Saturday, April 25, 2020

Weekly Commentary: Fault Lines

Now on a weekly basis, we're witnessing things that couldn’t happen – actually happen.

April 20 – Bloomberg (Catherine Ngai, Olivia Raimonde, and Alex Longley): “Of all the wild, unprecedented swings in financial markets since the coronavirus pandemic broke out, none has been more jaw-dropping than Monday’s collapse in a key segment of U.S. oil trading. The price on the futures contract for West Texas crude that is due to expire Tuesday fell into negative territory -- minus $37.63 a barrel.”

For posterity, the latest numbers on U.S. monetary inflation: Federal Reserve Assets expanded $205 billion last week to a record $6.573 TN. Fed Assets surged $2.307 TN, or 56%, in just seven weeks. Assets were up $2.645 TN over the past 33 weeks. M2 "money" supply surged $125bn last week to a record $16.870 TN, with an unprecedented seven-week expansion of $1.362 TN. M2 inflated $2.329 TN, or 16.0%, over the past year. Institutional Money Fund Assets (not included in M2) jumped $123 billion last week. Over seven weeks, Institutional Money Funds were up $845 billion. Combined, M2 and Institutional Money Funds jumped a staggering $2.207 TN over seven weeks ($100bn less than the growth of Fed Assets).

It's increasingly clear this pandemic is striking powerful blows at the most fragile Fault Lines – within communities, regions, societies, nations as well as for the world order. To see this disease clobber the most vulnerable ethnic groups and the downtrodden only compounds feelings of inequality, injustice and hopelessness. It is as well stunning to watch COVID-19 hasten the partisan brawl. A nation terribly divided is split only more deeply on the process of restarting the economy. To witness rival global superpowers plunge further into accusation and enmity. And to see the coronavirus viciously attack Europe’s fragile periphery, further splitting a hopelessly divided Europe and pressuring a critical global Fault Line.

There are these days three critical international Fault Lines – Europe, the emerging markets and China - that were demonstrating heightened fragility even prior to the pandemic’s catastrophic blow. Europe – with its structurally weak economies, fragile banking systems, social and political instability, and vulnerable euro currency regime – is a precarious Fault Line. In particular, COVID-19 is absolutely clobbering Europe's own internal Fault Line. Spain and Italy trail only the U.S. in global infections. European ministers met again Thursday in an attempt to cobble together some type of agreement for an EU COVID stimulus package.

Italian yields rose five bps this week to 1.84%. There’s more to the story. Yields traded as high as 2.27% in Wednesday trading, up 48 bps in three sessions to the high since global markets were “seizing up” back on March 18th. Heading into Thursday’s EU emergency meeting, yields were up across Europe’s periphery. At Wednesday's trading highs, a three-session surge had yields up 37 bps in Spain, 36 bps in Portugal, and 50 bps in Greece.

April 23 – Associated Press (Lorne Cook and Raf Casert): “European Union leaders agreed Thursday to revamp the EU’s long-term budget and set up a massive recovery fund to tackle the impact of the coronavirus and help rebuild the 27-nation bloc’s ravaged economies, but deep differences remain over the best way to achieve those goals… But the leaders did agree to task the European Commission with revamping the EU’s next seven-year budget — due to enter force on Jan. 1 but still the subject of much disagreement — and devise a massive recovery plan. While no figure was put on that plan, officials believe that 1-1.5 trillion euros ($1.1-1.6 trillion) would be needed.”

April 23 – Bloomberg (Birgit Jennen): “German Chancellor Angela Merkel called for a Europe-wide economic stimulus program to be financed by the European Union’s budget, making a national appeal that helping partners would be good for Germany. ‘A European growth program could support an upswing over the next two years, and we’ll work for that,’ Merkel said in a speech to the lower house of parliament in Berlin… ‘We want to act quickly in Europe, and we of course need instruments to be able to quickly deal with the effects of the crisis in all member states.’ She urged German lawmakers to move fast to make a planned 500 billion euros ($540bn) in EU spending available as soon as June 1.”

EU ministers, once again, kicked the can down the road – which spurred an immediate decline in periphery yields. Who will pay for massive - Trillion plus - stimulus spending plans – other than the ECB? Italy came into this crisis with national debt-to-GDP approaching 140%. In a likely scenario of GDP contracting 10% - and with debt surging at least 20% this year and growing rapidly again next year – it’s not long before Italy is facing an unmanageable 200% of GDP debt load. Conservative estimates have Portugal government debt expanding to 146% of GDP this year and Greece to 219%.

Italy’s weak coalition government is arguing for the EU to issue system-wide “coronabonds,” then employing these funds for grants to troubled nations. Germany, the Netherlands, Austria and other “northern” nations remain adamantly opposed to debt mutualization.

The Conti government is warning EU officials that Italy cannot handle a surge in debt issuance - and will not put its citizens through Greek-style austerity and debt restructuring.  I view Germans and Italians sharing a common currency as unsustainable over the longer-term. I have expected hardship that would accompany the piercing of the global Bubble to again place European monetary integration at risk. Italy’s deteriorating circumstance risks sparking public support for exiting the euro.

April 24 - Bloomberg (Alessandra Migliaccio): “Italy’s credit grade was left unchanged by S&P Global Ratings, which said the nation’s diversified and wealthy economy, net external creditor position and low levels of private debt partly offset the drag from high public leverage. The BBB rating is still just two notches above junk, and S&P kept its negative outlook, which means the risk of a downgrade remains. The country’s financial position has been severely weakened by the cost of dealing with the coronavirus… The country’s rating could be lowered if the ratio between government debt and gross domestic product ‘fails to shift onto a clearly discernible downward path over the next three years, or if there is a marked deterioration in borrowing conditions that jeopardizes the sovereign’s public finance sustainability,’ S&P said.”

COVID-19 will hasten the loss of confidence in myriad institutions. The rating agencies will not go unscathed. Italy investment-grade? Only massive ECB purchases have kept debt service costs manageable. And who would purchase Italian bonds today if not for the unstoppable ECB backstop? What are the ramifications for the ECB loading up on such unsound debt?

The euro traded down to almost 1.07 vs. the dollar in Friday trading – near one-month lows. A euro breaking lower on heightened concerns for periphery debt and euro zone integration would only add fuel to the dollar’s upside dislocation. The dollar index was back above 100 this week. With king dollar already benefiting from the U.S.’s competitive advantage in fiscal and monetary stimulus, an additional push from a euro crisis would place only more pressure on faltering EM currencies (including the renminbi).

The Brazilian real’s 6.2% drop this the week increased y-t-d losses to 27.8%. Brazil’s local currency bond yields surged 167 bps this week to 8.77%. Dollar-denominated yields surged 40 bps to 5.04%, the high since March 19th. Brazil’s Credit default swap prices surged 78 bps to 368 bps, the high since March 31st – and only 14 bps below the closing high from March 18th. Brazilian stocks sank 5.5% in Friday’s selloff, increasing y-t-d declines to 34.9%. Ominously, Banco do Brasil sank 15.6% this week, boosting 2020 losses to 54%. Banco Bradesco fell 14.5% (down 48.5% y-t-d). Brazil as an EM crisis Fault Line?

April 24 - UK Guardian (Dom Phillips): “Brazil’s government has been plunged into turmoil after the resignation of one of Jair Bolsonaro’s most powerful ministers sparked protests, calls for the president’s impeachment and an investigation into claims he had improperly interfered in the country’s federal police. In a rambling televised address…, Brazil’s embattled president denied claims from his outgoing justice minister Sérgio Moro that he had sought to appoint a new federal police chief in order to gain access to secret intelligence reports… ‘Sorry Mr Minister, you won’t make a liar of me,’ Bolsonaro declared… Moro’s bombshell allegations sparked pot-banging protests and an immediate outcry among Brazil’s political class, with Brazil’s prosecutor-general Augusto Aras requesting supreme court permission to launch an investigation. ‘Moro’s testimony … constitutes strong evidence for an impeachment process,’ tweeted Flávio Dino, the leftist governor of the northeastern state of Maranhão.”

