Friday, June 23, 2017

Friday Evening Links

[Bloomberg] U.S. Stocks Gain as Oil Stabilizes, Dollar Falls: Markets Wrap

[Reuters] Policy ponder: central banks head for the Portuguese hills

[Reuters] Fed's Mester unmoved by weak U.S. inflation

[Bloomberg] Fed's Mester Argues for Rate Hikes as Bullard Counsels Patience

[Bloomberg] A Second, Even Bigger Foreclosure Reaches NYC Billionaires' Row

[Reuters] Trump, Putin and Erdogan behave like autocratic rulers: Germany's Schulz

Friday's News Links

[Bloomberg] U.S. Stocks Gain as Oil Stabilizes, Dollar Falls: Markets Wrap

[Bloomberg] Surging Prices for New U.S. Homes Suggest Tight Low-End Supply

[CNBC] GOP leaders have a tough task ahead to win enough support for Obamacare replacement

[Bloomberg] Senate Holdouts Seek Upper Hand in Perilous Health Bill Talks

[CNBC/SCMP] China’s banking regulator orders loan checks on Wanda, Fosun, HNA, others

[Bloomberg] As China Targets Serial Acquirers, These Are The Deals Still Pending

[Reuters] German bond scarcity a key factor in ECB QE extension debate: sources

[Bloomberg] How Australia's Banks Have Been Beaten Down This Week

[Bloomberg] Asia Junk Bond Buyers Accept Weaker Protection as Sales Surge

[CNBC] Singapore wealth fund Temasek: How a financial crisis in China might play out

[WSJ] China’s Debt Crackdown Could Get Out of Hand

[WSJ] Goodbye for Now to China’s Biggest Deal Makers

[WSJ] Wild Week for Chinese Stocks Reminds Investors of Beijing’s Heavy Hand

[FT] China probe shines light on top dealmakers

[FT] Big China companies targeted over ‘systemic risk’

[Reuters] North Korea tests rocket engine, possibly for ICBM: U.S. officials

[Reuters] Japanese warship takes Asian guests on cruise in defiance of China

Wednesday, June 21, 2017

Wednesday Evening Links

[Reuters] Oil drops to 10-month low; biggest first-half slide in 20 years

[Reuters] Nasdaq boosted by biotechs; energy, banks weigh on Dow, S&P

[Bloomberg] U.S. Enjoying Easiest Financial Conditions in Three Years: Chart

[Reuters] U.S. existing home sales unexpectedly rise in May

[CNBC] Divide widens between housing haves and have-nots

[Bloomberg] High-Yield Carnage Stays Contained for Now

[Bloomberg] Toronto Home Sales Cool Amid Signs Prices May Be Next to Fall

Wednesday's News Links

[Bloomberg] Stocks Decline as Crude Struggles; Pound Advances: Markets Wrap

[Bloomberg] Oil Extends Drop Into Bear Market as Supply Remains Plentiful

[Bloomberg] BOE’s Haldane Sees Case for Raising Interest Rates This Year

[Reuters] After weeks of secrecy, U.S. Senate to unveil healthcare bill

[CNBC] Mortgage applications hold steady as rates remain low

[Bloomberg] ECB Sees Trump Administration as Key Risk to Global Economy

[Bloomberg] Saudi King Removes Crown Prince, Appoints Mohammed Bin Salman as Replacement

[Reuters] Brazilian police deliver graft investigation against Temer

[Bloomberg] Balance of Power: How to Read the Saudi Shakeup

[Bloomberg] Take a Look at the States Sending the Most Carbon Into the Air

[WSJ] U.S. Oil Falls Into Bear Market Amid Worries Over Supply Glut

[WSJ] Forget Trump-Generated Volatility. The World Is Awash in Calm

[FT] Assets of $1.5tn wash up in British Virgin Islands

[FT] Battle for eastern Syria risks US, Russia and Iran confrontation

Tuesday, June 20, 2017

Tuesday Evening Links

[Bloomberg] U.S. Stocks Drop Most in Month on Oil Bear Market: Markets Wrap

[Reuters] U.S. crude ends at nine-month lows on global oversupply

[Reuters] Fed policymakers in tug-of-war on inflation, instability

[ABC] Brazil federal police accuse president of getting bribes

[Bloomberg] China Stocks Enter MSCI as $6.9 Trillion Market Goes Global

[Bloomberg] Remember the Stunning Dollar Rally in 2014? Now It's Euro's Turn

[Bloomberg] Pension Crisis Won't Be Reversed by High Returns, Moody's Says

[CNBC] Trump: Working with China on North Korea 'has not worked out'

Tuesday's News Links

[Bloomberg] U.S. Stocks Slip With Oil Below $43; Pound Slumps: Markets Wrap

[Bloomberg] Oil Drops to Seven-Month Low as Libya Adds to Persistent Surplus

[Reuters] U.S. current account deficit widens to 2.5 percent of GDP

[Reuters] Fed's Rosengren: Low interest rates pose financial stability risks

[Bloomberg] Ryan Says Tax Overhaul Must Happen in 2017 to Rebuild Economy

[Bloomberg] Carney Ends Silence With Brexit Warning to Rebuff Rate-Hike Call

[Reuters] Funding scramble squeezes China's borrowers despite PBOC injections

[Bloomberg] China Deploys Bond-Buying Tool First Time to Boost Liquidity

[Reuters] Wealthy Chinese rise to 1.6 million in past decade, up nearly 9 times - survey

[Bloomberg] Rise of Robots: Inside the World's Fastest Growing Hedge Funds

[WSJ] Argentina Sells $2.75 Billion of 100-Year Bonds

Monday, June 19, 2017

Monday Evening Links

[Bloomberg] U.S. Tech Stocks Rally; Dollar Gains, Bonds Slide: Markets Wrap

[Reuters] Japan business mood up, points to better BOJ tankan - Reuters Tankan

[Bloomberg] Shale's Record Fracklog Could Force Crude Prices Even Lower

[Bloomberg] China's Workers are Saying Goodbye to Double-Digit Pay Raises

[Reuters] White House says it retains right to self-defense in Syria; Moscow warns Washington

[WSJ] Russia Warns U.S. as Risks Rise in Syria

Monday's News Links

[Bloomberg] U.S. Tech Stocks Jump; Dollar Gains, Bonds Decline: Markets Wrap

[Reuters] Tight U.S. labor market should push inflation higher: Fed's Dudley

[CNBC/NYT] Whole Foods Deal Shows Amazon’s Prodigious Tolerance for Risk

[Bloomberg] Brexit Talks Kick Off in Brussels as May Urged to Soften Stance

[Bloomberg] Hong Kong Will Continue With Currency Peg, HKMA's Chan Says

[Bloomberg] China's Home Prices Increase in Fewer Cities as Curbs Bite

[Bloomberg] Moody’s Cuts Ratings on Australia’s Banks on Housing Concern

[NYT] Some Global Investors See Fresh Worries in an Old Problem: China

[Bloomberg] Abe's Popularity Slides as Mounting Japan Scandals Take Toll

[WSJ] Market Volatility Has Vanished Around the World

[FT, El-Erian] Markets must grasp that the Fed is no longer their best friend

[FT] Brexit talks: what to expect on day one

[BBC] Syria conflict: Russia issues warning after US coalition downs jet

[Reuters] New assertive generation of Gulf leaders at heart of Qatar rift

Saturday, June 17, 2017

Saturday's News Links

[Bloomberg] May Is Living Brexit Nightmare She Warned Of

[Spiegel] Brexit Talks Set to Begin amid Chaos in London

[Reuters] Brazil's Temer led graft scheme, billionaire tells Época magazine

[AP] Official Warns Illinois Finances in 'Massive Crisis Mode'

[CNBC] Negative-yielding government debt 'supernova' jumps to $9.5 trillion

[CNBC] Millionaires own a record 45% of the world's wealth — and their share is growing

[NYT] Amazon Deal for Whole Foods Starts a Supermarket War

[FT] A deal too far for China’s Anbang

Weekly Commentary: Peak Stimulus Has Passed

Bloomberg Radio/Television’s Tom Keene, Wednesday June 14, 2017: “Professor, what is the question you want to ask chair Yellen at the press conference here in six minutes?”

Narayana Kocherlakota, former president of the Minneapolis Fed: “I think the question to ask is ‘Why are you continuing to hike rates in such a low inflation environment?’. There doesn’t seem to be any risk to keeping rates low and lots of benefits to it.”

Torsten Slok, chief international economist at Deutsche Bank: “What are their arguments why this move down in inflation is only temporary?”

Bloomberg’s Keene: “Krishna, what do you want to know? Please keep the stock markets up?”

Krishna Memani, chief investment officer of Oppenheimer Funds: “I want to know what would it take for you to get off the path of tightening? What would the data have to show you to get off the path you have set the Fed on?”

Bloomberg’s Keene: “Do you agree with vice chairman Fischer that we are still ultra-accommodative even with the low inflation…?”

Memani: “Yes we are, and there’s no downside because despite ultra-accommodative policies there’s no uptick in inflation. So we can press on the pedal as much as we want without it effecting the economy negatively.”

Bloomberg’s Keene: “Professor, do we have a good understanding of where we are in our technological economy – do you have a belief in the data that the good PhDs at the Fed are coming up with on productivity, on the measurement of price change, on GDP? Do you have faith in the numbers?”

Kocherlakota: “I have faith. It’s definitely a difficult job to be doing – to be measuring productivity in the kind of changing economy that we’re in. But I have faith in that. I look at the data, I try to keep track of not just what’s going on at the aggregate level but individual price changes and I think we’re living in a low inflation world and that gives the Fed a lot more room to stay accommodative.”

Bloomberg’s Scarlet Fu: “Is there any central bank that's doing it right, Torsten? You’re an international economist. Is the ECB doing it better? Is the BOE doing better? Is the Bank of Canada doing it better?”

Slok: “There are important nuances, but I actually think that central banks have done extremely well. They have supported the economy as good as they can; they have invented new tools and instruments. We can debate if they were the right tools at the right time - the right dose. But I still will argue, at the end of the day, that what else should they have done, if we had been sitting in their chairs? I think we would have done the same thing. You can’t invent new tools and [do] Monday morning quarterbacking again without having another framework that's better. This has proven again and again that this was the right way to look at. And you need to come up with some other reason or some other model, and there really is no convincing model other than what the Fed is saying.”


It’s not as if we don’t learn from history. It’s just that more recent history has such a predominant effect on our thinking and perspectives. Nowhere is this truer than in the financial markets.

It’s been going on nine years since the “worst financial crisis since the Great Depression.” We’re now only two months from the 10-year anniversary of the Fed’s August 17, 2007 extraordinary measures: “To promote the restoration of orderly conditions in financial markets, the Federal Reserve Board approved temporary changes to its primary credit discount window facility. The Board approved a 50 bps reduction in the primary credit rate to 5-3/4%.”

This extraordinary inter-meeting response to a faltering market Bubble marked the beginning of unprecedented global central bank stimulus that continues to this day. It’s worth noting that the Fed’s August 2007 efforts did somewhat prolong the Bubble. The S&P500 traded to a then record 1,562 on October 12, 2007 (Nasdaq peaked in November). Extending “Terminal Phase” mortgage finance Bubble excess, 30-year mortgage rates dropped below 5.7% by early-2008, down about 100 bps from early-August 2007. And trading at about $72 a barrel in August, crude oil then went on a moonshot to surpass $140 by June 2008.

Memories of the devastating effects of Credit and asset Bubbles have faded from memory. The disastrous aftermath of the Fed aggressively stimulating mortgage Credit - as the centerpiece of its post-“tech” Bubble reflation strategy - has been wiped away by the cagey hand of historical revisionism. The consequences of loose financial conditions – i.e. speculation, malinvestment, maladjustment, deep structural economic impairment, financial system fragility, wealth redistribution – no longer even merit consideration. Instead, it’s accepted as fact that central bank stimulus has been a huge and undeniable success. With inflation so low, central banks “can press on the pedal as much as we want without it effecting the economy negatively.” “There doesn’t seem to be any risk to keeping rates low and lots of benefits to it.” This never has to end.

