.S. oil producers failed to live within their means in the second quarter, even as oil rose above $70 a barrel. Collectively, 50 major U.S. oil companies reported in their second-quarter results that they have spent $2 billion more than they took in, according to… FactSet."

August 13 - Wall Street Journal (AnnaMaria Andriotis and Peter Rudegeair): "Financial-technology startups are stepping into a void increasingly left by credit-card-issuing banks: lending to customers with poor credit histories. LendUp Global Inc. and Fair Square Financial LLC, which focus more heavily on riskier borrowers, mailed out roughly 35 million credit-card offers during the first half of the year, according to market-research firm Competiscan, up from 7 million during the same period last year."

China Watch:

August 11 - Financial Times (Tom Mitchell): "When China's top leaders gathered earlier this month at a seaside resort near Beijing for their annual summer retreat, US President Donald Trump loomed large over their deliberations. The Trump administration had days earlier warned that they were considering taxing Chinese exports worth $200bn at 25%... In July the world's two largest economies had formally started trade hostilities, when they slapped punitive duties on $34bn of each other's exports. Chinese officials hoped their unwanted trade war with the US would pause there, at least for the summer. 'Everyone has been surprised by Trump,' said one Chinese economist who is close to Beijing policymakers. 'Most Chinese officials assumed that Trump was just trying to push the boundary but would eventually back off.' Mr Trump has instead pressed ahead with his efforts to turn up the heat on Chinese President Xi Jinping."

August 15 - The (Bradley Keoun): In the escalating trade war with President Donald Trump, China might be digging in its heels. According to a new report, China now appears willing to undertake a major currency devaluation - similar to the policy changes that roiled global markets in late 2015 and early 2016. The move by the Chinese government would help to offset the effect of the Trump administration's enacted or threatened tariffs on some $250 billion of imports from the country, writes the economic forecaster TS Lombard… China's main reason for avoiding a major devaluation so far was that it could spark large capital outflows from the country… according to TS Lombard. But the government has imposed capital controls to keep money from flowing out, providing officials with a source of confidence as they look for ways to push back against Trump and his trade war, according to the economists."

August 14 - Reuters (Jessica Jaganathan and Chen Aizhu): "Chinese oil importers are shying away from buying U.S. crude as they fear Beijing's decision to exclude the commodity from its tariff list in a trade dispute between the world's biggest economies may only be temporary. Not a single tanker has loaded crude oil from the United States bound for China since the start of August…"

August 13 - Reuters (Ben Blanchard): "China… condemned measures targeting it in a new U.S. defense act, saying it exaggerated antagonism and that Beijing would take a close look at aspects that beef up the role of a U.S. panel that reviews foreign investment proposals… 'The U.S. side should objectively and fairly treat Chinese investors, and avoid CFIUS becoming an obstacle to investment cooperation between Chinese and U.S. firms,' the ministry said…"

August 16 - Bloomberg: "The Chinese Communist Party's top newspaper issued a rare direct criticism of President Donald Trump's agenda, saying his 'America First' policies were hurting his own people and fomenting discontent in the country. 'After more than a year of observing American diplomatic practice, people have seen the United States strides under the slogan 'America First,' but the complaints of those Americans who have not felt the benefits of 'America First' are growing,' an opinion piece… in the People's Daily said. 'Bizarrely, U.S. trade policy makers seem to be deaf.'"

August 11 - South China Morning Post (He Huifeng): "China can easily find other countries to buy agricultural goods from instead of the U.S., its vice agriculture minister said, warning that American farmers could permanently lose their share of the Chinese market as a result of the trade war. 'Many countries have the willingness and they totally have the capacity to take over the market share the U.S. is enjoying in China. If other countries become reliable suppliers for China, it will be very difficult for the U.S. to regain the market,' Han Jun told official Xinhua news agency…"

August 10 - Reuters (Alexandra Harney): "China's state media continued a barrage of criticism of the United States on Saturday as their tit-for-tat trade war escalated, while seeking to reassure readers the Chinese economy remains in strong shape. Commentaries in the People's Daily, China's top newspaper, likened the United States to a bull in a China shop running roughshod over the rules of global trade and said that China was 'still one of the best-performing, most promising and most tenacious economies in the world.'"

August 13 - Reuters (Kevin Yao and Fang Cheng): "The Chinese government is expediting plans to invest billions of dollars in infrastructure projects as its economy shows signs of cooling further, with investment growth slowing to a record low and consumers turning more cautious. With its trade war with the United States threatening to pile more pressure on China's economy, Beijing… rolled out a $14 billion urban railway plan and pushed local governments to speed up issuance of special bonds for funding infrastructure projects. Official data showed fixed-asset investment expanded by a less-than-expected 5.5% in January-July, a result of Beijing's crackdown on lavish local government borrowing for projects to boost growth."

August 13 - Financial Times (Tom Mitchell and Xinning Liu): "The December 2009 debut of China's first long-distance high-speed rail service.. was a dramatic example of the Chinese Communist party's debt-fuelled response to the global financial crisis. Such investment projects fuelled demand for concrete, steel and other industrial commodities in the world's second-largest economy in the years after the crisis. But they have also saddled China Railway and other state-owned enterprises with huge amounts of debt. In the decade to 2016, Chinese corporate debt levels rose from 100% of gross domestic product to 190%, or Rmb141tn. As of March, China Railway's total debts stood at Rmb5tn. According to Li Hongchang, a transport expert at Beijing Jiaotong University, as much as 80% of the company's debt burden is related to HSR construction."

August 14 - Financial Times (Gabriel Wildau): "An investment arm of western China's Xinjiang region has failed to repay a Rmb500m ($73m) bond, marking the first public default by a Chinese government-linked holding company. The default by the Sixth Agriculture State-Owned Assets Management Co is the first by an investment holding company and a signal to investors that even state-owned groups that are agents of fiscal policy - considered closer to Beijing than commercially operated state-owned enterprises- are not guaranteed to be bailed out by the state… The central government keeps a tight lid on direct fiscal borrowing by local governments but has allowed them to skirt these limits by borrowing via investment vehicles such as Sixth Agricultural. Using traditional accounting, China's budget deficit was a modest 3.9% of gross domestic product last year, but when such off-budget spending was included, the 'augmented deficit' was 10.8% of GDP, according to the IMF."

August 14 - Wall Street Journal (Chao Deng): "A missed bond payment by a quasi-military organization in the Xinjiang Uighur Autonomous Region is fueling fresh concerns about China's ability to shoulder its massive debt. A unit of the Xinjiang Production & Construction Corps, an organization with military heritage that runs commercial enterprises for the government, acknowledged… that it failed to pay back interest and principal for $73 million of onshore bonds. The XPCC unit, known as the Sixth Division of State-Owned Asset Management, warned in another statement that it might also have trouble paying a separate 500 million yuan bond due Sunday. 'The company is negotiating several ways to repay the money,' that statement said… Several Chinese news media reports heralded the missed payment… as the first instance of a local-government financing vehicle to default."

August 12 - Bloomberg: "The People's Bank of China is tackling a problem it rarely had to worry about until recently -- persuading banks to lend the money they have. Thanks to the central bank turning on the liquidity taps, the cost for banks to borrow from one another is now lower than the cost to borrow from the PBOC, but a large chunk of those funds is sitting idle. That money isn't feeding into the wider economy, especially not to cash-strapped smaller firms, as lenders are unwilling to make loans or buy risky bonds. With China in a worsening trade war with the U.S. and also trying to control already large debts, ensuring funds get to needy companies is vital to sustain growth. Since the start of August, the central bank has begun softening rules to encourage lending, and a top-level meeting chaired by Vice Premier Liu He called for more efforts in 'unclogging' the transmission mechanism, underlining the government's sense of urgency."

EM Watch:

August 13 - Bloomberg (Justin Villamil and Pablo Gonzalez): "It isn't just sovereigns. Argentine and Turkish corporate bonds are also racing each other to the bottom. Of the 10 worst-returning dollar-denominated, emerging market corporate bonds this month, six are Turkish and four are Argentine. The worst are Turkiye Is Bankasi bonds maturing in 2028, down almost 19%... By comparison, Argentina's sovereign bonds have lost 7.5% and Turkish sovereigns are down 6.7%. 'Argentina and Turkey are trading like Siamese twins,' said Guido Chamorro, senior investment manager at Pictet Asset Management… 'For different reasons, but similar results.'"

Global Bubble Watch:

August 14 - Wall Street Journal (Ben Eisen): "Turkey's escalating crisis is spotlighting the giant stockpile of foreign-currency debt held by emerging markets, a build-up that threatens to throw those economies off course in the coming years. Governments, financial firms and other companies in emerging markets have $2.7 trillion in U.S. dollar-denominated debt that comes due between now and the end of 2025, according to the Institute of International Finance. These countries will need to pay off or refinance their loans and bonds as they come due. The trouble: A slide in emerging-market currencies against the U.S. dollar makes it tougher to pay back that greenback debt, particularly for countries where more revenue is generated in local currencies that are suddenly less valuable on a relative basis… Hungary, Argentina, Poland and Chile all have foreign-currency denominated debt that stands at more than half of gross domestic product, according to Deutsche Bank."

