Saturday, July 25, 2020

Weekly Commentary: Crossing Red Lines

The Shanghai Composite traded as high as 3,382 during Tuesday trading, before reversing 5.5% lower to end the week at 3,192. The Shanghai Composite previously surged 16% over eight sessions (June 30th to July 9th), highlighted by a 5.7% jump on July 6th. This index sank 4.4% on July 16th – and then fell 3.9% in Friday trading. China’s growth-oriented ChiNext Index sank 6.1% Friday.

COVID stimulus stoked Bubble Dynamics for global risk assets, certainly including Chinese equities. This Bubble has turned unstable. Chinese stocks reversed sharply lower after the U.S.’s shocking closure of China’s Houston consulate. Fundamentals and geopolitics do matter.

July 23 – Reuters (Fred Imbert): “China said the U.S. move to close its Houston consulate this week had ‘severely harmed’ relations and warned it ‘must’ retaliate… Washington… gave China 72 hours to close the consulate, which it said was ‘to protect American intellectual property and Americans’ private information,’ a dramatic escalation of tension between the world’s two biggest economies. Chinese Foreign Ministry spokesman Wang Wenbin described the U.S. allegations as ‘malicious slander’ and said the ‘unreasonable’ move had ‘severely harmed’ relations. ‘China must make a necessary response and safeguard its legitimate rights,’ he said…”

It has been an alarming deterioration in U.S./China relations over recent months. Bubble markets have been content to disregard what has been a virtual collapse in relations over recent days and weeks.

The unfolding U.S./China cold war is most regrettable. The only surprise, in my eyes, is that the relationship held together as long as it did. It was destined to mature into an intense superpower rivalry. From a Bubble Analysis perspective, the boom cycle fostered the perception of an expanding economic pie. Cooperation and integration were considered mutually beneficial. It was also unsustainable.

Stark changes in perceptions and relationships are fundamental to the bursting global Bubble thesis. The economic pie is stagnating rather than expanding. It’s become a zero-sum game – an inevitable new zeitgeist accelerated by COVID. Even as their respective Bubbles floundered over the past 18 months, an attitude persisted that the U.S. and China needed to work together to ensure stability. No more.

A local Houston television station Tuesday broke the story of fire engines responding to smoke coming from the Chinese consulate. Aerial photographs captured fires in three burn barrels in the consulate’s courtyard. Wednesday the State Department announced they had given the Chinese 72 hours to close the Houston consulate and leave the country. China is fuming.

From the New York Times (Keith Bradsher and Steven Lee Myers): “In the Chinese telling, Beijing is under assault, as the Trump administration goes after it with increasing intensity on trade, technology and human rights. All in a matter of weeks, the United States has sanctioned Chinese officials over the ruling Communist Party’s policies in Hong Kong and the western region of Xinjiang, cut off Chinese companies’ access to American technology and challenged Beijing’s claims in the South China Sea. The party’s propaganda outlets struck a nationalistic note on Friday, vowing that Beijing would hold firm in the face of mounting pressure from the United States.”

There’s no longer a shred of doubt. Beijing can blame its problems on the United States – and it will be credible to its riled citizens. The U.S. over recent weeks has been frenetically Crossing China’s Red Lines (like kids skipping over cracks in a sidewalk). We’re in the thick of election season – and the current administration might be short-timers. But huge – likely irreparable – damage is being wrought upon the most paramount of global relationships.

July 23 – Wall Street Journal (Kate O’Keeffe and William Mauldin): “Secretary of State Mike Pompeo called on the Chinese people to alter the ruling Communist Party’s direction in a speech explaining the Trump administration’s full-throttle response to an assertive China. Chinese leader Xi Jinping is a ‘true believer in a bankrupt, totalitarian ideology,’ Mr. Pompeo said. He stopped shy of explicitly calling for regime change, urging allied countries and the people of China to work with the U.S. to change the Communist Party’s behavior. The Communist Party ‘fears the Chinese people’s honest opinions more than any foe,’ Mr. Pompeo said… at the Richard Nixon Presidential Library… The U.S. ‘must also engage and empower the Chinese people,’ he said.”

It was crafted with history in mind (and to poke China in the eye). I’ve pulled significantly from Secretary of State Mike Pompeo’s Wednesday speech, believing it is both historic and unsettling. Pompeo may have “stopped shy of explicitly calling for regime change,” but in the eyes of China’s top leadership he surely Crossed the Reddest of Lines.

Pompeo: “Next year marks half a century since Dr. Kissinger’s secret mission to China, and the 50th anniversary of President Nixon’s trip isn’t too far away in 2022. The world was much different then. We imagined engagement with China would produce a future with bright promise of comity and cooperation. But today – today we’re all still wearing masks and watching the pandemic’s body count rise because the CCP failed in its promises to the world. We’re reading every morning new headlines of repression in Hong Kong and in Xinjiang. We’re seeing staggering statistics of Chinese trade abuses that cost American jobs and strike enormous blows to the economies all across America… And we’re watching a Chinese military that grows stronger and stronger, and indeed more menacing.”

“Look, we have to admit a hard truth. We must admit a hard truth that should guide us in the years and decades to come, that if we want to have a free 21st century, and not the Chinese century of which Xi Jinping dreams, the old paradigm of blind engagement with China simply won’t get it done. We must not continue it and we must not return to it… The free world must triumph over this new tyranny.”

“The truth is that our policies – and those of other free nations – resurrected China’s failing economy, only to see Beijing bite the international hands that were feeding it.”

“…A quote from the speech that General Barr gave…‘The ultimate ambition of China’s rulers isn’t to trade with the United States. It is to raid the United States.’ China ripped off our prized intellectual property and trade secrets, causing millions of jobs [losses] all across America.”

“President Nixon once said he feared he had created a ‘Frankenstein’ by opening the world to the CCP, and here we are.”

“…We have to keep in mind that the CCP regime is a Marxist-Leninist regime. General Secretary Xi Jinping is a true believer in a bankrupt totalitarian ideology. It’s this ideology, it’s this ideology that informs his decades-long desire for global hegemony of Chinese communism. America can no longer ignore the fundamental political and ideological differences between our countries, just as the CCP has never ignored them…”

"That the only way – the only way to truly change communist China is to act not on the basis of what Chinese leaders say, but how they behave… President Reagan said that he dealt with the Soviet Union on the basis of ‘trust but verify.’ When it comes to the CCP, I say we must distrust and verify. We, the freedom-loving nations of the world, must induce China to change, just as President Nixon wanted. We must induce China to change in more creative and assertive ways, because Beijing’s actions threaten our people and our prosperity.”

