Saturday, June 4, 2016

Weekly Commentary: Monkey with Money at Your Own Peril

With markets on the rather quiet side, I awoke Friday anticipating a more theoretical focus for this week’s CBB. But then May’s surprisingly dismal jobs report – 38,000 seasonally-adjusted jobs versus consensus expectations of 158,000 – threw the markets for a loop. Bond yields sank - at home and abroad. Currency markets went haywire, with the Japanese yen surging 2% versus the dollar. The U.S. dollar index ended Friday’s session down 1.75%, its biggest one-day decline since December.

June 3 – Bloomberg (Liz McCormick): “Bond traders have a message for the Federal Reserve: Don’t even think about raising interest rates this month. The world’s biggest debt market soared Friday, driving yields lower, after government data showed U.S. employers added the fewest workers in almost six years last month. For traders, the figures drove the final nail in the coffin as far as bets that the central bank would lift rates when it meets June 14-15. The probability of a June hike plunged to 4%, from about 22% before the report’s release. It was 30% a week ago…”

Two-year Treasury yields dropped 11 bps on Friday (“largest daily fall in 8 months”) – and were down 14 bps on the week (“largest weekly decline since October 2014”). Yet it wasn’t just Treasury yields on the decline. Friday trading saw German 10-year bund yields decline five bps to a record low 0.068%. Ten year U.K. gilt yields sank 16 bps this week to close at a record low 1.27%.

June 3 – Bloomberg (Jonathan Levin and Ye Xie): “Bond bears were licking their wounds after a weaker-than-forecast May jobs report sent Treasuries surging. Data released later Friday suggest the pain was widespread. Hedge funds and other speculative investors were net short Treasury two-year note futures in the week ended May 31 by the most since before the financial crisis, according to U.S. Commodity Futures Trading Commission data. Two-year notes surged Friday by the most since September…”

Global markets have not been cooperating with the leveraged sect. Just as market operators were becoming comfortably positioned for higher U.S. rates and a stronger dollar, the payroll data turned weak and previous growth was revised lower. Basically, job creation has been on a steady downtrend for the past six months. Perceptions had of late swung in the direction that a general firming of U.S. economic data (and relatively stable global markets) provided a window for the Fed to bump rates a bit higher. The markets rather abruptly Friday morning shifted to the view that the Fed might have once again missed its timing for a rate rise. One and done.

So the yen currency short – a seemingly enticing trade with Japan in disarray and the Fed about to hike rates – suddenly turned into a wretched bear trap. The yen surged 3.4% this week, charging back to near 18-month highs. The commodity currencies, ostensibly tantalizing shorts with the dollar rally gaining momentum, rather abruptly ripped traders’ faces off. For the week, the South African rand surged 4.0% and the New Zealand dollar rose 3.8%. The Australian dollar rallied 2.6% this week. And speaking of “rip your face off” rallies, gold stocks (HUI) surged 13.9% this week. Again, with the dollar rallying and bullion under pressure, the gold equities short trade was attracting attention again. So many speculative macro trades bludgeoned this week.

Global financial stocks have turned hyper volatile. U.S. Banks (BKX) dropped 2.25% during Friday’s session, and the Broker/Dealers (XBD) fell 2.20%. It was quite a reversal from last week, when the banks gained 3.2% and the broker/dealers surged 4.5%. Yet the really big moves were, ominously enough, in Europe.

Europe’s STOXX 600 Banks Index sank 5.4% this week (down 2.17% Friday), increasing 2016 losses to 19.6%. Italian bank stocks were clobbered 8.4% (down 2.84% Friday), ending the week just off early April’s three-year lows. Italy’s banks closed the week down 39% y-t-d. The Italian stock market (MIB) was down 3.8% this week, increasing y-t-d losses to 18.3%. Spanish stocks (IBEX) dropped 3.4%, increasing 2016 declines to 7.8%. Germany’s DAX fell 1.9% this week and France’s CAC 40 dropped 2.1%. European equities are quickly giving back what had been an unimpressive rally.

European bond markets have been confirming that all is not well. It was a week of record low German bund yields and widening periphery spreads. Portuguese 10-year bond spreads widened 20 bps this week, with Greek spreads 13 bps wider. Spanish and Italian 10-year spreads were five wider.

Analysts have been quick to note U.S. equity market resiliency. The S&P500 ended the week almost exactly unchanged, outperforming most developed markets. Below the surface there is ample volatility. While the financials were under heavy selling press, the Utilities jumped 2.4%. The small cap rally continued, with the Russell 2000 gaining 1.2%. The squeeze in the biotechs persevered, with the BTK up 2.7% this week. The bottom line is that market dynamics continue to be extraordinarily challenging.

