China’s renminbi dropped 1.38% versus the dollar this week to 6.9179, the low since November 30th (offshore renminbi at all-time lows). It’s worth noting that the renminbi is now only 1.2% from breaching the key psychological 7.00 level versus the dollar. Currencies were under pressure throughout Asia. The South Korean won declined 1.5%, the Singapore dollar 1.1%, the Taiwanese dollar 1.0%, the Philippine peso 1.0% and the Indonesian rupiah 0.9%. Weakness spread into EM more generally. The Brazilian real fell 3.5%, the South African ran 1.8%, the Hungarian forint 1.5%, the Chilean peso 1.5%, and the Colombian peso 1.0%.
For the most part, EM bond market calm endured. Problem child Lebanon saw local bond yields surged 24 bps to an almost five-month high 10.65%, with yields up 87 bps so far this month. More concerning, Brazil’s local (real) yields surged 31 bps to 9.09%, the highest level since March.
After somewhat stabilizing (courtesy of “national team” buying), Chinese equities this week resumed their descent. The Shanghai Composite dropped 1.9%, with the CSI Financials index down 2.7% and the ChiNext Index sinking 3.6%. Hong Kong’s Hang Seng Index declined 1.3%, led lower by a 2.1% drop in the Hang Seng China Financials index. Stocks were down 2.5% in South Korea, 6.2% in Indonesia, 3.1% in Taiwan, 2.5% in Thailand and 1.3% in the Philippines. Brazil’s Ibovespa index sank 4.5%.
Though major U.S. equities indices ended the week down less than 1%, there’s a story to tell. Monday trading saw the S&P500 sink 2.4% (DJIA down 617 pts). The President began the morning with a tweet: “China should not retaliate - will only get worse! I say openly to President Xi & all of my many friends in China that China will be hurt very badly if you don’t make a deal because companies will be forced to leave China for other countries.” Less than two hours later, Beijing announced retaliatory tariffs on $60 billion of U.S. goods.
Markets rallied on Tuesday, nerves calmed by the President’s comment that the trade war with China was a mere “little squabble;” “We have a good dialogue going. It will always continue.” “When the time is right we will make a deal with China. It will all happen, and much faster than people think!” A Chinese Foreign Ministry spokesperson said that China and the U.S. had agreed to continue “pursuing relevant discussions.” Treasury Secretary Mnuchin suggested he was planning for a trip to China to resume negotiations.
May 15 – Associated Press (Yanan Wang and Sam McNeil): “What do tilapia, Jane Austen and Chinese revolutionary poster art have in common? All have been used to rally public support around China’s position in its trade dispute with the U.S., as the ruling Communist Party takes a more aggressive approach — projecting stability and stirring up nationalistic sentiment in the process. ‘If you want to negotiate, the door is open,’ anchor Kang Hui said Monday on state broadcaster CCTV. ‘If you want a trade war,’ however, he added, ‘we’ll fight you until the end.’ ‘After 5,000 years of wind and rain, what hasn’t the Chinese nation weathered?’ Kang said. The toughly-worded monologue on the banner evening news program followed days of muted official responses to President Donald Trump’s decision to hike tariffs…”
May 14 – Bloomberg: “Chinese President Xi Jinping denounced as ‘foolish’ foreign efforts to reshape other nations as he pushes back against U.S. trade demands. ‘To think that one’s own race and civilization are superior to others, and to insist on transforming or even replacing other civilizations, is foolish in understanding and disastrous in practice,’ Xi said… at the opening ceremony of the Conference on Dialogue of Asian Civilizations in Beijing… ‘The Chinese people’s beliefs are united and their determination as strong as a rock to safeguard national unity and territorial integrity, and defend national interests and dignity,’ Xi said Tuesday when meeting with visiting Greek President Prokopis Pavlopoulos.”
By Wednesday morning, it was becoming increasingly clear that the “little squabble” was more than a little fib. China’s vice-premier Liu He had stated that China (negotiators and the Chinese people) would never “flinch” in the face of tariffs. After showing restraint over recent weeks, the Chinese media was unleashed. State media declared that China would “never surrender” to external pressure. And from the communist party’s People’s Daily: “At no time will China forfeit the country’s respect, and no one should expect China to swallow bitter fruit that harms its core interests.” CCTV’s “If you want a trade war, we’ll fight you until the end” video (from above) was quickly viewed more than 3.3 billion times.
U.S equities markets opened poorly Wednesday morning, quickly giving back much of Tuesday’s recovery. If Monday’s lows were to have been taken out, market technicals could have quickly turned problematic. Especially after the previous week’s instability, there were large quantities of put options outstanding in the marketplace. Had the markets weakened going into Friday’s expiration, there was a distinct possibility of intense self-reinforcing derivatives-related selling.
About 40 minutes after Wednesday’s open, Bloomberg reported that President Trump was preparing to offer the EU and Japan a six-month window to “limit or restrict” auto exports to the U.S. before imposing new tariffs. The S&P500 jumped as much as 1.4%, a rally that carried into Thursday’s session.
The auto tariff news came at a critical market juncture. Whether it was or wasn’t a coincidence hardly matters. At this point, markets have become quite enamored with the notion of Quadruple Puts – the Fed, Trump, Xi/Beijing and corporate buybacks. When historians look back at this period, they will surely be baffled by the markets’ capacity for disregarding major risks and negative developments. We’re at the stage of a historic - and especially protracted - cycle where it has repeatedly paid to ignore risk. Over time, the successful risk ignorers and dip buyers have ascended to the top. Risk-takers systematically rewarded; the cautious banished. And those that had recently purchased put options to hedge market risk were, once again, left unsatisfied.
The official announcement of the six-month delay in auto tariffs came Friday, along with news that the President was lifting tariffs on Canadian and Mexican steel and aluminum imports. The FT headline: “Trump Eases Trade Conflicts with US Allies.” Rallying markets were receptive to seemingly positive news – that is until a Friday afternoon report from CNBC (Kayla Tausche and Jacob Pramuk): “Negotiations between the U.S. and China appear to have stalled as both sides dig in after disagreements earlier this month. Scheduling for the next round of negotiations is ‘in flux’ because it is unclear what the two sides would negotiate…” One can assume the administration is now working to generate some positive news flow as it hunkers down for a tough fight with the Chinese.
The U.S./Chinese relationship was never going to end well. The lone superpower versus the rising superpower. Vastly different systems, cultures and values. And it would be such a different world these days if not for a decade (or three) of unprecedented global monetary stimulus – cheap (i.e. nearly free) finance that allowed the U.S. to run endless huge Current Account Deficits coupled with easy finance that bestowed upon the Chinese (the curse of) unlimited monetary resources for the most outrageous Credit and investment booms in history. I always expected markets would at some point put a kibosh to this perilous dynamic. It was instead the embittered U.S. electorate and the architect of “Make America Great Again.”
It sure appears as if the Rubicon has been crossed. Beijing has called out the dogs (i.e. state-controlled media) – and public anti-U.S. sentiments have been inflamed. I’ll assume they’re now executing a contingency plan some time in the making: Trump is the unreasonable and disrespectful bully. China will never again be disrespected and pushed around. President Xi - general secretary of the Communist Party, President of the People's Republic of China, chairman of the Central Military Commission, China's ‘Paramount Leader’ and revered ‘Core Leader’ – is precisely the great commander to confront the U.S. hegemon determined to repress China’s strength, advancement and rightful standing in the world.
It’s become difficult to envisage Trump and Xi exchanging pleasantries and doing beaming photo ops next month at the G-20 summit (June 28-29) in Osaka, Japan. President Trump has often touted his close personal relationship with China’s Xi, and the U.S. side seems to believe that a private meeting between the congenial leaders can get talks back on track (worked in Argentina!). Let’s ignore U.S. freedom of navigation voyages through the South China Sea; the administration cozying up with Taiwan; Secretary Pompeo meeting Thursday with a pro-democracy leader in Hong Kong, etc. Let’s disregard the trail of condescending tweets. And Huawei.
May 16 – Bloomberg: “The Trump administration is pulling out the big guns in its push to slow China’s rise, with potentially devastating consequences for the rest of the world. The White House on Wednesday initiated a two-pronged assault on China: barring companies deemed a national security threat from selling to the U.S., and threatening to blacklist Huawei Technologies Co. from buying essential components. If it follows through, the move could cripple China’s largest technology company, depress the business of American chip giants from Qualcomm Inc. to Micron Technology Inc., and potentially disrupt the rollout of critical 5G wireless networks around the world.”
From CNBC: “Reacting to U.S actions on Huawei, China’s Commerce Ministry said in a statement, ‘We firmly oppose the act of any country to impose unilateral sanctions on Chinese entities based on its domestic laws, and to abuse export control measures while making ‘national security’ a catch-all phrase. We urge the US to stop its wrong practices.’”
My view is that China is adamantly opposed to the U.S.’s use of “unilateral sanctions.” The administration’s insistence on a sanction enforcement regime as integral to the trade deal was a red line the Chinese refused to cross. The U.S. doubled-down with sanctions on Huawei – and until proven otherwise I’ll assume both China’s and the U.S.’s positions have further hardened.
This is a critical juncture for China’s faltering Bubble. Fragilities are acute. The assumption is that China will now move aggressively with additional fiscal and monetary stimulus. Conversely, it’s not an inopportune time for Beijing to take some pain. They have a scapegoat – a villainous foreigner determined to contain China’s rising power. For Beijing, the greatest risk is that its population loses trust in the phenomenal communist party meritocracy.
As noted above, the Chinese renminbi dropped 1.4% this week versus the dollar – and is now just a little over 1% away from the key psychological 7.00 level. “China’s Central Bank Won’t Let Yuan Weaken Past 7 to the Dollar (Reuters’ Zheng Li and Kevin Yao): ’At present, rest assured they will certainly not let it break 7,’ a source told Reuters. A defense of the 7 level could help boost confidence in the currency and soothe investor fears about a sharp depreciation in the yuan… ‘Breaking 7 is beneficial to China because it can reduce some of the effects of tariff increases, but the impact on our renminbi confidence is negative and funds will flow out,’ the source said.”
“At present, rest assured…” Excluding its massive surplus with the U.S., China runs a significant trade deficit with the rest of the world. There’s a scenario where President Trump places hefty tariffs on all Chinese imports into the U.S., levies that over time would be expected to significantly reduce demand for Chinese goods. At the same time, a weakening renminbi would see China expend more for much of its imports. Keep in mind, as well, that Beijing’s current stimulus measures are further fueling its apartment Bubble and resulting consumption boom. It’s possible that China’s trade position is poised to radically deteriorate.
Let’s assume the PBOC does move to defend the 7.0 level (renminbi vs. $). Markets will instinctively test this support – while closely monitoring for indications of the scope of reserves (and forward contracts) expended in the process. And China (and the world) better hope reserves prove more resilient than back in 2015 when they proceeded to collapse by $580 billion over a twelve-month period. If China’s reserves begin to rapidly deplete, expect stringent capital control and other measures to stem outflows. And while everyone believes China will resort to fiscal and monetary stimulus until the cows come home, EM Crisis Dynamics invariably force authorities to tighten conditions to bolster currency and financial system stability.
Friday’s report on University of Michigan Consumer Confidence had consumer sentiment at a 15-year high. Consumer Expectations surged almost nine points to 96 (up from January’s 79.9), to the highest reading since January 2004 – and the second strongest reading going back to November 2000. With stock prices recently (May 1st) hitting record highs and the unemployment rate at 50-year lows, consumer optimism is not unreasonable.
Increasingly, it appears as if the respite from Q4 global market instability has about run its course. As an economy – from governments to corporations to households – I can’t imagine a more poorly prepared system for the gathering storm. I know: fundamentals are “sound” and the banking system is “well capitalized.” Besides, there’s the Quadruple Puts – a deeply entrenched market misperception that really concerns me. Complacency is pervasive – epically so. Ignore fundamental developments, while placing faith in the power of politicians and central bankers (and corporations forever enjoying access to cheap finance to fund buybacks). Such a backdrop creates extraordinary risk for an abrupt change in perceptions and resulting crisis of confidence – in policymakers and the markets.
We started with the markets and will end with the markets. At this point, I don’t see great contradictions between the markets: Safe haven bonds and the risk markets are not actually telling wildly different stories. Seeing low market yields, loose financial conditions, seemingly great underlying U.S. economic fundamentals and Quadruple Puts, highly speculative (trend-following and performance-chasing) markets have been behaving about as one would expect near the end of a historic cycle: an intense, overarching short-term focus on speculative market gains. The safe havens, much less concerned with timing, see speculative Bubbles primed for bursting. Treasuries, bunds, JGBs, Swiss bonds, etc. see an acutely fragile global market structure.
May 14 – Bloomberg (Steve Matthews): “Federal Reserve Bank of Kansas City President Esther George said she’s opposed to cutting interest rates in order to raise inflation to the central bank’s 2% target, warning that could lead to asset-price bubbles and ultimately an economic downturn. ‘Lower interest rates might fuel asset price bubbles, create financial imbalances, and ultimately a recession,’ George… said… ‘In current circumstances, with an unemployment rate well below its projected longer-run level, I see little reason to be concerned about inflation running a bit below its longer-run objective.’”
Markets are not pricing in a 75% probability for a rate cut by December because of current Fed thinking. Chairman Powell is joined by sound thinkers including Esther George that recognize the risks associated with even looser monetary conditions. Safe haven markets are instead discerning the high probability of a market dislocation that would so significantly tighten financial conditions that the Fed and global central bankers will have no option other than cutting rates and resorting to more QE.
The breakdown in China/U.S. trade talks provides the initial catalyst. The 3.3% one-month decline in the renminbi (offshore renminbi down 3.9%) is indicative of acute vulnerability in the Chinese currency. And if PBOC support fails to stabilize the market, a crisis of confidence and run on Chinese assets cannot be ruled out. I don’t think one can overstate the financial, economic and geopolitical ramifications of China succumbing to Crisis Dynamics. The world becomes a much more uncertain place. Deleveraging in China would surely equate to global de-risking/deleveraging and highly destabilized global financial flows.
And for the crowd that these days harbors delusions of U.S. markets and economic activity largely immune to global issues, I pose the question: How do U.S. markets perform in the event of illiquidity and a “seizing up” of global markets? As I’ve posited before, the U.S. economy is extremely vulnerable to a dramatic market-induced tightening of financial conditions. What would markets look like if the marketplace turns against negative cash-flow enterprises? How would the U.S. economy function in the event of debt market illiquidity?
The Powell U-turn granted markets four months of fun and games – and only greater systemic vulnerability. Now comes the downside, with a Fed that just might prove somewhat slower to come to the markets’ rescue than everyone presumes. This week marked the True Start to the U.S. vs. China Trade War. The degree of cluelessness is shocking.
