Weekly Commentary: Now What?

September 18 – Reuters: “The world's leading central banks are facing the risk that their massive efforts to revive economic growth could be dragged down again, with some officials arguing for bold new ideas to counter the threat of slow growth for years to come. A day after the U.S. Federal Reserve kept interest rates at zero, citing risks in the global economy, the Bank of England's chief economist said central banks had to accept that interest rates might get stuck at rock bottom. In Japan, where interest rates have been at zero for more than 20 years, policymakers are already tossing around ideas for overhauling the Bank of Japan's huge monetary stimulus program as they worry that it will be unsustainable in the future, according to sources familiar with its thinking. Separately a top European Central Bank official said the ECB’s bond-buying program might need to be rethought if low inflation becomes entrenched.”

Most just scoff at the notion that there has been a historic global Bubble, let alone that this Bubble has over recent months begun to burst. Talk of an EM and global crisis is viewed as wackoism. Except that the Federal Reserve clearly sees something pernicious in the world that requires shelving, after seven years, even the cutest little baby step move in the direction of policy normalization.

The Fed and global central banks responded to the 2008 crisis with unprecedented measures. When the reflationary effects of these policies began to wane, the unfolding 2012 global crisis spurred desperate concerted do “whatever it takes” monetary stimulus. This phase has now largely run its course, and there is at this point little clarity as to what global central bankers might try next.

Clearly, great pressure will remain to hold rates tight at zero. I fully expect policymakers at some point to see no alternative than to implement additional QE. But under what circumstances? Will it be orchestrated independently or through concerted action? What about timing? How much and how quickly? Might global central banks actually consider adopting negative rates? Well, there’s enough here to really have the markets fretting the uncertainty, especially with global central bankers not having thought things through.

There is today extraordinary confusion and misunderstanding throughout the markets. Policymakers are confounded. Years of zero rates, Trillions of new “money” and egregious market intervention/manipulation have left global markets more vulnerable than ever. Now What? I’m the first to admit that global Credit, market and economic analyses are these days extraordinarily complex – and remain so now on a daily basis. We must test our analytical framework and thesis constantly.

I am confident in my analytical framework and believe it provides a valuable prism for understanding today’s complex world. The current global government finance Bubble is indeed the grand finale of serial Bubbles spanning about 30 years. Importantly, each Boom and Bust Bubble Cycle – going back to the mid-eighties (“decade of greed”) – spurred reflationary policy measures that worked to spur a bigger Bubble. Inevitably, each bursting Bubble would ensure only more aggressive inflationary policy measures.

It is fundamental to Credit Bubble Theory (heavily influenced by “Austrian” analysis) that the scope of each new Bubble must be bigger than the last. Credit growth must be greater, speculation must be greater and asset inflation must be greater. This Financial Sphere inflation is essential to sufficiently reflate the Real Economy Sphere – i.e. incomes, spending, corporate earnings/cash flows, investment, etc. Reflation is necessary to validate an ever-expanding debt and financial structure, including elevated asset prices. Ongoing rapid Credit growth is fundamental to this entire process, much to the eventual detriment of financial and economic stability.

There are a few key points that drive current analysis (completely disregarded by conventional analysts). First, the government finance Bubble saw historic Credit growth unfold in China and EM – Credit expansion sufficient to reflate a new Bubble after the bursting of the mortgage finance Bubble. Central to my thesis: when the current Bubble bursts – especially with regard to China – it will be near impossible to spur sufficient global Credit growth to inflate a bigger ensuing Bubble. Second, with the global government finance Bubble emanating from the very foundation of contemporary “money” and Credit, it will be impossible for governments and central banks to extricate themselves from monetary stimulus (any tightening would risk bursting Bubbles). Third, extreme measures - monetary inflation coupled with market manipulation – spurred enormous “Terminal Phase” growth in the global pool of speculative finance. It’s been a case of too much “money” ruining the game.

“Moneyness of Risk Assets” has played prominently throughout the government finance Bubble period. Unlimited Chinese stimulus seemed to ensure robust commodities markets and EM economies generally. Limitless sovereign debt and central bank Credit appeared to guarantee ongoing liquid and continuous global financial markets – “developed” and “developing.” And with governments backstopping global growth and central bankers backstopping liquid markets, the perception took hold that global stocks and bonds offered enticing returns with minimal risk. Global savers shifted Trillions into perceived “money-like” (liquid stores of nominal value) ETFs and stock and bond funds. Government policy measures furthermore incentivized leveraged speculation.

And why not leverage with global fiscal and monetary policies promoting such a predictable backdrop? Indeed, speculative finance has over recent years played an unappreciated but integral role in global reflation. This process has created acute fragility to market risk aversion and a reversal of “hot money” flows.

Central to the bursting global Bubble thesis is that Chinese and EM Bubbles have succumbed – with policymakers rather abruptly having lost control of reflationary processes. Measures that elicited predictable responses when Bubbles were inflating might now spur altogether different behavior. A year ago, Chinese stimulus incited speculation – and associated inflation – in domestic financial markets, while bolstering China’s economy and EM more generally. Today, in a faltering Bubble backdrop, aggressive Chinese measures weigh on general confidence and stoke concerns of destabilizing capital flight and currency market instability.

In the past, a dovish Fed would predictably bolster “risk-on” throughout U.S. and global markets. Times have changed. As we saw this week, an Ultra-Dovish Fed actually exacerbates market uncertainty. The global leveraged speculating community is these days Crowded in long dollar trades. Federal Reserve dovishness – and resulting pressure on the dollar - thus risks reinforcing “risk off” de-risking/de-leveraging. In particular, the yen popped on the Fed announcement, immediately adding pressure on already vulnerable yen “carry trades” (short/borrow in yen to finance higher-yielding trades in other currencies). While EM currencies generally enjoyed small bounces (likely short covering) this week, for the most part EM equities traded poorly post-Fed. European equities were hit hard, while the region’s bonds benefited from the prospect of more aggressive ECB QE.

The bullish contingent has clung to the view that EM weakness has been a function of an imminent Fed tightening cycle. In the market’s mixed reaction to Thursday’s announcement, I instead see support for my view that the bursting EM Bubble essentially has little to do with current Federal Reserve policy.

The bursting China/EM Bubble is the global system’s weak link. Surely the activist Fed would prefer to do something. They must believe that hiking rates – even if only 25 bps – would support the dollar at the risk of further straining commodities and EM currencies. Moreover, the FOMC likely sees any “tightening” measures as exacerbating general market nervousness and risk aversion. Moreover, the Fed must believe that dovish surprises will be effective in countering a tightening of financial conditions in the markets, as they were in the past.

Major Bubbles are so powerful. It was amazing how long the markets were willing to disregard shortcomings and risks in China and EM (financial, economic and political). Similarly, it’s been crazy what the markets have been so willing to embrace in terms of Federal Reserve and global central bank doctrine and policy measures. With their Bubble having recently burst, Chinese inflationary measures are now significantly hamstrung by an abrupt deterioration in confidence in policymaker judgment and the course of policymaking. I believe Thursday’s Fed announcement marks an important inflection point with respect to market confidence in the Fed and central banking.

Japan’s Nikkei dropped 2% Friday, and Germany’s DAX sank 3.1%. Both have been global leveraged speculating community darlings. Crude was hammered 4.2% Friday, with commodities indices down about 2%. Notably, the Brazilian real was trading at 3.83 (to the dollar) prior to the Fed announcement, before sinking 3% to a multi-year low by Friday’s close. Reminiscent of recent market troubles, financial stocks led U.S. equities lower on Friday. Financials badly underperformed for the week, with Banks down 2.7% and the Securities Broker/Dealers sinking 2.6%.

The market deck has been reshuffled for next week. A lot of market hedging took place during the past month of market instability. And a decent amount of this protection expired (worthless) with Friday’s quarterly “triple witch” options expiration. This means that if the market resumes its downward trajectory next week many players will be scampering again to buy market “insurance.” This creates market vulnerability to another “flash crash” panic “risk off” episode.

I am not predicting the market comes unglued next week. But I am saying that an unsound marketplace is again vulnerable to selling begetting selling – and another liquidity-disappearing act. Bullish sentiment rebounded quickly following the August market scare. The bear market will be well on its way if August lows are broken. I’m sticking with the view that uncertainties are so great – especially in the currencies – the leveraged players need to pare back risk. And the harsh reality is that central bank policymaking is the root cause of today’s extraordinary uncertainties and market instability.

In closing, I’m compelled to counter the conventional view that the Fed should stick longer at zero because there is essentially no cost in waiting. I believe there are huge costs associated with thwarting the market adjustment process. Measures that contravene more gradual risk market declines only raise the likelihood of eventual market dislocation and panic. This was one of many lessons that should have been heeded from the 2007/2008 experience.

For the Week:

The S&P500 slipped 0.2% (down 4.9% y-t-d), and the Dow declined 0.3% (down 8.1%). The Utilities jumped 2.8% (down 6.9%). The Banks dropped 2.7% (down 6.4%), and the Broker/Dealers fell 2.6% (down 8.7%). The Transports declined 0.2% (down 12.1%). The S&P 400 Midcaps were little changed (down 2.7%), while the small cap Russell 2000 gained 0.5% (down 3.4%). The Nasdaq100 (up 2.1%) and the Morgan Stanley High Tech index (down 0.4%) were both unchanged. The Semiconductors lost 0.8% (down 11.1%). The Biotechs gained 1.1% (up 16.2%). With bullion rallying $31, the HUI gold index recovered 8.3% (down 29.2%).

Three-month Treasury bill rates ended the week at negative two bps. Two-year government yields were down three bps to 0.68% (up one basis point y-t-d). Five-year T-note yields fell seven bps to 1.44% (down 21bps). Ten-year Treasury yields declined six bps to 2.13% (down 4bps). Long bond yields slipped a basis point to 2.94% (up 19bps).

