Saturday, September 14, 2019

Just the Facts: September 14, 2019

For the Week:

The S&P500 gained 1.0% (up 20.0% y-t-d), and the Dow rose 1.6% (up 16.7%). The Utilities were unchanged (up 18.8%). The Banks surged 7.8% (up 18.8%), and the Broker/Dealers jumped 5.2% (up 17.0%). The Transports rose 5.0% (up 17.9%). The S&P 400 Midcaps gained 2.7% (up 18.0%), and the small cap Russell 2000 surged 4.8% (up 17.0%). The Nasdaq100 added 0.5% (up 24.7%). The Semiconductors gained 2.4% (up 30.0%). The Biotechs jumped 3.7% (up 5.0%). With bullion declining $18, the HUI gold index dropped 5.9% (up 27.1%).

Three-month Treasury bill rates ended the week at 1.915%. Two-year government yields jumped 26 bps to 1.80% (down 69bps y-t-d). Five-year T-note yields surged 32 bps to 1.75% (down 76bps). Ten-year Treasury yields rose 34 bps to 1.90% (down 79bps). Long bond yields jumped 35 bps to 2.37% (down 64bps). Benchmark Fannie Mae MBS yields surged 46 bps to 2.83% (down 66bps).

Greek 10-year yields slipped a basis point to 1.56% (down 283bps y-t-d). Ten-year Portuguese yields jumped 13 bps to 0.32% (down 140bps). Italian 10-year yields were little changed at 0.88% (down 186bps). Spain's 10-year yields rose 13 bps to 0.30% (down 111bps). German bund yields jumped 19 bps to negative 0.45% (down 69bps). French yields rose 17 bps to negative 0.17% (down 88bps). The French to German 10-year bond spread narrowed two to 28 bps. U.K. 10-year gilt yields surged 26 bps to 0.76% (down 52bps). U.K.'s FTSE equities index gained 1.2% (up 9.5% y-t-d).

Japan's Nikkei Equities Index jumped 3.7% (up 9.9% y-t-d). Japanese 10-year "JGB" yields jumped eight bps to negative 0.15% (down 16bps y-t-d). France's CAC40 gained 0.9% (up 19.5%). The German DAX equities index advanced 2.3% (up 18.1%). Spain's IBEX 35 equities index rose 1.6% (up 7.0%). Italy's FTSE MIB index increased 1.1% (up 21.1%). EM equities were mostly higher. Brazil's Bovespa index added 0.5% (up 13.7%), and Mexico's Bolsa increased 0.3% (up 2.9%). South Korea's Kospi index rose 2.0% (up 0.4%). India's Sensex equities index gained 1.1% (up 3.7%). China's Shanghai Exchange increased 1.1% (up 21.5%). Turkey's Borsa Istanbul National 100 index surged 4.6% (up 13.4%). Russia's MICEX equities index slipped 0.2% (up 17.8%).

Investment-grade bond funds saw inflows of $5.559 billion, and junk bond funds posted inflows of $1.865 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates gained seven bps to 3.56% (down 104bps y-o-y). Fifteen-year rates rose nine bps to 3.09% (down 97bps). Five-year hybrid ARM rates increased six bps to 3.36% (down 57bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up 11 bps to 4.32% (down 35bps).

Federal Reserve Credit last week increased $4.6bn to $3.727 TN. Over the past year, Fed Credit contracted $444bn, or 10.6%. Fed Credit inflated $916 billion, or 33%, over the past 357 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt recovered $2.1bn last week to $3.453 TN. "Custody holdings" gained $31.3bn y-o-y, or 0.9%.

M2 (narrow) "money" supply jumped $40.6bn last week to $14.999 TN. "Narrow money" gained $762bn, or 5.4%, over the past year. For the week, Currency increased $1.5bn. Total Checkable Deposits surged $46.9bn, while Savings Deposits declined $11.7bn. Small Time Deposits slipped $1.0bn. Retail Money Funds rose $4.8bn.

Total money market fund assets rose $16.8bn to $3.397 TN. Money Funds gained $534bn y-o-y, or 18.6%.

Total Commercial Paper declined $8.1bn to $1.116 TN. CP was up $49bn y-o-y, or 4.6%.

Currency Watch:

The U.S. dollar index was little changed at 98.257 (up 2.2% y-t-d). For the week on the upside, the British pound increased 1.8%, the South African rand 1.6%, the Mexican peso 0.7%, the Singapore dollar 0.6%, the South Korean won 0.5%, the Australian dollar 0.5%, the euro 0.4%, and the Swedish krona 0.4%. On the downside, the Japanese yen declined 1.1%, the Canadian dollar 0.9%, the New Zealand dollar 0.7%, the Brazilian real 0.7%, the Swiss franc 0.3% and the Norwegian krone 0.1%. The Chinese renminbi increased 0.52% versus the dollar this week (down 2.84% y-t-d).

Commodities Watch:

September 8 – Bloomberg (Ranjeetha Pakiam): “China has added almost 100 tons of gold to its reserves since it resumed buying in December, with the consistent run of accumulation coming amid a rally in prices and the drag of the trade war with Washington. The People’s Bank of China raised bullion holdings to 62.45 million ounces in August from 62.26 million a month earlier… In tonnage terms, August’s inflow was 5.91 tons, following the addition of about 94 tons in the previous eight months.”

September 8 – CNBC (Huileng Tan): “Veteran investor Mark Mobius is bullish on gold as central banks around the world cut interest rates. ‘Physical gold is the way to go, in my view, because of the incredible increase in money supply,’ said Mobius… ‘All the central banks are trying to get interest rates down, they are pumping money into the system. Then, you have all of the cryptocurrencies coming in, so nobody really knows how much currency is out there,’ he told CNBC’s ‘Street Signs’…”

The Bloomberg Commodities Index declined 1.3% this week (up 17.3% y-t-d). Spot Gold retreated 1.2% to $1,489 (up 16.1%). Silver fell 3.0% to $17.569 (up 13%). WTI crude dropped $1.67 to $54.85 (up 21%). Gasoline fell 1.3% (up 17%), while Natural Gas surged 4.7% (down 11%). Copper rallied 2.5% (up 3%). Wheat surged 4.3% (down 4%). Corn jumped 3.7% (down 2%).

Market Instability Watch:

September 13 – Financial Times (Peter Wells): “Treasuries chalked up their worst week — and small-caps their best — since 2016 as investors extended a sweeping rotation away from the momentum plays and bonds that had been favoured over summer. The yield on the benchmark 10-year note surged 34 bps since last Friday to a six-week high of 1.90%, the largest weekly rise since mid-November 2016. An iShares exchange traded fund tracking US Treasuries fell 2.1% over the past five sessions, putting it its worst weekly performance also since that same November week nearly three years ago. The yield on the 10-year Treasury rose for an eighth consecutive session, the longest streak since March 2017.”

September 13 – Bloomberg (Vivien Lou Chen): “Treasuries extended their September tumble, sending the benchmark 10-year yield to its highest level since early August… Bonds fell after August retail sales and the September University of Michigan consumer sentiment index increased more than forecast, buoying confidence in the economic expansion. Yields across the curve rose, with the 10-year climbing more than 12 basis points to 1.90%, up from a three-year low of 1.43% early this month. The spread between 2-year and 10-year yields, considered a recession indicator when it inverts, as it did in August for the first time since 2007, widened back above 9 bps.”

September 11 – Bloomberg (John Gittelsohn): “The balance of power has shifted in the $8 trillion stock-fund industry. Assets in mutual funds and exchange-traded funds tracking U.S. equity indexes surpassed those run by stock-pickers for the first time last month, according to… Morningstar Inc. August fund flows helped lift assets in index-tracking U.S. equity funds to $4.271 trillion, compared with $4.246 trillion run by stock-pickers… Investors added $88.9 billion to passive U.S. stock funds while pulling $124.1 billion from active managers this year through August…”

September 11 – Bloomberg (John Gittelsohn): “It’s official: inexpensive index funds and ETFs have finally eclipsed old-fashioned stock pickers. Passive investing styles have been gaining ground on actively managed funds for decades. But in August the investment industry reached one of the biggest milestones in its modern history, as assets in U.S. index-based equity mutual funds and ETFs topped those in active stock funds for the first time. Stock picking isn’t dead. But the development marks the official end of money managers’ position as the guiding force in the American stock market -- and the seemingly inexorable rise of low-cost index-driven investing. If, as expected, the shift keeps gathering momentum, the implications will be enormous for the industry pros, financial markets and ordinary investors everywhere.”

September 10 – Bloomberg (Luke Kawa): “Go long the dollar, Treasuries and defensive stocks. Sell metals and the pound. It was an investing playbook that worked virtually all year -- until suddenly it didn’t. For a second straight day, 2019’s biggest winners across assets are getting hammered as investors reassessed expectations for global economic growth. The Treasury market set the tone, with a 10-month rally grinding to a halt Friday after data on the American consumer and labor market signaled a recession is far from imminent.”

September 10 – Wall Street Journal (Ryan Dezember): “A popular wager in the energy markets is backfiring. Hedge funds and other money managers in August built up a big bet that natural gas prices would decline—their most bearish position in the futures market in over a decade—only to have prices shoot up 25%. Prices usually weaken when summer subsides since there is less demand to generate electricity for air conditioners.”

September 11 – Reuters (Eliana Raszewski): “Argentina’s central bank… announced further currency controls in an effort to tame speculation and stem a spiraling debt crisis in Latin America’s third largest economy. The new measure requires anyone purchasing foreign currency to present a sworn oath promising to wait at least five days before using it to purchase bonds.”

September 10 – Wall Street Journal (Ira Iosebashvili): “Currencies around the world are tumbling to multiyear lows, bruising investors’ portfolios and fanning the flames of a global trade war. The Chinese yuan recently hit its lowest level in more than a decade against the dollar, the euro dropped to a fresh two-year low last week and the British pound is at depths it hasn’t consistently plumbed since the 1980s. Some emerging-market currencies such as the Colombian peso have fallen to their lowest prices on record against the dollar, while Argentina has recently introduced capital controls after its peso plunged in August. Out of 41 currencies tracked by The Wall Street Journal, only nine are up against the dollar in 2019. ‘People are becoming more concerned about currencies because currencies are becoming more dangerous,’ said Kit Juckes, global strategist at Société Générale.”

September 10 – Financial Times (Steve Johnson): “Rarely has the choice facing the emerging market investor been so stark. Bonds are so richly priced that around 30% of the entire universe of euro-denominated EM debt, with a face value of about €115bn, now trades with a negative yield… That has never happened before. What is more, not all of this negatively yielding debt consists of short-maturity bonds issued by the EU sovereigns of eastern and central Europe, which are usually considered ‘safe’ by fixed income investors. The bundle includes Polish government debt at a maturity as far out as 2026, along with bonds from Indonesia, China and South Korea.”

September 11 – Reuters (Richard Leong): “U.S. money market fund assets have hit their highest level since October 2009, as investors piled more cash into these low-risk products despite a lessening of concerns about U.S.-China trade tensions… Assets of money funds, which are seen as being nearly as safe as bank accounts, climbed by $24.57 billion to $3.355 trillion in the week ended Sept. 10…”

Trump Administration Watch:

September 12 – CNBC (Jacob Pramuk): “President Donald Trump signaled… that he would consider an interim trade deal with China, even though he would not prefer it. The president told reporters he would like to ink a full agreement with the world’s second largest economy. However, he left the door open to striking a limited deal with Beijing. ‘If we’re going to do the deal, let’s get it done,’ he told reporters… ‘A lot of people are talking about it, I see a lot of analysts are saying an interim deal — meaning we’ll do pieces of it, the easy ones first. But there’s no easy or hard. There’s a deal or there’s not a deal. But it’s something we would consider, I guess.’”

September 11 – CNBC (Riya Bhattacharjee and Chris Eudaily): “President Donald Trump… tweeted that he will delay increasing tariffs on $250 billion worth of Chinese goods from Oct. 1 to Oct. 15 as a ‘gesture of good will’ to China. Trump said the postponement came ‘at the request of the Vice Premier of China, Liu He, and due to the fact that the People’s Republic of China will be celebrating their 70th Anniversary.’ The tariffs were set to increase to 30% from 25% on the goods. He is set to be in Washington for talks in early October.”

September 11 – CNBC (Jeff Cox and John Melloy): “President Donald Trump… continued his verbal assault on the Federal Reserve, which he blames for slowing the economy, tweeting that the central bank should cut interest rates to zero or even set negative interest rates. The president also called Fed officials ‘boneheads’ in the tweet. ‘The Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt. INTEREST COST COULD BE BROUGHT WAY DOWN, while at the same time substantially lengthening the term,’ he said… The president also made a new suggestion not seen in some of his past attacks on the Fed, saying that the country should refinance its debt load. The U.S. has $22.5 trillion in debt, $16.7 trillion of which is held by the public… That debt load has grown $2.6 trillion, or 13% under Trump, due in part to the 2017 tax cut that the president shepherded through Congress. Taxpayers have shelled out $538.6 billion in interest costs in the 2019 fiscal year, easily a record. The idea for ‘refinancing’ federal debt is without any modern precedent.”

September 11 – Bloomberg (Christopher Condon): “President Donald Trump triggered a swift and skeptical reaction with his demand… for the Federal Reserve to lower interest rates ‘to zero, or less,’ as part of a plan to reduce the financing costs of U.S. government debt. ‘This is a recipe for disaster,’ said Roberto Perli, a former Fed economist and partner at Cornerstone Macro. ‘If a central bank starts financing debt spending without constraints, interest rates will end up being anything but moderate. Just look at Zimbabwe.’ … “The Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt,’ Trump tweeted. ‘Interest cost could be brought way down, while at the same time substantially lengthening the term.’”

September 6 – Associated Press (Kevin Freking): “White House economic adviser Larry Kudlow compared trade talks with China… to the U.S. standoff with Russia during the Cold War. In other words, negotiations could continue for a long time… Kudlow discounted the notion that next year’s election increases the urgency for President Donald Trump to conclude the trade war. ‘The stakes are so high, we have to get it right, and if that takes a decade, so be it,’ he said. Kudlow emphasized that it took the United States decades to get the results it wanted with Russia. He noted that he worked in the Reagan administration: ‘I remember President Reagan waging a similar fight against the Soviet Union.’”