“We know too that if our companies invest in China, they may wittingly or unwittingly support the Communist Party’s gross human rights violations.”

“…Our Department of Defense has ramped up its efforts, freedom of navigation operations out and throughout the East and South China Seas, and in the Taiwan Strait as well. And we’ve created a Space Force to help deter China from aggression on that final frontier… We reversed, two weeks ago, eight years of cheek-turning with respect to international law in the South China Sea.”

“But our approach can’t just be about getting tough. That’s unlikely to achieve the outcome that we desire. We must also engage and empower the Chinese people – a dynamic, freedom-loving people who are completely distinct from the Chinese Communist Party… The CCP fears the Chinese people’s honest opinions more than any foe, and save for losing their own grip on power, they have reason – no reason to… For too many decades, our leaders have ignored, downplayed the words of brave Chinese dissidents who warned us about the nature of the regime we’re facing. And we can’t ignore it any longer. They know as well as anyone that we can never go back to the status quo.”

“But I call on every leader of every nation to start by doing what America has done – to simply insist on reciprocity, to insist on transparency and accountability from the Chinese Communist Party. It’s a cadre of rulers that are far from homogeneous. And these simple and powerful standards will achieve a great deal. For too long we let the CCP set the terms of engagement, but no longer. Free nations must set the tone. We must operate on the same principles.”

“We cannot repeat the mistakes of these past years. The challenge of China demands exertion, energy from democracies – those in Europe, those in Africa, those in South America, and especially those in the Indo-Pacific region. And if we don’t act now, ultimately the CCP will erode our freedoms and subvert the rules-based order that our societies have worked so hard to build. If we bend the knee now, our children’s children may be at the mercy of the Chinese Communist Party, whose actions are the primary challenge today in the free world. General Secretary Xi is not destined to tyrannize inside and outside of China forever, unless we allow it.”

“So we can’t face this challenge alone. The United Nations, NATO, the G7 countries, the G20, our combined economic, diplomatic, and military power is surely enough to meet this challenge if we direct it clearly and with great courage. Maybe it’s time for a new grouping of like-minded nations, a new alliance of democracies. We have the tools. I know we can do it. Now we need the will. To quote scripture, I ask is ‘our spirit willing but our flesh weak?’ If the free world doesn’t change – doesn’t change, communist China will surely change us. There can’t be a return to the past practices because they’re comfortable or because they’re convenient. Securing our freedoms from the Chinese Communist Party is the mission of our time, and America is perfectly positioned to lead it because our founding principles give us that opportunity.”


“Indeed, Richard Nixon was right when he wrote in 1967 that ‘the world cannot be safe until China changes.’ Now it’s up to us to heed his words. Today the danger is clear. And today the awakening is happening. Today the free world must respond. We can never go back to the past.”


The U.S. has Crossed China’s Red Lines – have U.S./China relations crossed the Rubicon? I’ve for years now feared this rivalry risked deteriorating into confrontation. Such analysis doesn’t seem as wacko these days. And sure, U.S. stocks ended down slightly for the week, as manic markets somewhat began to take notice. It was fascinating to contrast market complacency with regard to collapsing U.S./China relations, to analysts histrionic response to the EU agreeing to debt mutualization (and grants to nations) as part of its COVID stimulus package.

July 20 – Associated Press (Raf Casert and Samuel Petrequin): “Weary but relieved, European Union leaders finally clinched an unprecedented 1.82 trillion euro ($2.1 trillion) budget and coronavirus recovery fund early Tuesday, somehow finding unity after four days and as many nights of fighting and wrangling over money and power in one of their longest summits ever. To confront the biggest recession in its history, the EU reached a consensus on a 750 billion euro coronavirus fund to be sent as loans and grants to the countries hit hardest by the virus. That comes on top of the seven-year 1 trillion euro EU budget. At first the grants were to total 500 billion euros, but the figure was lowered to 390 billion euros.”

Italian yields ended the week below 1% for the first time, with Greek yields down to a record low 1.05%. The euro closed the week at 1.1656, the high since September 2018. “Whatever it takes” ECB stimulus finally has its faithful partner: EU debt mutualization. As bullish thinking goes, no longer must markets fret a collapsing Italy seeking to exit the euro currency. European monetary integration’s weak link has been fortified.

Count me skeptical that this week’s EU compromise opens the floodgates for years of joint Eurobonds, with finance flowing freely to Italy and its “Club Med” neighbors. COVID created unique and pressing issues – and in four tough days of negotiations leaders from the 27 member nations mustered a compromise. But we haven’t heard the last from the “frugal four” (Sweden, Denmark, Austria and the Netherlands). Markets shouldn’t go too crazy in their mental extrapolations and “fiscal union” dreams. Deep philosophical divisions have not been resolved. Indeed, bitterness and animosity were likely reinforced. Going forward – post-COVID - I don’t expect widespread public support for fiscal union or EU handouts.

July 23 – Bloomberg (Joe Light): “Hedge funds and mutual funds are among bond holders that could lose $2 billion as a consequence of U.S. lawmakers letting millions of homeowners delay their mortgage payments… At stake are so-called credit-risk-transfer securities whose owners include fixed-income funds run by Franklin Resources and AllianceBernstein Holding LP. The securities, which threaten to lead to estimated losses of between $1 billion and $2 billion, are intended to shift the risk of borrower defaults on Fannie Mae and Freddie Mac mortgages to private investors. The issue is an unintended side effect of the response to the global health crisis. As the U.S. economy shut down in March, Congress rushed to pass the $2 trillion CARES Act, which included a provision that allowed forbearance on loans backed by Fannie and Freddie for as long as one year if borrowers were impacted by the pandemic.”