August 12 - Financial Times (Eric Platt and James Fontanella-Khan): "Acquisitions worth more than $540bn have been scuppered so far this year as blockbuster takeovers have come under renewed threat from government scrutiny. Countries are increasingly turning to foreign investment laws to block deals in sensitive industries, including the technology and utility sectors, while antitrust regulators have put up barriers to several multibillion-dollar transactions this year. Among the casualties was chipmaker Broadcom's $142bn hostile bid for rival Qualcomm, which was blocked by US president Donald Trump on national security grounds… In the last week alone, a handful of marquee transactions were killed…"

Central Bank Watch:

August 14 - Financial Times (Claire Jones): "Turkey's central bank this week raised rates in all but name, in effect using a method that seems to skirt President Recep Tayyip Erdogan's deep aversion to higher borrowing costs. The question is can it work? For two days now, the central bank has stopped lenders from drawing liquidity through its usual auctions of one week cash, forcing them instead to borrow overnight at a penalty. At the one-week window, banks can borrow at 17.75%, overnight it costs 19.25% - raising the price of financing by 1.5 percentage points."

August 14 - Bloomberg (Scott Squires): "Argentina increased its benchmark interest rate to 45% from 40%..., after the peso currency tumbled in response to a local corruption scandal and Turkey's currency crisis."

August 15 - South China Morning Post (Karen Yeung): "Hong Kong's de facto central bank said it has stepped in the foreign currency market to defend the Hong Kong dollar for the first time since May, bringing a key property loan interest rate closer to a tipping point… Depreciation pressure on the local currency was exacerbated in recent days as the Turkish lira crisis roiled equities and currency markets around the world, leading traders and investors to offload emerging market and Asian assets while buying the US dollar safe-haven assets."

Europe Watch:

August 13 - Reuters (Gavin Jones): "The economic spokesman of Italy's ruling League party warned… that unless the European Central Bank offers a guarantee to cap yield spreads in the euro zone, the euro will collapse. 'The situation can't be resolved, and it is going to explode,' Claudio Borghi told Reuters after Italian, Spanish and Portuguese government bond yields rose in the wake of the financial turmoil in Turkish markets."

August 16 - Bloomberg (Samuel Potter): "The dreaded sovereign-bank 'doom loop' in Europe may have weakened. Now comes the bad news. Thanks to political risks and regulatory changes, Italian lenders may be reluctant to snap up domestic government bonds during market stresses -- a potentially huge structural shift in demand in the euro area's second-most indebted nation. Goldman Sachs… casts doubt on whether such institutions can go on serving as dutiful marginal buyers, a bid that's historically stabilized a market seen as Europe's Achilles' heel. 'Whether domestic financial institutions will continue to act as a steady (and potentially increasing) source of demand for sovereign duration remains a fundamental question', Goldman's Matteo Crimella wrote…"

August 15 - Bloomberg (Irene García Pérez): "Bonds issued by Italy's biggest highways operator sank and the cost of insuring its debt surged after the government said the collapse of a motorway bridge operated by the firm's subsidiary wouldn't go unpunished… Infrastructure group Atlantia's saw some of its bonds fall to their lowest levels ever on Wednesday while swaps that protect against default soared to the highest in almost five years… The declines came after senior figures in Italy's government… called for Autostrade management to resign and threatened to withdraw licenses to operate the country's highways. Any loss of concessions would be a major setback for Atlantia, which has 12.8 billion euros ($14bn) of bonds Outstanding…"

Japan Watch:

August 16 - Reuters (Leika Kihara): "The Bank of Japan may allow long-term interest rates to creep up to around 0.4% under new guidance introduced last month, which lays the groundwork for 'stealth' rate hikes, the central bank's former executive Hideo Hayakawa said… The Bank of Japan may allow long-term interest rates to creep up to around 0.4% under new guidance introduced last month, which lays the groundwork for 'stealth' rate hikes, the central bank's former executive Hideo Hayakawa said…"

Fixed Income Bubble Watch:

August 15 - Financial Times (Colby Smith): "Convertible debt has emerged as a rare bright spot in the beleaguered fixed-income market this year, boosted by a rallying share market and rising interest rates, and in turn triggering the fastest pace of new sales in a decade, led by technology companies. US corporate bonds that convert to stock at a given price have generated a total return of 6% for investors this year... In contrast, investment-grade-rated corporate debt has lost 5.8% and high-yield bonds have dropped 2.4% in 2018… Fast-growing technology companies dominate convertible issuance as they are a cheaper way to raise money than issuing common stock or traditional junk bonds… Companies are issuing more convertible debt, with the volume of sales reaching $31.6bn so far this year, according to Dealogic - the fastest pace since the financial crisis."

August 16 - Wall Street Journal (Matt Wirz): "Investors bought record amounts of junk-rated corporate loans in recent years, betting they would deliver more stable returns than high-yield bonds, but the loans are no longer as safe as their owners may think. A rapid deterioration in the quality of 'leveraged loans' means loanholders would recover far less in a future economic downturn than they have historically, according to research by Moody's... Years of low rates have spurred record amounts of corporate borrowing, often in the $1.4 trillion market for below-investment-grade loans."

Leveraged Speculation Watch:

August 14 - Bloomberg (Stephen Gandel): "A number of hedge fund firms have a hot product. It's not their hedge funds. Och-Ziff Capital Management's investors withdrew $418 million from its hedge funds in the second quarter. Total inflow of assets under management, however, were $1.2 billion, its largest increase in assets in four years. The firm's hot product: Collateralized loan obligations - a derivative debt investment that invests in leveraged loans and is a cousin of the type of funds that blew up in the housing bubble. Like hedge funds, CLOs are supposed to be protected from losing money, particularly now. That's because they invest generally in floating rate loans, which, unlike normal bonds, won't lose money when interest rates rise… As a result, CLOs, which are also managed by private equity firms as well as other more specialized debt investors, have become one of the hottest products on Wall Street, with inflows continuing to pick up this year, leaving hedge funds far behind. Just more than $69 billion in CLOs… were issued in the U.S. in the first half of the year… An additional $9.7 billion flowed into the credit derivatives in July. And last month, Wells Fargo predicted that U.S. CLO issuance would hit $150 billion this year, a record."

Geopolitical Watch:

August 14 - Bloomberg (Tony Halpin): "Vladimir Putin isn't letting a good crisis go to waste. While Turkey's lira troubles have gripped global markets worried about contagion risks, Russia spies an opportunity in the political frictions between Ankara and the U.S. The idea of bringing Turkey tighter into Russia's embrace isn't as unrealistic as it was even a few years ago, with Turkish President Recep Tayyip Erdogan warning that spiraling conflict with the U.S. may prompt him to find new allies. As President Donald Trump's top national security aide warned Turkey's U.S. envoy they have nothing to discuss until a detained American pastor is released, Russia's foreign minister was holding talks in Ankara. Trump doubled tariffs on Turkish steel and aluminum while Erdogan and Putin discussed economic cooperation."

August 12 - Financial Times (Kathrin Hille): "Russia is trying to reduce its dependence on the dollar by cutting US securities holdings and settling more trade payments in other currencies, Moscow's chief economic policymaker said… Anton Siluanov, finance minister and deputy prime minister for the economy, said the US currency was 'becoming a risky instrument in international settlements'. 'We have decreased to a minimum level and will further cut our investment in the US economy, in US securities,' he added, in the most direct confirmation so far of a Russian government sell-off of US Treasuries."

August 12 - Reuters (Andrey Ostroukh): "Russia will further decrease its holdings of U.S. securities in response to new sanctions against Moscow but has no plans to shut down U.S. companies in Russia, Finance Minister Anton Siluanov said on state TV…"

August 12 - Financial Times (Henry Foy): "Russia has pledged to deepen co-operation with Iran and its Central Asian neighbours through a landmark deal on carving up the Caspian Sea, potentially paving the way for long-stalled energy projects and confirming Russia's military supremacy over the world's biggest lake. The Caspian's littoral states of Azerbaijan, Iran, Kazakhstan, Russia and Turkmenistan have quarrelled for more than two decades since the collapse of the Soviet Union over how to divide the strategically-important landlocked sea. On Sunday they signed a deal to manage a resource that holds large hydrocarbon resources and is a bridge between Central Asia, the Middle East and Europe. 'This is an exceptional summit with milestone significance for the fate of the Caspian Sea,' Russian president Vladimir Putin told his fellow leaders."

August 11 - Reuters: "Iranian Supreme Leader Ayatollah Ali Khamenei… called for 'swift and just' legal action from new courts after the head of the judiciary said the country faced an 'economic war'… The rial currency has lost about half of its value since April under the threat of revived U.S. sanctions, with heavy demand for dollars among ordinary Iranians trying to protect their savings. The cost of living has also soared, sparking sporadic demonstrations…"

August 16 - Reuters (Christopher Bing and Jack Stubbs): "Hackers operating from an elite Chinese university probed American companies and government departments for espionage opportunities following a U.S. trade delegation visit to China earlier this year, security researchers told Reuters. Cybersecurity firm Recorded Future said the group used computers at China's Tsinghua University to target U.S. energy and communications companies, as well as the Alaskan state government, in the weeks before and after Alaska's trade mission to China."

August 12 - Reuters (Jess Macy Yu): "Vowing that 'no one can obliterate Taiwan's existence,' President Tsai Ing-wen left on Sunday for the United States and two of Taipei's remaining diplomatic allies, amid pressure from China to try to stamp out references to the island internationally. China, which claims self-ruled and democratic Taiwan as its own, has stepped up a campaign against the island as it tries to assert Chinese sovereignty. Beijing has ordered foreign companies to label Taiwan as part of China on their websites and is excluding Taiwan from as many international forums as it can."