September 9 – Bloomberg (Mike Dorning): “The U.S. Agriculture Department’s top trade official called Chinese President Xi Jinping a ‘communist zealot,’ as he warned farmers the Asian leader is a tough adversary in negotiations. Ted McKinney, the department’s undersecretary for trade, offered the provocative characterization of the Chinese leader… at a sensitive time in U.S.-China relations… ‘Let me just tell you what: Mr. Xi Jinping is a communist zealot. He sees himself very much in the spirit of Mao Zedong,’ McKinney said… to 380 farmers the group gathered in Washington to lobby the government.”

September 13 – Reuters (Richard Cowan): “The Trump administration plans to unveil a tax cut plan in mid-2020, a top White House adviser said…, saying it would be targeted to giving significant relief to the middle class. …White House economic adviser Larry Kudlow offered no details on what he has termed “Tax Cuts 2.0,” a plan the administration intends to put forward as President Donald Trump pursues his bid for a second White House term. ‘We will gather together the best ideas from the Hill (Congress), the administration and outside folks to provide a significant new round of middle class tax relief,’ Kudlow said, adding, ‘This is not a recession measure at all.’”

September 10 – Financial Times (Robert Armstrong): “Trump administration officials plans’ for pushing Fannie Mae and Freddie Mac towards private ownership… faced sharp criticism from Democratic senators, who argued the reforms would make mortgages more costly. Steven Mnuchin, the US Treasury secretary; Mark Calabria, director of the Federal Housing Finance Agency; and Ben Carson, housing and urban development secretary, said the two government-backed mortgage guarantors were more leveraged than before the crisis and that Congress needed to act… ‘When I look at a $3tn institution levered up 1,000 to one, it keeps me up at night,’ Mr Calabria said during a hearing before the Senate banking committee.”

September 10 – Reuters (Pete Schroeder): “The Trump administration will pursue the reform of mortgage giants Fannie Mae and Freddie Mac, the guarantors of over half the nation’s mortgages, if Congress fails to act, officials told Congress… In testimony before the U.S. Senate Banking Committee, U.S. Treasury Secretary Steven Mnuchin, Housing and Urban Development Secretary Ben Carson, and Federal Housing Finance Agency Director Mark Calabria defended a plan to release Fannie and Freddie from government control more than a decade after they were bailed out during the 2008 financial crisis… ‘If we do nothing, this is going to end very badly,’ said Calabria, who warned Fannie and Freddie are undercapitalized and overly reliant on government backing to weather any downturn.”

September 12 – Reuters (Andrea Shalal): “U.S. Treasury Secretary Steven Mnuchin… said the United States will issue 50-year bonds if there is ‘proper demand,’ a moved aimed at ‘derisking’ the government’s $22 trillion of debt and locking in low interest rates.”

September 13 – Bloomberg (Erik Wasson and Christopher Condon): “White House Economic Adviser Larry Kudlow criticized Europe’s low and negative interest rates, contradicting his boss, President Donald Trump, who earlier in the week tweeted that the U.S. Federal Reserve should pursue a similar approach by bringing down rates ‘to ZERO, or less.’ Kudlow told reporters… ‘The Europe story -- all this super easy money, zero and negative rates. You know, if it was going to work it would have worked. And it’s not worked.’”

Federal Reserve Watch:

September 11 – Reuters (Lindsay Dunsmuir, Ann Saphir, Jonnelle Marte, Howard Schneider and Jason Lange): “U.S. President Donald Trump’s push for low interest rates reached a new pitch…, when he demanded the Federal Reserve take the extraordinary step of sending them below zero. Outside of Washington, D.C., Fed policymakers often face the opposite complaint. Interest rates are too low already, Americans tell Fed officials when they speak at Rotary Clubs and chambers of commerce around the country. Savers, and particularly those near retirement age, are not getting enough return from their savings accounts or fixed investments. The negative rates Trump is pushing, already in place in some parts of Europe and in Japan, would effectively charge people who save their money, and reward those able and willing to borrow. They were so unpopular in Japan that they became a hot topic on talk shows and tabloids, which highlighted consumers buying safes to stash their cash at home instead of with banks.”

September 6 – Financial Times (Brendan Greeley): “In Zurich on Friday, Jay Powell, chairman of the Federal Reserve, repeated his mantra from this summer that the Fed will continue to ‘act as appropriate to sustain the expansion.’ …But after that, he got technical. Talking about the challenges of easing in a potential downturn when policy rates are already close to zero — something he has called the ‘pre-eminent monetary policy challenge of our time’ — he offered one specific strategy: make-up inflation. When a central bank undershoots its inflation target, Mr Powell explained, it can promise to the public that it will overshoot in the future. As it makes up for lost inflation, the bank would also be making up for lost growth. ‘If the public understands and acts up on that, we limit the damage from the recession,’ he said. ‘It’s a great idea.’”

September 10 – Bloomberg (Sridhar Natarajan): “James Gorman has a note of caution for the Federal Reserve in the midst of its interest-rate reductions. ‘The problem with cutting is it’s one of the few tools you’ve got,’ Morgan Stanley’s chief executive officer said…, adding that he supports the reductions made so far. ‘So if you give it away too easily, what do you have if we have a real problem?’”

U.S. Bubble Watch:

September 12 – Associated Press (Martin Crutsinger): “The U.S. government’s budget deficit increased by $169 billion to $1.07 trillion in the first 11 months of this budget year as spending grew faster than tax collections. The… deficit with just one month left in the budget year is up 18.8% over the same period a year ago. Budget experts project a surplus for September, which would push the total 2019 deficit down slightly below the $1 trillion mark. The Congressional Budget Office is forecasting a deficit this year of $960 billion, compared to a 2018 deficit of $779 billion.”

September 12 – Reuters (Lindsay Dunsmuir): “The U.S. government posted a $200 billion budget deficit in August, bringing the fiscal year-to-date deficit past $1 trillion… Federal spending in August was $428 billion, down 1% from the same month in 2018, while receipts were $228 billion, an increase of 4% compared with August 2018. The deficit for the fiscal year to date was $1.067 trillion, compared with $898 billion in the comparable period the year earlier.”

September 10 – Wall Street Journal (Janet Adamy and Paul Overberg): “American incomes remained essentially flat in 2018 after three straight years of growth, according to Census Bureau figures… Median household income was $63,179 in 2018, an uptick of 0.9% that census officials said isn’t statistically significant from the prior year based on figures adjusted for inflation. The poverty rate in 2018 was 11.8%, a decrease of a half percentage point from 2017, marking the fourth consecutive annual decline in the national poverty rate. It was the first time the official poverty rate fell significantly below its level at the start of the recession in 2007.”

September 12 – Reuters (Lucia Mutikani): “U.S. underlying consumer prices increased solidly in August, leading to the largest annual gain in a year, but rising inflation is unlikely to deter the Federal Reserve from cutting interest rates again next week… The… consumer price index excluding the volatile food and energy components gained 0.3% for a third straight month. The so-called core CPI was boosted by a surge in healthcare costs and increases in prices for airline tickets, recreation and used cars and trucks. In the 12 months through August, the core CPI increased 2.4%, the most since July 2018, after climbing 2.2% in July.”

September 13 – Wall Street Journal (Harriet Torry): “Spending on vehicles drove strong retail sales in August, suggesting American shoppers continue to support the economy… Retail sales… climbed a seasonally adjusted 0.4% in August from a month earlier… The robust report beat economists’ expectations and came on the heels of stronger spending in July than initially estimated, a 0.8% rise. The data provide reassurance that household spending remains an economic bulwark against signs of a global slowdown, though perhaps not enough to prevent some softening in U.S. growth in the third quarter.”

September 10 – Bloomberg (William Edwards): “Optimism among U.S. small-business owners fell in August to the lowest level in five months, with the outlook for the economy and sales slumping amid escalating trade tensions and recession fears. The decline of 1.6 points to 103.1 in the National Federation of Independent Business’s index resulted from weaker expectations for businesses and sales…”

September 11 – CNBC (Diana Olick): “Total mortgage application volume rose 2% last week compared with the previous week… Volume was 69% higher than the same week one year ago… Mortgage applications to purchase a home increased 5% for the week and were 9% higher than the same week one year ago.”

September 13 – CNBC (Diana Olick): “The average rate on the 30-year fixed is now 20 bps higher than it was on Monday and 36 bps higher than its last low on Sept. 4… That is the biggest short-term jump since the week following the election of President Donald Trump… ‘The big risk here is that the overall rate rally — the one that began in November 2018 -- has run its course,’ said Matthew Graham, chief operating officer at Mortgage News Daily.”

September 10 – Reuters (David Randall): “Corporate America appears to be rushing to get the most out of the decade-long bull market in stocks and bonds before a possible recession and election-year stock market volatility slam the IPO and credit windows shut. Approximately 70 companies have registered with the U.S. Securities and Exchange Commission to go public…, while $72 billion in investment-grade corporate debt – a figure nearly as large as the total issuance in August - was issued last week, according to… Dealogic.”

September 10 – Associated Press (Matt O’Brien): “Big tech companies have long rebuffed attempts by the U.S. federal government to scrutinize or scale back their market power. Now they face a scrappy new coalition as well: prosecutors from nearly all 50 states. In a rare show of bipartisan force, attorneys general from 48 states along with Puerto Rico and the District of Columbia are investigating whether Google’s huge online search and advertising business is engaging in monopolistic behavior. The Texas-led antitrust investigation of Google… follows a separate multistate investigation of Facebook’s market dominance that was revealed Friday.”

September 10 – Reuters (Lindsay Dunsmuir and Howard Schneider): “The share of Americans without health insurance rose for the first time in a decade last year and U.S. household income hardly budged, according to a government report… that laid bare issues that could be central to the U.S. presidential election next year. …About 27.5 million residents, or 8.5% of people, did not have health insurance in 2018, an increase of almost 2 million from the year before when 7.9% of people lacked coverage, the Census Bureau said.”

September 9 – Bloomberg (Katherine Chiglinsky, Molly Smith, and David Caleb Mutua): “U.S. corporate pensions felt the pain of low bond yields in August. The retirement funds for U.S. corporations had just 82% of the money they expect to need over time for pensioners as of August, down four percentage points from July, according to… consulting firm Mercer… The steep drop stemmed from long-term bond yields plunging to record lows, which effectively increases the current value of companies’ future obligations… When companies have more than about 80% of the funding they expect to need for pensions, they tend to cut their investments in riskier assets like stocks and increase safer holdings like bonds to lock in gains and reduce risk.”

September 11 – New York Times (Conor Dougherty and Luis Ferré-Sadurní): “California lawmakers approved a statewide rent cap… covering millions of tenants, the biggest step yet in a surge of initiatives to address an affordable-housing crunch nationwide. The bill limits annual rent increases to 5% after inflation and offers new barriers to eviction… Gov. Gavin Newsom, a Democrat who has made tenant protection a priority in his first year in office, led negotiations to strengthen the legislation… The measure, affecting an estimated eight million residents of rental homes and apartments, was heavily pushed by tenants’ groups. In an indication of how dire housing problems have become, it also garnered the support of the California Business Roundtable…”

China Watch:

September 12 – Wall Street Journal (Lingling Wei, Chao Deng and Josh Zumbrun): “China is looking to narrow the scope of its negotiations with the U.S. to only trade matters, seeking to put thornier national-security issues on a separate track in a bid to break deadlocked talks with the U.S. Chinese officials hope such an approach would help both sides resolve some immediate issues and offer a path out of the impasse… The move is the latest in a series of steps officials in Washington and Beijing are taking to ease trade tensions ahead of high-level negotiations in October.”

September 13 – Reuters (Andrew Galbraith): “China will exempt some agricultural products from additional tariffs on U.S. goods, including pork and soybeans, China’s official Xinhua News Agency…, in the latest sign of easing Sino-U.S. tensions before a new round of talks aimed at curbing a bruising trade war.”

September 11 – Reuters: “China’s banks extended more new yuan loans in August as policymakers ratcheted up support for the slowing economy, and further policy easing is expected in the coming weeks as the Sino-U.S. trade war takes a bigger toll on the economy. Chinese regulators have been trying to boost bank lending and lower financing costs for more than a year, especially for smaller and private companies… Chinese banks extended 1.21 trillion yuan ($170bn) in new loans in August, up from July and exceeding analyst expectations… Analysts… had predicted new yuan loans would rise to 1.2 trillion yuan in August, up from 1.06 trillion yuan the previous month and compared with 1.28 trillion yuan a year earlier. Household loans, mostly mortgages, rose to 653.8 billion yuan in August from 511.2 billion yuan in July, while corporate loans climbed to 651.3 billion yuan from 297.4 billion yuan… Outstanding yuan loans grew 12.4% from a year earlier - in line with expectations but slower than July’s 12.6%... Growth of outstanding total social financing (TSF), a broad measure of credit and liquidity in the economy, rose 10.7% in August from a year earlier…”

September 9 – Kyodo: “Chinese President Xi Jinping voiced distrust of U.S. President Donald Trump during his meeting with the Japanese Prime Minister Shinzo Abe in June amid the U.S.-China trade dispute, a source close to the matter said… ‘I can't believe what President Trump says’ concerning trade negotiations, Xi was quoted as telling Abe during a meeting on the fringe of the Group of 20 summit in Osaka. Although Abe told Xi that Trump trusts the Chinese president, Xi continued to air his grievances about his U.S. counterpart, the diplomatic source told Kyodo News.”

September 8 – Associated Press (Joe McDonald): “China’s trade with the United States is falling as the two sides prepare for negotiations with no signs of progress toward ending a tariff war… Imports of American goods tumbled 22% in August from a year earlier to $10.3 billion… Exports to the United States, China’s biggest market, sank 16% to $44.4 billion.”

