It’s turning into a debacle. Evergrande bonds ended the week at 20 cents on the dollar, with yields surging to 72.5%. China’s real estate sector was hammered this week following the surprise default by mid-sized developer Fantasia Holdings.
October 6 – Bloomberg (Rebecca Choong Wilkins): “China’s property industry has suffered its first default on a dollar bond since China Evergrande Group sank deeper into crisis in recent weeks, fueling investor concerns over other highly leveraged borrowers and about global contagion. Fantasia Holdings Group Co., which develops high-end apartments and urban renewal projects, failed to repay a $205.7 million bond that came due Monday. That prompted a flurry of rating downgrades late Tuesday to levels signifying default. Creditors are now scanning debt repayment calendars as they try to suss out where the next flashpoints across the increasingly strained property industry may be -- nearly a dozen firms have debt maturing through early 2022.”
October 7 – Wall Street Journal (Frances Yoon and Quentin Webb): “Fantasia's nonpayment surprised investors because the… developer had recently said it had no liquidity issues, and indicated it had enough cash to repay the outstanding amount on a five-year dollar bond it issued in 2016. Fantasia, like Evergrande, was an active issuer of high-yield dollar bonds in the last few years. Some market participants surmised that Fantasia and its controlling shareholders had elected not to repay the company's international debt, which raised doubts as to whether other Chinese developers might do the same to conserve cash or give priority to their onshore creditors. ‘Market confidence is shattered by the recent event, which has triggered a reassessment by investors of sponsors' willingness to pay,’ said Jenny Zeng, co-head of Asia Pacific fixed income and a portfolio manager at AllianceBernstein in Hong Kong.”
October 8 – Bloomberg (Olivia Tam): “Yields on Chinese dollar junk-rated dollar bonds are poised for their worst week in 18 months as Fantasia’s surprise default accelerated worries about contagion risks from Evergrande’s debt crisis. Onshore notes were joining the declines Friday following the Golden Week holiday.”
Chinese developer bonds were routed. For example, Kaisa Group yields surged a full 15 percentage points this week to 35.5%, compared to only 13.5% to begin September. Easy Tactic yields were up 9.2 percentage points this week to 41.7%. Yango Justice International yields surged 27 percentage points to 50.9%, while Red Sun Properties yields jumped 5.2 percentage points to 20.5%. Times China Holdings yields spiked 18.5 percentage points to 26.7%, after yielding only 4.9% on September 15th. Sunac China Holdings yields rose 5.6 percentage points this week to 19.2%; China Aoyuan Group 4.6 percentage points to 16.4%; Yuzhou Group 6.7 percentage points to 23.3%; and Agile Group Holdings up 3.5 percentage points to 11.0%.
October 8 - Bloomberg: “Chinese property shares fell after a report that more than 90% of China’s top 100 property developers’ sales declined in September by an average of 36% from the same period last year… Sept. sales totaled 759.6b yuan, -36.2% from September 2020 and 17.7% lower from the same period in 2019: Shanghai Securities News, citing China Real Estate Information Corp. Research. Among companies, 60% of developers saw sales decrease by more than 30% y/y in Sept. (More than 90 developers saw a decline in their sales from a year ago). Beijing, Shenzhen and Guangzhou saw transaction volume of residential properties decline 30% y/y, while Shanghai fell 45%.”
Many major developers have lost access to new finance, while real estate transactions throughout China have slowed dramatically. Mounting evidence suggests China’s historic apartment Bubble has been pierced. Now it’s a matter of how rapidly prices deflate. And there appears no place to hide. Country Garden Holdings, China’s largest developer, saw yields (7.25%, 2026) surge 181 bps this week to 7.60%. Yields for this perceived pristine, investment-grade credit began September at 4.74%.
An index of Chinese high-yield dollar bonds was pummeled, with yields surging 310 bps this week to 17.5%. This index yielded 8.20% at the end of May, and 12.0% to conclude August. For further perspective, this yield briefly spiked to 14.0% during the March 2020 pandemic crisis (back down to 8% by August).
October 7 – Reuters (Marc Jones): “Investment bank JPMorgan has estimated that troubled Chinese property giant Evergrande and many of its major rivals have billions of dollars worth of off-balance sheet debt that, once added on, ramp up their leverage ratios. JPMorgan's China and Hong Kong property analysts said the tactic is likely to have been used to help firms look like they were conforming with new borrowing cap rules introduced last year, but Evergrande's case looks the most extreme. ‘Instead of true deleveraging, we think Evergrande has shifted some of the interest-bearing debt to off-balance sheet debt,’ JPMorgan's analysts said. ‘Commercial papers, wealth management products and perpetual capital securities, etc, which are not officially counted as debt.’ They estimated Evergrande's ‘net gearing,’ as debt as a ratio of a firm's equity is known, was at least 177% at the end of the first half of the year, instead of the 100% its accounts reported.”
October 4 – Wall Street Journal (Yoko Kubota and Liyan Qi): “Rows of residential towers, some 26 stories high, stand unfinished in this provincial city about 350 miles west of Shanghai, their plastic tarps flapping in the wind. Elsewhere in Lu’an, golden Pegasus statues guard an uncompleted $9 billion theme park that was supposed to be bigger than Disneyland. A planned $4 billion electric-vehicle plant, central to local leaders’ economic dreams, remains a steel frame with overgrown vegetation spilling into the road. The structures are monuments to the once-grand ambitions of China Evergrande Group, now among the world’s most indebted property companies, and a case study in how China’s dependence on real estate as an economic engine helped feed those ambitions.”
October 7 – Reuters (Ryan Woo and Liangping Gao): “Sagging demand at China's urban land auctions amid a crackdown on borrowing by private developers risks squeezing regional finances, pressuring local governments to scramble for other income sources to fund investments and support the economy. Land sales soared to a record 8.4 trillion yuan ($1.3 trillion) in 2020, the equivalent of Australia's annual gross domestic product, bolstering fiscal budgets in a pandemic year. But tighter regulations on borrowing by private developers since the summer of last year are increasingly eroding demand for land. The value of nationwide land sales abruptly fell 17.5% on year in August…”
A few weeks back (“Evergrande Moment”), I posited that China had not reached a so-called “Lehman Moment.” The crisis at Evergrande was still unfolding at the “Periphery.” There was little at that point indicating a systemic crisis at the “Core.” This week showed notable gravitation in Crisis Dynamics toward China’s vulnerable “Core.”
The week was notable for contagion spreading to Chinese bank credit default swap (CDS) prices. China Construction Bank CDS jumped six to 73 bps, the high since June 2020, and up from 46 bps on September 17th. Industrial & Commercial Bank of China CDS gained five to 73 bps – the high since April 2020. China Development Bank CDS rose 5.5 to 66.5 bps – the high since April 2020, and up from 44 bps on September 16th. Bank of China CDS increased 3.5 to 70 bps – the high since May 2020, and up from 44 bps on September 17th.
China's sovereign CDS rose a notable five this week to 52.5 bps – the highest level since June 2020. China CDS began September at 32.5 bps. This is one to watch. For comparison, South Korea CDS ended the week at 20 bps, with Thailand at 43 bps and Malaysia at 60 bps. For a system as egregiously levered as China, spiking market yields and CDS prices are analogous to a blitzkrieg of tiny pins attacking a bloated, timeworn and thin-skinned Bubble.
Contagion this week also spread to Asian sovereign CDS. Indonesia CDS jumped 10 to 88 bps, the high since March. Philippines CDS rose eight to 61 bps, the high back to July 2020, while Malaysia CDS rose seven to 60 bps (high since July ’20). Vietnam CDS gained six to 115 bps (high since July ’21).
It’s also worth noting the spike in CDS prices for some “frontier” markets. Sri Lanka CDS surged 104 this week to 1,688 bps; Mongolia 40 to 287 bps; Pakistan 33 bps to 475 bps; and Ghana 182 to 826 bps.
In general, the week provided corroboration of the EM de-risking/deleveraging thesis. Brazil’s real dropped another 2.6% to a six-month low, with the Chilean peso down 1.5%, the Turkish lira 1.2%, the Mexican peso 1.2%, the Hungarian forint 1.2%, and the Indian rupee 1.2%. In local currency bond markets, Turkish yields surged 49 bps to 18.14%; Malaysia rose 24 bps to 3.60% (high since July ’19); Poland 17 bps to 2.41% (high since June ’19); Romania 17 bps to 4.65% (high since April ’20); and South Africa 10 bps to 9.83% (high since May ’20). Philippine dollar bond yields surged 24 bps to 2.69%, the high since April 2020. Indonesian dollar bond yields rose 16 bps to 2.44% (high since March).
Contagion has even begun to wash up on our shores. U.S. Investment-grade CDS traded to 55 bps Wednesday, the high since March. High-yield CDS ended the week at 308 bps, also trading this week to six-month highs. Bank CDS prices rose for a third straight week. Goldman Sachs CDS traded to a six-month high 62 bps Wednesday, up from 51 bps on September 15th. Citigroup (56bps), Bank of America (50bps) and JPMorgan (49bps) CDS also traded Wednesday to six-month highs.
Those managing strategies that incorporate Treasuries as a risk market hedge must be nervous. Ten-year Treasury yields surged 15 bps this week to a four-month high 1.61%. Jumping 13 bps to 1.06%, five-year yields were back above 1% for the first time since February 2020. Benchmark MBS yields jumped 14 bps to an almost seven-month high 2.05%. Inflation Angst.
The five-year Treasury “breakeven” rate (market inflation gauge) jumped 12 bps this week to a five-month high 2.67%. WTI crude trade above $80 for the first time since October 2014, with a year-to-date gain of 64% (gasoline futures up 68% y-t-d). The Bloomberg Commodities Index jumped another 1.7% this week, increasing 2021 gains to 31.5%.
October 5 – Bloomberg (Saket Sundria and Elizabeth Low): “Asian buyers are paying top dollar for a variety of fuels that can be fed into steam boilers or power turbines as they seek alternatives to increasingly pricey natural gas. The electricity crisis is roiling energy markets from Europe to Asia, with fuels that can be used for heating or power generation such as propane, diesel and fuel oil in high demand. Goldman Sachs… predicts the crunch will drive greater consumption of crude later this year, while China has ordered state-owned firms to secure energy supplies for winter at all costs. In Asia, prices of propane -- an oil product that’s typically used for cooking or making plastics -- have surged to the highest since at least 2016, while fuel oil recently almost doubled from a year earlier.”
Panic buying and hoarding as the global energy crisis escalates. “China has ordered state-owned firms to secure energy supplies for winter at all costs,” as panic begins to envelop global energy markets. China, India and others are desperately short of coal. The UK and Europe are short of natural gas. With winter approaching, there is clear potential for the global inflation shock to intensify.
If global supply-chains weren’t already a huge mess…
October 7 – Bloomberg (Jeff Sutherland and Tom Hancock): “The hit from China’s energy crunch is starting to ripple throughout the globe, hurting everyone from Toyota Motor Corp. to Australian sheep farmers and makers of cardboard boxes. Not only is the extreme electricity shortage in the world’s largest exporter set to hurt its own growth, the knock-on impact to supply chains could crimp a global economy struggling to emerge from the pandemic. The timing couldn’t be worse, with the shipping industry already facing congested supply lines that are delaying deliveries of clothes and toys for the year-end holidays. It also comes just as China starts its harvest season, raising concerns over sharply higher grocery bills.”
The outlines of the unfolding crisis are beginning to come into clearer focus. Global de-risking/deleveraging is gaining momentum. China’s Bubble collapse appears poised to accelerate. With $3.2 TN of international reserves and the PBOC mandating price stability, China’s Renminbi has been a pillar of strength. But for how long? How much speculative leverage has accumulated in higher-yielding Chinese Credit instruments over this long cycle? How serious is the risk of a “hot money” exodus?
The PBOC added $123 billion of liquidity over ten sessions to calm the markets. What will be the scope of liquidity requirements when Crisis Dynamics engulf the “Core” - as confidence wanes in China’s banking system and financial structure more generally?
Beijing waited much too long to begin reining in its Bubble. Pandemic stimulus stoked already perilous excess. Now Chinese officials face a terrible predicament and onerous decisions. At this point, large liquidity injections could further stoke inflationary pressures, while risking a disorderly decline in the Renminbi.
The Fed waited much too long to begin reducing historic monetary stimulus. Pandemic stimulus stoked already perilous excess. Federal Reserve officials could soon face quite a predicament and difficult decisions.
Was the jobs report good enough for a November taper? That just doesn’t seem the crucial question today. What does the world look like a month from now? Has China’s unfolding crisis by then enveloped the “Core”? How powerful are de-risking/deleveraging dynamics in November, globally and in U.S. markets?
My thoughts harken back to the March 2020 dislocation in bond (and equities) ETFs. Since then, Fed pandemic measures have spurred additional gargantuan bond fund inflows (at historically low bond yields), while simultaneously unleashing powerful inflationary dynamics. Quite a combustible mix. Clearly, the Fed is not about to “slam on the brakes.” Might the bond market?
For the Week:
The S&P500 recovered 0.8% (up 16.9% y-t-d), and the Dow rose 1.2% (up 13.5%). The Utilities jumped 1.6% (up 3.4%). The Banks gained 2.3% (up 39.3%), and the Broker/Dealers jumped 2.9% (up 29.4%). The Transports advanced 2.7% (up 17.1%). The S&P 400 Midcaps added 0.2% (up 16.6%), while the small cap Russell 2000 slipped 0.4% (up 13.1%). The Nasdaq100 increased 0.2% (up 15.0%). The Semiconductors declined 0.5% (up 16.1%). The Biotechs lost 1.2% (down 2.4%). With bullion gaining $4, the HUI gold index rallied 5.4% (down 19.7%).
