Saturday, July 6, 2019

Weekly Commentary: Abject Monetary Disorder

Please join Doug Noland and David McAlvany Thursday, July 18th, at 4:00PM EST/ 2:00pm MST for the Tactical Short Q2 recap conference call, "What's Behind the Global Yield Collapse?" Click here to register.


A market week that began with a U.S./China trade “truce” ended with much stronger-than-expected (224k) June non-farm payrolls data. There were new intraweek record highs in equities and no let up in the global yield collapse. Lacking was increased clarity as to prospects for trade negotiations, economic growth and central bank policy.

Almost a week after Presidents Trump and Xi agreed to restart trade negotiations, there are few details as to what was actually discussed and agreed upon. The ratcheting down of tensions was widely expected in the markets. As anticipated, President Trump chose not to impose additional tariffs on Chinese imports. The softening of sanctions (allowing purchases from U.S. suppliers) on Huawei was the major surprise, although even on this point there is murkiness. After push back from U.S. security “hawks,” the administration stated the Chinese tech powerhouse remained blacklisted and had not been granted “general immunity.” Little wonder there was no mention of the Huawei concession from Chinese state media, only warnings of the U.S. propensity for “flip-flops.”

Analysts have generally responded cautiously to the “truce” and to prospects for an imminent trade deal. Equities, in the throes of speculative impulses and record highs, celebrated the reduced odds of near-term negative trade surprises during at least a temporary cooling off of vitriol.

Global bond markets, enjoying their own speculative melee and attendant unprecedented low yields, were fazed neither by the “truce” nor surging risk markets. German 10-year bund yields were down eight bps at Thursday’s lows, to a record negative 0.41%. French yields were down 13 bps for the week at Thursday’s record low negative 0.14%, with Swiss yields down another 12 bps to Thursday’s record low negative 0.67%.

As spectacular as it’s been at Europe’s “core,” the yield collapse at the “periphery” has been nothing short of astonishing. Italian 10-year yields traded as low as 1.55% Thursday, down a stunning 112 bps from the end of May. At Thursday’s 2.01% low, Greek yields were down 150 bps since May 15th. Portuguese 10-year yields were as low as 0.27% in early Thursday trading, after trading at 2.00% in November and 1.16% in May. After beginning the year at 1.41%, Spanish yields traded Thursday at 0.20%. At Friday’s close, Denmark’s 10-year yields were at negative 0.30%, Austria’s negative 0.13%, Netherlands’ negative 0.22%, Finland’s negative 0.10%, Belgium’s negative 0.02%, Sweden’s negative 0.02%, Slovakia’s 0.05%, Ireland’s 0.07%, Slovenia’s 0.11%, Cyprus' 0.45% and Croatia's 1.09%.

I’ve witnessed a lot of “crazy” in my three decades of closely following various Bubble markets (i.e. Japan’s Nikkei ending 1989 at 38,916 (closed Friday at 21,746); manic early-nineties buying of Mexican tesobonos; late-1993 collapsing U.S. yields and Bubble excess that portended the 1994 rout; speculative Bubbles in SE Asian securities and Russian bonds; LTCM with $2 TN notional derivatives exposures; Internet and tech stocks in 1999; and $1 TN of new subprime CDOs in 2006; etc.). Yet nothing compares to the ongoing global yield collapse.

The global bond market speculative melt-up has brought new meaning to phrase “indiscriminate buying.” I know it’s heresy to suggest as much, but we’re witnessing history’s greatest speculative Bubble go to absolutely “crazy” extremes (it will all have been obvious in hindsight).

According to Bloomberg, the amount of negative-yielding debt globally jumped Thursday to a record $13.4 TN. Rising almost $2.2 TN over the past month, “negative-yielding debt now comprises 25%” of the total investment-grade universe.

July 5 – ETF Trends.com: “According to the latest report on exchange-traded fund (ETF) flow data from State Street Global Advisors, fixed income exchange-traded fund (ETF) inflows were out of this world in the month of June, garnering over $25 billion. ‘Even with a 6% rally in global equities, investors allocated a record amount to fixed income ETFs,’ wrote Matthew Bartolini, CFA Head of SPDR Americas Research State Street Global Advisors… ‘Equity ETFs did garner $20 billion of inflows. However, inflows to bonds were truly out of this world with over $25 billion –a more than 45% increase over the prior record from October of 2014.’ The record number of inflows into bond ETFs allowed for record capital allocations into the fixed income space. ‘Bonds’ record June haul pushed the first-half figure to $74 billion, which is also a record amount for a first half,’ Bartolini noted.”

What others celebrate as a “fantastic bull market,” I see as Abject Monetary Disorder. With global bond prices spiking parabolically upward, how much systemic leverage and resulting liquidity is being created in the process? What quantity of global fixed-income has been purchased on leverage? More importantly, what is the scope of derivative-related leverage that has accumulated throughout global bond markets and fixed-income, as seller/writers of myriad strategies are forced to purchase the underling debt securities to hedge derivative contracts previously sold.

In contemporary derivatives-dominated markets, upside market dislocations create the outward appearance of endless liquidity. Indeed, the higher markets spike the more previously “out of the money” options (swaps, swaptions, etc.) move “in the money,” requiring more aggressive “dynamic” buying to hedge rapidly escalating derivatives-related exposures. Such “melt-ups” are powerfully self-reinforcing, with buying on leverage exacerbating liquidity excess and eventually culminating in panic buying.

There is increasing evidence of market dislocation and associated Monetary Disorder. While “money” supply data have lost relevance over the years, it’s worth noting M2 “money supply” has surged almost $210 billion over the past six weeks (up $638bn y-o-y) to a record $14.773 TN. Money market fund assets have gained $150 billion in nine weeks to an almost decade high $3.192 TN (retail money market funds included in M2). And in another indication of liquidity abundance, outstanding Commercial Paper has jumped almost $80 billion in five weeks to an eight-year high $1.164 TN. Where’s all this “money” coming from?

This week had somewhat of a capitulation look to it. After ending last week at 2.10%, Italian 10-year yields had sunk an incredible 55 bps at Thursday’s 1.55% low. Greek yields were down 42 bps for the week at Thursday’s 2.01% low. Elsewhere, Hungary’s 10-year yields were down 36 bps - India 31 bps, Turkey 70 bps, Lebanon 61 bps, Mexico 27 bps and Brazil 24 bps – at Thursday’s lows. Turkey’s dollar bond yields were down 39 bps for the week at Thursday’s 6.88% low.

The problem with speculative melt-ups – especially when dominated by speculative leverage and derivatives-related buying – is reversals tend to be sharp and problematic. In derivative “dynamic” trading strategies, virtual panic buying to hedge exposures during the market's upside blow-off phase can abruptly reverse into aggressive selling as prices turn lower. Market liquidity, seemingly so permanently abundant during the ascent, is prone to quickly becoming almost non-existent into the decline.

Global bond markets reversed sharply after Friday’s stronger-than-expected 224,000 gain in June non-farm payrolls (we’ll see Asia’s response Monday). Two- and five-year Treasury yields jumped 10 bps in Friday trading (to 1.86% and 1.83%). Ten-year yields rose eight bps to 2.03%. Ten-year sovereign yields jumped 10 bps in Canada, seven bps in Italy and Greece, eight in Spain and 10 bps in Portugal.