Friday, August 17, 2018

Friday Afternoon Links

[Reuters] Wall Street rises on news of trade progress

[Reuters] Turkey's lira weakens 3 percent, Trump says won't take pastor's detention 'sitting down'

[CNBC] S&P cuts Turkey credit rating deeper into junk territory

[Reuters] USTR doubles length of tariff hearing on $200 billion of China goods

[WSJ] U.S., China Plot Road Map to Resolve Trade Dispute by November

[WSJ] How Erdogan’s Push for Endless Growth Brought Turkey to the Brink

[FT] Turkey: the perils of Erdogan’s power grab

Friday's News Links

[BloombergQ] Big Caps Climb as Weakness in Semis Weighs on Tech: Markets Wrap

[Reuters] Turkey's lira weakens more than 6 percent on threat of more U.S. sanctions

[Reuters] Trump says the US 'will pay nothing' to Turkey for the release of detained pastor

[BloombergQ] Powell to Discuss Economy and Monetary Policy at Jackson Hole

[Reuters] Wage growth puzzle on next week's Jackson Hole agenda

[Reuters] Turkish court rejects U.S. pastor Brunson's appeal for release: Haberturk

[CNBC] Trump pushes to study an end to quarterly earnings reports as a way to help business do 'even better'

[Reuters] China Premier says will introduce new measures to boost private investment: Xinhua

[BloombergQ] Chinese Media Warns of Japan's Plaza Accord Lessons

[Reuters] Canadian inflation accelerates, lifting prospects of September hike

[CNBC/NYT] Musk Details ‘Excruciating’ Personal Toll of Tesla Turmoil

[Reuters] Pentagon says China military 'likely training for strikes' on U.S. targets

[WSJ] U.S. Signals It Could Sanction China Over Iran Oil Imports

[FT] Cost of junk debt casts doubt on US expansion

[FT] Global equity market shrinks as buybacks surge

[FT] China orders bad debt managers to help failing P2P lenders

[FT] Corporate power on the agenda at Jackson Hole

[BloombergSub] China, Unsure of How to Handle Trump, Braces for ‘New Cold War’

Thursday, August 16, 2018

Thursday Afternoon Links

[BloombergQ] Stocks Rise as Walmart Surge Lifts Grocery Chains: Markets Wrap

[BloombergQ] El-Erian, BlackRock Flag Turkey Risk as U.S. Eyes Sanctions

[BloombergQ] Trump Changes Tune on Dollar After Talking Down the Currency

[CNBC] Housing tipping back to a buyer's market as sellers cut prices

[BloombergQ] U.S. Junk Bonds Are Beating Global Sovereign Debt in Rare Shift

[FT] Rising rates imperil world’s priciest property market

Thursday's News Links

[Reuters] Shares, emerging market currencies steady after mauling

[Reuters] China, U.S. to hold lower-level trade talks in late August

[CNBC] US homebuilding rebounded less than expected in July from a nine-month low

[Reuters] Exclusive: China central bank bars some offshore lending in latest move to support yuan

[BloombergQ] China Says Trump's `America First' Policies Are Hurting U.S.

[Reuters] Turkey must commit to policies to promote stability amid market volatility-IMF

[Reuters] Japan central bank may tolerate yield rises to around 0.4 percent: ex-BOJ executive

[BloombergQ] How Freaked Out Are Italian Investors? Very.

[Reuters] Chinese hackers targeted U.S. firms, government after trade mission: researchers

[WSJ] U.S., China to Resume Trade Talks as Tariffs Bite

[WSJ] Investors Abandon Risk as Economic Fears Grip Markets

[WSJ] Turkey’s Energy Bill Soars as Its Currency Tumbles

[WSJ] Leveraged Loans Not as Safe as They Once Were

[FT] Erdogan and Trump battle it out in the lira blame game

[FT] Turkey’s fledgling finance minister put to the test

[FT] Mike Pence fires warning shot to Turkey as Qatar vows $15bn support

[FT] Erdogan can’t sidestep the IMF for long

Wednesday, August 15, 2018

Wednesday Evening Links

[BloombergQ] Stocks Tumble as Tech, Commodities Trigger Fears: Markets Wrap

[CNBC] Oil prices sink 3% after big, unexpected jump in US crude stockpiles

[BloombergQ] Qatar Comes to Rescue as Turkey Moves to Avert Financial Crisis

[Reuters] Turkey says ready to discuss issues with U.S. without threats

[CNBC] These charts of past currency crises show Turkey may face a lot more pain

[Reuters] U.S. targets Chinese and Russian firms with breach of North Korea sanctions

[WSJ] U.S. Policy Stirs Foreign Markets

[FT] Italian debt hit by fresh sell-off

Wednesday's News Links

[BloombergQ] Stocks Sink on Tech Weakness, Rout in Commodities : Markets Wrap

[Reuters] Resurgent dollar sends commodities and emerging markets reeling again

[BloombergQ] Turkish Lira Jumps as Regulator Curbs Bank Swap Transactions

[Reuters] Turkey doubles tariffs on some U.S. imports; lira rallies

[SCMP] Hong Kong Monetary Authority intervenes in currency market for first time since May

[Reuters] China could reportedly use its 'unwritten' tech rules as an 'invisible tool' against US firms

[Reuters] U.S. retail sales increase strongly in July

[Reuters] U.S. second-quarter productivity strongest in three years

[Reuters] Chinese oil importers shun U.S. crude despite tariff reversal

[BloombergQ] No Stopping China's Property Market as Smaller Cities Set Record

[Reuters] China says U.S. solar tariffs violate trade rules, lodges WTO complaint

[NYT] $100 Million Was Once Big Money for a Start-Up. Now, It’s Common.

[WSJ] Turkey Shifts Closer to Russia

[WSJ] Missed Bond Payment in Xinjiang Stirs Chinese Debt Fears

[FT] Turkish central bank raises rates via the backdoor

[FT] Currency pressure forces Hong Kong and Indonesia into action

[FT] US convertible debt splurge reflects tech shares rally

Tuesday, August 14, 2018

Tuesday Evening Links

[Reuters] Wall St. rises on earnings optimism, lira rebound

[Reuters] U.S. official warns of more actions against Turkey if pastor not freed

[Reuters] Emerging economies face threat of Turkey knock-on effect

[CNBC] Investors haven't been this bullish on US stocks since January 2015

[BloombergQ] Prices Are Rising for Walmart and Consumers May Feel the Pain

[NYT] Trump’s Trade War Is Rattling China leaders

[WSJ] Sinking Turkish Lira, Indian Rupee Fuel Fears of Contagion

[FT] Financial tremors threaten Recep Tayyip Erdogan’s hold on Turkey

Tuesday's News Links

[Reuters] Shares regain footing as lira roars out of rout

[Reuters] Erdogan says Turkey will boycott U.S. electronics, lira steadies

[BloombergQ] Calm Comes to Emerging Assets as Analysts Reassess Turkey Woes

[BloombergQ] U.S. Warns Turkey Over Detained Pastor as Market Meltdown Drags On

[BloombergQ] Erdogan Escalates Row With U.S., Calls for Boycott of iPhones

[Reuters] China's economy cools further, investment growth at record low

[Reuters] China's July property investment grows at fastest pace in 2-years

[BloombergQ] Think Turkey, Argentine Sovereign Debt Is Bad? Look at Companies

[BloombergQ] Putin Woos Turkey as Erdogan Spars With Trump

[Reuters] China angered at new U.S. defense act, to assess content

[NYT] Why Turkey’s Financial Crisis Matters Outside Turkey

[WSJ] Turkey Crisis Puts Spotlight on Emerging Market’s Foreign-Currency Debt

[WSJ] Turkey’s Banks Bear Weight of Currency Crisis

[WSJ] China’s Growth Engine Sputters as It Battles U.S. Over Trade

[FT] Turkish business feels the pain of currency crisis

[FT] Chinese regional investment arm in landmark bond default

Monday, August 13, 2018

Monday Evening Links

[BloombergQ] U.S. Stocks Fall, Dollar Gains Amid Turkey Fears: Markets Wrap

[Reuters] Oil falls 2 pct as focus shifts to softer demand outlook

[Reuters] Trump aide Bolton met Turkish envoy to discuss U.S. pastor: White House

[BloombergQ] Stress Mounts in Turkish Bank Bonds Battered by Lira's Slide

[Reuters] Argentina to increase benchmark interest rate to 45 pct -central bank

[Reuters] Erdogan vows action against 'economic terrorists' over lira plunge

[CNBC] 'What happens in Turkey won't stay in Turkey': Why this debt crisis could be different 

[CNBC] Turkey's crashing currency likely to unleash wave of bad loans in region

[CNBC] Goldman Sachs warns about US companies' emerging market exposure as Turkey crisis flares up

