Credit Bubble Bulletin : May 2017

Marie Diron, Moody’s associate managing director, Sovereign Risk Group, commenting Wednesday on Moody’s Chinese downgrade (Bloomberg Television): “It is likely to be a very medium-term and gradual erosion of credit metrics and we are looking at the policies that the government is implementing. The authorities have recognized the risks that come with high leverage and have a very broad agenda of structural reforms and we take that into account to the point that we think leverage will increase more slowly than it has in the past. But still these measures will not be enough to really reverse the increase in leverage.”

I’ve always felt the rating agencies got somewhat of a bum rap after the mortgage finance Bubble collapse. Sure, their ratings methodologies were flawed. In hindsight, Trillions of so-called “AAA” MBS were anything but pristine Credits. And, again looking back, it does appear a case of incompetence - if not worse. Yet reality at the time was one of home prices that had been inflating for years with a corresponding long spell of low delinquencies and minimal loan losses, along with GDP and incomes seemingly on a steady upward trajectory. The GSEs had come to dominate mortgage finance, while the Fed had market yields well under control. Washington surely wouldn’t allow a housing crisis, which ensured that markets were absolutely enamored with anything mortgage related. So the mortgage market enjoyed bountiful liquidity conditions, and it was just difficult for anyone – including the ratings firms – to see what might upset the apple cart.

The ratings agencies were basically oblivious to the key issue of deepening structural maladjustment throughout the mortgage finance Bubble period. They were inattentive to what a major de-leveraging episode could unleash. But so were the Federal Reserve, Wall Street and the world. Analysis and models did not incorporate latent (financial and economic) fragilities that had compounded from years of rapid credit growth and asset inflation. These days there’s a similar inability to comprehend the myriad global risks associated with the runaway Chinese Bubble.

The Moody’s downgrade spurred a bevy of articles this week examining China’s debt issues (i.e. “Total outstanding credit climbed to about 260% of GDP by the end of 2016, up from 160% in 2008”; “$9 trillion local bond market”; “debt has been increasing lately by an amount equal to about 15% of the country’s output each year”). Interestingly, I saw no mention that Chinese debt growth this year will likely approach $3.5 TN. Not only will this exceed U.S. 2017 debt growth, it will significantly surpass even peak annual U.S. debt expansion from the mortgage finance Bubble period.

May 23 – New York Times (Keith Bradsher): “China has gone on a spending spree, borrowing money to build cities, create manufacturing giants and nurture financial markets — money that has helped drive the economic powerhouse in recent years. But the debt-fueled binge now threatens to sap the energy of the world’s second-largest economy. With its economy maturing, China has to pile on ever more debt to keep its growth going, at a pace that could prove unsustainable. And the money is increasingly flowing through opaque channels that operate outside the regulated banking system, leaving China vulnerable to blowups. A major credit agency sounded the alarm on Wednesday, saying the steady buildup of debt would erode China’s financial strength in the years ahead… China’s debt has been increasing lately by an amount equal to about 15% of the country’s output each year, to keep the economy growing from 6.5% to 7%.”

The world has never witnessed such a Credit expansion. Moody’s noted the Chinese economy’s ongoing dependency on stimulus measures. I would argue that the key issue has evolved into China’s systemic addiction to ever-increasing expansions of “money” and Credit. The almost singular focus on debt to GDP ratios understates Chinese fragilities. In short, they succumbed to the debt trap: massive ongoing expansion of Credit - or bust. How sound is this Credit? How stable is the Chinese financial sector? And, perhaps most pressing, how vulnerable is their currency?

May 24 – New York Times (Keith Bradsher): “Moody’s… downgraded its rating of China’s sovereign debt one notch on Wednesday, citing concerns over growing debt in the country, which has the world’s second-largest economy. In recent years, as China’s stunning economic performance of past decades has become difficult to sustain, the country has used debt to fuel growth… When it comes to pumping money into a financial system, China has made the Federal Reserve in the United States and the European Central Bank look almost lackadaisical. It has expanded its broadly measured money supply by more than the rest of the world combined since the global financial crisis. Now it has 70% more money sloshing around its economy than the United States does, even though the American economy is bigger… China has accumulated its towering debt remarkably quickly. Goldman Sachs looked last year at how fast debt had accumulated relative to the size of the economy in 55 countries since 1960. It found that by the end of 2015, China was already in the top 2% of all credit expansions — and its debt shot up even higher last year. All of the other large expansions occurred in very small economies, some of which essentially lost control of their finances.”

Moody’s report focused on the risk of further leveraging. This is clearly an issue. Corporate debt is at very high levels ($18 TN, or 170% of GDP) and corporations (many with earnings and cash-flow issues) continue to pile on additional borrowings. Much of this debt is “non-productive,” as companies borrow to meet rising debt service and to plug expanding cash-flow deficits. Even more alarming, the bloated financial sector continues to balloon, issuing risky loans while creating new deposit “money”. From the NYT (Keith Bradsher) article above, China “has 70% more money sloshing around its economy than the United States.” Even more than “leverage,” China’s Wild West Risk-Intermediation Mayhem has created momentous systemic risk. Much of the risky “Terminal Phase” debt growth – financing inflated apartment values, uneconomic enterprises, economic maladjustment and chicanery – is being transformed into perceived safe and liquid “money” and money-like financial instruments.

The bulls were quick to downplay the importance of Moody’s action, stating both that China has minimal dependence on external financing and that the country still enjoys $3.0 TN of international reserve assets. I would view the issue differently. Yes, China has an extraordinarily large international reserve cushion, though holdings have declined $1.0 TN from June 2014. Most importantly, this large hoard has allowed authorities to prolong the Bubble and delay the type of harsh measures required to rein in Credit, speculation and now deeply imbedded boom-time psychology. Chinese savers are accumulating wealth they'd never dreamed of, backed by an economy with serious deficiencies and a financial sector of dubious standing.

Moody’s and others – certainly including Wall Street generally - handle China with kid gloves. Chinese authorities have backed away from needed reforms. The late-2015/early-2016 scare forced Beijing to effectively impose capital controls. Rather than promoting open and effective market-based mechanisms, the game has turned to only more zealous interventions: stabilize financial markets and promote rapid Credit growth necessary to sustain 6-7% GDP expansion, while cajoling and controlling to limit the capacity of all this Chinese “money” to flow out of the country.

Chinese authorities have also been pressing Chinese corporations and financial institutions to borrow in overseas markets. This kills two birds... China can offload some high-risk, late-cycle Credit to international investors, while also attracting needed financial inflows. The problem is that foreign investors fear capital control measures and don’t trust the renminbi. So much of this borrowing is done in dollar-denominated debt. And this large issuance of dollar-denominated debt only exacerbates systemic vulnerability to an abrupt renminbi devaluation.

May 24 – Reuters (Adam Jourdan and Samuel Shen): “The decision by Moody's… to downgrade China's credit rating is ‘illogical’ and overstates the levels of government debt, a commerce ministry researcher said in an editorial in the official People's Daily newspaper… Mei Xinyu, a researcher at China's Ministry of Commerce, wrote in a front page editorial of the paper's overseas edition the downgrade… overstated China's reliance on stimulus and the country's debt levels. Moody's downgraded China's credit ratings… for the first time in nearly 30 years, saying it expects the financial strength of the economy will erode in coming years as growth slows and debt continues to rise. China's Finance Ministry said… the downgrade overestimated the risks to the economy and was based on ‘inappropriate methodology’. China's state planner said debt risks were generally controllable.”

I’ve closely monitored China for years now. I recall reading some years back how Chinese officials had studied and learned from the Japanese Bubble experience. I’ve been waiting patiently for China to wrestle control of a precarious Credit Bubble. They have instead repeatedly taken tepid steps to curb various sectoral excesses – real estate, local government debt, stock market, corporate debt and, of late, shadow banking and insurance. Attempts to tamp down excess in one spot have only ensured it pops out elsewhere. The gravest policy misstep has been their failure to take a more systemic approach to Credit growth and asset inflation.

Basically, whenever tightening policies began to bite, Beijing would in short-order reverse course and stimulate. After a while, Chinese tightening measures lacked credibility. Moreover, the greater the inflation of Credit, financial institutions and perceived wealth, the more confident the Chinese population (including investors in real estate and financial assets, bankers, and corporate CEOs) became that Beijing would never tolerate a bust. Beijing these days essentially backs local government debt, the big state banks, corporate debt and apartment prices, not to mention $22 TN of “money” (M2) and trillions more of money-like “wealth management products” and such. The scope of Beijing’s contingent liabilities is unparalleled.

The Moody’s executive stated that “It is likely to be a very medium-term and gradual erosion of credit metrics.” The Credit “metric” that matters most is my hypothetical chart of systemic risk that turned parabolic with the rapid acceleration of Credit of rapidly deteriorating quality. This “Terminal Phase” Dynamic unfolds during a period of momentous structural maladjustment, with government policies invariably exacerbating already deep structural impairment. It’s worth recalling that the Japanese enjoyed incredible economic growth and restructuring for more than three decades before blowing up their Credit system during the final four years of the boom. The Chinese situation is much more precarious.

I found myself this week thinking back to Dallas Fed President Robert McTeer’s 2001 comment, “Let's all hold hands and buy an SUV.” It was at the time a rather ridiculous central banker prescription for recovery from recession. Things, however, turned only more outrageous the following year, with the arrival of the Bernanke Doctrine at the Federal Reserve (and central banking more generally). Since then policy floodgates have been thrown wide open. What passes these days for reasonable policy would have been unimaginable fifteen years ago.

Chinese authorities apparently believe they can grow out of debt and structural issues. No matter what, they can always stimulate. And no need to dig holes and then refill them. Just tear down old apartments and structures and fabricate glossy tall new ones. Throw “money” at any problem, always plenty freely available. And there’s always endless new enterprises and technologies to support. Lend money around the world so buyers can afford to buy Chinese products. The quantity of debt doesn’t really matter all that much; just keep growing.