A Friday afternoon Bloomberg headline: “Fed Debate Shifts From Large Cut to Whether to Cut at All.” While it did dip slightly in early-Friday trading, by the end of the session markets were back pricing a 100% probability of a rate cut at the Fed’s July 31st meeting. Fed funds futures imply a 1.81% Fed funds rate at the end of the year, up from Wednesday’s implied 1.63%.

Curiously, the market is still highly confident of a rate cut this month, this despite record stock prices, a trade “truce,” and a sharp snapback in job creation. Markets are clamoring for a rate cut and few believe the Powell Fed will risk a repeat episode of disappointing the markets. Yet there’s a strong case for the Fed to hold steady on rates.

July 2 – Bloomberg (Christopher Condon and Brian Swint): “Loretta Mester has laid out the argument against a rate cut this month, while many of her colleagues are leaning hard toward it and investors assume it’s on the way. The president of the Cleveland Fed… said her baseline forecast calls for slower, but still solid, growth of around 2% in 2019 -- even as she acknowledged that downside risks are on the rise. ‘Cutting rates at this juncture could reinforce negative sentiment about a deterioration in the outlook even if this is not the baseline view,’ she said. A cut ‘could also encourage financial imbalances given the current level of interest rates, which would be counterproductive.’”

A Reuters article (Marc Jones and Navdeep Yadav) quoted Mester: “The markets have priced in rate cuts, my interpretation is that they have put a lot of lean on that weak growth scenario. We don’t want to throw away what the market is telling us... You want to infer a signal from that but some of it is noise and some of it is signal, and the markets have shown they are not always correct about where the economy is going.”

It's a quandary. When markets go into speculative melt-up mode, the signaling process turns dysfunctional. Technology stock prices in March 2000; record high equities in July 1998 and October 2007; and sinking bond yields in late 1993. Never before have so many securities (bonds and stocks) been held by passive index products; and never have algorithmic trading strategies played such an impactful role in the marketplace. Moreover, never have global securities and derivatives markets been so closely interconnected. And of perhaps most consequence, never have central bank policies had such profound impacts on global bond prices, market perceptions and speculative trading dynamics.

Central bankers are now faced with the predicament of having nurtured distorted markets (with aberrant signals) that will throw a frenetic tantrum if central banks don’t follow the markets’ directive. There is bold discourse aplenty these days regarding the merits of an “insurance” rate cut. Chairman Powell himself has stated “an ounce of prevention is worth a pound of cure” – a comment markets have interpreted as guaranteeing a July cut. Pundits, including former central bankers, have been speaking as if there is essentially no risk to a cut they believe would offer protection against bad outcomes. This, however, completely disregards the risks associated with adding monetary stimulus to dislocated global securities markets already in dangerous detachment from fundamental realities.

With a rate cut cycle commencing imminently, the popular view is that the fixed income investment cycle is closer to the start of something than the end. Yet it sure has the look of the craziness that comes at the end of a long cycle. That central banks are prepared to further loosen monetary policies with global securities markets absolutely booming should be sounding the alarm bell. Central bankers will either hand over the keys to the asylum – or try to regain control. Either way, there is market uncertainty and volatility on the horizon.

It used to be that seasoned market players would fret late-cycle excess (appreciating associated fragilities created). But that was before “whatever it takes” QE and $13 TN of negative-yielding global bonds. Why not buy 10-year Treasuries at 2.00% when bunds trade at negative 0.37%. Why not own U.S. investment-grade bonds at historically (highly) elevated prices that appear attractive relative to negative-yielding European corporates? Junk, even better. MBS, why not. Basically, virtually the entire fixed-income universe is expensive on a fundamental basis - yet cheap relative to negative-yielding foreign bonds. And imagine how high U.S. stocks might trade if Treasury yields go negative?

Market speculation used to be grounded in “the greater fool theory”. Who needs a fool when markets have central bankers with the wizardry of their QE tool. Bonds have been around for centuries, but we’ve finally reached the point where there is no longer a ceiling to bond prices. This is a precarious juncture for global markets, and the Fed should think twice before it feeds this beast.


For the Week:

The S&P500 gained 1.7% (up 19.3% y-t-d), and the Dow rose 1.2% (up 15.4%). The Utilities jumped 1.7% (up 15.4%). The Banks gained 1.7% (up 16.1%), and the Broker/Dealers rose 2.0% (up 14.8%). The Transports added 0.2% (up 14.3%). The S&P 400 Midcaps gained 1.7% (up 18.2%), and the small cap Russell 2000 increased 0.6% (up 16.8%). The Nasdaq100 advanced 2.2% (up 23.9%). The Semiconductors added 0.2% (up 26.5%). The Biotechs slipped 0.3% (up 13.1%). With bullion down $10, the HUI gold index slipped 0.6% (up 20.2%).

Three-month Treasury bill rates ended the week at 2.17%. Two-year government yields jumped 11 bps to 1.86% (down 63bps y-t-d). Five-year T-note yields rose seven bps to 1.83% (down 68bps). Ten-year Treasury yields gained three bps to 2.04% (down 65bps). Long bond yields increased a basis point to 2.54% (down 47bps). Benchmark Fannie Mae MBS yields were unchanged at 2.74% (down 76bps).

Greek 10-year yields sank 31 bps to 2.12% (down 228bps y-t-d). Ten-year Portuguese yields declined four bps to 0.44% (down 129bps). Italian 10-year yields collapsed 36 bps to 1.75% (down 100bps). Spain's 10-year yields fell seven bps to 0.32% (down 109bps). German bund yields fell four bps to negative 0.36% (down 61bps). French yields dropped eight bps to negative 0.08% (down 79bps). The French to German 10-year bond spread narrowed four to 28 bps. U.K. 10-year gilt yields dropped 10 bps to 0.74% (down 54bps). U.K.'s FTSE equities index jumped 1.7% (up 12.3% y-t-d).

Japan's Nikkei Equities Index rose 2.2% (up 8.7% y-t-d). Japanese 10-year "JGB" yields were unchanged at negative 0.16% (down 16bps y-t-d). France's CAC40 gained 1.0% (up 18.2%). The German DAX equities index advanced 1.4% (up 19.0%). Spain's IBEX 35 equities index gained 1.5% (up 9.3%). Italy's FTSE MIB index surged 3.5% (up 20.0%). EM equities were mostly higher. Brazil's Bovespa index jumped 3.1% (up 14.4%), and Mexico's Bolsa added 0.6% (up 4.2%). South Korea's Kospi index declined 0.9% (up 3.4%). India's Sensex equities index increased 0.3% (up 9.6%). China's Shanghai Exchange rose 1.1% (up 20.7%). Turkey's Borsa Istanbul National 100 index jumped 3.3% (up 9.2%). Russia's MICEX equities index rose 2.5% (up 19.7%).

Investment-grade bond funds saw inflows of $1.76 billion, and junk bond funds posted inflows of $802 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates rose two bps to 3.75% (down 77bps y-o-y). Fifteen-year rates increased two bps to 3.18% (down 81bps). Five-year hybrid ARM rates gained six bps to 3.45% (down 29bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down seven bps to 4.10% (down 45bps).

Federal Reserve Credit last week declined $13.9bn to $3.782 TN. Over the past year, Fed Credit contracted $478bn, or 11.2%. Fed Credit inflated $971 billion, or 35%, over the past 348 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt sank $18.4bn last week to $3.449 TN. "Custody holdings" gained $53bn y-o-y, or 1.6%.

