Saturday, August 10, 2019

Weekly Commentary: "Hot Money" Watch

In the People’s Bank of China’s (PBOC) Monday daily currency value “fixing,” the yuan/renminbi was set 0.33% weaker (vs. dollar) at 6.9225. Market reaction was immediate and intense. The Chinese currency quickly traded to 7.03 and then ended Monday’s disorderly session at an 11-year low 7.0602 (largest daily decline since August ’15). While still within the PBOC’s 2% trading band, it was a 1.56% decline for the day (offshore renminbi down 1.73%). A weaker-than-expected fix coupled with the lack of PBOC intervention (as the renminbi blew through the key 7.0 level) rattled already skittish global markets.

Safe haven assets were bought aggressively. Gold surged $23, or 1.6%, Monday to $1,441, the high going back to 2013 (trading to all-time highs in Indian rupees, British pounds, Australian dollars and Canadian dollar). The Swiss franc gained 0.9%, and the Japanese yen increased 0.6%. Treasury yields sank a notable 14 bps to 1.71%, the low going back to October 2016. Intraday Monday, 10-year yields traded as much as 32 bps below three-month T-bills, “the most extreme yield-curve inversion” since 2007 (from Bloomberg). German bund yields declined another two bps to a then record low negative 0.52% (ending the week at negative 0.58%). Swiss 10-year yields fell two bps to negative 0.88% (ending the week at negative 0.98%). Australian yields dropped below 1.0% for the first time.

It’s worth noting the Japanese yen traded Monday at the strongest level versus the dollar since the January 3rd market dislocation (that set the stage for the Powell’s January 4th “U-turn). “Risk off” saw EM currencies under liquidation – with the more vulnerable under notable selling pressure. The Brazilian real dropped 2.2%, the Colombian peso 2.1%, the Argentine peso 1.8%, the Indian rupee 1.6% and the South Korean won 1.4%. Crude fell 1.7% in Monday trading. Hong Kong’s China Financials Index dropped 2.5%, with the index down 4.4% for the week to the lowest level since January. European bank stocks dropped 4.1%, trading to the low since July 2016.

A Monday Bloomberg headline: “China Retaliation ‘11’ on Scale of 1-10, Wall Street Warns.” Global markets were shocked Beijing would interject the renminbi into tit-for-tat trade retaliation. Trade war morphing into currency war? The White House was not impressed.

August 5 – Reuters (Susan Heavey and Dan Burns): “U.S. President Donald Trump slammed China’s decision to let its yuan currency breach the key seven-per-dollar level for the first time in more than a decade, calling it ‘a major violation’ and jabbing the U.S. central bank. ‘China dropped the price of their currency to an almost a historic low. It’s called ‘currency manipulation.’ Are you listening Federal Reserve? This is a major violation which will greatly weaken China over time!’ Trump tweeted.

The U.S. market selloff intensified after President Trump’s tweet, with the S&P500 ending the session down 3.0% - 2019’s biggest one-day decline. The Nasdaq100 dropped 3.6%, with the Semiconductors slammed 4.4%. The Bank index was hit 3.6%. Junk bond spreads widened 40 bps in Monday trading to 437 bps, trading near the highest level since January – weighed down by the energy sector. Investment-grade corporate and bank CDS rose, though not the dramatic moves suffered in high-yield.

Tuesday morning from PBOC Governor Yi Gang: “As a responsible big country, China will abide by the spirit of the G20 leaders’ summit on the exchange rate issue, adhere to the market-determined exchange rate system, not engage in competitive devaluation, and not use the exchange rate for competitive purposes and not use the exchange rate as a tool to deal with external disturbances such as trade disputes.” Yi’s statement along with the PBOC’s Tuesday “fix” at 6.9683 – a smaller decline versus the dollar than markets had expected – helped calm fears of a destabilizing devaluation.

By Thursday, fear of renminbi dislocation becoming a catalyst for global “risk off” had subsided. The renminbi gained 0.21% against the dollar in Thursday trading, as Asian and EM currencies posted modest gains. The Shanghai Composite recovered almost 1%. European stocks rallied sharply, with Germany’s DAX gaining 1.7% and France’s CAC40 jumping 2.3%. The S&P500 rallied 1.9%, with the Nasdaq100 up 2.3%.

Curiously, the safe havens were happy to disregard bouncing risk markets. Treasury yields declined two bps Thursday to 1.72%, while the yen and Swiss franc both posted small gains. Gold gave back hardly anything.

The VIX surged to 24.81 during Monday trading, the high since January 3rd. By Thursday’s close, the VIX was back down to 17. Option players were betting that the worst of the selling was likely over for the near-term – the critical time horizon for option traders. It has been a recurring pattern: a spell of “risk off” trading spurs hedging and put option buying. And after a flurry of put option purchases, the game then becomes getting to option expiration with as little value as possible left in these instruments.

Large quantities of outstanding put options (and other hedges) create the potential for a self-reinforcing self-off, where the writers of hedges are forced into the marketplace to aggressively sell futures and ETFs to offset mounting losses on the options they had previously sold. Yet market players have been conditioned to believe policymakers are keenly attuned to derivatives meltdown risk. After Monday’s scare, the bet is both President Trump and Beijing will avoid rocking the markets next week (U.S. options expiration Friday).

And while the VIX closed the week below 18 (17.97), Friday’s session was not without its share of drama. The S&P500 traded down 1.3% in early-Friday trading. After stating “We’re not going to be doing business with Huawei,” the President’s comments were later clarified. The U.S. will be moving ahead with its special licensing process for Huawei’s U.S. suppliers. The S&P500 traded back to little changed on the day, before reversing lower into the close.

The collapse of Italian bond yields has been one of the more dramatic global market moves. After trading to almost 3.60% last October, Italian 10-year yields ended Wednesday trading at 1.42%. For a country so hopelessly over-indebted ($3 TN plus), Italian bond prices are arguably one of the more distorted assets in a world of distorted asset markets. Italian yields reversed sharply higher at the end of the week, rising 12 bps Thursday and a notable 27 bps on Friday – on political instability after Deputy Prime Minister Matteo Salvini called for early elections (breaking with its Five Star Movement coalition partner). Italian stocks were hit 2.5% in Friday trading, ending the week down 3.4%. Global “risk off” could prove an especially challenging backdrop for vulnerable Italian assets.

August 9 – Bloomberg (Sophie Caronello): “Britain’s pound ended the week at its lowest closing level versus the greenback since Margaret Thatcher was ensconced in No. 10 Downing Street. Sterling posted a fourth straight-weekly decline, sliding 1.1% to $1.2033 in a five-day period that witnessed mounting concern over the country’s exit from the European Union and a report indicating that the British economy shrank for the first time in six years.”

Italy, the U.K., China, India, Brazil and many others… Global central bank-induced liquidity excess has kept numerous remarkably leaky boats afloat in recent years. There will be systemic hell to pay when the dam finally breaks.

