Saturday's News Links

[CNBC] Trump signing orders aimed at extending some pandemic relief after Congress fails to reach a deal

[Reuters] Trump vows to suspend U.S. payroll tax after coronavirus aid talks with Congress break down

[Politico] How politics, personalities and price tags derailed Covid relief talks

[AP] Schools face big virus test as students return to classroom

[CNN] The latest on the coronavirus pandemic

[Reuters] Coronavirus punishes Warren Buffett, as Berkshire Hathaway takes big writedown

[Reuters] Police fire tear gas at Beirut protesters angry over explosion

[WSJ] Trump Prepares Executive Actions as Coronavirus-Aid Talks Stall

[WSJ] New Chapter in U.S.-China Ties Marked by Confrontation

[FT] Hong Kong and China hit back at US sanctions

[FT] Central bankers are caught in a leverage trap

[FT] Global threats are reordering supply chains, says report

Weekly Commentary: Global Lender of Last Resort

Understandably, attention remains focused on the dominant U.S. tech stocks, record highs in Nasdaq, sector rotation opportunities, and the Robinhood phenomenon. It’s a mania, after all. There are as well stimulus negotiations and the administration’s determination to pound away at China – non-bullish developments too easily disregarded.

Crisis memories and concerns, meanwhile, fade with astonishing alacrity. These days, attention has shifted completely away from the global financial “plumbing” that became utterly clogged up in March. Did central banks successfully flush through the issue, or has the matter instead been left to swell into an only more problematic future blockage?

Fortunately, there are some determined financial journalists still pursuing one of the more significant stories of our lifetimes. There was Monday’s article from Bloomberg’s Rich Miller and Jesse Hamilton: “Fed Is Headed for a Clash With Hedge Funds, Other Shadow Banks.” Also Monday, from The Wall Street Journal’s Serena Ng and Nick Timiraos: “Covid Supercharges Federal Reserve as Backup Lender to the World.”

August 3 – Bloomberg (Rich Miller and Jesse Hamilton): “The Federal Reserve and other central banks are heading for a collision with shadow lenders -- the firms with a sinister nickname that are increasingly dominating global finance. Even as policymakers struggle to reopen their economies in the midst of the coronavirus pandemic, they’ve launched a review of what went wrong with markets in March, when a worldwide dash for cash by investors nearly crashed the financial system and forced unprecedented rescue actions by central banks. Their focus is on loosely regulated money market and hedge funds, mortgage originators and other entities. Already, some watchdogs have pointed to highly leveraged trades involving U.S. Treasuries as one source of the turmoil. ‘In many cases they have reached systemic importance,’ Bank for International Settlements General Manager Agustin Carstens said of the non-banks. He added that it’s time to move toward more regulation. There’s a lot at stake should the scrutiny lead to tougher oversight. The alternative financiers are major providers of credit to households and companies, making their smooth functioning critical to the health of financial markets and the economy.”

March’s financial dislocation – a frightening “seizing up” of global markets – corroborated the global Bubble thesis. International data along with myriad anecdotes over recent years have pointed to an unprecedented post-crisis expansion of global leveraged speculation. March saw the powerful explosion of de-risking/deleveraging swiftly bring global finance to its knees.

It was integral to my analysis that the Fed’s restart of QE last September – so-called “insurance” stimulus – stoked “terminal phase” speculative excess at home and abroad. The above Bloomberg article references the Bank of International Settlements’ (BIS) 2020 Annual Economic Report. I’ve extracted below:

BIS: “As a precursor to this episode, dislocations in the US repo market in September 2019 involved much the same players, with dealer balance sheet constraints again being a contributing factor. Back then, repo demand from hedge funds to maintain arbitrage trades between bonds and derivatives contributed to a repo funding squeeze. With dealer banks holding already large US Treasury positions, reluctance to accommodate the higher demand for repo funding compounded the shortage and led to a sharp spike in the secured overnight financing rate (SOFR). The Federal Reserve had to step in to provide ample repo funding and absorb Treasury collateral from the market.”

BIS: “The severe [March] dislocation in one of the world’s most liquid and important markets was startling. It reflected a confluence of factors. A key driver was the rapid unwinding of so-called relative value trades, which involve buying Treasury securities funded using leverage through repos while at the same time selling the corresponding futures contract. Investors, typically hedge funds, employ such strategies to profit from differences in the yield between cash Treasuries and the corresponding futures. Given that these price discrepancies are typically small, relative value funds amplify the return (and, by extension, losses) using leverage.”

An even greater dislocation erupted in international markets for dollar-denominated bonds and dollar-related derivatives. This followed years of unprecedented growth in dollar debt globally, along with corresponding levered speculation in these instruments (and related derivatives).

BIS: “Over the past two decades, the use of the US dollar in global financial transactions has ballooned. US dollar liabilities of non-US banks outside the United States grew from about $3.5 trillion in 2000 to around $10.3 trillion by the end of 2019. For non-banks located outside the United States, they have grown even more rapidly and now stand at roughly $12 trillion, almost double what they were a mere decade ago. There is also a significant amount of off-balance sheet dollar borrowing via FX derivatives, primarily through FX swaps. Funding pressures therefore tend to show up in these markets.”

BIS: “A significant portion of the international use of major reserve currencies, such as the US dollar, takes place offshore. Dollar liabilities (ie loans and debt securities) on the balance sheets of banks and non-banks outside the United States amounted to over $22 trillion at end-2019. On top of this, off-balance sheet US dollar obligations incurred via derivatives such as FX swaps were even larger, with estimates ranging up to $40 trillion. An FX swap allows an agent to obtain US dollars on a hedged basis, which is functionally equivalent to collateralised borrowing.”

