Saturday, September 21, 2019

Saturday's News Links

[Reuters] United States sending troops to bolster Saudi defenses after attack

[Reuters] Hong Kong police fire tear gas after protesters throw petrol bombs

[NYT] From Underwear to Cars, India’s Economy Is Fraying

[WSJ] Fed Mulls Lessons of Money-Market Spike After Curbing Volatility

[Reuters] Distressed Debt Trading Overshadows Corporate Bond Market

Weekly Commentary: No Coincidences

September 20 – Wall Street Journal (Daniel Kruger): “The Federal Reserve Bank of New York will offer to add at least $75 billion daily to the financial system through Oct. 10, prolonging its efforts to relieve funding pressure in money markets. In addition to at least $75 billion in overnight loans, the New York Fed… will also offer three separate 14-day repo contracts of at least $30 billion each next week… On Friday banks asked for $75.55 billion in reserves, $550 million more than the amount offered by the Fed, offering collateral in the form of Treasury and mortgage securities. The Fed’s operation was the fourth time this week it has intervened to calm roiled money markets. Rates on short-term repos briefly spiked to nearly 10% earlier this week as financial firms looked for overnight funding. The actions marked the first time since the financial crisis that the Fed had taken such measures.”

With the Lehman collapse setting off the “worst financial crisis since the Great Depression”, instability in the multi-trillion repurchase agreement marketplace generates intense interest. This market for funding levered securities holdings is critical to the financial system’s “plumbing.” It's a market in perceived “money” – highly liquid and virtually risk free-instruments. If risk suddenly becomes an issue for this shadowy network, the cost and availability of Credit for highly leveraged players is suddenly in question. And any de-risking/deleveraging at the nucleus of the global financial system would pose a clear and present danger for sparking “risk off” throughout Credit markets and financial markets more generally.

I’ll usually begin contemplating the CBB on Thursdays. This week’s alarming dislocation in the “repo” market was clearly a major development worthy of focus. But I was planning on highlighting the lack of initial contagion effects in corporate Credit, a not surprising development considering the New York Fed’s aggressive liquidity injections.

Investment-grade Credit default swaps (CDS), for example, closed Thursday trading near their lowest levels since February 2018. Junk bond spreads (to Treasuries) went out Thursday near the narrowest since early-November. Bank CDS, another important indicator, also continued to signal “all’s clear” throughout Thursday trading. As of Thursday’s close, Goldman Sachs’ (5yr) CDS was up a modest three points for the week to 58, after closing the previous Friday near the low going back to January 2018.

But Friday’s trading session came with additional intrigue. Investment-grade CDS jumped 15% to 59.7, the highest close in about a month. Goldman Sachs CDS rose 9.4% to 63.1, an almost four-week high. JPMorgan CDS rose 8.9% (to 42.7), BofA 11.0% (to 47.5) and Citigroup 5.7% (to 61.1). And as key financial CDS prices moved sharply higher, safe haven bond yields dropped. Treasury yields fell six bps in Friday trading to 1.72%, and Bund yields declined two bps to negative 0.525%. Even more curious, Gold popped almost $18 Friday to $1,517, boosting the week’s gain to $28.

The Fed’s return to system liquidity injections after a decade hiatus received abundant media coverage. For the most part, analysts were pointing to a confluence of unusual factors: $35 billion money market outflows to fund September 15th quarterly corporate tax payments; settlements for outsized Treasury auctions; and the approaching end to the quarter (where money center banks generally reduce balance sheet leverage for financial reporting and regulatory purposes).

Missing from the discussion was that this week’s money market tumult followed on the heels of instability in other markets. Is it coincidence that Monday’s spike in repo rates followed last week’s extraordinary bond market reversal – where 10-year Treasury yields surged 34 bps and benchmark MBS yields spiked an incredible 46 bps (2.37% to 2.83%)?

What a nightmare it’s been over recent months for those attempting to hedge interest-rate risk. After trading to 4.10% in November, benchmark MBS yields were down to 3.02% near the end of March. MBS yields then rose to 3.34% in April, before reversing lower to trade all the way down to 2.51% by late June. Yields were back up to 2.91% in mid-July – only to then reverse to a three-year low of 2.30% on September 4th. Collapsing MBS yields spur waves of refinancings, shortening the lives (“duration”) of existing MBS securities trading in the marketplace (as old MBS are replaced with new lower-yielding securities).

The marketplace for hedging MBS and other interest-rate risk is enormous. Derivatives really do rule the world. When market yields are declining, players that had sold various types of protection against lower rates are forced into the marketplace to acquire instruments for hedging their escalating rate exposure. Much of this levered buying would typically be financed in the repurchase agreement (“repo”) marketplace. This type of hedging activity can prove strongly self-reinforcing. Intense buying forces Treasury and bond market prices higher, “squeezing” those short the market while spurring additional hedging-related purchases. At the same time, the expansion of “repo” securities Credit boosts overall system liquidity, supporting the upside inflationary bias in bond and securities prices.

The recent downside dislocation in market yields included tell-tale signs of manic blow-off speculative excess. At 1.46% lows (September 3rd), an exuberant marketplace was calling for sub-1% Treasury yields – as if the unending supply from massive deficit spending would remain permanently divorced from market price dynamics. Meanwhile, booming corporate issuance was gobbled up at near record low yields - and at the lowest spreads to Treasuries in two years. Inflows were inundating the fixed-income ETF complex. Excesses in U.S. fixed-income were unfolding as $18 TN of global investment-grade bonds traded at negative yields, including European corporate debt.

Things got conspicuously out of hand. With global central bankers in aggressive easing mode – including an ECB restarting the QE machine while pushing rates further into negative territory – market participants were in the mood to believe central banks had abolished market cycles. Like deficits and Current Account Deficits, speculative excess and leverage don’t matter.

While everyone was relishing the mania, trouble was building under the market's surface – in the “plumbing.” As yields collapsed, speculative leverage mounted. Surging prices incited a buyers’ panic in Treasuries, MBS, corporate bonds, CDOs and structured finance – a chunk of it financed in the “repo” and money markets. Derivative player hedging activities also significantly boosted system leverage. All the speculative leveraging worked to expand system liquidity, crystallizing the market perception of endless liquidity abundance. While a deficient indicator of system liquidity, it’s still worth noting M2 “money” supply has expanded $560 billion over the past six months. Money market fund assets (retail funds included in M2) are up $350 billion since the end of April. Where’s all this “money” been coming from?

Market “melt-up” upside dislocations sow the seeds for abrupt market reversals and attendant upheaval. One day’s panic buying (on leverage) can be the following session’s frantic selling (unwind of leverage). Especially in the derivatives arena, self-reinforcing derivative-related dynamic (“delta”) hedging during an upside speculative blow-off is susceptible to abrupt reversals. Hedging programs necessitate buying into rapidly rising markets, only to immediately shift to aggressive selling in the event of market weakness. The associated leverage spurs liquidity excess on the upside, creating vulnerability for illiquidity in the event of downside sell programs and speculative deleveraging.

It is surely No Coincidence that this week’s “repo” ructions followed last week’s spike in yields and resulting deleveraging. Is it a Coincidence that the marketplace experienced a powerful “rotation” that saw the favorite stocks and sectors dramatically underperform the least favored? Is it a Coincidence that hedge fund long/short strategies have been clobbered, in what evolved into a powerful short squeeze and dislocation? Surely, it’s No Coincidence the so-called “quant quake” foresaw this week’s quake in the repo market.

Let’s expand this inquiry. Is it a Coincidence that this week’s money market upheaval followed by a few months dislocation in the Chinese money market? And is it mere Coincidence that U.S. money market instability erupted on the heels of the ECB’s decision to restart QE?

There are No Coincidences. Chinese money market issues and currency weakness were fundamental to the global yield collapse. Trade war escalation risked pushing China’s vulnerable Credit system and economy over the edge. Global central bankers responded to sinking bond yields with dovish talk and monetary stimulus, feeding the unfolding bond market dislocation. Collapsing market yields and dovish central banks stoked melt-up dynamics in stocks and sectors seen benefiting from a lower rate environment. Growth stocks were caught up in speculative melt-up dynamics, while short positions in underperforming financials and small caps were popular hedging targets. Both momentum longs and shorts became Crowded Trades

Meanwhile, booming markets and the resulting loosening of financial conditions quietly bolstered flagging growth dynamics – from China to the U.S. to Europe. The prospect of constructive U.S./China trade talks risked catching the manic bond market out over its skis. Some stronger U.S. data then sparked a sharp bond market reversal, with rising yields spurring a reversal of Crowded equities trades. Losing on both sides, the long/short players suffered painful losses. De-risking of long/short strategies incited a powerful short squeeze, a dynamic that gained momentum into expiration week.

The S&P500 is only about 1% from all-time highs. Yet there’s been some real damage below the markets' surfaces. The leveraged speculating community, in particular, has been shaken. There were losses in Argentina and EM currencies more generally. Bond markets have turned unstable – on both the up- and downside. Long/short strategies have been bludgeoned. Short positions have turned highly erratic. And this week instability engulfed the overnight funding markets, with contagion effects for other short-term funding vehicles at home and abroad. Trouble brewing.

The leveraged speculating community is the marginal source of liquidity throughout U.S. and global markets. Not only have they faced heightened risk across the spectrum of their holdings, they now confront funding market uncertainty into year-end. This doesn’t necessarily indicate imminent market weakness. But it does signal vulnerability. Many players are afflicted with increasingly “weak hands.” They’ll exhibit less tolerance for pain. This dynamic increases the likelihood that market weakness will spur self-reinforcing de-risking and deleveraging.

There was considerable market vulnerability this time last year – even with equities at all-time highs. Global markets, economies, trade relationships and geopolitics are all more troubling today. Central bankers have burned through precious ammunition, in the process spurring problematic late-cycle excess. Understandably, there is dissention within the ranks – from the Fed to the ECB to the BOJ. Is monetary stimulus the solution or the problem?

Autumn is set up for some serious instability. There’s all this talk of the need for the Fed to create additional bank reserves. The issue is not a shortage of reserves but a gross excess of speculative leverage. It started this week. The Fed’s balance sheet will be getting much bigger. The Fed and the markets were blindsided by this week’s repo market instability. The surprises will keep coming.

For the Week:

The S&P500 dipped 0.5% (up 19.4% y-t-d), and the Dow fell 1.0% (up 15.5%). The Utilities jumped 2.2% (up 21.5%). The Banks retreated 1.0% (up 17.6%), and the Broker/Dealers dropped 1.5% (up 15.3%). The Transports sank 3.3% (up 14.0%). The S&P 400 Midcaps declined 0.9% (up 16.9%), and the small cap Russell 2000 fell 1.2% (up 15.7%). The Nasdaq100 lost 0.9% (up 23.6%). The Semiconductors dropped 2.7% (up 35.3%). The Biotechs advanced 1.0% (up 6.0%). With bullion jumping $28, the HUI gold index surged 6.9% (up 35.9%).

Three-month Treasury bill rates ended the week at 1.86%. Two-year government yields dropped 12 bps to 1.69% (down 80bps y-t-d). Five-year T-note yields fell 15 bps to 1.72% (down 96bps). Ten-year Treasury yields dropped 18 bps to 1.72% (down 96bps). Long bond yields sank 21 bps to 2.16% (down 85bps). Benchmark Fannie Mae MBS yields dropped 19 bps to 2.64% (down 85bps).

Greek 10-year yields dropped 23 bps to 1.33% (down 307bps y-t-d). Ten-year Portuguese yields declined seven bps to 0.25% (down 147bps). Italian 10-year yields gained four bps to 0.92% (down 182bps). Spain's 10-year yields fell seven bps to 0.24% (down 118bps). German bund yields dropped seven bps to negative 0.52% (down 76bps). French yields declined five bps to negative 0.22% (down 93bps). The French to German 10-year bond spread widened two to 30 bps. U.K. 10-year gilt yields sank 13 bps to 0.63% (down 65bps). U.K.'s FTSE equities index slipped 0.3% (up 9.2% y-t-d).

Japan's Nikkei Equities Index added 0.4% (up 10.3% y-t-d). Japanese 10-year "JGB" yields fell five bps to negative 0.21% (down 21bps y-t-d). France's CAC40 increased 0.6% (up 20.3%). The German DAX equities index was unchanged (up 18.1%). Spain's IBEX 35 equities index increased 0.4% (up 7.5%). Italy's FTSE MIB index dipped 0.3% (up 20.7%). EM equities were mostly higher. Brazil's Bovespa index gained 1.3% (up 15.2%), and Mexico's Bolsa jumped 1.7% (up 4.6%). South Korea's Kospi index rose 2.1% (up 2.5%). India's Sensex equities index gained 1.7% (up 5.4%). China's Shanghai Exchange declined 0.8% (up 20.6%). Turkey's Borsa Istanbul National 100 index dropped 3.2% (up 9.8%). Russia's MICEX equities index added 0.2% (up 18.0%).

Investment-grade bond funds saw inflows of $2.831 billion, and junk bond funds posted inflows of $3.292 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates jumped 17 bps to 3.73% (down 92bps y-o-y). Fifteen-year rates rose 12 bps to 3.21% (down 90bps). Five-year hybrid ARM rates gained 13 bps to 3.49% (down 43bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down 16 bps to 4.16% (down 69bps).

Federal Reserve Credit last week jumped $23.4bn to $3.750 TN. Over the past year, Fed Credit contracted $423bn, or 10.1%. Fed Credit inflated $939 billion, or 33%, over the past 358 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $13.8bn last week to $3.467 TN. "Custody holdings" gained $40.8bn y-o-y, or 1.2%.

M2 (narrow) "money" supply jumped $12.3bn last week to a record $15.011 TN. "Narrow money" gained $791bn, or 5.6%, over the past year. For the week, Currency increased $5.8bn. Total Checkable Deposits rose $12.6bn, while Savings Deposits declined $14.0bn. Small Time Deposits were little changed. Retail Money Funds gained $8.6bn.