Greek 10-year yields sank another 41 bps to 7.92% (down 183bps y-t-d). Ten-year Portuguese yields dropped nine bps to 2.50% (down 12bps). Italian 10-yr yields fell seven bps to 1.76% (down 13bps). Spain's 10-year yields dropped 16 bps to 1.94% (up 33bps). German bund yields added a basis point to 0.66% (up 12bps). French yields declined three bps to 1.03% (up 20bps). The French to German 10-year bond spread narrowed four to 37 bps. U.K. 10-year gilt yields were unchanged at 1.83% (up 8bps).

Japan's Nikkei equities index declined 1.1% (up 3.6% y-t-d). Japanese 10-year "JGB" yields fell four bps to 0.30% (down two bps y-t-d). The German DAX equities index dropped 2.0% (up 1.1%). Spain's IBEX 35 equities index gained 1.1% (down 4.2%). Italy's FTSE MIB index fell 1.1% (up 13.2%). EM equities were mixed. Brazil's Bovespa index rallied 1.9% (down 5.5%). Mexico's Bolsa gained 1.8% (up 1.0%). South Korea's Kospi index gained 2.8% (up 4.2%). India’s Sensex equities index rose 2.4% (down 4.7%). China’s Shanghai Exchange lost 3.2% (down 4.7%). Turkey's Borsa Istanbul National 100 index rallied 5.3% (down 12.4%). Russia's MICEX equities index slipped 0.4% (up 22.5%).

Junk funds this week saw inflows of $236 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates added a basis point to 3.91% (up 4bps y-t-d). Fifteen-year rates increased one basis point to 3.11% (down 4bps). One-year ARM rates were down seven bps to 2.56% (up 16bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up a basis point to 4.06% (down 22bps).

Federal Reserve Credit last week rose $6.6bn to $4.446 TN. Over the past year, Fed Credit inflated $38bn, or 0.9%. Fed Credit inflated $1.635 TN, or 58%, over the past 149 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $2.2bn last week to $3.337 TN. "Custody holdings" were up $44.1bn y-t-d.

M2 (narrow) "money" supply increased $1.3bn to a record $12.187 TN. "Narrow money" expanded $714bn, or 6.2%, over the past year. For the week, Currency was little changed. Total Checkable Deposits dropped $16.7bn, while Savings Deposits gained $13.2bn. Small Time Deposits slipped $1.3bn. Retail Money Funds gained $6.2bn.

Money market fund assets dropped $16.2bn to $2.646 TN. Money Funds were down $87bn year-to-date, while gaining $70bn y-o-y (2.7%).

Total Commercial Paper fell $4.2bn to $1.039 TN. CP increased $31.6bn year-to-date.

Currency Watch:

The U.S. dollar index was little changed at 95.23 (up 5.5% y-t-d). For the week on the upside, the South African rand increased 1.7%, the Australian dollar 1.4%, the New Zealand dollar 1.3%, the Mexican peso 1.1%, the British pound 0.7%, the Japanese yen 0.5% and the Canadian dollar 0.3%. For the week on the downside, the Brazilian real declined 1.9% and the euro fell 0.4%.

Commodities Watch:

The Goldman Sachs Commodities Index fell 1.6% to a new multi-year low (down 14.5% y-t-d). Spot Gold jumped 2.8% to $1,139 (down 3.9%). December Silver rallied 4.1% to $15.17 (down 2.8%). October Crude recovered 17 cents to $44.94 (down 16%). October Gasoline declined 0.7% (down 7%), and October Natural Gas sank 3.3% (down 10%). September Copper fell 3.1% (down 16%). December Wheat gained 0.4% (down 18%). December Corn fell 2.5% (down 5%).

Federal Reserve Watch:

September 18 – Reuters (Vidya Ranganathan and Nichola Saminather): “The U.S. Federal Reserve's decision to delay raising interest rates, pending a clearer picture on the performance of emerging economies, has dismayed investors who believe the U.S. rate cycle and global markets are now hostage to Chinese fortunes. Fed Chair Janet Yellen's comments that U.S. rates were kept on hold on Thursday partly over concerns that China's slowdown may be more abrupt than expected prompted some investors to fret that the Fed was becoming too reactive, and focusing on China would prolong current market uncertainty. The thought of having to monitor China's notoriously opaque policy-making process to get a better reading of Fed policy and global liquidity has left investors flustered and dismayed. ‘It’s not clear what to watch,’ said Richard Jerram, chief Asian economist at Bank of Singapore. ‘Say, if the next China PMI is not that bad, is that reason for the Fed to go in December?’ he asked… “I don't know what the basis for their (Fed's) decision is anymore because they seem to have abandoned rigor. They seem to have become much more subjective, much more reactive, when policy is meant to be forward-looking,’ Jerram added.”

September 18 – Wall Street Journal (Brian Blackstone): “The Federal Reserve’s decision Thursday to keep interest rates pinned near zero could put added pressure on the European Central Bank to step up its own stimulus efforts to keep the euro’s exchange rate from strengthening too much and derailing Europe’s fragile economic recovery.”

Global Bubble Watch:

September 15 – CNBC (Everett Rosenfeld): “While many are watching its stock market, China's real problem may lie with its banking system… Kyle Bass, Hayman Capital Management founder and managing partner, told CNBC's ‘Squawk on the Street’ on Tuesday that Chinese banks will likely experience losses that may affect the country as a whole. ‘Those that are watching whether Chinese stocks go up or down aren't paying attention, in my opinion, to what the real problem is,’ Bass said. ‘And the real problem is the loans in this banking sector.’ The hedge fund manager said that Chinese bank assets rose about 400% since 2007, and are now about $31 trillion against an economy with a gross domestic product of $10 trillion. ‘When you run a bank expansion that aggressively, that quickly, you’re going to have some losses,’ he said, adding that ‘the scary thing about that’ is a ‘likely’ 10% asset loss in that banking sector would amount to $3 trillion.”

September 13 – Bloomberg (Anooja Debnath Anchalee Worrachate): “Turbulent trading that made August the worst month for global equities since 2012 also revealed a widening crack in the world’s largest market-- foreign exchange. Fabrizio Fiorini, chief investment officer at Aletti Gestielle SGR SpA in Milan, thought he was in luck as the financial turmoil curbed speculation the Federal Reserve would raise interest rates, sparking a stampede of dollar selling. To his dismay, he found that the gap between prices at which traders were willing to buy and sell major currencies had tripled, forcing him to pay a greater premium to purchase the greenback. ‘During those two or three critical days in August, I was frustrated that liquidity, which seems to always be there when the market is quiet, disappeared when you need it the most,’ said Fiorini… ‘Market makers are not able to provide liquidity the way they used to, and the market was too crowded with the same trades.’”

September 15 – Australian Financial Review: “Chinese purchases of Australian property have dropped significantly in the past month, according to agents, as buyers struggle to shift money out of the country following Beijing's move to tighten capital controls. One Chinese agent said the latest efforts by the central government to avoid large capital outflows were having a ‘significant impact’ on his business. ‘It has affected 70 to 80% of current transactions and some have already been suspended,’ said the agent… China has previously tolerated significant capital outflows via so called ‘grey channels’, but has tightened up enforcement in recent weeks as the economy slows and fears over capital flight put downward pressure on the currency… The crackdown is also said to be affecting trading companies, which have been asked to submit more supporting documents to verify transactions, according to a report in China Business News…”

September 15 – Financial Times: “Pity the investors who piled into Petrobras' century bonds back in June. Having been cut off from the global debt markets for six months amid a multibillion-dollar corruption probe, the $2.5bn offering was at the time hailed as a sign that the scandal-ridden Brazilian oil major had finally put the worst of its problems behind it. The 100-year bonds were sold at a yield of 8.45% — 0.4 percentage point less than bankers initially planned — and attracted some $13bn in orders as yield hungry investors jumped abroad. But fast forward three and a half months and the bonds have lost nearly a fifth of their value. The securities sank to a record low of 67 cents on the dollar last week after Brazil was stripped of its coveted investment grade rating by Standard & Poor's. The move… also prompted S&P to downgrade Petrobras into junk. It cut its rating on the company by two notches from BBB- to BB, with a negative outlook. Yields, which move inversely to price, have soared by more than 150 bps to a record 9.955%.”

September 15 – Bloomberg: “It’s about to get even uglier for China’s hedge funds. The newfangled industry, short on expertise and ways to protect itself from market declines, has seen almost 1,300 funds liquidate amid China’s $5 trillion stocks selloff, and a similar number may be at risk, according to Howbuy Investment Management Co. Now, a government crackdown on short selling and other hedging strategies have made prospering in a bear market difficult. It’s an inglorious turn for China’s on-again, off-again love affair with stocks, which saw the number of hedge-fund-like vehicles explode in past years as the government made it easier to register funds and introduced new financial instruments. The market rout -- and the regulatory response to it -- has revealed cracks in the industry that suggest it may need years to recover. In the most devastating blow to domestic hedge funds, China has imposed new restrictions on trading in stock-index futures, a key investment strategy to dampen volatility and avoid big losses. ‘It spells the end, at least temporarily, for China domestic hedge funds,’ Hao Hong, chief China strategist at BOCOM International Co. in Hong Kong, said…”

September 15 – Bloomberg (Christopher Langner and David Yong): “Two of Southeast Asia’s richest businessmen are experiencing the weight of dollar strength after loading their business empires up with cheap U.S. currency debt. Anthoni Salim, who controls the First Pacific Co. conglomerate, and T. Ananda Krishnan, a major shareholder of Malaysian mobile phone operator Maxis Bhd., are feeling the pinch as the rupiah and the ringgit slump to the lowest since the 1998 Asian financial crisis. The duo’s companies have among the most foreign-currency debt in their respective countries, with dollar liabilities totaling at least $3.8 billion for Salim and some $2.3 billion for Krishnan… While the lessons of the 1998 meltdown have prompted both tycoons to take out currency hedges and seek to balance cash flows and liabilities, concern over their foreign debts is weighing on the two groups’ shares and bonds.”