With “non-bank” dollar-denominated liabilities having doubled over the past decade to $12 TN – and FX swaps expanding to an estimated $40 TN – you’re talking massive proliferation of “offshore” dollar obligations. March’s “seizing up” confirmed that way too much speculative leverage had accumulated internationally. This helps explain why massive ($3 TN) Federal Reserve liquidity injections were required to reverse de-risking/deleveraging dynamics. As the BIS stated: “With the GFC [great financial crisis] as precursor, the role of the Federal Reserve as a Global Lender of Last Resort has been further cemented.”

August 3 – Wall Street Journal (Serena Ng and Nick Timiraos): “When the coronavirus brought the world economy to a halt in March, it fell to the U.S. Federal Reserve to keep the wheels of finance turning for businesses across America. And when funds stopped flowing to many banks and companies outside America’s borders—from Japanese lenders making bets on U.S. corporate debt to Singapore traders needing U.S. dollars to pay for imports—the U.S. central bank stepped in again. The Fed has long resisted becoming the world’s backup lender. But it shed reservations after the pandemic went global. During two critical mid-March weeks, it bought a record $450 billion in Treasurys from investors desperate to raise dollars. By April, the Fed had lent another nearly half a trillion dollars to counterparts overseas, representing most of the emergency lending it had extended to fight the coronavirus at the time. The massive commitment was among the Fed’s most significant—and least noticed—expansions of power yet.”

The Fed’s interventionist leap into corporate bonds and ETFs clearly exerted profound market impact. Suddenly, the Fed was viewed as providing a direct liquidity backstop, boosting the attractiveness (and prices!) of corporate Credit and fixed-income ETFs in particular. Not generally as appreciated – yet arguably more momentous – the Federal Reserve's aggressive liquidity measures and expansion of swap lines with the international central bank community were seen as creating a liquidity backstop for the massive offshore markets for dollar-denominated instruments (bonds and derivatives).

In both domestic corporate Credit and international finance, Fed and central bank measures reversed de-risking/deleveraging dynamics. At home and abroad, speculative flows resumed, financial conditions loosened, debt issuance mushroomed, and markets recovered. Global finance - markets and policymaking - became only more closely synchronized. As noted by the BIS: “It established the Fed as global guarantor of dollar funding, cementing the U.S. currency’s role as the global financial system’s underpinning.”

It is a central tenet of Bubble Analysis that “things get crazy at the end of cycles.” The confluence of late-cycle excess/fragility along with aggressive policy interventions (meant to hold crisis at bay) fosters a precarious dynamic of emboldened speculators operating in ultra-loose financial conditions. Especially after the Fed expanded its balance sheet by a few Trillion in not many weeks, confidence became stronger than ever in the central bank mantra of “whatever it takes” to sustain inflating market prices. Speculative Melt-Up.

There is today no doubt in the marketplace that the Fed, in the event of market instability, would quickly replay March’s crisis operations. Markets see nothing inhibiting Fed intervention measures. The sanguine view holds even for the Federal Reserve’s extraordinary international crisis operations. From the above WSJ article: “The risks to the Fed are minimal given that it is dealing with the most creditworthy nations and the most advanced central banks.”

Last week’s CBB attempted to explain how the unsound U.S. Bubble Economy structure ensured massive ongoing fiscal and monetary support. From an international financial markets perspective, Bubble Market Structure will also require unrelenting monetary stimulus – zero rates, open-ended QE, international swap arrangements, and other crisis-fighting tools.

Over the past two months, the Swiss franc has gained 5.5% versus the dollar. The euro is up 4.4%. The Dollar Index has sunk to a two-year low. Gold is up about $350, or 20%, in two months. Silver has surged almost 70%. And despite surging risk markets, safe haven 10-year Treasury yields sank 30 bps in two months to record lows.

Are the safe havens signaling acute fragility in this global Bubble of leveraged speculation and the inevitability of only more aggressive Federal Reserve balance sheet growth “as global guarantor of dollar funding”? Understandably, Fed officials must remain quite alarmed by the scope of March’s market dislocation – and even more so by the prospect of operating as lender of last resort for dysfunctional and chaotic global securities, funding and derivatives markets.

Bloomberg: “The tumult highlighted the vulnerabilities of non-banks, Fed Vice Chairman for Supervision Randal Quarles wrote in a July 14 letter to central bank chiefs and finance ministers of leading nations. As head of the Financial Stability Board, he’s promised to deliver a report on the mayhem to leaders of the Group of 20 nations by November.”

The Bloomberg article also quoted Janet Yellen calling for new Dodd-Frank legislation. I’ve pulled her more complete quote from a recent Brookings Institute event, “A Decade of Dodd-Frank” (quoted by doddfrankupdtate.com): “When we do recover, I think we should reflect on the lessons from the crisis. I personally think we need a new Dodd-Frank. We need to change the structure of FSOC (Financial Stability Oversight Council) and build up its powers to be able to deal more effectively with all of the problems that exist in the shadow banking sector. I think the structure is inherently flawed. I think the agencies need a definite financial stability mandate.”

Chair Yellen should have been more focused on the Fed’s financial stability mandate. The global “shadow bank” Bubble inflated tremendously under her watch, fueled by the Yellen Fed’s misguided postponement of policy normalization. Bubble fragilities then quashed Powell’s normalization plans. It was clear some years back that Dodd-Frank had worked to hasten the expansion of “off-shore” non-bank Credit excess and leveraged speculation.

And from Federal Reserve governor Lael Brainard: “I absolutely think the kinds of risk that Janet talked about in the nonbank financial sector were not only predictable but well-documented and can be subject to an expansion of the regulatory perimeter… I do think that very quickly, once we have come through this very challenging moment, it will be time to look back and make the necessary changes to those areas where the work of financial reform is incomplete. And to be fair, there will always be new areas.”

The Fed recognizes it has a huge problem. And much like President Trump’s calculated attacks on China, the markets believe the Fed might talk tough with respect to “shadow bank” excesses but would never risk measures that might destabilize fragile global markets. We’re now less than three months from election day. Ebullient markets can for now assume comfort with a President Biden. But if the Democrats complete a full sweep, expect impetus for a new Dodd-Frank with a focus on reining in the hedge funds and “shadow banks” more generally.

