Saturday, June 23, 2018

Saturday's News Links

[BloombergQ] OPEC+ Agrees Oil-Supply Boost in Victory for Saudis, Russia

[BloombergQ] U.S. Tariffs Draw New Retaliation Threat, as Russia Joins In

[CNBC] Increased threat of a trade war is ramping up fears of a 'full-blown recession'

[Reuters] European authorities will react to any U.S. auto tariff move: Le Monde

[Reuters] Xi says China must lead way in reform of global governance

[Reuters] Turkey's Erdogan, main rival stage final election rallies

[Spiegel] The Approaching End to Merkel's Tenure

[WSJ] A Generation of Americans Is Entering Old Age the Least Prepared in Decades

[FT] More storms are brewing for emerging markets

Weekly Commentary: Performance Chase

The Nasdaq Composite, Nasdaq 100, small cap Russell 2000, Value Line Arithmetic and the NYSE Arca Biotechnology were among U.S. indices trading to all-time highs during Wednesday's session. In the real world, there is escalating risk of a destabilizing global trade war. The Shanghai Composite sank 4.4% this week to two-year lows. It was another week of instability for emerging market equities, bonds and currencies - especially in Asia.

Here at home, it's difficult to envisage a more divided electorate or a more hostile political environment. Record securities and asset prices and such a sour social mood appear quite the extraordinary dichotomy. Yet I would argue that speculative financial market Bubbles, heightened global tensions and domestic social and political angst all have at their root cause decades of unsound "money" and Credit (an archaic notion, I fully appreciate).

"Inflation is always and everywhere a monetary phenomenon…", Milton Friedman explained some 50 years ago. At the time, Dr. Friedman was contemplating goods and services inflation. Financial, monetary management and technological developments over recent decades ensured that asset inflation evolved into the much more destabilizing form of inflation. A Bubble collapse presented Dr. Bernanke the opportunity to test his academic theories, unleashing unprecedented monetary inflation specifically targeting securities markets. His policies spurred similar monetary inflation around the world that has continued for almost a full decade.

Cut short rates to zero, print "money," buy bonds; force market yields lower; spur buying of risk assets and higher securities prices; orchestrate powerful wealth effects; households and businesses borrow and spend; the economy expands; inflation rises back to target - and all is good. Sure, there's some risk that asset prices get ahead of the real economy. Not to worry. Central banks will ensure a steadily rising general price level - and inflating earnings and incomes - to catch up to elevated asset prices. All will be well.

All is not well. With such complexity in the world, central bankers should be disinclined from grand experiments. A decade of central bank rate manipulation, "money" printing and market intervention has ensured deep structural changes in the marketplace. Central bankers failed to appreciate the evolving nature of contemporary Inflation Dynamics. Over time, a potent inflationary bias took hold in asset prices, while for a variety of reasons disinflationary dynamics held sway in the pricing of many goods.

A decade of unprecedented global monetary stimulus has stoked speculative assets Bubbles, replete with history's greatest redistribution of wealth. Central bankers now face acute market fragility, while governments face electorate enmity (along with other shaky governments). With U.S. stocks at or near record highs, my warning that free market Capitalism is today at great risk surely sounds ridiculous.

At this point, the key market issue goes far beyond securities valuation. Too many years of too much "money" chasing too few financial assets have imparted deep structural impairment. Or phrased differently, there has been too much "money" playing the game; too much liquidity and leverage aggressively playing a historic speculative Bubble has wrecked the game. Financial markets have become maladjusted and dysfunctional, although much remains unrecognizable to the naked eye.

Thursday from Zero Hedge: "This Is The Greatest Short-Squeeze In History." The Goldman Sachs Most Short (50 highest short interest names above $1bn) is up 18.8% y-t-d. From May 3rd intraday lows, the GS Most Short has surged 20% - one of the past decade's more spectacular squeezes. This squeeze saw Tesla, with 39 million shares short, spike almost 100 points.

The Retail Index (XRT) jumped 15% in about seven weeks. Ascena Retail Group (and Fossil) doubled in price. Signet Jewelers surged 55%, Rent-A-Center 55%, Carvana 54%, Wayfair 50%, Tripadvisor 50%, Express 50% and Conn's 50%. Since the May 3rd trading reversal, Food Retail and Department Stores have been two of the strongest industry groups in the S&P500. Footlocker gained 32%, Carmax 28%, Kroger 24%, Macy's 20%, Lowe's 20% and Kohls 18%. Hanesbrands jumped 33%, Under Armour 35% and Ralph Lauren 22%. Twitter surged 48%, AMD 44%, Netflix 33% and Micron 23%.

Squeezes have been spectacular in the mid and small cap universe. Since May 3rd in the S&P Mid Cap 400, Chesapeake Energy, Mallinckrodt and Genworth Financial have all jumped more than 50%. Akorn, Five Below, Southwestern Energy, and Boston Beer gained more than a third. Short squeezes in the small cap space have been even more dramatic.

The speculative melt-up in segments of the U.S. marketplace is the antithesis of the faltering EM Bubble. This week saw indications of strengthening EM contagion. Ominously, the Chinese renminbi dropped 1.0% versus the dollar (offshore CNH down 1.15%), now having given up previous solid y-t-d gains. The Thai baht fell 1.5%, the Indonesian rupiah 1.1%, the Taiwanese dollar 1.0%, the South Korean won 0.9% and the Singapore dollar 0.6%. China's small cap CSI 500 index sank 5.9% (down 17.5% y-t-d), and the growth/tech ChiNext index fell 5.6% (down 11.6%). The CSI 300/Telecommunications Services Index collapsed 15.7% (down 37.5%).

Elsewhere in Asia, major indexes were down 4.1% in Indonesia, 4.1% in Thailand, 3.8% in Malaysia, 6.2% in Philippines, 2.0% in South Korea, 1.0% in Taiwan, 3.3% in Vietnam and 4.3% in Pakistan. Hong Kong's Hang Seng index sank 3.6%, and Singapore's STI index fell 2.1%. Japan's TOPIX dropped 2.5%. Winning distinction as the most likely prophetic indicator of the week, Japan's TOPIX Bank Index sank 5.4% and Hong Kong's Hang Seng Financials dropped 5.1%.

Indonesian 10-year (local currency) yields jumped 20 bps to a 15-month high 7.43%, and Philippine yields rose 12 bps to a seven-year high 6.31%. Financial conditions continue to tighten throughout EM, though there was some relief this week with rallies in the Argentine peso (4.6%) and Mexican peso (3.1%). The Turkish lira recovered 1.1% ahead of Sunday's election. Notably absent from the EM currency rally list, Brazil's real declined another 1.5% (down 12.6% y-t-d).

It was only back in January that EM was in full melt-up mode - a speculative blow-off right in the face of tightening global financial conditions. With a veritable flood of flows into the $5.0 TN global ETF complex ($100bn inflow in January!), EM was a major beneficiary (EM equities and bonds both saw record inflows in January). Recall that EM ETFs enjoyed record inflows in 2017, with the inundation continuing well into 2018. What's more, EM flows benefitted from the U.S. market stumble in early February. Amazingly, EM ETFs were at the top of the ETF inflow leaderboard all the way into early May.

And a Friday afternoon headline from "Massive Weekly Inflows For Russell-Indexed ETFs." And from ETF Trends, "Small-Cap ETFs Big Winners in U.S., China Trade War." The iShares Russell 2000 ETF enjoyed its largest inflow since March. A Bloomberg headline: "Trade War Fears Spur Rotation From Industrials Into Small Caps."

The culminating shot of "hot money" into EM earlier in the year - benefitting both from the U.S. market swoon and the drumbeat of "global synchronized economic boom" - set the stage for today's trouble. So, it's only fitting that cracks at the Periphery of the global Bubble would incite a surge of "hot money" into outperforming U.S. securities markets. At this point, global finance has regressed to one big game of Performance Chase.

Am I the only analyst that views the manic interest in U.S. small caps portentously? I have highlighted the concept of the "moneyness of risk assets" - central bank backstops having nurtured the misperception of safety and liquidity throughout the risk markets. Incredibly, as fissures materialize in the global Bubble, performance-chasing "hot money" now floods into the least liquid corner of the U.S. equities market.

The gargantuan ETF complex has been instrumental in perpetuating this dynamic, intermediating less liquid securities into perceived highly liquid ETF shares. This was the situation earlier in the year for emerging market securities, and it remains the case in U.S. markets. And as the global Bubble navigates a worst-case scenario, it's only fitting that small caps lead the charge in U.S. equities and junk bonds outperform in fixed income. Over generations, market structures evolve and instruments change. Yet amazingly, through it all everyone seems compelled to get all ebullient and hunkered together at major market tops.

June 22 - Bloomberg (Shelly Hagan): "Corporate bond spreads jumped to the widest level in 16 months Friday as large deals flooded the U.S. market and rising trade tensions scared off some investors. Investment-grade bond spreads saw the biggest weekly increase since February as companies sold $43 billion of debt, including $31 billion from Bayer AG and Walmart Inc. alone. The market was also shaken by escalating trade tensions between the U.S. and its major partners… Corporate bond spreads have been widening since February, when they reached the tightest since before the financial crisis. Fewer foreign buyers, rate volatility and trade tensions are chipping away at investor confidence in the U.S. market, according to Thomas Murphy, a portfolio manager at Columbia Threadneedle… 'A lot of people pushed into our market because of QE overseas. They can now go back to their home markets. Hedging costs have gone up dramatically,' said Murphy…"

Global contagion and tightening financial conditions are making steady headway toward "Core" U.S. securities markets. The Trump administration is bluffing, aren't they? Or is the era of Trump Tariffs and trade war retaliation soon upon us? It's got to be the President playing hardball dealmaker with Beijing - right? Or could a momentous Washington crackdown on China be in the offing? Appearing increasingly vulnerable, China may emerge the cornered pit bull. It was another ominous week. China and Asian Contagion. Widening Italian spreads. But, then again, with a short squeeze in play and only a week or so until the end of a big performance quarter, why be bothered with global market instability or unfolding trade wars… These are deviant markets.

For the Week:

The S&P500 declined 0.9% (up 3.0% y-t-d), and the Dow fell 2.0% (down 0.6%). The Utilities jumped 2.6% (down 4.0%). The Banks declined 0.9% (unchanged), and the Broker/Dealers lost 1.6% (up 8.2%). The Transports dropped 2.7% (up 1.5%). The S&P 400 Midcaps were little changed (up 4.7%), while the small cap Russell 2000 added 0.1% (up 9.8%). The Nasdaq100 declined 0.8% (up 12.5%). The Semiconductors sank 3.6% (up 9.4%). The Biotechs slipped 0.2% (up 16.7%). With bullion down $10, the HUI gold index declined 0.5% (down 8.0%).

Three-month Treasury bill rates ended the week at 1.87%. Two-year government yields were little changed at 2.54% (up 66bps y-t-d). Five-year T-note yields declined three bps to 2.77% (up 56bps). Ten-year Treasury yields fell three bps to 2.90% (up 49bps). Long bond yields slipped a basis point to 3.04% (up 30bps). Benchmark Fannie Mae MBS yields dipped one basis point to 3.64% (up 65bps).

Greek 10-year yields sank 34 bps to 4.11% (up 4bps y-t-d). Ten-year Portuguese yields were unchanged at 1.82% (down 12bps). Italian 10-year yields rose nine bps to 2.69% (up 68bps). Spain's 10-year yields rose six bps to 1.35% (down 21bps). German bund yields dropped seven bps to 0.34% (down 9bps). French yields declined two bps to 0.71% (down 8bps). The French to German 10-year bond spread widened five to 37 bps. U.K. 10-year gilt yields declined a basis point to 1.32% (up 13bps). U.K.'s FTSE equities index gained 0.6% (down 0.1%).

Japan's Nikkei 225 equities index fell 1.5% (down 1.1% y-t-d). Japanese 10-year "JGB" yields were little changed at 0.04% (down one bp). France's CAC40 dropped 2.1% (up 1.4%). The German DAX equities index sank 3.3% (down 2.6%). Spain's IBEX 35 equities index declined 0.6% (down 2.5%). Italy's FTSE MIB index fell 1.4% (up 0.2%). EM equities were mostly lower. Brazil's Bovespa index slipped 0.2% (down 7.5%), and Mexico's Bolsa declined 0.4% (down 5.3%). South Korea's Kospi index dropped 1.9% (down 4.5%). India’s Sensex equities index added 0.2% (up 4.8%). China’s Shanghai Exchange sank 4.4% (down 12.6%). Turkey's Borsa Istanbul National 100 index recovered 1.4% (down 16.9%). Russia's MICEX equities gained 0.5% (up 6.6%).

Investment-grade bond funds saw inflows of $411 million, while junk bond funds had outflows of $232 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates fell five bps to 4.57% (up 67bps y-o-y). Fifteen-year rates declined three bps to 4.04% (up 87bps). Five-year hybrid ARM rates were unchanged at 3.83% (up 69bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down five bps to 4.61% (up 61bps).