Total money market fund assets gained $4.9bn to $3.402 TN. Money Funds gained $519bn y-o-y, or 18.0%.

Total Commercial Paper dropped $22.2bn to $1.094 TN. CP was up $19bn y-o-y, or 1.8%.

Currency Watch:

The U.S. dollar index added 0.3% to 98.513 (up 2.4% y-t-d). For the week on the upside, the Japanese yen increased 0.3%, the South Korean won 0.2% and the Canadian dollar 0.2%. On the downside, the South African rand declined 2.4%, the New Zealand dollar 1.9%, the Australian dollar 1.6%, the Brazilian real 1.4%, the Swedish krona 1.1%, the Norwegian krone 0.8%, the euro 0.5%, the Singapore dollar 0.3%, the Mexican peso 0.2%, the British pound 0.2% and the Swiss franc 0.1%. The Chinese renminbi declined 0.17% versus the dollar this week (down 3.0% y-t-d).

Commodities Watch:

September 17 – Bloomberg (Javier Blas and Catherine Ngai): “The Sunday opening of the oil market is traditionally a sedate affair: volumes are minimal and only a few traders in Asia, where it’s already early Monday, are in front of their screens. Last Sunday was different. Order volumes were sky high and hedge funds, refiners and oil trading houses had their top traders staffing operations, according to interviews with multiple market participants. Brokers put special teams in place to beef up skeleton weekend crews. ‘It wasn’t just profit and loss,’ said Richard Fullarton, the founder of… oil hedge fund Matilda Capital Management. ‘People’s careers and livelihoods changed on Sunday night.’ Those who put in the extra hours were confronted with the kind of market that few if any traders ever experienced before with positions that were previously profitable potentially deeply loss-making, and vice versa. Within 24 hours, the world’s two main exchange-traded futures had their busiest trading day ever. Even diesel transactions hit an all-time high as turmoil spread beyond the crude market.”

September 16 – Bloomberg (Tom Schoenberg and David Voreacos): “U.S. prosecutors took an unusually aggressive turn in their investigation of price fixing at JPMorgan…, describing its precious metals trading desk as a criminal enterprise operating inside the bank for nearly a decade. The prosecutors charged the head of JPMorgan’s global precious metals trading operation and two others…, accusing them of ‘conspiracy to conduct the affairs of an enterprise involved in interstate or foreign commerce through a pattern of racketeering activity.’”

The Bloomberg Commodities Index increased 0.6% this week (up 2.9% y-t-d). Spot Gold jumped 1.9% to $1,517 (up 18.3%). Silver rose 1.6% to $17.849 (up 14.9%). WTI crude surged $3.24 to $58.09 (up 28%). Gasoline jumped 8.1% (up 27%), while Natural Gas fell 3.1% (down 14%). Copper dropped 3.4% (down 1%). Wheat increased 0.2% (down 4%). Corn gained 0.5% (down 1%).

Market Instability Watch:

September 17 – Wall Street Journal (Nick Timiraos and Daniel Kruger): “For the first time in more than a decade, the Federal Reserve injected cash into money markets Tuesday to pull down interest rates and said it would do so again Wednesday after technical factors led to a sudden shortfall of cash. The pressures relate to shortages of funds banks face resulting from an increase in federal borrowing and the central bank’s decision to shrink the size of its securities holdings in recent years. It reduced these holdings by not buying new ones when they matured, effectively taking money out of the financial system.”

September 20 – Bloomberg (Liz Capo McCormick and Alexandra Harris): “Signs that stress in U.S. funding markets is rebuilding ramped up pressure on the Federal Reserve to permanently increase reserves by boosting Treasury holdings, even as it was preparing a temporary liquidity injection for a fourth straight day. The New York Fed plans to do another $75 billion overnight repo operation on Friday. It follows liquidity doses of the same size Thursday and Wednesday, and $53.2 billion on Tuesday. The central bank is deploying this remedy for the first time in a decade. This week’s actions have helped calm the funding market, with repo rates declining to more normal levels after soaring to 10% Tuesday… However, swap spreads tumbled to record lows Thursday amid concern Fed policy makers haven’t announced more aggressive steps. Swaps are signaling less appetite for Treasuries, driven by concern traders won’t be able to fund purchases through the repo market. ‘The Fed needs to do at least double what they offered now and maybe even be more vigilant and do something even more significant,” said Thomas Simons, senior economist at Jefferies LLC. ‘This attitude of trying to kind-of fix the problem is not great.’”

September 18 – CNBC (Patti Domm): “As the Fed was meeting to consider cutting interest rates, it lost control of the very benchmark rate that it manages. It’s been a rough week in the overnight funding market, where interest rates temporarily spiked to as high as 10% for some transactions Monday and Tuesday. The market is considered the basic plumbing for financial markets, where banks who have a short-term need for cash come to fund themselves. The odd spike in rates forced the Fed to jump in with money market operations aimed at reining them in, and after the second operation Wednesday morning, it seemed to have calmed the market. The Fed announced a third operation for Thursday morning. In a rare move, the Fed’s own benchmark fed funds target rate rose to 2.3% on Tuesday, above the target range set when it cut rates at its last meeting in July… ‘This just doesn’t look good. You set your target. You’re the all-powerful Fed. You’re supposed to control it and you can’t on Fed day. It looks bad. This has been a tough run for Powell,’ said Michael Schumacher, director, rate strategy, at Wells Fargo.”

September 16 – Bloomberg (Alex Harris): “One of the key U.S. borrowing markets saw a massive surge Monday, a sign the Federal Reserve is having trouble controlling short-term interest rates. Amid the settlement of Treasury coupon auctions and the influx of quarterly corporate tax payments, the rate on overnight repurchase agreements soared by as much as 248 basis points to 4.75%, the highest level since December, according to ICAP pricing. It came back down to 2.50%, still up 23 bps for the day. Curvature Securities spotted a different peak: 8%. While the spike doesn’t necessarily mean credit markets are seizing up or a financial calamity is imminent, it could hamper the Fed’s ability to steer the economy… ‘The Fed has lost control of funding,’ said Mark Cabana, head of U.S. interest rates at Bank of America Corp.”

September 16 – Bloomberg (Christopher Maloney): “The swift move higher in Treasury rates sent mortgage duration, a measure of a bond’s sensitivity to changes in interest rates, to its biggest weekly increase in almost nine years. The Bloomberg Barclays U.S. MBS index duration rose to 3.11 years from 2.45 years last week, a 27% increase. This was the most violent swing higher in percentage terms since the 47% increase seen during the week ending Sept. 24, 2010…”

September 16 – Bloomberg (Alexandra Harris): “Costs in one of the key U.S. borrowing markets surged Monday amid the settlement of Treasury coupon auctions and the influx of quarterly corporate tax payments. The rate on overnight repurchase agreements soared by more than 140 bps to 3.68%, the largest daily increase since December, based on ICAP pricing. ‘Secured funding markets are clearly not functioning well,’ said Jon Hill, a rates strategist at BMO Capital Markets. A jump like this, especially since it’s not happening at the end of a quarter, is ‘bordering on chaos,’ he added.”

September 19 – Bloomberg (Liz McCormick and Alex Harris): “When plumbing works well, you don’t need to think about it. That’s usually the case with a vital but obscure part of the financial system known as the repo market, where vast amounts of cash and collateral are swapped every day. But when it springs a leak, as it did this week, it rivets the attention of the U.S. Federal Reserve, the nation’s largest banks, money-market funds, corporations and other big investors. The Fed calmed things down by pumping in billions of dollars, but it may have a lot more work to do on the pipes.”

Trump Administration Watch:

September 16 – Bloomberg (Josh Wingrove and Daniel Flatley): “Donald Trump risks a political backlash if he retaliates against Iran over a weekend strike on Saudi Arabian oil facilities after campaigning on promises to withdraw the U.S. from foreign wars. Trump tweeted Sunday that the U.S. is ‘locked and loaded,’ raising bipartisan alarm after the weekend attack that halved Saudi oil production. Speaking on Monday to reporters in the Oval Office, Trump said: ‘It’s certainly looking that way at this moment,’ and ‘we pretty much already know’ who did it. Secretary of State Mike Pompeo has blamed Iran, though Riyadh is stopping short of directly doing so.”

September 19 – Reuters (Tuqa Khalid and Aziz El Yaakoubi): “The United States said… it was building a coalition to deter Iranian threats following a weekend attack on Saudi Arabian oil facilities. Iran has warned U.S. President Donald Trump against being dragged into a war in the Middle East and said it would meet any offensive action with a crushing response. U.S. Secretary of State Mike Pompeo said that Trump, who has ordered more sanctions on Iran, wants a peaceful solution to the crisis.”

September 18 – Reuters (Jeff Mason and Stephen Kalin): “U.S. President Donald Trump said… there were many options short of war with Iran after U.S. ally Saudi Arabia displayed remnants of drones and missiles it said were used in a crippling attack on its oil sites that was ‘unquestionably sponsored’ by Tehran. ‘There are many options. There’s the ultimate option and there are options that are a lot less than that. And we’ll see,’ Trump told reporters… ‘I’m saying the ultimate option meaning go in — war.’ The president struck a cautious note as his Secretary of State Mike Pompeo, during a visit to Saudi Arabia, described the attacks as ‘an act of war’ on the kingdom, the world’s largest oil exporter.”

September 20 – Bloomberg (Mike Dorning, Jordan Fabian, and Mario Parker): “A Chinese trade delegation canceled a planned visit to farms in the U.S. heartland, driving down stock indexes as investors turned pessimistic on progress toward resolving the two nations’ trade war. The cancellation came only about an hour after President Donald Trump said he wasn’t interested in ‘a partial deal’ with China based on Beijing increasing its purchases of U.S. agricultural products. U.S. and Chinese officials held negotiations this week and are aiming for a high-level meeting around Oct. 10.”

September 16 – Reuters (Michael Martina and Andrea Shalal): “U.S. and Chinese officials will restart trade talks at the end of this week, but any agreement the world’s largest economies carve out is expected to be a superficial fix. The trade war has hardened into a political and ideological battle that runs far deeper than tariffs, trade experts, executives, and officials in both countries say. China’s Communist Party is unlikely to budge on U.S. demands to fundamentally change the way it runs the economy, while the U.S. won’t backtrack on labeling Chinese companies national security threats. The conflict between the two countries could take a decade to resolve, White House economic advisor Larry Kudlow warned on Sept. 6. Yu Yongding, an influential former policy adviser to China’s central bank, told Reuters that China was in no rush to make a deal.”

September 18 – Reuters (David Lawder): “U.S. and Chinese deputy trade negotiators resumed face-to-face talks for the first time in nearly two months on Thursday, as the world’s two largest economies try to bridge deep policy differences and find a way out of their protracted trade war. The negotiations, which will extend into Friday, are aimed at laying the groundwork for high-level talks in early October that will determine whether the two countries are working toward a solution or headed for new and higher tariffs on each other’s goods.”

September 17 – Reuters (Roberta Rampton): “U.S. Vice President Mike Pence has canceled plans to meet with the leader of the Solomon Islands to discuss development partnerships after the Pacific island cut ties with Taiwan in favor of China this week, a senior U.S. official said… The Solomon Islands was the sixth country to switch allegiance to China since 2016. Self-ruled Taiwan has accused China - which claims Taiwan as its territory - of trying to meddle in its upcoming elections.”

September 16 – Wall Street Journal (Rebecca Ballhaus): “President Trump repeated his sharp criticism of the Federal Reserve after an attack in Saudi Arabia over the weekend led to a major crude oil disruption. In a pair of tweets Monday, the president questioned whether the Fed would ‘ever get into the game’ and said the central bank and its chairman, Jerome Powell, ‘don’t have a clue.’ He again badgered the Fed to lower the interest rate, citing a strong dollar’s harmful effect on U.S. exporters. ‘And now, on top of it all, the Oil hit,’ he wrote. ‘Big Interest Rate Drop, Stimulus!’”

Federal Reserve Watch:

September 18 – Associated Press (Martin Crutsinger): “A sharply divided Federal Reserve cut its benchmark interest rate… for a second time this year but declined to signal that further rate cuts are likely this year. The Fed’s move reduced its key short-term rate… by an additional quarter-point to a range of 1.75% to 2%. The action was approved 7-3, with two officials preferring to keep rates unchanged and one arguing for a bigger half-point cut. The divisions on the policy committee underscored the challenges for Chairman Jerome Powell in guiding the Fed at a time of high economic uncertainty. The Fed did leave the door open to additional rate cuts — if… the economy weakens. For now, he suggested, the economic expansion appears durable in its 11th year, with a still-solid job market and steady consumer spending.”

September 18 – Bloomberg (Alexandra Harris): “The Federal Reserve on Wednesday made an adjustment to its tools used to control key benchmark rate in conjunction with its decision to ease overall policy. Fed officials decided to lower the interest paid on excess reserves by 30 bps to 1.8%, effective Sept. 19, while lowering its target range by 25 bps to 1.75% to 2%. It also lowered the rate on its overnight facility for repurchase agreements by 30 bps to 1.70%. The central bank’s shift follows three days of volatility in the market for repurchase agreements.”

September 18 – Reuters (Jonnelle Marte, Ann Saphir and Megan Davies): “Wild swings this week in U.S. money markets have raised fresh concerns about whether the New York Federal Reserve under John Williams has lost its deft touch with markets. The New York Fed had to intervene in cash markets this week when the repo rate, a key measure of liquidity in the global banking system, sky-rocketed, forcing the Fed to make an emergency injection of more than $125 billion on Tuesday and Wednesday. A key interest rate the Fed aims to influence also broke above the central bank’s target range on Tuesday for the first time since the financial crisis. ‘What has happened in the repo market is far from a minor problem,’ said Ward McCarthy, chief financial economist for Jefferies. ‘That’s a financial crisis waiting to happen if they don’t get that under control.’”