This week’s EM currency weakness wasn’t limited to Brazil. The Mexican peso sank 5.1%, with y-t-d losses up to 24.2%. The Colombian peso was down 2.5%, the South Korean won 1.4%, the Hungarian forint 1.4%, and the South African rand 1.2%. Notable y-t-d EM currency declines include the South African rand’s 26.5%, Colombian peso’s 19.0%, Russian ruble’s 16.9%, Turkish lira’s 14.7%, Chilean peso’s 12.5%, Hungarian forint’s 10.4%, Indonesian Rupiah’s 10.0%, Argentine peso’s 9.9% and Czech koruna’s 9.7%.

EM booms were a central facet of the global bubble, thriving from a confluence of overheated domestic credit systems and booming Chinese demand and credit excess, along with unparalleled leveraged speculation and international inflows.

In past cycles, international speculative flows would gravitate freely into EM booms, only to eventually be trapped by collapsing currencies, illiquidity and capital controls – come the arrival of the bust. After the most protracted of booms, I believe a historic bust has commenced. The shocking precision of COVID-19 strikes on the susceptible – this week in Brazil.

Collapsing EM currency and bond prices were key aspects of March’s “seizing up” of global markets. Central bank policy measures – including the Fed’s expanded international swap arrangements – along with the global rally have somewhat stabilized “developing” markets. Yet EM remains the global financial system’s weak link. EM has added unprecedented amounts of debt during this long cycle, too much dollar-denominated. Widespread debt restructuring and defaults seem unavoidable.

EM now faces a very difficult road ahead. “Hot money” outflows have commenced, currencies have faltered, and bond markets have turned unstable. Acute financial and economic fragilities have begun to surface.

Importantly, EM central banks lack the flexibility to employ monetary stimulus to the extent enjoyed by the major central banks. Liquidity injections risk exacerbating outflows and currency crises, at the same time stoking inflationary pressures and bond yields. Sinking EM currencies and bond prices then incite panicked “hot money” outflows, dislocation and financial crisis.

To make a bad situation worse, aggressive stimulus by the Fed bolsters U.S. Treasuries and securities markets, drawing international flows to king dollar. The stronger dollar then further pressures EM currencies and stokes de-risking/deleveraging dynamics.

EM has entered what I expect will be a deep multiyear downcycle, with far-reaching market, financial, economic, social and geopolitical ramifications. Emerging market economies, certainly including China, played a powerful role as the “global locomotive” pulling the world out of the previous crisis period. They will now act as a major economic drag – and a Fault Line for global financial crisis.


For the Week:

The S&P500 declined 1.3% (down 12.2% y-t-d), and the Dow fell 1.9% (down 16.7%). The Utilities sank 4.1% (down 8.8%). The Banks lost 1.4% (down 39.1%), and the Broker/Dealers dropped 3.0% (down 22.6%). The Transports fell 1.7% (down 25.8%). The S&P 400 Midcaps dipped 0.7% (down 24.8%), while the small cap Russell 2000 increased 0.3% (down 26.1%). The Nasdaq100 declined 0.5% (up 0.6%). The Semiconductors slipped 0.2% (down 8.0%). The Biotechs jumped 2.5% (up 4.8%). With bullion jumping $47, the HUI gold index surged 13.6% (up 14.7%).

Three-month Treasury bill rates ended the week at 0.0975%. Two-year government yields increased two bps to 0.23% (down 134bps y-t-d). Five-year T-note yields added a basis point to 0.37% (down 132bps). Ten-year Treasury yields fell four bps to 0.60% (down 132bps). Long bond yields declined three bps to 1.17% (down 122bps). Benchmark Fannie Mae MBS yields dropped nine bps to 1.77% (down 95bps).

Greek 10-year yields jumped 18 bps to 2.29% (up 86bps y-t-d). Ten-year Portuguese yields rose 12 bps to 1.09% (up 64bps). Italian 10-year yields rose five bps to 1.84% (up 43bps). Spain's 10-year yields gained 14 bps to 0.95% (up 48bps). German bund yields were unchanged at negative 0.47% (down 29bps). French yields slipped one basis point to 0.03% (down 9bps). The French to German 10-year bond spread narrowed one to 50 bps. U.K. 10-year gilt yields declined a basis point to 0.29% (down 53bps). U.K.'s FTSE equities index declined 0.6% (down 23.7%).

Japan's Nikkei Equities Index fell 3.2% (down 18.6% y-t-d). Japanese 10-year "JGB" yields declined four bps to negative 0.02% (down 1bp y-t-d). France's CAC40 fell 2.3% (down 26.5%). The German DAX equities index dropped 2.7% (down 22%). Spain's IBEX 35 equities index sank 3.8% (down 30.7%). Italy's FTSE MIB index declined 1.2% (down 28.3%). EM equities were mostly lower. Brazil's Bovespa index sank 4.6% (down 34.9%), and Mexico's Bolsa dipped 0.4% (down 20.6%). South Korea's Kospi index fell 1.3% (down 14.0%). India's Sensex equities index declined 0.8% (down 24.1%). China's Shanghai Exchange lost 1.1% (down 7.9%). Turkey's Borsa Istanbul National 100 index increased 0.6% (down 13.7%). Russia's MICEX equities index gained 1.1% (down 15.9%).

Investment-grade bond funds saw inflows of $2.148 billion, and junk bond funds posted inflows of $2.219 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates added two bps to 3.33% (down 87bps y-o-y). Fifteen-year rates rose six bps to 2.86% (down 78bps). Five-year hybrid ARM rates fell six bps to 3.28% (down 49bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up a basis point to 3.70% (down 55bps).

Federal Reserve Credit last week surged $255bn to a record $6.451 TN, with a 33-week gain of $2.729 TN. Over the past year, Fed Credit expanded $2.559 TN, or 65.8%. Fed Credit inflated $3.640 Trillion, or 130%, over the past 389 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $2.0 billion last week to $3.320 TN. "Custody holdings" were down $132bn, or 3.8%, y-o-y.

M2 (narrow) "money" supply surged $125bn last week to a record $16.870 TN, with an unprecedented seven-week gain of $1.362 TN. "Narrow money" surged $2.329 TN, or 16.0%, over the past year. For the week, Currency increased $3.4bn. Total Checkable Deposits jumped $125bn, while Savings Deposits declined $18.0bn. Small Time Deposits were little changed. Retail Money Funds gained $14.0bn.

Total money market fund assets jumped $128bn to a record $4.652 TN. Total money funds jumped $1.602 TN y-o-y, or 52.5%.

Total Commercial Paper gained $9.9bn to $1.069 TN. CP was up $3.6bn, or 0.3% year-over-year.

Currency Watch:

For the week, the U.S. dollar index increased 0.9% to 100.38 (up 4.0% y-t-d). For the week on the upside, the Australian dollar increased 0.1%. For the week on the downside, the Brazilian real declined 6.2%, the Mexican peso 5.1%, the Norwegian krone 2.8%, the South Korean won 1.4%, the South African rand 1.2%, the British pound 1.1%, the Canadian dollar 0.7%, the Swiss franc 0.6%, the Swedish krona 0.6%, the euro 0.5%, the New Zealand dollar 0.3% and the Singapore dollar 0.1%. The Chinese renminbi declined 0.12% versus the dollar this week (down 1.68% y-t-d).

Commodities Watch:

April 18 – Bloomberg (Alfred Cang, Serene Cheong, and Andy Hoffman): “Bankers are increasingly reluctant to give commodity traders in Asia the credit they need to survive as the lenders grow ever more fearful about the risk of a catastrophic default. Their anxiety has reached new heights in recent days as fabled Singapore oil trader Hin Leong Trading (Pte.) Ltd. struggles to repay debts said to amount to almost $4 billion. And that’s just weeks after another commodities firm in the city-state, Agritrade International Pte, collapsed after a unit defaulted on its loans.”