September 8 – Wall Street Journal (Liyan Qi): “China’s imports fell for a fourth straight month in August as a drop-off in exports to the U.S. steepened, the most recent economic warning signs during a prolonged trade spat with the U.S. that has Beijing turning toward stimulus measures. Chinese imports of everything from raw materials to high-tech products dropped 5.6% in August compared with a year earlier…”

September 9 – Bloomberg (Yawen Chen and Se Young Lee): “China’s factory-gate prices shrank at the sharpest pace in three years in August, falling deeper into deflationary territory and reinforcing the urgency for Beijing to step up economic stimulus as the trade war with the United States intensifies… China’s producer price index (PPI) dropped 0.8% from a year earlier in August, widening from a 0.3% decline seen in July and the worst year-on-year contraction since August 2016…”

September 9 – Financial Times (Alice Woodhouse): “Chinese factory gate prices declined for a second month in August as the manufacturing sector remained under pressure, while consumer price growth hovered at an 18-month high as pork prices surged. Factory gate prices dipped 0.8% year on year in August…, the sharpest fall in three years… Chinese manufacturers are struggling amid ongoing US-China trade tensions. Separately, consumer prices rose 2.8% year on year in August…”

September 10 – New York Times (Alexandra Stevenson and Raymond Zhong): “Things that keep China’s top leaders up at night: a stalling economy, a bruising trade war and, increasingly, pigs. Specifically, a shortage of pigs, which is fast becoming a national crisis. The price of pork has been rising for months, and it is now nearly 50% higher than it was a year ago… Consumers are frustrated, and officials are quietly expressing alarm as they fight the outbreak of a disease that is devastating the country’s pig population and causing the shortage.”

September 10 – Bloomberg: “Chinese authorities have launched a crackdown on the use of credit card in property transactions, the 21st Century Herald reports… Regulators is cracking down on the use of credit card to pay deed taxes or for other payment to property developers and agents…”

September 8 – Bloomberg (Shawna Kwan): “Hong Kong’s protests aren’t just about freedom and democracy. Widening inequality has long contributed to tension in the city, and nothing exemplifies the divide between the haves and have-nots better than the sky-high cost of residential property. Developers, mostly owned by local billionaire families, wield great market power, controlling industries including utilities and mobile phone carriers… Hong Kong’s real estate has for years been ranked the world’s least affordable. For example, a one-bedroom unit in Tuen Mun in the New Territories -- about an hour by subway way from Central, the main business district -- costs the same as a two-bedroom apartment on New York’s upmarket Upper East Side. Prices have risen by 48% over the past five years.”

Central Banking Watch:

September 13 – Financial Times (Martin Arnold): “Mario Draghi’s decision to restart the European Central Bank’s economic stimulus efforts has attracted fierce criticism and opened deep divisions in the institution's top ranks. Thursday’s announcement that the central bank would cut interest rates further into negative territory and restart its €2.6tn quantitative easing programme of bond-buying was greeted with outrage by those who argue that the measures penalised prudent savers while fuelling potential asset bubbles in housing, stock markets and bonds. One German tabloid accused Mr Draghi of being ‘Count Draghila’ who ‘sucks our bank accounts empty’. And, more significantly for the future of the bloc’s policymaking, there was resistance within the ECB governing council itself. As many as nine of the 25 members of the council — the ECB’s main rate-setting body — spoke out against the package… Mr Draghi told reporters there was ‘a clear majority’ in favour of the package. He added that ‘an ample degree of monetary accommodation’ was necessary for ‘the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term’.”

September 12 – Bloomberg (Jana Randow): “European Central Bank governors representing the core of the euro-area economy resisted President Mario Draghi’s ultimately successful bid to restart quantitative easing, according to officials with knowledge of the matter. The unprecedented revolt took place during a fractious meeting where Bank of France Governor Francois Villeroy de Galhau joined more traditional hawks including his Dutch colleague Klaas Knot and Bundesbank President Jens Weidmann in pressing against an immediate resumption of bond purchases, the people said.”

September 11 – Reuters (Balazs Koranyi and Francesco Canepa): “European Central Bank chief Mario Draghi pledged indefinite stimulus… to revive an ailing euro zone economy, tying the hands of his successor for years to come and sparking an immediate conflict with U.S. President Donald Trump. As Draghi’s eight-year mandate nears its close, the ECB cut rates deeper into negative territory and promised bond purchases with no end-date to push borrowing costs even lower… The bigger-than-expected stimulus will increase pressure on the U.S. Federal Reserve and Bank of Japan to ease policy next week to support a world economy increasingly characterized by low growth and protectionist threats to free trade.”

September 12 – Wall Street Journal (Paul J. Davies): “The European Central Bank launched a fresh wave of loose-money policies… to jolt its stubbornly low inflation rate. But many suspect its primary target was something else: the euro. The central bank cut interest rates and revived a bond-buying program at President Mario Draghi ’s penultimate meeting… While the ECB doesn’t target specific levels for the euro, the exchange rate has become a policy focus because of fears that currency strength squashes inflation. ‘This [focus on the euro] is more true than it’s ever been,’ said Seema Shah, chief strategist at Principal Global Investors . ‘Interest rates are so low that any further cut is not going to have much of an impact and runs the risk of making things worse. So why bother? Simply to target the euro.’”

September 12 – Bloomberg (Yuko Takeo and Piotr Skolimowski): “The European Central Bank cut interest rates further below zero and revived bond purchases after President Mario Draghi overcame critics of his stimulus policies to make a final run at reflating the euro-area economy. The ECB reduced the deposit rate to minus 0.5% from minus 0.4%, and said it’ll buy debt from Nov. 1 at a pace of 20 billion euros ($22bn) a month for as long as necessary to hit its inflation goal. ‘We have headroom to keep going on for some time at this rhythm,’ Draghi, whose eight-year term ends next month, said… ‘We still think the probability of recession for the euro area is small, but it’s gone up.’”

September 10 – Reuters (Howard Schneider, Leika Kihara and Balazs Koranyi): “The last time major central banks shifted gears together, it was a cooperative move to keep the financial crisis of a decade ago from becoming a full-bore, worldwide depression. Now, a new round of global ratecutting risks taking on a competitive edge as policymakers try to stay ahead of rising trade tensions, a volatile investment climate, and a shift in the political mood from shared support for globalization to a more zero-sum battle over a slower-growing world economy. It’s a situation that has created deep internal divisions at the European Central Bank, the Bank of Japan and the U.S. Federal Reserve as officials debate how to confront a global slowdown with limited room to cut interest rates, and with elected officials pursuing policies that may be doing harm, at least in the short run.”

September 9 – Bloomberg (Mark Gongloff): “Central bankers were once magical beings with seemingly limitless powers. Paul Volcker slew stagflation. Alan Greenspan ruled for nearly 20 years. Ben Bernanke prevented a second Great Depression. Today’s central bankers are pale shadows. Federal Reserve Chairman Jerome Powell is constantly bullied by his boss. Worse, he and his counterparts in Europe face a weakening global economy armed with the equivalent of one of those guns that unfurls a flag with the word ‘Bang!’ on it. But they must pull the trigger again and again, even if there’s a strong chance it either won’t help or will do actual harm, writes Mohamed El-Erian. Markets demand they act and throw terrifying tantrums if they don’t. Similar pressure comes from politicians — the same politicians who do nothing to support growth, when they’re not actively hurting it.”

September 9 – Financial Times (Richard Koo): “The fear of ‘Japanisation’ has, once again, prompted monetary authorities on both sides of the Atlantic to consider additional monetary easing — but for all the wrong reasons. The extended periods of slow growth and low inflation seen in Japan since 1990 and in the west since 2008 are caused by the disappearance of borrowers, not by the lack of lenders. Monetary policy, which controls the availability of financing, does not work well when there is no appetite for debt. The Japanese demand for borrowing disappeared after the bursting of its bubble in 1990. During the process, commercial real estate prices fell almost 90% nationwide, falling back to the levels of 1973, destroying the financial health of all those who borrowed to purchase property and those who used it as collateral for borrowing. With pre-1990 liabilities still on the books but no assets to show for them, millions of borrowers started to pay down debt to remove their debt overhang... It was a journey that took nearly two decades to complete.”

Brexit Watch:

September 9 – Reuters (William James and Kylie MacLellan): “Prime Minister Boris Johnson said… he would not request an extension to Brexit, hours after a law came into force demanding that he delay Britain’s departure from the European Union until 2020 unless he can strike a divorce deal… ‘This government will press on with negotiating a deal, while preparing to leave without one,” Johnson told parliament… ‘I will go to that crucial summit on October the 17th and no matter how many devices this parliament invents to tie my hands, I will strive to get an agreement in the national interest... This government will not delay Brexit any further.”

September 11 – Reuters (Paul Sandle): “The British government’s plans for a no-deal Brexit warn of severe disruption to cross-Channel routes, affecting the supply of medicines and certain types of fresh foods, and say that protests and counter-protests will take place across the country, accompanied by a possible rise in public disorder. The ‘Operation Yellowhammer’ worst-case assumptions published on Wednesday were prepared on Aug. 2…”

September 11 – Reuters (Michael Holden and Guy Faulconbridge): “Prime Minister Boris Johnson’s suspension of the British parliament was unlawful, a court ruled…, prompting immediate calls for lawmakers to return to work as the government and parliament battle over the future of Brexit.”

September 7 – Reuters (James Davey): “The British Labour Party’s second most powerful man has warned of a possible ban on financial services companies awarding bonuses under a future Labour government… John McDonnell, Labour’s finance spokesman, said… he was putting the City of London on notice that it was time to end bonuses voluntarily or face draconian curbs. ‘If it continues and the City hasn’t learnt its lesson, we will take action, I’ll give them that warning now,’ he told the FT. ‘People are offended by bonuses,’ he said, calling them ‘a reflection of the grotesque levels of inequality’.”

Europe Watch:

September 10 – Reuters (Paul Carrel): “German Chancellor Angela Merkel said… her government was sticking to its balanced budget policy, tempering expectations for fiscal stimulus in Europe’s largest economy. ‘As a federal government, we take seriously the responsibility for a solid budget policy,’ Merkel told an event organized by the German taxpayers’ federation. ‘And I can assure you that we are sticking to the goal of a balanced budget.’”

September 10 – Financial Times (Guy Chazan): “Germany would deploy ‘many, many billions’ of euros to counteract an economic crisis in Europe, Olaf Scholz, the German finance minister, pledged…, saying that years of fiscal prudence and budget surpluses had helped prepare the country to act. Speaking at the start of a Bundestag debate on the 2020 budget, Mr Scholz said that thanks to its prudent management of Germany’s public finances, the government had ‘laid the foundations for us to be able to act in a difficult economic situation’. ‘It is absolutely crucial — if an economic crisis actually breaks out in Germany and Europe — that thanks to our sound finances we will be able to counter it with many, many billions… That is real Keynesianism, that is an active anti-crisis policy.’”

EM Watch:

September 12 – Bloomberg (Cagan Koc): “Turkey’s central bank signaled it’s set to slow the pace of monetary easing after delivering another interest-rate cut that exceeded forecasts as it navigates the conflicting demands of the presidency and markets. Governor Murat Uysal reduced the key rate to 16.5% from 19.75%... The Monetary Policy Committee said inflation is likely to end the year below its earlier forecasts but suggested less scope for deeper easing.”

September 11 – Financial Times (Benjamin Parkin): “Indian businesses typically enter September full of optimism about the spending boost that celebrations including Navratri and Diwali will bring as the country embarks on its biggest annual festive season. But this year, car manufacturers, suppliers and dealers are facing the festivities with something closer to dread. India’s vehicle market, until recently projected to be on track to become the world’s third largest, is facing its worst crisis since records began more than two decades ago. Car sales in August fell 41% from a year earlier…, extending a dismal run in which sales have fallen more than 20% each month since April. ‘We have never seen a crisis as painful as this one,’ said Puneet Gupta, an automotive analyst at IHS Markit. ‘When the market is flat we see people getting worried. This time it’s minus 40%, which is unimaginable . . . We are moving backwards rather than moving forwards.’”

September 7 – Bloomberg (Rahul Satija and P R Sanjai): “A prolonged shadow-banking crisis and hurdles in bankruptcy rules are set to keep India atop the world’s worst bad-debt pile, even as Italy, which held the title previously, quickens the clean-up of its lenders. Moody’s… to Credit Suisse Group AG. warned that more loans may sour in the Asian nation’s banking system. More than 2.4% of total loans in India’s banking system may be under stress on top of the 9.6% bad debt ratio as of June, the highest among major economies, Credit Suisse estimates shows. Italy, on the other hand, has nearly halved its ratio to 8.5% in the last three years.”

Japan Watch:

September 8 – Bloomberg (Toru Fujioka, Takashi Nakamichi and Takako Taniguchi): “Japanese regulators are surveying the nation’s financial firms to determine their exposure to foreign assets including risky credit products as the global economy slows… The Bank of Japan and Financial Services Agency want to get a fuller picture of domestic banks’ and insurers’ investments in collateralized loan obligations and leveraged loans to assess how they would fare if the borrowers run into difficulties… The inspection comes as some investors and analysts fret that years of low interest rates have led to overheated credit markets, with packages of leveraged loans known as CLOs under particular scrutiny. Big Japanese investors including large banks and other financial companies are thought to have snapped up the CLOs as negative rates eat into their returns.”

September 8 – Financial Times (Robin Harding and Leo Lewis): “For more than a hundred years, the Shimane Bank has been the economic heart of its remote Japanese prefecture, financing local companies through the vicissitudes of war, earthquake and rapid economic growth. But last Friday, it all fell apart, highlighting an often-forgotten financial stability risk that could affect not just Japan but the entire global economy. After years of ultra-low interest rates had slashed its loan income, Shimane Bank announced a sudden blow-up in the securities portfolio it had turned to instead... In order to return to profit, Shimane Bank plans to ramp up higher-margin lending to ‘medium risk’ companies... But in a prefecture where the population is already 25% below its peak, and projected to fall another 15% by 2045, good credit risks are hard to come by.”

Global Bubble Watch:

September 8 – Financial Times (Robin Wigglesworth): “The global bull run that started in 1985 is now one of the most intense in the debt market’s 700-year history, comparable with a deleveraging and economic growth spurt that followed the Napoleonic wars. Despite longstanding predictions of the end of the bond bull market that started after former Federal Reserve chair Paul Volcker quashed inflation in the 1980s, government debt has kept rallying this year, taking the average annual fall in yields to 17.4 bps… over the past 34 years. That puts it on the cusp of surpassing the 1873-1909 bull run in length, and makes it the strongest decline in long-term interest rates since 1817-1854, when bond yields declined by 22 bps a year, according to… Paul Schmelzing, a visiting scholar at the Bank of England. The only other stronger periods of declines since Italian city-states first began issuing bonds in the 12th century were under the reign of Louis XIV, Venice’s 14th and 15th century heyday and during the stability that followed the Peace of Cateau-Cambrésis in 1559.”