I’ll assume Monday’s global market convulsions will have the U.S. administration and Beijing treading cautiously next week. Yet I expect it will prove more difficult this time to squeeze the genie back into the bottle. To see such high cross asset correlations around the globe is disconcerting. And we saw Monday how critical a stable renminbi has become to global finance. It’s not a stretch to say this global party comes to rapid conclusion the moment markets fear a disorderly Chinese currency devaluation.

August 6 – Bloomberg (Michelle Jamrisko, Anirban Nag, and Karlis Salna): “It used to be that a buildup in foreign reserves was seen as a bulwark against currency shocks and swift turns in investor sentiment. Those days seem far away -- and that defense less robust -- as the trade conflict between the U.S. and China evolves into a full-blown currency war that’s threatening emerging markets globally. Reserves of central banks in developing Asian nations, which have risen to almost $5 trillion this year, will now be put to the test as currencies slide. ‘The key lesson from 2008 is that you can never have too much reserves,’ said Taimur Baig, chief economist at DBS Group… ‘But they were for fighting a fire in a conventional world,’ noting that today’s environment is quite unconventional.”

China’s $3.0 TN of reserves are less imposing than in the past. Indeed, reserves throughout EM will likely become a market focus. My sense is analysts have little grasp of potential capital flight risk, for China or EM more generally. How much “carry trade” leverage (borrow in low-yielding currencies to fund purchases in higher-yielding instruments) has accumulated during this most-protracted of speculative cycles? What other “hot money” vulnerability lurks (i.e. ETF outflows, derivatives…). Such issues garner little notice when “risk on” is bubbling and liquidity is flowing abundantly. But we were reminded Monday how abruptly “risk off” de-risking/deleveraging can erupt – and how quickly fears of illiquidity and dislocation can take hold.

I’ll stick with the analysis that global markets are moving toward a very problematic scenario. Having witnessed previous EM crises (i.e. Mexico in ‘94/’95, Southeast Asian ’97, Russia ’98 and Brazil ‘01/’02), it’s worth recalling how currency market dislocations become instrumental in systemic crises. Rapid drawdowns in international reserve holdings stoke fears of illiquidity, leading to a destabilizing “hot money” exodus. Rapidly shrinking reserve holdings then force central banks to raise interest rates to support domestic currencies, with the resulting rapidly tightened financial conditions bursting fragile financial and economic Bubbles.

EM central bankers learned from past predicaments. Over this cycle, it became increasingly common for central bankers to support their currencies in the derivatives marketplace, a mechanism whereby vulnerable currencies could be bolstered without resorting to precious international reserve holdings. Central bank derivative operations successfully stabilized currencies during previous fleeting bouts of “risk off”. The repeated rapid recovery of global liquidity abundance reassured – policymakers along with the markets – that these derivative trades could be unwound with little notice. Recurrent EM resilience emboldened the view that large reserve stockpiles had fundamentally upgraded EM risk profiles.

Like so many aspects of this long boom, it works miraculously – until it doesn’t. At this point, the key analysis is that reserve holdings surely overstate resources available for countries to combat a more enduring period of “risk off” capital flight. Moreover, the perception of EM resilience has ensured unprecedented Credit and speculative excess throughout a systemic EM Bubble.

August 6 – Reuters (Winni Zhou and Andrew Galbraith): “China’s major state-owned banks have been active in the yuan forwards markets this week, sources said, using swaps to curb greenback supply as authorities sought to slow the currency’s decline after its break past the key 7 to the dollar threshold… Four sources with knowledge of the matter told Reuters that state banks were seen swapping yuan for dollars in onshore forwards market to support the Chinese unit. ‘Yesterday big banks were all selling one-year onshore forward swaps, then in the afternoon the spot dollar-yuan fell,’ said a trader… in Shanghai.”

China’s major state-owned backs can support the renminbi through clandestine derivatives trading, while supporting the faltering small bank sector with liquidity and capital injections along with bolstering the faltering Chinese Bubble with aggressive Credit growth. This, as well, is an ostensible miracle – until it all blows up. To repeat: How large is the “carry trade” in higher-yielding Chinese securities? Add to this: How large are the big Chinese banks’ derivatives positions in support of the renminbi?

I am clearly not alone in the view that Beijing took a huge gamble in moving to devalue the Chinese currency this week. They today have a large international reserve position. Over the coming weeks and months, I expect analysts to increasingly question the adequacy of these reserves in light of extraordinary financial and economic vulnerabilities.

The key take-away from another critical week: As the marginal provider of global liquidity and economic growth, Chinese finance has become the epicenter of crisis dynamics. Global markets are highly correlated; speculative dynamics remain extraordinarily synchronized. At this point, a bet on global risk markets is a bet on China – a bet on the ongoing inflation of China’s historic Bubble. Developments – market, policy, economic and geopolitical - are corroborating the analysis that it’s very late in the game. I’ll assume the flow of “Hot Money” away from global risk markets has commenced.


For the Week:

The S&P500 declined 0.5% (up 16.4% y-t-d), and the Dow fell 0.7% (up 12.7%). The Utilities rose 1.0% (up 15.5%). The Banks dropped 3.6% (up 10.1%), and the Broker/Dealers fell 4.3% (up 6.7%). The Transports lost 1.6% (up 11.3%). The S&P 400 Midcaps declined 0.7% (up 14.3%), and the small cap Russell 2000 fell 1.3% (up 12.2%). The Nasdaq100 slipped 0.6% (up 20.8%). The Semiconductors dropped 1.6% (up 26.8%). The Biotechs declined 0.3% (up 9.0%). With bullion surging $52, the HUI gold index jumped 5.2% (up 36.7%).

Three-month Treasury bill rates ended the week at 1.95%. Two-year government yields declined six bps to 1.65% (down 84bps y-t-d). Five-year T-note yields fell eight bps to 1.58% (down 93bps). Ten-year Treasury yields dropped 10 bps to 1.75% (down 94bps). Long bond yields sank 12 bps to 2.26% (down 76bps). Benchmark Fannie Mae MBS yields dropped 11 bps to 2.49% (down 100bps).

Greek 10-year yields rose nine bps to 2.12% (down 228bps y-t-d). Ten-year Portuguese yields were unchanged at 0.29% (down 143bps). Italian 10-year yields surged 27 bps to 1.81% (down 94bps). Spain's 10-year yields added two bps to 0.26% (down 116bps). German bund yields dropped eight bps to negative 0.58% (down 82bps). French yields declined three bps to negative 0.27% (down 98bps). The French to German 10-year bond spread widened five to 31 bps. U.K. 10-year gilt yields fell seven bps to 0.48% (down 79bps). U.K.'s FTSE equities index lost 2.1% (up 7.8% y-t-d).

