Saturday, July 23, 2016

Weekly Commentary: Don't Mess with Turkey

July 20 – Financial Times (Eric Platt): “The Turkish lira weakened a new record low against the greenback on Wednesday after the country was cut deeper into junk territory by Standard & Poor’s, with analysts warning Ankara faced unpredictable capital flows that could constrain its levered economy following last week’s failed coup attempt… The rating agency also lowered its opinion of Turkey’s local currency debt one notch to double-B plus, sweeping its lira obligations into junk as well. ‘In the aftermath of the failed coup, we believe that the risks to Turkey’s ability to roll over its external debt have increased,’ said Trevor Cullinan, an analyst with S&P. ‘We expect that given the political uncertainty, Turkey’s policymakers will likely stray from their commitment to enact reforms intended to wean the economy away from its dependence on foreign financing.’ Mr Cullinan said he expected Turkey would have to roll over more than two-fifths of its external debt over the next 12 months, worth roughly $177bn.”

July 20 – JNiMedia: “Erdogan blasted Standard & Poor’s downgrading of Turkey’s rating in the wake of the failed coup. ‘Why are you even interested in Turkey? We’re not part of you… Don’t ever try to mess with us,’ he said.”

Perhaps Standard & Poor’s and fellow rating agencies share keen interest because Turkey and Turkish corporations and financial institutions have over recent years been assertive borrowers in international markets. For the past decade, President Erdogan has championed Turkish economic renaissance, a powerful boom that has been fundamental to his popularity and ascending political power. Unfortunately, it morphed into a Credit-fueled Bubble, with all the associated financial, economic and social consequences. Turkish consumer debt has skyrocketed, fueled by aggressive bank lending. Meanwhile, Turkey’s financial institutions have borrowed aggressively in global inter-bank markets, with much of this debt short-term and denominated in foreign currencies.

The Turkish Credit Bubble gained important momentum as part of the post-2008 global EM funding boom. Estimates have as much as $300 billion having flowed into Turkey over recent years, inflows that accelerated with the 2013 sovereign rating upgrade to investment grade. As a NATO member, aspiring EU nation and key ally in the explosive Middle East, Turkey benefited greatly from the view that Europe, the U.S. and the world, more generally, would not tolerate crisis engulfing Turkey.

Erdogan and his AKP party have been huge beneficiaries of the global funding boom, both financially and politically. Now, with the tide having turned, previous bedfellows - the rating agencies and global finance - will be pilloried and villainized for political advantage. To be sure, they’re a precarious mix of C’s – coups, crackdowns, crackpots, Credit and confidence. It’s worth noting that the domestic purge has expanded past university deans to school teachers to bank regulators.

Turkish stocks dropped 13.4% this week, the “worst week since 2008.” Turkish bank stocks were down 5% on Thursday’s debt downgrade, as sovereign yields surged 26 bps (from Bloomberg). For the week, Turkish sovereign CDS jumped 66 bps to 336 bps (from Reuters). Turkey’s lira declined 1.7% to another record low. In any other environment, Turkey would be facing a crisis of confidence along with a major test for its currency and banking system.

July 21 – Bloomberg (Ercan Ersoy): “Turkey’s failed coup is dealing yet another blow to the nation’s banks, which are already under pressure from rising bad debts and a slump in tourism. Istanbul-based lenders Yapi ve Kredi Bankasi AS and Sekerbank TAS canceled about $800 million of debt sales this week after the attempt to unseat President Recep Tayyip Erdogan and the ensuing political unrest spooked investors… The renewed tension in Turkey, which imposed a three-month state of emergency last night, is hampering access to the funding banks need to cover their short-term debt, while a slumping lira is increasing the risks of lending in foreign currency. The political instability has made a difficult year worse for banks as they contend with a 33% surge in bad loans and soaring bankruptcy filings. ‘Funding for Turkish banks could become more expensive, or even more difficult to access, given their large dependence on market funds and their exposure to the foreign-exchange market in a context where the local currency could be under pressure,’ Moody’s… said…”

July 21 – Fitch Ratings: “Turkish banks' dependence on foreign market access results from their high level of short-term external debt. We see the level of foreign-currency liquidity at Fitch-rated banks as generally adequate and broadly sufficient to cover short-term foreign-currency liabilities due within one year. However, any significant weakening in creditor sentiment, resulting in net capital outflows, would be likely to put banks' FX liquidity under some pressure, and would also probably result in further depreciation of the lira. At end-1Q16, banks accounted for $170 billion of Turkey's $416 billion external debt, with $100 billion of this (including both market funding and more stable sources) maturing within 12 months. The sharp drop in the lira following the attempted coup highlights the banking sector's exposure to foreign-currency lending risks, with FX-denominated loans making up around a third of the total sector portfolio.”