By Wednesday morning, it was becoming increasingly clear that the “little squabble” was more than a little fib. China’s vice-premier Liu He had stated that China (negotiators and the Chinese people) would never “flinch” in the face of tariffs. After showing restraint over recent weeks, the Chinese media was unleashed. State media declared that China would “never surrender” to external pressure. And from the communist party’s People’s Daily: “At no time will China forfeit the country’s respect, and no one should expect China to swallow bitter fruit that harms its core interests.” CCTV’s “If you want a trade war, we’ll fight you until the end” video (from above) was quickly viewed more than 3.3 billion times.
U.S equities markets opened poorly Wednesday morning, quickly giving back much of Tuesday’s recovery. If Monday’s lows were to have been taken out, market technicals could have quickly turned problematic. Especially after the previous week’s instability, there were large quantities of put options outstanding in the marketplace. Had the markets weakened going into Friday’s expiration, there was a distinct possibility of intense self-reinforcing derivatives-related selling.
About 40 minutes after Wednesday’s open, Bloomberg reported that President Trump was preparing to offer the EU and Japan a six-month window to “limit or restrict” auto exports to the U.S. before imposing new tariffs. The S&P500 jumped as much as 1.4%, a rally that carried into Thursday’s session.
The auto tariff news came at a critical market juncture. Whether it was or wasn’t a coincidence hardly matters. At this point, markets have become quite enamored with the notion of Quadruple Puts – the Fed, Trump, Xi/Beijing and corporate buybacks. When historians look back at this period, they will surely be baffled by the markets’ capacity for disregarding major risks and negative developments. We’re at the stage of a historic - and especially protracted - cycle where it has repeatedly paid to ignore risk. Over time, the successful risk ignorers and dip buyers have ascended to the top. Risk-takers systematically rewarded; the cautious banished. And those that had recently purchased put options to hedge market risk were, once again, left unsatisfied.
The official announcement of the six-month delay in auto tariffs came Friday, along with news that the President was lifting tariffs on Canadian and Mexican steel and aluminum imports. The FT headline: “Trump Eases Trade Conflicts with US Allies.” Rallying markets were receptive to seemingly positive news – that is until a Friday afternoon report from CNBC (Kayla Tausche and Jacob Pramuk): “Negotiations between the U.S. and China appear to have stalled as both sides dig in after disagreements earlier this month. Scheduling for the next round of negotiations is ‘in flux’ because it is unclear what the two sides would negotiate…” One can assume the administration is now working to generate some positive news flow as it hunkers down for a tough fight with the Chinese.
The U.S./Chinese relationship was never going to end well. The lone superpower versus the rising superpower. Vastly different systems, cultures and values. And it would be such a different world these days if not for a decade (or three) of unprecedented global monetary stimulus – cheap (i.e. nearly free) finance that allowed the U.S. to run endless huge Current Account Deficits coupled with easy finance that bestowed upon the Chinese (the curse of) unlimited monetary resources for the most outrageous Credit and investment booms in history. I always expected markets would at some point put a kibosh to this perilous dynamic. It was instead the embittered U.S. electorate and the architect of “Make America Great Again.”
It sure appears as if the Rubicon has been crossed. Beijing has called out the dogs (i.e. state-controlled media) – and public anti-U.S. sentiments have been inflamed. I’ll assume they’re now executing a contingency plan some time in the making: Trump is the unreasonable and disrespectful bully. China will never again be disrespected and pushed around. President Xi - general secretary of the Communist Party, President of the People's Republic of China, chairman of the Central Military Commission, China's ‘Paramount Leader’ and revered ‘Core Leader’ – is precisely the great commander to confront the U.S. hegemon determined to repress China’s strength, advancement and rightful standing in the world.
It’s become difficult to envisage Trump and Xi exchanging pleasantries and doing beaming photo ops next month at the G-20 summit (June 28-29) in Osaka, Japan. President Trump has often touted his close personal relationship with China’s Xi, and the U.S. side seems to believe that a private meeting between the congenial leaders can get talks back on track (worked in Argentina!). Let’s ignore U.S. freedom of navigation voyages through the South China Sea; the administration cozying up with Taiwan; Secretary Pompeo meeting Thursday with a pro-democracy leader in Hong Kong, etc. Let’s disregard the trail of condescending tweets. And Huawei.
May 16 – Bloomberg: “The Trump administration is pulling out the big guns in its push to slow China’s rise, with potentially devastating consequences for the rest of the world. The White House on Wednesday initiated a two-pronged assault on China: barring companies deemed a national security threat from selling to the U.S., and threatening to blacklist Huawei Technologies Co. from buying essential components. If it follows through, the move could cripple China’s largest technology company, depress the business of American chip giants from Qualcomm Inc. to Micron Technology Inc., and potentially disrupt the rollout of critical 5G wireless networks around the world.”
From CNBC: “Reacting to U.S actions on Huawei, China’s Commerce Ministry said in a statement, ‘We firmly oppose the act of any country to impose unilateral sanctions on Chinese entities based on its domestic laws, and to abuse export control measures while making ‘national security’ a catch-all phrase. We urge the US to stop its wrong practices.’”
My view is that China is adamantly opposed to the U.S.’s use of “unilateral sanctions.” The administration’s insistence on a sanction enforcement regime as integral to the trade deal was a red line the Chinese refused to cross. The U.S. doubled-down with sanctions on Huawei – and until proven otherwise I’ll assume both China’s and the U.S.’s positions have further hardened.
This is a critical juncture for China’s faltering Bubble. Fragilities are acute. The assumption is that China will now move aggressively with additional fiscal and monetary stimulus. Conversely, it’s not an inopportune time for Beijing to take some pain. They have a scapegoat – a villainous foreigner determined to contain China’s rising power. For Beijing, the greatest risk is that its population loses trust in the phenomenal communist party meritocracy.
As noted above, the Chinese renminbi dropped 1.4% this week versus the dollar – and is now just a little over 1% away from the key psychological 7.00 level. “China’s Central Bank Won’t Let Yuan Weaken Past 7 to the Dollar (Reuters’ Zheng Li and Kevin Yao): ’At present, rest assured they will certainly not let it break 7,’ a source told Reuters. A defense of the 7 level could help boost confidence in the currency and soothe investor fears about a sharp depreciation in the yuan… ‘Breaking 7 is beneficial to China because it can reduce some of the effects of tariff increases, but the impact on our renminbi confidence is negative and funds will flow out,’ the source said.”
“At present, rest assured…” Excluding its massive surplus with the U.S., China runs a significant trade deficit with the rest of the world. There’s a scenario where President Trump places hefty tariffs on all Chinese imports into the U.S., levies that over time would be expected to significantly reduce demand for Chinese goods. At the same time, a weakening renminbi would see China expend more for much of its imports. Keep in mind, as well, that Beijing’s current stimulus measures are further fueling its apartment Bubble and resulting consumption boom. It’s possible that China’s trade position is poised to radically deteriorate.
Let’s assume the PBOC does move to defend the 7.0 level (renminbi vs. $). Markets will instinctively test this support – while closely monitoring for indications of the scope of reserves (and forward contracts) expended in the process. And China (and the world) better hope reserves prove more resilient than back in 2015 when they proceeded to collapse by $580 billion over a twelve-month period. If China’s reserves begin to rapidly deplete, expect stringent capital control and other measures to stem outflows. And while everyone believes China will resort to fiscal and monetary stimulus until the cows come home, EM Crisis Dynamics invariably force authorities to tighten conditions to bolster currency and financial system stability.
Friday’s report on University of Michigan Consumer Confidence had consumer sentiment at a 15-year high. Consumer Expectations surged almost nine points to 96 (up from January’s 79.9), to the highest reading since January 2004 – and the second strongest reading going back to November 2000. With stock prices recently (May 1st) hitting record highs and the unemployment rate at 50-year lows, consumer optimism is not unreasonable.
Increasingly, it appears as if the respite from Q4 global market instability has about run its course. As an economy – from governments to corporations to households – I can’t imagine a more poorly prepared system for the gathering storm. I know: fundamentals are “sound” and the banking system is “well capitalized.” Besides, there’s the Quadruple Puts – a deeply entrenched market misperception that really concerns me. Complacency is pervasive – epically so. Ignore fundamental developments, while placing faith in the power of politicians and central bankers (and corporations forever enjoying access to cheap finance to fund buybacks). Such a backdrop creates extraordinary risk for an abrupt change in perceptions and resulting crisis of confidence – in policymakers and the markets.
We started with the markets and will end with the markets. At this point, I don’t see great contradictions between the markets: Safe haven bonds and the risk markets are not actually telling wildly different stories. Seeing low market yields, loose financial conditions, seemingly great underlying U.S. economic fundamentals and Quadruple Puts, highly speculative (trend-following and performance-chasing) markets have been behaving about as one would expect near the end of a historic cycle: an intense, overarching short-term focus on speculative market gains. The safe havens, much less concerned with timing, see speculative Bubbles primed for bursting. Treasuries, bunds, JGBs, Swiss bonds, etc. see an acutely fragile global market structure.
May 14 – Bloomberg (Steve Matthews): “Federal Reserve Bank of Kansas City President Esther George said she’s opposed to cutting interest rates in order to raise inflation to the central bank’s 2% target, warning that could lead to asset-price bubbles and ultimately an economic downturn. ‘Lower interest rates might fuel asset price bubbles, create financial imbalances, and ultimately a recession,’ George… said… ‘In current circumstances, with an unemployment rate well below its projected longer-run level, I see little reason to be concerned about inflation running a bit below its longer-run objective.’”
Markets are not pricing in a 75% probability for a rate cut by December because of current Fed thinking. Chairman Powell is joined by sound thinkers including Esther George that recognize the risks associated with even looser monetary conditions. Safe haven markets are instead discerning the high probability of a market dislocation that would so significantly tighten financial conditions that the Fed and global central bankers will have no option other than cutting rates and resorting to more QE.
The breakdown in China/U.S. trade talks provides the initial catalyst. The 3.3% one-month decline in the renminbi (offshore renminbi down 3.9%) is indicative of acute vulnerability in the Chinese currency. And if PBOC support fails to stabilize the market, a crisis of confidence and run on Chinese assets cannot be ruled out. I don’t think one can overstate the financial, economic and geopolitical ramifications of China succumbing to Crisis Dynamics. The world becomes a much more uncertain place. Deleveraging in China would surely equate to global de-risking/deleveraging and highly destabilized global financial flows.
And for the crowd that these days harbors delusions of U.S. markets and economic activity largely immune to global issues, I pose the question: How do U.S. markets perform in the event of illiquidity and a “seizing up” of global markets? As I’ve posited before, the U.S. economy is extremely vulnerable to a dramatic market-induced tightening of financial conditions. What would markets look like if the marketplace turns against negative cash-flow enterprises? How would the U.S. economy function in the event of debt market illiquidity?
The Powell U-turn granted markets four months of fun and games – and only greater systemic vulnerability. Now comes the downside, with a Fed that just might prove somewhat slower to come to the markets’ rescue than everyone presumes. This week marked the True Start to the U.S. vs. China Trade War. The degree of cluelessness is shocking.
For the Week:
The S&P500 declined 0.8% (up 14.1% y-t-d), and the Dow fell 0.7% (up 10.4%). The Utilities jumped 1.4% (up 11.5%). The Banks dropped 3.3% (up 12.3%), and the Broker/Dealers fell 2.9% (up 10.9%). The Transports declined 1.0% (up 14.4%). The S&P 400 Midcaps dropped 2.3% (up 13.6%), and the small cap Russell 2000 slumped 2.4% (up 13.9%). The Nasdaq100 declined 1.1% (up 18.5%). The Semiconductors sank 5.2% (up 21.4%). The Biotechs lost 1.5% (up 6.3%). Though bullion declined $9, the HUI gold index recovered 1.8% (down 6.3%).
Three-month Treasury bill rates ended the week at 2.33%. Two-year government yields dropped seven bps to 2.20% (down 29bps y-t-d). Five-year T-note yields fell nine bps to 2.18% (down 34bps). Ten-year Treasury yields dropped eight bps to 2.39% (down 29bps). Long bond yields declined six bps to 2.83% (down 19bps). Benchmark Fannie Mae MBS yields fell six bps to 3.16% (down 33bps).
Greek 10-year yields declined eight bps to 3.42% (down 98bps y-t-d). Ten-year Portuguese yields fell seven bps to 1.05% (down 67bps). Italian 10-year yields slipped two bps to 2.66% (down 8bps). Spain's 10-year yields dropped 10 bps to 0.88% (down 54bps). German bund yields fell six bps to negative 0.10% (down 35bps). French yields declined six bps to 0.29% (down 42bps). The French to German 10-year bond spread was little changed at 39 bps. U.K. 10-year gilt yields dropped 10 bps to 1.03% (down 24bps). U.K.'s FTSE equities index rallied 2.0% (up 9.2% y-t-d).
Japan's Nikkei Equities Index dipped 0.4% (up 6.2% y-t-d). Japanese 10-year "JGB" yields declined a basis point to negative 0.06% (down 6bps y-t-d). France's CAC40 recovered 2.1% (up 15.0%). The German DAX equities index rose 1.5% (up 15.9%). Spain's IBEX 35 equities index gained 1.8% (up 8.7%). Italy's FTSE MIB index rallied 1.1% (up 15.2%). EM equities were mostly under pressure. Brazil's Bovespa index sank 4.5% (down 1.1%), while Mexico's Bolsa was little changed (up 4.3%). South Korea's Kospi index fell 2.5% (up 0.7%). India's Sensex equities index gained 1.2% (up 5.2%). China's Shanghai Exchange dropped 1.9% (up 15.6%). Turkey's Borsa Istanbul National 100 index fell 2.0% (down 4.9%). Russia's MICEX equities index jumped 2.5% (up 8.8%).
Investment-grade bond funds saw inflows of $3.333 billion, while junk bond funds posted outflows of $212 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates declined three bps to 4.07% (down 54bps y-o-y). Fifteen-year rates fell four bps to 3.53% (down 55bps). Five-year hybrid ARM rates rose three bps to 3.66% (down 16bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down seven bps to 4.16% (down 57bps).
Federal Reserve Credit last week declined $1.9bn to $3.851 TN. Over the past year, Fed Credit contracted $464bn, or 10.8%. Fed Credit inflated $1.040 TN, or 37%, over the past 341 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $7.8bn last week to $3.469 TN. "Custody holdings" rose $82.2bn y-o-y, or 2.4%.
M2 (narrow) "money" supply gained $10.6bn last week to a record $14.552 TN. "Narrow money" rose $575bn, or 4.1%, over the past year. For the week, Currency slipped $0.2bn. Total Checkable Deposits dropped $74.0bn, while Savings Deposits surged $88.1bn. Small Time Deposits fell $7.2bn. Retail Money Funds gained $3.6bn.
Total money market fund assets rose $16.6bn to $3.101 TN. Money Funds gained $308bn y-o-y, or 11.0%.
Total Commercial Paper increased $9.8bn to $1.091 TN. CP gained $22bn y-o-y, or 2.1%.