[Reuters] Italy's League sees euro collapse without ECB bond guarantee

[CNBC] More than 1 million people default on their student loans each year

[NYT] Turkey’s Currency Crisis Tests Erdogan’s Authoritarian Approach

[WSJ] Fintech Crowd Dives Into Subprime Credit-Card Lending

[FT] Turkish lira crisis starts to hit other emerging markets

[FT] China’s high-speed rail and fears of fast track to debt

Monday's News Links

[BloombergQ] Stocks, EM Currencies Drop as Turkey Fever Spreads: Markets Wrap

[Reuters] Turkish lira pulls back from record low, markets rattled

[Reuters] Turkish sovereign, bank dollar bonds extend losses

[CNBC] Emerging markets shares drop on deepening Turkey crisis

[Reuters] Asian currencies weaken; Indonesian rupiah leads losses

[BloombergQ] Turkey Takes First Steps to Bolster Banks Amid Lira Decline

[BloombergQ] Italian Populists Fight Contagion From Turkey's Market Meltdown

[BloombergQ] China’s Giant Banks Top This Ranking. And That’s a Cause for Concern

[Reuters] The Chinese street's view of the trade war: some say they won't buy U.S. products

[BloombergQ] China-U.S. Trade Spat Is Just a Start to the Economic Cold War

[Reuters] China's July new loans rise to 1.45 trillion yuan, above forecasts - CBIRC

[WSJ] Frackers Burn Cash to Sustain U.S. Oil Boom

[FT] Turkey currency crisis fuels risk-off mood in Asia

[FT] Toll of scuppered deals this year hits $540bn

Sunday, August 12, 2018

Sunday Evening Links

[Reuters] Asian shares decline amid investor worries over Turkey

[BloombergQ] Lira Extends Retreat as Turkey Heads Toward a Financial Crisis

Sunday's News Links

Mideast Stocks-Gulf markets hit by Turkey turmoil, banks roiled

[BloombergQ] Erdogan Stays Defiant as Turkey Slips Toward Financial Crisis

[BloombergQ] U.S. Budget Gap Widens as Revenue Growth Outpaced by Spending

[Politico] China says U.S. farmers may never regain market share lost in trade war

[Reuters] Beijing struggles to defuse anger over China's P2P lending crisis

[Reuters] Turkey is a 'target of economic war', Erdogan says

[Reuters] Iran Supreme Leader calls for action to face 'economic war': state TV

[Reuters] Russia says will ditch U.S. securities amid sanctions: RIA

[Reuters] No one can 'obliterate' Taiwan's existence, president says on departure for U.S.

[WSJ] In Break From Precedent, Trump’s Moves Aggravate Turkey’s Currency Crisis, Rather Than Calm It

[FT] Trump’s tariffs prove tougher obstacle than China expected 

[FT] Erdogan defiant after Turkish lira’s plunge

[FT] Putin pledges deeper ties with Iran and other Caspian Sea states

Saturday, August 11, 2018

Saturday's News Links

[BloombergQ] As Turkey Crisis Deepens, Bankers to Review Impact of Shocks

[BloombergQ] Turkish Bank Crisis Prompts Emergency Meeting on Saturday

[Reuters] Erdogan says U.S. 'wrong' to threaten Turkey after Trump doubles tariffs

[Reuters] Turkey's Erdogan repeats call to Turks to help shore up lira

[Reuters] Chinese media keep up drumbeat of criticism of U.S.

[WSJ] Chinese Banks Rev up Lending to Buoy Economy in U.S. Trade Fight

[FT] Turkey warns US it will seek ‘new friends and allies’

[FT] Trump takes deployment of sanctions to new level

Weekly Commentary: Turkey (Nudged Over the Cliff)

The Turkish lira sank 13.7% in chaotic Friday trading. The lira's 21.0% "worst week in 17 years" collapse pushed y-t-d losses to 41.1%. Turkish 10-year yields spiked to almost 21%, before retreating somewhat. After beginning the year at 155, Turkey sovereign credit default swaps (CDS) spiked 166 bps during Friday trading (up 199 bps for the week) to 437 bps (high since Feb. 2009).

EM Contagion Effects gained momentum this week. Friday trading saw the Argentine peso hit 3.8% and the South African rand sink 2.7%. For the week, the Argentine peso fell 6.6%, the South African rand 5.5%, the Brazilian real 4.0%, the Hungarian forint 2.2%, the Romanian leu 2.1%, the Polish zloty 2.2% and the Mexican peso 1.8%. On the (local) bond yield front, 10-year yields in Brazil jumped 66 bps, Russia 40 bps, Hungary 15 bps and South Africa 13 bps. As global "hot money" frets faltering liquidity and the next shoe to drop, Brazilian equities sank 5.9% (as Brazil sovereign CDS jumped 24 bps to 237 bps).

August 10 - Bloomberg (Lionel Laurent): "Turkish President Recep Tayyip Erdogan has been standing firm as investors dump his country's assets at an alarming pace, saying: 'They have got dollars, we have got our people, our right, our Allah.' European banks with substantial investments in Turkey will hope some of that divine providence rubs off on them, too, after sticking with a bet that has gotten more perilous over time."

Fears of contagion this week were not limited to the emerging markets. With significant exposure to Turkey, European bank stocks were slammed in Friday trading. Unicredit sank 4.7% and ING Groep fell 4.3%. The big German banks, Deutsche Bank and Commerzbank, dropped 4.1% and 3.5%. European Banks (STOXX600) fell 1.9% Friday.

August 10 - Financial Times (Claire Jones, Ayla Jean Yackley and Martin Arnold): "The eurozone's chief financial watchdog has become concerned about the exposure of some of the currency area's biggest lenders to Turkey - chiefly BBVA, UniCredit and BNP Paribas - in light of the lira's dramatic fall… According to cross-border banking statistics from the Bank for International Settlements, local lenders, including foreign-owned subsidiaries, have dollar claims worth $148bn, up from $36bn in 2006 and euro claims worth $110bn. Spanish banks are owed $83.3bn by Turkish borrowers, French banks are owed $38.4bn and Italian lenders $17bn in a mix of local and foreign currencies. Banks' Turkish subsidiaries tend to lend in local currency."

The above FT article was written prior to Friday's currency collapse. As Contagion gathers momentum at the "periphery," the "core" is indicating heightened vulnerability. European fragilities are again rising to the surface. Italy's MIB 35 stock index dropped 2.5% in Friday trading. Germany's DAX fell 2.0%.

Safe haven buying saw German 10-year yields fall six bps to 0.31%. Italian 10-year yields jumped 9 bps Friday to 2.98%, as the Italian to German 10-year yield spread widened 15 bps. For the week, this spread widened 16 to 268 bps, the widest since the May spike to 290 bps (which was the wide since 2013). Elsewhere in the European "periphery," Greek spreads (to bunds) widened 22 bps (to 387 bps) this week and Portuguese spreads widened nine bps (to 146 bps).

August 10 - Financial Times (Daniel Dombey): "Some analysts have long seen Turkey as a 'quantitative easing play' - a country that benefited from developed economies' huge asset purchase schemes. But as US and eurozone quantitative easing becomes history - at least for this economic cycle - the funds that Turkey needs are getting harder to come by. Those funds are far from negligible. An ABN Amro report on Thursday said investors were worried Turkey would not be able to finance its annual external financing requirement of about $218bn - which includes funds needed to maintain Turkish companies' foreign-denominated debt as well as the country's hefty current account deficit."

Turkey is the poster child for systems that for a decade have luxuriated in abundant cheap global liquidity. Once again, dysfunctional global finance furnished plentiful rope for economies to hang themselves. A spectacular Turkish borrowing binge fueled a formidable Bubble. A spending boom, ongoing low savings and persistent Current Account Deficits (surpassing 6% this year) have been for years financed with cheap international (chiefly dollar) finance. Turkish corporations have more than doubled foreign-denominated borrowings since the crisis to over $200 billion, approaching 50% of GDP.  Inflation is running at 15% but poised to go much higher.

Turkey now faces funding requirements (current acct deficit and maturing debt) of over $200 billion over the next year in the face of an acute "hot money" exodus. It's untenable. The situation has evolved into a full-fledged crisis of confidence, which typically foreshadows the violent end to a country's existing financial and economic structure.

In ways, Turkey's crisis resembles previous bursting EM Bubble episodes: too much cheap international "hot money" financing an unsound boom, replete with excessive spending and malinvestment. The protracted nature of Turkey's Bubble ensured deep structural maladjustment. Today, the Turkish "economic miracle," as many before it, is exposed in harsh terms. The reversal of speculative flows has illuminating latent fragilities and an unsound currency. The banking system and scores of corporate borrowers of dollar-denominated debt are at the brink of insolvency. Suddenly, the whole Bubble is coming crashing down. Similar scenarios recurred in absolute dismal fashion throughout the nineties.

August 10 - Xinhua (China's official state-run press agency): "Turkish President Recep Tayyip Erdogan urged on Friday his nation to change all savings in U.S. dollar and gold into Turkish lira. [The] Dollar will not block our way. Let's respond them with our national currency,' Erdogan said in his address to crowds… 'Change your dollars and gold under the mattress to the local currency,' he added. The Turkish president described the campaign as a "national struggle" in response to 'those who declared economic war' against Turkey. Meanwhile, Erdogan ascribed the current 'economic problems' to 'artificial financial instability waves' stoked by foreign actors, rather than structural issues involving employment or the banking system. He also blamed foreign meddling in Turkey's economy because of 'some bilateral disagreements,' hinting at the tension between Turkey and the United States."

