Credit Bubble Bulletin : May 2016

Tuesday, May 31, 2016

Monday, May 30, 2016

Monday Evening Links

[Bloomberg] China's Slowdown Hits Nearby Economies Hardest

[Bloomberg] The Big Short Is Back in Chinese Stocks

[Bloomberg] Hong Kong Home Prices Have Much Further to Fall Before Controls Are Eased

Sunday, May 29, 2016

Monday's News Links

[Bloomberg] Bonds Fall With Emerging Markets as Dollar Gets Lift From Yellen

[Bloomberg] Emerging Markets Pounded by Yellen as Run of Monthly Gains Stall

[Bloomberg] Draghi’s First Good News in a Year Has $267 Billion Cost

[Reuters] Fed's Bullard says global markets seem well-prepared for summer rate hike

[Bloomberg Video] Defaults Threaten China's Wealth Management Market

[FT] A new monetary order will only emerge from the next crisis

[AP] China Lashes Out at US Defense Secretary Criticisms

Sunday Evening Links

[Bloomberg] Asian Index Futures Signal Gains After Yellen; Yen Extends Drop

[Bloomberg] China’s Stocks Extend Weekly Drop as Metals Shares Pace Retreat

[Bloomberg] China Default Chain Reaction Threatens Products Worth 35% of GDP

[Bloomberg] Goldman Sees End of Yuan ‘Sweet Spot’ Spurring Capital Outflows

Sunday's News Links

[Bloomberg] Abe Aide Says Delaying Japan Sales-Tax Rise Is Only Option

[Bloomberg] Negative Rates Failing to Spur Investment at Europe’s Companies

[FT] Passive funds grow 230% to $6tn

[FT] Emerging markets should shift from dollars into gold

Saturday, May 28, 2016

Saturday's News Links

[WSJ] Janet Yellen Sees Rate Hike Coming Soon

[Bloomberg] Currency Tranquility Is Calm Before Storm as Risks Taunt Traders

[NYT/CNBC] A Worrisome Pileup of $100 Million Homes

[NYT] Behind the Scenes, Billionaires’ Growing Control of News

[Der Spiegel] 'Disaster in the Making': The Many Failures of the EU-Turkey Refugee Deal

Friday, May 27, 2016

Weekly Commentary: Just the Facts

For the week:

The S&P500 jumped 2.3% (up 2.7% y-t-d), and the Dow gained 2.1% (up 2.6%). The Utilities increased 1.0% (up 11.7%). The Banks jumped 3.2% (down 2.8%), and the Broker/Dealers surged 4.5% (down 5.8%). The Transports gained 1.3% (up 3.5%). The S&P 400 Midcaps advanced 2.9% (up 6.7%), and the small cap Russell 2000 rose 3.4% (up 1.3%). The Nasdaq100 jumped 3.4% (down 1.8%), and the Morgan Stanley High Tech index rose 3.0% (unchanged). The Semiconductors surged 4.6% (up 4.9%). The Biotechs jumped 4.2% (down 16.7%). With bullion down $40, the HUI gold index sank 8.1% (up 79%).

Three-month Treasury bill rates ended the week at 31 bps. Two-year government yields gained three bps to 0.91% (down 14bps y-t-d). Five-year T-note yields added a basis point to 1.38% (down 37bps). Ten-year Treasury yields increased one basis point to 1.85% (down 40bps). Long bond yields increased two bps to 2.65% (down 37bps).

Greek 10-year yields dropped 24 bps to 7.07% (down 25bps y-t-d). Ten-year Portuguese yields declined seven bps to 3.01% (up 49bps). Italian 10-year yields dropped 12 bps to 1.35% (down 24bps). Spain's 10-year yields fell eight bps to 1.48% (down 29bps). German bund yields dipped two bps to 0.14% (down 48bps). French yields slipped three bps to 0.47% (down 52bps). The French to German 10-year bond spread narrowed one to 33 bps. U.K. 10-year gilt yields declined two bps to 1.43% (down 53bps).

Japan's Nikkei equities index increased 0.6% (down 11.6% y-t-d). Japanese 10-year "JGB" yields slipped a basis point to 0.13% (down 39bps y-t-d). The German DAX equities index rallied 3.7% (down 4.3%). Spain's IBEX 35 equities index jumped 3.8% (down 4.6%). Italy's FTSE MIB index recovered 2.1% (down 15.1%). EM equities were mostly higher. Brazil's Bovespa index declined 1.6% (up 13.2%). Mexico's Bolsa gained 2.1% (up 7.3%). South Korea's Kospi index rallied 1.1% (up 0.4%). India’s Sensex equities index surged 5.3% (up 2.1%). China’s Shanghai Exchange slipped 0.2% (down 20.3%). Turkey's Borsa Istanbul National 100 index gained 2.2% (up 8.8%). Russia's MICEX equities index advanced 1.9% (up 9.4%).

Junk funds saw outflows of $562 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates rose six bps to 3.64% (down 33bps y-o-y). Fifteen-year rates jumped eight bps to 2.89% (down 37bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up six bps to 3.84% (down 24bps).

Federal Reserve Credit last week dropped $15.7bn to $4.431 TN. Over the past year, Fed Credit declined $6.9bn. Fed Credit inflated $1.620 TN, or 58%, over the past 185 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week slipped $1.7bn to $3.218 TN. "Custody holdings" were down $109bn y-o-y, or 3.3%.

M2 (narrow) "money" supply last week jumped $26.8bn to a record $12.734 TN. "Narrow money" expanded $793bn, or 6.6%, over the past year. For the week, Currency increased $2.8bn. Total Checkable Deposits slipped $2.5bn, while Savings Deposits surged $30bn. Small Time Deposits were little changed. Retail Money Funds declined $3.1bn.

Total money market fund assets gained $14.2bn to $2.733 TN. Money Funds rose $119bn y-o-y (4.6%).

Total Commercial Paper dropped $19.6bn to $1.079 TN. CP expanded $134bn y-o-y, or 14%.

Currency Watch:

May 25 – Bloomberg: “China’s central bank weakened its currency fixing to the lowest since March 2011 as the dollar strengthened. The reference rate was set 0.3% weaker at 6.5693 per dollar. A gauge of the greenback’s strength rose to a two-month high Tuesday… A resurgent greenback is shaking up a strategy that the People’s Bank of China pursued over the past three months -- a steady rate against the dollar, combined with depreciation against other major currencies.”

The U.S. dollar index increased 0.4% this week to 95.7 (down 3.0% y-t-d). For the week on the upside, the British pound increased 0.8% and the Canadian dollar gained 0.7%. For the week on the downside, the Brazilian real declined 2.6%, the euro 1.0%, the New Zealand dollar 0.9%, the Mexican dollar 0.7%, the Australian dollar 0.6%, the South African rand 0.6%, Swiss franc 0.4%, the Swedish krona 0.4%, the Norwegian krone 0.1% and the Japanese yen 0.1%. The Chinese yuan declined 0.3% versus the dollar.

Commodities Watch:

The Goldman Sachs Commodities Index gained 1.2% (up 19.3% y-t-d). Spot Gold fell 3.2% to $1,212 (up 14%). Silver declined 1.8% to $16.25 (up 18%). WTI Crude gained another $1.58 to $49.33 (up 33%). Gasoline slipped 0.2% (up 28%), while Natural Gas rallied 5.9% (down 7%). Copper recovered 2.9% (down 1%). Wheat jumped 2.9% (up 2%). Corn surged 4.6% (up 15%).

Fixed-Income Bubble Watch:

May 23 – Bloomberg (Tracy Alloway): “Bond investors appear to have placed their faith in commodities exceptionalism, with many positing that the recent pick-up in U.S. default rates will defy historical trends and remain confined to that industry. New research from Deutsche Bank AG pours cold water on that idea, arguing that there are already signs of contagion in junk-rated debt outside of the commodities space. A look at previous peaks in default rates shows the potential for more pervasive corporate stress. While default rates were higher amongst particular sectors—such as telecoms in the early 2000s or financials during the 2008 crisis—the rate for junk bonds excluding these specialized industries also increased significantly.”

May 24 – Financial Times (Eric Platt): “The triple A rated company is nearly extinct. Just a handful of companies in the world retain the coveted rating from Standard & Poor’s after ExxonMobil was downgraded last month. In the US, the number has fallen to two — Johnson & Johnson and Microsoft. In 1992, there were 98 US companies that held the highest credit rating from S&P. The demise of triple A-rated companies reflects a dramatic rise in the use of debt to help bolster shareholder returns and fund takeover activity.”

May 26 – Reuters (Suzanne Barlyn): “New York state's financial regulator, which recently launched a probe into LendingClub Corp, is preparing to look into the activities at other online lenders and whether they should be licensed in New York… Last week, NYDFS subpoenaed San-Francisco based LendingClub, a so-called peer-to-peer lender…”

May 25 – Bloomberg (Matt Scully): “Some of Wall Street’s biggest banks are making contingency plans to cut their exposure to online consumer loans if the market deteriorates further after the recent crisis at LendingClub Corp., people with knowledge of the reviews said. While firms including Credit Suisse Group AG and Deutsche Bank AG haven’t scaled back exposure, they’re concerned about financing they provide to institutional investors that buy loans from companies like LendingClub and Prosper Marketplace Inc., the people said.”

May 25 – Associated Press (Stan Choe): “CEOs at the biggest companies got a 4.5% pay raise last year. That’s almost double the typical American worker’s, and a lot more than investors earned from owning their stocks — a big fat zero. The typical chief executive in the Standard & Poor’s 500 index made $10.8 million… That’s up from the median of $10.3 million the same group of CEOs made a year earlier. The raise alone for median CEO pay last year, $468,449, is more than 10 times what the typical U.S. worker makes in a year. The median full-time worker earned $809 weekly in 2015, up from $791 in 2014.”