April 21 – Bloomberg (Elena Mazneva): “Gold exports from Switzerland to the U.S. soared in March as American investors rushed to buy bullion amid the virus-driven panic. Shipments to the U.S. from Europe’s biggest precious-metals refining hub rose to 43.2 tons, the highest in data going back to 2012…”

The Bloomberg Commodities Index dropped 3.0% (down 25.5% y-t-d). Spot Gold jumped 2.8% to $1,730 (up 13.9%). Silver slipped 0.3% to $15.445 (down 13.8%). WTI crude fell $1.33 to $16.94 (down 72%). Gasoline dropped 7.3% (down 61%), and Natural Gas declined 0.9% (down 20%). Copper lost 0.9% (down 17%). Wheat dipped 0.6% (down 5%). Corn fell 2.0% (down 17%).

Coronavirus Watch:

April 23 – CNBC (Kevin Breuninger and Amanda Macias): “President Donald Trump said Thursday that his administration may extend its national social distancing guidelines until early in the summer or later. ‘We may, and we may go beyond that,’ Trump said at a… press briefing when asked if the federal guidelines would need to be extended at least until the start of summer. ‘We’re going to have to see where it is,’ Trump said. ‘I think people are going to know just out of common sense. At some point, we won’t have to do that. But until we feel safe, we’re going to be extending.’”

April 21 – Reuters (Jonnelle Marte): “Black and Hispanic families in the United States are taking the biggest income hit due to the coronavirus pandemic, and they are less prepared to withstand the blow, according to two studies… Low-income workers, including people of color and those without a college degree, are more likely to report a job loss or a pay cut related to measures introduced to limit spread of the virus, according to a report by the Pew Research Center. Hispanic workers are particularly vulnerable, with 61% saying they or someone in their household lost a job or experienced a pay cut because of the pandemic…”

April 18 – CNBC (Adam Jeffery): “This past week saw a number of protests spring up around the country demanding the reopening of the U.S. economy as cases of coronavirus now surpass 700,000. As cases continue to rise, several states have extended stay-at-home measures and social distancing orders into May… Protesters in Florida, North Carolina, Virginia, Michigan, Minnesota, Maryland, New Hampshire, Idaho, Texas and California gathered in cities and outside their state legislatures to demand the reopening of the economy. President Donald Trump seemingly tweeted his support for the protesters to ‘LIBERATE’ Michigan, Minnesota and Virginia, whose Democratic governors are still grappling with a rise of coronavirus cases.”

April 23 – Financial Times (Gillian Tett): “What will it take to restart the US economy amid the coronavirus pandemic? Armchair epidemiologists point to the need for mass testing and vaccines. But corporate executives insist that there is another precondition: handcuffs on American lawyers. Unless there are ‘strong liability protections’ it will be hard to reopen businesses properly, the National Association of Manufacturers warned... The White House agrees.”

April 18 – New York Times (Michael Corkery and David Yaffe-Bellany): “The modern American slaughterhouse is a very different place from the one that Upton Sinclair depicted in his early-20th-century novel, ‘The Jungle.’ Many are giant, sleek refrigerated assembly lines, staffed mostly by unionized workers who slice, debone and ‘gut snatch’ hog and beef carcasses, under constant oversight of government inspectors. The jobs are often grueling and sometimes dangerous, but pork and beef producers boast about having some of the most heavily sanitized work spaces of any industry. Yet meat plants, honed over decades for maximum efficiency and profit, have become major ‘hot spots’ for the coronavirus pandemic… The health crisis has revealed how these plants are becoming the weakest link in the nation’s food supply chain, posing a serious challenge to meat production.”

April 19 – Reuters (Hallie Gu and Emily Chow): “The global coronavirus pandemic threatens to cause a huge shock to international food trade and trigger a new food crisis, a top agriculture official in China said… The comments came as coronavirus outbreaks roiled global agriculture supply chains and upended trade, and after some countries restricted exports of main grains and increased procurement for reserves. ‘The fast spreading global epidemic has brought huge uncertainty on international agriculture trade and markets,’ said Yu Kangzhen, China’s deputy agriculture minister.”

April 21 – New York Times (Matthew Goldstein, Robert Gebeloff and Jessica Silver-Greenberg): “Even before they became deadly petri dishes for the worst pandemic in generations, many nursing homes were struggling to stay afloat and provide quality care. But since the start of the coronavirus outbreak, nursing home operators have had to spend more money on protective equipment for staff and technology to connect residents with relatives who are no longer allowed to visit. Their revenues have shrunk because they are admitting fewer new residents in hopes of reducing the risk of infection. The result is that some nursing homes, which often run on razor-thin profit margins, may be unable to pay their rent and other bills without government help.”

April 20 – Reuters (Noah Higgins-Dunn and Hannah Miller): “The Covid-19 outbreak in Los Angeles County is likely far more widespread than previously thought, up to an estimated 55 times bigger than the number of confirmed cases, according to new research from the University of Southern California and the LA Department of Public Health. …Preliminary study results… found that an estimated 4.1% of the county’s adult population has antibodies to the coronavirus, estimating that between 221,000 adults to 442,000 adults in the county have had the infection.”

April 23 – Financial Times (Donato Paolo Mancini and Hannah Kuchler): “A potential antiviral drug to treat coronavirus has flopped in its first randomised clinical trial, disappointing scientists and investors who had high hopes for remdesivir, according to draft documents published accidentally by the World Health Organization… The Chinese trial showed remdesivir — developed by California-based Gilead Sciences — did not improve patients’ condition or reduce the pathogen’s presence in the bloodstream. Researchers studied 237 patients, giving the drug to 158 and comparing their progress with the remaining 79. The drug also showed significant side effects in some, which meant 18 patients were taken off it.”

Market Instability Watch:

April 21 – Bloomberg (Elena Mazneva): “Bank of America Corp. raised its 18-month gold-price target to $3,000 an ounce -- more than 50% above the existing price record -- in a report titled ‘The Fed can’t print gold.’ The bank increased its target from $2,000 previously, as policy makers across the globe unleash vast amounts of fiscal and monetary stimulus to help shore up economies hurt by the coronavirus.”

April 19 – Financial Times (Wolfgang Münchau): “The spread between Italian and German bonds rose last week to around 2 percentage points. Why should that be so? Unlike in 2012, there is no looming threat of a liquidity crisis. The European Central Bank’s Pandemic Emergency Purchase Programme will probably ensure that the Italian government is safe to issue whatever debt it needs this year. Rather, Italy’s problems are of a different nature. As of the end of last year, Italy’s public sector debt was 136% of gross domestic product. Over the previous decade, it had increased by 30 percentage points. If you assume that what the IMF calls the Great Lockdown leaves Italian GDP 10% lower than in 2019, and if outstanding debt increases by 20%, then its debt-to-GDP ratio balloons to 180%. When debt rises and output falls at the same time, these ratios shoot up fast.”

April 23 – Financial Times (Tommy Stubbington): “A closely watched gauge of stress in the eurozone's financial system has climbed to its highest level since 2012, a sign that the coronavirus crisis has pushed up borrowing costs for banks in the currency bloc. Analysts said the rise in Euribor — a measure of the interest rates that euro area banks pay to borrow from one another — is a worrying sign of ‘fragmentation’ of the region’s money markets, with the European Central Bank’s efforts to hold borrowing costs at rock bottom failing to reach every corner of the financial system.”

April 22 – Bloomberg (Katherine Chiglinsky): “Chubb Ltd. Chief Executive Officer Evan Greenberg warned that the impact of the virus and related economic turmoil will likely be historic for the industry. ‘This event will be the largest event in insurance history,’ Greenberg said… The virus and its ripple effects will impact both the asset side and the liability side of the balance sheet, he said. Greenberg outlined the catastrophic-like nature of a pandemic in an interview last week, saying that the spread of an infectious virus is particularly devastating because it’s not limited by time or geography. Insurers are already seeing claims from policyholders affected by the virus and shutdowns, while also having to manage the market turmoil with the billions of investments the companies oversee.”

