Saturday, April 23, 2016

Weekly Commentary: More on China

Let’s return to last week’s theme of China as the “marginal source of global Credit and liquidity” for a runaway global Bubble that has been pierced at the periphery. It is difficult for my thoughts not to return to the analogy of the matador’s sword initially piercing bull flesh. It amounts to the beginning of the end. It could also very well mark the point of maximum bull madness and pandemonium.

From my analytical perspective, the spring of 2007 marked the piercing of the mortgage finance Bubble. The blowup of funds leveraged in subprime mortgage exposure marked a momentous inflection point in terms of speculator deleveraging, the flow of finance to the mortgage sector and an overall tightening of mortgage finance. Federal Reserve measures to hold Bubble bursting at bay pushed the crisis out several quarters into late-2008. Highly unsettled (crazy) markets saw a major bond rally – especially in agency debt and MBS – that extended the period of high-risk mortgage lending. Fed loosening in the midst of a highly unstable Bubble Dynamic also spurred a speculative frenzy in commodities, with crude oil surging to $145. It all exacerbated fragility.

The world has changed profoundly since 2007. For one, total Chinese bank assets have inflated from about $7.0 TN to over $30 TN. Annual growth in Chinese system Credit growth (“total social financing”) expanded from about $900 billion in 2007 to 2015’s $2.35 TN. Momentous changes have rewritten central banking doctrine. Not even contemplated in 2007, QE (ECB and BOJ) will add close to another $2.0 TN to global liquidity in 2016. Central banks will also push short-term rates (and bond yields!) further into negative territory this year, a policy course that would have been totally absurd in 2007. Prior to 2008, no one would have dared imagine today’s “whatever it takes” monetary management.

It’s an incredible confluence. Building on it’s historic $1.0 TN Q1 output, China could surpass $3.0 TN of 2016 system Credit growth. For perspective, Chinese Credit growth will likely expand at least 50% more than U.S. Credit this year. Such unprecedented Credit growth in the face of a stock market collapse, sinking corporate profits and rapidly intensifying Credit deterioration is simply astounding. It’s definitely a testament to the brute power of “whatever it takes” Chinese state-directed finance and investment. Combining Chinese communist leadership with “whatever it takes” global central bankers (with no constraints on their “money” printing operations) creates a backdrop for financial folly unrivaled in history.

Recall that Chinese authorities had previously tightened mortgage Credit in a belated attempt to rein in Credit excess and rapidly inflating housing (apartment) prices. Then to counter a weakening economy and incipient Credit problems, officials loosened policy in 2014. The upshot was a surge of liquidity (and leverage) into stock market speculation. After trading just above 2,000 in July 2014, the Shanghai Composite ballooned to almost 5,200 by June 2015 (Friday’s close 2,959).

The bursting Chinese stock market Bubble spurred “whatever it takes” measures out of Beijing that must leave Draghi, Kuroda and Yellen with deep senses of envy. And with perceptions fully solidified that Chinese officials have no tolerance for financial or economic crisis, “money” and speculative leverage returned with a vengeance in key housing markets and within commodities.

The global backdrop is unique. The late-twenties period does, however, offer some germane similarities. Incredible technological advancement, financial innovation, “globalization” and policy experimentation nurtured the extraordinary “Roaring Twenties” Bubble period (commencing during the first World War). Later in the twenties, the myriad affects of loose financial conditions – certainly including over-investment, mal-investment and income equality – became more pronounced. There was intensifying downward pressure on commodities and good prices, along with corporate profits.

The late-twenties Bubble period was characterized by an unusual backdrop that promoted financial speculation over productive investment. And as much as the Fed hoped to rein in speculative excess while providing a boost to the flagging real economy, cautious measures to dampened speculation were ineffective. Meanwhile, efforts to bolster the real economy were successful in stoking securities markets Bubbles and speculative leveraging. Money was literally flooding into New York to play the best game in town (and the world).

April 22 – Bloomberg: “Chinese speculators have a new obsession: the commodities market. Trading in futures on everything from steel reinforcement bars and hot-rolled coils to cotton and polyvinyl chloride has soared this week, prompting exchanges in Shanghai, Dalian and Zhengzhou to boost fees or issue warnings to investors. While the underlying products may be anything but glamorous, the numbers are eye-popping: contracts on more than 223 million metric tons of rebar changed hands on Thursday, more than China’s full-year production of the material used to strengthen concrete. ‘The great ball of China money is moving away from bonds and stocks to commodities,’ said Zhang Guoyu, a Shanghai-based analyst at Tebon Securities Co. ‘We’ve seen a lot of people opening accounts for commodities futures recently.’ The frenzy echoes the activity that fueled China’s stock market last year before a rout erased $5 trillion, and follows earlier bubbles in property to garlic and even certain types of tea.”

