[BloombergQ] Stocks Fall as Trade Fears Return; Dollar Slips: Markets Wrap
[BloombergQ] Turkish Lira Slides as Isbank Fallout Dilutes Rate-Hike Support
[Reuters] U.S. 10-year yield hits highest in four months
[BloombergQ] China’s Stocks Drop to Lowest Level in Nearly Four Years
[BloombergQ] China-U.S. Tariff Talks at Risk After Trump's Latest Threats, WSJ Reports
[Reuters] China won't just play defense in trade war, Global Times says
[CNBC] Monetary policy is directly responsible for economic and financial stability
[BloombergQ] A Roadmap for the Great U.S.-China Divorce
[CNBC] The next crisis could be triggered by the US-China trade war, interest rates: Sovereign wealth chief
[BloombergQ] Turkey Planning Help for Banks on Anticipation of Bad Loans
[BloombergQ] World’s Richest Economies Enjoy Biggest Pay Raise in a Decade
[BloombergQ, El-Erian] Central Banks Strike Back
[NYT] As Trump’s Trade War Mounts, China’s Wall Street Allies Lose Clout
[WSJ] Big Storms Leave Small Marks on the U.S. Economy
[FT] China prepares for new phase of Trump-led trade war
[FT] How US banks took over the financial world
[BloombergSub] One of China's Wildest Housing Markets Is Broken
Sunday, September 16, 2018
Sunday Evening Links
[BloombergQ] Asia Stocks Face Drop as Trade Concerns Resurface: Markets Wrap
[Reuters] China may reject new trade talks if more tariffs imposed: WSJ
[Reuters] 'Illusion' to think states can completely prevent financial crises: Weidmann
[CNBC] US-China trade war could cause a bear market, stress test shows
[WSJ] U.S. and China Ramp Up Trade Threats
[WSJ] Trump Promised a Rush of Repatriated Cash, But Company Responses Are Modest
[FT] Can macro policy easing still rescue China?
[Reuters] China may reject new trade talks if more tariffs imposed: WSJ
[Reuters] 'Illusion' to think states can completely prevent financial crises: Weidmann
[CNBC] US-China trade war could cause a bear market, stress test shows
[WSJ] U.S. and China Ramp Up Trade Threats
[WSJ] Trump Promised a Rush of Repatriated Cash, But Company Responses Are Modest
[FT] Can macro policy easing still rescue China?
Just the Facts: September 16, 2018
For the Week:
The S&P500 gained 1.2% (up 8.7% y-t-d), and the Dow added 0.9% (up 5.8%). The Utilities increased 0.4% (up 1.9%). The Banks dropped 2.1% (up 0.8%), and the Broker/Dealers added 0.3% (up 2.8%). The Transports jumped 2.0% (up 9.0%). The S&P 400 Midcaps gained 1.0% (up 7.7%), and the small cap Russell 2000 rose 0.5% (up 12.1%). The Nasdaq100 advanced 1.6% (up 18.0%). The Semiconductors gained 1.2% (up 9.9%). The Biotechs were about unchanged (up 21.7%). While bullion slipped $3, the HUI gold index recovered 0.9% (down 28.5%).
Three-month Treasury bill rates ended the week at 2.10%. Two-year government yields rose eight bps to 2.78% (up 89bps y-t-d). Five-year T-note yields gained eight bps to 2.90% (up 70bps). Ten-year Treasury yields rose six bps to 3.00% (up 59bps). Long bond yields added three bps to 3.13% (up 39bps). Benchmark Fannie Mae MBS yields gained six bps to 3.77% (up 77bps).
Greek 10-year yields dropped 20 bps to 4.07% (down 1bp y-t-d). Ten-year Portuguese yields declined five bps to 1.86% (down 9bps). Italian 10-year yields fell five bps to 2.98% (up 97bps). Spain's 10-year yields added two bps to 1.49% (down 8bps). German bund yields rose six bps to 0.45% (up 2bps). French yields rose five bps to 0.77% (down 2bps). The French to German 10-year bond spread narrowed one to 32 bps. U.K. 10-year gilt yields rose seven bps to 1.53% (up 34bps). U.K.'s FTSE equities index increased 0.4% (down 5.0%).
Japan's Nikkei 225 equities index surged 3.5% (up 1.4% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.12% (up 7bps). France's CAC40 gained 1.9% (up 0.8%). The German DAX equities index rose 1.4% (down 6.1%). Spain's IBEX 35 equities index rallied 2.1% (down 6.8%). Italy's FTSE MIB index rose 2.1% (down 4.4%). EM equities were mixed. Brazil's Bovespa index fell 1.3% (down 1.3%), while Mexico's Bolsa gained 1.3% (up 0.5%). South Korea's Kospi index jumped 1.6% (down 6.0%). India's Sensex equities index declined 0.8% (up 11.8%). China's Shanghai Exchange fell 0.8% (down 18.9%). Turkey's Borsa Istanbul National 100 index rallied 1.6% (down 17.8%). Russia's MICEX equities index recovered 1.7% (up 11.9%).
Investment-grade bond funds saw inflows of $3.127 billion, while junk bond funds had outflows of $862 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates jumped six bps to 4.60% (up 61bps y-o-y). Fifteen-year rates rose seven bps to 4.06% (up 62bps). Five-year hybrid ARM rates were unchanged at 3.93% (up 46bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up seven bps to 4.66% (up 51bps).
Federal Reserve Credit last week increased $1.2bn to $4.171 TN. Over the past year, Fed Credit contracted $247bn, or 5.6%. Fed Credit inflated $1.360 TN, or 48%, over the past 306 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt fell $7.0bn last week to $3.422 TN. "Custody holdings" were up $49.4bn y-o-y, or 1.5%.
M2 (narrow) "money" supply slipped $1.7bn last week to $14.246 TN. "Narrow money" gained $564bn, or 4.1%, over the past year. For the week, Currency increased $2.5bn. Total Checkable Deposits surged $134bn, while Savings Deposits sank $149bn. Small Time Deposits increased $5.2bn. Retail Money Funds gained $5.8bn.
Total money market fund assets were little changed at $2.881 TN. Money Funds gained $142bn y-o-y, or 5.2%.
Total Commercial Paper added $1.3bn to $1.067 TN. CP gained $44bn y-o-y, or 4.2%.
Currency Watch:
The U.S. dollar index added 0.5% to 94.927 (up 3.0% y-t-d). For the week on the upside, the Norwegian krone increased 2.4%, the Mexican peso 2.3%, the South African rand 2.0%, the British pound 1.2%, the Canadian dollar 1.0%, the Australian dollar 0.7%, the euro 0.6%, the New Zealand dollar 0.6%, the South Korean won 0.6%, the Singapore dollar 0.3%, the Swiss franc 0.1% and the Swedish krona 0.1%. For the week on the downside, the Brazilian real declined 2.8% and the Japanese yen 1.0%. The Chinese renminbi declined 0.35% versus the dollar this week (down 5.25% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index gained 0.7% (up 5.0% y-t-d). Spot Gold slipped 0.2% to $1,194 (down 8.4%). Silver slipped 0.2% to $14.142 (down 17.5%). Crude rallied $1.24 to $68.99 (up 14%). Gasoline was little changed (up 10%), while Natural Gas slipped 0.3% (down 6%). Copper increased 0.9% (down 20%). Wheat was about unchanged (up 20%). Corn fell 4.2% (unchanged).
Trump Administration Watch:
September 14 - Reuters (Jeff Mason): "U.S. President Donald Trump has directed aides to proceed with tariffs on about another $200 billion of Chinese goods, despite Treasury Secretary Steven Mnuchin's attempts to restart trade talks with China, a source familiar with the matter said on Friday. The timing for activating the additional tariffs was unclear."