May 22 – Wall Street Journal (Sam Goldfarb): “The esoteric securities market underpinning demand for the riskiest corporate loans is perking up, raising hopes that it could become easier for banks to sell a range of loans, including those that they failed to syndicate last year. More corporate loans are being bundled this spring into collateralized loan obligations, which buy loans from junk-rated companies and repackage them into securities that pay varying levels of interest based on which get paid off first if the underlying loans go bad.”

May 25 – Bloomberg (Elizabeth Campbell): “Illinois lawmakers have been busy in the last week of the regular legislative session. They moved to establish a youth-only turkey hunting season, set standards on where podiatrists can perform amputations and allowed for the adoption of retired police dogs. Yet, the Land of Lincoln remains the only state in the nation without a budget, mired in the longest such standoff in its history… If no deal is struck, the consequences will become more dire: Prisons may run out of food, schools may not open on time, and the state’s credit rating -- already the lowest in the U.S. -- is at risk of falling even further as the government’s deficit continues to grow.”

Global Bubble Watch:

May 26 – Financial Times (Robin Harding): “The global economic outlook is as grim as it was after the Lehman Brothers crisis in 2008, Shinzo Abe claimed on Thursday, as the Group of 7 revealed its stark divisions on economic policy. Seeking to rally support for a global fiscal stimulus at the G7 summit, the Japanese prime minister showed his fellow world leaders a series of alarming graphs comparing today’s economic conditions with those of 2008. But, according to people close to the discussions, Mr Abe struggled to win over opponents such as Germany’s chancellor Angela Merkel or UK Prime Minister David Cameron.”

May 26 – Reuters (Chris Gallagher and William Mallard): “Japanese Prime Minister Shinzo Abe warned his Group of Seven counterparts of a crisis on the scale of Lehman Brothers, Nikkei reported, offering a potential justification to again delay an increase in the national sales tax. Abe presented data at a Thursday session of the G7 summit he is hosting, showing that commodities prices have fallen 55% since 2014, the same margin they fell during the global financial crisis, the newspaper said, interpreting this as ‘warning of the re-emergence of a Lehman-scale crisis’.”

May 26 – Bloomberg (Claire Boston and Sally Bakewell): “A borrowing binge by companies globally is poised to make May one of the the busiest months ever, thanks to investors who continue to devour the relatively juicy yields on corporate debt in a negative-rate world. Global issuance of non-financial company debt will be in excess of $236 billion by month-end… In Europe, companies sold 48.5 billion euros ($54.2 billion) making it the busiest May on record.”

May 23 – Reuters (Anjuli Davies): “Revenue at the world's 12 largest investment banks fell 25% in the first quarter from a year ago as economic uncertainty and investor caution led to the slowest start since the financial crisis, a survey showed… Investment banks have been hit by a steep decline in oil prices, near-zero interest rates and worries about China's economy, which triggered a wave of volatility in financial markets at the start of the year, normally the most lucrative period when investors put their money to work. Trading in fixed income, currencies and commodities (FICC) divisions… declined 28% year-on-year to $17.8 billion, data from… Coalition shows.”

May 26 – Financial Times (Joe Rennison): “Global equity markets experienced further strong outflows this week, despite soothing economic data and rising stock prices. Equity funds suffered their seventh consecutive week of outflows, shedding another $9.2bn for the week ending May 25, taking their total outflows for the year above $100bn, according to data from EPFR.”

U.S. Bubble Watch:

May 23 – CNBC (Jeff Cox): “That American companies have been wadding up huge amounts of cash is no secret. What may be less well-known is that they're also accumulating debt at a much faster pace. Total debt among more than 2,000 nonfinancial companies swelled to $6.6 trillion in 2015, dwarfing the $1.84 trillion in cash on their balance sheets, according to a study… by S&P Global Ratings. The ratio of cash to debt is the lowest it's been in about 10 years, or just before the global financial crisis. As financial markets came to grips with the prospect of higher rates ahead, corporate America went on a debt bonanza. Debt grew 50 times that of cash, with companies rolling up $850 billion of new IOUs compared to just $17 billion, or 1%, cash growth.”

May 26 – MarketWatch (Ciara Linnane): “First-quarter earnings season is close to over, and the numbers it’s produced are as gloomy as they have been since the Great Recession. Overall profit for S&P 500 companies was the weakest in 6 1/2 years. The financial sector showed a double-digit percentage decline, while even stodgy utilities saw earnings fall into the red as unusual weather weighed. After selling assets, cutting capital expenditures and buying back their own shares at a record pace in recent years, companies are now clearly struggling to produce any kind of growth… A full 98.4% of S&P 500 companies have now reported through early Thursday, and profit measured by earnings per share is down 7% from a year ago, according to FactSet. On the heels of a 3.2% decline in the fourth quarter, that marks the fourth straight quarter of year-over-year earnings declines, and it was the biggest drop since the third quarter of 2009.”

May 25 – Bloomberg (Jeanna Smialek): “A substantial share of Americans lacked retirement savings and fewer households were confident in the outlook for their income at the end of last year. That’s according to a Federal Reserve report on the economic well-being of U.S. households in 2015… The findings show that while respondents increasingly reported that they are ‘doing OK’ or ‘living comfortably,’ a smaller share said they expected income growth than in the prior year’s survey. Thirty-one percent of non-retired Americans said they had no retirement savings at all, unchanged from 2014.”

May 26 – Wall Street Journal (Jesse Newman): “Banks are tightening credit for U.S. farmers amid a rise in delinquencies, forcing some growers to turn to alternative sources of loans. When U.S. agriculture was booming this decade, banks doled out ample credit to strong performers and weaker growers alike, said Michael Swanson, an agricultural economist at Wells Fargo & Co. But with the farm slump moving into its third year, banks have become pickier, requiring some growers to cough up more collateral and denying financing outright to some customers who need it to pay for seeds, crop chemicals and rent.”

May 27 – Bloomberg (Romy Varghese): “California’s three-year boom run is showing signs of fatigue. Shaking off recession-era comparisons to Greece, the most-populous U.S. state rebounded with surpluses and an economy fueled by the fast-growing technology industry, which garnered it eight bond-rating upgrades. Governor Jerry Brown is now forecasting that revenue growth is slowing along with the economy after April’s income-tax collections lagged expectations, in part because of the sputtering stock market. Even if voters in November decide to keep a temporary income-tax increase from ending -- a measure that Brown hasn’t endorsed -- the budget would ‘barely be balanced, his administration said…”

May 27 – Bloomberg (Prashant Gopal): “Miami’s crop of new condo towers, built with big deposits from Latin American buyers and lots of marketing glitz, are opening with many owners heading for the exits. A third of the units in some newly built high-rises are back on the market, though most are listed for more than their owners paid in the pre-construction phase. At the current sales pace, it would take 29 months to sell the 3,397 condominiums available in the downtown area, according to South Florida development tracker CraneSpotters.com. With the U.S. dollar strong, South American investors who piled into the downtown Miami market after the real estate crash are now trying to unload their recently built condos, adding inventory to an area where 8,000 units are under construction and nine towers were completed since the end of 2013.”

May 24 – Bloomberg (Michelle Jamrisko): “Purchases of new homes in the U.S. surged in April to the highest level since the start of 2008, pointing to a robust spring selling season for builders… (Sales) Rose 16.6% to 619,000 annualized rate (forecast was 523,000). Monthly increase was biggest since 1992, while pace was strongest since January 2008. Median selling price jumped 9.7% to a record $321,100.”

May 25 – Bloomberg (Prashant Gopal): “U.S. home prices rose 5.7% in the first quarter from a year earlier as buyers competed for a limited supply of listings. Prices climbed 1.3% on a seasonally adjusted basis from the previous three months, the 19th consecutive quarterly gain... There were 1.98 million houses for sale at the end of March, down 1.5% from the same month last year… While the U.S. has a whole had robust gains, prices fell from the previous quarter in 12 states and the District of Columbia, the FHFA said.”

May 25 – Wall Street Journal (Louise Radnofsky): “Big health plans stung by losses in the first few years of the U.S. health law’s implementation are seeking hefty premium increases for individual plans sold through insurance exchanges in more than a dozen states. The insurers’ proposed rates for individual coverage in states that have made their 2017 requests public largely bear out health plans’ grim predictions about their challenges under the health-care overhaul. According to the insurers’ filings with regulators, large plans in states including New York, Pennsylvania and Georgia are seeking to raise rates by 20% or more.”

China Bubble Watch:

May 24 – Bloomberg (Paul Panckhurst): “Charlene Chu, a banking analyst who made her name warning of the risks from China’s credit binge, said a bailout in the trillions of dollars is needed to tackle the bad-debt burden dragging down the nation’s economy. Speaking eight days after a Communist Party newspaper highlighted dangers from the build-up of debt, Chu… said she was yet to be convinced the government is serious about deleveraging and eliminating industry overcapacity. She also argued that lenders’ off-balance-sheet portfolios of wealth-management products are the biggest immediate threat to the nation’s financial system, with similarities to Western bank exposures in 2008 that helped to trigger a global meltdown.”

May 26 – Bloomberg: “China’s government still has room to borrow more to finance the investment and construction needed to shore up economic growth, the Ministry of Finance said. Overall risks associated with government debt, which amounted to 26.66 trillion yuan ($4.1 trillion) at the end of last year, are under control, the ministry said in a statement late on Thursday. The government can add leverage gradually because its debt ratio is still below international warning levels, it said.”

May 25 – Bloomberg (Lisa Pham): “In the creative world of Chinese lending, there’s a new trade in town: the cow leaseback. China Huishan Dairy Holdings Co., which operates the largest number of dairy farms in the country, is selling about a quarter of its herd -– some 50,000 animals -- to Guangdong Yuexin Finance Lease Co. for 1 billion yuan ($152 million) and then renting them back. With an estimated $1.3 trillion of risky loans in the country, Chinese banks are becoming more cautious about lending, forcing some companies to look for new ways to borrow. Finance leasing has been growing in popularity, especially for purchases of equipment. But cows?”