April 17 – Financial Times (Yuan Yang): “House prices in China’s leading cities surged as much as 63% in the year to March while lower-tier cities saw prices tumble, highlighting the country’s increasingly bifurcated market. In places such as Shanghai and Shenzhen, soaring house prices and subdued wage growth have sparked a frenzy of borrowing — estimated at an additional $48bn in January alone — prompting city governments… to crack down. These measures, introduced in January and including curbs on financing for downpayments and second homes, have had little impact so far in the ‘tier-one’ cities… ‘When you create a lot of liquidity, it flows to the hottest markets,’ said Ms Yao, who suspects easy credit and property speculation have stoked sharp price rises. Homebuyers have circumvented clampdowns on downpayment financing… by finding ever more novel ways to obtain the 20% of value deposit requirement.”

The extreme measures China adopted to counter its stock market crash and unfolding crisis have now incited precarious speculative Bubbles in commodities and housing. This creates extraordinary uncertainties for China and the world. A deepening Credit crisis (see “China Bubble Watch”) would seem to ensure the usual cautious official measures to counter speculative excesses. So the world has of late been contemplating booming China: ongoing loose financial conditions with 2016 Credit growth in the neighborhood of $3.0 TN – providing extraordinary fuel for a rather destabilizing speculative blow-off.

Keep in mind that The Mighty World of Speculative Finance has been positioned long “defensive,” long “deflation,” long “duration” and long sold balance sheets. This world has been short commodities, energy, yields, cyclicals, financials and bad balance sheets. Moreover, many of these (Crowded) macro themes have been combined into leveraged portfolios (“risk parity”, etc.). China with $3.0 TN of Credit growth fueling unpredictable housing and commodities speculative Bubbles upsets the leveraged speculators' applecart.

We need to deepen our discussion of China as “marginal source of Credit and liquidity.” A three Trillion (in U.S. dollars) Chinese Credit onslaught would bolster a vulnerable Chinese economy, in the process providing a much needed boost to EM economies and the global economy in general. Resurgent Chinese housing and commodities Bubbles would be expected to stoke the real economy and finance more generally – if unpredictably.

Chinese officials have adopted various capital control measures over recent months. These seem to ensure that a less-than-normal amount of newly created Chinese liquidity will make its way out into the global system. At the same time, Chinese Credit and Bubble Dynamics have already begun to have major indirect impacts on global market liquidity.

At this point, China - as the “marginal source of global Credit and liquidity” – is exacerbating what had already evolved into a powerful central-bank induced short squeeze dynamic. Despite the collapse of Doha talks over the weekend, crude’s march higher ran unabated again this week. Industrial metal prices have been surging. Silver jumped 4.4% this week, with copper up 5.4%. The week saw nickel prices rise to a five-month high and aluminum to eight-month highs. Platinum, palladium, zinc and lead prices have all shot higher. Some iron ore prices have jumped to highs since early 2015.

The problem is that China’s newfound commodities speculation is underpinned by historic Credit growth – say, more than $3.0 TN annualized. Meanwhile, global short-squeeze dynamics are bolstered by $2.0 TN of annualized QE (ECB and BOJ). Moreover, there’s the massive pool of speculative finance – including a $3.0 TN hedge fund industry – with large leverage positions throughout global markets. In an extraordinary development, as scores of trades continue to unwind, a destabilizing global dynamic feeds on itself and gathers momentum. It’s monetary disorder on steroids.

Thursday under the prescient Bloomberg (Netty Idayu Ismail) headline, “Yen Bulls Vulnerable to Kuroda Shock Amid Record Hedge Fund Bets: “Yen bulls are at risk from Haruhiko Kuroda’s favorite tactic: surprise. By pushing bets on a stronger currency to the most on record, speculators have left themselves vulnerable should the Bank of Japan governor blindside them with additional stimulus at the April 27-28 policy meeting… “Short dollar-yen is now a consensus trade,’ said James Purcell, cross-asset strategist at UBS Group AG’s wealth-management business in Hong Kong. ‘The market was caught on the wrong side when the cross fell in the first quarter. There is a danger people will get wrong-sided again.’”

