Saturday, June 30, 2018

Saturday's News Links

[Reuters] China factory growth slows in June as trade tensions rise

[CNBC] Trump, Saudi king agree to production boost to battle rising oil prices, and offset Venezuela, Iran supply woes

[MarketWatch] It’s been decades since the White House has warned the Fed the way Kudlow just did

[BloombergQ] Italy's Populist Playbook: How to Shake Up the EU Establishment

[Reuters] Investors hopeful Mexico's Lopez Obrador will veer to the center

[Spiegel] WTO Faces Existential Threat in Times of Trump

[Spiegel] Merkel's Toughest Adversary in Europe

[Reuters] U.S. sanctions aim to turn Iranians against government: Khamenei

[FT] Market ructions throw investor predictions off track

Weekly Commentary: A Decisive Quarter

June 29 - Financial Times (Peter Wells): "The buck is back. Tighter domestic monetary policy and global trade turmoil have set the US dollar for its best quarterly performance since December 2016. The DXY index, which tracks the US currency against a weighted basket of global peers, was up 5.2% in the three months to June 29. That has been achieved via a three-month winning streak, its first such run since December 2016, too."

Chicken or the egg? U.S. dollar strength or emerging market weakness? It's most likely a mix of both, but either way it was a quarter where "Periphery and Core Analysis" offered insight. Global financial conditions tightened significantly during the quarter.

The U.S. dollar gained 5.2% against the euro, 4.0% versus the Japanese yen, 6.7% versus the Swedish krona, 6.5% against the New Zealand dollar, 5.8% versus the British pound, 3.8% against the Norwegian krone, 3.7% against the Swiss franc, 3.6% versus the Australian dollar and 1.8% against the Canadian dollar.

There were large moves in "developed" currencies, though the larger drama played out in the emerging markets. The Argentine peso collapsed 30%, forcing the Macri government into an unpopular $50bn IMF aid package. Political uncertainty heading into fall elections, sinking stocks, destabilizing labor unrest and general strife led to a 14.7% drop in the Brazilian real. Surging inflation, a faltering boom, excessive debt and strongman President Erdogan's threats on central bank independence were behind the Turkish lira's 13.9% fall for the quarter. Vulnerable as well, the South African rand fell 13.7% versus the dollar.

Especially late in the quarter, Asian currencies were under heavy selling pressure. Declines for the quarter included the Thai baht's 5.8%, the Indian rupee's 4.8%, the South Korean won's 4.6%, the Taiwanese dollar's 4.5%, the Malaysian dollar's 4.3%, the Indonesian rupiah's 3.9% and the Singapore dollar's 3.7%.

While not garnering much attention, "developing" Europe faced significant currency weakness. Losses included the Hungarian forint's 10.0%, the Russian ruble's 8.9%, the Polish zloty's 8.7%, the Czech koruna's 7.5%, the Iceland krona's 6.5%, the Romanian leu's 5.3%, the Bulgarian lev's 5.2%, the Serbian dinar's 5.0% and the Croatian kuna's 4.5%.

In Latin America, the Venezuelan bolivar sank 48.5%, the Mexican peso 8.7%, the Chilean peso 7.7% and the Colombian peso 4.6%.

Headlines capture the dramatic change in market perceptions that unfolded during the pivotal second quarter. From Morningstar back in mid-April: "ETF Investors Favour Emerging Markets in 2018." And Thursday afternoon from CNBC: "Global stocks see biggest loss of investor cash since the financial crisis."

A quarter that began with the trumpeting of "synchronized global expansion" ended with increasing fears of EM-induced global recession. After beginning the year in speculative melt-up mode, emerging equities fell back to earth in Q2.

Chinese stocks led the rout. The Shanghai Composite sank 10.1% during the quarter. The small cap CSI 500 lost 14.7%, and the CSI Midcap 200 fell 12.5%. China's growth/tech ChiNext index was slammed 15.5%. Hong Kong's Hang Seng financials index dropped 10.7% during the quarter, led by losses from the Chinese securities firms. As for China's two largest banks, Industrial and Commercial Bank of China dropped 12.6% during the quarter and China Construction Bank lost 15.5%. Trouble brewing in Chinese Credit. Unfolding capital flight issue? Losing 1.75% in the final week of the quarter, the Chinese renminbi dropped a notable 5.2% during Q2.

June 29 - Bloomberg (Denise Wee): "Asia junk bond spreads blew out further this week as concerns about Chinese issuers mounted amid a selloff in that nation's shares and currency. Yield premiums on the notes spiked 25.3 bps on Thursday, leaving them poised for a 45.5 bps jump this week, the sharpest in more than five months… Adding to concerns in Asian credit markets this week, people familiar with the matter said that China is slowing approvals for offshore bonds and weighing whether to ban short-dated issuance in dollars."

June 29 - Bloomberg: "Asian high yield dollar bonds are set to post the biggest quarterly loss since 2013, with Chinese companies leading declines, as heavy pipeline of new bond deals and rising defaults dented market confidence. Asian junk bonds are set to post negative returns of about 3.3% in 2Q after a loss of 1.1% in 1Q, making it the worst quarter since 2Q 2013, when returns were negative 4.5%, according to Bloomberg Barclays Asian High-Yield Dollar Bond Index… Eight out of the 10 worst performers this quarter were Chinese firms compared to just three in 1Q."

Japan's TOPIX Bank Index fell 4.8%, though Japan's Nikkei rallied 4.0% during the period (on yen weakness). The quarter saw equity market losses of 4.9% for South Korea (KOSPI), 4.7% in Singapore, 10.2% in Thailand, 9.2% in Malaysia, 6.3% in Indonesia, 9.9% in Philippines and 18.2% in Vietnam. Not all was red in Asia. India's stocks (SENSEX) gained 7.5%. Stocks gained 7.6% in Australia and 7.5% in New Zealand.

Big bank stock losses were not limited to Asia. There was carnage in Brazil, home to Latin America's largest banks. Banco do Brasil sank 30.2%, Banco Bradesco dropped 30.3% and Itau Unibanco fell 21.4%. Brazil's Ibovespa index sank 14.8% during the quarter (27.3% in U.S. dollars).

Bank losses led European indices on the downside. European Banks (STOXX600) dropped 6.9% during the quarter, increasing y-t-d losses to 12.4%. Interestingly, German banks led on the downside, with Deutsche Bank dropping 41.9% and Commerzbank sinking 34.3%. Other losses included Bankia's 19.6%, ING's 19.6%, ABN Amro's 17.4%, Danske's 17.3%, Credit Agricole's 17.1% and Societe Generale's 16.1%. European and Latin American banks competed during the quarter for the largest jumps in Credit default swap prices.

Despite the weak banking sector, developed European equities indices for the most part posted gains for the quarter (supported by currency weakness). Major indexes were up 8.2% in the UK, 3.0% in France, 1.7% in Germany, 0.2% in Spain and 1.5% in Sweden. Italy's MIB index dropped 3.5% during the quarter.

Meanwhile, instability reemerged throughout European bonds markets. After beginning the quarter (and May) at 1.78%, Italian yields spiked to 3.13% in late-May. For the quarter, Italian yields rose 89 bps to 2.67% (2-yr yields up 103bps to 2.64%!). Spain's 10-year yields rose 17 bps and Portugal's 18 bps. Spreads widened significantly versus German bunds. The quarter saw bund yields drop a notable 19 bps to 30 bps. German two-year yields declined six bps to negative seven bps (traded as low as negative 77bps in late-May).

U.S. treasuries saw their share of volatility. Ten-year yields began the quarter at 2.73%, jumped to 3.13% on May 17th, before reversing back down to 2.78% on May 29th - before ending the quarter at 2.86%. The first half of the quarter saw yields respond to a booming U.S. economy, the second half to a bursting EM Bubble and the rising prospect of protectionism afflicting a vulnerable global economy.

Local currency EM bonds were hammered. Ten-year yields rose 393 bps in Turkey (to 16.17%), 214 bps in Brazil (11.62%), 123 bps in Hungary (3.60%), 107 bps in Indonesia (7.69%), 86 bps in South Africa (86 bps), 76 bps in Romania (5.17%), 75 bps in Peru (5.57%), 63 bps in Russia (7.66%), 51 bps in India (7.90%), and 27 bps in Mexico (7.58%). It's worth highlighting a few big moves in dollar-denominated EM bonds: Yields surged 200 bps in Argentina (8.65%), 109 bps in Brazil (5.96%) and 95 bps in Turkey (6.79%).

The surging dollar, fading global growth prospects and trade issues made for an interesting quarter in the commodities. WTI crude surged 14.2%, and NYMEX gasoline gained 8.0%. Meanwhile, the strong dollar pressured the precious metals. Golds fell 5.5%, silver 1.5% and Platinum 8.5%. Copper declined 1.3%. Agriculture commodity prices moved all over. Wheat jumped 10.3%, while corn dropped 9.7%. Soybeans sank 17.8%.

And saving the most intriguing for last, U.S. equities. A Friday Bloomberg headline: "Wall Street Left Reeling as 2018 Upends Almost Every Bet." A long central bank-induced bull market ensured too much "money" swirling around global markets. Crowded Trades were faltering left and right throughout the quarter.

The S&P500 rose a solid but un-noteworthy 2.9% during the quarter. The noteworthy lurked below the surface. The unloved retail stocks (XRT) surged 9.6%. Tiffany gained 34.8%, Macy's 25.9% and Kroger 18.8%. Q2 saw a rather spectacular short squeeze, with the Goldman Sachs Most Short Index gaining 15.0%. Notable quarterly gains included Twitter (50.5%), AMD (49.2%), Under Armour (46.9%), Trip Advisor (36.2%), Chipotle (33.5%), Netflix (32.5%), Tesla (28.9%), and Facebook (21.6%). A big energy sector short squeeze saw Chesapeake Energy gain 73.5%, Ensco 65.4%, Oasis Petroleum 60.1%, Diamond Offshore Drilling 42.3% and Hess 32.1%. The New York Arca Oil index surged 14.3%.

The higher-risk sectors generally outperformed. The Nasdaq Composite jumped 6.3%, the Nasdaq100 7.0% and the Biotechs (BTK) 5.5%. Relatively removed from EM and global trade concerns, broader U.S. equities outperformed. The small cap Russell 2000 jumped 7.4% and the S&P400 Midcaps rose 3.9%. The REITs gained 6.8%. While the unloved surged higher, the darling financial stocks were under moderate pressure. The banks (BKX) declined 2.5% for the quarter, and the NYSE Financials fell 3.1%.

June 29 - Bloomberg (Molly Smith): "Blue-chip corporate bonds are on track to be the worst-performing U.S. asset class this year, and money managers caution that it may be too soon to start looking for bargains… It's not clear how much longer the pain will persist for investment-grade bonds. Issuance is likely to slow down in the second half of the year, cutting into supply, and foreign buyers may be more inclined to buy now as the U.S. dollar appreciates… Investment-grade corporate debt has fallen 3.3% this year through June 28 on a total-return basis, on track for the worst first half of a year since 2013…"

June 29 - Financial Times (Alexandra Scaggs): "Investment-grade US corporate bonds recorded a second negative quarter in the three months to the end of June, marking the first back-to-back losses since the financial crisis, as the Federal Reserve raised interest rates and foreign buyers of corporate bonds retreated in the first half of this year… The spread between yields on corporate credit and comparable Treasuries widened to 130 bps from 90 bps in early February, according to ICE BofAML index data. Spreads widened as the pace of investment-grade bond issuance from US companies remained unexpectedly persistent this year, while rising hedging costs dented demand from non-US investors, previously a major buyer group, compared to 2017… The volume of investment-grade bond issuance in the first half of 2018 was just 5% lower than last year… This has confounded strategists' predictions of declines in issuance of as much as 16%."

Investment-grade bonds (LQD) returned negative 1.14% for the quarter, notably underperforming junk bonds (HYG) that returned positive 1.21%. Interesting to see investment-grade and junk bond spreads diverge. With cracks forming at the global Periphery (EM), flows gravitated to Core (US) securities markets. This worked to overpower the rise in Treasury yields. The reversal lower in market yields supported U.S. equities generally, which spurred quite a short squeeze at the "Periphery of the Core" (the fringe of U.S. securities). This tended to bolster more fundamentally-challenged U.S. equities, in the process also supporting higher-risk bonds. And as higher beta and the fundamentally challenged began outperforming the S&P500, the Performance Chase was on.

There's nothing like a short squeeze and perceptions of loose corporate Credit to spur speculative fervor. I would urge caution. I view the performance of the investment-grade market as the single most important market indicator for prospective U.S. equities returns. At this point, I would discount the outperformance of "short" stocks, the small caps, the higher beta sectors, big tech and high yield. This week's selling in the banks, brokers and transports portends challenges ahead.

The faltering Chinese and EM Bubbles abruptly altered global market dynamics, catching many players poorly positioned (over their skis in some areas and significantly underweight others). My sense is that many hedge funds suffered a challenging quarter, as their longs generally underperformed the market while their shorts significantly outperformed. This dynamic was instrumental in Q2's short squeeze. De-risking forced cutting back on favorite longs and reducing favorite shorts - with a plethora of Crowded Trades on both sides. Fascinating yes, but none of this is bullish.

The U.S. currency and equities market were beneficiaries of the rapidly deteriorating global backdrop. This market dynamic stoked the booming American economy. I would argue there is a clear downside to bubbling U.S. markets and economic output: For one, the environment emboldens both the Fed and President Trump. The Powell Fed is emboldened to follow through with rate and balance sheet normalization. The President, meanwhile, is emboldened to push through with his aggressive trade and political agendas - prominently with plans for major tariffs and additional tax cuts.