M2 (narrow) "money" supply gained $19.5bn last week to a record $14.773 TN. "Narrow money" gained $638bn, or 4.5%, over the past year. For the week, Currency increased $2.5bn. Total Checkable Deposits fell $11.5bn, while Savings Deposits rose $27.7bn. Small Time Deposits added $1.0bn. Retail Money Funds were unchanged.

Total money market fund assets jumped $46.2bn to $3.238 TN. Money Funds gained $384bn y-o-y, or 13.4%.

Total Commercial Paper surged $33.9bn to $1.164 TN. CP was up $99bn y-o-y, or 9.3%.

Currency Watch:

The U.S. dollar index gained 1.2% to 97.286 (up 1.2% y-t-d). For the week on the upside, the Mexican peso increased 1.1%, the Brazilian real 0.7%, and the Canadian dollar 0.1%. On the downside, the Swedish krona declined 1.7%, the Swiss franc 1.5%, the British pound 1.4%, the South Korean won 1.3%, the New Zealand dollar 1.3%, the euro 1.3%, the Norwegian krone 1.0%, the South African rand 0.6%, the Japanese yen 0.6%, the Australian dollar 0.6%, and the Singapore dollar 0.5%. The Chinese renminbi declined 0.39% versus the dollar this week (down 0.22% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index declined 0.7% this week (up 2.8% y-t-d). Spot Gold slipped 0.7% to $1,399 (up 9.1%). Silver fell 2.2% to $15.001 (down 3.5%). WTI crude declined 96 cents to $57.51 (up 27%). Gasoline rose 1.7% (up 46%), and Natural Gas jumped 4.8% (down 18%). Copper lost 1.9% (up 1%). Wheat fell 2.3% (up 2%). Corn rallied 2.5% (up 18%).

Market Instability Watch:

June 29 – CNBC (Yun Li): “It’s no secret that machines are taking up a bigger and bigger share of investing, but the extent of their influence is approaching shocking proportions. It is as high as 80%, according to one major investing firm. Passive investments such as index funds and exchange-traded funds control about 60% of the equity assets, while quantitative funds, those which rely on trend-following models instead of fundamental research from humans, now account for 20% of the market share, according to… J.P. Morgan. This means so much of stock trading is now in the hands of automated buyers and sellers that the market is increasingly sensitive to headlines and more prone to sharp price swings, many notable investors believe.”

July 3 – Bloomberg (Annie Massa, Miles Weiss and John Gittelsohn): “What’s really inside bond funds these days? The answer, for many of them, is more risk than there used to be. With little fanfare, many traditionally safe investment-grade bond funds have been edging into more complex corners of fixed income. The goal: to eke out returns in today’s low-interest-rate world. At issue is just how big some of those risks might turn out to be. Of particular concern is whether managers are moving into investments that could prove difficult to sell in the event investors rush for the exits. High-profile problems at several European funds have set nerves on edge... ‘It can definitely be a disaster,’ said Clark Randall, founder of financial planning and advisory firm Financial Enlightenment, if investors don’t keep tabs on whether their bond fund manager is moving further and further into junk-rated debt.”

July 1 – Wall Street Journal (Asjylyn Loder): “The amount of money in fixed-income exchange-traded funds passed $1 trillion last month, an ascendance that has reshaped the market in which countries and companies raise money to pay their bills. Just 20 years ago, bond ETFs didn’t even exist. The bond market was a largely sleepy enterprise that had long resisted the high-tech upheaval that transformed the way stocks are bought and sold. Even today, the biggest bond trades can take hours, or even days, while billions of dollars in stocks change hands in seconds.”

July 2 – Bloomberg (Ksenia Galouchko and Cecile Gutscher): “The U.S. and China may have reached a truce, but investors have plenty of other conflicts to worry about. The sugar high spurred by this weekend’s agreement to restart trade talks is fading fast, focusing the minds of money managers caught between assets at war. Markets are pricing both the best- and worst-case market scenarios, handing a conundrum to those riding the melt-up in everything: Pay up for defensive strategies, bet on more gains, or lock in the 2019 windfall. ‘We had a rally in both risk-free and risk assets,’ said Geraldine Sundstrom, portfolio manager at Pacific Investment Management Co. ‘Both are priced to perfection. We have a fixed-income market priced in between heaven and hell.’”

Trump Administration Watch:

June 29 – Financial Times (Demetri Sevastopulo, Robin Harding and Alex Barker): “Donald Trump touted the trade war truce he made with Chinese president Xi Jinping at the G20 summit but said he was ‘in no hurry’ to finish a deal to end the more than yearlong spat between the economic powers. Tweeting from South Korea… the US president said he wanted to ensure Washington secured a good trade deal with China and would not sacrifice that outcome for the sake of speed. ‘The quality of the transaction is far more important to me than speed,’ Mr Trump said. ‘I am in no hurry, but things look very good!’”

June 30 – Bloomberg (Alex Wayne): “President Donald Trump declared the U.S. was ‘winning’ the trade war a day after reaching a temporary truce with Chinese President Xi Jinping. On a visit to South Korea following the Group of 20 summit in Japan, Trump said… that the Federal Reserve ‘has not been of help to us at all’ in his trade spat with Beijing. ‘Despite that, we’re winning, and we’re winning big because we have created an economy that is second to none,’ he said.”

July 2 – Reuters (Makini Brice, David Lawder, Stephen Nellis and Munsif Vengattil): “White House trade adviser Peter Navarro said… U.S. trade talks with China are heading in the right direction and any concessions to Beijing on Huawei Technologies were small in the context of a larger trade deal. ‘We’re headed in a very good direction,’ Navarro said… ‘It’s complicated, as the president said, correctly, this will take time and we want to get it right. So let’s get it right.’”

July 1 – CNBC (Maggie Fitzgerald): “Tensions between the U.S. and China are not escalating but there is still ‘no clear path’ towards a deal between the world’s two largest economies, according to Morgan Stanley. Developments at the G-20 Summit in Osaka, Japan over the weekend on their own do not erase the uncertainty that is weighing on corporate confidence and the broader global economy, the firm said. ‘As things stand, we lack clarity on whether real progress was achieved on the sticking points that caused talks to break down in the first place,’ Morgan Stanley chief economist Chetan Ahya said in a note…”

June 30 – Financial Times (Demetri Sevastopulo and Tom Mitchell): “Donald Trump has angered US security hawks by softening his stance on Chinese telecoms company Huawei — a concession even Beijing had not expected to win as part of a trade truce with President Xi Jinping at the G20. As part of the trade compromise brokered on Saturday in Osaka, the US president agreed not to impose new tariffs on Chinese goods and China agreed to buy US agricultural produce. In a less expected twist, Mr Trump also agreed to reverse a decision that had in effect imposed a ban on American groups to sell software and equipment to Huawei. Mr Trump first said he told Mr Xi he would only consider addressing Huawei issues at the ‘very end’ of the trade talks. But on Sunday he revealed he reversed his position on the sale of gear to Huawei ‘at the request of our high tech companies and President Xi’.”

July 2 – Reuters (Alexandra Alper, Karen Freifeld, Stephen Nellis and Sijia Jiang): “A senior U.S. official told the Commerce Department’s enforcement staff this week that China’s Huawei should still be treated as blacklisted, days after U.S. President Donald Trump sowed confusion with a vow to ease a ban on sales to the firm. Trump surprised markets on Saturday by promising Chinese President Xi Jinping on the sidelines of the G20 summit in Japan that he would allow U.S. companies to sell products to Huawei Technologies Co Ltd.”