Sure enough, Friday trading saw the yen sink 2.13%, “the most in 17 months.” When trade unwinds/blowups proliferate, no trade is safe. Interestingly, the energy and commodities surge even began to garner the attention of global bond markets. Nothing dramatic thus far, yet bonds around the world are priced for deflation. Throughout equities and fixed income the “safety trade” is likely the most Crowded trades of all.

It’s also worth mentioning that the VIX (equity volatility) closed the week at 13.20, down from last week’s 13.62 to near one-year lows (not far from five-year lows). Considering the general mayhem operating below the market’s surface, a 13 VIX is incredible. Then again, the VIX has been right in the thick of the disorderly unwind of hedges and bearish bets. Besides, it’s at best an indication of the short-term probability of stock market dislocation. And for now markets are betting that “whatever it takes” Chinese officials and global central bankers have things under control.

And that’s what makes the current environment so dangerous. From my perspective, things continue to unfold in the worst-case scenario. Beijing has lost control of what has evolved into complex Credit, market and economic systems. Global central bankers have lost control of speculative market dynamics – not to mention inflation dynamics. And it’s not as if current predicaments are inconspicuous. So investors, speculators and investment managers around the world are forced to plug their noses and play the game.

Returning back to China: The “marginal source of global Credit and liquidity” is short-term supportive of global risk markets. Yet its Credit system is self-destructing – and doing so rather conspicuously. If any other country employed a similar policy mix the world would be sprinting from that currency.

Thus far, Chinese officials have been determined to carefully manage China’s pegged currency regime. Yet current Credit and market dynamics are inconsistent with a stable currency. I would furthermore argue that breakneck Credit growth in the face of rapidly deteriorating underlying fundamentals is a proven recipe for a crisis of confidence. Global markets are in the midst of a destabilizing adjustment to China’s resurgent booms in Credit and speculation. This ensures real havoc when global markets are confronted with a Chinese Credit and/or currency dislocation.


For the week:

The S&P500 increased 0.5% (up 2.3% y-t-d), and the Dow added 0.6% (up 3.3%). The Utilities sank 3.3% (up 9.6%). The Banks surged 5.2% (down 4.0%), and the Broker/Dealers jumped 5.5% (down 3.7%). The Transports gained 1.4% (up 7.7%). The S&P 400 Midcaps increased 0.8% (up 5.6%), and the small cap Russell 2000 rose 1.4% (up 1.0%). The Nasdaq100 fell 1.5% (down 2.6%), while the Morgan Stanley High Tech index increased 0.2% (down 2.2%). The Semiconductors slipped 0.7% (up 0.8%). The Biotechs jumped 2.5% (down 14%). Though bullion was little changed, the HUI gold index gained 2.1% (up 81.9%).

Three-month Treasury bill rates ended the week at 23 bps. Two-year government yields rose nine bps to 0.82% (down 23bps y-t-d). Five-year T-note yields surged 15 bps to 1.36% (down 39bps). Ten-year Treasury yields jumped 14 bps to 1.90% (down 36bps). Long bond yields rose 15 bps to 2.71% (down 31bps).

Greek 10-year yields sank 50 bps to 8.21% (up 89bps y-t-d). Ten-year Portuguese yields rose 11 bps to 3.26% (up 74bps). Italian 10-year yields jumped 14 bps to 1.47% (down 12bps). Spain's 10-year yields gained 10 bps to 1.59% (down 18bps). German bund yields rose 10 bps to 0.23% (down 39bps). French yields increased nine bps to 0.56% (down 43bps). The French to German 10-year bond spread declined one to 33 bps. U.K. 10-year gilt yields surged 19 bps to a three-month high 1.60% (down 36bps).

Japan's Nikkei equities index surged 4.3% (down 7.7% y-t-d). Japanese 10-year "JGB" yields slipped a basis point to negative 0.12% (down 14bps y-t-d). The German DAX equities index jumped 3.2% (down 3.4%). Spain's IBEX 35 equities index surged 4.3% (down 3.3%). Italy's FTSE MIB index rose 2.4% (down 12.8%). EM equities equities were mixed. Brazil's Bovespa index slipped 0.6% (up 22%). Mexico's Bolsa was little changed (up 6.1%). South Korea's Kospi index was about unchanged (up 2.8%). India’s Sensex equities index gained 0.8% (down 1.1%). China’s Shanghai Exchange sank 3.9% (down 16.4%). Turkey's Borsa Istanbul National 100 index added 0.3% (up 19.7%). Russia's MICEX equities index jumped 3.1% (up 11.7%).

