Credit Bubble Bulletin : April 2019

This week saw all-time highs in the S&P500, the Nasdaq Composite, the Nasdaq100, and the Philadelphia Semiconductor Index. Microsoft's market capitalization reached $1 TN for the first time. First quarter GDP was reported at a stronger-than-expected 3.2% pace.

So why would the market this week increase the probability of a rate cut by the December 11th FOMC meeting to 66.6% from last week’s 44.6%? What’s behind the 10 bps drop in two-year yields to 2.28%? And the eight bps decline in five-year Treasury yields to a one-month low 2.29% (10-yr yields down 6bps to 2.50%)? In Europe, German bund yields declined five bps back into negative territory (-0.02%). Spain’s 10-year yields declined five bps to 1.02% (low since 2016), and Portugal’s yields fell four bps to an all-time low 1.13%. French yields were down to 0.35%. Why would markets be pricing in another round of ECB QE?

In the currencies, king dollar gained 0.6%, trading above 98 for the first time in almost two-years. The Japanese yen outperformed even the dollar, adding 0.3%.

April 22 – Financial Times (Hudson Lockett and Yizhen Jia): “Chinese stocks fell on Monday amid concerns that Beijing may renew a campaign against shadow banking that contributed to a heavy sell-off across the market last year. Analysts pinned much of the blame… on a statement issued late on Friday following a politburo meeting chaired by President Xi Jinping in Beijing. They were particularly alarmed by a term that surfaced in state media reports of the meeting of top Communist party leaders: ‘deleveraging’. That word set off alarm bells among investors still hurting from Beijing’s campaign against leverage in the country’s financial system last year. Those reforms focused largely on so-called shadow banking, which before the clampdown saw lenders channel huge sums of money to fund managers who then invested it in stocks.”

And Tuesday from Bloomberg Intelligence (Qian Wan and Chang Shu): “The Central Financial and Economics Affairs Commission (CFEAC) – the Communist Party’s top policy body headed by President XI Jinping – is focused on ongoing structural reform and deleveraging, citing proactive fiscal policy and prudent monetary policy as key tools. Officials set a pragmatic growth target of 6.0%-6.5% for 2019. The government plan also indicated credit growth in line with that of nominal GDP in 2019, echoing the People’s Bank of China’s statement of ‘maintaining macro leverage.’”

The Shanghai Composite was hammered 5.6% this week. After last year’s scare, markets have good reason to fret the prospect of a return of Chinese “deleveraging” along with the PBOC restricting the “floodgates.” I would add that if Beijing actually plans to manage Credit growth to be in line with nominal GDP, the entire world has a big problem. Over the past year, China’s nominal GDP increased about 7.5%. Meanwhile, Chinese Aggregate Financing expanded at a double-digit annualized rate during Q1. This would imply a meaningful deceleration of Credit growth through the remainder of the year. Don’t expect that to go smoothly.

April 23 – Bloomberg: “The debt pain engulfing some of China’s big conglomerates has intensified in recent days with more bond defaults, asset freezes and payment uncertainties. China Minsheng Investment Group Corp. said last week cross defaults had been triggered on dollar bonds worth $800 million. Lenders to HNA Group Co.’s CWT International Ltd. seized control of assets in Singapore, China and the U.S. after the unit failed to repay a loan… Citic Guoan Group Co., backed by a state-owned company, isn’t certain whether it can pay a bond coupon due on April 27. The increased repayment stress sweeping some of China’s biggest corporations is a sign that the liquidity crunch -- induced by a two-year long deleveraging campaign -- is far from over despite an improving economy. Bonds from at least 44 Chinese companies totaling $43.7 billion faced repayment pressure as of last week, a 25% jump from the tally at the end of March… ‘The debt crisis at conglomerates can have more of a contagion impact on the corporate bond market compared with an average corporate default because those issuers typically have more creditors and large amount of outstanding debt,’ said Li Kai, a multi-strategy investment director at Genial Flow Asset Management Co.”

Chinese officials surely appreciate the risks associated with rampant debt growth. They have carefully studied the Japanese experience and have surely studied the history of financial crises. Beijing has had ample time to research Bubbles, yet they still have limited actual experience with Credit booms and busts. China has no experience with mortgage finance and housing Bubbles. They have never before managed an economy with a massively leveraged corporate sector – with much of the borrowings via marketable debt issuance. They have no experience with a multi-trillion (US$) money-market complex – and minimal with derivatives. Beijing has zero experience with a banking system that has inflated to about $40 TN – financing a wildly imbalanced and structurally impaired economy (not to mention fraud and malfeasance of epic proportions).

I’m not confident Beijing comprehends how deranged Credit can become late in the cycle. A system dominated by asset Bubbles and malinvestment over time evolves into a crazed Credit glutton. Keeping the historic Chinese apartment Bubble levitated will require enormous ongoing cheap Credit. Keeping the incredibly bloated Chinese corporate sector afloat will require only more ongoing cheap Credit. Ditto for the frighteningly levered local government sector. And the acute and unrelenting pressure on the banking system to support myriad Bubbles with generous lending terms will require massive unending banking balance sheet expansion. Worse yet, at this late “terminal phase” of the cycle it becomes impossible to control the flow of finance. It will instinctively flood into speculation and non-productive purposes. Has China studied the late-twenties U.S. experience?

If Beijing is serious about managing risk, they have no option other than to move to rein in Credit growth. Last year’s market instability, economic weakness and difficult trade negotiations forced officials to back off restraint and instead push forward with stimulus measures. This had characteristics of a short-term gambit.

Chinese officials will not be slamming on the brakes. But if they’re serious about trying to manage Credit and myriad risks, it would be reasonable to expect the imposition of restraint upon the completion of U.S. trade negotiations. Indeed, there are indications this transition has already commenced.

If this analysis has merit, the global market backdrop is near an important inflection point – potentially one of momentous consequence. Chinese Credit growth is about to slow, with negative ramifications for global market liquidity and economic expansion. I would further argue that the synchronized global “Everything Rally” has ensured latent fragilities even beyond those that erupted last year. The conventional view that China is now full speed ahead, with stimulus resolving myriad issues, could prove one of financial history’s great episodes of wishful thinking.

It’s worth recalling the 2018 market backdrop. After beginning the year with a moonshot (emerging markets trading to record highs in late-January), EM turned abruptly lower and trended down throughout much of the year. The Shanghai Composite traded to a high of 3,587 on January 29th, only to reverse sharply for a two-week 14% drop. By July, the Shanghai Composite had dropped 25% from January highs – and was down 31% at October lows (2,449).

And for much of the year, de-risking/deleveraging at the “Periphery” supported speculative flows to “Core” U.S. securities markets. U.S. equities bounced back from February’s “short vol” blowup and went on a speculative run throughout the summer (in the face of mounting global instability). After trading below 90 for much of April, the Dollar Index had risen to 95 by late-May and 97 in mid-August.

While the Fed raised rates 25 bps in June and again in September, financial conditions remained exceptionally loose. Ten-year Treasury yields traded down to 2.80% (little changed from early-February), held down by global fragilities and the surging dollar. High-yield debt posted positive returns through September. Ignoring rapidly escalating risks, the S&P500 traded right at all-time highs to begin the fourth quarter (10/3). The dam soon broke, with crisis Dynamics coming to fully envelop the “Core.”

After a several month respite, I’m back on “Crisis Dynamics” watch, carefully monitoring for indications of nascent risk aversion and waning liquidity at the “Periphery.” Last year’s market and economic developments provided important confirmation of the Global Bubble Thesis – including the fundamental proposition that major Bubbles function quite poorly in reverse. Years of zero rates and QE had inflated myriad Bubbles and a highly unbalanced global economy surreptitiously addicted to aggressive monetary stimulus. As tepid as it was, policy “normalization” had engendered latent fragilities – though this predicament remained hidden so long as “risk on” held sway over the markets.

