Over this period, the broader market significantly outperformed the S&P500. The small cap Russell 2000 jumped 19.9% and the S&P400 Midcaps 21.1%. The Philadelphia Oil Services Index surged 50.0%. The Homebuilders (XHB) jumped 26.2%, and the Bloomberg REIT index rose 22.5%. The average stock (Value Line Arithmetic Index) surged 25.3% in three weeks.
Over three weeks, United Airlines rose 113%, American Airlines 106%, Norwegian Cruise Line 105%, Royal Caribbean Cruises 85%, CIT Group 86%, Delta Air Lines 78%, Simon Property Group 73%, L Brands 72%, Boeing 71%, Carnival Corp 68%, Macy’s 68%, Alaska Air Group 67%, Kimco Realty 66%, Gap 62%, and Southwest Airlines 60%.
The Nasdaq Composite rose 8.9% over the past three weeks to close this week at all-time highs. The Semiconductors jumped 17.8% to end Friday at record highs. The Nasdaq100 (NDX) gained 7.3% in three weeks to new highs.
June 5 – Bloomberg (Sarah Ponczek): “The latest U.S. jobs report will go down in history as the data that shocked economists. And the market. Forecasts for a drop of 7.5 million in payrolls were met with the reality of a 2.5 million increase in May, supporting the view that the world’s largest economy may be more resilient than previously thought. A stock market already up 40% in a record period of time rallied further, with particular pockets going haywire. From a blowup in the momentum factor trade to a surge in small-cap shares, here’s a sample of what was happening under the equity market’s surface Friday. The momentum factor, which in essence bets that the recent winners will keep on winning, got pummeled Friday. At its lows, a Dow Jones market neutral momentum portfolio that goes long the highest momentum stocks and shorts those with the least momentum dropped 9% -- the worst day since at least 2002.”
I try to remain laser-focused on the analysis, conscious not to stray into the conspiracy realm. The Fed may buy S&P futures contracts at key market junctures and the government might at times fudge the numbers. I don’t know, and I’m not going there. Some will question the veracity of Friday’s payrolls data.
Forecasts were for the May unemployment rate to jump to 19.0%, surging from April’s 14.7%. Private Payrolls were to see a 6.75 million drop, with manufacturing jobs down 400,000. Instead, Private Payrolls surged almost 3.1 million, with manufacturers adding 225,000 workers. The Unemployment rate fell to 13.3%. Bloomberg: “Economists Have Biggest Miss Ever in U.S. Jobs-Report Shocker.”
June 5 – Fox News (Tyler Olson): “President Trump declared Friday that jobs are coming back on the heels of a surprise labor report that may indicate the start of an economic recovery amid historic job losses, as he also upped his demands on states to lift lingering coronavirus-related lockdowns… ‘We’re bringing our jobs back,’ Trump said during upbeat remarks to members of the media in the Rose Garden. ‘We’re gonna be back there. I think we’re actually going to be back there higher next year than ever before.’ He added, in reference to predictions that the economy could eventually bounce back to where it was before the pandemic: ‘We’ve been talking about a ‘V.’ This is far better than a ‘V.’ This is a rocketship.’”
Securities markets are indeed on a moonshot; the real economy not so much. The 2016 election cycle was nothing short of unbelievable. We’re now only five months from what is poised to be a historic election. The President has stumbled in a most challenging backdrop – and is down in the polls. With the pandemic, economic turmoil, protests and riots, it’s a surreal environment. We should expect things to turn even crazier in the months heading into voting. It was as if the presidential campaign finale officially commenced, buoyed by a stunningly better-than-expected employment report.
We’re witnessing final convulsions from a historic global speculative Bubble. Markets enjoy unparalleled support from the President and Federal Reserve, along with central bankers and other policymakers spanning the globe.
Keep in mind, the Fed began aggressively expanding its balance sheet – injecting marketplace liquidity – back in September in response to heightened repo market strain. So-called “insurance” policy measures were adopted: apply stimulus measures early and aggressively to ward off potential instability.
Employing liquidity injections in an environment of record securities prices significantly exacerbated speculative excess. Bubble markets could not have been in a more vulnerable state when the pandemic hit. As powerful self-reinforcing de-risking/deleveraging took hold, Bubbles were bursting in synchronized fashion. Dislocating markets were swiftly pushing global finance to the precipice. The upshot: global stimulus measures were taken to a whole new level, including an additional $3.0 TN of support from the Federal Reserve.
It was 15 months between the piercing of the mortgage finance Bubble (June ’07 subprime blowup) and the Fed’s $1.0 TN crisis-fighting QE program. Stocks had been weakening for about a year. Importantly, speculative impulses and Bubble Dynamics had been in the process of deflating for months prior to the Fed unleashing (at the time) unprecedented liquidity support. The economy was already well on its way to long overdue restructuring and adjustment. QE1 didn’t stoke craziness.
For this cycle, the Fed had been applying aggressive stimulus measures months ahead of the crisis. When mayhem hit, it was only nine trading sessions between February 19th all-time stock market highs and the March 3rd emergency rate cut. Within 10 weeks of record stock highs, the Fed had ballooned its balance sheet by almost $2.5 TN.
Dangerous speculative dynamics hadn’t had time to dissipate. Indeed, the most problematic outcome in such a situation is to aggressively fuel the speculative excess and market distortions that had fomented underlying fragilities in the first place. Speculators were further emboldened. Dysfunctional Market Structure was further crystallized.
June 5 – Financial Times (Richard Henderson and Eric Platt): “Investors pumped a record $22.5bn into US bond funds in the week to Wednesday as they shifted out of haven money market accounts to riskier but higher paying investments. The cash infusion into US bond mutual and exchange traded funds was the most since 2007, when the data provider EPFR began tracking the figures.”
The impact of QE liquidity injections varies profoundly based on prevailing inflationary biases, speculative impulses and Market Structure. QE in ’08 was administered to help stabilize a system in a deflated post-Bubble backdrop. Much bigger QE was administered in March and April specifically to hold financial collapse at bay - speculative zeal restored in the process. We don’t want to lose sight of today’s extraordinary global backdrop. It is a world of desperate trial-and-error monetary inflation, with momentous yet uncertain consequences.
The ECB Thursday “beat expectations” by almost doubling the size of its latest QE program, to $1.5 TN. In combination with the EU’s recent proposed $825 billion stimulus plan, policymakers have altered European risk market dynamics. Amazingly, major equities indices posted double-digit percentage gains this week in Germany, France, Spain, Italy and Belgium. Over two-weeks, stock market gains were nothing short of astonishing. Germany’s DAX and France’s CAC40 surged 16.0% and 17.0%. Major equities indices jumped 17.5% in Spain, 16.6% in Italy, 16.8% in Austria, 12.2% in Greece and 12.2% in Poland. European bank stocks (STOXX 600) surged 24.4% in 10 sessions.
It’s worth noting that in 10 sessions (May 25th to June 5th) the euro gained almost 4% versus the U.S. dollar (1.09 vs. 1.13). This was a major contributor to the Dollar Index’s drop from 100 to 97. It’s easy to attribute dollar weakness (and euro strength) to the reversal of more Crowded Trades in generally chaotic market conditions. Yet there might be more important fundamental factors to contemplate.
In the traditional sense, the U.S. dollar is a fundamentally weak currency. Incredibly, the U.S. has run persistent Trade and Current Account Deficits going all the way back to the early eighties (small surplus during ’91 recession). The U.S. has essentially flooded the world with dollar balances, liquidity arguably at the root of Global Bubble Dynamics. As the world’s dominant reserve currency, only the dollar could maintain international value in the face of such unrelenting supply. Currency values are all relative. And in a world of unsound currencies, the dollar has more than held its own.
March’s global crisis backdrop saw the reemergence of king dollar dynamics, as the dollar advanced against most currencies (dollar index approaching seven-year highs). Dollar bulls are always quick to extol the U.S. economy as “envy of the world.” There’s an element of truth to this, of course. Let us not forget, however, that the flexibility afforded to the Federal Reserve is definitely envied round the globe – and has been a key attribute supporting king dollar.
In a crisis environment, the Federal Reserve enjoys near total freedom to slash rates, “print money,” aggressively intervene in markets and employ myriad financing programs. No central bank has the flexibility to directly support its nation’s securities markets and, through booming markets and resulting loose financial conditions, underpin the overall U.S. economy. This has been a key dynamic supporting “king dollar” financial flows (floods) to U.S. markets during periods of instability and crisis.
A key question today: Is the dollar in the process of losing some of its competitive advantage – now that the ECB and EU are resorting to such massive stimulus operations? If the “whatever it takes” ECB is willing to bend the rules as it bolsters Italian (and periphery) bonds, while the EU rewrites the rule book for supporting Italy’s and others’ economies – does this not lower near-term odds of EU crisis and disintegration? And, does this not lend support to European securities (and derivatives) markets and the euro – at the expense of “king dollar” dominance? Moreover, did resulting dollar weakness not come at a critical market juncture, with hedges and short positions already under acute pressure on every continent?