September 8 – Wall Street Journal (Vipal Monga): “Global interest rates are low and may head lower, driven by slowing economies and the U.S.-China trade war. A less appreciated reason for lower rates is a mountain of debt built up during the past decade. Debt owed by governments, businesses and households around the globe is up nearly 50% since before the financial crisis to $246.6 trillion at the beginning of March… The borrowing helped pull economies out of the nasty recession, but left them with high debt burdens that make it harder for policy makers to raise rates. It also makes consumers and businesses more likely to pull back from spending money on new goods if economic conditions weaken.”

Fixed-Income Bubble Watch:

September 10 – Bloomberg (Michael Gambale): “Investors like long-term debt and companies are increasingly happy to sell it to them. Giving buyers a chance to lock in returns as rates fall, prudent borrowers are grabbing an opportunity to kick debt maturities down the road. In the U.S. investment-grade bond market, there have been 40 tranches launched already this week, of which 22 have a maturity of 10-years or more. Of last week’s 90 tranches sold, 52 had maturities of 10-years or greater. Longer-dated paper accounted for $40.6b (54%) of last week’s $74.9b barrage of new debt. This is an abnormally large amount of longer-dated issuance.”

September 12 – Bloomberg (Christopher DeReza): “Credit investors have pushed cash into U.S. high-grade funds at the third fastest rate ever. Net inflows hit $5.6 billion for the week ended Sept. 11, data from Refinitiv’s Lipper show, the most since April when funds received $5.9 billion… The biggest single weekly inflow was seen in October 2014, when investors added $6.9 billion.”

September 9 – Associated Press: “Moody's… downgraded Ford's credit rating to junk status, citing expectations that the automaker will be weighed by weak earnings and cash generation as it pursues a costly restructuring plan. Ford responded by saying that its underlying business is strong and its balance sheet is solid.”

September 9 – Reuters (Katanga Johnson): “The head of the top U.S. markets regulator… issued a warning over market risks including rising corporate debt, a U.K. withdrawal from the European Union, and the transition away from a key lending rate. Jay Clayton, chairman of the Securities and Exchange Commission (SEC), told an audience… he continued to be concerned over corporate debt growth, which he said had been fostered by a decade of accommodative monetary policies. In the United States, outstanding corporate debt stands at almost $10 trillion, almost 50% of GDP, he said. ‘Those are numbers that should attract our attention,” said Clayton.”

September 9 – Reuters (Richard Leong): “Moody’s… believes the U.S. Treasury Department’s proposal to bring Fannie Mae and Freddie Mac out of conservatorship raises their credit risk as it would shrink their role in U.S. housing market. The Treasury said… the government should draw up a plan to begin recapitalizing the mortgage finance agencies, while calling on Congress to act on comprehensive housing reform. ‘If implemented, proposals to reform the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, would be credit negative for the companies’ creditors,’ the rating agency said…”

Leveraged Speculation Watch:

September 12 – Bloomberg (Lu Wang, Melissa Karsh and Sonali Basak): “Equity hedge funds are paying dearly for their devotion to industries like software and distaste for energy and commodity stocks. Wrong-way moves in positions they’ve crowded into, both long and short, could raise survival risk for some managers, one firm says. ‘This unexpected, profit-sapping dislocation has definitely hurt the majority of clients,’ said Mark Connors, global head of risk advisory at Credit Suisse. ‘Some managers may not make it through the month.’ … According to Morgan Stanley’s prime brokerage unit, the violent moves in the past two weeks climaxed Monday with a hedge-fund alpha gauge the firm devised, plotting returns in popular longs versus those in favorite shorts, notching its second-worst showing of the year.”

September 10 – Bloomberg (Elizabeth Dexheimer): “Hedge funds and other investors in Fannie Mae and Freddie Mac got more mixed messages from the Trump administration Tuesday, adding to the whipsaw trading sessions that have dazed shareholders in recent days. Treasury Secretary Steven Mnuchin… made clear that he plans to end a controversial policy that requires the mortgage giants to send virtually all their earnings to the government. That was the good news for investors. But Mnuchin also said he opposes any ‘simple’ recap and release -- a move hedge funds have long lobbied for that would consist of building up Fannie and Freddie’s capital buffers and then freeing them from federal control.”

September 13 – Financial Times (Laurence Fletcher): “Robert Citrone’s Discovery Capital Management and Guillaume Fonkenell’s Pharo Management were among the big-name hedge funds that suffered losses during last month’s tumble in emerging markets. Worries about the US-China trade war and the health of the global economy, as well as a debt crisis in Argentina triggered by President Mauricio Macri’s shock primary election defeat, helped drive a sharp sell-off in EM assets during August as investors ran for cover.”

September 11 – Bloomberg (Sabrina Willmer): “Blackstone Group Inc. has raised $20.5 billion for its largest real estate fund ever… The amount gathered is more than the $15.8 billion raised by the 2015 pool. Institutions including public pension plans and insurance companies are putting more money into property assets to protect against inflation and diversify their holdings beyond stocks and bonds.”

Geopolitical Watch:

September 8 – Reuters (Francois Murphy): “The U.N. nuclear watchdog told Iran… there is no time to waste in answering its questions, which diplomats say include how traces of uranium were found at a site that was not declared to the agency. It also said Iran was starting to follow through on its pledge last week to further breach its 2015 nuclear deal with world powers, this time installing more advanced centrifuges and moving toward enriching uranium with them, which the deal bans.”

September 7 – Reuters (Parisa Hafezi): “Iran said… it was now capable of raising uranium enrichment past the 20% level and had launched advanced centrifuge machines in further breaches of commitments to limit its nuclear activity under a 2015 deal with world powers.”

September 13 – Reuters (Idrees Ali and Ben Blanchard): “A U.S. Navy destroyer sailed near islands claimed by China in the South China Sea…, the U.S. military said, a move likely to anger Beijing. The busy waterway is one of a growing number of flashpoints in the U.S.-Chinese relationship, which include an escalating trade war, American sanctions on China’s military and U.S. relations with Taiwan. Commander Reann Mommsen… told Reuters that the destroyer Wayne E. Meyer challenged territorial claims in the operation, including what she described as excessive Chinese claims around the Paracel Islands, which are also claimed by Taiwan and Vietnam.”

September 11 – Financial Times (Demetri Sevastopulo): “The Pentagon is compiling a list of companies with ties to the Chinese military as part of a stepped-up Trump administration effort to stop Beijing from obtaining sensitive technologies and protect US defence supply chains. The US defence department is trying to identify Chinese companies and organisations with direct and indirect relationships with the People’s Liberation Army to help reduce the chances of US weapons supply chains being compromised… The Pentagon has become increasingly concerned about supply chains, seeking ways to tackle critical gaps in the US industrial base and prevent infiltration by adversaries. The focus has intensified under the Trump administration, which in 2017 named China a ‘revisionist’ power in its first national security strategy.”

September 9 – Reuters (Thomas Escritt): “Comparing the struggle of Hong Kong’s pro-democracy protesters to the role of Berlin during the Cold War, activist Joshua Wong told an audience in the German capital that his city was now a bulwark between the free world and the ‘dictatorship of China’… ‘If we are in a new Cold War, Hong Kong is the new Berlin,’ he said in a reception space a stone’s throw from the Berlin Wall on the roof of the Reichstag building, which for decades occupied the no-man’s land between Communist East Berlin and the city’s capitalist western half.”

September 8 – Reuters (Brenda Goh): “Hong Kong is an inseparable part of China and any form of secessionism ‘will be crushed’, state media said…, a day after demonstrators rallied at the U.S. consulate to ask for help in bringing democracy to city. The China Daily newspaper said Sunday’s rally in Hong Kong was proof that foreign forces were behind the protests… and warned that demonstrators should ‘stop trying the patience of the central government’. Chinese officials have accused foreign forces of trying to hurt Beijing by creating chaos in Hong Kong over a hugely unpopular extradition bill that would have allowed suspects to be tried in Communist Party-controlled courts.”

September 10 – Reuters (Kelsey Johnson, Fabian Hamacher and Michael Martina): “Canada has sailed a warship through the sensitive Taiwan Strait, the Canadian government said, three months after a similar operation and amid strained ties between Beijing and Ottawa.”

Saturday's News Links

[AP] Yemen rebels claim drone attacks on major Saudi oil sites

[Reuters] Attacks on Saudi oil facilities knock out half the kingdom's supply

[Reuters] Take Five: Of Fed-aches and other central banks

[Reuters] White House to roll out tax cut plan mid-2020: Kudlow

[CNBC] This was the worst week for mortgage rates in 3 years – and it may be just the beginning

[Bloomberg] Treasuries Dive, Sending 10-Year Yield to Highest in Six Weeks

[Bloomberg] What Electric Shock Treatment and Trade Wars Have in Common

[Bloomberg] Kudlow Faults Negative Interest Rates, Contradicting Trump

[WSJ] Saudi Oil Attack: This Is the Big One

[WSJ] How Once-Doomed Mortgage Giants Gained New Lease on Life

[WSJ] U.S. Blames Iran for Attack on Saudi Oil Facilities

[WSJ] Auto Sales Revved Up August Retail Spending

[FT] Treasuries notch biggest weekly drop since 2016 as rotation hits

[FT] Draghi faces chorus of criticism over fresh stimulus

Will Get Something Posted Saturday

I'm enjoying the final evening of the McAlvany Wealth Management Investor Conference.

Thursday, September 12, 2019

Thursday Evening Links

[Reuters] Wall Street ends higher on trade, ECB stimulus hopes

[Reuters] Draghi ties Lagarde's hands with promise of indefinite stimulus

[Reuters] U.S. budget deficit passes $1 trillion mark for fiscal 2019

[Reuters] U.S. core inflation firming, but Fed still seen cutting rates

[Reuters] Ahead of renewed talks, Washington, Beijing prepare ground for trade deal

[Bloomberg] Draghi Faced Unprecedented ECB Revolt as Core Europe Resisted QE

[Bloomberg] ECB Cuts Rates, Revives QE to Lift Growth as Draghi Era Ends

[Bloomberg] Carnage in Crowded Hedge Fund Stocks May Mean Some Don't Survive

[WSJ] China Seeks to Narrow Trade Talks With U.S. in Bid to Break Deadlock

[WSJ] ECB Launches Major Stimulus Package, Cuts Key Rate

Thursday's News Links

[Reuters] Trade war thaw and ECB stimulus hopes buoys stocks

[Reuters] Oil prices fall as OPEC+ talks output compliance, not cuts

[Reuters] As trade talks loom, Chinese firms look into buying U.S. farm goods

[Reuters] ECB to turn stimulus taps back on as economy slows

[Reuters] Argentina announces new round of currency controls amid economic crisis

[Bloomberg] Turkey Surprises With Another Jumbo Rate Cut After Record Easing

[NYT] California Approves Statewide Rent Control to Ease Housing Crisis

[WSJ] China Seeks to Narrow Trade Talks With U.S. in Bid to Break Deadlock

[WSJ] Why Rate Cuts in Europe Could Do More Harm Than Good

[FT] China stimulus feared ‘too little, too late’

[FT] US targets companies with Chinese military ties

Wednesday, September 11, 2019

Wednesday Evening Links

[Reuters] Asian stocks rise on hopes for U.S.-China trade, monetary stimulus

[Reuters] Trade hopes buoy Wall Street as China extends olive branch

[CNBC] Trump delays tariff hikes by two weeks in ‘good will’ gesture to China

[Reuters] Trump reverses course, seeks negative rates from Fed 'boneheads'

[Reuters] Trump's call for negative rates threatens savers

[Reuters] Note to Trump: Negative rates have delivered few positive results

[Reuters] ECB to turn stimulus taps back on to prop up ailing economy

[Reuters] UK's worst-case no-deal Brexit plan warns of food shortages, public disorder

[Yahoo/Bloomberg] End of Era: Passive Equity Funds Surpass Active in Epic Shift

[Reuters] U.S. money fund assets grow to highest since October 2009: iMoneyNet

[Bloomberg] Trump’s Latest Tweet on Fed, U.S. Debt Is Called a ‘Recipe for Disaster’

[WSJ] Trump Says Fed Should Cut Rates to ‘Zero, or Less,’ Attacks Jerome Powell Again

[FT] India’s deepening car sales slump spreads alarm

Wednesday's News Links

[AP] Global stocks rise on signs of easing trade tensions

[Reuters] Investors unwind bearish bets as optimism grows on trade and stimulus

[Reuters] Treasuries - U.S. yields rise after producer prices data

[Reuters] U.S. producer prices unexpectedly rise in August

[CNBC] Trump says Fed ‘boneheads’ should cut interest rates to zero ‘or less,’ US should refinance debt

[Reuters] Trump urges zero or negative interest rates to tackle U.S. debt

[Reuters] White House adviser plays down expectations for U.S.-China talks

[Reuters] China bank loans up in August, more stimulus expected

[Reuters] Brexit in chaos after court rules PM's suspension of parliament was unlawful

[AP] ECB faces key stimulus decision as Draghi era nears end

[Reuters] U.S. corporate bond, IPO markets heat up as recession fears persist

[Reuters] In a fracturing world, central banks still stuck together

[CNBC] Weekly mortgage applications rise as buyer’s market takes hold

[Reuters] Canada again sails warship through sensitive Taiwan Strait

[Bloomberg] Morgan Stanley’s Gorman Warns Against Cutting Rates ‘Too Easily’

[Bloomberg] The ECB Is Preparing to Inflict More Pain on Banks

[Bloomberg] India’s Auto Boom Goes Bust

[NYT] China’s Pork Prices Soar, Adding to Beijing’s Troubles

[WSJ] Trump Says Fed Should Reduce Rates to ‘Zero, or Less’

[WSJ] Global Drop in Currencies Bruises Investors

[WSJ] Hong Kong Is the Lung Through Which Chinese Banks Breathe

[WSJ] Median U.S. Household Income Showed No Growth in 2018

[WSJ] American Businesses Say China’s Slowdown Is a Greater Threat Than the Trade War

[FT] Negative yields leave EM investors with nowhere to hide

Tuesday, September 10, 2019

Tuesday Evening Links

[Yahoo/Bloomberg] Stocks Jump Late to Close Positive; Bonds Fall: Markets Wrap

[Reuters] Wall Street ends flat as energy jumps, tech slips

[Reuters] More Americans went without health insurance in 2018; income growth stalled

[Reuters] Overhaul Fannie and Freddie or we will act, Trump administration tells Congress