It’s now been more than seven years since I first warned of a new “global government finance Bubble.” I had no idea that by 2016 the Fed’s balance sheet would have inflated to almost $4.5 TN. The thought that the BOJ and ECB would each be expanding their balance sheets by about $1.0 TN annually never came to mind. I did not at the time contemplate that the ETF and hedge fund industries would both balloon to $3.0 TN. I would have argued against the possibility for negative interest-rates and $10.0 TN of negative-yielding global debt securities. I expected a Bubble in China, but a $35 TN Chinese banking system and $8.0 TN of so-called “shadow banking” were inconceivable back in 2009. And clearly I expected this “Granddaddy of all Bubbles” to have succumbed before now.

I didn’t argue for a likely hyperinflation scenario. What was clear in my mind was that once the inflation of Central bank and sovereign Credit commenced it was going to be extremely difficult to control. Monkey with Money at Your Own Peril. I’ve always believed that using central bank Credit to inflate securities markets was both a trap and a monumental mistake. After the disastrous consequences of employing mortgage Credit for system reflation purposes, there was little possibility that inflating the securities markets would end any better. Yet after a few months of relative global market calm, the backdrop again has the appearance of being sustainable. I’ll continue to chronicle why I believe it’s late in the game.

It’s become increasingly obvious that Japan’s QE and negative rate endeavor is floundering. A similar prognosis for ECB reflationary measures is at this point only somewhat less evident. Historic bond Bubbles proliferate. Meanwhile confidence in economic fundamentals, the course of policymaking and general banking system soundness wavers. There is little to indicate that either the BOJ or ECB will be capable of extricating themselves from flawed policies.

With the Federal Reserve having concluded QE (for now), many present the U.S. as evidence that exit strategies are achievable and easily managed. It’s definitely not that straightforward. I would contend that ending QE was only possible because of the massive “money” printing operations being orchestrated in Tokyo and Frankfurt. I believe enormous amounts of finance have made their way into U.S. securities markets and the real economy, either directly or indirectly related to BOJ and ECB policymaking. Combined with historic Chinese “Terminal Phase” Credit excess, there was more than ample Credit and liquidity to propel the “global government finance Bubble” finale.

Yet there are today serious issues with BOJ and ECB policy measures as well as the Chinese Credit boom. I would argue that BOJ and ECB reflationary policies maintained the appearance of success only so long as the yen and euro were being devalued. For one, currency devaluation worked somewhat to mitigate domestic deflationary pressures. And, importantly, aggressive BOJ and ECB (QE and interest-rate) policies created extraordinary speculative opportunities for shorting the yen and euro. “Carry trades” and myriad leveraged strategies proliferated in order to profit from unusually conspicuous policy-orchestrated devaluations, in the process boosting securities market liquidity throughout global markets.

I tend to view yen and euro devaluations as part of last gasps in both policy experimentation and leveraged speculation. For a couple years, devaluation provided extraordinary speculative opportunities, in the process helping to mask the general deteriorating backdrop for leveraged speculation. Now, the yen is near 18-month highs against the dollar and the euro not far from one-year highs. Currency markets generally have turned volatile and uncertain. Slam dunk trades are a thing of the past. The backdrop is no longer conducive to leverage.

Integral to my bursting global Bubble thesis, I believe a monumental de-risking/de-leveraging cycle has commenced. This fledgling “risk off” backdrop helps to explain why BOJ and ECB QE measures have of late had such muted impact on global risk markets. At the same time, ongoing liquidity operations continue to bolster market sentiment in the face of a disconcerting fundamental global backdrop. Clearly, relative stability in China in concert with BOJ and ECB policy measures has been key to containing “risk off” over recent months.

China, commodities and EM have been the global markets’ weak links. The view has been that dollar weakness helps to ameliorate these fragilities. At the same time, there is the issue of how much speculative finance flowed into the U.S. in pursuit of king dollar returns. One more Crowded Trade to unravel? And there’s another issue worth pondering: confidence in QE has waned considerably over recent months. There’s increasing talk of “helicopter money” and central bank forgiveness of government debt obligations. Both would create serious issues in terms of the true underlying value of central bank Credit. And who holds the vast majority of central bank Credit? The major global commercial banks have accumulated Trillions of central bank obligations, as assets backing deposit liabilities. Perhaps waning confidence in central banking helps explain why the big global bank stocks trade as if something very serious is unfolding. It would also explain the seemingly insatiable appetite for safe haven assets.

