Saturday, July 7, 2018

Weekly Commentary: BIS Annual Economic Report (for posterity)

With attention focused on unfolding trade wars and summer vacations, the release of the Bank of International Settlement (BIS) Annual Report garnered scant notice (with the exception of Gillian Tett's Thursday FT article, "Holiday Trading Lull Flashes Red for Financiers").

From the BIS: "It is now 10 years since the Great Financial Crisis (GFC) engulfed the world. At the time, following an unparalleled build-up of leverage among households and financial institutions, the world's financial system was on the brink of collapse. Thanks to central banks' concerted efforts and their accommodative stance, a repeat of the Great Depression was avoided. Since then, historically low, even negative, interest rates and unprecedentedly large central bank balance sheets have provided important support for the global economy and have contributed to the gradual convergence of inflation towards objectives."

As we near the 10-year financial crisis anniversary, I would approach back slapping with caution. The key issue today is not whether central bank post-Bubble reflationary policies avoided a repeat of the Great Depression. Rather, did the unprecedented concerted - and protracted - global central bank response increase the likelihood of a more destabilizing future crisis - one where the dark forces of global depression might prove difficult to escape?

I'm not interested in bashing the BIS. They strive to have a balanced approach. Yet when reading through their insightful annual report it's apparent that major holes remain in the contemporary central banking analytical framework. To their Credit, they do recognize the unprecedented buildup of global debt and imbalances. In my view, however, they fail to appreciate how central bankers these days continue fighting the last war.

One of the report's five sections discusses, "The financial Sector: post-crisis adjustment and pressure points." The theme is the successful implementation of concerted measures to boost the safety and soundness of the global financial system through increased bank capital and liquidity buffers. There is some attention to "asset managers," but for the most part potential financial risks are viewed through a traditional lens.

It's been my view, going back to 2009's aggressive reflationary measures, that central bankers failed to learn key lessons from the mortgage finance Bubble period. My biggest frustration revolved around the Fed's fateful decision to target mortgage Credit for system reflation - and then their complete neglect of prudent oversight of mortgage lending and mortgage-related financial intermediation, leverage and speculation. Indeed, they fashioned powerful incentives to borrowing, lend, build, speculate, leverage and intermediate risk - and then looked away.

Even as a self-reinforcing boom took hold, the policy mindset fixated on the nineties crisis period and the view that the Fed must move quite cautiously in removing accommodative measures. When the mortgage boom overheated, the Fed remained too timid to risk removing the punchbowl. Worse yet, as the Bubble inflated the markets turned increasingly confident that the Fed would resort to unconventional measures.

Over the past decade, global central bankers have incentivized risk-taking, speculation and leveraging in the securities and derivatives markets. Yet the so-called "macroprudential" focus has been on banking system capital, leverage and liquidity - fighting the last war. Ensure the securities and derivatives markets get all lathered up - and look away.

BIS: "At least until recently, global financial conditions remained very easy. In fact, they loosened further even as US monetary policy proceeded along its very gradual and well anticipated normalisation path… Importantly, credit spreads have been unusually compressed, often at or even below pre-GFC levels, and the corresponding markets appear to have become increasingly illiquid. Moreover, for most of the year under review the US dollar depreciated, supporting buoyant financial conditions especially in EMEs, which post-crisis have borrowed heavily in that currency and during the past year saw strong portfolio inflows."

The BIS report includes interesting data and charts. One of the more dramatic charts is "USD-denominated credit to EME non-bank borrowers," where EM dollar borrowings more than doubled since the crisis to a staggering $3.6 TN. "These trends mean the EMEs have become more exposed to an appreciation of the dollar and to reversals in international investors' risk appetite, as recent evens confirmed… Meanwhile, the greater participation of foreign investors in local currency markets compared with pre-crisis might not necessarily act as a stabilizing factor, as it may expose EMEs to a greater risk of capital flight."

I saw no reference in the BIS report to "hedge funds," "carry trades," or leveraged speculation more generally. I would be much less concerned if I believed actual investors were on the other side of historic EM debt growth.

For obvious reasons (i.e. their own data), the BIS doesn't partake in the fanciful notion of "deleveraging." "Public debt has risen to new peacetime highs in both advanced and emerging market economies." After ending 2007 at a problematic 179% of global GDP, debt over the next nine years rose to 217% of GDP. BIS data are broken into Advanced Economies and Emerging Economies. Not surprisingly, EM debt has led the charge during this cycle, having surged from 113% to 176% of GDP. No slouch, Advanced Economies debt has inflated from 233% to 266% of GDP.

BIS: "In some countries largely spared by the GFC, for quite some time there have been signs of a build-up of financial imbalances. This is because, in contrast to countries at the heart of the turmoil, no private sector deleveraging has taken place, so that the financial expansion has continued. The signs of imbalances have taken the form of strong increases in private sector credit, often alongside similar increases in property prices - the tell-tale sign of the expansion phase of domestic financial cycles, qualitatively similar to those observed pre-crisis in the economies that subsequently ran into trouble."

"Against this backdrop, a number of developments could lead to the materialisation of risks… In all of them, financial factors seem destined to play a prominent role, either as a trigger or as an amplifying mechanism. Indeed, the role of financial forces in business fluctuations has grown substantially since the early 1980s, when financial liberalisation took hold… One possible trigger of an economic slowdown or downturn could be an escalation of protectionist measures… A second possible trigger could be a sudden decompression of historically low bond yields or snapback in core sovereign market yields, notably in the United States… A third trigger could be a more general reversal in risk appetite…"

The BIS report includes an interesting section, "A Tightening Paradox?"

BIS: "In fact, until at least the first quarter of 2018, no tightening of financial conditions accompanied the normalisation of US monetary policy; it was only well into the second quarter that any appreciable tightening was seen, particularly in EMEs… From December 2015, when the United States started tightening, until late May of this year, two-year US Treasury yields rose in line with higher policy rates… But the yield on the 10-year Treasury note increased by only around 70 bps, while very long-term yields traded sideways. Importantly, the S&P 500 surged by over 30%, and corporate credit spreads narrowed, in the high-yield segment by more than 250 bps. The Federal Reserve Bank of Chicago's National Financial Conditions Index (NFCI) trended down to a 24-year trough last year before rebounding slightly this year, in line with several other financial condition gauges."