September 20 – Bloomberg (Matthew Boesler): “The market apparently believes the economy needs added stimulus to continue the expansion. My own view is different,’ Boston Fed President Eric Rosengren says. ‘The data we have in hand suggest instead that the recovery would continue apace even with little monetary policy accommodation,’ Rosengren says… ‘So far the economy seems to have weathered the impact of trade disruptions and slowing foreign growth.’ ‘While risks clearly exist related to trade and geopolitical concerns, lowering rates to address uncertainty is not costless.’ ‘In my view, there are clearly risks of headwinds hitting the economy, but the stance of monetary policy is already accommodative. There are also risks of tailwinds and costs to monetary policy being too accommodative”

September 18 – Bloomberg (Annie Massa and John Gittelsohn): “Mark Wiedman, head of international and corporate strategy at BlackRock Inc., sounded an alarm about negative interest rates… ‘We’re slouching toward the U.S. moving into negative rate territory,’ Wiedman said... ‘Negative rates are corroding and poisoning financial systems.’ Wiedman joined Steve Schwarzman and Jeffrey Gundlach in stressing the harm of negative rates to banks and the economy… ‘My strong view is I don’t think it makes any sense whatsoever,’ Schwarzman, the founder of Blackstone Group Inc., said… ‘Why would I take my money and pay somebody to take it? It’s hard enough to make it. I really just don’t understand the theory behind negative interest rates.’”

September 17 – Bloomberg (John Gittelsohn and Katherine Greifeld): “The spike in overnight repurchase agreements may prompt the Federal Reserve to expand its balance sheet, according to Jeffrey Gundlach… ‘Is it an imminent disaster? No. The Fed is going to use this warning sign to go back to some balance sheet expansion,’ Gundlach said… during a webcast for his $54 billion DoubleLine Total Return Bond Fund. It’s a way of ‘baby stepping’ to more quantitative easing, he added.”

U.S. Bubble Watch:

September 18 – Reuters (Lucia Mutikani): “U.S. homebuilding surged to more than a 12-year high in August as both single- and multi-family housing construction increased, suggesting that lower mortgage rates were finally providing a boost to the struggling housing market. Housing starts jumped 12.3% to a seasonally adjusted annual rate of 1.364 million units last month, the highest level since June 2007…”

September 18 – CNBC (Diana Olick): “Homebuyers seemed undeterred by last week’s turnaround in interest rates, or perhaps they were spooked into action. Strong demand from buyers easily offset the drop in demand from those wishing to refinance… Mortgage applications to purchase a home increased 6% for the week and were a strong 15% higher annually.”

September 18 – Wall Street Journal (Dawn Lim): “Money managers that mimic the stock market just became the new titans of the fund-management world. Funds that track broad U.S. equity indexes hit $4.27 trillion in assets as of Aug. 31, according to… Morningstar… Funds that try to beat the market had $4.25 trillion as of that date. The passing of the asset crown is the latest chapter in one of the most dramatic transformations in the history of financial markets. In the past decade, nearly $1.36 trillion in net flows were added to U.S. equity mutual funds and exchange-traded funds that mimic market indexes while some $1.32 trillion fled higher-costing actively managed counterparts.”

September 17 – Wall Street Journal (Joe Flint and David Marcelis): “Entertainment heavyweights have spent more than $2 billion on classic television shows in recent weeks while signing talent for new programming, in an effort to win over streaming customers who soon will have many more options to choose from. This week, AT&T Inc. ’s WarnerMedia struck a deal for ‘The Big Bang Theory,’ while Netflix Inc. acquired ‘Seinfeld’ and Comcast Corp. ’s NBCUniversal said it would have exclusive streaming rights to ‘Parks and Recreation.’ Two other shows, ‘Friends’ and ‘The Office,’ changed homes earlier this summer. The commitments total over $2 billion… ‘You will see more of this,’ said industry analyst Hal Vogel of Vogel Capital Management… The spending frenzy comes as four high-profile services—from Apple Inc., Walt Disney Co. , Comcast and WarnerMedia—are to launch between November and the spring…”

China Watch:

September 19 – Fox Business (Brittany De Lea): “As mid-level discussions take place this week between China and the U.S. amid an ongoing trade war, new reports indicate that President Trump might be prepared to escalate the situation should an agreement not be reached in the near future. According to… Michael Pillsbury, who President Trump has referred to as a leading authority on China, the president believes he has so far exercised restraint with regard to tariff rates. ‘Does the president have options to escalate the trade war? Yes, the tariffs can be raised higher. These are low-level tariffs that could go to 50% or 100%,’ he said, as reported by the South China Morning Post.”

September 16 – Reuters (Kevin Yao and Stella Qiu): “The slowdown in China’s economy deepened in August, with growth in industrial production at its weakest 17-1/2 years amid spreading pain from a trade war with the United States and softening domestic demand… Industrial output growth unexpectedly weakened to 4.4% in August from the same period a year earlier, the slowest pace since February 2002 and receding from 4.8% in July.”

September 15 – Reuters: “Chinese Premier Li Keqiang said it is ‘very difficult’ for China’s economy to grow at a rate of 6% or more because of the high base from which it was starting and the complicated international backdrop. The world’s No.2 economy faced ‘certain downward pressure’ due to slowing global growth as well as the rise of protectionism and unilateralism, Li said…”

September 15 – Bloomberg: “China’s slowdown is deepening just as risks for the global economy mount, piling pressure on the authorities to do more to support growth. Industrial output rose 4.4% from a year earlier in August, the lowest for a single month since 2002, while retail sales came in below expectations. Fixed-asset investment slowed to 5.5% in the first eight months, with the private sector lagging state investment for the 6th month.”

September 16 – Reuters (Yawen Chen and Ryan Woo): “China’s new home prices grew at their weakest pace in nearly a year in August as a cooling economy and existing curbs on speculative buying put a dent on overall demand. Wary of property bubbles, Chinese regulators have vowed to refrain from stimulating the real estate sector as they roll out measures to boost the broader economy hit by the Sino-U.S. trade war and slowing consumer demand. Average new home prices in China’s 70 major cities rose 8.8% in August from a year earlier, compared with a 9.7% gain in July and the weakest pace since October 2018…”

September 15 – Reuters (Yawen Chen, Kevin Yao and Roxanne Liu): “China’s property investment grew at its fastest pace in four months in August, a boon for the economy as other sectors weaken from the Sino-U.S. trade war and consumer demand slows… Property investment in August rose 10.5% from year earlier, quickening from July’s 8.5% pace…”

September 19 – Financial Times (Don Weinland): “When lossmaking Chinese iron ore miner Shandong Hongda scooped up a UK game developer in 2016, it also had grand plans to diversify into energy and healthcare businesses around the globe and move away from its low-growth mining past. In the end, it held on to Jagex, the creator of the world’s largest online role-playing game for just short of two years and its other plans have since fallen away too. The trajectory of Shandong Hongda, with its brief stint as a game developer and ambitions to expand elsewhere, has been followed by a number of Chinese companies, which have attempted to make debt-fuelled leaps into countries and industries far from their areas of expertise. But as credit conditions have tightened and authorities have taken a much more active interest in how much debt companies hold and the risks they are taking, businesses have drawn in their horns. Since the start of the year, there has been a record sell-off of global assets by Chinese companies totalling about $40bn… At the same time, the pace of acquisitions has slowed to just $35bn, as businesses worry about being labelled speculative buyers. It is the first time in a decade that Chinese companies are net sellers of global assets.”

September 19 – Wall Street Journal (Mike Bird): “China’s property giants are notorious for their rapacious issuance of debt. But a more politically sensitive liability has risen even faster, posing a less well known risk to the country’s housing market. Unearned revenue—the line on developers’ balance sheets that accounts for presales or contracted sales—now makes up a greater share of the 10 largest property developers’ liabilities than total debt. Their combined unearned revenue rose to just over $400 billion in June… The practice of selling homes once construction has started—but often years before completion—now makes up more than 85% of total sales in China. Yields of above 10% aren’t uncommon on Chinese property bonds, making presales an attractive source of financing.”

September 16 – Reuters (Clare Jim and Noah Sin): “Credit rating agency Moody’s changed its outlook on Hong Kong’s rating to negative from stable on Monday, reflecting what it called the rising risk of ‘an erosion in the strength of Hong Kong’s institutions’ amid the city’s ongoing protests… ‘The decision to change Hong Kong’s outlook to negative signals rising concern that this shift is happening, notwithstanding recent moves by Hong Kong’s government to accommodate some of the demonstrators’ demands.’”

September 15 – Reuters (Jessie Pang): “Hong Kong’s businesses and metro stations reopened as usual on Monday after a chaotic Sunday when police fired water cannon, tear gas and rubber bullets at protesters who blocked roads and threw petrol bombs outside government headquarters. On Sunday what began as a mostly peaceful protest earlier in the day spiraled into violence in some of the Chinese territory’s busiest shopping and tourist districts.”

Central Banking Watch:

September 17 – Financial Times (Stephen Morris, Olaf Storbeck and Martin Arnold): “European lenders are bracing for deeper cost cuts and consolidation after the European Central Bank extended a punishing five-year stretch of negative interest rates. The region’s banks were left disappointed by Mario Draghi’s last major act as ECB president, in which he last week cut its key deposit rate to minus 0.5%, while also unveiling a new tiering system designed to shield a portion of the deposits lenders keep at the ECB from negative rates. However, the relief provided by tiering will barely offset the lost earnings from lower base rates, according to analysts and executives…, piling pressure on a sector already struggling to generate acceptable returns. The ECB is expected to cut its deposit rate again by next year, which could lower even further the Euribor rate on which many loans are priced. ‘Deposit tiers . . . [are] a drop in the ocean,’ said Morgan Stanley analyst Magdalena Stoklosa. ‘Profitability uplifts could be minimal for most banks… as sensitivity to Euribor is multiple times greater versus savings on cash reserves parked at the ECB.’”

Brexit Watch:

September 14 – Reuters (David Milliken and William James): “British Prime Minister Boris Johnson likened himself to the comic book character The Incredible Hulk in a newspaper interview where he stressed his determination to take Britain out of the European Union on Oct. 31… ‘The madder Hulk gets, the stronger Hulk gets,’ Johnson was quoted as saying. ‘Hulk always escaped, no matter how tightly bound in he seemed to be - and that is the case for this country. We will come out on October 31.’”

September 16 – Associated Press (Lorne Cook and Jill Lawless): “Boris Johnson was booed by protesters and berated by Luxembourg’s leader on a visit to the tiny nation… for his first face-to-face talks with the European Union chief about securing an elusive Brexit deal. On a day of commotion and conflicting signals, Johnson pulled out of a news conference because of noisy anti-Brexit demonstrators, leaving Luxembourg’s prime minister standing alone next to an empty lectern as he addressed the media.”

Europe Watch:

September 17 – Reuters (Michael Nienaber and Christian Kraemer): “German Finance Minister Olaf Scholz said… policymakers could not accept the emergence of parallel currencies such as Facebook’s planned Libra, adding that Berlin would reject any such plans… ‘We cannot accept a parallel currency,’ Scholz said... ‘You have to reject that clearly.’”

Asia Watch:

September 18 – Associated Press (Kim Tong-Hyung): “South Korea… dropped Japan from a list of countries receiving fast-track approvals in trade, a reaction to Tokyo’s decision to downgrade Seoul’s trade status amid a tense diplomatic dispute. South Korea’ trade ministry said Japan’s removal from a 29-member ‘white list’ of nations enjoying minimum trade restrictions went into effect as Seoul rearranged its export control system covering hundreds of sensitive materials that can be used for both civilian and military purposes. The change comes a week after South Korea initiated a complaint to the World Trade Organization over a separate Japanese move to tighten export controls on key chemicals…”

EM Watch:

September 15 – Financial Times (Steve Johnson): “Emerging market central banks have turned more dovish than at any point since at least the global financial crisis, according to analysis of the language in 4,000 monetary policy publications. The extreme pro-easing bias is remarkable given that banks, including those of Brazil, Russia, India, China, South Africa and Turkey, have already cut rates this year… Bank of America Merrill Lynch’s Emerging Monetary Mood Indicator, based on robotic scanning of keywords used in the publications of 11 big EM central banks, is at its more dovish extreme since the height of the crisis in 2009… Based on single-month figures, the August reading — the latest available — was the most extreme since the depths of the dotcom crash in 2000.”

September 16 – Associated Press (Sheikh Saaliq): “Anuj Kapoor took over his father’s booming auto parts business in 2012, hoping to elevate the company from selling to suppliers to selling directly to carmakers. Seven years later, he’s had to lay off half his workers as drooping sales caused his profit to plummet by at least 80%. Confidence in the Indian economy is giving way to uncertainty as growth in the labor-intensive manufacturing sector has come to a near standstill, braking to 0.6% in the last quarter from 12.1% in the same period a year earlier. The economy grew at its slowest annual pace in six years in April-June, 5%.”

Japan Watch:

September 18 – Reuters (Leika Kihara and Daniel Leussink): “The Bank of Japan kept monetary policy steady on Thursday but signaled the chance of expanding stimulus as early as its next policy meeting in October… BOJ Governor Haruhiko Kuroda said the central bank has edged closer toward loosening policy than when its board last met in July, as the U.S.-China trade war and slowing overseas demand dampen prospects for achieving its elusive 2% inflation target. ‘We are more eager to act given heightening global risks. We will scrutinise economic and price developments thoroughly at next month’s meeting to decide whether to ease,’ Kuroda told a news conference…”

Global Bubble Watch:

September 16 – Bloomberg (Anooja Debnath and Susanne Barton): “Trading in the global foreign-exchange market has jumped to the highest-ever level at $6.6 trillion, according to the Bank for International Settlements. The average daily trading in April was up 29% from $5.1 trillion in the same month in 2016, the BIS reported… The growth of FX derivatives trading, primarily swaps, outpaced the spot market and now accounts for almost half of global FX turnover… Trading of outright forwards also increased, with a large part of the rise due to non-deliverable forwards. That reflected strong activity in NDF markets for the Korean won, Indian rupee and Brazilian real, the BIS said. ‘While we’ve seen growth across all forms of FX trading, swaps and forwards have seen particular growth,’ said Matthew Hodgson, CEO and founder of Mosaic Smart Data… ‘The FX market has woken up.’”