May 24 – Bloomberg (Zhe Huang and Justina Lee): “The People’s Bank of China scrapped its market-based mechanism for managing the yuan on Jan. 4 and returned to setting the exchange rate based on what suits authorities the best, the Wall Street Journal reported, citing unidentified people close to the central bank. An unidentified official from the PBOC in March told economists and bankers that ‘the primary task is to maintain stability’ when they asked the central bank to stop fighting markets and let the yuan’s value fall at a closed door meeting, citing previously undisclosed minutes of the gathering.

May 26 – Reuters (Elias Glenn): “Profit growth at China's industrial firms slowed in April, in line with other data for the month which suggested the economy may be losing steam again after picking up earlier in the year. China's industrial firms made 502 billion yuan ($76.59 billion) in profits last month, up 4.2% from the same period last year and compared with growth of 11.1% in March…”

EM Bubble Watch:

May 26 – Bloomberg (Matthew Martin, Archana Narayanan and Deema Almashabi): “Banks in Saudi Arabia are coming under fresh pressure over products that allow speculators to bet against the kingdom’s currency peg, according to people with knowledge of the matter. The Saudi Arabia Monetary Agency has asked lenders to explain why they are offering dollar-riyal forward structured products to customers less than four months after the regulator banned options contracts that let speculators place wagers on a currency devaluation, the people said. The authority, known as SAMA, didn’t reply to requests for comment. Hedge funds… have made bets that the country’s peg to the dollar will be broken as oil revenue plunges…”

May 24 – Bloomberg (Onur Ant): “Turkey’s central bank cut its overnight lending rate for a third month on Tuesday, calling the reduction a ‘measured’ step toward simplifying its monetary policy. The bank lowered the rate by 50 basis points to 9.5%...”

May 22 – Bloomberg (Kartik Goyal): “Massive, game-changing and overwhelming were among the descriptions investors used for Indian Prime Minister Narendra Modi’s election victory in May 2014. Two years on, the slow pace of implementing policy threatens to sap interest. The rupee is the worst performer among currencies of the four biggest emerging markets this year. Indian sovereign bonds have lagged peers in Brazil and Russia this quarter, after delivering the best returns among the BRIC nations since the election win.”

Japan Watch:

May 22 – Reuters (Stanley White): “Japanese manufacturing activity contracted at the fastest pace in more than three years in May as new orders slumped… putting fresh pressure on the government and central bank to offer additional economic stimulus. The Markit/Nikkei Flash Japan Manufacturing Purchasing Managers Index (PMI) fell to 47.6 in May…”

May 22 – Reuters (Tetsushi Kajimoto and Leika Kihara): “Japan's exports fell sharply in April and manufacturing activity suffered the fastest contraction since Prime Minister Shinzo Abe swept to power in late 2012, providing further evidence that the premier's Abenomics stimulus policy is struggling for traction. The bleak readings on the health of the world's third-largest economy follow Japan's failure last week to win support from its global counterparts to weaken the strong yen, which Tokyo fears could do further damage to the sputtering economy… Data on Monday showed Japan's exports fell 10.1% in April from a year earlier…”

ECB Watch:

May 24 – Bloomberg (Alessandro Speciale): “The European Central Bank warned that risks of financial-market turmoil have increased amid slower growth in emerging economies, weak bank profitability and the rise of populist movements across the 19-nation euro region. ‘A sharper-than-expected fall in Chinese growth could well lead to a synchronized downturn across other emerging-market economies, particularly commodity-exporting economies,’ the ECB wrote in its twice-yearly Financial Stability Review… ‘Under such a scenario, the financial systems of advanced economies may be challenged by a reduction in consumer and business confidence, and renewed financial-market volatility potentially intensified by sudden stops in or reversals of cross-border capital flows.’”

Europe Watch:

May 24 – Bloomberg (Laura J Keller, Stephen Morris and Macarena Munoz Montijano): “Deutsche Bank AG Chief Executive Officer John Cryan said his bank has never had more capital and could easily repay its debt many times over, responding to a credit-rating cut by Moody’s… The ratings company on Monday said the German lender faces mounting challenges in carrying out its turnaround, and cut the bank’s senior unsecured debt metric one level to Baa2, two grades above junk. The firm’s long-term deposit rating fell to A3 from A2.”

May 25 – Bloomberg (Thomas Penny, Patrick Donahue and Ian Wishart): “When Germany hosted last year’s Group of Seven summit, European leaders assured President Barack Obama they were up to dealing with the crises on their doorstep. Twelve months on, Europe’s challenges have multiplied to an extent that questions the wisdom of making the 6,000-mile trip to Japan for the G-7. From Brexit to migration, home-grown terrorism to the destabilizing impact of surging populism, Europe has seldom looked in more need of political leadership at home. Global summits usually provide an opportunity for heads of government to play the role of international dealmakers. But right now Prime Ministers David Cameron and Matteo Renzi, Chancellor Angela Merkel and President Francois Hollande are faced with coalescing crises -- and restive electorates -- that demand attention in their own countries”

Brazil Watch:

May 23 – Bloomberg (Carla Simoes, Arnaldo Galvao and Mario Sergio Lima): “Brazil’s newly-appointed Budget Minister Romero Juca said he will take a leave of absence after allegations surfaced that he wanted to obstruct the sweeping corruption probe known as Carwash. Juca, the leader of Acting President Michel Temer’s political party, will return to his former job as senator and make room for Dyogo Oliveira to take the helm of the Budget Ministry… The surprise announcement on Monday afternoon capped a day of speculation about Juca’s future in the cabinet after he initially refused to step down. The dramatic departure highlights the challenges facing Temer…”

Leveraged Speculation Watch:

May 25 – Bloomberg (Scott Deveau and Devin Banerjee): “The $2.9 trillion hedge-fund industry may lose about a quarter of its assets in the next year as performance slumps, said Tony James, Blackstone Group LP’s billionaire president. ‘It’s kind of a day of reckoning that we face here,’ James said… ‘There will be a shrinkage in the industry and it will be painful. That’s going to be pretty painful for an awful lot of places.’ The hedge-fund industry is having its worst start to a year in performance and investor withdrawals since global markets reeled after the financial crisis.”

May 24 – Financial Times (John Authers and Mary Childs): “It was the shot heard around the hedge fund world. After the New York City Employees’ Retirement System decided to cash all its investments inhedge funds, Letitia James, the city’s public advocate, delivered a message to the industry straight out of Occupy Wall Street: ‘Let them sell their summer homes and jets and return those fees to their investors.’ Hedge funds, she said last month, ‘believe they can do no wrong, even as they are losing money’… ‘Let’s face it: if you go back to the 1990s, hedge funds delivered something very special: high returns or very differentiated returns that you could not get elsewhere, and that is what hedge fund investors have been looking for,’ said Neil Chriss, founder of Hutchin Hill Capital… ‘The problem is, since the crisis, a lot of hedge funds have not been delivering. Returns have been mediocre,” he told the Milken Global Conference…”

Geopolitical Watch:

May 27 – Reuters (David Lawder): “Corrosion-resistant steel from China will face final U.S. anti-dumping and anti-subsidy duties of up to 450 percent under the U.S. Commerce Department's latest clampdown on a glut of steel imports, the agency said… The department also issued anti-dumping duties of 3% to 92% on producers of corrosion-resistant steel in Italy, India, South Korea and Taiwan… China's Commerce Ministry said it was extremely dissatisfied at what it called the ‘irrational’ move by the United States, which it said would harm cooperation between the two countries.”

May 26 – Reuters (Thomas Wilson and Kiyoshi Takenaka): “Group of Seven (G7) leaders agree… on the need to send a strong message on maritime claims in the western Pacific, where an increasingly assertive China is locked in territorial disputes with Japan and several Southeast Asian nations. The agreement prompted a sharp rejoinder from China, which is not in the G7 club but whose rise as a power has put it at the heart of some discussions at the advanced nations' summit in Ise-Shima, central Japan.”

May 22 – Associated Press (Suzan Fraser and Geir Moulson): “German Chancellor Angela Merkel told Turkey’s president on Monday that Ankara must fulfill all the European Union’s conditions to secure visa-free travel for its citizens, but Turkey responded that it would suspend agreements with the EU if the bloc does not keep its promises. The EU says Turkey must narrow its definition of ‘terrorist’ and ‘terrorist act.’ The bloc is concerned that journalists and political dissenters could be targeted. But Turkish president Recep Tayyip Erdogan has said that is out of the question.”

May 26 – MarketWatch (Nicole Perlroth and Michael Corkery): “Security researchers have tied the recent spate of digital breaches on Asian banks to North Korea, in what they say appears to be the first known case of a nation using digital attacks for financial gain. In three recent attacks on banks, researchers working for the digital security firm Symantec said, the thieves deployed a rare piece of code that had been seen in only two previous cases: the hacking attack at Sony Pictures in December 2014 and attacks on banks and media companies in South Korea in 2013. Government officials in the United States and South Korea have blamed those attacks on North Korea…”

Weekly Commentary: Just the Facts

Friday Evening Links

[Bloomberg] Yellen Says Fed Hike Probably Appropriate in ‘Coming Months’