[Reuters] Germany sticking to balanced budget goal, Merkel says

[Bloomberg] Tumbling Treasuries Drive Yields to Highest Levels in a Month

[Bloomberg] Everything That Worked in Global Markets in 2019 Suddenly Doesn't

[Bloomberg] Hedge Funds Left Dizzy by Mnuchin’s Fannie-Freddie Musings

[WSJ] A Giant Bet Against Natural Gas Is Blowing Up

[FT] Trump officials defend Fannie Mae and Freddie Mac reform plans

Tuesday's News Links

[Reuters] Stocks edge lower as China data revives recession fears

[Reuters] Bond yields climb as ECB stimulus expectations fade

[Reuters] Oil hits six-week high on hopes of extended OPEC output cuts

[Reuters] China August factory deflation deepens, prices fall most in three years; pork prices soar

[Reuters] Boris Johnson tells parliament: You can tie my hands, but I will not delay Brexit

[Kyodo] Xi told Abe he "can't believe" Trump amid trade friction

[AP] Big Tech faces a new set of foes: nearly all 50 US states

[Reuters] Deadline looming, Japan struggles to elude Trump tariff threat

[Reuters] Prosecutors raid Commerzbank offices over share-trading scam

[Reuters] Fitch says trade policy disruption is 'darkening' global economic outlook

[Bloomberg] Record Bond Rally Hinges on Draghi Delivering a Full QE Package

[Bloomberg] U.S. Small-Business Optimism Declines to Lowest in Five Months

[WSJ] Mario Draghi’s Plan for Final Jolt of Stimulus Runs Into Opposition

[FT] Why aggressive monetary easing is pushing on a string

[FT] China producer prices fall at fastest rate in 3 years

[FT] Germany pledges to loosen purse strings in event of economic crisis

Monday, September 9, 2019

Monday Evening Links

[Reuters] Wall Street ends flat amid rate hopes, tech declines

[Reuters] Treasuries - U.S. yields gain, in line with Europe, as risk sentiment improves

[The Hill] Deficit surpasses $1 trillion: CBO

[AP] Moody's downgrades Ford credit rating to junk status

[Reuters] Top U.S. regulator warns over corporate debt, market risks

[Reuters] Moody's sees Fannie, Freddie privatization plan as 'credit negative'

[Reuters] My town is the new Cold War's Berlin: Hong Kong activist Joshua Wong

[Bloomberg] Big Central Bankers Have Big Problems

[Bloomberg] Hedge Funds Getting Burned as Growth Stocks Trounced by Value

[Bloomberg] Corporate Pension Funding Moves Closer to Worrisome 80% Level

[Bloomberg] Trump Agriculture Trade Official Calls Xi ‘Communist Zealot’

Monday's News Links

[Reuters] Stocks gain on stimulus hopes, pound hits six-week high

[Reuters] Oil rises as Saudi Arabia signals OPEC cuts to continue under new energy minister

[Reuters] Ireland warns PM Johnson: no-backstop equals no-deal Brexit

[Reuters] Time for shock and awe: Five questions for the ECB

[Reuters] Mnuchin considering U.S. sanctions over Turkey's S-400 purchase

[Reuters] China will not tolerate attempts to separate Hong Kong from China: state media

[Reuters] Exclusive: Germany mulls shadow budget to circumvent strict debt rules: sources

[CNBC] ‘Gold is the way to go’ as interest rates fall, says Mark Mobius

[Reuters] Iran moves toward enriching uranium with advanced centrifuges: IAEA

[Bloomberg] Chinese Exporters Get a Taste of the Misery to Come

[Bloomberg] China Has Added Nearly 100 Tons of Gold to Its Reserves

[Bloomberg] Japan Boosts CLO Scrutiny as Banks Buy Risky Assets

[Bloomberg] How Hong Kong’s Sky-High Home Prices Feed the Unrest

[FT] Draghi under pressure to deliver fresh stimulus package

[FT] Global bond bull run has reached historic levels

Saturday, September 7, 2019

Saturday's News Links

[AP] White House adviser compares China trade talks to Cold War

[Reuters] MPs prepare court action to enforce Brexit delay

[Reuters] UK's Labour to crack down on finance bonuses if it wins power: FT

[Reuters] Hong Kong police fend off airport protest but tear gas fired again in Kowloon

[Reuters] Iran further breaches nuclear deal, says it can exceed 20% enrichment

[Bloomberg] Powell Waves Off Recession Fear While Leaving Rate Cuts on Table

[WSJ] In the Race to Dominate 5G, China Sprints Ahead

[FT] ECB’s Draghi faces up to super-charged market expectations

[FT] Powell says making up for lost inflation is ‘great idea’

Weekly Commentary: $150 Billion Global Corporate Bond Binge

After an extraordinary August, markets are showing no inclination for stability to begin September. Jumping 1.3% Thursday on news of an October restart of trade talks, the S&P500 gained 1.8% for the week. The S&P500 ended the week less than 2% from all-time highs. The Semiconductors surged 4.2%, increasing 2019 gains to almost 36%. The Nasdaq100 advanced 2.1% (up 24.1% y-t-d), now also less than a couple percent from record highs. The Broker/Dealers jumped 2.7%.

Not uncharacteristically, the more dramatic market trading dynamics were visible throughout fixed-income. Curiously, Thursday’s bout of “risk on” (and much stronger-than-expected ADP and ISM Non-Manufacturing reports) finally captured the attention of safe haven bonds. Ten-year Treasury yields surged nine bps to 1.56% - which equated to a painful 1.8% one-day drop in the popular iShares Treasury Bond ETF (TLT). Intraday, TLT was down as much as 2.4%. Bullish pundits were quick to dismiss a single-session yield jump. But of the crowd piling into bond ETFs, how many are unaware of how quickly money can be lost in “safe” bonds?

“Biggest Bond Rout in Years Whiplashes Bulls Who Were Right,” read a Bloomberg article (Liz McCormick) headline. Jumping 9.5 bps to 1.53%, two-year Treasury yields posted their largest one-day jump since February 2015. At one point up 14 bps, two-year Treasury yields were on the cusp of the biggest single-session spike in a decade. Interestingly, the implied yield for December Fed funds futures was little changed for the week at 1.61%.

Investment-grade corporate bonds were under pressure as well. The iShares Investment-Grade Bond ETF (LQD) was down as much as 0.9% intraday before ending Thursday’s session with a loss of 0.7%. While declining almost 1% early in the trading day, the “risk on” backdrop lifted junk bond indices into positive territory by the close.

After trading at a record low negative 0.74% in Tuesday trading, German bund yields spiked to as high as negative 0.575% during Thursday’s session (before ending the week at negative 0.64%). Safe haven Swiss bonds were similarly unstable. After trading as low as negative 1.05% in Wednesday trading, Swiss 10-year yields surged to negative 0.90% - before closing Friday at negative 0.95%.

Curiously, there were bond rallies that didn’t miss a beat. This week’s 12 bps drop in Italian 10-year yields narrowed the spread to German bunds by 18 bps to a 16-month low 151 bps. Greek 10-year yields declined three bps, narrowing the spread to bunds to a near decade-low 222 bps. I’ll assume there have been some bearish bets on Italian and Greek yields (and spreads) that have “blown up.”

Argentine 30-year dollar bonds had a wild ride. After opening Monday trading at 16.69%, yields spiked to as high as 18.25% in Tuesday trading before reversing course and closing out the week at 13.55%. The Argentine peso rallied 6.6% this week, reducing 2019 losses versus the dollar to 32.5%.

And while risk showed its face in (most) bond prices, corporate debt issuance was nothing short of incredible. A Bloomberg headline described the week: “A $150 Billion Global Corporate Bond Binge Is Smashing Records.”

September 6 – Financial Times (Joe Rennison): “Companies across the world, from iPhone maker Apple to German financial technology group Wirecard, sold more bonds this week than ever before, abruptly waking the market from its summer slumber to take advantage of historically low borrowing costs. Investors lapped up more than $140bn of new corporate bonds, marking the biggest weekly volume to hit global markets on record, according to… Dealogic. The debt binge was fuelled by investment-grade companies in the US where $72bn was raised across 45 deals in a single week, roughly equalling the total issued in the whole of August. ‘We have had a month of issuance in three days,’ said Andrew Brenner, head of international fixed income at National Alliance Securities. ‘There is tremendous demand out there.’”

September 4 – Wall Street Journal (Matt Wirz and Nina Trentmann): “Apple… joined U.S. companies including Deere & Co. and Walt Disney Co. in a recent sprint to issue new bonds, taking advantage of the steep decline in benchmark interest rates and a surge in investor demand. Apple launched its first bond deal since 2017, selling $7 billion of debt. All three companies issued 30-year bonds with yields below 3%, a first for the corporate debt market. Twenty-one companies with investment-grade credit ratings issued bonds totaling about $27 billion on Tuesday, said Andrew Karp, head of investment-grade capital markets at Bank of America Corp. ‘That’s equivalent to a busy week for us—in one day,’ he said.”

September 5 – Bloomberg (Brian W Smith and Michael Gambale): “U.S. investment-grade bond issuance is hitting $74 billion for this week, the most for any comparable period since records began in 1972. Thursday’s $20 billion total adds to the $54 billion already sold, thrashing the week’s forecast of $40 billion. With a rally in Treasuries pushing the high-grade bond yield to a three-year low of just 2.77%, companies are borrowing cheap money now to refinance more expensive debt, spurred by a positive tone in global markets.”

September 6 – Financial Times (Joe Rennison): “…In a further sign of investors’ increasingly desperate search for yield, Restaurant Brands, which owns the Popeyes and Burger King chains, was set to issue an 8.5-year bond with a coupon under 4% on Friday, entering a tiny club of junk-rated issuers that have managed to sell debt below that level — and breaching what is typically expected from ‘high yield’ issuers. ‘The conventional heuristics are getting tossed out of the window,’ said John McClain, a portfolio manager at Diamond Hill Capital Management. ‘These are paltry returns.’”

It's difficult to envisage a more manic bond market environment – at home or abroad. In Europe, it’s tulip mania reincarnated, with a third of European investment-grade bonds now trading with negative yields. Draghi had best not disappoint the markets next Thursday. And when he comes through, markets will raise the stakes even higher for next month's meeting. From the Financial Times (Robert Smith): “JPMorgan’s analysts say September is shaping up to be the ‘first issuance window where negative yielding bonds are a common feature, rather than an occasional oddity’. ‘In our view, investors still have cash to deploy, and few other alternatives to buy,’ they say.”

September 5 – Bloomberg (Hannah Benjamin): “Sales of new bonds in Europe will pass 1 trillion euros ($1.1 trillion) on Thursday, earlier in the year than ever before as companies take advantage of ultra-low borrowing costs ahead of potential year-end volatility to raise funds. BT Group Plc, Continental AG and Snam SpA joined the deluge on Thursday, fanning what may be the busiest week for corporate issuance since March 2018. The day’s 13 offerings marketwide will also likely lift sales for the year above 1 trillion euros, about six weeks earlier than last year and two weeks quicker than 2017’s record…”

Beijing was determined to do its share to make the week noteworthy.

September 6 – Bloomberg: “China’s central bank said it will cut the amount of cash banks must hold as reserves to the lowest level since 2007, injecting liquidity into an economy facing both a domestic slowdown and trade-war headwinds. The required reserve ratio for all banks will be lowered by 0.5 percentage points, taking effect on Sept. 16… The PBOC also cut the reserve ratios by one percentage point for some city commercial banks, to take effect in two steps on Oct. 15 and Nov. 15. The cuts will release 900 billion yuan ($126bn) of liquidity, the PBOC said, helping to offset the tightening impact of upcoming tax payments. That is more than the previous cuts in January and May, which released 800 billion yuan and 280 billion yuan, respectively, the PBOC said…”

Though China’s latest cut in bank reserve requirements was well-telegraphed, it along with the restart of trade talks pushed the Shanghai Composite 3.9% higher. The renminbi rallied 0.56% versus the dollar. But before we get too excited by the “release” of an additional $126 billion of lending power, keep in mind that Chinese Credit in 2019 has already been expanding abundantly. After seven months, Total Aggregate Financing had already increased $2.022 Trillion, running at a rate 26% ahead of comparable 2018. Reserve reductions can be expected to somewhat extend China’s historic mortgage finance and apartment Bubbles.

And on the topic of mortgage finance Bubbles…

September 5 – Wall Street Journal (Andrew Ackerman and Kate Davidson): “The Trump administration said it would support returning mortgage-finance giants Fannie Mae and Freddie Mac to private hands, a development that could keep the companies at the center of the housing market for decades to come. The principles announced Thursday represent a major reversal from what leaders of both parties over the past decade promised—to abolish the companies, which guarantee roughly half the U.S. mortgage market. The approach, which doesn’t require approval by Congress, would mark an important win for investors who have been betting politicians wouldn’t follow through on those promises. Treasury officials said they would aim to privatize the government-controlled firms without making it tougher and more expensive for people to get mortgages.”

September 5 – Wall Street Journal (Aaron Back): “America’s mortgage-finance system isn’t going to change in a fundamental way for the foreseeable future. That is the inescapable—though to many parties deeply disappointing—takeaway from the U.S. Treasury Department’s housing reform plan… Mortgage guarantors Fannie Mae and Freddie Mac, which have been wards of the state for 11 years, are likely to remain so for some time. For years a debate has raged over how to deal with the companies that back most mortgages in the U.S. Some, especially holders of their volatile shares, want them recapitalized and released from government control as soon as possible. Others want a fundamental reform of the system, which would require new laws and likely include an explicit government guarantee for the mortgage-backed securities they issue. The Trump administration is trying to straddle the two camps by recommending that Congress get to work on the more fundamental reforms while the executive branch gets started recapitalizing and releasing the companies. But exhortations to Congress are likely to fall on deaf ears. Meanwhile, the route to recapitalizing the companies outlined in the report is tentative and vague. The report uses the term ‘Congress should’ 40 times.”

A factor fundamental to the predicament was captured succinctly by Barron’s (Bill Alpert): “Both Fannie and Freddie now have negative net worths. The Treasury would like to end their government conservatorship and have them stand on their own. But to capitalize them well enough to weather another financial crisis could require a couple of hundred billion dollars.”