Currency Watch:
May 14 – Wall Street Journal (Saumya Vaishampayan): “Escalating trade tensions have pounded the yuan, reviving questions about China’s willingness to use its currency as a tool of trade policy. The currency depreciated beyond 6.9 to the U.S. dollar this week in the offshore market, touching its weakest level since late December. Late Tuesday, it traded around 6.90 offshore—roughly 2.5% weaker over the last seven daily sessions… The swoon puts Beijing in a tricky spot. A weaker currency makes Chinese goods cheaper for U.S. buyers, helping offset the impact of higher tariffs. But China is eager to prevent domestic concerns about currency depreciation feeding an exodus of capital and further exchange-rate weakness. A breaching of the symbolically important level of 7 to the dollar could be a trigger.”
May 13 – Bloomberg (Paul Dobson): “Little-noticed amid the storm of words in the U.S.-China trade dispute, the euro has rallied the most in almost a year against the Chinese yuan, hampering the region’s beleaguered exporters. The seven-day surge in the European currency is the most dramatic since a similar period through early July 2018, dimming the appeal of the region’s goods for Chinese importers.”
The U.S. dollar index gained 0.7% to 97.995 (up 1.9% y-t-d). For the week on the upside, the Swiss franc increased 0.1%. For the week on the downside, the Brazilian real declined 3.6%, the British pound 2.1%, the Australian dollar 1.9%, the South African rand 1.87%, the South Korean won 1.5%, the New Zealand dollar 1.2%, the Singapore dollar 1.1%, the Norwegian krone 0.9%, the euro 0.7%, the Mexican peso 0.4%, the Swedish krona 0.3%, the Canadian dollar 0.3% and the Japanese yen 0.1%. The Chinese renminbi declined 1.38% versus the dollar this week (down 0.57% y-t-d).
Commodities Watch:
The Bloomberg Commodities Index increased 1.3% this week (up 3.5% y-t-d). Spot Gold declined 0.7% to $1,278 (down 0.4%). Silver sank 2.7% to $14.388 (down 7.4%). WTI crude jumped $1.10 to $62.76 (up 38%). Gasoline rallied 2.9% (up 55%), and Natural Gas gained 0.5% (down 11%). Copper declined 1.3% (up 4%). Wheat surged 9.5% (down 8%). Corn jumped 9.0% (up 2.2%).
Market Instability Watch:
May 14 – Bloomberg (Liz McCormick and Saleha Mohsin): “The idea that China would dump its $1.1 trillion of Treasuries to retaliate against U.S. tariffs is often dismissed as improbable. It’s seen as a nuclear option that would inflict more harm on China’s economy than America’s. Yet the tensions rippling through global financial markets could still lead Beijing to reduce its stockpile in the $15.9 trillion Treasuries market -- not to retaliate, but to defend its currency if it goes into a free-fall. The offshore yuan has slumped 2.6% this month to about 6.92 per dollar as the trade standoff intensified, reaching the weakest since December. The specter of Treasuries being deployed as a weapon in the trade spat surfaced via a tweet from a Chinese journalist on Monday that said the nation’s scholars are ‘discussing the possibility of dumping” U.S. government debt.’”
May 16 – Bloomberg (Allan Lopez): “High-yield corporate bond funds saw the pace of outflows accelerate as the U.S. and China continued to clash over trade, souring sentiment across markets. Investors yanked $2.57 billion from retail funds in the weekly reporting period ended May 15, according to data from Refinitiv’s Lipper. The outflow is the biggest cash withdrawal for corporate high yield since December…”
May 11 – Wall Street Journal (Lisa Beilfuss and Gunjan Banerji): “Martin Rogers has been regularly trading options from his mobile phone since last summer, after dabbling in stocks and derivatives for years. A pharmaceutical representative…, Mr. Rogers is often on the road and has been drawn to the ease of trading between meetings and the possibility of high returns. ‘I could invest $100 and get 100% return on it,’ Mr. Rogers said. When he first started trading options, he was blown away by the results. ‘Just looking at how powerful it was to make money … it was hard for me to sleep for a couple of days.’ Mr. Rogers is among the ranks of individual investors looking to magnify bets on stocks. U.S.-listed options volumes hit a record last year as market volatility roared back… The number of options trades at Charles Schwab Corp., one of the biggest online brokers, climbed 36% in 2018 from the prior year…”
Trump Administration Watch:
May 13 – Financial Times (Pan kwan Yuk): “President Donald Trump sharpened his trade war rhetoric on Monday, warning Beijing not to retaliate against the rise in tariffs his administration pushed through last week and said China would be ‘hurt very badly’ if it does not agree to a trade deal. ‘I say openly to President Xi & all of my many friends in China that China will be hurt very badly if you don’t make a deal because companies will be forced to leave China for other countries. Too expensive to buy in China. You had a great deal, almost completed, and you backed out!’ Mr Trump said in series of tweets. He added it would not be in Beijing’s interest to retaliate because manufacturers would just shift production from China to other countries. ‘There will be nobody left in China to do business with,’ he continued. ‘Very bad for China, very good for USA! . . . Therefore, China should not retaliate — will only get worse!’”
May 14 – New York Times (Ana Swanson): “President Trump’s tariffs were initially seen as a cudgel to force other countries to drop their trade barriers. But they increasingly look like a more permanent tool to shelter American industry, block imports and banish an undesirable trade deficit. More than two years into the Trump administration, the United States has emerged as a nation with the highest tariff rate among developed countries, outranking Canada, Germany and France, as well as China, Russia and Turkey. And with further trade confrontations brewing, the rate may only increase from here… On Tuesday, the president continued to praise his trade war with China, saying that the 25% tariffs he imposed on $250 billion worth of Chinese goods would benefit the United States, and that he was looking ‘very strongly’ at imposing additional levies on nearly every Chinese import. ‘I think it’s going to turn out extremely well. We’re in a very strong position,’ Mr. Trump said… ‘Our economy is fantastic; theirs is not so good. We’ve gone up trillions and trillions of dollars since the election; they’ve gone way down since my election.’ He called the trade dispute ‘a little squabble’ and suggested he was in no rush to end his fight, though he held out the possibility an agreement could be reached, saying: ‘They want to make a deal. It could absolutely happen.’”
May 12 – Reuters (Jan Wolfe): “President Donald Trump said on Sunday that the United States is ‘right where we want to be with China,’ adding that Beijing ‘broke the deal with us’ and then sought to renegotiate. ‘We will be taking in Tens of Billions of Dollars in Tariffs from China. Buyers of product can make it themselves in the USA (ideal), or buy it from non-Tariffed countries,’ Trump said on Twitter. Trump added: ‘We will then spend (match or better) the money that China may no longer be spending with our Great Patriot Farmers (Agriculture), which is a small percentage of total Tariffs received, and distribute the food to starving people in nations around the world!’”
May 11 – Bloomberg (Shawn Donnan, Yinan Zhao and Miao Han): “President Donald Trump said it would be wise for China to ‘act now’ to finish a trade deal with the U.S., warning that ‘far worse’ terms would be on offer for them after what he predicted would be his certain re-election in 2020. ‘I think that China felt they were beaten so badly in the recent negotiation that they may as well wait around for the next election,’ Trump said Saturday in… tweets. ‘The only problem is that they know I am going to win.’ …In a wide-ranging interview with Chinese media…, Vice Premier Liu He said that in order to reach an agreement the U.S. must remove all extra tariffs, set targets for Chinese purchases of goods in line with real demand, and ensure that the text of the deal is ‘balanced’ to ensure the ‘dignity’ of both nations.”
May 15 – Wall Street Journal (Josh Zumbrun, John D. McKinnon and William Mauldin): “President Trump signed an executive order that would let the U.S. ban telecommunications gear from ‘foreign adversaries,’ underscoring tensions with China even as the U.S. said it would likely resume trade talks soon in Beijing after reaching an impasse last week… Along with the executive order, the Commerce Department said it would add China’s Huawei Technologies Co. to a list of entities engaged in activities that are contrary to U.S. interests. That could restrict sales or transfers of American technology to Huawei by requiring a government license—a potential body blow to the company, which relies on some U.S. tech companies for chips. The action would also hurt U.S. chipmakers who sell to Huawei.”
May 17 – Bloomberg (Craig Trudell): “Toyota issues a statement criticizing the proclamation U.S. President Donald Trump released earlier Friday declaring that imported cars represent a threat to U.S. national security. “Today’s proclamation sends a message to Toyota that our investments are not welcomed, and the contributions from each of our employees across America are not valued,’ the co. says…”
May 15 – CNBC (Matthew J. Belvedere): “There is ‘no chance’ President Donald Trump will back down in the U.S. trade war with China, former Trump advisor Steve Bannon told CNBC… ‘China has been running an economic war against the industrial democracies for now 20 years,’ said the hardline ex-White House chief strategist… Bannon said previous presidents — Bill Clinton, George W. Bush and Barack Obama — passed the buck on addressing and fixing the problems of China’s protectionist economy. But Trump is not shying away from the fight, he added. ‘There is no chance that Donald Trump backs down from this. I think he’s looking at the good of people on a global basis,’ Bannon said…”
May 13 – Bloomberg (Shawn Donnan): “President Donald Trump loves tariffs so much he once called himself ‘Tariff Man.’ He also has repeatedly portrayed the punitive tariffs he has imposed on China and other countries as tools to create leverage and draw them into new trade deals that benefit the U.S. Increasingly, however, Trump’s tariffs are looking like an end-goal rather than a tool and more tangible than any of the deals the president has promised. And that, economists agree, bodes badly for the U.S. and global economies.”
May 13 – Financial Times (James Politi): “Donald Trump’s escalation of trade tensions with China has created a split within his Republican party as some of the president’s closest allies express anxieties about the mounting economic costs of the stand-off. Chuck Grassley… called… for a US-China trade agreement to be reached ‘as soon as possible’ after stock prices fell sharply… ‘There’s no doubt Americans will be harmed, including farmers, businesses and consumers in my home state of Iowa, if the additional tariffs take effect,’ he said. ‘Americans understand the need to hold China accountable, but they also need to know that the administration understands the economic pain they would feel in a prolonged war.’”
May 14 – Reuters (Doina Chiacu and Makini Brice): “President Donald Trump… denied a New York Times report that U.S. officials were discussing a military plan to send up to 120,000 troops to the Middle East to counter any attack or nuclear weapons acceleration by Iran. ‘I think it’s fake news, OK? Now, would I do that? Absolutely. But we have not planned for that. Hopefully we’re not going to have to plan for that. And if we did that, we’d send a hell of a lot more troops than that’…”
May 13 – Wall Street Journal (Summer Said, Nancy A. Youssef and Benoit Faucon): “An initial U.S. assessment indicated Iran likely was behind the attack on two Saudi Arabian oil tankers and two other vessels damaged over the weekend near the Strait of Hormuz, a U.S. official said, a finding that, if confirmed, would further inflame military tensions in the Persian Gulf.”
May 13 – Reuters (Makini Brice and David Brunnstrom): “U.S. Secretary of State Mike Pompeo shared information on ‘escalating’ threats from Iran with European allies and NATO officials during meetings in Brussels on Monday, the U.S. special representative for Iran said.”
May 14 – Reuters (Patricia Zengerle): “A group of President Donald Trump’s fellow Republicans in Congress introduced legislation on Tuesday intended to prohibit anyone employed or sponsored by the Chinese military from receiving student or research visas to the United States. The bill would require the U.S. government to create a list of scientific and engineering institutions affiliated with the Chinese People’s Liberation Army, and prohibit anyone employed or sponsored by those institutions from receiving the visas.”
Federal Reserve Watch:
May 14 – Bloomberg (Alister Bull and Shawn Donnan): “President Donald Trump called on the Federal Reserve to ‘match’ what he said China would do to offset economic hardship being caused by tariffs as he sought to draft the U.S. central bank into his simmering trade war. ‘China will be pumping money into their system and probably reducing interest rates, as always, in order to make up for the business they are, and will be, losing,’ the president said in a tweet… ‘If the Federal Reserve ever did a ‘match,’ it would be game over, we win! In any event, China wants a deal!’ The president later told an audience in Louisiana that ‘with a little quantitative easing’ U.S. growth would hit 5%...’”
May 14 – CNBC (Jeff Cox): “The Federal Reserve doesn’t need to cut interest rates to boost inflation, Kansas City Fed President Esther George said… In fact, George said, low inflation is of little concern to anyone but financial market participants and economists who fear that the central bank is undershooting its 2% target and thus should ease policy to boost activity. ‘As I listen to business and community leaders around my region, I hear few complaints about inflation being too low. In fact, I am more likely to hear disbelief when I mention that inflation is as low as measured in a number of key sectors,’ she said during a speech… ‘This leads me to the observation that inflation as experienced by households and businesses is fundamentally different from inflation as viewed by financial market participants and many economists.’”
May 13 – Bloomberg (Christopher Condon and Craig Torres): “Federal Reserve Vice Chairman Richard Clarida said the U.S. economy is close to the central bank’s twin goals for full employment and price stability, making the current climate a good time to review its approach to monetary policy. In prepared comments… at a ‘Fed Listens’ conference being held to explain its reasons for assessing its policy practices, Clarida said a global decline in the level of interest rates that central banks use to keep their economies on an even keel is likely to persist for years, making it harder to support the economy during recessions. He explained that a decline in neutral interest rates, which neither speed up nor slow down the economy, ‘increases the likelihood’ that policy makers will be forced to cut borrowing costs back to zero… ‘That development, in turn, could make it more difficult during downturns for monetary policy to support household spending, business investment, and employment and keep inflation from falling too low,’ he said.”
May 11 – Bloomberg (Rich Miller and Matthew Boesler): “Federal Reserve officials offered a damning take on rising inequality in America and the corrosive effects it can have on the economy. Fed Governor Lael Brainard told a conference… that the long-term vigor of the U.S. economy may be at risk as middle class households are squeezed by slow growth in income and wealth and rising costs for housing, health care and education. ‘An economy that delivers an increasing share of income gains to high-wealth households could result in less growth in consumer demand than one in which the gains are distributed more equally,’ she said.”
May 13 – Reuters (Trevor Hunnicutt): “Torturously slow recoveries from recessions and low inflation are here to stay unless policymakers can get a better grip on how to stabilize the global economy in an era of lower interest rates, a top Federal Reserve policymaker said… ‘Experience teaches us that it is better to prepare for the future than wait too long,’ New York Fed President John Williams said… ‘Ultimately, failure to prepare often means preparation for failure.’”
U.S. Bubble Watch:
May 12 – CNN (Haley Byrd and Phil Mattingly): “The US government is hurtling toward a potential financial crisis, and no one in Washington seems to know how to stop it. As lawmakers trade fire over contempt votes and impeachment, there's been no progress toward reaching a budget agreement or extending the federal government's ability to borrow before September, when the money runs out. That's raising the ugly prospect of more than $100 billion in mandatory cuts as well as an unprecedented default on US debt -- a situation that could trigger a worldwide economic catastrophe. It's a mess everyone knows is coming, and yet no one seems to have a plan -- at least at the moment -- for averting disaster.”