[Reuters] Putin vows Russian retaliation over U.S. missile shield

Thursday, May 26, 2016

Friday's News Links

[Bloomberg] Stocks Reach Three-Week High in Yellen Countdown as Oil Falls

[Bloomberg] California’s Recovery Loses Luster as Tax Increases Set to Lapse

[Bloomberg] Miami’s Condo Frenzy Ends With Inventory Piling Up in New Towers

[WSJ] Farm Belt Banks Tighten the Buckle

[Reuters] China April industrial profit growth slows from March

[MarketWatch] Earnings fall at fastest rate since the Great Recession

[NYT] North Korea Linked to Digital Attacks on Global Banks

[FT] Equity fund outflows surpass $100bn in year to date

Thursday Evening Links

[Bloomberg] Asian Stocks Rise Ahead of Yellen Speech as Japan Shares Advance

[Bloomberg] Japan CPI Falls 0.3%, Raising Pressure on BOJ for More Stimulus

[Bloomberg] Wall Street Waits for Yellen Before Taking Off for a Long Weekend

[Bloomberg] Companies Go on Worldwide Bond Bender With $230 Billion of Sales

[Bloomberg] China Says It Has Room to Increase Debt to Boost Economic Growth

[Reuters] Pentagon says China aircraft intercept violated 2015 agreement

Thursday's News Links

[Bloomberg] Oil Hits ‘Sweet Spot’ at $50, Boosting Stocks as Dollar Weakens

[Bloomberg] Saudi Arabia Probes Bank Currency Trades as Peg to Dollar Strains

[Reuters] U.S. levies hefty duties on Chinese corrosion-resistant steel

[Reuters] Exclusive: New York financial regulator gearing up to probe online lenders - source

[CNBC] Wells Fargo launches 3% down payment mortgage

[WSJ] Insurers Seek Big Premium Boosts

[FOX] Report: Japan PM Abe Warns of Lehman-Magnitude Crisis

[Bloomberg] One Year After Bubble Burst, China’s Stock Market Has Gone Quiet

[FT] Hedge funds: Overpriced, underperforming

[FT] Global conditions echo post-Lehman crisis, Abe warns G7

[Reuters] G7 agrees need strong message on South China Sea, China says don't 'hype'

Wednesday, May 25, 2016

Wednesday Evening Links

[Bloomberg] Households in Fed Survey Felt Vulnerable Despite Economic Gains

[Bloomberg] Hedge Funds May Lose 25% of Assets, Blackstone’s James Says

[Bloomberg] Lending in China Is So Risky That Cows Are Now Collateralized

[Bloomberg] Europe’s Troubles Pile Up at Home as Leaders Cross Globe for G-7

Tuesday, May 24, 2016

Wednesday's News Links

[Bloomberg] Stocks Gain With Emerging Markets as Fed Seen Pulling Off Hike

[Bloomberg] Oil Extends Gains Near $50 as U.S. Crude Stockpiles Seen Falling

[Reuters] Asian shares gain, dollar firm as U.S. data soothes rate fears

[Bloomberg] China Weakens Yuan Fixing to Lowest Since 2011 as Dollar Climbs

[Bloomberg] U.S. Home Prices Climbed 5.7% in First Quarter From Prior Year

[Reuters] Euro zone hails 'breakthrough' with Greece, IMF debt deal

[WSJ] Big Banks Ladle On the Risk

[WSJ] Auto, Mortgage Delinquencies Climb in Energy Regions

[Bloomberg] Treasuries World’s Worst-Performing Bonds as Fed Turns Hawkish

[Washington Post] CEO pay climbs again, even as their stock prices don’t

[Bloomberg] Illinois’s Lost Year About to Become Two as Budget Cliff Nears

[Bloomberg] Banks Said to Devise Plans for Cutting Back Online Lending Risk

Tuesday Evening Links

[Reuters] Banks and tech drive Wall Street up over 1 percent

[Economist] Insurance In China: Safe or Sorry?

[FT] Hedge funds: Overpriced, underperforming

Monday, May 23, 2016

Tuesday's News Links

[Bloomberg] Stocks Climb as Financial Shares Lead Gains; Dollar Strengthens

[Bloomberg] China Stocks Fall for First Time in Three Days as Trading Wanes

[Bloomberg] Japanese Stocks Decline, Led by Exporters as Yen Holds Gains

[Bloomberg] Turkey Central Bank Cuts Overnight Lending Rate to 9.5%

[Bloomberg] Emerging Currencies Drop on Fed Rate Bets as Turkish Stocks Jump

[Bloomberg] Rupee in Longest Losing Run Since 2007 as Fed Drives Funds Away

[Bloomberg] Why the Most Seductive Narrative About the Fed's Relationship With Markets Might be Off the Mark

[Bloomberg] New-Home Sales in U.S. Surge to Highest Level in Eight Years

[Bloomberg] PBOC Dropped Market-Based Yuan System in January, WSJ Says

[WSJ] A Rare Look Inside China’s Central Bank Shows Slackening Resolve to Revamp Yuan

[Bloomberg] Iron Ore’s Pivot From Boom to Gloom Puts $50 Level Back in View

[Bloomberg] Euro Area Confronts Greek Debt Spiral With IMF Demanding Action

[Bloomberg] ECB Warns of Financial Turmoil as Populism Adds to Asia Risks

[WSJ] ECB Warns Against Rise of Populism

[Bloomberg] Insurance Industry Is Falling Out of Love With Hedge Funds

[CNBC] Check out the $100 billion hedge fund, and the challengers to the throne

[Bloomberg] Ukrainian Troop Deaths at Highest in a Year as Fighting Surges

[Reuters] Japan, Canada share 'serious concerns' on South China Sea: PM Abe

Monday Evening Links

[Bloomberg] Asian Stocks Decline as Yen Weighs on Japan, Fed Hawks Speak

[Bloomberg] U.S. Stocks Retreat on Fed Rate Uncertainty as Crude, Gold Drop

[Bloomberg] Deutsche Bank Credit Rating Cut by Moody’s on Overhaul Struggle

[Bloomberg] ‘Massive Bailout’ Needed in Debt-Saddled China, Analyst Chu Says

[Bloomberg] Chinese State Fund Taps WMPs in Financing Shift, Merchants Says

[Reuters] Investment banks suffer worst first quarter since financial crisis: survey

[Reuters] Emerging Markets-Brazil currency drops on local political woes

[Bloomberg] Brazil’s Budget Minister Takes Leave of Absence During Probe

Sunday, May 22, 2016

Monday's News Links

[Bloomberg] Bonds Rise With Yen as Fed Hangs Over Markets; Commodities Drop

[Bloomberg] Yen Buoyed by Japan Trade Surplus as U.S. Opposes Intervention

[Bloomberg] Brazil’s Stocks Fall as Political Scandal Returns to Spotlight

[Bloomberg] Oil Extends Drop as Canada Seeks to Resume Production After Fire

[Bloomberg] Rupee Has Longest Losing Streak in Five Years as Stocks Retreat

[Bloomberg] Defaults Have Already Spread Outside Commodities

[CNBC] Companies 'drowning in debt' despite almost $2 trillion in cash

[FT] Triple-A quality fades as companies embrace debt

[Reuters] Tight U.S. labor market may put pressure on inflation: Fed's Bullard

[Bloomberg] China’s Cash-Strapped Local Governments Mull Ways to Boost Funds

[Reuters] Euro zone business growth slows, but not in Germany, France

[FT] Fledgling emerging market reprieve ends as Fed hawks take wing

[Bloomberg] Modi Euphoria Threatens to Turn Into Bond Ennui as Reforms Slow

[Reuters] Japan May factory activity shrinks most in over three years as orders slump: flash PMI

[Reuters] Japan April exports suffer biggest drop in three months, bode ill for growth

[FT] Disdain for Abe narrative at home and abroad

[WSJ] CLO Debt Market Peps Up

[Washington Post] Turkey threatens to suspend agreements with EU

[Washington Post] South China Sea Watch: China

Sunday Evening Links

[Bloomberg] Asian Stocks Swing After Four Weeks of Losses as Fed Rates Loom

[Bloomberg] Oil Extends Drop as Canada Seeks to Resume Production After Fire

[Bloomberg] Tsipras Survives Austerity Vote, Opening Path for Loan Payment

[FT/CNBC] US close to passing test for June rate rise, Fed official says

[FT] Liquid alternative mutual funds leave investors disappointed

[WSJ] The High Cost of Ultralow Interest Rates

[Bloomberg] Merkel on Mission to Rescue Turkey Deal as Erdogan Tightens Grip

[WSJ] China’s Taiwan Squeeze

Sunday's News Links

[Bloomberg] Abu Dhabi Stocks in Worst Run Since October as Gulf Markets Drop

[Bloomberg] G-7 Shows Gaps on Currency Tactics as Leaders’ Summit Looms

[Bloomberg] Lost Seals And Other Excuses Used By Defaulting Chinese Firms

[CNBC] BOJ Governor Kuroda says he has monetary policy levers still to pull to hit inflation target

[Bloomberg] Hedge Funds That Choked on Momentum Stocks Taking Another Bite

[FT] China steps up war on banks’ bad debt

[Bloomberg] Turkey Ruling Party Anoints New Premier to Tighten Erdogan Grip

[CNBC] China pressures Taiwan's President Tsai Ing-wen to acknowledge One China

Saturday, May 21, 2016

Saturday's News Links

[Bloomberg] G-7 Warns on Weak Global Growth as Japan Bristles Over Yen

[Reuters] U.S., Japan disagreement on yen moves overshadows G7 meeting

[Yahoo Finance] Tech unicorns see greener pastures outside America

[WSJ] Swift Banking Network Struggles With Wave of Cyberattacks

[Reuters] 'One China' principle must be basis for relations with Taiwan: Xinhua

Friday, May 20, 2016

Weekly Commentary: Unambiguous Signals Disregarded

May 20 – Bloomberg (Susanne Walker Barton): “Treasuries fell, heading for their biggest weekly drop since November, as Federal Reserve officials indicated they’re considering a June interest-rate increase should economic data remain steady… A measure of volatility in the $13.4 trillion Treasury market rose Thursday to the highest level in more than a month. Investors were caught off guard by the hawkish tone of Fed communications, lulled into complacency amid signs of sluggish global economic growth.”

I’ll assume the FOMC would prefer to boost rates another 25 bps. They seek to at least appear on a path of “normalization,” dissatisfied with the “one and done” tag. Perhaps they have also become more attentive to the risks associated with prolonged near-zero rates for banks, insurance companies, money funds and the financial industry more generally. Recent economic data would tend to support a more hawkish bent, with a firming of GDP and inflation trajectories. I’ll stick with the theme that currently the key economic dynamic is neither growth or recession, but instead major imbalances and various boom and bust dynamics.