China Bubble Watch:

September 15 – Reuters: “China cranked up its fiscal spending by 26% in August from a year earlier as Beijing tries to re-energise flagging economic growth and convince reluctant local officials to spend. August data over the past week suggested the world's second-largest economy lost further momentum over the summer, adding pressure on policymakers to ramp up what is already their biggest stimulus campaign since the global financial crisis. The spending increase to 1.28 trillion yuan ($201bn) last month was the biggest percentage rise in central and local government fiscal expenditure since April, when it leapt 33… For the first eight months of the year, fiscal expenditure rose 14.8% over 10 trillion yuan ($1.57 trillion) compared with the same period last year… With traditional monetary policy responses such as interest rate cuts having less impact in reviving economic activity than in the past, China is trying to increase fiscal stimulus to both shore up short-term growth and fend off growing deflationary pressures. ‘Given China's top policymakers have given green light to re-leverage the economy on the back of supportive fiscal policy and easing monetary policy, we expect China's fixed asset investment growth to find a bottom soon,’ economists at OCBC wrote…”

September 18 – Reuters: “The People's Bank of China has ordered banks to closely scrutinize clients' foreign exchange transactions to prevent illicit cross-border currency arbitrage, sources with the direct knowledge of the matter told Reuters… China's yuan is not freely convertible under the capital account, but some firms have made use of gray channels, such as via their overseas subsidiaries, to conduct arbitrage trading between onshore and offshore markets. Some have used bogus foreign trade deals to disguise speculative transactions. Now the PBOC has raised its settlement charges for some banks but not others, suggesting the central bank was disciplining particular banks which helped their clients to conduct such arbitrage business. ‘Several banks got the PBOC notices yesterday evening,’ said one source, adding the ‘punitive’ hike in trading fees reflected those banks' excessive foreign exchange trading of late, which showed they were suspected of making illicit deals.”

September 15 – Wall Street Journal (James T. Areddy): “The brokerage arm of China’s most politically pedigreed financial firm entered the summer with big gains in profit. Now, Citic Securities Co. is contending with a near meltdown in markets and a government crackdown that has entangled a number of its top executives… Citic Securities had positioned itself as China’s ‘go-to’ financial house for deal making in recent years and took the lead during the bull run to promote instruments like cross-border equity swaps that gave foreign hedge funds access to China’s markets. But the stock market selloff prompted a ham-fisted government bailout that raised doubts globally about the Communist Party’s reputation for sound economic stewardship has put the firm’s accomplishments in a new light. The equity swaps and other trading strategies Citic Securities promoted now appear to trouble regulators who are struggling to get a grip on the stock market decline and probing the industry for signs of what they term ‘abnormal’ trading… Margin financing… helped juice markets. In its earnings report…, Citic Securities described itself as No. 1 in lending to Chinese stock investors. Citic Securities also promoted new investment products, in particular cross-border equity swaps that were popular with global hedge funds… The swaps allow an investor in one country to place a bet on a stock or index in another without being there, as a middleman handles both sides of the deal. The swaps gave foreigners a way to sidestep quotas that limit their participation in China’s markets because the transactions were initiated in Hong Kong.”

September 16 – Bloomberg (Bei Hu): “Some banks are scaling back offerings that enable clients to indirectly wager against Chinese stocks through Hong Kong’s stock exchange link with Shanghai, as China’s regulators clamp down on practices such as short-selling. JPMorgan… stopped offering so-called synthetic shorts on shares under the Shanghai Connect arrangement, according to an e-mail from its prime brokerage unit to clients including hedge funds this week. Credit Suisse Group AG also cut back on products that enable synthetic short-selling of Shanghai Connect stocks, said two people… The Shanghai Composite Index has plummeted 39% from a June 12 peak, prompting China to clamp down on practices that authorities deem damaging, such as ‘malicious’ short-selling. The crackdown has snared senior industry executives including Citic Securities Co. President Cheng Boming.”

September 15 – Reuters: “China is extending its control of onshore markets to commodities exchanges, spooked by signs that speculators have shifted from China's volatile stock markets to commodities futures. The country's top commodities exchanges - the Dalian Commodity Exchange (DCE), Shanghai Futures Exchange (SHFE) and Zhengzhou Commodity Exchange (ZCE) - were asked recently by China's exchange regulator to draft rules designed to ‘regulate the behavior of program trading’ in futures markets, according to people familiar with the matter.”

September 15 – Bloomberg: “China removed quotas for companies to raise funds in the overseas bond and loan markets, as it tries to staunch capital outflows spurred by a currency devaluation. The National Development and Reform Commission, China’s top planning agency, will remove quota approval processes for foreign currency or yuan notes and loans with a term of more than one year, according to a statement… Previously, the NDRC reviewed each firm’s application for foreign borrowing, according to Moody’s… The move comes amid mounting speculation China will do more to counter the flow of money out of the nation, after yuan positions at the central bank and financial institutions fell by the most on record in August.”

September 14 – Bloomberg (Amy Li and Helen Yuan): “Chinese brokerages ruing the collapse of futures trading in Shanghai are pitching clients similar contracts in Singapore. ‘Goodbye, China Financial Futures Exchange; Hello, FTSE A50!’ reads an advertisement by a unit of Shenzhen-based Essence Securities Co. on the WeChat messaging service, referring to Singapore-traded futures on an index of the biggest mainland companies. China’s domestic equity futures market, ranked the world’s busiest as recently as July, has seen volumes plunge 99% since June as policy makers curbed leverage and position sizes and announced investigations into ‘malicious’ short sellers. That’s left brokerages, which boosted staff numbers by 50% since 2011, turning to promoting contracts on the SGX FTSE China A50 Index as an alternative. ‘Investors and hedge funds are showing great interest switching to overseas markets,’ Zhu Bin, deputy general manager of… Nanhua Futures Co., said. ‘Foreign investors who have positions in mainland equities will also turn to Singapore to hedge their positions.’”

September 14 – Reuters: “China's central bank and commercial banks sold a net 723.8 billion yuan ($113.69bn) of foreign exchange in August, by far the largest on record, highlighting how capital outflows intensified in the wake of the yuan's devaluation last month. The previous largest outflow, in July, totaled 249.1 billion yuan ($39.13bn). The figures are based on Reuters calculations using central bank data… The figures show the price China is paying to keep its currency from falling further in the face of concerns about the health of the economy and as financial markets anticipate a rise in U.S. interest rates.”

September 16 – Financial Times (Josh Noble): “The view that China is growing far slower than official figures show is increasingly going mainstream, with big global investors among those now basing decisions on a rate of about 5%. According to government statistics China’s economy grew at an annual pace of 7% in the second quarter of this year… However, doubts have long lingered about the veracity of Chinese economic data, with many analysts believing them to be understated during times of rapid growth and overstated during the current slowdown. A strategist at one European asset manager described the official growth figure as ‘a very crude propaganda tool’.”

September 14 – Bloomberg: “China National Erzhong Group Co. may miss an interest payment later this month after one of its creditors filed a restructuring request, putting it at risk of becoming the second state-owned company to default in the nation’s onshore bond market. The smelting-equipment maker might not be able to pay a coupon that’s due Sept. 28 on its 1 billion yuan ($157 million) of 5.65% 2017 notes if a local court accepts the creditor’s restructuring application before that date… China National Erzhong… issued the five-year securities in 2012 at par and the debentures are currently trading at 67.72% of that. Uncertainty over the payment comes as deflation risks, overcapacity and spiraling corporate debt cloud the outlook for China’s economy, forecast to expand at the slowest pace since 1990 this year… ‘Because Erzhong is a state-owned company, if it defaults it may arouse investors’ concern about companies’ credit risks,’ said Qu Qing, a bond analyst at Huachuang Securities…”

Fixed Income Bubble Watch:

September 17 – Bloomberg (Tracy Alloway): “The market remains deeply divided as to whether the Federal Reserve will embark on its first interest rate hike in almost a decade on Thursday, but it's worth taking a moment to appreciate just what nearly seven years of near-zero interest rates (what’s affectionately been called ‘zirp’) accomplished for the U.S. corporate bond market. In two words: a lot. 1. For a start, it led to a huge boom in corporate credit. Low-interest rates have encouraged companies to lock in lower borrowing costs by selling their bonds to eager, yield-hungry investors. The overall size of the U.S. corporate bond market has jumped from $5.4 trillion at the end of 2008 to almost $8 trillion currently -- an astounding 47% increase.”

September 16 – Bloomberg (Lisa Abramowicz): “Sprint Corp. is a cautionary tale for investors who think they’re immune to carnage in the $1.3 trillion junk-bond market as long as they steer clear of energy debt. Moody’s… downgraded the wireless company, which has more than $30 billion of debt outstanding, as it struggles to compete with better capitalized competitors such as AT&T Inc. and T-Mobile USA. Much of the company’s debt was downgraded several steps to Caa1, which is considered close to default. The market response was fierce. Sprint’s $2.5 billion of bonds maturing in 2028 plunged as low as 80.8 cents on the dollar from 88.4 cents on Monday. Its $4.2 billion of notes maturing in 2023 fell as low as 90.1 cents from 98.6 cents two days earlier. Many big high-yield bond-fund managers… hold Sprint debt… This just shows that even the most highly traded, popular names can be vulnerable to sudden plunges that leave millions of dollars of losses in their wake.”