Japan's Nikkei Equities Index slumped 1.9% (up 3.3% y-t-d). Japanese 10-year "JGB" yields dropped five bps to negative 0.22% (down 22bps y-t-d). France's CAC40 declined 0.6% (up 12.6%). The German DAX equities index fell 1.5% (up 10.7%). Spain's IBEX 35 equities index lost 1.6% (up 2.6%). Italy's FTSE MIB index dropped 3.4% (up 10.9%). EM equities were mixed. Brazil's Bovespa index gained 1.3% (up 14.3%), and Mexico's Bolsa rose 1.1% (down 2.9%). South Korea's Kospi index dropped 3.0% (down 5.1%). India's Sensex equities index advanced 1.2% (up 4.2%). China's Shanghai Exchange sank 3.2% (up 11.3%). Turkey's Borsa Istanbul National 100 index slipped 0.3% (up 8.9%). Russia's MICEX equities index added 0.2% (up 13.1%).

Investment-grade bond funds saw inflows of $2.795 billion, while junk bond funds posted outflows of $4.072 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates sank 15 bps to 3.60% (down 99bps y-o-y). Fifteen-year rates dropped 15 bps to 3.05% (down 100bps). Five-year hybrid ARM rates fell 10 bps to 3.36% (down 54bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down four bps 4.00% (down 53bps).

Federal Reserve Credit last week declined $10.1bn to $3.742 TN. Over the past year, Fed Credit contracted $476bn, or 11.3%. Fed Credit inflated $931 billion, or 33%, over the past 352 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt jumped $10.7bn last week to $3.474 TN. "Custody holdings" rose $31.4bn y-o-y, or 0.9%.

M2 (narrow) "money" supply gained $35.7bn last week to a record $14.917 TN. "Narrow money" gained $762bn, or 5.4%, over the past year. For the week, Currency increased $1.2bn. Total Checkable Deposits slipped $6.1bn, while Savings Deposits jumped $34.1bn. Small Time Deposits were little changed. Retail Money Funds gained $5.9bn.

Total money market fund assets surged $57.7bn to $3.336 TN. Money Funds gained $494bn y-o-y, or 17.4%.

Total Commercial Paper declined $12.7bn to $1.140 TN. CP was up $68bn y-o-y, or 6.3%.

Currency Watch:

August 5 – Bloomberg (Enda Curran and Claire Che): “The retreat in China’s yuan to levels unseen since 2008 threatens to revive concerns about the capital flight back then that helped spur the country to spend $1 trillion of its reserves. For all its perceived success in tightening regulations and strengthening scrutiny of funds moving abroad, the trauma of that period poses a big reason to avoid any continuous depreciation. An even more-important financial consideration could be the stockpile of Chinese dollar debt, which has more than doubled since the end of 2015 to $729.8 billion… Issuance so far this year is a record $138 billion.”

August 6 – Bloomberg: “Senior People’s Bank of China officials reassured foreign companies that the currency won’t continue to weaken significantly, after the yuan fell below 7 per dollar for the first time since 2008. The central bank held a meeting with a number of foreign exporters in Beijing Tuesday, at which officials also said that companies’ ability to buy and sell dollars would remain normal…”

August 5 – Reuters (Mitra Taj): “U.S. National Security Adviser John Bolton… warned China and Russia not to double down in support of Venezuelan President Nicolas Maduro, saying Venezuela might not repay its debt to them after Maduro falls.”

The U.S. dollar index declined 0.6% to 97.491 (up 1.4% y-t-d). For the week on the upside, the Swedish krona increased 1.0%, the Swiss franc 1.0%, the Japanese yen 0.9%, the euro 0.8%, and the Norwegian krone 0.4%. On the downside, the South African rand declined 3.1%, the Brazilian real 1.3%, the British pound 1.1%, the New Zealand dollar 1.0%, the South Korean won 1.0%, the Singapore dollar 0.6%, the Mexican peso 0.6%, the Australian dollar 0.2% and the Canadian dollar 0.1%. The Chinese renminbi dropped 1.72% versus the dollar this week (down 2.60% y-t-d).

Commodities Watch:

August 6 – Bloomberg (Ranjeetha Pakiam, Rupert Rowling, and Justina Vasquez): “Gold futures rallied above $1,500 an ounce on sustained demand for the traditional haven as the U.S.-China trade war festers, global growth slows and central banks around the world ease monetary policy. The metal advanced… to the highest since 2013. The move extends this year’s climb to 19%, with gains underpinned by inflows into exchange-traded funds and central bank purchases. China’s central bank expanded its gold reserves for an eighth straight month in July.”

August 7 – Bloomberg (Ranjeetha Pakiam): “There’s a powerful constant amid the to-and-fro of the U.S.-China trade war as currency policy gets dragged into the standoff between the world’s two top economies: Beijing wants more gold in its reserves. China’s central bank expanded gold reserves again in July, pressing on with a run that stretches back to December. The People’s Bank of China raised holdings to 62.26 million ounces from 61.94 million a month earlier… In tonnage terms, the inflow was close to 10 tons, following the addition of about 84 tons in the seven months to June.”

The Bloomberg Commodities Index increased 0.3% this week (up 0.6% y-t-d). Spot Gold jumped 3.6% to $1,492 (up 16.4%). Silver surged 4.1% to $16.931 (up 9.0%). WTI crude declined $1.16 to $54.50 (up 20%). Gasoline sank 6.0% (up 28%), while Natural Gas was little changed (down 28%). Copper recovered 0.7% (down 2%). Wheat rallied 2.2% (unchanged). Corn rose 2.0% (up 11%).

Market Instability Watch:

August 7 – Bloomberg (John Ainger): “The global bond market is sounding the alarm that things won’t be able to carry on much longer before a recession strikes. Germany’s yield curve is now at its flattest since the financial crisis -- and yields across the world are slumping to fresh lows -- in a cacophony of signs that investors are growing increasingly pessimistic about the outlook for the world economy. Central banks from New Zealand to India have responded by surprising markets with their efforts to boost stimulus. ‘This is all setting up for something very disruptive,’ said Marc Ostwald, a global strategist at ADM Investor Services. ‘What exactly is difficult to enumerate, but the flattening will continue as long as people believe that bunds are a safe haven.’”

August 5 – Financial Times (John Plender): “From trade war to currency war is a perilously simple step. As the US-China tariff skirmish escalates and the renminbi sinks against the dollar, there is a growing risk that President Donald Trump may take it. The more specific concern in the markets is that the US administration could intervene directly to weaken the dollar. While the yen, the euro and sterling are all potential targets, the greatest scope for global financial instability relates to the US and China. In a strikingly vivid phrase Paul Volcker, former chairman of the Federal Reserve, once referred to the close financial ties between the US and China as a potentially ‘fatal embrace’. Those ties include the fact that China holds more than $1tn of US Treasury securities. Against the background of rumbling trade friction between the two countries, the obvious nightmare scenario would be the weaponisation of Chinese official foreign exchange reserves against the US.”