Members of the FOMC have voiced unease with market expectations having of late diverged from Fed thinking. The Fed expects a series of rate increases, yet the markets anticipate little movement on rates. The FOMC is “data dependent,” and sees economic fundamentals supporting a move toward a somewhat more normalized rate environment. Markets, on the other hand, see global market fragility and a Federal Reserve held hostage by unstable securities markets (and a “risk off”-induced “tightening of financial conditions”). The markets’ perspective is certainly supported by the Fed’s repeated skittish responses to any evolving “risk off” dynamic.

I’ll be surprised if the Fed boosts rates next month. And even after this week’s price adjustment, the markets are still pricing only a 30% probability of a June rate hike. As analysts have pointed out, the Fed meets just days before the big “Brexit” vote in the UK. More important to my analysis, I expect heightened global market fragilities to manifest by June 15th.

The EM fragility theme gathers support by the week. Losing 1% Thursday, the MSCI Emerging Markets ETF (EEM) posted a fourth straight weekly decline (down 0.2%). EEM has now dropped 8.7% from April 19th trading highs, in the process giving back all the 2016 advance. Worse yet, bond investors are turning skittish, joining their equities and currencies cohorts.

From Reuters (Sujata Rao): “Emerging assets have taken a dive too and BAML said emerging debt funds had seen their first outflows in 13 weeks, shedding $38 million. Emerging equities lost a far bigger $1.6 billion - their third straight week of outflows.”

May 20 – Bloomberg (Benjamin Bain): “Mexico’s financial stability is hanging in the balance as the peso’s tumble prompts a dangerous acceleration in outflows from the nation’s bonds, according to BNP Paribas SA. A pullback by foreigners is particularly worrisome for authorities, who have often cited peso bond holdings by international investors as a sign of stability… The extra yield that investors demand to hold Mexican government peso debt rather than U.S. Treasuries has surged this month and the securities have lost 8.8% in dollar terms…”

Talk that “Mexico’s financial stability is hanging in the balance” should be taken seriously. Mexico has been an EM investor/speculator darling. It’s worth noting that Mexico’s current account deficit jumped to 2.8% of GDP last year (up from 2014’s 1.9%) to the largest ratio in 17 years. Mexico’s external debt has doubled since 2013 (to $170bn), while the country’s international reserve holdings were little changed ($178bn) over this same period. The Mexican economy is expected to grow only about 2% this year, pressured by low crude prices.

The Mexican peso declined 1.0% this week, trading to the lowest level since February. The peso has dropped 7% against the dollar so far this month. Mexican stocks were hit 1.8% on Thursday. Mexico’s 10-year bond yields were up 26 bps over the past month.

The South African rand, another fundamentally vulnerable EM currency, dropped 1.5% this week to a two-month low. The Russian ruble sank 2.1%. The Colombian peso fell 2.0% to a one-month low. Brazil’s Bovespa equities index sank 3.7%. Turkish stocks were down another 1.9%.

When market attention returns to heavy debt loads and latent fragilities, Asia underperforms. The trading week saw Asian currencies under pressure almost across the board. The South Korean won fell 1.6% to a two-month low, while the Indonesian rupiah dropped 2.1% to a three-month low. Currencies in Malaysia, Indonesia, Thailand and Singapore were all down about 1%. China’s yuan slipped 0.3% to a 10-week low versus the dollar.

India’s rupee fell 1.0% to a three-month low, as Indian stocks declined 0.7%. Indian stocks now trade about 14% below 2015 highs. Many have viewed India as the new China: years of unlimited potential growth. And integral to the bull case has been hundreds of billions of potential infrastructure spending. With a new pro-reform and pro-business Prime Minister, the sky was to be India’s limit.

But India’s economic boom is increasingly vulnerable. The country runs a Current Account Deficit and is susceptible to any deterioration in international investor confidence. The banking sector is suspect. India is also suffering from drought and problematic food inflation. Reserve Bank of India Governor Raghuram Rajan has inspired global confidence, but he is now under attack from politicians who would prefer to scrap the central bank’s inflation mandate.

May 20 – Bloomberg (Vrishti Beniwal and Bibhudatta Pradhan): “The Indian lawmaker leading a charge to oust central bank Governor Raghuram Rajan says he’s backed by the ‘overwhelming majority’ of Prime Minister Narendra Modi’s party, raising risks for investors in Asia’s third-largest economy. Subramanian Swamy, a member of Modi’s ruling Bharatiya Janata Party and a rival to Finance Minister Arun Jaitley, wrote a letter to the prime minister earlier this week calling for Rajan to either be fired or dismissed when his term ends in September.”

In a world of endless QE, liquidity abundance and resulting investor confidence, India’s massive financing needs appear manageable. But QE has not worked as global policymakers anticipated. The BOJ has printed a Trillion, yet a 25% decline from last year’s highs has Japanese stocks benefiting little from unprecedented money printing. The situation in Europe is similar: European stock markets have little to show from the ECB’s Trillion of new “money.” And in both cases, consumer price inflation has proven impervious to an additional Trillion.

In the past, the inflationists would invariably claim that monetary stimulus was not working as prescribed only because it was not being employed in sufficient quantities. These days, only the fanatics refuse to accept that QE is not very effective – while coming with huge risks. And after betting the ranch on QE, there is today no consensus as to what to try next.

May 20 – Reuters (Leika Kihara and Stanley White): “A rift on fiscal policy and currencies has set the stage for G7 advanced economies to agree on a ‘go-your-own-way’ response to address risks hindering global economic growth at their finance leaders' gathering that kicked off on Friday. Japan backed away from its previous calls for coordinated fiscal action to jump-start global growth with Finance Minister Taro Aso saying on Friday that while some G7 countries can deploy more fiscal stimulus, others cannot ‘due to their own situations.’ That chimed with Washington's stance made clear by a senior U.S. Treasury official that there was no ‘one-size-fits-all’ for the right mix of monetary, fiscal and structural policies.”

Friday from the Wall Street Journal: “U.S. and Japan Heading for Standoff on Yen Devaluation,”
and from Reuters: “Japan, U.S. remain at loggerheads over yen policy.” What a far cry from Dr. Bernanke’s “enrich-thy-neighbor” (as opposed to “beggar-thy-neighbor”) that he previously used to describe the Bank of Japan’s aggressive monetary stimulus and devaluation. The theory and experiment just didn’t play out as expected. Proponents, however, persist with the “things are still a lot better than they would have been without QE.” The much more important issue is how in the world are central banks to now extricate themselves from deeply flawed policies that have so destabilized global finance? Are this week’s rising Treasury yields partially explained by renewed fears of EM central bank liquidations?

I believe historians (and many others) will look back at this period and struggle to comprehend how such Unambiguous Signals were Disregarded: Declining equities and commodities prices in the face of massive QE; out-of-control debt growth in China; EM financial and economic travails; competitive devaluations and wild currency market volatility; unfathomable global bond yields; sinking global bank stocks; hedge fund struggles in the face of aggressive monetary stimulus; U.S. political upheaval (deep divisions, Trump, Bernie, etc.); rising geopolitical pressure across the globe; and tensions between the U.S. and China heading to the boiling point. The VIX jumped to 17.6 Thursday afternoon, near a two-month high.

For the week:

The S&P500 increased 0.3% (up 0.4% y-t-d), while the Dow slipped 0.2% (up 0.4%). The Utilities were hit 2.5% (up 10.6%). The Banks rallied 4.2% (down 5.9%), and the Broker/Dealers jumped 3.2% (down 9.9%). The Transports rose 2.2% (up 2.2%). The S&P 400 Midcaps increased 0.7% (up 3.7%), and the small cap Russell 2000 gained 0.9% (down 2.1%). The Nasdaq100 rose 0.8% (down 5.0%), and the Morgan Stanley High Tech index advanced 2.7% (down 2.9%). The Semiconductors surged 5.0% (up 0.2%). The Biotechs jumped 4.5% (down 20%). With bullion down $21, the HUI gold index declined 2.3% (up 94.7%).

Three-month Treasury bill rates ended the week at 32 bps. Two-year government yields jumped 13 bps to 0.88% (down 17bps y-t-d). Five-year T-note yields surged 16 bps to 1.37% (down 38bps). Ten-year Treasury yields gained 14 bps to 1.84% (down 41bps). Long bond yields rose eight bps to 2.63% (down 39bps).

Greek 10-year yields increased six bps to 7.31% (down one bp y-t-d). Ten-year Portuguese yields declined five bps to 3.08% (up 56bps). Italian 10-year yields were unchanged at 1.47% (down 12bps). Spain's 10-year yields slipped three bps to 1.56% (down 21bps). German bund yields rose four bps to 0.16% (down 46bps). French yields increased three bps to 0.50% (down 5bps). The French to German 10-year bond spread narrowed one to 34 bps. U.K. 10-year gilt yields gained eight bps to 1.45% (down 51bps).

Japan's Nikkei equities index rallied 2.0% (down 12.1% y-t-d). Japanese 10-year "JGB" yields were unchanged at negative 0.12% (down 38bps y-t-d). The German DAX equities index slipped 0.4% (down 7.7%). Spain's IBEX 35 equities index increased 0.6% (down 8.1%). Italy's FTSE MIB index gained 0.5% (down 16.8%). EM equities were lower. Brazil's Bovespa index sank 3.7% (up 15%). Mexico's Bolsa slipped 0.5% (up 5.1%). South Korea's Kospi index fell 1.0% (down 0.7%). India’s Sensex equities index declined 0.7% (down 3.1%). China’s Shanghai Exchange was little changed (down 20.2%). Turkey's Borsa Istanbul National 100 index dropped 1.9% (up 6.5%). Russia's MICEX equities index declined 0.8% (up 7.4%).

Junk funds saw inflows of $1.135 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates added a basis point to 3.58% (down 26bps y-o-y). Fifteen-year rates were unchanged at 2.81% (down 24bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up one basis point to 3.78% (down 25bps).