This section includes 12 separate bar charts comparing characteristics of the past three tightening periods, 1994/95, 2004/06 and "Current." To summarize, this cycle has seen the Fed raise rates less; bond yields generally rise less; stocks go up a lot more; high-yield spreads collapse like never before; investment-grade spreads narrow like never before; and local currency EM bond spreads collapse like never before. Perhaps most telling, the last chart shows $200 billion flowing into EM stocks and bonds during the current "tightening", up from about $40 billion and "NA" during the previous two cycles.

BIS: "There are several possible reasons for monetary policy's limited impact on financial conditions. These include factors unrelated to the policy itself, large and growing central bank balance sheets outside the United States, and possibly the gradual and predictable nature of the normalisation… The large-scale asset purchase programmes of the major central banks outside the United States may have offset the impact of the Fed's monetary policy normalisation… Finally, the gradualism and predictability of the tightening may also have played a role. Gradualism is especially called for when there is high uncertainty about the economic context and monetary transmission, as currently. In such a situation, this can help avoid undesirable financial and economic responses. Yet a high degree of gradualism and predictability may also dilute the impact of policy tightening."

"…Gradualism and predictability could induce search-for-yield and risk-taking behaviour, further compressing risk premia and boosting asset prices. Moreover, market participants could interpret gradualism and predictability as signalling that central banks wish to prevent sharp market moves, thereby providing implicit insurance for risky position-taking."

And this finds us closing in on a critical issue: After years of straying down the path of manipulating market perceptions and prices, it has turned into a monumental challenge to get markets to return to even a semblance of normal (self-adjusting and correcting) operations. History repeats. Once the Fed targeted mortgage Credit for post-"tech" Bubble reflationary measures, markets correctly presumed the Federal Reserve would adopt a hands-off approach. The Bubble would be left to inflate, with the Fed loath to risk popping a Bubble of its own creation - unwilling to quash progressively powerful asset market inflationary psychology.

Markets for years now have presumed central bankers would not dare risk popping global securities and derivatives market Bubbles. After all, the Bernanke Fed (followed by Draghi, Kuroda and others) specifically targeted inflating securities markets for system reflation. The Fed's ultra-gradualist approach to "normalization" has only worked to confirm the markets' faith that these Bubbles could run indefinitely. Gradualism has again fanned increasingly powerful market inflationary psychology. In the process, global markets became one unprecedented playground for leveraged speculation. Fed funds - securities speculation funding costs - remains below 2% in the U.S., while short rates are near zero or below for much of the world.

BIS: "The current backdrop for monetary policy normalisation is unprecedented in a number of important respects. Historically, interest rates in advanced economies, real and nominal, have never stayed this low for this long and central bank balance sheets have never swelled as large in peacetime. The long spell of multi-pronged policy accommodation may have left lasting marks on the macro-financial landscape, making policy effects harder to assess."

With equities rising on the initial day of Trump Tariffs (and retaliation), market pundits were proclaiming trade war risk was "already baked into stock prices." Wishful thinking, to be sure. From my vantage point, it was just another payrolls rally. Occurring on the first Friday of the month/quarter, the payroll data often spark an unwind of options positions maturing two weeks later.

The release of June jobs data corresponded with prospects for the first day of Trump Tariffs, ensuring ample hedging activity coming into Friday trading. And as the unwind of hedges spurred a market rally, pressure intensified on short positions more generally. The Goldman Sachs Most Short Index jumped (another) 1.4% Friday (up 3.4% for the week), again outperforming the general market. Betting against put buyers and short sellers has been a lucrative endeavor. But let's not mistake this speculative dynamic for sound fundamental underpinnings or healthy market behavior.

Trade wars appear poised to unfold over coming weeks and months, if not years. President Trump has threatened $500 billion of tariffs if China retaliates. China's initial response was measured. The game of chicken has commenced, although speculative markets are content to see minimal short-term economic risk. Surely, cooler heads will prevail. Nothing crazy prior to the midterms.

Meanwhile, Fed minutes presented a more hawkish FOMC, concerned by protectionist measures but increasingly focused on an overheated U.S. economy. Probably more interesting, there were some hawkish comments out of the ECB (Weidmann, Praet). This helped stabilize the euro (up 0.5%), with the weaker dollar spurring a relief rally in EM currencies, bonds and stocks. The rally in EM triggered the unwind of hedges and short covering in U.S. and developed markets.

Not uncharacteristically, U.S. non-farm payroll data evoke delusions of goldilocks. At this point, I doubt relatively contained wage growth will be holding the Fed back. Plus, the more important dynamics continue to unfold in overseas markets. China's Shanghai Composite sank another 3.5% this week, boosting y-t-d losses to 16.9%. China's CSI Midcap 200 dropped 5.1% and the CSI 500 small caps fell 4.2%. The ChiNext growth stock index sank 4.1%. Major indices in South Korea and Taiwan were both down better than 2%. Japan's Nikkei fell 2.3%. Copper sank 4.7%. Chinese real estate/apartment Bubble worries? In fixed income, German bund yields declined another basis point to a mere 29 bps. Ten-year Treasury yields fell four bps to 2.82%

It does not take a crazy imagination to envisage a global crisis beyond the scope of 2008/09. For one, Chinese and EM Bubbles barely missed a beat back then. A full-fledged global depression would require a synchronized global Bubble, replete with systematic Credit excess, economic maladjustment, and deeply systemic global imbalances. A backdrop conducive to fragility and crisis would include inflated asset markets on a global basis, policy-induced market misperceptions and egregious speculative excess. Well, it's all there.

I never bought into the 2008 vs. 1929 comparisons. The next crisis, perhaps. If you think the risk of a debilitating trade war is high today, just wait until Bubbles start popping. And is it reasonable to anticipate that countries actively engaged in heated trade disputes will empower their central bankers to quietly go off somewhere and develop a master plan for rescuing markets and the global financial system? Will swap lines between the Fed and PBOC be politically tolerable? It is a much more complicated world today than back in 2008.

We're approaching the 10-year anniversary of the "Great Financial Crisis." This fall will also mark 20 years since the Russia/LTCM fiasco and the "committee to save the world." Too many committees, bailouts and reflations have nurtured just the backdrop for acute global financial, economic and geopolitical crisis. I wouldn't bet on central bankers being capable of maintaining control. Future historians might look back and identify this as a pivotal week. But will they appreciate that protectionism and trade wars are but a symptom? When will it be recognized that central banks are much more the problem than the solution?