August 7 – Wall Street Journal (Mike Bird): “How should investors feel about the effect of the falling yuan on China’s dollar debtors? It depends where you look, and whom you believe. The most macro-level reading of China’s national balance sheet is reassuring: The country has a positive net international investment position, simply meaning that it has more assets abroad than liabilities owed to foreigners. Bank for International Settlements data for the entire Chinese banking system… also shows more dollar assets than liabilities… But the full story is more complicated: China’s four major commercial banks, which are also state-owned, no longer boast more dollar assets than liabilities. Bank of China, in particular, now owes a lot more in dollars than it is owed. The broader corporate sector also has binged on greenback bonds in recent years. According to… Nomura, the amount of offshore dollar bonds issued by Chinese corporations has more than tripled since the end of 2014, rising to $841.6 billion at the end of June.”

August 5 – Financial Times (Tom Mitchell and Xinning Liu): “The Trump administration’s formal designation of China as a currency ‘manipulator’ on Monday night was dramatic, coming just hours after Beijing finally allowed the renminbi to slip through seven to the dollar — a level it had flirted with repeatedly since 2016 but never breached. It was also largely symbolic. For now US President Donald Trump’s Treasury department will seek consultations with the IMF over possible remedies to what it believes is a rigged system. The designation did, however, highlight one of the central conflicts bedevilling Chinese and US trade negotiators… In area after area, the US is demanding structural reforms that the Chinese Communist party believes would undermine the stability of the world’s second-largest economy.”

August 5 – Bloomberg (Cormac Mullen): “The latest escalation in the U.S.-China trade war has sent investors rushing once more to haven assets, pushing the world’s stockpile of negative-yielding bonds to another record. The market value of the Bloomberg Barclays Global Negative Yielding Debt Index closed at $15.01 trillion Monday…”

August 5 – Bloomberg (Ruth Carson and Masaki Kondo): “Traders in Asia are bracing for a full-fledged currency war, after a slide in China’s yuan past the 7 per dollar mark raised the prospect of policy makers allowing their exchange rates to weaken to remain competitive. Currencies slumped across the region Monday, with South Korea’s won tumbling to the weakest in three years after the offshore yuan plunged almost 2% to an all-time low of 7.1114. The yen and Treasuries rallied amid a flight to safety.”

August 5 – Bloomberg (Enda Curran and Claire Che): “The biggest slide in China’s yuan since 2015 threatens to revive concerns about the capital flight back then that helped spur the country to spend $1 trillion of its reserves. For all its perceived success in tightening regulations and strengthening scrutiny of funds moving abroad, the trauma of that period poses a big reason to avoid any continuous depreciation. An even more-important financial consideration could be the stockpile of Chinese dollar debt, which has more than doubled since the end of 2015 to $729.8 billion… Issuance so far this year is a record $138 billion. ‘Capital flight is still a major concern,’ said Fraser Howie, who has two decades of experience in China’s financial markets and co-wrote the 2010 book ‘Red Capitalism.’ ‘They are not going to be doing anything foolish.’”

August 5 – Reuters (Karin Strohecker): “Emerging market debt and equities suffered their biggest outflows of 2019 on Friday with hefty losses continuing on Monday amid a sharp escalation of Sino-U.S. trade tensions, data from the Institute of International Finance showed (IIF). …The IIF, found that $2.33 billion of portfolio money had been pulled from developing bond and stock markets on Friday - the largest daily outflows of the year.”

August 8 – Reuters (Jennifer Ablan): “U.S.-based high-yield junk bond funds posted more than $4 billion of outflows in the week ended Wednesday, the largest weekly cash withdrawals since October 2018, according to Refinitiv’s Lipper data… Investors scrambled into safer U.S.-based money-market funds, which attracted $64.66 billion in the week ended Wednesday, the fifth largest weekly inflow on record since 1992, Lipper said.”

August 5 – Financial Times (Richard Henderson and Colby Smith): “Investors fled junk bonds amid the market turmoil that followed the escalation of the US-China trade war on Monday, with the spread over risk-free bonds widening by the most in three years. The spread between US junk bond yields and government debt grew to 4.5%, a 34 bps jump from Friday and the largest one-day move in basis points since June 2016…”

August 5 – Financial Times (Mohamed El-Erian): “Long spoiled by the comforting support of central banks, investors are getting a feel for what it would be like when economic concerns, rather than central banks’ monetary policies, take a bigger role in determining asset prices. With trade tensions more likely to grow than ease, investors now need to reassess whether further monetary policy loosening will again allow liquidity to push markets forwards, or instead prove less effective in countering economic and political headwinds. Conditioned by years of ample and predictable liquidity, markets have come to expect — and also feel entitled to — central banks countering virtually any sign of market volatility. This year’s dramatic policy U-turn from the Federal Reserve has only strengthened this, as has the speed with which central banks elsewhere have followed the Fed’s lead.”

August 6 – Reuters (Thyagaraju Adinarayan): “Goldman Sachs said it no longer expects the United States and China to agree on a deal to end their prolonged trade dispute before the November 2020 presidential election as policymakers from the world’s largest economies are ‘taking a harder line’. The bank now expects two back-to-back rate cuts from the U.S. Federal Reserve (Fed) ‘in light of growing trade policy risks, market expectations for much deeper rate cuts, and an increase in global risk related to the possibility of a no-deal Brexit’.”

Trump Administration Watch:

August 9 – Bloomberg (Josh Wingrove): “President Donald Trump said talks with China planned for next month could be called off after the trade war between the world’s biggest economies abruptly escalated in recent days. ‘We’ll see whether or not we keep our meeting in September,’ Trump said... ‘If we do, that’s fine. If we don’t, that’s fine.’ The president also tamped down speculation that the U.S. would intervene in currency markets to devalue the dollar. When asked whether he’d take such action, he replied: ‘No, we don’t have to.’ Yet he added lower interest rates from the Federal Reserve… would have the same effect.”

August 8 – Bloomberg (Jenny Leonard, Ian King and Jennifer Jacobs): “The White House is holding off on a decision about licences for U.S. companies to restart business with Huawei Technologies Co. after Beijing said it was halting purchases of U.S. farming goods… Commerce Secretary Wilbur Ross… said last week he’s received 50 requests and that a decision on them was pending. American businesses require a special license to supply goods to Huawei after the U.S. added the Chinese telecommunications giant to a trade blacklist in May over national-security concerns.”

August 5 – Bloomberg (Shawn Donnan): “Donald Trump’s trade battle with China is starting to look like a forever war -- a quagmire with no end in sight, no clear path to a resolution and more potential land mines for an already weakening global economy. With his move last week to announce his biggest tariff hike yet on imports from China, the president made clear he was exasperated with counterpart Xi Jinping and a perceived lack of Chinese urgency. While Trump portrayed the threat as a move to pressure Beijing to cut a deal, China responded with a painful measure of its own -- letting its currency tumble to the lowest in more than a decade.”