These folks are “charlatans” and “monetary quacks”, terminology pulled from analysis of the long and sordid history of monetary booms and busts. Today's central bankers are destroying the sanctity of money with no meaningful pushback. And while they risk calamity, pundits claim there’s little risk in zero rates and creating Trillions of new “money.” So long as securities prices are high, all must be well in the markets and with policy.

I am reminded of a parable coming out of the late-eighties commercial real estate boom and bust. A developer walks into a bank hoping for a loan to finance a wonderful new development idea. The loan officer thinks to herself, “This guy is a visionary and surely must know what he’s doing or he wouldn’t be here.” Sitting across the table from the loan officer, the developer is thinking “she’s a whiz with the numbers and wouldn’t think of lending me a dime if this plan doesn’t make financial sense.” So the relationship is cemented, the loan is made and everyone is happy – for a while.

These days, securities markets have raged on the notion of “enlightened” central bank monetary management. Meanwhile, central bankers have viewed robust markets as validation of the ingenuity of both their measures and overall policy frameworks. Everyone is happy - for now.

The crisis put the fear of God into Central bankers back in 2008/09 – and there have been a few unnerving reminders since. It’s difficult to believe most buy into the notion that low inflation ensures there’s little risk associated with sticking with extreme accommodation. Surely they’re familiar with the history of the late-twenties. And I believe there is a consensus view taking shape within the global central banker community that monetary policy should be moving in the direction of normalization. The Fed raised rates Wednesday, and the week was notable as well for less than dovish comments out of the Bank of England and Bank of Canada. And while the Bank of Japan left monetary policy unchanged, there has been a recent notable reduction in the quantity of bonds purchased. This week also saw Finance Minister Schaeuble (among other German officials) urging the ECB to prepare to reverse course.

I do think central bankers would prefer to remove some accommodation – and they won’t this time around be as disposed to flinch at the first sign of a market hissy fit. The Fed has now raised the fed funds rate four times, and financial conditions are as loose as ever. Securities markets have grown convinced that central bankers will not tighten policy to the point of meddling with the great bull market. Such market assurance then works to sustain loose financial conditions, a backdrop that will prod central bankers to move forward with accommodation removal.

I believe passionately in the moral and ethical grounds for sound money. It is a policy obligation at least commensurate with national defense. From my perspective, one can trace today’s disturbing social, political and geopolitical circumstance right back to the consequences of decades of unsound “money” and Credit. At this point, downplaying the risks of ultra-loose central bank policy measures is farcical.

Beyond morality and ethics, there are a more concrete practical issues that seems to escape conventional analysts. Desperate central bankers resorted to a massive “money printing” (central bank Credit) operation at the very heart of contemporary finance. Not surprisingly, years later they remain trapped in this inflationary gambit. They have manipulated interest rates, imposed zero rates on savings and forced savers into the risk markets. After nurturing a $3.0 TN hedge fund industry, monetary policymaking then promoted at $4.0 TN ETF complex. Near zero rates have accommodated an unprecedented expansion of global government and government-related debt. In China, ultra-loose global finance helped push a historic Bubble to unbelievable extremes.

History will look back at these measures as a most regrettable end game to a runaway multi-decade Credit and financial Bubble. When confidence wanes – in the moneyness of electronic central bank “money”; in the ability of central banks to manipulate market yields and returns; in the perception of money-like liquid and low-risk equities and corporate debt; in China – global policymakers will have lost the capacity to control financial and economic developments. It was a epic mistake to embark on almost a decade of central bank liquidity injections to reflate and then backstop global securities markets. To believe that structurally low consumer price inflation justifies ongoing aggressive monetary stimulus is foolhardy.

We’ve entered a dangerous period for the securities markets. Highly speculative markets have diverged greatly from underlying economic prospects. Unstable markets have been fueled by central bank liquidity and the belief that central bankers will not risk removing aggressive stimulus. At the minimum, there is now considerable uncertainty regarding the remaining two main sources of global QE (ECB and BOJ) out past a few months. Meanwhile, the Fed continues on a path of rate normalization, a course other central banks expect to follow. The monetary policy backdrop is in the process of changing. Peak Stimulus Has Passed.

Bull markets create their own liquidity. Especially late in the cycle, speculative leveraging spawns self-reinforcing liquidity abundance. Even with a diluted punch bowl, the party can still rave for a spell. Yet these days the changing backdrop significantly boosts the odds that the next risk-off episode sparks a problematic liquidity issue. It’s been awhile since the markets experienced de-risking/de-leveraging without the succor of a powerful QE liquidity backdrop.

According to JPMorgan’s Marko Kolanovic (via zerohedge), an incredible $1.3 TN of S&P500 options expired during Friday’s quarterly “quad witch” expiration. I have always been of the view that derivative trading strategies played a prevailing role in the final speculative blow-off in the big Nasdaq stocks back in Q1 2000. Coincidence that the Nasdaq 100 (NDX) peaked around March 2000 “triple witch” option expiration? After trading at a record high 4,816 on March 24, 2000, the NDX sank below 1,100 in August 2001 before hitting a cycle low 795 on October 8, 2002. Let this be a reminder of how quickly euphoria can vanish; how abruptly greed is transformed into fear; and how rapidly company, industry and economic fundamentals deteriorate when Bubbles burst.

The S&P500 traded to new all-time highs Wednesday, before a resumption of the technology selloff pressured major indices lower. After trading above 12 on Monday and Wednesday, the VIX retreated into Friday’s close (10.38). Such a low VIX reading doesn’t do justice to the volatility that is coming to life below the market’s veneer. The bank stocks (BKX) traded as high as 94.85 at Monday’s open and then retreated to a low of 93.24 before lunch, then traded to 94.93 Tuesday morning and then to 92.59 mid-session Wednesday - before rallying back to 94.78 Thursday and concluding the week at 93.94. The NDX traded as low as 5,633 Monday, then rallied to 5,774 Wednesday’s then as low as 5,635 early-Thursday - before closing the week down 1.1% at 5,681.

Thursday trading was the most interesting of the week. At one point, the S&P500 was approaching a 1% decline, with larger losses for the broader indices. The NDX was down as much as 1.6%. Yet despite weak equities, Treasury yields were grinding higher (up 4bps for the session). Both investment-grade and high-yield bonds were under modest selling pressure. Meanwhile, the currencies were trading wildly. The yen reversed abruptly lower, trading in an almost 2% range during the session. It was a market day that seemed to provide an inkling of what a more generally problematic de-risking episode might look like. But it was not to be this time, not with “quad witch” approaching. A significant amount of market “insurance” (put options) purchased over the past month (Trump/Comey/investigation uncertainties) expired worthless.

Returning to earlier, “There doesn’t seem to be any risk to keeping rates low…”, I would point directly to the incredible explosion in options trading (thought it was enormous before!). The VIX is indicative of one of the more conspicuous market distortions nurtured by low rates and central bank liquidity backstops. Anyone not seeing derivatives markets - the epicenter of central bank-induced risk misperceptions and price deviance - as one gigantic accident in the making hasn’t been paying attention.

Clearly, the (distorted) low cost of “market insurance” promotes destabilizing risk-taking and speculative leveraging. Moreover, derivative-related market leverage – in sovereign debt, corporate Credit, equities and commodities – is surely instrumental in what has evolved into a self-reinforcing global liquidity and price Bubble. Furthermore, these dynamics are integral to what has evolved into a major divergence between ultra-loose financial conditions in the markets and a central bank preference for marginally less accommodation.

I have little confidence that central bankers are on top of market developments. I do, however, suspect that they have become increasingly concerned by the markets’ general disregard for economic fundamentals and policy normalization measures. Central bankers over recent years have grown increasingly confident in their extraordinary control over securities markets. At least from the Fed’s vantage point, there must be some reflecting that perhaps markets have left them behind. Fed officials still talk the inflation and employment mandate along with “data dependent.” But they’ve now got at least one eye fixed on the markets.

In contrast to Dr. Kocherlakota, I doubt central bankers have a “good understanding of where we are in our technological economy.” There must be some nagging feelings creeping in – “Are we even measuring GDP correctly? Ditto productivity? Inflation dynamics have changed profoundly – so what effect do our policies really exert these days on consumer prices? Are our economic models even valid? It’s increasingly difficult to maintain faith in what we’ve been doing – this monetary experiment...”

In a period of such profound uncertainties, there’s one thing that is certain by now: central bank accommodation exerts powerful inflationary effects upon securities and asset prices. And for the first time in a while, unstable asset market Bubbles pressure central bankers to remove accommodation. Sure, they don’t want to be in the Bubble popping business, though when it comes to market Bubbles the sooner they pop the better. Surreptitiously, tremendous amounts of structural damage occur during late-cycle excess. Markets are indicating an initial recognition of structural issues.


For the Week:

The S&P500 was little changed (up 8.7% y-t-d), while the Dow increased 0.5% (up 8.2%). The Utilities jumped 1.6% (up 10.9%). The Banks were about unchanged (up 2.1%), while the Broker/Dealers added 0.7% (up 8.9%). The Transports gained 0.9% (up 4.1%). The S&P 400 Midcaps slipped 0.2% (up 5.6%), and the small cap Russell 2000 declined 1.1% (up 3.7%). The Nasdaq100 fell 1.1% (up 16.8%), and the Morgan Stanley High Tech index lost 0.8% (up 20.4%). The Semiconductors dropped 2.1% (up 17.7%). The Biotechs gained 0.9% (up 20.1%). With bullion down $13, the HUI gold index dropped 5.2% (up 2.1%).

Three-month Treasury bill rates ended the week at 99 bps. Two-year government yields slipped two bps to 1.32% (up 13bps y-t-d). Five-year T-note yields dipped two bps to 1.74% (down 18bps). Ten-year Treasury yields fell five bps to 2.15% (down 29bps). Long bond yields dropped eight bps to 2.78% (down 29bps).

Greek 10-year yields sank 32 bps to 5.63% (down 141bps y-t-d). Ten-year Portuguese yields dropped 10 bps to 2.92% (down 83bps). Italian 10-year yields fell 10 bps to 1.99% (up 17bps). Spain's 10-year yields added a basis point to 1.46% (up 8bps). German bund yields increased one basis point to 0.28% (up 7bps). French yields declined two bps to 0.63% (down 5bps). The French to German 10-year bond spread narrowed three to 35 bps. U.K. 10-year gilt yields added a basis point to 1.02% (down 22bps). U.K.'s FTSE equities index declined 0.8% (up 4.5%).

Japan's Nikkei 225 equities index slipped 0.3% (up 4.3% y-t-d). Japanese 10-year "JGB" yields were unchanged at 0.056% (up 2bps). France's CAC40 dipped 0.7% (up 8.2%). The German DAX equities index declined 0.5% (up 11.1%). Spain's IBEX 35 equities index dropped 2.0% (up 15%). Italy's FTSE MIB index declined 0.9% (up 8.9%). EM equities traded lower. Brazil's Bovespa index fell 0.9% (up 2.3%), while Mexico's Bolsa added 0.3% (up 7.8%). South Korea's Kospi lost 0.8% (up 16.5%). India’s Sensex equities index declined 0.7% (up 16.6%). China’s Shanghai Exchange fell 1.1% (up 0.6%). Turkey's Borsa Istanbul National 100 index declined 0.8% (up 25.7%). Russia's MICEX equities index sank 3.2% (down 18.4%).

Junk bond mutual funds saw inflows of $198 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates increased two bps to 3.91% (up 37bps y-o-y). Fifteen-year rates gained two bps to 3.18% (up 37bps). The five-year hybrid ARM rate rose four bps to 3.15% (up 41bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up a basis point to 4.00% (up 33bps).

Federal Reserve Credit last week declined $5.5bn to $4.428 TN. Over the past year, Fed Credit slipped $3.9bn. Fed Credit inflated $1.617 TN, or 58%, over the past 240 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $11.8bn last week to $3.270 TN. "Custody holdings" were up $32bn y-o-y, 1.0%.