June 2 – Bloomberg (Tracy Alloway): “Which fixed-income asset class is growing fast, outperforms similar debt issues, and rarely defaults? Emerging market 'quasi-sovereign' bonds, of course! At some $600 billion, debt sold by state-supported companies in emerging markets ranging from China to Oman has surpassed the amount of emerging market government debt outstanding, according to… Bank of America Merrill Lynch. Such quasi-sovereign debt issuance has helped propel the stunning growth of the overall bond market, with EM issuance accounting for 47% of the growth in global debt between 2007-14, compared to 22% in the previous seven years, according to S&P Global Ratings. But the surge in 'quasi' bonds is making some feel, well, queasy. ‘Quasi-sovereigns are effectively a 'contingent liability' for a country,’ write the BofAML analysts, led by Kay Hope. They note that quasi-sovereign issuance now makes up half of the $1.6 - 1.8 trillion euro- and dollar-denominated corporate bond market for emerging markets…”

May 31 – Wall Street Journal (Timothy J. Martin): “What it means to be a successful investor in 2016 can be summed up in four words: bigger gambles, lower returns. Thanks to rock-bottom interest rates in the U.S., negative rates in other parts of the world, and lackluster growth, investors are becoming increasingly creative—and embracing increasing risk—to bolster their performances. To even come close these days to what is considered a reasonably strong return of 7.5%, pension funds and other large endowments are reaching ever further into riskier investments: adding big dollops of global stocks, real estate and private-equity investments to the once-standard investment of high-grade bonds. Two decades ago, it was possible to make that kind of return just by buying and holding investment-grade bonds, according to new research.”

Again, Monkey with Money at Your Own Peril.

For the week:

The S&P500 was unchanged (up 2.7% y-t-d), while the Dow slipped 0.4% (up 2.2%). The Utilities surged 2.4% (up 14.4%). The Banks declined 1.7% (down 4.5%), and the Broker/Dealers lost 1.6% (down 7.4%). The Transports declined 0.5% (up 2.9%). The S&P 400 Midcaps added 0.6% (up 7.3%), and the small cap Russell 2000 gained 1.2% (up 2.5%). The Nasdaq100 was little changed (down 1.8%), while the Morgan Stanley High Tech index added 0.2% (up 0.2%). The Semiconductors jumped 1.4% (up 6.3%). The Biotechs rose 2.7% (down 14.5%). With bullion gaining $32, the HUI gold index surged 13.9% (up 104%).

Three-month Treasury bill rates ended the week at 28 bps. Two-year government yields fell 14 bps to 0.77% (down 28bps y-t-d). Five-year T-note yields sank 15 bps to 1.23% (down 52bps). Ten-year Treasury yields dropped 15 bps to 1.70% (down 55bps). Long bond yields fell 14 bps to 2.51% (down 51bps).

Greek 10-year yields gained six bps to 7.13% (down 19bps y-t-d). Ten-year Portuguese yields jumped 13 bps to a one-month high 3.14% (up 62bps). Italian 10-year yields slipped two bps to 1.33% (down 26bps). Spain's 10-year yields declined two bps to 1.46% (down 31bps). German bund yields fell seven bps to 0.07% (down 55bps). French yields dropped six bps to 0.41% (down 58bps). The French to German 10-year bond spread narrowed one to 34 bps. U.K. 10-year gilt yields sank 16 bps to 1.27% (down 69bps).

Japan's Nikkei equities index declined 1.1% (down 12.6% y-t-d). Japanese 10-year "JGB" yields dipped two bps to negative 0.11% (down 37bps y-t-d). The German DAX equities index dropped 1.8% (down 6.0%). Spain's IBEX 35 equities index sank 3.4% (down 7.8%). Italy's FTSE MIB index was hit 3.8% (down 18.3%). EM equities were mixed to higher. Brazil's Bovespa index jumped 3.2% (up 16.8%). Mexico's Bolsa slipped 0.4% (up 6.9%). South Korea's Kospi index increased 0.8% (up 1.3%). India’s Sensex equities index gained 0.7% (up 2.8%). China’s Shanghai Exchange rallied 4.2% (down 17%). Turkey's Borsa Istanbul National 100 index was little changed (up 8.9%). Russia's MICEX equities index fell 2.1% (up 7.1%).

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

Freddie Mac 30-year fixed mortgage rates added two bps to 3.66% (down 21bps y-o-y). Fifteen-year rates rose three bps to 2.92% (down 16bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down eight bps to 3.76% (down 30bps).