April 21 – Financial Times (Gregory Meyer and Derek Brower): “The world’s largest oil-backed exchange-traded fund has been forced to make far-reaching changes to its portfolio, after below-zero crude prices raised the spectre of unlimited losses for investors and its holdings ballooned to almost a quarter of the benchmark US futures market. The United States Oil Fund, an ETF with more than $4bn in assets, said it would shift money out of the West Texas Intermediate futures contract set to expire in June, in favour of later-dated contracts and possibly even other kinds of energy derivatives.”

April 23 – Bloomberg (Adam Tempkin): “More than 10% of U.S. collateralized loan obligations are now at risk of cutting off cash payments to holders of their riskiest portions amid a surge in downgrades among leveraged loans backing the securities, according to… Nomura… and Wells Fargo… About 13% of portfolios failed their so-called junior overcollateralization tests in April, based on a Nomura analysis of roughly 750 CLO deals where payment data was available.”

Global Bubble Watch:

April 20 – Reuters (Tsvetelia Tsolova): “The crisis sparked by the spread of the novel coronavirus is the worst since the Great Depression, IMF Managing Director Kristalina Georgieva said… The fallout from the virus will mean that 170 countries will have negative economic growth this year…”

April 22 – Bloomberg (Michelle Jamrisko and Gregor Stuart Hunter): “As governments dedicate more than $8 trillion to fight the coronavirus pandemic, a further widening in the gap between rich and poor countries threatens to exacerbate the global economy’s pain. Wealthy nations have delved deep to cushion the blow. For instance, Germany and Italy have each allocated more than 30% of gross domestic product to direct spending, bank guarantees, and loan and equity injections, for a combined $1.84 trillion in aid… Yet the countries IMF analysts say they’re most concerned about have only been able to trickle out support: Many African and Latin American economies have failed to reach even a few billion dollars in fiscal aid…”

April 19 – Financial Times (Colby Smith and Robin Wigglesworth): “Investors have pushed back on pleas by the G20 group of big economies to allow emerging economies to pause their debt repayments, in an early indication of how difficult it will be to get private creditors to collectively and voluntarily agree on coronavirus relief measures. …The G20 urged private creditors to participate in its plan to provide temporary debt relief to low-income countries until the end of the year. Zambia and Ecuador have already been forced to seek debt restructurings, and many more are expected to follow given the scale of the economic and financial shocks caused by the virus outbreak.”

April 22 – Bloomberg (Eric Martin): “Fitch Ratings warned that multilateral development banks could see their credit ratings suffer if they let the poorest nations suspend sovereign debt payments, a move that governments from the world’s biggest economies have urged them to explore. A reprieve of more than six months would lead Fitch to classify a development bank’s full exposure as impaired and undercut preferred creditor status… It also would increase the banks’ credit risk and hurt their cash flow and liquidity, Fitch said. While not mentioned by name, the multilateral development banks, including the World Bank, European Investment Bank and Asian Development Bank, have billions of dollars in outstanding loans.”

April 20 – Reuters (Andrea Shalal): “The International Monetary Fund may need to step outside its comfort zone and consider ‘exceptional measures’ to help countries deal with the coronavirus pandemic and mitigate its economic impact, Managing Director Kristalina Georgieva said… Georgieva… said the fund had already taken extraordinary steps to free up resources, especially for emerging markets and developing economies that have seen an outflow of $100 billion in recent months - the highest on record.”

April 21 – Financial Times (Katie Martin): “The collapse in oil prices is a warning. Anyone who has been swept up by the rally in stock markets since late March would be foolish to ignore it. Even by the standards of the past couple of months in markets, the sheer scale of the fall in oil has been breathtaking. For the first time ever on Monday, it turned negative. Having started the day at about $10 per barrel, prices for West Texas Intermediate, the US benchmark, tied to delivery of the black stuff in May, cratered to minus $40. That means there is so much oil sloshing around, so little demand for it in a global economy in lockdown, and so little space left to store it, that sellers are paying buyers to take it off their hands.”

April 23 – Bloomberg (Esteban Duarte): “Canada’s stellar credit rating is being put to the test as the oil crash and recession expose the country’s weak link: its provinces. Among the Group of Seven countries, only Germany and Canada have AAA ratings from S&P Global Ratings. But as pressure rises on the government of Justin Trudeau to aid provinces and key industries, Canada’s fiscal position is looking shakier. Going into the Covid-19 crisis, Canada’s provincial governments had C$853 billion ($602bn) of debt securities outstanding, more than the national government. They also shoulder most of the cost for health care and education.”

April 21 – Financial Times (Neil Hume and Stefania Palma): “Singapore energy tycoon Lim Oon Kuin spent decades building a business empire, transforming his ‘one-man-one-truck’ operation selling diesel to fishermen into one of the biggest shipping fuel traders in Asia. But in the space of a few days it has come crashing down, sending shockwaves through the commodity trading industry and the banks that finance global trade. The extent of the financial problems at Mr Lim’s Hin Leong Trading only became clear to its lenders last Tuesday. Under pressure to pay down billions of dollars in loans as crude prices crashed and demand slumped because of the coronavirus pandemic, he made a jaw-dropping admission. In a virtual meeting to discuss a possible debt moratorium, he revealed the company, which reported net income of almost $80m in its official accounts for 2019, had ‘in truth’ not been making profits for years... In fact, Hin Leong had suffered $800m in futures trading losses it had not disclosed in its accounts. But Mr Lim was not finished. The septuagenarian Chinese immigrant then dropped another bombshell, revealing oil pledged as collateral for loans had been sold to raise cash.”

April 21 – Bloomberg (Heejin Kim): “South Korea’s mom-and-pop investors, who dominate the nation’s $86 billion market for structured notes, face massive losses as oil sank to a historic low. About 1.45 trillion won ($1.18bn) worth of notes tied to Brent or West Texas Intermediate futures were outstanding as of April 20… One of the most-popular securities, a three-year vehicle sold by Samsung Securities Co., guarantees a 6.6% pre-tax annual coupon unless one of its underlying assets -- WTI contracts, the Hang Seng China Enterprises Index and the Euro Stoxx 50 Index -- falls more than 50% from their Feb. 12 closing price of $51.17.”

April 18 – Bloomberg (Brian K Sullivan): “The world’s seas are simmering, with record high temperatures spurring worry among forecasters that the global warming effect may generate a chaotic year of extreme weather ahead. Parts of the Atlantic, Pacific and Indian Oceans all hit the record books for warmth last month, according to the U.S. National Centers for Environmental Information. The high temperatures could offer clues on the ferocity of the Atlantic hurricane season, the eruption of wildfires from the Amazon region to Australia, and whether the record heat and severe thunderstorms raking the southern U.S. will continue.”

Trump Administration Watch:

April 22 – Wall Street Journal (Richard Rubin): “Treasury Secretary Steven Mnuchin said he is sensitive to concerns about rising federal debt but emphasized that low interest rates and the urgency of helping the economy during the coronavirus outbreak cut in the other direction. ‘This is a war, and we need to win this war and we need to spend what it takes to win the war,’ he said… on Fox Business. ‘We are sensitive to the economic impacts of putting on debt and that’s something that the president is reviewing with us very carefully.’ …“The Senate passed a nearly $500 billion bill… that replenishes a small-business loan program and includes money for hospitals and testing. That comes on top of a roughly $2 trillion bill enacted last month that included business tax cuts, payments to individuals and expanded unemployment insurance.”