May 17 – Reuters (Lucia Mutikani): “U.S. consumer sentiment jumped to a 15-year high in early May amid growing confidence over the economy’s outlook. The University of Michigan said its consumer sentiment index increased 5.3% to 102.4, the highest reading since 2004. Economists polled by Reuters had forecast a reading of 97.5.”
May 13 – Wall Street Journal (Ben Eisen): “The gatekeepers of the American mortgage market are increasingly backing loans to borrowers who have heavy debt loads, highlighting questions about mortgage risk as policy makers debate ways to change the system. Almost 30% of loans that mortgage giants Fannie Mae and Freddie Mac packaged into bonds last year went to home buyers whose total debt payments amounted to more than 43% of their incomes… The share has nearly doubled since 2015. Data on other government mortgage programs also show an increase. The backing of these loans opens up a debate about the government’s role in the housing market.”
May 16 – Reuters (Nandita Bose and Rod Nickel): “Walmart Inc said… that prices for shoppers will go up due to higher tariffs on goods from China as the world’s largest retailer reported its best comparable sales growth for the first quarter in nine years.”
May 14 – Associated Press (Paul Wiseman and Joyce M. Rosenberg): “For many Americans, President Donald Trump’s trade war may soon get very real. His administration is preparing to extend 25% tariffs to practically all Chinese imports not already hit with duties, including toys, sneakers, shirts, alarm clocks, toasters and coffeemakers. That’s roughly $300 billion worth of products on top of the $250 billion targeted earlier. ‘The administration’s decision to announce a tax on every product coming from China puts America’s entire economy at risk,’ the Retail Industry Leaders Association said… ‘Americans’ entire shopping cart will get more expensive.’”
May 15 – Associated Press: “U.S. retail sales declined last month, as Americans cut back their spending on clothes, appliances, and home and garden supplies. Sales dropped 0.2% in April…, after a big 1.7% jump in March. The March figure was revised upward from the originally reported figure of 1.6%. Car sales dropped 1.1% last month and sales at electronics and appliance stores dropped 1.3%. Economists are having a difficult time gauging the mood of consumers this year. Retail sales have been on a seesaw pattern, rising at a healthy pace in January, then falling in February, followed by the big jump in March and now a drop in April.”
May 16 – Wall Street Journal (Jessica Menton): “U.S. companies have been buying back their own shares at a blistering pace for more than a year, and market turbulence isn’t likely to stop them now. The more than 80% of firms in the S&P 500 that have reported results for the first quarter repurchased $180 billion worth of their own stock during that time, according to S&P Dow Jones Indices, on pace to be the second-highest amount on record based on data going back to 1998.”
May 11 – CNBC (Eric Rosenbaum): “The latest jobs report for April showed wage growth picking up steam. And it looks like employment income is going to stay moving that way, according to a new survey from CNBC of chief financial officers at major corporations. Cost of labor will be by far the biggest cost that companies face over the next six months, according to the CNBC Global CFO Council Survey for the second quarter. In the U.S., companies citing cost of labor as their biggest cost is higher than in any other global region. Eighty-five percent of North America-based CFOs surveyed by CNBC cited cost of labor as their biggest expense. That is up from 56% who cited it the last time the survey asked about the six-month costs outlook, in the fourth quarter 2018. Globally, 78% of CFOs cited cost of labor as their No. 1 future cost, versus 55% globally who cited in in Q4 2018.”
May 12 – Wall Street Journal (Ruth Simon): “Job growth at the smallest businesses has fallen to the lowest levels in nearly eight years as tiny companies struggle to attract and retain workers in the tightest U.S. job market in half a century. The number of people employed by companies with fewer than 20 workers grew by less than 1% in both March and April, compared with the same months a year earlier, according to… Moody’s Analytics… Hiring at the smallest businesses hasn’t been this low since May 2011, when the economy was still recovering from the financial crisis.”
May 14 – Reuters (Richard Leong): “The number of U.S. homeowners who fell behind on their mortgage payments climbed in the first quarter from an 18-year low at the end of 2018, while the share of mortgages at the start of foreclosure actions slipped, the Mortgage Bankers Association said… The delinquency rate for mortgages on one-to-four-unit homes rose to 4.42% in the first three months of 2019, up from 4.06% at the end of the fourth quarter which was the lowest level since the first quarter of 2000…”
May 14 – Wall Street Journal (Peter Grant): “Rapid growth of big technology companies is pushing demand for San Francisco office space to new heights, leading firms to go to unusual extremes to grab workspace. Some tech companies are leasing major portions of new buildings months before developers break ground, or before they even get the necessary government permits. Online image board Pinterest Inc. leased about 490,000 square feet of office space in a planned 1 million-square-foot project earlier this year, at about the same time it launched its initial public offering. The building’s developer, Alexandria Real Estate Equities , hopes to break ground in the first half of 2020, but that only happens if it gets the necessary approval under San Francisco’s Proposition M, which restricts the amount of office space built to about 900,000 square feet a year.”
May 11 – Wall Street Journal (Sam Schechner): “Governments are in a global race to scrutinize Silicon Valley, creating a broad regulatory wave aimed at curbing the power of a small group of American tech giants. French government officials said Friday they plan to give regulators there sweeping power to audit and fine large social-media companies like Facebook Inc. if they don’t adequately remove hateful content. Competition authorities in India… have launched a probe into whether Alphabet Inc.’s Google uses its mobile operating system to block rivals. The dual efforts are the latest in a series of increasingly aggressive probes and tough new regulations around the world circumscribing tech firms on a number of different fronts. The European Union has enacted broad restrictions on how companies handle data as concerns over privacy grow.”
May 14 – Reuters (Jennifer Ablan): “U.S. growth appears to be based ‘exclusively’ on government, corporate and mortgage debt and the economy would have contracted if the United States had not added trillions in debt, Jeffrey Gundlach, chief executive of DoubleLine Capital, said… ‘Nominal GDP growth over the past five years would have been negative if U.S. public debt had not increased,’ said Gundlach. ‘One thing everybody seems to miss when they look at these GDP numbers ... they seem to not understand that the growth in the GDP it looks pretty good on the screen is really based exclusively on debt - government debt, also corporate debt and even now some growth in mortgage debt.’”
China Watch:
May 17 – Bloomberg: “China’s state media signaled a lack of interest in resuming trade talks with the U.S. under the current threat to escalate tariffs, while the government said stimulus will be stepped up to buttress the domestic economy. Without new moves that show the U.S. is sincere, it is meaningless for its officials to come to China and have trade talks, according to a commentary by the blog Taoran Notes, which was carried by state-run Xinhua News Agency and the People’s Daily… The Ministry of Commerce spokesman said Thursday he had no information about any U.S. officials coming to Beijing for further talks.”
May 16 – Bloomberg: “‘If the U.S. doesn’t make concessions in key issues, there is little point for China to resume talks,’ said Zhou Xiaoming, a former commerce ministry official and diplomat. ‘China’s stance has become more hard-line and it’s in no rush for a deal’ because the U.S. approach is extremely repellent and China has no illusions about U.S. sincerity, he said. According to Zhou, the commerce ministry spokesman on Thursday effectively ruled out talks in the near term. In comments to the media, ministry spokesman Gao Feng said that China’s three major concerns need to be addressed before any deal can be reached, adding that the unilateral escalation of tensions in Washington recently had ‘seriously hurt’ talks.”
May 16 – Wall Street Journal (Lin Zhu): “China’s Commerce Ministry denied knowing about U.S. plans to resume trade talks, deflecting remarks by Treasury Secretary Steven Mnuchin that American officials are likely to travel to Beijing soon for negotiations. Mr. Mnuchin told a Senate committee Wednesday that the U.S. team is ‘likely to go to Beijing at some point in the near future.’ The comments offered prospects for a return to talks after both sides spent the better part of a week trading recriminations over perceived backsliding in positions that left the negotiations at an impasse. Asked by reporters about Mr. Mnuchin’s comments, Chinese Commerce Ministry spokesman Gao Feng said… that ‘the Chinese side doesn’t have a grasp on the U.S. side’s plans to come to China for negotiations.’ Mr. Gao then said the U.S.’s escalation of tariffs ‘severely hampered’ consultations.”
May 16 – Reuters (Yawen Chen and Se Young Lee): “China on Thursday slammed a decision by the U.S. government to put telecom equipment giant Huawei on a blacklist and said it will take steps to protect its companies, in a further test of ties as the economic heavyweights clash over trade. China is strongly against other countries imposing unilateral sanctions on Chinese entities, a Commerce Ministry spokesman said, stressing that the United States should avoid further damaging Sino-U.S. trade relations… Hopes for a deal to end their trade war have been thrown into doubt after the world’s two biggest economies raised tariffs on each other’s goods in the past week. The U.S. Commerce Department said… it was adding Huawei Technologies Co and 70 affiliates to its so-called ‘Entity List’ in a move that bans the Chinese company from acquiring components and technology from U.S. firms without prior U.S. government approval.”
May 15 – CNBC (Evelyn Cheng): “China’s state-run media outlets have come out in force this week after keeping relatively quiet in the wake of U.S. President Donald Trump’s surprise announcement of tariff increases on Chinese goods. Whether it’s the mouthpiece of the Communist Party or the national television broadcaster, the latest commentary exudes confidence about China’s ability to stand up to the U.S… In an environment of tight government control of what messages are allowed to surface, the shift can shed light into what Chinese leaders are thinking about the drawn out trade negotiations. ‘I expect it was ordered by the top leadership to forward the narrative of the U.S. as bully and China as victim,’ said Scott Kennedy, director… at the Center for Strategic and International Studies. ‘Putting the talks in broader normative terms gives (Beijing) leverage — ‘I can’t make big concession because my society will be angry’ — but it also makes it harder for both sides to dispassionately find common ground,’ Kennedy added.”
May 17 – CNBC (Jeff Cox): “Escalations in its trade dispute with the U.S. not only could dent China’s economy but also impact its credit standing, according to ratings agencies. China’s credit remains strong despite a weakening economy and a high-stakes tariff battle it is engaged in with the U.S. However, should the impasse linger on, the damages could become greater and start having some deeper impacts. ‘The tariff war is negative for China especially at a time when its policy makers are battling problems of rising debt and increasing leverage in its economy,’ analysts at ratings agency DBRS said… ‘The economic impact on China of rising tariffs would be broader than just via its trade with the U.S.’”
May 14 – Bloomberg (Benjamin Purvis): “China may be reluctant to commit to a deal with the U.S. that limits its flexibility on foreign-exchange rates if officials in Beijing draw lessons from previous trade clashes between America and Japan. That’s the view of Deutsche Bank AG strategists Oliver Harvey and Shreyas Gopal, who wrote that U.S. pressure on its biggest economic rival in the early 1990s appears to have at least indirectly contributed to an inadequate policy response from the Japanese authorities. That led to an unwanted appreciation of the yen and protracted deflation, they wrote… ‘China appears to have learnt from Japan’s mistakes,’ the strategists wrote. ‘Benefits for China to mirror the Japan experience and maintain a strong exchange rate may be lower than some argue.’”
May 14 – Bloomberg: “Chinese distressed debt investors are seizing the upper hand in the big rush by banks to offload soured loans. Increasingly, the bargaining power has fallen to the buyers’ side. Bidding was fierce a couple years ago amid slim pickings with buyers outnumbering sellers. For Wu Rui, with almost two decades of experience in the distressed debt business, that’s changed with bad loans soaring. He has received more invitations recently from banks and asset management companies keen to sell him the bad debt… Chinese banks’ outstanding bad loans climbed to a record 2.16 trillion yuan ($314bn) as of the end of March… The explosion of soured debt comes in the wake of more private sector firms struggling to refinance debts and an intensifying trade war with the U.S. that’s bearing down on the economy.”
May 15 – Bloomberg: “China’s bond traders are throwing away the script this year as the central bank repeatedly tweaks policy to keep up with shifts in the economy. The lack of visibility is sending tremors through the interbank lending market, which is typically a source of cheap leverage for government-bond buyers. The seven-day repurchase rate -- a gauge of China’s funding costs -- has turned the most volatile since 2014, 100-day historical data show. That has made it very difficult for traders to know how much it will cost them to buy bonds… ‘Volatility will continue in the near term,’ said Linan Liu, greater China macro strategist at Deutsche Bank AG. ‘This will be negative for leveraged investors, who will need higher investment returns from bonds and stocks to compensate for uncertainties in their funding costs.’”
May 14 – Reuters (Kevin Yao and Yawen Chen): “China reported surprisingly weaker growth in retail sales and industrial output for April, adding pressure on Beijing to roll out more stimulus as the trade war with the United States escalates. Clothing sales fell for the first time since 2009, suggesting Chinese consumers were growing more worried about the economy… Overall retail sales in April rose 7.2% from a year earlier, the slowest pace since May 2003… That undershot March’s 8.7% and forecasts of 8.6%.”
May 16 – Reuters (Yawen Chen and Ryan Woo): “New home prices in China grew at a solid pace in April as Beijing sought to boost economic activity in the face of an escalating trade war with the United States, though potential bubble risks may prompt some cities to tighten policies. Beijing has repeatedly called on local governments to take more responsibility in keeping the frothy market under control. But pent-up demand for housing, easier credit conditions and some local governments relaxing purchase restrictions may be further fanning price gains in a market where fear of missing out is strong. Average new home prices in China’s 70 major cities rose 0.6% in April… On an annual basis, home prices rose 10.7% in April, picking up from a 10.6% gain in March. ‘The impact of a series of cuts in banks’ required reserve ratio (RRR) on the property market is showing,’ said Zhang Dawei, an analyst with property consultancy Centaline.”
May 14 – Reuters (Kevin Yao and Yawen Chen): “Property investment in China was resilient in April as developers rushed to boost their land inventories in the wake of looser credit and purchasing rules, but demand for new homes remained weak in a reflection of the broader slowdown in the economy… Some analysts say bubble risks are rising as home prices continue to climb. The data was one of the few bright spots in a raft of other official economic indicators released on Wednesday… China’s real estate investment, which mainly focuses on the residential sector but also includes commercial and office space, rose 12% in April from a year earlier…”
May 15 – Reuters (Richard Leong): “China’s ownership of U.S. Treasuries fell to its lowest in nearly two years in March amid uncertainty about a trade deal between Beijing and Washington… China’s stake in Treasuries declined for the first time in four months to $1.121 trillion in March… It was $1.131 trillion in February…”
Central Bank Watch:
May 13 – Reuters (Stanley White): “Bank of Japan Governor Haruhiko Kuroda said… he would consider additional easing without hesitation if consumer prices lost upward momentum. Kuroda, speaking in parliament, said the BOJ was committed to keeping short- and long-term rates low until at least the spring of 2020, adding rates could remain low beyond that period.”