Junk funds saw inflows of $410 million (from Lipper), the eighth straight week of positive flows.

Freddie Mac 30-year fixed mortgage rates increased a basis point to 3.59% (down 6bps y-o-y). Fifteen-year rates slipped a basis point to 2.85% (down 7bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down two bps to 3.67% (down 32bps).

Federal Reserve Credit last week expanded $3.7bn to a three-month high $4.452 TN. Over the past year, Fed Credit increased $4.3bn. Fed Credit inflated $1.641 TN, or 58%, over the past 180 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week declined $1.4bn to $3.242 TN. "Custody holdings" were down $46.7bn y-o-y, or 1.4%.

M2 (narrow) "money" supply last week was little changed at $12.607 TN. "Narrow money" expanded $715bn, or 6.0%, over the past year. For the week, Currency slipped $0.6bn. Total Checkable Deposits declined $4.5bn, while Savings Deposits added $1.6bn. Small Time Deposits gained $0.8 billion. Retail Money Funds increased $2.8bn.

Total money market fund assets sank $32.9bn to a six-month low $2.698 TN. Money Funds rose $110bn y-o-y (4.3%).

Total Commercial Paper jumped $17.5bn to $1.111 TN. CP expanded $85bn y-o-y, or 8.3%.

Currency Watch:

April 16 – Reuters: “Japan's efforts to seek informal consent to act against an unwelcome yen rise bore little fruit, with the United States offering a cool response to concerns voiced by Tokyo that the currency's gains are too sharp and may justify intervention. A lack of G20 sympathy for Tokyo's appeal may embolden yen bulls to test the currency's 17-month highs against the dollar hit earlier this month, keeping Japanese policymakers on edge to contain the damage on a fragile, export-reliant economy.”

The U.S. dollar index recovered 0.4% this week to 95.12 (down 3.6% y-t-d). For the week on the upside, the Canadian dollar increased 1.2%, the South African rand 1.1%, the British pound 0.5%, the Mexican peso 0.4% and the Norwegian krone 0.1%. For the week on the downside, the Japanese yen declined 2.8%, the Swiss franc 1.1%, the Brazilian real 1.0%, the New Zealand dollar 1.0%, the euro 0.5%, the Swedish krona 0.4% and the Australian dollar 0.2%. The Chinese yuan declined 0.4% versus the dollar.

Commodities Watch:

The Goldman Sachs Commodities Index surged 3.5% to a five-month high (up 11.7% y-t-d). Spot Gold was little changed at $1,233 (up 16%). Silver jumped 4.4% to $16.97 (up 23%). WTI Crude rose another $3.34 to $43.74 (up 18%). Gasoline gained 4.7% (up 21%), and Natural Gas jumped 12% (down 9%). Copper advanced 5.4% (up 6%). Wheat increased 3.0% (up 1%). Corn declined 0.8% (up 5%).

Fixed-Income Bubble Watch:

April 22 – Bloomberg (Brian Chappatta): “Make no mistake about it: Puerto Rico will default in May on some of the $470 million it owes, according to Moody’s… The cash-strapped commonwealth is expected to fall short of paying $422 million to holders of bonds from the Government Development Bank, the credit rater said… It may also default on debt from the Employees Retirement System, Industrial Development Co. and Highways and Transportation Authority because the GDB has just $562 million in liquidity as of April 1…”

April 21 – Financial Times (Joel Lewin): “The debt doghouse is filling up fast. More companies were downgraded to junk status by Moody’s in the first three months of the year than in the whole of 2015. In total, 51 companies were pushed into junk territory, up from eight in the fourth quarter and 45 in 2015. The sharp increase in number of so-called ‘fallen angels’ — as those companies stripped of their investment grade status are known — comes as focus intensifies on whether the current credit cycle, which began after the 2008-2009 financial crisis, is turning… Moody’s also blamed the travails of the commodities market on the significant swelling in the number of ‘potential angels’, or those companies at risk of being cut to junk. The increase in the number pushed the amount of debt in ‘potential angel’ camp to $265bn by the end of March. That is up from just $234bn at the end of the year and $105bn at the end of the first quarter in 2015.”