Booming markets ensure imaginations run wild. Importantly, reality began to gain the upper hand during the quarter. The global Bubble faltered. The world is not robust - there are, indeed, fragilities everywhere. EM is a potential disaster. China is increasingly vulnerable. China and Asian debt has become a huge global risk. I worry about Brazil.

And this age of populism and the "strongman" politician actually does matter to the markets. Trump Tariffs. China ready to "punch back." Erdogan to dictate Turkish rate policy? The new Italian government to play hardball with the EU. Immigration becoming a pressing political issue from Washington to Frankfurt. A new leftist President in neighboring Mexico. Well, booming markets were content to disregard the global rise of populism, divisiveness and autocracy. Faltering markets will now amplify these troubling trends. All the makings for savage bear markets.

It was A Decisive Quarter: The world became more divided; the "Atlantic Alliance" became more divided; Europe became more divided; Asia became more divided; North America became more divided; and the United States turned only more divided. U.S. stock performance during the quarter should not distract from the ominous storm clouds forming globally - in the markets, economically, socially and geopolitically. Global markets were also more divided, though I would expect Contagion from the Periphery to now make more discernable headway toward the Core.


For the Week:

The S&P500 declined 1.3% (up 1.7% y-t-d), and the Dow fell 1.3% (down 1.8%). The Utilities jumped 2.2% (down 1.8%). The Banks dropped 2.6% (down 2.6%), and the Broker/Dealers sank 5.0% (up 2.7%). The Transports fell 4.0% (down 2.5%). The S&P 400 Midcaps dropped 1.9% (up 2.7%), and the small cap Russell 2000 sank 2.5% (up 7.0%). The Nasdaq100 lost 2.2% (up 10.1%). The Semiconductors fell 4.2% (up 4.8%). The Biotechs dropped 3.5% (up 12.5%). With bullion down $16, the HUI gold index declined 1.4% (down 9.3%).

Three-month Treasury bill rates ended the week at 1.88%. Two-year government yields slipped two bps to 2.53% (up 64bps y-t-d). Five-year T-note yields declined three bps to 2.74% (up 53bps). Ten-year Treasury yields fell four bps to 2.86% (up 45bps). Long bond yields dropped five bps to 2.99% (up 25bps). Benchmark Fannie Mae MBS yields declined four bps to 3.60% (up 57bps).

Greek 10-year yields dropped 18 bps to 3.93% (down 14bps y-t-d). Ten-year Portuguese yields slipped three bps to 1.79% (down 16bps). Italian 10-year yields dipped one basis point to 2.68% (up 66bps). Spain's 10-year yields declined three bps to 1.32% (down 25bps). German bund yields fell four bps to 0.30% (down 13bps). French yields declined four bps to 0.67% (down 12bps). The French to German 10-year bond spread was little changed at 37 bps. U.K. 10-year gilt yields declined four bps to 1.28% (up 9bps). U.K.'s FTSE equities index slipped 0.6% (down 0.7%).

Japan's Nikkei 225 equities index declined 0.9% (down 2.0% y-t-d). Japanese 10-year "JGB" yields were little changed at 0.04% (down one bp). France's CAC40 fell 1.2% (up 0.2%). The German DAX equities index sank 2.2% (down 4.7%). Spain's IBEX 35 equities index fell 1.7% (down 4.2%). Italy's FTSE MIB index declined 1.2% (down 1.0%). EM equities were mixed. Brazil's Bovespa index rallied 3.0% (down 4.8%), and Mexico's Bolsa recovered 2.0% (down 3.4%). South Korea's Kospi index fell 1.3% (down 5.7%). India’s Sensex equities index slipped 0.7% (up 4.0%). China’s Shanghai Exchange dropped another 1.5% (down 13.9%). Turkey's Borsa Istanbul National 100 index increased 0.7% (down 16.3%). Russia's MICEX equities gained 2.1% (up 8.8%).

Investment-grade bond funds saw inflows of $1.542 billion, while junk bond funds had outflows of $1.135 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates slipped two bps to 4.55% (up 67bps y-o-y). Fifteen-year rates were unchanged at 4.04% (up 87bps). Five-year hybrid ARM rates gained four bps to 3.87% (up 70bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down a basis point to 4.60% (up 59bps).

Federal Reserve Credit last week declined $7.0bn to $4.273 TN. Over the past year, Fed Credit contracted $158bn, or 3.6%. Fed Credit inflated $1.462 TN, or 52%, over the past 295 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt fell $4.0bn last week to $3.400 TN. "Custody holdings" were up $91.7bn y-o-y, or 2.8%.

M2 (narrow) "money" supply jumped $19.8bn last week to a record $14.118 TN. "Narrow money" gained $605bn, or 4.5%, over the past year. For the week, Currency increased $3.1bn. Total Checkable Deposits fell $23.3bn, while savings Deposits jumped $33.5bn. Small Time Deposits gained $2.8bn. Retail Money Funds rose $3.5bn.

Total money market fund assets recovered $22.7bn to $2.825 TN. Money Funds gained $203bn y-o-y, or 7.7%.

Total Commercial Paper dropped $17.4bn to $1.085 TN. CP gained $112bn y-o-y, or 11.5%.

Currency Watch:

June 27 - Wall Street Journal (Saumya Vaishampayan and Shen Hong): "As China faces off against the U.S. in a burgeoning trade dispute, the country's central bank is allowing the yuan to weaken against the dollar while also trying to prevent the kind of sharp devaluation that could have a destabilizing effect on its own economy. That balancing act was on display Wednesday: The yuan fell to a more-than-six-month low against the dollar before the People's Bank of China appeared to intervene to stem the decline. Allowing the yuan to fall, analysts say, is one way Beijing could try to counter growing pressure from the U.S. on the country's trade practices… A lower yuan versus the dollar would make China's exports more competitive, offsetting some of the tariff effect. However, a sudden yuan devaluation could prove dangerous for China. It would risk a destabilizing capital flight, as happened after Beijing last allowed a sudden drop in the currency in August 2015."

June 25 - Financial Times (Roger Blitz): "There are reasons both to relax and to worry about the renminbi's fall to its lowest level against the dollar since December. On the positive side, the currency's movement this year looks not unlike the freely traded behaviour of some of its peers - a strong climb in the first quarter, followed by the turnround in mid-April. If the People's Bank of China is less concerned about controlling its currency, recognising that sometimes there is no point fighting a stronger dollar, then markets will welcome it. But the PBoC must also face the uncomfortable reality familiar to central banks elsewhere: that markets, influenced by geopolitical events, may not respond to policy measures in the way policymakers hope."

The U.S. dollar index was little changed at 94.512 (up 2.6% y-t-d). For the week on the upside, the Canadian dollar increased 1.0%, the Mexican peso 0.5% and the euro 0.3%. For the week on the downside, the Brazilian real declined 2.3%, the South African rand 2.1%, the New Zealand dollar 2.0%, the Swedish krona 1.0%, the Japanese yen 0.7%, the Norwegian krone 0.6%, the South Korean won 0.6%, the Australian dollar 0.5%, the British pound 0.4%, the Singapore dollar 0.3%, and the Swiss franc 0.3%. The Chinese renminbi dropped 1.75% versus the dollar this week (down 1.73% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index jumped 2.1% (up 8.8% y-t-d). Spot Gold fell 1.3% to $1,253 (down 3.8%). Silver fell 2.3% to $16.16 (down 5.7%). Crude surged $5.67 to $74.25 (up 23%). Gasoline rose 3.8% (up 20%), while Natural Gas slipped 0.9% (down 1%). Copper dropped 2.8% (down 10%). Wheat slipped 0.6% (up 17%). Corn fell 1.8% (up 6%).

Market Dislocation Watch:

June 26 - CNBC (Jeff Cox): "They may have to start passing out neck braces on trading floors if the White House's contradictions on trade policies continue much longer. Investors are getting whiplash from watching the back-and-forth happening among Trump administration officials who can't seem to agree on a trade policy. Monday's action featured a series of mixed messages about President Donald Trump's latest trade-related threat, resulting in volatile market action and confusion and frustration in the financial markets. 'I don't think the people in the White House have an ideal path for the way this is going to go. They're trying lots of different things,' said Rob Lutts, chief investment officer and president of Cabot Money Management. 'I actually believe they're making this up as they go along.'"

June 24 - Financial Times (Andrew Hill): "If Chuck Prince, former chief executive of Citigroup, is remembered for anything, it is his insouciant comment about the boom in leveraged finance. 'As long as the music is playing, you've got to get up and dance. We're still dancing,' he told the Financial Times in 2007. He was out four months later. Mr Prince's remark is the best expression of bankerly smugness since the Depression. But how many of today's banker class remember it, let alone worry about the complacency it encapsulated? One, at least. Last week, James Gorman, chief executive of Morgan Stanley, told a conference on bank culture he was concerned about short memories on Wall Street… 'My fear is . . . those people who haven't been through the last 10-plus years . . . the crisis, the post-crisis, the Whale [a 2012 trading scandal at JPMorgan], all the other stuff that has happened since. Fifteen years from now, will management come to work every day with sufficient scarring or not?'"

Trump Administration Watch:

June 27 - CNBC (John W. Schoen): "Despite public statements softening its stance, the Trump administration could still take a hard line on Chinese investments in U.S. tech companies. A lot depends on whether Congress moves ahead with a long awaited overhaul of the current government system for reviewing and approving transactions that may pose a threat to national security, including the transfer of sensitive technologies. The White House on Wednesday backed away from a high profile promise made last month to single out China for a new investment ban. 'We are going to treat China the way we are going to treat other people,' Treasury Secretary Steve Mnuchin told reporters. 'And to the extent that we were worried about transactions, we will block them. But we are not going to on a wholesale basis discriminate against China as part of a negotiation.'"

June 27 - Bloomberg (Saleha Mohsin, Jennifer Jacobs, Jenny Leonard and Nick Wadhams): "Treasury Secretary Steven Mnuchin won a battle inside the Trump administration over trade policy this week after a series of setbacks as he tries to ease economic tensions with China. Most of President Donald Trump's top advisers had decided by Monday to recommend he invoke emergency powers under an obscure 1977 law to block China from acquiring U.S. technology companies and their intellectual property. But by Tuesday evening, Mnuchin had forged an about-face… Secretary of State Mike Pompeo provided a key assist…, siding with Mnuchin out of his own concern that an escalating trade war with China could hurt U.S. efforts to persuade North Korea to give up its nuclear weapons. On Tuesday, once Mnuchin had secured Trump's agreement to instead pursue a stepped-up Committee on Foreign Investment in the U.S. -- a less confrontational approach to the issue -- Mnuchin hit the gas on a public announcement that wasn't expected before Friday."

June 25 - Wall Street Journal (Bob Davis): "Bitter fights over trade within the Trump administration again broke into the open, driving wild swings in the stock market as the White House's top trade adviser clashed with the Treasury secretary over restrictions on foreign investment. For weeks, the administration has been planning a two-pronged effort to block Chinese companies from obtaining advanced U.S. technology. The U.S. would block Chinese companies from investing in U.S. technology companies, while restricting U.S. technology exports to China. Beijing has reacted strongly to the escalating tensions, with President Xi Jinping vowing to 'punch back' against the U.S. trade measures."

June 25 - CNBC (Javier E. David): "President Donald Trump issued a stark warning to the United States' trading partners on Sunday, calling on global economies to end all protectionist barriers or face a new round of retaliatory measures. As fears mount over a trade war between the world's largest economy and major trading partners like China and the European Union, Trump renewed his call for 'fair trade' that reduced barriers to entry. On Twitter, the president insisted that 'all countries' with protectionist measures must remove those barriers, or be met with 'reciprocity' by the U.S."

June 26 - Bloomberg: "China and the European Union vowed to oppose trade protectionism in an apparent rebuke to the U.S., saying unilateral actions risked pushing the world into a recession. Vice Premier Liu He -- President Xi Jinping's top economic adviser -- said China and the EU had agreed to defend the multilateral trading system, following talks Monday in Beijing. The comments… come as both sides prepare to face off against President Donald Trump's tariff threats. 'Unilateralism is on the rise and trade tensions have appeared in major economies,' Liu said. 'China and the EU firmly oppose trade unilateralism and protectionism and think these actions may bring recession and turbulence to the global economy.'"

June 26 - Reuters (Rajesh Kumar Singh): "From global manufacturers such as Harley-Davidson Inc to small tech startups, companies are scrambling to rework supply chains built for an era of stable, open trade policy that is now under threat. As U.S. President Donald Trump pushes to upend the status quo of global trade, companies that initially took a wait-and-see stance are starting to take action to shield their businesses from shifting trade policy. On Monday, U.S. motorcycle maker Harley warned of higher costs because of retaliatory EU tariffs, and said it would shift production of bikes destined for the European Union out of the United States to factories it has built in India, Brazil and Thailand."

June 27 - Reuters (David Shepardson): "Two major auto trade groups… warned the Trump administration that imposing up to 25% tariffs on imported vehicles would cost hundreds of thousands of auto jobs, dramatically hike prices on vehicles and threaten industry spending on self-driving cars. A coalition representing major foreign automakers including Toyota Motor Corp, Volkswagen AG, BMW AG, and Hyundai Motor Co, said the tariffs would harm automakers and U.S. consumers."