Federal Reserve Credit last week expanded $8.9bn to $4.447 TN. Over the past year, Fed Credit increased $3.8bn. Fed Credit inflated $1.636 TN, or 58%, over the past 184 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week increased $0.3bn to $3.220 TN. "Custody holdings" were down $105bn y-o-y, or 3.2%.

M2 (narrow) "money" supply last week declined $9.7bn to $12.707 TN. "Narrow money" expanded $794bn, or 6.7%, over the past year. For the week, Currency increased $1.3bn. Total Checkable Deposits jumped $15bn, while Savings Deposits fell $26.2bn. Small Time Deposits and Retail Money Funds were little changed.

Total money market fund assets increased $4.3bn to $2.715 TN. Money Funds rose $110bn y-o-y (4.2%).

Total Commercial Paper dropped $16.7bn to $1.099 TN. CP expanded $135bn y-o-y, or 14.0%.

Currency Watch:

May 19 – Bloomberg: “The offshore yuan slid the most since January overnight as minutes of the Federal Reserve’s last meeting put the prospect of a June interest-rate hike on the table. The Chinese currency slumped 0.5 percent on Wednesday to the lowest level since Feb. 3. The retreat came as the dollar surged the most in six months after the Fed record showed most officials want to raise rates next month should the U.S. economy continue to improve… A resurgent greenback is shaking up a strategy that the People’s Bank of China pursued over the past three months -- a steady rate against the dollar, combined with depreciation against other major currencies.”

May 18 – Nikkei Asia Review (Motonao Uesugi and Takeshi Kawanami): “Japan and the U.S. continue to clash over whether Tokyo should step in to dampen a strengthening yen, with Japan's addition to an American list of potential currency manipulators generating further friction. A top U.S. Treasury official said Monday that the yen's recent moves have been ‘orderly,’ echoing a remark by Treasury Secretary Jack Lew in mid-April. But Lew had left the time period of those moves vague, whereas the senior official specified the past few months.”

The U.S. dollar index gained 0.8% this week to 95.30 (down 3.4% y-t-d). For the week on the upside, the British pound increased 1.0% and the Brazilian real gained 0.3%. For the week on the downside, the Swiss franc declined 1.5%, the Norwegian krone 1.5%, the South African rand 1.5%, the Japanese yen 1.4%, the Canadian dollar 1.3%, the Mexican peso 1.0%, the euro 0.8%, the Swedish krona 0.8%, the Australian dollar 0.7% and the New Zealand dollar 0.1%. The Chinese yuan declined 0.3% versus the dollar.

Commodities Watch:

May 16 – Bloomberg (Ranjeetha Pakiam): “The great gold rush of 2016 is gathering pace. Holdings in exchange-traded funds have now surged by a quarter, with investors taking advantage of lower prices over the past two weeks to enlarge stakes on rising concern about central bank policy making worldwide. The holdings have increased to 1,822.3 metric tons, the most since December 2013…, after bottoming at a seven-year low in January.”

The Goldman Sachs Commodities Index gained 1.5% (up 17.9% y-t-d). Spot Gold fell 1.7% to $1,252 (up 18%). Silver dropped 3.4% to $16.55 (up 20%). WTI Crude gained $1.38 to $47.75 (up 29%). Gasoline rose 2.8% (up 29%), while Natural Gas declined 1.9% (down 12%). Copper fell 1.2% (down 4%). Wheat dropped 1.5% (down 1%). Corn rose 1.0% (up 10%).

Fixed-Income Bubble Watch:

May 20 – Bloomberg (Michelle Davis): “There’s more cash sitting on company balance sheets than ever before. For the first time since 2012, that’s not enough. Combining all of the corporate cash in the U.S. wouldn’t cover the $1.8 trillion of corporate debt that’s coming due in the next five years, according to… Moody’s… That’s because U.S. companies have been borrowing more quickly than they’ve built up the record $1.68 trillion of cash… And more of that debt comes due sooner. ‘You’re seeing more and more borrowing,’ Richard Lane, a senior vice president at Moody’s, said… ‘The increase in leverage has been notable.’ Cash coverage of near-term maturities hasn’t fallen below 100 percent since 2012, and hasn’t been as low as its current 93% since the year before that… One reason may be that companies are making less money… Cash flow from operations declined 0.2% to $1.54 trillion in the 12 months ended in December 2015, the first time the metric declined… going back to 2007.”

May 17 – Yahoo Finance (Justine Underhill): “The U.S. energy sector (XLE) is facing $370 billion of debt, a number that has more than doubled in the past decade. But even as oil rebounds off 13-year lows, many energy companies are struggling to stay afloat. To simply make the interest payments on the debt, energy companies shelled out $16.7 billion last year—about half of their total operating profit… The figures from the past quarter are increasingly grim: over 86% of energy sector operating profits were used to cover the interest payments on debt.”

May 16 – Bloomberg (Claire Boston): “Dell Inc. is paying up to sell more than $16 billion of secured bonds that will finance its $67 billion acquisition of EMC Corp. in what’s likely to be the week’s premier debt offering. While the computer maker’s proposed notes have been given the lowest investment-grade, the yields offered may entice investors who typically buy higher-rated junk bonds, said Matthew Duch, a money manager at Calvert Investments… The longest part of the offering, debt maturing in 30 years, is being marketed at a yield of 6.25 percentage points above similar-maturity Treasuries…”

Global Bubble Watch:

May 20 – Financial Times (Yukako Ono): “More than 70 corporate borrowers have defaulted across the world so far this year, piling up at the fastest pace since 2009 and closing in on the 113 issuers that defaulted for all of 2015, according to Standard & Poor’s. The tally of defaults has risen by 10 in the past week alone, the rating agency said, of which eight were from the energy and natural resources sector.”

May 16 – Bloomberg (Donal Griffin): “Deutsche Bank AG is stuck in a vicious circle as co-Chief Executive Officer John Cryan seeks to overhaul an impaired business that needs more capital, which the bank would struggle to raise if it tried to tap investors, according to Berenberg. The Frankfurt-based lender’s biggest problem is excessive leverage, Berenberg’s James Chappell wrote… that said the bank faces ‘insurmountable headwinds.’ He cut his rating to sell from hold and reduced his target price for the stock to 9 euros per share, the lowest among more than 30 analysts tracked by Bloomberg and about 40% below current levels.”

May 19 – Financial Times (Jennifer Hughes): “It says a lot about the potential for corporate restructuring in the region that Josef Athanas is preparing to forego the US energy bankruptcy boom and move to Hong Kong next month. The Latham & Watkins partner has no hands-on experience of Asia, but he is an expert in US reorganisations and will be joining a bulked-up team in the region readying for an expected wave of activity. ‘This opportunity looks greater and more interesting,’ he says. ‘I’m sure that however it happens, we will be busy.’ …Asian companies rarely follow western patterns when it comes to workouts and progress towards streamlined, predictable processes is still likely to be slow. ‘Unlike the US and Europe it is often the case in Asia that you do not have well-tested legal systems and procedures. Much of what is done in the region breaks new ground and tends to require more creativity,’ says Gary Hamp, another partner at Latham & Watkins…”

May 19 – Bloomberg (Stephen Morris): “Quiet trading floors are set to depress global investment banks’ second-quarter revenue 24%, with the underwriting and equities businesses facing the biggest drops, according to analysts at JPMorgan Chase & Co. Equity-trading revenue will retreat 28% compared with the same period in 2015, while fixed income, currencies and commodities, or FICC, will drop 12%, analysts led by Kian Abouhossein said… The analysts cut their 2016 earnings estimates for seven of the eight global firms they cover. Trading of interest-rates products and currencies is “showing a normal seasonal slowdown,” Abouhossein wrote. In equity derivatives, ‘lower revenues are driven by ongoing weakness in Asia.’”

May 18 – Bloomberg (Julie Verhage): “Goldman Sachs… has become the latest bank to turn more bearish on stocks. Goldman analysts led by Christian Mueller-Glissmann have downgraded global equities to 'neutral' over the next 12 months, recommending investors turn to cash instead. The firm also upgraded commodities to neutral as it sees oil demand rising, while sticking with an 'overweight' on corporate debt and 'underweight' on bonds.”

U.S. Bubble Watch:

May 16 – Bloomberg (Lu Wang): “Corporate America has its eye on a new target as executives look to tighten their belts amid a slump in profits -- and this time shareholders won’t like it. After snapping up trillions of dollars of their own stock in a five-year shopping binge that dwarfed every other buyer, U.S. companies from Apple Inc. to IBM Corp. just put on the brakes. Announced repurchases dropped 38% to $244 billion in the last four months, the biggest decline since 2009… Coming amid the worst profit slump since the financial crisis, the slowdown may signal companies are preserving cash as economic and political uncertainty whips up from Europe to China and in the U.S. At stake is the primary source of buoyancy for the second-longest bull market in history, at a time when individuals and money managers are bailing out and valuations sit near 14-year highs.”

May 16 – Reuters (Tom Hals): “SandRidge Energy Inc and Breitburn Energy Partners LP filed for bankruptcy protection on Monday, the latest in a surge of Chapter 11 filings among U.S. energy producers. The biggest U.S. energy price crash in a generation has now pushed more than 60 North American oil and gas producers to seek protection from creditors since early 2015… As of March 31, SandRidge estimated it had total assets of $7.0 billion and total debt of $4.0 billion, and Breitburn listed assets of $4.7 billion and liabilities of $3.4 billion. In the past three weeks, producers with about $25 billion in debt have filed for U.S. bankruptcy protection…”

May 16 – Bloomberg (Sridhar Natarajan): “Wall Street has cut its lending to the riskiest companies, shifting its financing to nonbanks that make the loans instead, according to a team of analysts at the Federal Reserve Bank of New York. ‘Since those policies reach beyond individual banks and target risk in the entire banking system, they are more likely to trigger significant responses that may have unintended consequences,’ said the report by Sooji Kim, Matthew Plosser and João Santos. Nonbanks, part of what’s called the shadow banking system, are financial institutions that don’t take deposits and fall outside the purview of banking regulators. They’ve increased their borrowing from banks, possibly to finance their growing leveraged-lending activity, the study found.”