Federal Reserve Credit last week declined $9.4bn to $4.422 TN. Over the past year, Fed Credit dipped $5.1bn. Fed Credit inflated $1.611 TN, or 57%, over the past 186 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week gained $11.8bn to $3.230 TN. "Custody holdings" were down $124bn y-o-y, or 3.7%.

M2 (narrow) "money" supply last week rose another $21bn to a record $12.755 TN. "Narrow money" expanded $794bn, or 6.6%, over the past year. For the week, Currency increased $1.5bn. Total Checkable Deposits rose $11.4bn, and Savings Deposits gained $9.6bn. Small Time Deposits were little changed. Retail Money Funds slipped $1.2bn.

Total money market fund assets were unchanged at $2.733 TN. Money Funds rose $116bn y-o-y (4.4%).

Total Commercial Paper contracted $13.1bn to a four-month low $1.066 TN. CP expanded $122bn y-o-y, or 13%.

Currency Watch:

May 31 – Financial Times (Gabriel Wildau): “China’s currency suffered its largest monthly depreciation since its devaluation last August as the central bank pushed back against claims it has abandoned market-orientated exchange rate reform. The renminbi fell 1.6% against the dollar in May… The currency fell 2.6% in August. The central bank cast that reform as a move to loosen government control of the exchange rate and let market forces play a greater role. However, many foreign investors were sceptical of the move because it came when market forces could be reliably expected to push the renminbi weaker.”

The U.S. dollar index dropped 1.8% this week to 93.94 (down 4.8% y-t-d). For the week on the upside, the South African rand increased 4.0%, the New Zealand dollar 3.8%, the Japanese yen 3.4%, the Australian dollar 2.6%, the Swedish krona 2.5%, the euro 2.3%, the Brazilian real 2.3%, the Norwegian krone 2.0%, the Swiss franc 1.9% and the Canadian dollar 0.6%. For the week on the downside, the British pound declined 0.7% and the Mexican peso slipped 0.6%. The Chinese yuan increased 0.2% versus the dollar.

Commodities Watch:

The Goldman Sachs Commodities Index added 0.6% (up 20% y-t-d). Spot Gold jumped 2.6% to $1,244 (up 17%). Silver gained 1.0% to $16.42 (up 19%). WTI Crude slipped 54 cents to $48.79 (up 32%). Gasoline fell 1.4% (up 27%), while Natural Gas surged 10.6% (up 2.6%). Copper added 0.2% (down 1%). Wheat jumped 3.3% (up 6%). Corn gained 1.3% (up 17%).

Fixed-Income Bubble Watch:

June 2 – Bloomberg (Michelle Kaske): “Even if U.S. lawmakers return next week and push through their Puerto Rico rescue with unusual speed, it may not come fast enough to save the island from its biggest default yet. The legislation would put Puerto Rico’s budget and, potentially, a restructuring of its debt in the hands of a federal oversight board appointed by congressional Republicans and President Barack Obama -- a body that’s virtually impossible to set up before $2 billion of debt payments come due on July 1. And the bill doesn’t provide any additional federal money to the U.S. territory, whose government says it’s simply too broke to pay.”

May 31 – Financial Times (Joe Rennison and Gavin Jackson): “Negative yields are prompting European and Japanese investors to look at bonds backed by leveraged loans as they seek income producing investments. Collateralised loan obligations — structured products which sell bonds and equity backed by bundles of risky loans — provide investors with an opportunity to derive a higher yield than from owning standard bonds that carry a similar rating. Japanese banks and European pension funds are looking at senior, and therefore safer, tranches of CLO deals.”

May 31 – Bloomberg (Rich Miller): “Consumers were the Achilles’ heel of the U.S. economy in the run-up to the last recession. This time, companies may play that role. Among the warning signs: rising debt, lagging profits and mounting defaults… ‘Companies have been adding to their debt and their debt has been growing more rapidly than their profits,’ said John Lonski, chief economist of Moody’s Capital Markets Research Group… ‘That imbalance in the past has usually led to problems’ in the economy as companies cut back on spending and hiring.”

Global Bubble Watch:

June 1 – Financial Times (Eric Platt and Mamta Badkar): “Negative-yielding government debt has risen above $10tn for the first time, enveloping an increasingly large part of the financial markets after being fuelled by central bank stimulus and a voracious investor appetite for sovereign paper. The amount of sovereign debt trading with a sub-zero yield climbed 5% in May from a month earlier to $10.4tn, buoyed by rising bond prices in Italy, Japan, Germany and France, according to… Fitch… The ascent of the negative yield, which first affected only the shortest maturing notes from highly rated sovereigns, has encompassed seven-year German Bunds and 10-year Japanese government bonds as both the European Central Bank and Bank of Japan have cut benchmark interest rates and launched bond-buying programmes.”