Over two weeks, the Brazilian real surged 11.5% (including “best week since 2008”), the Czech koruna 6.2%, the Indonesian rupiah 6.0%, the Colombian peso 5.8%, the Polish zloty 5.4%, the Hungarian forint 5.4%, the Mexican peso 5.3%, the Chilean peso 4.8%, the South African rand 4.4% and the Russian ruble 4.3%. Stocks were up 8.3% this week in Brazil, 7.8% in Mexico, 7.5% in South Korea, 10.6% in Chile, 19.0% in Argentina, 5.7% in India, 4.9% in Indonesia, 10.7% in Philippines, 5.6% in Malaysia, 4.9% in Taiwan, 7.3% in Thailand, 7.0% in Poland, 7.0% in Hungary and 4.3% in Turkey. The iShares MSCI Emerging Markets ETF (EEM) jumped 8.5% this week and 12.3% over the past two weeks.
We’re in the throes of an extraordinary upside global market dislocation. I do not recall such a ferocious globalized short squeeze – stocks, corporate Credit, currencies and EM sovereign debt. We can only imagine the behind the scenes fracas in derivatives trading. And I know it’s exciting to watch markets recover and to book some easy speculative trading profits. We all want to believe markets are signaling the worst of the pandemic and economic downturn is behind us. It’s comforting to imagine that Mr. Market is flashing that everything is in the process of returning to normal.
I just don’t believe markets these days function as discounting mechanisms. Speculative dynamics dictate markets like never before. FOMO – fear of missing out. What stocks, sectors, indices and markets are vulnerable to short squeezes? Where are the Crowded Trades? Where are the over- and underweights? What stocks and sectors have large outstanding call option positioning, leaving them susceptible to melt-up dynamics? How are the big derivatives players positioned?
I have similar issues as I had during last fall’s QE program: Fed liquidity was fueling leveraged speculation, ensuring huge QE measures would inevitably be required to mitigate “risk off” de-risking/deleveraging dynamics. These days, global QE foments upside market dislocation that leaves the world acutely vulnerable to an even more problematic market deleveraging episode. But with markets having turned conspicuously speculative and detached from economic realities, I’ll presume central banks will be somewhat more measured with QE during the next bout of market instability. Bottom line: Today’s melt-up creates great risk of another major global illiquidity event, yet central bankers may hesitate to immediately throw Trillions more at the problem.
It was only Crazier this week – at home and abroad. We’ve only begun to scratch the surface of Bubble Meets Pandemic Consequences. I’ve previously identified three global crisis Fault Lines – Europe, EM and China. Europe’s grandiose “money” printing and government spending may have bought them some time. Resulting dollar weakness and the unwind of hedges and shorts might have temporarily suppressed EM Crisis Dynamics. So, how ironic would it be for panicked reflationary dynamics globally and a disorderly unwind of hedges and short positions to trigger the onset of a dollar bear market?
Ten-year Treasury yields surged a notable 24 bps this week to 0.90%, the high going back to March 19th. It could prove an interesting juncture for “safe haven” Treasuries. The Fed has been reducing purchases, while waves of issuance are approaching as far as the eye can see. There are as well anomalous market concerns for U.S. social and political stability. And perhaps the Chinese are keen to reduce their Treasury trove. Moreover, what are Treasury market ramifications if this crazy period marks an inflection point for the world’s reserve currency?
The unfolding geopolitical backdrop may not be as conducive to “king” dollar as the speculator community has assumed. Prospective U.S. economic fundamentals may no longer prove the “envy of the world.” And as crazy as it sounds, perhaps fundamentals including trade and Current Account Deficits, economic structure, debt and deficits actually begin to matter. In a world of “pain trade” proliferation, it doesn’t take a wild imagination to envisage the Crowded long dollar trade suffering a bout of discomfort.
For the Week:
The S&P500 surged 4.9% (down 1.1% y-t-d), and the Dow jumped 6.8% (down 5.0%). The Utilities increased 2.0% (down 5.1%). The Banks surged 17.4% (down 22.9%), and the Broker/Dealers rose 11.5% (unchanged). The Transports spiked 10.1% (down 9.4%). The S&P 400 Midcaps rose 8.3% (down 7.4%), and the small cap Russell 2000 jumped 8.1% (down 9.7%). The Nasdaq100 advanced 2.8% (up 12.5%). The Semiconductors surged 8.2% (up 8.3%). The Biotechs slipped 1.2% (up 9.9%). With bullion sinking $45, the HUI gold stock index fell 4.4% (up 8.0%).
Three-month Treasury bill rates ended the week at 0.145%. Two-year government yields increased five bps to 0.21% (down 136bps y-t-d). Five-year T-note yields rose 16 bps to 0.47% (down 123bps). Ten-year Treasury yields surged 24 bps to 0.90% (down 122bps). Long bond yields jumped 26 bps to 1.67% (down 72bps). Benchmark Fannie Mae MBS yields rose 12 bps to 1.77% (down 95bps).
Greek 10-year yields dropped 16 bps to 1.34% (down 9bps y-t-d). Ten-year Portuguese yields increased three bps to 0.54% (up 10bps). Italian 10-year yields fell six bps to 1.41% (unchanged). Spain's 10-year yields were little changed at 0.56% (up 9bps). German bund yields surged 17 bps to negative 0.28% (down 9bps). French yields rose 10 bps to 0.02% (down 10bps). The French to German 10-year bond spread narrowed seven to 30 bps. U.K. 10-year gilt yields rose 17 bps to 0.35% (down 47bps). U.K.'s FTSE equities index jumped 6.7% (down 14.0%).
Japan's Nikkei Equities Index advanced 4.5% (down 3.4% y-t-d). Japanese 10-year "JGB" yields gained five bps to 0.05% (up 6bps y-t-d). France's CAC40 surged 10.7% (down 13.1%). The German DAX equities index rose 10.9% (down 3.0%). Spain's IBEX 35 equities index jumped 10.9% (down 17.6%). Italy's FTSE MIB index rose 10.9% (down 14.1%). The EM equities rally gained momentum. Brazil's Bovespa index jumped 8.3% (down 18.2%), and Mexico's Bolsa rose 7.8% (down 10.6%). South Korea's Kospi index gained 7.5% (down 0.7%). India's Sensex equities index jumped 5.7% (down 16.9%). China's Shanghai Exchange gained 2.8% (down 3.9%). Turkey's Borsa Istanbul National 100 index rose 4.3% (down 3.8%). Russia's MICEX equities index increased 2.1% (down 8.3%).
Investment-grade bond funds saw inflows of $9.914 billion, and junk bond funds posted inflows of $5.746 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates gained three bps to 3.18% (down 64bps y-o-y). Fifteen-year rates were unchanged at 2.62% (down 66bps). Five-year hybrid ARM rates declined three bps to 3.10% (down 42bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down 17 bps to 3.53% (down 62bps).
Federal Reserve Credit last week expanded $41.6bn to a record $7.101 TN, with a 39-week gain of $3.379 TN. Over the past year, Fed Credit expanded $3.293 TN, or 87%. Fed Credit inflated $4.290 Trillion, or 153%, over the past 395 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $1.5 billion last week to $3.390 TN. "Custody holdings" were down $53.6bn, or 1.6%, y-o-y.
M2 (narrow) "money" supply gained $31.6bn last week to a record $18.115 TN, with an unprecedented 13-week gain of $2.607 TN. "Narrow money" surged $3.438 TN, or 23.4%, over the past year. For the week, Currency increased $8.1bn. Total Checkable Deposits rose $25.2bn, while Savings Deposits slipped $2.8bn. Small Time Deposits fell $6.1bn. Retail Money Funds gained $7.4bn.
Total money market fund assets fell $36.1bn to $4.752 TN. Total money funds surged $1.589 TN y-o-y, or 50.2%.
Total Commercial Paper fell $13.8bn to $1.037 TN. CP was down $63bn, or 5.7% year-over-year.
Currency Watch:
June 2 – Financial Times (Eva Szalay and Colby Smith): “Strategists at banks including Goldman Sachs and JPMorgan have turned bearish on the US dollar, after a wave of optimism over the global recovery from coronavirus pushed the greenback lower against its peers. On Tuesday the trade-weighted dollar slipped to its weakest level since mid-March, continuing a five-day streak of losses… Goldman, JPMorgan, Deutsche Bank and Citigroup have argued in recent days that the currency’s long rally could be finally over. More than two years of near-uninterrupted gains had come to an end in March but the dollar had remained stubbornly strong, even as the Federal Reserve slashed interest rates to near zero and flooded markets with dollars through international swap lines.”
For the week, the U.S. dollar index fell 1.4% to 96.937 (up 0.5% y-t-d). For the week on the upside, the Brazilian real increased 7.6%, the New Zealand dollar 4.9%, the Australian dollar 4.5%, the Norwegian krone 4.4%, the South African rand 4.0%, the Mexican peso 2.8%, the Canadian dollar 2.7%, the British pound 2.6%, the South Korean won 2.6%, the Swedish krona 1.9%, the euro 1.7%, and the Singapore dollar 1.4%. For the week on the downside, the Japanese yen declined 1.6% and the Swiss franc 0.1%. The Chinese renminbi gained 0.76% versus the dollar this week (down 1.70% y-t-d).