June 30 – CNBC (Spencer Kimball): “White House economic advisor Larry Kudlow responded Sunday to criticism of President Donald Trump’s controversial decision to allow Chinese telecom giant Huawei to buy US products, part of a truce Trump struck with Chinese President Xi Jinping… Kudlow said the administration has not removed Huawei from the blacklist that largely blocks the company from buying American products. Instead, the Commerce Department will simply grant more licenses to allow U.S. companies to sell products to Huawei so long as those sales pose no threat to national security, Kudlow said. ‘This is not a general amnesty, if you will,’ Kudlow said…”

July 3 – Associated Press (Martin Crutsinger): “President Donald Trump… accused China and Europe of playing a ‘big currency manipulation game.’ He said the United States should match that effort, a move that directly contradicts official U.S. policy not to manipulate the dollar’s value to gain trade advantages. In a tweet, the president said if America doesn’t act, the country will continue ‘being the dummies who sit back and politely watch as other countries continue to play their games — as they have for so many years.’”

July 4 – CNBC (Weizhen Tan): “U.S. President Donald Trump has accused China and Europe of manipulating their currencies, raising fears that Washington will carry out repeated threats to impose tariffs on goods from the European Union. ‘Accusations of Eurozone currency manipulation are ... flying from the White House with talk of tariffs on the EU and European countermeasures heating up trade tension between the two regions,’ said Robert Carnell, chief economist at… ING. In a tweet… Trump said: ‘China and Europe playing big currency manipulation game and pumping money into their system in order to compete with USA.’ He then called for easier monetary policy, adding that the U.S. should ‘match’ the monetary policies of China and Europe.”

July 2 – Bloomberg (John Boudreau and Philip Heijmans): “The U.S. Commerce Department imposed duties of more than 400% on steel imports from Vietnam, accusing some businesses of shipping products from the Southeast Asian nation to evade the levies in a further escalation of tension between the two trading partners… Customs officials have been ordered to collect cash deposits at rates as high as 456.23% on imports of the steel products produced in Vietnam using material from South Korea and Taiwan.”

July 1 – Reuters (Andrea Shalal): “Just days after reaching a truce in the U.S.-China trade war, the U.S. government… ratcheted up pressure on Europe in a long-running dispute over aircraft subsidies, threatening tariffs on $4 billion of additional EU goods. The U.S. Trade Representative’s office released a list of additional products - including olives, Italian cheese and Scotch whiskey - that could be hit with tariffs, on top of products worth $21 billion that were announced in April.”

June 30 – Reuters (Yimou Lee): “Taiwan President Tsai Ing-wen will spend four nights in the United States in July while visiting Caribbean diplomatic allies, her government said…, angering China, which urged Washington not to allow her to visit. China says self-ruled Taiwan is merely a Chinese province with no right to state-to-state relations, calling it the most sensitive and important issue in ties with the United States, which has no formal ties with Taipei, but is its chief diplomatic backer and supplier of arms.”

June 30 – Reuters (Parisa Hafezi and Francois Murphy): “Iran announced… it had amassed more low-enriched uranium than permitted under its 2015 nuclear deal with world powers, drawing a warning from U.S. President Donald Trump that Tehran was ‘playing with fire.’ Tehran’s announcement marked its first major step beyond the terms of the pact since the United States pulled out of it more than a year ago.”

July 3 – Reuters (Babak Dehghanpisheh): “U.S. President Donald Trump warned Iran… against making threats that can ‘come back to bite you like nobody has been bitten before,’ after Tehran announced it would breach a 2015 nuclear deal.”

June 30 – The Hill (Jordain Carney): “Senate Republicans are struggling to unite behind a plan to fund the government after budget talks have ground to a halt. Congress has until the end of September to prevent the second government closure of the year, but Republicans are struggling to overcome the first roadblock — agreeing to top-line defense and nondefense figures or deciding what comes next if they can’t. The drama over how to fund the government and avoid deep budget cuts has played out in private, closed-door meetings and put a public spotlight on the high-profile split among Republicans as well as with the White House about the best path to avoid a shutdown.”

Federal Reserve Watch:

July 3 – New York Times (Jeanna Smialek): “On a steamy afternoon in late May, Judy Shelton was camped out in the lobby of the Trump Hotel in Washington, holding court with reporters from her perch on a high-backed couch. She had chosen the location, a symbolic backdrop for a big moment in her career. Her name had surfaced as being under consideration for one of two open seats on the seven-member Federal Reserve Board of Governors. For a proponent of the gold standard who has spent a career criticizing the Fed, a nomination offered a chance to shape the institution from within. Ms. Shelton, 65, has spent years positioning herself, penning opinion pieces and tweets praising President Trump’s policies, from tariffs to tax cuts. She was an adviser to his campaign and served on his transition team. But before nabbing the Fed job, Ms. Shelton made a final transformation, publicized partly from the air-conditioned calm of the hotel atrium. Long a critic of low interest rates, Ms. Shelton now said they should drop, potentially to zero — a pivot that made headlines and put her in line with Mr. Trump, a cheap-money devotee.”

U.S. Bubble Watch:

July 3 – Associated Press (Paul Wiseman): “The U.S. trade deficit rose to a five-month high in May as the politically sensitive imbalances with China and Mexico widened. …The gap between the goods and services the U.S. sells and what it buys from foreign countries rose 8.4% to $55.5 billion in May, the highest since December. Exports increased 2% to $210.6 billion on rising shipments of soybeans, aircraft and cars. But imports climbed more — 3.3% to $266.2 billion… The deficit in the trade of goods with Mexico rose 18.1% to a record $9.6 billion. The goods gap with China widened 12.2% to $30.2 billion.”¬

June 28 – Reuters (Noel Randewich): “Technology stocks are Wall Street’s top performers as 2019 hits half-way, with investors betting on lower interest rates, although Apple and chipmakers face turbulence related to the U.S.-China trade war. The S&P 500 information technology index has surged 9% in June, its strongest month in three years. That rally, and the S&P 500's record high on June 21, reflect investors' increased appetite for risk as they become more confident the Federal Reserve will cut interest rates to support a slowing economy.”

July 1 – Bloomberg (Natalya Doris): “Investors in the U.S. investment-grade debt have a lot to be thankful for as a dovish Federal Reserve, excess cash and light supply pushed the asset class to a 9.85% gain in the first six months of the year, marking its best performance in nearly a quarter of a century. Global central banks helped boost confidence in risk assets, giving the high-grade market a runway after the rout seen in the last quarter of 2019…”

July 5 – CNBC (Jeff Cox): “Payroll growth rebounded sharply in June as the U.S. economy added 224,000 jobs, the best gain since January and running contrary to worries that both the employment picture and overall growth picture were beginning to weaken. The unemployment rate edged up to 3.7% as labor force participation rose… Economists… had expected nonfarm payrolls to rise by 165,000…”

July 1 – Reuters: “The U.S. economy’s manufacturing sector expanded in June but at a slower pace than the previous month and the slowest pace overall since October 2016… The Institute for Supply Management (ISM) said its index of national factory activity fell to 51.7 from 52.1 the month before. The reading was just above expectations of 51…”

July 1 – CNBC (Jeff Cox): “Stocks may have brushed up against record highs Monday. However, a looming threat is just a couple weeks away once profit reports from the second quarter hit. Analysts have been taking a dimmer view of what is ahead for earnings. They’ve already forecast a decline for the first three quarters of 2019. Now companies are echoing those concerns with a level of pessimism not often seen from corporate America. Ahead of a season…, 77% of the 113 companies that have issued earnings per share guidance have warned that their numbers will be worse than what Wall Street analysts are estimating, according to FactSet… Earnings for the S&P 500, which had its best June since 1955, are projected to decline 2.6% from the same period a year ago.”