May 29 – Financial Times (Attracta Mooney): “Fund managers that attempt to beat the market are losing significant ground to cheaper rivals as investors shun stockpickers amid concerns over bad performance and high fees. Assets managed in passive mutual funds, which provide lower-cost exposure to markets by tracking an index, have grown four times faster than traditional active products since 2007, according to… Morningstar… The findings reinforce concerns about active fund managers, which have been attacked by academics and consumer groups for not offering investors value for money.”

May 30 – Bloomberg (Malcolm Scott): “Those nearest to China are among the hardest hit as growth in the world's second-largest economy grinds to the slowest pace in a quarter century. Hong Kong, Macau, and Taiwan all saw their economies shrink in the first quarter, while Mongolia's commodities-fueled boom has faltered… ‘The ripples are likely to spread further out,’ said Frederic Neumann, co-head of Asian economic research at HSBC… ‘As China's economy continues to cool, it will provide an ongoing drag on global output, curtailing inflation pressures in the process and anchoring interest rates in the process. The economic malaise currently experienced by China's immediate neighbors, therefore, is only a portend of a milder version to afflict economies elsewhere as China comes off the boil.’”

Federal Reserve Watch:

May 27 – Financial Times (Kate Davidson and Ben Leubsdorf): “Federal Reserve Chairwoman Janet Yellen on Friday signaled the central bank will likely raise interest rates within months if the U.S. economy keeps gaining strength. ‘It’s appropriate…for the Fed to gradually and cautiously increase our overnight interest rate over time, and probably in the coming months such a move would be appropriate,’ she said… This leaves the door open for a move as soon as the Fed’s next policy meeting June 14-15 or at its gatherings in July or September if officials prefer to wait for more economic data.”

U.S. Bubble Watch:

June 2 – CNBC (Phil LeBeau): “Americans are paying more every month for a new vehicle and making those payments for a longer time than ever. The latest data… by Experian shows Americans are taking out record-size loans, making larger monthly payments than ever before and extending their loans farther than ever. The numbers from millions of auto loans tracked in the first quarter of this year are striking. Average auto loan: $30,032 — the first time the amount borrowed to buy a new vehicle has topped $30,000. Average monthly payment: $503 — the first time the average auto payment has gone over the $500 mark. Average term for an auto loan: 68 months — this is the longest average term ever seen by Experian.”

June 2 – New York Times (Stacy Cowley): “The payday loan industry, which is vilified for charging exorbitant interest rates on short-term loans that many Americans depend on, could soon be gutted by a set of rules that federal regulators plan to unveil on Thursday. People who borrow money against their paychecks are generally supposed to pay it back within two weeks, with substantial fees piled on: A customer who borrows $500 would typically owe around $575, at an annual percentage rate of 391%. But most borrowers routinely roll the loan over into a new one, becoming less likely to ever emerge from the debt… Some 16,000 lenders run online and storefront operations that thrive on the hefty profits.”

May 31 – Bloomberg (Michelle Jamrisko and Sho Chandra): “Home prices in 20 U.S. cities rose faster than projected in March from a year earlier, adding to signs of healthy demand at the onset of the industry’s busy selling season, …S&P/Case-Shiller reported… 20-city property values index increased 5.4% from March 2015 (forecast was 5.16%) after climbing 5.4% in the year through February. National home-price gauge rose 5.2% from 12 months earlier…”

May 31 – Bloomberg (Victoria Stilwell): “Consumer spending climbed in April by the most in almost seven years, a sign U.S. households are ready to help jump start growth after a first-quarter slowdown. Consumer purchases climbed 1% in April (versus 0.7% forecast) after little change in March Increase in spending was the biggest since August 2009. Personal income climbed 0.4% for a second month. Fed’s preferred measure of inflation (tied to consumer spending) climbed 0.3% from month before, the biggest May 2015.”

China Bubble Watch:

May 30 – Bloomberg: “The risk of a default chain reaction is looming over the $3.6 trillion market for wealth management products in China. WMPs, which traditionally funneled money from Chinese individuals into assets from corporate bonds to stocks and derivatives, are now increasingly investing in each other. Such holdings may have swelled to as much as 2.6 trillion yuan ($396 billion) last year, based on estimates from Autonomous Research… The trend has China watchers worried. For starters, it means that bad investments by one WMP could infect others, causing a loss of confidence in products that play an important role in bank funding. It also suggests WMPs are struggling to find enough good assets to meet their return targets.”