September 7 - Bloomberg (Zainab Fattah): "China's trade surplus with the United States widened to a record in August even as the country's export growth slowed slightly… The politically sensitive surplus hit $31.05 billion in August, up from $28.09 billion in July, customs data showed on Saturday, surpassing the previous record set in June. Over the first eight months of the year, China's surplus with its largest export market has risen nearly 15%..."
September 10 - Bloomberg (Jennifer Epstein and Shannon Pettypiece): "President Donald Trump made a sweeping decision in August 2017 that could have rocked the global economy: the U.S. would pull out of Nafta, the World Trade Organization, and its trade deal with South Korea. Alarmed, Trump's top staffers scrambled to stop him, according to Bob Woodward's new book, 'Fear.' …Then-top economic adviser Gary Cohn and staff secretary Rob Porter pulled chief of staff John Kelly into the Oval Office to convince Trump to back down. Soon, Secretary of State Rex Tillerson and Defense Secretary James Mattis were brought into the fold and painted a dire picture of the national security and economic consequences of such a move. The president acquiesced -- but only temporarily."
Federal Reserve Watch:
September 12 - Financial Times (Sam Fleming): "The Federal Reserve may raise interest rates above its estimates of their longer-term level, a senior US policymaker said, as the central bank responds to strong growth and the extra lift provided by tax cuts and higher public spending. Lael Brainard, a member of the Federal Reserve's board of governors, said that with government stimulus providing 'tailwinds to demand' over the next two years, she expected the Fed to boost short-term rates above current estimates of the longer-run rate. Fed policymakers put the median estimate of the longer-run rate at just under 3% in their most recent round of forecasts. Ms Brainard argued in favour of further tightening in part because her estimate of the short-term neutral rate - which keeps output growing at a time of full employment and stable inflation - was rising… 'It appears reasonable to expect the shorter-run neutral rate to rise somewhat higher than the longer-run neutral rate,' Ms Brainard said. 'These developments raise the prospect that, at some point, the Committee's setting of the federal funds rate will exceed current estimates of the longer-run federal funds rate.'"
September 12 - Bloomberg (Jeanna Smialek): "Federal Reserve officials expect to lift the central bank's benchmark interest rate a total of four times in 2018, based on their economic projections. Markets are increasingly becoming believers. Policy makers have already lifted borrowing costs twice this year, and their projections indicate another two quarter-point moves by the end of 2018. The implied yield on January fed funds futures… climbed to an unprecedented 2.36%, indicating around 44 bps of additional tightening by the end of December. The first 25 bps of this is priced as a near certainty for the Federal Open Market Committee's meeting later this month, based on the October fed funds contract."
September 10 - Financial Times (Sam Fleming and Robin Wigglesworth): "The clock is ticking. As the Federal Reserve presides over the steady shrinking of its multi-trillion dollar balance sheet, investors are urging policymakers to push forward long-awaited decisions over just how large the central bank's portfolio will ultimately need to be to keep monetary policy running smoothly and the banking sector well-stocked with safe assets. Jay Powell, the Fed chairman, has lined up a debate for this autumn. But as the reduction in the balance sheet accelerates into 2019 the market is looking for much clearer signs from the Fed on its future framework for steering the markets. Some analysts worry the Fed risks shrinking its balance sheet too much. The Fed confronts two big, intertwined decisions. Does it want to stick with its current system for setting interest rates, or revert to something similar to the framework it used before the financial crisis? And how big a balance sheet is it willing to carry to execute monetary policy?"
September 13 - MarketWatch (Gregg Robb): "Three of the Fed's 12 districts - St. Louis, Philadelphia and Kansas City - reported weaker growth in August, according to the Federal Reserve's latest Beige Book… While the overall U.S. economy expanded at a 'moderate pace,' trade concerns and a lack of workers delayed projects. There were also 'some signs of a deceleration' in prices of final goods and services. What happened: Shortages of workers and possible additional trade tariffs continued to be the biggest worries for businesses, they said. Worker shortages spread from trucking and high-skilled sectors to lower-skilled sectors like restaurants and retailers… Concerns about trade seen over the summer have now morphed into some businesses deciding to 'scale back or postpone capital investment.' While businesses were trying to pass along cost hikes to customers, their input costs were still rising more rapidly than their selling prices. A few districts reported increased inflation expectations."
September 13 - Reuters (Lucia Mutikani): "U.S. consumer prices rose less than expected in August as increases in gasoline and rents were offset by declines in healthcare and apparel costs, and underlying inflation pressures also appeared to be slowing… Labor market strength was reinforced by other data… showing the number of Americans filing for unemployment aid dropped last week to near a 49-year low. 'With labor market conditions tight, wage growth accelerating and input prices being pushed up by capacity constraints and recently imposed tariffs, there is plenty of upward pressure on prices,' said Paul Ashworth, chief U.S. economist at Capital Economics…"
September 13 - Reuters: "U.S. Federal Reserve officials tout a decade of falling unemployment as among their major victories in fighting the economic crisis of 2007 to 2009. Now they are beginning to worry they have been too successful. When unemployment falls as low as it is currently, Boston Federal Reserve bank President Eric Rosengren said in a new paper released Thursday as part of a review of Fed policy, recession has inevitably followed, with the central bank showing no success in fine-tuning the economy to a stable rest at full employment."
U.S. Bubble Watch:
September 11 - MarketWatch (Steve Goldstein): "The numbers: The U.S. budget deficit in August was $211 billion, nearly double the gap during the year-ago month, the Congressional Budget Office estimated… Adjusted for shifts in the timing of payments that otherwise would have occurred on a weekend of holiday, the deficit would have grown by 19%... What happened: Excluding timing shifts, outlays grew 8%, as the net interest on public debt jumped 25%, defense spending jumped 10%, outlays for Social Security grew 5%, and outlays for Medicare benefits rose 7%... Receipts fell by 3%, with corporate taxes dropping by $5 billion, while revenue from income and payroll taxes rose marginally."
September 11 - CNBC (John Melloy): "U.S. small business optimism surged to a record in August as the tax cuts and deregulation efforts of President Donald Trump and the Republican-led Congress led to more sales, hiring and investment, according to a survey by the National Federation of Independent Business. The NFIB Small Business Optimism Index jumped to 108.8 last month, the highest level ever recorded in the survey's 45-year history and above the previous record of 108 in 1983… The August figure was up from a 107.9 reading in July."
September 13 - Wall Street Journal (Janet Adamy and Paul Overberg): "American incomes rose and poverty declined for the third consecutive year in 2017, according to census figures… that suggest more Americans are benefiting from the robust economy. The new data… show that median household income increased to $61,372 last year, up 1.8% when adjusted for inflation. There were 39.7 million people in poverty last year, and that rate dropped 0.4 percentage point to its lowest level since 2006. The number of people working full time year round increased by 2.4 million in 2017. Incomes have grown 10.4% in the past three years, and last year's figure was the highest on record."
September 14 - New York Times (Patricia Cohen): "Americans' household earnings are finally stretching back to their pre-recession heights. But feeling secure and comfortable isn't only a measure of how much money you have. It's also a measure of how much you have compared with others. For many, that is one reason that recent financial progress may seem overshadowed by the gains they've missed out on and a needling sense that they've lost ground. As new research illustrates, two groups in particular have stalled: whites without a college degree, and blacks and Hispanics with one. Both are being far outpaced by college-educated whites. 'America has been a story of getting ahead, of progress,' said Morris P. Fiorina, a political scientist at Stanford University. 'There's been no story of progress - for them.'"