Three-month Treasury bill rates ended the week at 0.045%. Two-year government yields jumped six bps to 0.32% (up 20bps y-t-d). Five-year T-note yields rose 13 bps to 1.06% (up 72bps). Ten-year Treasury yields surged 15 bps to 1.61% (up 70bps). Long bond yields jumped 14 bps to 2.17% (up 52bps). Benchmark Fannie Mae MBS yields rose 14 bps to 2.05% (up 71bps).
Greek 10-year yields gained six bps to 0.89% (up 27bps y-t-d). Ten-year Portuguese yields rose six bps to 0.38% (up 35bps). Italian 10-year yields increased six bps to 0.88% (up 33bps). Spain's 10-year yields jumped seven bps to 0.49% (up 44bps). German bund yields rose seven bps to negative 0.15% (up 42bps). French yields gained seven bps to 0.19% (up 53bps). The French to German 10-year bond spread was unchanged at 34 bps. U.K. 10-year gilt yields surged 17 bps to 1.16% (up 93bps). U.K.'s FTSE equities index gained 1.0% (up 9.8% y-t-d).
Japan's Nikkei Equities Index dropped 2.5% (up 2.2% y-t-d). Japanese 10-year "JGB" yields gained three bps to 0.09% (up 7bps y-t-d). France's CAC40 added 0.6% (up 18.2%). The German DAX equities index increased 0.3% (up 10.8%). Spain's IBEX 35 equities index rallied 1.8% (up 10.9%). Italy's FTSE MIB index recovered 1.7% (up 17.2%). EM equities were mixed. Brazil's Bovespa index was little changed (down 5.2%), and Mexico's Bolsa was about unchanged (up 16.0%). South Korea's Kospi index dropped 2.1% (up 2.9%). India's Sensex equities index jumped 2.2% (up 25.8%). China's Shanghai Exchange rallied 0.7% (up 3.4%). Turkey's Borsa Istanbul National 100 index slipped 0.2% (down 5.3%). Russia's MICEX equities surged 3.9% (up 28.9%).
The S&P500 recovered 0.8% (up 16.9% y-t-d), and the Dow rose 1.2% (up 13.5%). The Utilities jumped 1.6% (up 3.4%). The Banks gained 2.3% (up 39.3%), and the Broker/Dealers jumped 2.9% (up 29.4%). The Transports advanced 2.7% (up 17.1%). The S&P 400 Midcaps added 0.2% (up 16.6%), while the small cap Russell 2000 slipped 0.4% (up 13.1%). The Nasdaq100 increased 0.2% (up 15.0%). The Semiconductors declined 0.5% (up 16.1%). The Biotechs lost 1.2% (down 2.4%). With bullion gaining $4, the HUI gold index rallied 5.4% (down 19.7%).
Three-month Treasury bill rates ended the week at 0.045%. Two-year government yields jumped six bps to 0.32% (up 20bps y-t-d). Five-year T-note yields rose 13 bps to 1.06% (up 72bps). Ten-year Treasury yields surged 15 bps to 1.61% (up 70bps). Long bond yields jumped 14 bps to 2.17% (up 52bps). Benchmark Fannie Mae MBS yields rose 14 bps to 2.05% (up 71bps).
Greek 10-year yields gained six bps to 0.89% (up 27bps y-t-d). Ten-year Portuguese yields rose six bps to 0.38% (up 35bps). Italian 10-year yields increased six bps to 0.88% (up 33bps). Spain's 10-year yields jumped seven bps to 0.49% (up 44bps). German bund yields rose seven bps to negative 0.15% (up 42bps). French yields gained seven bps to 0.19% (up 53bps). The French to German 10-year bond spread was unchanged at 34 bps. U.K. 10-year gilt yields surged 17 bps to 1.16% (up 93bps). U.K.'s FTSE equities index gained 1.0% (up 9.8% y-t-d).
Japan's Nikkei Equities Index dropped 2.5% (up 2.2% y-t-d). Japanese 10-year "JGB" yields gained three bps to 0.09% (up 7bps y-t-d). France's CAC40 added 0.6% (up 18.2%). The German DAX equities index increased 0.3% (up 10.8%). Spain's IBEX 35 equities index rallied 1.8% (up 10.9%). Italy's FTSE MIB index recovered 1.7% (up 17.2%). EM equities were mixed. Brazil's Bovespa index was little changed (down 5.2%), and Mexico's Bolsa was about unchanged (up 16.0%). South Korea's Kospi index dropped 2.1% (up 2.9%). India's Sensex equities index jumped 2.2% (up 25.8%). China's Shanghai Exchange rallied 0.7% (up 3.4%). Turkey's Borsa Istanbul National 100 index slipped 0.2% (down 5.3%). Russia's MICEX equities surged 3.9% (up 28.9%).
Investment-grade bond funds saw outflows of $2.537 billion, and junk bond funds posted negative flows of $294 million (from Lipper).
Federal Reserve Credit last week declined $9.3bn to $8.416 TN. Over the past 108 weeks, Fed Credit expanded $4.689 TN, or 126%. Fed Credit inflated $5.605 Trillion, or 199%, over the past 465 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week declined $6.6bn to $3.478 TN. "Custody holdings" were up $68bn, or 2.0%, y-o-y.
Total money market fund assets declined $13.2bn to $4.531 TN. Total money funds increased $148bn y-o-y, or 3.4%.
Total Commercial Paper fell $9.5bn to $1.175 TN. CP was up $211bn, or 21.9%, year-over-year.
Freddie Mac 30-year fixed mortgage rates slipped two bps to 2.99% (up 12bps y-o-y). Fifteen-year rates fell five bps to 2.23% (down 14bps). Five-year hybrid ARM rates rose four bps to 2.52% (down 37bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down five bps to 3.15% (up 7bps).
Currency Watch:
For the week, the U.S. Dollar Index was little changed at 94.07 (up 4.6% y-t-d). For the week on the upside, the Canadian dollar increased 1.4%, the Norwegian krone 1.1%, the Australian dollar 0.7%, the British pound 0.5%, the Swiss franc 0.4%, the Singapore dollar 0.2%, and the Swedish krona 0.1%. For the week on the downside, the Brazilian real declined 2.6%, the Mexican peso 1.2%, the Japanese yen 1.1%, the South Korean won 0.6%, the euro 0.2% and the New Zealand dollar 0.1%. The Chinese renminbi was little changed versus the dollar (up 1.30% y-t-d).
Commodities Watch:
The Bloomberg Commodities Index gained 1.7% (up 31.5% y-t-d). Spot Gold slipped $4 to $1,757 (down 7.5%). Silver recovered 0.6% to $22.68 (down 14.1%). WTI crude surged $3.47 to $79.35 (up 64%). Gasoline jumped 5.2% (up 68%), while Natural Gas slipped 1.0% (up 119%). Copper gained 2.1% (up 22%). Wheat dropped 2.8% (up 15%). Corn fell 2.0% (up 10%). Bitcoin gained $5,705, or 11.8%, this week to $54,106 (up 86%).
Coronavirus Watch:
October 4 – Reuters (Manas Mishra): “The effectiveness of the Pfizer Inc/BioNTech SE vaccine in preventing infection by the coronavirus dropped to 47% from 88% six months after the second dose, according to data published… The analysis showed that the vaccine's effectiveness in preventing hospitalization and death remained high at 90% for at least six months, even against the highly contagious Delta variant of the coronavirus.”
Market Mania Watch:
October 5 – Financial Times (Kaye Wiggins): “Private equity firms are offering the highest premiums for listed companies in more than two decades, paying almost 70% above the prior share price in some cases, in a sign of the widening gap between cash-rich buyout groups and public market investors. Buyout groups paid an average premium of 45% for European companies in 2021, the highest since the data company Refinitiv’s records began in 1980. In the US, the premiums hit 42% this year, the highest since 1999.”
October 8 – Bloomberg (John Gittelsohn): “The median price for a home in California is set to jump north of $800,000 next year, adding to a long-simmering affordability crisis in the state. The state, which has grappled for years with a shortage of affordable housing, will see prices rise 5.2% to a median of $834,000 in 2022, according to a forecast by the California Association of Realtors… That comes after a surge of roughly 20% this year…”
Market Instability Watch:
October 4 – Reuters (Julia Payne and Dmitry Zhdannikov): “The world's top commodity trading houses are being told by brokers and exchanges to deposit hundreds of millions of dollars in extra funds to cover their exposure to soaring gas prices, seven sources… told Reuters. Glencore, Gunvor, Trafigura and Vitol are among the commodity merchants facing what are known as margin calls on their financial positions in natural gas markets, the sources said. The calls are forcing the traders to tie up more capital. Some, particularly smaller firms, are having to increase borrowing, leaving them with less cash to trade with and potentially hurting their profits, the sources said. The sources, who include company officials, brokers and bankers, declined to be named due to the sensitivity of the matter.”
October 2 – Politico (Victoria Guida and Ben White): “Massive support from the Federal Reserve has sent U.S. stocks and bonds soaring and enriched investors ever since markets almost collapsed at the onset of the pandemic. Now, the party may be ending. The central bank plans to begin yanking back its extraordinary assistance to the economy as early as next month, and many Fed officials are open to increasing interest rates next year — far earlier than expected — driven by fears that production and shipping delays will continue to stoke inflation. Chair Jerome Powell has sounded increasingly pessimistic over the past week about those supply chain disruptions, a concern shared by central bankers around the globe.”
October 4 – Bloomberg (Netty Ismail and Sydney Maki): “Emerging markets haven’t looked so exposed to climbing U.S. yields for almost half a decade. The correlation between currencies in the developing world and short-term Treasuries increased to around the strongest level since 2017 last week. It underscores the potential fallout for the asset class if traders continue to price in a faster-than-expected tightening drive by the Federal Reserve. Signs of stress are already showing. Emerging-market stocks just capped their longest string of weekly declines in more than two years, while bond funds in the space registered $2.8 billion of outflows in the week through Sept. 29, the biggest exodus since March…”
October 5 – Bloomberg (Nishant Kumar, Hema Parmar, and Akayla Gardner): “Western investors are backing away from Chinese companies, blaming politics and uncertainty for a souring stance on the world’s second-biggest market. On Tuesday, representatives of Man Group, Soros Fund Management and Elliott Management raised concerns about the outlook for Chinese stocks traded in New York and in Asia. Their comments came weeks after $59 billion investment firm Marshall Wace said some of those businesses have become ‘uninvestable.’”
October 7 – Wall Street Journal (Anna Hirtenstein): “Surging energy costs have spread fear among investors in recent weeks that inflation isn’t going away. One place where the strains are being felt most acutely is the U.K., where bond markets have exhibited some wild moves. The most dramatic swings took place with government bonds whose coupons are linked to inflation. Those bonds, and derivatives known as swaps, are seen as a measure of where investors believe inflation is headed. Yields on them surged to their highest levels in over a decade. ‘It’s extreme, I’ve never seen anything quite like it,’ said Bethany Payne, a global bonds portfolio manager at Janus Henderson. ‘What you’re seeing in the U.K. is a broad rise in inflation expectations.’”
October 6 – Financial Times (Kate Duguid): “US government bond specialists are starting to fret over how the world’s most important market will cope when the Federal Reserve pulls back its pandemic-era support. The $22tn Treasuries market forms the basis for pricing other assets around the world. It is famed for its liquidity… But on several occasions since Covid-19 first hit, gaps in liquidity have appeared, creating jerky price movements. When the Fed starts to trim its $120bn-a-month bond buying scheme, possibly as soon as November, some participants fear the lack of once-reliable market support could generate more instability. The Treasury market system ‘is primed so that high-frequency traders and primary dealers pull back when there are problems’, said Yesha Yadav, a professor at Vanderbilt Law School… who studies Treasury market structure and regulation. ‘The way this is set up is designed to fail. It is exceptionally fragile,’ Yadav said.”
October 5 – Financial Times (Chris Flood): “A top US regulator has warned that leveraged exchange traded products present a risk to the stability of financial markets and called for tighter rules to be applied to these complex vehicles. Gary Gensler, chair of the Securities and Exchange Commission, said… he supported the introduction of new rules. The statement followed warnings by US regulators stretching back more than a decade about the risks to individual investors posed by leveraged ETPs.”
Inflation Watch:
October 4 – Bloomberg (Gerson Freitas Jr.): “A gauge of commodities soared to an all-time high as a resurgence in demand for raw materials collides with supply constraints, working to fan fears of inflation around the world. The Bloomberg Commodity Spot Index, which tracks 23 energy, metals and crop futures contracts, rose 1.1% on Monday, topping a 2011 record. The index has surged more than 90% since reaching a four-year low in March of last year.”
October 4 – New York Times (Clifford Krauss and Peter Eavis): “Americans are spending a dollar more for a gallon of gasoline than they were a year ago. Natural gas prices have shot up more than 150% over the same time, threatening to raise prices of food, chemicals, plastic goods and heat this winter. The energy system is suddenly in crisis around the world as the cost of oil, natural gas and coal has climbed rapidly in recent months. In China, Britain and elsewhere, fuel shortages and panic buying have led to blackouts and long lines at filling stations. The situation in the United States is not quite as dire, but oil and gasoline prices are high enough that President Biden has been calling on foreign producers to crank up supply.”
October 3 – Financial Times (Derek Brower and David Sheppard): “US oil producers are not able to increase supply to tame soaring crude prices that remain ‘under Opec control’, according to the shale patch’s biggest operator… Scott Sheffield, chief executive of Texas-based Pioneer Natural Resources, said America’s once-prolific shale producers would keep using their burgeoning cash piles to pay shareholders, not fund new drilling. ‘Everybody’s going to be disciplined, regardless whether it’s $75 Brent, $80 Brent, or $100 Brent,’ Sheffield said. ‘All the shareholders that I’ve talked to said that if anybody goes back to growth, they will punish those companies.’ ‘I don’t think the world can rely much on US shale,’ he said. ‘It’s really under Opec control.’”