A speculative marketplace gleaned its own 2018-experience thesis confirmation: central bankers won’t tolerate bursting Bubbles. The dovish U-turn sparked a major short squeeze, unwind of bearish hedges and, more generally, a highly speculative market rally. And in global markets dominated by a pool of Trillions of trend-following and performance-chasing finance, rallies tend to take on lives of their own. With 2019’s surging markets and speculative leverage creating self-reinforcing liquidity, last year’s waning liquidity – and December’s illiquidity scare – are long forgotten.

But I’ll offer a warning: Liquidity Risk Lies in Wait. When risk embracement runs its course and risk aversion begins to reappear, it won’t be long before anxious sellers outnumber buyers. When “risk off” De-Risking/Deleveraging Dynamics again attain momentum, there will be a scarcity of players ready to accommodate the unwind of speculator leverage. And when a meaningful portion of the marketplace decides to hedge market risk, there will be a paucity of traders willing to take the other side of such trades.

And there’s an additional important facet to the analysis: Come the next serious “risk off” market dislocation, a further dovish U-turn will not suffice. That trump card was played – surely earlier than central bankers had envisaged. Spoon-fed markets will demand rate cuts. And when rate cuts prove insufficient, markets will impatiently clamor for more QE. In January, Powell’s abrupt inter-meeting termination of policy “normalization” carried quite a punch. Markets were caught off guard – with huge amounts of market hedges in place. These days, with markets already anticipating a rate cut this year, one wouldn’t expect the actual Fed announcement (in the midst of market instability) to elicit a big market reaction.

The Fed is clearly preparing for the next episode where it will be called upon to backstop faltering markets. Our central bankers will undoubtedly point to disinflation risk and consumer prices drifting below the Fed’s 2% target. I’ll expect markets to play along. But without the shock effect of spurring a big market reversal – with attendant risk embracement and speculative leveraging – it’s likely that a 25 bps rate cut will have only ephemeral impact on marketplace liquidity. Markets will quickly demand more QE – and Chairman Powell is right back in the hot seat.

I’m getting ahead of myself here. But the reemployment of Fed QE should be expected to have unintended consequences depending on relative U.S. versus global growth dynamics and market performance. If, as was the case last year, king dollar and speculative flows to the “Core” temporarily boost U.S. output, it would be an “interesting” backdrop for restarting QE.

But let’s get back to the present. Happenings at the “Periphery of the Periphery” seem to support the Global Liquidity Inflection Point Hypothesis. The Turkish lira fell 2.1% this week, with 12-month losses up to 31.5%. Turkey’s 10-year lira bond yields surged 30 bps to 17.75%, the high since October. Turkey sovereign CDS jumped 24 bps this week to 461 bps, the high going back to September 13th. Turkey’s 10-year dollar bond yields surged a notable 51 bps this week to 8.08% - the high also since mid-September instability. Turkey is sliding into serious crisis.

April 26 – Financial Times (Adam Samson and Caroline Grady): “Turkey’s central bank has confirmed it began engaging in billions of dollars in short-term borrowing last month, bulking out its reserves during a time when the lira was wobbling amid contentious local elections and concerns were growing over its financial defences. The central bank said… its borrowing from swaps with a maturity of up to one month was $9.6bn at the end of March. Friday’s report precisely matches figures first revealed last week by the Financial Times, which intensified concerns among investors about what they say is a highly unusual practice for a country’s reserve position. Turkey’s use of these transactions, in which it borrows dollars from local banks, ramped up dramatically following a sharp fall in the country’s foreign currency reserve position during the week of March 22.”

Also this week at the “Periphery of the Periphery,” Argentina’s peso sank 8.8% to an all-time low versus the dollar (y-t-d losses 17.9%). Argentine 10-year dollar bond yields jumped 26 bps Friday and 73 bps for the week to a multi-year high 11.53%. As the market increasingly fears default, short-term Argentine dollar bond yields jumped to 20%. Argentina’s sovereign CDS spiked a notable 263 bps this week to 1,234, a three-year high. A whiff of contagion was seen in the 10 bps rise in El Salvador and Costa Rica CDS. The MSCI Emerging Markets Equities Index declined 1.3% this week.

For the week, the Colombian peso dropped 2.4%, the South African rand 2.3%, the South Korean won 2.1%, the Chilean peso 1.8%, the Hungarian forint 1.5%, the Iceland krona 1.3%, and the Polish zloty 1.2%. The Russian ruble, Indonesian rupiah and Czech koruna all declined about 1% against the dollar. Problem child Lebanon saw 10-year domestic yields surge 31 bps to 9.84%.

Hong Kong’s Hang Seng Financial Index dropped 2.4% this week. China’s CSI 300 Financials Index sank 5.0%. China Construction Bank dropped 4.7%, and Industrial and Commercial Bank of China fell 4.5%. Japan’s TOPIX Bank index declined 1.3%. European bank stocks (STOXX 600) dropped 2.3%, led by a 3.2% fall in Italian banks. Deutsche Bank sank 6.7% on the breakdown of merger talks with Commerzbank. Deutsche Bank CDS jumped 12 bps this week to near two-month highs.

Reminiscent of about this time last year, U.S. bank stocks were content this week to ignore weak financial stocks elsewhere. US banks (BKX) jumped 1.6% this week, trading near the high since early December. Powered by fund inflows of a notable $5.8bn, investment-grade corporate bonds (LQD) closed the week at highs going back to February 2018. High-yield bonds similarly added to recent gains, also ending Friday at 14-month highs.

With animal spirits running high and financial conditions remaining loose, the “Core” has remained comfortably numb. But we’re now Officially on “Periphery” Contagion Watch. No reason at this point to expect much risk aversion in exuberant “Core” U.S. securities markets. Indeed, the drop in Treasury yields has been feeding through into corporate Credit, in the process loosening financial conditions. But I would expect risk aversion to begin gathering some momentum globally, with De-Risking/Deleveraging Dynamics ensuring waning liquidity and contagion for the more vulnerable currencies and markets.

April 26 – Bloomberg (Sarah Ponczek): “As equities surge to all-time highs, volatility has all but vanished. Hedge funds are betting the calm will last, shorting the Cboe Volatility Index, or VIX, at rates not seen in at least 15 years. Large speculators, mostly hedge funds, were net short about 178,000 VIX futures contracts on April 23, the largest such position on record, weekly CFTC data that dates back to 2004 show. Commonly known as the stock market fear gauge, aggressive bets against the VIX are, depending on your worldview, evidence of either confidence or complacency.”

When “risk off” does make its return to the “Core,” don’t be surprised by market fireworks. “Short Vol” Blowup 2.0 – compliments of the dovish U-turn? It’s always fascinating to observe how speculative cycles work. Writing/selling put options has been free “money” since Powell’s January 4th about face. Crowded Trade/“tinder” And if we’re now at an inflection point for global market liquidity, those gleefully “selling flood insurance during the drought” should be mindful of a decided shift in global weather patterns.

For the Week:

The S&P500 gained 1.2% (up 17.3% y-t-d), while the Dow was little changed (up 13.8%). The Utilities jumped 1.5% (up 10.7%). The Banks rose 1.6% (up 18.0%), and the Broker/Dealers added 0.2% (up 15.3%). The Transports fell 1.0% (up 18.7%). The S&P 400 Midcaps gained 1.0% (up 18.7%), and the small cap Russell 2000 jumped 1.7% (up 18.0%). The Nasdaq100 advanced 1.8% (up 23.6%). The Semiconductors declined 0.7% (up 34.0%). The Biotechs rallied 2.5% (up 12.8%). While bullion recovering $11, the HUI gold index was unchanged (down 0.1%).