April 21 – Bloomberg (Christopher Condon and Dave Merrill): “The U.S. budget deficit may quadruple this year to almost $4 trillion. Projections from the Committee for a Responsible Federal Budget (CRFB) say that by 2023 U.S. debt held by the public will surpass records set in the post-World War II years. And these projections only include spending enacted so far… Additional spending is almost certain as the coronavirus pandemic destroys millions of jobs and thousands of businesses while slashing tax revenues for local and state governments… Even before the crisis, U.S. debt-to-GDP had more than doubled to 79% in 2019 from 35% in 2007. Deficit hawks, already hard to find, disappeared once the virus shut down whole swaths of the U.S. economy.”

April 21 – Reuters (Susan Heavey): “U.S. President Donald Trump… said discussions on additional coronavirus-related aid for state and local governments would start after Congress passes a bill funding more small business loans, hospitals and testing.”

April 20 – Wall Street Journal (Ruth Simon and Peter Rudegeair): “The small businesses that received aid under the federal government’s $350 billion rescue program weren’t always the ones with the greatest needs or the best chances to survive the coronavirus pandemic. Whether a firm made the cut often came down to how and where it banked. Some recipients were publicly traded companies that already had significant loans with big banks. Others were customers of community banks that had long made loans through the Small Business Administration, which is guaranteeing loans made through the government program. Thousands more that lacked the right ties weren’t approved.”

April 22 – New York Times (Emily Flitter and Stacy Cowley): “The federal government’s $349 billion aid program for small businesses devastated by the coronavirus pandemic was advertised as first-come, first-served. As many business owners found out, it was anything but. That’s because some of the nation’s biggest banks, including JPMorgan Chase, Citibank and U.S. Bank, prioritized the applications of their wealthiest clients before turning to other loan seekers, according to half a dozen bank employees and financial industry executives who spoke on the condition of anonymity…”

April 23 – CNBC (Hue Son): “The Small Business Administration issued new guidance… making it less likely that big publicly traded companies can access the next round of funding for the U.S. government’s small business relief program. It also stepped up pressure on public companies that have tapped funds to return the money. The update comes after a public furor that large companies tapped the facility, known as the Paycheck Protection Program, for hundreds of millions of dollars in loans while thousands of small businesses have yet to receive funding.”

April 20 – Wall Street Journal (Andrew Ackerman): “A top U.S. regulator is considering taking steps to ease strains on mortgage companies facing a cash crunch as millions of Americans struggling with fallout from the coronavirus suspend their monthly payments… The Federal Housing Finance Agency is weighing whether to allow Fannie Mae and Freddie Mac, the government-controlled mortgage-finance giants, to buy home loans that recently entered forbearance, meaning borrowers have stopped making payments… That would help nonbank mortgage companies that lend to home buyers and then quickly sell the loans to Fannie and Freddie.”

April 21 – CNBC (Mike Calia and Kevin Breuninger): “President Donald Trump… ordered Energy Secretary Dan Brouillette and Treasury Secretary Steven Mnuchin to put together a plan to get funding to the struggling U.S. oil and gas industry as a historic sell-off in crude continued. ‘I have instructed the Secretary of Energy and Secretary of the Treasury to formulate a plan which will make funds available so that these very important companies and jobs will be secured long into the future!’ Trump tweeted…, as West Texas Intermediate crude futures for May delivery again traded in negative territory.”

April 21 – Wall Street Journal (Andrew Ackerman): “A top U.S. regulator took a step to help struggling mortgage lenders contend with a cash crunch as millions of Americans suspend monthly payments on their home loans. The Federal Housing Finance Agency said… it would cap at four months the period of time mortgage companies are on the hook to make monthly payments on behalf of borrowers who are in arrears. The move provides some relief to the mortgage companies, such as Quicken Loans Inc. and Freedom Mortgage Corp., that collect payments from homeowners and pass them on to investors in securities backed by the loans. The companies, which both originate and service home loans, must pay investors even if borrowers stop making payments.”

Federal Reserve Watch:

April 23 – Wall Street Journal (Nick Timiraos): “After several frenzied weeks creating a raft of emergency lending programs, Federal Reserve officials turn next week to planning and implementation rather than announcing new initiatives. Fed leaders have suggested they are comfortable with their current policy stance, meaning major changes are unlikely to be unveiled Wednesday, at the conclusion of their two-day policy meeting. But big questions loom that will dominate deliberations next week and in the weeks to follow, including how to manage the central bank’s bond-buying efforts and how long to extend those easy-money policies, with announcements still likely several weeks away.”

April 20 – Reuters (Eric Beech): “U.S. Senate Democratic leader Chuck Schumer said he had urged Federal Reserve Chairman Jerome Powell in a phone call on Monday to open Fed’s Main Street Lending program to nonprofits and local governments. …Schumer said Powell ‘indicated to me that the Fed is actively working on solutions, and nonprofits will very likely be included.” Schumer also said Powell ‘assured me that the Fed was similarly working to make the program directly accessible to more cities and counties.’”

U.S. Bubble Watch:

April 21 – Associated Press (Julie Pace): “America’s entrenched political divide is now playing out over matters of life and death. Republican governors, urged on by President Donald Trump, are taking the first steps toward reopening parts of their states’ economies in the midst of the coronavirus pandemic, and without adhering to the president’s own guidelines. Democratic governors are largely keeping strict stay-at-home orders and nonessential business closures in place, resisting small pockets of Trump-aligned protesters and public pressure from the president. The fault lines are familiar, exposing many of the same regional and demographic divisions that have increasingly come to define U.S. politics, as well as the stark differences in the ways the parties view the role of government in American life.”

April 19 – Washington Post (David Lynch): “The United States is embarking on a rapid-fire experiment in borrowing without precedent, as the government and corporations take on trillions of dollars of debt to offset the economic damage from the coronavirus pandemic. The federal government is on its way this year to spending nearly $4 trillion more than it collects in revenue…, a budget deficit roughly twice as large relative to the economy as in any year since 1945. Business borrowing also is setting records. Giant corporations…, which binged on debt over the past decade, now are exhausting their credit lines and tapping bondholders for even more cash. To support such borrowing, the Federal Reserve has dropped interest rates to zero and added more than $2 trillion of loans to its portfolio in the past six weeks — as much as in the four years following the Great Recession.”

April 22 – Reuters (Ylan Mui and Karen James Sloan): “State and local governments are warning of a wave of layoffs and pay cuts after getting left out of the federal coronavirus relief package expected to pass Congress this week. In many places, those painful reductions are already taking shape: Los Angeles plans to force city workers to spend 26 days on unpaid leave as revenues are forecast to drop as much as $600 million next fiscal year. Detroit has proposed laying off 200 workers and furloughing thousands more. In Ohio’s Hamilton County, Commissioner Denise Driehaus is taking a 10% pay cut alongside county workers.”

April 20 – CNBC (Patti Domm): “The oil industry is in its worst crisis since at least the Great Depression, according to analysts. There’s too much oil, and nobody wants to buy any more. Planes aren’t flying, shipping has slowed, and U.S. consumers, who use 10% of the world’s oil output in their cars, are now staying at home. The action Monday in the most closely watched energy market in the world was devastating, as the value of the May oil futures contract plummeted 300%, flipping into negative territory to end at minus $37.63 per barrel.”

April 18 – Bloomberg (Katherine Greifeld): “Here’s what investors don’t know: How many people will lose their jobs. How far profits will fall. How deep the recession will be. The only thing they’re sure of is that the government has pumped $4 trillion into the economy and is hell-bent on seeing it work. A world of total uncertainty, and one observable fact. Is it any wonder what markets are clinging to? The deluge of stimulus has pushed the S&P 500 up 27% since mid-March, a stretch that halved its bear-market plunge by way of the fastest 15-day rally in eight decades. There’s more to come -- Congress is negotiating an additional $250 billion for small businesses, while Federal Reserve chairman Jerome Powell has vowed the central bank will never ‘run out of ammunition.’”