For the Week:

The S&P500 rallied 1.5% (up 3.2% y-t-d), and the Dow increased 0.8% (down 1.1%). The Utilities surged 2.4% (up 0.5%). The Banks recovered 0.4% (down 0.4%), while the Broker/Dealers were little changed (up 2.9%). The Transports gained 1.2% (down 1.3%). The S&P 400 Midcaps jumped 1.9% (up 4.7%), and the small cap Russell 2000 surged 3.1% (up 10.3%). The Nasdaq100 jumped 2.4% (up 12.7%). The Semiconductors rose 2.7% (up 7.7%). The Biotechs surged 5.4% (up 18.6%). With bullion up $2, the HUI gold index rallied 2.7% (down 6.8%).

Three-month Treasury bill rates ended the week at 1.90%. Two-year government yields added a basis point to 2.54% (up 65bps y-t-d). Five-year T-note yields slipped two bps to 2.72% (up 51bps). Ten-year Treasury yields declined four bps to 2.82% (up 42bps). Long bond yields fell six bps to 2.93% (up 19bps). Benchmark Fannie Mae MBS yields declined three bps to 3.57% (up 57bps).

Greek 10-year yields were unchanged at 3.93% (down 15bps y-t-d). Ten-year Portuguese yields added two bps to 1.80% (down 14bps). Italian 10-year yields gained three bps to 2.72% (up 70bps). Spain's 10-year yields dipped one basis point to 1.31% (down 26bps). German bund yields declined one basis point to 0.29% (down 14bps). French yields fell two bps to 0.64% (down 14bps). The French to German 10-year bond spread narrowed one to 35 bps. U.K. 10-year gilt yields declined a basis point to 1.27% (up 8bps). U.K.'s FTSE equities index slipped 0.3% (down 0.9%).

Japan's Nikkei 225 equities index fell 2.3% (down 4.3% y-t-d). Japanese 10-year "JGB" yields were little changed at 0.03% (down 2bps). France's CAC40 gained 1.0% (up 1.2%). The German DAX equities index recovered 1.5% (down 3.3%). Spain's IBEX 35 equities index surged 2.9% (down 1.4%). Italy's FTSE MIB index rallied 1.4% (up 0.3%). EM equities were mixed. Brazil's Bovespa index jumped 3.1% (down 1.8%), and Mexico's Bolsa rose 2.8% (down 0.8%). South Korea's Kospi index fell 2.3% (down 7.9%). India’s Sensex equities index increased 0.7% (up 4.7%). China’s Shanghai Exchange sank 3.5% (down 16.9%). Turkey's Borsa Istanbul National 100 index rose 2.3% (down 14.4%). Russia's MICEX equities jumped 2.2% (up 11.2%).

Investment-grade bond funds saw inflows of $171 million, while junk bond funds had outflows of $1.729 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates declined three bps to 4.52% (up 56bps y-o-y). Fifteen-year rates fell five bps to 3.99% (up 77bps). Five-year hybrid ARM rates sank 13 bps to 3.74% (up 53bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down two bps to 4.58% (up 48bps).

Federal Reserve Credit last week dropped $12.6bn to $4.260 TN. Over the past year, Fed Credit contracted $167bn, or 3.8%. Fed Credit inflated $1.449 TN, or 52%, over the past 296 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $3.8bn last week to $3.396 TN. "Custody holdings" were up $79.7bn y-o-y, or 2.4%.

M2 (narrow) "money" supply expanded $14.9bn last week to a record $14.133 TN. "Narrow money" gained $584bn, or 4.3%, over the past year. For the week, Currency increased $1.8bn. Total Checkable Deposits declined $6.5bn, while Savings Deposits jumped $16.6bn. Small Time Deposits added $3.3bn. Retail Money Funds were little changed.

Total money market fund assets slipped $3.3bn to $2.822 TN. Money Funds gained $195bn y-o-y, or 7.4%.

Total Commercial Paper dropped $20.1bn to $1.065 TN. CP gained $118bn y-o-y, or 12.5%.

Currency Watch:

July 4 - Bloomberg (Gregor Hunter): "The sharpest decline in China's currency since policy makers devalued the yuan in 2015 has seen little of the capital-flight panic that gripped markets back then. How long the calm lasts depends in part on the effectiveness of controls put in place last time. This time around, the yuan's 3.6% slide since mid-June has been accompanied mainly by an outflow of cash from foreign, rather than domestic, investors, analysts say… Chinese operators face tight constraints -- ranging from official scrutiny of trade invoices to detailed justification for certain overseas transactions -- put in place years ago to stem an exodus of funds. The cost of the 2015-16 shore-up-the-yuan campaign was high: the central bank burned through $1 trillion of foreign-exchange reserves, and took some criticism in international forums for how it managed the exchange rate."

The U.S. dollar index declined 0.6% to 93.963 (up 2.0% y-t-d). For the week on the upside, the Mexican peso increased 4.6%, the Swedish krona 2.5%, the South African rand 1.9%, the Norwegian krone 1.5%, the New Zealand dollar 0.9%, the British pound 0.6%, the euro 0.5%, the Canadian dollar 0.4%, the Brazilian real 0.4%, the Australian dollar 0.3%, the Singapore dollar 0.3%, the Japanese yen 0.3% and the Swiss franc 0.1%. For the week on the downside, the South Korean won declined 0.1%. The Chinese renminbi declined 0.33% versus the dollar this week (down 2.05% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index slipped 0.2% (up 8.7% y-t-d). Spot Gold recovered 0.2% to $1,255 (down 3.7%). Silver slipped 0.6% to $16.069 (down 6.3%). Crude declined 45 cents to $73.80 (up 22%). Gasoline fell 1.9% (up 17%), and Natural Gas dropped 2.1% (down 3%). Copper sank 4.7% (down 14%). Wheat rallied 2.8% (up 21%). Corn added 0.5% (up 6%).

Trump Administration Watch:

July 5 - CNBC (Chloe Aiello): "President Donald Trump said on Thursday tariffs on $34 billion worth of Chinese goods will kick-in at 12:01 a.m. EST on Friday morning. Another $16 billion are expected to go into effect in two weeks, he said. Aboard Air Force One on his way to a rally in Montana, Trump told reporters he would also consider imposing additional tariffs on $500 billion in Chinese goods, should Beijing retaliate. First '34, and then you have another 16 in two weeks and then as you know we have 200 billion in abeyance and then after the 200 billion we have 300 billion in abeyance. Ok? So we have 50 plus 200 plus almost 300,' Trump said."