Fixed-Income Bubble Watch:

September 16 – Financial Times (Laurence Fletcher): “Parts of Wall Street’s debt securitisation engine are back running at levels not seen since the pre-financial crisis boom. …Dealogic’s indices of US securitisation activity show that issuance of collateralised debt obligations — structured products made up of bundles of bonds and loans — rose above its pre-crisis peak late last year and is currently back close to those levels this year. The market for commercial mortgage-backed securities has also rebounded strongly since late 2008 and early 2009, when issuance completely seized up in the aftermath of the financial crisis. Activity in the asset class is now some way above its 2007 high.”

Geopolitical Watch:

September 18 – Reuters (Phil Stewart and Parisa Hafezi): “The United States believes the attacks that crippled Saudi Arabian oil facilities last weekend originated in southwestern Iran, a U.S. official told Reuters, an assessment that further increases tension in the Middle East. Three officials… said the attacks involved cruise missiles and drones, indicating that they involved a higher degree of complexity and sophistication than initially thought.”

September 15 – Bloomberg (Anthony Dipaola and Verity Ratcliffe): “The latest and most destructive attacks on Saudi oil facilities provide stark evidence of the vulnerability of global crude supply in an age of disruptive technologies that can bring a century-old industry to its knees -- at least temporarily. From remote-controlled drones to anti-ship mines and computer worms, hostile parties have employed an unpredictable array of asymmetric weaponry to confound one of the best-equipped militaries in the Middle East. Saudi Arabia blames many of the attacks against its oil assets on Houthi rebels in impoverished Yemen, where Saudi forces have been fighting since 2015 in a civil war that’s spilling across their shared border.”

September 17 – Reuters (Tuqa Khalid): “Saudi King Salman said… that Riyadh was capable of dealing with the consequences of attacks on its installations. A statement issued after a meeting of Saudi Arabia’s council of ministers said the cabinet had reviewed the damage caused by the attacks on Aramco installations, and it called on world governments to confront them ‘regardless of their origin’.”

September 17 – Reuters (Stephen Kalin, Sylvia Westall): “Billions of dollars spent by Saudi Arabia on cutting edge Western military hardware mainly designed to deter high altitude attacks has proved no match for low-cost drones and cruise missiles used in a strike that crippled its giant oil industry. Saturday’s assault on Saudi oil facilities that halved production has exposed how ill-prepared the Gulf state is to defend itself despite repeated attacks on vital assets during its four-and-a-half year foray into the war in neighboring Yemen.”

September 16 – CNBC (Natasha Turak): “Satellite photos released by the U.S. government and DigitalGlobe reveal the surgical precision with which Saudi Aramco’s oil facilities were struck in attacks early Saturday. The strikes, which unidentified U.S. officials have said involved at least 20 drones and several cruise missiles, forced Saudi Arabia to shut down half its oil production capacity, or 5.7 million barrels per day of crude — 5% of the world’s global daily oil production.”

Friday, September 20, 2019

Friday Evening Links

[Reuters] Wall Street drops after China cancels trip to Montana farmland

[Reuters] Oil slips on trade fears but soars in week after Saudi production attacked

[CNBC] Chinese trade negotiators cancel US farm visit, cut trip short

[CNBC] China delegation’s sudden departure highlights trade and tariffs as main movers of markets

[Reuters] Hopes for trade breakthrough fade as China cancels U.S. farm visits

[AP] Trump says he doesn’t need China trade deal before election

[AP] 2 Federal Reserve officials highlight deep divisions

[Reuters] Fed's Rosengren flags risks to economy in WeWork-style model

[CNBC] Goldman Sachs says the market is about to get wild in October

[Bloomberg] Fed Tackles End-of-Quarter Funding Angst by Extending Repo Plan

[Bloomberg] U.S. Household Net Worth Increases $1.8 Trillion

[FT] Week of repo turmoil puts Wall Street traders in a spin

Friday's News Links

[Reuters] Wall Street opens slightly stronger amid stimulus hopes, easing trade tensions

[Reuters] Oil heading for 7% weekly gain after Saudi attacks

[Reuters] Gold edges higher on soft dollar, heads for first weekly gain in four

[Reuters] U.S. repo rate rises ahead of Fed repo operation

[Reuters] China cuts new loan rate for second month but struggling economy likely needs more

[Reuters] China's new one-year lending benchmark rate cut marginally

[AP] Fed rushes to plug cash shortage in short-term loan market

[CNBC] ‘The era of economic surrender is over,’ says Mike Pence on trade with China

[Bloomberg] Fed Injects Cash for Fourth Day as Funding Markets Stabilize

[Bloomberg] Repo Squeeze Has Upset Funding Markets. It’s About to Get Worse

[Bloomberg] China’s Plan for the Yuan Could Backfire in Any Crisis, Strategist Says

[Bloomberg] Oil's Rising Again as Iran's Warning of War Ratchets Up Tensions

[Bloomberg] Japan Inflation Hits 2-Year Low as BOJ Calls for Price Review

[Bloomberg] One of the World’s Top Investors Just Rang the Alarm, Again

[Bloomberg] BOJ Makes Sweeping Cuts to Bond Purchases to Steepen Curve

[Bloomberg] Free Money for Everyone Won’t Solve Our Problems

[WSJ] Fed Will Weigh Resuming Balance Sheet Growth at October Meeting

[FT] Quant funds lick wounds after rout in bonds and hot stocks

Thursday, September 19, 2019

Thursday Evening Links

[Reuters] Shares edge up after Fed rate cut, oil prices gain

[Reuters] U.S., Chinese trade deputies face off in Washington amid deep differences

[Reuters] U.S. building coalition after Saudi oil attack, Iran warns against war

[Bloomberg] The Repo Market’s a Mess. (What’s the Repo Market?)

[Bloomberg] The Fed Is Trapped in the Twilight Zone

[Bloomberg] Fed to Inject Cash for Fourth Day to Quell Funding Market Stress

[Bloomberg] Poor T-Bill Auctions Point to Investor Skepticism on Repo Market Calm

[FT] The story of China’s great corporate sell-off

[FT] Federal Reserve intervenes for third day to ease market strains

Thursday's News Links

[Reuters] Shares inch higher after Fed cut, BOJ keeps powder dry

[Reuters] U.S., Chinese trade deputies face off in Washington amid deep differences

[Reuters] BOJ keeps policy steady, signals chance of easing in October

[Reuters] Repo chaos tests Wall Street confidence in NY Fed's Williams

[Reuters] U.S. bankers seize on repo-market stress to push for softer liquidity rules

[Reuters] Trump sees many options short of war with Iran after attacks on Saudis

[Reuters] Iran warns against war as U.S. and Saudi weigh response to oil attack

[Bloomberg] Overnight Funding Rate Continues to Ease Before Fed Operation

[Bloomberg] China’s Mighty Trade Engine Is Stalling as Negotiators Seek Deal

[Bloomberg] While the Fed Has No 'Guts,' the PBOC Is on Steroids

[Bloomberg] Chinese Property Giants Could Regret Milking the Country’s Middle Class

[Bloomberg] Top Shadow Banker Calls Time on India’s Credit Crisis

[NYT] Wall Street Is Buzzing About Repo Rates. Here’s Why.

[WSJ] Bank Reserves: What Are They and Why a Shortage Is Roiling a Key Interest Rate

[WSJ] Fed Injects More Into Money Markets After Banks Bid Heavily for Funds

[WSJ] Repo Spike Signals Wrong Kind of Volatility

Wednesday, September 18, 2019

Wednesday Evening Links

[Reuters] S&P 500 ends slightly higher after Fed gives mixed signals

[Reuters] Fed cuts rates on 7-3 vote, gives mixed signals on next move

[CNBC] Here’s what changed in the new Fed statement

[CNBC] The Fed forecasts no further rate cuts for 2019 and 2020

[AP] A divided Fed cuts key rate for 2nd time this year

[AP] The Latest: Fed officials split on interest rate path

[Yahoo/Bloomberg] Fed Plans to Intervene in Repo Market for a Third Straight Day

[CNBC] Fed loses control of its own interest rate as it cut rates — ‘This just doesn’t look good’

[CNBC] Trump says Powell and the Fed ‘Fail Again’ — ‘No guts, no sense, no vision!’

[Reuters] Trump orders more Iran sanctions as Saudi displays attack evidence

[Reuters] Pompeo says attack was 'act of war' on Saudi Arabia, seeks coalition

[NYT] Fed Cuts Interest Rates by Another Quarter Point

[WSJ] Fed Cuts Rates By Quarter Point, But Faces Growing Split

[FT] Fed cuts rates as policymaker disagreement grows

Wednesday's News Links

[AP] Stocks mixed ahead of Fed, oil dips on Saudi output recovery

[Reuters] Oil steps back on Saudi supply reassurance, focus shifts to Fed

[Reuters] From oil shocks to funding strains, Fed confronts new complexities

[Reuters] Explainer: The Fed has a repo problem. What's that?

[Reuters] U.S. Fed dusts off old play to soothe money markets

[Reuters] Saudi Arabia promises concrete proof Iran behind oil strikes

[Reuters] Costly Saudi defenses prove no match for drones, cruise missiles

[CNBC] US housing starts race to 12-year high in August

[CNBC] Mortgage demand from buyers jumps, just as interest rates spike

[AP] South Korea downgrades Japan trade status as dispute deepens

[MarketWatch] EU car sales drop in August

[Reuters] Exclusive: Pence rebuffs Solomon Islands PM after nation cuts ties with Taiwan

[Reuters] Streaming War Spurs Classic-TV Arms Race

[Bloomberg] A Divided Fed May Be Reluctant to Forecast More Cuts

[Bloomberg] Fed Injects More Liquidity Into Repo Market Amid Signs of Calm

[Bloomberg] With Repo Market Still on Edge, Fed Preps Second Blast of Cash

[Bloomberg] ‘This Is Crazy!’: Wall Street Scurries to Protect Itself in Repo Surge

[Bloomberg] Here’s One More Theory on What’s Causing the Repo Squeeze

[NYT] The Fed Is Poised to Cut Rates Again. Here’s What to Watch.

[WSJ] Fed Prepares Second Rate Cut to Cushion Against Global Risks

[WSJ] Fed Intervenes to Curb Soaring Short-Term Borrowing Costs

[WSJ] Index Funds Are the New Kings of Wall Street

[FT] US Federal Reserve rate decision: five things to watch

[FT] European banks fear no escape from negative rates

Tuesday, September 17, 2019

Tuesday Evening Links

[Reuters] Wall Street rises as oil fears recede, market awaits Fed

[Reuters] Oil falls as supply worries fade; stocks edge higher

[Reuters] Saudi oil attacks came from southwest Iran, U.S. official says, raising tensions

[Yahoo Finance] Fed hits technical difficulty as it tries to regain control of rates

[Reuters] Divided Fed set to cut interest rates this week, but then what?

[Reuters] Battered Saudi oil output to recover in two or three weeks: sources

[Reuters] Trump says China trade deal could come before U.S. election, or not

[Reuters] U.S. manufacturing production rebounds; trend still weak

[Reuters] Germany's Scholz: We cannot accept parallel currencies such as Facebook's Libra

[Reuters] WeWork delays IPO after frosty investor response

[Bloomberg] Fed’s First-in-a-Decade Intervention Will Be Repeated Wednesday

[Bloomberg] Unhinged Money Markets Trigger Fed Action to Alleviate Stress

[Bloomberg] A Crazy Day for Oil Leaves Traders Dazed From Tokyo to Houston

[Bloomberg] Gundlach Says Fed May Expand Balance Sheet After Repo Squeeze

[NYT] Fed Jumps Into Market to Push Down Rates, a First Since the Financial Crisis

[WSJ] Fed’s Repo Rescue Leaves Many Searching for Answers

[WSJ] The Repo Market: What It Is, and Why Everyone Is Talking About It Again

[FT] Fed plans second intervention to ease funding squeeze

[FT] Federal Reserve injects billions of dollars into financial system

[FT] Why is the Federal Reserve pouring money into the financial system?

Tuesday's News Links

[Reuters] Oil sheds gains, stocks dip as Fed comes into focus

[CNBC] Oil drops 6% on report Saudi oil output will return to normal faster than initially anticipated

[Reuters] Trade talks seen as unlikely to mend U.S.-China divide

[Reuters] U.S., Chinese trade deputy talks to start on Thursday: USTR

[CNBC] Detailed satellite photos show extent of ‘surgical’ attack damage to Saudi Aramco oil facilities

[Reuters] Trump says U.S. reaches trade deals with Japan, no vote needed

[Yahoo/Bloomberg] Repo Market Chaos Signals Fed May Be Losing Control of Rates

[Reuters] China keeps one-year money market rate unchanged but easing still likely

[Reuters] China's home price growth slows, developers seen cutting prices

[CNBC] Expectations suddenly are rising that the Fed might not cut interest rates this week

[Reuters] Saudi king says kingdom is capable of responding to attacks

[Bloomberg] Repo Squeeze Threatens to Spill Over Into Funding Markets

[Bloomberg] Overnight Funding Rate Surges Above 8% in Early Tuesday Trading

[Bloomberg] Repo Squeeze Threatens to Spill Over Into Funding Markets

[Bloomberg] Disrepair of U.S. Oil Reserve May Hamper Its Value in a Crisis

[Bloomberg] Mortgage-Bond Rate Risk Surges Most Since 2010

[WSJ] Fed Steps Into Repo Market to Control Soaring Rates

[WSJ] Why Fed Officials Aren’t Saying More About the Rate Outlook

[WSJ] U.S. Tells Saudi Arabia Oil Attacks Were Launched From Iran

[WSJ] China Is Pitting the Yuan Against the Dollar. So Far, It’s Not Going to Plan.