October 6 – Wall Street Journal (Chuin-Wei Yap, Kejal Vyas and Chieko Tsuneoka): “Coal supply shortages are pushing prices for the fuel to record highs and laying bare the challenges to weaning the global economy off one of its most important—and polluting—energy sources. The crunch has many causes—from the post-pandemic boom to supply-chain strains and ambitious targets for reducing carbon emissions. And it is expected to last at least through the winter, raising fears in many countries of fuel shortfalls in the months ahead. Australia’s Newcastle thermal coal, a global benchmark, is trading at $202 a metric ton, three times higher than at the end of 2019. Global production of coal, which generates around 40% of the world’s electricity, is about 5% below pre-pandemic levels.”
October 7 – Reuters (Noah Browning and Susanna Twidale): “Soaring gas prices are forecast to drive a switch to oil and put more energy suppliers in Britain out of business, while industry groups called… for government action to ensure there is no supply interruption this winter. Natural gas prices, particularly in Europe, have rocketed this year due to lower-than-usual stocks, reduced supply from Russia, the onset of colder temperatures and infrastructure outages. The inexorable rise prompted some analysts to forecast a boost to global crude demand of several hundred thousand barrels per day (bpd), squeezing already tight supply, as countries switch to oil to generate power over the winter.”
October 8 – Reuters (Jessica Jaganathan): “Asia liquefied natural gas (LNG) prices soared this week, as the world's top buyer China faced an ongoing power crunch and low inventory in Europe drove up competition for the super-chilled fuel. The average LNG price for November delivery into Northeast Asia was estimated at about $37 per metric million British thermal units (mmBtu), up nearly 16% from the previous week…”
October 7 – Bloomberg (Christopher Condon and Misyrlena Egkolfopoulou): “Steven Mnuchin, the former U.S. Treasury secretary, warned about the risks of breaching the debt ceiling, overspending by the Biden administration and concerns that it could further fuel inflation. ‘I do worry that this will be ongoing inflation, and we could easily end up with 3.5% 10-year Treasuries, which again just increases the cost of the national debt and creates budget issues,’ Mnuchin said…”
Biden Administration Watch:
October 6 – Associated Press (Alan Fram): “President Joe Biden and congressional Democrats’ push for a 10-year, $3.5 trillion package of social and environmental initiatives has reached a turning point, with the president repeatedly conceding that the measure will be considerably smaller and pivotal lawmakers flashing potential signs of flexibility. In virtual meetings Monday and Tuesday with small groups of House Democrats, Biden said he reluctantly expected the legislation’s final version to weigh in between $1.9 trillion and $2.3 trillion… He told them he didn’t think he could do better than that…, reflecting demands from some of the party’s more conservative lawmakers.”
October 4 – CNBC (Amanda Macias): “U.S. Trade Representative Katherine Tai slammed China’s unfair trade practices and vowed to protect U.S. economic interests…, adding that the Biden administration will rally allies in order to push back on the world’s second-largest economy. ‘Our objective is not to inflame trade tensions with China,’ Tai said… ‘But above all else, we must defend to the hilt our economic interests and that means taking all steps necessary to protect ourselves against the waves of damage inflicted over the years through unfair competition,’ said Tai, the nation’s top trade official.”
October 5 – Wall Street Journal (Paul Kiernan and Dave Michaels): “Wall Street’s new overseer has outlined an aggressive regulatory agenda that threatens to squeeze the financial industry’s profit margins. Securities and Exchange Commission Chairman Gary Gensler is working on tougher rules for high-speed trading firms, private-equity managers, mutual funds and online brokerages. Mr. Gensler… says he wants to make the capital markets less costly for companies raising money as well as for ordinary investors saving for retirement. His main targets are what he says are profits and salaries earned above what a purely competitive market would allow, known as economic rents. ‘I hope that we address, and try to lower, the economic rents in our capital markets,’ Mr. Gensler said. He noted that finance as a share of U.S. economic output had more than doubled since the 1950s to roughly 8% of today’s gross domestic product. ‘If we ever got back to what it was,’ he said, ‘that’s a lot of savings.’”
Federal Reserve Watch:
October 4 – Bloomberg (Craig Torres): “The Federal Reserve is coming under greater scrutiny from inside and outside its walls following revelations about market trading by senior officials in 2020 as the coronavirus forced the central bank to leap to the rescue of the U.S. economy. Days after Bloomberg… reported trades made last year by Vice Chair Richard Clarida, the Fed said… its internal watchdog will review whether actions by ‘certain senior officials was in compliance with both the relevant ethics rules and the law.’ ‘We welcome this review and will accept and take appropriate actions based on its findings,’ the Fed said… The announcement came the same day Senator Elizabeth Warren called on the Securities and Exchange Commission to investigate whether the transactions violated insider trading rules.”
October 4 – Bloomberg (Steve Matthews): “Surging inflation this year could be creating a new pricing psychology where both businesses and consumers are getting used to rising prices, Federal Reserve Bank of St. Louis President James Bullard said, creating risks in 2022. ‘I am concerned about the changing mentality I would say around prices in the economy and the relative freedom that businesses feel that they can just pass on increased costs easily to their customers,’ Bullard said… ‘For years this has not been the case in the U.S…. They felt like if they raised prices, they would lose market share. It would hurt their business. And consumers were rabid about moving to the lower-cost places, low-cost products. That may be breaking down.’”
October 6 – Financial Times (Editorial Board): “Rules that limit employees’ trading exist, in part, to protect institutions from allegations of conflicts of interest. It is common for banks, law firms and news organisations including the Financial Times to have such policies. Perhaps the most surprising aspect of the scandal embroiling the Federal Reserve is that its policies did not prevent officials from dealing in individual stocks. This is despite it being the repository of some of the most market-moving information on the planet, at a time when its actions have an outsize effect on the price of almost any asset. In failing to protect the Fed from allegations that its senior officials made questionable trades, its code has been proven unfit for purpose. The Fed’s chair, Jay Powell, has pledged a tightening of the code, which currently bars the trading of bank stocks but allows other dealing. He must ensure substantive changes to prevent the scandal from undermining public confidence in the Fed…”
October 7 – Bloomberg (Nancy Cook, Jennifer Jacobs and Saleha Mohsin): “President Joe Biden’s selection of a new Federal Reserve chair grew more complicated in the last week as Congress quarrels over spending, taxes and debt, while a scandal over stock trades by some top officials under Jerome Powell’s leadership could damage his prospects. What once seemed like an easy potential renomination for Powell -- a favorite of Treasury Secretary Janet Yellen, moderate Democrats and Republicans on the Senate Banking Committee -- has morphed into a problem for the White House as Senator Elizabeth Warren… and progressive groups call into question the trading activity.”
U.S. Bubble Watch:
October 8 – Bloomberg (Olivia Rockeman and Reade Pickert): “U.S. job growth in September was the slowest this year, signaling a tempering of the labor market recovery and complicating a potential decision by the Federal Reserve to begin scaling back monetary support before year end. Nonfarm payrolls increased 194,000 last month after an upwardly revised 366,000 gain in August… The unemployment rate fell to 4.8%, partly reflecting a decline in labor force participation among women. Meantime, average hourly earnings jumped.”
October 8 – Bloomberg (Olivia Rockeman and Reade Pickert): “U.S. job growth in September was the slowest this year, signaling a tempering of the labor market recovery and complicating a potential decision by the Federal Reserve to begin scaling back monetary support before year end. Nonfarm payrolls increased 194,000 last month after an upwardly revised 366,000 gain in August… The unemployment rate fell to 4.8%, partly reflecting a decline in labor force participation among women. Meantime, average hourly earnings jumped.”
October 5 – Wall Street Journal (Yuka Hayashi): “The U.S. trade deficit widened to a record in August as American consumers continued to show a strong appetite for imported goods such as pharmaceutical products, toys and clothing. The… trade gap in goods and services expanded to $73.3 billion in August from $70.3 billion in July as the Delta variant of Covid-19 and supply constraints weighed on global trade.”
October 7 – CNBC (Jeff Cox): “The total of Americans submitting jobless claims fell sharply last week as enhanced federal unemployment benefits wound down… Initial filings for unemployment benefits totaled a seasonally adjusted 326,000 for the week ended Oct. 2, below the 345,000 Dow Jones estimate and a drop from the previous week’s 364,000… The weekly total was the lowest level since Sept. 4 and reverses a trend of rising claims over the past three weeks.”
October 6 – Reuters (Lucia Mutikani): “U.S. private payrolls increased more than expected in September as COVID-19 infections started subsiding, boosting hiring at restaurants and other high-contact businesses. The ADP National Employment Report… supported expectations that job growth picked up last month… Private payrolls increased by 568,000 jobs last month, the ADP National Employment Report showed. Data for August was revised lower to show 340,000 jobs added instead of the initially reported 374,000.”
October 5 – Reuters (Lucia Mutikani): “U.S. services industry activity nudged up in September, but growth is being restrained by a persistent shortage of inputs and the resulting high prices as the pandemic drags on. The… (ISM) survey… reported that ‘ongoing challenges with labor resources, logistics, and materials are affecting the continuity of supply.’ Hopes for an easing in the supply chain bottlenecks were dashed by a resurgence in COVID-19 infections over summer... Ports in China and the United States are also experiencing congestion. ‘We don't expect supply-side constraints to start easing meaningfully until mid-2022,’ said Oren Klachkin, lead U.S. economist at Oxford Economics... ‘Solid demand and less Covid wariness will keep services growing, but the expansion will be capped by the supply side's limited ability to meet demand.’ The ISM's non-manufacturing activity index edged up to a reading of 61.9 last month from 61.7 in August.”
October 3 – Wall Street Journal (Orla McCaffrey): “House prices are rising at a record pace but incomes aren’t keeping up, which is making home ownership less and less affordable. The median American household would need 32.1% of its income to cover mortgage payments on a median-priced home… That is the most since November 2008, when the same outlays would eat up 34.2% of income. Supercharged home prices in markets across the country are canceling out the impact of modestly higher incomes and historically low interest rates…”
October 6 – CNBC (Diana Olick): “A sharp jump in mortgage interest rates over the past few weeks is taking its toll on mortgage demand. Total application volume fell nearly 7% last week compared with the previous week… Refinance demand, which is especially sensitive to weekly interest rate movements, fell to the lowest level in three months, down 10% last week compared with the previous week. Volume was 16% lower than the same week one year ago… Mortgage applications to purchase a home declined 2% for the week and were 13% lower than the same week one year ago.”
October 6 – Wall Street Journal (Lydia O’Neal): “Shortages of key construction materials are forcing some builders and contractors to turn to substitutes and hunt for alternative suppliers as they rush to meet high demand for new housing. Construction companies are looking for replacements and new sources for everything from wood paneling to ceiling joists to pipes, saying that potentially higher costs and added complications to design and construction can be preferable to putting a project on hold for months while waiting for planned supplies. Supply shortages stem from a series of supply-chain disruptions hitting industries around the world this year, from port congestion in Asia and the U.S. to labor shortages at factories.”
October 4 – Yahoo Finance (Aarthi Swaminathan): “Supply chain bottlenecks are squeezing businesses big and small. One expert explains why it’s so hard to iron out the major kinks affecting global trade. ‘There really is a perfect storm going on,’ Adam Compain, senior vice president at project44, a supply chain technology provider, told Yahoo Finance... Compain laid out three major reasons why ports are so backed up and there’s red-hot demand for truckers. ‘First and foremost is customer expectations have risen only in one direction — and that's up,’ explained Compain. ‘Second to that is a capacity constraint. There are limitations to the supply chain network in terms of the quantity of drivers that are available to ship things within the United States and abroad.’ Third, ‘things are complex in the supply chain,’ Compain said. In his view, the process of turning raw materials into a finished good and bringing it to a consumer's home across the globe relies on ‘a whole bunch of interdependencies,’ and ‘logistics has reached a point that the existing software data and tools to make that job a reality are really strained.’”
October 6 – Bloomberg (Kevin Crowley): “U.S. shale oil production will expand at a ‘modest rate’ over the next 18 months even as prices touch multiyear highs, according to BloombergNEF, leaving OPEC in a powerful position as the world cries out for more barrels. Producers are using cash flow to pay down debt and reward shareholders rather than invest in new drilling… Yet demand for energy is rising around the world. U.S. crude futures reached a seven-year high this week after OPEC and its allies declined to alter their supply agreement to raise output… U.S. production will reach 12.1 million barrels by the end of next year, up 440,000 barrels a day from the end of 2021, according to BNEF’s base case scenario. That’s lower than its pre-pandemic record high of 13 million from 2019.”
October 7 – Reuters (Lisa Baertlein, Jonathan Saul and Siddharth Cavale): “The Flying Buttress once glided across the oceans carrying vital commodities like grain to all corners of the world. Now it bears a different treasure: Paw Patrol Movie Towers, Batmobile Transformers and Baby Alive Lulu Achoo dolls. The dry bulk cargo ship has been drafted into the service of retail giant Walmart, which is chartering its own vessels in an effort to beat the global supply chain disruptions that threaten to torpedo the retail industry's make-or-break holiday season.”
October 5 – Bloomberg (Alexandre Tanzi): “Generation X, the oft-overlooked demographic group squeezed between the Baby Boomers and Millennials, has experienced a wealth boom in the U.S. since Covid-19 was declared a national emergency. During the pandemic, household wealth distribution has shifted from older generations to those who are reaching their peak earnings years, according to… the Federal Reserve. Gen Xers, who are age 41 to 56, saw robust gains in equities and pension entitlements, while their share of the nation’s consumer debt declined… As of June this year, Generation X held 28.6% of the nation’s wealth, up 3.9 percentage points from the first quarter of 2020... In dollar value, that translates into a 50% gain in their aggregate net worth -- the difference between a household’s assets and debts.”