August 5 – Reuters (Susan Heavey, Yawen Chen, and David Stanway): “U.S. President Donald Trump dismissed fears of a protracted trade war with China… despite a warning from Beijing that labeling it a currency manipulator would have severe consequences for the global financial order. Trump, who announced last week he would slap a 10% tariff on a further $300 billion in Chinese imports starting on Sept. 1, tweeted that ‘massive amounts of money from China and other parts of the world’ were pouring into the U.S. economy. He also pledged to stand with American farmers in the face of Chinese retaliation.”

August 4 – Wall Street Journal (Vivian Salama and Josh Zumbrun): “President Trump overruled advisers to ramp up tariffs on China after a heated exchange in which he insisted levies were the best way to make Beijing comply with U.S. demands, according to people familiar with the matter. Barring a break in the impasse, the U.S. is now poised to impose 10% tariffs on roughly $300 billion in Chinese imports that aren’t currently taxed starting Sept. 1. Battle lines are hardening in Beijing as well… After returning [from China], the trade negotiators and other top advisers congregated early Thursday afternoon in the Oval Office to brief Mr. Trump on the talks. Messrs. Lighthizer and Mnuchin conveyed that they didn’t yield the kind of results that Mr. Trump had intended… ‘Tariffs,’ Mr. Trump said to his team… Those present included his national-security adviser John Bolton, top economic adviser Lawrence Kudlow, China adviser Peter Navarro and acting chief of staff Mick Mulvaney. All of them, save Mr. Navarro, a China hawk, adamantly objected to the tariffs, the people said. That spurred a debate lasting nearly two hours… Beijing insists that tariffs must be dropped in return for concessions demanded by the U.S. The president said his patience had worn thin and stood by his argument that tariffs were the best form of leverage…”

August 3 – Reuters (Idrees Ali and Colin Packham): “China is destabilizing the Indo-Pacific, U.S. Defense Secretary Mark Esper said…, charging Beijing with predatory economics, intellectual property theft and ‘weaponizing the global commons’. China is destabilizing the Indo-Pacific, U.S. Defense Secretary Mark Esper said…, charging Beijing with predatory economics, intellectual property theft and ‘weaponizing the global commons’.”

August 4 – Wall Street Journal (Mike Cherney): “Secretary of State Mike Pompeo escalated his criticism of China during a visit to Australia…, drawing a direct link between what he called one-sided trade deals and China’s ability to strengthen its military. Mr. Pompeo… said, ‘We were asleep at the switch’ as China began to steal data, launch military exercises in the disputed South China Sea and saddle other countries with debt to increase its influence. ‘Those are the kind of things that I think everyone needs to have their eyes wide open with respect to,’ Mr. Pompeo said. ‘The United States certainly does.’”

August 3 – Reuters (Patricia Zengerle): “U.S. President Donald Trump said on Saturday that things are going well with China, insisting U.S. consumers are not paying for import taxes he has imposed on goods from that country although economists say Americans are footing the bill. ‘Things are going along very well with China. They are paying us Tens of Billions of Dollars, made possible by their monetary devaluations and pumping in massive amounts of cash to keep their system going. So far our consumer is paying nothing - and no inflation. No help from Fed!’ Trump said on Twitter.”

Federal Reserve Watch:

August 5 – Bloomberg (Sarah McGregor): “Four former Federal Reserve chiefs made a joint plea for the central bank to be able to operate without political pressures or the threat of removal of its leaders, responding to President Donald Trump’s persistent attacks on current Chairman Jerome Powell. ‘We are united in the conviction that the Fed and its chair must be permitted to act independently and in the best interests of the economy, free of short-term political pressures and, in particular, without the threat of removal or demotion of Fed leaders for political reasons,’ Janet Yellen, Ben Bernanke, Alan Greenspan and Paul Volcker said in an op-ed in the Wall Street Journal.”

August 6 – Reuters (Howard Schneider): “After the U.S. central bank reshaped monetary policy around global trade volatility, a Federal Reserve official offered a message to the White House on Tuesday: Don’t expect more rate cuts every time trade policy threats or announcements send markets into a tailspin. St. Louis Federal Reserve President James Bullard said the Fed’s shift since the first of the year, from projecting continued rate hikes to cutting rates at its meeting last week, had made monetary policy ‘considerably’ looser and had adequately offset the uncertainty caused by the U.S. trade spat with China, as well as related global developments. ‘I don’t think it is realistic for the Fed to respond to each threat and counter threat in a tit-for-tat trade war,’ Bullard said, referring to the current situation as a ‘Pandora’s box’ that will be difficult for the United States, China and other countries to resolve any time soon.”

August 7 – Bloomberg (Matthew Boesler): “Developments since Federal Reserve policy makers cut interest rates last week may present headwinds to the economy that warrant more easing, Chicago Fed President Charles Evans said. ‘There is a role for risk management, and you could take the view, as I have, that inflation alone would call for more accommodation than we’ve put in place with just our last meeting,” Evans told reporters… ‘You might take the view that things have perhaps created more headwinds against that, and it would be reasonable to do more than just that. I don’t know. I have to look at it as the data come in,’ Evans said. ‘And you could take the view that the risks now have gone up, and as we think we’re going to get closer to the zero lower bound with higher probability, that would also call for more accommodation.’”

U.S. Bubble Watch:

August 5 – Reuters (Richard Leong): “Growth in the U.S. services sectors decelerated in July to its weakest level in three years as trade worries weighed on business orders and the outlook for the overall economy, a private survey… showed. The Institute for Supply Management (ISM) said its non-manufacturing activity index fell to 53.7 from 55.1 the month before. Analysts… had forecast a reading of 55.5 for July.”

August 5 – Reuters (Ann Saphir): “U.S. banks left loan standards unchanged on commercial and industrial loans to large and mid-sized firms during the second quarter and eased standards on such loans to smaller firms, according to a survey of bank officers… The U.S. Federal Reserve’s quarterly survey of senior loan officers also showed there appeared to be an overall easing of standards on commercial and industrial loans compared with before the financial crisis.”

August 7 – Bloomberg (Christine Maurus): “Home prices slipped in some of the costliest U.S. markets in the second quarter, a sign that would-be buyers are sitting out the competition for a scarcity of affordable properties. The median price for a previously owned single-family house increased 4.3% from a year earlier to $279,600, the National Association of Realtors said... Prices climbed in 162 of 178 metropolitan areas measured. The high-cost regions of San Jose, San Francisco and Honolulu were among those where prices fell. Americans are showing some resistance to overpaying for homes after years of price increases that have outpaced incomes.”

August 8 – Associated Press (Joe McDonald): “Chinese imports of American goods plunged in July as a tariff war with Washington intensified. Imports of U.S. goods fell 19% from a year earlier to $10.9 billion…, though that was an improvement over June’s 31.4% fall. Exports to the United States declined 6.5% to $38.8 billion. Beijing has retaliated for U.S. tariff hikes in a dispute over trade and technology by imposing its own punitive duties and suspending purchases of American soybeans and other goods.”