June 26 - Wall Street Journal (Ian Talley): "The U.S. threatened to slap sanctions on countries that don't cut oil imports from Iran to 'zero' by Nov. 4, part of the Trump administration's push to further isolate Tehran both politically and economically… Buyers of Iranian crude had expected the U.S. would allow them time to reduce their oil imports over a much longer period, by issuing sanctions waivers for nations that made significant efforts to cut their purchases. That expectation was partly based on previous comments from top Trump officials, as well as the Obama administration's earlier effort to wean the world off Iranian oil over several years. But the senior State Department official said on Tuesday that President Donald Trump's administration doesn't plan to issue any waivers and would instead be asking other Middle Eastern crude exporters over the coming days to ensure oil supply to global markets."

Federal Reserve Watch:

June 27 - Reuters (Richard Leong): "The rise of a key U.S. overnight interest rate has raised speculation that higher bank borrowing costs will force the Federal Reserve to stop shrinking its balance sheet sooner than planned. The federal funds interest rate, or what banks charge each other to borrow excess reserves overnight, crept up last week after the U.S. central bank lowered what it pays banks on excess reserves. That narrowing gap between the federal funds rate and the interest on excess reserves, or IOER, has stoked a debate over whether the Fed's reduction of its massive bond holdings… has made it more expensive for banks to borrow excess reserves to meet regulatory requirements or fund their daily needs, analysts said. 'It's a signal that perhaps they are closer to their balance sheet bottom than they had previously thought,' said Steven Blitz, chief U.S. economist at TS Lombard…"

U.S. Bubble Watch:

June 26 - Reuters (David Morgan): "Republican plans to make President Donald Trump's tax cuts permanent for individuals and many private businesses would worsen an already rising U.S. debt burden, congressional researchers said… In its annual long-term budget outlook, the nonpartisan Congressional Budget Office (CBO) said the debt will equal 78% of U.S. gross domestic product by the end of the year and a record 152% by 2048, a trajectory that it said would hurt the economy, increase the likelihood of a fiscal crisis and make it harder for the government to respond. Trump's $1.5 trillion tax cuts and a $1.3 trillion spending bill enacted by Congress in March have already helped push CBO's debt projections higher through 2041…"

June 26 - Reuters (Reade Pickert and Shobhana Chandra): "U.S. consumer sentiment eased in June as Americans became less optimistic for the economy and income growth, according to figures… from the… Conference Board. The report indicates that while Americans remain upbeat on the current state of the economy amid bountiful jobs and lower taxes, there is less confidence that gains will remain robust. Some 18.8% of respondents said they expected their incomes to rise in the next six months, the smallest share since April 2017. As a result, purchase plans for motor vehicles and major appliances settled back."

June 27 - Reuters (Kane Wu): "The rapidly deteriorating trade and investment relationship between Washington and Beijing is sending a further chill through Chinese dealmakers who have already seen the number of Chinese acquisitions of American assets take a big hit. So far this year, Chinese companies have spent just $1.6 billion on U.S. assets, down almost 80% from the year-earlier period… By contrast the amount China has spent on European assets has risen 39% from last year to $45.1 billion."

June 27 - Reuters (Adam Jourdan): "As Beijing and Washington veer towards a full-blown trade war, American brands in China face what may be an even bigger threat: local rivals armed with innovative products and the Chinese government's blessing. American household names like Apple, Starbucks and Procter & Gamble's Pampers are seeing their dominance challenged, a potential threat to the hundreds of billions of dollars U.S. firms make in China. According to an analysis of data from Bain and Kantar, local brands snatched almost three-quarters of China's 639 billion yuan ($97bn) market for fast-moving consumer goods - a category that includes items like soft drinks and shampoo - last year, up from two-thirds in 2013."

June 22 - Wall Street Journal (Heather Gillers, Anne Tergesen and Leslie Scism): "Americans are reaching retirement age in worse financial shape than the prior generation, for the first time since Harry Truman was president. This cohort should be on the cusp of their golden years. Instead, their median incomes including Social Security and retirement-fund receipts haven't risen in years, after having increased steadily from the 1950s. They have high average debt, are often paying off children's educations and are dipping into savings to care for aging parents. Their paltry 401(k) retirement funds will bring in a median income of under $8,000 a year for a household of two. In total, more than 40% of households headed by people aged 55 through 70 lack sufficient resources to maintain their living standard in retirement… That is around 15 million American households. Things are likely to get worse for a broader swath of America."

China Watch:

June 27 - Bloomberg: "A leaked report from a Chinese government-backed think tank has warned of a potential 'financial panic' in the world's second-largest economy, a sign that some members of the nation's policy elite are growing concerned as market turbulence and trade tensions increase. Bond defaults, liquidity shortages and the recent plunge in financial markets pose particular dangers at a time of rising U.S. interest rates and a trade spat with Washington, according to a study by the National Institution for Finance & Development… The think tank warned that leveraged purchases of shares have reached levels last seen in 2015 -- when a market crash erased $5 trillion of value. 'We think China is currently very likely to see a financial panic,' NIFD said in the study, which appeared briefly on the Internet on Monday, before being removed. 'Preventing its occurrence and spread should be the top priority for our financial and macroeconomic regulators over the next few years.'"

June 26 - Reuters (Evelyn Cheng): "Chinese President Xi Jinping said last week that he will not hesitate to retaliate against the U.S. on trade, The Wall Street Journal reported Monday, citing sources. 'In the West you have the notion that if somebody hits you on the left cheek, you turn the other cheek,' Xi said in the report... 'In our culture, we punch back.'"

June 26 - Bloomberg: "Xi Jinping vowed to match Donald Trump blow for blow in any trade war. Now as one gets closer, some in Beijing are starting to openly wonder whether China is ready for the fight -- an unusually direct challenge to the leadership of the world's second-largest economy. In recent weeks, prominent academics have begun to question if China's slowing, trade-dependent economy can withstand a sustained attack from Trump, which has already started to weigh on stock prices. The sentiments are being expressed in carefully worded essays circulated on China's heavily censored internet and… repeated in the halls of government offices, too. The essays have raised concerns that the ruling Communist Party underestimated the depth of anti-China sentiment in Washington and risked a premature showdown with the world's sole superpower… 'It seems like Chinese officials were mentally unprepared for the approaching trade friction or trade war,' Gao Shanwen, chief economist for Beijing-based Essence Securities Co… wrote in one widely circulated commentary. 'Anti-China views are becoming the consensus among the U.S. public and its ruling party.'"

June 24 - Bloomberg: "China's central bank will cut the amount of cash some lenders must hold as reserves, unlocking about 700 billion yuan ($108bn) of liquidity, as it seeks to control leverage and support smaller companies. The required reserve ratio for some banks will drop by 0.5 percentage point, effective July 5… That's the day before the U.S. and China are scheduled to impose tariffs on each other. Such a reduction had been widely expected, especially after China's cabinet said… that it would use monetary policy tools, including cutting reserve ratios for some banks, to boost credit supply to smaller companies."

June 26 - Bloomberg (Sofia Horta e Costa): "A deepening sense of unease is rippling through China's financial markets. The benchmark Shanghai stock index has tumbled 20% in just five months to enter a bear market. The yuan is heading for its longest losing streak in four years in Hong Kong. Corporate defaults are mounting. There are homegrown reasons for the concern: the nation's deleveraging campaign is reducing the amount of liquidity available -- threatening growth in the world's second-largest economy. Then throw in an unpredictable trade war with the U.S., and investors are facing a long list of reasons to sell. Official efforts to calm nerves, from cutting reserve ratios to publishing upbeat editorials in financial newspapers, have had little effect so far."

June 27 - Financial Times (Don Weinland and Roger Blitz): "Blame for the sell-off of China's stock market has been levelled at the Sino-US trade war but Beijing's problems have been evident for some time and run much deeper. Long before US president Donald Trump imposed billions of dollars in tariffs against China, a steady drip of credit tightening and middling Chinese economic data underpinned the selling… China's key stock market index, the Shanghai Composite, has now tumbled into bear market territory for the first time in more than two years… The last major sell-off at the start of 2016 was driven by a clutch of bad economic indicators. This time analysts say a multitude of concerns for China - from a mounting trade war with the US and failing overseas projects, to tighter credit and a pullback from institutional investors - has spurred the abrupt cooling of investor sentiment for shares."

June 24 - New York Times (Keith Bradsher): "China gave its economy a shot in the arm on Sunday amid signs of a slowdown, as it freed up more than $100 billion for banks to use to help small businesses and heavily indebted companies. The money is intended to help Beijing dance a complicated two-step. China is trying to curb the country's addiction to borrowing, which over the past decade has mired vast areas of the economy in debt. But that effort is showing signs of hurting growth. China is hoping it can help spur growth by steering loans where they are needed and blocking them where they are not."

June 27 - Bloomberg: "An accelerating slump in China's yuan is stoking fear that policy makers are less willing to temper the currency's decline as the economy slows and a trade battle with the U.S. worsens. The yuan is in the unusual position of leading Asian currency declines Wednesday, with a 0.5% drop against the dollar. While the People's Bank of China set the daily onshore reference rate slightly stronger than expected, there was little sign of official moves to halt the slide. The offshore yuan is matching its longest string of daily declines on record. Just a few weeks ago, the yuan was in effect serving as an anchor for emerging economies facing rising global interest rates and a strengthening dollar. The sharp turnaround has evoked parallels for some to the deliberate devaluation of 2015 that roiled global markets… 'The yuan now is a source of volatility, not stability,' said Michael Every, head of financial markets research at Rabobank Group… Further weakness in China's currency would be expected to 'hit the whole emerging-market complex, and to wallop commodity prices,' he said."

June 25 - Bloomberg (Christopher Balding): "Real estate is the driver of the Chinese economy. By some estimates, it accounts (directly and indirectly) for as much as 30% of gross domestic product. Keeping housing prices buoyant and development robust is thus an overriding imperative for China - one that is distorting policymaking and worsening its other economic imbalances. Despite reforms in recent years, there's little question that Chinese real estate is in bubble territory. From June 2015 through the end of last year, the 100 City Price Index, published by SouFun Holdings Ltd., rose 31% to nearly $202 per square foot. That's 38% higher than the median price per square foot in the U.S… Not surprisingly, this has put homeownership out of reach for most Chinese. Worried about these prices, and about growing indebtedness among developers, China's State Council has hatched a plan to encourage rentals."

June 25 - Reuters (Michael Martina, Kevin Yao and Yawen Chen): "Beijing has begun downplaying Made in China 2025, the state-backed industrial policy that has provoked alarm in the West and is core to Washington's complaints about the country's technological ambitions, diplomatic and Chinese state media sources said. With a full-blown trade war looming amid U.S. President Donald Trump's threats to impose tariffs on up to $450 billion in Chinese imports, his administration has fixed on Beijing's signature effort to deploy state support to close a technology gap in 10 key sectors. Beijing is increasingly mindful that its rollout of the ambitious plan has triggered U.S. backlash."

June 23 - Reuters (Ben Blanchard): "China must lead the way in reforming global governance, the foreign ministry on Saturday cited President Xi Jinping as saying, as Beijing looks to increase its world influence. China has sought a greater say in global organizations such as the World Bank, the International Monetary Fund and United Nations, in line with its growing economic and diplomatic clout."

EM Watch:

June 25 - Bloomberg (James Hertling and Ben Holland): "Basking in election victory, President Recep Tayyip Erdogan told jubilant supporters that Turkey had voted 'for growth, for development, for investment.' How he delivers that… remains a question economists and erstwhile political allies confront with skepticism. Erdogan, who has governed since 2003, presided over an economic boom in the first half of his rule that made Turkey a model for emerging markets. In recent months, though, it has threatened to turn into a bust. The currency plunged and capital fled as Erdogan fought with his own central bank… 'Given Erdogan's track record and autocratic style, there's a high risk that policy will be directed more towards economic growth than taming double-digit inflation or correcting the serious external imbalances,' said Nigel Rendell, a senior analyst at Medley Global Advisors."

June 26 - Financial Times (Adam Samson): "Investor wariness over holding Turkish government debt deepened on Tuesday amid persistent concern that President Erdogan's re-election will spur the leader to make good on his unorthodox economic policy promises. In a sign of the growing angst, the gap between the yield on Turkey's government bonds against US Treasuries has begun to widen again, signalling higher perceived risk. The spread on Turkey's 10-year dollar-denominated bond that matures in October 2028 clocked in at 4.364 percentage points on Tuesday. It is up from 4.191 points at the end of last week, before Sunday's elections, and much higher than the spread of 3.37 points at the issuance in April."

June 26 - Reuters (David Graham): "For 13 years, Mexico's perennial political outsider Andres Manuel Lopez Obrador has covered tens of thousands of miles crisscrossing the nation in dogged pursuit of its highest office. Now the 64-year-old leftist is on the brink of winning Sunday's presidential election, having spent his political career railing against Mexico's establishment. Years of mounting drug violence, sluggish economic growth and corruption have gradually eroded the credibility of the political class, leaving Lopez Obrador as the last man standing. Pledging to clean up government, reduce inequality and subdue gang violence, he promises to 'transform' a country he says has been debased by the few at the expense of the many."

June 27 - Bloomberg (Nacha Cattan and Eric Martin): "They should've been at school. Instead the four kids, and their mother, Fanny Santos, were among thousands who crammed onto a dusty soccer field in a hardscrabble suburb, and screamed with excitement when they got a wave from the man on stage -- Mexico's leftist president-in-waiting. Andres Manuel Lopez Obrador inspired plenty of people to skip school or work that day in Los Reyes La Paz on the outskirts of Mexico City. He's been doing the same thing for months… With a massive and durable lead in the polls, the politician known as AMLO has turned Mexico's presidential election campaign, usually a contentious affair, into a kind of triumphant carnival. The crowds of mostly poor Mexicans rallying around Lopez Obrador may be harbingers of something more than a handover of power from one party to another -- something more like regime-change. Unless the pollsters have got it wrong on an unprecedented scale, Mexico is turning its back on decades of rule by U.S.-trained technocrats. To the alarm of many investors and business leaders, it's swinging sharply to the left."