May 11 – Bloomberg (Martin Sobczyk): “Bundesbank President Jens Weidmann wouldn’t be able to quickly change the European Central Bank’s monetary policy if picked as its next president, Der Spiegel magazine reported, citing comments by former ECB chief economist Juergen Stark. ‘Even Weidmann couldn’t flip the lever overnight. For that, governments and capital markets are too dependent on the ECB and vice versa,’ the magazine quoted Stark as saying. Weidmann would, however, be the right person ‘to depoliticize the highly politicized ECB,’ Stark said. Otmar Issing, Stark’s predecessor as chief economist, said any new ECB president must ‘convince the public and the financial markets of the sustainable stability of the euro,’ according to the report.”
Europe Watch:
May 17 – Bloomberg (Arne Delfs): “Angela Merkel is feeling pressure from her chosen successor to quit as German chancellor after this month’s elections for the European parliament, according to two people with knowledge of the situation. With Merkel’s Christian Democrats expected to lose ground in the May 26 vote, their leader, Annegret Kramp-Karrenbauer, sent a message to Merkel urging her to resign and called a party conference for June 2 in order to try to force her hand…”
May 14 – Bloomberg (John Follain and Lorenzo Totaro): “Deputy Prime Minister Matteo Salvini sent ripples through financial markets on Tuesday, saying Italy could be ready to break European Union fiscal rules, on the same day his coalition partner called on him to stop ‘fanning the flames’ with critical comments about the government. ‘If we need to break some limits, like the 3% or the 130-140%, we’ll go ahead,’ League party chief Salvini told reporters…, while campaigning ahead of this month’s European parliamentary elections. Salvini was referring to the bloc’s limits on budget deficits and government debt as a share of economic output.”
Japan Watch:
May 13 – Financial Times (Robin Harding): “Japan’s economy is ‘worsening’ for the first time in more than six years, according to one of the government’s main indicators… The index of economic conditions compiled by Japan’s Cabinet Office fell 0.9% from February to March. That prompted statisticians to cut their assessment of the economy from ‘weakening’ to ‘worsening’ — the lowest of five levels. The last time the Cabinet Office used the bottom grade to describe the economy was in January 2013.”
EM Watch:
May 16 – Financial Times (Laura Pitel and Adam Samson): “Turkey’s foreign exchange reserves have fallen to a fresh 2019 low once short term borrowing is stripped out…, as Moody’s issued a warning over the country’s mounting vulnerabilities. Official figures for the net foreign currency reserves held by Turkey’s central bank showed that the country’s hard currency war chest climbed to $27.2bn in the week to May 10, up from $25.9bn the previous week. However, when a large jump in short-term dollar borrowing is excluded, the figure was $12.7bn — down from $14.2bn the week before.”
May 11 – Reuters (Orhan Coskun, Nevzat Devranoglu and Jonathan Spicer): “Turkish state banks sold around $4.5 billion last week, two sources told Reuters, including in a flurry of selling late on Friday, to support the lira and stem declines triggered by a decision this week to re-run Istanbul’s mayoral election.”
May 14 – Reuters (Marcela Ayres): “Brazil’s government will cut its 2019 economic growth forecast to below 2% and seek supplementary funding from state-run BNDES development bank to meet current expenditure and avoid breaking its fiscal rules, Economy Ministry officials said… Economy Minister Paulo Guedes and special secretary Waldery Rodrigues’ testimony to a budget commission made up of deputies and senators underscored the two most serious challenges facing the government: an anemic economy and stretched public finances.”
May 15 – Reuters: “Brazilian economic activity fell in March…, adding weight to the view flagged by policymakers earlier this week that the economy contracted in the first quarter. The central bank’s IBC-BR economic activity index, a leading indicator of gross domestic product (GDP), fell 0.28% in March from February, resulting in a decline of 0.68% in the first three months of the year.”
Global Bubble Watch:
May 14 – New York Times (Neil Irwin): “Just two weeks ago, the United States and China seemed to be gliding toward a trade deal meant to resolve tensions between the world’s two largest economies. But the breakdown in talks since — the United States raised tariffs to 25% on $200 billion of Chinese imports, for example, and is threatening to tax an additional $300 billion — worries people who study international economic diplomacy. That’s because both the United States and China seem to be digging into their positions in ways that will be hard to resolve with the mutual face-saving that typically turns high-stakes negotiations into deals. To use a common negotiating metaphor, it is not clear what the offramps might be that would allow a de-escalation and prevent a major trade war that would prove costly to both nations.”
May 11 – New York Times (Ana Swanson and Keith Bradsher): “A yearlong trade war between the United States and China is proving to be an initial skirmish in an economic conflict that may persist for decades, as both countries battle for global dominance, stature and wealth. Progress toward a trade agreement nearly collapsed this past week, with both sides hardening their bargaining positions. And even if a trade deal is reached, it may do little to resolve tensions between the world’s two largest economies. The United States is increasingly wary of China’s emerging role in the global economy and the tactics it uses to get ahead, including state-sponsored hacking, acquisitions of high-tech companies in the United States and Europe, subsidies to crucial industries and discrimination against foreign companies.”
May 12 – Financial Times (Amin Rajan): “The runaway success of the German government’s €2.4bn 10-year Bund sale in March was yet another sombre reminder of the plight of defined benefit pension plans. The issue attracted €6.3bn even though it offered a negative rate of 0.05%, requiring investors to pay for the privilege of lending. Negative rates are back in the news, currently accounting for 11% of global outstanding debt, according to Bank of America.”
May 14 – Bloomberg (Denise Wee): “The red hot rally in credit this year has prompted wealthy investors in Asia to borrow money to buy funds that often load up on lower-rated bonds. That’s setting the stage for pain should the market turn, as the products pose troubling risks if that happens… Some of these so-called fixed-maturity funds put most of their eggs in one basket, such as in Chinese property debt. The risks are compounded by leverage, and by the fact that the notes in the funds tend to mature around the same time. ‘When you put a number of high-yield issuers from a single sector into a fixed-maturity product portfolio, is there diversification?’ said Desmond Soon, head of investment management for Asia ex-Japan at Western Asset Management. ‘In a risk-off scenario, the default risk could rise exponentially.’”
May 14 – Financial Times (Fan Fei): “One of Claude Monet’s luminous ‘Haystack’ paintings, ‘Meules’ (1890), sold for a record $110.7m at Sotheby’s impressionist and modern art sale on Tuesday night. The price, which included fees, was 44 times the $2.5m paid when the artwork last appeared at auction 33 years ago, Sotheby’s said… According to the auction house, the price was a world record for any impressionist painting.”
May 14 – CNN (Oscar Holland): “A playful rabbit sculpture by Jeff Koons has become the most expensive work by a living artist ever to sell at auction. The American artist's ‘Rabbit,’ a stainless steel figure measuring just over 3 feet tall, sold for more than $91 million Wednesday evening at Christie's in New York, smashing auction estimates. The new record comes just six months after David Hockney's ‘Portrait of an Artist (Pool with Two Figures)’ set a new benchmark for a living artist, when it sold for $90.3 million last November…”
Fixed-Income Bubble Watch:
May 14 – Reuters (Eliza Ronalds-Hannon): “Credit investors who’ve plowed billions of dollars into private equity-sponsored LBO debt will be hit hard when the credit cycle turns and defaults rise, Moody’s… warns in a new report. The giants of the PE world have used their imposing status to loosen terms on the bonds and loans they sell to yield-hungry investors, says Neal Epstein, a senior credit officer at Moody’s. That gives them more room to preserve their investments in a downturn -- even if it means losses for creditors. ‘The investor demand for this debt is so strong that if the private equity sponsors want to borrow more money for their companies and do it with weaker terms, they can,’ said Epstein.”
Geopolitical Watch:
May 13 – Bloomberg (Derek Wallbank): “The voice on the radio in the middle of the South China Sea follows a familiar script for Captain Eric Anduze, who helms the USS Blue Ridge. It’s China on the phone. ‘They’ll contact us and they’ll go -- ‘U.S. government vessel, this is Chinese Navy vessel’ number whatever -- ‘we will maintain five miles from you and escort you as you make your transit,’ Anduze said… The U.S. response is short: ‘Chinese vessel, this is government vessel 1 9, copy, out.’ From there on, silence, as the vessels of the world’s rival powers steam onward together. The ship-to-ship interactions are a regular potential flash point for the world’s two biggest militaries in contested waters. In September, a Chinese destroyer sailed within a football field’s distance of the USS Decatur in what the U.S. said was an ‘unsafe and unprofessional’ maneuver. That hasn’t deterred future sailings -- the U.S. sent two guided-missile destroyers within 12 nautical miles of disputed islands earlier this month.”
May 16 – Reuters (Eric Beech and Ben Blanchard): “U.S. Secretary of State Mike Pompeo met with Hong Kong pro-democracy leader Martin Lee on Thursday, the State Department said, as Hong Kong activists seek to derail a proposed extradition law pushed by Beijing.”
May 15 – Reuters (Roslan Khasawneh and Muyu Xu): “A tanker carrying Iranian fuel oil in violation of U.S. sanctions has unloaded the cargo into storage tanks near the Chinese city of Zhoushan, according to… Refinitiv Eikon. The discharging of the nearly 130,000 tonnes of Iranian fuel oil onboard the tanker, the Marshal Z, confirmed by a representative of the oil storage terminal, marks the end of an odyssey for the cargo that began four months ago.”
May 14 – Reuters (Stephen Kalin and Rania El Gamal): “Saudi Arabia said armed drones struck two of its oil pumping stations on Tuesday, two days after the sabotage of oil tankers near the United Arab Emirates, and the U.S. military said it was braced for ‘possibly imminent threats to U.S. forces in Iraq’ from Iran-backed forces. The attacks took place against a backdrop of U.S.-Iranian tension following Washington’s decision this month to try to cut Iran’s oil exports to zero and to beef up its military presence in the Gulf in response to what it said were Iranian threats.”
May 14 – New York Times (Helene Cooper and Edward Wong): “As the Trump administration draws up war plans against Iran over what it says are threats to American troops and interests, a senior British military official told reporters at the Pentagon… that he saw no increased risk from Iran or allied militias in Iraq or Syria. A few hours later, the United States Central Command issued an unusual rebuke: The remarks from the British official — Maj. Gen. Chris Ghika, who is also the deputy commander of the American-led coalition fighting the Islamic State — run ‘counter to the identified credible threats available to intelligence from U.S. and allies regarding Iranian-backed forces in the region.’ The rare public dispute highlights a central problem for the Trump administration as it seeks to rally allies and global opinion against Iran.”
May 15 – Reuters (John Davison and Mark Hosenball): “Helicopters ferried U.S. staff from the American embassy in Baghdad on Wednesday out of apparent concern about perceived threats from Iran, which U.S. sources believe encouraged Sunday’s attacks on four oil tankers in the Gulf. The sabotage of the tankers… and Saudi Arabia’s announcement on Tuesday that armed drones hit two of its oil pumping stations have raised concerns Washington and Tehran may be inching toward conflict. A U.S. government source said American security experts believe Iran gave its ‘blessing’ to tanker attacks…”
May 15 – Newsweek (David Brennan): “The U.S. is withdrawing all non-emergency government employees from Iraq as tensions continue to mount between Washington and Iran, amid allies' warnings that war could break out inadvertently if concrete steps toward de-escalation are not taken… The statement also said that visa services would be ‘temporarily suspended’ … and noted the government had ‘limited ability to provide emergency services to U.S. citizens in Iraq.’ It urged citizens to leave Iraq as soon as possible and avoid all U.S. facilities within the country.”
May 14 – Reuters (Babak Dehghanpisheh and Dan Williams): “Iran will defeat the American and Israeli alliance, Iranian Defence Minister Amir Hatami said… ‘We will defeat the American-Zionist front,’ he said. ‘Iran has the highest level of defense-military preparedness to confront any type of threat and excessive demands,’ he added.”
May 14 – Wall Street Journal (Sune Engel Rasmussen, Nancy A. Youssef and Aresu Eqbali): “Iran vigorously denied a U.S. claim that it was behind attacks on four oil tankers in the Persian Gulf that set the Middle East on edge, as the Trump administration confronted mounting skepticism from allies abroad and Democrats at home. Iran accused officials in the Trump administration of trying to pull it into a war with the U.S. and its regional allies.”
May 13 – Reuters (Choonsik Yoo, Hyonhee Shin and Josh Smith): “North Korea said on… the seizure of one of its cargo ships by the United States was an illegal act that violated the spirit of a summit between the two countries’ leaders, and demanded the return of the vessel without delay.”
May 15 – Reuters (Chris Sanders and Luc Cohen): “The U.S. Department of Transportation… ordered the suspension of all commercial passenger and cargo flights between the United States and Venezuela, citing reports of unrest and violence around airports in the South American country.”
The S&P500 declined 0.8% (up 14.1% y-t-d), and the Dow fell 0.7% (up 10.4%). The Utilities jumped 1.4% (up 11.5%). The Banks dropped 3.3% (up 12.3%), and the Broker/Dealers fell 2.9% (up 10.9%). The Transports declined 1.0% (up 14.4%). The S&P 400 Midcaps dropped 2.3% (up 13.6%), and the small cap Russell 2000 slumped 2.4% (up 13.9%). The Nasdaq100 declined 1.1% (up 18.5%). The Semiconductors sank 5.2% (up 21.4%). The Biotechs lost 1.5% (up 6.3%). Though bullion declined $9, the HUI gold index recovered 1.8% (down 6.3%).
Three-month Treasury bill rates ended the week at 2.33%. Two-year government yields dropped seven bps to 2.20% (down 29bps y-t-d). Five-year T-note yields fell nine bps to 2.18% (down 34bps). Ten-year Treasury yields dropped eight bps to 2.39% (down 29bps). Long bond yields declined six bps to 2.83% (down 19bps). Benchmark Fannie Mae MBS yields fell six bps to 3.16% (down 33bps).
Greek 10-year yields declined eight bps to 3.42% (down 98bps y-t-d). Ten-year Portuguese yields fell seven bps to 1.05% (down 67bps). Italian 10-year yields slipped two bps to 2.66% (down 8bps). Spain's 10-year yields dropped 10 bps to 0.88% (down 54bps). German bund yields fell six bps to negative 0.10% (down 35bps). French yields declined six bps to 0.29% (down 42bps). The French to German 10-year bond spread was little changed at 39 bps. U.K. 10-year gilt yields dropped 10 bps to 1.03% (down 24bps). U.K.'s FTSE equities index rallied 2.0% (up 9.2% y-t-d).