July 5 - Bloomberg: "The world's two largest economies are set Friday to slide deeper into a trade conflict that's roiled markets and cast a shadow over the global growth outlook. In Beijing, policy makers are digging in for what could be a protracted fight -- one in which they say they won't be the aggressor. If the U.S. begins imposing additional steep tariffs on Chinese imports as of Friday, then Beijing is poised to respond in kind. With further tit-for-tat levies already threatened, this week could mark the start of a new and damaging phase. The U.S. imposition of tariffs on $34 billion of China's exports will not only hurt China, but America itself and the rest of the world, Gao Feng, China's Commerce Ministry spokesman, said… Beijing's retaliatory tariffs will become effective 'immediately' after the U.S. acts…"

July 5 - Reuters (Elias Glenn and Christian Shepherd): "The United States is 'opening fire' on the world with its threatened tariffs, China warned…, saying no one wants a trade war but it will respond the instant U.S. measures go into effect, as Beijing ramped up the rhetoric in the heated dispute. The Trump administration's tariffs on $34 billion of Chinese imports are due to go into effect at 0401 GMT on Friday, which is just after midday in Beijing."

July 2 - CNBC (Silvia Amaro): "The United States could get a new round of retaliatory tariffs worth as much as $300 billion, if it moves ahead with new duties on European cars, the Financial Times reported. In a written statement to the U.S. Department of Commerce, seen by the news publication, the EU set out clear plans to respond to potential U.S. duties on European cars. …European leaders are getting more convinced that President Donald Trump will put new tariffs on European cars."

July 4 - Bloomberg (Patrick Donahue, Arne Delfs and Birgit Jennen): "German Chancellor Angela Merkel raised the specter of the global financial crisis as she warned of potential fallout from a trade war with the U.S., saying tariffs on European cars would be 'much more serious' than levies on steel and aluminum… Faced with President Donald Trump's threat to target U.S. imports of cars from Europe, German and French government officials plan to meet next week in Paris to coordinate strategy. 'The international financial crisis, which ensured that we now act in the framework of the G-20, would never have been resolved so quickly, despite the pain, if we hadn't cooperated in a multilateral fashion in the spirit of comradeship,' Merkel said… 'This has to happen.'"

July 1 - The Hill (Niv Elis): "President Trump spent the first year of his presidency singing the praises of the stock market, which rose precipitously in anticipation of GOP tax cuts and business-friendly deregulation. Nearly seven months into 2018, Trump barely mentions the markets anymore… During his first full year in office, Trump tweeted the phrase 'stock market' 46 times, almost once a week. Since Jan. 26, when the market topped out at 2,872 and headed into a correction, Trump has only tweeted about it twice."

June 30 - MarketWatch (Greg Robb): "It has been a long time -the early 1990s in fact- since a White House tried to influence Federal Reserve policy the way Trump economic advisor Larry Kudlow did on Friday. In an interview with Fox Business Network, Kudlow jawboned the Fed, saying: 'My hope is that the Fed, under its new management, understands that more people working and faster economic growth do not cause inflation.' 'My hope is that they understand that and that they will move very slowly,' he added. It was the senior advisers to President George Bush, particularly Treasury Secretary Nicholas Brady, who pushed the Fed to cut rates at a faster pace in the run-up to the recession that lasted from July 1990 until March 1991."

July 1 - CNBC (Fred Imbert): "President Donald Trump said… he wants to wait until after the midterm elections to move forward on a new NAFTA deal with Mexico and Canada, with the parties locked in tough negotiations. The Congressional midterms are scheduled for Nov. 6, with Democrats poised to gain seats in the House, and possibly retake a majority. Separately, trade tensions between the three NAFTA principals have increased recently, with the U.S. slapped import tariffs on Mexican and Canadian steel and aluminum imports."

July 1 - Axios (Jonathan Swan): "Axios has obtained a leaked draft of a Trump administration bill - ordered by the president himself - that would declare America's abandonment of fundamental World Trade Organization rules. Why it matters: The draft legislation is stunning. The bill essentially provides Trump a license to raise U.S. tariffs at will, without congressional consent and international rules be damned. The details: The bill, titled the 'United States Fair and Reciprocal Tariff Act,' would give Trump unilateral power to ignore the two most basic principles of the WTO and negotiate one-on-one with any country:"

July 3 - Reuters (Jeff Mason and Jan Strupczewski): "U.S. President Donald Trump warned the World Trade Organization on Monday that 'we'll be doing something' if the United States is not treated properly, just hours after the European Union said that U.S. automotive tariffs would hurt its own vehicle industry and prompt retaliation. Trump, speaking to reporters during a meeting with Dutch Prime Minister Mark Rutte at the White House, said, 'The WTO has treated the United States very, very badly and I hope they change their ways.'

Federal Reserve Watch:

July 5 - CNBC (Jeff Cox): "Federal Reserve officials worry that letting the U.S. economy run too strong could cause major problems down the road if left unchecked, according to minutes from the most recent central bank meeting. Some members expressed 'concern that a prolonged period in which the economy operated beyond potential could give rise to heightened inflationary pressures or to financial imbalances that could lead eventually to a significant economic downturn,' the meeting summary… As a result, almost all officials at the central bank believe they should continue to raise interest rates on a regular basis."

July 3 - CNBC (Richard Bove): "Washington and the nation are very focused on the fact that Supreme Court Justice Anthony Kennedy has resigned, leaving the high court vulnerable to ideological change. Not really focused upon as much is an offhand remark made by Larry Kudlow, the director of the National Economic Council... Mr. Kudlow suggested that he hoped that the Federal Reserve would raise interest rates very slowly. While one might agree or disagree with Mr. Kudlow's remark…, what is of greater interest is that he made the statement. It breaks a precedent that presidents… have followed for more than two and half decades - i.e., the independence of the Federal Reserve would be respected. Mr. Kudlow understands that he is changing policy. What's more, he undoubtedly understands that the While House can, and I believe will, take total control of the Federal Reserve. It is very possible that monetary policy will become a political, not an economic or financial decision."

July 1 - Wall Street Journal (Nick Timiraos): "After the last recession, the Federal Reserve built up a mammoth $4.5 trillion portfolio of mostly mortgage and Treasury securities in an effort to boost financial markets and the economy. The sum was about equal in value to the total economic output of Japan, the world's third largest economy. Officials could soon take up an important debate about how much to let that portfolio shrink. Last year, they started a program to let securities in the portfolio mature without reinvesting the proceeds in other securities, putting it on a path to shrink to $3 trillion by 2020. Some officials are now wondering if they can end this 'run-off' process sooner than planned and manage monetary policy with a larger portfolio in the long run."