Federal Reserve Credit last week declined $2.1bn to $4.279 TN. Over the past year, Fed Credit contracted $151bn, or 3.4%. Fed Credit inflated $1.469 TN, or 52%, over the past 294 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $2.2bn last week to $3.404 TN. "Custody holdings" were up $114bn y-o-y, or 3.5%.

M2 (narrow) "money" supply rose $18.0bn last week to a record $14.098 TN. "Narrow money" gained $580bn, or 4.3%, over the past year. For the week, Currency increased $2.2bn. Total Checkable Deposits sank $54.0bn, while savings Deposits surged $64.9bn. Small Time Deposits added $3.5bn. Retail Money Funds gained $1.5bn.

Total money market fund assets dropped $52.55bn to $2.802 TN. Money Funds gained $185bn y-o-y, or 7.1%.

Total Commercial Paper declined $6.6bn to $1.103 TN. CP gained $124bn y-o-y, or 12.6%.

Currency Watch:

The U.S. dollar index slipped 0.3% to 94.52 (up 2.6% y-t-d). For the week on the upside, the Mexican peso increased 3.1%, the Swiss franc 1.0%, the Norwegian krone 0.6%, the Japanese yen 0.6% and the euro 0.4%. For the week on the downside, the Brazilian real declined 1.5%, the South Korean won 0.9%, the Swedish krona 0.8%, the Canadian dollar 0.6%, the New Zealand dollar 0.6%, the Singapore dollar 0.6%, the British pound 0.1% and the South African rand 0.1%. The Chinese renminbi declined 1.02% versus the dollar this week (up 0.02% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index gained 1.7% (up 6.6% y-t-d). Spot Gold declined 0.8% to $1,269 (down 2.6%). Silver increased 0.4% to $16.539 (down 3.5%). Crude surged $3.52 to $68.58 (up 14%). Gasoline rallied 2.3% (up 15%), while Natural Gas fell 2.5% (unchanged). Copper sank 3.0% (down 4%). Wheat fell 1.8% (up 18%). Corn declined 1.2% (up 8%).

Market Dislocation Watch:

June 16 - CNBC (Jeff Cox): "The Federal Reserve may have telegraphed a fourth interest rate hike this year, but markets didn't quite get the message. After the conclusion Wednesday of its two-day meeting, the Federal Open Market Committee, through the so-called dot plot of individual members' expectations, indicated that it would increase rates two more times before 2018 ends… As of Friday afternoon, traders were implying just a 55% chance of a fourth hike in December - a little better than a coin flip and just 10 percentage points or so above the chances before the meeting and the surprise dot-plot change."

June 21 - Wall Street Journal (Jon Sindreu): "As a full blown trade war between the U.S. and China looms, investors are already picking winners: Shares of small companies that are insulated from overseas turmoil. The S&P Small Cap 600 is on a tear, up 12.4% since the start of the year to a fresh record high, compared with a 3.5% gain for the S&P 500. The Russell 2000, another index of small U.S. companies, has gained 11.2%. A rising dollar and concerns about weaker global growth are also driving investors into the relative safety of smaller companies, as measured by market capitalization, that tend to earn most of their money at home."

June 21 - Bloomberg (Issei Hazama): "It must be tough out there in volatile emerging-debt markets. Overseas investors including Asian buyers this month bought a chunk of yen bonds from a Japanese highway operator yielding 0.0000027%. East Nippon Expressway Co. sold one-year notes at a coupon of 0.001% and an issue price of 100.001 yen on June 13. That means that an investor buying 100 million yen ($904,000) of the notes will receive 2.7 yen in interest… Even so, investors' orders for the debt came to about 4.3 times the 65 billion yen that was offered… Asian investors hit by a rout in emerging market bonds and in search of safe assets participated in the yen deal…"

Trump Administration Watch:

June 19 - Wall Street Journal (Chelsey Dulaney): "The Trump administration's threat to slap tariffs on another $200 billion in Chinese goods has reignited fears that Beijing will turn to a powerful but risky weapon: a depreciation of its currency. The latest salvo in the brewing trade conflict between the world's first and second-largest economies would raise the amount of Chinese goods taxed by the U.S. to $450 billion. That would mean tariffs on nearly all of the $505 billion in goods that China exported to the U.S. last year. Analysts say the tariff escalation could eventually lead China to depreciate its currency, the yuan-a maneuver that would help to offset the economic impact of the tariffs but also threatens to worsen trade tensions and rattle global markets."

June 19 - Financial Times (Tom Mitchell and Shawn Donnan): "By threatening to expand US tariffs on Chinese goods on Monday, President Donald Trump greatly increased the chances of Beijing responding with non-tariff measures. US executives fear that Mr Trump's latest threat to assess punitive tariffs on as much as $250bn of Chinese exports- roughly twice what the US ships to China every year - will trigger responses such as ad hoc regulatory probes of US companies by Chinese authorities. There already has been circumstantial evidence of just such a response over recent months, with Chinese imports of some US food, cars and pet food delayed at customs for more stringent inspections."

June 19 - Wall Street Journal (Bob Davis and Lingling Wei): "President Donald Trump's escalation of trade threats against China reflects his belief that Washington increasingly has the upper hand in the dispute, administration officials said, adding he is prepared to withstand pressure from U.S. businesses that might suffer from the conflict. Mr. Trump caught Chinese officials off guard with his announcement Monday evening about potential new tariffs. Should China retaliate against U.S. trade policies, the White House said, the U.S. would apply tariffs of 10% on as much as $400 billion in Chinese imports."

June 20 - CNBC (Huileng Tan): "The Trump administration ratcheted up its criticism of China in a report released by the White House… detailing its claims of 'economic aggression' by the Asian giant. The 35-page report titled 'How China's Economic Aggression Threatens the Technologies and Intellectual Property of the United States and the World' came a day after President Donald Trump threatened to slap additional tariffs on goods from China… China 'has experienced rapid economic growth to become the world's second largest economy while modernizing its industrial base and moving up the global value chain. However, much of this growth has been achieved in significant part through aggressive acts, policies, and practices that fall outside of global norms and rules (collectively, 'economic aggression'),' the… report said in its opening."

June 20 - Wall Street Journal (Peter Navarro): "The Chinese government's Made in China 2025 blueprint reveals Beijing's audacious plans to dominate emerging technology industries. Many of these targeted sectors, such as artificial intelligence and robotics, have clear implications for defense. China seeks to achieve its goal of economic and military domination in part by acquiring the best American technology and intellectual property. President Trump's new tariffs will provide a critical shield against this aggression. China acquires American technology in multiple ways. Theft, both physical and cyber, occurs through orchestrated industrial espionage campaigns. For years the U.S. intelligence community has acknowledged China as a persistent leader in economic espionage. Many American companies are forced to accept technology transfers to gain access to the Chinese market."

June 19 - New York Times (Ana Swanson): "President Trump's threat to impose tariffs on almost every Chinese product that comes into the United States intensified the possibility of a damaging trade war, sending stock markets tumbling… The Trump administration remained unmoved by those concerns, with a top trade adviser, Peter Navarro, insisting that China has more to lose from a trade fight than the United States. He also declared that Mr. Trump would not allow Beijing to simply buy its way out of an economic dispute by promising to import more American goods. 'President Trump has given China every chance to change its aggressive behavior,' Mr. Navarro said… 'China does have much more to lose than we do.' In threatening tariffs on as much as $450 billion worth of Chinese goods, the administration is betting that Beijing will blink first. It's a risky gamble by a White House that appears ready to forgo diplomatic negotiations in favor of punishing tariffs that could pinch consumers and companies on both sides of the Pacific."

June 19 - Bloomberg: "China doesn't import enough from the U.S. to match Donald Trump's tariffs dollar for dollar, but President Xi Jinping can still squeeze American companies in other ways in retaliation. American businesses from Apple Inc. and Walmart Inc. to Boeing Co. and General Motors Co. all operate in China and are keen to expand. That hands Xi room to impose penalties such as customs delays, tax audits and increased regulatory scrutiny if Trump delivers on his threat of bigger duties on Chinese trade. U.S. shares slumped Tuesday as part of a broad sell-off in global markets in response to Trump's threat."

June 20 - CNBC (Philip Blenkinsop): "The European Union will begin charging import duties of 25% on a range of U.S. products on Friday, in response to U.S tariffs imposed on EU steel and aluminum early this month, the European Commission said…

June 17 - Politico (Burgess Everett and John Bresnahan): "The first clues over whether President Donald Trump will risk a shutdown fight this fall over his border wall will come Monday in a private meeting with Sen. Shelley Moore Capito. Trump is increasingly frustrated with Congress' failure to fund the wall - his No. 1 campaign promise - and has threatened a shutdown in September if he doesn't get his way."

June 19 - Financial Times (Gideon Rachman): "In the midst of an escalating trade war with China and fresh from a nuclear summit with North Korea, Donald Trump took time out to attack Angela Merkel. 'The people of Germany are turning against their leadership,' tweeted the US president, adding that 'migration is rocking the already tenuous Berlin coalition'. The US president's direct attempt to undermine the German chancellor is remarkable. It is also very telling. For the two leaders have taken radically different approaches to the explosive questions of refugees and illegal migration. For Mr Trump and his alt-right allies in Europe, the fall of Ms Merkel would be a kind of vindication - proof that her decision to allow more than 1m migrants into Germany in 2015 has been decisively rejected by the electorate."

June 20 - Financial Times (Edward Luce): "In Canada they call it the Love, Actually effect. Justin Trudeau's rebuke of Donald Trump won him the type of kudos a fictional British prime minister earned in the 2003 movie for standing up to a US president. Canada will 'not be pushed around,' said Mr Trudeau to loud applause. That sentiment is rising on all sides. In Mexico, which looks set next weekend to elect its most anti-American administration in a generation, it might be dubbed the 'Amlo' effect - short for Andrés Manuel López Obrador, the country's likely next president. Mexico's foreign minister this week called America's child border camps 'cruel and inhumane'. A French spokesperson said the US had different 'civilisational values' to the rest of the west. Nobody batted an eyelid. From Ottawa to Wellington, because of one outrage or another, condemnations of America are becoming routine."

June 16 - CNBC (Andrea Hopkins): "Seventy percent of Canadians say they will start looking for ways to avoid buying U.S.-made goods in a threat to ratchet up a trade dispute between Prime Minister Justin Trudeau and U.S. President Donald Trump, an Ipsos Poll showed…"

Federal Reserve Watch:

June 20 - CNBC (Jeff Cox): "Citing robust growth and a generational low in unemployment, Federal Reserve Chairman Jerome Powell emphasized the central bank's commitment to further interest rate hikes… Economic gains are negating the need for crisis-era monetary policy, the Fed leader told a European Central Bank forum. 'Earlier in the expansion, as the economy recovered, the need for highly accommodative monetary policy was clear,' Powell said… 'But with unemployment low and expected to decline further, inflation close to our objective, and the risks to the outlook roughly balanced, the case for continued gradual increases in the federal funds rate is strong.'"

June 20 - Wall Street Journal (Nick Timiraos): "Federal Reserve Chairman Jerome Powell said sturdy U.S. economic growth has built a strong case for continuing to gradually lift interest rates, and he warned against policy complacency now that the central bank has nearly achieved its employment and price stability goals. 'Today, with the economy strong and risks to the outlook balanced, the case for continued gradual increases in the federal-funds rate remains strong and broadly supported among' participants on the Fed's rate-setting committee, Mr. Powell said…"

June 19 - Wall Street Journal (Daniel Kruger): "The Federal Reserve's move to trim the size of its bondholdings has exacerbated recent declines in prices for risky assets around the world, investors say. The central bank has scaled back its mountain of Treasury and mortgage debt by $111.9 billion since the policy was announced in September. More than half the reduction has taken place since the end of March, and the process of withdrawing money from the economy is scheduled to reach $50 billion a month in October."

U.S. Bubble Watch:

June 20 - New York Times (Nelson D. Schwartz): "The American economy has picked up speed and is now on course to expand this year at the fastest rate in more than a decade. That acceleration gives President Trump a stronger hand as he contemplates more tariffs and takes an increasingly confrontational approach with China, Canada, Mexico and other trading partners. Economists have raised their growth estimates for the second quarter to an annualized rate of nearly 5%, more than double the pace of the previous period. Some economists say the figure could hit 3% for the full year, a level last reached in 2005. As growth slows in Europe, China, Japan and elsewhere, the United States finds itself at the top of the global economy. The United States is also less exposed to the fallout from an escalating trade war since it does not rely on exports as much as other countries."

June 19 - CNBC (Michelle Fox): "There is a 'much bigger issue' for the market than concerns about trade, investing expert Richard Bernstein told CNBC… In fact, over the last three to four months, almost every sizeable market sell-off has come from pro-inflation policies out of Washington, D.C… 'There is a major sea change going on in the backdrop where we're going from a disinflationary environment to an inflationary environment," Bernstein said… 'We have tight labor markets, we have tight product markets because the economy is strong. We just got tax cuts on top of that. We're now getting fiscal spending,' he added. In addition, there are trade issues and immigration restrictions in play now. 'They are all pro-inflation policies and that's the big issue in the background here,' said Bernstein."