Commodities Watch:
June 1 – Wall Street Journal (Summer Said and Benoit Faucon): “An alliance of oil-producing nations led by Saudi Arabia and Russia is close to a deal that would extend their collective production cuts through Sept. 1… The Organization of the Petroleum Exporting Countries has agreed to move a planned conference call to discuss future output curbs to Thursday, from June 9, the delegates said. The 23-country group, known as OPEC-plus, agreed in April to cut output by 9.7 million barrels a day… While the current pact foresees the curbs easing to 8 million barrels a day between July 1 and the end of the year, OPEC kingpin Saudi Arabia is pushing for a deal that would keep the current restrictions of 9.7 million daily barrels, according to delegates in the cartel.”
The Bloomberg Commodities Index rallied 1.8% (down 20.0% y-t-d). Spot Gold fell 2.6% to $1,685 (up 11.0%). Silver dropped 5.5% to $17.479 (down 2.5%). WTI crude surged $4.06 to $39.55 (down 35%). Gasoline jumped 12.5% (down 28%), while Natural Gas fell 3.6% (down 19%). Copper recovered 5.4% (down 9%). Wheat declined 1.1% (down 8%). Corn gained 1.7% (down 15%).
Coronavirus Watch:
June 4 – CNBC (Berkeley Lovelace Jr.): “CDC Director Robert Redfield said… he’s ‘very concerned’ the agency’s public health message on the coronavirus isn’t ‘resonating’ with the public as the number of cases continues to rise across the U.S. Testifying before the House Appropriations Committee, Redfield said he sees “a lot of people” not wearing masks in Washington, D.C., where he works, while many people do wear masks in his hometown of Baltimore. Crowds of people have been seen in recent weeks at protests, over the Memorial Day holiday and, Redfield noted, at the SpaceX launch Saturday.”
June 3 – Reuters (Pedro Fonseca): “Brazil registered another record number of novel coronavirus deaths over the last 24 hours, the health ministry said…, as the pandemic in Latin America’s largest country shows no signs of slowing down. The nation registered 28,936 additional cases of the novel coronavirus, the ministry said, and 1,262 deaths. There are now 555,383 total confirmed coronavirus cases in Brazil and 31,199 coronavirus deaths.”
Market Instability Watch:
June 2 – Bloomberg (Claire Ballentine and Sarah Ponczek): “Bearish bets on exchange-traded funds that track high-yield bonds plunged as the Federal Reserve stepped into the market. Short interest as a percentage of shares outstanding on the $12 billion SPDR Bloomberg Barclays High Yield Bond ETF, ticker JNK, sank below 2% -- a four-year low -- after surging to as high as 25% in early March, according to… IHS Markit Ltd. For the $25 billion iShares iBoxx High Yield Corporate Bond ETF, ticker HYG, bearish wagers are at the lowest level this year. After the Fed pledged to shore up credit markets in March, investors have rushed in to front run the move, with the announcement alone causing enough demand to restore order. The central bank’s backstop is giving investors confidence to step into the market despite growing social unrest, uncertainty about coronavirus spread and increased tension between the U.S. and China.”
June 3 – Bloomberg (Ruth Carson, Livia Yap and Simon Flint): “When the offshore yuan matched its record low last week, it served notice that China’s exchange-rate fixing had returned as a key variable to participants in the $6.5 trillion-a-day global foreign-exchange market. With Sino-American tensions on the rise again, China’s appetite to allow significant drops in the yuan will affect the day-to-day moves of a whole raft of other currencies. While correlation is lacking over longer periods, last Wednesday showcased the kind of spot impact the yuan can have for others. The offshore yuan slid 0.7% at one point against the dollar in wake of the bilateral flare-up over Hong Kong. Australia’s dollar dropped as much as 1.3%, while the Colombian peso saw a 1.4% drop.”
June 3 – Reuters (Noah Sin): “China’s plans to impose a national security law on Hong Kong and moves by the United States to begin withdrawing privileges enjoyed by the city under U.S. law have unsettled investors. They have also raised fears about the stability of the Hong Kong dollar’s 36-year old peg to its U.S. counterpart, prompting local officials to issue several reassurances… There are fears that escalating U.S.-China tensions could result in the United States potentially limiting Hong Kong banks’ access to U.S. dollars, thus putting an end to the peg. Eddie Yue, chief executive of the HKMA, said… the peg predates by nine years the 1992 U.S. Act which grants Hong Kong special status - whose provisions Washington is currently reconsidering. ‘For the past 36 years, the (peg) has withstood the test of various market shocks and has been operating smoothly,’ Yue wrote… ‘It is a pillar of Hong Kong’s monetary and financial systems and will not be changed because of any shift in foreign policies towards Hong Kong.’”
June 4 – Bloomberg (Fion Li): “Hong Kong wants to send a clear message to its residents and the world: its currency peg isn’t in doubt, despite the city being increasingly caught up in tensions between Beijing and Washington. Focus has shifted to the safety of the peg in the wake of the Communist Party’s proposal to impose national security laws on Hong Kong. That’s led to concern that capital outflows could put pressure on the local currency. The Trump administration also has the power to limit the Hong Kong Monetary Authority’s access to U.S. dollars, which could hamper the city’s ability to defend its currency tie to the greenback. Don’t worry, say the territory’s financial chief as well as the head of the HKMA.”
June 1 – Bloomberg (Claire Ballentine and Katherine Greifeld): “Even a cooling bond rally didn’t deter exchange-traded fund investors from rushing to front run the Federal Reserve last month. Fixed-income ETFs took in almost $27 billion in May, their best month of inflows on record... Although ETF investors first piled into bond funds when the Fed announced plans to shore up credit markets in March, the central bank’s initial purchasing in mid-May set off another wave of buying in funds viewed as likely candidates for the program. Two of the favored ETFs -- iShares iBoxx $ Investment Grade Corporate Bond, ticker LQD, and BlackRock’s iShares iBoxx High Yield Corporate Bond ETF, ticker HYG -- ballooned to record assets in May. At the same time, HYG saw its best month of inflows in its history, with $4.3 billion added.”
Global Bubble Watch:
June 5 – CNBC (Emma Newburger): “The Earth had its hottest May ever last month, continuing an unrelenting climate change trend as 2020 is set to be among the hottest 10 years ever, scientists with the Copernicus Climate Change Service announced… It’s virtually certain that this year will be among the top hottest years in recorded history with a higher than 98% likelihood it will rank in the top five, according to the National Oceanic and Atmospheric Administration.”
June 3 – Associated Press: “The coronavirus pandemic pushed Australia’s economy into recession for the first time in 29 years in the first quarter of the year, and the situation is expected to get worse. Treasurer Josh Frydenberg said… the current June quarter will be the second in a row in which the Australian economy has contracted.”
June 3 – Financial Times (Melanie Gerlis): “The big-name auction houses may be making great strides online but there is a lot to make up for since the Covid-19 pandemic took its toll on live events. Sale totals worldwide fell 97% at Christie’s, Sotheby’s and Phillips during May, from nearly $2.9bn in 2019 to $93m last month… This is the lowest public auction total ever recorded for the month by the database (which tracks from 2007).”
Trump Administration Watch:
June 1 – CNBC (Christina Wilkie and Amanda Macias): “As the nation prepared for another night of violent protests sparked by the police killing of George Floyd, President Donald Trump threatened to deploy the military if states and cities failed to quell the demonstrations. ‘I am mobilizing all federal and local resources, civilian and military, to protect the rights of law abiding Americans,’ Trump said… ‘Today I have strongly recommended to every governor to deploy the National Guard in sufficient numbers that we dominate the streets. Mayors and governors must establish an overwhelming presence until the violence is quelled,’ Trump said. ‘If a city or state refuses to take the actions necessary to defend the life and property of their residents, then I will deploy the United States military and quickly solve the problem for them,’ said the president.”
June 2 – Associated Press (Zeke Miller and Tim Sullivan): “Undeterred by curfews, protesters streamed back into the nation’s streets Tuesday, hours after President Donald Trump pressed governors to put down the violence set off by George Floyd’s death and demanded that New York call up the National Guard to stop the ‘lowlifes and losers.’ But most protests passed peacefully…The president, meanwhile, amplified his hard-line calls from Monday, when he threatened to send in the military to restore order if governors didn’t do it. ‘NYC, CALL UP THE NATIONAL GUARD,’ he tweeted. ‘The lowlifes and losers are ripping you apart. Act fast!’”