[FT] Debt securitisation rebounds to pre-crash levels

[FT] Investors pull gold from Hong Kong as tensions rise

Monday, September 16, 2019

Monday Evening Links

[Reuters] Oil prices up 12% after attack on key Saudi oil facilities

[Reuters] Gold up 1% as attack on Saudi facilities boosts safe-haven assets

[Reuters] Wall Street hit by Saudi attacks; energy stocks temper losses

[Reuters] U.S. repo rates surge on tax payments, bond settlements

[Reuters] Treasuries - Yields fall as soaring oil adds to global growth fears

[Reuters] Evidence points to Iranian hand in oil attack, says Saudi alliance, as prices soar

[CNBC] Oil prices could go much higher if there is a military escalation after Saudi attack

[Reuters] Attacks on Saudi oil facilities - what will it mean for consumers?

[Reuters] Moody's downgrades Hong Kong outlook to 'negative' as protests continue

[Bloomberg] Aramco to Face Weeks Without the Majority of Abqaiq’s Oil Output

[Bloomberg] Repo Market Chaos Signals Fed May Be Losing Control of Rates

[Bloomberg] Global Currency Trading Surges to $6.6 Trillion-A-Day Market

[Bloomberg] Trump’s Suggestion of Iran Strike Raises Bipartisan Alarm

[Bloomberg] JPMorgan’s Metals Desk Was a Criminal Enterprise, U.S. Says

Monday's News Links

[Reuters] Wall Street slips after Saudi attacks; energy stocks surge

[Reuters] Biggest oil price surge since 1991 as 'locked and loaded' U.S. points finger at Iran for attack

[Reuters] U.S. stock futures fall after Saudi oil attacks

[Reuters] China's slowdown deepens; industrial output growth falls to 17-1/2 year low

[Reuters] China's property investment growth at 4-month high in August

[Reuters] N.Y. Fed 'Empire State' business index falls in September

[USAT] UAW hourly workers hope for short strike against GM as strike begins

[AP] Johnson, Juncker hold Brexit talks; no visible breakthrough

[AP] India’s economy slows, stalling once thriving manufacturing

[Reuters] Hong Kong reopens after violent weekend of clashes and protests

[Bloomberg] Saudi Attacks Reveal Oil Supply Fragility in Asymmetric War

[Bloomberg] China’s Economy Slows Again, Adding Pressure for Policy Action

[NYT] The Fed Faces a Tough End to 2019 as Worries Cloud the Horizon

[WSJ] Trump Again Pressures the Federal Reserve in Wake of Saudi Attacks

[WSJ] Banks Warm to Mortgage Bonds That Burned Them in 2008

[WSJ] China’s Economy Aches All Over as Beijing Seeks Trade Fix With the U.S.

[WSJ] Saudi Officials Consider Delaying Aramco IPO

[FT] Fed wrestles with trade uncertainty ahead of second rate cut

[FT] Emerging market central banks most dovish since financial crisis

Sunday, September 15, 2019

Sunday Evening Links

[Reuters] Oil surges, stock futures slip after attack on Saudi facility

[Reuters] Oil prices soar 10% after attack on Saudi facilities hits global supply

[Reuters] Gold gains as attacks on Saudi oil plants lift safe-haven bets

[Reuters] Dollar falls as oil attacks send investors to safety

[Reuters] Trump says U.S. 'locked and loaded' for potential response to Saudi oil attack

[CNBC] Trump authorizes release of oil from strategic petroleum reserve after Saudi attacks

[CNBC] It’s ‘very difficult’ for China’s economy to maintain 6% growth, says Premier Li Keqiang

Sunday's News Links

[CNBC] Saudi stock market dives, crude futures to jump after drone attack on oil plants

[Reuters] Saudi, Gulf stocks fall after attacks on Aramco oil plants

[CNBC] Oil could rise $10 per barrel after drone attack forces Saudi to cut output in half

[Reuters] Iran dismisses U.S. claim it was behind Saudi oil attacks, says ready for war

[AP] Attack on Saudi oil sites raises risks amid US-Iran tension

[Reuters] EU warns of instability after Saudi oil attacks

[Reuters] Fed trades 'remarkably positive' for 'no precedents' after volatile year

[Reuters] UK's Johnson, likening himself to Incredible Hulk, vows Oct. 31 Brexit

[Reuters] Hong Kong police fire tear gas to break up protesters

[Bloomberg] Saudis Race to Restore Oil Output After Aramco Attacks

[Bloomberg] Fed Doves Fear Risks Abroad While Hawks See a Solid Home Front

[WSJ] Iran Rejects U.S. Accusations Over Saudi Oil-Facility Attacks

[WSJ] Junk Debt Sends Early Warning Signals

[WSJ] Political Crisis Deepens in Hong Kong as Protesters Retake Streets

Saturday, September 14, 2019

Just the Facts: September 14, 2019

For the Week:

The S&P500 gained 1.0% (up 20.0% y-t-d), and the Dow rose 1.6% (up 16.7%). The Utilities were unchanged (up 18.8%). The Banks surged 7.8% (up 18.8%), and the Broker/Dealers jumped 5.2% (up 17.0%). The Transports rose 5.0% (up 17.9%). The S&P 400 Midcaps gained 2.7% (up 18.0%), and the small cap Russell 2000 surged 4.8% (up 17.0%). The Nasdaq100 added 0.5% (up 24.7%). The Semiconductors gained 2.4% (up 30.0%). The Biotechs jumped 3.7% (up 5.0%). With bullion declining $18, the HUI gold index dropped 5.9% (up 27.1%).

Three-month Treasury bill rates ended the week at 1.915%. Two-year government yields jumped 26 bps to 1.80% (down 69bps y-t-d). Five-year T-note yields surged 32 bps to 1.75% (down 76bps). Ten-year Treasury yields rose 34 bps to 1.90% (down 79bps). Long bond yields jumped 35 bps to 2.37% (down 64bps). Benchmark Fannie Mae MBS yields surged 46 bps to 2.83% (down 66bps).

Greek 10-year yields slipped a basis point to 1.56% (down 283bps y-t-d). Ten-year Portuguese yields jumped 13 bps to 0.32% (down 140bps). Italian 10-year yields were little changed at 0.88% (down 186bps). Spain's 10-year yields rose 13 bps to 0.30% (down 111bps). German bund yields jumped 19 bps to negative 0.45% (down 69bps). French yields rose 17 bps to negative 0.17% (down 88bps). The French to German 10-year bond spread narrowed two to 28 bps. U.K. 10-year gilt yields surged 26 bps to 0.76% (down 52bps). U.K.'s FTSE equities index gained 1.2% (up 9.5% y-t-d).

Japan's Nikkei Equities Index jumped 3.7% (up 9.9% y-t-d). Japanese 10-year "JGB" yields jumped eight bps to negative 0.15% (down 16bps y-t-d). France's CAC40 gained 0.9% (up 19.5%). The German DAX equities index advanced 2.3% (up 18.1%). Spain's IBEX 35 equities index rose 1.6% (up 7.0%). Italy's FTSE MIB index increased 1.1% (up 21.1%). EM equities were mostly higher. Brazil's Bovespa index added 0.5% (up 13.7%), and Mexico's Bolsa increased 0.3% (up 2.9%). South Korea's Kospi index rose 2.0% (up 0.4%). India's Sensex equities index gained 1.1% (up 3.7%). China's Shanghai Exchange increased 1.1% (up 21.5%). Turkey's Borsa Istanbul National 100 index surged 4.6% (up 13.4%). Russia's MICEX equities index slipped 0.2% (up 17.8%).

Investment-grade bond funds saw inflows of $5.559 billion, and junk bond funds posted inflows of $1.865 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates gained seven bps to 3.56% (down 104bps y-o-y). Fifteen-year rates rose nine bps to 3.09% (down 97bps). Five-year hybrid ARM rates increased six bps to 3.36% (down 57bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up 11 bps to 4.32% (down 35bps).

Federal Reserve Credit last week increased $4.6bn to $3.727 TN. Over the past year, Fed Credit contracted $444bn, or 10.6%. Fed Credit inflated $916 billion, or 33%, over the past 357 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt recovered $2.1bn last week to $3.453 TN. "Custody holdings" gained $31.3bn y-o-y, or 0.9%.

M2 (narrow) "money" supply jumped $40.6bn last week to $14.999 TN. "Narrow money" gained $762bn, or 5.4%, over the past year. For the week, Currency increased $1.5bn. Total Checkable Deposits surged $46.9bn, while Savings Deposits declined $11.7bn. Small Time Deposits slipped $1.0bn. Retail Money Funds rose $4.8bn.

Total money market fund assets rose $16.8bn to $3.397 TN. Money Funds gained $534bn y-o-y, or 18.6%.

Total Commercial Paper declined $8.1bn to $1.116 TN. CP was up $49bn y-o-y, or 4.6%.

Currency Watch:

The U.S. dollar index was little changed at 98.257 (up 2.2% y-t-d). For the week on the upside, the British pound increased 1.8%, the South African rand 1.6%, the Mexican peso 0.7%, the Singapore dollar 0.6%, the South Korean won 0.5%, the Australian dollar 0.5%, the euro 0.4%, and the Swedish krona 0.4%. On the downside, the Japanese yen declined 1.1%, the Canadian dollar 0.9%, the New Zealand dollar 0.7%, the Brazilian real 0.7%, the Swiss franc 0.3% and the Norwegian krone 0.1%. The Chinese renminbi increased 0.52% versus the dollar this week (down 2.84% y-t-d).

Commodities Watch:

September 8 – Bloomberg (Ranjeetha Pakiam): “China has added almost 100 tons of gold to its reserves since it resumed buying in December, with the consistent run of accumulation coming amid a rally in prices and the drag of the trade war with Washington. The People’s Bank of China raised bullion holdings to 62.45 million ounces in August from 62.26 million a month earlier… In tonnage terms, August’s inflow was 5.91 tons, following the addition of about 94 tons in the previous eight months.”

September 8 – CNBC (Huileng Tan): “Veteran investor Mark Mobius is bullish on gold as central banks around the world cut interest rates. ‘Physical gold is the way to go, in my view, because of the incredible increase in money supply,’ said Mobius… ‘All the central banks are trying to get interest rates down, they are pumping money into the system. Then, you have all of the cryptocurrencies coming in, so nobody really knows how much currency is out there,’ he told CNBC’s ‘Street Signs’…”

The Bloomberg Commodities Index declined 1.3% this week (up 17.3% y-t-d). Spot Gold retreated 1.2% to $1,489 (up 16.1%). Silver fell 3.0% to $17.569 (up 13%). WTI crude dropped $1.67 to $54.85 (up 21%). Gasoline fell 1.3% (up 17%), while Natural Gas surged 4.7% (down 11%). Copper rallied 2.5% (up 3%). Wheat surged 4.3% (down 4%). Corn jumped 3.7% (down 2%).

Market Instability Watch:

September 13 – Financial Times (Peter Wells): “Treasuries chalked up their worst week — and small-caps their best — since 2016 as investors extended a sweeping rotation away from the momentum plays and bonds that had been favoured over summer. The yield on the benchmark 10-year note surged 34 bps since last Friday to a six-week high of 1.90%, the largest weekly rise since mid-November 2016. An iShares exchange traded fund tracking US Treasuries fell 2.1% over the past five sessions, putting it its worst weekly performance also since that same November week nearly three years ago. The yield on the 10-year Treasury rose for an eighth consecutive session, the longest streak since March 2017.”

September 13 – Bloomberg (Vivien Lou Chen): “Treasuries extended their September tumble, sending the benchmark 10-year yield to its highest level since early August… Bonds fell after August retail sales and the September University of Michigan consumer sentiment index increased more than forecast, buoying confidence in the economic expansion. Yields across the curve rose, with the 10-year climbing more than 12 basis points to 1.90%, up from a three-year low of 1.43% early this month. The spread between 2-year and 10-year yields, considered a recession indicator when it inverts, as it did in August for the first time since 2007, widened back above 9 bps.”

September 11 – Bloomberg (John Gittelsohn): “The balance of power has shifted in the $8 trillion stock-fund industry. Assets in mutual funds and exchange-traded funds tracking U.S. equity indexes surpassed those run by stock-pickers for the first time last month, according to… Morningstar Inc. August fund flows helped lift assets in index-tracking U.S. equity funds to $4.271 trillion, compared with $4.246 trillion run by stock-pickers… Investors added $88.9 billion to passive U.S. stock funds while pulling $124.1 billion from active managers this year through August…”

September 11 – Bloomberg (John Gittelsohn): “It’s official: inexpensive index funds and ETFs have finally eclipsed old-fashioned stock pickers. Passive investing styles have been gaining ground on actively managed funds for decades. But in August the investment industry reached one of the biggest milestones in its modern history, as assets in U.S. index-based equity mutual funds and ETFs topped those in active stock funds for the first time. Stock picking isn’t dead. But the development marks the official end of money managers’ position as the guiding force in the American stock market -- and the seemingly inexorable rise of low-cost index-driven investing. If, as expected, the shift keeps gathering momentum, the implications will be enormous for the industry pros, financial markets and ordinary investors everywhere.”

September 10 – Bloomberg (Luke Kawa): “Go long the dollar, Treasuries and defensive stocks. Sell metals and the pound. It was an investing playbook that worked virtually all year -- until suddenly it didn’t. For a second straight day, 2019’s biggest winners across assets are getting hammered as investors reassessed expectations for global economic growth. The Treasury market set the tone, with a 10-month rally grinding to a halt Friday after data on the American consumer and labor market signaled a recession is far from imminent.”

September 10 – Wall Street Journal (Ryan Dezember): “A popular wager in the energy markets is backfiring. Hedge funds and other money managers in August built up a big bet that natural gas prices would decline—their most bearish position in the futures market in over a decade—only to have prices shoot up 25%. Prices usually weaken when summer subsides since there is less demand to generate electricity for air conditioners.”