M2 (narrow) "money" supply last week declined $11.7bn to $13.508 TN. "Narrow money" expanded $747bn, or 5.5%, over the past year. For the week, Currency increased $2.3bn. Total Checkable Deposits fell $36.7bn, while Savings Deposits rose $23.4bn. Small Time Deposits added $1.7bn. Retail Money Funds slipped $2.3bn.

Total money market fund assets fell $25bn to $2.634 TN. Money Funds fell $72.9bn y-o-y (2.7%).

Total Commercial Paper dropped $28.2bn to $969bn. CP declined $75bn y-o-y, or 7.2%.

Currency Watch:

The U.S. dollar index slipped 0.1% to 97.164 (down 5.1% y-t-d). For the week on the upside, the Canadian dollar increased 2.0%, the Mexican peso 1.5%, the Australian dollar 1.3%, the South African rand 1.0%, the New Zealand dollar 0.6%, the Norwegian krone 0.5%, the British pound 0.3%, the Singapore dollar 0.1% and the Brazilian real 0.1%. For the week on the downside, the South Korean won declined 1.0%, the Japanese yen 0.5% and the Swiss franc 0.4%. The Chinese renminbi declined 0.18% versus the dollar this week (up 1.97% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index declined 1.5% (down 8.6% y-t-d). Spot Gold lost 1.0% to $1,254 (up 8.8%). Silver sank 3.3% to $16.66 (up 4.3%). Crude dropped $1.09 to $44.74 (down 17%). Gasoline fell 3.1% (down 13%), while Natural Gas was little changed (down 19%). Copper dropped 2.7% (up 3%). Wheat surged 4.7% (up 18%). Corn gained 1.1% (up 11%).

Trump Administration Watch:

June 14 – Politico (Rachel Bade and Sarah Ferris): “House GOP efforts to write a fiscal 2018 budget are deadlocked amid Republican infighting, a divide that threatens to undermine President Donald Trump’s agenda by stalling tax reform and delaying progress on appropriations. The House Budget Committee is months behind its usual timeline in releasing and marking up its annual fiscal blueprint. While the panel said it hoped to release the budget by early June, conference-wide bickering over priorities and spending levels have all but ground the process to a halt.”

June 13 – Reuters (Pete Schroeder and Lisa Lambert): “The U.S. Treasury Department unveiled a sweeping plan… to upend the country's financial regulatory framework, which, if successful, would grant many items on Wall Street's wishlist. The nearly 150-page report suggested more than 100 changes, most of which would be made through regulators rather than Congress, Treasury Secretary Steven Mnuchin said… ‘We were very focused on, what we can do by executive order and through regulators,’ he said. ‘We think about 80% of the substance in the report can be accomplished by regulatory changes, and about 20% by legislation.’ Republican President Donald Trump has gradually been nominating heads of financial agencies to carry out his agenda…”

China Bubble Watch:

June 14 – Bloomberg: “China’s broadest measure of new credit slowed in May as policy makers moved to contain excessive borrowing, while M2 money supply increased at the slowest pace on record. Aggregate financing stood at 1.06 trillion yuan ($156bn)…, versus a median estimate of 1.19 trillion yuan… and 1.39 trillion yuan in April. New yuan loans rose to 1.11 trillion yuan, compared to the estimated 1 trillion yuan. The broad M2 money supply increased 9.6%, versus the 10.4% forecast…”

June 14 – Wall Street Journal (Anjani Trivedi): “China’s banking regulator should know better by now: loosen the reins and debt soon piles up. While Beijing is carrying out a high-profile campaign to reduce leverage in its financial markets with one hand, with the other it is encouraging more potentially reckless borrowing. This week, the regulator put pressure on the country’s big banks to lend more to small companies and farmers, while the government announced tax breaks for financial institutions that lend to rural households… If the goal of lending to poorer customers sounds noble, the concern is that the execution will only worsen Chinese banks’ existing problems, namely high levels of bad loans and swaths of mispriced credit. Bank lending to small companies is already growing pretty fast, with non-trivial sums involved: It jumped 17% in the year through March to 27.8 trillion yuan ($4.084 trillion). That compares favorably with the 7% rise in loans to large- and medium-size companies over the same period.”

June 14 – Bloomberg: “Only a year ago he was hailed as one of the boldest dealmakers in China. But on Wednesday, with scant explanation, Wu Xiaohui was said to be unable to perform his duties as chairman of Anbang Insurance Group Co… The development added another layer of intrigue to the story of Anbang, whose overseas acquisition spree has slowed in recent months amid increased scrutiny at home and abroad. China’s central bank was said to look into suspected breaches of anti-money laundering rules at the insurer late last year, while authorities temporarily banned Anbang’s life insurance unit from selling new products in May. High-profile bids for American hotels, insurance assets and a Manhattan office tower owned by the family of U.S. presidential adviser Jared Kushner have all fallen through over the past 18 months.”

June 14 – Bloomberg (Keith Zhai and Ting Shi): “China’s billionaires are learning yet again that wealth and power are no longer enough to keep them out of trouble. Anbang Insurance Group Co. said… that Wu Xiaohui -- its chairman, and one of China’s most aggressive overseas dealmakers -- was unable to perform his duties for personal reasons. Caijing Magazine, a reputable finance and business publication, said he was taken away for questioning. Wu is the latest example of the new reality in Xi Jinping’s China: Almost anyone could be hauled away at any time, regardless of cash or connections. Since Xi became party chief in 2012, billionaires and senior Communist Party members alike have been among those rounded up for questioning over corruption, financial crimes or other misdeeds.”

June 12 – Reuters (Stella Qiu and Jake Spring): “Chinese auto sales slipped in May from a year ago, registering two straight months of declines for the first time since 2015, with the automakers' association saying the weakness may drag on as the rollback of a tax incentive continues to hurt. The world's biggest auto market got a shot in the arm in 2016, growing at its fastest pace in three years, after Beijing halved the purchase tax on smaller-engined vehicles. But buyers have shied away since taxes climbed to 7.5%, from 5%, at the start of this year. Auto sales in China fell 0.1% in May from a year ago to 2.1 million vehicles…”

June 13 – Bloomberg (Kana Nishizawa): “The Hong Kong dollar may be sliding into the weak end of its trading band, yet money managers see no reason for stock investors to turn bearish just yet. Unlike previous bouts of weakness in the pegged currency… this time around there’s plenty of liquidity in the system, and no shortage of buyers. Foreign and mainland Chinese investors alike have been piling into Hong Kong-listed shares, lifting the benchmark index to a two-year high last week, even as the local currency retreated to a 17-month low.”

Europe Watch:

June 13 – Bloomberg (Rainer Buergin, Birgit Jennen, and Patrick Donahue): “German Finance Minister Wolfgang Schaeuble called for central banks to end ‘ultra loose’ monetary policy to avoid stoking global imbalances, saying that while they were beginning to take steps in that direction it was harder for the European Central bank to do so. ‘The Federal Reserve has already begun this process and even the ECB has made some communications that you could feel that, in a medium-term time, they will continue to think about -- in this direction,’ Schaeuble said… at the Bloomberg Germany G-20 Day conference in Berlin. ‘It’s not easy for the ECB, with all due respect.’”

June 14 – Reuters (Balazs Koranyi and Toby Sterling): “Top critics of the European Central Bank's asset purchase scheme expressed fresh doubts about the effectiveness of the program…, laying down their arguments just as the bank prepares for a debate on extending the measures. With its unprecedented 2.3 trillion euro ($2.6 trillion) bond buying scheme set to run until year's end, the ECB will have to decide this autumn whether to keep on buying to prop up a still weak inflation rate or start winding down the program. Conservative countries led by Germany, the bloc's biggest economy, have long opposed the scheme arguing that its effect is questionable while risks are underestimated… Jens Weidmann, president of the powerful Bundesbank, argued that the ECB, now a top creditor to euro zone governments, is at risk of coming under political pressure because any hint of policy tightening poses the risk of pushing yields higher and blowing a hole in national budgets. ‘At the end of the day, this can lead to political pressure being exerted on the Eurosystem to maintain the very accommodative monetary policy for longer than appropriate from a price stability standpoint,’ Weidmann told a conference…”

Central Bank Watch:

June 11 – Bloomberg: “Investors who fret about when and how global central banks will run down their crisis-era balance sheets can be relaxed about the biggest of them all -- China’s. Whereas the Federal Reserve’s $4.5 trillion asset pile is set to be shrunk and the European Central Bank’s should stop growing by the end of this year as the outlook brightens, China’s $5 trillion hoard is here to stay for the time being -- and could even still expand, according to the majority of respondents in a Bloomberg survey of People’s Bank of China watchers. The PBOC balance sheet is a fundamentally different beast from its global peers -- run up through years of capital inflows and trade surpluses rather than hoovering up government bonds -- but it still matters for the global economy. Changes in the amount of base money in the world’s largest trading nation are having a bigger impact than ever, making the variable key for stability in a year when political transition in Beijing is in the cards.”

June 15 – Reuters (Michael Nienaber): “Germany continued its push against European Central Bank policy…, when a senior member of Chancellor Angela Merkel's conservatives asserted the ECB has damaged the European project with its bond buying programme and could only regain trust by scaling back its ultra-loose monetary policy. The comments by Werner Bahlsen, head of the economic council of Merkel's CDU conservatives, came after Finance Minister Wolfgang Schaeuble… urged the ECB to change its policy ‘in a timely manner’, warning that very low interest rates had caused problems in some parts of the world. Germany is heading towards a federal election in September.”

June 14 – Reuters (Toby Sterling): “The impact of the European Central Bank's 2.3 trillion asset purchase program on inflation has been disappointing, Dutch central bank chief Klaas Knot, a long-time critic of the bond buying scheme, said… The purchases… have taken longer to work than the bank has anticipated. But other ECB officials argue that the benefits are now clear. ‘I think the effect (of asset buys) has been there in keeping the economic recovery going,’ Knot told Dutch lawmakers. ‘But the effect on inflation has just been what you'd call disappointing, full stop…If you look at core inflation... then actually inflation has been flat for four years, flat as a pancake, and so you can barely observe any effect,’ Knot said.”

June 15 – Bloomberg (Fergal O'Brien): “A split among Bank of England policy makers widened this month as two officials joined Kristin Forbes in her call for a rate increase, warning that inflation could rise more than previously thought. In the biggest division on interest rates in six years, the Monetary Policy Committee voted by five members to three to maintain the key interest rate at a record-low 0.25%. Michael Saunders and Ian McCafferty broke ranks to demand an immediate hike to 0.5%.”

June 12 – Bloomberg (Greg Quinn and Maciej Onoszko): “The Bank of Canada offered its strongest signal yet that it’s ready to raise interest rates as the economy gathers steam, in surprise comments that sent the Canadian dollar and bond yields soaring. In a speech Monday, Senior Deputy Governor Carolyn Wilkins highlighted how the nation’s recovery is broadening across regions and sectors, giving policy makers ‘reason to be encouraged.’ She downplayed worries about Toronto’s housing market and said policy makers need to keep their eye on the future evolution of growth, not only current economic conditions.”

Brexit Watch:

June 15 - CNN (Charles Riley): “Britain has three days to figure out its Brexit plan. The U.K. confirmed Thursday that official divorce talks with the European Union will start on June 19. But it's far from clear what its negotiating position will be when they get underway. Last week's general election wiped out Prime Minister Theresa May's parliamentary majority and raised big doubts about her hardline EU exit strategy. May is still trying to secure the support of a fringe party whose votes she needs to form a government, and it won't be clear until next Wednesday whether she commands a majority in parliament. Meanwhile, there is open debate about how Britain should approach talks with the EU, despite a year having passed since voters chose to pull the U.K. out of its most important export market.”