May 21 – Bloomberg (Alfred Liu, Moxy Ying, and Enda Curran): “In 1997, the Asian financial crisis touched off a six-year property bust in Hong Kong that shaved more than two-thirds off prices and saddled the city with a stagnant economy and deflation. As Hong Kong gets ready to celebrate the 20th anniversary of its handover to China, which happened just as Asia’s crisis began to unfold, that pain seems all but forgotten. Prices are at all-time highs. Mortgage borrowing is booming. Developers are bidding up the cost of land to records. People young and old are lining up to buy newly built apartments. In short, the kind of fervor that preceded the last bust is back. That’s got experts fretting about the potential fallout should the city of about 7.4 million people experience another crash. By several measures, Hong Kong looks more vulnerable this time around.”

The global government finance Bubble has “gone to unimaginable extremes - and then doubled.” And there are various elements of previous Bubbles that have coalesced into something that somehow masks inherent fragilities and the risk of devastating collapse. I think back to the commercial real estate Bubbles, junk bonds and LBOs from the late-eighties. Bond market leverage (“government carry trade”) and derivatives (mortgage IOs and POs) from the early-nineties. There was Mexico, SE Asia and EM from the mid-nineties. Russia and LTCM fiascos later in the decade. The “tech” and corporate debt Bubbles, followed by the great mortgage finance Bubble. Individually, we’ve seen these kinds of things before, and we know they end badly. But as one gigantic, comprehensive, almost all-inclusive Bubble garnering the attention and support from policymakers around the world, it’s different enough this time that risks are dismissed or downplayed. Greed trumps fear.

I look around the world and see an unprecedented Bubble in Chinese Credit and investment. EM more generally has borrowed enormous amounts of debt, much of it in dollars and foreign currencies. European securities markets have inflated into historic Bubbles. Bond markets around the global are mispriced like never before. Almost everything providing a yield – from commercial real estate to corporate debt to dividend stocks – trades today at inflated values. Especially considering the Trillions that have been issued – and Trillions more in the offing – Treasury prices are detached from market pricing mechanisms.

The Trillions of central bank “money” that has spurred a historic Bubble in “risk free” securities has worked similar magic on risk assets, notably corporate Credit, equities and EM debt. The reckless abandon that took derivatives markets by storm during the mortgage finance Bubble period has gone to even greater extremes, this time on a global basis. Everywhere, it seems market perceptions are more detached than ever from reality. I continue to see confirmation that China is a major global Bubble weak link.

May 26 – Bloomberg (Chris Anstey and Enda Curran): “Chalk up another win for the visible hand in China’s markets over the principle of the private sector determining prices. A move by authorities to smooth out daily changes in the yuan’s fixing versus the dollar, taken on its own, suggests a shift away from any eventual float of the currency. The news comes in a week when officials were suspected of having intervened in the stock market to limit damage to sentiment after Moody’s… downgraded China’s sovereign credit rating. Both developments underscore the importance the Communist Party leadership places on specific outcomes, rather than the embrace of free markets that Western nations once pressed on China. President Xi Jinping has every interest in avoiding turmoil in the currency and equity markets this year as he oversees a critical reshuffle of top officials. While relatively minor, the change ‘is surely a negative step for financial openness,’ said George Magnus, an associate at Oxford University’s China Centre and former adviser at UBS Group AG. It’s ‘another step by Xi Jinping and the leadership to exert control where the deference to market forces was making at least limited headway.’”

May 25 – Wall Street Journal (Lingling Wei and Saumya Vaishampayan): “China’s central bank is effectively anchoring the yuan to the dollar, a policy twist that has helped stabilize the currency in a year of political transition and market jitters about China’s economic management. The yuan weakened more than 6% against the dollar in 2016; this year, it is up roughly 1%, and the expectation that the currency will fluctuate—a gauge known as implied volatility—is around its lowest in nearly two years.”

After a brief bout of selling in Chinese and Asian equities, there was little market reaction to the Moody’s downgrade. Perhaps telling, Chinese authorities revalued the renminbi higher both Thursday and Friday, with the Chinese currency gaining a notable 0.43% for the week. With my belief that China’s currency may prove their system’s weak link, I find it intriguing that officials would be compelled to move immediately to manipulate its value higher. I believe Beijing prefers a weaker currency to support its massive export sector and to stoke moderately higher inflation. And while their currency policy may be somewhat posturing to the new U.S. administration, I suspect they are more fearful of an unwind of foreign-financed leveraged “carry trades” that have accumulated in higher-yielding Chinese Credit. In the past I’ve referred to the Chinese renminbi as a “currency peg on steroids.” There’s never been an EM currency with the potential for such massive outflows from domestic savers and international speculators alike.

May 26 – Bloomberg: “For ever yuan that the People’s Bank of China injects into the nation’s financial system, it’s up to the banks to decide how far they stretch it in the form of loans to the economy. Right now, they’re working overtime. China’s money multiplier -- the ratio between the broadest measure of money in use, M2, and base money created by the central bank -- has climbed to the highest on records that date to 1997, data compiled by Bloomberg show. Each yuan of base money is being turned into more than 5 in the real economy. The turbocharged multiplier is helping compensate for the drainage of cash caused by Chinese savers and companies venturing abroad. It’s also helping economic growth…”

For the Week:

The S&P500 jumped 1.4% (up 7.9% y-t-d), and the Dow rose 1.3% (up 6.7%). The Utilities surged 2.4% (up 8.6%). The Banks gained 0.9% (down 1.0%), and the Broker/Dealers rose 1.5% (up 4.0%). The Transports surged 3.3% (up 1.5%). The S&P 400 Midcaps added 0.9% (up 4.0%), and the small cap Russell 2000 gained 1.1% (up 1.9%). The Nasdaq100 advanced 2.4% (up 19.0%), and the Morgan Stanley High Tech index jumped 2.2% (up 21.4%). The Semiconductors rose 2.3% (up 19.7%). The Biotechs declined 1.1% (up 16.0%). Though bullion gained $11, the HUI gold index fell 1.2% (up 6.8%).

Three-month Treasury bill rates ended the week at 91 bps. Two-year government yields added two bps to 1.30% (up 11bps y-t-d). Five-year T-note yields rose one basis point to 1.79% (down 14bps). Ten-year Treasury yields added one basis point to 2.25% (down 20bps). Long bond yields increased two bps to 2.91% (down 15bps).

Greek 10-year yields jumped 29 bps to 5.91% (down 111bps y-t-d). Ten-year Portuguese yields declined four bps to 3.14% (down 60bps). Italian 10-year yields fell four bps to 2.10% (up 29bps). Spain's 10-year yields declined four bps to 1.54% (up 16bps). German bund yields fell four bps to 0.33% (up 13bps). French yields dropped five bps to 0.76% (up 8bps). The French to German 10-year bond spread narrowed one to 43 bps. U.K. 10-year gilt yields dropped eight bps to 1.01% (down 22bps). U.K.'s FTSE equities index gained 1.0% (up 5.7%).

Japan's Nikkei 225 equities index added 0.5% (up 3.0% y-t-d). Japanese 10-year "JGB" yields were unchanged at 0.04% (unchanged). France's CAC40 increased 0.2% (up 9.8%). The German DAX equities index slipped 0.3% (up 9.8%). Spain's IBEX 35 equities index rose 0.6% (up 16.6%). Italy's FTSE MIB index fell 1.7% (up 10.3%). EM equities were mostly higher. Brazil's Bovespa index recovered 2.3% (up 6.4%). Mexico's Bolsa gained 1.2% (up 8.8%). South Korea's Kospi jumped 2.9% (up 16.2%). India’s Sensex equities index rose 1.8% (up 16.5%). China’s Shanghai Exchange increased 0.6% (up 0.2%). Turkey's Borsa Istanbul National 100 index surged 2.5% (up 24.8%). Russia's MICEX equities index fell 1.4% (down 13.4%).

Junk bond mutual funds saw outflows of $568 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates dropped seven bps to 3.95% (up 37bps y-o-y). Fifteen-year rates fell eight bps to 3.19% (up 36bps). The five-year hybrid ARM rate declined six bps to 3.07% (up 23bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down two bps to 4.06% (up 31bps).

Federal Reserve Credit last week declined $4.5bn to $4.435 TN. Over the past year, Fed Credit gained $3.3bn (up 0.1%). Fed Credit inflated $1.624 TN, or 58%, over the past 237 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $10.0bn last week to $3.244 TN. "Custody holdings" were up $26.1bn y-o-y, or 0.8%.

M2 (narrow) "money" supply last week rose $25.2bn to a record $13.485 TN. "Narrow money" expanded $750bn, or 5.9%, over the past year. For the week, Currency increased $2.6bn. Total Checkable Deposits surged $50.7bn, while Savings Deposits fell $26.1bn. Small Time Deposits added $2bn. Retail Money Funds fell $4.0bn.

Total money market fund assets gained $3.7bn to $2.649 TN. Money Funds fell $85bn y-o-y (3.1%).

Total Commercial Paper increased $0.7bn to $987bn. CP declined $92bn y-o-y, or 8.5%.

Currency Watch:

The U.S. dollar index recovered 0.3% to 97.44 (down 4.8% y-t-d). For the week on the upside, the South African rand increased 2.7%, the New Zealand dollar 2.0%, the Mexican peso 1.1%, the South Korean won 0.6%, the Canadian dollar 0.5%, the Swedish krona 0.5%, and the Singapore dollar 0.3%. For the week on the downside, the British pound declined 1.8%, the euro 0.2%, the Brazilian real 0.2%, the Australian dollar 0.2%, the Swiss franc 0.1%, and the Japanese yen 0.1%. The Chinese renminbi gained 0.43% versus the dollar this week (up 1.31% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index increased 0.4% (down 3.3% y-t-d). Spot Gold added 0.9% to $1,267 (up 9.9%). Silver jumped 2.8% to $17.32 (up 8.4%). Crude fell 63 cents to $49.80 (down 8%). Gasoline slipped 0.5% (down 2%), while Natural Gas gained 1.8% (down 12%). Copper fell 0.9% (up 2%). Wheat increased 0.7% (up 7%). Corn added 0.5% (up 6%).

Trump Administration Watch:

May 25 – Bloomberg (Laura Litvan): “Senate Republicans are weighing a two-step process to replace Obamacare that would postpone a repeal until 2020, as they seek to draft a more modest version than a House plan that nonpartisan analysts said would undermine some insurance markets. Republicans -- in the early stages of private talks on the Senate plan -- say they may first take action to stabilize premium costs in Obamacare’s insurance-purchasing exchanges in 2018 and 2019. Major insurers have said they will leave the individual market in vast regions of states including North Dakota, Iowa and Missouri.”