U.S. Bubble Watch:

July 5 - Financial Times (Jason Cummins): "In Newton's First Law, an object in motion stays in motion until a force acts upon it. Under new leadership, the Federal Reserve's monetary policy strategy appears to be following the same logic. In his June press conference, chairman Jay Powell said the Fed would raise interest rates until 'we get a sense that the economy is reacting badly'. The latest numbers suggest the US economy is doing anything but reacting badly. The unemployment rate declined to 3.75%, a 48-year low... Consumer prices rose 2.3% in May from a year earlier. Excluding volatile food and energy categories, core personal consumption expenditures inflation moved up to 2%, matching the Fed's target for the first time in more than six years. Despite downside risks from trade tension, these trends look set to continue. Monetary policy is still expansionary on top of the sizeable fiscal expansion that will build in the coming years. The labour market is poised to get tighter and put continued upward pressure on inflation."

July 5 - CNBC (Fred Imbert): "Private payrolls grew at a disappointing rate last month as businesses struggled to find enough new hires, ADP and Moody's Analytics said… Jobs in the U.S. grew by 177,000 in June…, while economists… expected a gain of 190,000. June also marked the fourth straight month of jobs growth below 200,000… 'Business' number one problem is finding qualified workers,' Mark Zandi, chief economist at Moody's Analytics, said… 'At the current pace of job growth, if sustained, this problem is set to get much worse. These labor shortages will only intensify across all industries and company sizes.'"

July 3 - CNBC (Diana Olick): "It is a seller's market, undeniably. The supply of homes for sale is low, demand is high, and now prices are heating up even more. But sellers today see more reasons to stay put than to profit. Home prices jumped 7.1% annually in May, according to… CoreLogic. That's the biggest jump in four years. Annual price gains had been shrinking slightly, as mortgage rates rose… They are, however, exacerbating the already critical supply shortage. 'During the first quarter, we found that about 50% of all existing homeowners had a mortgage rate of 3.75% or less,' said Frank Nothaft, chief economist for CoreLogic. "May's mortgage rates averaged a seven-year high of 4.6%, with an increasing number of homeowners keeping the low-rate loans they currently have, rather than sell and buy another home that would carry a higher interest rate."

July 2 - CNBC (Jeff Cox): "Stocks right now are hanging by a thread, boosted by a bonanza of corporate buying unrivaled in market history and held back by a burst in investor selling that also has set a new record. Both sides are motivated by fear, as corporations find little else to do with their $2.1 trillion in cash than buy back their own shares or make deals, while individual investors head to the sidelines amid fears that a global trade war could thwart the substantial momentum the U.S. economy has seen this year. 'Corporate cash is going to find a home, and it's either going to be in buybacks, dividends or M&A activity. What it's not going to be is in capex,' said Art Hogan, chief market strategist at B. Riley FBR."

July 3 - Wall Street Journal (Maureen Farrell): "An IPO market that was left for dead just two years ago has come roaring back in 2018, with companies raising public capital at a pace rarely seen in the past two decades. So far this year, 120 companies have used initial public offerings to raise $35.2 billion on U.S. exchanges. That is the highest volume since 2014 and the fourth-busiest year-to-date on record, according to Dealogic…"

July 3 - CNBC (Patti Domm): "By the Fourth of July, drivers usually see the highest gas prices of summer in the rear-view mirror. That may not be the case this year, even though the national average is down about 14 cents from the near $3 a gallon drivers paid in late May. Consumers are paying the highest Fourth of July gasoline prices in four years."

July 3 - CNBC (Robert Frank): "Manhattan real estate had its worst second quarter since the financial crisis, with prices and sales dropping and inventory rising… Total sales in Manhattan fell 17% in the second quarter from a year ago, according to… Douglas Elliman and Miller Samuel Real Estate Appraisers and Consultants. The average sales price fell 5% to $2.1 million. Brokers blamed the decline partly on bad weather… But analysts say the market is facing bigger pressures, from a huge pipeline of new condos to a dwindling number foreigner buyers, volatile stock markets and new tax changes that make New York less attractive."

China Watch:

July 5 - Bloomberg (Brian Bremner): "Chinese President Xi Jinping has an ambitious master plan for his country's transformation into a wealthy, technology-driven global economic power. And U.S. companies need not apply. That's why the current trade rumble between the U.S. and China… is far more than just a spat over market restrictions, intellectual property rights and the epic U.S. deficit. On a deeper level, the standoff reflects an escalating economic and military rivalry between a status quo power and one of the most remarkable growth miracles in history. It's a clash between two divergent systems, (one state-directed, the other market-driven) with markedly divergent world views and national aspirations. That strategic tension seems likely to intensify, regardless of how the current brinkmanship over tariffs plays out."

July 3 - Wall Street Journal (Lingling Wei and Saumya Vaishampayan): "The yuan's rapid slide is posing a new test for Beijing as it grapples with a looming trade war, putting the central bank under pressure to revive the kind of interventions undertaken in the past to defend the currency's value. In an effort to calm jittery investors, China's central-bank chief Yi Gang… pledged to keep the yuan's exchange rate 'basically stable at a reasonable and balanced level,'… If the yuan continues to weaken in the next few trading days, government advisers and analysts say, the PBOC likely would reach into its tool kit to control the pace of decline, including tweaking the way it sets the yuan's official rate."

July 4 - Reuters (Kevin Yao): "China is comfortable with a weakening yuan, intervening only to prevent any rapid and destabilising declines or to restore market confidence, as the economy loses momentum and faces further risks from a heated trade dispute with the United States, policy insiders said. On Tuesday, as stocks sank and the yuan fell through a key psychological level of 6.7 on the dollar, traders said state-owned banks, which sometimes act on behalf of the central bank, made efforts to prop up the currency. All the same, authorities are confident they won't have to make heavy use of the official foreign exchange reserves to defend the yuan like in 2015 when stocks and the currency went into a tail spin as capital outflows accelerated…"

July 3 - Bloomberg: "China is zooming to a record year of corporate-bond defaults, with the 2018 total already more than three-quarters of the previous high even before an expected economic slowdown bites. Chinese companies have reneged on about 16.5 billion yuan ($2.5bn) of public bond payments so far this year, compared with the high of 20.7 billion yuan seen in all of 2016… Strains are set to get worse if the trends of credit-rating companies are anything to go by -- agencies including Dagong Global Rating Co. have been downgrading firms by an unprecedented margin. 'Corporate profits have worsened this year and are unlikely to improve against the backdrop of an economic slowdown,' Li Shi, general manager of the rating and bond-research department at China Chengxin International Credit Rating Co. 'Refinancing will continue to be tough as long as the crackdown on shadow banking continues.'"