July 1 – Financial Times (Philip Georgiadis): “Stock markets are rising — but profit forecasts are not. The S&P 500 has just posted its best first half of the year since 1997, up 17% as dovish signals from the Federal Reserve encouraged investors to pile in to risky assets. But, as the second half begins, fund managers will have to grapple with the fact that 2019’s market recovery has not been built on top of strong forecasts for corporate profits, leaving question marks over its durability… ‘This year’s powerful stock market upturn has not been accompanied by upward revisions in earnings forecasts,’ said Robert Bergqvist, chief economist at Swedish bank SEB.”


July 2 – Wall Street Journal (Michael Wursthorn): “Some companies are easing up on share repurchases this year, potentially removing a pillar of support from the stock market as executives contend with the consequences of trade tensions and slowing economic growth. Share repurchases contracted for the first time in seven quarters, with S&P 500 companies spending $205.8 billion to buy back stock in the first three months of the year, according to the latest S&P Dow Jones Indices data. While still robust, that is down from a record $223 billion in the fourth quarter… Buybacks have been one of the biggest sources of equity demand throughout much of the bull-market run, analysts say, with companies spending more than $800 billion last year alone on share repurchases—the most ever in a single year.”

July 2 – Reuters (Nick Carey and Ankit Ajmera): “Major automakers… posted mixed U.S. sales results for June and the second quarter, with demand still fairly strong for SUVs and pickup trucks while passenger car sales continued a long-running decline… ‘The market is not as down as it was to start off the year, which says a lot about market stability,’ said George Augustaitis, director of industry analysis at CarGurus… ‘At this point, a Fed interest rate cut could be the thing that sparks the industry.’”

July 1 – Reuters (Trevor Hunnicutt): “Last month Pink Floyd frontman David Gilmour sold his guitar collection for $21.5 million, including one piece - his famed ‘Black Strat’ Fender Stratocaster - that went for nearly $4 million to the owner of the U.S. National Football League’s Indianapolis Colts… And it is not just instruments or paintings in high demand among the world’s billionaire set. Auction houses themselves now appear to be prized vanity purchases: Just a few days before the Pink Floyd auction, Franco-Israeli cable magnate Patrick Drahi, whose firm Altice earned significant money in the United States, made a $3.7 billion bid for Sotheby’s… Welcome to the longest U.S. economic expansion in history, one perhaps best characterized by the excesses of extreme wealth and an ever-widening chasm between the unfathomably rich and everyone else.”

China Watch:

July 4 – Bloomberg: “China continues to stress that the U.S. must remove all the tariffs placed on Chinese goods as a condition for reaching a trade deal. On Friday, an influential blog connected to state media said the talks will ‘go backward again’ without that step, echoing the line from Ministry of Commerce’s weekly briefing… While President Donald Trump and President Xi Jinping agreed last month to re-start talks and the U.S. suspended the application of fresh tariffs, no plan for face-to-face negotiations has yet been announced. If the two sides are to reach a deal, all imposed tariffs must be removed,’ Ministry of Commerce Spokesman Gao Feng said… ‘China’s attitude on that is clear and consistent.’”

July 5 – CNBC (Yun Li): “The U.S. has to lift all the tariffs placed on Chinese goods if there is to be a trade deal, China’s Ministry of Commerce said… ‘If the two sides are to reach a deal, all imposed tariffs must be removed,’ Ministry of Commerce spokesman Gao Feng said… ‘China’s attitude on that is clear and consistent.’”

July 1 – South China Morning Post (Shi Jiangtao): “The meeting between Chinese and American leaders in Osaka may have pressed the pause button on their escalating trade war, but pundits on both sides remain doubtful about how long a ceasefire can avert a looming showdown between the two economic superpowers. In a make-or-break meeting on Saturday that stole the limelight at the Group of 20 summit in Japan, US President Donald Trump agreed with China’s Xi Jinping to resume trade talks while delaying new tariffs on Chinese imports. In what appeared to be another concession, Trump made a surprise announcement at a press briefing after his 80-minute meeting with Xi that effectively backtracked on a US ban on exports to Huawei, China’s top telecoms company. The official Chinese account of what happened during the meeting, issued by Xinhua before Trump’s press conference, made no mention of the Huawei situation…”

June 29 – Reuters (Ben Blanchard and Michael Martina): “China and the United States will face a long road before they can reach a deal to end their bitter trade war, with more fights ahead likely, Chinese state media said after the two countries’ presidents held ice-breaking talks in Japan. … the official China Daily, an English-language daily often used by Beijing to put its message out to the rest of the world, warned while there was now a greater likelihood of reaching an agreement, there’s no guarantee there would be one. ‘Even though Washington agreed to postpone levying additional tariffs on Chinese goods to make way for negotiations, and Trump even hinted at putting off decisions on Huawei until the end of negotiations, things are still very much up in the air,’ it said in an editorial…”

July 5 – South China Morning Post (Wendy Wu, Josephine Ma and Teddy Ng): “China will not buy American agriculture products if the United States ‘flip-flops’ again in future trade negotiations, Chinese state media said on Friday. A commentary by Taoran Notes, a social media account affiliated with Economic Daily, said recent remarks by US officials signalled that America was not treating China on an equal basis. It referred to remarks by White House economic adviser Larry Kudlow, who said the US would not remove tariffs already imposed on Chinese imports during negotiations.”

July 1 – Bloomberg: “The trade truce reached over the weekend between China and the U.S. doesn’t make a final deal any more likely, according to academic Zhu Ning, who advises the Chinese government and central bank. ‘With Donald Trump in office I don’t think it makes any difference,’ Zhu said… Zhu is a professor at the PBOC School of Finance at Tsinghua University in Beijing who advises the central bank and a number of economy-related ministries.”

July 1 – Reuters (Yawen Chen and Ryan Woo): “Only a small number of companies are moving supply chains out of China, a commerce ministry official said…, amid signs that some firms are shifting production to other countries as the U.S-China trade war drags on. The problem shouldn’t be overstated, Chu Shijia, a department director at the ministry, said…”

July 1 – Reuters (Kevin Yao): “China will make cuts in banks’ reserve requirement ratios and seek to lower real interest rates to help reduce funding costs for small firms, Premier Li Keqiang said… China’s economy is facing new downward pressure, Li said. But China will keep monetary policy prudent, and there will be no ‘flood-like’ stimulus, Li said…”

July 4 – Wall Street Journal (Shen Hong): “China’s $2.2 trillion government bond market has been noticeably absent from a global rally this year… Yields on sovereign debt in the U.S., major European economies, and regional neighbors such as Australia, Japan, South Korea and Thailand have dropped to multiyear or record lows. Yet those on China’s bonds are roughly where they were at the start of the year… The contrast marks a reversal from last year, when Chinese sovereign debt outperformed. How these securities perform is becoming more important to foreign investors, since institutions from the U.S. and elsewhere have increased their holdings as Beijing has made it easier to access the market, and as Chinese debt has joined some influential indexes.”