April 21 – Bloomberg (Chris Martin): “SunEdison Inc.’s liabilities of $16.1 billion makes the world’s biggest renewable energy developer the biggest bankruptcy of 2016. Here’s a review of the almost $35 billion in previous U.S. restructurings this year… Peabody Energy, $10.1 billion… Arch Coal Inc., U.S. mining company, $6.45 billion…Verso Corp., paper products company, $3.88 billion…Energy XXI Ltd., oil producer, $3.62 billion…Republic Airways Holdings Inc., airline, $2.97 billion… Paragon Offshore Plc, oil services provider, $2.96 billion… RCS Capital Corp., financial services, $1.39 billion… SH-130 Concession Co., highway operator, $1.27 billion… Noranda Aluminum Holding Corp., mining company, $1.12 billion… Southcross Holdings LP, natural gas processor, $1.07 billion…”

Global Bubble Watch:

April 17 – Financial Times (Eric Platt): “Corporate borrowers across the world have defaulted on $50bn of debt so far this year as the number of delinquent companies accelerates at its fastest pace since the US emerged from the financial crisis in 2009. The number of defaults rose by five in the past week, including the first European company of the year, according to Standard & Poor’s. Forty-six companies have defaulted since the year began.”

U.S. Bubble Watch:

April 20 – Reuters (Alistair Gray): “The six biggest US banks have suffered their steepest decline in quarterly revenues since 2011, after a profound slump on Wall Street overshadowed a boost from their consumer businesses. JPMorgan Chase, Bank of America, Citigroup, Goldman Sachs, Morgan Stanley and Wells Fargo generated total revenues of $98bn in the first quarter, down 9% from a year earlier — the steepest fall in five years… Deep cost cuts failed to counteract the fall in revenue so the six lenders also saw their collective net income plummet 24% year on year to $18bn.”

April 20 – HousingWire (Kelsey Ramírez): “Home sellers in March sold their homes for an average 17% gain, or $30,500 more than the purchase price, making it the highest average monthly price gain for home sellers since December of 2007, according to RealtyTrac… Of the nation’s 125 metropolitan areas with at least 300 sales in March, the largest gains occurred in San Francisco with a 72% gain. This was followed by San Jose, California with gains of 60%, Boulder, Colorado with 53%, Prescott, Arizona with 51% and Los Angeles 48%.”

April 17 – New York Times (John Herrman): “The business of online news has never been forgiving. But in recent weeks, what had been a simmering worry among publishers has turned into borderline panic. This month, Mashable, a site that had just raised $15 million, laid off 30 people. Salon, a web publishing pioneer, announced a new round of budget cuts and layoffs. And BuzzFeed, which has been held up as a success story, was forced to bat back questions about its revenue… ‘It is a very dangerous time,’ said Om Malik, an investor at True Ventures whose tech news site, Gigaom, collapsed suddenly in 2015, portending the flurry of contractions.”

China Bubble Watch:

April 18 – Bloomberg: “The unprecedented boom in China’s $3 trillion corporate bond market is starting to unravel. Spooked by a fresh wave of defaults at state-owned enterprises, investors in China’s yuan-denominated company notes have driven up yields for nine of the past 10 days and triggered the biggest selloff in onshore junk debt since 2014. Local issuers have canceled 61.9 billion yuan ($9.6bn) of bond sales in April alone, and Standard & Poor’s is cutting its assessment of Chinese firms at a pace unseen since 2003.”

April 20 – Bloomberg (Bonnie Cao and Ye Xie): “Billionaire investor George Soros said China’s debt-fueled economy resembles the U.S. in 2007-08, before credit markets seized up and spurred a global recession. China’s March credit-growth figures should be viewed as a warning sign, Soros said... The broadest measure of new credit in the world’s second-biggest economy was 2.34 trillion yuan ($362bn) last month, far exceeding the median forecast of 1.4 trillion yuan… and signaling the government is prioritizing growth over reining in debt. What’s happening in China ‘eerily resembles what happened during the financial crisis in the U.S. in 2007-08, which was similarly fueled by credit growth,’ Soros said. ‘It can reach a turning point later than everyone expects.’”