June 4 – Bloomberg (Saleha Mohsin): “Trump administration officials envision as much as $1 trillion in the next round of economic stimulus, though they have delayed those discussions scheduled for this week, according to people familiar with the matter. Top aides had planned to meet this week to discuss the next round of pandemic relief as more than 40 million people have lost jobs since states began restricting public activity in March. That meeting has been removed from the calender and has not been rescheduled yet…”
June 3 – Reuters (Patricia Zengerle, Humeyra Pamuk, Matt Spetalnick and David Brunnstrom): “The United States is expected to designate at least four additional state-run Chinese media outlets as foreign embassies, increasing restrictions on their operations on American soil, three people familiar with the matter said… The action by the State Department, sure to further inflame U.S.-China tensions… It follows President Donald Trump’s announcement on Friday of retaliatory measures against Beijing over its tightened grip on Hong Kong.”
Federal Reserve Watch:
June 2 – CNBC (Jeff Cox): “Getting the U.S. economy back to strong growth could require negative interest rates, according to a St. Louis Federal Reserve economist. As many economists dismiss the likelihood of the current record-breaking slump being followed by an equally aggressive recovery, central bank economist Yi Wen said in a paper on the St. Louis Fed’s website that achieving that kind of a rebound is necessary and possible. The key, he said, is using aggressive stimulus even beyond what authorities deployed during the financial crisis, and that could include taking interest rates below zero.”
June 3 – Bloomberg (Alister Bull): “Federal Reserve action to keep credit flowing rewards risky behavior and the remedy may be tougher regulation in the future, said former New York Federal Reserve Bank President William Dudley. ‘People who have high-yield debt that’s outstanding, a lot of times that’s happened by choice,’ he told Bloomberg… ‘So for the Federal Reserve to intervene and support those asset prices, is basically creating a little bit of moral hazard in the sense you’re encouraging people to take on more debt.’”
June 3 – Wall Street Journal (Matt Wirz): “The Federal Reserve thawed credit markets in March by promising a whatever-it-takes program to buy corporate bonds. Ten weeks later, the Fed has yet to buy a single bond. Just the announcement of the backstop ended panic selling, boosted prices and fueled a record surge of new corporate-bond sales. Companies are now reluctant to sign up for Fed purchases because such a move could be seen as a sign of weakness during a market rebound, some bond fund managers and bank executives said. ‘I really don’t think the market needs it anymore,’ said Columbia Threadneedle Investments portfolio manager Thomas Murphy. ‘They are the victim of their own success.’”
May 29 – Reuters (Dan Burns and Ann Saphir): “The U.S. central bank now has a stake in the fortunes of a broad swath of corporate America after buying about $1.3 billion of bond funds with debt issued by firms in all walks of the world’s biggest economy, from Apple Inc to a clutch of companies in bankruptcy. The details on holdings in the Fed’s Secondary Market Corporate Credit Facility, one of nearly a dozen emergency programs the Fed has rolled out since March… The Fed’s largest investment-grade fund holding - iShares iBoxx US Dollar Investment Grade Corporate Bond ETF… The largest of the facility’s junk bond fund holdings - iShares iBoxx High Yield Corporate Bond ETF… All told the Fed made 158 purchases of shares in 15 exchange-traded funds from May 12 and May 18…”
May 30 – Financial Times (Chris Flood): “US president Donald Trump’s view that the country should accept the ‘gift’ of negative interest rates would be hugely damaging for the nation’s $4.8tn money market funds sector. Mr Trump believes the US suffers a competitive disadvantage against nations that have more aggressively pursued unconventional monetary policies to support their economies. So far, his exhortations have failed to influence Jay Powell, the chairman of the Federal Reserve, who is opposed to cutting US interest rates below zero. Even so, derivative markets are already pricing in an unprecedented drop into negative territory for interest rates.”
June 3 – Financial Times (Eric Platt and James Politi): “Illinois is set to become the first US state to tap the Federal Reserve for emergency funding, planning to borrow $1.2bn from the US central bank to plug a financing gap created by the pandemic. The cash-strapped government, which faces more than $130bn of unfunded pension liabilities, said it was finalising plans to pay 3.82% for the one-year loan… Illinois recently decided against borrowing the $1.2bn from investors in the $3.9tn US municipal bond market after yields on its debt surged; in May, the state paid investors 4.88% to borrow $32m for one year. Illinois is rated only one notch above junk territory…”
June 3 – Reuters (Lindsay Dunsmuir and Howard Schneider): “The Federal Reserve said… it will allow governors of U.S. states to designate transit agencies, airports, utilities and other institutions to borrow under its municipal liquidity program as the central bank tries to mitigate economic fallout from the coronavirus pandemic. Governors will be able to designate two issuers in their states whose revenues are generally derived from operating so-called government activities… The central bank also said it is expanding its program to allow all U.S. states to be able to have at least two cities or counties eligible to directly issue notes to the municipal liquidity facility regardless of population.”
U.S. Bubble Watch:
May 31 – Financial Times (Joshua Chaffin and James Fontanella-Khan): “The worst civil uprisings in the US in more than half a century are forcing Americans to confront deep-rooted problems of racial inequality and police brutality — all while reeling from a pandemic that has killed more than 100,000 of their fellow citizens and shattered the economy. Protests over the death of George Floyd, an unarmed black man, at the hands of Minneapolis police began peacefully but disintegrated into violence and looting in dozens of cities. ‘Last night . . . was an ugly night all across the nation,’ said Andrew Cuomo, New York governor, adding that ‘the real issue is the continuing racism in this country. And it is chronic and it is endemic and it is institutional.’”
June 1 – Wall Street Journal (Paul Hannon and Paul Kiernan): “The U.S. economy could take the better part of a decade to fully recover from the coronavirus pandemic and related shutdowns, a U.S. budget agency said… The Congressional Budget Office, a nonpartisan legislative agency, said the sharp contraction triggered by the coronavirus caused it to mark down its 2020-30 forecast for U.S. economic output by a cumulative $7.9 trillion, or 3% of gross domestic product, relative to its January projections. GDP isn’t expected to catch up to the previously forecast level until the fourth quarter of 2029… The roughly $3.3 trillion in stimulus programs enacted by Congress since March will only ‘partially mitigate the deterioration in economic conditions,’ the CBO said.”
June 2 – Associated Press (Martin Crustsinger): “The Congressional Budget Office said… the U.S. economy could be $15.7 trillion smaller over the next decade than it otherwise would have been if Congress does not mitigate the economic damage from the coronavirus. The CBO… expanded that forecast to show that the severity of the economic shock could depress growth for far longer. The new estimate said that over the 2020-2030 period, total GDP output could be $15.7 trillion lower than CBO had been projecting as recently as January. That would equal 5.3% of lost GDP over the coming decade.”
June 4 – Bloomberg (Ana Monteiro): “U.S. trade in goods and services plunged in April to the lowest level in almost a decade… Exports declined from the prior month by 20.5%, the biggest drop in comparable data back to 1992, to $151.3 billion. Imports decreased 13.7%, also the most since 1992, to $200.7 billion. Combined, the value of U.S. exports and imports decreased to $352 billion, the lowest since May 2010… The overall gap in goods and services trade expanded to $49.4 billion…”
June 3 – Reuters (Lucia Mutikani): “The number of Americans filing for unemployment benefits dropped below 2 million last week for the first time since mid-March, but remains astonishingly high as companies adjust to an environment that has been significantly changed by COVID-19.”
May 30 – Associated Press (David Pitt): “As if trips to the grocery store weren’t nerve-wracking enough, U.S. shoppers lately have seen the costs of meat, eggs and even potatoes soar as the coronavirus has disrupted processing plants and distribution networks. Overall, the cost of food bought to eat at home skyrocketed by the most in 46 years, and analysts caution that meat prices in particular could remain high as slaughterhouses struggle to maintain production levels… The… 2.6% jump in April food prices was the largest monthly increase in 46 years. Prices for meats, poultry, fish and eggs increased the most, rising 4.3%. Although the 2.9% jump in cereals and bakery products wasn’t as steep, it was still the largest increase the agency has recorded. Dairy and related products, and fruits and vegetables increased by 1.5% in April.”
June 1 – Reuters (Joshua Franklin): “U.S. public companies sold more than $60 billion in shares in May, the biggest monthly haul ever, as they capitalized on a stock market rally fueled by hopes that the COVID-19 pandemic is subsiding… ‘We’re talking to a lot of companies around the fact that the market is here, you don’t know what lies in the economy to come,’ said Ryan Parrish, head of Americas equity capital markets syndicate at Bank of America. ‘If you even remotely have a need you should get it done now.’”
June 4 – Associated Press (Adam Beam): “California’s Legislative leaders… rejected billions of dollars in budget cuts to public schools and health care services that Gov. Gavin Newsom had proposed, setting up a fight with the governor over how to close the state’s estimated $54.3 billion budget deficit. Flush with cash just six months ago, California’s revenues have plummeted since March… Since then, more than 5 million people have filed for unemployment benefits.”