September 11 - Reuters (Lucia Mutikani): "U.S. job openings surged to a record high in July and more Americans voluntarily quit their jobs, pointing to sustained labor market strength and confidence that could soon spur faster wage growth. The Labor Department's monthly Job Openings and Labor Turnover Survey, or JOLTS… also suggested a further tightening in labor market conditions, with employers appearing to increasingly have trouble finding suitable workers."
September 11 - Wall Street Journal (Bob Tita): "Workers at two of the biggest U.S. steelmakers are demanding higher compensation as tariffs on foreign metal push prices and profits to their highest point in years in a buoyant economy. Leaders for some 30,000 members of the United Steelworkers union say United States Steet Corp. and ArcelorMittal SA aren't passing those benefits to their workers, who have gone without raises in recent years even as wages have started to climb more broadly."
September 13 - Reuters (Michelle Conlin and Robin Respaut): "The world has moved on from the global financial crisis. Hard-hit areas such as Las Vegas and the Rust Belt cities of Pittsburgh and Cleveland have seen their fortunes improve. But… about 5.1 million …U.S. homeowners are still living with the fallout from the real estate bust that triggered the epic downturn. As of June 30, nearly one in 10 American homes with mortgages were 'seriously' underwater, according to… ATTOM Data Solutions, meaning that their market values were at least 25% lower than the balance remaining on their mortgages. It is an improvement from 2012, when… severe negative equity topped out at 29%, or 12.8 million homes. Still, it is double the rate considered healthy by real estate analysts. 'These are the housing markets that the recovery forgot,' said Daren Blomquist, a senior vice president at ATTOM."
China Watch:
September 14 - Bloomberg: "Chinese state media warned the nation shouldn't expect a quick resolution of its trade dispute with the U.S., as there have been no signs that President Donald Trump has changed his thinking. While it is good to talk, China should be aware that there may not be a deal anytime soon, according to an editorial published… in Global Times, a tabloid run by the official People's Daily. The newspaper said Washington is still taking a tough attitude. The U.S. will only engage in serious discussions if it believes additional tariffs won't bring more benefits, or if public opinion in the U.S. harms Trump's approval rating… Trump tweeting that he isn't under pressure to make a deal with China has stoked concern that the U.S. president isn't serious about a possible new round of trade talks between the two nations. China's commerce ministry said… it welcomed a U.S. offer of talks and that both sides were working on the details. The U.S. proposal to talk could be 'deceptive,' warned the China Daily…"
September 12 - Reuters (Kevin Yao and Fang Cheng): "Chinese banks made fewer new loans in August than expected, highlighting problems facing the central bank as it tries to boost credit to smaller companies facing weaker demand at home and shrinking export orders… Chinese banks extended 1.28 trillion yuan ($186.40bn) in net new yuan loans in August, according to… the People's Bank of China (PBOC)… Analysts polled by Reuters had predicted an August tally of 1.3 trillion yuan, down from July's 1.45 trillion yuan but nearly 20% more than the same month last year. 'Financing demand is relatively weak as firms are unwilling to borrow,' said Luo Yunfeng, chief analyst at Merchants Securities in Beijing."
September 15 - Bloomberg: "China's economic momentum weakened again in August, presenting its policy makers with a test of nerve as they prepare for a potential new round of trade talks with their U.S. counterparts. Fixed-asset investment growth in the first eight months slowed to the lowest pace since at least 1999 and infrastructure investment rose just 4.2%, the weakest expansion since the data series started in 2014… A slowing economy gives China a weaker hand ahead of possible new trade talks the two sides are discussing, adding to the risk of a deeper slowdown should U.S. President Donald Trump pull the trigger on tariffs on an additional $200 billion of Chinese goods… Investment rose 5.3% year-on-year in the first eight months, compared with an estimated 5.6%... August industrial production expanded 6.1%, meeting estimates. Retail sales expanded 9% last month from a year earlier, accelerating from an 8.8% pace in July."
September 14 - Wall Street Journal (Stephen Wilmot): "Car sales in China have shifted into reverse, but figuring how exposed the world's biggest auto makers are to the world's biggest car market is almost impossible. Most major car makers have done very well in China… Nissan and Volkswagen get nearly a quarter of their pretax profit from those businesses, and General Motors isn't far behind. What the car companies don't tell investors is how much they earn from exports, royalties and parts sales in China, which can be significant and aren't fully disclosed… After years of rapid growth, the Chinese market is far larger than its counterparts in the West, with more than 24 million cars sold last year compared with roughly 17 million in the U.S. and 15 million in the European Union. But sales fell 7% in August compared with a year earlier…"
September 12 - Bloomberg (Lianting Tu): "S&P Global Ratings lowered its credit ratings by one notch on seven Chinese local government financing vehicles as it believes the likelihood of local government support 'could weaken over time.' The firm said Wednesday morning the rating moves also reflected the gradual weakening of those financing platforms' roles and links with their local-government parents. Moody's… also cut its scores on five LGFVs… as it sees 'reduced likelihood of support for the sector as a whole.' Fitch Ratings took similar actions in June. China has repeatedly said LGFVs must take responsibility to repay their own debts."
EM Watch:
September 14 - Bloomberg (Andrey Biryukov, Anna Andrianova and Olga Tanas): "Russia's central bank unexpectedly raised interest rates for the first time since 2014, following its counterparts across emerging economies as inflation risks mount with a slumping currency and threats of U.S. sanctions. Policy makers said they'll 'consider the necessity of further increases' after lifting their benchmark to 7.5%, a level last seen in March, from 7.25%... Governor Elvira Nabiullina… said easing may not resume for more than a year. 'The quick monetary-policy response will limit the growth of inflationary risks in the future and create the conditions for easing policy by the end of 2019 or the first half of 2020,' Nabiullina told reporters… Further tightening isn't inevitable, but it can't be ruled out, she said."
September 11 - New York Times (Matt Phillips): "Cratering currencies, rising inflation, jumpy investors: A financial panic is again gripping some of the world's developing economies. The sharp sell-off of emerging market currencies, stocks and bonds seems to stand in stark contrast to the United States, where a nearly decade-long bull market continues amid buoyant economic conditions. Higher interest rates in the United States and a stronger dollar rebalance the risks and rewards for investors the world over, and act as a kind of financial magnet, pulling them out of riskier investments. When we've seen this before - in the Mexican peso crisis of 1994, the Thai baht collapse of 1997 and the Russian default of 1998 - investors had to contend with spillover of trouble from one country to others, dragging down economic growth or causing market stress."
September 11 - Financial Times (James Politi and Sam Fleming): "Christine Lagarde has warned that the escalating US-China trade war could deliver a 'shock' to already struggling emerging markets, raising the prospect that a crisis ripping through Argentina and Turkey could spread across the developing world. The IMF managing director told the Financial Times that her staff does not yet see 'contagion' spreading to multiple countries beyond those currently fighting investor flight. But she warned that 'these things could change rapidly' and cited the 'uncertainty [and] lack of confidence already produced by the threats against trade, even before it materialises', as one of the main dangers facing the developing world."
September 13 - Wall Street Journal (David Gauthier-Villars and Jon Sindreu): "Turkey's central bank sharply raised interest rates-defying President Recep Tayyip Erdogan's demand to cut them-in an attempt to counter the country's economic problems and reverse growing investor aversion to emerging-market economies. The central bank increased its main interest rate to 24% from 17.75%..., citing concerns over price stability and saying it would maintain a tight monetary-policy stance until the inflation outlook improves significantly. The turmoil in Turkey has rattled global markets in recent weeks and comes at a precarious time for developing economies around the world, just as investors have started to cast doubt on how long the current period of synchronized global growth can last."