Three-month Treasury bill rates ended the week at 2.36%. Two-year government yields dropped 10 bps to 2.28% (down 21bps y-t-d). Five-year T-note yields fell eight bps to 2.29% (down 22bps). Ten-year Treasury yields declined six bps to 2.50% (down 19bps). Long bond yields fell four bps to 2.92% (down 9bps). Benchmark Fannie Mae MBS yields dropped eight bps to 3.23% (down 26bps).

Greek 10-year yields slipped a basis point to 3.29% (down 111bps y-t-d). Ten-year Portuguese yields declined four bps 1.13% (down 59bps). Italian 10-year yields fell two bps to 2.58% (down 16bps). Spain's 10-year yields declined five bps to 1.02% (down 39bps). German bund yields fell five bps to negative 0.02% (down 26bps). French yields declined two bps to 0.35% (down 36bps). The French to German 10-year bond spread widened three to 37 bps. U.K. 10-year gilt yields dropped six bps to 1.14% (down 14bps). U.K.'s FTSE equities index declined 0.4% (up 10.4% y-t-d).

Japan's Nikkei 225 equities index added 0.3% (up 11.2% y-t-d). Japanese 10-year "JGB" yields dipped a basis point to negative 0.04% (down 4bps y-t-d). France's CAC40 slipped 0.2% (up 17.7%). The German DAX equities index gained 0.8% (up 16.6%). Spain's IBEX 35 equities index declined 0.8% (up 11.3%). Italy's FTSE MIB index fell 1.0% (up 18.6%). EM equities were mixed. Brazil's Bovespa index gained 1.8% (up 5.7%), while Mexico's Bolsa fell 1.2% (up 8.0%). South Korea's Kospi index dropped 1.7% (up 6.8%). India's Sensex equities index dipped 0.2% (up 8.3%). China's Shanghai Exchange sank 5.6% (up 23.8%). Turkey's Borsa Istanbul National 100 index dropped 2.1% (up 3.8%). Russia's MICEX equities index was little changed (up 8.2%).

Investment-grade bond funds saw inflows of $5.864 billion, while junk bond funds posted outflows of $521 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates gained three bps to 4.20% (down 38bps y-o-y). Fifteen-year rates added two bps to 3.64% (down 38bps). Five-year hybrid ARM rates slipped a basis point to 3.77% (up 3bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down nine bps to 4.25% (down 44bps).

Federal Reserve Credit last week declined $4.2bn to $3.892 TN. Over the past year, Fed Credit contracted $451bn, or 10.4%. Fed Credit inflated $1.081 TN, or 38%, over the past 338 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $15.2bn last week to $3.452 TN. "Custody holdings" gained $40.5bn y-o-y, or 1.2%.

M2 (narrow) "money" supply jumped $22.5bn last week to $14.513 TN. "Narrow money" rose $558bn, or 4.0%, over the past year. For the week, Currency increased $3.0bn. Total Checkable Deposits surged $67.7bn, while Savings Deposits dropped $53.6bn. Small Time Deposits were up $4.2bn. Retail Money Funds added $1.3bn.

Total money market fund assets increased $7.0bn to $3.050 TN. Money Funds gained $218bn y-o-y, or 7.7%.

Total Commercial Paper dropped $15.0bn to $1.066 TN. CP gained $10bn y-o-y, or 0.9%.

Currency Watch:

The U.S. dollar index gained 0.6% to 98.006 (up 1.9% y-t-d). For the week on the upside, the Japanese yen increased 0.3%. For the week on the downside, the South African rand declined 2.3%, the South Korean won 2.1%, the Swedish krona 2.1%, the Norwegian krone 2.0%, the Australian dollar 1.5%, the euro 0.8%, the Mexican peso 0.8%, the British pound 0.6%, the Singapore dollar 0.5%, the Swiss franc 0.5%, the Canadian dollar 0.5%, the New Zealand dollar 0.3% and the Brazilian real 0.1%. The Chinese renminbi declined 0.37% versus the dollar this week (up 2.22% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index declined 1.2% this week (up 4.9% y-t-d). Spot Gold rallied 0.9% to $1,286 (up 0.3%). Silver increased 0.3% to $15.085 (down 2.9%). Crude declined 70 cents to $63.30 (up 39%). Gasoline gained 1.4% (up 59%), and Natural Gas recovered 3.6% (down 12%). Copper fell 1.1% (up 10%). Wheat declined 1.2% (down 12%). Corn dropped 1.6% (down 4%).

Market Instability Watch:

April 25 – Bloomberg (Rizal Tupaz and Allan Lopez): “Investors are piling the most cash into high-grade credit funds in more than four years. Inflows reached almost $5.9 billion for the week ended April 24, the most since October 2014, according to Lipper… It’s the 13th straight reporting period showing gains for funds that invest in high-grade debt. New money into the funds now totals $38 billion since the streak began in January.”

April 22 – Financial Times (Robin Wigglesworth): “When markets careened lower late last year, it seemed that perennial predictions of a new ‘age of volatility’ were finally coming true. Instead, tranquillity has reigned throughout 2019. Why? The Vix index — Wall Street’s ‘fear gauge’ in popular parlance — recently slipped below the 12-point mark it last touched in the halcyon days of mid-2018. But it is not the only measure of calm. There has been a remarkable collapse in volatility across asset classes and regions this year. The volatility indices of UK, European, Chinese and Japanese stocks have all sagged back to last year’s lows, and are not far off their 2017 nadirs. Currency and bond volatility gauges are also sedate. Bank of America’s cross-asset volatility index has only been lower for brief periods in early 2018, 2014 and 2007.”

April 22 – Wall Street Journal (Gunjan Banerji): “Volatility in the stock market has continued to drop in 2019, a sign that some investors are embracing riskier assets again. The Cboe Volatility Index, a yardstick for expected swings in equities, has fallen 9.4% this month after recording one of the biggest declines in history to start the year. The gauge measures the speed and severity of the stock market’s moves and tends to fall when equities are rising and demand for hedges on the S&P 500 slips. Volatility measures tracking currencies, bonds and oil have also retreated. ‘Sentiment is incredibly bullish,’ said Nancy Davis, chief investment officer at Quadratic Capital Management. ‘So many people are chasing performance now.’”

April 23 – Bloomberg (Justina Lee): “As the S&P 500 approaches all-time highs, defensive investing styles are trading at their most overbought levels in decades -- a sign of investor incredulity at this gravity-defying rally. Something may have to give. Growth shares have surged to the highest levels versus cheap equities since the dot-com bubble, underscoring fierce demand for companies less exposed to the gyrations of the economic cycle. Stocks posting a strong return on equity are near their most expensive since 1990, according to Sanford C. Bernstein & Co. To cap it all, tech multiples have jumped toward 2009 highs relative to the broader gauge.”

Trump Administration Watch:

April 24 – Reuters (Eric Beech): “U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin will travel to Beijing for trade talks beginning on April 30… It said Chinese Vice Premier Liu He, who will lead the Beijing talks for China, will travel to Washington for more discussions starting on May 8. ‘The subjects of next week’s discussions will cover trade issues including intellectual property, forced technology transfer, non-tariff barriers, agriculture, services, purchases, and enforcement,’ the White House said.”

April 21 – Wall Street Journal (Josh Zumbrun): “The accord now being drawn up to resolve the trade fight between the world’s two largest economies promises better treatment of U.S. companies in China and more Chinese orders for U.S. crops and other products. But rattled businesses on both sides of the Pacific are skittish about rushing back in to revive the once-booming investment activity between the two countries. ‘There is no way any deal between China and the U.S. will cause everyone on both sides to say, ‘We were just kidding,’’ said Dan Harris, managing partner at Harris Bricken, a law firm that specializes in investment with China. ‘The tariffs and the arrests and the threats and the heightened risk have impacted companies and that will not go away.’ The trade dispute isn’t the only factor driving a decline in investment flows between China and the U.S., which plunged to just over $19 billion last year, from a 2016 peak of $60 billion.”