July 4 - Bloomberg: "Signs of pressure on China's property market are deepening, with a report saying that soured loans from the industry could put 'significant stress' on banks and a state researcher warning of accumulating risks in a sector that underpins the economy. The value of bad loans from the real estate industry will increase by at least 20% this year, China Orient Asset Management Co. said… The property market will see an 'increasing correction' under heavier restrictions, leading to a rise in the non-performing loan ratio for the sector to about 1.5%, according to the survey. The report added to a chorus of warnings on the dangers mounting in the property market…"

July 5 - Bloomberg: "Chinese brokerages are sitting on more than $240 billion of loans that grow riskier by the day as the country's equity market tumbles. Extended to company founders and other major investors who pledged their shareholdings as collateral, the loans amount to 103% of Chinese brokerages' net capital, up from 16% in 2013, according to Morgan Stanley. Losses on the debt could wipe out 11% of the industry's net capital, analysts at the U.S. bank wrote… While the loans looked like safe bets as Chinese stocks marched higher over the past two years, a $2 trillion selloff since late January is rapidly eroding the value of brokerages' collateral."

July 3 - Reuters (Robin Emmott and Noah Barkin): "China is putting pressure on the European Union to issue a strong joint statement against President Donald Trump's trade policies at a summit later this month but is facing resistance, European officials said. In meetings in Brussels, Berlin and Beijing, senior Chinese officials… have proposed an alliance between the two economic powers and offered to open more of the Chinese market in a gesture of goodwill."

July 5 - Bloomberg (Venus Fang): "Another day. Another IPO. Another Chinese billionaire magically appears. Mu Rongjun, the co-founder of food-delivery behemoth Meituan Dianping, is poised to be the latest to join the club as the company announced plans to go public last month. Of the 27 billionaires to surface in Asia this year, about a third did so through initial public offerings in Hong Kong and Shenzhen, according to the Bloomberg Billionaires Index. Now the question is whether that torrid pace of wealth creation can continue as global trade tensions mount and markets struggle to hold gains."

July 4 - Bloomberg (Prudence Ho and Geraldine Amiel): "The turmoil deepened at HNA Group Co., the Chinese conglomerate that's been selling billions of dollars in assets to stay afloat, after its No. 2 executive died while touring southeastern France. Co-Chairman Wang Jian, who helped found the group more than two decades ago, fell from a height of about 15 meters (49 feet) … while having his photograph taken in the village of Bonnieux… Wang's sudden death comes as HNA, one of China's most indebted companies, is undertaking an urgent restructuring."

EM Watch:

July 3 - Bloomberg (Lyubov Pronina): "The wheels have come off emerging-market international bond sales. June issuance slumped by two-thirds versus a year earlier, capping a nine percent first-half decline in volume to $332.8 billion, according to Bloomberg data covering dollar and euro debt sales by government and companies from developing nations. The pace is unlikely to pick up in the rest of the year, according to bankers and investors… Issuance has cratered since April, the busiest month this year, with volume halving in May and again in June…"

July 2 - Bloomberg (Vivianne Rodrigues and Ben Holland): "Another election, another populist victory - but voters in Mexico yesterday went in a different direction than Europe and the U.S., choosing their first left-wing president in the nation's modern history. Andres Manuel Lopez Obrador, a 64-year-old firebrand… rode a wave of public anger over crime, corruption and poverty to deliver a crushing blow to the business-friendly parties in power for decades. While AMLO, as he is known, vowed to respect oil contracts and central bank autonomy, his procession to victory alarmed investors. Some fear his policies may spark the kind of collapse in the $1.2 trillion economy - and the region's second-largest crude producer - seen in Venezuela, Argentina and Brazil in recent years."

July 2 - Bloomberg (Nacha Cattan, Eric Martin and Amy Stillman): "Andres Manuel Lopez Obrador was elected as Mexico's first left-wing president in recent times, riding a public revolt against rampant crime, corruption and poverty and handing a crushing defeat to the business-friendly parties who've run the country for decades. Lopez Obrador's coalition also looks poised to pick up scores of seats in Congress, with some polls indicating that it may actually take a majority in both legislative chambers."

July 2 - Bloomberg (Alex Tanzi): "Brazil June IHS Markit PMI manufacturing activity dropped below 50.0 for the first time since March 2017, according to… IHS Markit Brazil Manufacturing Purchasing Managers' Index. The June index fell to 49.8 from 50.7 in May. A truck drivers' protest impacted the performance of Brazil's manufacturing industry as fewer orders were received and fewer deliveries were made. The protests hit production and increased prices."

July 3 - Bloomberg (Selcan Hacaoglu): "Turkey's consumer inflation accelerated more than expected to the highest level in nearly 15 years, heaping pressure on the central bank to raise borrowing costs and further weakening the embattled lira. The annual inflation rate rose to 15.4% in June from 12.2% the previous month as the lira's unabated slide against the dollar fueled price increases. The reading exceeded the median estimate of 13.9%... Monthly inflation was 2.6%, compared with 1.3% forecast…"

July 4 - Bloomberg (Henry Hoenig): "China may be the world's factory floor, but South Korea is the top supplier of the semiconductors that go into our laptops and cars and whatever else needs one. Now, the link between them is set to cause South Korea some pain. A global boom in demand for semiconductors has driven recent growth in Asia's exports. But the chip sector's outsize role in South Korea's exports and economic growth can cut both ways, leaving the country among the most exposed to U.S. tariffs on Chinese imports."

July 3 - CNBC (Saheli Roy Choudhury): "India's banking sector crisis has left most state lenders hamstrung with mounting levels of bad loans, investigations into fraud and restricted growth opportunities. Amid that storm, private banks are set to emerge as winners. India's public-sector financial institutions control about 70% of all banking assets in the country, but they have the highest exposure to soured loans amounting to as much as $150 billion. In fact, the 21 state-owned banks had stressed loans of about 8.26 trillion rupees ($120bn) as of Dec. 31… Private sector lenders, meanwhile, reportedly had a bad loan pile of just about 1.1 trillion rupees."