September 14 - Bloomberg (Onur Ant): "Turkey's President Recep Tayyip Erdogan resumed his criticism of the nation's central bank a day after it announced the biggest rate hike of his rule. 'It's currently my phase of patience but there is a limit to this patience,' Erdogan told members of his ruling AK Party… He restated his opinion that higher rates won't help to slow inflation and warned that his restraint won't last forever. The central bank was responding to repeated calls for a rate increase, Erdogan said, and responded with a 'quite' big hike. Turkey would see the 'results of the independence' of the regulator, he said."
September 13 - Financial Times (Laura Pitel): "Two hours before Turkey's central bank unveiled a critical interest rate decision, Recep Tayyip Erdogan took to a stage in Ankara and delivered a classic tirade. The Turkish president, notorious for his opposition to high interest rates, lambasted the central bank and decried interest rates as 'a tool of exploitation'. Yet shortly afterwards, an institution that had come to be seen as almost irrelevant by international investors shocked the markets by sharply increasing its benchmark rate to 24%. Analysts were left wondering what happened. 'Is this something they cooked up together with Erdogan? Or is it something they decided independently?' asked Nora Neuteboom, an economist at the Dutch bank ABN Amro."
September 12 - Bloomberg (Onur Ant): "President Recep Tayyip Erdogan appointed himself chairman of Turkey's sovereign wealth fund and got rid of the entire management staff that had presided over two years of inaction. Zafer Sonmez, head of Turkey and Africa for Malaysia's government investment vehicle Khazanah Nasional Bhd, was named general manager. Treasury and Finance Minister Berat Albayrak, Erdogan's son-in-law, will also sit on the board, according to a decree…"
Global Bubble Watch:
September 13 - Bloomberg (Rachel Evans and Carolina Wilson): "If you work in exchange-traded funds, memories of 2008 aren't all doom and gloom. Lehman Brothers' collapse in September of that year ushered in a new era for ETFs. And they've been on a roll ever since. Assets in the low-cost portfolios that trade like stocks and typically track an index have swelled to $5 trillion globally, up from less than $700 billion before the financial crisis. Meanwhile, the number of funds has more than doubled as they gradually account for bigger and bigger pieces of the equity, bond and commodity markets. Although they started trading in the U.S. in 1993, the financial crisis marked a turning point for ETFs. Banks were forced to shed large inventories to bolster their balance sheets. And retail investors who'd lost their shirts went looking for ways to diversify their risk. ETFs offered both a solution. By packaging slices of the market into tradeable vehicles, ETFs became the go-to instrument for professionals seeking instant, liquid exposure to markets around the world. Mom-and-pop savers, meanwhile, got a cheap, transparent way to buy companies for the long haul. But in remaking financial markets in their image, ETFs have fueled a fear that indexed investing will trigger the next crisis."
September 11 - Bloomberg (Satyajit Das): "Slowing global trade is evidence of how emerging-market stresses are being transmitted to advanced economies. The real concern of contagion remains financial linkages, though. Since 2009, non-resident gross flows into EM financial assets - loans, debt and equity securities - have averaged around $1 trillion annually, although the figure has been volatile. Total outstanding exposure, which remains opaque, may be around 50% of GDP in advanced economies. The main driver has been accommodative monetary policy of developed-world central banks and the lure of higher returns. Despite reductions, bank cross-border lending constitutes around half of the exposure. U.K., European, Japanese and Chinese banks are particularly vulnerable… Spanish banks have substantial amounts at risk in Turkey and South America. China's risks via loans to EM borrowers as part of the Belt and Road initiative are also significant. Investors make up the bulk of the remaining exposure."
September 14 - Reuters (Scott Squires): "Trade and investment ministers from G20 countries meeting in Argentina said there was an 'urgent need' to improve the World Trade Organization, a joint statement said on Friday. With U.S. President Donald Trump readying tariffs on another $200 billion in Chinese goods, the ministers said they were 'stepping up the dialogue' on international trade disputes, according to the statement issued at the summit."
September 10 - Bloomberg (Onur Ant): "Turkey's finance chief said the imposition of sanctions by the U.S. on the Middle East's largest economy was politically motivated, and called on other nations to form a united front against such actions. U.S. President Donald Trump used sanctions and tariffs to sabotage the Turkish economy, Treasury and Finance Minister Berat Albayrak said… Apart from a short-term currency impact, Turkish economic fundamentals had proved resilient, he said. The rallying cry from Turkey's top economy official, who is also the son-in-law of President Recep Tayyip Erdogan, ratchets up the rhetoric between Ankara and Washington."
September 10 - Bloomberg (Andreo Calonzo and Ian Sayson): "U.S. President Donald Trump is to blame for surging consumer prices in the Philippines after he sparked a trade war with China, said Rodrigo Duterte, head of the Southeast Asian country where inflation has reached a nine-year high. 'This inflation under my watch, believe or not, started when America' under Trump imposed duties on Chinese goods, which prompted retaliation, Duterte said… 'When America raised (tariff) rates and interest rates, everything went up.'"
Fixed Income Bubble Watch:
September 14 - CNBC (Thomas Franck and Alexandra Gibbs): "The yield on the benchmark 10-year Treasury note topped 3% on Friday for the first time since Aug. 2. Yields have been steadily rising since the start of September as expectations for economic growth creep higher. Traders pointed to a revision in the retail sales figures out on Friday as the reason for the latest push higher in rates."
Leveraged Speculation Watch:
September 11 - Bloomberg (Katherine Burton, Melissa Karsh and Sam Dodge): "You'd be forgiven for thinking the hedge fund industry might be starting to rebound. Industry assets are at a record $3.2 trillion this year, and a brand-new firm just brought in an unprecedented $8 billion. But the reality isn't so rosy. Inflows into funds, on the whole, are non-existent and the number of startups has slowed to levels not seen for nearly two decade. Once high-flying powerhouses run by David Einhorn, Bill Ackman and Alan Howard are mere shadows of their former glory after posting years of returns that ranged from uninspiring to downright awful. John Paulson has crashed so badly and seen assets plummet so far that he's largely left managing his own money. Overall, firms' assets are barely growing. Net inflows since the end of 2016 have equaled just $7.8 billion."
September 14 - Bloomberg (Melissa Karsh and Lu Wang): "Already stung by a defensive stance on U.S. stocks, the smart money is only getting more cautious. Hedge funds' net leverage, a measure of the industry's risk appetite, has fallen to the lowest level this year after a brief bounce in late August, client data compiled by Morgan Stanley showed. At 49%, the ratio is down from a peak of more than 60% in March. Hedge funds' reluctance to increase equity exposure underscores a growing skepticism about the durability of the S&P 500 Index's outperformance against equity markets in the rest of the world. Wall Street strategists this month have been sounding warnings about U.S. stocks, with Morgan Stanley lowering its recommendation and Goldman Sachs flagging the danger of a potential bear market should a full-blown trade war erupt."
Geopolitical Watch:
September 10 - Financial Times (Henry Foy): "Hundreds of Russian and Chinese tanks, attack helicopters, fighter jets and thousands of soldiers will this week fight side by side in the biggest war games in Russia since 1981, in a show of strength and friendship between Asia's two largest military powers. Russia's biggest military exercise since the cold war, and its first to be conducted with a country not from the former Soviet bloc, is the strongest sign yet of the deepening strategic bond between Moscow and Beijing… Involving 300,000 troops and close to 40,000 vehicles, the seven-day 'Vostok' war games will coincide with talks between Vladimir Putin and Xi Jinping in Vladivostok…, amid a concerted effort by Russia to pivot east and embrace its powerful neighbour."