Central Bank Watch:

June 24 - Wall Street Jounral (Paul Hannon): "Central bankers in the U.S. and Europe shouldn't be deterred from raising interest rates and winding back stimulus policies by the increased financial market volatility that will accompany their efforts, the Bank for International Settlements said… In its annual report, the club for central banks welcomed a series of rate increases by the Federal Reserve, as well as the European Central Bank's intention to halt purchases of government bonds in December. It urged policy makers to continue on the path of 'normalization' even if that triggers sharper prices moves in financial assets, including those based in emerging markets. Indeed, the BIS said such volatility would be welcome if it made investors more cautious. 'Policy makers will need to maintain a steady hand, avoiding the risk of overreacting to transitory bouts of volatility,' the BIS said. 'Higher volatility per se is not a problem as long as it remains contained; it is actually healthy whenever it helps inhibit unbridled risk-taking.'"

June 24 - Reuters (Marc Jones): "The Bank for International Settlements (BIS) urged the world's top central banks to keep lifting interest rates on Sunday, but warned escalating trade tensions between the United States and China could turn into a dangerous downward spiral. The new head of the BIS, former Mexican central bank chief Agustin Carstens, spoke to Reuters… 'We are entering into a dangerous dynamic where these type of (protectionist) issues start having side effects on currency markets and financial flows… We can start a very dangerous spiral that at some point can really affect the growth of the world economy and financial stability.'

Global Bubble Watch:

June 27 - Financial Times (Miles Johnson, Michael Hunter and Robert Smith): "Shares in Europe's largest banks have shed almost a fifth of their value in the past four months as hopes that economic growth will spur a recovery in financials crumble. The Stoxx European Banks index has lost nearly 20% of its value since the start of February as analysts and investors scale back assumptions for when higher growth will boost long-term interest rates in Europe…"

June 27 - Bloomberg (Cormac Mullen and Eric Lam): "That whooshing sound you hear is the draining of $1.4 trillion worth of global liquidity. Quantitative tightening, or the unwinding of central banks' extraordinary stimulus, has been the primary driver of asset-class performance this year, Bank of America Merrill Lynch analysts say. The march higher in U.S. interest rates and tighter financial conditions mean securities that did well during quantitative easing, such as corporate bonds and emerging-market debt, are now underperforming, while 'QE losers' have become stars. The year marks a shift in a tide of global liquidity that helped push up asset prices, according to Merrill Lynch's analysis. Securities purchases from the Fed, European Central Bank and Bank of Japan are just $125 billion year-to-date, well below the $1.5 trillion run-rate of 2017, they estimate. That suggests markets are missing an injection of some $1.38 trillion thanks to policy makers changing tack."

June 27 - Financial Times (James Kynge): "China's domestic bonds, denominated in renminbi, have been popular with international investors this year. But changes in key market conditions - including an upsurge in corporate defaults and the renminbi's slide against the US dollar - raises questions over the sustainability of inflows. The vogue for renminbi bonds has taken off this year mainly because of the prospect they will be included into global benchmark bond indices, obliging investors who track such indices to load up on as much as $245bn in domestic China debt in coming years, according to ANZ Research… The inflows thus mobilised have been impressive. Foreign ownership of Chinese onshore bonds reached Rmb1.36tn ($214bn) at the end of March, an increase of more than 60% from a year earlier, according to the People's Bank of China (PBoC)."

June 26 - Bloomberg (Denise We): "Asian junk bonds have sold off amid defaults and concerns over refinancing risks, dividing veterans on where the $121 billion market is headed. Spreads on the region's high-yield dollar notes have widened to the highest in nearly two years… The threat of a trade war and rising interest rates have added to concerns after recent defaults by China Energy Reserve & Chemicals Group Co. and Hsin Chong Group Holdings Ltd. For investors like Lombard Odier (Singapore), the selloff has increased the securities' appeal… The lack of a wide distribution for some of the bonds is also hurting the market, and there are few takers for small property companies or Chinese local government funding vehicles, according to Owen Gallimore, head of credit strategy at Australia & New Zealand Banking Group Ltd."

Europe Watch:

June 26 - Financial Times (Kate Allen): "Italian debt sales are at their lowest levels since the height of the eurozone crisis six years ago, as the lingering political tensions weigh on investor sentiment. With just two trading days to go until the end of the first half of the year, Italian borrowers have sold €45bn of syndicated bonds since the start of 2018, 36% down on the same period last year… Italian corporate debt sales are down 45% year on year, according to Dealogic, while Italian financial institutions have sold 21% less debt than in the first half of 2017. Syndicated debt sales by the Italian government, agencies and supranationals are 42% down year on year."

June 23 - Reuters (Valentina Za, Marine Pennetier and Mathieu Rosemain): "Italy on Saturday said 'arrogant' France risked becoming its 'No.1 enemy' on migration issues, a day before European leaders convene in Brussels for a hastily arranged meeting on the divisive topic. In answer to comments by French President Emmanuel Macron, who said migration flows toward Europe had reduced compared with a few years ago, Italy's Deputy Prime Minister Luigi Di Maio said Macron's words showed he was out of touch. 'Italy indeed faces a migration emergency and it's partly because France keeps pushing back people at the border. Macron risks making his country Italy's No.1 enemy on this emergency,' Di Maio wrote…"

June 23 - Reuters (Gabriela Baczynska and Robert-Jan Bartunek): "German Chancellor Angela Merkel said… she would seek direct deals with separate European Union states on migration, conceding the bloc had failed to find a joint solution to the issue threatening her government. Since Mediterranean arrivals spiked in 2015, when more than a million refugees and migrants reached the bloc, EU leaders have been at odds over how to handle them. The feud has weakened their unity and undermined Europe's Schengen free-travel area."

June 23 - Reuters (Mathieu Rosemain): "The European Union will respond to any U.S. move to raise tariffs on cars made in the bloc, a senior European Commission official said, the latest comments in an escalating trade row… 'If they decide to raise their import tariffs, we'll have no choice, again, but to react,' EU Commission Vice President Jyrki Katainen told French newspaper Le Monde. 'We don't want to fight (over trade) in public via Twitter. We should end the escalation,' he said…"

Japan Watch:

June 24 - Bloomberg (Tetsushi Kajimoto): "Bank of Japan policymakers said the central bank should 'patiently continue' its powerful monetary easing but attention must be paid to the potential side effects of prolonged easy policy, a summary of opinions at the June review showed. Some board members said the central bank needs to keep monetary easing from severely distorting economic and financial conditions, and to make the current policy sustainable."

Fixed Income Bubble Watch:

June 27 - Wall Street Journal (Daniel Kruger): "Intensifying trade tensions have U.S. investors parsing China's possible responses to the latest Trump administration salvos, concerned about everything from escalating tariffs to currency devaluation. One thing nervous investors shouldn't worry about, some analysts say, is China dumping its $1.18 trillion of U.S. government bonds. The nightmare scenario is that China, which owns about 8% of the U.S. government's public debt, could drive down bond prices by unloading even part of its hoard of Treasurys. Such a move would likely send interest rates paid by the U.S. sharply higher. Because Treasurys are a benchmark that help set rates for mortgages, business loans and consumer debt, such a move could drive up borrowing costs throughout the economy. A decision by China to sell Treasurys could be the economic equivalent of 'mutually assured destruction,' said Mark McCormick, head of currency strategy at TD Securities."

Leveraged Speculator Watch:

June 27 - Bloomberg (Nishant Kumar and Suzy Waite): "The ranks of hedge fund managers expecting impending market chaos are growing. Greg Coffey, the former star manager at Moore Capital Management…, is comparing the turmoil in May to the end of dotcom bubble in 2000. Horseman Capital Management's Russell Clark, one of the most bearish hedge fund managers in Europe, invoked memories of the financial crisis of 2008 in a letter to clients. The two managers, among the best-known in Europe, join a growing chorus of investors predicting an end to the decade-old rally in asset prices, as central banks move to normalize policies and the rise of populism threatens trade across the globe. Billionaire George Soros in May warned of a looming financial crisis and an existential threat to the European Union… 'The ghosts of 2000 are upon us,' Coffey wrote in a May investors letter for his Kirkoswald Capital Partners. 'Make no mistake, this is the current investment environment we are in, and will be through 2018.'"

June 26 - Bloomberg (Saijel Kishan and Vincent Bielski): "Many quant hedge funds -- young and old -- are struggling to make money this year. Manoj Narang, who started his hedge fund last year, saw his biggest investor, JPMorgan Chase & Co.'s asset management unit, pull its money. Renaissance Technologies, the world's most profitable hedge fund, is trailing its benchmark in one fund this year through mid-June. Jaffray Woodriff, who runs Quantitative Investment Management, lost 35% in his tactical aggressive fund this year through May. Quant funds, which rely on complex algorithms to navigate global markets, have suffered this year because of the rise in volatility."

Geopolitical Watch:

June 25 - Financial Times (Gideon Rachman): "An international nationalist movement sounds like a contradiction. Nationalists are concerned above all by the fortunes of their own tribe. International co-operation does not come naturally to them. And yet, despite this, the world is seeing the emergence of a 'nationalist international'. Nationalist political parties are on the rise across the west - and they are taking inspiration from each other and working together. Donald Trump is central to this development. The US president is often portrayed as an isolated maverick on the world stage. But, in fact, he is emerging as the informal leader of an international movement. By shifting American politics in a more nationalist direction, Mr Trump has changed the tone of politics everywhere. The US president already has ideological soulmates in Europe, where the key figures include Viktor Orban, the prime minister of Hungary…, and Matteo Salvini, Italy's deputy prime minister. Europe's nationalists include far-right parties that are now in coalition governments, such as Mr Salvini's League and Austria's Freedom Party. But nationalist themes have also been increasingly adopted by more traditional centre-right parties, such as Germany's CSU, Britain's Conservatives and Austria's People's party."

June 26 - Reuters (Phil Stewart and Ben Blanchard): "China is committed to peace but cannot give up 'even one inch' of territory that the country's ancestors left behind, Chinese President Xi Jinping told U.S. Defense Secretary Jim Mattis… during his first visit to Beijing. Xi's remarks underscored deep-rooted areas of tension in Sino-U.S. ties, particularly over what the Pentagon views as China's militarization of the South China Sea, a vital transit route for world trade. But irritants in U.S.-China relations extend to other sensitive areas, including fears of a full-blown trade war between the world economic heavyweights. Beijing is also deeply suspicious of U.S. intentions toward self-governing and democratic Taiwan, which is armed by the United States. China views the island as a sacred part of its territory."

June 24 - Financial Times (Edward White): "Taiwan has been hit by a jump in serious cyber attacks from China during the past two years in the latest sign that Beijing is only increasing its pressure as the US reaffirms its support for the self-ruled island. Taiwan's government departments are bombarded by tens of millions of hacking attempts each month but the number of 'high-impact incidents' - which include targeted attacks aimed at stealing sensitive government data and personal information - tripled from four in 2015 to 12 in 2017…"

June 26 - Reuters (Bozorgmehr Sharafedin): "President Hassan Rouhani promised Iranians… the government would be able to handle the economic pressure of new U.S. sanctions amid a second day of demonstrations in protest at financial hardship and a weakening rial. Parts of Tehran's Grand Bazaar were on strike for the second day running, state media reported, after traders massed outside parliament on Monday to complain about a sharp fall in the value of the national currency."

June 26 - Reuters (Pavel Polityuk): "Hackers from Russia are infecting Ukrainian companies with malicious software to create 'back doors' for a large, coordinated attack, Ukraine's cyber police chief told Reuters… The hackers are targeting companies, including banks and energy infrastructure firms, in a roll out that suggests they are preparing to activate the malware in one massive strike… Ukrainian police are working with foreign authorities to identify the hackers, Demedyuk added."

June 25 - CNBC (Nyshka Chandran): "The South China Sea and Indian Ocean have been the principal theaters for Beijing's naval ambitions in Asia. The Pacific Ocean and Mekong River, each rife with strategic advantages, could soon be next. For the world's second-largest economy, maritime expansion is a major means of achieving superpower stature and cementing its military, political and economic influence in Asia. Nowhere has that been more evident than the disputed South China Sea, where Beijing has reportedly installed anti-ship cruise missiles and surface-to-air missile systems on several outposts… Going forward, experts predict, Chinese President Xi Jinping's government will ramp up its presence in neighboring waterways as it pursues regional supremacy."

Friday, June 29, 2018

Friday Afternoon Links

[Reuters] Wall Street ends up on Nike, bank gains; posts declines for week

[Reuters] Trump says expects another tax overhaul 'probably in October'

[CNBC] Larry Kudlow says deficit is 'coming down rapidly,' but it sure doesn't look that way

[CNBC] The Fed has met its inflation target. Now what?