May 30 – Wall Street Journal (Laura Forman): “The rise of remote working could empower renters in places like New York City and San Francisco to finally buy homes—just not necessarily in those cities… Transactions have plummeted globally as a result of the coronavirus pandemic. Global real-estate tech strategist Mike DelPrete says short-lived transaction declines of as much as 90% have been observed in cities in China, South Korea and Italy at the height of the spread. In the U.S., Redfin says the volume of newly listed homes declined by as much as 50% from a year earlier the week before Easter. All this has set up some gloomy forecasts for the balance of the year. In April, Fannie Mae projected home sales would fall by nearly 15% in 2020 nationwide…”
Fixed-Income Bubble Watch:
June 4 – Bloomberg (Molly Smith and Jeremy Hill): “With the pandemic lockdowns starving many businesses of revenue, debt is becoming either the key to survival or a ticket to bankruptcy in corporate America. Companies strong enough to gain access to the bond markets have borrowed $1 trillion this year at the fastest pace on record. Then there are those that can’t afford to carry the debt they have, leading to the most large bankruptcy filings in the first five months of the year since 2009, during the Great Recession.”
June 1 – Financial Times (Joe Rennison): “The percentage of commercial property loans left unpaid by borrowers in the US more than trebled last month, in a sign of a deepening crisis in the $1.3tn market for bonds backed by the mortgages. The delinquency rate on loans underpinning commercial mortgage-backed securities rose from 2.3% in April to 7.4% in May, according to the data service Trepp. Borrowers are considered delinquent when they fail to make a payment within 30 days. A further 8.6% of mortgages were in that 30-day grace period after missing a payment.”
June 3 – Wall Street Journal (Megumi Fujikawa): “Japanese regulators have warned the nation’s banks for the first time about the risk of investing in overseas securitized corporate loans, which have run into trouble from a wave of U.S. bankruptcies. Japan’s banks collectively hold nearly 20% of the $750 billion global market for corporate debt packaged into securities called collateralized loan obligations… More than half the Japanese portion belongs to a single bank, Norinchukin Bank, which manages assets on behalf of farming and fishing cooperatives.”
China Watch:
June 1 – Reuters (Laura Forman): “China said… U.S. attempts to harm Chinese interests will be met with firm countermeasures, criticising a U.S. decision to begin ending special treatment for Hong Kong as well as actions against Chinese students and companies… Chinese foreign ministry spokesman Zhao Lijian said China firmly opposed the U.S. steps. ‘The announced measures severely interfere with China’s internal affairs, damage U.S.-China relations, and will harm both sides. China is firmly opposed to this,’ Zhao told reporters… ‘Any words or actions by the U.S. that harm China’s interests will meet with China’s firm counterattack,’ he said.”
June 1 – Financial Times (Tom Mitchell and Xinning Liu): “Chinese officials and state media outlets have savaged the Trump administration’s response to violent protests raging across the US, describing the president as a hypocrite after he supported Hong Kong’s demonstrations. In a tweet directed at US state department spokesperson Morgan Ortagus, who said the Chinese government had ‘flagrantly broken its promises to the people of Hong Kong’ with its plan to impose a new security law in the territory, her counterpart at China’s foreign ministry, Hua Chunying, wrote ‘I can’t breathe’.”
May 30 – Reuters (James Pomfret and Stella Qiu): “China’s state media and the government of Hong Kong lashed out… at U.S. President Donald Trump’s vow to end Hong Kong’s special status if Beijing imposes new national security laws on the city, which is bracing for fresh protests… ‘The baton of sanctions that the United States is brandishing will not scare Hong Kong and will not bring China down,’ China’s Communist Party mouthpiece, the People’s Daily, wrote… It used the pen name ‘Zhong Sheng’, meaning ‘Voice of China’, often used to give the paper’s view on foreign policy issues.”
June 1 – Reuters: “China has told state-owned firms to halt purchases of soybeans and pork from the United States, two people familiar with the matter said, after Washington said it would eliminate special treatment for Hong Kong to punish Beijing. Large volume state purchases of U.S. corn and cotton have also been put on hold, one of the sources said. China could expand the order to include additional U.S. farm goods if Washington took further action, the people said.”
June 2 – Wall Street Journal (Jonathan Cheng): “China’s economic recovery hit a speed bump in May as the coronavirus pandemic began curbing the world’s demand for Chinese goods. More and more Chinese factories have reopened for work in the past three months as authorities have eased their once-aggressive coronavirus measures. But now they are facing the dire reality of falling orders from overseas customers. The conundrum can be seen in official and private gauges of China’s factory activity.”
June 2 – Reuters (Gabriel Crossley): “China’s services sector returned to growth last month for the first time since January as the economy recovers from strict coronavirus-induced containment measures, although employment and overseas demand remained weak, a private survey showed. The Caixin/Markit services Purchasing Managers’ Index (PMI) rose to 55.0 in May from 44.4 in April, hitting the highest level since late 2010.”
May 30 – Reuters (Stella Qiu and Gabriel Crossley): “China’s factory activity grew at a slower pace in May but momentum in the services and construction sectors quickened, pointing to an uneven recovery in the world’s second-largest economy… The official manufacturing Purchasing Manager’s Index (PMI) eased to 50.6 in May from 50.8 in April… Export orders logged the fifth consecutive month of contraction, with a sub-index standing at 35.3 in May, well below the 50-point mark, as the coronavirus pandemic continued to take a toll on global demand.”
June 2 – Wall Street Journal (Chong Koh Ping): “China is dabbling with Western-style unconventional monetary policy, as it seeks to shore up small businesses and the labor market without fueling market bubbles. China’s central bank has allocated 400 billion yuan ($56.1bn) to buy slices of unsecured loans made by regional lenders to small and micro enterprises. The move… prompted economists to draw comparisons with efforts like the Federal Reserve’s Main Street Lending program. Beneficiaries must promise not to lay off workers… The People’s Bank of China will buy 40% stakes in loans with maturities of at least six months, made between March and year-end. Qualifying banks must lower lending rates for small businesses and buy back the loans after a year. The central bank won’t bear the losses if loans turn sour.”
May 30 – Bloomberg (Fion Li and Vinicy Chan): “Phyllis Lam has lived in Hong Kong for 42 years. It’s where she was born, went to school, met her husband and planned to raise her two children. But like a growing number of Hongkongers disillusioned by China’s tightening grip on the city, Lam now feels she has little choice but to leave. ‘I have no confidence in Hong Kong’s future,’ she said… For many in Hong Kong who’ve long feared an erosion of their freedoms under Chinese rule, last week marked a tipping point. Spurred to action by Beijing’s decision to impose controversial national security legislation on the former British colony, residents have been flooding migration consultants with questions on how to move their families overseas.”
June 3 – Reuters (Sumeet Chatterjee): “Some global companies are considering shifting some of their treasury operations out of Hong Kong as the United States moves to end the city’s privileges, senior bankers said, in the latest blow to the territory’s status as a major financial hub… Against the backdrop, a handful of global firms are eyeing a move of some of their corporate treasury operations to countries like Singapore, Malaysia, Thailand, and Vietnam, four senior bankers with knowledge of the matter said.”
June 4 – Bloomberg: “A slump in China’s government bonds is set to deepen as traders’ hopes for aggressive monetary easing quickly evaporate. The yield on sovereign notes due in a decade touched 2.85% on Wednesday, the highest level since February, before pulling back. The high extended the surge since the start of May to about 30 bps, making the bonds the world’s second-worst performer after Bulgarian debt. The yield rose four bps to 2.83%...”
Central Bank Watch:
June 4 – Reuters (Alexander Weber and Carolynn Look): “The European Central Bank intensified its response to the ‘unprecedented contraction’ facing the euro area with a bigger-than-anticipated increase to its emergency bond-buying program… President Christine Lagarde and colleagues decided to expand the amount of purchases by 600 billion euros ($675bn) to 1.35 trillion euros, and extended their duration until at least the end of June 2021. The vast majority of economists surveyed by Bloomberg last week expected a boost of 500 billion euros… ‘Action had to be taken,’ Lagarde said… While there are nascent signs of the downturn bottoming out, ‘the improvement has so far been tepid.’ She revealed sweeping downward revisions to the ECB’s projections for growth and inflation in the region. In 2020, the bloc will likely see a contraction of 8.7% before rebounding by 5.2% in 2021. Under a more severe scenario with a strong resurgence of infections, output could shrink by as much as 12.6% this year.”
Europe Watch:
May 31 – Reuters (Jonathan Cable and Leika Kihara): “European manufacturers may be over the worst of a coronavirus-driven downturn, but Asia’s pain deepened in May due to a slump in global trade, with export powerhouses Japan and South Korea seeing the sharpest falls in activity in over a decade, surveys showed. The new coronavirus pandemic… has wreaked havoc with supply chains and quashed demand as government-imposed lockdowns forced businesses to close and citizens to stay home.”
Brazil Watch:
June 2 – Financial Times (Andres Schipani and Jonathan Wheatley): “Foreign investors in Brazil’s stock and bond markets continue to withdraw money en masse from Latin America’s largest economy, frightened off by hard-right president Jair Bolsonaro… Cross-border flows from Brazil have dwarfed those of most other emerging economies. Foreign investors took $11.8bn from Brazil’s stock market in the four months from February to May and $18.7bn from its bond market between February and April… The record outflows, said Monica de Bolle, a senior fellow at the Peterson Institute for International Economics in Washington, ‘reflect investors’ fears regarding the evolution of the pandemic but, most importantly, the fear of Bolsonaro as an agent of economic, political, institutional and health crises himself’.”