For now, bubbling stocks and corporate Credit focus on short-term prospects for ongoing momentum. Safe havens, meanwhile, have become fixated on the inevitability of crisis and mayhem. And while most dollar-denominated EM bonds remain in speculative melt-up mode, Turkey is back in crisis. The Turkish lira dropped another 4.2% this week to an all-time low versus the dollar (down 18.3% y-t-d). Turkey’s 10-year dollar bond yields jumped 17 bps to a 10-week high 7.48%. Offshore lira borrowing rates surged to 1,000% annualized this week, as Turkey’s markets approach the breaking point (facing huge dollar debt maturities with rapidly depleting international reserves).

BIS: “The Fed’s aggressive overseas lending has injected it into the world of foreign policy: Not every country gets equal access to the Fed’s dollars. Turkey, for example, has appealed unsuccessfully for dollar loans from the Fed to support its sinking currency…”

The dollar has a long history as “the world’s reserve currency.” Over the past decade, it also became the prevailing currency for a historic Bubble in global leveraged speculation. I’m sticking with the view that the global Bubble has been pierced (analogous to subprime in Spring 2007). The U.S. flooded the world with dollar balances – freely used for leveraged speculation in higher-yielding dollar-denominated EM debt. EM central banks would then predictably “recycle” these Bubble Dollars right back into U.S. securities markets. It was miraculous, went to egregious excess, and is now winding down.

We saw in March that this process badly malfunctions in reverse. And while Trillions of central bank liquidity sparked a market rally, I expect the next phase of global deleveraging to commence in the coming months. There is a long list of vulnerable countries that accumulated too much debt – too much denominated in dollars. It's worth noting that the Brazilian real declined 4.0% this week, with the Chilean peso down 3.8%, the South African rand 3.2%, and the Colombian peso 1.1%.

It’s not difficult to envisage a scenario where the Fed finds itself stuck deep in geopolitical muck. Pressure to lend to our allies and avoid the others – a process that would accelerate the transformation to a more bi-polar world. I’ve for a while now pondered the relationship between the Fed and PBOC when things turn sour for Washington and Beijing. There are enormous amounts of dollar-denominated debt in China and Asia – too much held by leveraged speculators.

The bursting of the global dollar debt Bubble will likely coincide with a major deterioration in the dollar’s value as the world’s reserve currency. And this seems like a pretty good explanation for surging precious metals prices. Markets these days see nothing that could keep the Fed from aggressively employing endless QE necessary to sustain market Bubbles. There are myriad complexities and challenges being ignored today by the risk markets.


For the Week:

The S&P500 jumped 2.5% (up 3.7% y-t-d), and the Dow rose 3.8% (down 3.9%). The Utilities gained 1.2% (down 3.5%). The Banks surged 3.9% (down 31.7%), and the Broker/Dealers jumped 4.2% (down 0.1%). The Transports surged 5.8% (down 3.0%). The S&P 400 Midcaps jumped 4.0% (down 6.0%), and the small cap Russell 2000 surged 6.0% (down 6.0%). The Nasdaq100 advanced 2.1% (up 27.6%). The Semiconductors rose 2.0% (up 17.8%). The Biotechs added 0.4% (up 12.0%). Though bullion rose another $60, the HUI gold index was little changed (up 45.0%).

Three-month Treasury bill rates ended the week at 0.0875%. Two-year government yields increased two bps to 0.13% (down 144bps y-t-d). Five-year T-note yields rose three bps to 0.23% (down 146bps). Ten-year Treasury yields gained four bps to 0.57% (down 135bps). Long bond yields rose four bps to 1.24% (down 115bps). Benchmark Fannie Mae MBS yields declined three bps to 1.21% (down 150bps).

Greek 10-year yields dropped eight bps to 1.01% (down 43bps y-t-d). Ten-year Portuguese yields fell five bps to 0.30% (down 15bps). Italian 10-year yields sank eight bps to 0.93% (down 48bps). Spain's 10-year yields dropped six bps to 0.28% (down 19bps). German bund yields increased two bps to negative 0.51% (down 32bps). French yields declined two bps to negative 0.21% (down 33bps). The French to German 10-year bond spread narrowed four to 30 bps. U.K. 10-year gilt yields rose four bps to 0.14% (down 68bps). U.K.'s FTSE equities index rallied 2.3% (down 20.0%).

Japan's Nikkei Equities Index recovered 2.9% (down 5.6% y-t-d). Japanese 10-year "JGB" yields slipped a basis point to 0.01% (up 2bps y-t-d). France's CAC40 gained 2.2% (down 18.2%). The German DAX equities index rallied 2.9% (down 4.3%). Spain's IBEX 35 equities index gained 1.1% (down 27.2%). Italy's FTSE MIB index rose 2.2% (down 17.0%). EM equities were mixed. Brazil's Bovespa index was little changed (down 11.1%), while Mexico's Bolsa rallied 2.7% (down 12.7%). South Korea's Kospi index surged 4.5% (up 7.0%). India's Sensex equities index gained 1.2% (down 7.8%). China's Shanghai Exchange advanced 1.3% (up 10.0%). Turkey's Borsa Istanbul National 100 index sank 5.9% (down 7.3%). Russia's MICEX equities index rose 2.1% (down 2.4%).

Investment-grade bond funds saw inflows of $7.208 billion, and junk bond funds posted positive flows of $4.389 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates sank 11 bps to 2.88% (down 72bps y-o-y). Fifteen-year rates fell seven bps to 2.44% (down 61bps). Five-year hybrid ARM rates declined four bps to 2.90% (down 46bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates unchanged at 3.12% (down 88bps).