More from Bloomberg (Ercan Ersoy): ‘Downside risks for Turkish banks’ credit profiles and ratings have increased as a result of the country’s attempted military coup,’ Fitch… said. ‘Turkish banks’ credit profiles are sensitive to country risks, access to foreign credit markets and the lira exchange rate.’ Banks accounted for $170 billion of Turkey’s $416 billion external debt in the first quarter, with $100 billion maturing within a year, according to Fitch.”

The unfolding EM debacle is one of the saddest consequences arising from the U.S. mortgage finance Bubble - turned reflationary QE before transforming into the global government finance Bubble. Throws Trillions of loose finance at the emerging markets and rest assured there will be epic corruption, economic maladjustment and destabilizing social and geopolitical stress. As for corruption and malfeasance, China, Brazil, Russia, Turkey and Malaysia come quickly to mind. Yet it’s systemic, the upshot from what has become a hopelessly dysfunctional global system. Indeed, EM these days has regressed into one big highly synchronized and vacillating Bubble. That EM could now somehow be experiencing record inflows in the face of such financial, economic and social instability is remarkable. There is precedent.

Apparently unappreciated by contemporary central bankers, over-liquefied and speculative markets are by their nature mystifying. They will confound – and seem to revel in doing the exact opposite of what is expected. Bubble markets will undoubtedly behave in a manner that guarantees that the most damage is inflicted upon the largest number of participants. I was in awe as “money” flooded into GSE debt and MBS following the subprime eruption in 2007. The Bubble had been pierced, with Trillions of securities and assets mispriced throughout the markets. Yet speculative impulses and confidence that aggressive monetary stimulus was in the offing ensured prices became only further detached from reality. MBS yields sank 100 bps in the six months preceding early-2008, extending “Terminal Phase” excesses and ensuring that risk markets turned highly correlated – and acutely vulnerable.

July 20 – Reuters (Karin Strohecker): “Developing countries have nearly tripled their external debt over the past decade, outpacing economic growth and increases in foreign exchange reserves - which could leave them open in the future to a ‘systemic crisis’, …Moody's said… Emerging market governments and companies around the globe have rushed in recent years to take advantage of rock-bottom global borrowing costs and investor hunger for yield. As a result, external debt jumped to $8.2 trillion in 2015 from $3.0 trillion in 2005, the Moody's report found, thanks largely to private-sector borrowing. The average ratio of external debt to gross domestic product jumped to 54% in 2015 from a decade-low of 40% in 2008. ‘External vulnerability has increased significantly in about 75% of emerging economies globally,’ the authors… wrote. The average ratio of external debt to reserves soared to more than 350% last year from just over 250% in 2007, the report added.”

July 22 – Bloomberg (Alastair Marsh and Siddharth Verma): “Investors are rushing into emerging-market debt so fast they've already beaten the record they set two weeks ago. Net inflows to funds that buy emerging-market bonds reached an all-time high in the week through July 20, according to Bank of America Corp. — $4.9 billion, to be precise. That's over a billion more than the previous record registered only two weeks before, indicating that the "great migration" into the asset class heralded by BlackRock Inc. is rapidly picking up pace… Almost the same amount of money's been poured into EM equity funds as into bonds. The $4.7 billion invested into EM stock markets over the same week amounts to the most in 12 months…”

A powerful short squeeze throughout EM has at this point morphed into self-reinforcing inflows. Recent outperformance has incited the mammoth – and fidgety - trend-following and performance-chasing Crowd. Of course, global QE and zero rates have been instrumental. Moreover, the policy-induced market dislocation that has created $12 Trillion of negative-yielding sovereign debt has unleashed another powerful round of global yield-chasing flows – right in the face of fundamental deterioration. Importantly, EM outperformance has worked to further synchronize global markets into one big highly-correlated speculative melee, a Bubble resting precariously on simple faith that central banks have it all under control.

Chairman Greenspan used to posit (rationalize) that since real estate markets were a local phenomenon a national real estate Bubble was implausible. I countered that the Bubble was in mortgage finance and that a centralized mortgage finance Bubble was exerting a powerful nationwide inflationary dynamic. “Terminal Phase” excess proved so powerful that a tidal wave of inflationary finance essentially lifted all boats.