We’ve only begun to scratch the surface of COVID ramifications. Perhaps a small silver lining - it should quell the idea of privatizing Fannie Mae and Freddie Mac. The CARES Act provision for forbearance on Fannie and Freddie mortgages offers a timely reminder that the bulk of U.S. mortgage risk is nationalized. And in difficult times this nationalization will be explicit – and costly for the U.S. taxpayer. I am opposed to private sector skimming “profits” during the good times only to leave skin and bones and worse for when things turn bad. We’ve seen enough of that.

COVID is accelerating myriad trends and dynamics: bursting global Bubbles, Fed and global central bank inflationism, global economic structure, U.S./China relations and the world order more generally.

The U.S. dollar index dropped 1.6% this week to the low since September 2018. The dollar fell 2.0% versus the euro and Swiss franc and 0.8% against the Japanese yen. Interestingly, China’s renminbi was the only major currency down versus the dollar this week (0.37%). Against the euro and Swiss franc, the renminbi lost a notable 2.3%. The renminbi fell 1.2% versus the yen. Meanwhile, gold bullion surged $92, or 5.1%, to $1,902 – just below the all-time high from September 2011.

It’s intriguing to see both the dollar and renminbi underperform global currencies in a week when U.S./China relations took a turn (dive) for the worse. “The truth is that our policies – and those of other free nations – resurrected China’s failing economy,” Pompeo asserts. How China was capable of rising to global superpower status in only a couple decades will be debated for decades to come. Many were complicit. Virtually everyone wanted to participate in the historic boom. Who wasn’t willing to overlook longer-term ramifications, while disregarding red flags flying in abundance?

I’m not confident history will fault the Federal Reserve and decades of unsound money. The U.S. has run persistent Current Account Deficits for more than thirty years, flooding the world with dollar liquidity. Serial Bubbles began in Japan in the mid-eighties, then to Mexico, SE Asia, Russia, Brazil, Argentina, Iceland and so on. It would eventually make it to China.

Here at home, the bursting of the ‘90s “tech” Bubble spurred reflationary policymaking and the resulting mortgage finance Bubble. What was not to like about “globalization”?  The U.S. could deindustrialize – and clean its air in the process. Services suited policymakers just fine. And all the cheap imports kept CPI low, ensuring endless easy money to inflate equities, bond and asset prices more generally. Besides, all those dollars flooding the world from Current Account Deficits would just be recycled back to U.S. Treasuries and financial assets. Miraculous. What could go wrong?

China ended 2002 with international reserve holdings of less than $300 billion. U.S. Bubble period trade deficits saw Chinese international reserves spike to almost $2.0 TN by the end of 2008. Things then went crazy. QE1 was instrumental in China’s reserves inflating another $1 TN by 2011 – on their way to 2014’s $4.0 TN.

I seriously doubt China’s banking system inflates from $8 TN to $43 TN during this cycle without Trillions of “Bubble Dollars” flooding the world and its resulting reserves horde. U.S. crisis and QE1 provided China a blank check for a massive $600 billion 2009 stimulus plan. And Chinese Credit – along with investment, manufacturing, apartment Bubble, economic boom, technological advancement, military buildup, global influence peddling, and ambitions for superpower status – never looked back.

For years now, CBB analysis has focused on the interdependence of historic U.S. and Chinese Bubbles. “Decoupling” has commenced – spurred on by COVID. Myriad uncertainties and fragilities ensure intense pressures on both the Fed and PBOC to keep their respective systems afloat. Crazy equities, for now, luxuriate in the thought of ultra-easy money for as far as the eye can see.

Meanwhile, the safe havens sense one hell of a crisis brewing. Ten-year Treasury yields this week traded below 0.6%, with German bund yields holding at negative 0.45%. And the metals are on fire. Gold was up 5% and silver jumped almost 16% this week. Surging industrial metals prices add further intrigue. I doubt prices are surging on economic prospects. In a world of such uncertainty and unfolding mayhem, all the metals are viewed as Stores of Value. Will future historians see this week as pivotal for Red Lines Being Crossed?


For the Week:

The S&P500 slipped 0.3% (down 0.5% y-t-d), and the Dow declined 0.8% (down 7.2%). The Utilities were little changed (down 5.5%). The Banks rallied 3.3% (down 33.4%), while the Broker/Dealers declined 1.1% (down 2.7%). The Transports fell 1.7% (down 10.7%). The S&P 400 Midcaps gained 0.7% (down 10.3%), while the small cap Russell 2000 dipped 0.4% (down 12.0%). The Nasdaq100 fell 1.5% (up 20.0%). The Semiconductors lost 1.5% (up 10.2%). The Biotechs dropped 4.5% (up 13.9%). With bullion surging $92, the HUI gold index jumped 7.5% (up 41.2%).

Three-month Treasury bill rates ended the week at 0.1025%. Two-year government yields were little changed at 0.15% (down 142bps y-t-d). Five-year T-note yields slipped a basis point to 0.28% (down 142bps). Ten-year Treasury yields fell four bps to 0.59% (down 133bps). Long bond yields sank 10 bps to 1.23% (down 116bps). Benchmark Fannie Mae MBS yields declined three bps to 1.42% (down 129bps).

Greek 10-year yields dropped 13 bps to 1.05% (down 38bps y-t-d). Ten-year Portuguese yields were down six bps to 0.36% (down 9bps). Italian 10-year yields sank 17 bps to 1.00% (down 42bps). Spain's 10-year yields fell six bps to 0.35% (down 12bps). German bund yields were unchanged at negative 0.45% (down 26bps). French yields declined a basis point to negative 0.15% (down 27bps). The French to German 10-year bond spread narrowed one to 30 bps. U.K. 10-year gilt yields declined two bps to 0.14% (down 68bps). U.K.'s FTSE equities index dropped 2.6% (down 18.8%).

Japan's Nikkei Equities Index added 0.2% (down 3.8% y-t-d). Japanese 10-year "JGB" yields declined one basis point to 0.02% (up 3bps y-t-d). France's CAC40 fell 2.2% (down 17.1%). The German DAX equities index declined 0.6% (down 3.1%). Spain's IBEX 35 equities index dropped 2.0% (down 23.6%). Italy's FTSE MIB index fell 1.7% (down 14.6%). EM equities were mixed. Brazil's Bovespa index declined 0.5% (down 11.5%), while Mexico's Bolsa rallied 2.8% (down 14.2%). South Korea's Kospi index was little changed (unchanged). India's Sensex equities index jumped 3.0% (down 7.6%). China's Shanghai Exchange declined 0.5% (up 4.8%). Turkey's Borsa Istanbul National 100 index increased 0.3% (up 4.2%). Russia's MICEX equities index jumped 3.2% (down 6.0%).