April 21 – Bloomberg (Tracy Alloway): “Here's a growing list to further excite China bears this Thursday: Baoding Tianwei Group Co., China National Erzhong Group, Sinosteel Co., China Railway Materials Co. Ltd., Guangxi Nonferrous Metal Group, Greenland Holdings Corp.'s Yun Feng unit, and Dongbei Special Steel Group Ltd. These are the eight state-owned enterprises (SEOs) that have run into some sort of repayment problem this year, exacerbating already heightened concerns over the future of China's debt-fueled economy… SEOs that overindulged on debt may actually be keen to default on their bonds, while government officials may be loath to bail them out entirely. Meanwhile, banks will likely want to suppress defaults in the SEO arena through potentially any means possible, including, perhaps, pushing losses on to investors who have purchased the debt through wealth management products (WMPs).”

April 20 – Bloomberg (Lianting Tu and Molly Wei): “Chinese companies have never had to wait so long to get paid, as stockpiles build and customers delay sending funds. Firms now take a record 192 days to collect payment for their goods or services from when they pay for the inputs… The cash conversion ratio is up from 125 days five years ago. Liquidity is tightening in China after company profits declined for the first time in three years and as debtors face their hardest time ever paying interest. ‘The longer the cash conversion cycle, the higher the risk of corporates not having enough cash to repay their debts,’ said Iris Pang, senior economist for greater China at Natixis SA… ‘That creates a chain reaction.’”

April 18 – Bloomberg (David Yong): “China’s state-owned enterprises are likely to suffer more defaults over the next year as the government shows its readiness to shut companies in industries struggling with overcapacity, according to Standard & Poor’s. ‘In a major policy shift, the central government appears willing to close and liquidate struggling enterprises in the steel, mining, building materials, and shipbuilding industries,’ S&P analyst Christopher Lee wrote… ‘We believe this stance will exacerbate the problems of companies in these cyclical and capital-intensive sectors, which are facing sluggish demand amid slowing investment growth.’”

April 22 – Reuters (Ruby Lian and Manolo Serapio Jr): “China's commodity exchanges are trying to cool their markets as benchmarks rallied rapidly this week, with turnover of a single rebar contract on Thursday worth nearly 50% more than the total value traded on the Shanghai stock exchange. Chinese investors - both funds and individuals - appear to be making big bets that a rise in infrastructure spending will be positive for battered commodities such as steel and iron ore, turning their interest away from equities after a crash last summer that has driven down stocks by 40%.”

April 17 – Reuters (Clare Jim): “China's home prices in March gained at the fastest pace in almost two years but that growth may slow as local authorities tighten home purchase requirements in the two top performing cities on fears of a bubble forming. The southern city of Shenzhen continued to be the top performer, with home prices surging 61.6% from a year ago, followed by Shanghai with a 25% gain. Prices in the two cities were up 3.7% and 3.6% respectively from a month earlier… While property in China's top-tier cities is booming, prices in smaller centers, where most of China's urban population lives, are still sinking and complicating government efforts to spread wealth more evenly and arrest slowing economic growth.”

April 20 – Bloomberg: “China’s central bank is signaling less of an appetite for expanding monetary stimulus following evidence of an acceleration in growth that has led some private economists to upgrade their forecasts… While monetary policy will maintain a certain degree of looseness in coming months, prudence will feature more prominently than last year, Xinhua said. Late Tuesday, PBOC research bureau chief economist Ma Jun said… that future policy operations, while observing the need to continue supporting growth, will also pay attention to heading off macroeconomic risks -- especially an over-expansion of corporate leverage.”

April 15 – New York Times (Neil Gough.): “For Chinese banks, the decision to lend to companies like Bohai Steel was for years a no-brainer. Lenders took heart from its state backing, which appeared as solid as the millions of tons of steel pipes that rolled off its production lines each year. That ironclad image is now tarnished. Plunging demand and a worsening glut in production capacity have left Bohai Steel struggling to repay as much as $30 billion in debt. Worried creditors — more than 100 of them — are locked in negotiations with the company and local officials. China’s bad loans are on the rise, as companies that borrowed heavily in headier times struggle against a slowing Chinese economy.”

April 20 – Bloomberg (Ye Xie): “Global investors have cheered the recent signs of economic pickup in China. Andrew Colquhoun is unimpressed. Colquhoun, the head of Asia Pacific sovereigns at Fitch Ratings, sees the growth spurt, fueled by a resurgence in borrowing, threatening to wreak havoc on the financial system. ‘Whether we call it stabilization or not, I am not sure,’ Colquhoun said… ‘From a credit perspective, we’d be more comfortable with China slowing more than it is. We are getting less confident in the government’s commitment to structural reforms.’ While global equity and commodity markets have rallied on signs that a surge in lending is helping stabilize the economy, the borrowing binge is adding to an already unsustainable debt level, according to Colquhoun.”