June 1 – Bloomberg: “China’s central bank is expanding the fight to monitor and control risks emerging in the burgeoning market for loosely-regulated shadow lending. The People’s Bank of China has started collecting data from the murky world of online financing, in which firms make loans for everything from weddings to mining projects. It’s a growing part of a shadow banking market that ballooned 30% last year to 53 trillion yuan ($8.1 trillion), or four-fifths the size of the economy, Moody’s… data show… The PBOC has switched gears from stimulating growth in an easing cycle that started late 2014 to clamping down on the financial and debt risks that threaten to derail a tenuous stabilization in the world’s second-largest economy… More than 90% of China’s almost 4,000 lending platforms promised their 2.9 million investors annual returns ranging from 8% to 24% in March, according to Yingcan Group, which tracks the data.”

May 30 – Bloomberg: “The end of a temporary sweet spot that China enjoyed with its exchange rate -- strength versus the dollar and weakness against trading partners -- will spur renewed capital outflows, Goldman Sachs/Gao Hua Securities Co. said. With the U.S. poised to raise interest rates and pressure building on China to ease monetary policy, cash outflows will accelerate, said Song Yu, chief China economist for Goldman Sachs/Gao Hua. The yuan is down 1.6% this month against the greenback, with policy makers setting the currency’s daily fixing at the weakest level in five years on Monday… The nation’s reserves, still the world’s largest at $3.2 trillion, will drop to $2.7 trillion by the end of this year and to $2 trillion in about a year, according to Kevin Lai… chief economist of Asia ex-Japan at Daiwa Capital Markets.”

June 2 – Reuters (Nathaniel Taplin): “Investors are piling up bets to profit from a fall in the Chinese currency with a variety of creative strategies, raising the risk of a fresh bout of yuan volatility… The yuan fell 1.5% in May, its sharpest monthly drop, excluding August when the currency was devalued, leaving it near levels last trade in 2011. Investors expecting the currency to keep falling are adopting tactics to stay beyond the clutches of China's central bank. The… PBOC intervened heavily in onshore and offshore markets last year and early this year to try to force speculators out of the yuan market. The strategies include fake invoicing of imports and exports to build up dollars offshore, buying the cyber currency Bitcoin and taking up short positions in Hong Kong stocks… An estimated $674 billion flowed out of China last year, the Institute of International Finance… said...”

May 30 – Bloomberg: “Chinese sovereign bonds posted their steepest monthly loss in a year amid speculation authorities will refrain from easing monetary policy after the U.S. signaled higher borrowing costs as early as next month. The yuan fell by the most this month since the August devaluation. The yield on 10-year government bonds climbed nine bps since the end of April to 2.98% in Shanghai, the highest level since December…”

June 1 – Reuters (Engen Tham): “China's insurance regulator has launched an inspection of insurers' risk controls over stock, private equity and real estate investments, the official Shanghai Securities News reported…, citing unnamed sources… According to a note circulated this week, the China Insurance Regulatory Commission (CIRC) told insurers and insurance asset management companies that they plan to inspect investments in stocks, equity and real estate, in both onshore and offshore markets…”

May 31 – Reuters (Elias Glenn): “Activity at China's factories shrank for a 15th straight month in May as new orders fell, a private survey showed…, as hope fades for a quick recovery in the country's vast manufacturing sector. The Caixin/Markit Manufacturing Purchasing Managers' index (PMI) fell to 49.2 last month, below market expectations of 49.3 and April's reading of 49.4. While modest, May's decline marked a reversal after two months of relative improvement…”

May 30 – Bloomberg: “An investor who used Chinese stock-index futures for hedging triggered a flash crash Tuesday, the China Financial Futures Exchange said. Contracts on the CSI 300 Index due in June dropped by the 10% daily limit at 10:42 a.m. local time before recovering almost all of their losses in the same minute.”

May 30 – Bloomberg (Frederik Balfour): “Memo to Hong Kong developers calling for the government to ease property curbs amid a slump in home prices: Don’t hold your breath. Declines in the residential property market have to get a lot worse before Hong Kong’s lawmakers would consider rolling back measures they introduced more than five years ago to rein in prices, according to eight analysts and economists polled by Bloomberg… On average, they estimate that home prices, which have fallen 13% from a September peak, will have to plunge another 19% before the government intervenes.”