April 22 – BBC (Ana Nicolaci da Costa): “A US-China trade deal - if it happens - is unlikely to end the rivalry between the two economic giants. Both sides have fought a trade war over the past year with damaging consequences for the global economy. But many say their dispute goes well beyond trade - it represents a power-struggle between two very different world views. Deal or no deal, that rivalry is only expected to broaden and become more difficult to resolve. ‘We have entered into a new normal in which US-China geopolitical competition has intensified and become more explicit,’ says Michael Hirson, Asia director at… Eurasia Group. ‘The trade deal will moderate one phase of the US-China power struggle, but only temporarily and with limited effect.’”

April 24 – Reuters (Makini Brice): “U.S. President Donald Trump… again threatened to close part of the southern border and send more ‘armed soldiers’ to defend it if Mexico did not block a new caravan of migrants traveling toward the United States. ‘A very big Caravan of over 20,000 people started up through Mexico,’ Trump wrote on Twitter. ‘It has been reduced in size by Mexico but is still coming. Mexico must apprehend the remainder or we will be forced to close that section of the Border & call up the Military.’ Trump also said… that Mexican soldiers recently had ‘pulled guns’ on U.S. troops in what he suggested was ‘a diversionary tactic for drug smugglers.’”

April 23 – CNBC (Emma Newburger): “President Donald Trump appeared to reverse course on Harley Davidson…, pledging to retaliate against ‘unfair’ European Union tariffs that the company partially blamed for its nearly 27% drop in first-quarter profit. Trump, who called for a boycott against the motorcycle company last year amid a spat over steel, said that the EU tariffs have forced Harley to move U.S. jobs overseas. ‘So unfair to U.S. We will Reciprocate!’ he said in a tweet.”

April 19 – Reuters (Kanishka Singh): “U.S. intelligence has accused Huawei Technologies of being funded by Chinese state security, The Times said on Saturday, adding to the list of allegations faced by the Chinese technology company in the West. The CIA accused Huawei of receiving funding from China’s National Security Commission, the People’s Liberation Army and a third branch of the Chinese state intelligence network, the British newspaper reported, citing a source.”

Federal Reserve Watch:

April 22 – Bloomberg (Rich Miller): “Some Federal Reserve policy makers seem resigned to running a heightened risk of asset bubbles and other financial excesses as they seek to keep the economic expansion going. That’s one of the messages tucked inside the minutes of the Federal Open Market Committee’s March 19-20 policy making meeting. ‘A few participants observed that the appropriate path for policy, insofar as it implied lower interest rates for longer periods of time, could lead to greater financial stability risks,’ according to the minutes… Chairman Jerome Powell could be one of those officials. He’s publicly pointed out that the last two expansions ended not in a burst of inflation, but in financial froth, first a dot-com stock market boom, then a housing bubble.”

April 20 – Wall Street Journal (Nick Timiraos): “Federal Reserve officials are starting to talk about the conditions under which they would cut interest rates, including a scenario where inflation drifts lower even if the economic growth doesn’t falter. Such a scenario isn’t seen as particularly likely, and a rate cut isn’t imminent or under consideration for their meeting April 30-May 1. But the thresholds for such action have been a topic of conversations in recent interviews and public remarks. Inflation rose last year to the Fed’s 2% target after years of undershooting it. Central bank officials say the target is symmetric, meaning they expect inflation will drift mildly above and below it at different times.”

April 23 – CNBC (Jeff Cox): “The Federal Reserve’s benchmark interest rate has inched up to its highest level in 11 years even though the central bank has sent a clear message that it is done tightening policy indefinitely. In recent days, the effective fed funds rate, which targets the overnight level that banks charge each other for loans, has moved up to 2.44%. That’s the highest since March 2008 and is just 6 bps from the top of the target range and the closest to the top since December, when the Fed last raised rates. For now, the move is looked on as not being especially problematic given that there is still room between the current level and the top of the 2.25% to 2.5% range in which the rate is supposed to trade. But moves toward the upper end of the band have prompted action before, and the trend likely will be a topic of discussion at next week’s Federal Open Market Committee meeting.”

April 22 – New York Times (Jim Tankersley and Alan Rappeport): “President Trump announced… that Herman Cain, one of his two embattled picks for the Federal Reserve Board, had withdrawn his name from consideration, even as his second candidate came under new scrutiny over his attitudes toward women. Mr. Cain… made his decision as he battled old accusations of sexual harassment that had halted his 2012 presidential campaign. His withdrawal bows to political reality in a moment when Mr. Trump has faced mounting criticism for tapping loyalists to join the historically independent Fed. And it moved a spotlight to the other man Mr. Trump has said he wants to put on the Fed, his economic adviser Stephen Moore, who faced new objections… because of a series of magazine columns that denigrated women…”

April 23 – Bloomberg (Jim Bianco): “Most everybody seems to be wondering what’s happened to U.S. inflation and why it hasn’t returned in any meaningful ways as suggested by the economic models. The answer matters to the Federal Reserve’s unique status as a central bank with a rare ‘dual mandate’ of maximum employment and stable prices. The evidence is mounting that this dual mandate is clouding the Fed’s judgment, especially at a time when the relationship between inflation and employment is being openly questioned. Congress has changed the mandate before, and maybe it should do so again. Perhaps Congress can give the Fed a mandate of full employment and financial stability, or a mandate of low inflation and financial stability. But juggling employment and inflation at the same time is becoming more and more problematic.”

U.S. Bubble Watch:

April 26 – Bloomberg (Katia Dmitrieva, Reade Pickert and Jeff Kearns): “President Donald Trump was quick to tout the U.S. economy’s surprisingly strong upturn in the first quarter, but it still seems poised for a slowdown this year. While gross domestic product surpassed all analyst expectations, kicking off the year with a 3.2% advance, more than half the gain came from the volatile trade and inventories components that may soon reverse. Underlying pillars of growth weakened. Consumer spending… cooled for the third straight quarter, and nonresidential business investment grew at the second-slowest pace since Trump took office. The question remains just how strong is the world’s largest economy.”

April 22 – Associated Press (Andrew Taylor): “The financial condition of the government’s bedrock retirement programs for middle- and working-class Americans remains shaky, with Medicare pointed toward insolvency by 2026, according to a report… by the government’s overseers of Medicare and Social Security. It paints a sobering picture of the programs, though it’s relatively unchanged from last year’s update. Social Security would become insolvent in 2035, one year later than previously estimated. Both programs will need to eventually be addressed to avert automatic cuts should their trust funds run dry… Social Security is the government’s largest program, costing $853 billion last year, with another $147 billion for disability benefits. Medicare’s hospital, outpatient care, and prescription drug benefits totaled about $740 billion. Taken together, the two programs combined for 45% of the federal budget, excluding interest payments on the national debt.”

April 26 – Bloomberg (Jenny Surane): “Red flags are flying in the credit-card industry after a key gauge of bad debt jumped to the highest level in almost seven years. The charge-off rate -- the percentage of loans companies have decided they’ll never collect -- rose to 3.82% in the first three months of 2019, the highest since the second quarter of 2012… And loans 30 days past due, a harbinger of future write-offs, increased at all seven of the largest U.S. card issuers. There’s been a ‘degradation’ in credit quality for certain customers, according to Richard Fairbank, chief executive officer at Capital One… Fairbank said some customers with negative credit events during the financial crisis are now seeing those problems disappear from their credit-bureau reports. ‘We may be looking at data that might not paint the full picture of a consumer’s credit history,’ Fairbank said… ‘Part of the context for our caution has been not only how deep we are in the cycle but, also, this is the time period when there is less information than there once was.’”