September 15 – Bloomberg (Michelle Kaske): “Puerto Rico’s main water utility paid a significant premium while selling $75 million of short-term notes that extend a bank loan through November… The Puerto Rico Aqueduct and Sewer Authority revenue note sale transfers most of a $90 million loan with Banco Popular to Bank of America Merrill Lynch, the lead underwriter of the deal… The notes, which mature Nov. 30, were privately placed with an 8.75% coupon priced at par. Top-rated three-month tax-exempt securities yield about 0.09%...”

Central Bank Watch:

September 16 – Reuters (Balazs Koranyi and John O’Donnell): “The European Central Bank has scope to buy more assets as its quantitative easing has been small compared to similar schemes elsewhere, ECB Vice President Vitor Constancio said, adding that Europe also needs the U.S. and Chinese economies to motor ahead. The asset buys, started in March to lift the bloc out of deflation, helped Europe to weather the Greek and Chinese turmoil but euro area inflation could turn negative again in the coming months so the bank stands ready to increase the size, composition and duration of the scheme, if necessary, Constancio said. Drawing a comparison with other major central banks around the globe, Constancio said the European scheme is dwarfed by past asset buys, particularly by the U.S. Federal Reserve and the Bank of Japan. ‘The total amount that we have purchased represents 5.3% of the GDP… of the euro area, whereas what the Fed has done represents almost 25% of the U.S. GDP, what the Bank of Japan has done represents 64% of the Japanese GDP and what the U.K. has done 21% of the UK’s GDP,’ Constancio told Reuters…”

September 15 – Reuters (Paul Carrel): “European Central Bank policymaker Jens Weidmann took aim at the ECB's monetary stimulus in a German newspaper interview, saying a loose policy stance cannot support sustained growth and creates risks over time. The ECB earlier this month cut its growth and inflation forecasts, warning of possible further trouble from China and paving the way for an expansion of its already massive 1 trillion-euro plus asset-buying programme. ‘All the cheap money cannot ignite sustained growth and builds bigger risks over time, for example for financial stability,’ Weidmann told the Sueddeutsche Zeitung…”

U.S. Bubble Watch:

September 15 – Wall Street Journal (Daniel Gilbert, Erin Ailworth and Alison Sider): “U.S. energy companies have defied financial gravity for more than a year, borrowing and spending billions of dollars to pump oil, even as crude prices plummeted. Until now. The oil patch is expected to finally face a financial reckoning, experts say, with carnage occurring as early as this month. One trigger: Smaller drillers are bracing for cuts to their credit lines in October as banks re-evaluate how much energy companies’ oil and gas properties are worth. But with oil trading below $45 a barrel, bigger oil outfits are struggling to stay profitable, too.”

September 18 – Bloomberg (Oshrat Carmiel): “Manhattan’s growing inventory of ultra-luxury condominiums has another big developer seeing signs of a glut. Toll Brothers Inc., the largest U.S. luxury-home builder, is zeroing in on smaller apartments with lower prices in Manhattan after watching expensive units sit on the market, said David Von Spreckelsen, the New York division president of the company’s City Living unit. Its latest project, at 55 W. 17th St. in Chelsea, will have an average asking price per square foot less than at new buildings in the rest of the borough. ‘The days of super pricing and of raising prices every other week, I think, are probably past,’ Von Spreckelsen said… ‘Supply has started to catch up with demand.’”

EM Bubble Watch:

September 13 – Bloomberg (Tugce Ozsoy): “There’s no end in sight to the Turkish lira’s longest run of losses this century. The lira fell as low as 3.0695 on Monday, extending a record and heading for the second worst performance among 24 emerging-market currencies tracked by Bloomberg… Sellers of the currency outweighed buyers by the most since 2000 on Friday… Turkey’s currency plunge and soaring bond yields, topped only by recession-hit Brazil among emerging markets this year, show the deterioration of confidence in a country grappling with worsening security risks, a second election in six months and an economic slowdown that’s narrowing the central bank’s scope to raise interest rates.”

Brazil Watch:

September 15 – Bloomberg (Anna Edgerton Raymond Colitt): “The momentum has shifted against Brazil’s President Dilma Rousseff in a ruling on her government’s finances that could be decisive in attempts to impeach her, according to two people with direct knowledge of the matter. Most members of Brazil’s audit court known as the TCU are leaning toward a ruling against Rousseff, the people said, asking not to be named… Pressure from civil society makes it difficult for court members to go back on a preliminary June decision that said Rousseff’s 2014 accounting practices were illegal, they said. The TCU’s decision is expected in October and could shift the balance on starting impeachment proceedings.”

September 14 – Bloomberg (Anna Edgerton Carla Simoes): “Finance Minister Joaquim Levy proposed a new round of spending cuts and tax increases that are designed to close the budget gap and protect Brazil from further credit downgrades. The government will reduce expenditures by 26 billion reais ($6.8bn) next year in large part by capping salaries of civil servants and trimming social programs, Levy said… Brazil also plans to raise 28 billion reais in revenue by boosting taxes, including a levy on financial transactions.”

Geopolitical Watch:

September 18 – Reuters (Ben Blanchard): “China said on Friday it was ‘extremely concerned’ about a suggestion from a top U.S. commander that U.S. ships and aircraft should challenge China's claims in the South China Sea by patrolling close to artificial islands it has built. China's increasingly assertive action to back up its sovereignty claims in the South China Sea have included land reclamation and the construction of ports and air facilities on several reefs in the Spratly Islands. The work has rattled China's neighbors, in particular U.S. ally the Philippines, and raised concern in the United States. China says it has irrefutable sovereignty over the Spratly Islands and no hostile intent. Admiral Harry Harris, the commander of U.S. forces in the Pacific, told a Senate hearing on Thursday that China's building of three airfields on small islands and their further militarization was of ‘great concern militarily’ and posed a threat to all countries in the region. Harris said the United States should exercise freedom of navigation and flight ‘in the South China Sea against those islands that are not islands’.”

September 15 – Bloomberg (David Tweed): “China is still reclaiming land in the South China Sea, a defense analyst said, a month after Foreign Minister Wang Yi said his country’s island reclamation program was completed. Satellite photos taken in early September show dredgers at work on Subi Reef and Mischief Reef, two of China’s eight outposts in the Spratly islands, according to Bonnie Glaser, a senior adviser at the Center for Strategic and International Studies… ‘On the eve of President Xi Jinping’s visit to the United States, Beijing appears to be sending a message to President Barack Obama that China is determined to advance its interests in the South China Sea even if doing so results in heightened tensions with the United States,’ Glaser said…”

September 16 – Financial Times (Avantika Chilkoti): “Indonesia has called on China to alter a marking on its maps delineating its maritime territorial claims, while confirming plans to build a new naval base on islands in the South China Sea. Susi Pudjiastuti, the… minister of maritime affairs and fisheries, told the Financial Times that China should alter the notorious ‘nine-dash line’ which outlines Beijing’s claim to almost all of the South China Sea and intersects with Indonesia’s 200-nautical-mile exclusive economic zone around the Natuna islands. ‘They say they don’t mind, they don’t want to insist on claiming [the area of intersection],’ she said. ‘But we also want them to put changed corrections on their map.’ Ms Pudjiastuti said misunderstandings based on China’s map threatened to cause conflicts between the two countries’ coastguards that could be ‘dangerous for the stability of the whole region’. Security analysts say plans to build a base on the Natuna islands reflect the strategic importance of the waters in northern Indonesia, which include vast gasfields.”

September 15 – Bloomberg (Henry Meyer and Anton Doroshev): “Russian President Vladimir Putin said the fight against Islamic State should be the global community’s top priority in Syria, rather than changing the regime of Bashar al-Assad. A broad coalition is needed to combat the threat posed by the terrorist group, which wants to spread its activities across Europe and Russia, Putin said… It’s impossible to curb Islamic State without the Syrian army and Russia is backing President Assad’s government in fighting terrorism, including by providing military aid, he said.”

September 15 – Reuters (Jonny Hogg): “The strain of sheltering the world's largest refugee population is showing in Turkey, whose open door to those fleeing Syria and Iraq is shielding European nations from a migration crisis far worse than the one they are struggling with now. As some European governments turn to baton-wielding police and barricades to stem the flow of migrants, Ankara has vowed to continue accommodating more than 2 million people from its war-torn southern neighbors and welcome any more who come. But refugees are becoming a political liability in the run-up to a close-fought election due in November… Barred from work by a government that fears a voter backlash, many of the newcomers are restless.”

Japan Watch:

September 16 – Bloomberg (Yoshiaki Nohara): “Japan’s export growth slowed for a second month, signaling waning overseas support for an economy that’s already beset by weakness at home. The value of shipments rose 3.1% in August from a year earlier, compared with estimates compiled by Bloomberg for a 4.3% increase. Imports dropped 3.1%, leaving a deficit of 569.7 billion yen ($4.7bn)… Exports to China fell 4.6% as a market rout and economic slowdown in Japan’s biggest trading partner sapped demand.”

September 14 – Bloomberg (Toru Fujioka and Masahiro Hidaka): “The Bank of Japan refrained from boosting stimulus even after the economy shrank last quarter, betting that a resumption in growth will be enough to rekindle inflation. The move by Governor Haruhiko Kuroda and his colleagues leaves the onus on Prime Minister Shinzo Abe’s government to compile a stimulus package to boost what evidence indicates is a lackluster recovery in the second half of the year so far. Kuroda repeatedly told reporters… that the bank sees a gradual recovery continuing in the economy, while also saying the bank wouldn’t hesitate to ease if there was some danger of prices not rising to its target.”

Weekly Commentary: Now What?