September 11 - Bloomberg (Andrew Osburn): "Russia began its biggest war games since the fall of the Soviet Union… close to its border with China, mobilising 300,000 troops in a show of force that will include joint exercises with the Chinese army. China and Russia have staged joint drills before but not on such a large scale, and the Vostok-2018 (East-2018) exercise signals closer military ties as well as sending an unspoken reminder to Beijing that Moscow is able and ready to defend its sparsely populated far east."
September 10 - Bloomberg (Zainab Fattah): "The U.S. Navy is conducting exercises this month to ensure its readiness to guarantee freedom of movement through Persian Gulf and Red Sea waterways amid escalating threats from Iran to disrupt shipping across important choke points. The exercises, with regional and global allies, are part of the U.S. 5th Fleet Theater Counter Mine and Maritime Security Exercise…"
The S&P500 gained 1.2% (up 8.7% y-t-d), and the Dow added 0.9% (up 5.8%). The Utilities increased 0.4% (up 1.9%). The Banks dropped 2.1% (up 0.8%), and the Broker/Dealers added 0.3% (up 2.8%). The Transports jumped 2.0% (up 9.0%). The S&P 400 Midcaps gained 1.0% (up 7.7%), and the small cap Russell 2000 rose 0.5% (up 12.1%). The Nasdaq100 advanced 1.6% (up 18.0%). The Semiconductors gained 1.2% (up 9.9%). The Biotechs were about unchanged (up 21.7%). While bullion slipped $3, the HUI gold index recovered 0.9% (down 28.5%).
Three-month Treasury bill rates ended the week at 2.10%. Two-year government yields rose eight bps to 2.78% (up 89bps y-t-d). Five-year T-note yields gained eight bps to 2.90% (up 70bps). Ten-year Treasury yields rose six bps to 3.00% (up 59bps). Long bond yields added three bps to 3.13% (up 39bps). Benchmark Fannie Mae MBS yields gained six bps to 3.77% (up 77bps).
Greek 10-year yields dropped 20 bps to 4.07% (down 1bp y-t-d). Ten-year Portuguese yields declined five bps to 1.86% (down 9bps). Italian 10-year yields fell five bps to 2.98% (up 97bps). Spain's 10-year yields added two bps to 1.49% (down 8bps). German bund yields rose six bps to 0.45% (up 2bps). French yields rose five bps to 0.77% (down 2bps). The French to German 10-year bond spread narrowed one to 32 bps. U.K. 10-year gilt yields rose seven bps to 1.53% (up 34bps). U.K.'s FTSE equities index increased 0.4% (down 5.0%).
Japan's Nikkei 225 equities index surged 3.5% (up 1.4% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.12% (up 7bps). France's CAC40 gained 1.9% (up 0.8%). The German DAX equities index rose 1.4% (down 6.1%). Spain's IBEX 35 equities index rallied 2.1% (down 6.8%). Italy's FTSE MIB index rose 2.1% (down 4.4%). EM equities were mixed. Brazil's Bovespa index fell 1.3% (down 1.3%), while Mexico's Bolsa gained 1.3% (up 0.5%). South Korea's Kospi index jumped 1.6% (down 6.0%). India's Sensex equities index declined 0.8% (up 11.8%). China's Shanghai Exchange fell 0.8% (down 18.9%). Turkey's Borsa Istanbul National 100 index rallied 1.6% (down 17.8%). Russia's MICEX equities index recovered 1.7% (up 11.9%).
Investment-grade bond funds saw inflows of $3.127 billion, while junk bond funds had outflows of $862 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates jumped six bps to 4.60% (up 61bps y-o-y). Fifteen-year rates rose seven bps to 4.06% (up 62bps). Five-year hybrid ARM rates were unchanged at 3.93% (up 46bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up seven bps to 4.66% (up 51bps).
Federal Reserve Credit last week increased $1.2bn to $4.171 TN. Over the past year, Fed Credit contracted $247bn, or 5.6%. Fed Credit inflated $1.360 TN, or 48%, over the past 306 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt fell $7.0bn last week to $3.422 TN. "Custody holdings" were up $49.4bn y-o-y, or 1.5%.
M2 (narrow) "money" supply slipped $1.7bn last week to $14.246 TN. "Narrow money" gained $564bn, or 4.1%, over the past year. For the week, Currency increased $2.5bn. Total Checkable Deposits surged $134bn, while Savings Deposits sank $149bn. Small Time Deposits increased $5.2bn. Retail Money Funds gained $5.8bn.
Total money market fund assets were little changed at $2.881 TN. Money Funds gained $142bn y-o-y, or 5.2%.
Total Commercial Paper added $1.3bn to $1.067 TN. CP gained $44bn y-o-y, or 4.2%.
Currency Watch:
The U.S. dollar index added 0.5% to 94.927 (up 3.0% y-t-d). For the week on the upside, the Norwegian krone increased 2.4%, the Mexican peso 2.3%, the South African rand 2.0%, the British pound 1.2%, the Canadian dollar 1.0%, the Australian dollar 0.7%, the euro 0.6%, the New Zealand dollar 0.6%, the South Korean won 0.6%, the Singapore dollar 0.3%, the Swiss franc 0.1% and the Swedish krona 0.1%. For the week on the downside, the Brazilian real declined 2.8% and the Japanese yen 1.0%. The Chinese renminbi declined 0.35% versus the dollar this week (down 5.25% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index gained 0.7% (up 5.0% y-t-d). Spot Gold slipped 0.2% to $1,194 (down 8.4%). Silver slipped 0.2% to $14.142 (down 17.5%). Crude rallied $1.24 to $68.99 (up 14%). Gasoline was little changed (up 10%), while Natural Gas slipped 0.3% (down 6%). Copper increased 0.9% (down 20%). Wheat was about unchanged (up 20%). Corn fell 4.2% (unchanged).
Trump Administration Watch:
September 14 - Reuters (Jeff Mason): "U.S. President Donald Trump has directed aides to proceed with tariffs on about another $200 billion of Chinese goods, despite Treasury Secretary Steven Mnuchin's attempts to restart trade talks with China, a source familiar with the matter said on Friday. The timing for activating the additional tariffs was unclear."
September 7 - Bloomberg (Zainab Fattah): "China's trade surplus with the United States widened to a record in August even as the country's export growth slowed slightly… The politically sensitive surplus hit $31.05 billion in August, up from $28.09 billion in July, customs data showed on Saturday, surpassing the previous record set in June. Over the first eight months of the year, China's surplus with its largest export market has risen nearly 15%..."
September 10 - Bloomberg (Jennifer Epstein and Shannon Pettypiece): "President Donald Trump made a sweeping decision in August 2017 that could have rocked the global economy: the U.S. would pull out of Nafta, the World Trade Organization, and its trade deal with South Korea. Alarmed, Trump's top staffers scrambled to stop him, according to Bob Woodward's new book, 'Fear.' …Then-top economic adviser Gary Cohn and staff secretary Rob Porter pulled chief of staff John Kelly into the Oval Office to convince Trump to back down. Soon, Secretary of State Rex Tillerson and Defense Secretary James Mattis were brought into the fold and painted a dire picture of the national security and economic consequences of such a move. The president acquiesced -- but only temporarily."