May 26 – New York Times (Jennifer Steinhaurer and Robert Pear): “Shortly after President Trump took office, Senator Mitch McConnell of Kentucky, the majority leader, met privately with his colleagues to discuss the Republican agenda. Repealing the Affordable Care Act was at the top, he said. But replacing it would be really hard. Mr. McConnell was right. The many meetings Republicans held to discuss a Senate health care bill have exposed deep fissures within the party that are almost as large as the differences between Republicans and Democrats. Elements of a bill that passed the House this month have divided Republicans. Mr. McConnell faces an increasingly onerous math problem. He can afford to lose only two Republicans if he is to get a bill through the Senate, and that would require the help of Vice President Mike Pence, who would have to cast the tiebreaking vote. But at least three senators in the party are diametrically opposed to the views of at least another three, so the path to agreement is narrow.”

May 23 – Bloomberg (Erik Wasson, Steven T. Dennis, and John McCormick): “President Donald Trump made an impassioned plea for support from minority voters during his election campaign by asking them, ‘What do you have to lose?’ On Tuesday, they got an answer, as did many of the rural, poor and working-class voters who propelled him into office. In his fiscal 2018 budget proposal, Trump asked Congress for $3.6 trillion in spending cuts that would mean steep reductions in food stamps, Medicaid health insurance payments, disability benefits, low-income housing assistance and block grants that fund meals-on-wheels for the elderly. The plan found little favor in Congress, even among Republican lawmakers from districts and states that gave Trump wide margins in the November election, and it had Democrats talking about a deal on spending that would exclude the White House. The administration was undeterred.”

May 22 – Politico (Rachael Bade and Josh Dawsey): “Paul Ryan and the White House are barreling toward a tax reform show-down — a faceoff that’s becoming all but inevitable as the speaker continues selling a tax plan rejected by Trump officials. At issue is a controversial pillar of the House GOP tax plan that effectively hikes taxes on imports. Top administration officials from Treasury Secretary Steven Mnuchin to chief economic adviser Gary Cohn have warned the speaker that they’re not exactly fans of the so-called border adjustment tax — hoping Ryan would take a hint and change direction. But the Wisconsin Republican is refusing to back off, arguing in recent days that it’s ‘the smart way to go.’”

China Bubble Watch:

May 23 – Bloomberg: “Moody’s… cut its rating on China’s debt for the first time since 1989, challenging the view that the nation’s leadership will be able to rein in leverage while maintaining the pace of economic growth. Stocks and the yuan slipped in early trading after Moody’s reduced the rating to A1 from Aa3… Moody’s cited the likelihood of a ‘material rise’ in economy-wide debt and the burden that will place on the state’s finances, while also changing the outlook to stable from negative. It’s ‘absolutely groundless’ for Moody’s to argue that local government financing vehicles and state-owned enterprise debt will swell the government’s contingent liabilities, according to… the Ministry of Finance. The ratings company has underestimated the capability of the government to deepen reform and boost demand, the ministry said… Total outstanding credit climbed to about 260% of GDP by the end of 2016, up from 160% in 2008…”

May 22 – Wall Street Journal (Shen Hong): “China’s $1.7 trillion government-bond market is turning ever weirder. In a fresh sign of the nerves among investors caused by Beijing’s campaign this spring to make Chinese markets less risky, the yield on seven-year government bonds rose to 3.79% on Monday, above the yield on both five-year and 10-year bonds. The highly unusual move means that China’s government-bond yield curve now resembles a triangle, with the seven-year yield at its highest since October 2014… The shift comes less than two weeks after the government-bond yield curve became inverted for the first time on record…”

May 24 – Bloomberg: “China’s first credit rating downgrade by Moody’s… since 1989 couldn’t have come at a worse time for the nation’s companies, which have never been more reliant on the overseas bond market for funding. While Chinese companies’ foreign-currency debt is only a fraction of the $9 trillion local bond market, China Inc. is on pace for record dollar bond sales this year after the authorities’ crackdown on financial leverage drove up borrowing costs at home. Overseas borrowing has also been part of the government’s strategy to encourage capital inflows in a bid to ease the depreciation pressure on the yuan.”

May 24 – Bloomberg: “Hong Kong saw its debt rating cut by Moody’s… hours after China’s downgrade, highlighting potential risks from a tightening economic integration. The former British colony has seen not only its property and stock markets increasingly entwined with the world’s second-largest economy, but its government as well. Moody’s cut the rating on local- and foreign-currency issuances to Aa2 from Aa1… That’s the territory’s first cut in ranking by Moody’s since the throes of the Asian financial crisis in 1998… ‘Credit trends in China will continue to have a significant impact on Hong Kong’s credit profile due to close and tightening economic, financial and political linkages with the mainland,’ Moody’s said… Closer financial ties ‘risk introducing more direct contagion channels between China’s and Hong Kong’s financial markets.’”

Europe Watch:

May 23 – Bloomberg (Alessandro Speciale and Piotr Skolimowski): “Mario Draghi’s right-hand man and left-hand man may have some differences to sort out. Peter Praet and Benoit Coeure, arguably the two most influential members of the European Central Bank after the president, have struck contrasting tones about how to communicate the institution’s intentions. Both are wary of how markets will react to the ECB’s first step toward unwinding stimulus, but while Praet advocates caution and maintaining the easing bias enshrined in current guidance, Coeure has warned that moving too slowly could eventually lead to a bigger shock.”

May 22 – Bloomberg (Viktoria Dendrinou, Corina Ruhe, and Joao Lima): “Euro-area finance ministers gathering in Brussels… failed to break an impasse on debt relief for Greece, delaying the completion of the country’s bailout review and the disbursement of fresh loans needed to repay obligations in July. After nearly eight hours of talks and multiple draft compromises, Athens and its creditors couldn’t reach an accord that would ease Greece’s debt and that would convince the International Monetary Fund to agree to help finance the country’s bailout. ‘The Eurogroup held an in-depth discussion on the sustainability of Greece’s public debt but did not reach an overall agreement,’ said Jeroen Dijsselbloem, the Dutch finance minister who presides over meetings with his euro-area counterparts. Work will continue in the coming weeks…”

May 24 – Bloomberg (Jana Randow, Alessandro Speciale, and Piotr Skolimowski): “Mario Draghi is leading a push to stamp out any speculation that the European Central Bank might raise interest rates before it ends quantitative easing. …The ECB president reaffirmed the ‘logic’ of the current sequencing, arguing that the unwarranted side effects of negative rates are likely to be less of a problem than those potentially produced by asset purchases. Along with his deputy Vitor Constancio and Executive Board member Peter Praet, he urged investors waiting for a signal on the path of policy normalization to be patient, signaling that June might not be the time for big decisions.”

May 23 – Bloomberg (Piotr Skolimowski and Alessandro Speciale): “The German economy is firing on all cylinders, and a surge in sentiment suggests it has staying power. Business confidence rose to the highest since 1991 this month, while manufacturers saw the fastest growth in six years amid a surge in orders. Consumer spending, investment and exports all contributed to growth in the first quarter, helping the economy to expand 0.6%, its strongest performance in a year.”

Brexit Watch:

May 22 – Bloomberg (Joe Mayes): “European Union ministers finalized their Brexit negotiating position a day after the U.K. threatened to quit talks on its departure unless the bloc drops its demands for a divorce payment as high as 100 billion euros ($112bn). Governments of the 27 remaining nations approved their mandate for the EU’s chief negotiator Michel Barnier at a two-hour meeting in Brussels. The size of Britain’s exit bill, and which types of negotiations can begin before it is determined, has been a source of debate for weeks and will prove an early test of the ability of both sides to find common ground. Even a 1 billion pound settlement would be ‘a lot of money,’ Brexit Secretary David Davis said…”

Global Bubble Watch:

May 23 – Bloomberg (Lisa Pham): “Just as China embarks on a massive Silk Road development funding initiative, a survey of business practices suggests corruption in Asia is only getting worse, adding potential potholes to new deals. Despite anti-graft initiatives under way from China to India, the survey by EY -- formerly known as Ernst & Young -- found that ‘ethical standards are not improving.’ Some 63% of respondents said that bribery or corrupt practices ‘happen widely’ in their country, up from 60% in 2015. And 35% cited bribery as ‘common practice’ to win contracts in their industry or sector, up from 31% in the 2015 survey.”

May 22 – Reuters (A. Ananthalakshmi and Mai Nguyen): “Japan and other members of the Trans-Pacific Partnership agreed… to pursue their trade deal without the United States as the Trump administration's ‘America First’ policy created tension at a meeting of Asia-Pacific countries. Turmoil over global trade negotiations was laid bare at a meeting of the Asia-Pacific Economic Cooperation (APEC) forum, which failed to agree on its usual joint statement after U.S. opposition to wording on fighting protectionism. The meeting in Hanoi, Vietnam, was the biggest trade gathering since U.S. President Donald Trump upended the old order, arguing that multilateral free-trade agreements were costing American jobs and that he wanted to cut new deals.”

Fixed Income Bubble Watch:

May 23 – Financial Times (Eric Platt): “A month after the International Monetary Fund sounded the alarm over a debt binge by US companies, investors are expressing confidence in the sector and have been eager buyers of tens of billions of new bond offerings… Monica Erickson, a portfolio manager with asset manager DoubleLine Capital, says for many investors ‘leverage is less of a concern with earnings growth’. Outstanding US corporate debt has swelled more than 275% over the past two decades to $8.5tn, with credit ratings broadly deteriorating over that period. In 1996, roughly two-thirds of groups rated by S&P Global held an investment-grade rating. That has fallen to less than 45% today…”

Federal Reserve Watch:

May 25 – Bloomberg (Jeanna Smialek and Christopher Condon): “Most Federal Reserve officials judged ‘it would soon be appropriate’ to tighten monetary policy again and backed a plan that would gradually shrink their $4.5 trillion balance sheet. ‘Most participants judged that if economic information came in about in line with their expectations it would soon be appropriate for the committee to take another step in removing some policy accommodation,’ according to minutes from the Federal Open Market Committee’s May 2-3 gathering… The statement points toward a hike as soon as the Fed’s meeting in mid-June, though FOMC voters added the caveat that ‘it would be prudent’ to wait for evidence that a recent slowdown in economic activity had been transitory.”