ECB Watch:

April 21 – Associated Press (David McHugh): “European Central Bank head Mario Draghi made it clear Thursday he is ready to launch even more stimulus if the eurozone economy needs it. And he told German officials, who are complaining the ECB's stimulus is hurting the country's savers, to please butt out… Draghi firmly rejected criticism from German officials who think the ECB has done too much. They complain low rates have wiped out returns for people saving for retirement. Finance Minister Wolfgang Schaeuble even blamed Draghi for much of the success of the anti-euro, anti-immigrant Alternative for Germany party. Draghi alluded to the EU treaty, which forbids the ECB from taking orders from politicians.”

April 21 – CNBC (Holly Ellyatt): “Relations between the European Central Bank (ECB) and Germany's leaders are becoming increasingly strained as differences grow over the increasingly dovish path taken by the central bank. The criticism in Germany targeted at the ECB and its President, Mario Draghi, has reached fever-pitch since the ECB brought out an even bigger bazooka from its arsenal of monetary policy strategies to try to stimulate growth and inflation in the anemic euro zone. As well as cutting its main interest rates, it expanded its massive bond-buying program to 80 billion euros ($90.3 billion) a month and added corporate bonds into the mix.”

April 20 – Bloomberg (Patrick Donahue and Birgit Jennen): “German Vice Chancellor Sigmar Gabriel said the European Central Bank has ‘reached its limit’ with stimulus measures, wading into the euro area’s debate over monetary policy with a call for governments to step into the breach with higher spending. ‘The ECB is acting as an ersatz economy ministry, but it’s not made for that, because its only instrument is printing money,’ Gabriel said… Wherever fiscal investment and growth impulses are lacking among European Union states, the ECB jumps in with liquidity.’ While ECB policy is ‘very problematic’ for Germans who see their savings whittled away by shrinking rates, ECB President Mario Draghi shouldn’t be cast as the ‘bad guy,’ Gabriel said…”

Europe Watch:

April 17 – New York Times (Landon Thomas Jr.): “Executives of the International Monetary Fund mutter darkly about Greeks tapping their phones in Athens. Greek government officials accuse the fund of torpedoing their economy via tough austerity measures. And both the Greeks and the fund moan about the refusal of Germany to consider any form of debt relief for Greece. Signs of the growing tensions over Greece and its debt were evident at meetings of the I.M.F. in Washington last week.”

Central Bank Watch:

April 19 – Wall Street Journal (Tom Fairless): “UBS… Chairman Axel Weber, the former president of Germany’s Bundesbank, warned that central banks in Europe and Japan have reached the limits of monetary stimulus, weighing into an increasingly fractious debate in Germany over the European Central Bank’s easy-money policies. ‘We are now at a point…probably [where] the net benefits of further monetary easing, in particular in Europe but also in Japan, are outweighed by the costs and side effects,’ Mr. Weber said... He warned that negative interest rates ‘are only possible for a very short time and in close proximity to zero,’ and said he doubts that the ECB’s bond-purchase program will bolster economic growth and inflation.”

Japan Watch:

April 20 – Bloomberg (Keiko Ujikane): “Bank of Japan Governor Haruhiko Kuroda said he isn’t thinking about using so-called helicopter money and that the notion contradicts the law. With inflation and economic growth still lagging, debate in Japan has turned to the policy idea coined by Nobel laureate Milton Friedman in 1969. Such an initiative could involve the government selling debt straight to central bank for newly printed money that’s then injected directly into the economy via tax cuts or spending programs.”

April 22 – Bloomberg (Toru Fujioka Masahiro Hidaka): “Having adopted a negative interest rate on some excess reserves to penalize financial institutions for leaving money idle, the Bank of Japan may consider helping them lend by offering a negative rate on some loans, according to people familiar with talks at the BOJ. Such a discussion could happen in conjunction with any decision to make a deeper cut to the current negative rate on reserves… The BOJ’s Stimulating Bank Lending Facility, which now offers loans at zero percent interest, would be the most likely vehicle for this option, they said. The officials said that adding this to the central bank’s arsenal could have a positive impact on the economy, but would also raise questions about giving subsidies to commercial lenders.”