Japan's Nikkei Equities Index dipped 0.4% (up 6.2% y-t-d). Japanese 10-year "JGB" yields declined a basis point to negative 0.06% (down 6bps y-t-d). France's CAC40 recovered 2.1% (up 15.0%). The German DAX equities index rose 1.5% (up 15.9%). Spain's IBEX 35 equities index gained 1.8% (up 8.7%). Italy's FTSE MIB index rallied 1.1% (up 15.2%). EM equities were mostly under pressure. Brazil's Bovespa index sank 4.5% (down 1.1%), while Mexico's Bolsa was little changed (up 4.3%). South Korea's Kospi index fell 2.5% (up 0.7%). India's Sensex equities index gained 1.2% (up 5.2%). China's Shanghai Exchange dropped 1.9% (up 15.6%). Turkey's Borsa Istanbul National 100 index fell 2.0% (down 4.9%). Russia's MICEX equities index jumped 2.5% (up 8.8%).
Investment-grade bond funds saw inflows of $3.333 billion, while junk bond funds posted outflows of $212 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates declined three bps to 4.07% (down 54bps y-o-y). Fifteen-year rates fell four bps to 3.53% (down 55bps). Five-year hybrid ARM rates rose three bps to 3.66% (down 16bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down seven bps to 4.16% (down 57bps).
Federal Reserve Credit last week declined $1.9bn to $3.851 TN. Over the past year, Fed Credit contracted $464bn, or 10.8%. Fed Credit inflated $1.040 TN, or 37%, over the past 341 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $7.8bn last week to $3.469 TN. "Custody holdings" rose $82.2bn y-o-y, or 2.4%.
M2 (narrow) "money" supply gained $10.6bn last week to a record $14.552 TN. "Narrow money" rose $575bn, or 4.1%, over the past year. For the week, Currency slipped $0.2bn. Total Checkable Deposits dropped $74.0bn, while Savings Deposits surged $88.1bn. Small Time Deposits fell $7.2bn. Retail Money Funds gained $3.6bn.
Total money market fund assets rose $16.6bn to $3.101 TN. Money Funds gained $308bn y-o-y, or 11.0%.
Total Commercial Paper increased $9.8bn to $1.091 TN. CP gained $22bn y-o-y, or 2.1%.
Currency Watch:
May 14 – Wall Street Journal (Saumya Vaishampayan): “Escalating trade tensions have pounded the yuan, reviving questions about China’s willingness to use its currency as a tool of trade policy. The currency depreciated beyond 6.9 to the U.S. dollar this week in the offshore market, touching its weakest level since late December. Late Tuesday, it traded around 6.90 offshore—roughly 2.5% weaker over the last seven daily sessions… The swoon puts Beijing in a tricky spot. A weaker currency makes Chinese goods cheaper for U.S. buyers, helping offset the impact of higher tariffs. But China is eager to prevent domestic concerns about currency depreciation feeding an exodus of capital and further exchange-rate weakness. A breaching of the symbolically important level of 7 to the dollar could be a trigger.”
May 13 – Bloomberg (Paul Dobson): “Little-noticed amid the storm of words in the U.S.-China trade dispute, the euro has rallied the most in almost a year against the Chinese yuan, hampering the region’s beleaguered exporters. The seven-day surge in the European currency is the most dramatic since a similar period through early July 2018, dimming the appeal of the region’s goods for Chinese importers.”
The U.S. dollar index gained 0.7% to 97.995 (up 1.9% y-t-d). For the week on the upside, the Swiss franc increased 0.1%. For the week on the downside, the Brazilian real declined 3.6%, the British pound 2.1%, the Australian dollar 1.9%, the South African rand 1.87%, the South Korean won 1.5%, the New Zealand dollar 1.2%, the Singapore dollar 1.1%, the Norwegian krone 0.9%, the euro 0.7%, the Mexican peso 0.4%, the Swedish krona 0.3%, the Canadian dollar 0.3% and the Japanese yen 0.1%. The Chinese renminbi declined 1.38% versus the dollar this week (down 0.57% y-t-d).
Commodities Watch:
The Bloomberg Commodities Index increased 1.3% this week (up 3.5% y-t-d). Spot Gold declined 0.7% to $1,278 (down 0.4%). Silver sank 2.7% to $14.388 (down 7.4%). WTI crude jumped $1.10 to $62.76 (up 38%). Gasoline rallied 2.9% (up 55%), and Natural Gas gained 0.5% (down 11%). Copper declined 1.3% (up 4%). Wheat surged 9.5% (down 8%). Corn jumped 9.0% (up 2.2%).
Market Instability Watch:
May 14 – Bloomberg (Liz McCormick and Saleha Mohsin): “The idea that China would dump its $1.1 trillion of Treasuries to retaliate against U.S. tariffs is often dismissed as improbable. It’s seen as a nuclear option that would inflict more harm on China’s economy than America’s. Yet the tensions rippling through global financial markets could still lead Beijing to reduce its stockpile in the $15.9 trillion Treasuries market -- not to retaliate, but to defend its currency if it goes into a free-fall. The offshore yuan has slumped 2.6% this month to about 6.92 per dollar as the trade standoff intensified, reaching the weakest since December. The specter of Treasuries being deployed as a weapon in the trade spat surfaced via a tweet from a Chinese journalist on Monday that said the nation’s scholars are ‘discussing the possibility of dumping” U.S. government debt.’”
May 16 – Bloomberg (Allan Lopez): “High-yield corporate bond funds saw the pace of outflows accelerate as the U.S. and China continued to clash over trade, souring sentiment across markets. Investors yanked $2.57 billion from retail funds in the weekly reporting period ended May 15, according to data from Refinitiv’s Lipper. The outflow is the biggest cash withdrawal for corporate high yield since December…”
May 11 – Wall Street Journal (Lisa Beilfuss and Gunjan Banerji): “Martin Rogers has been regularly trading options from his mobile phone since last summer, after dabbling in stocks and derivatives for years. A pharmaceutical representative…, Mr. Rogers is often on the road and has been drawn to the ease of trading between meetings and the possibility of high returns. ‘I could invest $100 and get 100% return on it,’ Mr. Rogers said. When he first started trading options, he was blown away by the results. ‘Just looking at how powerful it was to make money … it was hard for me to sleep for a couple of days.’ Mr. Rogers is among the ranks of individual investors looking to magnify bets on stocks. U.S.-listed options volumes hit a record last year as market volatility roared back… The number of options trades at Charles Schwab Corp., one of the biggest online brokers, climbed 36% in 2018 from the prior year…”
Trump Administration Watch:
May 13 – Financial Times (Pan kwan Yuk): “President Donald Trump sharpened his trade war rhetoric on Monday, warning Beijing not to retaliate against the rise in tariffs his administration pushed through last week and said China would be ‘hurt very badly’ if it does not agree to a trade deal. ‘I say openly to President Xi & all of my many friends in China that China will be hurt very badly if you don’t make a deal because companies will be forced to leave China for other countries. Too expensive to buy in China. You had a great deal, almost completed, and you backed out!’ Mr Trump said in series of tweets. He added it would not be in Beijing’s interest to retaliate because manufacturers would just shift production from China to other countries. ‘There will be nobody left in China to do business with,’ he continued. ‘Very bad for China, very good for USA! . . . Therefore, China should not retaliate — will only get worse!’”
May 14 – New York Times (Ana Swanson): “President Trump’s tariffs were initially seen as a cudgel to force other countries to drop their trade barriers. But they increasingly look like a more permanent tool to shelter American industry, block imports and banish an undesirable trade deficit. More than two years into the Trump administration, the United States has emerged as a nation with the highest tariff rate among developed countries, outranking Canada, Germany and France, as well as China, Russia and Turkey. And with further trade confrontations brewing, the rate may only increase from here… On Tuesday, the president continued to praise his trade war with China, saying that the 25% tariffs he imposed on $250 billion worth of Chinese goods would benefit the United States, and that he was looking ‘very strongly’ at imposing additional levies on nearly every Chinese import. ‘I think it’s going to turn out extremely well. We’re in a very strong position,’ Mr. Trump said… ‘Our economy is fantastic; theirs is not so good. We’ve gone up trillions and trillions of dollars since the election; they’ve gone way down since my election.’ He called the trade dispute ‘a little squabble’ and suggested he was in no rush to end his fight, though he held out the possibility an agreement could be reached, saying: ‘They want to make a deal. It could absolutely happen.’”
May 12 – Reuters (Jan Wolfe): “President Donald Trump said on Sunday that the United States is ‘right where we want to be with China,’ adding that Beijing ‘broke the deal with us’ and then sought to renegotiate. ‘We will be taking in Tens of Billions of Dollars in Tariffs from China. Buyers of product can make it themselves in the USA (ideal), or buy it from non-Tariffed countries,’ Trump said on Twitter. Trump added: ‘We will then spend (match or better) the money that China may no longer be spending with our Great Patriot Farmers (Agriculture), which is a small percentage of total Tariffs received, and distribute the food to starving people in nations around the world!’”
May 11 – Bloomberg (Shawn Donnan, Yinan Zhao and Miao Han): “President Donald Trump said it would be wise for China to ‘act now’ to finish a trade deal with the U.S., warning that ‘far worse’ terms would be on offer for them after what he predicted would be his certain re-election in 2020. ‘I think that China felt they were beaten so badly in the recent negotiation that they may as well wait around for the next election,’ Trump said Saturday in… tweets. ‘The only problem is that they know I am going to win.’ …In a wide-ranging interview with Chinese media…, Vice Premier Liu He said that in order to reach an agreement the U.S. must remove all extra tariffs, set targets for Chinese purchases of goods in line with real demand, and ensure that the text of the deal is ‘balanced’ to ensure the ‘dignity’ of both nations.”
May 15 – Wall Street Journal (Josh Zumbrun, John D. McKinnon and William Mauldin): “President Trump signed an executive order that would let the U.S. ban telecommunications gear from ‘foreign adversaries,’ underscoring tensions with China even as the U.S. said it would likely resume trade talks soon in Beijing after reaching an impasse last week… Along with the executive order, the Commerce Department said it would add China’s Huawei Technologies Co. to a list of entities engaged in activities that are contrary to U.S. interests. That could restrict sales or transfers of American technology to Huawei by requiring a government license—a potential body blow to the company, which relies on some U.S. tech companies for chips. The action would also hurt U.S. chipmakers who sell to Huawei.”
May 17 – Bloomberg (Craig Trudell): “Toyota issues a statement criticizing the proclamation U.S. President Donald Trump released earlier Friday declaring that imported cars represent a threat to U.S. national security. “Today’s proclamation sends a message to Toyota that our investments are not welcomed, and the contributions from each of our employees across America are not valued,’ the co. says…”
May 15 – CNBC (Matthew J. Belvedere): “There is ‘no chance’ President Donald Trump will back down in the U.S. trade war with China, former Trump advisor Steve Bannon told CNBC… ‘China has been running an economic war against the industrial democracies for now 20 years,’ said the hardline ex-White House chief strategist… Bannon said previous presidents — Bill Clinton, George W. Bush and Barack Obama — passed the buck on addressing and fixing the problems of China’s protectionist economy. But Trump is not shying away from the fight, he added. ‘There is no chance that Donald Trump backs down from this. I think he’s looking at the good of people on a global basis,’ Bannon said…”
May 13 – Bloomberg (Shawn Donnan): “President Donald Trump loves tariffs so much he once called himself ‘Tariff Man.’ He also has repeatedly portrayed the punitive tariffs he has imposed on China and other countries as tools to create leverage and draw them into new trade deals that benefit the U.S. Increasingly, however, Trump’s tariffs are looking like an end-goal rather than a tool and more tangible than any of the deals the president has promised. And that, economists agree, bodes badly for the U.S. and global economies.”
May 13 – Financial Times (James Politi): “Donald Trump’s escalation of trade tensions with China has created a split within his Republican party as some of the president’s closest allies express anxieties about the mounting economic costs of the stand-off. Chuck Grassley… called… for a US-China trade agreement to be reached ‘as soon as possible’ after stock prices fell sharply… ‘There’s no doubt Americans will be harmed, including farmers, businesses and consumers in my home state of Iowa, if the additional tariffs take effect,’ he said. ‘Americans understand the need to hold China accountable, but they also need to know that the administration understands the economic pain they would feel in a prolonged war.’”
May 14 – Reuters (Doina Chiacu and Makini Brice): “President Donald Trump… denied a New York Times report that U.S. officials were discussing a military plan to send up to 120,000 troops to the Middle East to counter any attack or nuclear weapons acceleration by Iran. ‘I think it’s fake news, OK? Now, would I do that? Absolutely. But we have not planned for that. Hopefully we’re not going to have to plan for that. And if we did that, we’d send a hell of a lot more troops than that’…”
May 13 – Wall Street Journal (Summer Said, Nancy A. Youssef and Benoit Faucon): “An initial U.S. assessment indicated Iran likely was behind the attack on two Saudi Arabian oil tankers and two other vessels damaged over the weekend near the Strait of Hormuz, a U.S. official said, a finding that, if confirmed, would further inflame military tensions in the Persian Gulf.”
May 13 – Reuters (Makini Brice and David Brunnstrom): “U.S. Secretary of State Mike Pompeo shared information on ‘escalating’ threats from Iran with European allies and NATO officials during meetings in Brussels on Monday, the U.S. special representative for Iran said.”
May 14 – Reuters (Patricia Zengerle): “A group of President Donald Trump’s fellow Republicans in Congress introduced legislation on Tuesday intended to prohibit anyone employed or sponsored by the Chinese military from receiving student or research visas to the United States. The bill would require the U.S. government to create a list of scientific and engineering institutions affiliated with the Chinese People’s Liberation Army, and prohibit anyone employed or sponsored by those institutions from receiving the visas.”
Federal Reserve Watch:
May 14 – Bloomberg (Alister Bull and Shawn Donnan): “President Donald Trump called on the Federal Reserve to ‘match’ what he said China would do to offset economic hardship being caused by tariffs as he sought to draft the U.S. central bank into his simmering trade war. ‘China will be pumping money into their system and probably reducing interest rates, as always, in order to make up for the business they are, and will be, losing,’ the president said in a tweet… ‘If the Federal Reserve ever did a ‘match,’ it would be game over, we win! In any event, China wants a deal!’ The president later told an audience in Louisiana that ‘with a little quantitative easing’ U.S. growth would hit 5%...’”
May 14 – CNBC (Jeff Cox): “The Federal Reserve doesn’t need to cut interest rates to boost inflation, Kansas City Fed President Esther George said… In fact, George said, low inflation is of little concern to anyone but financial market participants and economists who fear that the central bank is undershooting its 2% target and thus should ease policy to boost activity. ‘As I listen to business and community leaders around my region, I hear few complaints about inflation being too low. In fact, I am more likely to hear disbelief when I mention that inflation is as low as measured in a number of key sectors,’ she said during a speech… ‘This leads me to the observation that inflation as experienced by households and businesses is fundamentally different from inflation as viewed by financial market participants and many economists.’”