I fear Erdogan pinpointing sinister foreign forces behind Turkey's problems will garner adherent elsewhere - with measures from the U.S. administration stoking conspiracy suspicions. Calls for Turks to sell dollars and gold to support the lira recalls South Korean citizens donating their gold to help the government stabilize the Korean won (and service an IMF loan) back in 1997/98. We'll see if Turkey's population can match the extraordinary patriotism demonstrated by the South Koreans - and if so, whether it will even matter.

Typically, market expectations would have Turkey immediately commencing negotiations with the IMF (didn't take Argentina long). Yet these are neither normal times nor is Recep Erdogan a typical head of state. In this age of the strongman leader, bowing to the demands of an institution domiciled in Washington (while backing down to Trump) may be unacceptable in Ankara and throughout Turkey.

From the FT (Ayla Jean Yackley and Demetri Sevastopulo): "Mr Erdogan urged Turks to stand firm and defend their currency. 'If there is anyone who has dollars, euros or gold under the pillow, he should go and convert this at the bank,' Mr Erdogan said. He also held talks by telephone with Russian president Vladimir Putin to discuss economic and commercial ties."

Putin will lend a sympathetic ear. For some time now, the strongman Russian president has assailed U.S. dominance over global financial and economic institutions and arrangements. Putin's outrage was surely further elevated this week with the imposition of additional U.S. sanctions.

August 10 - Politico (Emily Goldberg): "Russian Prime Minister Dmitry Medvedev warned Friday that his nation could retaliate against the United States' newly issued economic sanctions, saying it would consider any action against its banks an act of economic war. 'I would not like to comment on talks about future sanctions, but I can say one thing: If some ban on banks' operations or on their use of one or another currency follows, it would be possible to clearly call it a declaration of economic war… And it would be necessary, it would be needed to react to this war economically, politically, or, if needed, by other means. And our American friends need to understand this…'"

The Russian ruble declined 1.4% Friday and was down 6.4% for the week (down 14.8% y-t-d). Russian 10-year (ruble) yields increased eight bps Friday and surged 40 bps for the week to the high since December 2016. Russian dollar-denominated yields jumped 32 bps this week to multi-year highs (5.14%). Moscow must be feeling under assault - and increasingly bereft of patience.

To have the strongmen of Turkey and Russia speaking the same language ("economic war") in the midst of currency and market turmoil is noteworthy, to say the least. A three-way conference call with China's president Xi would be only fitting. Might as well tie in the Iranians and others.

Donald J. Trump - 5:47 AM - 10 Aug 2018: "I have just authorized a doubling of Tariffs on Steel and Aluminum with respect to Turkey as their currency, the Turkish Lira, slides rapidly downward against our very strong Dollar! Aluminum will now be 20% and Steel 50%. Our relations with Turkey are not good at this time!"

Those are fighting words. Teetering at the edge, a presidential tweet Nudges Turkey Over the Cliff. I cringed. Leaders around the world surely recoiled. Does President Trump appreciate the consequences and ramifications of a destabilizing currency crisis in a world of lurking financial, economic and geopolitical fragilities? Our President is tough, enthralled with disruption and clearly sending a message. But does he appreciate the extent to which he is playing with fire?

The world order is fraying before our eyes - and, for many, the impulse is to revel. Careful what you wish for. I'll assume recent events push forward the move to develop financial and economic institutions outside of the U.S. sphere of influence. In recent years, Putin has surely been preaching to his close comrade Xi Jinping that the U.S. is a hostile and untrustworthy rival. At least publicly, Beijing had remained non-aligned, content to foster a non-adversarial relationship with the U.S. Much has changed. The world is now on a trajectory that will shatter pretenses - the façade is being unmasked.

Bloomberg Friday headline: "Trump Embraces Market Pain With Little Concern for Contagion."

The dollar index gained 1.2% this week to a 13-month high. With Turkey now in full-fledged crisis, the unfolding EM de-risking/de-leveraging dynamic attained important momentum this week. Meanwhile, the U.S. vs. China trade war further escalated. President Trump admitted that playing hardball is "my thing." The Chinese invoked "American trade blackmail"; "waving the stick of hegemony everywhere"; "playing double-faced tactics" and "mobster mentality" (to name but a few). Perhaps heightened global market instability will have the Trump administration backing down from their hardline approach with China. I seriously doubt that U.S. unilateral actions in dealing with Turkey, Russia and Iran will inspire a softening in Beijing's resolve.

Turkey, a nation of 80 million, is a long-time U.S. ally and NATO member. The U.S. Air Force has significant operations at the Incirlik Air Base, and Turkey was a staging ground for major U.S. military operations including the two gulf wars and, more recently, in Syria. I see the unfolding financial, economic and geopolitical crisis in Turkey as an ominous development for a region sliding into an intractable geopolitical maelstrom.

Despite Friday's decline, the S&P500 ended the week a little more than 1% below all-time highs. With Treasuries enjoying safe haven demand - and visions of jittery Fed officials glued to Bloomberg screens, longing to conclude rate hikes - there's still little worrying the bulls. But the global backdrop is now in a state of transformation - and not for the better. And on various fronts this became increasingly apparent this week.

When I began posting the CBB almost twenty years ago, my focus was on "money," Credit and the U.S. boom. I didn't anticipate geopolitical developments would some day play a role in my analysis. But I also never contemplated a global Bubble of today's dimensions and characteristics.

I never imagined how an explosion of government debt and central bank Credit would be used so recklessly to inflate intertwined Bubbles spanning the globe. Never did I contemplate how this new age global "system" (already highly unstable two decades ago) would be nurtured, backstopped and resuscitated into today's monstrosity. I never could have envisioned how the U.S. would run huge Current Account Deficits for another 20 years and still maintain such command over a dollar-based global financial apparatus. Who would have believed a global financial arms race was even possible - especially amidst such escalating animosity and hostility?

This is a strange period. It's strange here at home - in society, in politics and in the markets. It is strange globally. The unprecedented nature of what we see at home, abroad and in the markets provides a lot of leeway with interpretation and analysis. Somehow, there's a dominant contingent that believes the U.S. is on the right course - that the economic boom will accelerate, markets will, as they always do, continue to rise. The future is bright, all the polarization and social angst notwithstanding. Markets offer unassailable confirmation.

It would be great if the optimists were right. But this was a week that corroborated a much darker interpretation of developments. A decade of unrelenting easy "money" and booming finance has masked a metastasis of festering issues - financial, economic, social and geopolitical. And we're now only a more general bursting of the global financial Bubble away from having to simultaneously face a bevy of very serious issues. As they tend to do, developments can seem to move at glacial pace - and then, rather suddenly, they can be more akin to lava.

As I have posited repeatedly and expounded in more detail last week, the global Bubble has been pierced at the "periphery." I also believe the backdrop is now conducive to contagion at the "periphery" (finally) gravitating toward the "core." The Turkey-induced risk aversion that erupted this week in European equities (bank shares!) is an important escalation in "Periphery to Core Crisis Dynamics." "Risk off" is gaining a firm foothold, and global financial conditions now tighten by the week. Market pundits expect cooler heads in Ankara and Washington to prevail over the weekend. If not, it could intensify what was already a particularly long and hot summer.

I lost a dear friend, mentor and teacher this past week. Gordy Ringoen gave me my first opportunity in the money-management industry back in 1990. In my bio, I refer to Gordy as "one of the most brilliant individuals I've met." He was also one of the kindest and most generous individuals you'll ever meet. To know Gordy (and his family) was to love him (them). I spoke to Gordy for the final time a few weeks back. Downplaying his fragile health, he was upbeat and excited to chat about the state of the world. Gordy and I shared deep concerns for how things were unfolding at home and abroad. His deeply analytical mind hadn't lost a beat.

But Gordy was most electrified when discussing a trip to the Shakespearean Festival with his wonderful wife Carole and grandkids Jenn and Joe. Gordy so loved his family (Carole, Jenn, Joe, son Todd and daughter-in-law Sue). And, being Gordy, he ended the conversation suggesting what a great experience it would be to take our ten-year old to the festival - and offering to send us tickets. Gordy will be so missed by many. Meeting Gordy changed my life, and I will be forever grateful. A great man.

Sadly, we also recently lost another great man at the very top of my list of individuals I most respect and admire. Tom Dulcich lost his battle with cancer. Tom was a devoted family man, a preeminent attorney and recipient of the prestigious "Significant Sig" award from the Sigma Chi Fraternity (along with an impressive list of lifetime achievements). An avid Oregon Duck fan, Columbia River salmon fisherman and all-around great guy, Tom will be dearly missed by so many. Like the Ringoens, you won't find a finer group than the Dulcich family.

For the Week:

The S&P500 slipped 0.2% (up 6.0% y-t-d), and the Dow declined 0.6% (up 2.4%). The Utilities fell 0.7% (up 0.1%). The Banks declined 1.1% (up 2.3%), while the Broker/Dealers were little changed (up 2.9%). The Transports were about unchanged (up 4.5%). The S&P 400 Midcaps dipped 0.2% (up 5.0%), while the small cap Russell 2000 gained 0.8% (up 9.9%). The Nasdaq100 added 0.2% (up 15.8%). The Semiconductors dropped 1.9% (up 8.1%). The Biotechs jumped 1.5% (up 21.6%). With bullion down $2, the HUI gold index sank 2.9% (down 16.8%).