Federal Reserve Credit last week declined $14.3bn to $6.902 TN, with a 48-week gain of $3.180 TN. Over the past year, Fed Credit expanded $3.161 TN, or 84.5%. Fed Credit inflated $4.091 Trillion, or 146%, over the past 404 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt billion last week added $1.2bn to $3.409 TN. "Custody holdings" were down $65bn, or 1.9%, y-o-y.
M2 (narrow) "money" supply fell $31.9bn last week to $18.286 TN, with an unprecedented 22-week gain of $2.779 TN. "Narrow money" surged $3.383 TN, or 22.7%, over the past year. For the week, Currency increased $7.3bn. Total Checkable Deposits rose $9.6bn, while Savings Deposits dropped $40.4bn. Small Time Deposits declined $6.3bn. Retail Money Funds slipped $2.2bn.

Total money market fund assets increased $5.2bn to $4.575 TN. Total money funds surged $1.239 TN y-o-y, or 37%.

Total Commercial Paper declined $1.0bn to $1.018 TN. CP was down $121bn, or 10.7% year-over-year.

Currency Watch:

August 5 – Financial Times (Eva Szalay, Adam Samson and Ayla Jean Yackley): “The Turkish lira has come under renewed pressure against the dollar, a day after short-term borrowing costs signalled that the country’s money markets were starting to malfunction. Through most of June and July, Turkish authorities succeeded in pinning the dollar to less than TL6.85… But the lira weakened beyond that point last week… The lira’s latest tumble comes a day after the costs of borrowing the currency overnight skyrocketed close to the record intraday highs struck in March last year. The offshore overnight swap rate — the cost to investors exchanging foreign currency for lira over a set period — hit an annualised level of more than 1,000% on Tuesday from 30% the previous day, according to Refinitiv data.”

For the week, the U.S. dollar index was little changed at 93.435 (down 3.3% y-t-d). For the week on the upside, the Norwegian krone increased 0.7%, the South Korean won 0.5%, the Swedish krona 0.3%, the Canadian dollar 0.2%, the Australian dollar 0.2%, the Singapore dollar 0.1%, the euro 0.1%, and the Swiss franc 0.1%. For the week on the downside, the Brazilian real declined 4.0%, the South African rand 3.2%, the Mexican peso 0.4%, the New Zealand dollar 0.4%, the British pound 0.3% and the Japanese yen 0.1%. The Chinese renminbi increased 0.1% versus the dollar this week (down 0.07% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index jumped 2.6% (down 12.9% y-t-d). Spot Gold rose 3.0% to $2,036 (up 34.1%). Silver surged 13.7% to $27.54 (up 54%). WTI crude gained 95 cents to $41.22 (down 33%). Gasoline rose 3.1% (down 29%), and Natural Gas surged 24.4% (up 2%). Copper dropped 2.6% (unchanged). Wheat sank 6.7% (down 11%). Corn fell 1.9% (down 17%).

Coronavirus Watch:

August 3 – Wall Street Journal (Walter Russell Mead): “Eight months after the novel coronavirus burst out of Wuhan, China, it has created unprecedented economic and social disruption, with economies cratering across the globe and more destruction to come. Tens of millions have lost their jobs, and millions more have seen their life savings disappear as governments forced restaurants, bars and other small businesses to shut their doors. Wealthy societies are able, for now, to print and pump money in hope of limiting the social and economic damage, but such measures cannot be extended forever. For the first time since the 1940s, political authorities around the world face a flood of economic and political challenges that could overwhelm the safeguards built into the system. In poorer countries, the situation is worse. The pandemic rages unchecked through countries like South Africa and Brazil, where low commodity prices, falling remittances and falling demand for industrial products are intersecting with capital flight to create an unprecedented economic shock. Countries like Lebanon and Ethiopia, facing grave crises before the pandemic, struggle to maintain basic order.”

August 2 – CNBC (Emma Newburger): “Dr. Deborah Birx, the White House coronavirus task force coordinator, said… that the U.S. is ‘in a new phase’ of battling against the coronavirus pandemic and urged Americans to wear masks and follow social distancing guidelines. ‘What we are seeing today is different from March and April. It is extraordinarily widespread ... it’s more widespread and it’s both rural and urban,’ Birx said… ‘To everybody who lives in a rural area, you are not immune or protected from this virus,’ Birx said.”

August 2 – Associated Press (Lauran Neergaard): “Who gets to be first in line for a COVID-19 vaccine? U.S. health authorities hope by late next month to have some draft guidance on how to ration initial doses, but it’s a vexing decision. ‘Not everybody’s going to like the answer,’ Dr. Francis Collins, director of the National Institutes of Health, recently told one of the advisory groups the government asked to help decide. ‘There will be many people who feel that they should have been at the top of the list.’”

August 4 – Reuters (Benjamin Lesser, Dan Levine, Jaimi Dowdell and Andrea Januta): “The soaring number of COVID-19 cases in the United States has far outstripped many local health departments’ ability to trace the contacts of those infected, a step critical in containing the virus’ spread. With the pandemic claiming about a thousand American lives a day, many city and county departments say they lack the money and staff to expeditiously identify people who have been exposed… The United States badly lags other wealthy countries in contact tracing…”

August 3 – Reuters (Michelle Nichols): “U.N. Secretary-General Antonio Guterres warned… the world faces a ‘generational catastrophe’ because of school closures amid the coronavirus pandemic and said that getting students safely back to the classroom must be ‘a top priority.’ Guterres said that as of mid-July schools were closed in some 160 countries, affecting more than 1 billion students, while at least 40 million children have missed out on pre-school. This came on top of more than 250 million children already being out of school before the pandemic…”

Market Instability Watch:

August 2 – Financial Times (Laura Pitel): “Speaking last month, President Recep Tayyip Erdogan hailed a sharp fall in interest rates and praised measures taken to block ‘malicious’ attacks on the Turkish lira. Such steps, he said, were ‘strengthening the immune system of our economy against global turbulence.’ That could not be further from how most economists see the Turkish picture. The collapse in tourism as a result of the coronavirus pandemic has left a gaping hole in the country’s finances. Foreign investors have fled, pulling out a large volume of funds from the country’s local-currency bonds and stocks over the past 12 months. In the face of those outflows, the country has burnt through tens of billions of dollars of reserves this year in a bid to maintain an unofficial currency peg… But, in a sign that those efforts are floundering, the lira last week lurched towards a record low against the dollar even as authorities spent billions trying to defend it.”