[Reuters] Mexican markets poised for leftist win, but wary of landslide

[Reuters] Papering over cracks, EU leaders claim summit victory on migration

Friday's News Links

[BloombergQ] Stocks Cap Quarter With Gains, Dollar Slumps: Markets Wrap

[Reuters] World stocks enjoy relief rally though trade tensions linger

[Reuters] Euro jumps after EU leaders reach deal on migration at summit

[Reuters] U.S. consumer inflation rises, core PCE price index hits 2 percent

[BloombergQ] U.S. Consumer Spending Cools While Inflation Tops Fed Goal

[Axios] Scoop: Trump's private threat to upend global trade

[BloombergQ] Mnuchin Calls Report That Trump Wants to Withdraw From WTO an ‘Exaggeration’

[BloombergQ] Everything You Need to Know About the Trade War

[BloombergQ] How Monetary Policy Suddenly Became Controversial

[BloombergQ] Wall Street Left Reeling as 2018 Upends Almost Every Bet

[BloombergQ] Beaten-Up U.S. Corporate Debt Is Enticing Few Bargain Hunters

[BloombergQ] Traders Are Still Haunted by the VIX Five Months Later

[Reuters] ECB mulls small 'Twist' to keep borrowing costs low: sources

[BloombergQ] Emerging-Market Central Banks Are Losing Battle Against Traders

[BloombergQ] Kashkari Says Fed Confused About What's Next After Neutral Rates

[BloombergQ] Deutsche Bank's Quarter to Forget

[BloombergQ] Mexico Election Has Global Market Implications

[BloombergQ] Why Strongmen Aren’t Going Away

[WSJ] The $2 Trillion Challenge Facing Emerging Markets

[WSJ] Boston Fed’s Rosengren Says It’s Time to Take Away Monetary-Policy Punch Bowl

[WSJ] Investors Double Down on FAANG in Rocky Quarter for Stocks

[FT] Fed’s preferred measure of inflation hits 2% target

Thursday, June 28, 2018

Thursday Evening Links

[BloombergQ] U.S. Stocks Rise, Emerging-Market Woes Intensify: Markets Wrap

[BloombergQ] Corporate Bond Issuance Decelerates to Its Slowest Pace This Year

[CNBC] Global stocks see biggest loss of investor cash since the financial crisis

[BloombergQ] Conte Threatens Italian Veto in Blow to Merkel's Migration Plans

[BloombergQ] PBOC Panel Signals Shift to Growth and Market Stabilization

[WSJ] Trade War Punctures China’s Pride in Its Technology

[FT] Global dealmaking reaches $2.5tn as US megadeals lift volumes

[FT] Italy threatens to veto EU migration deal

Thursday's News Links

[Reuters] Trade war fears grip stocks, dollar bides time

[Reuters] Drug stocks hit by Amazon health push, while tech steadies Wall Street

[BloombergQ] China Shares Sink to Lowest Since March 2016 as Yuan Declines

[Reuters] US oil hits $74 per barrel, jumps more than 1.5%

[Reuters] Nikkei hits near 1-month low; large caps weak as trade war fears take toll

[Reuters] U.S. first-quarter GDP growth lowered; weekly jobless claims rise

[Reuters] China says carefully monitoring U.S. policies on inbound investments

[BloombergQ] Powell Wants ‘Real Economy’ to Guide Fed

[BloombergQ] Mario Draghi Can't Save Europe This Time

[MarketWatch] Opinion: The next bear market in stocks will spark a retirement crisis

[CNBC] China's latest conquest: Middle East power broker

[BBC] Europe's migration crisis: Could it finish the EU?

[NYT] Demystifying the Blockchain

[WSJ] White House Retreats From Plans for Strict Limits on Chinese Investment

[FT] In charts: what is making Mexicans so angry?

[FT] Indian rupee weakens to record low against dollar

Tuesday, June 26, 2018

Wednesday's News Links

[BloombergQ] Stocks Erase Decline as Trump Trade Talk Softens: Markets Wrap

[Reuters] Oil rises on supply disruptions and as U.S. tries to cut Iran from markets

[BloombergQ] China’s Yuan Tumble Blindsides Traders, Spurs Worry Over Impact

[CNBC] Trump announces his plan to crack down on foreign investment - and it's much less harsh than expected

[CNBC] Kudlow moves to restock White House economic team

[BloombergQ] Hedge Fund Managers See Echo of Past Crashes in Markets

[Reuters] Trade war or not, China Inc already reining in American brands

[Reuters] Worsening trade row deepens chill felt by Chinese dealmakers seeking to do U.S. takeovers

[CNBC] Weekly mortgage applications fall sharply as potential homebuyers drop out

[BloombergQ] Mexico’s Populist Tide Pushes AMLO Toward a Blowout Victory

[BloombergQ] As Merkel’s Power Drains, the Threat to Europe Grows

[BloombergQ] Equity Markets Are Living on Borrowed Time

[BloombergQ] Yuan's Rapid Selloff Puts China's Market-Anchor Role in Danger

[Reuters] Xi tells Mattis China won't give up 'one inch' of territory

[NYT] Trump May Soften Sweeping Plan to Restrict Chinese Investments

[WSJ] Trump Eases Demand for New Tools to Limit Chinese Investment

[WSJ] The Fed’s Latest Challenge: Keeping Benchmark Rate in Check

[WSJ] U.S. Toughens Stance on Future Iran Oil Exports

[WSJ] Trump Decides to Use Updated Law to Restrict Chinese Investment, Drops Executive Action Option

[FT] China’s ‘Big Mama’ Steps In as Yuan Tumbles Further

[FT] Italian debt sales fall as political tensions linger

Tuesday Evening Links

[Reuters] Wall Street rebounds from selloff on trade worries

[CNBC] Market whiplash over Trump trade policy: 'They're making this up as they go along'

[Reuters] New U.S. tax cuts would worsen federal fiscal picture - CBO

[Reuters] Scourge of Mexico establishment poised to capture presidency

[Reuters] Exclusive: Ukraine says Russia hackers laying groundwork for massive strike

Tuesday's News Links

[Reuters] Stocks claws higher after China enters bear territory

[BloombergQ] U.S. Consumer Confidence Declines With Economic Optimism Cooling

[BloombergQ] China Begins to Question Whether It’s Ready for a Trade War

[BloombergQ] Chinese Stocks Poised to Enter Bear Market

[BloombergQ] Italy's Crunch Moment in the Bond Market

[BloombergQ] Asia Junk Bond Rout Divides Veterans on $121 Billion Market

[BloombergQ] Why Protectionist Rhetoric Is Roiling Markets

[Reuters] Rouhani says Iran will not yield to pressure from Trump

[FT] Turkish debt wobbles again after Erdogan election victory

Monday, June 25, 2018

Monday Evening Links

[Reuters] Wall Street falls as trade threats intensify

[Reuters] Trump officials send mixed signals on China investment curbs, markets sink

[CNBC] Trade advisor Navarro says no plans for investment restrictions on China, other countries

[CNBC] Xi has strong words for Trump: 'In our culture, we punch back' — report

[Reuters] Trump tariffs force companies to rework supply chains

[Reuters] Trump adviser Navarro says investment restrictions won't be global

[CNBC] The Fed's effort to control the rise of its key interest rate is running into some problems

[CNBC] China's sudden currency slide sparks rumors of an anti-Trump policy move

[WSJ] Trade Rift Within Trump Administration Sends Stocks on Wild Ride

[FT] US disagreements over China trade strategy heat up

[FT] People’s Bank of China must face awkward reality over renminbi

Monday's News Links

[BloombergQ] Stocks Drop on Trade Dispute; Italian Bonds Fall: Markets Wrap

[Reuters] Brent oil prices drop by 2 percent as traders expect output rise after OPEC deal

[BloombergQ] China's Yuan Sinks to Five-Month Low on Worsening Trade Outlook

[Reuters] Dollar falls to two-week low versus yen on renewed trade tensions

[BloombergQ] U.S. Plans Curbs on Chinese Investment, Citing Security Risks

[CNBC] Trump plans to bar China from investing in US tech firms and block more tech exports

[BloombergQ] China, Europe Warn Trade War Could Trigger Global Recession

[BloombergQ] U.S., China to See Who Blinks First in Economic `Chicken' Game

[BloombergQ] Harley to Shift Production Out of U.S. to Avoid EU's Tariffs

[Reuters] Exclusive: Facing U.S. blowback, Beijing softens 'Made in China 2025' message

[BloombergQ] China to Unleash $108 Billion in Reserves Cut for Most Banks

[BloombergQ] Why China Can’t Fix Its Housing Bubble

[BloombergQ] Erdogan's Election Celebration Gives Way to Economic Reality

[Reuters] BOJ should continue powerful easing, guard against side effects: June meeting summary

[Reuters] Low risk ECB extends QE into next year, say economists

[CNBC] Beyond the South China Sea: Beijing may target these waterways next

[NYT] What’s the Yield Curve? ‘A Powerful Signal of Recessions’ Has Wall Street’s Attention

[WSJ] Trump Plans New Curbs on Chinese Investment, Tech Exports to China

[WSJ] Yuan’s 2018 Gain Disappears as Dollar Rallies

[FT] Amnesia dooms bankers to repeat their mistakes

[FT] Donald Trump leads a global revival of nationalism

Saturday, June 23, 2018

Saturday's News Links

[BloombergQ] OPEC+ Agrees Oil-Supply Boost in Victory for Saudis, Russia

[BloombergQ] U.S. Tariffs Draw New Retaliation Threat, as Russia Joins In

[CNBC] Increased threat of a trade war is ramping up fears of a 'full-blown recession'

[Reuters] European authorities will react to any U.S. auto tariff move: Le Monde

[Reuters] Xi says China must lead way in reform of global governance

[Reuters] Turkey's Erdogan, main rival stage final election rallies

[Spiegel] The Approaching End to Merkel's Tenure

[WSJ] A Generation of Americans Is Entering Old Age the Least Prepared in Decades

[FT] More storms are brewing for emerging markets

Weekly Commentary: Performance Chase

The Nasdaq Composite, Nasdaq 100, small cap Russell 2000, Value Line Arithmetic and the NYSE Arca Biotechnology were among U.S. indices trading to all-time highs during Wednesday's session. In the real world, there is escalating risk of a destabilizing global trade war. The Shanghai Composite sank 4.4% this week to two-year lows. It was another week of instability for emerging market equities, bonds and currencies - especially in Asia.

Here at home, it's difficult to envisage a more divided electorate or a more hostile political environment. Record securities and asset prices and such a sour social mood appear quite the extraordinary dichotomy. Yet I would argue that speculative financial market Bubbles, heightened global tensions and domestic social and political angst all have at their root cause decades of unsound "money" and Credit (an archaic notion, I fully appreciate).

"Inflation is always and everywhere a monetary phenomenon…", Milton Friedman explained some 50 years ago. At the time, Dr. Friedman was contemplating goods and services inflation. Financial, monetary management and technological developments over recent decades ensured that asset inflation evolved into the much more destabilizing form of inflation. A Bubble collapse presented Dr. Bernanke the opportunity to test his academic theories, unleashing unprecedented monetary inflation specifically targeting securities markets. His policies spurred similar monetary inflation around the world that has continued for almost a full decade.

Cut short rates to zero, print "money," buy bonds; force market yields lower; spur buying of risk assets and higher securities prices; orchestrate powerful wealth effects; households and businesses borrow and spend; the economy expands; inflation rises back to target - and all is good. Sure, there's some risk that asset prices get ahead of the real economy. Not to worry. Central banks will ensure a steadily rising general price level - and inflating earnings and incomes - to catch up to elevated asset prices. All will be well.

All is not well. With such complexity in the world, central bankers should be disinclined from grand experiments. A decade of central bank rate manipulation, "money" printing and market intervention has ensured deep structural changes in the marketplace. Central bankers failed to appreciate the evolving nature of contemporary Inflation Dynamics. Over time, a potent inflationary bias took hold in asset prices, while for a variety of reasons disinflationary dynamics held sway in the pricing of many goods.

A decade of unprecedented global monetary stimulus has stoked speculative assets Bubbles, replete with history's greatest redistribution of wealth. Central bankers now face acute market fragility, while governments face electorate enmity (along with other shaky governments). With U.S. stocks at or near record highs, my warning that free market Capitalism is today at great risk surely sounds ridiculous.

At this point, the key market issue goes far beyond securities valuation. Too many years of too much "money" chasing too few financial assets have imparted deep structural impairment. Or phrased differently, there has been too much "money" playing the game; too much liquidity and leverage aggressively playing a historic speculative Bubble has wrecked the game. Financial markets have become maladjusted and dysfunctional, although much remains unrecognizable to the naked eye.

Thursday from Zero Hedge: "This Is The Greatest Short-Squeeze In History." The Goldman Sachs Most Short (50 highest short interest names above $1bn) is up 18.8% y-t-d. From May 3rd intraday lows, the GS Most Short has surged 20% - one of the past decade's more spectacular squeezes. This squeeze saw Tesla, with 39 million shares short, spike almost 100 points.

The Retail Index (XRT) jumped 15% in about seven weeks. Ascena Retail Group (and Fossil) doubled in price. Signet Jewelers surged 55%, Rent-A-Center 55%, Carvana 54%, Wayfair 50%, Tripadvisor 50%, Express 50% and Conn's 50%. Since the May 3rd trading reversal, Food Retail and Department Stores have been two of the strongest industry groups in the S&P500. Footlocker gained 32%, Carmax 28%, Kroger 24%, Macy's 20%, Lowe's 20% and Kohls 18%. Hanesbrands jumped 33%, Under Armour 35% and Ralph Lauren 22%. Twitter surged 48%, AMD 44%, Netflix 33% and Micron 23%.

Squeezes have been spectacular in the mid and small cap universe. Since May 3rd in the S&P Mid Cap 400, Chesapeake Energy, Mallinckrodt and Genworth Financial have all jumped more than 50%. Akorn, Five Below, Southwestern Energy, and Boston Beer gained more than a third. Short squeezes in the small cap space have been even more dramatic.