September 18 – Reuters: “The world's leading central banks are facing the risk that their massive efforts to revive economic growth could be dragged down again, with some officials arguing for bold new ideas to counter the threat of slow growth for years to come. A day after the U.S. Federal Reserve kept interest rates at zero, citing risks in the global economy, the Bank of England's chief economist said central banks had to accept that interest rates might get stuck at rock bottom. In Japan, where interest rates have been at zero for more than 20 years, policymakers are already tossing around ideas for overhauling the Bank of Japan's huge monetary stimulus program as they worry that it will be unsustainable in the future, according to sources familiar with its thinking. Separately a top European Central Bank official said the ECB’s bond-buying program might need to be rethought if low inflation becomes entrenched.”

Most just scoff at the notion that there has been a historic global Bubble, let alone that this Bubble has over recent months begun to burst. Talk of an EM and global crisis is viewed as wackoism. Except that the Federal Reserve clearly sees something pernicious in the world that requires shelving, after seven years, even the cutest little baby step move in the direction of policy normalization.

The Fed and global central banks responded to the 2008 crisis with unprecedented measures. When the reflationary effects of these policies began to wane, the unfolding 2012 global crisis spurred desperate concerted do “whatever it takes” monetary stimulus. This phase has now largely run its course, and there is at this point little clarity as to what global central bankers might try next.

Clearly, great pressure will remain to hold rates tight at zero. I fully expect policymakers at some point to see no alternative than to implement additional QE. But under what circumstances? Will it be orchestrated independently or through concerted action? What about timing? How much and how quickly? Might global central banks actually consider adopting negative rates? Well, there’s enough here to really have the markets fretting the uncertainty, especially with global central bankers not having thought things through.

There is today extraordinary confusion and misunderstanding throughout the markets. Policymakers are confounded. Years of zero rates, Trillions of new “money” and egregious market intervention/manipulation have left global markets more vulnerable than ever. Now What? I’m the first to admit that global Credit, market and economic analyses are these days extraordinarily complex – and remain so now on a daily basis. We must test our analytical framework and thesis constantly.

I am confident in my analytical framework and believe it provides a valuable prism for understanding today’s complex world. The current global government finance Bubble is indeed the grand finale of serial Bubbles spanning about 30 years. Importantly, each Boom and Bust Bubble Cycle – going back to the mid-eighties (“decade of greed”) – spurred reflationary policy measures that worked to spur a bigger Bubble. Inevitably, each bursting Bubble would ensure only more aggressive inflationary policy measures.

It is fundamental to Credit Bubble Theory (heavily influenced by “Austrian” analysis) that the scope of each new Bubble must be bigger than the last. Credit growth must be greater, speculation must be greater and asset inflation must be greater. This Financial Sphere inflation is essential to sufficiently reflate the Real Economy Sphere – i.e. incomes, spending, corporate earnings/cash flows, investment, etc. Reflation is necessary to validate an ever-expanding debt and financial structure, including elevated asset prices. Ongoing rapid Credit growth is fundamental to this entire process, much to the eventual detriment of financial and economic stability.

There are a few key points that drive current analysis (completely disregarded by conventional analysts). First, the government finance Bubble saw historic Credit growth unfold in China and EM – Credit expansion sufficient to reflate a new Bubble after the bursting of the mortgage finance Bubble. Central to my thesis: when the current Bubble bursts – especially with regard to China – it will be near impossible to spur sufficient global Credit growth to inflate a bigger ensuing Bubble. Second, with the global government finance Bubble emanating from the very foundation of contemporary “money” and Credit, it will be impossible for governments and central banks to extricate themselves from monetary stimulus (any tightening would risk bursting Bubbles). Third, extreme measures - monetary inflation coupled with market manipulation – spurred enormous “Terminal Phase” growth in the global pool of speculative finance. It’s been a case of too much “money” ruining the game.

“Moneyness of Risk Assets” has played prominently throughout the government finance Bubble period. Unlimited Chinese stimulus seemed to ensure robust commodities markets and EM economies generally. Limitless sovereign debt and central bank Credit appeared to guarantee ongoing liquid and continuous global financial markets – “developed” and “developing.” And with governments backstopping global growth and central bankers backstopping liquid markets, the perception took hold that global stocks and bonds offered enticing returns with minimal risk. Global savers shifted Trillions into perceived “money-like” (liquid stores of nominal value) ETFs and stock and bond funds. Government policy measures furthermore incentivized leveraged speculation.

And why not leverage with global fiscal and monetary policies promoting such a predictable backdrop? Indeed, speculative finance has over recent years played an unappreciated but integral role in global reflation. This process has created acute fragility to market risk aversion and a reversal of “hot money” flows.

Central to the bursting global Bubble thesis is that Chinese and EM Bubbles have succumbed – with policymakers rather abruptly having lost control of reflationary processes. Measures that elicited predictable responses when Bubbles were inflating might now spur altogether different behavior. A year ago, Chinese stimulus incited speculation – and associated inflation – in domestic financial markets, while bolstering China’s economy and EM more generally. Today, in a faltering Bubble backdrop, aggressive Chinese measures weigh on general confidence and stoke concerns of destabilizing capital flight and currency market instability.

In the past, a dovish Fed would predictably bolster “risk-on” throughout U.S. and global markets. Times have changed. As we saw this week, an Ultra-Dovish Fed actually exacerbates market uncertainty. The global leveraged speculating community is these days Crowded in long dollar trades. Federal Reserve dovishness – and resulting pressure on the dollar - thus risks reinforcing “risk off” de-risking/de-leveraging. In particular, the yen popped on the Fed announcement, immediately adding pressure on already vulnerable yen “carry trades” (short/borrow in yen to finance higher-yielding trades in other currencies). While EM currencies generally enjoyed small bounces (likely short covering) this week, for the most part EM equities traded poorly post-Fed. European equities were hit hard, while the region’s bonds benefited from the prospect of more aggressive ECB QE.

The bullish contingent has clung to the view that EM weakness has been a function of an imminent Fed tightening cycle. In the market’s mixed reaction to Thursday’s announcement, I instead see support for my view that the bursting EM Bubble essentially has little to do with current Federal Reserve policy.

The bursting China/EM Bubble is the global system’s weak link. Surely the activist Fed would prefer to do something. They must believe that hiking rates – even if only 25 bps – would support the dollar at the risk of further straining commodities and EM currencies. Moreover, the FOMC likely sees any “tightening” measures as exacerbating general market nervousness and risk aversion. Moreover, the Fed must believe that dovish surprises will be effective in countering a tightening of financial conditions in the markets, as they were in the past.

Major Bubbles are so powerful. It was amazing how long the markets were willing to disregard shortcomings and risks in China and EM (financial, economic and political). Similarly, it’s been crazy what the markets have been so willing to embrace in terms of Federal Reserve and global central bank doctrine and policy measures. With their Bubble having recently burst, Chinese inflationary measures are now significantly hamstrung by an abrupt deterioration in confidence in policymaker judgment and the course of policymaking. I believe Thursday’s Fed announcement marks an important inflection point with respect to market confidence in the Fed and central banking.

Japan’s Nikkei dropped 2% Friday, and Germany’s DAX sank 3.1%. Both have been global leveraged speculating community darlings. Crude was hammered 4.2% Friday, with commodities indices down about 2%. Notably, the Brazilian real was trading at 3.83 (to the dollar) prior to the Fed announcement, before sinking 3% to a multi-year low by Friday’s close. Reminiscent of recent market troubles, financial stocks led U.S. equities lower on Friday. Financials badly underperformed for the week, with Banks down 2.7% and the Securities Broker/Dealers sinking 2.6%.

The market deck has been reshuffled for next week. A lot of market hedging took place during the past month of market instability. And a decent amount of this protection expired (worthless) with Friday’s quarterly “triple witch” options expiration. This means that if the market resumes its downward trajectory next week many players will be scampering again to buy market “insurance.” This creates market vulnerability to another “flash crash” panic “risk off” episode.

I am not predicting the market comes unglued next week. But I am saying that an unsound marketplace is again vulnerable to selling begetting selling – and another liquidity-disappearing act. Bullish sentiment rebounded quickly following the August market scare. The bear market will be well on its way if August lows are broken. I’m sticking with the view that uncertainties are so great – especially in the currencies – the leveraged players need to pare back risk. And the harsh reality is that central bank policymaking is the root cause of today’s extraordinary uncertainties and market instability.

In closing, I’m compelled to counter the conventional view that the Fed should stick longer at zero because there is essentially no cost in waiting. I believe there are huge costs associated with thwarting the market adjustment process. Measures that contravene more gradual risk market declines only raise the likelihood of eventual market dislocation and panic. This was one of many lessons that should have been heeded from the 2007/2008 experience.

For the Week:

The S&P500 slipped 0.2% (down 4.9% y-t-d), and the Dow declined 0.3% (down 8.1%). The Utilities jumped 2.8% (down 6.9%). The Banks dropped 2.7% (down 6.4%), and the Broker/Dealers fell 2.6% (down 8.7%). The Transports declined 0.2% (down 12.1%). The S&P 400 Midcaps were little changed (down 2.7%), while the small cap Russell 2000 gained 0.5% (down 3.4%). The Nasdaq100 (up 2.1%) and the Morgan Stanley High Tech index (down 0.4%) were both unchanged. The Semiconductors lost 0.8% (down 11.1%). The Biotechs gained 1.1% (up 16.2%). With bullion rallying $31, the HUI gold index recovered 8.3% (down 29.2%).

Three-month Treasury bill rates ended the week at negative two bps. Two-year government yields were down three bps to 0.68% (up one basis point y-t-d). Five-year T-note yields fell seven bps to 1.44% (down 21bps). Ten-year Treasury yields declined six bps to 2.13% (down 4bps). Long bond yields slipped a basis point to 2.94% (up 19bps).

Greek 10-year yields sank another 41 bps to 7.92% (down 183bps y-t-d). Ten-year Portuguese yields dropped nine bps to 2.50% (down 12bps). Italian 10-yr yields fell seven bps to 1.76% (down 13bps). Spain's 10-year yields dropped 16 bps to 1.94% (up 33bps). German bund yields added a basis point to 0.66% (up 12bps). French yields declined three bps to 1.03% (up 20bps). The French to German 10-year bond spread narrowed four to 37 bps. U.K. 10-year gilt yields were unchanged at 1.83% (up 8bps).