August 4 – CNBC (Leslie Josephs and Michael Wayland): “In the decade since the U.S. emerged from the recession, many industries, including airlines and automakers, have enjoyed a near uninterrupted streak of profits. U.S. airlines… are headed for their 10th straight year of profitability. The top four biggest airlines and three biggest automakers in the country brought in more than $25 billion in profit last year. Now, across the U.S., workers who assemble cars, fly planes, prepare airplane food, clean hotel rooms and stock grocery store shelves, just to name a few — many of them unionized employees in the middle of contract talks — are determined to get a bigger cut of the spoils. The contracts currently under negotiation between the United Auto Workers and Big Three Detroit automakers expire in September and will set the wages and benefits for about 158,000 employees for the next few years. The more than 37,000 pilots at the three largest U.S. airlines… are seeking higher pay and better retirement benefits after cuts in past downturns.”

August 6 – Wall Street Journal (Heather Gillers): “Public pension plans fell short of their projected returns this year, adding to the burden on governments struggling to fund promised benefits to retired workers. Public plans with more than $1 billion in assets earned a median return of 6.79% for the year ended June 30, the lowest since 2016, according to Wilshire Trust Universe Comparison Service data... Public pension plans project a median long-term return of 7.25%, according to… Wilshire Associates in 2018.”

August 6 – Wall Street Journal (Jacob Bunge, Kirk Maltais and Lucy Craymer): “The U.S. Farm Belt braced for deeper pain from the escalating trade battle between the world’s two biggest economies after China said it would suspend all imports of U.S. agricultural goods. China’s move will affect farmers raising fuzzy green soybean pods in Illinois, milking cows in California and feeding hogs in North Carolina, all of whom have seen business suffer as a result of tariffs that Chinese officials implemented last year. China’s suspension of U.S. farm purchases is a ‘body blow’ to U.S. farmers and ranchers, said Zippy Duvall, a Georgia farmer and head of the American Farm Bureau Federation. ‘We urge negotiators to redouble their efforts to arrive at an agreement, and quickly,’ he said.”

August 8 – Bloomberg (Claire Boston, Christopher Maloney, and Katrina Lewis): “Suddenly, mortgage broker Mark Livingstone is working weekends and spending his meager free time reading resumes because he needs help handling the crush of refinancing applications. Rates for 30-year mortgages are at their lowest since late 2016, sending many previously hesitant homeowners to their brokers. Under normal circumstances, new-home purchases make up 70% of the business at Cornerstone First Financial… These days, it’s 70% refinancing. ‘It’s one of the busiest we’ve ever been,’ said Livingstone, a 25-year industry veteran… ‘I almost don’t have the manpower to keep up with it.’”

China Watch:

August 6 – Bloomberg (Peter Martin, Shawn Donnan and Kevin Hamlin): “When Xi Jinping first met Donald Trump back in 2017, the Chinese leader said they had ‘a thousand reasons to make the China-U.S. relationship a success, and not a single reason to break it.’ Two years on, ties are at their lowest point in decades -- and they appear to be worsening by the day. Trump’s threat to raise tariffs on all Chinese goods last week shattered a truce reached with Xi just weeks earlier, unleashing tit-for-tat actions on trade and currency policy… A big part of the problem is that neither leader believes the other is serious about making a deal: China sees Trump as posturing ahead of the 2020 election, while U.S. officials think Xi is looking to wait him out for a better deal. Either way, the political space for compromise is diminishing as hardliners take center stage, prompting investors to weigh the potential economic fallout.”

August 6 – Wall Street Journal (Chao Deng and Chun Han Wong): “The volley-for-volley trade war between China and the U.S. is accelerating at a time when Chinese President Xi Jinping can ill afford to make concessions, raising the likelihood of a protracted struggle between the world’s two biggest economies. Mr. Xi is ordering a celebratory run-up to the 70th anniversary of the People’s Republic in October, an event that Communist Party watchers and media say will showcase him as a strong leader of a powerful nation. With his government struggling to rejuvenate a sluggish economy and quell antigovernment protests in Hong Kong, Mr. Xi has little leeway to take steps that would undercut his strongman image.”

August 5 – Bloomberg (Katherine Greifeld and Liz McCormick): “The yuan’s decline to a decade-low has analysts and investors casting a wary eye toward China’s $1.1 trillion pile of U.S. Treasuries. The idea that China -- America’s biggest foreign creditor -- would dump its U.S. debt holdings wholesale as a way to retaliate in the trade war is often dismissed as improbable… However, the yuan’s plunge on Monday past 7 per dollar -- long seen as a line in the sand for Chinese authorities -- shows the possibility can’t be ruled out, according to Stephen Roach, a senior lecturer at Yale University. China has ‘plenty of ammunition’ and is operating on a longer time-frame than U.S. President Donald Trump, he said. ‘Most people didn’t think they’d use the currency weapon and they’ve used that, and used it surgically.’ said Roach… ‘So conceivably, they might consider other options, and you can’t rule out the Treasuries option.’”

August 5 – Reuters (Cate Cadell): “Protesters in Hong Kong must not ‘play with fire’ and mistake Beijing’s restraint for weakness, China said on Tuesday in its sharpest rebuke yet of the ‘criminals’ behind demonstrations in the city whom it vowed to bring to justice… ‘I would like to warn all of the criminals: don’t ever misjudge the situation and mistake our restraint for weakness,’ the Chinese government’s Hong Kong and Macau Affairs Office said…”

August 6 – Reuters (Farah Master and James Pomfret): “Hong Kong is facing its worst crisis since it returned to China from British rule in 1997, the head of China’s Hong Kong and Macau Affairs office said… ‘Hong Kong’s crisis ... has continued for 60 days, and is getting worse and worse,’ Zhang Xiaoming, one of the most senior Chinese officials overseeing Hong Kong affairs, said… ‘Violent activities are intensifying and the impact on society is spreading wider. It can be said that Hong Kong is now facing the most severe situation since its handover,’ he said.”

August 9 – Bloomberg: “Government of eastern Chinese province of Shandong will become the biggest shareholder of the troubled regional lender after injecting 30b yuan, Caixin reports, without citing anyone. Central Huijin Investment will become a strategic investor which holds a stake of lower than 20%...”

August 4 – Bloomberg: “Stock investors have never been so downbeat on the world’s biggest banks. China’s ‘big four’ state-owned lenders, which together control more than $14 trillion of assets, tumbled to record-low valuations on Monday amid mounting concern that Beijing will encourage them to bail out smaller peers. Industrial & Commercial Bank of China Ltd., the world’s largest lender by assets, lost $11 billion of market value last week after injecting capital into a troubled regional bank as part of a government-orchestrated rescue. Big Chinese lenders have long sacrificed profits in the name of national service, but that prospect has become increasingly worrying as pressure builds on their regional, city and rural peers. Smaller Chinese banks tracked by UBS Group AG need an estimated $349 billion of fresh capital…”

August 8 – CNBC (Huileng Tan): “China’s July food prices jumped 9.1% from a year ago, data from the National Bureau of Statistics showed on Friday, as the country battles soaring pork prices amid the spread of African swine fever. In particular, pork prices rose 27% from a year ago in July while fresh fruit prices rose 39.1%...”