These days, a similar dynamic has taken hold on a global basis, across asset classes. It’s a backdrop that continues to wreak havoc upon active fund managers – those more likely to incorporate micro and macro analysis along with risk control. It’s an atypical backdrop that continues to reward passive “management,” unencumbered by analysis and risk management. And as “money” floods in to play high-dividend payers, high-yield, low-beta, “defensive”, “smart-beta,” and EM, an inflating market forces short-covering, the unwinding of hedges and capitulation “gotta jump aboard ‘cause I can’t afford to miss the rally” flows. It boils down to one singular speculative bet on “the market.” All-time highs into an alarming, faltering fundamental backdrop? It happened in late-2007. What others label “bull market” I view as market dislocation.

For the Week:

The S&P500 increased 0.6% (up 6.4% y-t-d), and the Dow added 0.3% (up 6.6%). The Utilities gained 1.5% (up 22.3%). The Banks increased 0.4% (down 7.6%), and the Broker/Dealers advanced 1.3% (down 9.6%). The Transports slipped 0.2% (up 6.1%). The S&P 400 Midcaps increased 0.6% (up 11.0%), and the small cap Russell 2000 gained 0.6% (up 6.8%). The Nasdaq100 advanced 1.7% (up 1.6%), and the Morgan Stanley High Tech index jumped 2.6% (up 4.5%). The Semiconductors surged 2.6% (up 11.9%). The Biotechs rose 2.6% (down 14.9%). With bullion down $15, the HUI gold index dropped 3.2% (up 133%).

Three-month Treasury bill rates ended the week at 31 bps. Two-year government yields gained three bps to 0.70% (down 35bps y-t-d). Five-year T-note yields increased two bps to 1.12% (down 63bps). Ten-year Treasury yields rose two bps to 1.57% (down 68bps). Long bond yields added a basis point to 2.28% (down 74bps).

Greek 10-year yields jumped 18 bps to 7.82% (up 50bps y-t-d). Ten-year Portuguese yields fell eight bps to 3.02% (up 50bps). Italian 10-year yields dipped two bps to 1.23% (down 36bps). Spain's 10-year yield sank 11 bps to 1.11% (down 66bps). German bund yields declined three bps to negative 0.03% (down 65bps). French yields fell two bps to 0.21% (down 78bps). The French to German 10-year bond spread increased a basis point to 24 bps. U.K. 10-year gilt yields declined four bps to 0.79% (down 117bps). U.K.'s FTSE equities index increased 0.9% (up 7.8%).

Japan's Nikkei equities index rose 0.8% (down 12.6% y-t-d). Japanese 10-year "JGB" yields increased a basis point to negative 0.23% (down 49bps y-t-d). The German DAX equities index gained 0.8% (down 5.5%). Spain's IBEX 35 equities index increased 0.8% (down 9.9%). Italy's FTSE MIB index gained 0.2% (down 21.7%). EM equities were mixed. Brazil's Bovespa index jumped 2.6% (up 32%). Mexico's Bolsa advanced 1.8% (up 10.6%). South Korea's Kospi index slipped 0.3% (up 2.5%). India’s Sensex equities was little changed (up 6.5%). China’s Shanghai Exchange fell 1.4% (down 14.9%). Turkey's Borsa Istanbul National 100 index sank 13.4% (unchanged). Russia's MICEX equities slipped 0.7% (up 9.4%).

Junk bond mutual funds saw inflows of $322 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates added three bps to 3.45% (down 59bps y-o-y). Fifteen-year rates increased three bps to 2.75% (down 46bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up four bps to 3.71% (down 41bps).

Federal Reserve Credit last week expanded $7.7bn to $4.439 TN. Over the past year, Fed Credit declined $21.8bn. Fed Credit inflated $1.628 TN, or 58%, over the past 193 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $6.0bn last week to $3.228 TN. "Custody holdings" were down $112bn y-o-y, or 3.4%.

M2 (narrow) "money" supply last week jumped $25bn to a record $12.847 TN. "Narrow money" expanded $822bn, or 6.8%, over the past year. For the week, Currency increased $0.2bn. Total Checkable Deposits jumped $21.4bn, and Savings Deposits gained $5.9bn. Small Time Deposits were little changed. Retail Money Funds slipped $2.5bn.

Total money market fund assets declined $5.6bn to $2.715 TN. Money Funds rose $66bn y-o-y (2.5%).