Federal Reserve Watch:
September 12 - Financial Times (Sam Fleming): "The Federal Reserve may raise interest rates above its estimates of their longer-term level, a senior US policymaker said, as the central bank responds to strong growth and the extra lift provided by tax cuts and higher public spending. Lael Brainard, a member of the Federal Reserve's board of governors, said that with government stimulus providing 'tailwinds to demand' over the next two years, she expected the Fed to boost short-term rates above current estimates of the longer-run rate. Fed policymakers put the median estimate of the longer-run rate at just under 3% in their most recent round of forecasts. Ms Brainard argued in favour of further tightening in part because her estimate of the short-term neutral rate - which keeps output growing at a time of full employment and stable inflation - was rising… 'It appears reasonable to expect the shorter-run neutral rate to rise somewhat higher than the longer-run neutral rate,' Ms Brainard said. 'These developments raise the prospect that, at some point, the Committee's setting of the federal funds rate will exceed current estimates of the longer-run federal funds rate.'"
September 12 - Bloomberg (Jeanna Smialek): "Federal Reserve officials expect to lift the central bank's benchmark interest rate a total of four times in 2018, based on their economic projections. Markets are increasingly becoming believers. Policy makers have already lifted borrowing costs twice this year, and their projections indicate another two quarter-point moves by the end of 2018. The implied yield on January fed funds futures… climbed to an unprecedented 2.36%, indicating around 44 bps of additional tightening by the end of December. The first 25 bps of this is priced as a near certainty for the Federal Open Market Committee's meeting later this month, based on the October fed funds contract."
September 10 - Financial Times (Sam Fleming and Robin Wigglesworth): "The clock is ticking. As the Federal Reserve presides over the steady shrinking of its multi-trillion dollar balance sheet, investors are urging policymakers to push forward long-awaited decisions over just how large the central bank's portfolio will ultimately need to be to keep monetary policy running smoothly and the banking sector well-stocked with safe assets. Jay Powell, the Fed chairman, has lined up a debate for this autumn. But as the reduction in the balance sheet accelerates into 2019 the market is looking for much clearer signs from the Fed on its future framework for steering the markets. Some analysts worry the Fed risks shrinking its balance sheet too much. The Fed confronts two big, intertwined decisions. Does it want to stick with its current system for setting interest rates, or revert to something similar to the framework it used before the financial crisis? And how big a balance sheet is it willing to carry to execute monetary policy?"
September 13 - MarketWatch (Gregg Robb): "Three of the Fed's 12 districts - St. Louis, Philadelphia and Kansas City - reported weaker growth in August, according to the Federal Reserve's latest Beige Book… While the overall U.S. economy expanded at a 'moderate pace,' trade concerns and a lack of workers delayed projects. There were also 'some signs of a deceleration' in prices of final goods and services. What happened: Shortages of workers and possible additional trade tariffs continued to be the biggest worries for businesses, they said. Worker shortages spread from trucking and high-skilled sectors to lower-skilled sectors like restaurants and retailers… Concerns about trade seen over the summer have now morphed into some businesses deciding to 'scale back or postpone capital investment.' While businesses were trying to pass along cost hikes to customers, their input costs were still rising more rapidly than their selling prices. A few districts reported increased inflation expectations."
September 13 - Reuters (Lucia Mutikani): "U.S. consumer prices rose less than expected in August as increases in gasoline and rents were offset by declines in healthcare and apparel costs, and underlying inflation pressures also appeared to be slowing… Labor market strength was reinforced by other data… showing the number of Americans filing for unemployment aid dropped last week to near a 49-year low. 'With labor market conditions tight, wage growth accelerating and input prices being pushed up by capacity constraints and recently imposed tariffs, there is plenty of upward pressure on prices,' said Paul Ashworth, chief U.S. economist at Capital Economics…"
September 13 - Reuters: "U.S. Federal Reserve officials tout a decade of falling unemployment as among their major victories in fighting the economic crisis of 2007 to 2009. Now they are beginning to worry they have been too successful. When unemployment falls as low as it is currently, Boston Federal Reserve bank President Eric Rosengren said in a new paper released Thursday as part of a review of Fed policy, recession has inevitably followed, with the central bank showing no success in fine-tuning the economy to a stable rest at full employment."
U.S. Bubble Watch:
September 11 - MarketWatch (Steve Goldstein): "The numbers: The U.S. budget deficit in August was $211 billion, nearly double the gap during the year-ago month, the Congressional Budget Office estimated… Adjusted for shifts in the timing of payments that otherwise would have occurred on a weekend of holiday, the deficit would have grown by 19%... What happened: Excluding timing shifts, outlays grew 8%, as the net interest on public debt jumped 25%, defense spending jumped 10%, outlays for Social Security grew 5%, and outlays for Medicare benefits rose 7%... Receipts fell by 3%, with corporate taxes dropping by $5 billion, while revenue from income and payroll taxes rose marginally."
September 11 - CNBC (John Melloy): "U.S. small business optimism surged to a record in August as the tax cuts and deregulation efforts of President Donald Trump and the Republican-led Congress led to more sales, hiring and investment, according to a survey by the National Federation of Independent Business. The NFIB Small Business Optimism Index jumped to 108.8 last month, the highest level ever recorded in the survey's 45-year history and above the previous record of 108 in 1983… The August figure was up from a 107.9 reading in July."
September 13 - Wall Street Journal (Janet Adamy and Paul Overberg): "American incomes rose and poverty declined for the third consecutive year in 2017, according to census figures… that suggest more Americans are benefiting from the robust economy. The new data… show that median household income increased to $61,372 last year, up 1.8% when adjusted for inflation. There were 39.7 million people in poverty last year, and that rate dropped 0.4 percentage point to its lowest level since 2006. The number of people working full time year round increased by 2.4 million in 2017. Incomes have grown 10.4% in the past three years, and last year's figure was the highest on record."
September 14 - New York Times (Patricia Cohen): "Americans' household earnings are finally stretching back to their pre-recession heights. But feeling secure and comfortable isn't only a measure of how much money you have. It's also a measure of how much you have compared with others. For many, that is one reason that recent financial progress may seem overshadowed by the gains they've missed out on and a needling sense that they've lost ground. As new research illustrates, two groups in particular have stalled: whites without a college degree, and blacks and Hispanics with one. Both are being far outpaced by college-educated whites. 'America has been a story of getting ahead, of progress,' said Morris P. Fiorina, a political scientist at Stanford University. 'There's been no story of progress - for them.'"
September 11 - Reuters (Lucia Mutikani): "U.S. job openings surged to a record high in July and more Americans voluntarily quit their jobs, pointing to sustained labor market strength and confidence that could soon spur faster wage growth. The Labor Department's monthly Job Openings and Labor Turnover Survey, or JOLTS… also suggested a further tightening in labor market conditions, with employers appearing to increasingly have trouble finding suitable workers."
September 11 - Wall Street Journal (Bob Tita): "Workers at two of the biggest U.S. steelmakers are demanding higher compensation as tariffs on foreign metal push prices and profits to their highest point in years in a buoyant economy. Leaders for some 30,000 members of the United Steelworkers union say United States Steet Corp. and ArcelorMittal SA aren't passing those benefits to their workers, who have gone without raises in recent years even as wages have started to climb more broadly."
September 13 - Reuters (Michelle Conlin and Robin Respaut): "The world has moved on from the global financial crisis. Hard-hit areas such as Las Vegas and the Rust Belt cities of Pittsburgh and Cleveland have seen their fortunes improve. But… about 5.1 million …U.S. homeowners are still living with the fallout from the real estate bust that triggered the epic downturn. As of June 30, nearly one in 10 American homes with mortgages were 'seriously' underwater, according to… ATTOM Data Solutions, meaning that their market values were at least 25% lower than the balance remaining on their mortgages. It is an improvement from 2012, when… severe negative equity topped out at 29%, or 12.8 million homes. Still, it is double the rate considered healthy by real estate analysts. 'These are the housing markets that the recovery forgot,' said Daren Blomquist, a senior vice president at ATTOM."