September 11 – Reuters (Eliana Raszewski): “Argentina’s central bank… announced further currency controls in an effort to tame speculation and stem a spiraling debt crisis in Latin America’s third largest economy. The new measure requires anyone purchasing foreign currency to present a sworn oath promising to wait at least five days before using it to purchase bonds.”

September 10 – Wall Street Journal (Ira Iosebashvili): “Currencies around the world are tumbling to multiyear lows, bruising investors’ portfolios and fanning the flames of a global trade war. The Chinese yuan recently hit its lowest level in more than a decade against the dollar, the euro dropped to a fresh two-year low last week and the British pound is at depths it hasn’t consistently plumbed since the 1980s. Some emerging-market currencies such as the Colombian peso have fallen to their lowest prices on record against the dollar, while Argentina has recently introduced capital controls after its peso plunged in August. Out of 41 currencies tracked by The Wall Street Journal, only nine are up against the dollar in 2019. ‘People are becoming more concerned about currencies because currencies are becoming more dangerous,’ said Kit Juckes, global strategist at Société Générale.”

September 10 – Financial Times (Steve Johnson): “Rarely has the choice facing the emerging market investor been so stark. Bonds are so richly priced that around 30% of the entire universe of euro-denominated EM debt, with a face value of about €115bn, now trades with a negative yield… That has never happened before. What is more, not all of this negatively yielding debt consists of short-maturity bonds issued by the EU sovereigns of eastern and central Europe, which are usually considered ‘safe’ by fixed income investors. The bundle includes Polish government debt at a maturity as far out as 2026, along with bonds from Indonesia, China and South Korea.”

September 11 – Reuters (Richard Leong): “U.S. money market fund assets have hit their highest level since October 2009, as investors piled more cash into these low-risk products despite a lessening of concerns about U.S.-China trade tensions… Assets of money funds, which are seen as being nearly as safe as bank accounts, climbed by $24.57 billion to $3.355 trillion in the week ended Sept. 10…”

Trump Administration Watch:

September 12 – CNBC (Jacob Pramuk): “President Donald Trump signaled… that he would consider an interim trade deal with China, even though he would not prefer it. The president told reporters he would like to ink a full agreement with the world’s second largest economy. However, he left the door open to striking a limited deal with Beijing. ‘If we’re going to do the deal, let’s get it done,’ he told reporters… ‘A lot of people are talking about it, I see a lot of analysts are saying an interim deal — meaning we’ll do pieces of it, the easy ones first. But there’s no easy or hard. There’s a deal or there’s not a deal. But it’s something we would consider, I guess.’”

September 11 – CNBC (Riya Bhattacharjee and Chris Eudaily): “President Donald Trump… tweeted that he will delay increasing tariffs on $250 billion worth of Chinese goods from Oct. 1 to Oct. 15 as a ‘gesture of good will’ to China. Trump said the postponement came ‘at the request of the Vice Premier of China, Liu He, and due to the fact that the People’s Republic of China will be celebrating their 70th Anniversary.’ The tariffs were set to increase to 30% from 25% on the goods. He is set to be in Washington for talks in early October.”

September 11 – CNBC (Jeff Cox and John Melloy): “President Donald Trump… continued his verbal assault on the Federal Reserve, which he blames for slowing the economy, tweeting that the central bank should cut interest rates to zero or even set negative interest rates. The president also called Fed officials ‘boneheads’ in the tweet. ‘The Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt. INTEREST COST COULD BE BROUGHT WAY DOWN, while at the same time substantially lengthening the term,’ he said… The president also made a new suggestion not seen in some of his past attacks on the Fed, saying that the country should refinance its debt load. The U.S. has $22.5 trillion in debt, $16.7 trillion of which is held by the public… That debt load has grown $2.6 trillion, or 13% under Trump, due in part to the 2017 tax cut that the president shepherded through Congress. Taxpayers have shelled out $538.6 billion in interest costs in the 2019 fiscal year, easily a record. The idea for ‘refinancing’ federal debt is without any modern precedent.”

September 11 – Bloomberg (Christopher Condon): “President Donald Trump triggered a swift and skeptical reaction with his demand… for the Federal Reserve to lower interest rates ‘to zero, or less,’ as part of a plan to reduce the financing costs of U.S. government debt. ‘This is a recipe for disaster,’ said Roberto Perli, a former Fed economist and partner at Cornerstone Macro. ‘If a central bank starts financing debt spending without constraints, interest rates will end up being anything but moderate. Just look at Zimbabwe.’ … “The Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt,’ Trump tweeted. ‘Interest cost could be brought way down, while at the same time substantially lengthening the term.’”

September 6 – Associated Press (Kevin Freking): “White House economic adviser Larry Kudlow compared trade talks with China… to the U.S. standoff with Russia during the Cold War. In other words, negotiations could continue for a long time… Kudlow discounted the notion that next year’s election increases the urgency for President Donald Trump to conclude the trade war. ‘The stakes are so high, we have to get it right, and if that takes a decade, so be it,’ he said. Kudlow emphasized that it took the United States decades to get the results it wanted with Russia. He noted that he worked in the Reagan administration: ‘I remember President Reagan waging a similar fight against the Soviet Union.’”

September 9 – Bloomberg (Mike Dorning): “The U.S. Agriculture Department’s top trade official called Chinese President Xi Jinping a ‘communist zealot,’ as he warned farmers the Asian leader is a tough adversary in negotiations. Ted McKinney, the department’s undersecretary for trade, offered the provocative characterization of the Chinese leader… at a sensitive time in U.S.-China relations… ‘Let me just tell you what: Mr. Xi Jinping is a communist zealot. He sees himself very much in the spirit of Mao Zedong,’ McKinney said… to 380 farmers the group gathered in Washington to lobby the government.”

September 13 – Reuters (Richard Cowan): “The Trump administration plans to unveil a tax cut plan in mid-2020, a top White House adviser said…, saying it would be targeted to giving significant relief to the middle class. …White House economic adviser Larry Kudlow offered no details on what he has termed “Tax Cuts 2.0,” a plan the administration intends to put forward as President Donald Trump pursues his bid for a second White House term. ‘We will gather together the best ideas from the Hill (Congress), the administration and outside folks to provide a significant new round of middle class tax relief,’ Kudlow said, adding, ‘This is not a recession measure at all.’”

September 10 – Financial Times (Robert Armstrong): “Trump administration officials plans’ for pushing Fannie Mae and Freddie Mac towards private ownership… faced sharp criticism from Democratic senators, who argued the reforms would make mortgages more costly. Steven Mnuchin, the US Treasury secretary; Mark Calabria, director of the Federal Housing Finance Agency; and Ben Carson, housing and urban development secretary, said the two government-backed mortgage guarantors were more leveraged than before the crisis and that Congress needed to act… ‘When I look at a $3tn institution levered up 1,000 to one, it keeps me up at night,’ Mr Calabria said during a hearing before the Senate banking committee.”

September 10 – Reuters (Pete Schroeder): “The Trump administration will pursue the reform of mortgage giants Fannie Mae and Freddie Mac, the guarantors of over half the nation’s mortgages, if Congress fails to act, officials told Congress… In testimony before the U.S. Senate Banking Committee, U.S. Treasury Secretary Steven Mnuchin, Housing and Urban Development Secretary Ben Carson, and Federal Housing Finance Agency Director Mark Calabria defended a plan to release Fannie and Freddie from government control more than a decade after they were bailed out during the 2008 financial crisis… ‘If we do nothing, this is going to end very badly,’ said Calabria, who warned Fannie and Freddie are undercapitalized and overly reliant on government backing to weather any downturn.”

September 12 – Reuters (Andrea Shalal): “U.S. Treasury Secretary Steven Mnuchin… said the United States will issue 50-year bonds if there is ‘proper demand,’ a moved aimed at ‘derisking’ the government’s $22 trillion of debt and locking in low interest rates.”

September 13 – Bloomberg (Erik Wasson and Christopher Condon): “White House Economic Adviser Larry Kudlow criticized Europe’s low and negative interest rates, contradicting his boss, President Donald Trump, who earlier in the week tweeted that the U.S. Federal Reserve should pursue a similar approach by bringing down rates ‘to ZERO, or less.’ Kudlow told reporters… ‘The Europe story -- all this super easy money, zero and negative rates. You know, if it was going to work it would have worked. And it’s not worked.’”

Federal Reserve Watch:

September 11 – Reuters (Lindsay Dunsmuir, Ann Saphir, Jonnelle Marte, Howard Schneider and Jason Lange): “U.S. President Donald Trump’s push for low interest rates reached a new pitch…, when he demanded the Federal Reserve take the extraordinary step of sending them below zero. Outside of Washington, D.C., Fed policymakers often face the opposite complaint. Interest rates are too low already, Americans tell Fed officials when they speak at Rotary Clubs and chambers of commerce around the country. Savers, and particularly those near retirement age, are not getting enough return from their savings accounts or fixed investments. The negative rates Trump is pushing, already in place in some parts of Europe and in Japan, would effectively charge people who save their money, and reward those able and willing to borrow. They were so unpopular in Japan that they became a hot topic on talk shows and tabloids, which highlighted consumers buying safes to stash their cash at home instead of with banks.”

September 6 – Financial Times (Brendan Greeley): “In Zurich on Friday, Jay Powell, chairman of the Federal Reserve, repeated his mantra from this summer that the Fed will continue to ‘act as appropriate to sustain the expansion.’ …But after that, he got technical. Talking about the challenges of easing in a potential downturn when policy rates are already close to zero — something he has called the ‘pre-eminent monetary policy challenge of our time’ — he offered one specific strategy: make-up inflation. When a central bank undershoots its inflation target, Mr Powell explained, it can promise to the public that it will overshoot in the future. As it makes up for lost inflation, the bank would also be making up for lost growth. ‘If the public understands and acts up on that, we limit the damage from the recession,’ he said. ‘It’s a great idea.’”

September 10 – Bloomberg (Sridhar Natarajan): “James Gorman has a note of caution for the Federal Reserve in the midst of its interest-rate reductions. ‘The problem with cutting is it’s one of the few tools you’ve got,’ Morgan Stanley’s chief executive officer said…, adding that he supports the reductions made so far. ‘So if you give it away too easily, what do you have if we have a real problem?’”

U.S. Bubble Watch:

September 12 – Associated Press (Martin Crutsinger): “The U.S. government’s budget deficit increased by $169 billion to $1.07 trillion in the first 11 months of this budget year as spending grew faster than tax collections. The… deficit with just one month left in the budget year is up 18.8% over the same period a year ago. Budget experts project a surplus for September, which would push the total 2019 deficit down slightly below the $1 trillion mark. The Congressional Budget Office is forecasting a deficit this year of $960 billion, compared to a 2018 deficit of $779 billion.”

September 12 – Reuters (Lindsay Dunsmuir): “The U.S. government posted a $200 billion budget deficit in August, bringing the fiscal year-to-date deficit past $1 trillion… Federal spending in August was $428 billion, down 1% from the same month in 2018, while receipts were $228 billion, an increase of 4% compared with August 2018. The deficit for the fiscal year to date was $1.067 trillion, compared with $898 billion in the comparable period the year earlier.”

September 10 – Wall Street Journal (Janet Adamy and Paul Overberg): “American incomes remained essentially flat in 2018 after three straight years of growth, according to Census Bureau figures… Median household income was $63,179 in 2018, an uptick of 0.9% that census officials said isn’t statistically significant from the prior year based on figures adjusted for inflation. The poverty rate in 2018 was 11.8%, a decrease of a half percentage point from 2017, marking the fourth consecutive annual decline in the national poverty rate. It was the first time the official poverty rate fell significantly below its level at the start of the recession in 2007.”

September 12 – Reuters (Lucia Mutikani): “U.S. underlying consumer prices increased solidly in August, leading to the largest annual gain in a year, but rising inflation is unlikely to deter the Federal Reserve from cutting interest rates again next week… The… consumer price index excluding the volatile food and energy components gained 0.3% for a third straight month. The so-called core CPI was boosted by a surge in healthcare costs and increases in prices for airline tickets, recreation and used cars and trucks. In the 12 months through August, the core CPI increased 2.4%, the most since July 2018, after climbing 2.2% in July.”

September 13 – Wall Street Journal (Harriet Torry): “Spending on vehicles drove strong retail sales in August, suggesting American shoppers continue to support the economy… Retail sales… climbed a seasonally adjusted 0.4% in August from a month earlier… The robust report beat economists’ expectations and came on the heels of stronger spending in July than initially estimated, a 0.8% rise. The data provide reassurance that household spending remains an economic bulwark against signs of a global slowdown, though perhaps not enough to prevent some softening in U.S. growth in the third quarter.”

September 10 – Bloomberg (William Edwards): “Optimism among U.S. small-business owners fell in August to the lowest level in five months, with the outlook for the economy and sales slumping amid escalating trade tensions and recession fears. The decline of 1.6 points to 103.1 in the National Federation of Independent Business’s index resulted from weaker expectations for businesses and sales…”

September 11 – CNBC (Diana Olick): “Total mortgage application volume rose 2% last week compared with the previous week… Volume was 69% higher than the same week one year ago… Mortgage applications to purchase a home increased 5% for the week and were 9% higher than the same week one year ago.”

September 13 – CNBC (Diana Olick): “The average rate on the 30-year fixed is now 20 bps higher than it was on Monday and 36 bps higher than its last low on Sept. 4… That is the biggest short-term jump since the week following the election of President Donald Trump… ‘The big risk here is that the overall rate rally — the one that began in November 2018 -- has run its course,’ said Matthew Graham, chief operating officer at Mortgage News Daily.”

September 10 – Reuters (David Randall): “Corporate America appears to be rushing to get the most out of the decade-long bull market in stocks and bonds before a possible recession and election-year stock market volatility slam the IPO and credit windows shut. Approximately 70 companies have registered with the U.S. Securities and Exchange Commission to go public…, while $72 billion in investment-grade corporate debt – a figure nearly as large as the total issuance in August - was issued last week, according to… Dealogic.”