Predictably, Washington has failed to resolve the serious systemic risk posed by the GSEs, risk made disastrously clear in 2008. Indeed, the Trump administration has followed Obama’s in lacking the fortitude to even commence the process. It’s been more than a decade since the crisis and resulting Fannie and Freddie government receivership. At the minimum, these two failed institutions should have shrunk. But after ending 2008 at $8.167 TN, Total GSE Securities (chiefly Fannie and Freddie’s) closed out Q1 at a record $9.147 TN.

It’s worth noting GSE Securities surged $626 billion since the end of 2016 – in what is reckless late-cycle growth for institutions with zero capital buffers. But as a wing of the Department of Treasury (and a probable target of the Fed’s next QE program), GSE debt and MBS have enjoyed insatiable demand. In one of history’s great Bond Binges, combined outstanding Treasury and GSE securities have increased $3.0 Trillion over just the past ten quarters.

In theory, it would be prudent to push hard for less Washington monopolization of mortgage Credit. But at this point, the idea of “privatizing” Fannie and Freddie would simply be a return to the disastrous system of privatizing profits while nationalizing risk. There is simply no mechanism to effectively privatize this risk, as markets will invariably recognize these bigger than ever colossal institutions as much too big to fail.

Confident in the Washington backstop, GSE securities will continue to trade with meager risk premiums. This distortion creates extraordinarily attractive profit opportunities for equity investors clamoring for a so-called “privatization.” As before, cheap financing costs and the gross under-reserving for future losses would create the illusion of sound and highly profitable institutions. These “private” companies would surely reward investors with strong earnings growth and dividends, ensuring a hopelessly insufficient capital base for the downside of the cycle.

The Trump administration punted. Yet I would prefer to see these institutions remain under the Treasury umbrella rather than be part of some sham “privatization.” The administration should, however, at the very minimum demand a moratorium on expansion. It would take years, but Fannie and Freddie exposures could be meaningfully reduced. I won’t hold my breath. Cheap mortgage Credit has been a staple for U.S. economic and financial systems now going on three decades. One of many historic market distortions that these days passes as normal and sustainable.


For the Week:

The S&P500 jumped 1.8% (up 18.8% y-t-d), and the Dow gained 1.5% (up 14.9%). The Utilities added 0.6% (up 18.8%). The Banks rose 1.6% (up 10.3%), and the Broker/Dealers jumped 2.7% (up 11.3%). The Transports gained 1.7% (up 12.3%). The S&P 400 Midcaps rose 1.6% (up 14.9%), and the small cap Russell 2000 increased 0.7% (up 11.6%). The Nasdaq100 advanced 2.1% (up 24.1%). The Semiconductors surged 4.2% (up 35.8%). The Biotechs declined 2.6% (up 1.2%). With bullion $, the HUI gold index sank 4.9% (up 35.1%).

Three-month Treasury bill rates ended the week at 1.91%. Two-year government yields gained four bps to 1.54% (down 95bps y-t-d). Five-year T-note yields rose five bps 1.43% (down 108bps). Ten-year Treasury yields jumped six bps to 1.56% (down 112bps). Long bond yields rose six bps to 2.03% (down 99bps). Benchmark Fannie Mae MBS yields declined a basis point to 2.38% (down 112bps).

Greek 10-year yields declined three bps to 1.58% (down 282bps y-t-d). Ten-year Portuguese yields jumped seven bps to 0.19% (down 153bps). Italian 10-year yields dropped 12 bps to 0.88% (down 187bps). Spain's 10-year yields gained seven bps to 0.17% (down 124bps). German bund yields rose six bps to negative 0.64% (down 88bps). French yields jumped seven bps to negative 0.34% (down 105bps). The French to German 10-year bond spread was little changed at 30 bps. U.K. 10-year gilt yields gained three bps to 0.51% (down 77bps). U.K.'s FTSE equities index jumped 1.0% (up 8.2% y-t-d).

Japan's Nikkei Equities Index added 0.2% (up 5.9% y-t-d). Japanese 10-year "JGB" yields increased three bps to negative 0.24% (down 24bps y-t-d). France's CAC40 jumped 2.3% (up 18.5%). The German DAX equities index rose 2.1% (up 15.5%). Spain's IBEX 35 equities index gained 2.0% (up 5.3%). Italy's FTSE MIB index surged 2.9% (up 19.8%). EM equities were mostly higher. Brazil's Bovespa index gained 1.8% (up 13.1%), and Mexico's Bolsa added 0.2% (up 2.6%). South Korea's Kospi index rose 2.1% (down 1.6%). India's Sensex equities index declined 0.9% (up 2.5%). China's Shanghai Exchange surged 3.9% (up 20.3%). Turkey's Borsa Istanbul National 100 index rose 2.3% (up 8.5%). Russia's MICEX equities index gained 2.1% (up 18.1%).

Investment-grade bond funds saw inflows of $1.219 billion, while junk bond funds posted outflows of $319 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates dropped nine bps to 3.49% (down 105bps y-o-y). Fifteen-year rates fell six bps to 3.00% (down 99bps). Five-year hybrid ARM rates dipped a basis point to 3.30% (down 63bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up one basis point to 4.21% (down 21bps).

Federal Reserve Credit last week declined $1.8bn to $3.722 TN. Over the past year, Fed Credit contracted $447bn, or 10.7%. Fed Credit inflated $911 billion, or 32%, over the past 356 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $24.3bn last week to $3.451 TN. "Custody holdings" rose $22bn y-o-y, or 0.6%.

M2 (narrow) "money" supply jumped $20.6bn last week to $14.958 TN. "Narrow money" gained $717bn, or 5.0%, over the past year. For the week, Currency increased $3.8bn. Total Checkable Deposits gained $9.4bn, and Savings Deposits rose $2.5bn. Small Time Deposits added $0.8bn. Retail Money Funds increased $4.0bn.

Total money market fund assets gained $16.8bn to $3.381 TN. Money Funds gained $516bn y-o-y, or 18%.

Total Commercial Paper gained $3.4bn to $1.124 TN. CP was up $58bn y-o-y, or 5.4%.

Currency Watch:

The U.S. dollar index declined 0.8% to 98.012 (up 1.9% y-t-d). For the week on the upside, the Mexican peso increased 2.7%, the South African rand 2.6%, the Brazilian real 2.1%, the Swedish krona 2.0%, the Australian dollar 1.7%, the Norwegian krone 1.7%, the New Zealand dollar 1.2%, the South Korean won 1.2%, the Canadian dollar 1.1%, the British pound 1.0%, the euro 0.4%, the Singapore dollar 0.4% and the Swiss franc 0.3%. On the downside, the Japanese yen declined 0.6%. The Chinese renminbi increased 0.56% versus the dollar this week (down 3.34% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index gained 1.1% this week (up 1.2% y-t-d). Spot Gold declined 0.9% to $1,507 (up 17.5%). Silver retreated 1.2% to $18.119 (up 16.6%). WTI crude jumped $1.42 to $56.52 (up 25%). Gasoline rose 2.9% (up 19%), and Natural Gas surged 9.2% (down 15%). Copper gained 3.2% (unchanged). Wheat added 0.3% (down 8%). Corn sank 3.9% (down 5%).

Market Instability Watch:

September 5 – New York Times (Ana Swanson and Matt Phillips): “President Trump’s decision to renew talks with China in the coming weeks sent financial markets soaring on Thursday… But expectations for progress remain low, and many in the United States and China see the best outcome as a continued stalemate that would prevent a collapse in relations before the 2020 election. Both Mr. Trump and President Xi Jinping of China are under pressure from domestic audiences to stand tough, and the talks will happen after Mr. Trump’s next round of punishing tariffs take effect on Oct. 1.”

September 5 – Bloomberg (Liz McCormick): “After August’s historic drop, it was starting to seem like Treasury yields could only fall. And then came Thursday, when an enormous surge reminded even well-entrenched bulls that the world’s biggest bond market isn’t a one-way street. Yields on two-year notes jumped as much as 14 bps, which would be the largest full-day increase in a decade, before pulling back to 11 points. A popular iShares ETF tracking long bonds sank as much as 2.4%, the biggest intraday rout since the day after the 2016 U.S. presidential election. The sell-off was global, with German 30-year rates briefly turning positive after a month under zero, and yields in Australia and New Zealand climbing early in Asia on Friday.”

September 4 – Financial Times (Andrew Cummins): “Politics hates a vacuum; capital markets even more so. Argentina is suffering a confidence-driven liquidity crisis in the uncertain lead up to October 27 presidential elections. The country is at risk of experiencing a full-blown economic and banking crisis that becomes a solvency problem. Given the uncertainty, Argentine banks are seeing fearful depositors line up to make dollar withdrawals… New measures announced in the past week may calm markets. Last Wednesday, the country announced plans to ‘reprofile’ its external dollar debt, without cutting the face value or interest rates, and it also delayed payments on its short-term local currency obligations. Then, over the weekend, authorities imposed capital controls to stabilise the tumbling exchange rate and slow panic buying of dollars.”

August 30 – Reuters (John Ainger): “The global stock of negative-yielding debt is now in excess of $17 trillion as rising market volatility lends extra force to this year’s unprecedented bond rally. Thirty percent of all investment-grade securities now bear sub-zero yields, meaning that investors who acquire the debt and hold it to maturity are guaranteed to make a loss. Yet buyers are still piling in, seeking to benefit from further increases in bond prices and favorable cross-currency hedging rates—or at least to avoid greater losses elsewhere.”

September 2 – Reuters (Dhara Ranasinghe): “The pool of negative-yielding bonds in the euro area expanded further in August, with almost half of euro-denominated investment grade corporate debt on the Tradeweb platform now carrying negative yields, Tradeweb said…”

September 4 – Reuters (Richard Leong): “U.S. money market fund assets rose to their highest level since October 2009, as investors resumed their move into these low-risk products due to jitters about a slowing global economy and U.S.-China trade tensions… Assets of money funds, which are seen nearly as safe as bank accounts, climbed by $14.87 billion to $3.331 trillion in the week ended Sept 3… This brought their year-to-date increase in fund assets to about $360 billion.”

Trump Administration Watch:

September 4 – CNBC (Kayla Tausche and Jacob Pramuk): “President Donald Trump wanted to double tariff rates on Chinese goods last month after Beijing’s latest retaliation in a boiling trade war before settling on a smaller increase, three sources told CNBC. The president was outraged after he learned Aug. 23 that China had formalized plans to slap duties on $75 billion in U.S. products in response to new tariffs from Washington… His initial reaction, communicated to aides on a White House trade call held that day, was to suggest doubling existing tariffs… Treasury Secretary Steven Mnuchin and U.S. Trade Representative Robert Lighthizer then enlisted multiple CEOs to call the president and warn him about the impact such a move would have on the stock market and the economy.”

September 2 – Associated Press: “The Trump administration’s latest round of tariffs on Chinese imports took effect early Sunday, potentially raising prices Americans pay for some clothes, shoes, sporting goods and other consumer goods in advance of the holiday shopping season. The 15% taxes apply to about $112 billion of Chinese imports. All told, more than two-thirds of the consumer goods the United States imports from China now face higher taxes. The administration had largely avoided hitting consumer items in its earlier rounds of tariff hikes.”

September 6 – Bloomberg (Saleha Mohsin and Shawn Donnan): “President Donald Trump’s trade war with China is threatening to draw one of the global economy’s neutral referees into the fray: the International Monetary Fund. As part of his campaign to pressure Beijing into changing its trade practices, Trump last month formally declared China a currency manipulator. But in a move that risks undermining the IMF’s place as an arbiter for sound economic policy, Treasury Secretary Steven Mnuchin has also been quietly pushing the fund to endorse its view -- just weeks after the IMF found China’s yuan was fairly valued and declared there was no evidence of manipulation by Beijing, according to people familiar with the matter.”

September 5 – Reuters (Pete Schroeder): “The U.S. Treasury… said the government should draw up a plan to begin recapitalizing mortgage giants Fannie Mae and Freddie Mac, while calling on Congress to pen a comprehensive housing reform that would allow them to be safely freed from government control. The Treasury’s plan, released in a 53-page report, marks the first major effort to jump-start housing finance reform in Washington after a failed 2012 attempt by the Obama administration. The report calls for recuperating Fannie and Freddie and removing them from their government lifeline, but it strikes a cautious tone by failing to commit to concrete timelines or a specific recapitalization plan.”

Federal Reserve Watch:

September 5 – Wall Street Journal (Nick Timiraos): “Federal Reserve officials are gearing up to reduce interest rates at their next policy meeting in two weeks, most likely by a quarter-percentage point, as the trade war between the U.S. and China darkens the global economic outlook. The idea of an aggressive half-point cut to battle the slowdown hasn’t gained much support inside the central bank, according to interviews with officials and their public speeches. While market-determined interest rates have tumbled, signaling a dimmer outlook for growth and inflation, many Fed officials believe that the 10-year U.S. expansion can continue at a modest pace and inflation will gradually rise to their 2% target. ‘The economy is in a good place, but not without risk and uncertainty,” said New York Fed President John Williams… ‘Our role is to navigate a complex and at times ambiguous outlook to keep the economy growing and strong.’”

September 4 – Bloomberg (Christopher Condon): “The U.S. economy grew at a modest pace through much of July and August, with companies remaining upbeat despite disruption caused by international trade disputes, a Federal Reserve survey found. ‘Although concerns regarding tariffs and trade policy uncertainty continued, the majority of businesses remained optimistic about the near-term outlook’…

September 5 – Financial Times (Brendan Greeley and Colby Smith): “Over the summer, investors put a gimlet eye to returns on US Treasuries, examining them for signs of a recession. The Fed has been watching, too, with some disagreement over what it is seeing and how to respond. In appearances this week, two Fed presidents laid out different arguments for the recent dramatic fall in Treasury yields and the concurrent inversion of the yield curve — a traditional harbinger of recession, in which shorter-term interest rates are higher than longer-term ones. Eric Rosengren… attributed the developments in the Treasury market to economic weakness abroad, which means there is less reason for concern at the US central bank. Robert Kaplan… blamed concerns over domestic growth, highlighting the need for the Fed to cut interest rates. Their disagreement lies at the heart of the central bank’s debate about what to do at its next policy meeting, later this month, where Fed chairman Jay Powell is facing a divided committee.”