Global Bubble Watch:

June 11 – Bloomberg (Jonas Cho Walsgard): “The best returns are not in the riskiest stocks but in the least risky bonds. But you can’t get them without leverage. That philosophy helped Asgard Fixed Income Fund deliver a 19% return in the past year. ‘That’s the core of our strategy,’ Morten Mathiesen, 45, chief investment adviser at Copenhagen-based Moma Advisors A/S, said… ‘The best risk-adjusted returns are actually the low vol trades.’ …Mathiesen uses a proprietary model to forecast and pick the best risk premiums in short-term, high-quality bond markets. Most of the fund’s bonds are AAA rated, such as Danish mortgage bonds… To offset the interest rate risk the fund hedges the bonds with derivatives and is only exposed to the spread. The spread is usually small so the fund must borrow money to boost the return. Current leverage is about 11 times and has been as high as 25 times, according to Mathiesen. The volatility target is about 6%.”

June 14 – Wall Street Journal (Asjylyn Loder and Gunjan Banerji): “Wall Street’s ‘fear gauge’ has neared all-time lows this year. That hasn’t stopped retail investor Jason Miller from making a nice chunk of change betting it will go even lower. The Boca Raton, Fla., day trader says he has made $53,000 since the start of the year by effectively shorting the CBOE Volatility Index, nicknamed the VIX. That includes a white-knuckle day on May 17, when the VIX spiked 46% following reports that President Donald Trump had pressured former FBI Director James Comey to drop an investigation into former National Security Advisor Michael Flynn. As the 40-year-old Mr. Miller recalls, he rode out the storm, confident the market would revert to its torpid ways—which it did. ‘One person’s fear is another person’s opportunity,’ says Mr. Miller.”

June 11 – CNBC (Stephanie Landsman): “If David Stockman is right, Wall Street should hunker down. ‘This is one of the most dangerous market environments we’ve ever been in. It’s the calm before a gigantic, horrendous storm that I don't think is too far down the road,’ he recently said on ‘Futures Now.’ Stockman, who was director of the Office of Management and Budget under President Ronald Reagan, made his latest prediction after lawmakers grilled former FBI Director James Comey…”

June 14 – Bloomberg (Michael Heath): “Australian employment surged in May, led by a rebound in full-time positions, sending the jobless rate to the lowest level in more than four years. The currency surged. Employment jumped 42,000 from April, when it climbed an upwardly revised 46,100… Jobless rate fell to 5.5%, the lowest since Feb. 2013…”

Fixed Income Bubble Watch:

June 14 – Bloomberg (Luke Kawa and Robert Elson): “Combine the enduring search for yield with a renewed bull market in Treasuries and what do you get? Record high U.S. corporate debt holdings. Stone & McCarthy Research Associates’ weekly survey of fixed-income portfolio managers showed corporate debt allocations at an all-time high of 37%, matching levels last seen in August 2016. Money managers’ holdings of corporate bonds as a share of assets has oscillated between 32% and 37% over the past five years. Survey participants also reported reducing their allocation to Treasuries ahead of this week’s Federal Reserve meeting to 24.2%...”

June 11 – Bloomberg (Michelle Kaske and Steven Church): “Puerto Rico will likely need to fund government operations using sales-tax revenue claimed by warring factions of bondholders unless a legal dispute at the heart of the island’s bankruptcy is resolved by November. The federal oversight board charged with restructuring Puerto Rico’s $74 billion debt asked a judge to let the board appoint two independent agents to help litigate a dispute over who owns cash collected by the government’s sales tax agency…”

June 14 – Wall Street Journal (Ben Eisen): “Move over Benjamin Franklin. It’s all about the euros. American companies sold $107.3 billion of bonds in other currencies in 2017, the most for any comparable period in a decade, according to… Dealogic. U.S. companies have done hefty issuance of euro-denominated debt but have also sold bonds in Canadian dollars and British pounds this year, Bank of America Merrill Lynch data show.”

June 14 – Bloomberg (Carrie Hong and Narae Kim): “Dollar bond deals in Asia are coming so fast and furious that buyers sometimes aren’t getting the chance for a thorough look under the hood. Yet with yields higher than available elsewhere, the pressure is on to buy nevertheless -- a situation that could see problems down the road… That’s the picture emerging from an analysis of the record $137 billion of bonds sold in the U.S. currency in Asia excluding Japan so far this year -- nearly double of what was priced in the same period last year.”

Federal Reserve Watch:

June 14 – Bloomberg (Christopher Condon and Craig Torres): “Federal Reserve officials forged ahead with an interest-rate increase and additional plans to tighten monetary policy despite growing concerns over weak inflation. Policy makers agreed to raise their benchmark lending rate for the third time in six months, maintained their outlook for one more hike in 2017 and set out some details for how they intend to shrink their $4.5 trillion balance sheet this year. In a press conference…, Fed Chair Janet Yellen said the unwinding plan could be put into effect ‘relatively soon’ if the economy evolves as the central bank expects. ‘Near-term risks to the economic outlook appear roughly balanced, but the committee is monitoring inflation developments closely,’ the Federal Open Market Committee said… ‘The committee currently expects to begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated.’”

June 11 – Wall Street Journal (David Harrison): “The Federal Reserve’s interest-rate increases aren’t having the desired effect of cooling off Wall Street’s hot streak. While Fed officials meeting this week will likely decide to raise short-term interest rates for a fourth time since December 2015, much of that tightening effort has yet to be felt in financial markets, where stocks have rallied to records this year and bond yields have fallen, developments that tend to prompt more borrowing, faster economic growth and more market speculation. The tech-heavy Nasdaq Composite stock index, despite a drop Friday afternoon, is still up 15% as it nears the midyear mark and the S&P 500 index a robust 9% so far in 2017. Yields on 10-year Treasury notes have dropped to their lowest levels since November, meaning borrowing costs are falling for many households and businesses even as the Fed tries to raise them. Broad financial conditions are as accommodative now as they were in early 2015, the point of maximum Fed stimulus, according to a closely watched Goldman Sachs index…”

June 14 – Bloomberg (Cameron Crise): “The Federal Reserve’s focus on consumer-price inflation, over which it exerts relatively little influence, means it’s ignoring asset prices that are veering dangerously close to bubble territory. The surge in prices this year for virtual currencies such as bitcoin is reminiscent of the technology-stock excess of the late 1990s, and even after a recent selloff, the biggest U.S. tech shares are still up more than 20%. Policy makers could rein in the speculation by speeding up the pace of interest-rate increases…”

June 14 – Bloomberg (Nick Timiraos and Kate Davidson): “The White House is set to launch its search for the next Federal Reserve chief, according to a senior official, and it will be managed by Gary Cohn, the former Wall Street executive who some market strategists believe could be a candidate for the post himself. Officials won’t publicly outline any timetable for their decision or shortlist of candidates. Fed Chairwoman Janet Yellen’s term runs through January… Ms. Yellen’s reappointment isn’t an outcome many observers expect because of Mr. Trump’s fierce criticism of her during the final weeks of last year’s presidential campaign. But his willingness to consider her speaks to the amicable relationship they have forged since Mr. Trump took office, observers say.”

U.S. Bubble Watch:

June 14 – Bloomberg (Sho Chandra): “U.S. retail sales fell in May by the most since the start of 2016, reflecting broad declines in categories including motor vehicles and electronics… Retail sales dropped 0.3% (est. unchanged) after a 0.4% increase in prior month. Sales excluding autos and gasoline were unchanged after a revised 0.5% advance…”

June 14 – Wall Street Journal (Jon Sindreu): “Desperate to increase returns, some of the world’s most conservative investors are taking bigger risks by aping banks and lending directly to companies. In recent years, there has been a surge in investments from pension funds and life insurers into specialist asset managers that lend to midsize firms who can’t get financing from banks… But now the flood of cash is pushing down returns, leading these funds to design riskier and more complex products, while increasing their leverage. Because ultralow interest rates and other monetary stimulus have pushed down yields across markets, pension funds and life insurers have struggled to match their long-dated liabilities. That has encouraged them to chase riskier assets, such as real estate, private equity and now direct lending to companies.”

June 13 – Bloomberg (Julie Verhage): “U.S. stocks are the most overvalued investment in the world. At least that’s what institutional investors say. A record 44% of fund managers polled in a monthly survey from Bank of America Merrill Lynch see equities as overvalued, up from 37% last month. The technology-heavy Nasdaq Composite Index was named the most crowded trade, with 57% of investors saying Internet stocks are expensive and 18% calling them ‘bubble-like.’ Still, analysts caution that these results don’t spell the end of the bull market.”

June 12 – Bloomberg (Luke Kawa): “The severity of the retreat from tech shares Friday can be seen in the amount of cash that fled the group. The Technology Select Sector SPDR Fund, ticker XLK, suffered its worst week of outflows in 18 months, shedding more than $737 million. Friday’s withdrawals of $560.5 million were the most among U.S.-listed equity products, and the third-highest for the ETF since the start of 2015.”

June 14 – Bloomberg (Matt Scully): “Two of the biggest online consumer lenders don’t always check whether borrowers are lying to them, and if they find errors in an application, they may still approve the loan. Prosper Marketplace Inc. doesn’t verify key information like income and employment for around a quarter of the loans it makes, according to documents... LendingClub Corp. said it only verified income about a third of the time for one of the most popular loans it made in 2016… If either lender finds mistakes in a borrower’s application, such as overstated income, they may still go ahead with the loan, according to disclosures…”

June 12 – Wall Street Journal (Kristen Grind): “Brokers willing to learn the lost art of making risky mortgages are in demand again. Brandon Boyd was a high school junior during the financial crisis. Now, the former Calvin Klein salesman is teaching mortgage brokers how to make subprime loans. Mr. Boyd, a 25-year-old account executive at FundLoans in a beach town outside of San Diego, is at the cusp of efforts to bring back an army of salespeople who once powered the mortgage industry and, some say, contributed to the housing crisis.”

June 12 – Bloomberg (Matt Scully): “Subprime auto bonds issued in 2015 are by one key measure on track to become the worst performing in the history of car-loan securitizations, according to Fitch Ratings. This group of securities is experiencing cumulative net losses at a rate projected to reach 15%, which is higher even than for bonds in the 2007, Fitch analysts Hylton Heard and John Bella Jr. wrote… ‘The 2015 vintage has been prone to high loss severity from a weaker wholesale market and little-to-no equity in loan contracts at default due to extended-term lending, a trend which was not as apparent in the recessionary vintages,’ said the analysts, referring to lenders’ stretching out repayment terms on subprime loans, sometimes to over six years, to lower borrowers’ monthly payment.”

Japan Watch:

June 14 – Wall Street Journal (Saumya Vaishampayan and Megumi Fujikawa): “Don’t look now, but Japan’s central bank is slowing its vast bond-buying exercise. The Bank of Japan bought just ¥7.89 trillion ($71.6bn) worth of Japanese government debt last month, according to J.P. Morgan. While that sounds like a lot, it is the least outright buying… since October 2014, when the central bank surprised markets by saying it would increase its asset purchases. The latest figure raises a question: Is the BOJ trying to rein in its ultraloose policies by stealth?”

EM Watch:

June 13 – Bloomberg (Archana Narayanan, Alaa Shahine, and Fiona Macdonald): “Some Qatari banks are boosting interest rates on dollar deposits to shore up liquidity as a Saudi-led campaign to isolate the gas-rich Arab state intensifies, people familiar with the matter said. The lenders are offering a premium of as much as 100 bps over the London interbank offered rate to attract dollars from regional banks… That compares with rates of 20 basis bps over Libor before the feud started on June 5.”

Leveraged Speculator Watch:

June 14 – Bloomberg (Evelyn Cheng): “Short-term investors should sell stocks and get ready for a drop in the market this summer, Jeffrey Gundlach, CEO and CIO of DoubleLine, said… ‘If you’re a trader or a speculator I think you should be raising cash today, literally today. If you're an investor you can easily sit through a seasonally weak period,’ Gundlach said… Gundlach reiterated his expectation for a summer correction in the U.S. stock market, while Treasury yields rise.”

June 13 – Bloomberg (John Gittelsohn): “Investors should be wary as low interest rates, aging populations and global warming inhibit real economic growth and intensify headwinds facing financial markets, according to Bill Gross. ‘Don’t be mesmerized by the blue skies,’ Gross, manager of the Janus Henderson Global Unconstrained Bond Fund, wrote... ‘All markets are increasingly at risk.’”