EM Bubble Watch:

May 31 – Reuters (Nichola Saminather and Vidya Ranganathan): “Having dumped Asian shares on resurgent worries about China's economy, the specter of more aggressive U.S. interest rate rises is now forcing global investors to sell the region's bonds and currencies. A net $3.2 billion left Asian equity markets, excluding Japan, during the period May 1 to 24, the largest outflow since January, data from HSBC showed. Indonesia's and South Korea's bond markets, heavy recipients of foreign investment until March, are now seeing chunks of inflows reverse while Asia's currencies have also fallen quite sharply.”

May 31 – Bloomberg (Xola Potelwa): “The rand has weakened almost 10% this month as increased expectations that the Federal Reserve will raise rates boost the dollar and the threat of a downgrade of South Africa’s credit rating weighs on the currency… Investors betting on South African government bonds have taken the largest loss among 31 emerging markets this month. Returns are down 12%, compared with an average drop of 3% for developing nations.”

June 1 – Bloomberg (Constantine Courcoulas): “Unpredictable politics and a clouding economic outlook have persuaded investors that Turkey’s debt is now a riskier bet than junk-rated Russia. The cost of insuring Turkish bonds against non payment jumped in May by the most in eight months, with five-year credit default swaps widening 33 bps to 273, surpassing Russia for the first time since mid 2014…. While looming U.S. rate increases weighed on all emerging markets last month, Turkish assets came under further pressure as Erdogan, who has repeatedly called for looser monetary policy, moved to concentrate state power in his own hands.”

June 1 – Bloomberg (Nacha Cattan): “Disgust with corruption in Mexico is so overwhelming that voters on Sunday are entertaining the thought of sacrificing landmark education and economic reforms in exchange for a chance to bring down the politicians they blame for it. Through the heart of the June 5 elections for governors flow the stirrings of populism, personified by Andres Manuel Lopez Obrador, 62, a two-time presidential contender known as AMLO. He has railed against graft in government, but has also raised concerns in the past that he’d pit the poor against the rest of the country and recently criticized evaluations of teachers, whose protests have grown in some states.”

May 31 – Reuters (Daren Butler): “President Tayyip Erdogan officially designated the religious movement of U.S.-based Islamic cleric Fethullah Gulen a terrorist group and said he would pursue its members whom he accuses of trying to topple the government. The move puts the organization built by his former ally legally on par with Kurdish militants currently fighting the army in Turkey's southeast. Erdogan might use the designation in pressing Washington to extradite Gulen, a step U.S. authorities are nonetheless unlikely to take without concrete grounds.”

Japan Watch:

June 2 – Reuters (Hideyuki Sano): “When Japan's central bank shocked markets with its negative interest rates policy in January, its main aim was to squeeze investors out of safehavens and into assets that would stoke economic growth, like stocks and property. While Japan's perennially conservative investors have indeed pursued better returns away from Japanese government bonds, their hunt for yield has taken their money out of the country and into the U.S. debt market… Japanese investment flows into U.S. bonds hit multiyear highs in March… ‘Negative rates have changed the world. Japanese banks tend to endure (low returns) until they can, but negative rates have pushed them beyond their limit,’ said Shuji Ikebuchi, director at Citigroup Global Markets.”

June 1 – Reuters (Tetsushi Kajimoto and Leika Kihara): “Japanese Prime Minister Shinzo Abe announced on Wednesday his widely expected decision to delay a scheduled sales tax increase by two-and-a-half years, putting his plans for fiscal reforms on the back burner due to growing signs of weakness in the economy. While the decision may help Abe win votes at an upper house election on July 10, it could fan doubts about his plans to curb Japan's huge public debt and fund ballooning social welfare costs of a fast-ageing population. Mindful of opposition criticism that the delay is a sign his ‘Abenomics’ stimulus policies have failed to spur growth, Abe justified the decision, saying it was needed to forestall risks posed by external factors - notably slowing Chinese growth.”

May 31 – Reuters (Stanley White): “Japanese manufacturing activity contracted at the fastest pace in more than three years in May as new orders slumped…, highlighting renewed weakness in the economy and adding pressure on the government and central bank. The Markit/Nikkei Final Japan Manufacturing Purchasing Managers Index (PMI) fell to 47.7 in May on a seasonally adjusted basis…”

ECB Watch:

May 29 – Bloomberg (Niklas Magnusson): “A prolonged period of negative interest rates is failing to revive investment at Europe’s companies, with the vast majority of businesses in the region saying the stimulus measures have had no affect at all on their growth plans. Some 84% of the 9,440 companies surveyed by Swedish debt collector Intrum Justitia AB… say low interest rates haven’t affected their willingness to invest. And perhaps more alarmingly, the number is up from 73% last year. ‘Creating economic growth requires stability and optimism,’ Intrum Justitia Chief Executive Officer Mikael Ericson said… ‘Evidently, the strategy of keeping interest rates record low for more than a year has not created the much sought-after stability.’”