Fixed-Income Bubble Watch:
October 2 – Bloomberg (Jack Pitcher): “Wall Street syndicate desks expect to see $90 billion to $100 billion of fresh U.S. investment-grade bond supply in October, with as much as $20 billion of that lining up next week. That’s higher than the $80 billion that priced in October of last year and significantly more robust than the $68 billion that came in 2019…”
October 3 – Wall Street Journal (Sebastian Pellejero): “U.S. companies have sold a record amount of junk-rated loans to raise money for dividends this year… Nonfinancial companies… have issued more than $72 billion worth of speculative-grade loans to pay dividends in 2021, according to S&P Global Market Intelligence’s LCD. That is already a full-year record in data going back to 2000, topping 2013’s previous high of $54.4 billion.”
October 7 – Bloomberg (Alex Tanzi and Liz Capo McCormick): “America’s super-rich hold fewer U.S. government and municipal securities than they’ve done for almost two decades, according to recent data from the Federal Reserve. The top 1% of households by income held $887 billion of those assets as of June, the smallest amount in 17 years and down from a peak of $1.5 trillion a decade ago.”
October 4 – Bloomberg (John Gittelsohn): “Deals by real estate investment trusts totaled $108 billion this year through September, beating the annual record as ample capital fueled transactions in the recovering economy, according to Jones Lang LaSalle Inc.”
China Watch:
October 4 – Bloomberg (Claire Boston and Alice Huang): “Another Chinese developer fell into crisis on Monday after failing to repay a maturing bond, adding to the strains of the nation’s heavily leveraged property firms following industry giant China Evergrande Group’s debt woes. Fantasia Holdings Group Co. didn’t repay a $205.7 million bond that was due Monday… Signs of stress in China’s property sector are spreading, as lower-rated developers face a surge in bond yields to a decade high.”
October 4 – Bloomberg (Sofia Horta e Costa and Rebecca Choong Wilkins): “A missed bond payment by a Chinese developer reignited investor angst about the health of the nation’s property sector on Tuesday. Chinese junk dollar bonds were poised for their biggest selloff in at least eight years amid renewed concern that authorities will do little to alleviate the credit crisis gripping the industry. Yields are near a decade high. Developer shares tumbled…”
October 6 – Wall Street Journal (Frances Yoon and Quentin Webb): “Shrinking apartment sales and an unexpected default have stoked fresh investor concerns about China’s property developers, causing a steep selloff in U.S. dollar bonds from many of the sector’s debt-laden companies. On Wednesday, …dozens of dollar bonds sold by Chinese real-estate companies tumbled in price, pushing yields on those bonds higher. The selldown extended sharp declines logged the previous day, reflecting increasing investor pessimism after luxury developer Fantasia Holdings Group Co. failed to repay $206 million in dollar bonds that matured on Monday. Some developers’ sales figures for September have also showed a significant drop in home-buyer demand…”
October 5 – Bloomberg: “China ordered its banks to ramp up funding to coal and energy companies, another step in its efforts to ease a power crunch and ensure supplies this winter. Banks and other financial institutions should prioritize lending to qualified mines and power plants so they can increase thermal coal and electricity output, China Banking and Insurance Regulatory Commission said… In order to maintain price stability, bank loans and financing are strictly banned from being used to speculate on commodities such as coal, steel and metals in the financial markets, the regulator said.”
October 6 – Bloomberg (Stephen Stapczynski): “China is urging its liquefied natural gas importers to procure more supply to fix its energy crisis, while providing little financial support for firms paying record-high rates for the super-chilled fuel. The government isn’t providing enough subsidies for recent purchases, making it difficult for the nation’s smaller gas distributors to meet the request to secure enough fuel before winter, according to traders with knowledge of the matter. While some firms are avoiding buying for now, they may ultimately have to bow to Beijing’s wishes. North Asian LNG spot prices surged to a record high this week as importers from China to the U.K. intensify competition for a shrinking pool of available winter supply.”
October 7 – Bloomberg: “Travel during China’s ‘Golden Week’ national vacation was down by a third on pre-pandemic levels, with government measures to contain sporadic coronavirus outbreaks prompting holidaymakers to spend closer to home. The number of trips taken on China’s roads on Wednesday was 34.1% below levels seen in 2019…, and 2.2% lower than last year.”
October 7 – Bloomberg (Allan Ray Restauro): “China's official manufacturing PMI entered into contraction territory in September 2021, the first time since February 2020. The official release indicated a reading of 49.6, below the 50 threshold for expansionary levels.”
October 7 – Reuters (Stella Qiu and Ryan Woo): “Activity in China’s services sector returned to growth in September as a major COVID-19 outbreak in the eastern province of Jiangsu receded, a private-sector survey showed… The Caixin/Markit services Purchasing Managers’ Index (PMI) rose to 53.4 from 46.7 in August, pulling away from the lowest level seen since the height of the pandemic last year. The 50-point mark separates growth from contraction on a monthly basis.”
October 6 – New York Times (Li Yuan): “This year has been unsettling for Chinese business. The ruling Communist Party has gone after the private sector industry by industry. The stock markets have taken a huge hit. The country’s biggest property developer is on the verge of collapse. But for some of the biggest names on Wall Street, China’s economic prospects look rosier than ever. BlackRock, the world’s biggest asset manager, urged investors to increase their exposure to China by as much as three times. ‘Is China investable?’ asked J.P. Morgan, before answering, ‘We think so.’ Goldman Sachs says ‘yes,’ too. Their bullishness in the face of growing uncertainty has puzzled China experts and drawn criticism from a wide political spectrum, from George Soros, the progressive investor, to congressional Republicans.”
Central Banker Watch:
October 6 – Financial Times (William Langley): “New Zealand has raised interest rates for the first time in seven years as concerns over rising property prices and inflation outweigh the importance of the Pacific nation’s battle to control the spread of coronavirus. The Reserve Bank of New Zealand became the third central bank of a developed economy to raise rates since the pandemic began, the latest indication of an acceleration of the global tightening of pandemic-era monetary stimulus. The RBNZ raised the country’s benchmark lending rate by 25 bps to 0.5%... and signalled that more tightening was likely.”
October 6 – Bloomberg (Dorota Bartyzel): “Poland unexpectedly raised borrowing costs for the first time since 2012, caving in to government and investor pressure to tackle soaring inflation that’s already triggered interest-rate hikes across eastern Europe. The central bank didn’t specify if Wednesday’s increase in the reference rate to 0.5% from a record-low 0.1% was a one-time move or the start of a tightening cycle.”
October 7 – Bloomberg (Jeff Sutherland and Tom Hancock): “Peru tightened monetary policy for a third straight month after inflation surged to its highest rate in 12 years and political volatility roiled the currency. The central bank lifted its benchmark rate half a percentage point, to 1.5%, matching the median forecast…”
October 7 – Reuters (Balazs Koranyi): “European Central Bank policymakers debated a bigger cut in asset purchases last month and some even argued that markets may have already prepared for the end of emergency support, the accounts of their Sept 9 meeting showed… ‘It was argued that a symmetric application of the (Pandemic Emergency Purchase Programme) framework would call for a more substantial reduction in the pace of purchases,’ the ECB said. ‘From this perspective, a pace of purchases similar to the level prevailing at the beginning of the year would be appropriate.’”
October 8 – Reuters (Wayne Cole): “Australia's central bank… warned that ‘exuberance’ in a red-hot housing market was encouraging a build-up of debt that might destabilise the financial system, urging banks to maintain lending discipline amid the boom. In its semi-annual Financial Stability Review, the Reserve Bank of Australia (RBA) said the banking system was generally sound and well capitalised, but a debt-fuelled surge in house prices needed to be watched.”
Global Bubble Watch:
October 6 – Financial Times (Cheng Ting-Fang and Lauly Li): “Manufacturers are warning that further disruptions to energy supplies in China would create havoc in the tech supply chain at a time when the industry is gearing up for peak production season, including that of the latest iPhones. Several companies including key Apple suppliers have already said they have had to halt or reduce operations at facilities in Jiangsu province, China’s industrial tech heartland, after local governments restricted the supply of electricity for industrial use until the end of the month. Cities in Jiangsu either told enterprises to stop using electricity entirely for the last week of September or set targets for manufacturers to reduce their energy use in the period by 10 to 30% from usual levels, several tech industry executives told Nikkei Asia.”
October 7 – Bloomberg (Megan Durisin): “The jump in global food prices to a decade high risks leading to even more expensive grocery bills, and the energy crisis is threatening to make things even worse. Harvest setbacks, strong demand and supply chain disruptions have sent a United Nations index of food costs up by a third over the past year. The latest leg up last month came as prices for almost all types of foodstuffs gained, adding to inflationary headaches for consumers and central banks. Soaring energy bills are now adding to the problem, escalating costs of producing fertilizers and transporting goods around the world, and making the run-up more reminiscent of the price spikes seen during food crises in 2008 and 2011. The energy rally could also prompt more crops to be diverted from food to making biofuels, the UN warned.”
October 3 – CNBC (Ian Thomas): “The semiconductor chip shortage that is hamstringing the production of products ranging from cars and computers to appliances and toothbrushes will extend into 2022 and potentially beyond that, the CEO of semiconductor company Marvell Technology said. ‘Right now, every single end market for semiconductors is up simultaneously; I’ve been in this industry 27 years, I’ve never seen that happen,’ said Marvell CEO Matt Murphy… ‘If it stays business as usual, and everything’s up and to the right, this is going to be a very painful period, including in 2022 for the duration of the year.’”
October 6 – Financial Times (James Kynge in Hong Kong and Amy Kazmin): “Acute power shortages in China and India, the two biggest drivers of global growth, are casting a pall over Asia’s economic prospects and raising the risk that inflationary pressures may ripple through the region. Several leading China economists expect growth in the world’s second-largest economy to slow appreciably in coming months as power shortages hit industrial output and a property sector downturn further reduces activity… But India too is being hit by an acute shortage of coal, which is crucial for generating the electricity that underpins growth. As of October 3, India’s 135 thermal power plants had just four days’ worth of coal stocks…”
October 8 – Reuters (Sudarshan Varadhan): “North Indian states have suffered electricity cuts and face further outages because of a lack of coal, an analysis of government data and interviews with residents found, contradicting government assurances there is enough power. The shortages in India - the world's largest coal consumer after China - follow widespread outages in neighbouring China, which has shut factories and schools to manage the crisis. Over half of India's 135 coal-fired power plants, which in total supply around 70% of India's electricity, have fuel stocks of less than three days…”
October 3 – Bloomberg (Lars Paulsson, Jesper Starn and Lars Erik Taraldsen): “As the frontier of Europe’s energy crisis moves north, the Nordic region faces a worsening power crisis with dwindling water reservoirs hampering the generation of hydroelectric power. Nordic power prices were five times higher in September than a year ago. That’s hitting everyone from power-hungry factories and miners, to students struggling with their bills. Inflation is rocketing. Europe’s northern corner can’t hide from the global shortage of natural gas and coal, with falling water reserves curbing the region’s most important source of electricity.”
October 5 – Bloomberg (Sam Kim): “South Korea’s inflation came in faster than expected in September, adding support to the view that the central bank will raise interest rates again this year. Consumer prices rose 2.5% from a year earlier… The report underscores growing price pressures in the economy as the recovery continues, and was supported further by higher energy and food prices…”
October 3 – Associated Press: “Hundreds of world leaders, powerful politicians, billionaires, celebrities, religious leaders and drug dealers have been hiding their investments in mansions, exclusive beachfront property, yachts and other assets for the past quarter-century, according to a review of nearly 12 million files obtained from 14 firms located around the world. The report released Sunday by the International Consortium of Investigative Journalists involved 600 journalists from 150 media outlets in 117 countries. It’s being dubbed the ‘Pandora Papers’ because the findings shed light on the previously hidden dealings of the elite and the corrupt, and how they have used offshore accounts to shield assets collectively worth trillions of dollars. The more than 330 current and former politicians identified as beneficiaries of the secret accounts…”
EM Watch:
October 4 – Reuters (Tom Arnold): “Higher energy prices are fanning inflation in several emerging markets, testing the resolve of their central banks and risking stymieing growth in Hungary, Poland and the Czech Republic and more currency weakness in Turkey, analysts say. In a bold response to the price pressures, the Czech National Bank (CNB)… raised its main interest rate by 75 bps, its biggest hike since 1997. It cited rising energy prices as well as supply-chain disruptions and domestic factors like higher costs in owner-occupied housing and services. The country's prime minister said the hike would damage the economy, illustrating the dilemma emerging central banks face as they try to head off inflation, already running above target levels, while sustaining fragile economic recoveries from the COVID-19 pandemic.”
October 3 – Financial Times (Amy Kazmin): “India is the latest country to face a severe power crisis that threatens to undermine its recovery from the pandemic, with authorities warning that power plants have run perilously low on coal. According to India’s power ministry, the 135 thermal power plants of Asia’s third-largest economy had an average of just four days of coal stocks as of Friday, down from 13 days of supplies in early August. Of the plants monitored daily, more than half have less than three days of stocks.”
October 6 – Bloomberg (Subhadip Sircar and Vrishti Beniwal): “Higher oil prices and coal shortages risk fanning inflation and slowing economic growth in India ahead of a central bank meeting, while punishing the nation’s currency and bonds. A lack of coal means factories could shut, while forcing India to import more fossil fuels at a time when crude prices at a seven-year high are already weighing on the energy hungry nation. The threat of inflation and worsening external deficit have led to a 14 bps surge in the nation’s benchmark bond yields over the past two weeks and a decline in the rupee to its lowest since April.”