Japan's Nikkei equities index declined 1.1% (up 3.6% y-t-d). Japanese 10-year "JGB" yields fell four bps to 0.30% (down two bps y-t-d). The German DAX equities index dropped 2.0% (up 1.1%). Spain's IBEX 35 equities index gained 1.1% (down 4.2%). Italy's FTSE MIB index fell 1.1% (up 13.2%). EM equities were mixed. Brazil's Bovespa index rallied 1.9% (down 5.5%). Mexico's Bolsa gained 1.8% (up 1.0%). South Korea's Kospi index gained 2.8% (up 4.2%). India’s Sensex equities index rose 2.4% (down 4.7%). China’s Shanghai Exchange lost 3.2% (down 4.7%). Turkey's Borsa Istanbul National 100 index rallied 5.3% (down 12.4%). Russia's MICEX equities index slipped 0.4% (up 22.5%).

Junk funds this week saw inflows of $236 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates added a basis point to 3.91% (up 4bps y-t-d). Fifteen-year rates increased one basis point to 3.11% (down 4bps). One-year ARM rates were down seven bps to 2.56% (up 16bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up a basis point to 4.06% (down 22bps).

Federal Reserve Credit last week rose $6.6bn to $4.446 TN. Over the past year, Fed Credit inflated $38bn, or 0.9%. Fed Credit inflated $1.635 TN, or 58%, over the past 149 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $2.2bn last week to $3.337 TN. "Custody holdings" were up $44.1bn y-t-d.

M2 (narrow) "money" supply increased $1.3bn to a record $12.187 TN. "Narrow money" expanded $714bn, or 6.2%, over the past year. For the week, Currency was little changed. Total Checkable Deposits dropped $16.7bn, while Savings Deposits gained $13.2bn. Small Time Deposits slipped $1.3bn. Retail Money Funds gained $6.2bn.

Money market fund assets dropped $16.2bn to $2.646 TN. Money Funds were down $87bn year-to-date, while gaining $70bn y-o-y (2.7%).

Total Commercial Paper fell $4.2bn to $1.039 TN. CP increased $31.6bn year-to-date.

Currency Watch:

The U.S. dollar index was little changed at 95.23 (up 5.5% y-t-d). For the week on the upside, the South African rand increased 1.7%, the Australian dollar 1.4%, the New Zealand dollar 1.3%, the Mexican peso 1.1%, the British pound 0.7%, the Japanese yen 0.5% and the Canadian dollar 0.3%. For the week on the downside, the Brazilian real declined 1.9% and the euro fell 0.4%.

Commodities Watch:

The Goldman Sachs Commodities Index fell 1.6% to a new multi-year low (down 14.5% y-t-d). Spot Gold jumped 2.8% to $1,139 (down 3.9%). December Silver rallied 4.1% to $15.17 (down 2.8%). October Crude recovered 17 cents to $44.94 (down 16%). October Gasoline declined 0.7% (down 7%), and October Natural Gas sank 3.3% (down 10%). September Copper fell 3.1% (down 16%). December Wheat gained 0.4% (down 18%). December Corn fell 2.5% (down 5%).

Federal Reserve Watch:

September 18 – Reuters (Vidya Ranganathan and Nichola Saminather): “The U.S. Federal Reserve's decision to delay raising interest rates, pending a clearer picture on the performance of emerging economies, has dismayed investors who believe the U.S. rate cycle and global markets are now hostage to Chinese fortunes. Fed Chair Janet Yellen's comments that U.S. rates were kept on hold on Thursday partly over concerns that China's slowdown may be more abrupt than expected prompted some investors to fret that the Fed was becoming too reactive, and focusing on China would prolong current market uncertainty. The thought of having to monitor China's notoriously opaque policy-making process to get a better reading of Fed policy and global liquidity has left investors flustered and dismayed. ‘It’s not clear what to watch,’ said Richard Jerram, chief Asian economist at Bank of Singapore. ‘Say, if the next China PMI is not that bad, is that reason for the Fed to go in December?’ he asked… “I don't know what the basis for their (Fed's) decision is anymore because they seem to have abandoned rigor. They seem to have become much more subjective, much more reactive, when policy is meant to be forward-looking,’ Jerram added.”

September 18 – Wall Street Journal (Brian Blackstone): “The Federal Reserve’s decision Thursday to keep interest rates pinned near zero could put added pressure on the European Central Bank to step up its own stimulus efforts to keep the euro’s exchange rate from strengthening too much and derailing Europe’s fragile economic recovery.”

Global Bubble Watch:

September 15 – CNBC (Everett Rosenfeld): “While many are watching its stock market, China's real problem may lie with its banking system… Kyle Bass, Hayman Capital Management founder and managing partner, told CNBC's ‘Squawk on the Street’ on Tuesday that Chinese banks will likely experience losses that may affect the country as a whole. ‘Those that are watching whether Chinese stocks go up or down aren't paying attention, in my opinion, to what the real problem is,’ Bass said. ‘And the real problem is the loans in this banking sector.’ The hedge fund manager said that Chinese bank assets rose about 400% since 2007, and are now about $31 trillion against an economy with a gross domestic product of $10 trillion. ‘When you run a bank expansion that aggressively, that quickly, you’re going to have some losses,’ he said, adding that ‘the scary thing about that’ is a ‘likely’ 10% asset loss in that banking sector would amount to $3 trillion.”

September 13 – Bloomberg (Anooja Debnath Anchalee Worrachate): “Turbulent trading that made August the worst month for global equities since 2012 also revealed a widening crack in the world’s largest market-- foreign exchange. Fabrizio Fiorini, chief investment officer at Aletti Gestielle SGR SpA in Milan, thought he was in luck as the financial turmoil curbed speculation the Federal Reserve would raise interest rates, sparking a stampede of dollar selling. To his dismay, he found that the gap between prices at which traders were willing to buy and sell major currencies had tripled, forcing him to pay a greater premium to purchase the greenback. ‘During those two or three critical days in August, I was frustrated that liquidity, which seems to always be there when the market is quiet, disappeared when you need it the most,’ said Fiorini… ‘Market makers are not able to provide liquidity the way they used to, and the market was too crowded with the same trades.’”

September 15 – Australian Financial Review: “Chinese purchases of Australian property have dropped significantly in the past month, according to agents, as buyers struggle to shift money out of the country following Beijing's move to tighten capital controls. One Chinese agent said the latest efforts by the central government to avoid large capital outflows were having a ‘significant impact’ on his business. ‘It has affected 70 to 80% of current transactions and some have already been suspended,’ said the agent… China has previously tolerated significant capital outflows via so called ‘grey channels’, but has tightened up enforcement in recent weeks as the economy slows and fears over capital flight put downward pressure on the currency… The crackdown is also said to be affecting trading companies, which have been asked to submit more supporting documents to verify transactions, according to a report in China Business News…”

September 15 – Financial Times: “Pity the investors who piled into Petrobras' century bonds back in June. Having been cut off from the global debt markets for six months amid a multibillion-dollar corruption probe, the $2.5bn offering was at the time hailed as a sign that the scandal-ridden Brazilian oil major had finally put the worst of its problems behind it. The 100-year bonds were sold at a yield of 8.45% — 0.4 percentage point less than bankers initially planned — and attracted some $13bn in orders as yield hungry investors jumped abroad. But fast forward three and a half months and the bonds have lost nearly a fifth of their value. The securities sank to a record low of 67 cents on the dollar last week after Brazil was stripped of its coveted investment grade rating by Standard & Poor's. The move… also prompted S&P to downgrade Petrobras into junk. It cut its rating on the company by two notches from BBB- to BB, with a negative outlook. Yields, which move inversely to price, have soared by more than 150 bps to a record 9.955%.”

September 15 – Bloomberg: “It’s about to get even uglier for China’s hedge funds. The newfangled industry, short on expertise and ways to protect itself from market declines, has seen almost 1,300 funds liquidate amid China’s $5 trillion stocks selloff, and a similar number may be at risk, according to Howbuy Investment Management Co. Now, a government crackdown on short selling and other hedging strategies have made prospering in a bear market difficult. It’s an inglorious turn for China’s on-again, off-again love affair with stocks, which saw the number of hedge-fund-like vehicles explode in past years as the government made it easier to register funds and introduced new financial instruments. The market rout -- and the regulatory response to it -- has revealed cracks in the industry that suggest it may need years to recover. In the most devastating blow to domestic hedge funds, China has imposed new restrictions on trading in stock-index futures, a key investment strategy to dampen volatility and avoid big losses. ‘It spells the end, at least temporarily, for China domestic hedge funds,’ Hao Hong, chief China strategist at BOCOM International Co. in Hong Kong, said…”

September 15 – Bloomberg (Christopher Langner and David Yong): “Two of Southeast Asia’s richest businessmen are experiencing the weight of dollar strength after loading their business empires up with cheap U.S. currency debt. Anthoni Salim, who controls the First Pacific Co. conglomerate, and T. Ananda Krishnan, a major shareholder of Malaysian mobile phone operator Maxis Bhd., are feeling the pinch as the rupiah and the ringgit slump to the lowest since the 1998 Asian financial crisis. The duo’s companies have among the most foreign-currency debt in their respective countries, with dollar liabilities totaling at least $3.8 billion for Salim and some $2.3 billion for Krishnan… While the lessons of the 1998 meltdown have prompted both tycoons to take out currency hedges and seek to balance cash flows and liabilities, concern over their foreign debts is weighing on the two groups’ shares and bonds.”