September 3 – Bloomberg (Christopher Condon): “Federal Reserve Bank of Boston President Eric Rosengren said the U.S. economy remains ‘relatively strong’ despite clearly heightened risks, leaving him unconvinced the central bank needs to cut interest rates at its upcoming meeting this month. ‘If the consumer continues to spend, and global conditions do not deteriorate further, the economy is likely to continue to grow around 2%,’ Rosengren said… At that pace, ‘with continued gradual increases in wages and prices, then in my view, no immediate policy action would be required.’”

September 3 – Reuters (Howard Schneider and Ann Saphir): “The Federal Reserve should use its meeting in two weeks to aggressively cut interest rates, one U.S. central banker said… Less than an hour later, a second U.S. central banker said he saw no need to use up the Fed’s precious firepower when the economy is growing, inflation looks stable and labor markets are in good shape. The dueling views - from St. Louis Fed President James Bullard, who called for a half-a-percentage-point rate cut, and Boston Fed President Eric Rosengren, who saw no immediate need for any move - show the tight spot Fed Chair Jerome Powell finds himself in as the Fed’s next policy-setting meeting approaches.”

September 3 – Reuters (Jonnelle Marte and Trevor Hunnicutt): “The U.S. Federal Reserve’s balance sheet could end up between $3.8 trillion and $4.7 trillion by 2025, according to projections collected by the New York Fed. The regional arm of the central bank, which manages the Fed’s massive bond holdings, released the projections in a report… drawn from surveys of Wall Street traders. The New York Fed’s report showed the Fed could start buying Treasuries as soon as 2019 or as late as 2025, but the decision would depend on the growth of bank reserves and other Fed liabilities, including currency. The Fed currently holds about $3.8 trillion in assets…”

U.S. Bubble Watch:

September 5 – CNBC (Jeff Cox): “Job growth continued at a tepid pace in August, with nonfarm payrolls increasing by just 130,000 thanks in large part to the temporary hiring of Census workers… The increase fell short of Wall Street estimates for 150,000, while the unemployment rate stayed at 3.7%, as expected… Wage growth remained solid, with average hourly earnings increasing by 0.4% for the month and 3.2% over the year; both numbers were one-tenth of a percentage point better than expected. Labor force participation also increased, rising to 63.2% and tying its highest level since August 2013. The total number of Americans considered employed surged by 590,000 to a record 157.9 million, according to the household survey…”

September 5 – CNBC (Jeff Cox): “Company payrolls surged by 195,000 in August, well above Wall Street estimates and at a time when fears have been growing about a looming recession, according to… ADP and Moody’s Analytics. Economists surveyed by Dow Jones had been looking for a gain of just 140,000 following July’s 142,000…”

September 4 – Reuters (Lucia Mutikani): “The U.S. trade deficit narrowed slightly in July, but the gap with China, a focus of the Trump administration’s ‘America First’ agenda, surged to a six-month high… The trade deficit dropped 2.7% to $54.0 billion as exports rebounded and imports fell… The monthly trade gap has swelled from $46.4 billion at the start of 2017… The politically sensitive goods trade deficit with China increased 9.4% to $32.8 billion on an unadjusted basis, the highest since January, with imports jumping 6.4%. Exports to China fell 3.3% in July.”

September 5 – Reuters (Lucia Mutikani): “U.S. services sector activity accelerated in August and private employers boosted hiring, suggesting the economy continued to grow at a moderate pace despite trade tensions which have stoked financial market fears of a recession… The Institute for Supply Management said its non-manufacturing activity index increased to a reading of 56.4 in August from 53.7 in July.”

September 5 – Financial Times (Richard Henderson): “The US recession has arrived. No, not that one, but a recession in US company profits. As the second-quarter earnings season draws to a close, profits at US blue-chips have fallen 0.3% on a per-share basis, according to FactSet data. The drop means that, following a first-quarter contraction of 0.2%, companies are officially in an ‘earnings recession’…”

September 3 – Bloomberg (Richard Leong): “The U.S. manufacturing sector contracted in August for the first time since 2016 amid worries about a weakening global economy and rising trade tensions between China and the United States… The Institute for Supply Management (ISM) said its index of national factory activity decreased to 49.1, the lowest level since January 2016. This compared with a figure of 51.2 in July.”

September 5 – Reuters (Jason Lange and P.J. Huffstutter): “Farm loan delinquencies rose to a record high in June at Wisconsin’s community banks…, a sign President Donald Trump’s trade conflicts with China and other countries are hitting farmers hard in a state that could be crucial for his chances of re-election in 2020. The share of farm loans that are long past-due rose to 2.9% at community banks in Wisconsin as of June 30…”

September 5 – Bloomberg (Allison McNeely): “Oil wells jet out of the scrubby, dusty ground in West Texas’ Permian Basin as far as the eye can see. A gas station off Route 285 bustles with workers in boots and baseball caps. Residents fret about the crumbling road, which has been pummeled by trucks barreling in and out of the oilfields. There’s nothing to suggest the distress that’s mounting in the busiest U.S. oil and gas region. About 500 miles east, Houston is abuzz about another slump on the way. Restructuring expert Jay Haber, for one, has been fielding call after call from New York with banks, hedge funds and private equity sponsors having to decide whether to sink more money into souring wells or cut their losses. ‘People were far too quick to save basically broke companies in 2015 and 2016,’ said Haber, a… adviser at turnaround shop Getzler Henrich & Associates LLC and 30-year veteran of the energy business. ‘Had oil gone to $80 or $90, things would be better.’”

China Watch:

September 2 – South China Morning Post (Frank Tang): “China will have to go a step further in easing monetary policy and increasing fiscal spending to help support domestic growth given that Beijing sees no near-term resolution to its trade war with the United States, a top policy body has indicated. While the Chinese government policy body did not call for all-out stimulus, it made clear Beijing would not shy away from pumping additional credit into its banking system or boosting fiscal support for the economy, according to the conclusions announced by the decision making meeting chaired by Vice-Premier Liu He. China will ‘enhance countercyclical measures in macroeconomic policies … to ensure sufficient liquidity and reasonable growth in credit…’”

September 3 – Reuters (Marc Jones): “A credit-fuelled stimulus splurge could hurt China’s credit rating more than the immediate hit from U.S. trade tariffs, S&P Global’s main analyst for the country says. S&P last cut China’s rating a couple of years ago, but it has been almost a year since its last formal review of the world’s number two economy and a lot has happened since… ‘If we have an abrupt shock of some sort then I think the government might start running for the more immediate kinds of economic support,’ Tan said. ‘That in our view will mean the banks will have to start lending quite quickly and that would be negative for the government’s rating.’ S&P currently rates China at A+ with a stable outlook. That is the same as both Moody’s and Fitch.”

September 1 – Reuters: “China’s factory activity unexpectedly expanded in August as production edged up…, but orders remained weak and business confidence faltered as the Sino-U.S. trade war continued to escalate. Export orders fell for the third month in a row and at the sharpest pace since November 2018, amid slowing global demand… The Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) for August rose to a five-month high of 50.4 from 49.9 in July, after two months of contraction.”

September 4 – Reuters (Roxanne Liu and Se Young Lee): “Activity in China’s services sector expanded at the fastest pace in three months in August as new orders rose, prompting the biggest increase in hiring in over a year… The Caixin/Markit services purchasing managers’ index (PMI) picked up to 52.1 last month, the highest since May, compared with July’s 51.6.”

September 4 – Bloomberg: “London, Seattle, Manchester and, um, Xiamen. Some of the world’s priciest housing markets aren’t where you might think. A four-year property boom in China has elevated a collection of little-known cities and turned them into real estate gold. While that’s been great news for speculators, it’s raising concern about whether China’s educated middle-class is quickly being priced out of these so-called second-tier cities, undermining Beijing’s goal of making them home to the millions moving from rural areas. Another risk is increasingly stretched family budgets: The average household debt-to-income ratio in China soared to a record 92% last year from just 30% a decade ago. ‘A property bubble is foaming up in many places in China,’ said Chen Gong, the chief researcher at independent strategic think tank Anbound Consulting. ‘Prices are starting to look abnormal when compared to residents’ income.’”

September 2 – Wall Street Journal (Frances Yoon): “A troubled Chinese bank said it would skip a year’s worth of interest payments to international bondholders, days after reporting that losses and problem loans had soared. Bank of Jinzhou is the first Chinese lender to protect its financial health by using this provision on its additional tier-1 dollar bonds, analysts said. A form of ‘contingent convertible,’ or CoCo, these bonds are widely used by lenders in Europe and Asia to shore up their financial positions. If a bank runs low on capital, it can withhold coupon payments or in some cases convert the securities into common stock.”

September 5 – Financial Times (Don Weinland): “Provincial auditors across China are sounding the alarm on a wave of fast-approaching local government debt maturities that analysts think could amount to at least Rmb3.8tn ($560bn) within the next two and half years, presenting a risk to China’s financial system. The auditing office of Shaanxi province in northwestern China is the latest authority to release a worrying report on the level of debt repayments facing the local government. The office… warned this week that the province bears heavy repayment pressure over the next five years and that 34% of its so-called ‘hidden debt’ must be paid back before the end of the year… Hidden debt for Chinese local governments often refers to debt obligations that do not fall directly onto government books but are still considered liabilities. Local government financing vehicles (LGFVs), or companies operated by municipal or provincial officials, are a primary source of the hidden debt load.”

September 2 – Bloomberg (Nisha Gopalan): “There's a lot working against China's most indebted property firm. China Evergrande Group is sitting on $113.7 billion in debt and its core profit fell 45% in the first half of the year. Real-estate growth is slowing, with banks under orders to curb home loans. President Xi Jinping’s refrain that houses are for living in, not speculation, has been cropping up more frequently. Time to rein things in, right? Not Evergrande. The company, whose portfolio already includes theme parks and a football club, now wants to become the world’s biggest electric-vehicle maker in the next three to five years. It’s burning through precious cash – 160 billion yuan ($22bn) – to build factories in Guangzhou. Investors are voting on this folly with their feet. The company’s shares have fallen 30% this year, making Evergrande the worst performer among Hong Kong-listed Chinese developers. The property firm’s borrowing costs are among the highest in the offshore dollar market and its bonds are tumbling.”

September 3 – Bloomberg: “HNA Group Co.’s cash pile shrank 20 times faster than its debts, indicating that pressure is building for one of China’s most indebted conglomerates to speed up asset sales. Cash, equivalents and short-term investments as of the end of June tumbled 61% from a year earlier, according to data derived from from the Hainan-based Chinese group’s interim report released on Friday. By comparison, total debt fell 3%. The figures illustrate how HNA’s liquidity challenges persist more than a year after the company that was once at the forefront of China’s unprecedented acquisition binge began dumping tens of billions of dollars in assets as borrowing costs soared.”

September 4 – Bloomberg: “More Chinese companies are defaulting on private bonds this year as the slowing economy weighs on weaker companies and firms seek to repay publicly traded debt first. The nation’s issuers have missed repayments on a record 31.8 billion yuan ($4.4bn) of private bonds this year through August, compared with 26.7 billion yuan for all of 2017 and 2018 combined, according to data by China Chengxin International Credit Rating Co., one of China’s biggest rating firms.”

September 2 – South China Morning Post (Teddy Ng and Wendy Wu): “Chinese state media and government advisers have said Beijing is in no rush for a trade deal, instead warning that any concessions made to the United States would be a grave error. A commentary in the Communist Party mouthpiece People’s Daily… said Beijing needed to stand up to the US and not give in to pressure. ‘If China appears weak and gives concessions under hegemony, it will have committed a subversive historical error,’ said the commentary… ‘Facing extreme pressure and bullying behaviour, being weak and taking a step back will not get sympathy. We can only protect the core interest of the nation and the people by upholding rational and favourable struggle at the right pace.’”

September 3 – Bloomberg: “Chinese President Xi Jinping urged the ruling Communist Party to brace for a ‘long term’ struggle against a variety of threats, the latest in a series of warnings to a nation facing a slowing economy and a more confrontational U.S. Xi said officials needed to display a ‘spirit of struggle’ to overcome challenges ranging from security concerns to financial risks, according to the official Xinhua News Agency. ‘The struggles we face will not be short term, but long term,’ Xi told a cadre training course Tuesday in Beijing, adding that they would continue at least through 2049, the 100th anniversary of the People’s Republic of China.”

September 2 – CNBC (Weizhen Tan): “A sense of nationalism is growing in China, and that could bolster support for those hoping to wait out the trade dispute with the U.S., said Max Baucus, a former American ambassador to China. ‘Don’t forget … Chinese (are) very patient historically, they’ll wait it out, they’ll play lots of different angles. They’re going to try to hang in there, waiting for President (Donald) Trump to come to them,’ he told CNBC… ‘There’s a feeling that nationalism is getting a little stronger … I think that’s also emboldening President Xi,’ said Baucus…”

September 5 – Associated Press: “China… criticized Washington’s opposition to Chinese-made next-generation telecoms technology after Vice President Mike Pence called on Iceland and other governments to find alternatives. A foreign ministry spokesman, Geng Shuang, accused American leaders of ‘abusing the concept of national security’ to block Chinese commercial activity.”

September 5 – Reuters: “Global credit rating agency Fitch Ratings on Friday downgraded Hong Kong’s long-term foreign currency issuer default rating to ‘AA’ from ‘AA+’ following months of unrest and protests in the Asian financial hub. Hong Kong’s rating outlook is negative, Fitch Ratings said...The massive, and sometimes violent protests have roiled the financial centre as thousands chafe at a perceived erosion of freedoms and autonomy under Chinese rule.”

September 2 – Reuters (Greg Torode, James Pomfret and Anne Marie Roantree): “Embattled Hong Kong leader Carrie Lam said she has caused ‘unforgivable havoc’ by igniting the political crisis engulfing the city and would quit if she had a choice, according to an audio recording of remarks she made last week to a group of businesspeople. At the closed-door meeting, Lam told the group that she now has ‘very limited’ room to resolve the crisis because the unrest has become a national security and sovereignty issue for China amid rising tensions with the United States. ‘If I have a choice,’ she said…, ‘the first thing is to quit, having made a deep apology.’”

September 3 – Reuters (James Pomfret and Clare Jim): “Hong Kong leader Carrie Lam… withdrew an extradition bill that triggered months of often violent protests so the Chinese-ruled city can move forward from a ‘highly vulnerable and dangerous’ place and find solutions… ‘Lingering violence is damaging the very foundations of our society, especially the rule of law,’ a somber Lam said as she sat wearing a navy blue jacket and pink shirt with her hands folded on a desk… Some lawmakers said the move should have come earlier. ‘The damage has been done. The scars and wounds are still bleeding,’ said pro-democracy legislator Claudia Mo. ‘She thinks she can use a garden hose to put out a hill fire. That’s not going to be acceptable.’”