Leveraged Speculation Watch:

April 20 – Bloomberg (Will Wainewright and Nishant Kumar): “Hedge funds suffered the worst withdrawals last quarter since the tail-end of the financial crisis as wild swings in stocks and commodities caused losses at some of the best-known firms. Investors pulled a net $15 billion between January and March, reducing assets under management to $2.86 trillion from $2.9 trillion, …Hedge Fund Research Inc. said… The last time outflows were higher was in the second quarter of 2009, when $43 billion was redeemed. Clients are redeeming after many hedge funds failed to protect them during market turmoil in the second half of last year and again at the start of 2016… Hedge funds following macro economic trends to bet across asset classes suffered $7.3 billion in outflows, while those betting on corporate events saw about $8.35 billion pulled out…”

April 18 – Wall Street Journal (Ryan Tracy): “Top U.S. regulators are set to focus on borrowing by the hedge-fund industry, particularly large funds, as they assess potential risks in the asset-management sector. The Financial Stability Oversight Council voted unanimously at a public meeting Monday to endorse a 27-page ‘update’ of its more-than-two-year review of financial-stability risks tied to the asset-management industry. Treasury Secretary Jacob Lew said the oversight council… has found that leverage in the hedge-fund industry appears to be concentrated at larger funds… ‘We do not have a good metric for leverage in this context,’ Commodity Futures Trading Commission Chairman Timothy Massad said… ‘We have not yet connected the dots.’”

Brazil Watch:

April 18 – Reuters (Anthony Boadle and Lisandra Paraguassu): “Brazil's President Dilma Rousseff vowed on Monday to fight impeachment tooth-and-nail in the Senate after a heavy defeat in the lower house of Congress raised the likelihood of an end to 13 years of leftist rule in Latin America's largest economy. In a raucous vote late on Sunday that sparked jubilation among Rousseff's foes, the opposition comfortably surpassed the two-thirds majority needed to send Brazil's first female president for trial in the Senate on charges she manipulated budget accounts. If the Senate votes by a simple majority to accept the case next month, as is expected, Rousseff would become the first Brazilian leader to be impeached for more than 20 years.”

April 20 – Bloomberg (Carla Simoes): “Rio de Janeiro said it’s running out of money to pay for basic services months before the Olympic Games while other Brazilian states warned of similar financial crises if the federal government doesn’t provide debt relief. Six state governors and a representative for Rio de Janeiro said… their fiscal woes are forcing them to make cutbacks that could lead to a breakdown of social services. Rio has been delaying payment of salaries to public servants since the beginning of the year.”

Geopolitical Watch:

April 17 – Reuters (John Kemp): “Saudi Arabia's decision to scupper negotiations on a coordinated oil output freeze in Doha on Sunday seems to confirm a significant shift in the kingdom's oil policy. For decades, the kingdom has insisted it does not wield oil as a diplomatic weapon, but at the weekend it did just that as part of an intensifying conflict with Iran. The kingdom's position on Iranian oil production has steadily hardened over the course of the last year and at the weekend it reached its logical conclusion. Saudi Arabia will not accept any constraints on its output, even freezing at record levels, unless Iran agrees to similar controls, which it has rejected until production has reached pre-sanctions levels.”

April 20 – Reuters (Alex Lawler): “Iran is determined to recover its share of the world oil market following the lifting of sanctions, and can withstand low prices since it has sold oil for as little as $6 a barrel in the past, a source close to Iranian oil policy said... ‘We paid for our barrels with our centrifuges,’ the source said, referring to Iran's acceptance of curbs on its nuclear program in order for Western sanctions on Tehran to be lifted. ‘We are going to get our share back. For us, oil is only 12% of our GDP. We used to sell oil in the war (between Iran and Iraq in the 1980s) at $6 a barrel.’”

April 21 – Wall Street Journal (Jeremy Page): “Chinese President Xi Jinping added a new military leadership post to his already extensive collection of official titles—commander-in-chief of a new joint-battle-command center—given as part of the biggest restructuring of the armed forces since the 1950s. State media announced the title and the setting up of the new command center this week in reports that on state television showed Mr. Xi making a rare public appearance in green camouflage fatigues and black combat boots. The changes are the latest in an overhaul of the military command structure that Mr. Xi has pushed in the past few months to strengthen his control of the People’s Liberation Army, or PLA, and transform it into a modern fighting force.”