October 8 – Bloomberg (Andrew Rosati): “Brazil’s consumer prices rose less than expected in September, supporting the central bank’s view that inflation peaked just above 10% and will start to slow as rising borrowing costs cool down the economy. Inflation accelerated to 10.25% from a year ago, its fastest pace since February 2016, and to 1.16% from the month prior…”
October 4 – Reuters (Onur Ant): “Turkey’s consumer inflation accelerated in September, driven by a surge in the cost of energy. A core gauge closely watched by the central bank also edged higher. Prices rose an annual 19.58% through last month, up from 19.25% in August… Prices rose 1.25% from August, compared with the median estimate of 1.27% in a separate survey.”
October 3 – Reuters (Azra Ceylan and Jonathan Spicer): “President Tayyip Erdogan said… Turkey had ordered agricultural cooperatives to open about 1,000 new markets across the country to provide ‘suitable’ prices for consumer goods in the face of nearly 20% annual inflation. Construction would quickly begin on the shops to provide Turks ‘cheap and high quality goods’ and to ‘balance out markets’, he said, after consumer price rises to levels well above a 5% official target.”
Europe Watch:
October 3 – Financial Times (Erika Solomon): “Germany’s leading political parties held competing rounds of exploratory coalition talks on Sunday, aimed at winning over potential partners to form the government that will take the reins from Chancellor Angela Merkel after 16 years in power. Both the Social Democrats (SPD), who won the largest share of votes at about 25.7%, and Merkel’s Christian Democrats, who came second, are trying to woo the third- and fourth-placed parties: the Greens, with 14.8% of the vote, and the pro-business Free Democrats (FDP), with 11.5%.”
October 6 – Associated Press: “Factory orders in Germany plummeted 7.7% in August compared with the previous month, led by much lower demand from countries outside the eurozone… The drop in orders, a leading indicator for Europe’s biggest economy, followed month-on-month gains of 4.6% in June and 4.9% in July. The Economy Ministry said that orders from inside Germany were down 5.2%, while those from non-eurozone countries were off 15.2%.”
October 5 – New York Times (Jack Ewing): “In Germany, where one in four jobs depends on exports, the crisis gumming up the world’s supply chains is weighing heavily on the economy, which is Europe’s largest and a linchpin to global commerce. Recent surveys and data point to a sharp slowdown of the German manufacturing powerhouse, and economists have begun to predict a ‘bottleneck recession.’ Almost everything that German factories need to operate is in short supply, not just computer chips but also plywood, copper, aluminum, plastics and raw materials like cobalt, lithium, nickel and graphite, which are crucial ingredients of electric car batteries.”
October 4 – Reuters (Paul Carrel): “Investor morale in the euro zone fell for the third month in a row in October and hit its lowest level since April… Sentix's index for the euro zone fell to 16.9 from 19.6 in September… A current conditions index fell to 26.3 from 30.8. An expectations index fell to 8.0 from 9.0, dropping for the fifth month in a row to hit its lowest level since May 2020.”
Japan Watch:
October 5 – Reuters (Sakura Murakami and Kiyoshi Takenaka): “Japan's new government signaled… a more assertive position on China's aggressive posture towards self-ruled Taiwan, suggesting it would consider options and prepare for ‘various scenarios’, while reaffirming close U.S. ties. Taiwan and broader relations with China are likely to dominate security policies and foreign relations from the outset of new Prime Minister Fumio Kishida's administration.”
Social, Political, Environmental, Cybersecurity Instability Watch:
October 5 – Wall Street Journal (Ann M. Simmons and Georgi Kantchev): “Thawing earth once thought to be permanently frozen is springing to life and threatening a crucial chunk of Russia’s economy. The melting of the thick layer of the earth known as permafrost is a result of climate change, according to scientists and Russia government research. Two-thirds of the country sits on such soil, including much of its oil and gas infrastructure. Since 1976, Russia’s average temperature has risen 0.92 degree Fahrenheit per decade, or 2½ times the global pace… Mines and plants are experiencing increasing corrosion leaks and cracks, stemming in large part from defrosting ground. In the pipeline industry, braces and other mechanisms, previously anchored into permafrost, often corrode, twist and bend when the earth below changes…”
Levered Speculation Watch:
October 8 – Bloomberg (Heather Perlberg, Matt Robinson and Sridhar Natarajan): “A U.S. investigation into the collapse of Bill Hwang’s Archegos Capital Management is examining whether the firm engaged in market manipulation. The U.S. Securities and Exchange Commission is scrutinizing the firm’s trading activity, including whether it concealed the size of its bets on public companies, according to people familiar with the matter. Authorities are reviewing whether Archegos bought multiple stakes in the same companies across several banks in an effort to avoid triggering public disclosure rules. In aggregate, Hwang’s positions were massive.”
Geopolitical Watch:
October 6 – Associated Press (Huizhong Wu and David Rising): “With record numbers of military flights near Taiwan over the last week, China has been showing a new intensity and military sophistication as it steps up its harassment of the island it claims as its own and asserts its territorial ambitions in the region. China’s People’s Liberation Army flew 56 planes off the southwest coast of Taiwan on Monday, setting a new record and capping four days of sustained pressure involving 149 flights. All were in international airspace, but prompted Taiwanese defense forces to scramble in response and raised fears that any misstep could provoke an unintended escalation.”
October 3 – Bloomberg (Cindy Wang and Jacob Gu): “The U.S. called on China to halt its ‘provocative’ pressure on Taiwan after a record number of daily incursions by Chinese warplanes, saying the military actions are destabilizing and risk leading to ‘miscalculations.’ ‘The U.S. commitment to Taiwan is rock solid and contributes to the maintenance of peace and stability across the Taiwan Strait and within the region,’ State Department spokesman Ned Price said in a statement.”
October 4 – The Hill (Ellen Mitchell): “Taiwan is preparing for potential war with China following a series of increasingly aggressive military activity from Beijing, with Taipei’s foreign minister warning that should the nation attack, it would ‘suffer tremendously.’ China on Monday sent 52 military aircraft into Taiwan’s air defense identification zone, the largest military provocation seen yet. In anticipation of further aggression, the self-ruled island is preparing to repel any strike and has asked Australia to increase intelligence sharing and security cooperation, Taiwanese Foreign Minister Joseph Wu told the Australian Broadcast Corporation's ‘China Tonight.’ ‘The defense of Taiwan is in our own hands, and we are absolutely committed to that,’ Wu told ABC's Stan Grant… ‘I’m sure that if China is going to launch an attack against Taiwan, I think they are going to suffer tremendously as well.’”
October 7 – Bloomberg (Peter Martin and Samson Ellis): “The U.S. has had troops in Taiwan training local forces to better defend themselves in case of attack by China, according to a U.S. defense official, an acknowledgment that could challenge Washington’s recent thaw with Beijing. The official… confirmed an earlier report by the Wall Street Journal that more than two dozen American service members, including special forces, have been in Taiwan for more than a year… The deployment of foreign forces on Taiwan is one of six conditions Chinese military commanders have set for launching a military strike, according to a state media report in April 2020…”
October 5 – Financial Times (Kathrin Hille and Demetri Sevastopulo): “Taiwan’s defence minister has warned that China will be fully capable of invading the island by 2025, in the government’s first clear message to the public that the country faces a threat of war. Chiu Kuo-cheng issued the warning after almost 150 Chinese warplanes operated in international airspace near Taiwan between Friday and Monday. The current situation is really the most dangerous I have seen in my more than 40 years in the military,’ Chiu said in a question-and-answer session with lawmakers about a NT$240bn ($8.6bn) special defence budget for anti-ship missiles and warships. ‘If they want to attack now, they are already capable. But they have to calculate at what cost it would come and what results it would have,’ Chiu said. ‘From 2025, they will already have lowered the cost and the losses to the lowest possible level, so . . . they will have the complete capability.’”
October 4 – Reuters (Ben Blanchard): “Taiwan falling to China would trigger ‘catastrophic’ consequences for peace in Asia, President Tsai Ing-wen wrote in a piece for Foreign Affairs…, and if threatened Taiwan will do whatever it takes to defend itself. Taiwan, which is claimed by China as its sovereign territory, has faced a massive stepping up of pressure from Beijing since Friday, with 148 Chinese air force aircraft flying into Taiwan's air defence zone over a four-day period. China has blamed the United States, Taiwan's most important international backer and arms supplier, for the rise in tensions, while Taiwan has called China the ‘chief culprit’ in the current situation. Writing in Foreign Affairs, Tsai said as countries increasingly recognise the threat China's Communist Party poses, they should understand the value of working with the island.”
October 6 – Reuters (Akriti Sharma): “U.S. Secretary of State Antony Blinken says the U.S. wants China to act ‘responsibly’ when it comes to addressing the potential impacts of China Evergrande Group's financial crisis… ‘China has to make sovereign economic decisions for itself, but we also know that what China does economically is going to have profound ramifications, profound effects, on literally the entire world because all of our economies are so intertwined,’ Blinken said… ‘So certainly when it comes to something that could have a major impact on the Chinese economy we look to China to act responsibly and to deal effectively with any challenges,’ the report quoted Blinken as saying.”
October 7 – Reuters (John Revill and Steve Holland): “The United States and China have agreed in principle for their presidents to hold a virtual meeting before year's end…, after high-level talks meant to improve communication between the two big powers.The closed-door meeting at an airport hotel in the Swiss city of Zurich between U.S. national security adviser Jake Sullivan and China's top diplomat, Yang Jiechi, was their first face-to-face encounter since an unusually public and acrid airing of grievances in Alaska in March.”
Federal Reserve Credit last week declined $9.3bn to $8.416 TN. Over the past 108 weeks, Fed Credit expanded $4.689 TN, or 126%. Fed Credit inflated $5.605 Trillion, or 199%, over the past 465 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week declined $6.6bn to $3.478 TN. "Custody holdings" were up $68bn, or 2.0%, y-o-y.
Total money market fund assets declined $13.2bn to $4.531 TN. Total money funds increased $148bn y-o-y, or 3.4%.
Total Commercial Paper fell $9.5bn to $1.175 TN. CP was up $211bn, or 21.9%, year-over-year.
Freddie Mac 30-year fixed mortgage rates slipped two bps to 2.99% (up 12bps y-o-y). Fifteen-year rates fell five bps to 2.23% (down 14bps). Five-year hybrid ARM rates rose four bps to 2.52% (down 37bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down five bps to 3.15% (up 7bps).
Currency Watch:
For the week, the U.S. Dollar Index was little changed at 94.07 (up 4.6% y-t-d). For the week on the upside, the Canadian dollar increased 1.4%, the Norwegian krone 1.1%, the Australian dollar 0.7%, the British pound 0.5%, the Swiss franc 0.4%, the Singapore dollar 0.2%, and the Swedish krona 0.1%. For the week on the downside, the Brazilian real declined 2.6%, the Mexican peso 1.2%, the Japanese yen 1.1%, the South Korean won 0.6%, the euro 0.2% and the New Zealand dollar 0.1%. The Chinese renminbi was little changed versus the dollar (up 1.30% y-t-d).
Commodities Watch:
The Bloomberg Commodities Index gained 1.7% (up 31.5% y-t-d). Spot Gold slipped $4 to $1,757 (down 7.5%). Silver recovered 0.6% to $22.68 (down 14.1%). WTI crude surged $3.47 to $79.35 (up 64%). Gasoline jumped 5.2% (up 68%), while Natural Gas slipped 1.0% (up 119%). Copper gained 2.1% (up 22%). Wheat dropped 2.8% (up 15%). Corn fell 2.0% (up 10%). Bitcoin gained $5,705, or 11.8%, this week to $54,106 (up 86%).
Coronavirus Watch:
October 4 – Reuters (Manas Mishra): “The effectiveness of the Pfizer Inc/BioNTech SE vaccine in preventing infection by the coronavirus dropped to 47% from 88% six months after the second dose, according to data published… The analysis showed that the vaccine's effectiveness in preventing hospitalization and death remained high at 90% for at least six months, even against the highly contagious Delta variant of the coronavirus.”
Market Mania Watch:
October 5 – Financial Times (Kaye Wiggins): “Private equity firms are offering the highest premiums for listed companies in more than two decades, paying almost 70% above the prior share price in some cases, in a sign of the widening gap between cash-rich buyout groups and public market investors. Buyout groups paid an average premium of 45% for European companies in 2021, the highest since the data company Refinitiv’s records began in 1980. In the US, the premiums hit 42% this year, the highest since 1999.”
October 8 – Bloomberg (John Gittelsohn): “The median price for a home in California is set to jump north of $800,000 next year, adding to a long-simmering affordability crisis in the state. The state, which has grappled for years with a shortage of affordable housing, will see prices rise 5.2% to a median of $834,000 in 2022, according to a forecast by the California Association of Realtors… That comes after a surge of roughly 20% this year…”
Market Instability Watch:
October 4 – Reuters (Julia Payne and Dmitry Zhdannikov): “The world's top commodity trading houses are being told by brokers and exchanges to deposit hundreds of millions of dollars in extra funds to cover their exposure to soaring gas prices, seven sources… told Reuters. Glencore, Gunvor, Trafigura and Vitol are among the commodity merchants facing what are known as margin calls on their financial positions in natural gas markets, the sources said. The calls are forcing the traders to tie up more capital. Some, particularly smaller firms, are having to increase borrowing, leaving them with less cash to trade with and potentially hurting their profits, the sources said. The sources, who include company officials, brokers and bankers, declined to be named due to the sensitivity of the matter.”
October 2 – Politico (Victoria Guida and Ben White): “Massive support from the Federal Reserve has sent U.S. stocks and bonds soaring and enriched investors ever since markets almost collapsed at the onset of the pandemic. Now, the party may be ending. The central bank plans to begin yanking back its extraordinary assistance to the economy as early as next month, and many Fed officials are open to increasing interest rates next year — far earlier than expected — driven by fears that production and shipping delays will continue to stoke inflation. Chair Jerome Powell has sounded increasingly pessimistic over the past week about those supply chain disruptions, a concern shared by central bankers around the globe.”