May 21 – Wall Street Journal (Katy Burne): “Federal Reserve officials grappling with the legacy of expansive stimulus would find it difficult to return to the central bank’s precrisis role on the sidelines of financial markets, analysts and central-bank watchers say. A long list of programs adopted to help foster economic growth, along with changes in money markets and bank regulation, have vastly expanded the Fed’s balance sheet and its involvement in markets. The Fed’s assets now total $4.5 trillion, up from less than $1 trillion a decade ago. Since 2013 the central bank has become one of the largest traders with U.S. taxable money-market funds… Many analysts and investors worry that significantly rolling back the Fed’s expansion… risks disrupting markets and the economy at a time when growth remains tepid. It would also reduce the connections the institution has built with a diverse set of Wall Street firms, beyond the group of banks it dealt with before the crisis. The Fed has become ‘like an octopus,’ said Jeffrey Cleveland, chief economist at Payden & Rygel… ‘Once you get the power and you are influencing all these markets, do you really want to retreat from all that?’”

U.S. Bubble Watch:

May 24 – Bloomberg (Prashant Gopal): “Home prices in the U.S. increased 6% in the first quarter from a year earlier as competition heated up for a scarcity of listings. Prices rose 1.4% on a seasonally adjusted basis from the previous three months… In March, prices climbed 0.6% from February, matching the average estimate… Job growth is firing up demand for real estate, pushing buyers into bidding wars for the tight supply of homes on the market. There were 1.83 million previously owned homes available for sale at the end of March, down 6.6% from a year earlier…”

Japan Watch:

May 23 – Reuters (Stanley White): “Former Federal Reserve Chairman Ben Bernanke said… the Bank of Japan may need to coordinate a new fiscal spending plan with the government, allowing for inflation to accelerate above its 2% target without worsening the debt burden. Making a temporary commitment to allow inflation to overshoot would help keep the ratio of debt to gross domestic product stable, and is different from directly underwriting fiscal spending, Bernanke said. Bernanke also said the BOJ's current policy framework may be reaching its limits because short- and long-term interest rates are near zero, but the need for more easing cannot be ruled out. ‘The direct approach...would be for the BOJ to commit to a temporary overshoot of its inflation target sufficient to avoid any increase in the debt-to-GDP ratio,’ Bernanke said. ‘This commitment amounts to a monetary financing of the fiscal program without relying on exotic concepts like helicopter drops.’”

May 23 – Reuters (Stanley White): “Bank of Japan Governor Haruhiko Kuroda said… that uncertainty about the natural rate of interest - the level of interest rates that neither stimulates nor constrains growth - is making it difficult for central bankers to steer policy. Kuroda, who spoke at a seminar hosted by the BOJ, said the natural rate of interest has been falling globally, which has led central banks to adopt unconventional economic policies.”

EM Watch:

May 22 – Reuters (Silvio Cascione and Anthony Boadle): “Brazilian President Michel Temer, facing growing calls for his resignation over a corruption scandal, said he would not step down even if he was formally indicted by the Supreme Court. ‘I will not resign. Oust me if you want, but if I stepped down, I would be admitting guilt,’ Temer told Folha de S.Paulo, Brazil's biggest newspaper… Brazilians who have become inured to a massive, three-year corruption investigation were shocked last week by the disclosure of a recording that appeared to show Temer condoning the payment of hush money to a jailed lawmaker.”

May 25 – Reuters (Alonso Soto and Anthony Boadle): “Protesters demanding the resignation of Brazilian President Michel Temer staged running battles with police and set fire to a ministry building in Brasilia on Wednesday, prompting the scandal-hit leader to order the army onto the streets. Police unleashed volleys of tear gas, stun grenades and rubber bullets to halt tens of thousands of protesters as they marched towards Congress to call for Temer's ouster and an end to his austerity program.”

May 25 – Bloomberg (Tim Padgett): “In U.S. history, entire cities and states have been branded corrupt: Think Richard J. Daley’s Chicago or Huey Long’s Louisiana. But amid even the worst federal scandals, Watergate included, the country has never been nationally profiled as crooked—a venal society from coast to coast, from dogcatcher to commander-in-chief. Brazil feels that way right now, largely the result of a bribery scandal of Amazonian proportions known in Portuguese as Lava Jato, or Operation Car Wash, believed to be the largest corruption case in modern history… And it could force the resignation of Brazilian President Michel Temer, who’s been fingered repeatedly in recent weeks for allegedly orchestrating and receiving millions of dollars in bribes.”

May 23 – Wall Street Journal (Carolyn Cui): “S&P Global Ratings delivered more bad news to Brazil, warning… that it may cut the country’s sovereign debt rating because of its troubled political situation. S&P said questions surrounding the president’s political future could stall efforts to enact fiscal and economic reforms. Reports surfaced last week that President Michel Temer is embroiled in corruption allegations. He has denied the allegations. The credit rating firm placed Brazil’s long-term foreign and local currency sovereign credit ratings on its negative credit-watch list, which indicates that Brazil could be downgraded in the next three months.”

May 22 – Bloomberg (Ahmed Feteha and Tarek El-Tablawy): “Egyptian stocks fell the most in the world on Monday after the central bank unexpectedly raised interest rates to contain surging prices… The Monetary Policy Committee raised the benchmark overnight deposit rate by 200 bps, or two percentage points, to 16.75%...”

May 23 – Financial Times (Jeevan Vasagar and Alice Woodhouse): “Shares in Noble Group endured a turbulent day, as the crisis-hit Asian commodities trader tried to reassure about its future by saying it was still in talks with potential major investors. The Singapore-listed company’s stock fell as much as 27% on Wednesday, before closing down 8% at S$0.385. Noble, which has been searching for a new investor for more than a year, said in a statement: ‘The company has previously announced it is in talks with various potential strategic parties, and has informed the market that no assurance can be given that any discussion will result in a transaction. Such discussions are ongoing.’”

Geopolitical Watch:

May 23 – Reuters (Phil Stewart and Idrees Ali): “North Korea, if left unchecked, is on an ‘inevitable’ path to obtaining a nuclear-armed missile capable of striking the United States, Defense Intelligence Agency Director Lieutenant General Vincent Stewart told a Senate hearing… The remarks are the latest indication of mounting U.S. concern about Pyongyang's advancing missile and nuclear weapons programs, which the North says are needed for self-defense.”

May 25 – Bloomberg: “China’s government warned a U.S. warship to leave waters around a reef it claims in the South China Sea, saying the vessel was trespassing on its territory and undermining security in the region. The U.S. warship entered waters adjacent to the Spratly islands, an area where China has ‘indisputable sovereignty,’ defense ministry spokesman Ren Guoqiang said… China ‘identified, tracked, verified and warned off the ship.’ The so-called freedom of navigation operation in the South China Sea was the first under President Donald Trump.”

Friday Evening Links

[Bloomberg] U.S. Stocks Edge Higher, Dollar Gains as Oil Dips: Markets Wrap

[Bloomberg] Brazil Outlook Lowered to Negative by Moody's on Temer Probe

[Bloomberg] Brazil's Iron Lady Resigns as Head of BNDES Development Bank

[Reuters] Chinese jets intercept U.S surveillance plane: U.S. officials

Thursday, May 25, 2017

Friday's News Links

[Bloomberg] U.S. Stock Rally Falters, Dollar Gains as Oil Dips: Markets Wrap

[Bloomberg] U.S. Growth Not So Bad After Revisions to Spending, Investment

[Reuters] U.S. home prices to rise at a strong pace on tight supply: Reuters poll

[Bloomberg] China's reforms will not be enough to arrest rising debt: Moody's Diron says

[Bloomberg] China's Hand-of-State Tightens Grip on Market With Yuan Move

[Reuters] Japan consumer prices rise in April, driven by energy costs

[Reuters] Trump and other leaders clash on trade, climate at G7

[Bloomberg] Trump Blasts German Carmakers’ U.S. Sales, Threatens Barriers

[Bloomberg] Noble Group Dealt Fresh Blow as Fitch Cuts Ratings Yet Again

[NYT] McConnell May Have Been Right: It May Be Too Hard to Replace Obamacare

[WSJ] Canada’s Banks Can’t Dodge Housing Risks Forever

[FT] Central banks risk messy ‘market melt-up’

[FT] Renminbi rule change tracks capital flight worries

[Reuters] Trumps calls North Korea a 'big problem,' promises to resolve issue

Thursday Evening Links

[Bloomberg] U.S. Stocks Add to Records; Oil Tumbles on OPEC: Markets Wrap

[Reuters] Oil plunges 4 percent on disappointment with OPEC cuts

[Bloomberg] China's Monetary Turbocharger Is Running at an All-Time High

[Bloomberg] Chinese Money Funneled to Far-Flung Homes Heralds Bubble Trouble

[Bloomberg] More Optimism About U.S. Buying Climate Signals Spending Rebound

[Bloomberg] China's State Media Hits Out at Debt Downgrade With a Buffett Quote

[Bloomberg] Brazil Succession Race Heats Up as Temer Struggles With Crisis

[Bloomberg] Senate Weighs a Health Rewrite That Would Push Obamacare Repeal to 2020

[Reuters] Ballooning Chinese dollar borrowing a dilemma for index trackers

[WSJ] China Takes Aim at Moody’s After Rating Downgrade

[Reuters] U.S. drill designed to reject China's claim around artificial island: officials

Wednesday, May 24, 2017

Thursday's News Links

[Reuters] World stocks hit record, oil falls on OPEC cuts deal

[Bloomberg] All Eyes on Vienna as Oil Drops; Growth Hits Pound: Markets Wrap

[Bloomberg] Crude Oil Weakens as OPEC Disappoints With `Safe Bet' Extension

[Bloomberg] OPEC Extends Oil Cuts for Nine Months to End Global Glut

[Reuters] Moody's China downgrade 'illogical', overstates debt: People's Daily

[Bloomberg] Hong Kong Faces China Collateral Damage on Moody's Downgrade

[Bloomberg] Brazil’s Car Wash Scandal Reveals a Country Soaked in Corruption

[Reuters] Hadas: The next financial crisis could be in forex

[NYT] Why China’s Growing Debt Load Worries the World

[WSJ] China Hitches Yuan to the Dollar, Buying Rare Calm

[Reuters] In first under Trump, U.S. warship challenges Beijing's claims in South China Sea