China Bubble Watch:

September 15 – Reuters: “China cranked up its fiscal spending by 26% in August from a year earlier as Beijing tries to re-energise flagging economic growth and convince reluctant local officials to spend. August data over the past week suggested the world's second-largest economy lost further momentum over the summer, adding pressure on policymakers to ramp up what is already their biggest stimulus campaign since the global financial crisis. The spending increase to 1.28 trillion yuan ($201bn) last month was the biggest percentage rise in central and local government fiscal expenditure since April, when it leapt 33… For the first eight months of the year, fiscal expenditure rose 14.8% over 10 trillion yuan ($1.57 trillion) compared with the same period last year… With traditional monetary policy responses such as interest rate cuts having less impact in reviving economic activity than in the past, China is trying to increase fiscal stimulus to both shore up short-term growth and fend off growing deflationary pressures. ‘Given China's top policymakers have given green light to re-leverage the economy on the back of supportive fiscal policy and easing monetary policy, we expect China's fixed asset investment growth to find a bottom soon,’ economists at OCBC wrote…”

September 18 – Reuters: “The People's Bank of China has ordered banks to closely scrutinize clients' foreign exchange transactions to prevent illicit cross-border currency arbitrage, sources with the direct knowledge of the matter told Reuters… China's yuan is not freely convertible under the capital account, but some firms have made use of gray channels, such as via their overseas subsidiaries, to conduct arbitrage trading between onshore and offshore markets. Some have used bogus foreign trade deals to disguise speculative transactions. Now the PBOC has raised its settlement charges for some banks but not others, suggesting the central bank was disciplining particular banks which helped their clients to conduct such arbitrage business. ‘Several banks got the PBOC notices yesterday evening,’ said one source, adding the ‘punitive’ hike in trading fees reflected those banks' excessive foreign exchange trading of late, which showed they were suspected of making illicit deals.”

September 15 – Wall Street Journal (James T. Areddy): “The brokerage arm of China’s most politically pedigreed financial firm entered the summer with big gains in profit. Now, Citic Securities Co. is contending with a near meltdown in markets and a government crackdown that has entangled a number of its top executives… Citic Securities had positioned itself as China’s ‘go-to’ financial house for deal making in recent years and took the lead during the bull run to promote instruments like cross-border equity swaps that gave foreign hedge funds access to China’s markets. But the stock market selloff prompted a ham-fisted government bailout that raised doubts globally about the Communist Party’s reputation for sound economic stewardship has put the firm’s accomplishments in a new light. The equity swaps and other trading strategies Citic Securities promoted now appear to trouble regulators who are struggling to get a grip on the stock market decline and probing the industry for signs of what they term ‘abnormal’ trading… Margin financing… helped juice markets. In its earnings report…, Citic Securities described itself as No. 1 in lending to Chinese stock investors. Citic Securities also promoted new investment products, in particular cross-border equity swaps that were popular with global hedge funds… The swaps allow an investor in one country to place a bet on a stock or index in another without being there, as a middleman handles both sides of the deal. The swaps gave foreigners a way to sidestep quotas that limit their participation in China’s markets because the transactions were initiated in Hong Kong.”

September 16 – Bloomberg (Bei Hu): “Some banks are scaling back offerings that enable clients to indirectly wager against Chinese stocks through Hong Kong’s stock exchange link with Shanghai, as China’s regulators clamp down on practices such as short-selling. JPMorgan… stopped offering so-called synthetic shorts on shares under the Shanghai Connect arrangement, according to an e-mail from its prime brokerage unit to clients including hedge funds this week. Credit Suisse Group AG also cut back on products that enable synthetic short-selling of Shanghai Connect stocks, said two people… The Shanghai Composite Index has plummeted 39% from a June 12 peak, prompting China to clamp down on practices that authorities deem damaging, such as ‘malicious’ short-selling. The crackdown has snared senior industry executives including Citic Securities Co. President Cheng Boming.”

September 15 – Reuters: “China is extending its control of onshore markets to commodities exchanges, spooked by signs that speculators have shifted from China's volatile stock markets to commodities futures. The country's top commodities exchanges - the Dalian Commodity Exchange (DCE), Shanghai Futures Exchange (SHFE) and Zhengzhou Commodity Exchange (ZCE) - were asked recently by China's exchange regulator to draft rules designed to ‘regulate the behavior of program trading’ in futures markets, according to people familiar with the matter.”

September 15 – Bloomberg: “China removed quotas for companies to raise funds in the overseas bond and loan markets, as it tries to staunch capital outflows spurred by a currency devaluation. The National Development and Reform Commission, China’s top planning agency, will remove quota approval processes for foreign currency or yuan notes and loans with a term of more than one year, according to a statement… Previously, the NDRC reviewed each firm’s application for foreign borrowing, according to Moody’s… The move comes amid mounting speculation China will do more to counter the flow of money out of the nation, after yuan positions at the central bank and financial institutions fell by the most on record in August.”

September 14 – Bloomberg (Amy Li and Helen Yuan): “Chinese brokerages ruing the collapse of futures trading in Shanghai are pitching clients similar contracts in Singapore. ‘Goodbye, China Financial Futures Exchange; Hello, FTSE A50!’ reads an advertisement by a unit of Shenzhen-based Essence Securities Co. on the WeChat messaging service, referring to Singapore-traded futures on an index of the biggest mainland companies. China’s domestic equity futures market, ranked the world’s busiest as recently as July, has seen volumes plunge 99% since June as policy makers curbed leverage and position sizes and announced investigations into ‘malicious’ short sellers. That’s left brokerages, which boosted staff numbers by 50% since 2011, turning to promoting contracts on the SGX FTSE China A50 Index as an alternative. ‘Investors and hedge funds are showing great interest switching to overseas markets,’ Zhu Bin, deputy general manager of… Nanhua Futures Co., said. ‘Foreign investors who have positions in mainland equities will also turn to Singapore to hedge their positions.’”

September 14 – Reuters: “China's central bank and commercial banks sold a net 723.8 billion yuan ($113.69bn) of foreign exchange in August, by far the largest on record, highlighting how capital outflows intensified in the wake of the yuan's devaluation last month. The previous largest outflow, in July, totaled 249.1 billion yuan ($39.13bn). The figures are based on Reuters calculations using central bank data… The figures show the price China is paying to keep its currency from falling further in the face of concerns about the health of the economy and as financial markets anticipate a rise in U.S. interest rates.”

September 16 – Financial Times (Josh Noble): “The view that China is growing far slower than official figures show is increasingly going mainstream, with big global investors among those now basing decisions on a rate of about 5%. According to government statistics China’s economy grew at an annual pace of 7% in the second quarter of this year… However, doubts have long lingered about the veracity of Chinese economic data, with many analysts believing them to be understated during times of rapid growth and overstated during the current slowdown. A strategist at one European asset manager described the official growth figure as ‘a very crude propaganda tool’.”

September 14 – Bloomberg: “China National Erzhong Group Co. may miss an interest payment later this month after one of its creditors filed a restructuring request, putting it at risk of becoming the second state-owned company to default in the nation’s onshore bond market. The smelting-equipment maker might not be able to pay a coupon that’s due Sept. 28 on its 1 billion yuan ($157 million) of 5.65% 2017 notes if a local court accepts the creditor’s restructuring application before that date… China National Erzhong… issued the five-year securities in 2012 at par and the debentures are currently trading at 67.72% of that. Uncertainty over the payment comes as deflation risks, overcapacity and spiraling corporate debt cloud the outlook for China’s economy, forecast to expand at the slowest pace since 1990 this year… ‘Because Erzhong is a state-owned company, if it defaults it may arouse investors’ concern about companies’ credit risks,’ said Qu Qing, a bond analyst at Huachuang Securities…”

Fixed Income Bubble Watch:

September 17 – Bloomberg (Tracy Alloway): “The market remains deeply divided as to whether the Federal Reserve will embark on its first interest rate hike in almost a decade on Thursday, but it's worth taking a moment to appreciate just what nearly seven years of near-zero interest rates (what’s affectionately been called ‘zirp’) accomplished for the U.S. corporate bond market. In two words: a lot. 1. For a start, it led to a huge boom in corporate credit. Low-interest rates have encouraged companies to lock in lower borrowing costs by selling their bonds to eager, yield-hungry investors. The overall size of the U.S. corporate bond market has jumped from $5.4 trillion at the end of 2008 to almost $8 trillion currently -- an astounding 47% increase.”

September 16 – Bloomberg (Lisa Abramowicz): “Sprint Corp. is a cautionary tale for investors who think they’re immune to carnage in the $1.3 trillion junk-bond market as long as they steer clear of energy debt. Moody’s… downgraded the wireless company, which has more than $30 billion of debt outstanding, as it struggles to compete with better capitalized competitors such as AT&T Inc. and T-Mobile USA. Much of the company’s debt was downgraded several steps to Caa1, which is considered close to default. The market response was fierce. Sprint’s $2.5 billion of bonds maturing in 2028 plunged as low as 80.8 cents on the dollar from 88.4 cents on Monday. Its $4.2 billion of notes maturing in 2023 fell as low as 90.1 cents from 98.6 cents two days earlier. Many big high-yield bond-fund managers… hold Sprint debt… This just shows that even the most highly traded, popular names can be vulnerable to sudden plunges that leave millions of dollars of losses in their wake.”

September 15 – Bloomberg (Michelle Kaske): “Puerto Rico’s main water utility paid a significant premium while selling $75 million of short-term notes that extend a bank loan through November… The Puerto Rico Aqueduct and Sewer Authority revenue note sale transfers most of a $90 million loan with Banco Popular to Bank of America Merrill Lynch, the lead underwriter of the deal… The notes, which mature Nov. 30, were privately placed with an 8.75% coupon priced at par. Top-rated three-month tax-exempt securities yield about 0.09%...”