China Watch:
September 14 - Bloomberg: "Chinese state media warned the nation shouldn't expect a quick resolution of its trade dispute with the U.S., as there have been no signs that President Donald Trump has changed his thinking. While it is good to talk, China should be aware that there may not be a deal anytime soon, according to an editorial published… in Global Times, a tabloid run by the official People's Daily. The newspaper said Washington is still taking a tough attitude. The U.S. will only engage in serious discussions if it believes additional tariffs won't bring more benefits, or if public opinion in the U.S. harms Trump's approval rating… Trump tweeting that he isn't under pressure to make a deal with China has stoked concern that the U.S. president isn't serious about a possible new round of trade talks between the two nations. China's commerce ministry said… it welcomed a U.S. offer of talks and that both sides were working on the details. The U.S. proposal to talk could be 'deceptive,' warned the China Daily…"
September 12 - Reuters (Kevin Yao and Fang Cheng): "Chinese banks made fewer new loans in August than expected, highlighting problems facing the central bank as it tries to boost credit to smaller companies facing weaker demand at home and shrinking export orders… Chinese banks extended 1.28 trillion yuan ($186.40bn) in net new yuan loans in August, according to… the People's Bank of China (PBOC)… Analysts polled by Reuters had predicted an August tally of 1.3 trillion yuan, down from July's 1.45 trillion yuan but nearly 20% more than the same month last year. 'Financing demand is relatively weak as firms are unwilling to borrow,' said Luo Yunfeng, chief analyst at Merchants Securities in Beijing."
September 15 - Bloomberg: "China's economic momentum weakened again in August, presenting its policy makers with a test of nerve as they prepare for a potential new round of trade talks with their U.S. counterparts. Fixed-asset investment growth in the first eight months slowed to the lowest pace since at least 1999 and infrastructure investment rose just 4.2%, the weakest expansion since the data series started in 2014… A slowing economy gives China a weaker hand ahead of possible new trade talks the two sides are discussing, adding to the risk of a deeper slowdown should U.S. President Donald Trump pull the trigger on tariffs on an additional $200 billion of Chinese goods… Investment rose 5.3% year-on-year in the first eight months, compared with an estimated 5.6%... August industrial production expanded 6.1%, meeting estimates. Retail sales expanded 9% last month from a year earlier, accelerating from an 8.8% pace in July."
September 14 - Wall Street Journal (Stephen Wilmot): "Car sales in China have shifted into reverse, but figuring how exposed the world's biggest auto makers are to the world's biggest car market is almost impossible. Most major car makers have done very well in China… Nissan and Volkswagen get nearly a quarter of their pretax profit from those businesses, and General Motors isn't far behind. What the car companies don't tell investors is how much they earn from exports, royalties and parts sales in China, which can be significant and aren't fully disclosed… After years of rapid growth, the Chinese market is far larger than its counterparts in the West, with more than 24 million cars sold last year compared with roughly 17 million in the U.S. and 15 million in the European Union. But sales fell 7% in August compared with a year earlier…"
September 12 - Bloomberg (Lianting Tu): "S&P Global Ratings lowered its credit ratings by one notch on seven Chinese local government financing vehicles as it believes the likelihood of local government support 'could weaken over time.' The firm said Wednesday morning the rating moves also reflected the gradual weakening of those financing platforms' roles and links with their local-government parents. Moody's… also cut its scores on five LGFVs… as it sees 'reduced likelihood of support for the sector as a whole.' Fitch Ratings took similar actions in June. China has repeatedly said LGFVs must take responsibility to repay their own debts."
EM Watch:
September 14 - Bloomberg (Andrey Biryukov, Anna Andrianova and Olga Tanas): "Russia's central bank unexpectedly raised interest rates for the first time since 2014, following its counterparts across emerging economies as inflation risks mount with a slumping currency and threats of U.S. sanctions. Policy makers said they'll 'consider the necessity of further increases' after lifting their benchmark to 7.5%, a level last seen in March, from 7.25%... Governor Elvira Nabiullina… said easing may not resume for more than a year. 'The quick monetary-policy response will limit the growth of inflationary risks in the future and create the conditions for easing policy by the end of 2019 or the first half of 2020,' Nabiullina told reporters… Further tightening isn't inevitable, but it can't be ruled out, she said."
September 11 - New York Times (Matt Phillips): "Cratering currencies, rising inflation, jumpy investors: A financial panic is again gripping some of the world's developing economies. The sharp sell-off of emerging market currencies, stocks and bonds seems to stand in stark contrast to the United States, where a nearly decade-long bull market continues amid buoyant economic conditions. Higher interest rates in the United States and a stronger dollar rebalance the risks and rewards for investors the world over, and act as a kind of financial magnet, pulling them out of riskier investments. When we've seen this before - in the Mexican peso crisis of 1994, the Thai baht collapse of 1997 and the Russian default of 1998 - investors had to contend with spillover of trouble from one country to others, dragging down economic growth or causing market stress."
September 11 - Financial Times (James Politi and Sam Fleming): "Christine Lagarde has warned that the escalating US-China trade war could deliver a 'shock' to already struggling emerging markets, raising the prospect that a crisis ripping through Argentina and Turkey could spread across the developing world. The IMF managing director told the Financial Times that her staff does not yet see 'contagion' spreading to multiple countries beyond those currently fighting investor flight. But she warned that 'these things could change rapidly' and cited the 'uncertainty [and] lack of confidence already produced by the threats against trade, even before it materialises', as one of the main dangers facing the developing world."
September 13 - Wall Street Journal (David Gauthier-Villars and Jon Sindreu): "Turkey's central bank sharply raised interest rates-defying President Recep Tayyip Erdogan's demand to cut them-in an attempt to counter the country's economic problems and reverse growing investor aversion to emerging-market economies. The central bank increased its main interest rate to 24% from 17.75%..., citing concerns over price stability and saying it would maintain a tight monetary-policy stance until the inflation outlook improves significantly. The turmoil in Turkey has rattled global markets in recent weeks and comes at a precarious time for developing economies around the world, just as investors have started to cast doubt on how long the current period of synchronized global growth can last."
September 14 - Bloomberg (Onur Ant): "Turkey's President Recep Tayyip Erdogan resumed his criticism of the nation's central bank a day after it announced the biggest rate hike of his rule. 'It's currently my phase of patience but there is a limit to this patience,' Erdogan told members of his ruling AK Party… He restated his opinion that higher rates won't help to slow inflation and warned that his restraint won't last forever. The central bank was responding to repeated calls for a rate increase, Erdogan said, and responded with a 'quite' big hike. Turkey would see the 'results of the independence' of the regulator, he said."
September 13 - Financial Times (Laura Pitel): "Two hours before Turkey's central bank unveiled a critical interest rate decision, Recep Tayyip Erdogan took to a stage in Ankara and delivered a classic tirade. The Turkish president, notorious for his opposition to high interest rates, lambasted the central bank and decried interest rates as 'a tool of exploitation'. Yet shortly afterwards, an institution that had come to be seen as almost irrelevant by international investors shocked the markets by sharply increasing its benchmark rate to 24%. Analysts were left wondering what happened. 'Is this something they cooked up together with Erdogan? Or is it something they decided independently?' asked Nora Neuteboom, an economist at the Dutch bank ABN Amro."