June 3 – Reuters (Jamie McGeever): “Industrial production in Brazil fell at its fastest pace on record in April due to the COVID-19 pandemic…, although the decline was not as severe as economists had expected. Output fell 18.8% in April from March and 27.2% from the same month a year ago, both by far the steepest declines since the IBGE series began in 2002.”
EM Watch:
June 1 – New York Times (Mary Williams Walsh and Matt Phillips): “From Angola to Jamaica to Ecuador to Zambia, the world’s poor countries have had their finances shredded by the global pandemic. The president of Tanzania has called on ‘our rich brothers’ to cancel his country’s debt. Belarus veered toward a default when a promised $600 million loan from Russia fell through. Russia couldn’t spare the money because the ruble had taken a nose-dive… Lebanon, troubled even before the pandemic, has embarked on its first debt restructuring. And Argentina has defaulted again — for the ninth time in its history. The low interest rates of the past decade led to an unlikely alliance between poor countries and international investors. Governments, state-owned companies and other businesses were able to raise money relatively cheaply to finance their growth, while investors searching for better returns than they were getting at home gobbled up that debt. As a result, developing countries owe record amounts of money to investors, governments and others outside their borders: $2.1 trillion for countries ranked as ‘low income’ and ‘lower-middle income’ by the World Bank…”
June 2 – Bloomberg (Rahul Satija): “Moody’s… said stress among Indian lenders may be ‘deeper and broader’ than it thought, adding more risks to the already battered economy. ‘A deeper and more prolonged credit crunch would constrain’ gross domestic product growth further, and that ‘in turn would increase the pressure on financial institutions’ balance sheets,’ according to the ratings company. It made the comments… when it cut India’s sovereign rating by one step to the lowest investment grade. The downgrade comes days after India’s central bank said it expects the economy will contract for the first time in more than four decades. India already has the world’s worst bad loan pile, and Moody’s said subdued economic growth is likely to further weaken asset quality and the health of banks and non-bank financial institutions.”
June 1 – Bloomberg (Anurag Joshi): “A slump in Indian company foreign-currency loans to an 11-year low is raising concerns that weaker borrowers may struggle to refinance a record amount of maturing debt amid the pandemic. Local firms have secured $1.4 billion from offshore loans since April 1, down from $7.3 billion in the first quarter… Their overseas bond issuance has also dropped. The Covid-19 crisis has further crimped options for foreign-currency funding, worsening a credit crunch sparked by the collapse of shadow lender IL&FS in 2018.”
June 2 – Reuters (Alun John, Nupur Anand, and Fanny Potkin): “The spring started out rosy for the Indian arm of ClearScore, a company that offers online credit scores and loans. Within weeks, the coronavirus pandemic had taken hold, drastically changing the picture for the online lending industry in Asia… Alternative lending companies and platforms across Asia are scrambling to raise funds and stave off bankruptcy as they face a wave of bad loans.”
June 2 – Bloomberg (Cagan Koc and Constantine Courcoulas): “Turkish policy makers are pumping money into the economy at the fastest pace in over a decade to contain the fallout of the coronavirus pandemic, a move that risks weakening the currency and stoking inflation. State lenders are unleashing credit through the economy as the central bank injects liquidity by scooping up government bonds. The money supply, as measured by the M1 gauge -- which includes currency in circulation and bank deposits -- is growing at an annual rate of almost 80%...”
May 31 – Wall Street Journal (Stephen Kalin): “Saudi Arabia’s foreign reserves dropped sharply in April as the kingdom kept its peg with the U.S. dollar steady while transferring a chunk to its sovereign-wealth fund to bet on stocks beaten down by the coronavirus pandemic. The kingdom’s reserves in recent years have hovered around the $500 billion level… The implied stability allowed officials to maintain the Saudi riyal’s peg to the dollar and demonstrate the kingdom’s financial strength as it raised billions in debt to help fund an ambitious spending plan. Total foreign reserve assets fell by $24.7 billion in April to about $448.6 billion… They had fallen by $23.9 billion in March—the largest single-month drop going back two decades.”
Japan Watch:
June 4 – Reuters (Leika Kihara, Kaori Kaneko and Tetsushi Kajimoto): “Japan’s household spending fell at the fastest pace on record in April as the coronavirus shut down travel and dining-out in the world’s third-largest economy, while fears of higher job losses chilled consumer confidence… Household spending tumbled 11.1% in April from a year earlier…”
Geopolitical Watch:
June 4 – CNBC (Yen Nee Lee): “China has been flexing its geopolitical muscles as countries around the world grapple with the coronavirus pandemic — a reflection of Beijing’s belief that ‘China’s time has come,’ a former U.S. diplomat said… In addition to pressing ahead with a new national security law for Hong Kong, China has toughened its stance on Taiwan — which it considers a wayward province that must be reunited with the mainland. Beijing has also kept up its aggression in the disputed waters of South China Sea and recently, at its border with India. ‘China is being more assertive in pursuing goals that we know that it’s had in a number of decades,’ Robert Daly, director of the Wilson Center’s Kissinger Institute on China and the United States, told CNBC… ‘So clearly, this is an assertion of strength and it reflects a belief that China’s time has come, combined with the fact that this may be seen as a very good opportunity when America seems to have lost interest in global leadership and when there’s distraction from the coronavirus,” he added.”
June 4 – Reuters (Ben Blanchard): “A U.S. warship sailed through the sensitive Taiwan Strait on Thursday, the U.S. and Taiwanese militaries said, on the same day as the 31st anniversary of China’s bloody crackdown on pro-democracy demonstrators in and around Tiananmen Square. China, which considers Taiwan its territory, has been angered by the Trump administration’s stepped-up support for the self-ruled, democratic island, such as more arms sales and nearby U.S. patrols.”
U.S. Bubble Watch:
May 31 – Financial Times (Joshua Chaffin and James Fontanella-Khan): “The worst civil uprisings in the US in more than half a century are forcing Americans to confront deep-rooted problems of racial inequality and police brutality — all while reeling from a pandemic that has killed more than 100,000 of their fellow citizens and shattered the economy. Protests over the death of George Floyd, an unarmed black man, at the hands of Minneapolis police began peacefully but disintegrated into violence and looting in dozens of cities. ‘Last night . . . was an ugly night all across the nation,’ said Andrew Cuomo, New York governor, adding that ‘the real issue is the continuing racism in this country. And it is chronic and it is endemic and it is institutional.’”
June 1 – Wall Street Journal (Paul Hannon and Paul Kiernan): “The U.S. economy could take the better part of a decade to fully recover from the coronavirus pandemic and related shutdowns, a U.S. budget agency said… The Congressional Budget Office, a nonpartisan legislative agency, said the sharp contraction triggered by the coronavirus caused it to mark down its 2020-30 forecast for U.S. economic output by a cumulative $7.9 trillion, or 3% of gross domestic product, relative to its January projections. GDP isn’t expected to catch up to the previously forecast level until the fourth quarter of 2029… The roughly $3.3 trillion in stimulus programs enacted by Congress since March will only ‘partially mitigate the deterioration in economic conditions,’ the CBO said.”
June 2 – Associated Press (Martin Crustsinger): “The Congressional Budget Office said… the U.S. economy could be $15.7 trillion smaller over the next decade than it otherwise would have been if Congress does not mitigate the economic damage from the coronavirus. The CBO… expanded that forecast to show that the severity of the economic shock could depress growth for far longer. The new estimate said that over the 2020-2030 period, total GDP output could be $15.7 trillion lower than CBO had been projecting as recently as January. That would equal 5.3% of lost GDP over the coming decade.”
June 4 – Bloomberg (Ana Monteiro): “U.S. trade in goods and services plunged in April to the lowest level in almost a decade… Exports declined from the prior month by 20.5%, the biggest drop in comparable data back to 1992, to $151.3 billion. Imports decreased 13.7%, also the most since 1992, to $200.7 billion. Combined, the value of U.S. exports and imports decreased to $352 billion, the lowest since May 2010… The overall gap in goods and services trade expanded to $49.4 billion…”
June 3 – Reuters (Lucia Mutikani): “The number of Americans filing for unemployment benefits dropped below 2 million last week for the first time since mid-March, but remains astonishingly high as companies adjust to an environment that has been significantly changed by COVID-19.”
May 30 – Associated Press (David Pitt): “As if trips to the grocery store weren’t nerve-wracking enough, U.S. shoppers lately have seen the costs of meat, eggs and even potatoes soar as the coronavirus has disrupted processing plants and distribution networks. Overall, the cost of food bought to eat at home skyrocketed by the most in 46 years, and analysts caution that meat prices in particular could remain high as slaughterhouses struggle to maintain production levels… The… 2.6% jump in April food prices was the largest monthly increase in 46 years. Prices for meats, poultry, fish and eggs increased the most, rising 4.3%. Although the 2.9% jump in cereals and bakery products wasn’t as steep, it was still the largest increase the agency has recorded. Dairy and related products, and fruits and vegetables increased by 1.5% in April.”