[Bloomberg] China Warned U.S. Warship Challenging Its South China Sea Claims

[Reuters] Brazil's Temer deploys army as protesters battle police

Wednesday Evening Links

[Bloomberg] U.S. Stocks Rise to Record, Dollar Slips on Fed: Markets Wrap

[Bloomberg] Most Fed Officials Saw Tightening ‘Soon,’ Favored Unwind Plan

[Reuters] Fed ties rate hike to economic rebound, sees balance sheet cuts in 2017

[Bloomberg] China's Rating Cut Exposes Companies Hooked on Dollar Borrowing

[Bloomberg] Shanghai’s Financial Center Was a Swamp Last Time Moody’s Cut China’s Rating

[Bloomberg] S&P's Famous FANG Trade Has Nothing on Chinese Four-Stock Frenzy

[NYT] Fed Sounds Cautious Note but Doesn’t Deter Forecast of Rate Increase

[NYT] China’s Addiction to Debt Now Threatens Its Growth

[WSJ] Moody’s Serves Warning to China

[WSJ] CBO Report on Health Bill: What It Is and Why It Matters

Tuesday, May 23, 2017

Wednesday's News Links

[Bloomberg] Stocks, Currencies Hit Pause on Wait for Fed Clues: Markets Wrap

[Bloomberg] China Handed First Moody's Downgrade Since 1989 on Debt Risk

[Bloomberg] U.S. Home Prices Rose 6% in First Quarter as Supply Tightened

[Bloomberg] Draghi Says There's No Reason to Deviate From ECB Guidance

[Bloomberg] Draghi’s Lieutenants Spar as ECB Braces for Exit Strategy Debate

[Bloomberg] ECB Sees Slow Approach to Stimulus Change Keeping Markets Calm

[Reuters] BOJ's Kuroda: uncertainty about natural interest rate complicates policy

[Reuters] Ex-Fed Bernanke: BOJ may need to coordinate new fiscal plan to lift inflation

[Bloomberg] Warning Signs Flashing in Korea as Investors Dump Stock ETFs

[Reuters] Moody's downgrades China, warns of fading financial strength as debt mounts

[Bloomberg] China's Markets Get a Double Dose of Caution From Moody's, MSCI

[NYT] Moody’s Downgrades China Over Worries About Its Growing Debt

[WSJ] Fed Minutes to Offer Clues on Debate Over Path of Rate Increases

[WSJ] S&P Adds to Brazil’s Woes, Warning of a Possible Credit Downgrade

[FT] Noble Group reassurance fails to dispel doubts

[Reuters] China says no one should bring chaos to the Korean peninsula

Tuesday Evening Links

[Bloomberg] China Downgraded to A1 by Moody's on Worsening Debt Outlook

[Bloomberg] U.S. Stocks Advance, Bonds Mixed as Oil Tops $51: Markets Wrap

[CNBC] The Fed is about to reveal how it could wind down its biggest policy experiment ever

[CNBC] Read the full transcript from Treasury Secretary Steve Mnuchin's interview

[Reuters] Banks' bond trading roars back in first-quarter but FX lags badly - survey

[Bloomberg] Bitcoin Surge Is Driven by People Leaving Riskier Digital Currencies, Say Execs

[Bloomberg] Broker Stocks Drop After Labor Secretary Says Fiduciary Rule Will Take Effect June 9

[Bloomberg] Corruption in Asia Is Getting Worse, Especially Among Millennials: EY Survey

[Reuters] North Korea, if left unchecked, on 'inevitable' path to nuclear ICBM: U.S.

Monday, May 22, 2017

Tuesday's News Links

[Bloomberg] U.S. Stocks Fluctuate, Bonds Mixed as Oil Advances: Markets Wrap

[Bloomberg] OPEC on Verge of 9-Month Cuts Extension After Iraq Backing

[Bloomberg] Trump Seeks $3.6 Trillion in Cuts to Reshape U.S. Government

[Politico] Ryan bucks White House, setting up clash on taxes

[Bloomberg] Noble Group Halted After 32% Plunge as S&P Sees Default Risk

[CNBC] Noble shares plunge amid a double dose of bad news

[Bloomberg] German Upswing Set to Last as Sentiment Jumps to Record High

[Reuters] Brazil President Temer: 'I won't resign. Oust me if you want'

[FT] Why investors downplay US debt binge risks

[FT] Investors keen to hear Federal Reserve balance sheet details

Monday Evening Links

[Bloomberg] U.S. Stocks Rise as Oil Advances, Dollar Weakens: Markets Wrap

[Bloomberg] Brazil Selloff Resumes as Temer's Graft Defense Falls Flat

[Bloomberg] Greek Deal on Debt Relief Founders as Talks Stretch to June

[CNBC] Gold's golden cross: The metal just formed a chart pattern that can signal a breakout

Monday's News Links

[Bloomberg] Output Bets Spur Oil; Euro Rises on Merkel Comment: Markets Wrap

[Bloomberg] Euro Rebounds to Six-Month High on Merkel While Dollar Steadies

[Bloomberg] Trump to Propose Deep Cuts to Anti-Poverty Programs and Medicai

[Bloomberg] Credit Cards Give Investors Jitters, But Bankers Sleep Just Fine

[Bloomberg] EU Finalizes Brexit Position as U.K. Threatens to Quit Talks

[Bloomberg] OPEC's Worst Cheater Will Get Harder to Ignore as Curbs Falter

[WSJ] Taxes, Budget Are Focus for Trump Despite Probes

[WSJ] China’s Bond-Yield Curve Gets Bent Out of Shape

Sunday, May 21, 2017

Sunday's News Links

[Bloomberg] Asian Stocks May Rise, Oil Extends Gains Above $50: Markets Wrap

[Reuters] U.S. and Pacific Rim countries at odds in heated trade meeting

[Bloomberg] Ghost of the 1997 Crisis Stalks Hong Kong's Economy

[Bloomberg] Brazilians Call for President to Resign After Graft Charges

[Bloomberg] Egypt Unexpectedly Raises Rates as IMF Urges Action on Inflation

[WSJ] The Quants Run Wall Street Now

[WSJ] Here’s Why the Fed Will Stay Central to Markets

[Reuters] North Korea says missile tests warhead guidance, ready for deployment

Saturday, May 20, 2017

Saturday's News Links

[Bloomberg] Iran's Rouhani Sweeps to Second Term, Beating Hardline Rival

[Reuters] The European Central Bank will need to "show backbone" when inflationary pressure rises in the eurozone although

[Reuters] Under fire at home, Trump in Saudi on first foreign trip

Friday, May 19, 2017

Just the Facts - May 19, 2017

For the Week:

The S&P500 slipped 0.4% (up 6.4% y-t-d), and the Dow declined 0.4% (up 5.3%). The Utilities lost 0.5% (up 6.1%). The Banks fell 1.6% (down 1.9%), and the Broker/Dealers dropped 1.6% (up 2.4%). The Transports fell 1.4% (down 1.8%). The S&P 400 Midcaps slipped 0.4% (up 3.1%), and the small cap Russell 2000 dropped 1.1% (up 0.8%). The Nasdaq100 lost 0.6% (up 16.2%), and the Morgan Stanley High Tech index declined 0.7% (up 18.7%). The Semiconductors gained 1.5% (up 17%). The Biotechs slipped 0.3% (up 17.4%). While bullion jumped $28, the HUI gold index was unchanged (up 8.1%).

Three-month Treasury bill rates ended the week at 89 bps. Two-year government yields declined two bps to 1.27% (up 8bps y-t-d). Five-year T-note yields dropped seven bps to 1.78% (down 15bps). Ten-year Treasury yields dropped nine bps to 2.24% (down 21bps). Long bond yields sank nine bps to 2.90% (down 17bps).

Greek 10-year yields were little changed at 5.62% (down 140bps y-t-d). Ten-year Portuguese yields sank 19 bps to 3.18% (down 56bps). Italian 10-year yields fell 12 bps to 2.14% (up 33bps). Spain's 10-year yields declined five bps to 1.58% (up 20bps). German bund yields declined two bps to 0.37% (up 16bps). French yields fell three bps to 0.81% (up 13bps). The French to German 10-year bond spread narrowed one to 44 bps. U.K. 10-year gilt yields added a basis point to 1.09% (down 14bps). U.K.'s FTSE equities index increased 0.5% (up 4.6%).

Japan's Nikkei 225 equities index fell 1.5% (up 2.5% y-t-d). Japanese 10-year "JGB" yields declined a basis point to 0.04% (unchanged). France's CAC40 fell 1.5% (up 9.5%). The German DAX equities index declined 1.0% (up 10.1%). Spain's IBEX 35 equities index dipped 0.6% (up 15.9%). Italy's FTSE MIB index traded unchanged (up 12.1%). EM equities were mostly under pressure. Brazil's Bovespa index sank 8.2% (up 4.0%). Mexico's Bolsa declined 0.7% (up 7.5%). South Korea's Kospi was about unchanged (up 12.9%). India’s Sensex equities index added 0.9% (up 14.4%). China’s Shanghai Exchange increased 0.2% (down 0.4%). Turkey's Borsa Istanbul National 100 index added 0.2% (up 21.8%). Russia's MICEX equities index fell 1.6% (down 12.1%).

Junk bond mutual funds saw inflows of $650 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates declined three bps to 4.02% (up 44bps y-o-y). Fifteen-year rates slipped two bps to 3.27% (up 46bps). The five-year hybrid ARM rate dipped a basis point to 3.13% (up 33bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down eight bps to 4.08% (up 30bps).

Federal Reserve Credit last week expanded $5.1bn to $4.439 TN. Over the past year, Fed Credit declined $7.9bn (down 0.2%). Fed Credit inflated $1.628 TN, or 58%, over the past 236 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $12.4bn last week to $3.234 TN. "Custody holdings" were up $14.3bn y-o-y, or 0.4%.