Investment-grade bond funds saw inflows of $7.746 billion, and junk bond funds posted positive flows of $3.908 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates increased three bps to 3.01% (down 74bps y-o-y). Fifteen-year rates rose six bps to 2.54% (down 64bps). Five-year hybrid ARM rates gained three bps to 3.09% (down 38bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down two bps to 3.17% (down 87bps).

Federal Reserve Credit last week expanded $31.0bn to $6.912 TN, with a 46-week gain of $3.190 TN. Over the past year, Fed Credit expanded $3.145 TN, or 84%. Fed Credit inflated $4.101 Trillion, or 146%, over the past 402 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $2.9 billion last week to $3.402 TN. "Custody holdings" were down $58.6bn, or 1.7%, y-o-y.

M2 (narrow) "money" supply jumped $74.7bn last week to $18.400 TN, with an unprecedented 20-week gain of $2.892 TN. "Narrow money" surged $3.579 TN, or 24%, over the past year. For the week, Currency increased $8.5bn. Total Checkable Deposits rose $74.8bn, and Savings Deposits gained $5.2bn. Small Time Deposits fell $7.0bn. Retail Money Funds declined $6.6bn.

Total money market fund assets gained $20.2bn to $4.588 TN. Total money funds surged $1.304 TN y-o-y, or 40%.

Total Commercial Paper declined $4.7bn to $1.021 TN. CP was down $130bn, or 11.3% year-over-year.

Currency Watch:

July 22 – Reuters (Getrude Chavez-Dreyfus): “A steady decline in the dollar has accelerated in recent weeks, as a resurgent coronavirus outbreak in the United States and improving economic prospects abroad sour investors on the currency. The buck is down 8% from its highs of the year against a basket of currencies and stands near its lowest level since 2018… ‘The dollar is hanging by a thread,’ said Mazen Issa, senior currency strategist at TD Securities… ‘At this point, the dollar-weakness mindset has become deeply entrenched.’”

July 21 – Bloomberg (John Ainge, Olivia Konotey-Ahulu, and Theo Golden): “Europe’s landmark recovery deal is just what the euro needs to press on with a rally that could send the common currency to multi-year highs, according to strategists. Having been in the doldrums since the euro area sovereign debt crisis nearly ripped the bloc apart less than a decade ago, strategists see the common currency roaring back in the coming months, potentially as high as $1.30. For the first time member states will underwrite joint bond issuance, posing a challenge to the hegemony of the dollar in financial markets.”

For the week, the U.S. dollar index fell 1.6% to 94.435 (down 2.1% y-t-d). For the week on the upside, the Brazilian real increased 2.9%, the Swedish krona 2.2%, the euro 2.0%, the Swiss franc 2.0%, the British pound 1.8%, the Australian dollar 1.6%, the Norwegian krone 1.5%, the New Zealand dollar 1.3%, the Canadian dollar 1.2%, the Mexican peso 1.2%, the Japanese yen 0.8%, the Singapore dollar 0.6%, the South Korean won 0.3% and the South African rand 0.2%. The Chinese renminbi declined 0.37% versus the dollar this week (down 0.79% y-t-d).

Commodities Watch:

July 22 – Reuters (Eileen Soregn): “Gold surged to a nine-year peak… on bets that central banks would introduce more stimulus measures to ease the economic impact of coronavirus, while silver scaled a near seven-year high on hopes of a rebound in industrial activity… ‘The fact that governments, central banks and pretty much everyone else are looking to more fiscal and monetary policy inputs is helping drive the yellow metal,’ said Michael Hewson, chief market analyst at CMC Markets UK.”

The Bloomberg Commodities Index jumped 2.5% (down 15.7% y-t-d). Spot Gold jumped 5.1% to $1,902 (up 25.3%). Silver surged 15.7% to $22.85 (up 27.5%). WTI crude gained 1.8% to $41.34 (down 32%). Gasoline jumped 5.2% (down 24%), and Natural Gas rose 5.2% (down 17%). Copper slipped 0.4% (up 3%). Wheat gained 0.9% (down 3%). Corn fell 1.4% (down 14%).

Coronavirus Watch:

July 21 – Reuters (Lisa Shumaker): “U.S. deaths from the novel coronavirus rose by more than 1,000 on Tuesday, the biggest single-day increase since early June…”

July 22 – CNBC (Noah Higgins-Dunn): “California reported more than 12,800 coronavirus cases on Tuesday, the highest reported daily tally the state has recorded so far… California has now surpassed New York in total confirmed Covid-19 cases — more than 409,500 cases as of Wednesday — making it the state with the most cases in the U.S.”

July 21 – Reuters (Jane Wardell and Gayle Issa): “Global coronavirus infections surged past 15 million on Wednesday, according to a Reuters tally, with the pandemic gathering pace even as countries remain divided in their response to the crisis.”

July 21 – Associated Press (Carla K. Johnsn, Matt Sedensky and Candice Choi): “One of the great mysteries of the coronavirus is how quickly it rocketed around the world. It first flared in central China and, within three months, was on every continent but Antarctica, shutting down daily life for millions. Behind the rapid spread was something that initially caught scientists off guard, baffled health authorities and undermined early containment efforts — the virus could be spread by seemingly healthy people. As workers return to offices, children prepare to return to schools and those desperate for normalcy again visit malls and restaurants, the emerging science points to a menacing reality: If people who appear healthy can transmit the illness, it may be impossible to contain.”

July 20 – Reuters (Julie Steenhuysen): “Early data from trials of three potential COVID-19 vaccines released on Monday, including a closely-watched candidate from Oxford University, increased confidence that a vaccine can train the immune system to recognize and fight the novel coronavirus without serious side effects.”