Total Commercial Paper expanded $5.3bn to $1.053 TN. CP expanded $6bn y-o-y, or 0.5%.

Currency Watch:

The U.S. dollar index gained 0.7% to 97.35 (down 1.4% y-t-d). For the week on the upside, the South African rand increased 1.9%, the Brazilian real 0.7% and the Mexican peso 0.3%. For the week on the downside, the New Zealand dollar declined 1.7%, the Australian dollar 1.5%, the Canadian dollar 1.2%, the Japanese yen 1.2%, the Norwegian krone 0.8%, the British pound 0.6%, the euro 0.5% and the Swiss franc 0.4%. The Chinese yuan increased 0.2% versus the dollar (down 2.9% y-d-t).

Commodities Watch:

The Goldman Sachs Commodities Index sank 3.3% (up 12% y-t-d). Spot Gold declined 1.1% to $1,323 (up 25%). Silver gave back 3.0% to $19.69 (up 43%). WTI Crude dropped $1.69 to $44.26 (up 20%). Gasoline sank 4.4% (up 7%), while Natural Gas added 0.7% (up 19%). Copper was little changed (up 5%). Wheat was about unchanged (down 10%). Corn lost 3.0% (down 5%).

Turkey Watch:

July 21 – Bloomberg (Constantine Courcoulas and Tugce Ozsoy): “Turkish stocks and bonds tumbled on concern further credit downgrades will spark an exodus of capital after President Recep Tayyip Erdogan imposed a three-month state of emergency on the nation following the failed weekend coup. The Borsa Istanbul 100 Index declined 4.4% Thursday, reversing this year’s gains and is headed for its worst week since 2008. The nation’s 10-year local currency government bonds fell for a fifth day.”

July 21 – Reuters (Samia Nakhoul, Nick Tattersall and Orhan Coskun): “Turkish President Tayyip Erdogan promised on Thursday to quickly restructure the armed forces in order to prevent another coup attempt, signaling a major overhaul in the military as emergency rule took hold across the country. Erdogan's comments… come as Turkey seeks to assure its citizens and the outside world that the government was not turning its back on democracy and returning to the harsh repression of past regimes… Opposition parties which stood with the authorities against the coup expressed concern that the state of emergency could concentrate too much power in the hands of Erdogan, whose rivals have long accused him of suppressing free speech. About 60,000 soldiers, police, judges, civil servants and teachers have been suspended, detained or have been placed under investigation since the coup was put down.”

July 20 – Washington Post (Loveday Morris and Hugh Naylor): “Turkey declared a state of emergency on Wednesday, a move that President Recep Tayyip Erdogan said would enable the state to act faster against those who plotted a failed coup. In a late-night televised address, Erdogan, who has been carrying out a large-scale purge of the country’s institutions, sought to reassure the country that the measure — which would be in force for three months — will protect democratic freedoms. But the move consolidates more power in the president’s hands, allowing him to rule by decree. For the state of emergency to be implemented, the decision must be approved by parliament… Turkey’s countermeasures have affected more than 50,000 people — judges, civil servants, military, police and others — as the country’s leaders seek to root out opponents and perceived internal dissent… ‘The cleansing is continuing, and we remain very determined,’ Erdogan said. He described a ‘virus’ within the Turkish military and state institutions that had spread like ‘cancer.’”

July 21 – Bloomberg (Sujata Rao and Asli Kandemir): “Turkey's botched coup and an apparent lurch toward authoritarianism is ratting investors and threatens to throw into reverse the hundreds of billions of dollars that have flowed to this once-booming emerging market. In the years after its 2001-2002 financial crisis, Turkey rode a wave of bullishness toward emerging markets, and while estimates vary, the Institute of International Finance reckons overseas investors poured more than $150 billion into Turkish stock and bond markets since end-2003. The IIF, one of the most authoritative trackers of capital to and from the developing world, also calculates bricks-and-mortar direct investment (FDI) into Turkish factories and property at $163 billion.”

July 19 – Financial Times (Thomas Hale, Katie Martin and Mehreen Khan): “Turkey’s fourth-largest lender pulled a US dollar-denominated bond deal that recently priced, a rare move that marks escalating investor aversion towards the country after a failed coup. Yapı ve Kredi Bankası said… it had cancelled the seven-year, $550m bond ‘due to the recent negative developments and the ensuing market volatility’. The bond priced on July 12, with a yield of 4.625%, was twice oversubscribed, and had been due to settle on Tuesday.”