June 21 - Reuters (Se Young Lee and Yawen Chen): "Chinese acquisitions and investments in the U.S. fell 92% to just $1.8 billion in the first five months of this year, consulting and research firm Rhodium Group [reported]… Counting divestitures, net Chinese deal flow to the U.S. during that time was a negative $7.8 billion, the report said. The decline follows a sharp drop in the second half of last year as pressure from both Beijing and the Trump administration curbed a recent surge in cross-border investment. Completed Chinese deals in the U.S. hit a record $46 billion in 2016, and dropped to $29 billion in 2017…"

June 18 - Wall Street Journal (Matt Wirz): "A wave of expected big media mergers would transform AT&T Inc. and Comcast Corp. into the two most indebted companies in the world, a standing that carries uncharted risks for investors in the firms' bonds. AT&T has bought Time Warner Inc., and Comcast hopes to purchase most of 21st Century Fox Inc. The companies would carry a combined $350 billion of bonds and loans…"

June 19 - Bloomberg (Riley Griffin): "Despite recent job gains, rising wages and falling unemployment, almost a quarter of Americans said they still have no emergency savings, according to an annual report… The number of Americans who said they have no money readily available in either a checking, savings or money market account fell to a seven-year low of 23%, down from 24% last year… The percentage of Americans with some savings, but not enough to cover three months' worth of expenses, rose to 22% from 20% last year… And the percentage with enough to cover expenses for three to five months ticked up to 18%, from 17% last year. Still, only 29% of Americans have enough emergency savings to cover at least six months' of expenses. This is down from 31% in 2017."

June 19 - Reuters (Karen Pierog): "U.S. state and local government tax revenue climbed to $350.2 billion in the first quarter of 2018, a rise of 5.8% compared with the same time period in 2017, the U.S. Census Bureau reported…"

June 21 - Reuters (Alex Tanzi): "The American dream continues to fade for many people. Housing affordability dropped this quarter to the lowest since late 2008, according to… the National Association of Realtors. In May, the median price of a previously owned homes rose to a record $264,800… A separate report from ATTOM Data Solutions shows average wage earners would need to spend 31.2% of income to buy a median-priced home this quarter -- above the historic average of 29.6%. Home price appreciation, coupled with rising mortgage rates, have pushed three-quarters of average wage earners out of the market with property costs rising faster than wages in 64% of regions surveyed, ATTOM reported."

June 21 - Wall Street Journal (Janet Adamy and Paul Overberg): "The surge of retiring baby boomers is reshaping the U.S. into a country with fewer workers to support the elderly-a shift that will add to strains on retirement programs such as Social Security and sharpen the national debate on the role of immigration… For most of the past few decades, the ratio of retiree-aged adults to those of working age barely budged. In 1980, there were 19 U.S. adults age 65 and over for every 100 Americans between 18 and 64… That number-called the old-age dependency ratio-barely edged up over the next 30 years, rising to just 21 retiree-aged Americans for every 100 of working age in 2010. But there has been a rapid shift since then. By 2017, there were 25 Americans 65 and older for every 100 people in their working years… The ratio would climb to 35 retiree-age Americans for every 100 of working age by 2030…"

China Watch:

June 19 - Reuters (Ben Blanchard): "The Trump administration has 'blood lust' when it comes to pushing its trade agenda against China and wants to 'suck the lifeblood' from China's economy, a state-run newspaper said…, stepping up the angry rhetoric over their dispute. President Donald Trump threatened on Monday to hit $200 billion of Chinese imports with 10% tariffs if China follows through with retaliation against his previous targeting of $50 billion in imports, aimed at pressing China to stop what the United States sees as the theft of its intellectual property."

June 21 - Reuters (Se Young Lee and Yawen Chen): "China's commerce ministry… accused the United States of being 'capricious' over bilateral trade issues, and warned that the interests of U.S. workers and farmers ultimately will be hurt by Washington's penchant for brandishing 'big sticks'. Previous trade negotiations with the United States were constructive, but Beijing has had to respond in a strong manner due to the U.S. tariff threats, commerce ministry spokesman Gao Feng said… Washington's accusations of forced tech transfers are a distortion of reality, and China is fully prepared to respond with 'quantitative' and 'qualitative' tools if the U.S. releases a new list of tariffs, Gao told a regular briefing in Beijing."¬

June 19 - Bloomberg: "China's benchmark equity gauge tumbled to a two-year low and the yuan weakened as a worsening trade dispute with the U.S. spurred panic selling. Bonds gained. The Shanghai Composite Index plummeted almost 5% in intraday trading before paring losses, while a gauge of technology shares sank the most in two years. China's currency fell to a five-month low against the dollar and the 10 year-yield on government debt dropped two bps."

June 20 - Financial Times (Hudson Lockett): "China's central bank acted to calm markets on Wednesday, a day after Washington's threat to impose tariffs on another $200bn of Chinese goods caused turmoil in global bourses. Yi Gang, governor of the People's Bank of China… called for investors to 'stay calm and rational' and pledged that the central bank would 'ensure liquidity and reasonable stability' after the Shanghai benchmark had dropped to a near-two-year low. The PBoC also injected a net Rmb40bn ($6.2bn) into China's financial market on Wednesday morning… That followed a surprise intervention by the bank on Tuesday, when it injected Rmb200bn into the financial system and signalled that it planned to cut the amount of capital banks are required to hold."

June 19 - Bloomberg: "China's central bank called for investors to remain calm and pledged to use monetary policy 'comprehensively,' after an escalation of the stand-off with U.S. sent the nation's benchmark stock index plunging. The People's Bank of China Governor, Yi Gang, said… that policy makers are prepared for outside shocks and that investors should take a rational view. The Shanghai Composite Index earlier slid 3.8%, falling below the 3,000 level previously breached during market crashes in 2015 and 2016."

June 20 - Bloomberg (Sandy Hendry and Jeffrey Hernandez): "The debt load of China's 100 biggest companies is escalating despite the government's deleveraging campaign, with seven property developers having liabilities exceeding 10 times equity… While stronger revenues are boosting Chinese companies' ability to repay debt, there's no deleveraging in sight, Natixis SA concluded after analyzing 2017 data from 3,000 non-financial companies. The liabilities to equity ratio climbed strongly for the biggest 100 companies by assets."

June 20 - Bloomberg (Carrie Hong): "In what's increasingly a buyer's market for offshore Chinese debt, some of the country's property developers are having to offer double-digit coupons to borrow for just two years. Zhenro Properties Group Ltd. is planning to offer new two- year dollar bonds in the 11.5% area… That leaves it just under the highest-coupon dollar bond to price so far in Asia this year… Dogged by surging funding costs onshore due to the government's deleveraging drive and rising yields on U.S. Treasuries, Chinese property companies have paid some of the highest coupons on dollar bonds this year, as they look to refinance a wall of maturing debt. Others have resorted to floating-rate notes to stoke investor appetite."

EM Watch:

June 18 - Bloomberg (Yumi Teso, Garfield Reynolds and Adam Haigh): "A falling tide lowers all boats, it seems. Amid an exodus from emerging markets, investors are pulling out of even Asian economies with solid prospects for growth and debt financing. Overseas funds are pulling out of six major Asian emerging equity markets at a pace unseen since the global financial crisis of 2008 -- withdrawing $19 billion from India, Indonesia, the Philippines, South Korea, Taiwan and Thailand so far this year…"

June 19 - Reuters (Walter Bianchi): "Argentina's central bank on Tuesday hiked its interest rate on Lebac notes to 47% from 40%, and it sold 308 billion pesos ($11bn) of the securities out of some 514 billion that expired…"

June 19 - Bloomberg (Riley Griffin): "What a waste of 500 bps of rate hikes. Just when it seemed Turkish President Recep Tayyip Erdogan may have learnt the errors of his interfering ways, he's back at it again, vowing to 'deal with interest rates' if elected. And the Turkish lira has duly voted with its feet. The first round of the presidential elections, as well as general elections, are on Sunday, June 24. There could be a subsequent round on July 8. The question of how independent the central bank will be after the vote is back again in the spotlight. If Erdogan were to order interest rates lower it would have a devastating effect on the currency - and it's already about 25% weaker versus the U.S. dollar this year. Inflation is on an upward tear, having risen to 12.15% in May from 10.85% the prior month."

June 20 - Bloomberg (Justin Carrigan, Yumi Teso and Ben Bartenstein): "Emerging markets were left reeling as the world's two biggest economies threatened punishing tariffs in the early shots of a trade war. Stocks slid to the lowest since October and currencies dropped a sixth day. The MSCI Emerging Markets Index of equities sank below the 1,100 mark, which has historically limited losses, amid concern that a tit-for-tat tariff showdown between the U.S. and China will crimp global growth. All but five of the 24 emerging-market currencies tracked by Bloomberg retreated, while sovereign yield spreads blew out an average of 9 bps versus Treasuries."

June 18 - Bloomberg (Asli Kandemir and Cagan Koc): "Even in Recep Tayyip Erdogan's electoral stronghold, businessmen like Halit Ozkaya can't help but complain about the currency crisis the president instigated just weeks before elections. The chairman of steel and copper cable maker Has Celik was forced to halt metal imports in May when Erdogan sent the lira into freefall by vowing to interfere in monetary policy if he wins on June 24. Now Ozkaya is worried Turkey is on the cusp of a debt crisis. 'The magnitude of the lira's swings is putting us in trouble by killing predictability and creating uncertainty on debts repayment,' Ozkaya said…"

June 18 - Bloomberg (Walter Brandimarte): "Brazil's growth forecasts fell for a seventh consecutive week as economists assessed the impact of a nationwide trucker strike, growing emerging market turbulence and domestic uncertainty ahead of the October presidential election. Economists in a weekly central bank survey lowered their 2018 estimate for gross domestic product to 1.76%, the lowest level for the year since President Michel Temer took office in May 2016 and fulled hopes of faster economic recovery."

Central Bank Watch:

June 20 - Reuters (Balazs Koranyi and Francesco Canepa): "A developing trade war between the world's biggest economies is weighing on business confidence and could force central banks to downgrade their outlook, the world's most powerful policymakers argued… After imposing punitive tariffs on a number of its top trading partners, the United States earlier this week threatened China with further duties on $200 billion, escalating a conflict that has already drawn retaliatory steps from nearly all corners of the world. Sitting side by side in a Portuguese hill-top town, the heads of the U.S. Federal Reserve, the European Central Bank, the Bank of Japan and the Reserve Bank of Australia all took a gloomy view on the escalating conflict, arguing that the consequences are already evident. 'Changes in trade policy could cause us to have to question the outlook,' Fed Chair Jerome Powell said in some of his strongest remarks yet on the issue."

June 21 - Reuters (David Milliken and Alistair Smout): "The Bank of England bolstered expectations that at its next meeting it will raise rates for only the second time in a decade, after its chief economist unexpectedly joined the minority of policymakers voting for a hike… The central bank also gave new guidance on when it might start to sell its 435 billion pounds ($574bn) of British government bonds, saying this could come once rates have reached around 1.5%, compared with previous guidance of 2%"

June 18 - Bloomberg (Enda Curran, Alessandro Speciale and Rich Miller): "Don't declare the end of easy money just yet. Major central banks took significant steps last week toward dismantling the emergency stimulus they'd used to lubricate financial markets and escape recession in the decade since the financial crisis. But most are clear that they're not ready to get out of the business of supporting their economies… Such commitments mean the loose-money era endures. Bank of America Corp. estimates the combined balance sheet of the world's biggest central banks is still $11.8 trillion higher than when Lehman Brothers Holdings Inc. collapsed in September 2008, and just short of a $12.3 trillion peak."

June 15 - Financial Times (Robin Wigglesworth, Kate Allen and Roger Blitz): "A week of landmark monetary policy decisions has left investors revamping their portfolios to fit a new era of tightening global liquidity. The US Federal Reserve's seventh interest rate increase since 2015 on Wednesday came the day before the European Central Bank announced that it would end its €2.4tn bond-buying programme in December. The decision on Friday by the Bank of Japan to persevere with its quantitative easing programme leaves it as the laggard among major central banks… 'We are now in a quantitative tightening regime, not a quantitative easing regime,' said Gregory Peters, senior portfolio manager at PGIM Fixed Income. 'The halcyon days of lower volatility and rising markets are behind us. If QE lifted markets then the opposite has to have some kind of impact.'"

June 21 - Wall Street Journal (Brian Blackstone, Nina Adam and Jason Douglas): "Central banks in Europe… signaled different outlooks toward rate increases, suggesting the divergent paths of the world's largest central banks are gripping smaller ones too. The Bank of England held its benchmark interest rate steady at 0.5%, but officials said they expect economic growth in the U.K. to pick up in the months ahead…, setting the stage for a rise in borrowing costs this summer. Norway's central bank also stayed on hold but said rates will probably go up in September. In contrast, the Swiss National Bank kept its key policy rate in deeply negative territory and signaled no forthcoming changes despite signs of healthy economic activity and slowly rising inflation, as the bank remains constrained by the actions of the European Central Bank. Divergence among major central banks has emerged as a key theme recently with potential repercussions on stock, bond and currency markets."