September 10 – Associated Press (Matt O’Brien): “Big tech companies have long rebuffed attempts by the U.S. federal government to scrutinize or scale back their market power. Now they face a scrappy new coalition as well: prosecutors from nearly all 50 states. In a rare show of bipartisan force, attorneys general from 48 states along with Puerto Rico and the District of Columbia are investigating whether Google’s huge online search and advertising business is engaging in monopolistic behavior. The Texas-led antitrust investigation of Google… follows a separate multistate investigation of Facebook’s market dominance that was revealed Friday.”

September 10 – Reuters (Lindsay Dunsmuir and Howard Schneider): “The share of Americans without health insurance rose for the first time in a decade last year and U.S. household income hardly budged, according to a government report… that laid bare issues that could be central to the U.S. presidential election next year. …About 27.5 million residents, or 8.5% of people, did not have health insurance in 2018, an increase of almost 2 million from the year before when 7.9% of people lacked coverage, the Census Bureau said.”

September 9 – Bloomberg (Katherine Chiglinsky, Molly Smith, and David Caleb Mutua): “U.S. corporate pensions felt the pain of low bond yields in August. The retirement funds for U.S. corporations had just 82% of the money they expect to need over time for pensioners as of August, down four percentage points from July, according to… consulting firm Mercer… The steep drop stemmed from long-term bond yields plunging to record lows, which effectively increases the current value of companies’ future obligations… When companies have more than about 80% of the funding they expect to need for pensions, they tend to cut their investments in riskier assets like stocks and increase safer holdings like bonds to lock in gains and reduce risk.”

September 11 – New York Times (Conor Dougherty and Luis Ferré-Sadurní): “California lawmakers approved a statewide rent cap… covering millions of tenants, the biggest step yet in a surge of initiatives to address an affordable-housing crunch nationwide. The bill limits annual rent increases to 5% after inflation and offers new barriers to eviction… Gov. Gavin Newsom, a Democrat who has made tenant protection a priority in his first year in office, led negotiations to strengthen the legislation… The measure, affecting an estimated eight million residents of rental homes and apartments, was heavily pushed by tenants’ groups. In an indication of how dire housing problems have become, it also garnered the support of the California Business Roundtable…”

China Watch:

September 12 – Wall Street Journal (Lingling Wei, Chao Deng and Josh Zumbrun): “China is looking to narrow the scope of its negotiations with the U.S. to only trade matters, seeking to put thornier national-security issues on a separate track in a bid to break deadlocked talks with the U.S. Chinese officials hope such an approach would help both sides resolve some immediate issues and offer a path out of the impasse… The move is the latest in a series of steps officials in Washington and Beijing are taking to ease trade tensions ahead of high-level negotiations in October.”

September 13 – Reuters (Andrew Galbraith): “China will exempt some agricultural products from additional tariffs on U.S. goods, including pork and soybeans, China’s official Xinhua News Agency…, in the latest sign of easing Sino-U.S. tensions before a new round of talks aimed at curbing a bruising trade war.”

September 11 – Reuters: “China’s banks extended more new yuan loans in August as policymakers ratcheted up support for the slowing economy, and further policy easing is expected in the coming weeks as the Sino-U.S. trade war takes a bigger toll on the economy. Chinese regulators have been trying to boost bank lending and lower financing costs for more than a year, especially for smaller and private companies… Chinese banks extended 1.21 trillion yuan ($170bn) in new loans in August, up from July and exceeding analyst expectations… Analysts… had predicted new yuan loans would rise to 1.2 trillion yuan in August, up from 1.06 trillion yuan the previous month and compared with 1.28 trillion yuan a year earlier. Household loans, mostly mortgages, rose to 653.8 billion yuan in August from 511.2 billion yuan in July, while corporate loans climbed to 651.3 billion yuan from 297.4 billion yuan… Outstanding yuan loans grew 12.4% from a year earlier - in line with expectations but slower than July’s 12.6%... Growth of outstanding total social financing (TSF), a broad measure of credit and liquidity in the economy, rose 10.7% in August from a year earlier…”

September 9 – Kyodo: “Chinese President Xi Jinping voiced distrust of U.S. President Donald Trump during his meeting with the Japanese Prime Minister Shinzo Abe in June amid the U.S.-China trade dispute, a source close to the matter said… ‘I can't believe what President Trump says’ concerning trade negotiations, Xi was quoted as telling Abe during a meeting on the fringe of the Group of 20 summit in Osaka. Although Abe told Xi that Trump trusts the Chinese president, Xi continued to air his grievances about his U.S. counterpart, the diplomatic source told Kyodo News.”

September 8 – Associated Press (Joe McDonald): “China’s trade with the United States is falling as the two sides prepare for negotiations with no signs of progress toward ending a tariff war… Imports of American goods tumbled 22% in August from a year earlier to $10.3 billion… Exports to the United States, China’s biggest market, sank 16% to $44.4 billion.”

September 8 – Wall Street Journal (Liyan Qi): “China’s imports fell for a fourth straight month in August as a drop-off in exports to the U.S. steepened, the most recent economic warning signs during a prolonged trade spat with the U.S. that has Beijing turning toward stimulus measures. Chinese imports of everything from raw materials to high-tech products dropped 5.6% in August compared with a year earlier…”

September 9 – Bloomberg (Yawen Chen and Se Young Lee): “China’s factory-gate prices shrank at the sharpest pace in three years in August, falling deeper into deflationary territory and reinforcing the urgency for Beijing to step up economic stimulus as the trade war with the United States intensifies… China’s producer price index (PPI) dropped 0.8% from a year earlier in August, widening from a 0.3% decline seen in July and the worst year-on-year contraction since August 2016…”

September 9 – Financial Times (Alice Woodhouse): “Chinese factory gate prices declined for a second month in August as the manufacturing sector remained under pressure, while consumer price growth hovered at an 18-month high as pork prices surged. Factory gate prices dipped 0.8% year on year in August…, the sharpest fall in three years… Chinese manufacturers are struggling amid ongoing US-China trade tensions. Separately, consumer prices rose 2.8% year on year in August…”

September 10 – New York Times (Alexandra Stevenson and Raymond Zhong): “Things that keep China’s top leaders up at night: a stalling economy, a bruising trade war and, increasingly, pigs. Specifically, a shortage of pigs, which is fast becoming a national crisis. The price of pork has been rising for months, and it is now nearly 50% higher than it was a year ago… Consumers are frustrated, and officials are quietly expressing alarm as they fight the outbreak of a disease that is devastating the country’s pig population and causing the shortage.”

September 10 – Bloomberg: “Chinese authorities have launched a crackdown on the use of credit card in property transactions, the 21st Century Herald reports… Regulators is cracking down on the use of credit card to pay deed taxes or for other payment to property developers and agents…”

September 8 – Bloomberg (Shawna Kwan): “Hong Kong’s protests aren’t just about freedom and democracy. Widening inequality has long contributed to tension in the city, and nothing exemplifies the divide between the haves and have-nots better than the sky-high cost of residential property. Developers, mostly owned by local billionaire families, wield great market power, controlling industries including utilities and mobile phone carriers… Hong Kong’s real estate has for years been ranked the world’s least affordable. For example, a one-bedroom unit in Tuen Mun in the New Territories -- about an hour by subway way from Central, the main business district -- costs the same as a two-bedroom apartment on New York’s upmarket Upper East Side. Prices have risen by 48% over the past five years.”

Central Banking Watch:

September 13 – Financial Times (Martin Arnold): “Mario Draghi’s decision to restart the European Central Bank’s economic stimulus efforts has attracted fierce criticism and opened deep divisions in the institution's top ranks. Thursday’s announcement that the central bank would cut interest rates further into negative territory and restart its €2.6tn quantitative easing programme of bond-buying was greeted with outrage by those who argue that the measures penalised prudent savers while fuelling potential asset bubbles in housing, stock markets and bonds. One German tabloid accused Mr Draghi of being ‘Count Draghila’ who ‘sucks our bank accounts empty’. And, more significantly for the future of the bloc’s policymaking, there was resistance within the ECB governing council itself. As many as nine of the 25 members of the council — the ECB’s main rate-setting body — spoke out against the package… Mr Draghi told reporters there was ‘a clear majority’ in favour of the package. He added that ‘an ample degree of monetary accommodation’ was necessary for ‘the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term’.”

September 12 – Bloomberg (Jana Randow): “European Central Bank governors representing the core of the euro-area economy resisted President Mario Draghi’s ultimately successful bid to restart quantitative easing, according to officials with knowledge of the matter. The unprecedented revolt took place during a fractious meeting where Bank of France Governor Francois Villeroy de Galhau joined more traditional hawks including his Dutch colleague Klaas Knot and Bundesbank President Jens Weidmann in pressing against an immediate resumption of bond purchases, the people said.”

September 11 – Reuters (Balazs Koranyi and Francesco Canepa): “European Central Bank chief Mario Draghi pledged indefinite stimulus… to revive an ailing euro zone economy, tying the hands of his successor for years to come and sparking an immediate conflict with U.S. President Donald Trump. As Draghi’s eight-year mandate nears its close, the ECB cut rates deeper into negative territory and promised bond purchases with no end-date to push borrowing costs even lower… The bigger-than-expected stimulus will increase pressure on the U.S. Federal Reserve and Bank of Japan to ease policy next week to support a world economy increasingly characterized by low growth and protectionist threats to free trade.”

September 12 – Wall Street Journal (Paul J. Davies): “The European Central Bank launched a fresh wave of loose-money policies… to jolt its stubbornly low inflation rate. But many suspect its primary target was something else: the euro. The central bank cut interest rates and revived a bond-buying program at President Mario Draghi ’s penultimate meeting… While the ECB doesn’t target specific levels for the euro, the exchange rate has become a policy focus because of fears that currency strength squashes inflation. ‘This [focus on the euro] is more true than it’s ever been,’ said Seema Shah, chief strategist at Principal Global Investors . ‘Interest rates are so low that any further cut is not going to have much of an impact and runs the risk of making things worse. So why bother? Simply to target the euro.’”

September 12 – Bloomberg (Yuko Takeo and Piotr Skolimowski): “The European Central Bank cut interest rates further below zero and revived bond purchases after President Mario Draghi overcame critics of his stimulus policies to make a final run at reflating the euro-area economy. The ECB reduced the deposit rate to minus 0.5% from minus 0.4%, and said it’ll buy debt from Nov. 1 at a pace of 20 billion euros ($22bn) a month for as long as necessary to hit its inflation goal. ‘We have headroom to keep going on for some time at this rhythm,’ Draghi, whose eight-year term ends next month, said… ‘We still think the probability of recession for the euro area is small, but it’s gone up.’”

September 10 – Reuters (Howard Schneider, Leika Kihara and Balazs Koranyi): “The last time major central banks shifted gears together, it was a cooperative move to keep the financial crisis of a decade ago from becoming a full-bore, worldwide depression. Now, a new round of global ratecutting risks taking on a competitive edge as policymakers try to stay ahead of rising trade tensions, a volatile investment climate, and a shift in the political mood from shared support for globalization to a more zero-sum battle over a slower-growing world economy. It’s a situation that has created deep internal divisions at the European Central Bank, the Bank of Japan and the U.S. Federal Reserve as officials debate how to confront a global slowdown with limited room to cut interest rates, and with elected officials pursuing policies that may be doing harm, at least in the short run.”

September 9 – Bloomberg (Mark Gongloff): “Central bankers were once magical beings with seemingly limitless powers. Paul Volcker slew stagflation. Alan Greenspan ruled for nearly 20 years. Ben Bernanke prevented a second Great Depression. Today’s central bankers are pale shadows. Federal Reserve Chairman Jerome Powell is constantly bullied by his boss. Worse, he and his counterparts in Europe face a weakening global economy armed with the equivalent of one of those guns that unfurls a flag with the word ‘Bang!’ on it. But they must pull the trigger again and again, even if there’s a strong chance it either won’t help or will do actual harm, writes Mohamed El-Erian. Markets demand they act and throw terrifying tantrums if they don’t. Similar pressure comes from politicians — the same politicians who do nothing to support growth, when they’re not actively hurting it.”

September 9 – Financial Times (Richard Koo): “The fear of ‘Japanisation’ has, once again, prompted monetary authorities on both sides of the Atlantic to consider additional monetary easing — but for all the wrong reasons. The extended periods of slow growth and low inflation seen in Japan since 1990 and in the west since 2008 are caused by the disappearance of borrowers, not by the lack of lenders. Monetary policy, which controls the availability of financing, does not work well when there is no appetite for debt. The Japanese demand for borrowing disappeared after the bursting of its bubble in 1990. During the process, commercial real estate prices fell almost 90% nationwide, falling back to the levels of 1973, destroying the financial health of all those who borrowed to purchase property and those who used it as collateral for borrowing. With pre-1990 liabilities still on the books but no assets to show for them, millions of borrowers started to pay down debt to remove their debt overhang... It was a journey that took nearly two decades to complete.”

Brexit Watch:

September 9 – Reuters (William James and Kylie MacLellan): “Prime Minister Boris Johnson said… he would not request an extension to Brexit, hours after a law came into force demanding that he delay Britain’s departure from the European Union until 2020 unless he can strike a divorce deal… ‘This government will press on with negotiating a deal, while preparing to leave without one,” Johnson told parliament… ‘I will go to that crucial summit on October the 17th and no matter how many devices this parliament invents to tie my hands, I will strive to get an agreement in the national interest... This government will not delay Brexit any further.”

September 11 – Reuters (Paul Sandle): “The British government’s plans for a no-deal Brexit warn of severe disruption to cross-Channel routes, affecting the supply of medicines and certain types of fresh foods, and say that protests and counter-protests will take place across the country, accompanied by a possible rise in public disorder. The ‘Operation Yellowhammer’ worst-case assumptions published on Wednesday were prepared on Aug. 2…”

September 11 – Reuters (Michael Holden and Guy Faulconbridge): “Prime Minister Boris Johnson’s suspension of the British parliament was unlawful, a court ruled…, prompting immediate calls for lawmakers to return to work as the government and parliament battle over the future of Brexit.”