August 1 – Financial Times (Richard Henderson): “A strong year for the largest five US stocks despite the worst recession the country has faced in decades has further expanded their influence on equity markets. Apple, Microsoft, Amazon, Alphabet and Facebook now represent more than a fifth of the S&P 500. Not since the 1980s have the biggest five companies had such a large share of the index, according to S&P Dow Jones Indices.”

August 5 – Bloomberg (Max Reyes and Lyubov Pronina): “The biggest returns for U.S. junk bonds since 2011 are driving up demand among investors and sending money flowing into the debt securities. Retail funds that buy high-yield debt have already reached $4.2 billion in new money as of Monday, according to… Refinitiv Lipper. That is putting this week’s inflow on track to be among the ten highest on record…”

August 6 – Dow Jones (Alexander Osipovich): “Trading slivers of individual shares has become a fervent pursuit for thousands of individual investors, amplifying the 2020 rise of pricey yet popular stocks like Amazon.com Inc. and Tesla Inc. Fidelity Investments, which rolled out fractional trading to customers in January and February, says more than 340,000 of its accounts have placed a fractional trade… Interactive Brokers… says around 117,000 users have enabled fractional trading… Charles Schwab Corp. says more than 60,000 accounts have bought its ‘Stock Slices’ since it turned on the feature in June.”

Global Bubble Watch:

August 1 – Reuters (Andrew Galbraith): “Foreign investors made record net purchases of Chinese bonds traded through the country’s Bond Connect programme in July, boosted by record yield premiums over U.S. debt. Net inflows into Chinese bonds through Bond Connect… totalled 75.5 billion yuan ($10.83bn) in July…”

Trump Administration Watch:

August 7– Bloomberg: “With the stroke of a pen, Donald Trump made his strategic fight with China hit home for potentially billions of people -- generating confusion, panic and fear around the globe. The U.S. president’s move to ban the Chinese-owned TikTok and WeChat in just over six weeks from now sent shockwaves through the tech industry and the many American businesses who rely on the apps to sell goods in China. The decision also spurred alarm on Chinese social media, with WeChat users in the U.S. posting contact information so friends and family could reach them if the app disappeared.”

August 5 – Bloomberg (Nick Wadhams): “Secretary of State Michael Pompeo signaled… that U.S. efforts to bar Chinese technology from U.S. computers and smartphones in the name of national security will extend well beyond the push to force a sale or shutdown of TikTok, as he promoted a ‘clean network’ initiative. Pompeo said the U.S. wants to see untrusted Chinese apps removed from app stores like those operated by Apple Inc. and Google. He also called for companies to limit their apps from phones made by Huawei Technologies Corp. and for ending the use of Chinese cloud providers. ‘We call on all freedom-loving nations and countries to join the clean network,’ Pompeo told reporters…”

August 3 – Wall Street Journal ( Liza Lin, Jing Yang and Eva Xiao): “Washington’s ultimatum to the Chinese owner of TikTok—sell the app’s U.S. operations or leave the country—is hardening long-held suspicions in China that the U.S. aims to sabotage the country’s efforts to grow its technology, while raising concerns about the precedent it could set for Chinese companies with global ambitions as U.S.-China relations unravel. After months in which TikTok owner Bytedance Ltd. fought to appease the Trump administration, Washington’s push for Bytedance to sell TikTok’s U.S. operations to Microsoft Corp. means China will likely lose control over its first true global internet sensation—one with ambitions of becoming a top-tier global technology giant—in its most important market.”

August 6 – Reuters (Andrea Shalal): “U.S. President Donald Trump… intensified his attacks on China for its handling of the novel coronavirus outbreak…, as his health secretary headed to Taiwan for a visit sure to irk Beijing… The Republican president… said it was a ‘disgrace’ that Beijing had limited the spread of the virus at home but allowed it to reach the rest of the world… ‘What China did is a terrible thing ... whether it was incompetence or on purpose,’ he said…”

August 6 – The Hill (Niv Elis): “President Trump said… he had reimposed aluminum tariffs on Canada, reigniting a point of contention that had been cleared up prior to the finalization of the U.S.-Mexico-Canada trade agreement, which went into effect in July. …Trump said he signed a proclamation earlier in the day to reimpose the tariff at its previous rate of 10 percent. ‘Canada was taking advantage of us, as usual, and I signed it, and it imposes — because the aluminum business was being decimated by Canada. Very unfair,’ Trump said.”

August 3 – Reuters (Doina Chiacu, Susan Heavey and Pete Schroeder): “White House trade adviser Peter Navarro suggested… that Microsoft Corp could divest its holdings in China if it were to buy the Chinese owned short-video app TikTok. ‘So the question is, is Microsoft going to be compromised?’ Navarro said in an interview with CNN. ‘Maybe Microsoft could divest its Chinese holdings?’”