July 22 – Bloomberg (Onur Ant, Isobel Finkel ad Ercan Ersoy): “Turkey is requesting that some banks with offices in the country share the market analysis they’ve written after Friday night’s failed coup attempt, according to three people familiar with the matter. The banking regulator contacted at least three international investment banks to formally request the macroeconomic reports they’ve sent to clients in recent days, the people said, asking not to be identified because of the subject’s sensitivity. A day after S&P Global Ratings downgraded Turkey’s credit rating to a further notch under investment grade, the head of the country’s banks regulator has also cautioned against talking down the economy. ‘We disapprove of our banks publishing reports that would turn expectations and the atmosphere negative, like the international credit rating agencies did,’ Mehmet Ali Akben, head of the banking regulator BDDK, was reported as saying by the state-run Anadolu Agency…”

July 16 – Reuters (David Brunnstrom and Jeff Mason): “Secretary of State John Kerry told Turkish Foreign Minister Mevlut Cavosoglu on Saturday that public claims suggesting the United States was involved in the failed coup in Turkey were harmful to relations between the two NATO allies. Kerry pressed Turkey to use restraint and respect the rule of law during its investigation into the plot, State Department spokesman John Kirby said…”

Europe Watch:

July 21 – Bloomberg (Alessandro Speciale): “As worries that the European Central Bank will soon run out of sovereign debt to buy for its quantitative-easing program persist, Europe's over-leveraged governments are declining to lend a hand. According to a study by JPMorgan..., net issuance of new debt this year will fall well short of the ECB's appetite, which runs at a monthly clip of 80 billion euros ($88bn). While that's just a drop in the ocean compared with the total ‘eligible universe,’ the data illustrate the speed with which the central bank is eating up the market. The ECB's demand for bonds this year was in fact about three times of what governments will put on the market.”

Brexit Watch:

July 22 – Reuters (Andy Bruce and Douglas Busvine): “Britain's economy is shrinking, the broadest survey of business confidence since last month's historic vote to quit the European Union showed on Friday, leading finance minister Philip Hammond to pledge a loosening of purse strings if the weakness endures. The Bank of England has also been clear that easing monetary policy may be necessary. The flash, or preliminary, Markit survey of purchasing managers… fell by the most in its 20-year history.”

Italy Watch:

July 21 – Financial Times (Claire Jones): “Mario Draghi backed a public bailout of Italy’s troubled banks ‘in exceptional circumstances’, even as he hailed the eurozone for its resilience in the aftermath of Britain’s decision to quit the EU and left interest rates on hold. The remarks by the president of the European Central Bank… helped alleviate concerns about Italian lenders, which have been weighed down by a heavy burden of bad debt and non-performing loans and whose shares have been depressed after the British referendum stoked fears about EU cohesion... European bank stocks, led by Italian lenders, rallied after he described a state backstop as a ‘very useful’ way to help banks rid their books of non-performing loans — a problem the ECB president said was making his central bank’s policies less effective.”

July 19 – Financial Times (Stephanie Bodoni): “The European Union’s top court backed EU guidelines designed to prevent taxpayers from footing the bill for bailing out stricken lenders, strengthening the hand of Brussels regulators as Italy fights to shield some bondholders caught up in the nation’s banking crisis. Tuesday’s decision is a show of support for the European Commission, which updated its crisis rules for banks in 2013 as part of a shift from taxpayer-funded bailouts to bail-in, the practice of imposing possible losses on investors before public money can flow. ‘Burden-sharing by shareholders and subordinated creditors as a prerequisite for the authorization, by the commission, of state aid to a bank with a shortfall is not contrary to EU law,’ according to the EU Court of Justice.”

Central Bank Watch:

July 19 – Bloomberg (Anooja Debnath): “The European Central Bank’s bond-buying program will be scrounging for German debt within months, according to two of the region’s banks. The securities that yield less than the ECB’s minus 0.4 deposit rate have grown to more than 60%, based on a $1.13 trillion Bloomberg German bond index. That means they’re ineligible for the purchases. Analysts from UBS Group AG and SEB AB are estimating the central bank may run out of German targets within six months, and as soon as August, unless the rules are broadened.

July 18 – Reuters (Francesco Canepa): “The European Central Bank snapped up debt of blue-chip names such as BMW, Sanofi and BASF as Germany and France accounted for the lion's share of its first batch of corporate bond purchases. The ECB has bought 10 billion euros worth of corporate bonds since June 8… The purchases are part of its 80-billion-euros-a-month money-printing programme… Germany's Bundesbank and the Banque de France, two of the six banks executing the purchases, bought hundreds of bonds between them, compared to a few tens apiece for the central banks of Italy and Spain.”