September 7 – Reuters (James Davey): “The British Labour Party’s second most powerful man has warned of a possible ban on financial services companies awarding bonuses under a future Labour government… John McDonnell, Labour’s finance spokesman, said… he was putting the City of London on notice that it was time to end bonuses voluntarily or face draconian curbs. ‘If it continues and the City hasn’t learnt its lesson, we will take action, I’ll give them that warning now,’ he told the FT. ‘People are offended by bonuses,’ he said, calling them ‘a reflection of the grotesque levels of inequality’.”

Europe Watch:

September 10 – Reuters (Paul Carrel): “German Chancellor Angela Merkel said… her government was sticking to its balanced budget policy, tempering expectations for fiscal stimulus in Europe’s largest economy. ‘As a federal government, we take seriously the responsibility for a solid budget policy,’ Merkel told an event organized by the German taxpayers’ federation. ‘And I can assure you that we are sticking to the goal of a balanced budget.’”

September 10 – Financial Times (Guy Chazan): “Germany would deploy ‘many, many billions’ of euros to counteract an economic crisis in Europe, Olaf Scholz, the German finance minister, pledged…, saying that years of fiscal prudence and budget surpluses had helped prepare the country to act. Speaking at the start of a Bundestag debate on the 2020 budget, Mr Scholz said that thanks to its prudent management of Germany’s public finances, the government had ‘laid the foundations for us to be able to act in a difficult economic situation’. ‘It is absolutely crucial — if an economic crisis actually breaks out in Germany and Europe — that thanks to our sound finances we will be able to counter it with many, many billions… That is real Keynesianism, that is an active anti-crisis policy.’”

EM Watch:

September 12 – Bloomberg (Cagan Koc): “Turkey’s central bank signaled it’s set to slow the pace of monetary easing after delivering another interest-rate cut that exceeded forecasts as it navigates the conflicting demands of the presidency and markets. Governor Murat Uysal reduced the key rate to 16.5% from 19.75%... The Monetary Policy Committee said inflation is likely to end the year below its earlier forecasts but suggested less scope for deeper easing.”

September 11 – Financial Times (Benjamin Parkin): “Indian businesses typically enter September full of optimism about the spending boost that celebrations including Navratri and Diwali will bring as the country embarks on its biggest annual festive season. But this year, car manufacturers, suppliers and dealers are facing the festivities with something closer to dread. India’s vehicle market, until recently projected to be on track to become the world’s third largest, is facing its worst crisis since records began more than two decades ago. Car sales in August fell 41% from a year earlier…, extending a dismal run in which sales have fallen more than 20% each month since April. ‘We have never seen a crisis as painful as this one,’ said Puneet Gupta, an automotive analyst at IHS Markit. ‘When the market is flat we see people getting worried. This time it’s minus 40%, which is unimaginable . . . We are moving backwards rather than moving forwards.’”

September 7 – Bloomberg (Rahul Satija and P R Sanjai): “A prolonged shadow-banking crisis and hurdles in bankruptcy rules are set to keep India atop the world’s worst bad-debt pile, even as Italy, which held the title previously, quickens the clean-up of its lenders. Moody’s… to Credit Suisse Group AG. warned that more loans may sour in the Asian nation’s banking system. More than 2.4% of total loans in India’s banking system may be under stress on top of the 9.6% bad debt ratio as of June, the highest among major economies, Credit Suisse estimates shows. Italy, on the other hand, has nearly halved its ratio to 8.5% in the last three years.”

Japan Watch:

September 8 – Bloomberg (Toru Fujioka, Takashi Nakamichi and Takako Taniguchi): “Japanese regulators are surveying the nation’s financial firms to determine their exposure to foreign assets including risky credit products as the global economy slows… The Bank of Japan and Financial Services Agency want to get a fuller picture of domestic banks’ and insurers’ investments in collateralized loan obligations and leveraged loans to assess how they would fare if the borrowers run into difficulties… The inspection comes as some investors and analysts fret that years of low interest rates have led to overheated credit markets, with packages of leveraged loans known as CLOs under particular scrutiny. Big Japanese investors including large banks and other financial companies are thought to have snapped up the CLOs as negative rates eat into their returns.”

September 8 – Financial Times (Robin Harding and Leo Lewis): “For more than a hundred years, the Shimane Bank has been the economic heart of its remote Japanese prefecture, financing local companies through the vicissitudes of war, earthquake and rapid economic growth. But last Friday, it all fell apart, highlighting an often-forgotten financial stability risk that could affect not just Japan but the entire global economy. After years of ultra-low interest rates had slashed its loan income, Shimane Bank announced a sudden blow-up in the securities portfolio it had turned to instead... In order to return to profit, Shimane Bank plans to ramp up higher-margin lending to ‘medium risk’ companies... But in a prefecture where the population is already 25% below its peak, and projected to fall another 15% by 2045, good credit risks are hard to come by.”

Global Bubble Watch:

September 8 – Financial Times (Robin Wigglesworth): “The global bull run that started in 1985 is now one of the most intense in the debt market’s 700-year history, comparable with a deleveraging and economic growth spurt that followed the Napoleonic wars. Despite longstanding predictions of the end of the bond bull market that started after former Federal Reserve chair Paul Volcker quashed inflation in the 1980s, government debt has kept rallying this year, taking the average annual fall in yields to 17.4 bps… over the past 34 years. That puts it on the cusp of surpassing the 1873-1909 bull run in length, and makes it the strongest decline in long-term interest rates since 1817-1854, when bond yields declined by 22 bps a year, according to… Paul Schmelzing, a visiting scholar at the Bank of England. The only other stronger periods of declines since Italian city-states first began issuing bonds in the 12th century were under the reign of Louis XIV, Venice’s 14th and 15th century heyday and during the stability that followed the Peace of Cateau-Cambrésis in 1559.”

September 8 – Wall Street Journal (Vipal Monga): “Global interest rates are low and may head lower, driven by slowing economies and the U.S.-China trade war. A less appreciated reason for lower rates is a mountain of debt built up during the past decade. Debt owed by governments, businesses and households around the globe is up nearly 50% since before the financial crisis to $246.6 trillion at the beginning of March… The borrowing helped pull economies out of the nasty recession, but left them with high debt burdens that make it harder for policy makers to raise rates. It also makes consumers and businesses more likely to pull back from spending money on new goods if economic conditions weaken.”

Fixed-Income Bubble Watch:

September 10 – Bloomberg (Michael Gambale): “Investors like long-term debt and companies are increasingly happy to sell it to them. Giving buyers a chance to lock in returns as rates fall, prudent borrowers are grabbing an opportunity to kick debt maturities down the road. In the U.S. investment-grade bond market, there have been 40 tranches launched already this week, of which 22 have a maturity of 10-years or more. Of last week’s 90 tranches sold, 52 had maturities of 10-years or greater. Longer-dated paper accounted for $40.6b (54%) of last week’s $74.9b barrage of new debt. This is an abnormally large amount of longer-dated issuance.”

September 12 – Bloomberg (Christopher DeReza): “Credit investors have pushed cash into U.S. high-grade funds at the third fastest rate ever. Net inflows hit $5.6 billion for the week ended Sept. 11, data from Refinitiv’s Lipper show, the most since April when funds received $5.9 billion… The biggest single weekly inflow was seen in October 2014, when investors added $6.9 billion.”

September 9 – Associated Press: “Moody's… downgraded Ford's credit rating to junk status, citing expectations that the automaker will be weighed by weak earnings and cash generation as it pursues a costly restructuring plan. Ford responded by saying that its underlying business is strong and its balance sheet is solid.”

September 9 – Reuters (Katanga Johnson): “The head of the top U.S. markets regulator… issued a warning over market risks including rising corporate debt, a U.K. withdrawal from the European Union, and the transition away from a key lending rate. Jay Clayton, chairman of the Securities and Exchange Commission (SEC), told an audience… he continued to be concerned over corporate debt growth, which he said had been fostered by a decade of accommodative monetary policies. In the United States, outstanding corporate debt stands at almost $10 trillion, almost 50% of GDP, he said. ‘Those are numbers that should attract our attention,” said Clayton.”

September 9 – Reuters (Richard Leong): “Moody’s… believes the U.S. Treasury Department’s proposal to bring Fannie Mae and Freddie Mac out of conservatorship raises their credit risk as it would shrink their role in U.S. housing market. The Treasury said… the government should draw up a plan to begin recapitalizing the mortgage finance agencies, while calling on Congress to act on comprehensive housing reform. ‘If implemented, proposals to reform the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, would be credit negative for the companies’ creditors,’ the rating agency said…”

Leveraged Speculation Watch:

September 12 – Bloomberg (Lu Wang, Melissa Karsh and Sonali Basak): “Equity hedge funds are paying dearly for their devotion to industries like software and distaste for energy and commodity stocks. Wrong-way moves in positions they’ve crowded into, both long and short, could raise survival risk for some managers, one firm says. ‘This unexpected, profit-sapping dislocation has definitely hurt the majority of clients,’ said Mark Connors, global head of risk advisory at Credit Suisse. ‘Some managers may not make it through the month.’ … According to Morgan Stanley’s prime brokerage unit, the violent moves in the past two weeks climaxed Monday with a hedge-fund alpha gauge the firm devised, plotting returns in popular longs versus those in favorite shorts, notching its second-worst showing of the year.”

September 10 – Bloomberg (Elizabeth Dexheimer): “Hedge funds and other investors in Fannie Mae and Freddie Mac got more mixed messages from the Trump administration Tuesday, adding to the whipsaw trading sessions that have dazed shareholders in recent days. Treasury Secretary Steven Mnuchin… made clear that he plans to end a controversial policy that requires the mortgage giants to send virtually all their earnings to the government. That was the good news for investors. But Mnuchin also said he opposes any ‘simple’ recap and release -- a move hedge funds have long lobbied for that would consist of building up Fannie and Freddie’s capital buffers and then freeing them from federal control.”

September 13 – Financial Times (Laurence Fletcher): “Robert Citrone’s Discovery Capital Management and Guillaume Fonkenell’s Pharo Management were among the big-name hedge funds that suffered losses during last month’s tumble in emerging markets. Worries about the US-China trade war and the health of the global economy, as well as a debt crisis in Argentina triggered by President Mauricio Macri’s shock primary election defeat, helped drive a sharp sell-off in EM assets during August as investors ran for cover.”

September 11 – Bloomberg (Sabrina Willmer): “Blackstone Group Inc. has raised $20.5 billion for its largest real estate fund ever… The amount gathered is more than the $15.8 billion raised by the 2015 pool. Institutions including public pension plans and insurance companies are putting more money into property assets to protect against inflation and diversify their holdings beyond stocks and bonds.”

Geopolitical Watch:

September 8 – Reuters (Francois Murphy): “The U.N. nuclear watchdog told Iran… there is no time to waste in answering its questions, which diplomats say include how traces of uranium were found at a site that was not declared to the agency. It also said Iran was starting to follow through on its pledge last week to further breach its 2015 nuclear deal with world powers, this time installing more advanced centrifuges and moving toward enriching uranium with them, which the deal bans.”

September 7 – Reuters (Parisa Hafezi): “Iran said… it was now capable of raising uranium enrichment past the 20% level and had launched advanced centrifuge machines in further breaches of commitments to limit its nuclear activity under a 2015 deal with world powers.”

September 13 – Reuters (Idrees Ali and Ben Blanchard): “A U.S. Navy destroyer sailed near islands claimed by China in the South China Sea…, the U.S. military said, a move likely to anger Beijing. The busy waterway is one of a growing number of flashpoints in the U.S.-Chinese relationship, which include an escalating trade war, American sanctions on China’s military and U.S. relations with Taiwan. Commander Reann Mommsen… told Reuters that the destroyer Wayne E. Meyer challenged territorial claims in the operation, including what she described as excessive Chinese claims around the Paracel Islands, which are also claimed by Taiwan and Vietnam.”

September 11 – Financial Times (Demetri Sevastopulo): “The Pentagon is compiling a list of companies with ties to the Chinese military as part of a stepped-up Trump administration effort to stop Beijing from obtaining sensitive technologies and protect US defence supply chains. The US defence department is trying to identify Chinese companies and organisations with direct and indirect relationships with the People’s Liberation Army to help reduce the chances of US weapons supply chains being compromised… The Pentagon has become increasingly concerned about supply chains, seeking ways to tackle critical gaps in the US industrial base and prevent infiltration by adversaries. The focus has intensified under the Trump administration, which in 2017 named China a ‘revisionist’ power in its first national security strategy.”

September 9 – Reuters (Thomas Escritt): “Comparing the struggle of Hong Kong’s pro-democracy protesters to the role of Berlin during the Cold War, activist Joshua Wong told an audience in the German capital that his city was now a bulwark between the free world and the ‘dictatorship of China’… ‘If we are in a new Cold War, Hong Kong is the new Berlin,’ he said in a reception space a stone’s throw from the Berlin Wall on the roof of the Reichstag building, which for decades occupied the no-man’s land between Communist East Berlin and the city’s capitalist western half.”

September 8 – Reuters (Brenda Goh): “Hong Kong is an inseparable part of China and any form of secessionism ‘will be crushed’, state media said…, a day after demonstrators rallied at the U.S. consulate to ask for help in bringing democracy to city. The China Daily newspaper said Sunday’s rally in Hong Kong was proof that foreign forces were behind the protests… and warned that demonstrators should ‘stop trying the patience of the central government’. Chinese officials have accused foreign forces of trying to hurt Beijing by creating chaos in Hong Kong over a hugely unpopular extradition bill that would have allowed suspects to be tried in Communist Party-controlled courts.”

September 10 – Reuters (Kelsey Johnson, Fabian Hamacher and Michael Martina): “Canada has sailed a warship through the sensitive Taiwan Strait, the Canadian government said, three months after a similar operation and amid strained ties between Beijing and Ottawa.”