Central Bank Watch:

September 16 – Reuters (Balazs Koranyi and John O’Donnell): “The European Central Bank has scope to buy more assets as its quantitative easing has been small compared to similar schemes elsewhere, ECB Vice President Vitor Constancio said, adding that Europe also needs the U.S. and Chinese economies to motor ahead. The asset buys, started in March to lift the bloc out of deflation, helped Europe to weather the Greek and Chinese turmoil but euro area inflation could turn negative again in the coming months so the bank stands ready to increase the size, composition and duration of the scheme, if necessary, Constancio said. Drawing a comparison with other major central banks around the globe, Constancio said the European scheme is dwarfed by past asset buys, particularly by the U.S. Federal Reserve and the Bank of Japan. ‘The total amount that we have purchased represents 5.3% of the GDP… of the euro area, whereas what the Fed has done represents almost 25% of the U.S. GDP, what the Bank of Japan has done represents 64% of the Japanese GDP and what the U.K. has done 21% of the UK’s GDP,’ Constancio told Reuters…”

September 15 – Reuters (Paul Carrel): “European Central Bank policymaker Jens Weidmann took aim at the ECB's monetary stimulus in a German newspaper interview, saying a loose policy stance cannot support sustained growth and creates risks over time. The ECB earlier this month cut its growth and inflation forecasts, warning of possible further trouble from China and paving the way for an expansion of its already massive 1 trillion-euro plus asset-buying programme. ‘All the cheap money cannot ignite sustained growth and builds bigger risks over time, for example for financial stability,’ Weidmann told the Sueddeutsche Zeitung…”

U.S. Bubble Watch:

September 15 – Wall Street Journal (Daniel Gilbert, Erin Ailworth and Alison Sider): “U.S. energy companies have defied financial gravity for more than a year, borrowing and spending billions of dollars to pump oil, even as crude prices plummeted. Until now. The oil patch is expected to finally face a financial reckoning, experts say, with carnage occurring as early as this month. One trigger: Smaller drillers are bracing for cuts to their credit lines in October as banks re-evaluate how much energy companies’ oil and gas properties are worth. But with oil trading below $45 a barrel, bigger oil outfits are struggling to stay profitable, too.”

September 18 – Bloomberg (Oshrat Carmiel): “Manhattan’s growing inventory of ultra-luxury condominiums has another big developer seeing signs of a glut. Toll Brothers Inc., the largest U.S. luxury-home builder, is zeroing in on smaller apartments with lower prices in Manhattan after watching expensive units sit on the market, said David Von Spreckelsen, the New York division president of the company’s City Living unit. Its latest project, at 55 W. 17th St. in Chelsea, will have an average asking price per square foot less than at new buildings in the rest of the borough. ‘The days of super pricing and of raising prices every other week, I think, are probably past,’ Von Spreckelsen said… ‘Supply has started to catch up with demand.’”

EM Bubble Watch:

September 13 – Bloomberg (Tugce Ozsoy): “There’s no end in sight to the Turkish lira’s longest run of losses this century. The lira fell as low as 3.0695 on Monday, extending a record and heading for the second worst performance among 24 emerging-market currencies tracked by Bloomberg… Sellers of the currency outweighed buyers by the most since 2000 on Friday… Turkey’s currency plunge and soaring bond yields, topped only by recession-hit Brazil among emerging markets this year, show the deterioration of confidence in a country grappling with worsening security risks, a second election in six months and an economic slowdown that’s narrowing the central bank’s scope to raise interest rates.”

Brazil Watch:

September 15 – Bloomberg (Anna Edgerton Raymond Colitt): “The momentum has shifted against Brazil’s President Dilma Rousseff in a ruling on her government’s finances that could be decisive in attempts to impeach her, according to two people with direct knowledge of the matter. Most members of Brazil’s audit court known as the TCU are leaning toward a ruling against Rousseff, the people said, asking not to be named… Pressure from civil society makes it difficult for court members to go back on a preliminary June decision that said Rousseff’s 2014 accounting practices were illegal, they said. The TCU’s decision is expected in October and could shift the balance on starting impeachment proceedings.”

September 14 – Bloomberg (Anna Edgerton Carla Simoes): “Finance Minister Joaquim Levy proposed a new round of spending cuts and tax increases that are designed to close the budget gap and protect Brazil from further credit downgrades. The government will reduce expenditures by 26 billion reais ($6.8bn) next year in large part by capping salaries of civil servants and trimming social programs, Levy said… Brazil also plans to raise 28 billion reais in revenue by boosting taxes, including a levy on financial transactions.”

Geopolitical Watch:

September 18 – Reuters (Ben Blanchard): “China said on Friday it was ‘extremely concerned’ about a suggestion from a top U.S. commander that U.S. ships and aircraft should challenge China's claims in the South China Sea by patrolling close to artificial islands it has built. China's increasingly assertive action to back up its sovereignty claims in the South China Sea have included land reclamation and the construction of ports and air facilities on several reefs in the Spratly Islands. The work has rattled China's neighbors, in particular U.S. ally the Philippines, and raised concern in the United States. China says it has irrefutable sovereignty over the Spratly Islands and no hostile intent. Admiral Harry Harris, the commander of U.S. forces in the Pacific, told a Senate hearing on Thursday that China's building of three airfields on small islands and their further militarization was of ‘great concern militarily’ and posed a threat to all countries in the region. Harris said the United States should exercise freedom of navigation and flight ‘in the South China Sea against those islands that are not islands’.”

September 15 – Bloomberg (David Tweed): “China is still reclaiming land in the South China Sea, a defense analyst said, a month after Foreign Minister Wang Yi said his country’s island reclamation program was completed. Satellite photos taken in early September show dredgers at work on Subi Reef and Mischief Reef, two of China’s eight outposts in the Spratly islands, according to Bonnie Glaser, a senior adviser at the Center for Strategic and International Studies… ‘On the eve of President Xi Jinping’s visit to the United States, Beijing appears to be sending a message to President Barack Obama that China is determined to advance its interests in the South China Sea even if doing so results in heightened tensions with the United States,’ Glaser said…”

September 16 – Financial Times (Avantika Chilkoti): “Indonesia has called on China to alter a marking on its maps delineating its maritime territorial claims, while confirming plans to build a new naval base on islands in the South China Sea. Susi Pudjiastuti, the… minister of maritime affairs and fisheries, told the Financial Times that China should alter the notorious ‘nine-dash line’ which outlines Beijing’s claim to almost all of the South China Sea and intersects with Indonesia’s 200-nautical-mile exclusive economic zone around the Natuna islands. ‘They say they don’t mind, they don’t want to insist on claiming [the area of intersection],’ she said. ‘But we also want them to put changed corrections on their map.’ Ms Pudjiastuti said misunderstandings based on China’s map threatened to cause conflicts between the two countries’ coastguards that could be ‘dangerous for the stability of the whole region’. Security analysts say plans to build a base on the Natuna islands reflect the strategic importance of the waters in northern Indonesia, which include vast gasfields.”

September 15 – Bloomberg (Henry Meyer and Anton Doroshev): “Russian President Vladimir Putin said the fight against Islamic State should be the global community’s top priority in Syria, rather than changing the regime of Bashar al-Assad. A broad coalition is needed to combat the threat posed by the terrorist group, which wants to spread its activities across Europe and Russia, Putin said… It’s impossible to curb Islamic State without the Syrian army and Russia is backing President Assad’s government in fighting terrorism, including by providing military aid, he said.”

September 15 – Reuters (Jonny Hogg): “The strain of sheltering the world's largest refugee population is showing in Turkey, whose open door to those fleeing Syria and Iraq is shielding European nations from a migration crisis far worse than the one they are struggling with now. As some European governments turn to baton-wielding police and barricades to stem the flow of migrants, Ankara has vowed to continue accommodating more than 2 million people from its war-torn southern neighbors and welcome any more who come. But refugees are becoming a political liability in the run-up to a close-fought election due in November… Barred from work by a government that fears a voter backlash, many of the newcomers are restless.”

Japan Watch:

September 16 – Bloomberg (Yoshiaki Nohara): “Japan’s export growth slowed for a second month, signaling waning overseas support for an economy that’s already beset by weakness at home. The value of shipments rose 3.1% in August from a year earlier, compared with estimates compiled by Bloomberg for a 4.3% increase. Imports dropped 3.1%, leaving a deficit of 569.7 billion yen ($4.7bn)… Exports to China fell 4.6% as a market rout and economic slowdown in Japan’s biggest trading partner sapped demand.”

September 14 – Bloomberg (Toru Fujioka and Masahiro Hidaka): “The Bank of Japan refrained from boosting stimulus even after the economy shrank last quarter, betting that a resumption in growth will be enough to rekindle inflation. The move by Governor Haruhiko Kuroda and his colleagues leaves the onus on Prime Minister Shinzo Abe’s government to compile a stimulus package to boost what evidence indicates is a lackluster recovery in the second half of the year so far. Kuroda repeatedly told reporters… that the bank sees a gradual recovery continuing in the economy, while also saying the bank wouldn’t hesitate to ease if there was some danger of prices not rising to its target.”

Friday Evening Links

[Bloomberg] Power Goes Out on S&P 500 Rally as China Crashes Fed Celebration

[Bloomberg] U.S. Stocks Tumble as Fed Decision Spurs Global Economy Concerns

[Bloomberg] Brazil Real Falls Toward Record Low Amid Rating-Cut Speculation

[Bloomberg] Brazil's Stocks Slump as Political Turmoil Eclipses Fed Decision

[AP] Moody's downgrades credit rating of France

[FT] Megadeals for 2015 hit record high

[NYT] Watching the Fed, and Remembering the Tequila Crisis

[WSJ] Malaysia Fund 1MDB’s Missing Money Problem Grows

[WSJ] Russia Moves Its First Tactical Fighter Jets to Base in Syria