August 8 – Reuters (Yawen Chen and Ryan Woo): “China’s factory gate prices shrank for the first time in three years in July, stoking deflation worries and adding pressure on Beijing to deliver more stimulus as the economy sputters amid an intensifying trade war with the United States… China’s producer price index (PPI) fell 0.3% from year earlier in July…”

August 8 – Reuters (Huizhong Wu and Stella Qiu): “China’s exports unexpectedly returned to growth in July… July exports rose 3.3% from a year earlier, the fastest since March and more than the most optimistic estimate in a Reuters poll, customs data showed on Thursday. Analysts had expected a 2.0% drop after June’s 1.3% fall.”

August 9 – Bloomberg: “Chinese auto sales returned to a downward trajectory last month after a brief uptick, showing the market’s historic rut is far from over. Retail sales of sedans, sport utility vehicles, minivans and multipurpose vehicles in July fell 5.3% from a year earlier to 1.51 million units... That’s the 13th decline in the past 14 months.”

August 6 – New York Times (Alexandra Stevenson and Cao Li): “China was on the cusp of the biggest building boom the world had ever seen when Zhang Zhiyang started his architecture firm. It was 2007, and the money rushed in for contracts to design residential complexes and an exhibition hall. These days, with China’s economy slowing and his own business dropping off, Mr. Zhang can’t seem to get paid on time. He is now accepting the financial equivalent of i.o.u.s from as many as one-third of his clients instead of cash. ‘It wasn’t like this before,’ he said. But, he added, ‘it’s better than nothing.’ China’s trade war with the United States has escalated…, posing a growing threat to an already slowing economy. Beijing needs private businesses like Mr. Zhang’s and his clients to help rekindle growth and provide paychecks to Chinese workers. But many of those private businesses are short of cash. Instead, more than $200 billion in i.o.u.s — known in the dry world of finance as commercial acceptance bills — are floating around the Chinese financial system…”

August 6 – Reuters (Pei Li, Yimou Lee): “China’s film regulator… said it was blocking the mainland movie industry from participating in Taiwan’s Golden Horse Awards without a giving a reason, in the latest sign of rising tensions between Beijing and the self-ruled island.”

Central Banking Watch:

August 6 – Reuters (Praveen Menon and Charlotte Greenfield): “New Zealand’s central bank stunned markets on Wednesday by cutting interest rates a steep 50 bps and even flagged the risk of going nuclear by taking rates below zero, a radical shift that drove its currency to three-and-a-half year lows. Seemingly trying to get ahead of policy easings in the United States and Australia, the Reserve Bank of New Zealand (RBNZ) slashed its official cash rate (OCR) to a record trough of 1% and opened the door to truly drastic action. ‘It is easily within the realms of possibility that we might have to use negative interest rates,’ RBNZ Governor Adrian Orr told a news conference…”

August 7 – New York Times (Alexandra Stevenson): “Central banks in India, Thailand and New Zealand moved to shore up their economies on Wednesday amid fears that global growth will become the biggest casualty in the spiraling trade war between the United States and China. Monetary authorities in all three countries cut interest rates in a series of unexpected moves that shook currency markets just two days after China allowed the renminbi to weaken, a move that prompted President Trump to label Beijing a currency manipulator.”

Brexit Watch:

August 8 – Reuters (Kylie MacLellan): “Parliament should honour the 2016 Brexit referendum and leave the European Union on Oct. 31, British Prime Minister Boris Johnson said… when asked if he would resign if his government lost a vote of no-confidence. Johnson has pledged to take Britain out of the EU at the end of October, with or without a deal, setting himself up for a clash with lawmakers who have vowed to try and stop a no-deal Brexit, including by trying to collapse the government.”

August 8 – Associated Press (Pan Pylas): “The British economy unexpectedly shrank in the second quarter for the first time since 2012 as Brexit uncertainties heaped pressure on firms… The decline is set to raise alarm that the economy could experience its first recession in a decade… The drop illustrates the market disappointment to the quarterly contraction, which lowered the annual growth rate to 1.2% from 1.8% in the first quarter.”

Asia Watch:

August 5 – Financial Times (Gideon Rachman): “When somebody is reaching the end of their life, they often suffer from lots of apparently unrelated ailments — fevers, aches-and-pains, unlucky falls. Something similar may happen when a strategic order is dying. Across east Asia, the past month has seen a rash of diplomatic and security incidents that are symptoms of a wider sickness. In late July, the Chinese and Russian air forces staged their first ever joint aerial patrol in the region, causing South Korean warplanes to fire hundreds of warning shots at Russian intruders. The South Koreans are also facing the most serious deterioration in their relations with Japan in decades… North Korea has also just restarted missile tests, endangering US-led peace efforts. All of the other east Asian flashpoints — Taiwan, the South China Sea, Hong Kong and the US-China trade war — are also looking more combustible. Protests and strikes in Hong Kong are still gathering momentum. Chinese officials are now openly discussing military intervention and last week a White House official drew attention to a massing of Chinese troops, just across the border from Hong Kong.”

August 3 – Bloomberg (Niluksi Koswanage): “South Korea may go ahead with maritime defense drills around a group of islands that the country and Japan have competing claims over, Yonhap reported… The drills could begin as early as this month for the easternmost Dokdo islands, which lie between Korea and Japan, Yonhap said. The exercises involve the navy, air force and coast guard, and they are usually carried out in June and December, it said.”

Europe Watch:

August 9 – Bloomberg (Alessandro Speciale): “Prime Minister Giuseppe Conte signaled he won’t leave office without a fight as his deputy, Matteo Salvini, took steps toward bringing the government down and forcing snap elections. Italian bonds plunged on the prospect of political uncertainty and a new vote. With Salvini, head of the anti-immigrant League, pulling support from the administration and calling for a national ballot, Conte said… that he won’t let his opponent dictate the pace of events. His comments offered a glimmer of encouragement to those in Rome still hoping for an anti-Salvini coalition that could survive long enough to approve a budget for next year.”

August 6 – Reuters (Michael Nienaber): “German industrial output fell more than expected in June driven by weaker production of intermediate and capital goods, in a further sign that Europe’s biggest economy contracted in the second quarter… Industrial output dropped by 1.5% on the month - a far steeper decline than the 0.4% fall forecast… ‘The continued plunge in production is scary,’ Bankhaus Lampe economist Alexander Krueger said…”

August 8 – Reuters (Michael Nienaber): “Germany is considering ditching its long-cherished balanced budget policy to help finance a costly climate protection program with new debt, a senior government official said. Chancellor Angela Merkel’s government has managed to raise public spending without incurring new debt since 2014 thanks to an unusually long growth cycle, record-high employment, buoyant tax revenues and the European Central Bank’s bond-buying plan.”