Geopolitical Watch:

June 13 – Reuters (Idrees Ali and Mike Stone): “U.S. Defense Secretary Jim Mattis said… that North Korea's advancing missile and nuclear programs were the ‘most urgent’ threat to national security and that its means to deliver them had increased in speed and scope. ‘The regime’s nuclear weapons program is a clear and present danger to all, and the regime’s provocative actions, manifestly illegal under international law, have not abated despite United Nations’ censure and sanctions,’ Mattis said… ‘The most urgent and dangerous threat to peace and security is North Korea… North Korea's continued pursuit of nuclear weapons and the means to deliver them has increased in pace and scope.’”

June 10 – Reuters (Maria Kiselyova): “Russia said… it had told the United States it was unacceptable for Washington to strike pro-government forces in Syria after the U.S. military carried out an air strike on pro-Assad militia last month. Russian Foreign Minister Sergei Lavrov relayed the message to U.S. Secretary of State Rex Tillerson… on Saturday initiated by the U.S. side, the Russian Foreign Ministry said…”

June 13 – Reuters (Jim Finkle): “Two cyber security firms have uncovered malicious software that they believe caused a December 2016 Ukraine power outage, they said…, warning the malware could be easily modified to harm critical infrastructure operations around the globe. ESET, a Slovakian anti-virus software maker, and Dragos Inc, a U.S. critical-infrastructure security firm, released detailed analyses of the malware, known as Industroyer or Crash Override, and issued private alerts to governments and infrastructure operators to help them defend against the threat.”

Thursday, June 15, 2017

Thursday Evening Links

[Reuters] Wall St. lower as tech slide resumes

[Bloomberg] BOJ Decision Guide: Kuroda Faces Pressure to Talk About Exit

[Bloomberg] The Nasdaq-100's Most Impressive Bull Run in Over 20 Years Is in Trouble

[Bloomberg] Bitcoin Tumbles Most in More Than Two Years After Record Run

[CNBC] The Fed wants to go on 'autopilot': Look out for storm clouds ahead

[Bloomberg] Canada Home Sales Drop Most in Almost 5 Years on Toronto Decline

[Reuters] Kyle Bass still short yuan, says China credit bubble 'metastasizing'

[Bloomberg] China Builds Its Global Role, One Infrastructure Loan at a Time

[WSJ] Flush With Cash, Top Quant Funds Stumble

Thursday's News Links

[Bloomberg] U.S. Stocks Slide on Tech, Dollar Gains After Fed: Markets Wrap

[Reuters] Oil hits six-week low as OPEC fails to curb oversupply

[Bloomberg] BOE Policy Split Deepens as Three Officials Seek Rate Hike

[Reuters] China stands pat on rates after Fed lifts benchmark

[Reuters] Merkel ally renews German push for ECB to wind down bond purchases

[Bloomberg] Anbang Rout Turns China's Stock Giants From Heroes to Zeroes

[Bloomberg] Australian Unemployment Drops to Four-Year Low, Currency Surges

[Bloomberg] Dollar Bonds Coming Too Fast in Asia for Investors to Keep Up

[Bloomberg] Who Will Be the Next Fed Chair?

[NYT] Why Did China Detain Anbang’s Chairman? He Tested a Lot of Limits

[WSJ] Fed Raises Rates, Sets Out Plan to Shrink Asset Holdings Beginning This Year

[WSJ] A Requiem for Bond Buying: A Look Back at How the Fed Supersized Its Balance Sheet

[WSJ] Investors Play the Risky Role of Lender

Wednesday, June 14, 2017

Wednesday Evening Links

[Bloomberg] Asian Stocks Set to Slide as Bonds Rise After Fed: Markets Wrap

[Bloomberg] Fed Raises Rates, Maintains Forecast for One More Hike

[Reuters] Weak data weighs on bank stocks; Fed rate decision looms

[Bloomberg] Asset Inflation Jumps and Fed Policy Makers Are Hamstrung

[Bloomberg] Yellen Doubles Down on Bet Hot Job Market Stokes Inflation

[Bloomberg] Anbang Shows Billionaires Should Be Nervous in Xi's New China

[Bloomberg] Portfolio Managers Are Holding Record Levels of Corporate Debt

[WSJ] Shhh…The Bank of Japan Is Buying Fewer Bonds

[WSJ] Beijing Gives Banks the Go-Ahead for Yet Another Lending Binge

Wednesday's News Links

[Bloomberg] Treasuries Rise, Dollar Dips as Economic Data Miss: Markets Wrap

[Bloomberg] Dollar Tanks on Disappointing Data Ahead of FOMC Meeting

[Bloomberg] Oil Falls as U.S. Stockpiles Rise and IEA Sees 2018 Supply Surge

[Bloomberg] Slowdown in U.S. Consumer Inflation May Sow Fed Doubt on Prices

[Bloomberg] Drop in U.S. Retail Sales Signals Uneven Consumer Spending

[Reuters] BOJ to keep policy steady, reassure markets stimulus exit still distant

[Bloomberg] China Credit Growth Slows in May as Tighter Oversight Takes Hold

[Bloomberg] China’s Consumers, Factories Hold Up as Global Outlook Brightens

[Bloomberg] Anbang Chairman's Mysterious Absence Caps Months of Intrigue

[Bloomberg] Euro-Area Employment Rises at Fastest Pace Since 2008: Chart

[Reuters] ECB critics, weary of lax policy, voice fresh doubts

[Reuters] ECB's bond buys' impact on inflation disappointing: Knot

[Bloomberg] Biggest Online Lenders Don't Always Check Key Borrower Details

[Politico] Internal House GOP budget feud threatens agenda

[WSJ] Federal Reserve Expected to Deliver Rate Increase

[WSJ] Markets Await Fed Moves to Trim Balance Sheet

[WSJ] Wall Street Veteran Leads Search for Next Fed Chief

[Bloomberg] A New Record for Global Pollution : Chart

Tuesday, June 13, 2017

Tuesday Evening Links

[Bloomberg] Stocks Close at Records, Dollar Slips as Fed Looms: Markets Wrap

[Bloomberg] Anbang Says Chairman Can't Perform Job for Personal Reasons

[Bloomberg] Jeff Gundlach sees trouble, says traders should raise cash 'literally today'

[Bloomberg] Here Are the Theories for Why Mega-Cap Tech Stocks Took a Bath

[Bloomberg] A Record Number of Investors Say Stocks Are Overvalued

[Bloomberg] Sinking Hong Kong Dollar Has Money Managers Unworried -- for Now

[WSJ] U.S. Companies Look Abroad to Sell Their Debt

Tuesday's News Links

[Bloomberg] U.S. Stocks Rebound, Dollar Weakens as Fed Looms: Markets Wrap

[Reuters] U.S. Treasury unveils financial reforms, critics attack

[Reuters] Fed set to raise interest rates, give more detail on balance sheet winddown

[Reuters] U.S. producer prices unchanged as energy costs drop

[Bloomberg] Charting the Lift in U.S. Job Market as Trump Seeks Elevation

[Bloomberg] Qatar Banks to Boost Deposit Rates to Attract Dollars

[Bloomberg] Schaeuble Calls for End to ‘Ultra Loose’ Monetary Policy

[Bloomberg] ECB Said to Be Unlikely to Include Greece in QE in Coming Months

[Reuters] Slowdown in BOJ's bond buying a result of stable yields - official

[Bloomberg] Bill Gross Warns All Financial Markets ‘Increasingly at Risk’

[CNBC] Trump reportedly told Yellen he considers her a 'low-interest-rate' person like himself

[NYT] Markets Unfazed as Federal Reserve Nears Plan to Shed Bonds

[WSJ] The Snowballing Power of the VIX, Wall Street’s Fear Index

[WSJ] Beneath the Uneasy Peace Between Donald Trump and Janet Yellen

[WSJ] Does Anyone Remember How to Make a Subprime Mortgage?

[FT] Why China no longer fears the Fed

[Reuters] Cyber firms warn of malware that could cause power outages

[Reuters] North Korea 'most urgent' threat to security: Mattis

[Reuters] Iran's Khamenei blames U.S. for regional instability, creation of Islamic State

Monday, June 12, 2017

Monday Evening Links

[Bloomberg] U.S. Tech Drop Resumes as Apple Falls; Oil Rises: Markets Wrap

[Bloomberg] Bank of Canada Rate Hike Signal Sends Loonie Higher

[Bloomberg] Subprime Auto Bonds From 2015 May End Up Worst Ever, Fitch Says

[Bloomberg] U.S. Bears Return to China With Shorts Circling $6 Billion ETFs

[CNBC] The tech wreck is a sign there could be a summer swoon

Monday's News Links

[Bloomberg] Tech Selloff Spreads; Pound Slides as May Battles: Markets Wrap

[Reuters] Tech sell-off spreads to Europe and Asia, politics lift euro

[Reuters] Eyes on central banks after sterling shocker

[Reuters] Britain's PM May to face her party amid post-election tumult

[Reuters] French finance minister says 'optimistic' about Greek deal after Athens talks

[Bloomberg] Bond Market Doomsayers Sound Alarm as Margin of Safety Vanishes

[Bloomberg] Hedge Fund Delivers 19% Return by Betting Only on Safest Bonds

[Bloomberg] Two Chinese Provinces Falsified Economic Data, Inspectors Say

[Reuters] China's monthly vehicle sales post first back-to-back drop since 2015

[Reuters] Japan core machinery orders fall more than forecast in sign of economic fragility

[Bloomberg] Major Tech ETF Sees Worst Weekly Outflow in 18 Months

[CNBC] 'Horrendous storm' to hit stocks, Wall Street not rational: David Stockman

[Politico] Forget Comey. The Real Story Is Russia’s War on America

[Bloomberg, El-Erian] Anti-Establishment Politics Is Far From Going Away

[NYT] Preparing for ‘Brexit,’ Britons Face Economic Pinch at Home

[WSJ] Fed’s Effort to Guide Markets Falls Short

[WSJ] As Politics Boil, Financial Markets Are in Dream Land

Saturday, June 10, 2017

Saturday's News Links

[Reuters] British PM fights for survival ahead of Brexit talks

[Bloomberg] May Fights to Keep Job as Top Aides Resign

[BBC] Theresa May's Top Two Aids Quit

[CNBC] The five biggest tech stocks lost nearly $100 billion in value on Friday

[Reuters] Italy's Renzi sees elections at natural end of legislature in 2018

[Bloomberg] Washington's Never Seen Anything Like the Comey Crisis. Or Has It?

Weekly Commentary: Crowded Longs, Shorts and a New Z1

It was a week that saw Mario Draghi cling stubbornly to ultra-dovish monetary policy, the UK’s Brexit strategy thrown into even greater disarray after Prime Minister Theresa May’s failed election gambit, and the former Director of the FBI essentially testify that our President is a scoundrel. And then there’s the Middle East…

In the midst of it all, after trading at a 24-year low 9.37 Friday morning, an abrupt reversal had the VIX ending the week at 10.70. Looking at the S&P500’s slight (0.3%) decline for the week, one might be tempted to think comfortably “boring.” Market internals, though, were anything but boring or comforting. Friday’s session saw the Nasdaq 100 (NDX) swing wildly. After trading to an all-time high 5,898 in the first hour of U.S. trading, the index sank over 4.0% to 5,658 before closing the session down 2.44% at 5,742. Amazon traded in an intraday range of 1,013 to 927. Looking at “FANG” plus Microsoft and Apple, major market cap was evaporating in a hurry. By the end of Friday’s session, Facebook had declined 3.3%, Apple 3.9%, Amazon 3.2%, Microsoft 2.3%, Netflix 4.7% and Google 3.4%. The semiconductors (SOX) traded at a multi-year high 1,149 early in Friday’s session, then sank 7.0% before recovering somewhat to close the day down 4.3% at 1,090. Biotech (BTK) rose 1.5% in the morning to an all-time high and then closed the session slightly lower.

Yet it was not just Friday - and not only tech. After trading Tuesday morning at a low of 88.38, bank stocks (BKX) surged over 6% before closing the week up 4.9% to 93.79. The broker/dealers jumped 3.6% this week. The small cap Russell 2000 traded Tuesday morning at a low of 1,387 before rallying 3.3% to end the week with a gain of 1.2%.