July 1 – Bloomberg: “China’s banking regulator plans to tighten rules on so-called cash-management products, according to people familiar with the matter, impacting an estimated $2 trillion worth of the investments. The China Banking and Insurance Regulatory Commission aims to treat CMPs similar to money-market funds by imposing stricter rules on pricing and restricting where and for how long the inflows can be invested… CMPs are issued by banks and are more liquid than money market funds… Looser regulation of CMPs currently allow banks to offer higher yields than those on money-market funds and the CBIRC’s changes could damp their investment appeal… The moves are another step in China’s fight against financial risk as policy makers try to contain the fallout from rising defaults and a slowing economy.”

July 5 – Bloomberg (Neha D'silva): “The fallout from billionaire Wang Zhenhua’s surprise detention by Chinese police worsened on Friday as his property developer’s dollar bonds plunged to fresh lows and credit-rating companies warned of potential downgrades. Wang’s detention could have ‘severe repercussions’ for Future Land Development Holdings Ltd.’s reputation and brand, said S&P Global Ratings… Future Land could face margin calls on its stake in a China-listed subsidiary, Moody’s… warned. The price of Future Land’s $200 million note due in 2023 fell 5.6 cents to 85 cents on the dollar…"

June 30 – Reuters (Yawen Chen, Yilei Sun and Norihiko Shirouzu): “China’s factory activity shrank more than expected in June, an official manufacturing survey showed, highlighting the need for more economic stimulus as U.S. tariffs and weaker domestic demand ramped up pressure on new orders for goods. The Purchasing Managers’ Index (PMI) stood at 49.4 in June…”

June 29 – Reuters: “Growth in China’s services sector activity held firm in June..., despite growing pressure on the broader economy from tougher U.S. trade measures. The official non-manufacturing Purchasing Managers’ Index (PMI) fell to 54.2 from 54.3 in May, but stayed well above the 50-point mark that separates growth from contraction. Services account for more than half of China’s economy, and rising wages have increased Chinese consumers’ spending power.”

July 4 – Bloomberg: “China Banking and Insurance Regulatory Commission has told some trust firms via so-called ‘window guidance’ to limit their property financing, the Securities Times reports… Some trust companies were told to keep their property financing balance at the end of the third quarter at below the level at the end of the second quarter. Some trust firms were even ordered to suspend their property financing businesses.”

July 4 – Bloomberg: “The respite from defaults in China’s onshore bond market isn’t seen lasting as risks to the country’s economy grow. While the number of defaults in China’s $13 trillion bond market slid for a second straight quarter, down from a record high last year, June saw a resurgence as borrowing costs rose and liquidity tightened. Analysts and investors expect debt failures to rise in the months ahead, in tandem with slowing economic growth.”

June 29 – Reuters (Dominique Patton and Hallie Gu): “As many as half of China’s breeding pigs have either died from African swine fever or been slaughtered because of the spreading disease, twice as many as officially acknowledged, according to the estimates of four people who supply large farms. While other estimates are more conservative, the plunge in the number of sows is poised to leave a large hole in the supply of the country’s favorite meat, pushing up food prices and devastating livelihoods in a rural economy that includes 40 million pig farmers. ‘Something like 50% of sows are dead,’ said Edgar Wayne Johnson, a veterinarian who has spent 14 years in China and founded Enable Agricultural Technology Consulting, a Beijing-based farm services firm…”

Central Banking Watch:

July 4 – Wall Street Journal (Tom Fairless): “Christine Lagarde may be world renowned as head of the International Monetary Fund, but her first big challenge as European Central Bank president would be to win over skeptics in her next home country: Germany. She is set to take the reins as the ECB faces critical decisions in the coming months over how to support the eurozone’s sagging economy. That could mean expanding or relaunching a giant bond-buying program that has been criticized by German officials. The ECB’s relationship with its biggest shareholder is crucial but has often been strained, even though the eurozone central bank is housed in Germany’s financial capital and modeled on the nation’s Bundesbank.”

June 30 – Wall Street Journal (Tom Fairless): “Mario Draghi is teeing up some of the boldest policy moves of his eight-year term as European Central Bank president only four months before he steps down, potentially binding the hands of his successor for years. The late burst of activism by the 71-year-old Italian is buoying European financial markets and catching the eye of President Donald Trump, even as it raises legal and practical questions about how much more the ECB can squeeze out of its existing toolbox. The shift toward easier money, mirroring a move by the Federal Reserve, comes despite relative resilience in the eurozone economy, whose unemployment rate is at the lowest level in a decade.”

July 1 – Associated Press (Rod McGuirk): “Australia’s central bank cut its benchmark interest rate by a quarter of a percentage point… to a record low of 1% in a bid to boost the economy. The cut is the second in consecutive months. Previously the Reserve Bank of Australia had not shifted the rate in almost three years. ‘This easing of monetary policy will support employment growth and provide greater confidence that inflation will be consistent with the medium-term target,’ Reserve Bank Governor Philip Lowe said…”

June 30 – Reuters (Marc Jones): “Bank for International Settlements (BIS) chief Agustin Carstens has urged top central banks to preserve their ammunition for more serious economic downturns rather than deplete it chasing higher growth. Presenting the annual report of the Swiss-based BIS, dubbed the central bank for the world’s central banks, Carstens told reporters any easing needed to be considered carefully and done sparingly. ‘We would stress that it is important to preserve some room for maneuver for more serious downturns,’ he said.”

Europe Watch:

July 4 – Associated Press (Lorne Cook): “European Council President Donald Tusk appealed… to hostile lawmakers to endorse a raft of nominees for some of the EU’s most coveted jobs amid accusations that he and the bloc’s leaders hand-picked the candidates in a series of shady backroom deals. Two days after one of the longest-ever EU summits — beating even the all-nighters that marked the Greek debt crisis — Tusk struggled to convince the European Parliament of the credentials of candidates chosen more for political reasons than for their competence.”

June 30 – MarketWatch (Paul Hannon): “Eurozone manufacturers were at their most downbeat in almost six years in June as hopes for a speedy resolution to a series of disputes between the U.S. and its main trading partners faded. Weaker exports have cooled the eurozone economy over the past 18 months, hitting the currency area's manufacturing sector particularly hard.”

July 4 – Reuters (Michelle Martin): “German industrial orders fell far more than expected in May, and the Economy Ministry warned on Friday that this sector of Europe’s largest economy was likely to remain weak in the coming months. Contracts for ‘Made in Germany’ goods were down by 2.2% on the month after rising slightly in March and April… ‘The great order book deflation continues,’ ING economist Carsten Brzeski said. ‘Devastating new orders data just undermined any hopes for an industrial rebound.’”

Asia Watch:

July 1 – Bloomberg (Russell Ward): “The days of a ‘free lunch’ are over for Asia’s banks, which face an intensifying threat from slowing economic growth and competition with technology firms, according to McKinsey & Co. After years of rapid expansion, banks in the region are now seeing their revenue and profit growth slow and global market share shrink… Tighter margins, declining asset quality and rising capital costs are putting pressure on lenders to partner or merge to boost productivity and scale. ‘Many banks will struggle as the storm worsens,’ McKinsey wrote. ‘The road ahead is difficult, and less efficient banks will disappear.’”