The speculative melt-up in segments of the U.S. marketplace is the antithesis of the faltering EM Bubble. This week saw indications of strengthening EM contagion. Ominously, the Chinese renminbi dropped 1.0% versus the dollar (offshore CNH down 1.15%), now having given up previous solid y-t-d gains. The Thai baht fell 1.5%, the Indonesian rupiah 1.1%, the Taiwanese dollar 1.0%, the South Korean won 0.9% and the Singapore dollar 0.6%. China's small cap CSI 500 index sank 5.9% (down 17.5% y-t-d), and the growth/tech ChiNext index fell 5.6% (down 11.6%). The CSI 300/Telecommunications Services Index collapsed 15.7% (down 37.5%).

Elsewhere in Asia, major indexes were down 4.1% in Indonesia, 4.1% in Thailand, 3.8% in Malaysia, 6.2% in Philippines, 2.0% in South Korea, 1.0% in Taiwan, 3.3% in Vietnam and 4.3% in Pakistan. Hong Kong's Hang Seng index sank 3.6%, and Singapore's STI index fell 2.1%. Japan's TOPIX dropped 2.5%. Winning distinction as the most likely prophetic indicator of the week, Japan's TOPIX Bank Index sank 5.4% and Hong Kong's Hang Seng Financials dropped 5.1%.

Indonesian 10-year (local currency) yields jumped 20 bps to a 15-month high 7.43%, and Philippine yields rose 12 bps to a seven-year high 6.31%. Financial conditions continue to tighten throughout EM, though there was some relief this week with rallies in the Argentine peso (4.6%) and Mexican peso (3.1%). The Turkish lira recovered 1.1% ahead of Sunday's election. Notably absent from the EM currency rally list, Brazil's real declined another 1.5% (down 12.6% y-t-d).

It was only back in January that EM was in full melt-up mode - a speculative blow-off right in the face of tightening global financial conditions. With a veritable flood of flows into the $5.0 TN global ETF complex ($100bn inflow in January!), EM was a major beneficiary (EM equities and bonds both saw record inflows in January). Recall that EM ETFs enjoyed record inflows in 2017, with the inundation continuing well into 2018. What's more, EM flows benefitted from the U.S. market stumble in early February. Amazingly, EM ETFs were at the top of the ETF inflow leaderboard all the way into early May.

And a Friday afternoon headline from ETF.com: "Massive Weekly Inflows For Russell-Indexed ETFs." And from ETF Trends, "Small-Cap ETFs Big Winners in U.S., China Trade War." The iShares Russell 2000 ETF enjoyed its largest inflow since March. A Bloomberg headline: "Trade War Fears Spur Rotation From Industrials Into Small Caps."

The culminating shot of "hot money" into EM earlier in the year - benefitting both from the U.S. market swoon and the drumbeat of "global synchronized economic boom" - set the stage for today's trouble. So, it's only fitting that cracks at the Periphery of the global Bubble would incite a surge of "hot money" into outperforming U.S. securities markets. At this point, global finance has regressed to one big game of Performance Chase.

Am I the only analyst that views the manic interest in U.S. small caps portentously? I have highlighted the concept of the "moneyness of risk assets" - central bank backstops having nurtured the misperception of safety and liquidity throughout the risk markets. Incredibly, as fissures materialize in the global Bubble, performance-chasing "hot money" now floods into the least liquid corner of the U.S. equities market.

The gargantuan ETF complex has been instrumental in perpetuating this dynamic, intermediating less liquid securities into perceived highly liquid ETF shares. This was the situation earlier in the year for emerging market securities, and it remains the case in U.S. markets. And as the global Bubble navigates a worst-case scenario, it's only fitting that small caps lead the charge in U.S. equities and junk bonds outperform in fixed income. Over generations, market structures evolve and instruments change. Yet amazingly, through it all everyone seems compelled to get all ebullient and hunkered together at major market tops.

June 22 - Bloomberg (Shelly Hagan): "Corporate bond spreads jumped to the widest level in 16 months Friday as large deals flooded the U.S. market and rising trade tensions scared off some investors. Investment-grade bond spreads saw the biggest weekly increase since February as companies sold $43 billion of debt, including $31 billion from Bayer AG and Walmart Inc. alone. The market was also shaken by escalating trade tensions between the U.S. and its major partners… Corporate bond spreads have been widening since February, when they reached the tightest since before the financial crisis. Fewer foreign buyers, rate volatility and trade tensions are chipping away at investor confidence in the U.S. market, according to Thomas Murphy, a portfolio manager at Columbia Threadneedle… 'A lot of people pushed into our market because of QE overseas. They can now go back to their home markets. Hedging costs have gone up dramatically,' said Murphy…"

Global contagion and tightening financial conditions are making steady headway toward "Core" U.S. securities markets. The Trump administration is bluffing, aren't they? Or is the era of Trump Tariffs and trade war retaliation soon upon us? It's got to be the President playing hardball dealmaker with Beijing - right? Or could a momentous Washington crackdown on China be in the offing? Appearing increasingly vulnerable, China may emerge the cornered pit bull. It was another ominous week. China and Asian Contagion. Widening Italian spreads. But, then again, with a short squeeze in play and only a week or so until the end of a big performance quarter, why be bothered with global market instability or unfolding trade wars… These are deviant markets.


For the Week:

The S&P500 declined 0.9% (up 3.0% y-t-d), and the Dow fell 2.0% (down 0.6%). The Utilities jumped 2.6% (down 4.0%). The Banks declined 0.9% (unchanged), and the Broker/Dealers lost 1.6% (up 8.2%). The Transports dropped 2.7% (up 1.5%). The S&P 400 Midcaps were little changed (up 4.7%), while the small cap Russell 2000 added 0.1% (up 9.8%). The Nasdaq100 declined 0.8% (up 12.5%). The Semiconductors sank 3.6% (up 9.4%). The Biotechs slipped 0.2% (up 16.7%). With bullion down $10, the HUI gold index declined 0.5% (down 8.0%).

Three-month Treasury bill rates ended the week at 1.87%. Two-year government yields were little changed at 2.54% (up 66bps y-t-d). Five-year T-note yields declined three bps to 2.77% (up 56bps). Ten-year Treasury yields fell three bps to 2.90% (up 49bps). Long bond yields slipped a basis point to 3.04% (up 30bps). Benchmark Fannie Mae MBS yields dipped one basis point to 3.64% (up 65bps).

Greek 10-year yields sank 34 bps to 4.11% (up 4bps y-t-d). Ten-year Portuguese yields were unchanged at 1.82% (down 12bps). Italian 10-year yields rose nine bps to 2.69% (up 68bps). Spain's 10-year yields rose six bps to 1.35% (down 21bps). German bund yields dropped seven bps to 0.34% (down 9bps). French yields declined two bps to 0.71% (down 8bps). The French to German 10-year bond spread widened five to 37 bps. U.K. 10-year gilt yields declined a basis point to 1.32% (up 13bps). U.K.'s FTSE equities index gained 0.6% (down 0.1%).

Japan's Nikkei 225 equities index fell 1.5% (down 1.1% y-t-d). Japanese 10-year "JGB" yields were little changed at 0.04% (down one bp). France's CAC40 dropped 2.1% (up 1.4%). The German DAX equities index sank 3.3% (down 2.6%). Spain's IBEX 35 equities index declined 0.6% (down 2.5%). Italy's FTSE MIB index fell 1.4% (up 0.2%). EM equities were mostly lower. Brazil's Bovespa index slipped 0.2% (down 7.5%), and Mexico's Bolsa declined 0.4% (down 5.3%). South Korea's Kospi index dropped 1.9% (down 4.5%). India’s Sensex equities index added 0.2% (up 4.8%). China’s Shanghai Exchange sank 4.4% (down 12.6%). Turkey's Borsa Istanbul National 100 index recovered 1.4% (down 16.9%). Russia's MICEX equities gained 0.5% (up 6.6%).

Investment-grade bond funds saw inflows of $411 million, while junk bond funds had outflows of $232 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates fell five bps to 4.57% (up 67bps y-o-y). Fifteen-year rates declined three bps to 4.04% (up 87bps). Five-year hybrid ARM rates were unchanged at 3.83% (up 69bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down five bps to 4.61% (up 61bps).

Federal Reserve Credit last week declined $2.1bn to $4.279 TN. Over the past year, Fed Credit contracted $151bn, or 3.4%. Fed Credit inflated $1.469 TN, or 52%, over the past 294 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $2.2bn last week to $3.404 TN. "Custody holdings" were up $114bn y-o-y, or 3.5%.

M2 (narrow) "money" supply rose $18.0bn last week to a record $14.098 TN. "Narrow money" gained $580bn, or 4.3%, over the past year. For the week, Currency increased $2.2bn. Total Checkable Deposits sank $54.0bn, while savings Deposits surged $64.9bn. Small Time Deposits added $3.5bn. Retail Money Funds gained $1.5bn.

Total money market fund assets dropped $52.55bn to $2.802 TN. Money Funds gained $185bn y-o-y, or 7.1%.

Total Commercial Paper declined $6.6bn to $1.103 TN. CP gained $124bn y-o-y, or 12.6%.

Currency Watch:

The U.S. dollar index slipped 0.3% to 94.52 (up 2.6% y-t-d). For the week on the upside, the Mexican peso increased 3.1%, the Swiss franc 1.0%, the Norwegian krone 0.6%, the Japanese yen 0.6% and the euro 0.4%. For the week on the downside, the Brazilian real declined 1.5%, the South Korean won 0.9%, the Swedish krona 0.8%, the Canadian dollar 0.6%, the New Zealand dollar 0.6%, the Singapore dollar 0.6%, the British pound 0.1% and the South African rand 0.1%. The Chinese renminbi declined 1.02% versus the dollar this week (up 0.02% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index gained 1.7% (up 6.6% y-t-d). Spot Gold declined 0.8% to $1,269 (down 2.6%). Silver increased 0.4% to $16.539 (down 3.5%). Crude surged $3.52 to $68.58 (up 14%). Gasoline rallied 2.3% (up 15%), while Natural Gas fell 2.5% (unchanged). Copper sank 3.0% (down 4%). Wheat fell 1.8% (up 18%). Corn declined 1.2% (up 8%).

Market Dislocation Watch:

June 16 - CNBC (Jeff Cox): "The Federal Reserve may have telegraphed a fourth interest rate hike this year, but markets didn't quite get the message. After the conclusion Wednesday of its two-day meeting, the Federal Open Market Committee, through the so-called dot plot of individual members' expectations, indicated that it would increase rates two more times before 2018 ends… As of Friday afternoon, traders were implying just a 55% chance of a fourth hike in December - a little better than a coin flip and just 10 percentage points or so above the chances before the meeting and the surprise dot-plot change."

June 21 - Wall Street Journal (Jon Sindreu): "As a full blown trade war between the U.S. and China looms, investors are already picking winners: Shares of small companies that are insulated from overseas turmoil. The S&P Small Cap 600 is on a tear, up 12.4% since the start of the year to a fresh record high, compared with a 3.5% gain for the S&P 500. The Russell 2000, another index of small U.S. companies, has gained 11.2%. A rising dollar and concerns about weaker global growth are also driving investors into the relative safety of smaller companies, as measured by market capitalization, that tend to earn most of their money at home."

June 21 - Bloomberg (Issei Hazama): "It must be tough out there in volatile emerging-debt markets. Overseas investors including Asian buyers this month bought a chunk of yen bonds from a Japanese highway operator yielding 0.0000027%. East Nippon Expressway Co. sold one-year notes at a coupon of 0.001% and an issue price of 100.001 yen on June 13. That means that an investor buying 100 million yen ($904,000) of the notes will receive 2.7 yen in interest… Even so, investors' orders for the debt came to about 4.3 times the 65 billion yen that was offered… Asian investors hit by a rout in emerging market bonds and in search of safe assets participated in the yen deal…"

Trump Administration Watch:

June 19 - Wall Street Journal (Chelsey Dulaney): "The Trump administration's threat to slap tariffs on another $200 billion in Chinese goods has reignited fears that Beijing will turn to a powerful but risky weapon: a depreciation of its currency. The latest salvo in the brewing trade conflict between the world's first and second-largest economies would raise the amount of Chinese goods taxed by the U.S. to $450 billion. That would mean tariffs on nearly all of the $505 billion in goods that China exported to the U.S. last year. Analysts say the tariff escalation could eventually lead China to depreciate its currency, the yuan-a maneuver that would help to offset the economic impact of the tariffs but also threatens to worsen trade tensions and rattle global markets."

June 19 - Financial Times (Tom Mitchell and Shawn Donnan): "By threatening to expand US tariffs on Chinese goods on Monday, President Donald Trump greatly increased the chances of Beijing responding with non-tariff measures. US executives fear that Mr Trump's latest threat to assess punitive tariffs on as much as $250bn of Chinese exports- roughly twice what the US ships to China every year - will trigger responses such as ad hoc regulatory probes of US companies by Chinese authorities. There already has been circumstantial evidence of just such a response over recent months, with Chinese imports of some US food, cars and pet food delayed at customs for more stringent inspections."

June 19 - Wall Street Journal (Bob Davis and Lingling Wei): "President Donald Trump's escalation of trade threats against China reflects his belief that Washington increasingly has the upper hand in the dispute, administration officials said, adding he is prepared to withstand pressure from U.S. businesses that might suffer from the conflict. Mr. Trump caught Chinese officials off guard with his announcement Monday evening about potential new tariffs. Should China retaliate against U.S. trade policies, the White House said, the U.S. would apply tariffs of 10% on as much as $400 billion in Chinese imports."