Global Bubble Watch:

June 20 - Financial Times (Michael Mackenzie): "Debt and plenty of it was the legacy of the global financial crisis. Over the past decade of ultra low and negative interest rates, companies have more than doubled their outstanding amount of bonds and loans. Now, as central banks… retreat from the era of easy money that helped fuel huge corporate debt sales in the past decade, the bill for the debt binge looms large. The global value of corporate bonds outstanding has risen 2.7 times since 2007 to $11.7tn, doubling as a share of gross domestic product alongside a deterioration in credit ratings, noted McKinsey & Co. 'The average quality of blue-chip borrowers has declined, growth in speculative-grade corporate bonds has been particularly strong and bond issuance by companies in China and other developing countries - often denominated in foreign currency - has soared,' said the consultancy."

June 20 - Financial Times (Robin Wigglesworth): "Of all the fashionable alarm bells that market-watchers keep an eye on, the yield curve is the most timeless. It is Coco Chanel's proverbial 'little black dress' of economic indicators. The slope made up of bond yields of various maturities has a record of predicting recessions that would make even the savviest econometrician turn pea-green with envy. It is not perfect, but the curve has become flat and inverted… ahead of most economic downturns in most major countries since the second world war. This is why some analysts and investors are worryingly eyeing the US yield curve, where the difference between the two and 10-year Treasury yields has narrowed to just 37 bps. That is the slimmest spread since September 2007. But interestingly, and worryingly, the global yield curve has now already inverted."

June 16 - Bloomberg (Randall Woods): "China remained the largest foreign owner of Treasuries in April even with a slight drop in holdings, as the Asian nation's appetite for U.S. government debt shows few signs of waning amid growing tensions over trade. China's holdings of U.S. bonds, bills and notes decreased by $5.8 billion to $1.18 trillion in April… The second-biggest foreign holder, Japan, saw its Treasuries drop by $12.3 billion to $1.03 trillion, the lowest since 2011. Overall, foreign ownership of Treasuries receded in April, falling to $6.17 trillion."

June 17 - Reuters (Colin Packham): "Australia's relationship with top trading partner China faces a testing two weeks as Canberra prepares to pass laws designed to limit Beijing's influence in domestic affairs amid pressure on some of its fastest growing exports. The fallout from proposed foreign interference laws will likely be exacerbated by an expected ban on China's Huawei Technologies from supplying equipment for the soon-to-be built 5G mobile broadband network on national security grounds."

Europe Watch:

June 21 - Reuters (Gavin Jones and Giuseppe Fonte): "Two leading eurosceptics from Italy's far-right League, Claudio Borghi and Alberto Bagnai, were picked… to head important parliamentary committees, as the League and the anti-establishment 5-Star Movement put together their coalition government. Borghi will become president of the Budget Committee in the lower house of parliament and Bagnai president of the Finance Committee in the Senate. Both have repeatedly railed against EU budget restraints, and Borghi has called for the issuance of short-term government bonds, known as mini-Bots, to pay companies and individuals owed money by the state. 'The goal to balance the budget has destroyed our economy,' Bagnai said earlier this year. He said monetary union was 'destined to fail,' but added that leaving the currency bloc was not among the League's top priorities."

June 17 - Wall Street Journal (Eric Sylvers): "A youth revolt is upending Italian politics, and it could be a harbinger of things to come. Western Europe's largest antiestablishment government came to power earlier this month, driven largely by young Italian voters. Struggling with a persistent lack of job prospects over the past decade, they voted in droves for two parties in the country's March 4 elections, the 5 Star Movement and the League, an anti-immigration party. The result laid bare a stark generation gap, with older Italians, who often have to support their grown children, continuing to vote for mainstream parties. The same pattern appears across southern Europe, and the forces behind the divide show few signs of slowing. Almost 30% of Italians age 20 to 34 aren't working, studying or in a training program…, more than in any other European Union country. Greece is second at 29%, while Spain's rate is 21%."

June 20 - Bloomberg (Arne Delfs, Gregory Viscusi and Helene Fouquet): "German Chancellor Angela Merkel and French President Emmanuel Macron agreed on a plan to strengthen the euro area, seeking to fortify Europe against financial crises and strengthen its global influence. 'This is an important step that Europe will be working on for a while,' Merkel said alongside Macron… 'We can say that we've taken a small step along the road.' Macron said the measures would boost 'stability and solidarity' in the euro area."

Fixed Income Bubble Watch:

June 21 - Bloomberg (Kristine Owram): "Fixed-income indexes are 'broken,' making active management necessary for successful bond ETFs, according to the head of global exchange-traded funds at Franklin Templeton Investments. 'Investors typically have gone into passive fixed income primarily because that's all there was,' Patrick O'Connor said… 'But as a firm, and as an active manager, we don't just think indexes are flawed in fixed income, we think they're broken.' The weight of individual securities in fixed-income indexes is often determined by debt issued, meaning companies that issue more debt will have a higher weight in an index-based ETF."

June 17 - Financial Times (Gideon Rachman): "Three-letter initialisms gained notoriety during the financial crisis and again this year. In 2008 it was the CDO, or collateralised debt obligation, the asset-backed securities blamed for exacerbating the financial crisis. In February the ETN was in the spotlight, as several volatility exchange traded note products were forced to liquidate after a market spasm. Now investors are wholeheartedly embracing a third: the CLO. Collateralised loan obligations… are enjoying a boom. Institutional investors have piled into the products, which pool predominantly US or European corporate loans into one portfolio, before divvying up slices of the vehicle based on perceived risks… A surge of CLO issuance - $54bn has been raised in the US this year… has been sopped up by buyers and could eclipse the record $124bn raised in 2014."

Leveraged Speculator Watch:

June 15 - Financial Times (Robin Wigglesworth): "Hedge funds are once again betting the US stock market will remain tranquil. The volume of 'short' positions in the Vix volatility index has climbed to the highest since late January, just before the implosion of several Vix-linked funds ripped through financial markets. Investment groups are now net 'short' over 53,000 futures contracts in Cboe's Vix index… Shorting volatilit y - in practice selling insurance against market turmoil to other investors - has long been a lucrative strategy, and produced eye-watering gains in 2017. But it unravelled in dramatic fashion in February."

Geopolitical Watch:

June 19 - Reuters: "A sophisticated hacking campaign launched from computers in China burrowed deeply into satellite operators, defense contractors and telecommunications companies in the United States and southeast Asia, security researchers at Symantec Corp said… Symantec said the effort appeared to be driven by national espionage goals, such as the interception of military and civilian communications."

Thursday, June 21, 2018

Thursday Evening Links

[Reuters] Dow drops eighth straight session on trade worry; Amazon slips

[Reuters] U.S. labor market tightening; mid-Atlantic manufacturing cools

[BloombergQ] U.S. Consumers' Economic Expectations Match Highest Since 2002

[Reuters] Supreme Court lets states force online retailers to collect sales tax

[BloombergQ] Americans Devote Biggest Share of Income to Mortgages Since 2009

[CNBC] Goldman Sachs: Weak stock market returns are ahead even with booming earnings

[Reuters] Italy and Germany clash as migration rows split EU

[FT, Tett] Markets might look calm, but they are behaving abnormally

[FT] Beijing woos foreign businesses as US trade war looms

[FT] Italy blocks Merkel bid to outwit immigration rebels

Thursday's News Links

[BloombergQ] Stocks Drop, Treasuries Gain on Fresh Italy Worry: Markets Wrap

[BloombergQ] Italian Assets Resume Slide After Euroskeptic Appointments

[Reuters] Dollar scales 11-month peak, oil slides ahead of OPEC

[Reuters] Washington's 'capricious' trade actions will hurt U.S. workers, China warns

[CNBC] Chinese investment in the US drops 90% amid political pressure

[Reuters] China-U.S. trade war hits Daimler profit, may sweep sector

[BloombergQ] U.S. Homes Prices Least Affordable in Almost a Decade

[Reuters] Eurosceptics to head Italian parliamentary finance committees

[Reuters] Bank of England chief economist votes for rate rise, boosting chance of Aug hike

[BloombergQ] Now You Can Gorge Guilt-Free: 1-Month Bill Yield on Par With S&P

[UK Guardian] 'Facebook is taking everything': rising rents drive out Silicon Valley families

[NYT] Trump’s Ace in the Hole in Trade War: A Strong Economy

[WSJ] Central Banks Go Their Separate Ways

[WSJ] Central Bank Leaders Warn Trade Conflicts Could Damage Global Economy

[WSJ] Growth in Retiring Baby Boomers Strains U.S. Entitlement Programs

[WSJ] Small-Cap Stocks: Where Investors Hide in a Trade War

[WSJ] The Arms Race for Quants Comes to the World’s Biggest Asset Managers

[WSJ, Navarro] Trump’s Tariffs Are a Defense Against China’s Aggression

[FT] EM sell-off set to continue as dollar strengthens

[FT] Turkey election: Will Erdogan’s power grab backfire?

[FT] The rise of a new generation of anti-Americans

Wednesday, June 20, 2018

Wednesday Evening Links

[BloombergQ] Asia Stocks Edge Higher; Dollar, Treasuries Steady: Markets Wrap

[BloombergQ] Tech Rally Drives U.S. Stock Gains as Oil Climbs: Markets Wrap

[BloombergQ] ‘Close to a Peak’ U.S. Growth at Risk on Trade Spat, Housing

[Reuters] Top central banks see growing gloom global trade war

[Reuters] Brazil holds rates steady at all-time low despite weak currency

[BloombergQ] Emerging Markets Have Many Tools, But Few That Are Good

[WSJ] Powell Says Solid Economy Supports Further Fed Rate Increases

Wednesday's News Links

[Reuters] World shares snap five-day losing streak on China policy expectation

[CNBC] Fed Chair Powell calls case 'strong' for more interest rate hikes

[BloombergQ] Trump Faults China's Economic Policy as Threat to U.S. Security

[Reuters] Chinese paper says Trump administration has 'blood lust' over trade

[BloombergQ] Trump's Tariffs Could Deliver a Sizable Hit to China's Economy

[CNBC] White House says China's 'economic aggression' is a global threat

[BloombergQ] China Has a Nuclear Option in the Trade War

[Reuters] EU to impose duties on U.S. imports Friday after Trump tariffs

[BloombergQ] Iran Rejects Compromise as OPEC Heads for Battle in Vienna

[BloombergQ] Americans Still Aren’t Saving, Despite the Booming Economy

[CNBC] Weekly mortgage applications jump 5.1% as interest rates settle

[Reuters] May faces new battle in parliament over Brexit

[BloombergQ] Emerging Market Rout Tests Brazil Central Bank on Rate Decision

[BloombergQ] Erdogan Scares Off the Few Friends the Lira Had

[Reuters] China-based hacking campaign is said to have breached satellite, defense companies

[FT] Bill looms large for companies after post-crisis debt binge

[FT] China’s central bank calms markets after tariff turmoil

[FT] Flat yield curve sends a grim message for investors in 2019

[FT] Central bank meeting in Sintra will highlight policy divergence

Tuesday, June 19, 2018

Tuesday Evening Links

[Reuters] Trade fears rattle Wall Street, Dow gives up 2018 gains

[Reuters] Argentina central bank hikes rate on 27-day Lebac notes to 47 pct

[BloombergQ] Trade-War Clamor Batters Emerging Stocks, Currencies: Inside EM

[Reuters] White House piles pressure on China after Trump tariff threat

[Reuters] U.S. state, local tax revenue up 5.8 percent in first quarter: Census

[CNBC] How the US ended up in an escalating trade dispute with China

[CNBC] There is a 'much bigger issue' for the market than trade: Analyst

[BloombergQ] Merkel, Macron Reach Deal to Strengthen Euro Area Against Shocks

[BloombergQ] The Taxicab Bubble Couldn’t Last Forever

[NYT] Trump’s Trade War Spooks Markets as White House Waits for China to Blink

[WSJ] White House Sees an Edge in Trade Dispute With China

[WSJ] Markets Begin to Take Threat of Trade War Seriously

[WSJ] Risk of Chinese Currency Devaluation Rises With Latest Tariffs Threat

[WSJ] The Other Yield Curve Investors Should Watch as Trouble Mounts

[FT] Trump tariff threat fuels risk-off mood in markets

[FT] Mounting trade fears send waves through global markets

Tuesday's News Links

[BloombergQ] Stocks Slide, Bonds Rally as Trade Fears Build: Market Wrap

[Reuters] Trade war worries slam China and emerging markets

[BloombergQ] Commodities Slide as U.S.-China Spat Hits Soy to Steelmakers

[Reuters] U.S. housing starts jump to near 11-year high, permits fall

[Reuters] China slams U.S. 'blackmailing' as Trump issues new trade threat

[CNBC] China pledges it will fight back firmly if Trump goes ahead and publishes list of additional tariffs

[Reuters] PBOC injects medium-term liquidity in surprise move as trade war escalates