Fixed-Income Bubble Watch:

July 21 – CNBC (Jeff Cox): “Corporate debt is projected to swell over the next several years, thanks to cheap money from global central banks, according to a report Wednesday that warns of a potential crisis from all that new, borrowed cash floating around. By 2020, business debt likely will climb to $75 trillion from its current $51 trillion level, according to S&P Global Ratings. Under normal conditions, that wouldn't be a major problem so long as credit quality stays high, interest rates and inflation remain low, and there are economic growth persists. However, the alternative is less pleasant should those conditions not persist.”

July 21 – Bloomberg (Sally Bakewell and Karl Lester M Yap): “It’s getting harder for corporate debt investors to avoid the volume of negative yielding bonds that are now pouring into credit markets. Investors are holding about 465 billion euros ($512bn) of investment-grade company bonds with yields below zero, an eleven-fold increase on the start of the year, according to Bank of America Merrill Lynch data.”

Global Bubble Watch:

July 20 – Financial Times (Roger Blitz): “Pill-popping financial markets are a patient who has swallowed enough central bank medicine to become numb to any shocks, perceived or real. Shocks that previously sent markets into spasms are still being watched closely, but it is not long before they are deemed to have no lasting effect… Consider three events of recent weeks, each with a potentially heart-stopping impact on markets — Brexit, China currency depreciation and Turkey. Brexit has caused barely a tremor beyond sterling, there has been no market seizure from the renminbi’s fall since the start of the year…, while the failed coup against Turkish president Recep Tayyip Erdogan and its repercussions left European stocks, 10-year Treasury yields and the currency market beyond the Turkish lira untroubled… Market commentators say the source for this market sang-froid comes from the doctors administering the pills, the central banks. Since the 2008 financial crisis, policymakers and their meetings, communications and subsequent actions (or inactions) have assumed huge importance to the market.”

July 18 – Financial Times (Rochelle Toplensky): “Yield-hungry investors buoyed by the prospects of further monetary easing have invested $73bn in bond exchange traded funds globally this year. Brexit has meant interest rates are expected to be lower for longer, forcing investors to search for safe assets with a non-negative yield, creating massive demand for bonds that has pushed sovereign debt yields to new lows. ‘EPFR Global-tracked Bond Funds took in over $9bn for the second week running as investors responded to predictions of a rate hike-free remainder of 2016 in the US and fresh monetary tailwinds for emerging markets,’ said EPFR. Flows into long-term US corporate debt set a new record last week and a net $52bn has been invested in US bond ETFs in the year to date.”

July 22 – Bloomberg (Wes Goodman and Anchalee Worrachate): “Japanese investors rushed into foreign debt for a second week, government figures showed… Fund managers in the Asian nation bought a net 1.72 trillion yen ($16.2bn) of medium- and long-term debt abroad in the seven days ended July 15, the Ministry of Finance said. They bought a record 2.55 trillion yen of debt the previous week…”

July 17 – Wall Street Journal (Kim Mackrael): “Low interest rates around the world are fueling a familiar threat of housing bubbles, and central bankers in a number of key economies feel powerless to stop them. The problem is being acutely felt in Canada, where home prices are soaring even as the country’s energy- and mining-dependent economy slows. Sweden and Australia are dealing with similar surges in the value of homes, leading officials in all three countries to worry about the risk of a destabilizing bust.”

July 19 – Wall Street Journal (Jenny Strasburg): “S&P Global Ratings on Tuesday lowered its credit outlook for Deutsche Bank AG to negative from stable, saying market conditions and the U.K.’s decision to leave the European Union are expected to complicate the German lender’s restructuring plans.”

July 19 – Financial Times (Rochelle Toplensky): “Fund managers are buying record amounts of protection against a sharp fall in equities over the next three months while a growing number expect a radical new chapter in monetary stimulus, according to the latest Bank of America Merrill Lynch survey. BAML’s July survey of fund managers said a record net 44% of investors ‘think global fiscal policy is currently too restrictive’ and 39% expect the introduction of so-called helicopter money… by a country in the next 12 months, a 12 percentage point jump from June. Ben Bernanke’s recent meeting with Japanese Prime Minister Shinzo Abe started chatter that the Bank of Japan may introduce some form of helicopter money.”