M2 (narrow) "money" supply last week declined $14.8bn to $13.460 TN. "Narrow money" expanded $740bn, or 5.8%, over the past year. For the week, Currency increased $1.1bn. Total Checkable Deposits jumped $45bn, while Savings Deposits dropped $62.8bn. Small Time Deposits were little changed. Retail Money Funds gained $1.8bn.

Total money market fund assets declined $5.1bn to $2.645 TN. Money Funds fell $74bn y-o-y (2.7%).

Total Commercial Paper rose $5.0bn to $987bn. CP declined $112bn y-o-y, or 10.2%.

Currency Watch:

May 17 – Wall Street Journal (Saumya Vaishampayan): “China’s central bank is guiding the currency higher, but the country’s investors seem unconvinced. The People’s Bank of China on Wednesday fixed the yuan at 6.8635 per dollar, the strongest since Feb. 17, only to have it weaken to 6.88 within minutes... The gap between the central bank’s fix and where the currency then trades in the onshore market has widened in recent days. Wednesday’s discount was the largest since January. Such a gap ‘suggests that the onshore market is still not fully convinced that the Chinese yuan will remain strong,’ said Irene Cheung, a senior strategist for Asia at ANZ in Singapore…”

The U.S. dollar index sank 2.1% to 97.125 (down 5.2% y-t-d). For the week on the upside, the Swiss franc increased 2.9%, the euro 2.5%, the Norwegian krone 2.2%, the Japanese yen 1.9%, the Canadian dollar 1.5%, the Singapore dollar 1.3%, the British pound 1.1%, the Swedish krona 1.1%, the South African rand 1.0%, the Australian dollar 1.0%, the New Zealand dollar 0.8% and the Mexican peso 0.5%. For the week on the downside, the Brazilian real declined 4.0%. The Chinese renminbi gained 0.21% versus the dollar this week (up 0.87% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index gained 1.2% (down 3.6% y-t-d). Spot Gold rallied 2.2% to $1,256 (up 9.0%). Silver jumped 2.4% to $16.85 (up 5.4%). Crude recovered $2.59 to $50.43 (down 6%). Gasoline rallied 4.5% (down 1%), while Natural Gas dropped 5.0% (down 13%). Copper rallied 2.6% (up 3.3%). Wheat increased 0.6% (up 6.7%). Corn added 0.4% (up 5.8%).

Trump Administration Watch:

May 19 – Bloomberg (Justine Sink): “Donald Trump won the presidency on the promise he’d drain the swamp. This week, the swamp struck back. The naming Wednesday of former FBI Director Robert Mueller as special counsel to investigate the Russian government’s meddling in the U.S. election, including ties to Trump’s campaign, abruptly shifted the balance of power in Washington. The city’s permanent political class forcefully reasserted itself against an antagonistic president determined to bring them to heel. The Russia investigation will cast a pall over Trump’s first term, with Mueller free to pursue the facts where they lead and little urgency to get there.”

May 18 – Reuters (Julia Edwards Ainsley and Steve Holland): “The U.S. Justice Department, in the face of rising pressure from Capitol Hill, named former FBI chief Robert Mueller… as special counsel to investigate alleged Russian interference in the 2016 U.S. election and possible collusion between President Donald Trump's campaign and Moscow. The move followed a week in which the White House was thrown into uproar after Trump fired FBI Director James Comey… Trump, whose anger over the allegations has grown in recent weeks, took the news calmly and used it to rally his team to unite, move on and refocus on his stalled agenda, a senior White House official said. ‘We are all in this together,’ Trump told his team…”

May 13 – Reuters (David Lawder): “U.S. Treasury Secretary Steven Mnuchin said… that United States reserves the right to be protectionist on trade, but noted that his international counterparts are growing more comfortable with the Trump administration's economic agenda. ‘We do not want to be protectionist but we reserve our right to be protectionist to the extent that we believe trade is not free and fair,’ Mnuchin told a news conference at the end of a meeting of finance ministers from the Group of Seven industrial democracies. ‘Our approach is for more balanced trade, and people have heard that… And as I say, people are more comfortable today, now that they've had the opportunity to spend time with me and listen to the president and hear our economic message.’”

May 15 – Bloomberg (David Goodman and Alessandra Migliaccio): “Group-of-Seven ministers slowly coming to terms with the reality of Donald Trump’s administration are about to leave the heavy lifting to their bosses. Finance chiefs in Italy at the weekend spoke of an improving relationship with their U.S. counterpart Steven Mnuchin, in a contrast to previous encounters. But with their gathering in Bari cementing rather than mending disagreements on free trade, the risk is that the diplomatic truce they achieved unwinds when Trump himself meets with G-7 leaders on the island of Sicily later this month.”

May 16 – Bloomberg (Joe Light): “A top Treasury Department official said the Trump administration wants to boost the role of private capital in the mortgage market, a longstanding Washington goal that has largely befuddled policy makers since the 2008 financial crisis. Transferring risk away from Fannie Mae and Freddie Mac is ‘core’ to U.S. housing policy, Craig Phillips, a counselor to Treasury Secretary Steven Mnuchin, said… Without outlining any specific plans, Phillips said a central goal is increasing the amount of private loans in the market that lack government backing.”

China Bubble Watch:

May 15 – Bloomberg: “The ferocity of China’s bond rout is surprising some of the market’s top observers. The yield on sovereign debt due in a decade surged to a two-year-high of 3.7% last week, wrong-footing analysts from Citic Securities Co. and Haitong Securities Co. -- the country’s two biggest brokerages -- who had in April predicted a maximum level of 3.6% in the near term. The tumble comes amid intensifying efforts to crack down on excessive borrowing… ‘No one knows what kind of indicator would suggest the campaign is over, and no one knows how long this process will last,’ said Shan Kun, head of China markets strategy at BNP Paribas (China)… ‘When the market is so pessimistic, investors are trading based on expectations, and declines can be illogical.’”

May 18 – Bloomberg: “China’s anti-leverage campaign is causing a distortion that hasn’t happened in the nation’s $9 trillion bond market in at least a decade. The five-year sovereign yield is now higher than that on debt due in a decade, the first time the curve has inverted for the tenor in data going back to 2006. This is due mainly to a surge in the shorter-term yield because of a deleveraging campaign, and a limited advance in the 10-year cost as economic growth concerns raise demand for safety… ‘It’s hard to say where the funding costs will be able to stabilize, so that’s curbing demand for the short-end of the curve,” said Wu Sijie, a Shanghai-based senior trader at China Merchants Bank Co. ‘A liquid market has become the paramount consideration, as people want to escape as fast as they can in a selloff.’”

May 16 – Reuters (Samuel Shen and Engen Tham): “China's banking regulator is tightening disclosure rules on lenders' wealth management products (WMP) as it tries to track risky lending practices in the shadow banking sector, the latest in a series of steps by Beijing aimed at defusing financial risks. The China Banking Regulatory Commission (CBRC) said… it plans to launch 46 new or revised rules this year, part of which targets risks related to shadowbanking activities Authorities are trying to better regulate 30 trillion yuan ($4.35 trillion) of WMPs, much of it sitting off-balance sheet in the shadowbanking sector. The WMPS have been used to channel deposits into risky investments, often via many layers of asset management schemes to skirt lending and capital rules. The CBRC will now require that banks report the underlying assets and liabilities of their WMPs, as well as all layers of investment schemes, on a weekly basis.”

May 16 – Wall Street Journal (Shen Hong): “China’s central bank made its biggest one-day cash injection into the country’s fragile financial markets in nearly four months Tuesday, a fresh sign that Beijing is trying to mitigate the damage to investor confidence inflicted by its recent campaign to tamp down speculative investing fueled by debt. The People’s Bank of China pumped a net 170 billion yuan ($24.7bn) into the financial system… The huge provision of cash follows comments from Chinese officials in recent days that suggest they are concerned that recent moves to tighten market regulation have caused too much disruption.”

May 17 – Financial Times (Gabriel Wildau and Nan Ma): “One of China’s largest insurers has warned of mass defaults and social unrest unless the regulator lifts a ban on its issuance of new products, the latest sign of stress in the industry caused by a crackdown on financial risk. In a letter to China’s insurance regulator seen by the Financial Times, Foresea Life Insurance warns that the company expects Rmb60bn ($8.7bn) in redemptions this year and might be unable to meet payouts unless it is able to sell new products. In December, the China Insurance Regulatory Commission banned Foresea for three months from applying to sell new products… In the letter dated April 28, Foresea asks the CIRC to resume new product approvals ‘in order to avoid inciting mass incidents by clients and localised and systemic risks, producing greater damage to the industry’… Foresea is a unit of Baoneng Group, a property and financial conglomerate… Baoneng has used the sale of so-called ‘universal insurance’ products to finance its stake in Vanke and other listed companies. Such policies are, essentially, investment vehicles offering high yields and guaranteed payouts on maturities. Distributed through banks, they bear little resemblance to traditional insurance…”

May 14 – Wall Street Journal (Chuin-Wei Yap): “The past two months have been tumultuous for Chinese lenders as a new banking czar has unleashed a blizzard of new directives, uncovered a fraud scandal and issued heavy fines. Since his appointment to head the China Banking Regulatory Commission in February, Guo Shuqing has become a central figure in Beijing’s crackdown on risk… The 60-year-old Mr. Guo is navigating narrow straits: He has to tame a freewheeling industry without killing a tentative recovery in bank profits or causing too much disruption. President Xi Jinping has stressed the need for a stable financial sector ahead of a major Communist Party leadership shuffle this fall. On Friday, the CBRC tried to reassure investors that it was aware of the threat of overregulation and emphasized the campaign’s value in reducing risk long term. ‘We’re hoping now to avoid risks that have resulted from the regulations to resolve risk,’ said Xiao Yuanqi, a CBRC department head.”

May 16 – Reuters (Elias Glenn): “China's growth is set for its weakest patch since the global financial crisis as authorities pull back on the stimulus that helped the economy get off to an unexpectedly strong start this year, and keep funds tight to deter risky lending… Massive debt - standing at nearly 300% of GDP - and serious budgetary imbalances mean Beijing can't carry on pump priming. The brakes went on in April, when annual growth in fiscal spending dropped to 3.8% from 21% the first quarter. And worries about speculative bubbles have forced the central bank to tighten short term liquidity, while trying to keep medium term funding available for investment.”