April 18 – Financial Times (Michael Corkery and David Yaffe-Bellany): “Big US banks made one thing clear this week: they are battening down the hatches to deal with an expected surge in loan losses as the pandemic casts serious doubts over the capacity of consumers and companies to pay their debt. Loan loss charges at six big American banks reached a total of $25.4bn in the first quarter. This marks a 350% surge in collective provisions across Bank of America, Citigroup, JPMorgan Chase, Wells Fargo, Goldman Sachs and Morgan Stanley versus a year earlier, as charges soared to levels not seen since the financial crisis.”

April 22 – Bloomberg (Kevin Crowley and Rachel Adams-Heard): “An historic crash in crude prices is driving U.S. shale into full-on retreat with operators halting new drilling and shutting in old wells, moves that could cut output by 20% for the world’s biggest producer of oil and leave thousands of workers unemployed. For shale companies, the price of West Texas Intermediate crude went from hunker-down-and-ride-it-out mode to crisis mode in just a few days, with many now unsure whether there will even be a market for their oil. Some 1.75 million barrels a day is at immediate risk of shutting down while the number of new wells being brought online is forecast to plunge almost 90% by the end of the year, according to IHS Markit Ltd.”

April 21 – New York Times (Clifford Krauss): “Workers at Marathon Petroleum’s refinery in Gallup, N.M., are turning off the valves. Oil companies in West Texas are paying early termination fees to contract employees rather than drill new wells. And in Montana, producers are shutting down wells and slashing salaries and benefits. Just a few months ago, the American oil industry was triumphant in its quest for energy independence, having turned the United States into the world’s biggest petroleum producer for the first time in decades. But that exhilaration has given way to despair… The oil industry has lived through many booms and busts, but never before have prices collapsed as they have this week.”

April 22 – CNBC (Diana Olick): “Mortgage volume appears to be settling into a new normal, as refinance demand stays high and purchase demand sits at a five-year low… Mortgage applications to purchase a home did increase 2% for the week but were 31% lower than the one year ago.”

April 22 – Reuters (Tina Bellon): “Auto retail sales in the United States are beginning to recover from a massive slump in March due to the outbreak of the coronavirus and nationwide stay-at-home orders, according to analysts at research firm J.D. Power… ‘For the week ending April 19, retail sales were down 48% from the pre-virus forecast, an improvement of 3 percentage points from the week ending April 12, J.D. Power analyst Tyson Jominy said. Around 300,000 new vehicles were sold during the first 19 days of April.”

April 19 – Bloomberg (Joanna Ossinger): “The biggest U.S. companies will slash their cash spending this year amid the uncertainty of the coronavirus pandemic, according to Goldman Sachs… ‘We forecast S&P 500 cash spending will decline by an annual record 33% during 2020 as firms prioritize liquidity in a worsening economic environment,’ strategists led by David Kostin wrote… He continues to expect a big decline in earnings per share for the first and second quarters.”

April 22 – Wall Street Journal (Sarah Chaney): “New York state has asked the federal government for a $4 billion no-interest loan to cover unemployment payments for people put out of work by the coronavirus pandemic as it and other states burn through funds set aside for jobless claims. States are quickly depleting funds set aside as millions of laid-off workers apply for unemployment-insurance benefits offered by state governments… Nearly half of U.S. states have logged double-digit percentage declines in their trust-fund balances since the end of February…”

April 20 – Reuters (Hilary Russ): “U.S. restaurants asked Congress for more financial aid… to help weather the coronavirus crisis ravaging the industry, saying they are on track to lose $240 billion by the end of 2020. The National Restaurant Association said its latest survey showed two-thirds of its workers - more than 8 million people - have been laid off or furloughed as four in 10 restaurants are closed.”

April 21 – Reuters (Laurence Frost and Conor Humphries): “Faltering consumer confidence will slow the recovery of air travel once coronavirus restrictions end, the sector’s main global body warned… ‘Once market travel restrictions and lockdowns are relaxed, there’s still an issue about whether there will be demand from passengers to come back and fly,’ IATA Chief Economist Brian Pearce said during an online media presentation. Domestic air traffic is down 70% worldwide, IATA said.”

April 21 – Associated Press (David Pitt): “After enduring extended trade disputes and worker shortages, U.S. hog farmers were poised to finally hit it big this year with expectations of climbing prices amid soaring domestic and foreign demand. Instead, restaurant closures due to the coronavirus have contributed to an estimated $5 billion in losses for the industry, and almost overnight millions of hogs stacking up on farms now have little value.”

April 21 – Financial Times (David Sheppard): “Investors who have flooded into the oil markets to bet on a rebound in crude prices are risking big losses, say commodity specialists, as the exchange traded funds they use are swept up in the current market turmoil. The United States Oil fund, the largest oil ETF known as USO, saw inflows of about $1.5bn last week, as US crude prices hit their lowest levels since the early 2000s… Professional traders said retail investors, in particular, were trying to pick the turning point for oil, betting that the market will recover quickly once coronavirus-fighting measures are eased.”

April 20 – Financial Times (Laura Noonan): “Up to a fifth of Goldman Sachs’ credit card and personal loans customers are taking payment holidays, a far higher level than at more established lenders such as Bank of America and Wells Fargo. Goldman, which lends to consumers under its Marcus brand and issues credit cards offered by Apple, has seen 10 to 20% of such borrowers request to defer payments since the coronavirus crisis…”

April 18 – Reuters (Mike Spector and Jessica DiNapoli): “Neiman Marcus Group is preparing to seek bankruptcy protection as soon as this week, becoming the first major U.S. department store operator to succumb to the economic fallout from the coronavirus outbreak…”

Fixed-Income Bubble Watch:

April 20 – Reuters (Ann Saphir): “Some 3 million U.S. households have won at least a measure of relief on mortgage payments as efforts to squelch the coronavirus pandemic throw millions out of work and stretch household balance sheets, a survey from the Mortgage Bankers Association showed… About 5.95% of mortgage loans were in forbearance during the survey week of April 6-12, up from 3.74% a week earlier and from just 0.25% the week of March 2…”

April 23 – Bloomberg (Robert Schmidt, Jesse Hamilton and Sally Bakewell): “Private equity’s decade-long debt binge is coming back to haunt it when it comes to obtaining the U.S. government’s coronavirus aid. Already largely shut out of the popular small business rescue loan program, the industry is now realizing that it’s likely to be excluded from the Federal Reserve’s $600 billion lending initiative because it bars companies that have loaded up on borrowed money. The prohibition strikes at the heart of the buyout-shop business model, where firms saddle the companies they purchase with debt in order to mint bigger profits on their investments.”

April 20 – Bloomberg (Lisa Lee): “As U.S. financial markets have rebounded feverishly this past month from the worst of the coronavirus-induced sell-off, one asset has been conspicuously absent from the rally: the collateralized loan obligation. Prices in key parts of the almost $700 billion market -- which through large doses of Wall Street alchemy provides financing to companies with less-than-stellar credit scores -- have remained deeply depressed, typically fetching less than 70 cents on the dollar. Back in February, before the Covid-19 pandemic throttled the economy, they hovered near par. Part of the reason for this is the simple fact that CLOs… have been largely left out of the stimulus programs hastily crafted by U.S. officials to shore up markets… Credit ratings on risky corporate loans that were stuffed into the CLOs are being downgraded at a pace so frenetic that it threatens to overwhelm safeguards that were put in place to ensure the securities’ financial strength.”

April 21 – Reuters (Karen Pierog): “New Jersey’s credit ratings were downgraded on… by Fitch Ratings, which cited expectations the state’s finances will ‘significantly weaken’ due to the coronavirus outbreak. The state’s general obligation rating was lowered one notch to A-minus with a negative outlook, affecting about $1.6 billion in outstanding bonds. Ratings on other state-related debt were also cut a notch to BBB-plus.”