It was an unpleasant day and week for the Momentum Crowd all crowded into outperforming technology stocks. It was even worse for those long momentum and short the underperformers. Long tech versus short financials had been a big winner until the late-week “rip your face off” – with Friday trading seeing bank stocks up 2.3% and the Morgan Stanley High Tech Index down 3.0%. Long big technology against short small caps had also been easy money – until the last few sessions. This week saw the NDX drop 2.4%, while the small cap Russell 2000 gained 1.2%. And it’s worth noting some of Friday’s winners: Dillards (10.2%), Urban Outfitters (7.8%), J.C. Penny (6.8%) and Barnes & Noble (6.0%) - all heavily shorted in the despised retail sector. Moreover, the session's leading gainers in the S&P500 – including Kohl’s (7.2%), Chesapeake Energy (4.9%), Nordstrom (5.7%), Tractor Supply Company (4.7%) and Murphy Oil 4.7% – are popular short targets. It was a rotten day and a poor week for many long/short strategies.

As for the ECB decision and the UK election, I’ll this evening posit the briefest of thoughts. Mario Draghi has been kicking the can down the road since 2012, and he clearly is in no mood to see what happens when his leg turns weary. We’ll apparently have to wait until later in the year to have a clearer understanding of the ECB’s stimulus program end-game. The Wall Street Journal ran an interesting pre-meeting article – with the catchy headline “ECB Critic Holds His Tongue as Race Nears for Bank’s Top Job” - discussing how the Germans have set their sights on the end of Draghi’s term in 2019.

June 7 – Wall Street Journal (Tom Fairless): “Jens Weidmann, the German central-bank chief who made his name by loudly attacking the European Central Bank’s crisis-fighting efforts, has become a quiet defender of the ECB against its German critics. The shift has been subtle. Mr. Weidmann still criticizes the bank’s radical stimulus measures. But his tone has softened as evidence accumulates that the ECB’s policies are working—and as the race to become the institution’s next president approaches. ‘There is currently no doubt that an expansionary monetary policy stance is appropriate,’ Mr. Weidmann said…, while suggesting he might not agree with his colleagues on the details. Only five years ago, he was boasting of clashes with fellow policy makers, and comparing easy-money policies to drugs and alcohol. As ECB officials gather Wednesday and Thursday in Estonia, what was once a bitter argument over the bank’s far-reaching monetary stimulus is expected instead to be a pragmatic discussion about whether to start reducing it.”

And why the big surprise over the dismal Conservative party showing in the UK election? Has there been any brightening in the underlying dour public mood? Folks suddenly content with the “establishment,” “elites” and the status quo? Feelings the “system” is working more fairly? Market and media complacency returned after Emmanuel Macron’s huge market-pleasing victory in the French presidential election. I would suggest the Mr. Macron owes his presidency and apparent mandate to Mario Draghi. I wouldn’t, however, wager on a long honeymoon period – let along some new golden age in French (and European) policy management. The political instability that had pundits fretting coming into 2017 is merely in a bit of remission. Wait until the ECB tap goes dry and the Draghi Bubble bursts.

Closer to home, there was a new Federal Reserve “flow of funds” Z.1 report this week. From my perspective, interesting data raised more questions than were answered.

Certainly not inconsistent with downshifting GDP (Q1 1.2% vs. Q4 2.1%), Credit growth somewhat fell off a cliff. Total Non-Financial Debt (NFD) growth slowed to a 1.4% pace in Q1, down from Q4 2016’s 2.8% to the slowest expansion in years. In seasonally-adjusted and annualized (SAAR) dollars, NFD expanded $676bn in Q1, down from $1.338 TN in Q4 and $2.406 TN in Q1 2016. Seeing such data, I would normally be chronicling a dramatic tightening of Credit Availability and financial conditions. It’s yet another example of these being the most abnormal of times.

Household mortgage Credit expanded at a 3.0% rate during Q1, second only to Q4’s 3.2% going all the way back to the pre-crisis era. Consumer (non-mortgage) Credit expanded at a 6.5% pace, matching Q4 (strongest since Q3 ’15). Corporate borrowings bounced back strongly from Q4’s abrupt stall (0.2%). Q1’s 6.9% growth rate surpassed Q3’s 6.3% and was the strongest expansion of Corporate borrowings since Q1 ’16 (10.7%). Data just don’t speak to a tightening of Credit conditions.

Q1 saw Federal government borrowings contract at a 3.3% pace and State & Local borrowings fall at a 3.5% rate. It was this atypical decline in government Credit that largely explains Q1’s tepid overall Credit expansion. At least at the federal level, a significant drawdown in deposits helps to explain the one-quarter hiatus from market borrowings. A Q2 bounce back in government borrowings should push system Credit growth significantly higher.

To see booming securities markets in the face of 1.2% pace NFD growth is strange indeed. But while overall Non-Financial borrowings slowed to a crawl, the financial sector seemed to be frantically scurrying about. The Domestic Financial Sector’s “Net Acquisition of Financial Assets” surged an unusual SAAR $4.840 TN (vs. Q4’s $291bn and Q3’s $2.716 TN). After three straight quarters of contraction, Net Interbank Assets expanded an extraordinary SAAR $1.589 TN. The Financial Sector also increased Miscellaneous Assets SAAR $1.811 TN, while expanding Debt Securities holdings SAAR $452bn and Fed Funds and Repos SAAR $158bn.

Depository Institutions’ Loans expanded a robust SAAR $924bn during Q1, up from Q4’s SAAR $595bn but somewhat below Q1 ‘16’s booming $1.241 TN. Clearly, booming asset markets had much more to do with a booming financial sector than a robust real economy. It would be quite unusual for booming markets not to provide some degree of economic stimulus, though bubbling markets create myriad fragilities.

Securities markets remain the epicenter of this cycle’s historic inflation. Q1 saw Equities increase a nominal $939bn to a record $40.755 TN. This boosted Equities as a percent of GDP to a record 214%. This compares to the previous peak levels from 2007 and 1999 of 181% and 202%. Total Debt Securities increased nominal $320bn during Q1 to a record $41.464 TN. Debt Securities-to-GDP at a near-record 218% has been relatively stable over recent quarters. Total (Debt and Equities) Securities ended Q1 at a record $82.220 TN and a record 432% of GDP. This compares to the cyclical peaks of 379% at Q3 2007 and 359% at Q1 2000.

The Household Balance Sheet continues to be a centerpiece of U.S. Bubble Economy analysis. U.S. Household Assets ended Q1 at a record $110 TN, increasing $2.383 TN during the quarter. And with Household Liabilities up $36 billion (to $15.152 TN), Household Net Worth surged another (remarkable) $2.347 TN during the quarter to a record $94.835 TN. It’s worth noting that Household Net Worth has now inflated $39.1 TN, or 70%, since Q1 2009.

Over the past year, Net Worth inflated $7.259 TN, or 8.3%, one of the largest one-year gains on record. By major component, Household Financial Assets increased $1.781 TN during Q1 to a record $77.115 TN, with a notable one-year rise of $5.734 TN (8.0%). At 125% of GDP, Real Estate holdings gained $499bn during the quarter to a record $26.866 TN, with a large one-year rise of $1.794 TN (7.2%).

Q1 Household Net Worth reached a record 498% of GDP. For comparison, Net Worth/GDP ended the (“decade of greed”) eighties at 379%, Bubble year 1999 at 446% and peak mortgage finance Bubble 2007 at 461%. Unless something dramatic unfolds over the next few weeks, Net Worth/GDP will have cruised through 500% during Q2. It’s worth noting that Household Total Equities (equities and mutual funds) holdings have doubled from 2009 levels to approach the record 129% of GDP from year-end 1999.

Helping to offset tepid domestic Credit, Rest of World (ROW) had strong Q1 flows into U.S. financial assets. At SAAR $1.200 TN, Q1 ROW flows compare to an outflow of SAAR $187bn in Q4 and an inflow of SAAR $501bn in Q1 2016. Curiously, Treasury purchases (SAAR $344bn) dominated flows into U.S. debt securities and were the strongest since 2014. Purchases of U.S. corporates slowed to SAAR $132bn, down from Q4’s SAAR $433bn. After big Q4 outflows (SAAR $480bn), ROW increased U.S. equities holdings SAAR $219bn during Q1. It’s difficult to comprehend that ROW holdings of U.S. financial assets have grown to almost $25 TN, inflating about ten-fold from the mid-nineties.

Returning to the markets, players will spend the weekend pondering whether Friday’s tech swoon was a mere flash in the pan or the beginning of something more serious. That intense selling manifested from market dynamics rather than in response to some news event might make it more difficult to spin. Rotations have become a common feature of this speculative marketplace, and the bulls will spin rotations positively. This week saw previous underperformers gain momentum, while the highflyer Wall Street darlings saw melt-ups rather abruptly indicate potential trouble below. When the Crowded Trade phenomenon has finally reached the top of the food chain – to a select group of speculative favorite megacaps - a big rotation away from the darlings will present a formidable market challenge. From my vantage point, such dynamics are consistent with equities (and risk markets) working toward putting in a major top.


For the Week:

The S&P500 slipped 0.3% (up 8.6% y-t-d), while the Dow added 0.3% (up 7.6%). The Utilities lost 1.1% (up 9.2%). The Banks surged 4.9% (up 2.2%), and the Broker/Dealers jumped 3.6% (up 8.1%). The Transports were unchanged (up 3.1%). The S&P 400 Midcaps added 0.4% (up 5.8%), and the small cap Russell 2000 jumped 1.2% (up 4.8%). The wild Nasdaq100 dropped 2.4% (up 18.1%), and the Morgan Stanley High Tech index fell 2.0% (up 21.3%). The Semiconductors declined 1.2% (up 20.3%). The Biotechs slipped 0.8% (up 19.0%). Though bullion gave back $13, the HUI gold index recovered 2.5% (up 7.7%).

Three-month Treasury bill rates ended the week at 98 bps. Two-year government yields rose five bps to 1.34% (up 15bps y-t-d). Five-year T-note yields gained five bps to 1.77% (down 16bps). Ten-year Treasury yields increased four bps to 2.20% (down 24bps). Long bond yields advanced five bps to 2.86% (down 21bps).

Greek 10-year yields slipped five bps to 5.94% (down 108bps y-t-d). Ten-year Portuguese yields dipped two bps to 3.02% (down 73bps). Italian 10-year yields sank 17 bps to 2.09% (up 28bps). Spain's 10-year yields fell 13 bps to 1.44% (up 6bps). German bund yields slipped a basis point to 0.26% (up 6bps). French yields fell six bps to 0.65% (down 3bps). The French to German 10-year bond spread narrowed five to 39 bps. U.K. 10-year gilt yields declined three bps to 1.01% (down 23bps). U.K.'s FTSE equities index slipped 0.3% (up 5.4%).

Japan's Nikkei 225 equities index declined 0.8% (up 4.7% y-t-d). Japanese 10-year "JGB" yields were about unchanged at 0.056% (up 2bps). France's CAC40 fell 0.8% (up 9.0%). The German DAX equities index was about unchanged (up 11.6%). Spain's IBEX 35 equities index added 0.7% (up 17.4%). Italy's FTSE MIB index gained 0.9% (up 9.8%). EM equities were mixed. Brazil's Bovespa index declined 0.5% (up 3.3%) and Mexico's Bolsa lost 0.5% (up 7.5%). South Korea's Kospi added 0.4% (up 17.5%). India’s Sensex equities index was unchanged (up 17.4%). China’s Shanghai Exchange rallied 1.7% (1.8%). Turkey's Borsa Istanbul National 100 index was little changed (up 26.6%). Russia's MICEX equities index was about unchanged (down 15.6%).

Junk bond mutual funds saw inflows of $586 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates fell five bps to 3.89% (up 29bps y-o-y). Fifteen-year rates decline three bps to 3.16% (up 29bps). The five-year hybrid ARM rate was unchanged at 3.11% (up 29bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down three bps to a seven-month low 3.99% (up 28bps).