May 17 – Bloomberg: “China home-price growth eased last month after authorities imposed stricter restrictions on property purchases. New-home prices… gained last month in 58 of the 70 cities tracked by the government, compared with 62 in March, the National Bureau of Statistics said… Prices fell in eight cities and were unchanged in four… Chinese authorities stepped up curbs in a string of large cities last month to rein in prices, following a resurgence in demand the previous two months as buyers tried to get in ahead of further restrictions.”

Europe Watch:

May 12 – Wall Street Journal (Giovanni Legorano and Manuela Mesco): “Europe’s establishment breathed a sigh of relief after the pro-European Union centrist Emmanuel Macron was elected French president this week. But another populist storm is brewing in Italy, where the euroskeptic 5 Star Movement has remained strong. Fueled by discontent with slow growth, high unemployment and disillusionment with mainstream politicians, 5-Star has won local elections in Rome, Turin and elsewhere, partly on the strength of its leaders’ call for a referendum on Italy’s use of the European single currency. Pollsters say about 30% of Italian voters support the movement founded by comedian Beppe Grillo, a level of popularity that has stood firm despite a series of high-profile stumbles…”

May 17 – Bloomberg (Piotr Skolimowski): “The European Central Bank is trying to work out a key question about the road to policy normalization: what’s the speed limit? Three weeks before their next policy decision, the terms of debate between the ECB’s 25 Governing Council members over announcing and implementing an exit from unconventional stimulus have coalesced around the pace. In one camp are those who want to move slowly. In the opposite camp: those who want to move extremely slowly. The June 8 meeting in Tallinn is in the sights of investors and economists seeking a signal that the euro area has recovered enough for the ECB to at least hold its first formal talks on what a policy reversal might look like.”

May 18 – Bloomberg (Carolynn Look and Alessandro Speciale): “European Central Bank policy makers pointed to June to revisit their policy stance after differing on how much the region’s economic outlook had improved. At the next policy meeting on June 8, new staff projections and data will put officials ‘in a better position to take stock and reassess the sustainability of the recovery and the outlook for inflation,’ an account of the Governing Council’s April 26-27 meeting showed... ‘Some members considered that the risks to real gross domestic product could now be characterized as broadly balanced,’ while ‘other members maintained that downside risks to growth still prevailed,’ the account showed.”

May 17 – Bloomberg (Maria Tadeo and Ainhoa Goyeneche): “Spain’s government debt pile rose for the fourth consecutive month in March, once again climbing above 100% of gross domestic product… Prime Minister Mariano Rajoy’s government has been struggling with a debt-to-GDP ratio hovering around 100% since mid-2014 even as Spain leads the recovery in the euro area.”

Global Bubble Watch:

May 13 – New York Times (Jane Perlez and Yufan Huang): “Along the jungle-covered mountains of Laos, squads of Chinese engineers are drilling hundreds of tunnels and bridges to support a 260-mile railway, a $6 billion project that will eventually connect eight Asian countries. Chinese money is building power plants in Pakistan to address chronic electricity shortages, part of an expected $46 billion worth of investment. Chinese planners are mapping out train lines from Budapest to Belgrade, Serbia, providing another artery for Chinese goods flowing into Europe through a Chinese-owned port in Greece. The massive infrastructure projects, along with hundreds of others across Asia, Africa and Europe, form the backbone of China’s ambitious economic and geopolitical agenda… The initiative, called ‘One Belt, One Road,’ looms on a scope and scale with little precedent in modern history, promising more than $1 trillion in infrastructure and spanning more than 60 countries.”

May 15 – Reuters (Shu Zhang and Matthew Miller): “Behind China's trillion-dollar effort to build a modern Silk Road is a lending program of unprecedented breadth, one that will help build ports, roads and rail links, but could also leave some banks and many countries with quite a hangover. At the heart of that splurge are China's two policy lenders, China Development Bank (CDB) and Export-Import Bank of China (EXIM), which have between them already provided $200 billion in loans throughout Asia, the Middle East and even Africa. They are due to extend at least $55 billion more… Thanks to cheaper funding, CDB and EXIM have helped to unblock what Chinese president Xi Jinping on Sunday called a 'prominent challenge' to the Silk Road: the funding bottleneck. But as the Belt and Road project grows, so do the risks to policy banks, commercial lenders and borrowers, all of whom are tangled in projects with questionable business logic, bankers and analysts say.”

Fixed Income Bubble Watch:

May 14 – Wall Street Journal (Heather Gillers and Tom McGinty): “The losses from soured investments in Puerto Rico bonds are coming into focus for some of the world’s biggest mutual funds, and it is a brutal reckoning. The total red ink for mutual funds that invested in debt issued by the troubled island commonwealth is as much as $5.4 billion over the past five years, according to a Wall Street Journal analysis of mutual-fund holdings… Those losses… were tucked inside a wide range of funds…”

May 14 – Financial Times (Fraser Lundie): “‘The past is always triple-A. We can all remember what the past was. But if we try to make the future triple-A, we have no future. The future is always single-B.’ Michael Milken, the ‘Junk bond king’, was not describing the asset class he created, but he could well have been. In hindsight, high-yield bonds have been one of the best performing asset classes on a risk-adjusted basis of any in the world, an asset class delivering equity-like rewards with half the volatility. Like all things too good to last, capital markets have come to chew the fat off this remarkable record… It is ironic that an asset class that has taken decades to rid itself of the unflattering ‘junk’ tag now finds itself in a state more likely to exhibit junk status than ever before.”

May 16 – Wall Street Journal (Min Zeng): “The U.S. bond market is sending a note of caution to the Federal Reserve, which is on track to raise interest rates in June. Hedge funds and money managers have built up the biggest net wagers since 2008 betting long-term Treasury yields will fall. At the same time, wagers betting on an increase in short-term interest rates are near the highest level since 1993. This divergence is happening at a time when the yield premium on the 10-year note relative to the two year has been shrinking.”

Federal Reserve Watch:

May 17 – Bloomberg (Brian Chappatta): “The bond market is interpreting what could be the deepest crisis of Donald Trump’s presidency as throwing the Federal Reserve off its path for interest-rate increases this year. The odds that the central bank raises its benchmark rate next month are about 60%, based on the current effective fed funds rate and the forward overnight index swap rate. That’s down from 80% a week ago.”

May 15 – CNBC (Steve Liesman): “While Federal Reserve officials have said they plan to begin a process to normalize their balance sheet, the end result is likely to be a balance sheet that is anything but normal. Interviews with Fed officials, and public statements they've made suggest the Fed's new normalized balance sheet could end up being three times as large as it was before the financial crisis. And it could be bigger than that. The Fed has yet to announce a plan to run off its massive $4.4 trillion balance sheet, but market participants… expect the process to begin in January 2018, months sooner than previously forecast. Some Fed officials have made no secret of their intentions to announce a plan later this year to reduce the balance sheet.”

May 15 – Bloomberg (Liz McCormick and Alex Harris): “To appreciate just how important the Federal Reserve has been to the U.S. Treasury, consider this simple fact: It alone financed roughly 40% of America’s budget deficit last year. So as Fed officials talk up the possibility of unwinding the central bank’s crisis-era bond holdings later this year, figuring out what will happen when the U.S. loses its biggest source of funding has become a pressing concern. Of course, finding ready buyers in the Treasury market… has rarely been a problem. But with deficits poised to balloon, bond dealers are divided over which parts of the market will feel the most pain as the Fed pulls back and the Treasury ramps up debt issuance to fill those gaps.”

U.S. Bubble Watch:

May 15 – Wall Street Journal (Laura Kusisto): “Home sales in the first quarter hit their fastest pace in a decade, a sign that rising prices and slightly higher mortgage rates haven’t deterred home buyers from rushing into the market. Total existing-home sales climbed 1.4% in the quarter to a seasonally adjusted annual rate of 5.62 million, the highest since the first quarter of 2007… The national median home price, meanwhile, jumped 6.9% from the same quarter a year earlier to $232,100, the sharpest price gain in nearly two years. Demand remains strong as millennials begin to enter the housing market in force.”

May 17 – CNBC (Diana Olick): “The number of homes for sale in America has been falling steadily for the past year, but the situation is apparently getting much worse as spring demand heats up. ‘The inventory is reaching historic lows. It's never declined faster than it did last month. It's freaking us out — it's affecting our business; it's limiting our sales,’ said Glenn Kelman, CEO of Seattle-based Redfin…”

May 15 – Bloomberg (Patricia Laya): “More confidence among U.S. home builders this month shows the industry remains optimistic demand will keep growing in the face of rising property values, according to data… from the National Association of Home Builders/Wells Fargo. Builder sentiment rose to 70, the second-highest since 2005, from 68 in April…”

May 16 – Reuters (Richard Leong): “The U.S. economy is forecast to expand at a 4.1% annualized pace in the second quarter following the release of April figures on housing starts and industrial output, the Atlanta Federal Reserve's GDP Now forecast model showed… Domestic factory production increased 1.0% last month for its biggest monthly gain in over three years, but housing starts unexpectedly fell 2.6%...”

May 17 – Reuters (Jonathan Spicer): “Americans' debt level reached a record high this year, surpassing the peak touched just as the worst of the recession was taking hold in 2008, and marking a milestone for households that now lean less on mortgages and more on auto and student loans. Total U.S. household debt was $12.73 trillion at the end of the first quarter of 2017, up $473 billion from a year ago, according to a Federal Reserve Bank of New York survey… Total indebtedness is now 14% above the 2013 trough of household deleveraging brought on by the 2007-2009 financial crisis and Great Recession. The previous peak, in the third quarter of 2008, was $12.68 trillion, and the New York Fed stressed that the pull-back since then marked an ‘aberration’ from what had been a 63-year upward trend in household debt.”

May 18 – Bloomberg (Shahien Nasiripour): “Student debt has more than tripled as a share of total debt owed by U.S. households in less than 15 years.. Student loans made up just 3.3% of total household debt in 2003, for a sum of $240.7 billion, according to estimates… by the Federal Reserve Bank of New York. That sum is now about $1.3 trillion, or about 10.6% of all U.S. household debt. The jump reflects higher tuition and campus-related costs, more people seeking higher education…, and declines in state appropriations to public colleges and federal grants to students relative to rising college costs. One in six American adults, or 44 million people, has a student loan.”