July 22 – Reuters (Stephanie Nebehay and John Miller): “Researchers are making ‘good progress’ in developing vaccines against COVID-19, with a handful in late-stage trials, but their first use cannot be expected until early 2021, a World Health Organization (WHO) expert said…”

July 21 – Bloomberg (James Paton, Robert Langreth, and Stephanie Baker): “When it comes to protecting the world from the coronavirus, two doses of a vaccine may be better than one. But doubling the number of jabs each person needs could complicate efforts to immunize billions of people. The latest results from front-runners in the sprint to come up with a vaccine, including the University of Oxford-AstraZeneca Plc partnership and Moderna Inc., highlight that prospect. Both efforts are conducting final-stage testing with two doses. Producing vaccines and deploying them to the world’s population in the midst of a pandemic would be a massive feat even if researchers are able to deliver single-dose inoculations. A need for two would make manufacturing and logistics even more complex.”

July 20 – Financial Times (David Crow): “The largest laboratory company in the US has warned it will be impossible to increase coronavirus testing capacity to cope with a surge in demand during the autumn flu season… The stark warning comes as the country struggles to tackle a resurgence of the disease, especially in sunbelt states like California, Texas and Florida, even as some countries in Europe and Asia have had some success in taming the virus. Long delays in processing test results — which are taking more than a week to return — are exacerbating the situation and the time lag is expected to worsen in the autumn, when millions of Americans catch common colds and the flu.”

July 22 – Reuters (Javier López de Lérida, Pedro Fonseca and Gram Slattery): “Brazil and Argentina registered daily records for confirmed coronavirus cases on Wednesday, pushing the total number of cases in Latin America past 4 million… Brazil registered 67,860 additional cases of the virus on Wednesday, along with 1,284 related deaths. That brought the total number of cases in Latin America’s largest nation to 2,227,514, while deaths rose to 82,771. Neighboring Argentina posted a daily record of 5,782 confirmed cases, the vast majority of them in and around… Buenos Aires…”

July 23 – Bloomberg (Jinshan Hong): “Coronavirus resurgences in the Asia-Pacific region reached new heights this week, with Hong Kong, Tokyo and Australia’s Victoria state seeing consecutive record growth in infections in a sign containing the virus is becoming more challenging across the world. Hong Kong reported 111 locally-transmitted virus cases on Thursday… as the city scrambles to boost hospitalization and testing capacity in the face of its worst outbreak ever. In Japan, the start of a four-day holiday weekend was marred by a record 366 cases detected in Tokyo, as well as a second day of more than 100 cases in Osaka…”

July 23 – Reuters (Zeba Siddiqui and Rajendra Jadhav): “India reported over 49,000 fresh cases of the novel coronavirus with 740 new deaths on Friday, marking the biggest daily surge in cases even as officials in some states complained of shortages of vital drugs for those hospitalized.”

July 21 – Bloomberg (Michelle Fay Cortez and Niclas Rolander): “Recovering from Covid-19 may not offer much protection from future infections for those with only a mild case, according to a report that suggests caution regarding so-called herd immunity as well as the durability of vaccines. The correspondence in the New England Journal of Medicine outlined research on antibodies taken from the blood of 34 patients who had recovered after suffering mainly mild symptoms… The first analysis was done on antibodies taken an average of 37 days after symptoms began, with a second after about 86 days… The researchers found that antibody levels fell quickly, with a half-life of about 73 days between the two time frames. The loss of antibodies occurred more quickly than with SARS, an earlier type of coronavirus infection.”

Market Instability Watch:

July 23 – Financial Times (John Dizard): “The note sent on July 14 by the Federal Reserve’s vice-chair Randal Quarles to other central bank governors and finance ministers reads like one of those anodyne diplomatic demarches that trade hands just before a major war. The note… is a warning directed against hedge funds, big asset managers and anyone else Quarles and the Fed believe to be responsible for the approaching apocalypse in the fixed income markets… After the usual niceties for fellow FSB regulators, Mr Quarles gets down to the point, which is ‘reinforcing resilient non-bank financial intermediation (NBFI)’. As Mr Quarles puts it, the Covid-19 crisis ‘has highlighted vulnerabilities in the NBFI sector related to liquidity mismatches, leverage, and interconnectedness, and investor behaviour to certain funds that they treat as cash equivalents during economic calm, but not during crisis’.”

July 20 – Bloomberg (Jeran Wittenstein and Sarah Ponczek): “The stay-at-home trade roared back on Monday after a rough week, sending the Nasdaq 100 to its best gain in three months and pushing one measure of momentum to the highest in two decades… The rally has pushed the Nasdaq 100 further away from its recent trend line. Trading 21% above its average price over the past 100 days, the gap is the widest since the dot-com peak in March 2000.”

July 20 – Bloomberg (Jack Pitcher): “Jeff Bezos added $13 billion to his net worth on Monday, the largest single-day jump for an individual since the Bloomberg Billionaires Index was created in 2012. Amazon.com Inc. shares surged 7.9%... and are now up 73% this year. Bezos… has seen his fortune swell $74 billion in 2020 to $189.3 billion, despite the U.S. entering its worst economic downturn since the Great Depression.”

July 21 – Bloomberg (Stephen Spratt, Liz Capo McCormick and James Hirai): “As fast and furiously as the world’s central banks are purchasing debt, there’s still about $1 trillion of sovereign bonds coming to market in the months ahead that will be looking for buyers. The flood of fresh debt, sold by governments to fund pandemic-rescue packages, threatens to dwarf central-bank buying and swamp markets in the U.K., Canada and Australia, according to Bloomberg calculations. Policy-maker purchases will also lag issuance in the U.S. and Japan…”

Global Bubble Watch:

July 19 – Financial Times (Jonathan Wheatley): “Some of the world’s largest developing economies are set to face a fiscal crisis in the coming years unless they can roll back huge increases in public spending enacted in response to the Covid-19 pandemic, analysts have warned. The economic downturn caused by the pandemic, combined with rising healthcare spending to tackle the spread of the virus, have caused budget deficits to soar in many countries. They will have to face the choice of risking public unrest by cutting back on spending, or negotiating with investors to restructure their debts.”

July 20 – Reuters (Joori Roh): “South Korean exports fell during the first 20 days of July by a larger percentage than in June as protracted a lockdown and delay in economic reopenings across the world cut global demand. The country’s overseas sales during July 1-20 dropped 12.8% from the same period a year earlier, while imports slid 13.7%...”