[BloombergQ] PBOC to Use Tools `Comprehensively' as Trade War Sparks Sell-Off

[CNBC] Has a US-China trade war begun? Experts weigh in

[BloombergQ] ZTE Tanks After U.S. Lawmakers Advance Effort to Restore Ban

[BloombergQ] Draghi Says ECB Will Be Patient in Timing of First Rate Hike

[WSJ] Markets Begin to Take Threat of Trade War Seriously

[WSJ] Don’t Fight the Fed’s Balance Sheet Taper

[FT] China readies regulatory weapons in US trade spat

[FT] Brazil’s ‘tragic destiny’ of anti-democratic rebellion looms afresh

[FT] Why Donald Trump has it in for Angela Merkel

Monday, June 18, 2018

Monday Evening Links

[Reuters] Stocks extend slide, yen up as Sino-U.S. trade dispute escalates

[BloombergQ] China's Stock Index Falls Below 3,000 First Time Since 2016

[Reuters] Trump threatens to hit China with new tariffs on $200 billion in goods

[BloombergQ] China Vows to Retaliate as Trump Targets $200 Billion in Tariffs

[BloombergQ] Bipartisan Senate Vote to Punish ZTE Heightens Pressure on Trump

[Reuters] Argentina bank stocks plunge on hike in reserve requirements

[BloombergQ] Pompeo Calls China's Appeals for More Trade Openness a `Joke'

[CNBC] Russia cuts Treasury holdings in half as foreigners start losing appetite for US debt

[BloombergQ] China's Struggling Stock Market Faces Hit From Tariff Tensions

[BloombergQ] Here's How a Trade War Between the U.S. and China Could Play Out

[BloombergQ] History's Not on the Market's Side in a Trade War

[BloombergQ] Fed's Williams Sees Rosy Economy, Bank Culture Still Needs Work

[WSJ] Donald Trump Threatens New Tariffs if China Retaliates

[FT] Trump turns his fire on Germany over immigration

Monday's News Links

[BloombergQ] Stocks Retreat on Trade Concern; Brent Erases Loss: Markets Wrap

[BloombergQ] Xi to Counter Trump Blow for Blow in Unwanted Trade War

[Reuters] China's tariffs on U.S. oil would disrupt $1 billion monthly business

[BloombergQ] Emerging Asia Hit by Biggest Foreign Investor Exodus Since 2008

[BloombergQ] Brazil Growth Forecast Falls Off a Cliff on Strike, Uncertainty

[BBC] Is this Angela Merkel's moment of reckoning?

[AP] AP Explains: Who and what are behind Germany’s govt crisis?

[BloombergQ] Italy's Populists Show How to Lose Friends and Alienate People

[BloombergQ] In Erdogan Heartland, Lira Crisis Is Taking Toll on Businesses

[WSJ] Fate of Nafta Is Next in Line as Source for Market Concern

[WSJ] Mergers Would Make AT&T, Comcast World’s Most Indebted Companies

[WSJ] Sizing Up Tesla’s $10 Billion Debt Stack

[WSJ] The Force Behind Europe’s Populist Tide: Frustrated Young Adults

[FT] Why even bigger volatility ‘accidents’ are yet to come

[FT] High demand for collateralised loans weakens lender protections

[FT] ‘Big ticket’ trades made possible by bond ETF liquidity

[FT] Bond managers plot next move amid ‘quantitative tightening’

Saturday, June 16, 2018

Saturday's News Links

[BloombergQ] Trade War Hits Trump Heartland as China Targets Farms, Mines

[Reuters] China state media attack U.S. tariffs, leave scope for negotiation

[Reuters] At odds with Trump over trade, Canadians say they will avoid U.S. goods: poll

[UK Express] 'We might have a new situation' German MP predicts Merkel could be ousted end of next week

[CNBC] Russia, Saudi Arabia are getting increasingly chummy, and that has big implications for OPEC and oil prices

[BloombergQ] China's Holdings of U.S. Treasuries Fell $5.8 Billion in April

[NYT] China’s Official News Media Sharply Criticize Trump

[WSJ] China Warns U.S. Firms as Trade War Brews: Buckle Up

[FT] Halcyon days recede as ECB and Fed step back

[FT] Hedge funds are selling volatility again

Weekly Commentary: The Great Fallacy

A big week in the world of monetary management: The Federal Reserve raised rates 25 bps, the ECB announced plans to wind down its historic QE program, and the Bank of Japan clung to its "powerful monetary easing" inflationist scheme. A tense People's Bank of China left rate policy unchanged, too weary to follow the Fed's path.

The renminbi declined a notable 0.5% versus the dollar this week. More dramatic, the euro was hammered 1.9% on Draghi's game plan. Also on Thursday's dollar strength - and even more dramatic - the Argentine peso sank another 6.2% (down 34% y-t-d). The session saw the Brazilian real drop 2.2%, the Hungarian forint 2.6%, the Czech koruna 2.2%, the Polish zloty 2.0%, the Bulgarian lev 1.9%, the Romanian leu 1.9% and the Turkish lira 1.7%.

The FOMC, raising rates and adjusting "dot plots" higher, was viewed more on the hawkish side. The ECB, while announcing plans to conclude asset purchases by the end of the year, was compelled to add dovish guidance on rate policy ("…expects the key ECB interest rate to remain at present levels at least through the summer of 2019…"). Blindsided, the market dumped the euro. The Fed and ECB now operate on disparate playbooks, each focused on respective domestic issues. Anyone these days focused on faltering emerging market Bubbles, global contagion and the rising risk of market illiquidity?

June 13 - Financial Times (Sam Fleming): "Jay Powell put his personal stamp on the Federal Reserve on Wednesday, as the new chairman vowed to speak in plain English and hold more regular press conferences as he fosters 'a public conversation' about what the US central bank is up to. The Fed's statement after the Federal Open Market Committee meeting, which detailed its decision to raise rates 0.25% and set a course for two more increases this year, also bore his imprint, as Mr Powell stripped away some of the economic verbiage that cluttered its communications in recent years. Mr Powell's break from the approach of his predecessor… was more a stylistic one than a radical change of monetary policy strategy."

It may be subtle, but Chairman Powell appears ready to break from both his predecessors and fellow global central bankers. So far, there's been the envisioned continuity, along with a traditional element of caution when it comes to adjusting central bank doctrine. There are, however, indications that Powell is ready to distance his committee from the Fed's recent radical monetary experiment.

Mr. Powell's plain-speaking approach is refreshing. He is the antithesis of "Greenspeak." The new Chairman is clear, concise and devoid of obfuscation. He's no ideologue. There are no glaring idiosyncrasies, for a change. Powell appears the adept and confident leader, yet he demonstrates an admirable humility when it comes to pontificating about today's exceedingly complex backdrop. The Chairman has also abandoned much of the academic narrative that too often ensures economic analysis and discussion turn hopelessly convoluted and divorced from reality.

June 14 - Bloomberg (Jeanna Smialek): "Federal Reserve Chairman Jerome Powell doesn't claim to have all of the answers, but when it comes to where unemployment can settle in the long run, he and his colleagues are especially stumped. 'No one really knows with certainty what the level of the natural rate of unemployment is,' Powell told reporters… Later, pressed about whether the Fed's long-run estimate, now at 4.5%, could come down, he indicated that it's possible. 'We can't be too attached to these unobservable variables.' It's a crucial uncertainty, because the natural jobless rate is a linchpin of Fed policy."

The Fed Chairman is also moving to a press conference following each FOMC meeting. I suspect there's more to this move than a desire for greater transparency. The markets have been assuming that significant policy moves would only occur during meetings with scheduled press conferences. Powell would prefer the markets not make such presumptions. Every meeting is live. Data matter. There are financial stability risks when the Fed pre-commits on policy or becomes hamstrung by market expectations.

The past few Fed chairs were keen to use forward guidance as part of their strategies to manipulate market expectations, prices and economic outcomes. Powell, in what would be a major departure, appears to want the Fed out of the guidance and manipulation business. It's an uncertain world, and financial markets must be reacquainted with the capitalistic principle of markets standing on their own. He appreciates the extraordinary uncertainty in the economic, market, policy, and geopolitical backdrops. Powell views the economy as strong and ongoing monetary policy normalization as appropriate. Of course, there are downside risks. But in contrast to Draghi, Powell shows little predilection to dangle the carrot of monetary stimulus and liquidity backstops in front of a craving marketplace.

With his background in finance, I'll assume the Chairman appreciates the speculative nature of current market dynamics. He is well aware of the powerful role the Greenspan/Bernanke/Yellen puts have played within the financial markets. Cognizant of market distortions, Powell would rather the markets not revel in the certitude of a Fed ready and willing to sprint immediately to the markets' defense. On the surface, adjustments in the Powell Fed's rate and communications policies appear less than far-reaching. But on the critical issue of the Federal Reserve's approach to market-pandering policy guidance and market-bolstering liquidity backstops, I believe Powell is breaking with the progressively radical policy course that unfolded under Drs. Greenspan, Bernanke and Yellen.

Over in Frankfurt, Mario Draghi is having a devil of a time shedding "whatever it takes." He stated the ECB's intention to end QE at the end of the year. This is, however, "subject to incoming data confirming the Governing Council's medium-term inflation outlook." Markets hear Draghi discussing an exit, while seeing ECB forward guidance as virtually ensuring ongoing liquidity operations. Viewing unfolding developments in EM, Italy, the European periphery and vulnerable global markets more generally, markets see fragilities that create a high likelihood of future "whatever it takes" QE measures.

The pressing issue for global markets goes far beyond widening interest-rate differentials. Markets anticipate a future with the Draghi ECB eager to expand QE and, across the pond, the Powell Fed reluctant to redeploy QE - in a world increasingly vulnerable to a globally systemic market liquidity event. Markets see a stimulus-driven overheated ("Core") U.S. economy distancing itself from faltering ("Periphery") Bubbles in EM and Europe. Recalling how cracks in subprime worked to extend "Terminal Phase Excess" in prime U.S. mortgages right into the 2008 crisis, serious issues today at the global "periphery" ensure financial conditions remain dangerously loose for the late-cycle U.S. boom.

The risk of an upside dollar market dislocation is rising. That, at least, was how markets seemed to trade on Friday. The GSCI Commodities index fell 2.2%, with crude sinking $2.55, or 3.8%, in Friday trading. Silver (COMEX) was slammed 4.0%, gold 1.8% and Platinum 1.9%. Copper fell 2.5% and Nickel dropped 2.2%. Even in U.S. equities, it was sell industrials and materials and buy defensive. Treasury yields followed European yields lower, focused more on international developments than U.S. GDP or the trajectory of short-term interest rates. Despite the U.S. boom, there are rising concerns for the global economy. China ok?

June 13 - Bloomberg: "China's broadest measure of new credit slumped in May to the lowest in almost two years, as a campaign to rein in the shadow banking sector gained traction. Aggregate financing stood at 760.8 billion yuan ($118.8bn) in May…, compared with an estimated 1.3 trillion yuan in a Bloomberg survey and 1.56 trillion yuan in April. The change was driven by a fall in off-balance sheet lending of 421.5 billion yuan, the most since data began in 2006… New yuan loans stood at 1.15 trillion yuan, versus a projected 1.2 trillion yuan, and broad M2 money supply increased 8.3%, compared with a forecast 8.5%"

China's CNY 761 billion ($119bn) May increase in Total Social Financing not only badly missed estimates, it was the smallest monthly increase since July 2016. Y-t-d growth of CNY 17.990 TN ($1.235 TN) is running 16% below comparable 2017 - and was even below comparable 2016 Credit growth.

Beijing's crackdown on shadow banking has had a dramatic impact. Major shadow bank components (i.e. trust loans, entrusted loans and undiscounted bankers' acceptances) all contracted for the month. Corporate debt financings also declined during May (about $7bn).

At $180 billion, New Bank Loans were slightly below estimates and just below the May 2017 level. Importantly, lending (mostly mortgages) to the Household sector continues to grow at a rapid clip. May Household lending of CNY 614.3 billion ($96bn) expanded at 17.2% annual rate, with y-t-d growth at a 17.3% pace. This helps to explain an increasingly unbalanced Chinese economy.

June 14 - Reuters (Yawen Chen and Ryan Woo): "China's home prices in May logged their fastest growth in nearly a year, suggesting buyers are targeting smaller cities even as the government steps up measures to clamp down on speculation. Average new home prices in China's 70 major cities rose 0.7% in May from the previous month - the best pace since June 2017 - compared with a 0.5% increase in April…"

With real estate-directed lending booming, the resilience in the apartment price Bubble is easily explained. Related wealth effects are behind much stronger-than-expected May Imports (up 15.6% vs. expectations of 8.6%) - and China's rapidly shrinking Trade Surplus. I would argue that China's runaway mortgage finance and apartment Bubbles at this late stage of the cycle significantly increase the risk of systemic crisis.

In important sectors of the Chinese economy, there are indications that tighter Credit conditions are having an impact. Industrial Production (up 6.8%) and Fixed Investment (up 6.1%) both slowed and missed forecasts in May.

From Thursday's NYT (Keith Bradsher): "Gary Liu, the president of the China Financial Reform Institute, a Shanghai-based research group, said on the sidelines of the Lujiazui Forum that China's private-sector companies of all sizes, even large ones, had long faced challenges in obtaining loans. But the credit squeeze on them this spring has been particularly painful. 'It's very bad, and we see not just small and medium-sized enterprises defaulting but even big companies defaulting,' he said."