April 23 – Reuters (Lucia Mutikani): “Sales of new U.S. single-family homes rose to a near 1-1/2-year high in March… New home sales increased 4.5% to a seasonally adjusted annual rate of 692,000 units last month, the highest level since November 2017… Economists polled by Reuters had forecast new home sales, which account for 11.7% of housing market sales, decreasing 2.5% to a pace of 650,000 units in March… The median new house price dropped 9.7% to $302,700 in March from a year ago, the lowest level since February 2017. The drop was because of an increase in the share of homes sold in the $200,000-$300,000 price range.”

April 22 – Bloomberg (Prashant Gopal): “Buyers in the tightest U.S. housing markets finally got what they’ve been looking for: inventory. But instead of sales surging as a result, they’re sinking. In Salt Lake City, where listings jumped 53% in March from a year earlier, transactions fell 21%..., according to… Redfin Corp. Utah’s capital was followed by Los Angeles, Las Vegas and Orange County, California, all previously hot markets where inventory has been rising. Blame affordability. Buyers… stepped back last year after a jump in mortgage rates made it more expensive to purchase homes that were already costly. Trump’s tax plan, which punished pricey areas, added to the slowdown. But there’s hope that lower borrowing costs this year may already be helping. ‘Buyers are back, but they’re picky,’ said Daryl Fairweather, chief economist of Redfin. ‘In order to get back to a balanced market, prices have to come down more.’”

April 22 – CNBC (Diana Olick): “Sales of existing homes were weaker than expected in March. But behind the headline numbers, an even more disconcerting dynamic is playing out. Both the high end and the low end of the market are struggling due to completely different factors. Sales of the lowest-priced homes—those below $100,000—were down 13% in March compared with a year ago… This weakness on the low end started two years ago, as demand began to soar amid very tight supply. The inventory of cheaper homes continues to drop for two reasons: builders are not focused on the sector and investors snapped up lower-end homes during the last housing crisis, turning them into rentals. About 5 million homes were added to the rental stock and very few of them were replaced in the for-sale market. In contrast, sales of high-end homes were soaring in 2017. Million-dollar-plus sales were up nearly 31% that year. This March, sales in that price class were down 11% year over year, even though there are plenty of those homes for sale.”

April 25 – Associated Press (Martin Crutsinger): “Orders to U.S. factories for big-ticket manufactured goods rose 2.7% in March with a key category that tracks business investment decisions rising at the strongest pace in eight months. The increase in orders for durable goods followed a 1.1% drop in orders in February… Both months were influenced by a swing in the volatile category of commercial aircraft…”

April 22 – Associated Press (Joyce M. Rosenberg): “The boom market in small businesses is showing signs of cooling. The number of small business sales counted by online market BizBuySell.com fell 6.5% during the first quarter from the same period of 2018, following a 6% fourth quarter drop. BizBuySell.com reported 2,504 first quarter transactions, down from 2,678 a year earlier. Sales remain very strong, and the first quarter total is close to the record for a January-March period…”

April 24 – Associated Press (David Koenig): “Boeing is already estimating a $1 billion increase in costs related to its troubled 737 Max and has pulled its forecast of 2019 earnings because of uncertainty surrounding the jetliner, which remains grounded after two crashes that killed 346 people. The $1 billion figure is a conservative starting point. It covers increased production costs over the next few years but does not include the company’s spending to fix software implicated in the crashes, additional pilot training, payments to airlines for grounded jets, or compensation for families of the dead passengers… The company also said it is suspending stock buybacks. Boeing spent $2.3 billion in the first quarter to buy its own stock, which is designed to make remaining shares more valuable.”

April 22 – Associated Press (Janie Har): “San Francisco’s renowned waterfront hosts joggers, admiring tourists and towering condos with impressive views. It could also become the site of a new homeless shelter for up to 200 people. Angry residents have packed public meetings, jeering at city officials and even shouting down Mayor London Breed over the proposal. They say they were blindsided and argue billionaire Twitter executive Jack Dorsey and other tech executives who support the idea should lobby city officials to build a shelter by their homes. The waterfront uproar is among recent examples of strife in an expensive city that is both overwhelmed by tech wealth and passionate about social justice. San Francisco companies Pinterest and Lyft recently went public, and Uber and Slack are coming soon, driving fears that newly minted millionaires will snap up the few family homes left for under $2 million.”

April 23 – Reuters (Richard Leong and Trevor Hunnicutt): “American middle class consumers are enjoying the strongest wage growth in a decade, but higher gasoline prices are eating a good chunk of that increase for many, and it looks like pump prices are headed higher. Gasoline pump prices have already jumped about 25% this year, the fastest rate in three years… Some analysts expect the national average pump price, currently near $2.85 a gallon, will climb above $3 a gallon for the first time since 2014. Few goods prices aggravate U.S. consumers as much as high gasoline prices.”

April 21 – Financial Times (Andrew Edgecliffe-Johnson): “When Roger Williams got his turn at the microphone earlier this month, his question for the bank CEOs lined up before the House committee on financial services seemed an unusual one to put to seven sharp-suited financiers. ‘Are you a socialist or are you a capitalist?’ the Texas Republican asked each of them, from Citigroup’s Mike Corbat to David Solomon of Goldman Sachs. None struggled to assure him of their free market bona fides, but the fact the question was even asked reflected a remarkable change in the discussion about business… America’s decades-old system of corporate capitalism is suddenly up for debate. One reason is the rising prominence of self-described democratic socialists such as Alexandria Ocasio-Cortez, Mr Williams’ fellow committee member, which has put a spotlight on critics who were once outside the political mainstream. Yet some of the most influential voices calling for change are the very chief executives who have arguably benefited most from the current model.”

April 22 – Bloomberg (Prashant Gopal): “The Trump Administration is cracking down on national affordable housing programs because of concern over growing risk to the government’s almost $1.3 trillion portfolio of federally insured mortgages. The effort targets providers of money for borrowers who can’t afford the 3.5% down payment typically required on Federal Housing Administration loans. Such help -- from government agencies and families -- enables 4 in 10 FHA loans. Borrowers in government down-payment assistance programs become delinquent at about twice the rate of those who put up their own money.”

April 25 – Gallup (Julie Ray): “Even as their economy roared, more Americans were stressed, angry and worried last year than they have been at most points during the past decade. Asked about their feelings the previous day, the majority of Americans (55%) in 2018 said they had experienced stress during a lot of the day, nearly half (45%) said they felt worried a lot and more than one in five (22%) said they felt anger a lot. Each of these figures matches or tops previous highs in the U.S. Additionally, Gallup's latest annual update on the world's emotional state shows Americans were more likely to be stressed and worried than much of the world.”

April 22 – Bloomberg (Suzanne Woolley): “Just as single-income families began to vanish in the last century, many of America’s elderly are now forgoing retirement for the same reason: They don’t have enough money. Rickety social safety nets, inadequate retirement savings plans and sky high health-care costs are all conspiring to make the concept of leaving the workforce something to be more feared than desired. For the first time in 57 years, the participation rate in the labor force of retirement-age workers has cracked the 20% mark, according to… United Income. As of February, the ranks of people age 65 or older who are working or seeking paid work doubled from a low of 10% back in early 1985. The biggest spike in employment has gone to college-educated older workers; the share of all employees age 65 or older with at least an undergraduate degree is now 53%, up from 25% in 1985.”

China Watch:

April 26 – Bloomberg: “Chinese President Xi Jinping addressed some 40 world leaders at the Belt and Road forum in Beijing, but his speech may have been aimed at a head of state not in the audience: U.S. President Donald Trump. Xi spent a large portion of his speech Friday addressing Chinese domestic reforms, pledging to address state subsidies, protect intellectual property rights, allow foreign investment in more sectors and avoid competitive devaluation of the yuan. All four are issues the U.S. is addressing in trade talks with Beijing. ‘We will establish a binding enforcement system for international agreements,’ Xi said, adding that China will standardize all levels of government in terms of issuing administrative licenses and market regulation, and also ‘eliminate improper rules, subsidies and practices that impede fair competition and distort the market.’”