July 20 – Wall Street Journal (Kelly Crow): “The global art market has gone on a diet. After the recession, seasoned and newcomer collectors alike surged into the world’s chief auction houses to splurge on trophies carrying eye-popping asking prices. Now, art lovers are cutting back, plying fewer $20 million-plus pieces into auctions and increasingly contenting themselves with cheaper, overlooked pieces... On Wednesday, …Christie’s International offered further proof of a downturn when it said it sold $3 billion in art during the first half of the year, down a third from the same period last year. Christie’s latest total included $2.5 billion in auction sales, down 37.5% from a year ago.”

U.S. Bubble Watch:

July 17 – Wall Street Journal (Kate Linebaugh): “More than 90 of the biggest U.S. companies will report results this week, giving a clearer picture of what is expected to be the fourth straight quarter of declining profits. Based on analysts’ forecasts for companies in the S&P 500 index, Thomson Reuters predicted that adjusted earnings per share for the second quarter were down 4.7% from a year earlier. That follows a 5% drop in the first quarter and would be the fourth straight period of declines. Revenue, meanwhile, is expected to slip 0.8%, marking the sixth straight quarter of declines…”

July 18 – Financial Times (Stephen Foley): “The shift of assets from actively managed investment funds to low-cost index trackers accelerated last month, as US stockpicking funds suffered their worst outflows since the financial crisis... While $21.7bn flowed out of actively managed US equity funds in June, the worst monthly figure since October 2008, passive funds, including exchange traded funds, took in $8.7bn… Morningstar’s latest monthly figures show that American savers have now taken $236bn out of active equity funds in the past year, while $229bn has gone into passive equity funds.”

July 21 – Bloomberg (Lexi Nahl): “First-time buyers have returned, helping boost sales of previously owned homes in June to the highest level in more than nine years… Tight supply may impact future sales as inventories dropped 5.8% from a year earlier to 2.12 million units, the lowest for a June since 2001.”

July 21 – Bloomberg (Oshrat Carmiel): “It’s a good time to buy a home in New York’s Hamptons, especially for shoppers with more than $3 million to spend. Sales of luxury homes in the area, known as Wall Street’s beachside retreat, fell 20% in the second quarter from a year earlier to 57 deals, while the number of high-end listings climbed, according to… appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate.”

July 21 – CNBC (Robert Frank): “The number of real estate transactions in the Hamptons fell 21% during the second quarter, adding to evidence that the high end of the housing market is faltering… The average sale price also declined, slipping 0.3% to $1.68 million. The softness in the Hamptons mirrors declines in high-end real estate across the country, from Manhattan penthouses and Miami condos to L.A. mansions.”

China Bubble Watch:

July 22 – Bloomberg (Enda Curran): “China’s weakening currency has triggered an increase in the amount of cash leaving the country, according to… Goldman Sachs… The U.S. bank estimates $49 billion worth of foreign-exchange outflows in June, compared with $25 billion in May…. The yuan fell 1.1% against the dollar and 2.2% versus a trade-weighted index last month.”

July 18 – Reuters (Winni Zhou and Nick Heath): “China has room to increase its fiscal deficit ratio to between 4 and 5% to more effectively boost the economy, official media quoted a central bank official as saying. China's current fiscal deficit target is 3% of gross domestic product (GDP), up from an actual 2.4% in 2015.”

Japan Watch:

July 21 – Bloomberg (James Mayger and Toru Fujioka): “Bank of Japan Governor Haruhiko Kuroda rejected the idea of helicopter money in comments made last month as investors seek hints on his next policy step as prices fall and growth wanes in the world’s third-largest economy. Given the current institutional setting, at this stage there is ‘no need and no possibility for helicopter money,’ Kuroda said in a BBC Radio 4 program that was aired Thursday and that the broadcaster said was recorded on June 17. ‘At this moment, the Bank of Japan has three options with quantitative and qualitative easing with negative interest rates.’ These current policies can be expanded if needed and there are no significant limitations to further monetary stimulus, he said.”