October 4 – Bloomberg (Netty Ismail and Sydney Maki): “Emerging markets haven’t looked so exposed to climbing U.S. yields for almost half a decade. The correlation between currencies in the developing world and short-term Treasuries increased to around the strongest level since 2017 last week. It underscores the potential fallout for the asset class if traders continue to price in a faster-than-expected tightening drive by the Federal Reserve. Signs of stress are already showing. Emerging-market stocks just capped their longest string of weekly declines in more than two years, while bond funds in the space registered $2.8 billion of outflows in the week through Sept. 29, the biggest exodus since March…”
October 5 – Bloomberg (Nishant Kumar, Hema Parmar, and Akayla Gardner): “Western investors are backing away from Chinese companies, blaming politics and uncertainty for a souring stance on the world’s second-biggest market. On Tuesday, representatives of Man Group, Soros Fund Management and Elliott Management raised concerns about the outlook for Chinese stocks traded in New York and in Asia. Their comments came weeks after $59 billion investment firm Marshall Wace said some of those businesses have become ‘uninvestable.’”
October 7 – Wall Street Journal (Anna Hirtenstein): “Surging energy costs have spread fear among investors in recent weeks that inflation isn’t going away. One place where the strains are being felt most acutely is the U.K., where bond markets have exhibited some wild moves. The most dramatic swings took place with government bonds whose coupons are linked to inflation. Those bonds, and derivatives known as swaps, are seen as a measure of where investors believe inflation is headed. Yields on them surged to their highest levels in over a decade. ‘It’s extreme, I’ve never seen anything quite like it,’ said Bethany Payne, a global bonds portfolio manager at Janus Henderson. ‘What you’re seeing in the U.K. is a broad rise in inflation expectations.’”
October 6 – Financial Times (Kate Duguid): “US government bond specialists are starting to fret over how the world’s most important market will cope when the Federal Reserve pulls back its pandemic-era support. The $22tn Treasuries market forms the basis for pricing other assets around the world. It is famed for its liquidity… But on several occasions since Covid-19 first hit, gaps in liquidity have appeared, creating jerky price movements. When the Fed starts to trim its $120bn-a-month bond buying scheme, possibly as soon as November, some participants fear the lack of once-reliable market support could generate more instability. The Treasury market system ‘is primed so that high-frequency traders and primary dealers pull back when there are problems’, said Yesha Yadav, a professor at Vanderbilt Law School… who studies Treasury market structure and regulation. ‘The way this is set up is designed to fail. It is exceptionally fragile,’ Yadav said.”
October 5 – Financial Times (Chris Flood): “A top US regulator has warned that leveraged exchange traded products present a risk to the stability of financial markets and called for tighter rules to be applied to these complex vehicles. Gary Gensler, chair of the Securities and Exchange Commission, said… he supported the introduction of new rules. The statement followed warnings by US regulators stretching back more than a decade about the risks to individual investors posed by leveraged ETPs.”
Inflation Watch:
October 4 – Bloomberg (Gerson Freitas Jr.): “A gauge of commodities soared to an all-time high as a resurgence in demand for raw materials collides with supply constraints, working to fan fears of inflation around the world. The Bloomberg Commodity Spot Index, which tracks 23 energy, metals and crop futures contracts, rose 1.1% on Monday, topping a 2011 record. The index has surged more than 90% since reaching a four-year low in March of last year.”
October 4 – New York Times (Clifford Krauss and Peter Eavis): “Americans are spending a dollar more for a gallon of gasoline than they were a year ago. Natural gas prices have shot up more than 150% over the same time, threatening to raise prices of food, chemicals, plastic goods and heat this winter. The energy system is suddenly in crisis around the world as the cost of oil, natural gas and coal has climbed rapidly in recent months. In China, Britain and elsewhere, fuel shortages and panic buying have led to blackouts and long lines at filling stations. The situation in the United States is not quite as dire, but oil and gasoline prices are high enough that President Biden has been calling on foreign producers to crank up supply.”
October 3 – Financial Times (Derek Brower and David Sheppard): “US oil producers are not able to increase supply to tame soaring crude prices that remain ‘under Opec control’, according to the shale patch’s biggest operator… Scott Sheffield, chief executive of Texas-based Pioneer Natural Resources, said America’s once-prolific shale producers would keep using their burgeoning cash piles to pay shareholders, not fund new drilling. ‘Everybody’s going to be disciplined, regardless whether it’s $75 Brent, $80 Brent, or $100 Brent,’ Sheffield said. ‘All the shareholders that I’ve talked to said that if anybody goes back to growth, they will punish those companies.’ ‘I don’t think the world can rely much on US shale,’ he said. ‘It’s really under Opec control.’”
October 6 – Wall Street Journal (Chuin-Wei Yap, Kejal Vyas and Chieko Tsuneoka): “Coal supply shortages are pushing prices for the fuel to record highs and laying bare the challenges to weaning the global economy off one of its most important—and polluting—energy sources. The crunch has many causes—from the post-pandemic boom to supply-chain strains and ambitious targets for reducing carbon emissions. And it is expected to last at least through the winter, raising fears in many countries of fuel shortfalls in the months ahead. Australia’s Newcastle thermal coal, a global benchmark, is trading at $202 a metric ton, three times higher than at the end of 2019. Global production of coal, which generates around 40% of the world’s electricity, is about 5% below pre-pandemic levels.”
October 7 – Reuters (Noah Browning and Susanna Twidale): “Soaring gas prices are forecast to drive a switch to oil and put more energy suppliers in Britain out of business, while industry groups called… for government action to ensure there is no supply interruption this winter. Natural gas prices, particularly in Europe, have rocketed this year due to lower-than-usual stocks, reduced supply from Russia, the onset of colder temperatures and infrastructure outages. The inexorable rise prompted some analysts to forecast a boost to global crude demand of several hundred thousand barrels per day (bpd), squeezing already tight supply, as countries switch to oil to generate power over the winter.”
October 8 – Reuters (Jessica Jaganathan): “Asia liquefied natural gas (LNG) prices soared this week, as the world's top buyer China faced an ongoing power crunch and low inventory in Europe drove up competition for the super-chilled fuel. The average LNG price for November delivery into Northeast Asia was estimated at about $37 per metric million British thermal units (mmBtu), up nearly 16% from the previous week…”
October 7 – Bloomberg (Christopher Condon and Misyrlena Egkolfopoulou): “Steven Mnuchin, the former U.S. Treasury secretary, warned about the risks of breaching the debt ceiling, overspending by the Biden administration and concerns that it could further fuel inflation. ‘I do worry that this will be ongoing inflation, and we could easily end up with 3.5% 10-year Treasuries, which again just increases the cost of the national debt and creates budget issues,’ Mnuchin said…”
Biden Administration Watch:
October 6 – Associated Press (Alan Fram): “President Joe Biden and congressional Democrats’ push for a 10-year, $3.5 trillion package of social and environmental initiatives has reached a turning point, with the president repeatedly conceding that the measure will be considerably smaller and pivotal lawmakers flashing potential signs of flexibility. In virtual meetings Monday and Tuesday with small groups of House Democrats, Biden said he reluctantly expected the legislation’s final version to weigh in between $1.9 trillion and $2.3 trillion… He told them he didn’t think he could do better than that…, reflecting demands from some of the party’s more conservative lawmakers.”
October 4 – CNBC (Amanda Macias): “U.S. Trade Representative Katherine Tai slammed China’s unfair trade practices and vowed to protect U.S. economic interests…, adding that the Biden administration will rally allies in order to push back on the world’s second-largest economy. ‘Our objective is not to inflame trade tensions with China,’ Tai said… ‘But above all else, we must defend to the hilt our economic interests and that means taking all steps necessary to protect ourselves against the waves of damage inflicted over the years through unfair competition,’ said Tai, the nation’s top trade official.”
October 5 – Wall Street Journal (Paul Kiernan and Dave Michaels): “Wall Street’s new overseer has outlined an aggressive regulatory agenda that threatens to squeeze the financial industry’s profit margins. Securities and Exchange Commission Chairman Gary Gensler is working on tougher rules for high-speed trading firms, private-equity managers, mutual funds and online brokerages. Mr. Gensler… says he wants to make the capital markets less costly for companies raising money as well as for ordinary investors saving for retirement. His main targets are what he says are profits and salaries earned above what a purely competitive market would allow, known as economic rents. ‘I hope that we address, and try to lower, the economic rents in our capital markets,’ Mr. Gensler said. He noted that finance as a share of U.S. economic output had more than doubled since the 1950s to roughly 8% of today’s gross domestic product. ‘If we ever got back to what it was,’ he said, ‘that’s a lot of savings.’”
Federal Reserve Watch:
October 4 – Bloomberg (Craig Torres): “The Federal Reserve is coming under greater scrutiny from inside and outside its walls following revelations about market trading by senior officials in 2020 as the coronavirus forced the central bank to leap to the rescue of the U.S. economy. Days after Bloomberg… reported trades made last year by Vice Chair Richard Clarida, the Fed said… its internal watchdog will review whether actions by ‘certain senior officials was in compliance with both the relevant ethics rules and the law.’ ‘We welcome this review and will accept and take appropriate actions based on its findings,’ the Fed said… The announcement came the same day Senator Elizabeth Warren called on the Securities and Exchange Commission to investigate whether the transactions violated insider trading rules.”
October 4 – Bloomberg (Steve Matthews): “Surging inflation this year could be creating a new pricing psychology where both businesses and consumers are getting used to rising prices, Federal Reserve Bank of St. Louis President James Bullard said, creating risks in 2022. ‘I am concerned about the changing mentality I would say around prices in the economy and the relative freedom that businesses feel that they can just pass on increased costs easily to their customers,’ Bullard said… ‘For years this has not been the case in the U.S…. They felt like if they raised prices, they would lose market share. It would hurt their business. And consumers were rabid about moving to the lower-cost places, low-cost products. That may be breaking down.’”
October 6 – Financial Times (Editorial Board): “Rules that limit employees’ trading exist, in part, to protect institutions from allegations of conflicts of interest. It is common for banks, law firms and news organisations including the Financial Times to have such policies. Perhaps the most surprising aspect of the scandal embroiling the Federal Reserve is that its policies did not prevent officials from dealing in individual stocks. This is despite it being the repository of some of the most market-moving information on the planet, at a time when its actions have an outsize effect on the price of almost any asset. In failing to protect the Fed from allegations that its senior officials made questionable trades, its code has been proven unfit for purpose. The Fed’s chair, Jay Powell, has pledged a tightening of the code, which currently bars the trading of bank stocks but allows other dealing. He must ensure substantive changes to prevent the scandal from undermining public confidence in the Fed…”
October 7 – Bloomberg (Nancy Cook, Jennifer Jacobs and Saleha Mohsin): “President Joe Biden’s selection of a new Federal Reserve chair grew more complicated in the last week as Congress quarrels over spending, taxes and debt, while a scandal over stock trades by some top officials under Jerome Powell’s leadership could damage his prospects. What once seemed like an easy potential renomination for Powell -- a favorite of Treasury Secretary Janet Yellen, moderate Democrats and Republicans on the Senate Banking Committee -- has morphed into a problem for the White House as Senator Elizabeth Warren… and progressive groups call into question the trading activity.”
U.S. Bubble Watch:
October 8 – Bloomberg (Olivia Rockeman and Reade Pickert): “U.S. job growth in September was the slowest this year, signaling a tempering of the labor market recovery and complicating a potential decision by the Federal Reserve to begin scaling back monetary support before year end. Nonfarm payrolls increased 194,000 last month after an upwardly revised 366,000 gain in August… The unemployment rate fell to 4.8%, partly reflecting a decline in labor force participation among women. Meantime, average hourly earnings jumped.”
October 8 – Bloomberg (Olivia Rockeman and Reade Pickert): “U.S. job growth in September was the slowest this year, signaling a tempering of the labor market recovery and complicating a potential decision by the Federal Reserve to begin scaling back monetary support before year end. Nonfarm payrolls increased 194,000 last month after an upwardly revised 366,000 gain in August… The unemployment rate fell to 4.8%, partly reflecting a decline in labor force participation among women. Meantime, average hourly earnings jumped.”
October 5 – Wall Street Journal (Yuka Hayashi): “The U.S. trade deficit widened to a record in August as American consumers continued to show a strong appetite for imported goods such as pharmaceutical products, toys and clothing. The… trade gap in goods and services expanded to $73.3 billion in August from $70.3 billion in July as the Delta variant of Covid-19 and supply constraints weighed on global trade.”
October 7 – CNBC (Jeff Cox): “The total of Americans submitting jobless claims fell sharply last week as enhanced federal unemployment benefits wound down… Initial filings for unemployment benefits totaled a seasonally adjusted 326,000 for the week ended Oct. 2, below the 345,000 Dow Jones estimate and a drop from the previous week’s 364,000… The weekly total was the lowest level since Sept. 4 and reverses a trend of rising claims over the past three weeks.”
October 6 – Reuters (Lucia Mutikani): “U.S. private payrolls increased more than expected in September as COVID-19 infections started subsiding, boosting hiring at restaurants and other high-contact businesses. The ADP National Employment Report… supported expectations that job growth picked up last month… Private payrolls increased by 568,000 jobs last month, the ADP National Employment Report showed. Data for August was revised lower to show 340,000 jobs added instead of the initially reported 374,000.”
October 5 – Reuters (Lucia Mutikani): “U.S. services industry activity nudged up in September, but growth is being restrained by a persistent shortage of inputs and the resulting high prices as the pandemic drags on. The… (ISM) survey… reported that ‘ongoing challenges with labor resources, logistics, and materials are affecting the continuity of supply.’ Hopes for an easing in the supply chain bottlenecks were dashed by a resurgence in COVID-19 infections over summer... Ports in China and the United States are also experiencing congestion. ‘We don't expect supply-side constraints to start easing meaningfully until mid-2022,’ said Oren Klachkin, lead U.S. economist at Oxford Economics... ‘Solid demand and less Covid wariness will keep services growing, but the expansion will be capped by the supply side's limited ability to meet demand.’ The ISM's non-manufacturing activity index edged up to a reading of 61.9 last month from 61.7 in August.”