April 22 – Bloomberg (Natalie Wong): “The developer behind the Hudson Yards project says hotels and retail stores will be hit with a ‘wave of defaults’ as the coronavirus batters the U.S. economy. Jeff Blau, chief executive officer of… Related Cos., said that if landlords can’t collect rent, the turmoil will soon cascade to banks. ‘Once that ecosystem of rent to expenses to interest to the banks gets broken at one part of the chain, ultimately it’s going to be a problem at the banks,’ Blau said…”

April 23 – Wall Street Journal (Sam Goldfarb): “A rush to raise cash in the high-yield bond market picked up momentum Thursday, with US Foods Holding Corp., Gap Inc. and MGM Resorts International among the latest companies to complete new bond sales. At least seven businesses rated below investment-grade by a major ratings firm began marketing new bonds on Thursday… Before the new sales were unveiled, this week’s projected high-yield bond issuance was expected to exceed $6 billion… That comes after companies issued $15.8 billion last week—the eighth-largest weekly total on record…”

China Watch:

April 21 – Bloomberg: “Bad debt at Chinese banks climbed in the first quarter even as lenders deferred payments on and rolled over a combined 1.5 trillion yuan ($212bn) in loans after the coronavirus outbreak brought the world’s second-largest economy to a standstill. After allowing banks to take a more lenient approach on how they classify bad debt, regulators in Beijing on Wednesday revealed the industry’s non-performing loan ratio nudged up just 0.06 percentage point to 2.04% at the end of March… ‘The virus has barely made any impact on banks’ asset quality in the first quarter thanks to the policy on delaying loan payments,’ said Wang Jian, an analyst at Guosen Securities Co. ‘We will see a more significant increase in the second quarter.’”

April 21 – Reuters (Yawen Chen and Se Young Lee): “China’s loan defaults, repayment delays and bad loans all rose in the first quarter as the coronavirus outbreak triggered unprecedented economic challenges, officials at the banking and insurance regulator said… The sector’s non-performing loan (NPL) ratio climbed in the first quarter to 2.04%, and it will continue to rise at a moderate pace in the second quarter, said Xiao Yuanqi, chief risk officer at the China Banking and Insurance Regulatory Commission (CBIRC). ‘The coronavirus has brought unprecedented shocks to China’s economic and social development,’ Huang Hong, a vice chairman of the CBIRC, told a news conference…”

April 19 – Reuters (Kevin Yao): “China’s fiscal revenue tumbled 26.1% in March from a year earlier…, extending the previous month’s slump as the coronavirus pandemic ravaged the economy. The massive hit to receipts is expected to increase the government’s reliance on borrowing to fund the stimulus needed to prop up collapsing economic growth.”

April 23 – Financial Times (Sue-Lin Wong and Nicolle Liu): “When China and the UK were negotiating the handover of Hong Kong in the 1980s, Martin Lee helped to write the legal framework that would underpin the future governance of the Asian financial hub, earning him the moniker of the territory’s ‘Father of Democracy’. On Saturday, the 81-year-old lawyer and founder of Hong Kong’s opposition Democratic party was arrested along with 14 other pro-democracy activists as Beijing seeks to tighten its control over the city… With the world distracted by the coronavirus pandemic, Beijing’s representatives in the city have ramped up pressure on the city’s pro-democracy movement ahead of parliamentary elections in September. Aside from the arrests, China has moved to curb the territory’s treasured special autonomy and is suspected to be behind a reshuffle of the city’s government.”

April 20 – Bloomberg (Iain Marlow): “On the surface, Hong Kong leader Carrie Lam appears to have had a few pretty good months: Her government has managed to contain the coronavirus outbreak, during which street protests have mostly disappeared. Yet her bosses in Beijing don’t appear convinced that will help their allies during Legislative Council elections set for September. A spate of arrests and stern official edicts over the past few weeks amount to an offensive that looks designed to ensure China gets its way no matter what happens at the ballot box.”

Central Bank Watch:

April 20 – Bloomberg (Matthew Boesler and Yuko Takeo): “Central-bank balance sheets are expanding to record levels amid their latest buying spree, raising questions about how big they can get and whether those assets can ever be sold back to markets. Policy makers didn’t have much luck paring down much smaller portfolios in the decade since the financial crisis. And now they have to bankroll a coronavirus economy that’s putting government budgets under unprecedented strain and threatening to drive companies everywhere out of business… Central banks in Group of Seven countries purchased $1.4 trillion of financial assets in March, nearly five times as much as the previous monthly record set in April 2009…”

April 22 – Bloomberg (Carolynn Look): “The European Central Bank will accept some junk-rated debt as collateral for its loans to banks in a move that aims to shield the euro area’s most vulnerable economies as they face the risk of credit downgrades in the coronavirus pandemic. The ECB will accept bonds as long as they had at least the lowest investment grade on April 7… The decision to ignore deeper cuts comes two days before a possible reduction for Italy by S&P Global Ratings.”

Europe Watch:

April 24 – Financial Times (Sam Fleming and Mehreen Khan): “EU leaders have failed to resolve deep divisions over whether their proposed ‘recovery fund’ will provide sufficient help to embattled member states as they debate the size of the proposed instrument and the amount of cash it will distribute. Leaders agreed on Thursday night to task the European Commission with creating a ‘recovery fund’ to fuel their economies once the lockdowns ease, but capitals including Paris warned that a programme that simply handed out additional loans, piling debts upon hard-hit member states, would fail to alleviate the deep challenges ahead. Asked after the meeting about the size of the fund, Ursula von der Leyen, commission president, said ‘we are not talking about billion, we are talking about trillion’, but she declined to give specifics…”

April 22 – Reuters (Gabriela Baczynska): “It may take European Union countries until the summer or even longer to agree on how exactly to finance aid to help economies recover from the coronavirus pandemic as major disagreements persist, a bloc official said on Wednesday… ‘My hope is to make progress in June, July,’ said the EU official, who is involved in preparing the leaders’ summit. But a final deal might take even longer: ‘Political lines are moving ... but it will take time,’ the official stressed. Wealthy, fiscally conservative countries like Germany, Austria, Denmark, Sweden, Finland and the Netherlands have rejected calls by the bloc’s ailing southern economies — led by Italy, France and Spain — to sell joint ‘coronabonds’ to raise funds to restart growth.”

April 19 – Bloomberg (John Follain and Nikos Chrysoloras): “Italian Prime Minister Giuseppe Conte joined a chorus of Southern European nations calling for the issuance of as much as 1.5 trillion euros ($1.6 trillion) of joint bonds to aid economies crippled by the coronavirus… Conte evoked the risk of market contagion if European leaders fail to act on pressure from Italy and Spain… His words echo a warning from French President Emmanuel Macron last week that it’s necessary for the EU to ‘issue common debt with a common guarantee’ and that failure to rise to the occasion would lead to the bloc’s collapse.”

April 21 – Financial Times (Sam Fleming and Miles Johnson): “Italy’s prime minister faces an invidious decision over whether to tap Europe’s bailout fund as he balances increasingly toxic domestic politics against the possibility of teeing up extra firepower to tackle the country’s mountainous borrowing requirements. Ahead of a crucial EU leaders’ summit on Thursday, Giuseppe Conte has sent mixed messages over whether Italy will draw on precautionary credit lines from the €500bn European Stability Mechanism. His prevarication reflects divisions within his fragile governing coalition and a recognition that sustained campaigning by Eurosceptic Italian politicians has stained the ESM’s reputation among his electorate.”