May 13 – Bloomberg (Christopher Condon and Craig Torres): “Federal Reserve Vice Chairman Richard Clarida said the U.S. economy is close to the central bank’s twin goals for full employment and price stability, making the current climate a good time to review its approach to monetary policy. In prepared comments… at a ‘Fed Listens’ conference being held to explain its reasons for assessing its policy practices, Clarida said a global decline in the level of interest rates that central banks use to keep their economies on an even keel is likely to persist for years, making it harder to support the economy during recessions. He explained that a decline in neutral interest rates, which neither speed up nor slow down the economy, ‘increases the likelihood’ that policy makers will be forced to cut borrowing costs back to zero… ‘That development, in turn, could make it more difficult during downturns for monetary policy to support household spending, business investment, and employment and keep inflation from falling too low,’ he said.”
May 11 – Bloomberg (Rich Miller and Matthew Boesler): “Federal Reserve officials offered a damning take on rising inequality in America and the corrosive effects it can have on the economy. Fed Governor Lael Brainard told a conference… that the long-term vigor of the U.S. economy may be at risk as middle class households are squeezed by slow growth in income and wealth and rising costs for housing, health care and education. ‘An economy that delivers an increasing share of income gains to high-wealth households could result in less growth in consumer demand than one in which the gains are distributed more equally,’ she said.”
May 13 – Reuters (Trevor Hunnicutt): “Torturously slow recoveries from recessions and low inflation are here to stay unless policymakers can get a better grip on how to stabilize the global economy in an era of lower interest rates, a top Federal Reserve policymaker said… ‘Experience teaches us that it is better to prepare for the future than wait too long,’ New York Fed President John Williams said… ‘Ultimately, failure to prepare often means preparation for failure.’”
U.S. Bubble Watch:
May 12 – CNN (Haley Byrd and Phil Mattingly): “The US government is hurtling toward a potential financial crisis, and no one in Washington seems to know how to stop it. As lawmakers trade fire over contempt votes and impeachment, there's been no progress toward reaching a budget agreement or extending the federal government's ability to borrow before September, when the money runs out. That's raising the ugly prospect of more than $100 billion in mandatory cuts as well as an unprecedented default on US debt -- a situation that could trigger a worldwide economic catastrophe. It's a mess everyone knows is coming, and yet no one seems to have a plan -- at least at the moment -- for averting disaster.”
May 17 – Reuters (Lucia Mutikani): “U.S. consumer sentiment jumped to a 15-year high in early May amid growing confidence over the economy’s outlook. The University of Michigan said its consumer sentiment index increased 5.3% to 102.4, the highest reading since 2004. Economists polled by Reuters had forecast a reading of 97.5.”
May 13 – Wall Street Journal (Ben Eisen): “The gatekeepers of the American mortgage market are increasingly backing loans to borrowers who have heavy debt loads, highlighting questions about mortgage risk as policy makers debate ways to change the system. Almost 30% of loans that mortgage giants Fannie Mae and Freddie Mac packaged into bonds last year went to home buyers whose total debt payments amounted to more than 43% of their incomes… The share has nearly doubled since 2015. Data on other government mortgage programs also show an increase. The backing of these loans opens up a debate about the government’s role in the housing market.”
May 16 – Reuters (Nandita Bose and Rod Nickel): “Walmart Inc said… that prices for shoppers will go up due to higher tariffs on goods from China as the world’s largest retailer reported its best comparable sales growth for the first quarter in nine years.”
May 14 – Associated Press (Paul Wiseman and Joyce M. Rosenberg): “For many Americans, President Donald Trump’s trade war may soon get very real. His administration is preparing to extend 25% tariffs to practically all Chinese imports not already hit with duties, including toys, sneakers, shirts, alarm clocks, toasters and coffeemakers. That’s roughly $300 billion worth of products on top of the $250 billion targeted earlier. ‘The administration’s decision to announce a tax on every product coming from China puts America’s entire economy at risk,’ the Retail Industry Leaders Association said… ‘Americans’ entire shopping cart will get more expensive.’”
May 15 – Associated Press: “U.S. retail sales declined last month, as Americans cut back their spending on clothes, appliances, and home and garden supplies. Sales dropped 0.2% in April…, after a big 1.7% jump in March. The March figure was revised upward from the originally reported figure of 1.6%. Car sales dropped 1.1% last month and sales at electronics and appliance stores dropped 1.3%. Economists are having a difficult time gauging the mood of consumers this year. Retail sales have been on a seesaw pattern, rising at a healthy pace in January, then falling in February, followed by the big jump in March and now a drop in April.”
May 16 – Wall Street Journal (Jessica Menton): “U.S. companies have been buying back their own shares at a blistering pace for more than a year, and market turbulence isn’t likely to stop them now. The more than 80% of firms in the S&P 500 that have reported results for the first quarter repurchased $180 billion worth of their own stock during that time, according to S&P Dow Jones Indices, on pace to be the second-highest amount on record based on data going back to 1998.”
May 11 – CNBC (Eric Rosenbaum): “The latest jobs report for April showed wage growth picking up steam. And it looks like employment income is going to stay moving that way, according to a new survey from CNBC of chief financial officers at major corporations. Cost of labor will be by far the biggest cost that companies face over the next six months, according to the CNBC Global CFO Council Survey for the second quarter. In the U.S., companies citing cost of labor as their biggest cost is higher than in any other global region. Eighty-five percent of North America-based CFOs surveyed by CNBC cited cost of labor as their biggest expense. That is up from 56% who cited it the last time the survey asked about the six-month costs outlook, in the fourth quarter 2018. Globally, 78% of CFOs cited cost of labor as their No. 1 future cost, versus 55% globally who cited in in Q4 2018.”
May 12 – Wall Street Journal (Ruth Simon): “Job growth at the smallest businesses has fallen to the lowest levels in nearly eight years as tiny companies struggle to attract and retain workers in the tightest U.S. job market in half a century. The number of people employed by companies with fewer than 20 workers grew by less than 1% in both March and April, compared with the same months a year earlier, according to… Moody’s Analytics… Hiring at the smallest businesses hasn’t been this low since May 2011, when the economy was still recovering from the financial crisis.”
May 14 – Reuters (Richard Leong): “The number of U.S. homeowners who fell behind on their mortgage payments climbed in the first quarter from an 18-year low at the end of 2018, while the share of mortgages at the start of foreclosure actions slipped, the Mortgage Bankers Association said… The delinquency rate for mortgages on one-to-four-unit homes rose to 4.42% in the first three months of 2019, up from 4.06% at the end of the fourth quarter which was the lowest level since the first quarter of 2000…”
May 14 – Wall Street Journal (Peter Grant): “Rapid growth of big technology companies is pushing demand for San Francisco office space to new heights, leading firms to go to unusual extremes to grab workspace. Some tech companies are leasing major portions of new buildings months before developers break ground, or before they even get the necessary government permits. Online image board Pinterest Inc. leased about 490,000 square feet of office space in a planned 1 million-square-foot project earlier this year, at about the same time it launched its initial public offering. The building’s developer, Alexandria Real Estate Equities , hopes to break ground in the first half of 2020, but that only happens if it gets the necessary approval under San Francisco’s Proposition M, which restricts the amount of office space built to about 900,000 square feet a year.”
May 11 – Wall Street Journal (Sam Schechner): “Governments are in a global race to scrutinize Silicon Valley, creating a broad regulatory wave aimed at curbing the power of a small group of American tech giants. French government officials said Friday they plan to give regulators there sweeping power to audit and fine large social-media companies like Facebook Inc. if they don’t adequately remove hateful content. Competition authorities in India… have launched a probe into whether Alphabet Inc.’s Google uses its mobile operating system to block rivals. The dual efforts are the latest in a series of increasingly aggressive probes and tough new regulations around the world circumscribing tech firms on a number of different fronts. The European Union has enacted broad restrictions on how companies handle data as concerns over privacy grow.”
May 14 – Reuters (Jennifer Ablan): “U.S. growth appears to be based ‘exclusively’ on government, corporate and mortgage debt and the economy would have contracted if the United States had not added trillions in debt, Jeffrey Gundlach, chief executive of DoubleLine Capital, said… ‘Nominal GDP growth over the past five years would have been negative if U.S. public debt had not increased,’ said Gundlach. ‘One thing everybody seems to miss when they look at these GDP numbers ... they seem to not understand that the growth in the GDP it looks pretty good on the screen is really based exclusively on debt - government debt, also corporate debt and even now some growth in mortgage debt.’”
China Watch:
May 17 – Bloomberg: “China’s state media signaled a lack of interest in resuming trade talks with the U.S. under the current threat to escalate tariffs, while the government said stimulus will be stepped up to buttress the domestic economy. Without new moves that show the U.S. is sincere, it is meaningless for its officials to come to China and have trade talks, according to a commentary by the blog Taoran Notes, which was carried by state-run Xinhua News Agency and the People’s Daily… The Ministry of Commerce spokesman said Thursday he had no information about any U.S. officials coming to Beijing for further talks.”
May 16 – Bloomberg: “‘If the U.S. doesn’t make concessions in key issues, there is little point for China to resume talks,’ said Zhou Xiaoming, a former commerce ministry official and diplomat. ‘China’s stance has become more hard-line and it’s in no rush for a deal’ because the U.S. approach is extremely repellent and China has no illusions about U.S. sincerity, he said. According to Zhou, the commerce ministry spokesman on Thursday effectively ruled out talks in the near term. In comments to the media, ministry spokesman Gao Feng said that China’s three major concerns need to be addressed before any deal can be reached, adding that the unilateral escalation of tensions in Washington recently had ‘seriously hurt’ talks.”
May 16 – Wall Street Journal (Lin Zhu): “China’s Commerce Ministry denied knowing about U.S. plans to resume trade talks, deflecting remarks by Treasury Secretary Steven Mnuchin that American officials are likely to travel to Beijing soon for negotiations. Mr. Mnuchin told a Senate committee Wednesday that the U.S. team is ‘likely to go to Beijing at some point in the near future.’ The comments offered prospects for a return to talks after both sides spent the better part of a week trading recriminations over perceived backsliding in positions that left the negotiations at an impasse. Asked by reporters about Mr. Mnuchin’s comments, Chinese Commerce Ministry spokesman Gao Feng said… that ‘the Chinese side doesn’t have a grasp on the U.S. side’s plans to come to China for negotiations.’ Mr. Gao then said the U.S.’s escalation of tariffs ‘severely hampered’ consultations.”
May 16 – Reuters (Yawen Chen and Se Young Lee): “China on Thursday slammed a decision by the U.S. government to put telecom equipment giant Huawei on a blacklist and said it will take steps to protect its companies, in a further test of ties as the economic heavyweights clash over trade. China is strongly against other countries imposing unilateral sanctions on Chinese entities, a Commerce Ministry spokesman said, stressing that the United States should avoid further damaging Sino-U.S. trade relations… Hopes for a deal to end their trade war have been thrown into doubt after the world’s two biggest economies raised tariffs on each other’s goods in the past week. The U.S. Commerce Department said… it was adding Huawei Technologies Co and 70 affiliates to its so-called ‘Entity List’ in a move that bans the Chinese company from acquiring components and technology from U.S. firms without prior U.S. government approval.”
May 15 – CNBC (Evelyn Cheng): “China’s state-run media outlets have come out in force this week after keeping relatively quiet in the wake of U.S. President Donald Trump’s surprise announcement of tariff increases on Chinese goods. Whether it’s the mouthpiece of the Communist Party or the national television broadcaster, the latest commentary exudes confidence about China’s ability to stand up to the U.S… In an environment of tight government control of what messages are allowed to surface, the shift can shed light into what Chinese leaders are thinking about the drawn out trade negotiations. ‘I expect it was ordered by the top leadership to forward the narrative of the U.S. as bully and China as victim,’ said Scott Kennedy, director… at the Center for Strategic and International Studies. ‘Putting the talks in broader normative terms gives (Beijing) leverage — ‘I can’t make big concession because my society will be angry’ — but it also makes it harder for both sides to dispassionately find common ground,’ Kennedy added.”
May 17 – CNBC (Jeff Cox): “Escalations in its trade dispute with the U.S. not only could dent China’s economy but also impact its credit standing, according to ratings agencies. China’s credit remains strong despite a weakening economy and a high-stakes tariff battle it is engaged in with the U.S. However, should the impasse linger on, the damages could become greater and start having some deeper impacts. ‘The tariff war is negative for China especially at a time when its policy makers are battling problems of rising debt and increasing leverage in its economy,’ analysts at ratings agency DBRS said… ‘The economic impact on China of rising tariffs would be broader than just via its trade with the U.S.’”
May 14 – Bloomberg (Benjamin Purvis): “China may be reluctant to commit to a deal with the U.S. that limits its flexibility on foreign-exchange rates if officials in Beijing draw lessons from previous trade clashes between America and Japan. That’s the view of Deutsche Bank AG strategists Oliver Harvey and Shreyas Gopal, who wrote that U.S. pressure on its biggest economic rival in the early 1990s appears to have at least indirectly contributed to an inadequate policy response from the Japanese authorities. That led to an unwanted appreciation of the yen and protracted deflation, they wrote… ‘China appears to have learnt from Japan’s mistakes,’ the strategists wrote. ‘Benefits for China to mirror the Japan experience and maintain a strong exchange rate may be lower than some argue.’”
May 14 – Bloomberg: “Chinese distressed debt investors are seizing the upper hand in the big rush by banks to offload soured loans. Increasingly, the bargaining power has fallen to the buyers’ side. Bidding was fierce a couple years ago amid slim pickings with buyers outnumbering sellers. For Wu Rui, with almost two decades of experience in the distressed debt business, that’s changed with bad loans soaring. He has received more invitations recently from banks and asset management companies keen to sell him the bad debt… Chinese banks’ outstanding bad loans climbed to a record 2.16 trillion yuan ($314bn) as of the end of March… The explosion of soured debt comes in the wake of more private sector firms struggling to refinance debts and an intensifying trade war with the U.S. that’s bearing down on the economy.”
May 15 – Bloomberg: “China’s bond traders are throwing away the script this year as the central bank repeatedly tweaks policy to keep up with shifts in the economy. The lack of visibility is sending tremors through the interbank lending market, which is typically a source of cheap leverage for government-bond buyers. The seven-day repurchase rate -- a gauge of China’s funding costs -- has turned the most volatile since 2014, 100-day historical data show. That has made it very difficult for traders to know how much it will cost them to buy bonds… ‘Volatility will continue in the near term,’ said Linan Liu, greater China macro strategist at Deutsche Bank AG. ‘This will be negative for leveraged investors, who will need higher investment returns from bonds and stocks to compensate for uncertainties in their funding costs.’”
May 14 – Reuters (Kevin Yao and Yawen Chen): “China reported surprisingly weaker growth in retail sales and industrial output for April, adding pressure on Beijing to roll out more stimulus as the trade war with the United States escalates. Clothing sales fell for the first time since 2009, suggesting Chinese consumers were growing more worried about the economy… Overall retail sales in April rose 7.2% from a year earlier, the slowest pace since May 2003… That undershot March’s 8.7% and forecasts of 8.6%.”