September 12 - Bloomberg (Onur Ant): "President Recep Tayyip Erdogan appointed himself chairman of Turkey's sovereign wealth fund and got rid of the entire management staff that had presided over two years of inaction. Zafer Sonmez, head of Turkey and Africa for Malaysia's government investment vehicle Khazanah Nasional Bhd, was named general manager. Treasury and Finance Minister Berat Albayrak, Erdogan's son-in-law, will also sit on the board, according to a decree…"
Global Bubble Watch:
September 13 - Bloomberg (Rachel Evans and Carolina Wilson): "If you work in exchange-traded funds, memories of 2008 aren't all doom and gloom. Lehman Brothers' collapse in September of that year ushered in a new era for ETFs. And they've been on a roll ever since. Assets in the low-cost portfolios that trade like stocks and typically track an index have swelled to $5 trillion globally, up from less than $700 billion before the financial crisis. Meanwhile, the number of funds has more than doubled as they gradually account for bigger and bigger pieces of the equity, bond and commodity markets. Although they started trading in the U.S. in 1993, the financial crisis marked a turning point for ETFs. Banks were forced to shed large inventories to bolster their balance sheets. And retail investors who'd lost their shirts went looking for ways to diversify their risk. ETFs offered both a solution. By packaging slices of the market into tradeable vehicles, ETFs became the go-to instrument for professionals seeking instant, liquid exposure to markets around the world. Mom-and-pop savers, meanwhile, got a cheap, transparent way to buy companies for the long haul. But in remaking financial markets in their image, ETFs have fueled a fear that indexed investing will trigger the next crisis."
September 11 - Bloomberg (Satyajit Das): "Slowing global trade is evidence of how emerging-market stresses are being transmitted to advanced economies. The real concern of contagion remains financial linkages, though. Since 2009, non-resident gross flows into EM financial assets - loans, debt and equity securities - have averaged around $1 trillion annually, although the figure has been volatile. Total outstanding exposure, which remains opaque, may be around 50% of GDP in advanced economies. The main driver has been accommodative monetary policy of developed-world central banks and the lure of higher returns. Despite reductions, bank cross-border lending constitutes around half of the exposure. U.K., European, Japanese and Chinese banks are particularly vulnerable… Spanish banks have substantial amounts at risk in Turkey and South America. China's risks via loans to EM borrowers as part of the Belt and Road initiative are also significant. Investors make up the bulk of the remaining exposure."
September 14 - Reuters (Scott Squires): "Trade and investment ministers from G20 countries meeting in Argentina said there was an 'urgent need' to improve the World Trade Organization, a joint statement said on Friday. With U.S. President Donald Trump readying tariffs on another $200 billion in Chinese goods, the ministers said they were 'stepping up the dialogue' on international trade disputes, according to the statement issued at the summit."
September 10 - Bloomberg (Onur Ant): "Turkey's finance chief said the imposition of sanctions by the U.S. on the Middle East's largest economy was politically motivated, and called on other nations to form a united front against such actions. U.S. President Donald Trump used sanctions and tariffs to sabotage the Turkish economy, Treasury and Finance Minister Berat Albayrak said… Apart from a short-term currency impact, Turkish economic fundamentals had proved resilient, he said. The rallying cry from Turkey's top economy official, who is also the son-in-law of President Recep Tayyip Erdogan, ratchets up the rhetoric between Ankara and Washington."
September 10 - Bloomberg (Andreo Calonzo and Ian Sayson): "U.S. President Donald Trump is to blame for surging consumer prices in the Philippines after he sparked a trade war with China, said Rodrigo Duterte, head of the Southeast Asian country where inflation has reached a nine-year high. 'This inflation under my watch, believe or not, started when America' under Trump imposed duties on Chinese goods, which prompted retaliation, Duterte said… 'When America raised (tariff) rates and interest rates, everything went up.'"
Fixed Income Bubble Watch:
September 14 - CNBC (Thomas Franck and Alexandra Gibbs): "The yield on the benchmark 10-year Treasury note topped 3% on Friday for the first time since Aug. 2. Yields have been steadily rising since the start of September as expectations for economic growth creep higher. Traders pointed to a revision in the retail sales figures out on Friday as the reason for the latest push higher in rates."
Leveraged Speculation Watch:
September 11 - Bloomberg (Katherine Burton, Melissa Karsh and Sam Dodge): "You'd be forgiven for thinking the hedge fund industry might be starting to rebound. Industry assets are at a record $3.2 trillion this year, and a brand-new firm just brought in an unprecedented $8 billion. But the reality isn't so rosy. Inflows into funds, on the whole, are non-existent and the number of startups has slowed to levels not seen for nearly two decade. Once high-flying powerhouses run by David Einhorn, Bill Ackman and Alan Howard are mere shadows of their former glory after posting years of returns that ranged from uninspiring to downright awful. John Paulson has crashed so badly and seen assets plummet so far that he's largely left managing his own money. Overall, firms' assets are barely growing. Net inflows since the end of 2016 have equaled just $7.8 billion."
September 14 - Bloomberg (Melissa Karsh and Lu Wang): "Already stung by a defensive stance on U.S. stocks, the smart money is only getting more cautious. Hedge funds' net leverage, a measure of the industry's risk appetite, has fallen to the lowest level this year after a brief bounce in late August, client data compiled by Morgan Stanley showed. At 49%, the ratio is down from a peak of more than 60% in March. Hedge funds' reluctance to increase equity exposure underscores a growing skepticism about the durability of the S&P 500 Index's outperformance against equity markets in the rest of the world. Wall Street strategists this month have been sounding warnings about U.S. stocks, with Morgan Stanley lowering its recommendation and Goldman Sachs flagging the danger of a potential bear market should a full-blown trade war erupt."
Geopolitical Watch:
September 10 - Financial Times (Henry Foy): "Hundreds of Russian and Chinese tanks, attack helicopters, fighter jets and thousands of soldiers will this week fight side by side in the biggest war games in Russia since 1981, in a show of strength and friendship between Asia's two largest military powers. Russia's biggest military exercise since the cold war, and its first to be conducted with a country not from the former Soviet bloc, is the strongest sign yet of the deepening strategic bond between Moscow and Beijing… Involving 300,000 troops and close to 40,000 vehicles, the seven-day 'Vostok' war games will coincide with talks between Vladimir Putin and Xi Jinping in Vladivostok…, amid a concerted effort by Russia to pivot east and embrace its powerful neighbour."
September 11 - Bloomberg (Andrew Osburn): "Russia began its biggest war games since the fall of the Soviet Union… close to its border with China, mobilising 300,000 troops in a show of force that will include joint exercises with the Chinese army. China and Russia have staged joint drills before but not on such a large scale, and the Vostok-2018 (East-2018) exercise signals closer military ties as well as sending an unspoken reminder to Beijing that Moscow is able and ready to defend its sparsely populated far east."
September 10 - Bloomberg (Zainab Fattah): "The U.S. Navy is conducting exercises this month to ensure its readiness to guarantee freedom of movement through Persian Gulf and Red Sea waterways amid escalating threats from Iran to disrupt shipping across important choke points. The exercises, with regional and global allies, are part of the U.S. 5th Fleet Theater Counter Mine and Maritime Security Exercise…"
Sunday's News Links
[Reuters] Trump 'likely' to announce new China tariffs as early as Monday: source
[BloombergQ] Japan’s Abe Says He Told Trump It’s Dangerous to Play With FX
[Reuters] London mayor calls for second referendum on Brexit
[WSJ] Trump to Announce New Tariffs on $200 Billion in Chinese Imports
[FT] Financial sector remains an impenetrable black box
[BloombergQ] Japan’s Abe Says He Told Trump It’s Dangerous to Play With FX
[Reuters] London mayor calls for second referendum on Brexit
[WSJ] Trump to Announce New Tariffs on $200 Billion in Chinese Imports
[FT] Financial sector remains an impenetrable black box
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