April 24 – Bloomberg: “The People’s Bank of China offered 267.4 billion yuan ($39.8bn) of targeted medium-term loans on Wednesday, a step that funnels money to some lenders while avoiding broad easing… The injection signals a calibrated approach to liquidity management, with the PBOC trying to keep money moving through the financial system while holding back market expectations for stronger easing. That’s partly because the economy is recovering, thanks to earlier stimulus that drove stronger-than-expected growth in March credit figures and last quarter’s GDP… The TMLF offering is “lower profile, more targeted" than cuts to reserve-requirement ratios, which could create bubbles in the stock market, said Lu Ting, chief China economist at Nomura International… ‘The chance of an RRR cut in the coming month is very small… The PBOC’s tone has changed, which means the pace and scale of easing will moderate. The central bank will stay in a wait and see mode,’ he said.”

April 24 – Reuters (Stella Qiu and Winni Zhou): “China’s central bank has no intent to tighten or relax monetary policy, a vice governor said…, as the market debates how much more support Beijing will give the economy after surprisingly resilient data was released last week. The People’s Bank of China’s use of reverse repos or a medium-term lending facility (MLF) does not signal that it has a loosening bias, Vice-Governor Liu Guoqiang told reporters…”

April 24 – Reuters (Kevin Yao): “China’s economy still faces downward pressure and the government will counter it by deepening reforms and cutting taxes, state television quoted Premier Li Keqiang as saying… The economy grew a steady 6.4% in the first quarter, defying expectations of a further slowdown, with factory output, retail sales and investment in March all growing faster than expected following a raft of stimulus measures. ‘We are keenly aware that China’s economy still faces downward pressure,’ Li said. He called for greater confidence but said authorities should not underestimate the difficulties in the economy.”

April 24 – Bloomberg (Tian Chen and Wenjin Lv): “China’s government bonds, among some of the world’s top-performing debt last year, have tumbled so much over the past month they’ve become the worst bets in Asia-Pacific. The yield on 10-year government bonds has surged more than 30 bps since late March, as wagers on broad monetary easing receded due to a better economic outlook and a rally in stocks. Singapore’s sovereign notes were the second-worst performer, followed by the Philippines.”

April 21 – Bloomberg: “China’s cash-strapped companies are going to new lengths to raise money from the booming stock market, even if it comes at a cost to existing shareholders. Nine firms have said they plan to raise a combined 40.5 billion yuan ($6bn) through rights issues since January, almost twice the amount announced all of last year… That includes Tianqi Lithium Corp. and Xinjiang Tianrun Dairy Co., whose shares slumped 5.4% and 10% immediately after their respective announcements. Chinese companies face restrictions on how much, how often and at what price they can sell new shares through private placements, the hitherto most popular method to raise money via the equity market. That’s sent them on a hunt for alternative funding tools, making the most of this year’s surging risk appetite.”

April 24 – Bloomberg (Carrie Hong and Carol Zhong): “Investor faith in Chinese dollar bonds backed by banks is about to be tested after a default by one of the country’s best known private conglomerates. China Minsheng Investment Group Corp. said last week cross-default clauses have been triggered on dollar bonds worth $800 million. These include $300 million of debt that carries a standby letter of credit from China Construction Bank Corp. -- effectively a pledge to repay if the borrower can’t. So far investor confidence that banks will honor such an agreement is unshaken. While CMIG’s dollar bonds due in August -- which aren’t backed by a letter of credit -- traded at around 58 cents on the dollar, bonds with CCB’s backing due 2020 were indicated at about 99 cents…”

April 21 – Wall Street Journal (Shen Hong): “China’s bond market is hosting a battle of wills between the country’s leadership and lower-ranking officials and corporate bosses. They are fighting over perpetual bonds, debtlike securities that lack a maturity date and technically never need to be repaid. Issuance has surged since the start of 2018, partly because state-backed companies see them as a way to hit Beijing-mandated debt-reduction targets without going through a painful restructuring or diluting government control. The central government, concerned that issuers are adding to their long-term financial risk and deferring more substantive efforts to hit those targets, recently tightened the rules, making it harder to count perpetuals as equity rather than debt for accounting purposes. The securities were first permitted in China in 2013. Some 1.8 trillion yuan ($268bn) of perpetuals are now outstanding—95% issued by state-backed businesses, from energy giants to ‘local government financing vehicles,’ which build and run infrastructure projects.”

April 23 – Wall Street Journal (Mike Bird): “China’s major commercial banks have a funding issues outside Beijing’s control: They’re running low on the U.S. dollars they need for activities both at home and abroad. The combined dollar liabilities at the big four commercial banks exceeded their dollar assets at the end of 2018, …a sharp reversal from just a few years ago. Back in 2013, the four together had around $125 billion more dollar assets than liabilities, but now they owe more dollars to creditors and customers than are owed to them. Bank of China is by far the greatest contributor to the shift. Once the holder of more net assets in dollars than any other Chinese lender, it ended 2018 owing about $70 billion more in dollar liabilities than it booked in dollar assets.”

April 22 – Financial Times (Gregory Meyer, Hudson Lockett and Andres Schipani): “As millions of pigs disappear in China, the rest of the world is beginning to notice. The country’s pig population, the largest in the world, is likely to shrink by almost a third, losing 130m animals as African swine fever ravages the country’s farms. The outbreak will reshape protein markets across the globe, driving up meat prices as China, the leading consumer and producer of pork, braces for years of shortages and disruptions to its food supply. ‘This has been a game-changer,’ says Jais Valeur, group chief executive at Danish Crown, Europe’s leading pork processor. ‘We’re only starting to see the real impact of African swine fever.’ The ASF virus, endemic to Africa, is fatal to pigs and has no cure. The current wave of cases began in Georgia in 2007 and spread to parts of eastern Europe and Russia before reaching China in August.”

April 24 – Bloomberg (Alfred Cang and Anna Kitanaka): “In almost 40 years of analyzing commodity markets, Arlan Suderman says he has never witnessed an industry-jolting event as dramatic as the contagion spreading across China’s hog farms. The chief commodities economist at INTL FCStone Inc… has been warning clients about the impact of African swine fever, which he says is not only under-reported but will spur a restructure of China’s entire farm industry and trigger an escalation in meat prices globally. Most react in disbelief, Suderman said, but the situation is likely to worsen before it gets better.”

April 22 – Financial Times (Tom Hancock): “A massive scheme to demolish nearly 25m homes in designated ‘slum’ areas in China — forcing the relocation of some 100m people over the past four years — is straining local government finances amid a downturn in land sales. Residents of Qiangbei village in the central Chinese city of Jiaozuo say the government has been destroying homes without compensating those evicted with new housing or money. ‘The national policy is to build relocation housing before demolition, but here it’s the opposite way around,’ said Zhang Xiaoqin, a… farmer who was collecting the last items from her two-storey village house ahead of demolition. The villagers’ plight reflects difficulties some municipalities in China have had in meeting spending obligations as they struggle under a collective debt burden that reached Rmb40.3tn ($6tn) last year, according to S&P Global.”