July 22 – Reuters (Swati Pandey): “Australia’s budget is set to plunge into its biggest deficit since World War Two this year… Although Australia has managed the pandemic better than most developed nations, the shattering global impact of the outbreak has left its trade-exposed A$2 trillion ($1.43 trillion) economy grappling with skyrocketing unemployment as many businesses sink in red ink.”

July 20 – Bloomberg (Todd Gillespie): “Global real estate investment fell by 33% in the first half as the coronavirus pandemic battered economies and disrupted deals. The Asia-Pacific region took the biggest hit, with volumes down 45% from the year-earlier period…, according to… broker Savills Plc. Investment dropped by 36% in the Americas and 19% in Europe, the Middle East and Africa.”

Trump Administration Watch:

July 22 – Bloomberg (Nick Wadhams and Peter Martin): “Donald Trump spent the first three years of his presidency balancing the demands of hardliners who wanted a crackdown on China against his own desire to pursue a trade deal and cultivate a stronger relationship with Xi Jinping. The unexpected order Wednesday to close the Chinese consulate in Houston made one thing clear: the hawks are now in charge. Eager to blame China for the Covid-19 pandemic and fed up with what U.S. officials call a history of espionage and intellectual-property theft, Trump has allowed a small group of advisers led by Secretary of State Michael Pompeo to push U.S. policy toward its most antagonistic in decades. The result is a series of sanctions, restrictions and condemnations that culminated in the Houston decision.”

July 23 – CNBC (Amanda Macias): “Capping a string of searing speeches by Trump administration officials, Secretary of State Mike Pompeo slammed the Chinese government in a sweeping address…, saying the United States will no longer tolerate Beijing’s playbook to usurp global order. ‘The truth is that our policies, and those of other free nations, resurrected China’s failing economy, only to see Beijing bite the international hands that fed it,’ Pompeo told an audience… The crumbling relationship between Washington and Beijing, strained from an ongoing trade battle, has intensified as the Trump administration places blame squarely on China for the coronavirus pandemic and its devastation on the global economy.”

July 23 – Reuters (David Brunnstrom and Daphne Psaledakis): “U.S. Secretary of State Mike Pompeo took fresh aim at China on Thursday and said Washington and its allies must use ‘more creative and assertive ways’ to press the Chinese Communist Party to change its ways, calling it the ‘mission of our time.’ …Pompeo said the former U.S. leader’s worry about what he had done by opening the world to China’s Communist Party in the 1970s had been prophetic. ‘President Nixon once said he feared he had created a ‘Frankenstein’ by opening the world to the CCP,’ Pompeo said. ‘And here we are.’”

July 23 – Bloomberg (Nick Wadhams): “Secretary of State Michael Pompeo cast China’s leaders as tyrants bent on global hegemony, painting a dark portrait of the country’s direction as tensions soar between the world’s two biggest economies. President Xi Jinping ‘isn’t destined to tyrannize inside and outside China forever unless we allow it,’ Pompeo said… at the Richard Nixon presidential library… ‘Securing our freedoms from the Chinese Communist Party is the mission of our time… If we bend the knee now, our children’s children may be at the mercy of the Chinese Community Party, whose actions are the primary challenge today in the free world… The free world must triumph over this new tyranny.’”

July 24 – Associated Press (Ken Moritsugu): “Four decades after the U.S. established diplomatic ties with Communist China, the relationship between the two may have reached a turning point. Tensions have reached new heights on what has always been a rocky road, as the ambitions of a rising superpower increasingly clash with those of the established one. China ordered the closing of the U.S. Consulate in the southwestern city of Chengdu on Friday, in rapid retaliation for the closing of its consulate in Houston. Two weeks ago, Chinese Foreign Minister Wang Yi asked aloud if relations could stay on track. On Thursday, U.S. Secretary of State Mike Pompeo delivered an answer: The time has come to change course.”

July 23 – Bloomberg (Jordan Fabian and Misyrlena Egkolfopoulou): “President Donald Trump said that the trade accord with China means ‘much less to me’ because of what he called that country’s role in the spread of the coronavirus. The president… again complained that the U.S. had to shut down its economy to protect against the virus. ‘The trade deal means less to me now than when I made it,’ Trump said.”

July 23 – Reuters (Richard Cowen): “U.S. Senate Republicans will unveil their proposal next week for a fresh round of coronavirus aid, including more direct payments to Americans and a partial extension of enhanced unemployment benefits, Senate Majority Leader Mitch McConnell said… Republicans have been trying for days to agree on a negotiating position, a preliminary step to hashing out details with Democrats who control the House of Representatives, which in May passed a proposed $3 trillion response plan that the Senate declined to take up.”

July 21 – Reuters (Chris Sanders and Christopher Bing): “The U.S. Justice Department… indicted two Chinese nationals over their role in what the agency called a decade-long cyber espionage campaign that targeted defense contractors, COVID researchers and hundreds of other victims worldwide. U.S. authorities said Li Xiaoyu and Dong Jiazhi stole terabytes of weapons designs, drug information, software source code, and personal data from targets that included dissidents and Chinese opposition figures. They were contractors for the Chinese government, rather than full-fledged spies, U.S. officials said.”

Federal Reserve Watch:

July 22 – Wall Street Journal (Nick Timiraos): “Federal Reserve officials are set to discuss next week how to provide more economic stimulus, though they have signaled comfort leaving policy on hold until they learn more about how the coronavirus pandemic is weighing on the U.S. economy. Deliberations at their July 28-29 meeting could determine how soon officials can finalize any plans, which would be unveiled either at their September meeting or later this fall, according to interviews and public statements.”

July 21 – Wall Street Journal (Paul Kiernan): “A controversial Trump administration nominee for the Federal Reserve’s policy-making board cleared a major hurdle in her path to confirmation Tuesday after a Senate panel voted to support the choice. The candidacy of Judy Shelton, an economic adviser to Mr. Trump’s 2016 presidential campaign, for the Fed’s Board of Governors was approved by the Senate Banking Committee in a party-line vote despite objections from Democrats. Her next and final stop will be a confirmation vote on the Senate floor, where Republicans hold a 53-47 majority.”