June 20 - CNBC (Huileng Tan): "The Trump administration ratcheted up its criticism of China in a report released by the White House… detailing its claims of 'economic aggression' by the Asian giant. The 35-page report titled 'How China's Economic Aggression Threatens the Technologies and Intellectual Property of the United States and the World' came a day after President Donald Trump threatened to slap additional tariffs on goods from China… China 'has experienced rapid economic growth to become the world's second largest economy while modernizing its industrial base and moving up the global value chain. However, much of this growth has been achieved in significant part through aggressive acts, policies, and practices that fall outside of global norms and rules (collectively, 'economic aggression'),' the… report said in its opening."

June 20 - Wall Street Journal (Peter Navarro): "The Chinese government's Made in China 2025 blueprint reveals Beijing's audacious plans to dominate emerging technology industries. Many of these targeted sectors, such as artificial intelligence and robotics, have clear implications for defense. China seeks to achieve its goal of economic and military domination in part by acquiring the best American technology and intellectual property. President Trump's new tariffs will provide a critical shield against this aggression. China acquires American technology in multiple ways. Theft, both physical and cyber, occurs through orchestrated industrial espionage campaigns. For years the U.S. intelligence community has acknowledged China as a persistent leader in economic espionage. Many American companies are forced to accept technology transfers to gain access to the Chinese market."

June 19 - New York Times (Ana Swanson): "President Trump's threat to impose tariffs on almost every Chinese product that comes into the United States intensified the possibility of a damaging trade war, sending stock markets tumbling… The Trump administration remained unmoved by those concerns, with a top trade adviser, Peter Navarro, insisting that China has more to lose from a trade fight than the United States. He also declared that Mr. Trump would not allow Beijing to simply buy its way out of an economic dispute by promising to import more American goods. 'President Trump has given China every chance to change its aggressive behavior,' Mr. Navarro said… 'China does have much more to lose than we do.' In threatening tariffs on as much as $450 billion worth of Chinese goods, the administration is betting that Beijing will blink first. It's a risky gamble by a White House that appears ready to forgo diplomatic negotiations in favor of punishing tariffs that could pinch consumers and companies on both sides of the Pacific."

June 19 - Bloomberg: "China doesn't import enough from the U.S. to match Donald Trump's tariffs dollar for dollar, but President Xi Jinping can still squeeze American companies in other ways in retaliation. American businesses from Apple Inc. and Walmart Inc. to Boeing Co. and General Motors Co. all operate in China and are keen to expand. That hands Xi room to impose penalties such as customs delays, tax audits and increased regulatory scrutiny if Trump delivers on his threat of bigger duties on Chinese trade. U.S. shares slumped Tuesday as part of a broad sell-off in global markets in response to Trump's threat."

June 20 - CNBC (Philip Blenkinsop): "The European Union will begin charging import duties of 25% on a range of U.S. products on Friday, in response to U.S tariffs imposed on EU steel and aluminum early this month, the European Commission said…

June 17 - Politico (Burgess Everett and John Bresnahan): "The first clues over whether President Donald Trump will risk a shutdown fight this fall over his border wall will come Monday in a private meeting with Sen. Shelley Moore Capito. Trump is increasingly frustrated with Congress' failure to fund the wall - his No. 1 campaign promise - and has threatened a shutdown in September if he doesn't get his way."

June 19 - Financial Times (Gideon Rachman): "In the midst of an escalating trade war with China and fresh from a nuclear summit with North Korea, Donald Trump took time out to attack Angela Merkel. 'The people of Germany are turning against their leadership,' tweeted the US president, adding that 'migration is rocking the already tenuous Berlin coalition'. The US president's direct attempt to undermine the German chancellor is remarkable. It is also very telling. For the two leaders have taken radically different approaches to the explosive questions of refugees and illegal migration. For Mr Trump and his alt-right allies in Europe, the fall of Ms Merkel would be a kind of vindication - proof that her decision to allow more than 1m migrants into Germany in 2015 has been decisively rejected by the electorate."

June 20 - Financial Times (Edward Luce): "In Canada they call it the Love, Actually effect. Justin Trudeau's rebuke of Donald Trump won him the type of kudos a fictional British prime minister earned in the 2003 movie for standing up to a US president. Canada will 'not be pushed around,' said Mr Trudeau to loud applause. That sentiment is rising on all sides. In Mexico, which looks set next weekend to elect its most anti-American administration in a generation, it might be dubbed the 'Amlo' effect - short for Andrés Manuel López Obrador, the country's likely next president. Mexico's foreign minister this week called America's child border camps 'cruel and inhumane'. A French spokesperson said the US had different 'civilisational values' to the rest of the west. Nobody batted an eyelid. From Ottawa to Wellington, because of one outrage or another, condemnations of America are becoming routine."

June 16 - CNBC (Andrea Hopkins): "Seventy percent of Canadians say they will start looking for ways to avoid buying U.S.-made goods in a threat to ratchet up a trade dispute between Prime Minister Justin Trudeau and U.S. President Donald Trump, an Ipsos Poll showed…"

Federal Reserve Watch:

June 20 - CNBC (Jeff Cox): "Citing robust growth and a generational low in unemployment, Federal Reserve Chairman Jerome Powell emphasized the central bank's commitment to further interest rate hikes… Economic gains are negating the need for crisis-era monetary policy, the Fed leader told a European Central Bank forum. 'Earlier in the expansion, as the economy recovered, the need for highly accommodative monetary policy was clear,' Powell said… 'But with unemployment low and expected to decline further, inflation close to our objective, and the risks to the outlook roughly balanced, the case for continued gradual increases in the federal funds rate is strong.'"

June 20 - Wall Street Journal (Nick Timiraos): "Federal Reserve Chairman Jerome Powell said sturdy U.S. economic growth has built a strong case for continuing to gradually lift interest rates, and he warned against policy complacency now that the central bank has nearly achieved its employment and price stability goals. 'Today, with the economy strong and risks to the outlook balanced, the case for continued gradual increases in the federal-funds rate remains strong and broadly supported among' participants on the Fed's rate-setting committee, Mr. Powell said…"

June 19 - Wall Street Journal (Daniel Kruger): "The Federal Reserve's move to trim the size of its bondholdings has exacerbated recent declines in prices for risky assets around the world, investors say. The central bank has scaled back its mountain of Treasury and mortgage debt by $111.9 billion since the policy was announced in September. More than half the reduction has taken place since the end of March, and the process of withdrawing money from the economy is scheduled to reach $50 billion a month in October."

U.S. Bubble Watch:

June 20 - New York Times (Nelson D. Schwartz): "The American economy has picked up speed and is now on course to expand this year at the fastest rate in more than a decade. That acceleration gives President Trump a stronger hand as he contemplates more tariffs and takes an increasingly confrontational approach with China, Canada, Mexico and other trading partners. Economists have raised their growth estimates for the second quarter to an annualized rate of nearly 5%, more than double the pace of the previous period. Some economists say the figure could hit 3% for the full year, a level last reached in 2005. As growth slows in Europe, China, Japan and elsewhere, the United States finds itself at the top of the global economy. The United States is also less exposed to the fallout from an escalating trade war since it does not rely on exports as much as other countries."

June 19 - CNBC (Michelle Fox): "There is a 'much bigger issue' for the market than concerns about trade, investing expert Richard Bernstein told CNBC… In fact, over the last three to four months, almost every sizeable market sell-off has come from pro-inflation policies out of Washington, D.C… 'There is a major sea change going on in the backdrop where we're going from a disinflationary environment to an inflationary environment," Bernstein said… 'We have tight labor markets, we have tight product markets because the economy is strong. We just got tax cuts on top of that. We're now getting fiscal spending,' he added. In addition, there are trade issues and immigration restrictions in play now. 'They are all pro-inflation policies and that's the big issue in the background here,' said Bernstein."

June 21 - Reuters (Se Young Lee and Yawen Chen): "Chinese acquisitions and investments in the U.S. fell 92% to just $1.8 billion in the first five months of this year, consulting and research firm Rhodium Group [reported]… Counting divestitures, net Chinese deal flow to the U.S. during that time was a negative $7.8 billion, the report said. The decline follows a sharp drop in the second half of last year as pressure from both Beijing and the Trump administration curbed a recent surge in cross-border investment. Completed Chinese deals in the U.S. hit a record $46 billion in 2016, and dropped to $29 billion in 2017…"

June 18 - Wall Street Journal (Matt Wirz): "A wave of expected big media mergers would transform AT&T Inc. and Comcast Corp. into the two most indebted companies in the world, a standing that carries uncharted risks for investors in the firms' bonds. AT&T has bought Time Warner Inc., and Comcast hopes to purchase most of 21st Century Fox Inc. The companies would carry a combined $350 billion of bonds and loans…"

June 19 - Bloomberg (Riley Griffin): "Despite recent job gains, rising wages and falling unemployment, almost a quarter of Americans said they still have no emergency savings, according to an annual Bankrate.com report… The number of Americans who said they have no money readily available in either a checking, savings or money market account fell to a seven-year low of 23%, down from 24% last year… The percentage of Americans with some savings, but not enough to cover three months' worth of expenses, rose to 22% from 20% last year… And the percentage with enough to cover expenses for three to five months ticked up to 18%, from 17% last year. Still, only 29% of Americans have enough emergency savings to cover at least six months' of expenses. This is down from 31% in 2017."

June 19 - Reuters (Karen Pierog): "U.S. state and local government tax revenue climbed to $350.2 billion in the first quarter of 2018, a rise of 5.8% compared with the same time period in 2017, the U.S. Census Bureau reported…"

June 21 - Reuters (Alex Tanzi): "The American dream continues to fade for many people. Housing affordability dropped this quarter to the lowest since late 2008, according to… the National Association of Realtors. In May, the median price of a previously owned homes rose to a record $264,800… A separate report from ATTOM Data Solutions shows average wage earners would need to spend 31.2% of income to buy a median-priced home this quarter -- above the historic average of 29.6%. Home price appreciation, coupled with rising mortgage rates, have pushed three-quarters of average wage earners out of the market with property costs rising faster than wages in 64% of regions surveyed, ATTOM reported."

June 21 - Wall Street Journal (Janet Adamy and Paul Overberg): "The surge of retiring baby boomers is reshaping the U.S. into a country with fewer workers to support the elderly-a shift that will add to strains on retirement programs such as Social Security and sharpen the national debate on the role of immigration… For most of the past few decades, the ratio of retiree-aged adults to those of working age barely budged. In 1980, there were 19 U.S. adults age 65 and over for every 100 Americans between 18 and 64… That number-called the old-age dependency ratio-barely edged up over the next 30 years, rising to just 21 retiree-aged Americans for every 100 of working age in 2010. But there has been a rapid shift since then. By 2017, there were 25 Americans 65 and older for every 100 people in their working years… The ratio would climb to 35 retiree-age Americans for every 100 of working age by 2030…"

China Watch:

June 19 - Reuters (Ben Blanchard): "The Trump administration has 'blood lust' when it comes to pushing its trade agenda against China and wants to 'suck the lifeblood' from China's economy, a state-run newspaper said…, stepping up the angry rhetoric over their dispute. President Donald Trump threatened on Monday to hit $200 billion of Chinese imports with 10% tariffs if China follows through with retaliation against his previous targeting of $50 billion in imports, aimed at pressing China to stop what the United States sees as the theft of its intellectual property."

June 21 - Reuters (Se Young Lee and Yawen Chen): "China's commerce ministry… accused the United States of being 'capricious' over bilateral trade issues, and warned that the interests of U.S. workers and farmers ultimately will be hurt by Washington's penchant for brandishing 'big sticks'. Previous trade negotiations with the United States were constructive, but Beijing has had to respond in a strong manner due to the U.S. tariff threats, commerce ministry spokesman Gao Feng said… Washington's accusations of forced tech transfers are a distortion of reality, and China is fully prepared to respond with 'quantitative' and 'qualitative' tools if the U.S. releases a new list of tariffs, Gao told a regular briefing in Beijing."¬

June 19 - Bloomberg: "China's benchmark equity gauge tumbled to a two-year low and the yuan weakened as a worsening trade dispute with the U.S. spurred panic selling. Bonds gained. The Shanghai Composite Index plummeted almost 5% in intraday trading before paring losses, while a gauge of technology shares sank the most in two years. China's currency fell to a five-month low against the dollar and the 10 year-yield on government debt dropped two bps."

June 20 - Financial Times (Hudson Lockett): "China's central bank acted to calm markets on Wednesday, a day after Washington's threat to impose tariffs on another $200bn of Chinese goods caused turmoil in global bourses. Yi Gang, governor of the People's Bank of China… called for investors to 'stay calm and rational' and pledged that the central bank would 'ensure liquidity and reasonable stability' after the Shanghai benchmark had dropped to a near-two-year low. The PBoC also injected a net Rmb40bn ($6.2bn) into China's financial market on Wednesday morning… That followed a surprise intervention by the bank on Tuesday, when it injected Rmb200bn into the financial system and signalled that it planned to cut the amount of capital banks are required to hold."

June 19 - Bloomberg: "China's central bank called for investors to remain calm and pledged to use monetary policy 'comprehensively,' after an escalation of the stand-off with U.S. sent the nation's benchmark stock index plunging. The People's Bank of China Governor, Yi Gang, said… that policy makers are prepared for outside shocks and that investors should take a rational view. The Shanghai Composite Index earlier slid 3.8%, falling below the 3,000 level previously breached during market crashes in 2015 and 2016."

June 20 - Bloomberg (Sandy Hendry and Jeffrey Hernandez): "The debt load of China's 100 biggest companies is escalating despite the government's deleveraging campaign, with seven property developers having liabilities exceeding 10 times equity… While stronger revenues are boosting Chinese companies' ability to repay debt, there's no deleveraging in sight, Natixis SA concluded after analyzing 2017 data from 3,000 non-financial companies. The liabilities to equity ratio climbed strongly for the biggest 100 companies by assets."