June 1 – Reuters (Joshua Franklin): “U.S. public companies sold more than $60 billion in shares in May, the biggest monthly haul ever, as they capitalized on a stock market rally fueled by hopes that the COVID-19 pandemic is subsiding… ‘We’re talking to a lot of companies around the fact that the market is here, you don’t know what lies in the economy to come,’ said Ryan Parrish, head of Americas equity capital markets syndicate at Bank of America. ‘If you even remotely have a need you should get it done now.’”
June 4 – Associated Press (Adam Beam): “California’s Legislative leaders… rejected billions of dollars in budget cuts to public schools and health care services that Gov. Gavin Newsom had proposed, setting up a fight with the governor over how to close the state’s estimated $54.3 billion budget deficit. Flush with cash just six months ago, California’s revenues have plummeted since March… Since then, more than 5 million people have filed for unemployment benefits.”
May 30 – Wall Street Journal (Laura Forman): “The rise of remote working could empower renters in places like New York City and San Francisco to finally buy homes—just not necessarily in those cities… Transactions have plummeted globally as a result of the coronavirus pandemic. Global real-estate tech strategist Mike DelPrete says short-lived transaction declines of as much as 90% have been observed in cities in China, South Korea and Italy at the height of the spread. In the U.S., Redfin says the volume of newly listed homes declined by as much as 50% from a year earlier the week before Easter. All this has set up some gloomy forecasts for the balance of the year. In April, Fannie Mae projected home sales would fall by nearly 15% in 2020 nationwide…”
Fixed-Income Bubble Watch:
June 4 – Bloomberg (Molly Smith and Jeremy Hill): “With the pandemic lockdowns starving many businesses of revenue, debt is becoming either the key to survival or a ticket to bankruptcy in corporate America. Companies strong enough to gain access to the bond markets have borrowed $1 trillion this year at the fastest pace on record. Then there are those that can’t afford to carry the debt they have, leading to the most large bankruptcy filings in the first five months of the year since 2009, during the Great Recession.”
June 1 – Financial Times (Joe Rennison): “The percentage of commercial property loans left unpaid by borrowers in the US more than trebled last month, in a sign of a deepening crisis in the $1.3tn market for bonds backed by the mortgages. The delinquency rate on loans underpinning commercial mortgage-backed securities rose from 2.3% in April to 7.4% in May, according to the data service Trepp. Borrowers are considered delinquent when they fail to make a payment within 30 days. A further 8.6% of mortgages were in that 30-day grace period after missing a payment.”
June 3 – Wall Street Journal (Megumi Fujikawa): “Japanese regulators have warned the nation’s banks for the first time about the risk of investing in overseas securitized corporate loans, which have run into trouble from a wave of U.S. bankruptcies. Japan’s banks collectively hold nearly 20% of the $750 billion global market for corporate debt packaged into securities called collateralized loan obligations… More than half the Japanese portion belongs to a single bank, Norinchukin Bank, which manages assets on behalf of farming and fishing cooperatives.”
China Watch:
June 1 – Reuters (Laura Forman): “China said… U.S. attempts to harm Chinese interests will be met with firm countermeasures, criticising a U.S. decision to begin ending special treatment for Hong Kong as well as actions against Chinese students and companies… Chinese foreign ministry spokesman Zhao Lijian said China firmly opposed the U.S. steps. ‘The announced measures severely interfere with China’s internal affairs, damage U.S.-China relations, and will harm both sides. China is firmly opposed to this,’ Zhao told reporters… ‘Any words or actions by the U.S. that harm China’s interests will meet with China’s firm counterattack,’ he said.”
June 1 – Financial Times (Tom Mitchell and Xinning Liu): “Chinese officials and state media outlets have savaged the Trump administration’s response to violent protests raging across the US, describing the president as a hypocrite after he supported Hong Kong’s demonstrations. In a tweet directed at US state department spokesperson Morgan Ortagus, who said the Chinese government had ‘flagrantly broken its promises to the people of Hong Kong’ with its plan to impose a new security law in the territory, her counterpart at China’s foreign ministry, Hua Chunying, wrote ‘I can’t breathe’.”
May 30 – Reuters (James Pomfret and Stella Qiu): “China’s state media and the government of Hong Kong lashed out… at U.S. President Donald Trump’s vow to end Hong Kong’s special status if Beijing imposes new national security laws on the city, which is bracing for fresh protests… ‘The baton of sanctions that the United States is brandishing will not scare Hong Kong and will not bring China down,’ China’s Communist Party mouthpiece, the People’s Daily, wrote… It used the pen name ‘Zhong Sheng’, meaning ‘Voice of China’, often used to give the paper’s view on foreign policy issues.”
June 1 – Reuters: “China has told state-owned firms to halt purchases of soybeans and pork from the United States, two people familiar with the matter said, after Washington said it would eliminate special treatment for Hong Kong to punish Beijing. Large volume state purchases of U.S. corn and cotton have also been put on hold, one of the sources said. China could expand the order to include additional U.S. farm goods if Washington took further action, the people said.”
June 2 – Wall Street Journal (Jonathan Cheng): “China’s economic recovery hit a speed bump in May as the coronavirus pandemic began curbing the world’s demand for Chinese goods. More and more Chinese factories have reopened for work in the past three months as authorities have eased their once-aggressive coronavirus measures. But now they are facing the dire reality of falling orders from overseas customers. The conundrum can be seen in official and private gauges of China’s factory activity.”
June 2 – Reuters (Gabriel Crossley): “China’s services sector returned to growth last month for the first time since January as the economy recovers from strict coronavirus-induced containment measures, although employment and overseas demand remained weak, a private survey showed. The Caixin/Markit services Purchasing Managers’ Index (PMI) rose to 55.0 in May from 44.4 in April, hitting the highest level since late 2010.”
May 30 – Reuters (Stella Qiu and Gabriel Crossley): “China’s factory activity grew at a slower pace in May but momentum in the services and construction sectors quickened, pointing to an uneven recovery in the world’s second-largest economy… The official manufacturing Purchasing Manager’s Index (PMI) eased to 50.6 in May from 50.8 in April… Export orders logged the fifth consecutive month of contraction, with a sub-index standing at 35.3 in May, well below the 50-point mark, as the coronavirus pandemic continued to take a toll on global demand.”
June 2 – Wall Street Journal (Chong Koh Ping): “China is dabbling with Western-style unconventional monetary policy, as it seeks to shore up small businesses and the labor market without fueling market bubbles. China’s central bank has allocated 400 billion yuan ($56.1bn) to buy slices of unsecured loans made by regional lenders to small and micro enterprises. The move… prompted economists to draw comparisons with efforts like the Federal Reserve’s Main Street Lending program. Beneficiaries must promise not to lay off workers… The People’s Bank of China will buy 40% stakes in loans with maturities of at least six months, made between March and year-end. Qualifying banks must lower lending rates for small businesses and buy back the loans after a year. The central bank won’t bear the losses if loans turn sour.”
May 30 – Bloomberg (Fion Li and Vinicy Chan): “Phyllis Lam has lived in Hong Kong for 42 years. It’s where she was born, went to school, met her husband and planned to raise her two children. But like a growing number of Hongkongers disillusioned by China’s tightening grip on the city, Lam now feels she has little choice but to leave. ‘I have no confidence in Hong Kong’s future,’ she said… For many in Hong Kong who’ve long feared an erosion of their freedoms under Chinese rule, last week marked a tipping point. Spurred to action by Beijing’s decision to impose controversial national security legislation on the former British colony, residents have been flooding migration consultants with questions on how to move their families overseas.”
June 3 – Reuters (Sumeet Chatterjee): “Some global companies are considering shifting some of their treasury operations out of Hong Kong as the United States moves to end the city’s privileges, senior bankers said, in the latest blow to the territory’s status as a major financial hub… Against the backdrop, a handful of global firms are eyeing a move of some of their corporate treasury operations to countries like Singapore, Malaysia, Thailand, and Vietnam, four senior bankers with knowledge of the matter said.”
June 4 – Bloomberg: “A slump in China’s government bonds is set to deepen as traders’ hopes for aggressive monetary easing quickly evaporate. The yield on sovereign notes due in a decade touched 2.85% on Wednesday, the highest level since February, before pulling back. The high extended the surge since the start of May to about 30 bps, making the bonds the world’s second-worst performer after Bulgarian debt. The yield rose four bps to 2.83%...”
Central Bank Watch:
June 4 – Reuters (Alexander Weber and Carolynn Look): “The European Central Bank intensified its response to the ‘unprecedented contraction’ facing the euro area with a bigger-than-anticipated increase to its emergency bond-buying program… President Christine Lagarde and colleagues decided to expand the amount of purchases by 600 billion euros ($675bn) to 1.35 trillion euros, and extended their duration until at least the end of June 2021. The vast majority of economists surveyed by Bloomberg last week expected a boost of 500 billion euros… ‘Action had to be taken,’ Lagarde said… While there are nascent signs of the downturn bottoming out, ‘the improvement has so far been tepid.’ She revealed sweeping downward revisions to the ECB’s projections for growth and inflation in the region. In 2020, the bloc will likely see a contraction of 8.7% before rebounding by 5.2% in 2021. Under a more severe scenario with a strong resurgence of infections, output could shrink by as much as 12.6% this year.”