U.S. Bubble Watch:

July 23 – Reuters (Fred Imbert): “The number of Americans who filed for unemployment benefits rose more than expected last week as the coronavirus pandemic inflicted more damage to the U.S. economy. …Initial jobless claims came in at 1.416 million for the week ending July 18. Economists polled by Dow Jones expected 1.3 million. It was the 18th straight week in which initial claims totaled more than 1 million, and it snapped a 15-week streak of declining initial claims.”

July 23 – Bloomberg (Jordan Fabian and Misyrlena Egkolfopoulou): “The official numbers have begun to confirm what many Americans feel in their bones: the economy is buckling once again. Despite assurances from the Trump administration that better times are at hand, the worsening pandemic is restraining or even snuffing out the economy’s nascent recovery. From restaurant dining to air travel and now to filings for unemployment benefits, a growing body of evidence indicates America’s rebound from the pandemic is stalling days before hundreds of billions of dollars’ worth of federal aid is set to expire.”

July 20 – New York Times (David Gelles): “With coronavirus cases around the country on the rise and states rolling back their reopening plans, many of the nation's top business leaders are steeling themselves for a period of prolonged economic disruption and the prospect of a slow, halting recovery. ‘I’m less optimistic today than I was 30 days ago,’ said Arne Sorenson, chief executive of Marriott International. ‘The virus is in so many different markets of the United States.’ Mr. Sorenson’s outlook, like those of many chief executives, has worsened in recent weeks as virus cases have spiked in the South and the West, leading some states to close businesses that had previously been allowed to open.”

July 20 – New York Times (Matt Phillips): “Since the 2008 global financial crisis, American corporations have taken advantage of historically low interest rates to gorge themselves on debt. Then came the pandemic and the sharpest economic downturn in history, which resulted in an odd solution for the companies that did all that borrowing: more debt. Through late June, giant U.S. companies had borrowed roughly $850 billion in the bond markets this year, double the pace from last year. Analysts at JPMorgan… anticipate that investment-grade companies will borrow roughly $1.6 trillion from investors by the time 2020 is over. It has turned conventional wisdom on its head. ‘During a standard recession, and that would include the global financial crisis as well, you would expect to see corporate debt as a percentage of G.D.P. begin to come down,’ said Paul Ashworth, chief U.S. economist at Capital Economics…”

July 19 – Wall Street Journal (Chip Cutter and Doug Cameron): “Big U.S. companies are deciding March and April moves won’t cut it. The fierce resurgence of Covid-19 cases and related business shutdowns are dashing hopes of a quick recovery, prompting businesses from airlines to restaurant chains to again shift their strategies and staffing or ramp up previous plans to do so. They are turning furloughs into permanent layoffs, de-emphasizing their core businesses and downsizing production indefinitely.”

July 20 – Bloomberg (Emmy Lucas and Amanda Albright): “America’s states and cities are putting infrastructure projects on hold as tax revenue tumbles, threatening to deal another setback to an already sputtering economy. New York’s Metropolitan Transportation Authority, the operator of the nation’s largest public transit system, is putting its $51.5 billion, five-year capital program on hold as the pandemic decimates subway ridership… Across the country, about two-thirds of cities reported delaying or canceling infrastructure and capital spending since the coronavirus drove the nation into a recession, according to… the National League of Cities.”

July 23 – Reuters (Sheila Dang): “Not so long ago, advertising executives were banking on the start of an industry recovery as early as the third quarter after the global coronavirus pandemic decimated marketing budgets this year. But the rebound will be slower than expected as the restart of the U.S. economy has stumbled across many states and COVID-19 infections have spiked in key regions including California, Florida and Texas. Ad market forecasters said they are likely to lower expectations for the year.”

July 23 – Bloomberg (Hailey Waller and Allison McNeely): “One of the key sources of funding for American shale is evaporating, just as the sector needs it more than ever. Banks lending against the oil and natural gas reserves of hundreds of independent U.S. drilling companies have pulled back from the sector at an unprecedented rate this year… There’s every indication they’re not done: Many in the industry expect further reductions to credit facilities in the fall, with higher costs and more stringent protections for lenders.”

July 22 – Reuters (Lucia Mutikani): “U.S. home sales increased by the most on record in June, boosted by historically low mortgage rates, but the outlook for the housing market is being clouded by low inventory and high unemployment amid the COVID-19 pandemic… Existing home sales jumped 20.7% to a seasonally adjusted annual rate of 4.72 million units last month… June’s increase ended three straight months of decreases, though home resales remained 18% below their pre-pandemic level.”

July 21 – Bloomberg (Greg Ritchie): “Sales of New York’s most expensive homes cratered by 70% in the first half, the biggest decline among the world’s priciest cities. Just 41 properties sold for $10 million or more in the U.S. financial capital, down from 137 a year earlier…, according to broker Knight Frank. That topped steep declines of 68% in London and 61% in Hong Kong.”

July 23 – CNBC (Robert Frank): “Home prices in the Hamptons hit new records as wealthy New Yorkers fled the Covid-19 troubles of the city for the beach… The median price of a single-family home in the Hamptons reached a record $1.1 million in the second quarter, an increase of 25% over last year’s second quarter, according to… Miller Samuel and Douglas Elliman. The average sale price hit $2.1 million… The rebound in the Hamptons, after nearly two years of weakness in 2018 and 2019, shows how the coronavirus is remaking the real estate landscape…”

July 21 – Bloomberg (Nabila Ahmed and Fareed Sahloul): “After months of lagging 2019 volumes, U.S. dealmaking has crept back and put July on course to be the busiest month of the year so far. The tally is rising as large deals that have been in the works for months finally reach the finish line. U.S. transactions valued at $105 billion have been announced in July, making it the only month of 2020 so far in which deal volume has increased year-on-year…”

July 20 – Financial Times (Arash Massoudi and Ortenca Aliaj): “Michael Klein has spent much of a long career on Wall Street courting chief executives, big corporations and governments with the promise of sage advice on their biggest decisions. The former Citigroup banker is now turning to his extensive Rolodex for his latest act: creating shell companies, listing them on the stock market and then using the money raised to merge with real businesses. Long confined to the periphery of finance, special purpose acquisition companies, or Spacs as the shells are known, have emerged as one of the hottest trends on the US equity market…”

China Watch:

July 19 – Reuters: “China’s embassy in Myanmar… accused the United States of ‘outrageously smearing’ the country and driving a wedge with its Southeast Asian neighbors over the contested South China Sea and Hong Kong, as tensions mount between the superpowers. Responding to U.S. claims Beijing was undermining the sovereignty of its neighbors, the Chinese embassy said U.S. agencies abroad were doing ‘disgusting things’ to contain China and had showed a ‘selfish, hypocritical, contemptible, and ugly face’.”