Central Banking Watch:

September 2 – Financial Times (Huw van Steenis): “As central bankers weigh up cutting interest rates deeper into negative territory, investors should consider when the risks of this trend will begin to outweigh its benefits. With almost $17tn of negative-yielding debt already out there, I fear we have already hit the reversal rate — the point at which accommodative monetary policy ‘reverses’ its intended effect and becomes contractionary for the economy. Conventional macroeconomic models typically take banks and other intermediaries for granted. As a result, the overall benefits of cutting rates below zero may have been exaggerated.”

September 4 – Bloomberg (Craig Stirling and Zoe Schneeweiss): “Mario Draghi’s bid to reactivate bond purchases in a final salvo of stimulus is being threatened by the biggest pushback on policy ever seen during his eight-year reign as European Central Bank president. Bank of France Governor Francois Villeroy de Galhau’s skepticism over the need for an immediate resumption of quantitative easing follows outright opposition from the ECB’s German and Dutch policy makers and a hawkish tone from Austria. It means any push to restart QE to fight the euro zone’s slowdown faces resistance from countries that form the heart of mainland Europe’s economy and half the bloc’s population.”

September 3 – Reuters (Balazs Koranyi and Frank Siebelt): “ECB policymakers are leaning toward a stimulus package that includes a rate cut, a beefed-up pledge to keep rates low for longer and compensation for banks over the side-effects of negative rates, five sources familiar with the discussion said. Many also favor restarting asset buys, a significantly more powerful weapon, but opposition from some northern European countries is complicating this issue, the sources… added.”

September 4 – Reuters (Martin Arnold and Mehreen Khan): “Christine Lagarde has called on European governments to co-operate more closely over fiscal policy to stimulate the stuttering eurozone economy, in her first public appearance as president-elect of the European Central Bank. Ms Lagarde… made the comments in an address to the European Parliament… as part of her nomination process. Telling MEPs that ‘central banks are not the only game in town’, Ms Lagarde urged richer eurozone governments with low deficits to bolster their crisis-fighting capacities by spending during downturns. ‘I’m not a fairy’, she said. In remarks aimed at rich economies like Germany and the Netherlands, she said governments who ‘have the capacity to use the fiscal space available to them’ should spend on improving their infrastructure.”

September 5 – Financial Times (Martin Arnold): “Poor Jens Weidmann. After the head of Germany’s Bundesbank lost out to Christine Lagarde in the race to succeed Mario Draghi as president of the European Central Bank this year, he faces another long period in the monetary policy wilderness… Once dismissed by Mr Draghi as Nein zu allem — which is German for ‘No to everything’ — Mr Weidmann spent much of his first eight-year term fighting a lonely resistance to the ECB’s increasingly unconventional policies that have flooded markets with cheap money. Having had his term renewed for another eight years in May, the 51-year-old is again gearing up to push back against a fresh wave of monetary stimulus at next week’s meeting of the ECB’s governing council.”

August 31 – Reuters (Michael Shields): “New Austrian National Bank Governor Robert Holzmann set out a hawkish stance before his first meeting as a European Central Bank policymaker, saying stepped-up monetary stimulus for the euro zone posed more risks than benefits. Holzmann, 70, is a pensions specialist who has worked at the World Bank and the International Monetary Fund… In an interview with Austrian broadcaster ORF…, Holzmann, who takes over from Nowotny on Sept. 1, said he was working… to draw up his policy positions. ‘I will probably voice a somewhat more critical stance concerning suggestions about a future deepening of the monetary footprint,’ he said. ‘Cheap money has its charms but also its limits, especially when it lasts for a long time.’”

September 3 – Bloomberg (Piotr Skolimowski): “European Central Bank policy maker Francois Villeroy de Galhau signaled skepticism over the need for renewed asset purchases while leaving open the question of whether he’d still back a stimulus package that includes them. …L’Agefi, Villeroy said the ECB doesn’t have to use all the instruments in its toolbox at the same time, entering an already divided debate within the Governing Council before next week’s policy meeting. Asked whether it was necessary to restart quantitative easing now, the governor of the French central bank said this was ‘a question to be discussed.’ He said the ‘elevated’ stock of assets the ECB has already accumulated significantly pushed down long-term yields.”

September 3 – Bloomberg (Ott Ummelas and Piotr Skolimowski): “European Central Bank policy maker Madis Muller joined the swelling ranks of officials skeptical over the need for a large stimulus package by saying a resumption of bond purchases now would be disproportionate to economic conditions. The Estonian central-bank head signaled he is comfortable with cutting interest rates… on Sept. 12, but said the ECB can’t be hostage to market expectations… ‘I don’t think we have a strong case for reactivating QE now,’ Muller… said… ‘In addition to being disproportionate in a situation where there is no deflation risk, in my opinion there is also a concern over ineffectiveness. It just might not be very productive.’”

September 3 – Bloomberg (Eduardo Thomson): “Chile’s central bank cut its benchmark interest rate to a nine-year low, and hinted on more reductions, in a bid to stimulate an economy… The bank’s board… cut the key rate by 50 bps to 2%...”

Brexit Watch:

September 4 – Reuters (Elizabeth Piper, William James and Kylie MacLellan): “The British parliament voted on Wednesday to prevent Prime Minister Boris Johnson taking Britain out of the European Union without a deal on Oct. 31, but rejected his first bid to call a snap election two weeks before the scheduled exit. After wresting control of the day’s parliamentary agenda from Johnson, the House of Commons backed a bill that would force the government to request a three-month Brexit delay rather than leave without a divorce agreement. Opposition Labour party leader Jeremy Corbyn said he would agree to hold an early election once the bill passed the upper house of parliament…”

Europe Watch:

September 4 – Reuters (Michael Nienaber): “Weaker demand from abroad drove a bigger-than-expected drop in German industrial orders in July… Contracts for ‘Made in Germany’ goods fell 2.7% from the previous month in July, data showed on Thursday, driven by a big drop in bookings from non-euro zone countries, the economy ministry said. That undershot a… forecast for a 1.5% drop.”

EM Watch:

September 2 – Financial Times (Michael Stott and Benedict Mander): “The decision to seek what became the biggest bailout in the IMF’s history took only a few minutes. A loss of faith in Argentina’s reform programme had been visibly demonstrated by a two-week run on the peso in spring last year. President Mauricio Macri had few options left. A long-mooted contingency plan went into action. ‘When it came to it, we had discussed it so much, for Macri it was no problem,’ says one senior government official recalling the events of last May. ‘The decision took five minutes . . . back then, Macri was fine and he was very happy with the agreement . . . after all, we had managed to get $50bn.’”

September 3 – Bloomberg (Anurag Joshi): “India’s shadow banks are getting increasingly squeezed by a crisis of confidence at home, forcing them to cough up more for funds overseas. And that’s just for the lucky ones. The non-bank financing companies have struggled to raise as much abroad this year, as defaults in India’s credit market spread after a shock failure by major shadow lender IL&FS Group last year. They’ve signed $1.5 billion of foreign-currency loans so far in 2019, down from $2 billion in the same period last year… Average margins jumped to a three-year high of 118 bps, compared with 95 for the deals signed in the same period in 2018…”

September 4 – Financial Times (Amy Kazmin): “Kaushik Sengupta, 45, a product development manager for an export-oriented shoe manufacturer, is the kind of middle-class Indian whose family’s consumption should be helping power the economy. But his decision in 2009 to buy a Rs2.4m flat from an ostensibly reputable property developer, who promised it would be ready in two years, proved a financially crippling mistake. Today his unfinished flat on New Delhi’s outskirts is one of the estimated 465,000 residential units across India that were sold but never completed as property developers confronted regulatory issues, litigation over land titles or simply ran out of money. For the past decade, Mr Sengupta, like many others in his situation, has paid both a mortgage and rent, which together eat up around half of his Rs80,000 ($1,109) monthly salary. The rest goes on food, school fees and other household necessities, leaving little for discretionary purchases. ‘I end up with nothing in my hand to spend,’ he said. ‘It’s a disaster.’ He is not alone in this gloom.”

Japan Watch:

September 4 – Reuters (Tetsushi Kajimoto): “Budget requests from Japan’s ministries have hit a record amount for the next fiscal year starting in April, the finance ministry said, highlighting the conflicting need to promote fiscal reform while propping up a flagging economy facing external risks. Fiscal reform is an urgent task for Japan, which is saddled with the industrial world’s heaviest public debt at more than twice the size of its $5 trillion economy.”

September 3 – Bloomberg (Ayai Tomisawa and Issei Hazama): “Japan’s troubled regional banks are plunging into riskier corners of the credit markets, in a struggle to survive ultra-low interest rates and an industry shakeout. As debt yields tumble globally, the lenders are also facing weak business at home… That’s prompting authorities to push for consolidation. Desperate to avoid that fate, the banks are shedding their traditional conservatism, fueling questions about their ability to manage riskier holdings including foreign assets… ‘There’s excessive competition among regional banks now, which is driving fierce competition to get profit margins,’ said Takayuki Atake, head of credit research at SMBC Nikko Securities Inc. ‘They used to only buy domestic bond products but they have no choice but to take risks by looking into overseas debt.’”

Global Bubble Watch:

September 1 – Financial Times (Abraham Newman): “With the end of the cold war, it looked as if globalisation had tamed power politics and heralded a more peaceful world. The networks that distributed money, information and production seemed to resist state control. Economic conflict appeared irrational: attacking a rival would hurt your economy as well. That’s not quite how it turned out, as US President Donald Trump’s recent tweets about forcing American businesses to leave China make clear. We are at the beginning of a new ‘quiet war’, where the global networks that were supposed to tie countries together have become a distributed and complex battlefield. Great powers such as the US and China are wielding supply chains as weapons in their grand disputes, while smaller states such as Japan and South Korea copy their tactics. Businesses like FedEx, Huawei and Samsung are pawns on the battlefield or collateral damage. What went wrong? States woke up and realised that global networks could be weaponised.”

September 5 – Bloomberg (Randy Thanthong-Knight, Harry Suhartono, and Xuan Quynh Nguyen): “From quiet beaches in Bali to empty rooms in Hanoi’s hotels, pangs from China’s economic malaise and weakening yuan are being felt across Southeast Asia’s vacation belt. A boom in Chinese outbound travel in recent years that stoked tourism across Southeast Asia is now in reverse gear. The abrupt decline of Chinese travelers is becoming a painful lesson for nations such as Thailand and Indonesia that had become overly dependent on Asia’s top economy. ‘The slump in Chinese arrivals and tourism spending is being felt throughout the region,’ said Kampon Adireksombat, …head of economic and financial market research at Siam Commercial Bank Pcl. ‘There’s always a concentration risk when relying on one market, and many countries may not be able to find a replacement for growth fast enough.’”

September 3 – Reuters (Wayne Cole): “Australia’s much-vaunted economy grew at its slowest pace in a decade last quarter as cash-strapped consumers went on strike, an urgent argument for more monetary and fiscal stimulus as headwinds mount globally. Gross domestic product (GDP) rose just 1.4% in the June quarter from a year earlier…”

September 1 – Reuters: “Australian house prices boasted their biggest monthly gain since 2017 in August as the hard-hit markets of Sydney and Melbourne came roaring back on record low interest rates and looser lending rules. The bounce marks an end to two years of constant decline… The Sydney market saw a jump of 1.6% and Melbourne added 1.4%, gains more reminiscent of the bubble days of 2016. Sydney prices were still down 6.9% year-on-year and Melbourne 6.2%...”

Fixed-Income Bubble Watch:

September 2 – Reuters (Abhinav Ramnarayan): “Junk-rated firms Smurfit Kappa and Thyssenkrupp were overwhelmed with demand when they kicked off post-summer proceedings for the European high-yield market on Monday, as yield-starved investors piled into the new issues. With much of the European bond market now in negative-yielding territory, investors are being forced down the credit spectrum - allowing the likes of Smurfit Kappa and Thyssenkrupp to price deals at levels rarely seen before. Packaging firm Smurfit Kappa caught the eye with its plans to sell 750 million euros ($835.80 million) of eight-year bonds at 1.5%, some of the lowest yields clocked in the European junk bond market for a new issue, particularly for one of such a long maturity.”

September 4 – Wall Street Journal (Liz Hoffman and Telis Demos): “When two of Europe’s corporate titans sat down to negotiate a merger this year, they called American banks. Fiat Chrysler Automobiles hired Goldman Sachs Group Inc. as its lead adviser. France’s Renault SA hired a boutique bank stacked with Goldman alumni. In a deal that would reshape Europe’s auto industry, the continental banks that had sustained Fiat and Renault for more than a century were muscled aside by a pair of Wall Street deal makers. A decade after fueling a crisis that nearly brought down the global financial system, America’s banks are ruling it. They earned 62% of global investment-banking fees last year, up from 53% in 2011… Last year, U.S. banks took home $7 of every $10 in merger fees, $6 of every $10 in stock commissions, and $6 of every $10 paid to hold and move corporate cash.”

Leveraged Speculation Watch:

September 5 – Wall Street Journal (Rachael Levy): “Hedge fund Autonomy Capital lost about $1 billion last month largely on investments tied to Argentina, making it one of the most prominent investors caught on the wrong side of market turmoil in that country. The wager on Argentina is one of the largest for Autonomy’s founder, 50-year-old Robert Gibbins, who is known for making concentrated bets. Last year his fund began making bullish bets on the country’s recovery, including in a wide swath of Argentinian bonds and wagers that Argentina wouldn’t default on its debt…”

Geopolitical Watch:

September 4 – Reuters (Ece Toksabay): “Turkish President Tayyip Erdogan said… it was unacceptable for nuclear-armed states to forbid Ankara from obtaining its own nuclear weapons… ‘Some countries have missiles with nuclear warheads, not one or two. But (they tell us) we can’t have them. This, I cannot accept,’ he told his ruling AK Party members… ‘There is no developed nation in the world that doesn’t have them,’ Erdogan said.”

September 4 – Reuters (Richard Leong): “Iran… said it would take another step away from a 2015 nuclear deal by starting to develop centrifuges to speed up its uranium enrichment but it also gave European powers two more months to try to save the multilateral pact.”