May 17 – Bloomberg (Gabrielle Coppola): “Lenders are tightening the spigot on new auto loans, making it harder for U.S. consumers with weak credit to buy a car, data from the Federal Reserve Bank of New York show. New car loans for subprime borrowers fell in the first quarter to $25.9 billion, the lowest in two years… Drivers with credit scores below 620 now comprise less than 20% of new loans, down from almost 30% a decade ago. Borrowers with the highest credit scores -- 760 or more -- made up nearly a third of new auto loan originations in the first quarter as lenders target the safer deals.”

May 16 – Reuters (Lucia Mutikani): “U.S. manufacturing production recorded its biggest increase in more than three years in April, bolstering the view that economic growth picked up early in the second quarter despite a surprise decline in homebuilding. The broad strength in factory output… added to labor market data in suggesting the growth slowdown in the first quarter was temporary… ‘The sharp increase in industrial activity is a clear sign that the first-quarter sluggishness is behind us. It comes at the right time as home construction seems to have hit a lull,’ said Joel Naroff, chief economist at Naroff Economic Advisors…”

May 14 – Wall Street Journal (Tripp Mickle and Eliot Brown): “Apple Inc. employees last month began testing the company’s latest innovation: Apple Park, one of history’s most expensive corporate campuses and the leading example of the tech industry’s newfound love for splashy architecture. The first of 12,000 Apple headquarters employees moved from several drab, stone buildings in Cupertino, Calif., to space across town in the 2.8-million-square-foot circular building that resembles a spaceship. It features a seamless, curved-glass exterior and a theater that architects said was designed to look like a MacBook Air. The estimated $5 billion project commanded years of attention from top Apple executives… Apple Park is the most lavish in a spate of glitzy new architectural projects by tech titans at a time when their businesses are booming and market valuations are soaring to new heights. Facebook Inc. and Alphabet Inc. have tapped top architects Frank Gehry and Bjarke Ingels for expansions, Amazon is building giant glass globes containing an indoor forest in Seattle, and business-software company Salesforce.com Inc. paid to put its name on a new, 61-story tower that will be the tallest building in San Francisco.”

May 15 – Bloomberg (Martin Z Braun and Jonathan Levin): “San Juan’s gleaming commuter train seemed like a coup -- the kind of big-ticket item many U.S. cities can only dream of. More than a decade on, the Tren Urbano is a monument to the folly, bloat and abuse that finally bankrupted Puerto Rico. Despite years of planning, it sells only a third of the rides it needs to, and loses roughly $50 million a year. The cost so far: $2.25 billion, $1 billion more than planned. That, in a nutshell, is Puerto Rico’s story. With Wall Street’s help, the U.S. commonwealth borrowed tens of billions in the bond markets, only to squander much of it on grand projects, government bureaucracy, everyday expenses and worse. Debts were piled on debts, even as the economy gave way.”

Japan Watch:

May 16 – Reuters (Leika Kihara): “Bank of Japan Governor Haruhiko Kuroda said he was ‘quite sure’ the central bank could smoothly exit from its massive monetary stimulus when the appropriate time to do so came. But he also said the BOJ ‘always’ had room to expand monetary stimulus to achieve its 2% inflation target, indicating that wages and prices had been slow to respond to improvements in the economy. The remarks suggest the BOJ is in no rush to swing monetary policy in either direction, particularly toward cutting back on stimulus with the economic recovery still fragile. ‘There may be some challenging issues, but I'm quite sure the BOJ has enough tools’ to manage an exit from its stimulus program, Kuroda told a seminar…”

May 18 – Bloomberg (Keiko Ujikane): “Japan’s economy advanced for a fifth straight quarter, the longest expansion in a decade, supported by continued strength in exports. Domestic demand rebounded, but economists question whether this strength will continue. Gross domestic product increased by an annualized 2.2% in the three months ended March 31 (estimate +1.7%), accelerating from a revised 1.4% in the previous quarter… The last time Japan strung together this many quarters of growth was in 2006…”

May 15 – Bloomberg (Gareth Allan and Shingo Kawamoto): “Earnings reports by Japan’s three megabanks on Monday pointed to a fourth straight fall in combined annual profit, even as the impact of negative interest rates begins to ease. Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc., and Mizuho Financial Group Inc. forecast a 4.8% drop in combined net income to 2.13 trillion yen ($18.8bn) in the fiscal year ending March 2018 from the previous 12 months.”

EM Watch:

May 19 – Reuters (Brad Brooks and Lisandra Paraguassu): “Brazil's top court released plea-bargain testimony on Friday accusing President Michel Temer and his two predecessors of receiving millions of dollars in bribes, the most damaging development yet in a historic political corruption probe. The testimony made public by the Supreme Court is from executives of the world's largest meatpacking company, and raises serious doubts about whether Temer can maintain his grip on the presidency. The scandals that have engulfed Brazil's political class and many business elites reduce the chances that Temer, a conservative who took office after leftist former President Dilma Rousseff was impeached last year, can push through economic reforms crucial for Latin America's biggest country to recover from its worst recession on record.”

May 16 – Bloomberg (Blaise Robinson): “The scorching gains that have put emerging-market equities on track for their best year since 2009 are showing signs of flagging. After the MSCI Emerging Market Index’s surge of about 17% this year, momentum indicators suggest the rally is losing steam. The benchmark is approaching a resistance level formed by the trend line connecting the peaks in 2011, 2014 and 2015. While breaking above it would be a bullish omen, other technical signals also point to some overheating.”

May 19 – Bloomberg (Eric Martin): “Mexico’s central bank unexpectedly raised its key interest rate for a sixth straight meeting to keep an increase in consumer prices from deepening after inflation accelerated to almost double policy makers’ target… Banco de Mexico, led by Governor Agustin Carstens, lifted its benchmark by a quarter point to 6.75% Thursday…”

May 16 – Bloomberg (Isabella Cota, Eric Martin, and Michelle Davis): “Mexican authorities have zeroed in on seven banks, including three from the U.S., as part of a widening investigation into price manipulation in the nation’s bond market, according to a person with knowledge of the matter. Local units of Banco Santander SA, Banco Bilbao Vizcaya Argentaria SA, JPMorgan Chase & Co., HSBC Holdings Plc, Barclays Plc, Citigroup Inc. and Bank of America Corp. have become the focus of the probe…”

Leveraged Speculator Watch:

May 15 – Bloomberg (Susanne Barton): “Expectations for another boost in U.S. interest rates are wearing down gold bulls. Hedge funds and other large speculators cut long positions in bullion futures and options by the most in more than eight years last week.”

Geopolitical Watch:

May 17 – Reuters (Christine Kim): “South Korean President Moon Jae-in said… there was a ‘high possibility’ of conflict with North Korea, which is pressing ahead with nuclear and missile programs it says are needed to counter U.S. aggression. Moon made his comments hours after South Korea, which hosts 28,500 U.S. troops, said it wanted to reopen a channel of dialogue with North Korea as Moon seeks a two-track policy… North Korea has made no secret of its work to develop a nuclear-tipped missile capable of striking the United States and has ignored calls to halt its nuclear and missile programs, even from China, its lone major ally.”

May 14 – CNN (Brad Lendon): “North Korea says the missile it tested Sunday is capable of carrying a large nuclear warhead, state media said… The country's leader, Kim Jong Un, supervised the launch of the Hwasong-12 missile that reached an altitude of 2,111.5 kilometers (1,312 miles) and flew 787 kilometers (489 miles)… The test was ‘aimed at verifying the tactical and technological specifications of the newly developed ballistic rocket capable of carrying a large-size heavy nuclear warhead,’ KCNA said.”

May 16 – Reuters (Christine Kim and Tom Miles): “North Korea's missile program is progressing faster than expected, South Korea's defense minister said… Han Min-koo told South Korea's parliament that Sunday's test had been detected by the controversial U.S. THAAD anti-missile system, which was deployed in South Korea last month, infuriating China. North Korea has defied all calls to rein in its nuclear and missile programs, even from China, its lone major ally, calling them legitimate self-defense. It has been working to develop a nuclear-tipped missile capable of striking the U.S. mainland, and experts say Sunday's test was another step toward that aim.”

May 14 – Bloomberg (Jordan Robertson and Rebecca Penty): “An unrivaled global cyber-attack is poised to continue claiming victims Monday as people return to work and turn on their desktop computers, even as hospitals and other facilities gained the upper hand against the first wave. More than 200,000 computers in at least 150 countries have so far been infected, according to Europol, the European Union’s law enforcement agency. The U.K.’s National Cyber Security Centre said new cases of so-called ransomware are possible ‘at a significant scale.’ ‘We’ve seen the rise of ransomware becoming the principal threat, I think, but this is something we haven’t seen before -- the global reach is unprecedented,’ Europol Executive Director Rob Wainwright said…”

May 16 – New York Times (Nicole Perlroth and David E. Sanger): “Intelligence officials and private security experts say that new digital clues point to North Korean-linked hackers as likely suspects in the sweeping ransomware attacks that have crippled computer systems around the world. The indicators are far from conclusive, the researchers warned, and it could be weeks, if not months, before investigators are confident enough in their findings to officially point the finger at Pyongyang’s increasingly bold corps of digital hackers. The attackers based their weapon on vulnerabilities that were stolen from the National Security Agency and published last month.”

May 16 – New York Times (Choe Sang-Hun, Paul Mozur, Nicole Perlroth and David E. Sanger): “They take legitimate jobs as software programmers in the neighbors of their home country, North Korea. When the instructions from Pyongyang come for a hacking assault, they are believed to split into groups of three or six, moving around to avoid detection. Ever since the 1980s, reclusive North Korea has been known to train cadres of digital soldiers to engage in electronic warfare and profiteering exploits against its perceived enemies… In more recent years, cybersecurity experts say, the North Koreans have spread these agents across the border into China and other Asian countries to help cloak their identities. The strategy also amounts to war-contingency planning in case the homeland is attacked. Now this force of North Korean cyberhacking sleeper cells is under new scrutiny in connection with the ransomware assaults that have roiled much of the world over the past four days.”

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