Federal Reserve Credit last week increased $1.3bn to $4.422 TN. Over the past year, Fed Credit declined $0.7bn. Fed Credit inflated $1.611 TN, or 57%, over the past 239 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt surged $21.0bn last week to $3.259 TN. "Custody holdings" were up $17bn y-o-y, 0.5%.

M2 (narrow) "money" supply last week slipped $3.5bn to $13.520 TN. "Narrow money" expanded $769bn, or 6.0%, over the past year. For the week, Currency increased $2.1bn. Total Checkable Deposits declined $20.4bn, while Savings Deposits gained $16.2bn. Small Time Deposits added $1.0bn. Retail Money Funds declined $2.7bn.

Total money market fund assets gained $5.5bn to $2.659 TN. Money Funds fell $66bn y-o-y (2.4%).

Total Commercial Paper added $3.2bn to $996.9bn. CP declined $55bn y-o-y, or 5.3%.

Currency Watch:

The U.S. dollar index recovered 0.6% to 97.274 (down 5.0% y-t-d). For the week on the upside, the Mexican peso increased 2.8%, the Australian dollar 1.1%, the New Zealand dollar 1.0%, the Canadian dollar 0.1%, and the Japanese yen 0.1%. For the week on the downside, the Brazilian real declined 1.6%, the British pound 1.1%, the Swedish krona 1.1%, the South African rand 1.0%, the Norwegian krone 1.0%, the euro 0.7%, the Swiss franc 0.7%, the Singapore dollar 0.3% and the South Korean won 0.1%. The Chinese renminbi gained 0.18% versus the dollar this week (up 2.16% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index declined 1.2% (down 7.2% y-t-d). Spot Gold retreated 1.0% to $1,267 (up 9.9%). Silver dropped 1.7% to $17.223 (up 7.8%). Crude sank another $1.83 to $45.83 (down 15%). Gasoline lost 4.8% (down 10%), while Natural Gas recovered 1.3% (down 19%). Copper jumped 2.9% (up 6%). Wheat rallied 3.8% (up 9%). Corn rose 4.0% (up 10%).

Trump Administration Watch:

June 6 – Wall Street Journal (Kristina Peterson, Stephanie Armour and Louise Radnofsky): “Republican senators left their first decision-making meeting on overhauling the nation’s health-care system Tuesday deeply divided over the fate of Medicaid, a fissure that threatens to thwart their ambitions to dismantle the Affordable Care Act. The divide among Senate Republicans over Medicaid was wide enough that some GOP lawmakers and aides said they now believe it may be impossible to broker a deal to unwind the health law known as Obamacare. Some senators are already preparing to move to another goal, an overhaul of the tax code. ‘It’s more likely to fail than not,’ Sen. Lindsey Graham (R., S.C.) said of the health bill… ‘We need to bring this to an end and move to taxes.’”

June 6 – Financial Times (Robin Wigglesworth and Ben McLannahan): “Investors are growing more sceptical that the Trump administration will be able to nurture an economic bounce, with Treasury yields and the US dollar sagging to new post-election lows and the US equity market increasingly dependent on technology stocks to maintain its highs. The 10-year Treasury yield dipped as low as 2.13% on Tuesday, its lowest since the immediate post-election surge in November.”

China Bubble Watch:

June 3 – New York Times (Ryan McMorrow): “When a Chinese tech company with global ambitions began to run short of cash last year, it sought billions of dollars from new investors. One of them was a music teacher. Li Shenghong, who teaches out of a mall storefront in southern China, was already a fan of the smartphones and televisions sold by the company, an internet-and-gadgets conglomerate called LeEco. When LeEco also began selling investment products online, Mr. Li snapped them up, even though the company said little about where the money would go. ‘Whenever I have leftover money from my salary, I’ll invest it,’ Mr. Li said, explaining that he had invested $7,000 in the company. ‘My spare change? I put it in.’ LeEco, buffeted by rapid expansion, has turned to murky and potentially risky ways to stay afloat, including tapping China’s shadowy informal banking system, which many people believe threatens the Chinese economy.”

June 4 – Wall Street Journal (Chao Deng and Lingling Wei): “China’s crackdown on debt is driving some companies to a murkier form of financing as it gets harder to secure bank loans or tap the bond market. New loans from so-called trusts, firms that raise money from individuals and corporations to plow into riskier areas of the economy, reached 882.3 billion yuan ($129.5 billion) in the first four months of this year…, nearly five times as much as the same period in 2016. Trust firms, which often charge borrowers higher rates than banks, occupy a middle ground between banking and asset management. They are licensed and loosely regulated by China’s banking watchdog, but they lack some of banks’ protections, such as government deposit insurance, and they have more flexibility to invest in risky areas than banks do.”

June 6 – Wall Street Journal (Shen Hong): “A sharp rise in the cost of borrowing in China’s bond markets is the latest sign of conflict between Beijing’s effort to rein in financial-system risk and its long-term goal of modernizing the economy. In a little-noticed shift, Chinese companies in recent weeks have been able to take out medium-term bank loans at a lower interest rate than bond investors demand. The average yield on AAA-rated five-year corporate bonds, currently 4.90%, has been above the central bank’s corresponding benchmark lending rate of 4.75% since May 3… The highly unusual reversal—it hadn’t happened since records began in 2006—is largely down to Chinese regulators’ attempts to tamp down speculation by investment funds that borrow heavily to leverage their bets.”

June 5 – Reuters (Yawen Chen and Ryan Woo): “Activity in China's services sector expanded at the fastest pace in fourth months in May thanks to a surge in new orders, a private business survey showed, helping to offset worries about unexpected weakness in manufacturing. The Caixin/Markit services purchasing managers' index (PMI) rose to 52.8 in May from April's 51.5, breaking a four-month decline and marking the highest reading since January.”

June 7 – Reuters (Yawen Chen and Kevin Yao): “China's foreign exchange reserves rose in May for a fourth consecutive month and by more than markets had expected, as stringent capital control measures and a weakening in the dollar helped staunch outflows. Reserves rose $24 billion in May to a seven-month high of $3.054 trillion, compared with an increase of $21 billion in April… It was the first time since June 2014 that reserves climbed for four months in a row, and the biggest gain since reserves moved back above the closely watched $3 trillion level in February.”

June 7 – Bloomberg: “China’s overseas shipments accelerated from a year earlier in May, aided by more buoyant global demand, and robust imports signaled resilience in the domestic economy. Exports rose 8.7% in May in dollar terms, more than the 7.2% increase forecast… Imports surged 14.8% in dollar terms, more than the 8.3% forecast. The trade surplus widened to $40.81 billion.”

Europe Watch:

June 7 – Reuters (Jesús Aguado and Francesco Guarascio): “European authorities stepped in to avert a collapse of Spain's Banco Popular following a run on the bank, orchestrating a last-minute rescue on Wednesday by Santander, the country's biggest lender. Owners of Popular bonds faces losses of some 2 billion euros, while Santander will ask its shareholders for around 7 billion euros ($7.9bn) of capital to absorb Spain's sixth biggest bank.”

June 7 – Reuters (Francesco Guarascio and Stefano Bernabei): “European Union regulators believe their rescue of Spanish lender Banco Popular has strengthened the case for intervening in Italy's two weakest lenders, but expect it will be harder to use the same approach, a senior EU official said… EU regulators arranged for Spain's biggest bank, Santander, to take over Banco Popular, but only after wiping out the investments of the troubled lender's shareholders and junior creditors -- a move welcomed by financial markets which saw it as a possible template for other EU banking crises.”

June 8 – Reuters (Gavin Jones): “A proposed Italian electoral law that looked set to usher in early elections has lost the support of major parties, sending shares and bonds higher and easing nerves among investors wary of yet more political uncertainty in Europe. ‘The accord on the electoral law is dead,’ Emanuele Fiano, a deputy from the ruling Democratic Party… told reporters after his group lost a parliamentary vote on a proposed amendment.”

June 8 – Bloomberg (Carolynn Look): “German industrial production rose more than analysts predicted, with a fourth consecutive increase in manufacturing adding to signs of underlying strength in Europe’s largest economy. Output… jumped 0.8% in April after an upwardly revised drop of 0.1%... The typically volatile measure compares with a median estimate for a 0.5% gain in a Bloomberg survey. Production was up 2.9% from a year earlier.”

June 7 – Financial Times (Mehreen Khan): “Things are on the up for the eurozone economy. With growth accelerating, unemployment steadily falling, and inflation at comfortable levels, the European Central Bank should be resting easy that its more than two-year stimulus experiment is bearing dividend after years of concerns about the eurozone’s political stability. But there are still some worries for the central bank of 19 eurozone countries. Among them is a growing headache over the implementation of its QE measures and more specifically, a shortage of available German bonds. Latest data from the central bank’s QE holdings show the ECB fell short of its monthly target for German bond purchases for the second month in a row in May, raising concerns about the longevity of the aggressive stimulus policies in place since 2015.”

Brexit Watch:

June 9 – Reuters (David Milliken and Kate Holton): “British Prime Minister Theresa May said she would lead a minority government backed by a small Northern Irish party after she lost an election gamble days before the start of talks on Britain's departure from the European Union. May called the snap election confident her Conservative Party would increase its majority and strengthen her hand in the Brexit talks. Instead, Thursday's vote damaged her authority and made her negotiating position more vulnerable to criticism.”

Global Bubble Watch:

June 6 – Bloomberg (Miles Weiss): “High up in a New York City skyscraper, China’s biggest bank is playing in the shadows of American finance. The prize for Industrial & Commercial Bank of China Ltd. isn’t stocks, bonds or currencies. It’s the grease in the wheels of all those markets: repurchase agreements. By exploiting a loophole in rules intended to keep U.S. banks from getting ‘too big to fail,’ the state-owned ICBC has become a go-to dealer in repos in just a few short years, alongside longtime powerhouses like Goldman Sachs… The short-term loans allow investors to borrow money by lending securities, serving a vital role in day-to-day trading on Wall Street. ICBC’s rise reflects not only China’s global ambitions in high finance, but also how post-crisis rules have let a whole host of new players profit from the murky world of shadow banking, largely beyond the reach of bank regulators.”

June 5 – Bloomberg (Noah Smith): “In the comic strip Calvin and Hobbes, Calvin asks his dad how engineers determine the weight limit on bridges. The dad answers that they do this by driving heavier and heavier trucks over the bridge until it breaks, then rebuild the bridge after discovering what it took to break it. This isn’t how engineers actually figure out the safety specifications of bridges -- since they know a lot about how physics works, they can predict how much it would take to break a bridge without actually breaking it. But the same isn't true in the financial world. No one knows the basic laws that govern asset markets, so there’s a tendency to use new technologies until they fail, then start over. Calvin’s dad was effectively describing the process by which we test financial innovation. Mortgage-backed bonds are a good example… In the years since the crisis, financial markets have started to be transformed by a new innovation -- exchange-traded funds.”

June 6 – Financial Times (Robin Wigglesworth): “Is leverage, the poison that brought the global economy to its knees less than a decade ago, creeping back into financial markets? The global economy is enjoying a rare spell of broad if not strong growth, financial markets are tranquil, corporate earnings are buoyant, and monetary policy remains supportive. As a result, the MSCI World equity index sits at a record, up more than 11% so far this year, while bond markets are becalmed. Yet some investors, analysts and economists fret that beneath the calm surface there are some worrying cross-currents that could turn the sea choppy once more. In particular, signs that leverage — in the form of borrowed money or derivatives when they are used to amplify bets on asset prices — is creeping up. ‘The low volatility frightens me, because I know what it does to people’s behaviour,’ says Robert Frey, chief investment officer at FQS, a fund-of-hedge-funds… He compares it to building a flimsy oceanfront house because there have been no storms recently. ‘Eventually a hurricane will hit and the house will fall down.’”