July 1 - Financial Times (Kate Allen): "Countries that are vulnerable to climate change are paying significantly more to borrow from the financial markets, according to new research, as investors price in the risks. The most vulnerable developing countries have already paid more than $40bn in additional interest payments on their governments' debt because of their exposure to climate change risks. That is set to cost them a further $168bn in the next decade, the study by academics from Imperial College Business School and SOAS University of London found. The most affected countries include Ghana, Tanzania, Kenya, Bangladesh and Vietnam."

Central Bank Watch:

July 1 - Reuters (Francesco Canepa, Frank Siebelt and Thomas Escritt): "The next head of the European Central Bank must be someone who can tighten the money taps after years of crisis-fighting and stimulus, the head of the Bundesbank Jens Weidmann said… Weidmann, seen as a leading candidate to replace Mario Draghi in November 2019, has so far avoided throwing his hat into the ring for the job, which is decided on by euro zone finance ministers. But, when asked on Sunday about the next ECB President, his comments were closely aligned with some of his own views, including his long-standing call for the bank to halt extraordinary stimulus measures and tighten monetary policy."

July 2 - Bloomberg (Karlis Salna): "Indonesia's central bank is showing its willingness to sacrifice economic growth for currency stability in its latest aggressive move on interest rates. Bank Indonesia surprised economists with a bigger-than-forecast 50 bps hike on Friday, on top of two rate increases in May aimed at halting a currency rout. That takes the benchmark rate to 5.25%... Southeast Asia's biggest economy has been among the hardest hit in the region following a sell-off in global emerging markets…"

Global Bubble Watch:

July 3 - Bloomberg (Sony Kapoor): "It is a decade since Lehman Brothers collapsed and the time of year when the markets are worried about another 'summer surprise.' No two market shocks are identical, and no one has yet mastered the timing of market crashes. However, knowing where vulnerability lies makes for better risk management, and maybe more carefree vacations. There are four main areas of worry that, taken together, suggest the global economy may be in a more fragile place than it was even at the eve of Lehman's demise a decade ago. First… there is a record level of indebtedness in the global economy. It is not just the amount of public and private debt which is worrying, but also the deterioration in average quality. There is now $63 trillion of sovereign debt outstanding, with total debt at $237 trillion, a full $70 trillion above pre-Lehman levels. There are only 11 sovereigns and only two U.S. firms left with a AAA rating… The 2007 U.S. deficit at $161 billion or 1.1% of GDP pales in comparison to this year's projection of $804 billion. America's public debt-to-GDP ratio has risen to over 105% of GDP from around 65% of GDP in 2008… In the euro zone too debt is now 20% higher, rising 60% in Spain; and Italy's public debt, already high in 2008, has now breached 130% of GDP, a full 30% higher than its 2008 level… Second, with quantitative easing having left central banks with a record $15 trillion of assets on their balance sheets, and interest rates still close to record lows, there is limited room for a robust monetary policy response to another shock… Third, the political center, which was strong in 2008, has frayed considerably in almost all major economies. Populism of both the far right and far left variety is rising… Fourth is the collapse of trust and weakening in the international order."

July 4 - Reuters (Tom Miles): "Trade barriers being erected by major economies could jeopardize the global economic recovery and their effects are already starting to show, the World Trade Organization said… in a report on trade restrictions among G20 nations. 'This continued escalation poses a serious threat to growth and recovery in all countries, and we are beginning to see this reflected in some forward-looking indicators,' WTO Director General Roberto Azevedo said…"

July 5 - Financial Times (Kate Allen): "Emerging market borrowers have had their quietest month in the bond market for nearly three years, underlining the challenge that issuers will face as markets enter a summer slowdown. Deteriorating sentiment towards emerging markets in recent months has seen EM sovereigns and corporates sell just $15bn of syndicated bonds in June, the lowest monthly total since late 2015… The second-quarter total of $132.7bn in debt sold was the slowest three-month period for three years. The widespread EM sell-off has sent the flagship JPMorgan EM bond index down 3.1% in the past three months, triggering large outflows from EM specialist funds."

July 1 - Wall Street Journal (Dana Mattioli and Dana Cimilluca): "This M&A market is zooming into record territory, helped along by factors not normally seen as big catalysts for deals: technological disruption and a court decision. There have been $2.35 trillion of deals announced globally so far in 2018, up 57% from the same period a year earlier, according to Dealogic. Should that pace continue, there would be a total of $4.8 trillion worth of mergers and acquisitions for the full year, beating the prior record of $4.3 trillion set in 2007. Like in 2007 and 2015, the second-busiest year by a hair, big deals abound. So far in 2018, there have been 25 mergers valued at $10 billion or more… That is a record for the first half of the year, surpassing the prior high-water mark of 20 set in 2007."

July 4 - Wall Street Journal (Manju Dalal): "Plunging bond prices in an obscure corner of the Asian credit markets are starting to worry investors. In recent weeks, yields on more than a dozen U.S. dollar bonds issued by Chinese local governments have surged as their prices dropped sharply on concerns of potential defaults. The issuers are known as local government financing vehicles, which in recent years took advantage of hospitable market conditions and bond investors' thirst for yield to raise money to fund things like roads, ports, factories and railway projects. There are around 90 such financing vehicles with more than $40 billion in U.S. dollar debt outstanding, roughly half of which comes due in 2019 or 2020, according to ANZ Research."

June 30 - Financial Times (Chris Flood): "Increasing concern about the effect of a possible trade war between the US and China has forced investors in equity funds to head for the exits. Investors pulled $29.7bn from equity funds in the week ended June 27, the second largest weekly outflow since the beginning of the millennium, according to… EPFR."

July 2 - Bloomberg (Emily Cadman): "Australian housing prices fell for a ninth straight month in June as tighter credit rules weigh on buyers. Property values fell 0.2% nationally last month, to be 1.3% lower than their September peak, according to CoreLogic… The decline was led by the biggest cities, with prices falling 0.3% in Sydney and 0.4% in Melbourne. Under pressure from regulators, banks have been cutting back on riskier loans such as interest-only mortgages, and getting tougher on expense and income verification."

July 3 - BBC: "Shares in mining giant Glencore sunk as much as 12% after it was ordered by US authorities to hand over documents relating to a money laundering probe. The subpoena from the US Department of Justice is in relation to compliance with the Foreign Corrupt Practices Act and money-laundering laws. It is regarding business dealings in Nigeria, Democratic Republic of Congo and Venezuela from 2007 onwards."