With the Trump administration Friday announcing $50 billion of tariffs on Chinese goods - supposedly with a list of an additional $100 billion ready to go - and China retaliating with its own tariffs on $34 billion, there are concerns for an escalating trade war. Returning to the potential for an upside dollar dislocation, China is today unusually financially and economically vulnerable.

A surging U.S. dollar would find Beijing in a difficult quandary. Maintaining China's soft peg to the dollar would leave Chinese manufacturers in a disadvantageous position, right as Credit and liquidity conditions tighten and growth slows.

Chinese devaluation fears would reemerge, spurring capital flight and the unwind of leveraged holdings of higher-yielding Chinese Credit instruments. With China's banks and corporations having over recent years borrowed aggressively in dollars, currency instability could quickly develop into Credit worries and market illiquidity. The Shanghai Composite dropped 1.5% this week, increasing y-t-d losses to 8.6%. The small cap CSI 500 index sank 3.3% (down 12.3% y-t-d), and China's growth stock ChiNext index was slammed 4.1% (down 6.3%). It's worth adding that Hong Kong's Hang Seng Financials index fell 2.3% this week, trading near 2018 lows. Bank stocks traded poorly almost around the globe this week.

Here at home, the NFIB Small Business Optimism Index jumped three points in May to the highest reading since 1983. Preliminary June Michigan Consumer Confidence rose to a stronger-than-expected 99.3, with Current Conditions rising to the second-highest reading going back to 2000. Up a blistering 0.8% for the month, May Retail Sales blew away estimates. The Empire Manufacturing Index jumped to an eight-month high. May CPI was up 2.8% y-o-y, with PPI gaining 3.1% y-o-y. The Atlanta Fed's growth forecasting model has real GDP expanding at a 4.8% clip.

The U.S. economy has grown too hot and markets too speculative. U.S. rates and market yields remain inappropriately low. The Powell Fed has set a course for rate normalization. Meanwhile, fissures open in the global Bubble. Global imbalances are coming home to roost. Resulting dollar strength has a very real possibility of becoming self-reinforcing and increasingly destabilizing. The Argentine peso sank 10.3% this week. The Turkish lira fell 5.4%, the South African rand 2.7%, the Hungarian forint 2.2%, the South Korean won 2.0% and the Mexican peso 1.6%. Yields rose again this week in Brazil, Argentina and Turkey. International markets seem to have a solid grasp of the immediately vulnerable countries. In short, the unfolding global crisis thesis remains on track.

Objectively, global markets indicating such fragility in the face of extraordinarily low rates and about $100 billion of ongoing monthly QE portends difficult challenges ahead. The notion that you can inflate your way out of Bubbles is The Great Fallacy of contemporary central bankers. They've inflated only bigger Bubbles.

For the Week:

The S&P500 was little changed (up 4.0% y-t-d), while the Dow declined 0.9% (up 1.5%). The Utilities rallied 2.1% (down 6.4%). The Banks lost 2.1% (up 0.9%), and the Broker/Dealers declined 1.2% (up 9.9%). The Transports rose 1.2% (up 4.4%). The S&P 400 Midcaps slipped 0.4% (up 4.8%), while the small cap Russell 2000 added 0.7% (up 9.7%). The Nasdaq100 advanced 1.4% (up 13.4%). The Semiconductors increased 0.7% (up 13.5%). The Biotechs jumped 1.8% (up 16.9%). With bullion down $20, the HUI gold index declined 0.5% (down 7.5%).

Three-month Treasury bill rates ended the week at 1.88%. Two-year government yields rose five bps to 2.55% (up 66bps y-t-d). Five-year T-note yields added a basis point to 2.80% (up 59bps). Ten-year Treasury yields declined three bps to 2.92% (up 52bps). Long bond yields fell four bps to 3.05% (up 31bps). Benchmark Fannie Mae MBS yields declined four bps to 3.65% (up 66bps).

Greek 10-year yields dropped 20 bps to 4.45% (up 38bps y-t-d). Ten-year Portuguese yields fell 23 bps to 1.82% (down 12bps). Italian 10-year yields sank 52 bps to 2.61% (up 59bps). Spain's 10-year yields dropped 17 bps to 1.30% (down 27bps). German bund yields declined five bps to 0.40% (down 2bps). French yields fell nine bps to 0.73% (down 5bps). The French to German 10-year bond spread narrowed four to 33 bps. U.K. 10-year gilt yields declined six bps to 1.33% (up 14bps). U.K.'s FTSE equities index slipped 0.6% (down 0.7%).

Japan's Nikkei 225 equities index increased 0.7% (up 0.4% y-t-d). Japanese 10-year "JGB" yields declined one basis point to 0.04% (down one bp). France's CAC40 gained 0.9% (up 3.6%). The German DAX equities index jumped 1.9% (up 0.7%). Spain's IBEX 35 equities index rose 1.1% (down 1.9%). Italy's FTSE MIB index rallied 3.9% (up 1.5%). EM equities were mostly lower. Brazil's Bovespa index sank 3.0% (down 7.4%), while Mexico's Bolsa gained 2.2% (down 4.9%). South Korea's Kospi index dropped 1.9% (down 2.6%). India’s Sensex equities index added 0.5% (up 4.6%). China’s Shanghai Exchange fell 1.5% (down 8.6%). Turkey's Borsa Istanbul National 100 index lost 1.4% (down 18.0%). Russia's MICEX equities dropped 1.3% (up 6.1%).

Investment-grade bond funds saw inflows of $2.038 billion, and junk bond funds had inflows of $324 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates jumped eight bps to 4.62% (up 71bps y-o-y). Fifteen-year rates rose six bps to 4.07% (up 89bps). Five-year hybrid ARM rates gained nine bps to 3.83% (up 68bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up four bps to 4.66% (up 66bps).

Federal Reserve Credit last week increased $3.0bn to $4.282 TN. Over the past year, Fed Credit contracted $146bn, or 3.3%. Fed Credit inflated $1.471 TN, or 52%, over the past 293 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $3.2bn last week to $3.402 TN. "Custody holdings" were up $131bn y-o-y, or 4.0%.

M2 (narrow) "money" supply rose $13.8bn last week to a record $14.080 TN. "Narrow money" gained $568bn, or 4.2%, over the past year. For the week, Currency increased $3.0bn. Total Checkable Deposits surged $43.9bn, while savings Deposits fell $39bn. Small Time Deposits added $2.0bn. Retail Money Funds gained $3.9bn.

Total money market fund assets dropped $22.8bn to $2.855 TN. Money Funds gained $221bn y-o-y, or 8.4%.

Total Commercial Paper expanded $11.2bn to $1.109 TN. CP gained $140bn y-o-y, or 14.5%.

Currency Watch:

The U.S. dollar index jumped 1.3% to 94.788 (up 2.9% y-t-d). For the week on the downside, the South African rand declined 2.7%, the Australian dollar 2.1%, the South Korean won 2.0%, the Canadian dollar 1.9%, the Mexican peso 1.6%, the euro 1.4%, the Norwegian krone 1.3%, the New Zealand dollar 1.2%, the Swiss franc 1.2%, the Singapore dollar 1.1%, Japanese yen 1.0%, the British pound 1.0%, the Swedish krona 0.8% and the Brazilian real 0.6%. The Chinese renminbi declined 0.50% versus the dollar this week (up 1.21% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index dropped 2.6% (up 4.8% y-t-d). Spot Gold declined 1.5% to $1,280 (down 1.8%). Silver fell 1.6% to $16.48 (down 3.9%). Crude declined 68 cents to $65.06 (up 8%). Gasoline sank 4.0% (up 13%), while Natural Gas rose 4.6% (down 3%). Copper dropped 4.7% (down 4.7%). Wheat lost 1.3% (up 20%). Corn gained 1.3% (up 9%).

Market Dislocation Watch:

June 13 - Bloomberg (Liz Capo McCormick): "The Treasury yield curve from 5 to 30 years flattened to levels last seen in August 2007 after Federal Reserve officials hiked rates and signaled a faster pace of tightening ahead. The spread narrowed to as little as 24.4 bps, falling below the previous low for 2018, touched in May. The gap between 2- and 10-year yields also slid to the smallest since 2007, touching 39.1 bps, before rebounding to just above 40 bps."¬

June 13 - Bloomberg (James Hirai): "The sharp sell-off in Italy's government bonds on May 29 was driven as much by technical factors as fundamentals and the lack of liquidity at such times implies that increased 'left tail risk in liquid asset prices' might be understated, economist Charles Himmelberg writes… Sell-off triggered 'largest 1-day spike in 2-year yields in at least 20 years' along with bid-ask spreads widening by more 'than at any time during the European sovereign-debt crisis in 2012."

June 11 - Financial Times (Philip Stafford and Kate Allen): "The gyrations in the Italian government bond market have revealed how Europe's liquidity-starved sovereign debt markets are being heavily tested by even short bouts of political instability. The rapid rise and fall in yields in the eurozone's largest debt market in recent weeks has been exacerbated by thin sovereign debt liquidity. During the most intense price swings some primary dealers - banks which deal directly with the national central bank to distribute its bonds into the wider market - reported that the electronic screens they used were showing fewer potential deals than normal. This made it difficult for them to carry out their traditional role of market-makers - providing liquidity to reduce price volatility."

Trump Administration Watch:

June 15 - Wall Street Journal (Bob Davis, Vivian Salama and Lingling Wei): "Beijing retaliated against planned U.S. tariffs on Chinese goods by targeting high-value American exports-including farm products, cars, and crude oil-bringing the world's two biggest economies closer to an all-out trade war. Shortly after the Trump administration unveiled plans Friday to impose tariffs of 25% on $50 billion in Chinese products, China's State Council announced it would levy penalties of the same rate on the U.S. goods of the same value. The U.S. is 'provoking the trade war,' China's Foreign Ministry spokesman Lu Kang said Friday, while pledging to defend the country's interests."

June 10 - Bloomberg (Mark Niquette): "President Donald Trump's disavowal of a joint statement after the Group of Seven meeting was made to avoid looking weak going into the North Korea summit after 'sophomoric' comments by Canada's Justin Trudeau, a top aide said. Trudeau 'really kind of stabbed us in the back,' White House economic adviser Larry Kudlow said on CNN's "State of the Union"…, calling on the Canadian to apologize. Trudeau's office, in turn, said what the Canadian leader said on Saturday was nothing new… Speaking on 'Fox News Sunday,' Navarro doubled down on Kudlow's rhetoric and said Trudeau's post-conference comments were in bad faith. 'There's a special place in Hell for any foreign leader that engages in bad faith diplomacy with President Donald J. Trump and then tries to stab him in the back on the way out the door,' Navarro said."

June 12 - Reuters (Matt Spetalnick and David Brunnstrom): "U.S. President Donald Trump… kept up his feud with America's closest allies over trade, saying he could not allow them to continue taking advantage of the United States… 'We are being taken advantage of by virtually every one of those countries,' Trump told a news conference… 'Look, countries cannot continue to take advantage of us on trade.'"

June 10 - Reuters (Matt Spetalnick and David Brunnstrom): "U.S. President Donald Trump fired off a volley of tweets on Monday venting anger on NATO allies, the European Union and Canadian Prime Minister Justin Trudeau in the wake of a divisive G7 meeting over the weekend… 'Fair trade is now to be called fool trade if it is not reciprocal,' said Trump… 'Sorry, we cannot let our friends, or enemies, take advantage of us on trade anymore. We must put the American worker first!'"

June 11 - Wall Street Journal (Paul Vieira and Sara Schaefer Muñoz): "A backdrop of new hostility is hurting chances for Washington and Ottawa to successfully overhaul the North American Free Trade Agreement, say people close to the talks… Before this past weekend's Group of Seven leaders' summit, the fate of Nafta was on shaky footing following the U.S. decision to impose tariffs on Canadian- and Mexican-made steel and aluminum products on national-security grounds. Both Canada, the largest foreign supplier of both metals to the U.S., and Mexico unveiled retaliatory tariffs, and former trade negotiators warned the levies would only strengthen Canadian and Mexican resolve not to give in to unconventional U.S. demands in Nafta. A successful outcome for the trade pact now seems even more tenuous after President Donald Trump abruptly withdrew U.S. support for a G-7 final communiqué and he and advisers issued a series of highly personal attacks on Twitter and in interviews against Canada's prime minister…"

June 10 - New York Times (Ana Swanson): "At the rockiest annual meeting of major Western powers in decades, President Trump criticized the tariffs imposed on American goods as 'ridiculous and unacceptable' and vowed to put an end to being 'like a piggy bank that everybody is robbing.' Behind Mr. Trump's outrage is his belief that the United States is at a disadvantage when it comes to global trade and is on the losing end of tariffs imposed by other nations. But to many of the country's trading partners, the president's criticisms ring hollow given that the United States places its own tariffs on everything from trucks and peanuts to sugar and stilettos."