August 3 – Reuters (Pete Schroeder): “The U.S. government should receive a ‘big percentage’ of the proceeds from any sale of the U.S. operations of TikTok to Microsoft, President Donald Trump said… Trump told reporters that the United States would make any sale of the Chinese-owned video app possible, and therefore deserves a share of the proceeds…”

Federal Reserve Watch:

August 2 – Wall Street Journal (Nick Timiraos): “The Federal Reserve is preparing to effectively abandon its strategy of pre-emptively lifting interest rates to head off higher inflation, a practice it has followed for more than three decades. Instead, Fed officials would take a more relaxed view by allowing for periods in which inflation would run slightly above the central bank’s 2% target, to make up for past episodes in which inflation ran below the target. ‘It would be a significant change in terms of how they are thinking about’ the trade-off between employment and inflation, said Jan Hatzius of Goldman Sachs. ‘A lot of those things look very different now from the way they looked a few years ago,’ he said.”

August 5 - Reuters (Jonnelle Marte): “The resurgence of coronavirus infections has muted the economic recovery and Congress needs to support the economy by continuing to provide enhanced unemployment benefits and aid to state and local governments, Dallas Federal Reserve Bank President Robert Kaplan said… ‘I believe the economy needs a continuation of the unemployment benefits,’ Kaplan said… ‘It may not need to be in the same form as it currently is, but we need a continuation.’”

August 3 – Reuters (Ann Saphir and Lindsay Dunsmuir): “The U.S. economy, battered by a resurgence in the spread of COVID-19, needs increased government spending to tide over households and businesses and broader use of masks to better control the virus, U.S. central bankers said… ‘The ball is in Congress’ court,’ Chicago Fed President Charles Evans told reporters… ‘Fiscal policy is fundamental to a better baseline outlook, to a stronger recovery and getting the unemployment rate down, people back to work safely, and ultimately reopening the schools safely.’”

August 2 – Reuters (Tim Ahmann): “The U.S. economy could benefit if the nation were to ‘lock down really hard’ for four to six weeks, a top Federal Reserve official said…, adding that Congress can well afford large sums for coronavirus relief efforts. The economy, which in the second quarter suffered its biggest blow since the Great Depression, would be able to mount a robust recovery, but only if the virus were brought under control, Neel Kashkari, president of the Minneapolis Federal Reserve Bank, told CBS’ ‘Face the Nation.’”

U.S. Bubble Watch:

August 5 – CNBC (Alicia Adamczyk): “By the end of August, over 5 million Americans will be unable to cover their basic expenses for a full month without the extra $600 in enhanced unemployment insurance payments that lapsed last week, according to Morning Consult. Some 30 million Americans are currently collecting jobless benefits, and they can continue to do so through the end of the year. But the extra $600 a week from the federal government that was provided under the CARES Act expired last week. Without that money, 44% of those currently collecting UI benefits will now receive less than $800 per month…”

August 6 – Reuters (Lucia Mutikani): “U.S. employers announced another 262,649 job cuts in July as the COVID-19 pandemic continued to weigh on demand, the latest indication that the labor market recovery is losing steam. The layoffs reported by global outplacement firm Challenger, Gray & Christmas… were up 54% from June.”

August 3 – Bloomberg (Kim Bhasin): “Every week seems to bring another round of retail bankruptcies… Over the weekend, Tailored Brands Inc. -- the owner of Men’s Wearhouse and JoS. A. Bank -- and department store Lord & Taylor filed for Chapter 11… The previous week, it was Ann Taylor and Lane Bryant parent Ascena Retail Group Inc. At least 25 major retailers have now filed for bankruptcy this year, with 10 of these coming over the last five weeks… ‘The common denominator is debt,’ said Simeon Siegel, an analyst at BMO Capital Markets. ‘At this point, now everyone has debt. Everyone took on massive amounts of liquidity.’”

August 3 – Bloomberg (Jeff Feeley): “Lord & Taylor, known for its upscale fashions and extravagant holiday window displays, sought bankruptcy protection from creditors after a turnaround effort faltered amid the coronavirus pandemic. The oldest U.S. department store filed for Chapter 11 protection in Richmond, Virginia, on Sunday…”

August 2 – CNBC (Lauren Thomas): “High-end handbag maker Valentino is suing to get out of its lease on Fifth Avenue in Manhattan, a vacated Barneys New York still sits empty on Madison Avenue just a block over, while bankrupted luxury department store chain Neiman Marcus is shutting its doors for good on Worth Avenue in Palm Beach. As the coronavirus pandemic brings tourism to a temporary standstill, leaves consumers holed up at home and puts millions out of work, America’s glitziest and most expensive retail districts are losing tenants, and rents are in a free fall.”

August 5 – Bloomberg (Payne Lubbers): “The four largest U.S. banks had at least $151.5 billion of loans with payments in deferral at midyear as borrowers from small businesses to homeowners sought debt relief amid the coronavirus pandemic. Programs vary among banks and account types, with Bank of America Corp. offering deferrals of as long as 60 days on consumer credit cards, and JPMorgan… giving clients rolling, three-month deferrals for as much as a year on residential mortgages. The two lenders, along with Citigroup Inc. and Wells Fargo & Co., disclosed deferral details in their second-quarter filings…”

August 5 – Associated Press (Paul Wiseman): “The U.S. trade deficit fell in June for the first time since February as exports posted a record increase, rising twice as fast as imports. The… gap between the value of what the United States buys and what it sells abroad fell 7.5% to $50.7 billion in June from $54.8 billion in May. Exports shot up an unprecedented 9.4% to $158.3 billion. Imports rose 4.7% to $208.9 billion… Compared to June 2019, total U.S. trade — exports plus imports — plunged 21.9% in June to $367.2 billion.”

August 4 – CNBC (Diana Olick): “Nationally, home prices increased by 4.9% annually in June, a much greater gain than the 4.1% annual rise in May, according to CoreLogic. Prices climbed 1% month to month, which is the fastest monthly gain for June since 2013. Prices got a boost from record low mortgage rates… The average rate on the popular 30-year fixed mortgage jumped up to 3.24% at the start of the month, but then fell precipitously, ending June at 2.94%...”

August 5 – CNBC (Diana Olick): “Record low mortgage rates are clearly not as impressive as they used to be. Even with another new low set last week, mortgage application volume decreased 5.1% from the previous week… Mortgage applications to purchase a home also fell for the week, down 2%, but were 22% higher than a year ago.”