Three-month Treasury bill rates ended the week at 2.01%. Two-year government yields declined four bps to 2.61% (up 72bps y-t-d). Five-year T-note yields fell seven bps to 2.75% (up 54bps). Ten-year Treasury yields dropped eight bps to 2.87% (up 47bps). Long bond yields fell six bps to 3.03% (up 29bps). Benchmark Fannie Mae MBS yields dropped seven bps to 3.60% (up 60bps).

Greek 10-year yields jumped 13 bps to 4.19% (up 11bps y-t-d). Ten-year Portuguese yields were unchanged at 1.78% (down 17bps). Italian 10-year yields rose seven bps to 2.99% (up 98bps). Spain's 10-year yields slipped a basis point to 1.41% (down 16bps). German bund yields dropped nine bps to 0.32% (down 11bps). French yields fell seven bps to 0.67% (down 12bps). The French to German 10-year bond spread widened two to 35 bps. U.K. 10-year gilt yields dropped nine bps to 1.24% (up 5bps). U.K.'s FTSE equities index was little changed (down 0.3%).

Japan's Nikkei 225 equities index fell 1.0% (down 2.1% y-t-d). Japanese 10-year "JGB" yields slipped a basis point to 0.10% (up 5bps). France's CAC40 declined 1.2% (up 1.9%). The German DAX equities index dropped 1.5% (down 3.8%). Spain's IBEX 35 equities index lost 1.4% (down 4.4%). Italy's FTSE MIB index dropped 2.2% (down 3.5%). EM equities were mostly under pressure. Brazil's Bovespa index sank 5.9% (up 0.1%), and Mexico's Bolsa fell 1.9% (down 2.0%). South Korea's Kospi index slipped 0.2% (down 7.5%). India’s Sensex equities index gained 0.8% (up 11.2%). China’s Shanghai Exchange rallied 2.0% (down 15.5%). Turkey's Borsa Istanbul National 100 index declined 0.7% (down 17.7%). Russia's MICEX equities index fell 1.0% (up 7.8%).

Investment-grade bond funds saw inflows of $2.804 billion, and junk bond funds had inflows of $828 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates slipped a basis point to 4.59% (up 69bps y-o-y). Fifteen-year rates declined three bps to 4.05% (up 87bps). Five-year hybrid ARM rates fell three bps to 3.90% (up 76bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down four bps to 4.59% (up 56bps).

Federal Reserve Credit last week declined $14.8bn to $4.218 TN. Over the past year, Fed Credit contracted $194bn, or 4.4%. Fed Credit inflated $1.407 TN, or 50%, over the past 301 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $8.0bn last week to $3.442 TN. "Custody holdings" were up $101bn y-o-y, or 3.0%.

M2 (narrow) "money" supply was little changed last week at a record $14.156 TN. "Narrow money" gained $528bn, or 3.9%, over the past year. For the week, Currency increased $1.6bn. Total Checkable Deposits slipped $1.1bn, and Savings Deposits declined $2.5bn. Small Time Deposits rose $2.5bn. Retail Money Funds were little changed.

Total money market fund assets gained $13bn to $2.864 TN. Money Funds gained $171bn y-o-y, or 6.3%.

Total Commercial Paper expanded $5.2bn to $1.072 TN. CP gained $97bn y-o-y, or 10.3%.

Currency Watch:

August 7 - Wall Street Journal (Shen Hong): "The yuan's recent slide has been dramatic. Without some discreet expectations management on Beijing's part, it could have been even more striking. Traders at four major financial institutions in Shanghai said the People's Bank of China has shifted away from traditional intervention, or selling billions of dollars to buy yuan, instead acting through lower-profile foreign-exchange swaps. 'The PBOC is guiding people's expectations in the forward market as it doesn't want to waste money in the spot market. Without action in the forward market, the yuan's depreciation could have been far worse,' said Suan Teck Kin, an economist at United Overseas Bank."

The U.S. dollar index jumped 1.2% to 96.357 (up 4.6% y-t-d). For the week on the downside, the South African rand declined 5.5%, the Brazilian real 4.0%, the New Zealand dollar 2.3%, the Swedish krona 2.1%, the British pound 1.9%, the Mexican peso 1.8%, the Australian dollar 1.4%, the euro 1.3%, the Norwegian krone 1.2%, the Canadian dollar 1.1%, the Singapore dollar 0.6%, the Swiss franc 0.1% and the South Korean won 0.1%. The Chinese renminbi declined 0.28% versus the dollar this week (down 4.96% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index declined 1.3% (up 3.6% y-t-d). Spot Gold dipped 0.2% to $1,212 (down 7.0%). Silver fell 1.1% to $15.295 (down 10.8%). Crude declined 86 cents to $67.63 (up 12%). Gasoline fell 1.3% (up 14%), while Natural Gas jumped 3.2% (unchanged). Copper declined 0.8% (down 17%). Wheat fell 1.8% (up 33%). Corn dropped 3.3% (up 6%).

Trump Administration Watch:

August 4 - Bloomberg (Margaret Talev): "President Donald Trump defended his use of tariffs that have inflamed tensions with China and Europe, telling an audience of diehard supporters… that playing hardball on trade is 'my thing.' 'We have really rebuilt China, and it's time that we rebuild our own country now,' Trump said Saturday during about an hour of free-wheeling remarks at a rally outside Columbus, Ohio. He added that Chinese stocks are down, weakening that nation's bargaining power in the escalating trade war… 'Every country on earth wants to take wealth out of the U.S., always to our detriment,' Trump tweeted, 'I say, as they come, Tax them.'"

August 8 - The Hill (Niv Elis): "The federal deficit jumped 20% in the first 10 months of the 2018 fiscal year, the Congressional Budget Office (CBO) reported… Spending outpaced revenue between the beginning of the fiscal year, on Oct. 1, and July by $682 billion, $116 billion more than over the same period in the last fiscal year… The CBO projects that the deficit will reach $793 billion by the end of the year and approach $1 trillion next year. White House estimates have the deficit surpassing $1 trillion in 2019. Budget watchers have warned that interest payments - the amount the Treasury has to pay just to service the debt - are slated to become the fastest-growing annual expenditure."

August 7 - New York Times (Jim Tankersley): "President Trump has a new plan for how to pay down the national debt: Taxing American consumers and businesses when they buy certain goods from countries subject to his tariffs. Math is not on his side. Mr. Trump contended over the weekend that the tariffs his administration has imposed on steel, aluminum and a variety of imported Chinese goods will soon begin to generate sufficient revenue to reduce the federal debt… For this fiscal year, the Congressional Budget Office projects the federal budget deficit will be $800 billion. Mr. Trump's own Office of Management and Budget projects the deficit will top $1 trillion in 2019. That means that to pay down any of the debt - let alone 'large amounts' - tariffs will need to bring in at least $800 billion this year."

August 7 - Reuters (Babak Dehghanpisheh and Peter Graff): "Companies doing business with Iran will be barred from the United States, President Donald Trump said…, as new U.S. sanctions took effect despite pleas from Washington's allies… 'These are the most biting sanctions ever imposed, and in November they ratchet up to yet another level. Anyone doing business with Iran will NOT be doing business with the United States. I am asking for WORLD PEACE, nothing less!' Trump tweeted…"

Federal Reserve Watch:

August 9 - Bloomberg (Matthew Boesler): "The Federal Reserve may need to raise interest rates to 'somewhat restrictive' levels to combat the effects of recent fiscal stimulus on the U.S. economy, said Chicago Fed President Charles Evans in hawkish comments from one of the central bank's most reliable doves. 'If inflation continues to be on the order of 2, 2.2% -- I'm not expecting it to get as high as 2.5 -- that suggests only a modest amount of restrictiveness above our neutral rate might be called for in 2020,' Evans told reporters…"

August 8 - Reuters (Jason Lange): "The U.S. economy is strong enough to warrant further interest rate increases by the Federal Reserve, Richmond Fed President Thomas Barkin said… In a speech on the U.S. economy, Barkin argued that the Fed's benchmark interest rate was below normal levels, a suggestion that Fed policy was still stimulating economic growth…"

U.S. Bubble Watch:

August 8 - Bloomberg (Lananh Nguyen): "Investors had better start paying more attention to November's U.S. midterm elections, according to Standard Chartered Plc. As the campaign for control of Congress enters a crucial phase, Republicans defending seats in some of the most competitive races in the House of Representatives have more cash on hand than their Democratic challengers, a Bloomberg tabulation of Federal Election Commission reports shows. But polls, turnout and fundraising show Democrats have a credible shot at winning the House in November. Should Democrats regain majorities in the House or even the Senate, it could put them in a position to step up scrutiny of President Donald Trump's administration and might raise the likelihood of Congressional gridlock that slows the president's policy initiatives."

August 6 - Reuters (Lindsay Dunsmuir): "Loan officers at U.S. banks reported easing lending standards for business loans for firms of all sizes while keeping terms for commercial real estate loans almost unchanged in the second quarter, a Federal Reserve survey showed… The officers also said they were seeing stronger demand for business loans from small firms and weaker interest in commercial real estate loans. 'Notably, almost all domestic banks that reportedly eased standards or terms on [business] loans over the past three months cited increased competition from other lenders as a reason for easing,' the U.S. central bank said…"

August 8 - Reuters (Lucia Mutikani): "U.S. job openings held near record highs in June amid a modest decline in hiring, pointing to further tightening labor market conditions, which economists hope will soon spur faster wage growth… 'The labor market continues to run hot and this guarantees that more rate hikes are on the way,' said Chris Rupkey, chief economist at MUFG… 'Fed officials are increasingly skeptical that this economy requires any monetary policy support whatsoever.'"