June 10 - Financial Times (Chris Giles): "Relations between the US and its closest allies plunged to new depths on Sunday after the most acrimonious G7 summit in a generation ended with the American president lashing out at fellow leaders and backtracking on a pledge to sign the G7 communiqué. The west was in disarray after Donald Trump left the summit early, instructed his officials to tear up the bland G7 statement, threatened to impose more tariffs and called the Canadian prime minister 'very dishonest and weak'…"

June 14 - Politico (Adam Behsudi and Nancy Cook): "President Donald Trump wants his staff to push forward with plans to slap 25% tariffs on foreign cars before the midterm elections in a bid to score points with his political base, according to administration and auto industry officials. The president believes a promise to tax cars, trucks and auto parts coming from U.S. competitors like Europe and Japan would allow him to present a concrete win to workers, the officials said. 'Trump sees the auto tariffs as part of his midterm strategy, a way to position Republicans and the White House as pro-worker,' said one senior administration official. 'He views it as part of the broader story about to helping to revitalize the American-based economy.' Raising the price of foreign cars would be the latest in a series of aggressive trade moves by Trump, who is betting that his supporters will be more focused on the protection of local jobs than on the increased costs for consumers…"

June 9 - Reuters (Christian Shepherd and Shu Zhang): "Chinese President Xi Jinping, whose country is locked in a high-stakes trade dispute with the United States, …said China rejects 'selfish, shortsighted' trade policies, and called for building an open global economy… 'We reject selfish, shortsighted, closed, narrow policies, (we) uphold World Trade Organisation rules, support a multi-lateral trade system, and building an open world economy,' Xi said…"

June 14 - Reuters (Philip Blenkinsop): "European Union countries on Thursday unanimously backed a plan to impose import duties on 2.8 billion euros ($3.3bn) worth of U.S. products after Washington hit EU steel and aluminum with tariffs at the start of June, EU sources said… The European Commission has proposed setting 25% duties on U.S. goods such as orange juice, bourbon, jeans, motorcycles in response to what it is sees as illegal U.S. action affecting 6.4 billion euros of its exports."

June 10 - Reuters (Paul Carrel and Michael Nienaber): "International Monetary Fund chief Christine Lagarde led an attack by global economic organizations on U.S. President Donald Trump's 'America First' trade policy on Monday, warning that clouds over the global economy 'are getting darker by the day'… The… IMF is sticking to its forecast for global growth of 3.9% both this year and next, she said, before adding: 'But the clouds on the horizon that we have signaled about six months ago are getting darker by the day, and I was going to say by the weekend.'"

June 11 - Financial Times (Anne-Sylvaine Chassany and Tobias Buck): "This time, there was no kissing, hugging or planting trees. Less than two months after Donald Trump and Emmanuel Macron displayed mutual affection in Washington, their encounter at the G7 meeting in Canada during the weekend was marked by angry rhetoric on US trade tariffs and a white thumbprint left on Mr Trump's hand by a firm squeeze from the French leader. Mr Trump's weekend onslaught on the postwar multilateral order has cooled his bromance with Mr Macron and reinforced the French president's determination that the EU should stand its ground on trade, seen by the EU as a defining transatlantic issue. For Mr Macron and German chancellor Angela Merkel, who described the G7 outcome as 'sobering' and 'depressing', the Québec debacle also emphasised how much the EU's two dominant leaders will have to rely on each other in a colder multilateral era. 'Flattery has had no effect, we are now in a more confrontational phase,' said François Heisbourg, a geopolitical analyst."

Federal Reserve Watch:

June 13 - Bloomberg (Craig Torres, Christopher Condon and Jeanna Smialek): "Federal Reserve officials raised interest rates for the second time this year and upgraded their forecast to four total increases in 2018, as unemployment falls and inflation overshoots their target faster than previously projected. The so-called 'dot plot' …showed eight Fed policy makers expected four or more quarter-point rate increases for the full year, compared with seven officials during the previous forecast round in March… The median estimate implied three increases in 2019 to put the rate above the level where officials see policy neither stimulating nor restraining the economy. Chairman Jerome Powell told reporters following the decision -- which lifted the Fed's benchmark rate by a quarter percentage point to a range of 1.75% to 2% -- that the main takeaway was that 'the economy is doing very well.' Powell also announced he plans to start holding a press conference after every meeting in January…"

June 13 - Wall Street Journal (Nick Timiraos): "Federal Reserve officials signaled… they could pick up the pace of interest-rate increases this year and next to keep a rapidly expanding economy on an even keel. Central bank officials voted unanimously to raise their benchmark federal-funds rate by a quarter-percentage point to a range between 1.75% and 2%. It is their second rate rise this year, and they penciled in a total of four increases for 2018, up from a projection of three at their March meeting. 'The decision you see today is another sign that the U.S. economy is in great shape,' said Fed Chairman Jerome Powell… 'Growth is strong. Labor markets are strong. Inflation is close to target.' Eight of 15 Fed officials now expect at least four rate increases will be needed this year, up from seven in March and four in December."

U.S. Bubble Watch:

June 12 - Reuters (Lindsay Dunsmuir): "The U.S. government had a $147 billion budget deficit in May, an increase of 66% from the same month last year as the ledger took a hit from declining revenue and higher spending… The deficit for the fiscal year, which began last October, was $532 billion, compared to a deficit of $433 billion in the same period of fiscal 2017. On an adjusted basis, the gap was $584 billion compared with $473 billion in the prior period. Unadjusted receipts last month totaled $217 billion, down 10% from May 2017, while unadjusted outlays were $364 billion, a rise of 11% from the same month a year earlier."

June 14 - Bloomberg (John Gittelsohn): "The soaring U.S. budget deficit at a time interest rates are increasing may be setting the stage for fiscal trouble, according to Jeffrey Gundlach, chief investment officer of DoubleLine Capital. 'Here we are doing something that almost seems like a suicide mission,' Gundlach said… 'We are increasing the size of the deficit while we're raising interest rates.'"

June 13 - Bloomberg (Liz Capo McCormick): "The Treasury yield curve from 5 to 30 years flattened to levels last seen in August 2007 after Federal Reserve officials hiked rates and signaled a faster pace of tightening ahead. The spread narrowed to as little as 24.4 bps, falling below the previous low for 2018, touched in May. The gap between 2- and 10-year yields also slid to the smallest since 2007, touching 39.1 bps, before rebounding to just above 40 bps."

June 12 - Reuters (Lucia Mutikani): "U.S. consumer prices rose marginally in May amid a slowdown in increases in the cost of gasoline and the underlying trend continued to suggest moderate inflation in the economy… The Consumer Price Index increased 0.2% last month… That followed a similar gain in the CPI in April. In the 12 months through May, the CPI increased 2.8%, the biggest advance since February 2012, after rising 2.5% in April."

June 13 - Reuters (Lucia Mutikani): "U.S. producer prices increased more than expected in May, leading to the biggest annual gain in nearly 6-1/2 years, the latest sign of a gradual building up of inflation pressures… The producer price index for final demand rose 0.5% last month, boosted by a surge in gasoline prices and continued gains in the cost of services… The PPI edged up 0.1% in April. In the 12 months through May, the PPI increased 3.1%, the largest advance since January 2012. Producer prices rose 2.6% year-on-year in April."

June 14 - CNBC (Patti Domm): "Armed with new-found proceeds from the tax bill, American consumers went shopping in May, driving retail sales - and economic growth - sharply higher. The economy in the second quarter is tracking close to 4% growth - a level President Donald Trump raved about last December, just before the tax bill was approved. At the same time, he had also told reporters he was holding out for a doubling of growth to 6%. For now, his 4% forecast is close to coming true on a quarterly basis, after strong retail sales data pushed up tracking GDP growth for the second quarter to about double the first quarter's level. The economy grew by 2.2% in the first quarter. CNBC/Moody's Analytics Rapid GDP Update reported economists' estimates of tracking GDP show average growth at 3.8%..."

June 12 - Bloomberg (Scott Lanman): "A gauge of optimism among U.S. small-business owners rose to a 34-year high amid increasingly sunny expectations for sales and profits, a National Federation of Independent Business survey showed… Sentiment index rose 3 points to 107.8 (est. 105), second-highest in gauge's history behind reading of 108 in 1983. Net 31% expect sales to increase, up 10 points from prior month and highest since Nov. Record 34% of respondents said it's a good time to expand…"

June 13 - Wall Street Journal (Miriam Gottfried): "The animal spirits are returning to the leveraged-buyout business, and that's helping fuel a historic rise in merger activity. At $156 billion, this year is on pace to have the highest dollar volume of LBOs since 2007 and is about 44% above last year's comparable level, according to Dealogic… The pace of private-equity fundraising, including more than $500 billion raked in last year alone, has led to concern about their ability to spend all that cash profitably, especially with equity valuations running near all-time highs."

June 10 - CNBC (Jeff Cox): "Corporate executives are using tax cuts and share buybacks to boost their own compensation, a top regulator said… Companies have announced a record-breaking level of share buybacks since Congress passed the Republican-backed tax reduction in December. Critics of the $1.5 trillion measure had worried that it would lead to big rewards for shareholders and only limited benefit to the broader economy. Robert Jackson Jr., a member of the Securities and Exchange Commission, said corporate bigwigs have been selling their shares after the buyback announcements hit, cashing in from the stock price surge that often happens after a repurchase notice."

June 9 - Financial Times (Owen Walker): "The asset management snowball is in full roll. The industry's largest funds are hurtling along, attracting billions of dollars of assets, while small competitors struggle to keep up. From mutual funds and exchange traded funds to private equity and other alternative vehicles, the story is the same: the biggest products are growing rapidly as assets are increasingly concentrated in the megafunds. The implications for the market and consumers are huge. 'As investors entrust their money to fewer products, assets come under the control of fewer individuals, who ultimately make fewer but larger decisions,' said Warren Miller, chief executive of Flowspring, a US data analysis group… According to Flowspring, the largest 1% of mutual funds manage 45% of industry assets. That figure is 72 times larger than all the assets managed by the bottom half. This is the highest concentration in two decades and has increased dramatically since the financial crisis. In 2009, the amount managed by the top 1% was just over 30 times that of the bottom half. The ratio was as low as 22:1 in 2006."

June 12 - Bloomberg (Joe Light): "Fannie Mae and Freddie Mac's regulator is proposing that the mortgage-finance giants have a combined capital buffer of as much as $180.9 billion should the companies be released from government control. The capital requirement, which the Federal Housing Finance Agency proposed…, would be suspended as long as the companies remain in federal conservatorship… FHFA Director Mel Watt first told the Senate Banking Committee last month that he was developing the rule…. 'We think it is important for FHFA, as the prudential regulator for Fannie Mae and Freddie Mac, to articulate our views on capital requirements and to start a healthy discussion about the amount of capital the enterprises should have to appropriately shield taxpayers,' Watt said…"

June 12 - Reuters (Diane Bartz and David Shepardson): "AT&T Inc won court approval… to buy Time Warner Inc for $85 billion, rebuffing an attempt by U.S. President Donald Trump's administration to block the deal and likely setting off a wave of corporate mergers. The deal, which could close next week, is seen as a turning point for a media industry that has been upended by companies like Netflix Inc and Alphabet Inc's Google which produce content and sell it online directly to consumers, without requiring a pricey cable subscription. Cable, satellite and wireless carriers all see buying content companies as a way to add revenue."

June 14 - Financial Times (Nicole Bullock): "Funds have been raised at a record rate in the US this year for shell companies that offer a 'blank cheque' to sponsors to pursue takeovers, providing further evidence of the rehabilitation of a controversial tool that waned in the wake of the financial crisis. The so-called special purpose acquisition companies, or spacs, have raised $4.5bn so far in 2018 - the largest amount for this type of fundraising in the period, according to Dealogic… That followed a brisk 2017, the second strongest year on record with nearly $10bn sold."

China Watch:

June 13 - Bloomberg: "China's broadest measure of new credit slumped in May to the lowest in almost two years, as a campaign to rein in the shadow banking sector gained traction. Aggregate financing stood at 760.8 billion yuan ($118.8bn) in May…, compared with an estimated 1.3 trillion yuan in a Bloomberg survey and 1.56 trillion yuan in April. The change was driven by a fall in off-balance sheet lending of 421.5 billion yuan, the most since data began in 2006… New yuan loans stood at 1.15 trillion yuan, versus a projected 1.2 trillion yuan, and broad M2 money supply increased 8.3%, compared with a forecast 8.5%."

June 13 - Wall Street Journal (Nathaniel Taplin): "China has spent the past 18 months tightening the screws on risky funding practices, but growth has mostly kept chugging along. Total financing in the economy-including municipal and corporate bond issuance, equity sales and shadow banking-grew just 11.5% in May from a year earlier, the slowest pace in more than a decade. Even so, factory-gate price inflation accelerated again. What exactly is going on? A big factor is the convoluted way that China's campaign against debt has unfolded-which implies that the real hit to growth could arrive soon."

June 14 - Financial Times (Edward White): "China's retail sales, investment growth and industrial output came in below forecasts in May… Retail sales growth showed a year-on-year increase of 8.5% last month, missing a 9.6% forecast from economists polled by Reuters and down almost 1 percentage point from 9.4% in April. Total fixed-asset investment growth slowed to 6.1%, compared to a 7% Reuters forecast. Commerzbank analyst Zhou Hao noted that the indicators 'illustrated a rather sluggish growth picture' with the sharp fall for fixed asset investment sending the marker to a new record low. 'After seasonal adjustment, all the indicators point to a rapidly slowing momentum,' he said. 'There is a clear spill-over effect from the financial deleveraging to the real sector.'"