EM Watch:

August 8 – Financial Times (Laura Pitel): “A group of top officials have been removed from their posts at Turkey’s central bank just weeks after President Recep Tayyip Erdogan sacked its governor. At least nine senior figures, including the chief economist, Hakan Kara, were told on Thursday that they were being moved to other roles, according to two people familiar with the matter.”

Global Bubble Watch:

August 7 – Bloomberg (Sybilla Gross): “After a two-year slide, Australian house prices look to have bottomed out, sending buyers flocking back to the market. Case in point: An auction for a four-bedroom house in the Sydney suburb of Ryde on Saturday attracted about 100 people. Spirited bidding pushed offers A$226,000 above the reserve price, before it finally sold for almost A$1.5 million ($1 million) -- a buzz last seen during the boom years.”

Fixed-Income Bubble Watch:

August 5 – Bloomberg (Ben Bain, Silla Brush and Claire Boston): “Wall Street’s push to clean up a $10 trillion corner of the derivatives market is getting poor reviews from an important audience: global financial regulators. Behind closed doors, watchdogs from Washington to London have made clear that a fix the industry came up with this year to crack down on shady deals falls short of what’s needed, said people familiar with the matter. The focus of the scrutiny is credit default swaps -- instruments tainted by the 2008 financial crisis that traders use to cash in when companies miss bond payments.”

August 7 – Wall Street Journal (Cezary Podkul and Gunjan Banerji): “Times are tough for the Mall at Stonecrest in suburban Atlanta. The Kohl’s closed in 2016. The Sears shut in 2018, and the Payless ShoeSource finished its going-out-of-business sale in May. When a $90.5 million mortgage came due last summer, the mall’s owners defaulted. Through it all, S&P Global Inc. SPGI 3.66% has said a security tied to the mall’s mortgage wouldn’t lose money. S&P says the ‘situation is fluid’ and ‘we won’t hesitate to revisit the rating.’ Inflated bond ratings were one cause of the financial crisis. A decade later, there is evidence they persist. In the hottest parts of the booming bond market, S&P and its competitors are giving increasingly optimistic ratings as they fight for market share. All six main ratings firms have since 2012 changed some criteria for judging the riskiness of bonds in ways that were followed by jumps in market share…”

August 6 – Bloomberg (Charles Williams): “Some cracks are appearing in health-care loans, a sector that accounts for nearly 12% of exposure in CLO portfolios, according to JPMorgan. The development comes after a decades-long boom in spending and revenues with modest restraint on volume or price, analysts led by Rishad Ahluwalia wrote… Fortunately, the health-care sector is generally ‘creditor-friendly’ in its diversity…”

Geopolitical Watch:

August 5 – Reuters (Matt Spetalnick and Roberta Rampton): “U.S. President Donald Trump imposed a freeze on all Venezuelan government assets in the United States…, sharply escalating an economic and diplomatic pressure campaign aimed at removing socialist President Nicolas Maduro from power.”

August 7 – Reuters (David Stanway): “An order by U.S. President Donald Trump to freeze the Venezuelan government’s assets and cut off its funds is an act of ‘gross interference’ and a violation of the norms of international relations, China’s foreign ministry said. China would continue to cooperate with Venezuela, ministry spokeswoman Hua Chunying said…, and urged the United States to respect international law and stop trying to stir up discord.”

August 8 – Reuters (Chen Aizhu, Shu Zhang, Florence Tan, Muyu Xu, Timothy Gardner and Jeff Mason): “China imported Iranian crude oil in July for the second month since a U.S. sanctions waiver ended, according to research from three data firms, with one estimate showing some oil entered tanks holding the country’s strategic reserves.”

August 6 – Reuters (Mitra Taj): “U.S. national security adviser John Bolton… said Washington was ready to impose sanctions on any international company doing business with Venezuelan President Nicolas Maduro, a sharp escalation of U.S. pressure on the leftist leader… ‘We are sending a signal to third parties that want to do business with the Maduro regime: proceed with extreme caution,’ Bolton said.”

August 7 – Reuters (John Mair and Colin Packham): “NATO needs to understand the implications of China’s rise as Beijing expands its power around the world, including areas that may challenge members of the North Atlantic security body, Secretary General Jens Stoltenberg said… China’s increasing assertiveness, including in the South China Sea, has raised concerns about its intentions, and the United States has called on NATO to recognize and adapt to new emerging threats, including China. ‘This is not about moving NATO into the Pacific, but this is about responding to the fact that China is coming closer to us,’ Stoltenberg told Reuters…”

August 5 – Reuters (Michael Martina): “China threatened countermeasures… if the United States deploys intermediate-range, ground-based missiles in Asia and warned U.S. allies of repercussions if they allow such weapons on their territory. U.S. Defense Secretary Mark Esper said on Saturday he was in favour of placing ground-launched, intermediate-range missiles in the region soon, possibly within months.”

August 8 – Bloomberg (Iain Marlow and Dandan Li): “China has singled out a U.S. diplomat’s meeting with Hong Kong pro-democracy activists as evidence of allegations that foreign interference is to blame for historic unrest in Asia’s main financial hub. Beijing ‘lodged solemn representations’ with the U.S… after reports emerged of a meeting between Julie Eadeh, the political unit chief for the American consulate in Hong Kong, and activist Joshua Wong, who served a brief jail term for his prominent role leading an earlier wave of pro-democracy protests in 2014.”

August 9 – Bloomberg (Kerim Karakaya and Asli Kandemir): “China’s central bank transferred $1 billion worth of funds to Turkey in June, Beijing’s biggest support package ever for President Recep Tayyip Erdogan delivered at a critical time in an election month. The inflow marks the first time Turkey received such a substantial amount under the lira-yuan swap agreement with Beijing that dates back to 2012… The cash infusion boosted Turkey’s foreign reserves around the time of Istanbul local elections that had left international investors fretting about the country’s political and financial stability.”

August 5 – Reuters (Josh Smith and Joyce Lee): “North Korea fired missiles into the sea off its east coast for the fourth time in less than two weeks, South Korea said…, as Pyongyang warned that hostile moves against it ‘have reached the danger line.’”

August 6 – Reuters (Fayaz Bukhari, Devjyot Ghoshal, and Asif Shahzad): “Indian Prime Minister Narendra Modi’s plan to change the status of Kashmir ran into fierce opposition from China and its ally Pakistan… as the disputed territory lay under a telecoms blackout to forestall protests for a second day. In a move to tighten its grip on Jammu and Kashmir, parts of which are claimed by Pakistan and China, India dropped a constitutional provision that allowed the country’s only Muslim-majority state to make its own laws.”

August 7 – Reuters (Asif Shahzad and Fayaz Bukhari): “Pakistan halted its main train service to India… and banned Indian films as it exerted diplomatic pressure on New Delhi for revoking the special status of Kashmir, the region at the heart of 70 years of hostility between them. Seeking to tighten its grip over the contested region, Prime Minister Narendra Modi’s government this week withdrew Muslim-majority Jammu and Kashmir’s right to frame its own laws and allowed people from outside the state to buy property there.”