May 17 – Bloomberg (Noah Buhayar and Laura J Kellero): “LendingClub Corp. shares resumed their slide in New York trading Tuesday amid a scandal that cost the chief executive officer his job, prompted investors to suspend debt purchases and spurred a U.S. Justice Department probe. The stock tumbled 11% to $3.52…”

May 16 – Financial Times (Kadhim Shubber): “Last year, online lenders were generally spending their time raising eye-watering sums of money and talking about how great the champagne tastes. This year, they’re busy firing employees, getting in trouble with Wall Street and getting used to the taste of water. The problem, in lending as in life, is that yesterday’s boozing is today’s hangover. In 2015, investors were clamouring to buy loans from online lenders and the bottleneck was on the borrower side. We’ve seen the effect of that in rising delinquencies and bond deals gone bad.”

May 17 – Bloomberg (Alison Vekshin): “A custom-built home in the heart of California’s Silicon Valley had its price cut by $500,000 last week after sitting on the market since the end of March -- a move that would’ve been almost unfathomable a year ago and a signal that frenzied demand has peaked. The six-bedroom, five-bath house in Palo Alto -- located blocks from Stanford University and the homes of Google co-founder Larry Page and Steve Jobs’s widow, Laurene Powell Jobs -- is now listed for $7.5 million. It joins a growing inventory of high-end homes in the area that are taking longer to sell… ‘We’ve recently noticed a slowdown,’ Jack Woodson, who works at Alain Pinel Realtors in nearby Menlo Park, said… ‘Buyers are taking more time to decide about making offers.’”

May 16 – New York Post (Lois Weiss): “The fall-off in sales at US brick-and-mortar stores is starting to hit Manhattan’s pricey commercial real estate. Building owners across town are being forced to cut their rents as sales slow and retailers become cautious, a report due out Monday reveals. Retail rents in 10 of 17 top Manhattan shopping corridors are getting marked down — some by as much as 16%, the report shows.”

May 19 – Bloomberg (Julie Verhage): “Bank of America analysts just checked out of the hotel industry. In a note published on Thursday, BofAML analysts led by Shaun Kelley cited a raft of pressures on the lodging sector, such as ‘soft’ corporate demand, a glut of brick-and-mortar hotels, and pressure brought to bear by the Internet, including the rise of home-sharing startup Airbnb Inc. The team is downgrading Hilton Worldwide Holdings Inc., Hyatt Hotels Corp., and Hersha Hospitality Trust from "buy" to ‘neutral’ and cutting RLJ Lodging Trust from a "buy" to ‘underperform.’ The analysts estimate that the sector could see shares fall as much as 40% if valuations move back toward their historical average.”

May 19 – Bloomberg (David Roman): “Moody’s… lowered its growth forecast for the U.S. economy this year to 2% from 2.3% to account for a weak first quarter, while anticipating underlying resilience through 2017. Moody’s said it expects the Federal Reserve to raise its benchmark interest rate ‘at most’ twice this year, according to a statement it e-mailed. The ratings company also sees the country’s gross domestic product rising 2.3% in 2017. One of the biggest risks facing the global economy is a more pronounced slowdown in China than currently anticipated, given that it could have a ‘significant’ impact through roiling financial markets and spurring investors to cut back on riskier assets.”

May 16 – Financial Times (Yuan Yang): “An unprecedented influx of Chinese money into US real estate is slowing following moves by Beijing to restrict the amount of funding leaving the country, according to a report. In recent years a tide of Chinese money has hit global property markets, with buyers from the country now the largest single group of foreign investors in residential property in the US, UK and Australia. But after inflows of $110bn into US real estate between 2010 and 2015, investment in residential American property is expected to drop in the next two years, according to… the US-based Asia Society and the Rosen Consulting Group.”

May 16 – Reuters: “Chinese investment in the U.S. real estate market has surpassed $300 billion and is growing despite China's economic weakness and increased currency controls, the authors of a new report said… Between 2010 and 2015 Chinese buyers bought $93 billion in residential real estate, nearly $208 billion of mortgage-backed securities, and roughly $17 billion of commercial real estate, including office towers and hotels, according to the report by the Rosen Consulting Group and the Asia Society.”

Federal Reserve Watch:

May 18 – Wall Street Journal (Kate Davidson and Jon Hilsenrath): “Federal Reserve officials sent skeptical investors a sharp warning Wednesday that an interest-rate increase is still in play for June’s policy meeting if the economy keeps improving. Until a few days ago, traders in futures markets saw almost no possibility the Fed would move short-term interest rates up at midyear… Fed officials concluded a rate increase in June was a distinct possibility when they last gathered to discuss the economy, according to minutes of their April 26-27 policy meeting…”

China Bubble Watch:

May 14 – Reuters (Pete Sweeney and Jessica Macy Yu): “China's investment, factory output and retail sales all grew more slowly than expected in April, adding to doubts about whether the world's second-largest economy is stabilizing. Growth in factory output cooled to 6% in April…, disappointing analysts who expected it to rise 6.5% on an annual basis after an increase of 6.8 percent the prior month. China's fixed-asset investment growth eased to 10.5% year-on-year in the January-April period…, and down from the first quarter's 10.7%. Fixed investment by private firms continued to slow… Investment by private firms rose 5.2% year-on-year in January-April… ‘It appears that all the engines suddenly lost momentum, and growth outlook has turned soft as well,’ Zhou Hao, economist at Commerzbank in Singapore, said…”

May 19 – Bloomberg: “Defaults and pulled sales are starting to gum up China’s bond refinancing machine. Chinese companies issued 382.7 billion yuan ($58.5bn) of notes onshore this month, down 11% from the same period in April and 57% March… With just eight trading days to go, fundraising may fall short of the record 547.3 billion yuan of debt due. That would mark a shift after sales were 83% more than maturities in April and almost three times higher in March. The faltering $3 trillion corporate bond market will test Premier Li Keqiang’s determination to weed out zombie companies dragging on growth in the world’s second-biggest economy. At least 10 issuers have reneged on onshore debt obligations this year, while 153 Chinese firms have pulled 175 billion yuan of domestic sales this quarter… ‘Many Chinese companies are relying on new borrowings to repay their old debt,’ said Liu Dongliang, a senior analyst at China Merchants Bank Co. in Shenzhen. ‘If they can’t get the money they need, more will default.’”

May 18 – Reuters (Samuel Shen, David Lin and John Ruwitch): “China is stepping up its crackdown on risky shadow banking with plans to rein in explosive growth of fund houses' subsidiaries - a $1.5 trillion business widely used by banks to move their loans off balance sheet to skirt regulatory oversight. The Asset Management Association of China (AMAC) will raise the thresholds for fund houses to establish subsidiaries and use capital ratios to limit the subsidiaries' ability to expand... Beijing's long crackdown on shadow banking has taken on fresh urgency amid a growing number of company defaults as the economy cools, and as policymakers worry about the risks of too much debt-fueled stimulus. ‘The business of fund companies' subsidiaries has exploded in recent years because there have been almost no capital requirements, and their investment scope is very wide,’ said Ivan Shi, head of research at fund research firm Z-Ben Advisors.”

May 16 – Bloomberg: “A Chinese shipbuilder defaulted on bonds, becoming at least the 10th company to miss local debt payments in the world’s third-biggest note market this year. Evergreen Holding Group Co. said it can’t make full payment due Monday… The company… sold the 400 million yuan ($61.3 million) of bonds with a coupon rate of 7.95% in May 2015. Credit woes are spreading in China as both privately held and state-owned firms struggle with record debt repayments this year amid the worst economic slowdown in a quarter century.”

May 18 – Reuters (Clare Jim and Brenda Goh): “China's home prices posted their fastest growth in two years in April, with gains in regional centers indicating a broader recovery in the country's housing market beyond the major cities. However, while Shanghai and Shenzhen remained the country's two hottest housing markets, there are signs recent tightening measures are beginning to temper demand… Average new home prices in 70 cities climbed 6.2% in April from a year ago, up from March's 4.9% rise…”

May 19 – Reuters (Saikat Chatterjee): “China's desire to hold up headline growth figures may increase longer-term risks for the world's second-largest economy, ratings agency Moody's… said… Even though the ratings agency has kept its growth forecast for China unchanged at 6.3% for this year, it said headline growth continues to be supported by increasing amounts of debt... ‘Delivering target headline growth rates as the primary objective could come at a cost to the quality of growth due to further misallocation of resources, and limit the government's ability to address imbalances in the economy through implementation of reforms,’ authors Madhavi Bokil and Dima Cvetkova wrote.”

May 16 – Wall Street Journal (James T. Areddy): “When China’s government set out a few years ago to turn the country’s financial sector into a better driver of growth, a dozen tycoons pooled funds to set up a new bank. Today, the year-old Shanghai Huarui Bank Co. is the clearest example of something different in a Shanghai free-trade zone established to promote financial innovation. With a more-aggressive type of banking centered on selling small-time investors short-term, high-yield products online, it also illustrates how Chinese regulators are allowing lines to blur between traditional banking and lightly regulated Internet-based finance. Moody’s… recently warned that such blurring in China’s banking industry, which it called ‘rising interconnectedness,’ is a sign of the ‘evolving and elusive nature of risks in the financial system.’ China says 1,200 nonbank financial firms have faced problems returning money to investors this year.”

May 15 – Financial Times (Gabriel Wildau): “Implicit guarantees are ubiquitous in China, but one company went a step further when it appealed to the central bank to give an explicit reassurance to creditors that the government will not permit any default. China City Construction Holding Group Co saw yields on its Hong Kong-traded ‘dim sum’ bonds spike recently after a surprise privatisation, highlighting the ways moral hazard distorts capital allocation in the world’s largest economy. CCCC was previously owned by a unit of the housing ministry, but a private equity fund took control late last month following a complex asset restructuring.”