June 13 - Reuters (Yawen Chen and Kevin Yao): "China's real estate investment growth slowed in May but remained firm, with sales growth hitting a near one-year high, defying fresh purchase curbs and higher financing costs and indicating resilience in one of the country's main economic drivers. Property investment rose 9.8% in May from the same period a year earlier, compared with a 10.2% rise in April... It grew 10.2% in the first five months of the year."

June 12 - Financial Times (James Kynge): "A moderate shock, perhaps caused by mounting trade frictions, could send China's current account into deficit this year for the first time since 1993, according to Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered. As the current account balance moves closer to zero, more movement in the value of the renminbi… against the US dollar is possible, Mr Ding said. A weakening renminbi has in the past fuelled outflows of capital from China and hit domestic equity and bond markets. Standard Chartered forecasts a narrowing surplus in the current account, which measures trade and services flows, to 1% of GDP this year and 0.5% in 2019, down from 1.3% in 2017."

June 13 - Bloomberg: "China's two-year long deleveraging campaign is finally taking a toll on corporate financing, igniting concerns that defaults will accelerate as liquidity strains worsen. The nation's broadest measure of new credit slumped in May to the lowest in almost two years. Net financing by company bond sales turned negative for the first time since last June, with more debt maturing than was issued… 'Chinese companies face heavy bond redemption in the second half of the year,' said Jiang Chao, an analyst at Haitong Securities Co. 'So if new credit growth stays sluggish, default risk will keep rising.' China is grappling with a delicate balancing act to rein in the shadow banking sector without undermining investment and growth in the economy. At least 17 bond defaults have occurred this year, while investors have also become pickier. Since the start of April, 13 issuers rated AA or below and considered junk score in the nation, have called off bond sales, the most for any quarter in two years."

June 13 - Bloomberg (Christopher Balding): "You wouldn't know it from the government's optimistic pronouncements, but China's banks are still under significant stress. Although the latest plan to help them out won't solve any fundamental problems, it will buy time… By several measures, Chinese banks are strained. Their official loan-to-deposit ratio increased from 65.8% in June 2015 to 71.2% at the end of March. New deposits peaked in 2015 and have since failed to keep up with lending growth. Last year, new loans amounted to 100.1% of new deposits. Through the first five months of this year, they were running at 104%... Since 2015, the PBOC has boosted lending to banks by more than 300%, to $1.5 trillion. Beyond just providing liquidity, it's also pushing banks to change their lending patterns: In particular, by allowing short-term debt to expire and rolling it into loans of longer duration. Since January 2017, medium- and long-term loans have made up 85% of all new bank lending."

EM Watch:

June 10 - Financial Times (Jonathan Wheatley): "In the turmoil that has struck emerging market currencies over the past six weeks the headlines have been grabbed by the Turkish lira, the Argentine peso and, in the past week, the Brazilian real. But what of the Mexican peso, traditionally seen as a bellwether of sentiment towards emerging markets as a whole? It crashed to an all-time low against the US dollar after the election of Donald Trump to the US presidency in November 2016. After staging a comeback, it is heading back in that direction, shedding 12% of its dollar value since mid-April. Worse may lie ahead. Analysts say the Trump administration's renewed abrasive attitude to trade and a likely runaway victory in Mexico's July 1 election for the leftist Andrés Manuel López Obrador, known to all as Amlo, could send the peso into uncharted territory. 'Markets are too complacent,' said Win Thin, emerging market currency strategist at Brown Brothers Harriman. 'There could be a big overshoot if Amlo wins that would test the levels of January 2017.'"

June 14 - Financial Times (Adam Samson): "Recep Tayyip Erdogan has threatened to conduct an 'operation' against Moody's, less than two weeks after the ratings company placed Turkey on review for a downgrade, state-run media reported. The Turkish president was quoted by the Anadolu Agency as saying the operation would commence after elections scheduled for later this month… 'God willing, we will conduct an operation against Moody's after June 24. Moody's is making unnecessary statements despite the fact that we are not a member of it. What a shame,' AA quoted Mr Erdogan as saying. Mr Erdogan's comments came after Moody's on June 1 placed Turkey on review for a downgrade just months after it cut the country's rating."

June 12 - Financial Times (Henny Sender): "As real US interest rates and the dollar have risen, investors have been pulling money from emerging markets. There has been about $10bn of outflows from EM debt and shares over the past six weeks, according to analysts at Bank of America Merrill Lynch. Portfolio managers are detecting vulnerabilities in several Asian countries, including India and Indonesia. And despite investors feeling far more comfortable about China than they did at the start of 2016, the rebound in the dollar over the past six weeks has increased the scrutiny of the economy. For those starting to pay attention, the focus is on how much dollar-denominated debt corporate China has sold in recent years and, critically, how much of it will fall due next year and in 2020. Plenty of it comes from the country's property companies."

June 14 - Bloomberg (Andres R. Martinez): "Argentina's truck drivers began a one-day national strike, demanding wage increases to compensate for an unexpected surge in inflation and protesting President Mauricio Macri's economic policies. Workers want wage increases of 27%, as well as reductions in the price of fuel and other subsidized utilities. Workers began blocking streets in Buenos Aires early in the morning… The strike is a test for Macri as his government embarks on a series of unpopular measures amid a possible economic recession, an unexpected surge in inflation and a free-falling currency."

June 12 - Financial Times (Joe Leahy and Andres Schipani): "Brazil's central bank president Ilan Goldfajn is facing the test of his career as the country's currency has once more come under assault from foreign exchange traders. Mr Goldfajn… has warned speculators he has the firepower to see them off in the form of dollar swaps, in effect a bet against the dollar settled in the local currency, the real. During the last bout of volatility before he took over in 2016, the central bank issued $115bn of the instruments. This time, the central bank has sold only slightly more than one-third of this amount, leaving it with plenty of room for more, in addition to its $380bn in reserves. 'We can exceed the amount [of swaps] offered in the past,' Mr Goldfajn said… 'We will intensify their use in the near term.'"

June 14 - Reuters (Caroline Stauffer): "Consumer prices rose 2.1% in May in Argentina… That brought 12-month inflation to 26.3%, up from 25.5% in the 12 months through April. The central bank abandoned its 15% inflation goal for 2018 last week…"

June 10 - Reuters (Delphine Schrank): "Mexican presidential frontrunner Andres Manuel Lopez Obrador extended his lead to nearly 17 points over his nearest rival ahead of the July 1 vote… The polling reflects the unpopularity of the ruling Institutional Revolutionary Party (PRI) in the bloodiest presidential race of recent history. On Friday night, Fernando Puron, a congressional candidate for the PRI and a former mayor of Piedras Negras, Coahuila state, was shot in the back of the head as he was greeting supporters just after leaving a debate… Puron's death was the first for a candidate running at the federal level, bringing to 112 the number of candidates, politicians or office holders killed since nationwide campaigning began in September…"

June 10 - Reuters (Andreina Aponte): "Prices in Venezuela rose almost 24,600% in the 12 months ended May 31, the country's opposition-led National Assembly, whose numbers are broadly in line with those of independent economists, reported…"

Central Bank Watch:

June 14 - Bloomberg (Brian Swint, Piotr Skolimowski and Catherine Bosley): "Mario Draghi put the European Central Bank on the road to raising interest rates, though he may never get the chance to complete the journey himself. Sixteen months before his crisis-marked tenure at the central bank draws to a close, the president has shifted the ECB back toward the old norm of using borrowing costs as the main policy tool. For the past four years, bond-buying has been the flagship measure for reviving inflation and the economy after Draghi found that even negative rates couldn't do the job alone. The Governing Council used its June meeting to announce that asset purchases will phased out by the end of December… But it was a pledge to keep interest rates at current record lows 'at least through the summer of 2019' that caught investors by surprise…"

June 14 - Bloomberg (Piotr Skolimowski): "Mario Draghi said the euro-area economy is strong enough to overcome increased risk, justifying the European Central Bank's decision to halt bond purchases and end an extraordinary chapter in the decade-long struggle with financial crises and recession. Policy makers agreed to phase out the stimulus tool with 15 billion euros ($17.7bn) of purchases in each of the final three months of the year… The central bank also pledged to keep interest rates unchanged at current record lows at least through the summer of 2019."

Global Bubble Watch:

June 14 - Bloomberg (Suzanne Woolley): "The rich are getting a lot richer and doing so a lot faster. Personal wealth around the globe reached $201.9 trillion last year, a 12% gain from 2016 and the strongest annual pace in the past five years, Boston Consulting Group said… Booming equity markets swelled fortunes, and investors outside the U.S. got an exchange-rate bonus as most major currencies strengthened against the greenback. The growing ranks of millionaires and billionaires now hold almost half of global personal wealth, up from slightly less than 45% in 2012… In North America, which had $86.1 trillion of total wealth, 42% of investable capital is held by people with more than $5 million in assets. Investable assets include equities, investment funds, cash and bonds."

June 10 - Wall Street Journal (Richard Rubin): "Multinational companies shift about 40% of the profits they earn outside their home countries into tax havens, eluding tax-collection efforts, according to an analysis that points to persistent gaps in government revenue collection. U.S. companies are among the most aggressive users of profit-shifting techniques, which often relocate paper profits without bringing jobs and wages, according to the study by economists Thomas Torslov and Ludvig Wier of the University of Copenhagen and Gabriel Zucman of the University of California, Berkeley. Mr. Zucman said the research suggests the global trend toward lower corporate tax rates in major countries-including the recent U.S. reduction to 21% from 35%-won't by itself cause companies to alter their tax-avoidance moves. Companies can still lower their tax bills significantly by shifting profits to places with effective tax rates between zero and 10%."

June 11 - Bloomberg (Michael Heath and Garfield Reynolds): "Australia's east-coast property bubble is showing signs of deflating at a faster clip as home-lending data recorded the longest losing streak in almost a decade. Housing finance fell 1.4% in April, the fifth straight monthly drop and the longest stretch of declines since September 2008… The downturn is most prominent in Sydney where prices slid 4.2% in May from a year earlier, when they were rising at an annual pace of 17%. Sales at auctions -- a popular way of marketing houses Down Under - have slumped to the lowest since early 2016 in Australia's biggest city, with only around half of properties successfully selling."

Europe Watch:

June 13 - Financial Times (Kate Allen): "Bond investors demanded significantly higher returns from Italian debt at auctions on Wednesday, highlighting the lasting scar left by last month's market ructions. The country raised €2bn in three-year paper at a gross yield of 1.16%, some 1.09 percentage points higher than the last time Italy sold three-year paper. It also sold seven-, 28- and 30-year debt with higher yields across the board to issue a total of €5.6bn. According to Reuters these are the highest prices paid for fresh Italian debt since 2014."

Japan Watch:

June 14 - Bloomberg (Leika Kihara and Izumi Nakagawa): "Japan's 'Abenomics' stimulus program is sputtering just as the government and the central bank wanted to tap the brakes, heightening the chance they will be forced to fight the next economic downturn with a near-empty policy arsenal. Analysts say Japan will avoid a recession… and suggest the first-quarter slump was a soft patch caused by temporary factors like bad weather and weak stock markets. But there are signs growth is moderating after two years of expansion. Factory output slowed and inventory rose in April, a sign firms may have overestimated global demand."

Fixed Income Bubble Watch:

June 11 - Bloomberg (Christopher DeReza): "Sales of the riskiest subprime auto bonds are on pace for a record year, according to Barclays Plc. Companies have sold more than $150 million of B rated subprime auto ABS bonds this year, compared with nothing last year, and an annual average of about $20 million since the financial crisis, Barclays analyst Alin Florea wrote… Meanwhile, BB rated debt in the sector has already exceeded $500 million and looks set to pass last year's total of $950 million. 'Despite the volatility earlier in the year, 2018 is shaping up to be a banner year for subprime, auto ABS high yield issuance,' Florea wrote. Subprime auto ABS issuers have started to sell more BB- and B rated bonds to meet investor demand for riskier slices of the debt."

Leveraged Speculator Watch:

June 13 - Bloomberg (Elena Popina): "Signs of gathering economic strength are throwing the best thinking of short sellers out the window. A basket of 50 heavily shorted companies -- stocks that speculators bet will fall -- has jumped 16% since May 1, according to… Goldman Sachs… That's twice the return of a separate collection of companies favored by hedge-fund longs… While firms targeted by short sellers have often done well during the bull market, rarely has their performance been this dominating… Versus the hedge-fund VIP picks, the rally in the bear basket is currently two standard deviations wider than normal in the past 10 years."

Geopolitical Watch:

June 12 - Reuters (Mohammed Ghobari and Mohamed Mokhashef): "A Saudi-led alliance of Arab states launched an attack on Yemen's main port city on Wednesday in the largest battle of the Yemen war, aiming to bring the ruling Houthi movement to its knees at the risk of worsening the world's biggest humanitarian crisis. Arab warplanes and warships pounded Houthi fortifications to support ground operations by foreign and Yemeni troops massed south of the port of Hodeidah in operation 'Golden Victory'."