July 22 – Reuters (Kevin Yao): “China's central bank does not see an immediate need to ease monetary policy further, but will keep conditions accommodative to support a recovery in the world's second-largest economy, four policy sources told Reuters. A stronger-than-expected rebound in activity in the second quarter has reduced the urgency for the People's Bank of China (PBOC) to act… The PBOC also wants to avoid the side-effects caused by excessive stimulus, such as a surge in debt and risks of bubbles in the property market, said the sources…”

July 23 – Bloomberg (Venus Feng and Pei Yi Mak): “Zhong Shanshan, whose schooling was interrupted during China’s cultural revolution, worked in construction, as a reporter and in the bottled-water business. Today, he’s worth $17 billion after his drug company went public in April and the shares surged 26-fold. Known as Lone Wolf by the Chinese media, Zhong, 65, has a made-for-movie story, but it’s far from unique in China. At least 24 people have become billionaires this year through June from the country’s raging market for initial public offerings, including former teachers, accountants and software developers…”

July 19 – Bloomberg: “China’s cash-strapped small lenders are expanding their pile of the riskiest kind of bank debt to shore up their capital levels, bracing against an economic slowdown and rising loan defaults. A total of 19 banks have sold 339.6 billion yuan ($48.5bn) perpetual bonds, high-yielding subordinated bonds with no maturity dates, as of July 10 this year… Smaller lenders including Chongqing Three Gorges Bank Co., Bank of Rizhao Co., and Huarong Xiangjiang Bank Corp. accounted for more than 70% of the issuance.”

Europe Watch:

July 21 – Wall Street Journal (Bojan Pancevski and Laurence Norman): “Europe’s €750 billion economic rescue was secured by an unlikely champion: German Chancellor Angela Merkel, who after years of opposition to such handouts, was the driving force behind the deal. With her prodding, European Union leaders took a step… they have shunned for years—agreeing to issue common debt on a large scale—to fund an attempt to lift member countries out of economic crises brought on by the coronavirus. The agreement puts all 27 EU nations on the hook for debt to help prop up the finances of poorer EU nations, a move Germans, led by Ms. Merkel, have balked at for over a decade. Ms. Merkel’s Damascene conversion, unthinkable a few months ago, raises the prospects of a reversal of fortune for the EU.”

July 22 – Reuters (Giuseppe Fonte): “The Italian government approved 25 billion euros ($28.93bn) of extra spending…, the third major cash injection to try to support its battered economy since the start of the country’s coronavirus outbreak. The new stimulus will involve additional borrowing and drive the 2020 budget deficit to 11.9% of national output, versus a goal of 10.4% set in April and a figure of 1.6% reported in 2019…”

EM Watch:

July 24 – Bloomberg (Suvashree Ghosh): “The bad loan ratio in India’s banking sector is forecast to swell to the highest level in more than two decades after a prolonged lockdown hurt businesses and left millions jobless. Soured assets will rise to 12.5% of total advances by March 2021 -- highest since the financial year started 1999 -- from 8.5% a year earlier… It warned that if the macroeconomic environment worsens further, the ratio may escalate to 14.7% under the very severely stressed scenario.”

July 24 – Wall Street Journal (Caitlin Ostroff): “Bond investors are retreating from Turkey, adding to the pressure on an economy long seen as dependent on foreign funding. Fund managers withdrew more than $7 billion from Turkey’s local currency bond market in the six months ended in June, making it the largest drawdown in the first half on record… Nonresidents’ ownership of outstanding Turkish government bonds has melted to about 5%, from nearly a third in 2013.”

Japan Watch:

July 19 – Bloomberg (Yoshiaki Nohara and Yuko Takeo): “Japanese exports fell by more than 20% for a third straight month even as key markets started to reopen from virus shutdowns. The value of Japan’s overall shipments overseas slid 26.2% in June from a year earlier, led by steep declines in exports of cars and auto parts…”

Leveraged Speculation Watch:

July 21 – Bloomberg (Carter Johnson): “A bread-and-butter source of returns for macro hedge funds is getting re-thought in the age of Covid-19. The Australian and Canadian dollars now rank among the most efficient for funding carry trades, in which investors borrow those currencies at low interest rates to fund purchases of higher-yielding assets in emerging markets. That’s a reversal of how these trades worked in the past, when assets in those two countries were popular purchases in carry trades. It’s a reflection of the rapidly shifting economic environment brought on by the coronavirus pandemic…”

Geopolitical Watch:

July 20 – Bloomberg (Iain Marlow, Miaojung Lin, and Kari Soo Lindberg): “For decades, Hong Kong served as a bridge between China and Taiwan. Now, that appears to be just one more thing that’s changing in the former British colony. China’s insistence that Taiwanese officials as a condition of stay in Hong Kong sign a statement agreeing that both sides belong to ‘one China’ adds pressure on Taipei to close its de facto consulate in the city. The decision not only potentially impacts millions of people who travel between the two places each year, it also chips away at the city’s role as a gateway from China to the democratic world.”

July 20 – Reuters (David Lague): “China launched its military build-up in the mid-1990s with a top priority: keep the United States at bay in any conflict by making the waters off the Chinese coast a death trap. Now, China’s People’s Liberation Army (PLA) is preparing to challenge American power further afield. China’s shipyards have launched the PLA Navy’s first two Type 075 amphibious assault ships, which will form the spearhead of an expeditionary force to play a role similar to that of the U.S. Marine Corps. And like the Marines, the new force will be self-contained - able to deploy solo with all its supporting weapons to fight in distant conflicts or demonstrate Chinese military power.”

July 18 – Bloomberg: “Japan’s government will start subsidizing some companies to invest in factories in Japan and South-East Asia as part of efforts to reduce reliance on manufacturing in China. Fifty-seven companies including privately-held facemask-maker Iris Ohyama Inc. or Sharp Corp. will receive a total of 57.4 billion yen ($536 million) in subsidies from the government to invest in production in Japan…”