Europe Watch:
May 31 – Reuters (Jonathan Cable and Leika Kihara): “European manufacturers may be over the worst of a coronavirus-driven downturn, but Asia’s pain deepened in May due to a slump in global trade, with export powerhouses Japan and South Korea seeing the sharpest falls in activity in over a decade, surveys showed. The new coronavirus pandemic… has wreaked havoc with supply chains and quashed demand as government-imposed lockdowns forced businesses to close and citizens to stay home.”
Brazil Watch:
June 2 – Financial Times (Andres Schipani and Jonathan Wheatley): “Foreign investors in Brazil’s stock and bond markets continue to withdraw money en masse from Latin America’s largest economy, frightened off by hard-right president Jair Bolsonaro… Cross-border flows from Brazil have dwarfed those of most other emerging economies. Foreign investors took $11.8bn from Brazil’s stock market in the four months from February to May and $18.7bn from its bond market between February and April… The record outflows, said Monica de Bolle, a senior fellow at the Peterson Institute for International Economics in Washington, ‘reflect investors’ fears regarding the evolution of the pandemic but, most importantly, the fear of Bolsonaro as an agent of economic, political, institutional and health crises himself’.”
June 3 – Reuters (Jamie McGeever): “Industrial production in Brazil fell at its fastest pace on record in April due to the COVID-19 pandemic…, although the decline was not as severe as economists had expected. Output fell 18.8% in April from March and 27.2% from the same month a year ago, both by far the steepest declines since the IBGE series began in 2002.”
EM Watch:
June 1 – New York Times (Mary Williams Walsh and Matt Phillips): “From Angola to Jamaica to Ecuador to Zambia, the world’s poor countries have had their finances shredded by the global pandemic. The president of Tanzania has called on ‘our rich brothers’ to cancel his country’s debt. Belarus veered toward a default when a promised $600 million loan from Russia fell through. Russia couldn’t spare the money because the ruble had taken a nose-dive… Lebanon, troubled even before the pandemic, has embarked on its first debt restructuring. And Argentina has defaulted again — for the ninth time in its history. The low interest rates of the past decade led to an unlikely alliance between poor countries and international investors. Governments, state-owned companies and other businesses were able to raise money relatively cheaply to finance their growth, while investors searching for better returns than they were getting at home gobbled up that debt. As a result, developing countries owe record amounts of money to investors, governments and others outside their borders: $2.1 trillion for countries ranked as ‘low income’ and ‘lower-middle income’ by the World Bank…”
June 2 – Bloomberg (Rahul Satija): “Moody’s… said stress among Indian lenders may be ‘deeper and broader’ than it thought, adding more risks to the already battered economy. ‘A deeper and more prolonged credit crunch would constrain’ gross domestic product growth further, and that ‘in turn would increase the pressure on financial institutions’ balance sheets,’ according to the ratings company. It made the comments… when it cut India’s sovereign rating by one step to the lowest investment grade. The downgrade comes days after India’s central bank said it expects the economy will contract for the first time in more than four decades. India already has the world’s worst bad loan pile, and Moody’s said subdued economic growth is likely to further weaken asset quality and the health of banks and non-bank financial institutions.”
June 1 – Bloomberg (Anurag Joshi): “A slump in Indian company foreign-currency loans to an 11-year low is raising concerns that weaker borrowers may struggle to refinance a record amount of maturing debt amid the pandemic. Local firms have secured $1.4 billion from offshore loans since April 1, down from $7.3 billion in the first quarter… Their overseas bond issuance has also dropped. The Covid-19 crisis has further crimped options for foreign-currency funding, worsening a credit crunch sparked by the collapse of shadow lender IL&FS in 2018.”
June 2 – Reuters (Alun John, Nupur Anand, and Fanny Potkin): “The spring started out rosy for the Indian arm of ClearScore, a company that offers online credit scores and loans. Within weeks, the coronavirus pandemic had taken hold, drastically changing the picture for the online lending industry in Asia… Alternative lending companies and platforms across Asia are scrambling to raise funds and stave off bankruptcy as they face a wave of bad loans.”
June 2 – Bloomberg (Cagan Koc and Constantine Courcoulas): “Turkish policy makers are pumping money into the economy at the fastest pace in over a decade to contain the fallout of the coronavirus pandemic, a move that risks weakening the currency and stoking inflation. State lenders are unleashing credit through the economy as the central bank injects liquidity by scooping up government bonds. The money supply, as measured by the M1 gauge -- which includes currency in circulation and bank deposits -- is growing at an annual rate of almost 80%...”
May 31 – Wall Street Journal (Stephen Kalin): “Saudi Arabia’s foreign reserves dropped sharply in April as the kingdom kept its peg with the U.S. dollar steady while transferring a chunk to its sovereign-wealth fund to bet on stocks beaten down by the coronavirus pandemic. The kingdom’s reserves in recent years have hovered around the $500 billion level… The implied stability allowed officials to maintain the Saudi riyal’s peg to the dollar and demonstrate the kingdom’s financial strength as it raised billions in debt to help fund an ambitious spending plan. Total foreign reserve assets fell by $24.7 billion in April to about $448.6 billion… They had fallen by $23.9 billion in March—the largest single-month drop going back two decades.”
Japan Watch:
June 4 – Reuters (Leika Kihara, Kaori Kaneko and Tetsushi Kajimoto): “Japan’s household spending fell at the fastest pace on record in April as the coronavirus shut down travel and dining-out in the world’s third-largest economy, while fears of higher job losses chilled consumer confidence… Household spending tumbled 11.1% in April from a year earlier…”
Geopolitical Watch:
June 4 – CNBC (Yen Nee Lee): “China has been flexing its geopolitical muscles as countries around the world grapple with the coronavirus pandemic — a reflection of Beijing’s belief that ‘China’s time has come,’ a former U.S. diplomat said… In addition to pressing ahead with a new national security law for Hong Kong, China has toughened its stance on Taiwan — which it considers a wayward province that must be reunited with the mainland. Beijing has also kept up its aggression in the disputed waters of South China Sea and recently, at its border with India. ‘China is being more assertive in pursuing goals that we know that it’s had in a number of decades,’ Robert Daly, director of the Wilson Center’s Kissinger Institute on China and the United States, told CNBC… ‘So clearly, this is an assertion of strength and it reflects a belief that China’s time has come, combined with the fact that this may be seen as a very good opportunity when America seems to have lost interest in global leadership and when there’s distraction from the coronavirus,” he added.”
June 4 – Reuters (Ben Blanchard): “A U.S. warship sailed through the sensitive Taiwan Strait on Thursday, the U.S. and Taiwanese militaries said, on the same day as the 31st anniversary of China’s bloody crackdown on pro-democracy demonstrators in and around Tiananmen Square. China, which considers Taiwan its territory, has been angered by the Trump administration’s stepped-up support for the self-ruled, democratic island, such as more arms sales and nearby U.S. patrols.”
May 31 – Financial Times (Rana Foroohar): “Unfettered globalisation is over. That is not a controversial statement at this point for obvious reasons, from the post-Covid-19 retrenchment of complex international supply chains to the decoupling of the US and China. It’s hard to imagine a reset to the 1990s neoliberal mindset, even if Joe Biden wins the US presidential elections, or if the EU experiences a moment of renewed cohesion in response to the pandemic. The world is more likely to become tripolar — or at least bipolar — with more regionalisation in trade, migration and even capital flows in the future. There are all sorts of reasons for this, some disturbing (rising nationalism) and others benign (a desire for more resilient and inclusive local economies). That begs a question that has been seen as controversial — are we entering a post-dollar world?”
June 5 – Reuters (Tim Kelly): “China is using the coronavirus as a cover to push territorial claims in the South China Sea through a surge in naval activity meant to intimidate other countries that claim the waters, the commander of U.S. Forces in Japan said… There has been a surge of activity by China in the South China Sea with navy ships, coast guard vessels and a naval militia of fishing boats in harassing vessels in waters claimed by Beijing, said Lieutenant General Kevin Schneider. ‘Through the course of the COVID crisis we saw a surge of maritime activity,” he told Reuters… He said Beijing had also increased its activity in the East China Sea, where it has a territorial dispute with Japan.”
June 5 – Reuters (Tim Kelly): “China is using the coronavirus as a cover to push territorial claims in the South China Sea through a surge in naval activity meant to intimidate other countries that claim the waters, the commander of U.S. Forces in Japan said… There has been a surge of activity by China in the South China Sea with navy ships, coast guard vessels and a naval militia of fishing boats in harassing vessels in waters claimed by Beijing, said Lieutenant General Kevin Schneider. ‘Through the course of the COVID crisis we saw a surge of maritime activity,” he told Reuters… He said Beijing had also increased its activity in the East China Sea, where it has a territorial dispute with Japan.”