August 9 - Wall Street Journal (Jennifer Smith): "Empty trucks are so hard to come by right now that Dean Foods Co., one of North America's largest milk suppliers, cut its full-year earnings outlook in part because it simply can't move its goods for anything close to what it expected to pay this year. 'Industry capacity for truck drivers remains extremely tight. This is driving third-party hauling rates to record levels, up 26% versus prior year,' Chief Executive Ralph Scozzafava said… The warning from the… dairy processor puts Dean in a growing line of U.S. businesses struggling with the tightest freight market in recent memory. Distribution channels that carry goods to retailers, factories and consumers are struggling to keep up the fast-growing U.S. economy as more companies caution that the strains in the transport sector are holding back their ability to grow."

August 7 - New York Times (Jamie Condliffe): "American companies are set to hand a record amount back to shareholders in the coming quarters. Corporate boards have authorized the repurchase of $754 billion of stock so far this year, up 80% from the same period last year, according to a Goldman Sachs report. And that figure could reach a record $1 trillion by the end of the year."

August 8 - Reuters (Richard Leong): "U.S. mortgage application activity decreased to its lowest in 2-1/2 years last week as loan requests to refinance an existing home fell to their weakest level since December 2000… MBA's measure on loan applications to buy a home, a proxy on future housing activity, fell 2% to 233.1 in the latest week, which was the lowest since 225.5 in the week of Feb. 16."

August 8 - Wall Street Journal (Laura Kusisto): "Western states experienced the sharpest decline for existing-home sales in the second quarter, a sign that rising prices, higher mortgage rates and, to a limited extent, the new tax law are weighing on pricier markets. Existing-home sales in the western region, including California, Washington and Arizona, declined 4.1% in the second quarter compared with the first quarter... Sales in the Northeast were unchanged from the first quarter, while sales in the more affordable Midwest and South rose 1.6% and declined 2.7%, respectively."

August 5 - Financial Times (Chris Flood): "US private equity managers have extracted $400bn in fees and expenses from investors since 2006 but on average they failed to beat the returns from an S&P 500 tracker fund… The findings are an analysis by Oxford Saïd Business School… Pension funds and other institutional investors hunting better returns after the 2007-08 financial crisis ramped up allocations to illiquid private equity strategies. This created a gold rush for managers such as Blackstone, KKR, Apollo, Carlyle and CVC Capital. Investors, however, have difficulty in assessing value for money because of complex and opaque agreements that allow private equity managers to charge multiple layers of hidden fees. About $2tn in new cash was raised from investors by US private equity managers between 2006 and the end of 2015."

August 7 - Wall Street Journal (Anne Tergesen): "The rate at which Americans age 65 and older are filing for bankruptcy has more than tripled since 1991 amid reductions in the social safety net and a shift away from pensions, according to a new study. 'Older Americans are more likely than ever to find themselves in bankruptcy court, seeking protection from creditors,' said the study written by academics at institutions including the University of Idaho and University of Illinois. It also said that among Americans in bankruptcy, the percentage of older people 'has never been higher.' The study, titled 'Graying of U.S. Bankruptcy: Fallout from Life in a Risk Society,' found that between 2013 and 2016, the average rate at which 65- to 74-year-old Americans filed for bankruptcy increased to 3.6 out of every 1,000 individuals from a rate of 1.2 per 1,000 in 1991."

China Watch:

August 8 - Wall Street Journal (Yoko Kubota): "Beijing warned it would match the Trump administration step for step should it move ahead with new tariffs on Chinese imports, as trade data showed the country is shoring up its economy for a long trade conflict with the U.S. China's Ministry of Commerce… criticized the U.S.'s plan to impose new 25% tariffs on $16 billion in Chinese goods on Aug. 23, and released an updated list of items it would target with similar tariffs… 'This is very unreasonable,' the ministry said. 'In order to defend China's rightful interests and the multilateral trade system, China has to retaliate as necessary.' …State media… said that China will get through this storm, and those placing tariffs on it would end up hurting themselves, without resolving economic imbalances. 'Some people selfishly swim against the tide and act against morality, wantonly raising the barrier of tariffs and waving the stick of hegemony everywhere,' said the editorial…"

August 7 - CNBC (Huileng Tan): "China's state media continued its aggressive rhetoric against U.S. President Donald Trump's administration, accusing Washington of being 'double-faced' amid an ongoing trade dispute. 'Pointing China with (sic) gun and artillery and then asking for a talk, the U.S. showed zero sincerity,' said the People's Daily newspaper… 'Washington is playing double-faced tactics in the ongoing trade war,' the official newspaper of the Chinese Communist Party said in its editorial… 'From $50 billion, to $200 billion and then the proposed $500 billion, from 10% to 25%, Washington's tariff game has been seen through by China,' it added. The U.S. is using 'carrot-and-stick diplomacy to bully China into unilateral trade concessions,' but any move to 'defeat China' will be futile, said the People's Daily. The Communist Party paper said that Beijing would overcome the American 'trade blackmail,' adding: 'China will not surrender to the US, nor could it ignore the trade war. The only way is to face it and win it.'"

August 8 - Reuters (Ryan Woo and David Lawder): "China is slapping additional tariffs of 25% on $16 billion worth of U.S. imports from fuel and steel products to autos and medical equipment, the Chinese commerce ministry said, as the world's largest economies escalated their trade dispute. The tariffs will be activated on Aug. 23, the ministry said, the same day that the United States plans to begin collecting 25% extra in tariffs on $16 billion of Chinese goods."

August 8 - The Hill (Brenda Goh): "Chinese state media on Thursday accused the United States of a 'mobster mentality' in its move to implement additional tariffs on Chinese goods, and warned Beijing had all the necessary means to fight back."

August 7 - CNBC (Arjun Kharpal): "Apple has benefited from cheap labor and a strong supply chain in China and needs to share more of its profit with the Chinese people or face 'anger and nationalist sentiment' amid the ongoing trade war, an article in the state-backed People's Daily warned… But the continuing trade war between the U.S. and China could leave Apple and other U.S. firms vulnerable as 'bargaining chips' for Beijing, according to the article. 'The eye-catching success achieved in the Chinese market may provoke nationalist sentiment if U.S. President Donald Trump's recently adopted protectionist measures hit Chinese companies hard,' the People's Daily said."

August 9 - Reuters (Ben Blanchard and Kevin Yao): "A growing trade war with the United States is causing rifts within China's Communist Party, with some critics saying that an overly nationalistic Chinese stance may have hardened the U.S. position, according to four sources close to the government. President Xi Jinping still has a firm grip on power, but an unusual surge of criticism about economic policy and how the government has handled the trade war has revealed rare cracks in the ruling Communist Party. A backlash is being felt at the highest levels of the government, possibly hitting a close aide to Xi, his ideology chief and strategist Wang Huning, according to two sources…"

August 7 - Wall Street Journal (James Kynge): "China's leader, Xi Jinping, has called it the 'project of the century' and said it will usher in a 'golden age' of globalisation. With Beijing-backed projects in 78 countries, the 'Belt and Road Initiative' (BRI) is one of the world's most ambitious development programmes. But critics fear it could become the conduit through which some of China's debt problems are transmitted overseas. A series of controversies that have flared in countries as far apart as Pakistan, Sri Lanka, Laos, Malaysia, Montenegro and others are all related to debt sustainability - either because of the perceived inability of countries to handle outsized debts to China, or because some Beijing-funded infrastructure projects do not appear likely to justify their price tag. 'Disconnects between the creditworthiness of a project or a country and the size of the loans that China offers have led to project delays, political turmoil and allegations of wrongdoing in contract award procedures,' said Andrew Davenport, chief operating officer at RWR Advisory Group…"

August 8 - Bloomberg: "Chinese car sales slumped for a second consecutive month as a slowing economy and a tit-for-tat trade war with the U.S. kept consumers away from showrooms. Retail sales of cars, SUVs and multipurpose vehicles fell 5.4% to 1.6 million units in July… That compares with a 3.7% drop in June and trimmed the year-to-date growth in the world's biggest automobile market to 2%. China's economy is showing signs of weakness as a weakening yuan and a slump in stocks cost the country its rank as the world's second-biggest equity market."

August 8 - Bloomberg: "China is increasing its monitoring of indebted state-owned enterprises by creating watch lists and setting alarm levels, underscoring that the government hasn't abandoned the goal of controlling borrowing. The government will set two debt thresholds for state-owned firms -- one level would trigger alarms and the other would require higher regulatory attention… With the economy slowing and trade tensions rising, officials are now placing more emphasis on curbing debt at state firms and in parts of the property market."

August 5 - Financial Times (Tom Hancock and Wang Xueqiao): "Struggling to find well-paid work after arriving in Shanghai as a graduate from a middle-ranked Chinese university, Tom Wang turned to another source to fund his spending: credit cards… To cover repayments and keep spending, Mr Wang took on more debt - borrowing Rmb60,000 over four credit cards - before turning to online lenders for a further Rmb70,000. Interest payments 'snowballed' to Rmb1,500 a month, he said. Mr Wang is part of a generation of young consumers who have rejected the thrifty habits of their elders and become used to spending with borrowed money. Outstanding consumer loans - used for vehicle purchases, holidays, household renovations and buying expensive household goods - in China grew nearly 40% last year to reach Rmb6.8tn, according to Chinese investment bank CICC."