May 16 – Reuters (Yawen Chen and Ryan Woo): “New home prices in China grew at a solid pace in April as Beijing sought to boost economic activity in the face of an escalating trade war with the United States, though potential bubble risks may prompt some cities to tighten policies. Beijing has repeatedly called on local governments to take more responsibility in keeping the frothy market under control. But pent-up demand for housing, easier credit conditions and some local governments relaxing purchase restrictions may be further fanning price gains in a market where fear of missing out is strong. Average new home prices in China’s 70 major cities rose 0.6% in April… On an annual basis, home prices rose 10.7% in April, picking up from a 10.6% gain in March. ‘The impact of a series of cuts in banks’ required reserve ratio (RRR) on the property market is showing,’ said Zhang Dawei, an analyst with property consultancy Centaline.”
May 14 – Reuters (Kevin Yao and Yawen Chen): “Property investment in China was resilient in April as developers rushed to boost their land inventories in the wake of looser credit and purchasing rules, but demand for new homes remained weak in a reflection of the broader slowdown in the economy… Some analysts say bubble risks are rising as home prices continue to climb. The data was one of the few bright spots in a raft of other official economic indicators released on Wednesday… China’s real estate investment, which mainly focuses on the residential sector but also includes commercial and office space, rose 12% in April from a year earlier…”
May 15 – Reuters (Richard Leong): “China’s ownership of U.S. Treasuries fell to its lowest in nearly two years in March amid uncertainty about a trade deal between Beijing and Washington… China’s stake in Treasuries declined for the first time in four months to $1.121 trillion in March… It was $1.131 trillion in February…”
Central Bank Watch:
May 13 – Reuters (Stanley White): “Bank of Japan Governor Haruhiko Kuroda said… he would consider additional easing without hesitation if consumer prices lost upward momentum. Kuroda, speaking in parliament, said the BOJ was committed to keeping short- and long-term rates low until at least the spring of 2020, adding rates could remain low beyond that period.”
May 11 – Bloomberg (Martin Sobczyk): “Bundesbank President Jens Weidmann wouldn’t be able to quickly change the European Central Bank’s monetary policy if picked as its next president, Der Spiegel magazine reported, citing comments by former ECB chief economist Juergen Stark. ‘Even Weidmann couldn’t flip the lever overnight. For that, governments and capital markets are too dependent on the ECB and vice versa,’ the magazine quoted Stark as saying. Weidmann would, however, be the right person ‘to depoliticize the highly politicized ECB,’ Stark said. Otmar Issing, Stark’s predecessor as chief economist, said any new ECB president must ‘convince the public and the financial markets of the sustainable stability of the euro,’ according to the report.”
Europe Watch:
May 17 – Bloomberg (Arne Delfs): “Angela Merkel is feeling pressure from her chosen successor to quit as German chancellor after this month’s elections for the European parliament, according to two people with knowledge of the situation. With Merkel’s Christian Democrats expected to lose ground in the May 26 vote, their leader, Annegret Kramp-Karrenbauer, sent a message to Merkel urging her to resign and called a party conference for June 2 in order to try to force her hand…”
May 14 – Bloomberg (John Follain and Lorenzo Totaro): “Deputy Prime Minister Matteo Salvini sent ripples through financial markets on Tuesday, saying Italy could be ready to break European Union fiscal rules, on the same day his coalition partner called on him to stop ‘fanning the flames’ with critical comments about the government. ‘If we need to break some limits, like the 3% or the 130-140%, we’ll go ahead,’ League party chief Salvini told reporters…, while campaigning ahead of this month’s European parliamentary elections. Salvini was referring to the bloc’s limits on budget deficits and government debt as a share of economic output.”
Japan Watch:
May 13 – Financial Times (Robin Harding): “Japan’s economy is ‘worsening’ for the first time in more than six years, according to one of the government’s main indicators… The index of economic conditions compiled by Japan’s Cabinet Office fell 0.9% from February to March. That prompted statisticians to cut their assessment of the economy from ‘weakening’ to ‘worsening’ — the lowest of five levels. The last time the Cabinet Office used the bottom grade to describe the economy was in January 2013.”
EM Watch:
May 16 – Financial Times (Laura Pitel and Adam Samson): “Turkey’s foreign exchange reserves have fallen to a fresh 2019 low once short term borrowing is stripped out…, as Moody’s issued a warning over the country’s mounting vulnerabilities. Official figures for the net foreign currency reserves held by Turkey’s central bank showed that the country’s hard currency war chest climbed to $27.2bn in the week to May 10, up from $25.9bn the previous week. However, when a large jump in short-term dollar borrowing is excluded, the figure was $12.7bn — down from $14.2bn the week before.”
May 11 – Reuters (Orhan Coskun, Nevzat Devranoglu and Jonathan Spicer): “Turkish state banks sold around $4.5 billion last week, two sources told Reuters, including in a flurry of selling late on Friday, to support the lira and stem declines triggered by a decision this week to re-run Istanbul’s mayoral election.”
May 14 – Reuters (Marcela Ayres): “Brazil’s government will cut its 2019 economic growth forecast to below 2% and seek supplementary funding from state-run BNDES development bank to meet current expenditure and avoid breaking its fiscal rules, Economy Ministry officials said… Economy Minister Paulo Guedes and special secretary Waldery Rodrigues’ testimony to a budget commission made up of deputies and senators underscored the two most serious challenges facing the government: an anemic economy and stretched public finances.”
May 15 – Reuters: “Brazilian economic activity fell in March…, adding weight to the view flagged by policymakers earlier this week that the economy contracted in the first quarter. The central bank’s IBC-BR economic activity index, a leading indicator of gross domestic product (GDP), fell 0.28% in March from February, resulting in a decline of 0.68% in the first three months of the year.”
Global Bubble Watch:
May 14 – New York Times (Neil Irwin): “Just two weeks ago, the United States and China seemed to be gliding toward a trade deal meant to resolve tensions between the world’s two largest economies. But the breakdown in talks since — the United States raised tariffs to 25% on $200 billion of Chinese imports, for example, and is threatening to tax an additional $300 billion — worries people who study international economic diplomacy. That’s because both the United States and China seem to be digging into their positions in ways that will be hard to resolve with the mutual face-saving that typically turns high-stakes negotiations into deals. To use a common negotiating metaphor, it is not clear what the offramps might be that would allow a de-escalation and prevent a major trade war that would prove costly to both nations.”
May 11 – New York Times (Ana Swanson and Keith Bradsher): “A yearlong trade war between the United States and China is proving to be an initial skirmish in an economic conflict that may persist for decades, as both countries battle for global dominance, stature and wealth. Progress toward a trade agreement nearly collapsed this past week, with both sides hardening their bargaining positions. And even if a trade deal is reached, it may do little to resolve tensions between the world’s two largest economies. The United States is increasingly wary of China’s emerging role in the global economy and the tactics it uses to get ahead, including state-sponsored hacking, acquisitions of high-tech companies in the United States and Europe, subsidies to crucial industries and discrimination against foreign companies.”
May 12 – Financial Times (Amin Rajan): “The runaway success of the German government’s €2.4bn 10-year Bund sale in March was yet another sombre reminder of the plight of defined benefit pension plans. The issue attracted €6.3bn even though it offered a negative rate of 0.05%, requiring investors to pay for the privilege of lending. Negative rates are back in the news, currently accounting for 11% of global outstanding debt, according to Bank of America.”
May 14 – Bloomberg (Denise Wee): “The red hot rally in credit this year has prompted wealthy investors in Asia to borrow money to buy funds that often load up on lower-rated bonds. That’s setting the stage for pain should the market turn, as the products pose troubling risks if that happens… Some of these so-called fixed-maturity funds put most of their eggs in one basket, such as in Chinese property debt. The risks are compounded by leverage, and by the fact that the notes in the funds tend to mature around the same time. ‘When you put a number of high-yield issuers from a single sector into a fixed-maturity product portfolio, is there diversification?’ said Desmond Soon, head of investment management for Asia ex-Japan at Western Asset Management. ‘In a risk-off scenario, the default risk could rise exponentially.’”
May 14 – Financial Times (Fan Fei): “One of Claude Monet’s luminous ‘Haystack’ paintings, ‘Meules’ (1890), sold for a record $110.7m at Sotheby’s impressionist and modern art sale on Tuesday night. The price, which included fees, was 44 times the $2.5m paid when the artwork last appeared at auction 33 years ago, Sotheby’s said… According to the auction house, the price was a world record for any impressionist painting.”
May 14 – CNN (Oscar Holland): “A playful rabbit sculpture by Jeff Koons has become the most expensive work by a living artist ever to sell at auction. The American artist's ‘Rabbit,’ a stainless steel figure measuring just over 3 feet tall, sold for more than $91 million Wednesday evening at Christie's in New York, smashing auction estimates. The new record comes just six months after David Hockney's ‘Portrait of an Artist (Pool with Two Figures)’ set a new benchmark for a living artist, when it sold for $90.3 million last November…”
Fixed-Income Bubble Watch:
May 14 – Reuters (Eliza Ronalds-Hannon): “Credit investors who’ve plowed billions of dollars into private equity-sponsored LBO debt will be hit hard when the credit cycle turns and defaults rise, Moody’s… warns in a new report. The giants of the PE world have used their imposing status to loosen terms on the bonds and loans they sell to yield-hungry investors, says Neal Epstein, a senior credit officer at Moody’s. That gives them more room to preserve their investments in a downturn -- even if it means losses for creditors. ‘The investor demand for this debt is so strong that if the private equity sponsors want to borrow more money for their companies and do it with weaker terms, they can,’ said Epstein.”
Geopolitical Watch:
May 13 – Bloomberg (Derek Wallbank): “The voice on the radio in the middle of the South China Sea follows a familiar script for Captain Eric Anduze, who helms the USS Blue Ridge. It’s China on the phone. ‘They’ll contact us and they’ll go -- ‘U.S. government vessel, this is Chinese Navy vessel’ number whatever -- ‘we will maintain five miles from you and escort you as you make your transit,’ Anduze said… The U.S. response is short: ‘Chinese vessel, this is government vessel 1 9, copy, out.’ From there on, silence, as the vessels of the world’s rival powers steam onward together. The ship-to-ship interactions are a regular potential flash point for the world’s two biggest militaries in contested waters. In September, a Chinese destroyer sailed within a football field’s distance of the USS Decatur in what the U.S. said was an ‘unsafe and unprofessional’ maneuver. That hasn’t deterred future sailings -- the U.S. sent two guided-missile destroyers within 12 nautical miles of disputed islands earlier this month.”
May 16 – Reuters (Eric Beech and Ben Blanchard): “U.S. Secretary of State Mike Pompeo met with Hong Kong pro-democracy leader Martin Lee on Thursday, the State Department said, as Hong Kong activists seek to derail a proposed extradition law pushed by Beijing.”
May 15 – Reuters (Roslan Khasawneh and Muyu Xu): “A tanker carrying Iranian fuel oil in violation of U.S. sanctions has unloaded the cargo into storage tanks near the Chinese city of Zhoushan, according to… Refinitiv Eikon. The discharging of the nearly 130,000 tonnes of Iranian fuel oil onboard the tanker, the Marshal Z, confirmed by a representative of the oil storage terminal, marks the end of an odyssey for the cargo that began four months ago.”
May 14 – Reuters (Stephen Kalin and Rania El Gamal): “Saudi Arabia said armed drones struck two of its oil pumping stations on Tuesday, two days after the sabotage of oil tankers near the United Arab Emirates, and the U.S. military said it was braced for ‘possibly imminent threats to U.S. forces in Iraq’ from Iran-backed forces. The attacks took place against a backdrop of U.S.-Iranian tension following Washington’s decision this month to try to cut Iran’s oil exports to zero and to beef up its military presence in the Gulf in response to what it said were Iranian threats.”
May 14 – New York Times (Helene Cooper and Edward Wong): “As the Trump administration draws up war plans against Iran over what it says are threats to American troops and interests, a senior British military official told reporters at the Pentagon… that he saw no increased risk from Iran or allied militias in Iraq or Syria. A few hours later, the United States Central Command issued an unusual rebuke: The remarks from the British official — Maj. Gen. Chris Ghika, who is also the deputy commander of the American-led coalition fighting the Islamic State — run ‘counter to the identified credible threats available to intelligence from U.S. and allies regarding Iranian-backed forces in the region.’ The rare public dispute highlights a central problem for the Trump administration as it seeks to rally allies and global opinion against Iran.”
May 15 – Reuters (John Davison and Mark Hosenball): “Helicopters ferried U.S. staff from the American embassy in Baghdad on Wednesday out of apparent concern about perceived threats from Iran, which U.S. sources believe encouraged Sunday’s attacks on four oil tankers in the Gulf. The sabotage of the tankers… and Saudi Arabia’s announcement on Tuesday that armed drones hit two of its oil pumping stations have raised concerns Washington and Tehran may be inching toward conflict. A U.S. government source said American security experts believe Iran gave its ‘blessing’ to tanker attacks…”
May 15 – Newsweek (David Brennan): “The U.S. is withdrawing all non-emergency government employees from Iraq as tensions continue to mount between Washington and Iran, amid allies' warnings that war could break out inadvertently if concrete steps toward de-escalation are not taken… The statement also said that visa services would be ‘temporarily suspended’ … and noted the government had ‘limited ability to provide emergency services to U.S. citizens in Iraq.’ It urged citizens to leave Iraq as soon as possible and avoid all U.S. facilities within the country.”
May 14 – Reuters (Babak Dehghanpisheh and Dan Williams): “Iran will defeat the American and Israeli alliance, Iranian Defence Minister Amir Hatami said… ‘We will defeat the American-Zionist front,’ he said. ‘Iran has the highest level of defense-military preparedness to confront any type of threat and excessive demands,’ he added.”
May 14 – Wall Street Journal (Sune Engel Rasmussen, Nancy A. Youssef and Aresu Eqbali): “Iran vigorously denied a U.S. claim that it was behind attacks on four oil tankers in the Persian Gulf that set the Middle East on edge, as the Trump administration confronted mounting skepticism from allies abroad and Democrats at home. Iran accused officials in the Trump administration of trying to pull it into a war with the U.S. and its regional allies.”
May 13 – Reuters (Choonsik Yoo, Hyonhee Shin and Josh Smith): “North Korea said on… the seizure of one of its cargo ships by the United States was an illegal act that violated the spirit of a summit between the two countries’ leaders, and demanded the return of the vessel without delay.”
May 15 – Reuters (Chris Sanders and Luc Cohen): “The U.S. Department of Transportation… ordered the suspension of all commercial passenger and cargo flights between the United States and Venezuela, citing reports of unrest and violence around airports in the South American country.”