April 22 – Bloomberg (John Follain and Alessandra Migliaccio): “Italy’s government expects the budget deficit to rise to more than 10% of economic output this year… Prime Minister Giuseppe Conte’s administration is drawing up an an economic and financial plan, to be approved by cabinet… The government is set to ask parliament for authorization to broaden the budget deficit by about 55 billion euros ($60bn) to finance a new stimulus package in the wake of the coronavirus outbreak, the officials said. The country’s gross domestic product is expected to contract by about 8% this year…”

April 21 – Bloomberg (John Ainger and Anooja Debnath): “The good news is that demand for Italy’s syndicated bond sale topped 110 billion euros ($120bn). The bad news is that the 16 billion euros it raised was a reminder of how much Italy needs the funds, as it confronts the possibility of losing its investment-grade rating. That sent its bonds on a downward spiral, with the yield on 30-year notes breaking above 3% for the first time since mid-March. The sale came just days before S&P Global Ratings is set to review the nation’s credit grade. It currently ranks it at BBB, two notches above junk, with a negative outlook. ‘It’s a perfect storm,’ said Antoine Bouvet, senior rates strategist at ING Groep… But ‘one way or another, they need to raise that cash,’ he said.”

EM Watch:

April 19 – Bloomberg (Ruth Pollard): “India recorded its largest daily spike in coronavirus cases, adding 1,400 new infections to its tally of more than 16,000 amid a nationwide lockdown that’s about to enter its fourth week. The South Asian nation’s cases have been surging over the last week as it gradually scales up its testing capacity.”

April 19 – Bloomberg (Divya Patil): “Indian companies struggling against the coronavirus pandemic and a domestic credit crunch are facing another obstacle: competition from state governments to sell debt. States in Asia’s third-biggest economy are planning to crank up bond sales by 18.2% this quarter from a year earlier to make up for a decline in tax revenue… They usually have lower credit risks than companies, and are offering higher yields than before… The corporate bond market was already suffering, prompting the central bank Friday to again inject more money into it.”

April 20 – Reuters (Marc Jones, Cassandra Garrison and Adam Jourdan): “A group of major asset managers who are creditors to Argentina have rejected the government’s proposal aimed at overhauling $66.2 billion of its foreign-law debt, saying it inflicted an unjust amount of financial pain on international bond holders. Argentina sketched out its proposal late last week involving a three-year grace period, large coupon cuts and a smaller reduction in capital that would provide the South American nation with around $41.5 billion of relief.”

April 21 – Bloomberg (Patrick Gillespie): “Argentina’s money supply is surging as the country deals with the economic fallout of the coronavirus pandemic, stoking inflation fears and increasing the chances of a chaotic debt default next month. Since the country is cut off from credit markets as it nears default, it can’t borrow to fund stimulus programs, as other countries in the region are doing. Instead, the central bank is emitting massive amounts of money to cover government programs… ‘The risk of inflation is right around the corner,’ said Marina Dal Poggetto, executive director at consulting firm Eco Go in Buenos Aires… ‘Argentina is facing fiscal needs and the only tool in the short term I’d say is monetary emission.’ Since the lockdown was announced March 19, the monetary base has increased about 20%...”

April 21 – Reuters (Anthony Esposito): “Mexico’s central bank unveiled around $31 billion in support for the financial system and cut borrowing costs… in the country’s most decisive move yet to help the economy weather the coronavirus pandemic. Banxico, as the Bank of Mexico is known, said it implemented the measures to ‘foster an orderly behaviour of financial markets, strengthen the credit channels and provide liquidity for the sound development of the financial system.’”

April 22 – Bloomberg (Cagan Koc, Constantine Courcoulas and Kerim Karakaya): “Turkey lowered interest rates more than forecast by most economists, forcing state banks to defend the lira to keep it from breaching a key threshold against the dollar. Government-owned lenders sold at least $600 million to support the Turkish currency after the rate decision… The Monetary Policy Committee on Wednesday reduced its benchmark for an eighth time in less than a year, lowering it to 8.75% from 9.75%.”

April 21 – Bloomberg (Constantine Courcoulas and Kerim Karakaya): “Turkish government-owned lenders sold at least $300 million to support the currency after a bigger-than-expected rate cut piled pressure on the lira, according to two traders… Interventions come as the lira tests the psychologically important 7-per-dollar mark, a level it hasn’t crossed since the August 2018 currency crisis…”

Japan Watch:

April 19 – Reuters (Tetsushi Kajimoto): “Japan boosted its new economic stimulus package… to a record $1.1 trillion to expand cash payouts to its citizens… Prime Minister Shinzo Abe formally decided the new stimulus less than two weeks after his cabinet approved an earlier plan to spend 108.2 trillion yen ($1 trillion)…”

April 19 – Reuters (Tetsushi Kajimoto): “Japan’s exports slumped the most in nearly four years in March as U.S.-bound shipments, including cars, fell at the fastest rate since 2011… Japanese exports fell 11.7% in the year to March, compared with a 10.1% decrease expected…”

Leveraged Speculation Watch:

April 22 – Bloomberg (Melissa Karsh): “Investors pulled a net $33 billion from hedge funds in the first quarter, the most in more than a decade. The total is about 1% of industry capital, and the largest quarterly outflow since investors yanked about $42 billion in the second quarter of 2009, according to… Hedge Fund Research Inc. In all of 2019, investors pulled $43.1 billion. Some of the industry’s largest names took a hit in last month’s market tumult, including funds run by Ray Dalio, Michael Hintze and Adam Levinson.”

April 18 – Wall Street Journal (Juliet Chung): “Citigroup Inc.’s private bank decided to sever its relationship with Anthony Scaramucci’s SkyBridge Capital and expects to see clients redeem $100 million over time, said a person familiar with the matter. Citigroup’s decision earlier this week follows a more-than-20% loss in March by SkyBridge’s flagship fund…”

April 23 – Bloomberg (Stefania Spezzati, Viren Vaghela and Geraldine Amiel): “Societe Generale SA lost hundreds of millions of euros on stock trades during the market turmoil triggered by the coronavirus pandemic, following in the footsteps of French rival BNP Paribas SA. Traders at the Paris-based bank lost between 150 million and 200 million euros ($160 million to $215 million) on equity derivatives…”

Geopolitical Watch:

April 18 – Reuters (Jeff Mason, Matt Spetalnick, Idrees Ali, Julia Harte and Makini Brice): “U.S. President Donald Trump warned China… it should face consequences if it was ‘knowingly responsible’ for the coronavirus pandemic, as he ratcheted up criticism of Beijing over its handling of the outbreak. ‘It could have been stopped in China before it started and it wasn’t, and the whole world is suffering because of it,’ Trump told a daily White House briefing.”

April 18 – Reuters (Matt Spetalnick and Sarah Lynch): “The Trump administration… condemned Hong Kong’s arrests of 15 activists, including veteran politicians, a publishing tycoon and senior barristers, describing them as ‘inconsistent’ with China’s international commitments. The raids mark the biggest crackdown on the pro-democracy movement since the beginning of anti-government protests across the former British colony in June last year.”

April 23 – Reuters (Parisa Hafezi): “Iran will destroy U.S. warships if its security is threatened in the Gulf, the head of Iran’s elite Revolutionary Guards told state TV…, a day after U.S. President Donald Trump warned Tehran over ‘harassment’ of U.S. vessels. ‘I have ordered our naval forces to destroy any American terrorist force in the Persian Gulf that threatens security of Iran’s military or non-military ships,’ Major General Hossein Salami said. ‘Security of the Persian Gulf is part of Iran’s strategic priorities.’ Trump said… he had instructed the U.S. Navy to fire on any Iranian ships that harass it at sea, but said later he was not changing the military’s rules of engagement.”

April 19 – Bloomberg (Golnar Motevalli): “Iran’s central bank governor urged the International Monetary Fund to resist U.S. pressure and approve its application for financing to help bridge a 10 billion-euro ($10.9bn) deficit as the country’s sanctions-hit economy struggles to cope with the coronavirus pandemic.”

April 20 – Reuters (Jeff Mason): “President Donald Trump said… his administration was considering the possibility of stopping incoming Saudi Arabian crude oil shipments as a measure to support the battered domestic drilling industry. ‘Well, I’ll look at it,’ Trump told reporters… after he was asked about requests by some Republican lawmakers to block the shipments under his executive authority.”