Europe Watch:

June 1 – Bloomberg (Jana Randow): “Manufacturing in the 19-nation euro area barely grew in May, damping confidence in the strength of the region’s economic recovery, according to Markit Economics. A Purchasing Managers Index slipped to 51.5 from 51.7… ‘The disappointing performance of manufacturing adds to suspicions that the pace of euro-zone economic growth in the second quarter has cooled after a surprisingly brisk start to the year,’ said Chris Williamson, chief economist at Markit. New orders expanded at the slowest rate in more than a year, and companies were reluctant to build capacity and hire workers…”

June 2 – Reuters (Balazs Koranyi): “The Bundesbank cut its German inflation and growth forecasts on Friday citing weaker demand for exports, even as it predicted that robust consumer demand and a tightening labour market would keep the domestic economy buoyant… The bank now sees GDP growing at 1.7% this year, below a December projection for 1.8%, and 1.4% in 2017, down from 1.7% seen earlier.”

June 2 – Financial Times (Eric Platt and Gavin Jackson): “More than $36bn of corporate bonds with a short-term maturity currently trade with a sub-zero yield as the European Central Bank starts buying debt sold by companies next week. In the wake of the ECB announcing this policy shift back in March, eurozone corporate bond yields have fallen while debt sales from companies have accelerated. The yield on a host of short-term paper sold by groups including Johnson & Johnson, General Electric, LVMH Moët Hennessy Louis Vuitton and Philip Morris now trade below zero in the secondary market.”

Brazil Watch:

June 3 – Bloomberg (Jonathan Levin and Ye Xie): “Reining in Brazil’s mammoth budget is no small feat, no matter how good you are. Cut discretionary spending, and risk blowback from an already frustrated electorate. Raise taxes, you could exacerbate the nation’s crushing recession. Privatize government companies? Beware the wrath of the unions. Shrink social security? It’ll take decades to manifest itself on the nation’s balance sheet. And that doesn’t even start to address Brazil’s massive interest tab. That’s the harsh reality facing Acting President Michel Temer… His economic cabinet… takes over a crisis-torn country with a public-sector debt burden that climbed 9 percentage points last year alone to 67% of gross domestic product. And liabilities keep mounting fast. The budget gap is now the biggest among all countries in the G-20 except Saudi Arabia, equal to more than 10% of GDP.”

Leveraged Speculation Watch:

June 1 – Bloomberg (Oliver Renick): “Hedge funds, who’ve seen their reputations take a beating in recent months, have not suffered a corresponding hit to their confidence, at least as far as stock-picking goes. So says research from Goldman Sachs…, which found that a stock-selection metric known as concentration climbed at the end of the first quarter to the highest level on record. The term refers to the percentage of hedge fund holdings accounted for by their 10 biggest positions, currently at 68%. Coming amid the worst crush of outflows in six years, the tightening can be viewed as a doubling down in conviction… It’s also a gamble, after a stretch where losses in a handful of stocks wreaked havoc on large swaths of the industry.”

Geopolitical Watch:

May 30 – Associated Press: “China… lashed out at criticism from U.S. Defense Secretary Ashton Carter, accusing him of harboring a Cold War mentality and saying Beijing has no interest in ‘playing a role in a Hollywood movie’ of Washington's design. Foreign Ministry spokeswoman Hua Chunying told reporters Carter's comment last week that China was creating a ‘Great Wall of self-isolation’ was merely an attempt to provide cover for U.S. plans to deploy additional military forces to the Asia-Pacific region. Carter's remarks ‘laid bare the stereotypical U.S. thinking and U.S. hegemony,’ Hua said…”

May 31 – Reuters (Ben Blanchard): “China will ‘pressure’ the United States on maritime issues at talks in Beijing next week because of Chinese concern about an increased U.S. military presence in the disputed South China Sea, a major state-run newspaper said… China has been angered by what it views as provocative U.S. military patrols close to islands China controls in the South China Sea. The United States says the patrols are to protect freedom of navigation.”

May 31 – Financial Times (Stefan Wagstyl): “Support for Angela Merkel’s ruling conservative bloc and her Social Democrat coalition partners has dropped below 50% for the first time since the rebirth of German democracy after the second world war. An opinion poll published… in Bild newspaper shows the two groupings are losing support following the rise of the rightwing anti-immigration Alternative for Germany party and a recovery in the liberal FDP.”