July 1 – Associated Press (Yuri Kageyama and Hyung-Jin Kim): “Japan is imposing restrictions on exports to South Korea, citing a decline in ‘relations of international trust’ between the Asian neighbors. The Ministry of Economy, Trade and Industry said a review soliciting public comments starts Monday on the move to effectively remove South Korea from a list of so-called ‘white nations,’ like the U.S. and European nations, that have minimum restrictions on trade. Starting Thursday, Japanese manufacturers must apply for approval for each technology-related contract, such as sales of fluorinated polyimides used for displays, the ministry said.”

Japan Watch:

June 30 – Reuters (Daniel Leussink): “Japanese manufacturing activity contracted in June to hit a three-month low, a revised survey showed on Monday, offering fresh evidence of an economy under the pump as global demand weakened in the face of a heated U.S.-China trade conflict.”

July 4 – Reuters (Kaori Kaneko): “Household spending in Japan rose at the fastest pace in four years in May, in a sign improving domestic demand will offer some support for an economy facing growing external pressure. Household spending grew 4.0% in May from a year earlier thanks to Japan’s 10-day holiday…”

EM Watch:

July 1 – Bloomberg (Divya Patil): “India’s $42 billion shadow-banking system has been creaking since one of the country’s biggest infrastructure lenders unexpectedly halted debt repayments in 2018. Investor nerves were rattled again in June when a major mortgage lender delayed bond interest payments, indicating credit markets remain under enormous strain… Can investor confidence be restored or is a full-blown financial crisis brewing? … The crisis in India started a year ago when Infrastructure Leasing & Financial Services Ltd. missed debt payments after its short-term financing costs jumped. Until then, investors had viewed the group’s debt as rock solid. The sudden default sent shock waves across India’s credit markets, pushing up funding costs and making it harder for peers to access debt markets. Investors are demanding the highest premium in six years to hold short-term debt of non-bank lenders over government bonds.”

July 4 – Wall Street Journal (Corinne Abrams): “A pair of defaults and failures by nonbank lenders in India has cut down on consumer and business credit, weighing on the country’s economic growth and prompting calls for tighter regulation. The lenders have grown rapidly in the past decade, handing out car loans, construction loans and much else. But the failure of one lender last fall, and a default by another on some of its payments last month, has spun out into the economy. Car sales in May, for example, fell 19%, and economists say lending constraints account for a significant part of a slowdown in consumer spending that has persisted for the past few months. Now, some analysts and economists worry, without more aggressive regulation of the troubled industry, defaults could gain momentum and create a new wave of soured loans for a financial system already weighed down by bad debts at regular banks. ‘This has a potential to disrupt the economy,’ said Kunal Kundu, India economist for Société Générale.”

July 2 – Financial Times (Benjamin Parkin): “In his noisy workshop off a dirt road, Rajaram Yadav uses lathes and other tools to craft stainless steel pipes and parts for use in India’s chemical factories. The machinist, who works alongside three employees in his cramped shop, dreams of expanding his business. But, like countless other small business owners, he fears a crisis in India’s shadow banking system will leave him unable to secure new funding. ‘I’m worried about my business,’ said Mr Yadav. Things had been looking up for him two years ago when he secured two loans from Kinara Capital, one of India’s many so-called nonbank financial companies. But the sector is facing a crunch, with lending from nonbank financial companies falling 30% in the year to the end of March… With mounting debts at some large NBFCs, economists now expect some to go bust and put India’s financial system at risk. ‘This is a crisis waiting to happen,’ said Vivek Dehejia, an economist at Carleton University in Canada.”

July 2 – Bloomberg (Subhadip Sircar and Divya Patil): “Bond traders have one question as they head into India’s budget on Friday -- how big are the off-balance sheet borrowings? There’s growing expectations that the government will do an accounting sleight of hand to keep its deficit in check: borrow via state-owned firms and issue special bonds. That’s a concern since total public sector borrowings have reached as much as 9% of gross domestic product by one estimate. ‘Extra-budgetary resources are exerting pressure on corporate bond yields because the government is channelizing a lot of borrowings through state-run entities,’ said Shailendra Jhingan, chief executive at ICICI Securities…”

Global Bubble Watch:

July 2 – Bloomberg (Michelle Jamrisko): “Global trade is starting to exhibit war wounds that not even a U.S.-China ceasefire can heal. Bloomberg’s Trade Tracker is as bleak as it’s been since its start in November, thanks in part to sour purchasing managers’ indexes from the battered industrial engines of Asia to sluggish Europe, and then on to the barely expanding U.S. factories. It was a blue Monday that threatens to carry through this week and beyond. Here are some other warning signs: Nine of the 10 gauges tracked by Bloomberg to assess the health of global trade — across shipping, sentiment and exports — are below their average midpoint… The downturn in the electronics cycle has dealt a special blow to export powerhouses South Korea and Taiwan.”

June 29 – New York Times (Keith Bradsher): “The spin from President Trump and China’s propaganda machines on Saturday portrayed a truce in a trade war that has shaken economies and markets around the world. Tariffs won’t rise further, at least not yet. And the United States will loosen its potentially devastating punishments against Huawei, China’s most successful multinational company. Yet the outlines of the tentative peace accord President Trump reached on Saturday with his Chinese counterpart, Xi Jinping, could further cement a broad reshuffling of the global economic order that undermines China’s decades-long role as the world’s factory floor.”

July 1 – New York Times (Stephen Grocer): “Business leaders had plenty of reasons to worry in the first half: Economic growth slowed, geopolitical tensions were on the rise and the trade war seemed unending. But they looked past all that to strike big deals at a record pace. A flurry of so-called megamergers — those valued at $10 billion or more — during the first half pushed the value of announced acquisitions in the United States above $1 trillion for the first time, according to… Refinitiv. Worldwide, the value of deals stood at about $2 trillion. In June alone, acquisitions worth more than $400 billion were announced, the most in a single month this year.”

June 30 – Bloomberg (Yuan Liu and Xiaoyu Zhu): “China’s global mergers & acquisitions slid to a four-year low last quarter as a nascent ‘economic iron curtain’ between China and the U.S. strangled technology investments outside of Asia. Cross-border M&A by mainland companies slid 38% in the second quarter from a year earlier to $14.6 billion. The slump was paced by a drop-off in semiconductor, internet and healthcare deals, after several quarters in which real estate was the worst hit… China’s global M&A is being hit by both domestic regulators, who are concerned capital outflows will weaken the yuan, and those abroad, where Chinese ownership has become a liability in countries with nationalist leaders such as Donald Trump.”

June 30 – Financial Times (Tom Hancock and Jamie Smyth): “China’s slowing economic growth, a trade war with the US and weakening currency are causing significant declines in spending by its tourists overseas. Chinese people made 150m border crossings last year and are crucial to the global travel market, accounting for about a fifth of tourism spending worldwide… But they spent 10% less outside the country in the first quarter compared with the same period last year, according to official data. Industry executives and analysts say China’s slowing economic growth combined with the depreciation over the past year of its currency, partly as a result of the trade war with the US, are to blame.”