August 4 – Reuters (Lucia Mutikani): “New orders for U.S.-made goods increased more than expected in June, suggesting the manufacturing sector was regaining its footing, though rising COVID-19 cases threaten the tentative recovery. …Factory orders rose 6.2%, boosted by a surge in demand for motor vehicles, after rebounding 7.7% in May… Factory orders decreased 10.1% in the month from a year earlier.”

August 4 – Bloomberg (Lu Wang): “All the teeth-gnashing in Congress over tech’s endless ascent has done nothing to keep the big from getting bigger in the stock market, going by the Nasdaq 100’s last two sessions. New research says that as far as the economy is concerned, that’s fortunate… In a note titled ‘Stocks Are Too Big to Fail,’ Michael Kantrowitz, a strategist with… Cornerstone Macro, argued that psychology in the economy has rarely been fastened as tightly to equity gains as it is now. One example: consumer confidence is correlated to the S&P 500 more than any time in the past three decades.”

August 5 – Bloomberg (Jack Pitcher): “The combined wealth of New York City residents shrank by an estimated $336 billion, or 13%, in the past year, exacerbated by the fallout from the coronavirus crisis in 2020. The decline… is the biggest in dollar terms among major U.S. cities during that period, according to… research firms Webster Pacific and New World Wealth. San Francisco, the nation’s second-wealthiest city, held up better, losing $105 billion, or 5% of wealth.”

Fixed Income Watch:

August 5 – Bloomberg (Emily Barrett and Jenny Leonard): “The U.S. government will push its fundraising to new extremes this quarter to cope with a budget deficit unseen since the country mobilized to fight World War II. The Treasury expanded its plans for borrowing at longer maturities in the coming months, saying Wednesday it will sell a record $112 billion of securities at next week’s so-called quarterly refunding of maturing Treasuries. Over the three months through October, it will boost its offering of notes and bonds by a total of $132 billion compared with the previous quarter, and rely more heavily on securities due in seven to 30 years. The latest deluge of debt sales exceeded most of Wall Street’s expectations, but it’s unlikely to overwhelm the market’s appetite.”

July 31 – Reuters (Eric Platt and Colby Smith): “Fitch cut its outlook on US debt…, warning that the rise in federal spending to deal with the coronavirus pandemic had led to a deterioration in public finances. The rating agency lowered its outlook on the US to ‘negative’ from ‘stable’, but affirmed its triple A rating, its top grade. Fitch analysts said they believed there were growing risks the US would be unable to curtail rising deficits as policymakers seek to jump-start economic growth.”

August 5 – Bloomberg (Amanda Albright): “America’s municipal bondholders have never been paid so little for taking on so much risk. The yields on state and local government bonds have steadily dwindled over the past month, even as the resurgent coronavirus pandemic is threatening to prolong the deep recession that’s dealing a financial setback to borrowers in virtually every corner of the $3.9 trillion market. The oldest gauge of municipal yields, the Bond Buyer index of those on 20-year general-obligation bonds, now stands at 2.09%, the lowest since 1952.”

August 1 – Financial Times (Joe Rennison): “Investors in US junk bonds had their best month in nearly nine years in July, as continued market support from the Federal Reserve bolstered yield hungry investors’ confidence in more precarious companies. Rising prices and their flipside, falling yields, led to a 4.78% return for the asset class — the best outcome since October 2011… The average junk bond yield fell from 6.85% at the start of the month to 5.46% at the end, the biggest monthly drop since May 2009…”

August 3 – Bloomberg (Max Reyes): “The lowest-rated U.S. junk bonds left distressed territory for the first time since the pandemic after spreads on the securities fell beneath 1,000 bps on Aug. 3 The average spread over Treasuries for bonds in the Bloomberg Barclays CCC index tightened 16 bps to 996 bps, the lowest since Feb. 27. That marks an exit from a level typically associated with distress. The index move underlines a recovery for junk bonds that coincides with a broader rally in the credit market following unprecedented support from the Federal Reserve.”

China Watch:

August 4 – CNBC (Arjun Kharpal): “Chinese state media labeled the U.S. a ‘rogue country’ and dubbed the potential sale of social media firm TikTok to Microsoft as ‘theft,’ adding that Beijing could retaliate if a deal is sealed. Microsoft announced plans on Sunday to acquire TikTok’s business in certain markets — the U.S., Canada, Australia and New Zealand.”

August 5 – Reuters (Cate Cadell and Ben Blanchard): “China on Thursday threatened to take countermeasures over a trip to Taiwan by U.S. Secretary of Health and Human Services Alex Azar, as the Chinese-claimed island geared up for its highest-level U.S. official visit in four decades.”

August 5 – Bloomberg: “China’s banks need about $500 billion in fresh liquidity this month to roll over existing debt and buy government bonds, complicating the People’s Bank of China’s efforts to exit crisis measures. Monetary policy makers have been signaling for weeks that abundant funding made available to tide the world’s second-largest economy through the coronavirus slump will soon be reined in, mindful of rising debt risks. At the same time, over a trillion yuan in new government stimulus bonds are expected to be offered this month, putting the onus on the PBOC to ensure the financial system has sufficient cash to absorb them. It’s a tricky balancing act. If the central bank doesn’t inject enough liquidity or even drains it, then lenders will scramble for cash, driving up inter-bank rates and undermining the recovery. If it pumps in too much money, the surplus cash will likely find its way to frothy stock and property markets and add to the nation’s already massive debt pile.”

