Saturday, May 21, 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.”