October 3 – Wall Street Journal (Orla McCaffrey): “House prices are rising at a record pace but incomes aren’t keeping up, which is making home ownership less and less affordable. The median American household would need 32.1% of its income to cover mortgage payments on a median-priced home… That is the most since November 2008, when the same outlays would eat up 34.2% of income. Supercharged home prices in markets across the country are canceling out the impact of modestly higher incomes and historically low interest rates…”
October 6 – CNBC (Diana Olick): “A sharp jump in mortgage interest rates over the past few weeks is taking its toll on mortgage demand. Total application volume fell nearly 7% last week compared with the previous week… Refinance demand, which is especially sensitive to weekly interest rate movements, fell to the lowest level in three months, down 10% last week compared with the previous week. Volume was 16% lower than the same week one year ago… Mortgage applications to purchase a home declined 2% for the week and were 13% lower than the same week one year ago.”
October 6 – Wall Street Journal (Lydia O’Neal): “Shortages of key construction materials are forcing some builders and contractors to turn to substitutes and hunt for alternative suppliers as they rush to meet high demand for new housing. Construction companies are looking for replacements and new sources for everything from wood paneling to ceiling joists to pipes, saying that potentially higher costs and added complications to design and construction can be preferable to putting a project on hold for months while waiting for planned supplies. Supply shortages stem from a series of supply-chain disruptions hitting industries around the world this year, from port congestion in Asia and the U.S. to labor shortages at factories.”
October 4 – Yahoo Finance (Aarthi Swaminathan): “Supply chain bottlenecks are squeezing businesses big and small. One expert explains why it’s so hard to iron out the major kinks affecting global trade. ‘There really is a perfect storm going on,’ Adam Compain, senior vice president at project44, a supply chain technology provider, told Yahoo Finance... Compain laid out three major reasons why ports are so backed up and there’s red-hot demand for truckers. ‘First and foremost is customer expectations have risen only in one direction — and that's up,’ explained Compain. ‘Second to that is a capacity constraint. There are limitations to the supply chain network in terms of the quantity of drivers that are available to ship things within the United States and abroad.’ Third, ‘things are complex in the supply chain,’ Compain said. In his view, the process of turning raw materials into a finished good and bringing it to a consumer's home across the globe relies on ‘a whole bunch of interdependencies,’ and ‘logistics has reached a point that the existing software data and tools to make that job a reality are really strained.’”
October 6 – Bloomberg (Kevin Crowley): “U.S. shale oil production will expand at a ‘modest rate’ over the next 18 months even as prices touch multiyear highs, according to BloombergNEF, leaving OPEC in a powerful position as the world cries out for more barrels. Producers are using cash flow to pay down debt and reward shareholders rather than invest in new drilling… Yet demand for energy is rising around the world. U.S. crude futures reached a seven-year high this week after OPEC and its allies declined to alter their supply agreement to raise output… U.S. production will reach 12.1 million barrels by the end of next year, up 440,000 barrels a day from the end of 2021, according to BNEF’s base case scenario. That’s lower than its pre-pandemic record high of 13 million from 2019.”
October 7 – Reuters (Lisa Baertlein, Jonathan Saul and Siddharth Cavale): “The Flying Buttress once glided across the oceans carrying vital commodities like grain to all corners of the world. Now it bears a different treasure: Paw Patrol Movie Towers, Batmobile Transformers and Baby Alive Lulu Achoo dolls. The dry bulk cargo ship has been drafted into the service of retail giant Walmart, which is chartering its own vessels in an effort to beat the global supply chain disruptions that threaten to torpedo the retail industry's make-or-break holiday season.”
October 5 – Bloomberg (Alexandre Tanzi): “Generation X, the oft-overlooked demographic group squeezed between the Baby Boomers and Millennials, has experienced a wealth boom in the U.S. since Covid-19 was declared a national emergency. During the pandemic, household wealth distribution has shifted from older generations to those who are reaching their peak earnings years, according to… the Federal Reserve. Gen Xers, who are age 41 to 56, saw robust gains in equities and pension entitlements, while their share of the nation’s consumer debt declined… As of June this year, Generation X held 28.6% of the nation’s wealth, up 3.9 percentage points from the first quarter of 2020... In dollar value, that translates into a 50% gain in their aggregate net worth -- the difference between a household’s assets and debts.”
Fixed-Income Bubble Watch:
October 2 – Bloomberg (Jack Pitcher): “Wall Street syndicate desks expect to see $90 billion to $100 billion of fresh U.S. investment-grade bond supply in October, with as much as $20 billion of that lining up next week. That’s higher than the $80 billion that priced in October of last year and significantly more robust than the $68 billion that came in 2019…”
October 3 – Wall Street Journal (Sebastian Pellejero): “U.S. companies have sold a record amount of junk-rated loans to raise money for dividends this year… Nonfinancial companies… have issued more than $72 billion worth of speculative-grade loans to pay dividends in 2021, according to S&P Global Market Intelligence’s LCD. That is already a full-year record in data going back to 2000, topping 2013’s previous high of $54.4 billion.”
October 7 – Bloomberg (Alex Tanzi and Liz Capo McCormick): “America’s super-rich hold fewer U.S. government and municipal securities than they’ve done for almost two decades, according to recent data from the Federal Reserve. The top 1% of households by income held $887 billion of those assets as of June, the smallest amount in 17 years and down from a peak of $1.5 trillion a decade ago.”
October 4 – Bloomberg (John Gittelsohn): “Deals by real estate investment trusts totaled $108 billion this year through September, beating the annual record as ample capital fueled transactions in the recovering economy, according to Jones Lang LaSalle Inc.”
China Watch:
October 4 – Bloomberg (Claire Boston and Alice Huang): “Another Chinese developer fell into crisis on Monday after failing to repay a maturing bond, adding to the strains of the nation’s heavily leveraged property firms following industry giant China Evergrande Group’s debt woes. Fantasia Holdings Group Co. didn’t repay a $205.7 million bond that was due Monday… Signs of stress in China’s property sector are spreading, as lower-rated developers face a surge in bond yields to a decade high.”
October 4 – Bloomberg (Sofia Horta e Costa and Rebecca Choong Wilkins): “A missed bond payment by a Chinese developer reignited investor angst about the health of the nation’s property sector on Tuesday. Chinese junk dollar bonds were poised for their biggest selloff in at least eight years amid renewed concern that authorities will do little to alleviate the credit crisis gripping the industry. Yields are near a decade high. Developer shares tumbled…”
October 6 – Wall Street Journal (Frances Yoon and Quentin Webb): “Shrinking apartment sales and an unexpected default have stoked fresh investor concerns about China’s property developers, causing a steep selloff in U.S. dollar bonds from many of the sector’s debt-laden companies. On Wednesday, …dozens of dollar bonds sold by Chinese real-estate companies tumbled in price, pushing yields on those bonds higher. The selldown extended sharp declines logged the previous day, reflecting increasing investor pessimism after luxury developer Fantasia Holdings Group Co. failed to repay $206 million in dollar bonds that matured on Monday. Some developers’ sales figures for September have also showed a significant drop in home-buyer demand…”
October 5 – Bloomberg: “China ordered its banks to ramp up funding to coal and energy companies, another step in its efforts to ease a power crunch and ensure supplies this winter. Banks and other financial institutions should prioritize lending to qualified mines and power plants so they can increase thermal coal and electricity output, China Banking and Insurance Regulatory Commission said… In order to maintain price stability, bank loans and financing are strictly banned from being used to speculate on commodities such as coal, steel and metals in the financial markets, the regulator said.”
October 6 – Bloomberg (Stephen Stapczynski): “China is urging its liquefied natural gas importers to procure more supply to fix its energy crisis, while providing little financial support for firms paying record-high rates for the super-chilled fuel. The government isn’t providing enough subsidies for recent purchases, making it difficult for the nation’s smaller gas distributors to meet the request to secure enough fuel before winter, according to traders with knowledge of the matter. While some firms are avoiding buying for now, they may ultimately have to bow to Beijing’s wishes. North Asian LNG spot prices surged to a record high this week as importers from China to the U.K. intensify competition for a shrinking pool of available winter supply.”
October 7 – Bloomberg: “Travel during China’s ‘Golden Week’ national vacation was down by a third on pre-pandemic levels, with government measures to contain sporadic coronavirus outbreaks prompting holidaymakers to spend closer to home. The number of trips taken on China’s roads on Wednesday was 34.1% below levels seen in 2019…, and 2.2% lower than last year.”
October 7 – Bloomberg (Allan Ray Restauro): “China's official manufacturing PMI entered into contraction territory in September 2021, the first time since February 2020. The official release indicated a reading of 49.6, below the 50 threshold for expansionary levels.”
October 7 – Reuters (Stella Qiu and Ryan Woo): “Activity in China’s services sector returned to growth in September as a major COVID-19 outbreak in the eastern province of Jiangsu receded, a private-sector survey showed… The Caixin/Markit services Purchasing Managers’ Index (PMI) rose to 53.4 from 46.7 in August, pulling away from the lowest level seen since the height of the pandemic last year. The 50-point mark separates growth from contraction on a monthly basis.”
October 6 – New York Times (Li Yuan): “This year has been unsettling for Chinese business. The ruling Communist Party has gone after the private sector industry by industry. The stock markets have taken a huge hit. The country’s biggest property developer is on the verge of collapse. But for some of the biggest names on Wall Street, China’s economic prospects look rosier than ever. BlackRock, the world’s biggest asset manager, urged investors to increase their exposure to China by as much as three times. ‘Is China investable?’ asked J.P. Morgan, before answering, ‘We think so.’ Goldman Sachs says ‘yes,’ too. Their bullishness in the face of growing uncertainty has puzzled China experts and drawn criticism from a wide political spectrum, from George Soros, the progressive investor, to congressional Republicans.”
Central Banker Watch:
October 6 – Financial Times (William Langley): “New Zealand has raised interest rates for the first time in seven years as concerns over rising property prices and inflation outweigh the importance of the Pacific nation’s battle to control the spread of coronavirus. The Reserve Bank of New Zealand became the third central bank of a developed economy to raise rates since the pandemic began, the latest indication of an acceleration of the global tightening of pandemic-era monetary stimulus. The RBNZ raised the country’s benchmark lending rate by 25 bps to 0.5%... and signalled that more tightening was likely.”
October 6 – Bloomberg (Dorota Bartyzel): “Poland unexpectedly raised borrowing costs for the first time since 2012, caving in to government and investor pressure to tackle soaring inflation that’s already triggered interest-rate hikes across eastern Europe. The central bank didn’t specify if Wednesday’s increase in the reference rate to 0.5% from a record-low 0.1% was a one-time move or the start of a tightening cycle.”
October 7 – Bloomberg (Jeff Sutherland and Tom Hancock): “Peru tightened monetary policy for a third straight month after inflation surged to its highest rate in 12 years and political volatility roiled the currency. The central bank lifted its benchmark rate half a percentage point, to 1.5%, matching the median forecast…”
October 7 – Reuters (Balazs Koranyi): “European Central Bank policymakers debated a bigger cut in asset purchases last month and some even argued that markets may have already prepared for the end of emergency support, the accounts of their Sept 9 meeting showed… ‘It was argued that a symmetric application of the (Pandemic Emergency Purchase Programme) framework would call for a more substantial reduction in the pace of purchases,’ the ECB said. ‘From this perspective, a pace of purchases similar to the level prevailing at the beginning of the year would be appropriate.’”
October 8 – Reuters (Wayne Cole): “Australia's central bank… warned that ‘exuberance’ in a red-hot housing market was encouraging a build-up of debt that might destabilise the financial system, urging banks to maintain lending discipline amid the boom. In its semi-annual Financial Stability Review, the Reserve Bank of Australia (RBA) said the banking system was generally sound and well capitalised, but a debt-fuelled surge in house prices needed to be watched.”
Global Bubble Watch:
October 6 – Financial Times (Cheng Ting-Fang and Lauly Li): “Manufacturers are warning that further disruptions to energy supplies in China would create havoc in the tech supply chain at a time when the industry is gearing up for peak production season, including that of the latest iPhones. Several companies including key Apple suppliers have already said they have had to halt or reduce operations at facilities in Jiangsu province, China’s industrial tech heartland, after local governments restricted the supply of electricity for industrial use until the end of the month. Cities in Jiangsu either told enterprises to stop using electricity entirely for the last week of September or set targets for manufacturers to reduce their energy use in the period by 10 to 30% from usual levels, several tech industry executives told Nikkei Asia.”
October 7 – Bloomberg (Megan Durisin): “The jump in global food prices to a decade high risks leading to even more expensive grocery bills, and the energy crisis is threatening to make things even worse. Harvest setbacks, strong demand and supply chain disruptions have sent a United Nations index of food costs up by a third over the past year. The latest leg up last month came as prices for almost all types of foodstuffs gained, adding to inflationary headaches for consumers and central banks. Soaring energy bills are now adding to the problem, escalating costs of producing fertilizers and transporting goods around the world, and making the run-up more reminiscent of the price spikes seen during food crises in 2008 and 2011. The energy rally could also prompt more crops to be diverted from food to making biofuels, the UN warned.”
October 3 – CNBC (Ian Thomas): “The semiconductor chip shortage that is hamstringing the production of products ranging from cars and computers to appliances and toothbrushes will extend into 2022 and potentially beyond that, the CEO of semiconductor company Marvell Technology said. ‘Right now, every single end market for semiconductors is up simultaneously; I’ve been in this industry 27 years, I’ve never seen that happen,’ said Marvell CEO Matt Murphy… ‘If it stays business as usual, and everything’s up and to the right, this is going to be a very painful period, including in 2022 for the duration of the year.’”