August 4 - South China Morning Post (Zhang Shidong): “Baoshang Bank, a key part of troubled magnate Xiao Jianhua’s business empire, collapsed, as big shareholder Tomorrow Group failed to repay billions of yuan in loans that were obtained through flawed corporate governance and mismanagement. The group illegally borrowed 156 billion yuan (US$22.3bn) from Baoshang Bank, which was taken over by the government last year, in the form of 347 loans through 209 shell companies from 2005 to 2019 and these subsequently became delinquent, Zhou Xuedong, head of the takeover team at the central bank, wrote… Baoshang Bank and Tomorrow Group were both controlled by Xiao, who is believed to be awaiting trial for bribery and manipulating stock prices. Tomorrow Group had an 89% stake in Baoshang Bank, a monopoly shareholding structure that brewed up the risk of weak corporate governance.”

August 4 – Reuters (Kevin Yao): “China is looking to reduce its reliance on overseas markets and technology for its economic development, government advisers say, as U.S. hostility and a global pandemic increase external risks that could hamper longer-term progress. The country’s leaders have proposed a so-called ‘dual circulation’ model of growth to steer the economy, the sources said, which would prioritise ‘internal circulation’ to boost domestic demand and be supplemented by “external circulation”… ‘The Chinese leadership raised the ‘internal circulation’ concept as the situation has become grim, although complete (reliance on) ‘internal circulation’ is unlikely,’ said a policy insider…”

August 4 – Reuters (Stella Qiu and Ryan Woo): “Growth in China’s services sector slowed in July from a decade high the previous month, as new export business fell and job losses continued…, pointing to cracks in the sector’s post-COVID recovery. The Caixin/Markit services Purchasing Managers’ Index (PMI) fell to 54.1 from June’s 58.4, which was the highest reading since April 2010.”

August 4 – Bloomberg: “Vehicle sales advanced for a fourth straight month in China… Sales of passenger cars such as sedans and SUVs, as well as commercial vehicles, increased 14.9% in July from a year earlier to 2.08 million units, the China Association of Automobile Manufacturers said… From January to July, vehicle sales declined by 12.7% to 12.3 million units.”

EM Watch:

August 4 – Financial Times (Delphine Strauss): “A fresh mass outbreak of Covid-19 could increase the risks of an external debt crisis among emerging and developing economies which are vulnerable to sudden capital outflows, the IMF warned on… The economic impact of the pandemic has been especially acute for countries that rely on oil, tourism or remittances from migrant workers. Many of these countries faced a fall in their current account balances this year equivalent to more than 2% of gross domestic product… In its annual assessment of global imbalances, the fund said trade balance losses were likely to exceed 3% of GDP for oil exporters… In countries such as Costa Rica, Morocco and Portugal, losses of tourism proceeds could exceed 2% of GDP, while lower remittances would hit hardest in countries such as Guatemala, Pakistan and Egypt.”

August 5 – Wall Street Journal (Jared Malsin and Nazih Osseiran): “Everyday life in Lebanon was already unraveling. The economy was in free fall, a coronavirus outbreak was accelerating and power outages were plunging Beirut into darkness for hours at a time. Then came Tuesday’s catastrophic explosion, which in a few terrifying moments killed more than a hundred people, injured thousands and tore the heart out of this tiny nation’s capital city. Lebanon and its people have a long history of resilience—surviving years of brutal, sectarian civil strife, an invasion by Syria and a bruising war with Israel. But the country’s latest run of misfortune threatens to push it over the edge.”

August 4 – Wall Street Journal (Amrith Ramkumar): “Investors are bracing for more defaults and disruptions in emerging markets after Argentina’s deal with creditors highlighted the pandemic’s stress on many developing economies. The agreement to grant debt relief to Latin America’s third-biggest economy eased some concerns about a prolonged dispute between Argentina and its creditors. But it also underscored the hardship caused by the coronavirus in emerging markets. Ecuador and Lebanon have also sought concessions from creditors this year… Many of these emerging markets are saddled with billions of dollars in debt and rely on tourism and exports to support economic activity.”

Leveraged Speculation Watch:

August 5 – Bloomberg (Lu Wang and Melissa Karsh): “The relentless rally in American equities is emboldening hedge funds at a time their own clients are getting worried. Professional managers that make both bullish and bearish equity bets last month pushed their long positions on stocks up above their short ones by a ratio of almost 1.9-to-1, the highest reading in more than a decade, according to… Morgan Stanley’s prime brokerage unit.”

August 5 – Bloomberg (Melissa Karsh and Hema Parmar): “Renaissance Technologies, one of the industry’s best performing hedge fund firms, is down 13.4% this year in its biggest fund open to the public despite the surging U.S. stock market… The market-neutral Renaissance Institutional Diversified Alpha Fund fell 0.6% and the Renaissance Institutional Diversified Global Equities Fund rose 0.4% last month, according to a person familiar… They’re down about 20% and 18.6%, respectively, for the first seven months of 2020.”

Geopolitical Watch:

August 5 – CNBC (Huileng Tan): “Taiwan appears to be distancing itself from China in recent months, as military activities around the island intensify amid heightened U.S.-China tensions and the coronavirus pandemic. In late July, Taiwan’s legislature approved two proposals. One was to rename carrier China Airlines, and the other was to highlight the word Taiwan on passports, which are currently marked ‘Republic of China’ — Taiwan’s official name. In the last few months, China has stepped up its military and navy activity around the island, spurring Taiwanese Premier Su Tseng-chang to say late June that Beijing was ‘disturbing’ the island. Experts say China will likely intensify its efforts to isolate Taiwan internationally, and some expressed concerns there may be a risk of military conflict, particularly as the island is caught in the crosshairs of Sino-U.S. friction.”

August 6 – Reuters (Idrees Ali and Phil Stewart): “U.S. Defense Secretary Mark Esper expressed concerns about Beijing’s ‘destabilizing’ activity near Taiwan and the South China Sea in a call with Chinese Defense Minister Wei Fenghe, the Pentagon said…, the first time the two are believed to have spoken since March. The call came as U.S.-China ties have rapidly deteriorated this year over a range of issues…”