EM Bubble Watch:

May 18 – Bloomberg (Olga Tanas Andrey Biryukov): “As risks for recession-hit Russia subside at home, top officials are sounding alarms about another gathering threat. President Vladimir Putin hosts leaders from across Southeast Asia this week, and policy makers are increasingly turning their focus to perils from China. Any ‘problems’ in the second-biggest economy will feed through to Russia via commodities markets, according to Deputy Finance Minister Maxim Oreshkin… Squeezed by the crash in oil prices and Western sanctions over the conflict in Ukraine, Russia has looked to Asia and China, in particular, as it searches for a way out of its longest recession in two decades.”

May 16 – Bloomberg (Bei Hu): “At first glance, it might not seem like wallets are tight inside Riyadh’s Centria Mall. On a weekday afternoon, women with covered faces stroll the halls, drifting in and out of Dior and Burberry outlets. But they’re not buying like they did last year, says Mohammed Fahmawi, a manager at the Saudi Arabian mall’s Gucci store. A year ago, more than 100 customers would come through his doors daily, Fahmawi said. Now, it gets 20 on a good day. Traffic’s also down at the Cartier store nearby. ‘People are afraid,’ he said, citing the economic slowdown brought on by the oil price slump. ‘They don’t want to spend their money.’”

Japan Watch:

May 19 – Reuters (Leika Kihara): “Bank of Japan Governor Haruhiko Kuroda said on Thursday the central bank would not hesitate easing monetary policy further if market moves, including a spike in the yen, threatened prospects for achieving its 2% inflation target. Kuroda shrugged off the view that Japan was triggering a currency devaluation war with its ultra-loose monetary policy, saying that its aggressive easing steps were aimed purely at achieving its price goal. ‘Like other major advanced nations, the BOJ is conducting monetary policy for the domestic purpose of achieving our inflation target,’ a view recognized by the global community, Kuroda told reporters in Sendai, northeastern Japan, ahead of a two-day G7 finance leaders' gathering that kicks off on Friday.”

ECB Watch:

May 20 – Bloomberg (Piotr Skolimowski): “Mario Draghi is discovering that the European Central Bank’s purchasing power isn’t as strong as he had hoped. Less than two years since the ECB president said he would boost the institution’s balance sheet to 3 trillion euros ($3.4 trillion) to revive inflation, he has reached that way-point and is on the verge of setting a new record. Unfortunately, inflation has only worsened.”

May 18 – Wall Street Journal (Tom Fairless): “A law professor who is suing the European Central Bank in Germany’s top court warned the institution to expect legal ‘surprises’ in coming weeks, as his clients race to derail the ECB’s €1.8 trillion ($2.03 trillion) bond-purchase program before it ends in March. Markus C. Kerber, an attorney and professor of public finance at the Technical University of Berlin, filed a lawsuit last week against the ECB’s quantitative-easing program on behalf of four German businessmen. The lawsuit is only the latest to be filed with Germany’s constitutional court over ECB bond-purchase programs, underlining the tensions between the eurozone’s central bank and Germany, its largest shareholder and host nation… Tensions have escalated since the ECB ramped up its bond-buying program this March…”

May 16 – Reuters (Michelle Martin): “Recent strong criticism of the European Central Bank's monetary policy may be the result of some measures having blurred the lines between monetary and fiscal policy, ECB Governing Council member Jens Weidmann told a German newspaper… ‘The vehemence of the debate perhaps also stems from some of the measures we have taken so far having blurred the boundaries between monetary and fiscal policy and having redistributed government liability risks via central bank balance sheets,’ he said, adding this had made the ECB more vulnerable to attack… He said he did not approve of discussions about ‘helicopter money’, or free cash dished out to citizens in a bid to stimulate spending and inflation, and added that it was not on the table for the ECB's Governing Council.”

Europe Watch:

May 19 – Reuters (An Strupczewski): “The euro zone and International Monetary are struggling with Greece's debt crisis - not with Athens this time, but with each other over when to give Greece a break on its future massive debt repayments. The euro zone has begun talks on debt relief for Greece but wants to postpone the final decision until 2018; the IMF insists Greek debt repayment is unsustainable and investors need clarity now. Euro zone finance ministers are likely to forge a tentative plan when they meet next Tuesday - what in Brussels-speak is known as a political agreement. But their offer is unlikely to be anything but highly conditional, euro zone officials preparing the talks said. The gist is to find a way to lower Greece's debt-repayment burden without actually cutting the debt itself via a so-called haircut. Instead, Greece's debt would be "re-profiled" - less interest, longer maturities, limits based on growth etc.”

May 19 – Reuters (Gernot Heller): “Many euro zone countries have neither the leeway nor any urgent need to increase fiscal spending, so they should focus on reform instead to improve their growth potential, Jens Weidmann, the head of Germany's Bundesbank, said… An expansionary monetary stance is appropriate for now but should not be maintained longer than necessary, because the negative side effects grow over time… ‘Expansive monetary and fiscal policies will not be able to boost growth in the long run,’ said Weidmann…”

Brazil Watch:

May 18 – Bloomberg (Peter Millard and Paula Sambo): “Petroleo Brasileiro SA, the state-run oil producer at the center of Brazil’s biggest ever corruption scandal, offered record-high interest rates to entice investors to its first international bond sale in a year. Petrobras sold $5 billion five-year notes to yield 8.625% and $1.75 billion of 10-year notes to yield 9%... The oil producer said it would use proceeds from the sale to buy back as much as $3 billion in notes due in 2018.”

Geopolitical Watch:

May 15 – Reuters (Benjamin Kang Lim): “China condemned the U.S. Defense Department's annual report on the Chinese military…, calling it deliberate distortion that has ‘severely damaged’ mutual trust. In its annual report to Congress on Chinese military activities, the U.S. Defense Department said… that China is expected to add substantial military infrastructure, including communications and surveillance systems, to artificial islands in the South China Sea this year. China's Defense Ministry spokesman Yang Yujun expressed ‘strong dissatisfaction’ and ‘firm opposition’ to the Pentagon report and said it has ‘severely damaged mutual trust’, state news agency Xinhua reported.”

May 20 – Reuters (Idrees Ali and Megha Rajagopalan): “Beijing demanded an end to U.S. surveillance near China on Thursday after two of its fighter jets carried out what the Pentagon said was an ‘unsafe’ intercept of a U.S. military reconnaissance aircraft over the South China Sea. The incident, likely to increase tension in and around the contested waterway, took place in international airspace on Tuesday as the plane carried out ‘a routine U.S. patrol,’ a Pentagon statement said... ‘It must be pointed out that U.S. military planes frequently carry out reconnaissance in Chinese coastal waters, seriously endangering Chinese maritime security,’ China's Foreign Ministry spokesman Hong Lei Hong told reporters. ‘We demand that the United States immediately cease this type of close reconnaissance activity to avoid having this sort of incident happening again,’ Hong said.”

May 19 – CNBC (Seema Mody and Ted Kemp): “China's attempts to claim a nearly 1.4-million-square-mile swathe of open ocean are without precedent and probably without legal merit, but Beijing continues to assert its right to the economically critical zone — and increasingly puts its claims in military terms. Speaking to a small group of reporters in Beijing on Thursday, a high-ranking Chinese official made his warning clear: The United States should not provoke China in the South China Sea without expecting retaliation. ‘The Chinese people do not want to have war, so we will be opposed to [the] U.S. if it stirs up any conflict,’ said Liu Zhenmin, vice minister of the Ministry of Foreign Affairs. ‘Of course, if the Korean War or Vietnam War are replayed, then we will have to defend ourselves.’ The so-called ‘nine-dash line’ that China has drawn over most of the South China Sea — a gargantuan territorial claim that stretches about 1,200 miles from its shores — would give Beijing control over a zone that's estimated to handle about half of global merchant shipping, a third of the planet's oil shipping, two-thirds of global liquid natural gas shipments, and more than a 10th of Earth's fish catch.”

May 14 – BBC: “President Vladimir Putin has escalated Russian criticism of a new US missile defence station in Romania, saying his country will ‘neutralise emerging threats’. He argued it was aimed at weakening Russia's nuclear power and vowed to increase Russian defence spending. US President Barack Obama voiced concern about Russia's ‘growing aggressive military presence’. Nato says the base is aimed at potential threats from the Middle East. The US on Thursday activated the estimated $800m missile shield in Deveselu, southern Romania.”

May 19 – Reuters (Ruby Lian and David Lawder): “China said it would persist with controversial tax rebates to steel exporters to support the sector's painful restructuring, defying a United States move to impose punitive import duties on Chinese steel products. A worldwide steel glut has become a major trade irritant, with China under fire from global rivals who say it is dumping cheap exports after a slowdown in demand at home. In a marked escalation of the spat, the United States…. said it would impose duties of more than 500% on Chinese cold-rolled flat steel, widely used for car body panels, appliances and in construction.”

May 16 – New York Times (Paul Mozur and Jane Perlez): “Chinese authorities are quietly scrutinizing technology products sold in China by Apple and other big foreign companies, focusing on whether they pose potential security threats to the country and its consumers and opening up a new front in an already tense relationship with Washington over digital security. Apple and other companies in recent months have been subjected to reviews that target encryption and the data storage of tech products, said people briefed on the reviews…”

May 19 – Reuters (Humeyra Pamuk and Nick Tattersall): “Turkey's Transport Minister Binali Yildirim emerged… as the likely new leader of the ruling AK Party and therefore the next prime minister, cementing President Tayyip Erdogan's hold on government as he seeks to extend his powers. Yildirim, 60, and a close ally of Erdogan for two decades, will be the sole candidate for the AKP leadership at a special party congress on Sunday… A co-founder with Erdogan of the AKP, Yildirim has been the driving force behind major infrastructure projects in Turkey which were one of the pillars of the party's electoral successes during its first decade in power.”

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