June 7 – Bloomberg (Beth Jinks and Simone Foxman): “Billionaire investor Paul Singer said ‘distorted’ monetary and regulatory policies have increased risks for investors almost a decade after the financial crisis.’I am very concerned about where we are,’ Singer said… ‘What we have today is a global financial system that’s just about as leveraged -- and in many cases more leveraged -- than before 2008, and I don’t think the financial system is more sound.’ Years of low rates have eroded the effectiveness of central banks to contend with downturns, Singer said…”

June 7 – Bloomberg (Enda Curran): “Central bankers and investors are grappling with a $100 trillion question: why consumer price inflation remains so low in most parts of the world even as economic growth quickens. Compounding the riddle, question marks are now emerging over the one part of the global inflation picture that had been moving higher -- producer prices. That’s because two engines of that turnaround -- China’s resurgent factories and prospects for tax-cut fueled stimulus under President Donald Trump -- are showing signs of fading. Which way the inflation mystery unravels is crucial for the global monetary policy outlook and the world’s $100 trillion bond market.”

June 5 – Bloomberg (Greg Quinn and Erik Hertzberg): “Toronto’s housing fever is showing signs of cooling as price gains slowed and new listings surged in May, the first full month reflecting a new tax on foreign buyers and a crisis at mortgage lender Home Capital Group Inc. The number of new listings soared 49% last month from a year earlier to 25,837, the biggest increase since 2010… The average price rose 15% to C$863,910 ($640,076), compared with annual gains of 25% in April and 33% in March. The benchmark price index, which measures more typical mid-priced homes, rose 29%, also down from a 32% gain in April.”

June 7 – Wall Street Journal (James Glynn): “Data analyst Ben Reid recently took out a 25-year loan on a home outside Sydney despite a frothy housing market in Australia, believing in the market’s staying power. Payments on the $500,000 mortgage will consume about half his take-home pay. ‘I’d like a new car in the next couple of years but not sure where that cash will come from,’ said Mr. Reid… Big personal debts and spending worries like Mr. Reid’s are a gathering storm over Australia’s economy, threatening a 25-year streak without recession. Growth rose an anemic 0.3% in the first quarter.., putting annual growth on track to be the weakest since September 2009… Australian household debt has risen to a record 212% of income, according to the latest available data… That’s the fourth-highest globally…”

June 7 – Wall Street Journal (Lynn Cook): “American oil exports are emerging as a disruptive new force in global markets. The U.S. exported 1 million barrels of oil a day during some months so far this year—double the pace of 2016—and is on track to average that amount for all of 2017... In another era, a domestic glut and low prices, currently hovering under $50 a barrel, might have caused companies to slow the pace of drilling. But since Congress lifted a ban on oil exports at the end of 2015, shipments out of Texas and Louisiana have skyrocketed, taking the fruits of the U.S. fracking revolution to new markets.”

Federal Reserve Watch:

June 5 – CNBC (Jeff Cox): “President Donald Trump appears ready to remake the Federal Reserve in an image that will be considerably different than what investors have known for many years. The president is prepared to nominate Randal Quarles and Marvin Goodfriend to two of three vacancies at the central bank, according to multiple press accounts… Quarles likely would assume the role vacated by Daniel Tarullo to oversee the nation's banking system… Should Trump nominate the two men and they receive confirmation, it will represent the first steps in a possible substantial remaking of a Fed that has practiced ultra-loose monetary policy for the past decade but has been tight on banking regulations. Trump will have the opportunity to name one more person now, then can fill two even more critical vacancies in 2018 — that of Chair Janet Yellen and Vice Chair Stanley Fischer. If the Quarles and Goodfriend moves are indicators of what's to come, things could start getting less comfortable for Yellen. Both are considered solidly conservative, in line with the Republican president and Congress but perhaps not with Yellen.”

U.S. Bubble Watch:

June 7 – New York Times (Landon Thomas Jr.): “Facebook. Amazon. Apple. Netflix. Google. Not only do they dominate our daily lives, but as their stocks continue to soar, these technology giants may also dictate our financial futures. In the last three years, their share prices have risen far faster than the major market indexes — Amazon leads the way, up 206%; Apple trails the pack with a 67% gain — as investors of virtually every stripe have piled into these companies. But this gold-rush mentality, reminiscent of investor frenzies for Nifty 50 stocks in the late 1970s and the dot-com boom and bust at the end of the last century, is giving investors pause… ‘There is valuation anxiety out there, that is for sure,’ said Ed Yardeni, an independent investment strategist… ‘No one is feeling totally comfortable holding stocks that are this expensive.’”

June 4 – Wall Street Journal (Lev Borodovsky, Ben Eisen and Tom DeStefano): “By now it’s no epiphany that technology stocks are in favor. Apple recently passed $800 billion in market value for the first time, and both Amazon.com and Alphabet, the parent of Google, are each hovering around the rarely seen $1,000-a-share level. What you may not know is that by one measure, the 2017 tech-stock rally is already at levels last seen in 2000. The S&P technology sector accounts for nearly a quarter of the S&P 500’s market value. The last time that happened was 1999.”

June 6 – CNBC (Diana Olick): “This spring may be one of the hottest sellers' markets in history, but even off-the-chart-demand can't put every potential buyer in a home of their own. If the house is too expensive for the region's demand, it won't sell. That is becoming the case in more and more neighborhoods this spring — and is likely behind the first sign that big price gains are starting to shrink. Home values rose a healthy 6.9% in April compared with April 2016, …but that is a drop from the 7.1% annual gain in March… ‘I think we are beginning to see it in selected markets,’ said Frank Nothaft, CoreLogic's chief economist. ‘You just can't have house prices grow at 7% year after year, when income growth is 2-3% a year.’”

June 6 – Bloomberg (Vince Golle): “If you’re building or renovating a home in the U.S. these days, you’ve got plenty of company. Americans’ spending on residential construction projects -- from the pouring of foundations to home improvement -- just hammered out its strongest three-month period since 1994. Solid job growth, low borrowing costs and a recovery in home equity since the market crash a decade ago are generating momentum… While a report… showed a 2.9% drop in April outlays for improvements from the prior month, such spending was still 32.3% higher than it was a year ago.”

June 6 – Bloomberg (Sho Chandra): “An increase in U.S. job openings in April to a record high indicates demand for workers remains strong in the world’s largest economy while the supply is tightening, a Labor Department report showed… Number of positions waiting to be filled rose by 259k to 6.044m (est. 5.75m), from revised 5.785m in March, according to Job Openings and Labor Turnover Survey, or JOLTS…”

June 6 – Bloomberg (Patricia Laya): “Chief executive officers of some of the largest U.S. companies are becoming even more sanguine about sales and spending, a good omen for the economy after a lackluster first-quarter expansion, according to a quarterly survey from the Business Roundtable… Main index gained 0.6 point to 93.9, highest since 2Q 2014…”

June 7 – Bloomberg (John Gittelsohn and Erik Schatzker): “U.S. markets are at their highest risk levels since before the 2008 financial crisis because investors are paying a high price for the chances they’re taking, according to Bill Gross, manager of the $2 billion Janus Henderson Global Unconstrained Bond Fund. ‘Instead of buying low and selling high, you’re buying high and crossing your fingers,’ Gross, 73, said… Central bank policies for low-and negative-interest rates are artificially driving up asset prices while creating little growth in the real economy and punishing individual savers, banks and insurance companies, according to Gross.”

June 6 – Bloomberg (Matt Scully): “After bingeing on credit for a half decade, U.S. consumers may finally be feeling the hangover. Americans faced with lackluster income growth have been financing more of their spending with debt instead. There are early signs that loan burdens are growing unsustainably large for borrowers with lower incomes. Household borrowings have surged to a record $12.73 trillion, and the percentage of debt that is overdue has risen for two consecutive quarters.”

Japan Watch:

June 8 – Bloomberg (Toru Fujioka and Masahiro Hidaka): “The Bank of Japan is re-calibrating its communications to acknowledge that it is thinking about how to handle a future exit from monetary stimulus, without giving the impression that this is on the agenda anytime soon, according to people with knowledge of discussions… With inflation still far below target, the BOJ is contending with increasing debate about exit in markets, the media and among some lawmakers. Officials realize it’s unrealistic and unconstructive to try to remain silent on the issue and the BOJ now wants to make it known that it’s conducting simulations internally on how an exit could play out… Governor Haruhiko Kuroda, who has been called before parliament 18 times this year, was grilled by lawmakers last month on his thinking about post-stimulus policy. Kuroda responded by saying he would carefully consider external communications…”

EM Watch:

June 3 – Reuters (Anthony Boadle and Lisandra Paraguassú): “Former Brazilian lawmaker Rodrigo Rocha Loures, a close aide and friend of President Michel Temer, was arrested at his home on Saturday in a corruption investigation that also targets the president... In a police video released in May, Loures was seen running out of a Sao Paulo restaurant carrying a bag with 500,000 reais ($154,000) in cash that prosecutors say was a bribe from the owners of the world's largest meatpacker JBS SA. Plea bargain testimony by two executives of JBS's holding company J&F Investimentos SA implicated Temer and other politicians in graft…”

June 6 – Bloomberg (Arabile Gumede, Amogelang Mbatha, and Aarti Bhana): “South Africa’s economy fell into a recession for the first time since 2009 after it contracted for a second straight quarter in the first three months of the year as all bar two industries shrank. Gross domestic product receded an annualized 0.7% in the first quarter from a contraction of 0.3% in the previous three months…”

June 8 – Reuters (Andrew Torchia): “Standard & Poor's downgraded Qatar's debt… as the riyal currency fell to an 11-year low amid signs that portfolio investment funds were flowing out of the country because of Doha's diplomatic rift with other Arab states. S&P cut its long-term rating of Qatar by one notch to AA- from AA and put the rating on CreditWatch with negative implications…”

Leveraged Speculator Watch:

June 5 – Bloomberg (Miles Weiss and Katherine Burton): “The walls keep closing in on John Paulson. A decade after Paulson shot to fame betting on the collapse of the U.S. housing market, the hedge-fund mogul is struggling to persuade investors to stick with him after a string of missteps on everything from gold to European bonds to drug stocks. Since the end of 2015 alone, assets at Paulson & Co. have fallen by $6 billion from losses and client withdrawals. The decline, underscored in the firm’s most recent regulatory filing, leaves Paulson and his employees with just $2 billion in client money.”

Geopolitical Watch:

June 5 – Financial Times (Erika Solomon): “Qatar paid up to $1bn to release members of the Gulf state's royal family who were kidnapped in Iraq while on a hunting trip, according to people involved in the hostage deal — one of the triggers behind Gulf states' dramatic decision to cut ties with Doha. Commanders of militant groups and government officials in the region told the Financial Times that Doha spent the money in a transaction that secured the release of 26 members of a Qatari falconry party in southern Iraq and about 50 militants captured by jihadis in Syria. By their telling, Qatar paid off two of the most frequently blacklisted forces of the Middle East in one fell swoop: an al-Qaeda affiliate fighting in Syria and Iranian security officials. The deal, which was concluded in April, heightened concerns among Qatar's neighbours about the small gas-rich state's role in a region plagued by conflict and bitter rivalries.”

June 7 – Financial Times (Monavar Khalaj and Erika Solomon): “Iran’s Revolutionary Guards ratcheted up the tensions with Saudi Arabia as it accused Tehran’s regional rival of involvement in Wednesday’s double terrorist attack in the capital… Gunmen and suicide bombers launched simultaneous attacks on the parliament building in Tehran and the nearby shrine of Ayatollah Ruhollah Khomeini, the Islamic Republic’s founder. The attacks were claimed by Isis, in what would be the jihadi group’s first significant strike in the Islamic Republic. However a statement from the Revolutionary Guards linked the ‘brutal attack’ to Donald Trump’s visit last month to Riyadh, where the US president singled out Iran for fuelling ‘the fires of sectarian conflict and terror’.”

June 4 – Reuters: “China has expressed its strong dissatisfaction with what it labeled ‘irresponsible remarks’ on the South China Sea by U.S. Secretary of Defense James Mattis during a security forum at the weekend. Mattis accused China of having contempt for other nations' interests and disregarding international law. He told the annual Shangri-La Dialogue in Singapore that the construction and militarization of artificial islands in the South China Sea undermined regional stability.”