Europe Watch:

July 2 - Reuters (Thomas Escritt and Madeline Chambers): "German Chancellor Angela Merkel's conservatives settled a row over migration that threatened to topple her fragile governing coalition… after talks with her rebellious interior minister led him to drop his threat to resign. Emerging after five hours of talks, Horst Seehofer, leader of Bavaria's Christian Social Union (CSU), told reporters he would remain in his post after a deal with Merkel's Christian Democrats (CDU) that he said would stem illegal immigration."

July 5 - Reuters (Joseph Nasr and Thomas Escritt): "German Chancellor Angela Merkel said… she would back a lowering of EU tariffs on U.S. car imports, responding to an offer from Washington to abandon threats to impose levies on European cars in return for concessions. Merkel said any such measures would require the European Union to also lower tariffs on cars imported from countries other than the United States, otherwise the plan would not be conform to World Trade Organization rules."

June 30 - Financial Times (Wolfgang M√ľnchau): "The EU faces two existential challenges: one from Donald Trump and one from Matteo Salvini, the leader of Italy's far-right League. The threat posed by the US president is obvious, direct and brutal. Trade tariffs for European cars will probably happen. The EU is paying a price for its over-dependence on the US as an absorber of export surpluses and for external security. But the threat posed by Mr Salvini may be more potent if not quite so direct. Since he agreed to join a coalition with the Five Star Movement, he made two politically cunning decisions: the first was to suspend the talk about an Italian euro exit. The second is to use his role as interior minister as a bully pulpit with terrifying success."

June 30 - Financial Times (Chris Flood): "Matteo Salvini, Italy's deputy prime minister and leader of the far-right League, has said next year's European elections are an opportunity to create an 'international alliance of populists' and overcome a 'Europe of the elites'. Mr Salvini, whose party has been soaring in opinion polls this year after it took the reins of government in Rome, is emerging as one of the most disruptive politicians in the EU, challenging Brussels and individual EU capitals on everything from economic policy to immigration and foreign affairs. At a political rally in Pontida…, Mr Salvini told activists, lawmakers and supporters that he was gearing up for the next political battle after taking power following Italy's general election in March."

Fixed Income Bubble Watch:

July 3 - Bloomberg (Alexandra Harris and Liz Capo McCormick): "With all the focus on the shape of the U.S. yield curve recently, fixed-income traders could be forgiven for not concentrating so much on the growing tumult in the fed funds rate. Not anymore. Rising money-market rates have forced Federal Reserve officials to take unprecedented steps to maintain control over their key policy benchmark -- and the job is about to get harder. With the Treasury continuing to ramp up bill issuance and the central bank's balance sheet unwind accelerating, the front-end is poised to take center stage… From further policy-tool adjustments, to the outlook for balance-sheet normalization, to America's debt-management strategy, the influence of short-term rates is set to reverberate through the financial system. It's forcing traders to focus on funding markets once again, just months after Libor's surge brought the usually sleepy corner of the fixed-income world roaring to the fore."

July 3 - Bloomberg (Shelly Hagan): "The U.S. corporate bond market is bracing for a flood of supply from mergers and acquisitions in the second half of the year. Borrowers will have to pay up after a first-half deluge helped wreck spreads. Sales of investment-grade bonds tied to M&A surged by 50% to $154 billion in the first half compared with the same period last year, driven by a slew of deals… That pickup in supply helped push spreads in the secondary market to the highest level in a year and a half. The trend could continue for the next six months. There's more than $1 trillion in pending M&A deals…"

July 4 - Financial Times (Alexandra Scaggs): "For the US corporate bond market, current conditions can be described with a comparison made famous in the financial crisis film Margin Call: the proverbial game of musical chairs is still on but the pace of the song has become more frenetic. This year, the corporate bond market has been defined by a marked shift away from quality with lower-rated issues outperforming bonds from companies with stronger balance sheets… Investment grade companies rated at triple B minus and higher lost 3.1% this year through to the end of June, according to ICE BofAML indices, while those rated in the junk tier (double B plus and below) have eked out a positive return of 0.1%. The divergence is even starker in the lowest triple C-rated tier of debt that makes up just 12% of the high-yield market's value."

July 1 - Financial Times (Owen Walker): "A host of large bond funds from companies such as Pictet Asset Management, Pimco and Allianz Global Investors have been butchered in the rout of emerging markets. Plunging returns and large outflows have caused some funds to lose hundreds of millions of dollars, with one AllianzGI fund shrinking by two-thirds this year. Pictet's $5.6bn Global Emerging Debt fund suffered $809m of outflows in May alone and Pimco's $2.5bn GIS Emerging Local Bond fund bled $596m the same month, according to Morningstar…"

Leveraged Speculator Watch:

July 2 - Bloomberg (Charles Stein): "Kenneth Heebner, once America's top stock-picker, has found the going tougher these days. Heebner's $768 million CGM Focus Fund fell 18% in the first half of 2018, the biggest drop among more than 900 diversified domestic equity mutual funds with at least $500 million in assets… The S&P 500 Index returned 2.7%, including reinvested dividends."

Geopolitical Watch:

July 1 - Wall Street Journal (Jonathan Cheng): "North Korea is completing a major expansion of a key missile-manufacturing plant, said researchers who have examined new satellite imagery of the site, the latest sign Pyongyang is pushing ahead with weapons programs even as the U.S. pressures it to abandon them. The facility makes solid-fuel ballistic missiles-which would be able to strike U.S. military installations in Asia with a nuclear weapon with little warning-as well as re-entry vehicles for warheads that Pyongyang might use on longer-range missiles…"

June 30 - Reuters (John Irish): "U.S. President Donald Trump will suffocate Iran's 'dictatorial ayatollahs', his close ally Rudy Giuliani said on Saturday, suggesting his move to re-impose sanctions was aimed squarely at regime change… 'I can't speak for the president, but it sure sounds like he doesn't think there is much of a chance of a change in behavior unless there is a change in people and philosophy,' Giuliani told Reuters…"

July 5 - Reuters (Bozorgmehr Sharafedin): "The U.S. Navy stands ready to ensure free navigation and the flow of commerce, the U.S. military's Central Command said on Thursday, as Iran's Revolutionary Guards warned they would block oil shipments through the Strait of Hormuz if necessary… Rouhani and some senior military commanders have threatened in recent days to disrupt oil shipments from the Gulf countries if Washington tries to strangle Tehran's exports."