Central Bank Watch:

April 24 – Reuters (Leika Kihara, Tetsushi Kajimoto, Stanley White and Kaori Kaneko): “The Bank of Japan kept monetary policy steady… and clarified its intention to keep interest rates very low for a prolonged period, committing to do so at least through around the spring of next year. In a widely expected move, the BOJ maintained its short-term interest rate target at minus 0.1% and a pledge to guide 10-year government bond yields around zero percent. ‘The BOJ intends to maintain the current extremely low levels of short-term and long-term interest rates for an extended period of time, at least through around spring 2020,’ the BOJ said…”

April 20 – Bloomberg (Catherine Bosley): “The Swiss National Bank can lower its subzero interest rates even further, President Thomas Jordan told newspaper Blick. …Jordan affirmed the ongoing need for a deposit rate of minus 0.75% plus a pledge to intervene in currency markets, if necessary, adding the franc remains highly valued. The SNB had the tools to act, he said, should economic conditions deteriorate.”

Europe Watch:

April 25 – Associated Press (Joseph Wilson): “The outcome of Spain’s election on Sunday is anyone’s guess. A substantial pool of voters is still undecided. The country’s traditional parties have been diluted. And a rising populist party has splintered the right. The ballot will be Spain’s third parliamentary election in less than four years, with no sign that the uncertainty will go away anytime soon. Socialist Prime Minister Pedro Sánchez is hoping voters give him a strong mandate to stay in the office he assumed 11 months ago…”

April 23 – Bloomberg (Ferdinando Giugliano): “The euro zone has only recently recovered from a double-dip recession, but there are already questions about how prepared it would be for a new crisis. All eyes are on the European Central Bank, which has been the strongest line of defense against an economic slowdown. While pessimists worry that the ECB has few tools left if it needs to revive growth — given the region’s already rock-bottom interest rates — such concerns are overdone. A far bigger risk is the replacement of Mario Draghi as the central bank’s president this year. Will the new chief be willing to use all of the instruments available to take the monetary union out of any crisis? It’s far from certain.”

April 24 – Reuters (Paul Carrel and Jörn Poltz): “German business morale deteriorated in April, bucking expectations for a small improvement, as trade tensions hurt the industrial engine of Europe’s largest economy… The Munich-based Ifo economic institute said… its business climate index fell to 99.2 in April from an upwardly revised 99.7 in March, the first rise after six straight declines. The consensus forecast for a rise to 99.9. ‘March’s gentle optimism regarding the coming months has evaporated,’ Ifo President Clemens Fuest said… ‘The German economy continues to lose steam.’”

April 24 – Financial Times (Hannah Roberts): “The well-heeled inhabitants of Munich are sometimes disparaged by other Germans as schickimicki — something like ‘fancy-schmancy’… Münchner have plenty to feel smug about. Top companies such as BMW, Siemens and Allianz are based there, helping to make the city one of the most affluent in Germany. Economic success has had an effect on house prices, causing them to rocket in recent years. Today, Munich is Germany’s most expensive city in which to buy property… The average price per square metre in the city is €7,630, dwarfing the €2,993 in Germany as a whole. Prices have risen so steeply, in fact, that a report by UBS considers Munich to be the biggest bubble risk in Europe. Only Hong Kong is more at risk in the 20 cities analysed in its Real Estate Bubble Index.”

EM Watch:

April 25 – Financial Times (Adam Samson): “Turkey’s financial markets suffered a new blow on Thursday as the country’s central bank unnerved investors by signalling a growing reluctance to raise interest rates and disclosed a further drop in its foreign currency reserves. The monetary policy decision, along with fresh data that show the country’s foreign currency coffers had dropped $1.8bn last week, deepened worries about the country’s deteriorating financial defences.”

Global Bubble Watch:

April 26 – Financial Times (Peter Campbell): “Global gloom swept the auto industry this week with Daimler and Renault becoming the latest in a string of carmakers to report falling sales and squeezed margins. Their results for the first quarter follow falling sales at Peugeot-owned PSA and a sharp earnings drop at Volvo, while Nissan this week slashed its profit forecasts by a fifth… Car sales have slumped in China and emerging markets, while Europe and the US are stagnating, as the global automotive cycle eases into reverse following years of strong growth. At the same time as slowing sales, carmakers are facing rising costs from developing electric and hybrid models to meet emissions targets, as well as new technologies such as self-driving vehicles.”

April 23 – Financial Times (Richard Henderson): “The amount of assets held in exchange-traded bond funds has pushed past $1tn, capping a near fivefold increase since the financial crisis, and underscoring a radical reshaping of the world’s debt markets. ETFs — passive vehicles that try to mimic the performance of an underlying index — have emerged as fixtures of many investors’ portfolios over the past 30 years, giving them relatively cheap and reliable access to a wide variety of assets… Equity ETFs continue to dominate the $5.6tn-in-assets industry, but the rapid rise of fixed income ETFs highlights how investors have become increasingly comfortable using such vehicles… Assets in bond ETFs came to $1.03tn at the end of March, according to ETFGI... At the end of 2009 the equivalent figure stood at $218bn.”

April 24 – Reuters (Joori Roh and Cynthia Kim): “South Korea’s economy unexpectedly shrank in the first quarter, marking its worst performance since the global financial crisis, as companies slashed investment and exports slumped in response to Sino-U.S. trade tensions and cooling Chinese demand… Gross domestic product (GDP) in the first quarter declined a seasonally adjusted 0.3% from the previous quarter, the worst contraction since a 3.3% drop in late 2008…”

April 23 – Wall Street Journal (Jenny Strasburg): “Deutsche Bank AG executives have discussed creating a new unit to house unwanted assets and businesses that could be earmarked for closure, part of contingency planning under way should a possible merger with German rival Commerzbank AG fall through… Deutsche Bank for years has been retooling its strategy and management, promising to reinvigorate profits, repair compliance weaknesses and cut rising costs. Executives insisted publicly up until late 2018 that the bank should only consider deals after it heals itself. Now, deep into merger talks, it is looking at a potentially bigger cleanup effort than it previously signaled.”

April 25 – Bloomberg (Fergal O'Brien): “The global trade funk is dragging on, with new data on Thursday showing volumes are falling at the fastest pace since the depths of the financial crisis. Calculations by Bloomberg based on the Dutch statistics office’s trade monitor show a 1.9% drop in the three months through February compared with the previous three months. That marks the steepest drop since the period through May 2009.”

Japan Watch:

April 25 – Reuters (David Lawder and Jason Lange): “Japanese Finance Minister Taro Aso said… he told U.S. Treasury Secretary Steven Mnuchin that Tokyo cannot accept discussions that link monetary policy to trade issues. Aso, who met Mnuchin on the eve of a summit between U.S. President Donald Trump and Japanese Prime Minister Shinzo Abe in Washington, said the two countries also agreed that exchange-rate matters would be discussed between financial authorities. Trump has made clear he is unhappy with Japan’s trade surplus with the United States - much of it from auto exports - and wants a two-way agreement to address it.”

Fixed-Income Bubble Watch:

April 25 – Wall Street Journal (Sam Goldfarb): “A sharp rally in speculative-grade corporate bonds has pushed the average yield on those bonds below that of comparably rated loans, an unusual market distortion reflecting an improved U.S. economic outlook and the Federal Reserve’s retreat from tightening monetary policy. Bond yields… typically exceed those of loans because holders of the latter are typically paid first in bankruptcies. This year, yields on both are down amid a broad rally in riskier assets. Still, yields on bonds are down more in large part because the floating coupons of loans have become less appealing now that the Fed is no longer raising interest rates. At the same time, investors see little reason to seek shelter in loans given a still-benign economic environment and low rate of corporate defaults. As of Tuesday, the average yield to maturity of bonds in the Bloomberg Barclays high yield index was 6.51%, down from 8% at the end of last year, while the average yield of loans in the S&P/LSTA Leveraged Loan index was 6.53%, down from 7.23%.”