July 1 – Financial Times (Delphine Strauss): “The global manufacturing slump deepened in June, with data from round the world illustrating the extent to which the US-China trade conflict is weighing on growth. A global manufacturing index produced by JPMorgan and IHS Markit fell to its lowest level since 2012 in June, with new orders weakening sharply and business optimism at the lowest level on record. Its monthly reading of 49.4, down from 49.8 in May, indicated a majority of firms reported falling output.”

Fixed-Income Bubble Watch:

July 1 – Bloomberg (Crystal Kim): “Bankers are holding their breath as the Federal Reserve threatens to spoil what could otherwise be a banner year for convertible paper. They say equity-linked issuance is poised to surpass the nearly $50 billion raised in 2018, the biggest haul in a decade… As the Federal Reserve debates the timing and size of a cut in interest rates, the possibility of a lower-rate environment threatens to make equity-linked issuance less desirable to issuers than other types of financing. More than $21 billion has been raised in such offerings so far in 2019.”

July 1 – Bloomberg (Danielle Moran): “U.S. states are selling mortgage-backed debt at the fastest pace since the height of the real estate bubble more than a decade ago. The slide in tax-exempt bond yields has spurred a steep increase in borrowing by state housing agencies… State housing authorities have sold about $8.6 billion of debt over the last six months, 70% more than the same period a year earlier.”

Leveraged Speculation Watch:

July 4 – Financial Times (Robin Wigglesworth): “Steve Ketchum is not happy. The hedge fund manager is a big investor in so-called leveraged loans, a corner of the debt market that involves lending to riskier, lower-rated companies. Mr Ketchum believes in the asset class. It makes up the bulk of the $21bn his firm manages. But he worries that heavy-hitting private equity firms are sabotaging the market by relaxing terms on the loans they are foisting on to investors. ‘At some point they could kill the golden goose,’ he warned… ‘If they push for more toxic loan structures and this affects default or recovery rates in a recession, the demand for leveraged loans won’t keep up with future needs.’”

July 5 – Bloomberg (Anders Melin and Jasmine Teng): “Shares of several U.S. private equity firms have jumped since they announced plans to convert themselves into corporations, making some of the world’s wealthiest people even richer. Steve Schwarzman’s net worth surged 20% to $16.2 billion since April, when Blackstone Group LP said it would abandon the partnership structure… The billionaire founders of KKR & Co., Apollo Global Management LLC and Ares Management Corp. have also seen their fortunes increase by several hundred million dollars following conversion announcements.”

Geopolitical Watch:

July 4 – Wall Street Journal (Sune Engel Rasmussen): “Tighter new U.S. sanctions have proved more punishing than Iran’s leaders expected, driving Tehran to hit back militarily and breach limits it had agreed to put on its nuclear program. This increasingly confrontational approach aims to raise the costs to the U.S. of its maximum-pressure campaign and to push Western European nations to offer economic relief, according to former Iranian officials and analysts. Iran’s brinkmanship could present President Trump, who campaigned against U.S. involvement in Middle East conflicts, with difficult questions of war and peace as he heads into the 2020 election. On Wednesday, Iranian President Hassan Rouhani said Tehran would enrich uranium beyond 3.67%—a step that would surpass limits imposed by a 2015 nuclear deal…”

July 5 – Reuters (Kate Holton and Parisa Hafezi): “An Iranian Revolutionary Guards commander threatened on Friday to seize a British ship in retaliation for the capture of an Iranian supertanker in Gibraltar by Royal Marines. ‘If Britain does not release the Iranian oil tanker, it is the authorities’ duty to seize a British oil tanker,’ Mohsen Rezai said on Twitter.”

July 2 – Reuters (Amanda Ferguson and Alistair Smout): “Britain told China to honor its commitments to protect freedoms in Hong Kong on Tuesday, after police fired tear gas to disperse hundreds of protesters in the former British colony… British Foreign Minister Jeremy Hunt condemned violence on both sides and warned of consequences if China neglects commitments made when it took back Hong Kong to allow freedoms not enjoyed in mainland China, including the right to protest. ‘We can make it clear we stand behind the people of Hong Kong in defense of the freedoms that we negotiated for them when we agreed to the handover in 1997 and we can remind everyone that we expect all countries to honor their international obligations,’ Hunt told Reuters…”

July 1 – Reuters (Anne Marie Roantree): “China… condemned violent protests in Hong Kong as an ‘undisguised challenge’ to the formula under which the city is ruled, hours after police fired tear gas to disperse hundreds of protesters who stormed and trashed the legislature.”

July 3 – Bloomberg (Robert Hutton and Thomas Penny): “China and Britain’s war of words over Hong Kong escalated, with the two sides openly accusing each other of behaving inappropriately toward the former U.K. colony. Foreign Secretary Jeremy Hunt said the U.K. is keeping its options open over its threat of ‘serious consequences’ if China fails to honor the letter and spirit of an agreement that guarantees freedoms in Hong Kong. I’m not saying anything about what those consequences might be, that would not be the right thing for me to do as foreign secretary because of course you keep your options open,’ Hunt told BBC radio…”

July 3 – Reuters (Costas Pitas and Ben Blanchard): “British Foreign Secretary Jeremy Hunt said on Thursday that he had not backed violent protests in Hong Kong, after Chinese state media blamed ‘Western ideologues’ for fomenting unrest in the former British colony… State media in particular has blamed London, Washington and other Western capitals for offering succour to the demonstrators. ‘Ideologues in Western governments never cease in their efforts to engineer unrest against governments that are not to their liking, even though their actions have caused misery and chaos in country after country in Latin America, Africa, the Middle East and Asia,’ the official China Daily said…”

July 3 – Reuters (Kylie MacLellan): “Boris Johnson, who could be Britain’s prime minister by the end of the month, said he backed the people of Hong Kong every inch of the way and cautioned China that ‘one country, two systems’ should not be cast aside… ‘The people of Hong Kong are perfectly within their rights to be very skeptical, very anxious about proposals for extradition to the mainland that could be politically motivated, that could be arbitrary and could infringe their human rights,’ Johnson told Reuters…”

July 2 – Reuters (Idrees Ali and Ben Blanchard): “The Pentagon said… a recent Chinese missile launch in the disputed South China Sea was ‘disturbing’ and contrary to Chinese pledges that it would not militarize the disputed waterway. The South China Sea is one of a growing number of flashpoints in the U.S.-China relationship, which include a trade war, U.S. sanctions and Taiwan. China and the United States have repeatedly traded barbs in the past over what Washington says is Beijing’s militarization of the South China Sea by building military installations on artificial islands and reefs.”

July 1 – Financial Times (Editorial Board): “Among several chummy meetings Donald Trump held with authoritarians at the Osaka G20 summit was one with Recep Tayyip Erdogan of Turkey. Mr Erdogan emerged insisting the US president had told him Washington would not impose sanctions over Turkey’s obdurate plans to buy an air defence system, the S-400, from Russia. Turkey’s president told local media the first shipments would arrive within 10 days. Yet for all the display of bonhomie in Osaka, the deal is a slow-motion collision between Turkey and the US that could turn into a train-wreck. The US Congress is unlikely to be as sanguine as the president on sanctions. Washington has repeatedly made clear Turkey cannot buy both the F-35, the new stealth fighter jet being produced by the US and its allies — including Turkey itself — as well as the Russian missile system. It has warned that if, as a Nato ally, Mr Erdogan sides with Russia, Turkey will be hit by the Countering America’s Adversaries Through Sanctions Act.”