October 6 – Financial Times (James Kynge in Hong Kong and Amy Kazmin): “Acute power shortages in China and India, the two biggest drivers of global growth, are casting a pall over Asia’s economic prospects and raising the risk that inflationary pressures may ripple through the region. Several leading China economists expect growth in the world’s second-largest economy to slow appreciably in coming months as power shortages hit industrial output and a property sector downturn further reduces activity… But India too is being hit by an acute shortage of coal, which is crucial for generating the electricity that underpins growth. As of October 3, India’s 135 thermal power plants had just four days’ worth of coal stocks…”
October 8 – Reuters (Sudarshan Varadhan): “North Indian states have suffered electricity cuts and face further outages because of a lack of coal, an analysis of government data and interviews with residents found, contradicting government assurances there is enough power. The shortages in India - the world's largest coal consumer after China - follow widespread outages in neighbouring China, which has shut factories and schools to manage the crisis. Over half of India's 135 coal-fired power plants, which in total supply around 70% of India's electricity, have fuel stocks of less than three days…”
October 3 – Bloomberg (Lars Paulsson, Jesper Starn and Lars Erik Taraldsen): “As the frontier of Europe’s energy crisis moves north, the Nordic region faces a worsening power crisis with dwindling water reservoirs hampering the generation of hydroelectric power. Nordic power prices were five times higher in September than a year ago. That’s hitting everyone from power-hungry factories and miners, to students struggling with their bills. Inflation is rocketing. Europe’s northern corner can’t hide from the global shortage of natural gas and coal, with falling water reserves curbing the region’s most important source of electricity.”
October 5 – Bloomberg (Sam Kim): “South Korea’s inflation came in faster than expected in September, adding support to the view that the central bank will raise interest rates again this year. Consumer prices rose 2.5% from a year earlier… The report underscores growing price pressures in the economy as the recovery continues, and was supported further by higher energy and food prices…”
October 3 – Associated Press: “Hundreds of world leaders, powerful politicians, billionaires, celebrities, religious leaders and drug dealers have been hiding their investments in mansions, exclusive beachfront property, yachts and other assets for the past quarter-century, according to a review of nearly 12 million files obtained from 14 firms located around the world. The report released Sunday by the International Consortium of Investigative Journalists involved 600 journalists from 150 media outlets in 117 countries. It’s being dubbed the ‘Pandora Papers’ because the findings shed light on the previously hidden dealings of the elite and the corrupt, and how they have used offshore accounts to shield assets collectively worth trillions of dollars. The more than 330 current and former politicians identified as beneficiaries of the secret accounts…”
EM Watch:
October 4 – Reuters (Tom Arnold): “Higher energy prices are fanning inflation in several emerging markets, testing the resolve of their central banks and risking stymieing growth in Hungary, Poland and the Czech Republic and more currency weakness in Turkey, analysts say. In a bold response to the price pressures, the Czech National Bank (CNB)… raised its main interest rate by 75 bps, its biggest hike since 1997. It cited rising energy prices as well as supply-chain disruptions and domestic factors like higher costs in owner-occupied housing and services. The country's prime minister said the hike would damage the economy, illustrating the dilemma emerging central banks face as they try to head off inflation, already running above target levels, while sustaining fragile economic recoveries from the COVID-19 pandemic.”
October 3 – Financial Times (Amy Kazmin): “India is the latest country to face a severe power crisis that threatens to undermine its recovery from the pandemic, with authorities warning that power plants have run perilously low on coal. According to India’s power ministry, the 135 thermal power plants of Asia’s third-largest economy had an average of just four days of coal stocks as of Friday, down from 13 days of supplies in early August. Of the plants monitored daily, more than half have less than three days of stocks.”
October 6 – Bloomberg (Subhadip Sircar and Vrishti Beniwal): “Higher oil prices and coal shortages risk fanning inflation and slowing economic growth in India ahead of a central bank meeting, while punishing the nation’s currency and bonds. A lack of coal means factories could shut, while forcing India to import more fossil fuels at a time when crude prices at a seven-year high are already weighing on the energy hungry nation. The threat of inflation and worsening external deficit have led to a 14 bps surge in the nation’s benchmark bond yields over the past two weeks and a decline in the rupee to its lowest since April.”
October 8 – Bloomberg (Andrew Rosati): “Brazil’s consumer prices rose less than expected in September, supporting the central bank’s view that inflation peaked just above 10% and will start to slow as rising borrowing costs cool down the economy. Inflation accelerated to 10.25% from a year ago, its fastest pace since February 2016, and to 1.16% from the month prior…”
October 4 – Reuters (Onur Ant): “Turkey’s consumer inflation accelerated in September, driven by a surge in the cost of energy. A core gauge closely watched by the central bank also edged higher. Prices rose an annual 19.58% through last month, up from 19.25% in August… Prices rose 1.25% from August, compared with the median estimate of 1.27% in a separate survey.”
October 3 – Reuters (Azra Ceylan and Jonathan Spicer): “President Tayyip Erdogan said… Turkey had ordered agricultural cooperatives to open about 1,000 new markets across the country to provide ‘suitable’ prices for consumer goods in the face of nearly 20% annual inflation. Construction would quickly begin on the shops to provide Turks ‘cheap and high quality goods’ and to ‘balance out markets’, he said, after consumer price rises to levels well above a 5% official target.”
Europe Watch:
October 3 – Financial Times (Erika Solomon): “Germany’s leading political parties held competing rounds of exploratory coalition talks on Sunday, aimed at winning over potential partners to form the government that will take the reins from Chancellor Angela Merkel after 16 years in power. Both the Social Democrats (SPD), who won the largest share of votes at about 25.7%, and Merkel’s Christian Democrats, who came second, are trying to woo the third- and fourth-placed parties: the Greens, with 14.8% of the vote, and the pro-business Free Democrats (FDP), with 11.5%.”
October 6 – Associated Press: “Factory orders in Germany plummeted 7.7% in August compared with the previous month, led by much lower demand from countries outside the eurozone… The drop in orders, a leading indicator for Europe’s biggest economy, followed month-on-month gains of 4.6% in June and 4.9% in July. The Economy Ministry said that orders from inside Germany were down 5.2%, while those from non-eurozone countries were off 15.2%.”
October 5 – New York Times (Jack Ewing): “In Germany, where one in four jobs depends on exports, the crisis gumming up the world’s supply chains is weighing heavily on the economy, which is Europe’s largest and a linchpin to global commerce. Recent surveys and data point to a sharp slowdown of the German manufacturing powerhouse, and economists have begun to predict a ‘bottleneck recession.’ Almost everything that German factories need to operate is in short supply, not just computer chips but also plywood, copper, aluminum, plastics and raw materials like cobalt, lithium, nickel and graphite, which are crucial ingredients of electric car batteries.”
October 4 – Reuters (Paul Carrel): “Investor morale in the euro zone fell for the third month in a row in October and hit its lowest level since April… Sentix's index for the euro zone fell to 16.9 from 19.6 in September… A current conditions index fell to 26.3 from 30.8. An expectations index fell to 8.0 from 9.0, dropping for the fifth month in a row to hit its lowest level since May 2020.”
Japan Watch:
October 5 – Reuters (Sakura Murakami and Kiyoshi Takenaka): “Japan's new government signaled… a more assertive position on China's aggressive posture towards self-ruled Taiwan, suggesting it would consider options and prepare for ‘various scenarios’, while reaffirming close U.S. ties. Taiwan and broader relations with China are likely to dominate security policies and foreign relations from the outset of new Prime Minister Fumio Kishida's administration.”
Social, Political, Environmental, Cybersecurity Instability Watch:
October 5 – Wall Street Journal (Ann M. Simmons and Georgi Kantchev): “Thawing earth once thought to be permanently frozen is springing to life and threatening a crucial chunk of Russia’s economy. The melting of the thick layer of the earth known as permafrost is a result of climate change, according to scientists and Russia government research. Two-thirds of the country sits on such soil, including much of its oil and gas infrastructure. Since 1976, Russia’s average temperature has risen 0.92 degree Fahrenheit per decade, or 2½ times the global pace… Mines and plants are experiencing increasing corrosion leaks and cracks, stemming in large part from defrosting ground. In the pipeline industry, braces and other mechanisms, previously anchored into permafrost, often corrode, twist and bend when the earth below changes…”
Levered Speculation Watch:
October 8 – Bloomberg (Heather Perlberg, Matt Robinson and Sridhar Natarajan): “A U.S. investigation into the collapse of Bill Hwang’s Archegos Capital Management is examining whether the firm engaged in market manipulation. The U.S. Securities and Exchange Commission is scrutinizing the firm’s trading activity, including whether it concealed the size of its bets on public companies, according to people familiar with the matter. Authorities are reviewing whether Archegos bought multiple stakes in the same companies across several banks in an effort to avoid triggering public disclosure rules. In aggregate, Hwang’s positions were massive.”
Geopolitical Watch:
October 6 – Associated Press (Huizhong Wu and David Rising): “With record numbers of military flights near Taiwan over the last week, China has been showing a new intensity and military sophistication as it steps up its harassment of the island it claims as its own and asserts its territorial ambitions in the region. China’s People’s Liberation Army flew 56 planes off the southwest coast of Taiwan on Monday, setting a new record and capping four days of sustained pressure involving 149 flights. All were in international airspace, but prompted Taiwanese defense forces to scramble in response and raised fears that any misstep could provoke an unintended escalation.”
October 3 – Bloomberg (Cindy Wang and Jacob Gu): “The U.S. called on China to halt its ‘provocative’ pressure on Taiwan after a record number of daily incursions by Chinese warplanes, saying the military actions are destabilizing and risk leading to ‘miscalculations.’ ‘The U.S. commitment to Taiwan is rock solid and contributes to the maintenance of peace and stability across the Taiwan Strait and within the region,’ State Department spokesman Ned Price said in a statement.”
October 4 – The Hill (Ellen Mitchell): “Taiwan is preparing for potential war with China following a series of increasingly aggressive military activity from Beijing, with Taipei’s foreign minister warning that should the nation attack, it would ‘suffer tremendously.’ China on Monday sent 52 military aircraft into Taiwan’s air defense identification zone, the largest military provocation seen yet. In anticipation of further aggression, the self-ruled island is preparing to repel any strike and has asked Australia to increase intelligence sharing and security cooperation, Taiwanese Foreign Minister Joseph Wu told the Australian Broadcast Corporation's ‘China Tonight.’ ‘The defense of Taiwan is in our own hands, and we are absolutely committed to that,’ Wu told ABC's Stan Grant… ‘I’m sure that if China is going to launch an attack against Taiwan, I think they are going to suffer tremendously as well.’”
October 7 – Bloomberg (Peter Martin and Samson Ellis): “The U.S. has had troops in Taiwan training local forces to better defend themselves in case of attack by China, according to a U.S. defense official, an acknowledgment that could challenge Washington’s recent thaw with Beijing. The official… confirmed an earlier report by the Wall Street Journal that more than two dozen American service members, including special forces, have been in Taiwan for more than a year… The deployment of foreign forces on Taiwan is one of six conditions Chinese military commanders have set for launching a military strike, according to a state media report in April 2020…”
October 5 – Financial Times (Kathrin Hille and Demetri Sevastopulo): “Taiwan’s defence minister has warned that China will be fully capable of invading the island by 2025, in the government’s first clear message to the public that the country faces a threat of war. Chiu Kuo-cheng issued the warning after almost 150 Chinese warplanes operated in international airspace near Taiwan between Friday and Monday. The current situation is really the most dangerous I have seen in my more than 40 years in the military,’ Chiu said in a question-and-answer session with lawmakers about a NT$240bn ($8.6bn) special defence budget for anti-ship missiles and warships. ‘If they want to attack now, they are already capable. But they have to calculate at what cost it would come and what results it would have,’ Chiu said. ‘From 2025, they will already have lowered the cost and the losses to the lowest possible level, so . . . they will have the complete capability.’”
October 4 – Reuters (Ben Blanchard): “Taiwan falling to China would trigger ‘catastrophic’ consequences for peace in Asia, President Tsai Ing-wen wrote in a piece for Foreign Affairs…, and if threatened Taiwan will do whatever it takes to defend itself. Taiwan, which is claimed by China as its sovereign territory, has faced a massive stepping up of pressure from Beijing since Friday, with 148 Chinese air force aircraft flying into Taiwan's air defence zone over a four-day period. China has blamed the United States, Taiwan's most important international backer and arms supplier, for the rise in tensions, while Taiwan has called China the ‘chief culprit’ in the current situation. Writing in Foreign Affairs, Tsai said as countries increasingly recognise the threat China's Communist Party poses, they should understand the value of working with the island.”
October 6 – Reuters (Akriti Sharma): “U.S. Secretary of State Antony Blinken says the U.S. wants China to act ‘responsibly’ when it comes to addressing the potential impacts of China Evergrande Group's financial crisis… ‘China has to make sovereign economic decisions for itself, but we also know that what China does economically is going to have profound ramifications, profound effects, on literally the entire world because all of our economies are so intertwined,’ Blinken said… ‘So certainly when it comes to something that could have a major impact on the Chinese economy we look to China to act responsibly and to deal effectively with any challenges,’ the report quoted Blinken as saying.”
October 7 – Reuters (John Revill and Steve Holland): “The United States and China have agreed in principle for their presidents to hold a virtual meeting before year's end…, after high-level talks meant to improve communication between the two big powers.The closed-door meeting at an airport hotel in the Swiss city of Zurich between U.S. national security adviser Jake Sullivan and China's top diplomat, Yang Jiechi, was their first face-to-face encounter since an unusually public and acrid airing of grievances in Alaska in March.”