June 20 - Bloomberg (Carrie Hong): "In what's increasingly a buyer's market for offshore Chinese debt, some of the country's property developers are having to offer double-digit coupons to borrow for just two years. Zhenro Properties Group Ltd. is planning to offer new two- year dollar bonds in the 11.5% area… That leaves it just under the highest-coupon dollar bond to price so far in Asia this year… Dogged by surging funding costs onshore due to the government's deleveraging drive and rising yields on U.S. Treasuries, Chinese property companies have paid some of the highest coupons on dollar bonds this year, as they look to refinance a wall of maturing debt. Others have resorted to floating-rate notes to stoke investor appetite."

EM Watch:

June 18 - Bloomberg (Yumi Teso, Garfield Reynolds and Adam Haigh): "A falling tide lowers all boats, it seems. Amid an exodus from emerging markets, investors are pulling out of even Asian economies with solid prospects for growth and debt financing. Overseas funds are pulling out of six major Asian emerging equity markets at a pace unseen since the global financial crisis of 2008 -- withdrawing $19 billion from India, Indonesia, the Philippines, South Korea, Taiwan and Thailand so far this year…"

June 19 - Reuters (Walter Bianchi): "Argentina's central bank on Tuesday hiked its interest rate on Lebac notes to 47% from 40%, and it sold 308 billion pesos ($11bn) of the securities out of some 514 billion that expired…"

June 19 - Bloomberg (Riley Griffin): "What a waste of 500 bps of rate hikes. Just when it seemed Turkish President Recep Tayyip Erdogan may have learnt the errors of his interfering ways, he's back at it again, vowing to 'deal with interest rates' if elected. And the Turkish lira has duly voted with its feet. The first round of the presidential elections, as well as general elections, are on Sunday, June 24. There could be a subsequent round on July 8. The question of how independent the central bank will be after the vote is back again in the spotlight. If Erdogan were to order interest rates lower it would have a devastating effect on the currency - and it's already about 25% weaker versus the U.S. dollar this year. Inflation is on an upward tear, having risen to 12.15% in May from 10.85% the prior month."

June 20 - Bloomberg (Justin Carrigan, Yumi Teso and Ben Bartenstein): "Emerging markets were left reeling as the world's two biggest economies threatened punishing tariffs in the early shots of a trade war. Stocks slid to the lowest since October and currencies dropped a sixth day. The MSCI Emerging Markets Index of equities sank below the 1,100 mark, which has historically limited losses, amid concern that a tit-for-tat tariff showdown between the U.S. and China will crimp global growth. All but five of the 24 emerging-market currencies tracked by Bloomberg retreated, while sovereign yield spreads blew out an average of 9 bps versus Treasuries."

June 18 - Bloomberg (Asli Kandemir and Cagan Koc): "Even in Recep Tayyip Erdogan's electoral stronghold, businessmen like Halit Ozkaya can't help but complain about the currency crisis the president instigated just weeks before elections. The chairman of steel and copper cable maker Has Celik was forced to halt metal imports in May when Erdogan sent the lira into freefall by vowing to interfere in monetary policy if he wins on June 24. Now Ozkaya is worried Turkey is on the cusp of a debt crisis. 'The magnitude of the lira's swings is putting us in trouble by killing predictability and creating uncertainty on debts repayment,' Ozkaya said…"

June 18 - Bloomberg (Walter Brandimarte): "Brazil's growth forecasts fell for a seventh consecutive week as economists assessed the impact of a nationwide trucker strike, growing emerging market turbulence and domestic uncertainty ahead of the October presidential election. Economists in a weekly central bank survey lowered their 2018 estimate for gross domestic product to 1.76%, the lowest level for the year since President Michel Temer took office in May 2016 and fulled hopes of faster economic recovery."

Central Bank Watch:

June 20 - Reuters (Balazs Koranyi and Francesco Canepa): "A developing trade war between the world's biggest economies is weighing on business confidence and could force central banks to downgrade their outlook, the world's most powerful policymakers argued… After imposing punitive tariffs on a number of its top trading partners, the United States earlier this week threatened China with further duties on $200 billion, escalating a conflict that has already drawn retaliatory steps from nearly all corners of the world. Sitting side by side in a Portuguese hill-top town, the heads of the U.S. Federal Reserve, the European Central Bank, the Bank of Japan and the Reserve Bank of Australia all took a gloomy view on the escalating conflict, arguing that the consequences are already evident. 'Changes in trade policy could cause us to have to question the outlook,' Fed Chair Jerome Powell said in some of his strongest remarks yet on the issue."

June 21 - Reuters (David Milliken and Alistair Smout): "The Bank of England bolstered expectations that at its next meeting it will raise rates for only the second time in a decade, after its chief economist unexpectedly joined the minority of policymakers voting for a hike… The central bank also gave new guidance on when it might start to sell its 435 billion pounds ($574bn) of British government bonds, saying this could come once rates have reached around 1.5%, compared with previous guidance of 2%"

June 18 - Bloomberg (Enda Curran, Alessandro Speciale and Rich Miller): "Don't declare the end of easy money just yet. Major central banks took significant steps last week toward dismantling the emergency stimulus they'd used to lubricate financial markets and escape recession in the decade since the financial crisis. But most are clear that they're not ready to get out of the business of supporting their economies… Such commitments mean the loose-money era endures. Bank of America Corp. estimates the combined balance sheet of the world's biggest central banks is still $11.8 trillion higher than when Lehman Brothers Holdings Inc. collapsed in September 2008, and just short of a $12.3 trillion peak."

June 15 - Financial Times (Robin Wigglesworth, Kate Allen and Roger Blitz): "A week of landmark monetary policy decisions has left investors revamping their portfolios to fit a new era of tightening global liquidity. The US Federal Reserve's seventh interest rate increase since 2015 on Wednesday came the day before the European Central Bank announced that it would end its €2.4tn bond-buying programme in December. The decision on Friday by the Bank of Japan to persevere with its quantitative easing programme leaves it as the laggard among major central banks… 'We are now in a quantitative tightening regime, not a quantitative easing regime,' said Gregory Peters, senior portfolio manager at PGIM Fixed Income. 'The halcyon days of lower volatility and rising markets are behind us. If QE lifted markets then the opposite has to have some kind of impact.'"

June 21 - Wall Street Journal (Brian Blackstone, Nina Adam and Jason Douglas): "Central banks in Europe… signaled different outlooks toward rate increases, suggesting the divergent paths of the world's largest central banks are gripping smaller ones too. The Bank of England held its benchmark interest rate steady at 0.5%, but officials said they expect economic growth in the U.K. to pick up in the months ahead…, setting the stage for a rise in borrowing costs this summer. Norway's central bank also stayed on hold but said rates will probably go up in September. In contrast, the Swiss National Bank kept its key policy rate in deeply negative territory and signaled no forthcoming changes despite signs of healthy economic activity and slowly rising inflation, as the bank remains constrained by the actions of the European Central Bank. Divergence among major central banks has emerged as a key theme recently with potential repercussions on stock, bond and currency markets."

Global Bubble Watch:

June 20 - Financial Times (Michael Mackenzie): "Debt and plenty of it was the legacy of the global financial crisis. Over the past decade of ultra low and negative interest rates, companies have more than doubled their outstanding amount of bonds and loans. Now, as central banks… retreat from the era of easy money that helped fuel huge corporate debt sales in the past decade, the bill for the debt binge looms large. The global value of corporate bonds outstanding has risen 2.7 times since 2007 to $11.7tn, doubling as a share of gross domestic product alongside a deterioration in credit ratings, noted McKinsey & Co. 'The average quality of blue-chip borrowers has declined, growth in speculative-grade corporate bonds has been particularly strong and bond issuance by companies in China and other developing countries - often denominated in foreign currency - has soared,' said the consultancy."

June 20 - Financial Times (Robin Wigglesworth): "Of all the fashionable alarm bells that market-watchers keep an eye on, the yield curve is the most timeless. It is Coco Chanel's proverbial 'little black dress' of economic indicators. The slope made up of bond yields of various maturities has a record of predicting recessions that would make even the savviest econometrician turn pea-green with envy. It is not perfect, but the curve has become flat and inverted… ahead of most economic downturns in most major countries since the second world war. This is why some analysts and investors are worryingly eyeing the US yield curve, where the difference between the two and 10-year Treasury yields has narrowed to just 37 bps. That is the slimmest spread since September 2007. But interestingly, and worryingly, the global yield curve has now already inverted."

June 16 - Bloomberg (Randall Woods): "China remained the largest foreign owner of Treasuries in April even with a slight drop in holdings, as the Asian nation's appetite for U.S. government debt shows few signs of waning amid growing tensions over trade. China's holdings of U.S. bonds, bills and notes decreased by $5.8 billion to $1.18 trillion in April… The second-biggest foreign holder, Japan, saw its Treasuries drop by $12.3 billion to $1.03 trillion, the lowest since 2011. Overall, foreign ownership of Treasuries receded in April, falling to $6.17 trillion."

June 17 - Reuters (Colin Packham): "Australia's relationship with top trading partner China faces a testing two weeks as Canberra prepares to pass laws designed to limit Beijing's influence in domestic affairs amid pressure on some of its fastest growing exports. The fallout from proposed foreign interference laws will likely be exacerbated by an expected ban on China's Huawei Technologies from supplying equipment for the soon-to-be built 5G mobile broadband network on national security grounds."

Europe Watch:

June 21 - Reuters (Gavin Jones and Giuseppe Fonte): "Two leading eurosceptics from Italy's far-right League, Claudio Borghi and Alberto Bagnai, were picked… to head important parliamentary committees, as the League and the anti-establishment 5-Star Movement put together their coalition government. Borghi will become president of the Budget Committee in the lower house of parliament and Bagnai president of the Finance Committee in the Senate. Both have repeatedly railed against EU budget restraints, and Borghi has called for the issuance of short-term government bonds, known as mini-Bots, to pay companies and individuals owed money by the state. 'The goal to balance the budget has destroyed our economy,' Bagnai said earlier this year. He said monetary union was 'destined to fail,' but added that leaving the currency bloc was not among the League's top priorities."

June 17 - Wall Street Journal (Eric Sylvers): "A youth revolt is upending Italian politics, and it could be a harbinger of things to come. Western Europe's largest antiestablishment government came to power earlier this month, driven largely by young Italian voters. Struggling with a persistent lack of job prospects over the past decade, they voted in droves for two parties in the country's March 4 elections, the 5 Star Movement and the League, an anti-immigration party. The result laid bare a stark generation gap, with older Italians, who often have to support their grown children, continuing to vote for mainstream parties. The same pattern appears across southern Europe, and the forces behind the divide show few signs of slowing. Almost 30% of Italians age 20 to 34 aren't working, studying or in a training program…, more than in any other European Union country. Greece is second at 29%, while Spain's rate is 21%."

June 20 - Bloomberg (Arne Delfs, Gregory Viscusi and Helene Fouquet): "German Chancellor Angela Merkel and French President Emmanuel Macron agreed on a plan to strengthen the euro area, seeking to fortify Europe against financial crises and strengthen its global influence. 'This is an important step that Europe will be working on for a while,' Merkel said alongside Macron… 'We can say that we've taken a small step along the road.' Macron said the measures would boost 'stability and solidarity' in the euro area."

Fixed Income Bubble Watch:

June 21 - Bloomberg (Kristine Owram): "Fixed-income indexes are 'broken,' making active management necessary for successful bond ETFs, according to the head of global exchange-traded funds at Franklin Templeton Investments. 'Investors typically have gone into passive fixed income primarily because that's all there was,' Patrick O'Connor said… 'But as a firm, and as an active manager, we don't just think indexes are flawed in fixed income, we think they're broken.' The weight of individual securities in fixed-income indexes is often determined by debt issued, meaning companies that issue more debt will have a higher weight in an index-based ETF."

June 17 - Financial Times (Gideon Rachman): "Three-letter initialisms gained notoriety during the financial crisis and again this year. In 2008 it was the CDO, or collateralised debt obligation, the asset-backed securities blamed for exacerbating the financial crisis. In February the ETN was in the spotlight, as several volatility exchange traded note products were forced to liquidate after a market spasm. Now investors are wholeheartedly embracing a third: the CLO. Collateralised loan obligations… are enjoying a boom. Institutional investors have piled into the products, which pool predominantly US or European corporate loans into one portfolio, before divvying up slices of the vehicle based on perceived risks… A surge of CLO issuance - $54bn has been raised in the US this year… has been sopped up by buyers and could eclipse the record $124bn raised in 2014."

Leveraged Speculator Watch:

June 15 - Financial Times (Robin Wigglesworth): "Hedge funds are once again betting the US stock market will remain tranquil. The volume of 'short' positions in the Vix volatility index has climbed to the highest since late January, just before the implosion of several Vix-linked funds ripped through financial markets. Investment groups are now net 'short' over 53,000 futures contracts in Cboe's Vix index… Shorting volatilit y - in practice selling insurance against market turmoil to other investors - has long been a lucrative strategy, and produced eye-watering gains in 2017. But it unravelled in dramatic fashion in February."

Geopolitical Watch:

June 19 - Reuters: "A sophisticated hacking campaign launched from computers in China burrowed deeply into satellite operators, defense contractors and telecommunications companies in the United States and southeast Asia, security researchers at Symantec Corp said… Symantec said the effort appeared to be driven by national espionage goals, such as the interception of military and civilian communications."