July 21 – Bloomberg (Toru Fujioka and Masahiro Hidaka): “An increasing number of officials at the Bank of Japan are concerned about the sustainability of the current framework for massive monetary stimulus, according to people familiar with the discussions. Some current and former BOJ officials, including dissenting board member Takahide Kiuchi, have for some time publicly said that the central bank’s unprecedented scale of bond purchases and time frame for achieving its 2% inflation goal is problematic. Now, there’s a broadening sense among some at the BOJ that the bank has to weigh the costs and benefits of policy measures more carefully, according to the people, who asked not to be named…”

EM Watch:

July 21 – Reuters (Karin Strohecker): “Developing countries have nearly tripled their external debt over the past decade, outpacing economic growth and increases in foreign exchange reserves - which could leave them open in the future to a ‘systemic crisis’, ratings agency Moody's said… Emerging market governments and companies around the globe have rushed in recent years to take advantage of rock-bottom global borrowing costs and investor hunger for yield. As a result, external debt jumped to $8.2 trillion in 2015 from $3.0 trillion in 2005, the Moody's report found, thanks largely to private-sector borrowing. The average ratio of external debt to gross domestic product jumped to 54% in 2015 from a decade-low of 40% in 2008. ‘External vulnerability has increased significantly in about 75% of emerging economies globally,’ the authors… wrote. The average ratio of external debt to reserves soared to more than 350% last year from just over 250% in 2007, the report added.”

July 21 – Wall Street Journal (Jon Sindreu): “The failed coup in Turkey is spotlighting a problem that threatens to sandbag emerging markets more broadly: burgeoning private debt. In the wake of Turkey’s political turmoil, credit-rating firms warned this week that heightened uncertainty threatens to undermine the country’s economy and the ability of companies to repay their debts. Standard & Poor’s… cut Turkey’s credit rating to double-B, deeper into junk territory. Moody’s… is weighing a downgrade. Economists often point to external debt as a key danger for emerging markets. In the case of Turkey and many other such nations, however, the growing debt pile is mostly home-based. Domestic credit to the Turkish nonfinancial sector has exploded to roughly 70% of gross domestic product, from around 20% in 2000…”

Leveraged Speculator Watch:

July 21 – Bloomberg (Oshrat Carmiel): “The amount of money leaving hedge funds slowed in the second quarter as firms that rely on computer algorithms made money in the selloff following the U.K.’s vote to exit the European Union. The industry saw $8.2 billion in net outflows in the second quarter, about 46% less than in the prior three months, Hedge Fund Research Inc. said… Global hedge fund assets rose by $42.1 billion in the second quarter to nearly $2.9 trillion… Asset growth was the strongest since the first quarter of 2015, boosted by a 2% return for the HFRI Fund Weighted Composite Index. The asset increase ‘was driven by strong quantitative CTA gains on Brexit Friday and broad-based industrywide gains across equity, commodity and currency markets pursuant to the Brexit dislocations,’ HFR President Kenneth Heinz said…”

Geopolitical Watch:

July 20 – Wall Street Journal (Michael Auslin): “In 1933, Japan walked out of the League of Nations after being condemned for invading Manchuria. This act of defiance dealt a blow to liberal internationalists’ hopes that global cooperation could lead to a peaceful resolution of the Asian crisis. It also ended decades of Japanese globalization during the Meiji and Taisho periods and set Tokyo on a path of confrontation with Western powers. The ultimate result was the Pacific War from 1937-45. Could the same thing happen today with China? Beijing’s reaction to last week’s ruling by the Hague-based Permanent Court of Arbitration recalls Tokyo’s rejection of the League’s attempt to rein in great-power competition 85 years ago.”

July 17 – Reuters (Ben Blanchard): “Freedom of navigation patrols carried out by foreign navies in the South China Sea could end ‘in disaster’, a senior Chinese admiral has said, a warning to the United States after last week's ruling against Beijing's claims in the area. China has refused to recognize the ruling by an arbitration court in The Hague that invalidated its vast territorial claims in the South China Sea, and did not take part in the proceedings brought by the Philippines.”

July 19 – Financial Times (Roman Olearchyk): “Ukraine’s top military commander promised an ‘adequate response’ after seven Ukrainian soldiers were killed and 14 injured in the past 24 hours in fighting with Russian-backed separatists… The battles mark one of the bloodiest days of fighting this year, as an uptick in the daily shelling and gunfire threatens to reignite full-scale fighting in a smouldering 26-month conflict that has claimed nearly 10,000 lives. The heightened hostilities are also a stark reminder that while last year’s internationally brokered peace accord succeeded in reducing the fighting from peak 2014 levels, the so-called Minsk agreements have failed to deliver a lasting ceasefire…”

July 20 – NBC: “North Korea said on Wednesday it had conducted a ballistic missile test that simulated pre-emptive strikes against South Korean ports and airfields used by the U.S. military... Leader Kim Jong Un guided the launches and expressed his satisfaction with them, the North's official Korean Central News Agency reported, without saying when the tests happened.”