August 5 - Financial Times: "In 2009 China launched probably the biggest ever peacetime stimulus, issuing debt to fund an investment programme amounting to 12.5% of gross domestic product. It aimed to offset the impact of the 2008 global financial crisis, which had clobbered the country's export markets and thrown tens of millions of workers out of their jobs within a few months. China's actions then spurred a recovery in emerging markets that eventually helped restore the world's economic equilibrium. But… the debts incurred now rank as Beijing's greatest economic frailty. Its ratio of gross debt to GDP surged from about 171% before the crisis to 299% this year… Its corporate sector is the world's most indebted, and its most highly leveraged. A huge and loosely regulated shadow finance system conceals eruptive risks. Small and medium-sized banks, which have doubled in size over the past decade to account for 43% of total banking assets, are riddled with risky funding models and a few have already had to be bailed out."

August 5 - Financial Times (Gabriel Wildau and Yizhen Jia): "Chinese alternative asset managers have become the latest casualty of the country's crackdown on debt and financial risk, with a record number of private equity and hedge funds dissolving in recent months as new regulations limit their fundraising. In the first six months of this year, the Asset Management Association of China (Amac) - a government-controlled industry body - 'lost contact' with 163 private fund institutions, more than 70% of the total for which contact was lost for 2017. The 'lost contact' designation refers to private funds that have failed to renew their registration status with the association every three months as required."

EM Watch:

August 5 - Financial Times (Colby Smith): "Turkey's lira is one of the worst-performing currencies this year. In the last 12 months, it has weakened some 40% against the dollar and now hovers near all-time lows. A slide of this magnitude is especially worrisome when it comes to repaying debt that's denominated in non-domestic, 'hard' currencies like the dollar or the euro. Emerging-market borrowers in Asia and Latin America learned this lesson in the 1990s. Turkey's private sector apparently has not. Through May 2019, the country's banks and corporations have billions of dollars of hard-currency debt coming due. Here is HSBC's Melis Metiner on the repayment schedule… According to Metiner, banks are scheduled to repay $51bn over the next year, while the remaining $18.5bn sits on non-financial corporate balance sheets. These bills are coming due at a time when corporate indebtedness sits at 62% of GDP, half of which is denominated in foreign currencies (dollars and euros, mostly)."

August 7 - Bloomberg (Selcuk Gokoluk): "Turkey has replaced Argentina as the year's worst performer in local-currency bonds and the carry trade following the lira's plunge to a record. Losses for both nations far exceed the 4.7% average decline in emerging market local-currency debt in 2018. Investors holding lira-denominated bonds have lost 38% in dollar terms as the securities plunged 8% in just one week, while Argentina's losses stabilized at 36%..."

August 9 - Reuters (Andrew Osborn): "The Turkish lira sank to a record low as concern about souring relations with the U.S. and runaway inflation outweighed the nation's plans to stem a market rout. The lira sank about 4%, while the iShares MSCI Turkey ETF extended a two-day plunge. The currency had initially pared losses after the government set a growth target of less than 4%, down from 5.5%. The move represents Treasury and Finance Minister Berat Albayrak's first whack at fixing the $880 billion economy's vulnerabilities since a market meltdown sparked by last week's U.S. sanctions."

August 8 - Bloomberg (Pablo Gonzalez): "Argentina's century bonds fell to a record and the peso sunk to a two-week low as concern grows that a widening graft scandal will derail government efforts to shore up the economy. Yields on the overseas debt due in 2117 edged up to 9.14% early Wednesday, bringing the increase to 0.18 percentage point since July 31, when journalists at La Nacion newspaper published the findings of an investigation into more than a decade of alleged corruption under former President Cristina Fernandez de Kirchner and her late husband."

Global Bubble Watch:

August 7 - Bloomberg (Dani Burger and Sid Verma): "From excess to scarcity, a liquidity crunch has climbed to the top of the credit market's wall of worry -- a volte face from June when debt investors fretted bubbles. Angst over 'vanishing' liquidity is now the chief concern among credit buyers in Europe, according to Bank of America's client survey this month. Late-cycle worries, European political risk and sharp price moves this year -- particularly in Italy -- are feeding fears money managers will be unable to relinquish their positions in the next downturn. 'It's not trade wars or an equity market correction that look to be keeping credit investors up at night,' Bank of America strategists, led by Barnaby Martin, wrote… 'The concern is a more pervasive rush for the exit at some point in the future.'"

August 8 - Reuters (Jamie McGeever): "Financial market volatility is slumping across the board to historically - or, dangerously - low levels, potentially fanning the flames for a repeat of February's 'volmageddon' explosion that sparked a 10% correction in U.S. and world stocks. Then, major bond and currency markets remained reasonably insulated from the turmoil that swept through equities. They may not be so lucky next time around, because positioning in some cases is even more extreme than it is in stocks. A breakdown of how speculative investors like hedge funds are positioned across U.S. futures markets shows that short VIX positions as a share of overall open interest are higher now than they were just before that record surge in February."

August 6 - Wall Street Journal (Manju Dalal): "Beijing's softening stance on deleveraging and defaults has helped fuel a mini-revival across Asia's credit markets, pushing up bond prices in recent weeks and sparking debt issuance. Issuers from China to South Korea and India sold about $9.2 billion in new U.S. dollar bonds during the week… New deals had nearly ground to a halt in early July over fears of rising defaults among Chinese borrowers."

Europe Watch:

August 8 - Wall Street Journal (Laurence Norman and Drew Hinshaw): "The European Union has spent nearly $1 trillion to unify the continent by delivering highways and trains into places where there were once gravel paths. In current dollars, that is over eight times the Marshall Plan that rebuilt Europe after World War II. The EU has bought airports and bridges, trams and swimming pools. It has repaired castles and medieval churches. It hasn't bought love. To the vexation of European leaders, some of the biggest recipients of funding are now hotbeds of discontent, brimming with voters disquieted by the cultural and political pressures that have accompanied European integration, and threatening the bloc's cohesion."

Fixed Income Bubble Watch:

August 8 - The Hill (Niv Elis): "The amount of debt the federal government owes could be double the size of the entire U.S. economy in the next 30 years, according to a new report from the Congressional Budget Office (CBO). Debt would surpass an unprecedented 200% of gross domestic product (GDP) by 2048 under any of three scenarios explored by the CBO in its report…, while the nation's economy would be smaller than under current projections."

August 7 - Bloomberg (Margaret Talev): "Not content with a previous warning investors should brace for U.S. yields of 4%, Jamie Dimon went one further at the weekend, suggesting 5% was a distinct possibility. The JPMorgan Chase & Co. chief executive officer said Saturday people should be prepared to deal with the benchmark 10-year bond yield at 5% or higher. 'I think rates should be 4% today,' Dimon said... 'You better be prepared to deal with rates 5% or higher - it's a higher probability than most people think.'"

Geopolitical Watch:

August 3 - Bloomberg (Nicholas Wadhams and Jason Koutsoukis): "U.S. Secretary of State Michael Pompeo warned against easing up on sanctions until North Korea gives up its nuclear weapons, drawing a rebuke from the regime that underscored how far apart the two sides remain almost two months after their leaders met in Singapore. Back in Singapore for a regional security forum, Pompeo… called out Russia and China, highlighting reports that they are violating United Nations Security Council resolutions restricting trade with North Korea. 'We expect the Russians and all countries to abide by the UN Security Council resolutions and enforce sanctions on North Korea,' Pompeo said. 'Any violation that detracts from the world's goal of finally fully denuclearizing North Korea would be something that America would take very seriously.'"

August 8 - Reuters (Ben Blanchard and Michelle Martin): "China and Germany defended their business ties with Iran… in the face of President Donald Trump's warning that any companies trading with the Islamic Republic would be barred from the United States. The comments from Beijing and Berlin signaled growing anger from partners of the United States, which reimposed strict sanctions against Iran…, over its threat to penalize businesses from third countries that continue to operate there. 'China has consistently opposed unilateral sanctions and long-armed jurisdiction,' the Chinese foreign ministry said."

August 6 - Wall Street Journal (Asa Fitch and Aresu Eqbali): "Iranians are hoarding gold as a safeguard against a collapsing local currency and soaring cost of living as the U.S. is poised to impose economic sanctions on Iran, pushing the metal's price to records in Tehran. On Tuesday… the Trump administration is set to bring back a first wave of restrictions that had been waived under the Iran nuclear deal, an Obama-era agreement that gave Iran sanctions relief in exchange for curbs on its nuclear program."

August 7 - Financial Times (Andrew England and Simeon Kerr): "Since Mohammed bin Salman's swift rise to heir apparent last year, the young Saudi crown prince has earned a reputation for assertiveness as he seeks to shake up the conservative kingdom. Under his watch, the authorities have arrested powerful members of Prince Mohammed's own family and launched a sweeping crackdown against voices of dissent. Riyadh has also been at the forefront of a regional embargo against Qatar; alleged to have detained and forced the brief resignation of Lebanon's prime minister; and quarrelled with Germany over criticism of Saudi Arabia's interventionist foreign policy. But the country's extraordinary row with Canada and the bellicose language emanating from Riyadh this week still came as a shock to the kingdom's western allies and long-time Saudi watchers."