April 25 – Financial Times (Joe Rennison and Ed Crooks): “The junk-rated debt of energy companies has surged this year to become the best-performing sector within the US high-yield bond market, lifted by a rally in commodity prices that was strengthened this week by Washington’s decision to tighten curbs on Iran’s oil exports. The total return on high-yield debt from energy companies has risen to 10.3% for 2019, outpacing a broader recovery across the lower ranks of the corporate bond market, which has returned 8.7%... The main catalyst has been a resurgent oil market. Internationally traded Brent crude has climbed to more than $75 a barrel, up nearly 40% from the turn of the year…”

Leveraged Speculator Watch:

April 21 – Financial Times (Laurence Fletcher): “Life has not been good for many macro hedge funds in recent years — but the green shoots of recovery are beginning to appear. Quantitative easing has been a big drag for traders by pushing bond yields lower and for longer than many had expected, distorting fund managers’ fundamental analysis of markets and suppressing the volatility they like to trade. Macro hedge funds epitomise what many people imagine the hedge fund industry to be — traders taking punchy bets on a move in the yen or the path of US interest rates. So modest positive returns in the first quarter are raising hopes that broader market conditions have become more favourable… While hardly spectacular, the first quarter’s 2.6% average gain… would equate to an annualised return of more than 10%... That would be a welcome improvement after a loss of 4.1% last year and lacklustre performance in the previous three years.”

April 21 – Financial Times (Javier Espinoza): “Some of the largest private equity groups are raising the performance fees they charge investors to well above the industry’s norm at a time when institutions are fighting to put money into the best funds. Institutional investors are in some cases paying 30% in ‘carried interest’ — the share of profits taken by the private equity groups — up from the traditional 20% share of profits that the industry has charged for decades. Funds charging this ‘super carry’ have been launched recently by Carlyle Group, Vista Equity Partners and Bain Capital in the US and EQT, Eurazeo and Altor in Europe. Advisors to large private equity funds have defended the rise of ‘super carry’, arguing it is only the top-tier funds with stellar results that can get away with it.”

April 24 – Reuters (John Kemp): “Hedge funds are betting heavily on higher gasoline prices this summer, anticipating that refiners will struggle to produce enough gasoline to replenish depleted stocks while ramping up diesel output for the shipping industry. Hedge funds and other money managers have accumulated 118 million barrels of bullish long positions in futures and options linked to U.S. gasoline prices compared with just 3 million barrels betting on prices falling.”

Geopolitical Watch:

April 24 – Reuters (Hyonhee Shin, Joyce Lee, Maria Kiselyova, Darya Korsunskaya and Maxim Rodionov): “Russian President Vladimir Putin said after holding his first face-to-face talks with North Korean leader Kim Jong Un on Thursday that U.S. security guarantees would probably not be enough to persuade Pyongyang to shut its nuclear program.”

April 20 – Reuters (Joori Roh and Josh Smith): “North Korea has criticized U.S. National Security Adviser John Bolton’s ‘nonsense’ call for Pyongyang to show that it’s serious about giving up its nuclear weapons, the second time it has criticized a leading U.S. official in less than a week. U.S. President Donald Trump has said he is open to a third summit with North Korean leader Kim Jong Un, but Bolton told Bloomberg… there first needed to be ‘a real indication from North Korea that they’ve made the strategic decision to give up nuclear weapons’.”

April 23 – Financial Times (Lucy Hornby, Anjli Raval, Aime Williams and Najmeh Bozorgmehr): “China has hit out at a US decision to tighten restrictions on oil exports from Iran, warning that the move could destabilise the Middle East even as other buyers scramble to fall into line with Washington. Beijing emerged quickly… as the chief opponent of a Trump administration move to scrap waivers that had enabled China and several other countries to buy Iranian oil despite US sanctions. Chinese oil companies are among Iran’s biggest customers and China’s foreign ministry lodged a formal protest with the US over the decision, according to the ministry spokesman Geng Shuang… ‘The decision from the US will contribute to volatility in the Middle East and in the international energy market,’ he said.”

April 22 – Bloomberg (Arsalan Shahla and Ladane Nasseri): “Iran will close the Strait of Hormuz, a waterway vital for global oil shipments, if the country is prevented from using it, a senior military official said… in what appears to be a response to the U.S. plan to end waivers on Iranian oil exports. ‘If we are prevented from using it, we will close it,’ the state-run Fars news agency reported, citing Alireza Tangsiri, head of the Revolutionary Guard Corps navy force. ‘In the event of any threats, we will not have the slightest hesitation to protect and defend Iran’s waterway.’”

April 22 – Financial Times (Anjli Raval and Ed Crooks): “The US has stepped up pressure on Tehran by deciding to end sanctions waivers that have allowed big economic powers to continue importing crude from Iran, a move that raises questions about the ability of other oil producers to fill the gap. The move helped push up the price of Brent crude…, which climbed above $74 a barrel for the first time in six months this week. The US… restated its desire to bring Iran’s oil exports down to ‘zero’ — an ambition it announced last November when it reintroduced sweeping anti-Iran economic sanctions. Although exports have dropped since then they did not vanish, partly because of the exemptions that will now be phased out. Iran’s exports averaged about 2.5m barrels a day before the US decision to reimpose curbs… In the past five months its exports have dropped to 1m-1.3m barrels per day, according to estimates by consultancy FGE Energy. Tanker-tracking websites suggest Iran has been secretly exporting rather more: about 1.9m b/d.”

April 24 – Reuters (Michelle Nichols, Lesley Wroughton and Phil Stewart): “Iranian Foreign Minister Mohammad Javad Zarif does not believe U.S. President Donald Trump wants war with Iran, but he told Reuters… that Trump could be lured into a conflict. ‘I don’t think he wants war,’ Zarif said… ‘But that doesn’t exclude him being basically lured into one.’”

April 23 – Reuters (David Lague and Benjamin Kang Lim): “In 1938, in the midst of a long campaign to bring China under Communist Party rule, revolutionary leader Mao Zedong wrote: ‘Whoever has an army has power.’ Xi Jinping, Mao’s latest successor, has taken that dictum to heart. He has donned camouflage fatigues, installed himself as commander-in-chief and taken control of the two million-strong Chinese military, the People’s Liberation Army. It is the biggest overhaul of the PLA since Mao led it to victory in the nation’s civil war and founded the People’s Republic in 1949. Xi has accelerated the PLA’s shift to naval power from a traditionally land-based force. He has broken up its vast, Maoist-era military bureaucracy. A new chain of command leads directly to Xi as chairman of the Central Military Commission… The Chinese leader isn’t just revolutionizing the PLA. Xi is making a series of moves that are transforming both China and the global order.”

April 24 – Reuters (David Lague and Benjamin Kang Lim): “China’s powerful military is considered to be a master at concealing its intentions. But there is no secret about how it plans to destroy American aircraft carriers if rivalry becomes war. At November’s biennial air show in the southern city of Zhuhai, the biggest state-owned missile maker, China Aerospace Science and Industry Corporation Ltd, screened an animation showing a hostile ‘blue force,’ comprising an aircraft carrier, escort ships and strike aircraft, approaching ‘red force’ territory. On a giant screen, the animation showed a barrage of the Chinese company’s missiles launched from ‘red force’ warships, submarines, shore batteries and aircraft wreaking havoc on the escort vessels around the carrier. In a final salvo, two missiles plunge onto the flight deck of the carrier and a third slams into the side of the hull near the bow.”

April 23 – Reuters (Brenda Goh, Michael Martina, Cate Cadell, Ben Blanchard and John Ruwitch): “China is expected to promote a recalibrated version of its Belt and Road initiative at a summit of heads of state this week in Beijing, seeking to allay criticism that its flagship infrastructure policy fuels indebtedness and lacks transparency. The policy championed by Chinese President Xi Jinping has become mired in controversy, with some partner nations bemoaning the high cost of projects. Western governments have tended to view it as a means to spread Chinese influence abroad, saddling poor countries with unsustainable debt.”