From Thursday’s Bloomberg article, “Virologists have detected almost 100 cases linked to the variant in the country to date…” By Friday, there were individual cases reported in Hong Kong, Brussels and Israel, all travelers from South Africa, along with a number of infections in Botswana. Friday from Bloomberg: “Early PCR test results showed that 90% of 1,100 new cases reported Wednesday in the South African province that includes Johannesburg were caused by the new variant.” “This new variant, B.1.1.529 seems to spread very quick! In less than 2 weeks now dominates all infections following a devastating Delta wave in South Africa.”
It could take scientists several weeks to better understand what the world is dealing with.
November 26 – Financial Times (Clive Cookson and Oliver Barnes): “The 50 mutations on the new B.1.1.529 variant… include more than 30 on the spike protein, the exposed part of the virus that binds with human cells. These changes could make it more transmissible than the dominant Delta variant and more likely to evade the immune protection conferred by vaccines or prior infection. Scientists are concerned for two main reasons. One is epidemiological and relates to the speed with which the variant that emerged this month is spreading in South Africa, particularly in Gauteng province... Daily cases have more than tripled in South Africa since Tuesday, with 2,828 cases recorded on Friday. Early testing results indicated that 90% of the new cases on Wednesday in Gauteng were caused by the new variant… The other cause for concern is its highly unusual genetic profile. Jeffrey Barrett, director of the Covid-19 Genomics Initiative at the Wellcome Sanger Institute, described Omicron as ‘an unprecedented sampling’ of mutations from four earlier variants of concern: Alpha, Beta, Gamma and Delta. There are other genetic changes that have not been seen before, whose significance is as yet unknown, he added. Worryingly, said Jacob Glanville, a computational immunologist and founder of California therapeutics company Centivax, 15 of the mutations are on the ‘receptor binding domain’ — which acts like a ‘grappling hook’ for the Sars-Cov-2 virus to enter human cells. These mutations help the virus circumvent the body’s immune defences because it is trained by vaccines or prior infection to recognise and fight the original Wuhan strain. By comparison, the Delta variant which accounts for almost all sequenced cases worldwide dented the effectiveness of vaccines with just three mutations in this region.”
November 26 – Business Insider (Aria Bendix): “South African researchers identified the first Omicron case on November 9, then reported the variant to the WHO on Wednesday. Scientists are hopeful that they spotted the variant early, since the majority of known cases are still concentrated in southern Africa… Still, a number of markers suggest that Omicron is highly transmissible relative to other coronavirus strains. For one, South Africa's coronavirus cases have risen sharply over the last few weeks: Average daily cases have risen 13-fold since the variant was first discovered on November 9, from around 275 to 3,700 cases per day. Omicron also contains several worrisome mutations found in other variants of concern — including Delta and Alpha — that could help it spread, render vaccines less effective, or potentially lead to more severe disease. The new variant carries some unfamiliar mutations, as well. ‘There are a number of mutations that we don't have any information about,’ Jetelina said. ‘They've never seen them on previous variants of concern. So I think one of the first questions is: What are these? Do we need to worry about them or not?’ So far, scientists have identified 32 mutations on the variant’s spike protein — the sharp, crown-like bumps on the surface of the virus that help it invade our cells. Other variants of concern have had fewer spike mutations.”
November 26 – Bloomberg: “Based on omicron’s mutation profile, partial immune escape is likely, the European Centre for Disease Prevention and Control said in a threat assessment report Friday. The EU’s health agency is among the first official authorities to acknowledge that vaccines may not work well against the new strain. ‘The omicron variant is the most divergent variant that has been detected in significant numbers during the pandemic so far, which raises concerns that it may be associated with increased transmissibility, significant reduction in vaccine effectiveness and increased risk for reinfections,’ the ECDC said.”
Market reaction was swift and, in many cases, brutal. Pundits suggested panicked markets were overreacting. There is as yet no evidence of more severe symptoms from Omicron, and South Africa’s early recognition and communication offer the possibility of more successful global containment efforts. The U.K. and European Union moved quickly to restrict travel from South Africa, followed by Singapore, Japan, the U.S., Canada and others.
Once again, the wily Covid virus boasts ghostly timing. Omicron barges in with de-risking/deleveraging and global Crisis Dynamics attaining pivotal momentum. And with contagion rapidly enveloping the emerging markets (EM), disaster strikes for the vulnerable South African domino already in line for trouble.
The South African rand this week sank 3.4%, increasing 2021 losses to 9.8%. South African 10-year yields jumped 19 bps Friday (high since April 2020), boosting the week’s yield spike to 43 bps. South African CDS Friday surged 25 (43 for the week) to 252 bps – the high since March.
An index of EM CDS surged 19 Friday - the largest one-day rise since September 2020 - to 221 bps, the high back to October 2020. EM CDS surged 34 for the week, the biggest weekly gain since September 2020. Friday saw sovereign CDS surge 17.5 in Brazil to 268 bps (high since June 2020), 17.5 in Colombia to 218 bps (May 2020), and nine in Chile to 99 bps (May 2020). For the week, CDS jumped 26 bps in Brazil, 32 bps in Colombia, 27 bps in Mexico, and 11 bps in Indonesia.
November 25 – Wall Street Journal (Jared Malsin and Anna Hirtenstein): “A currency crisis here is battering Turks’ confidence in their government’s ability to manage the economy, causing droves of people to buy U.S. dollars and sending crowds of people into the streets to oppose President Recep Tayyip Erdogan’s policies. Riot police lined the streets in parts of Istanbul as the country braced for a third night of scattered protests over Mr. Erdogan’s inability to stop a precipitous drop in the Turkish lira. The lira’s depreciation has undermined nearly two decades of economic gains that had lent Turks a sense that they were ascending into the world’s club of top economies. Such protests have been rare since Mr. Erdogan concentrated power following a 2016 coup attempt…”
The last thing Turkey needed was a stiff forearm shove toward a full-fledged financial and economic crisis. The Turkish lira sank another 2.8% Friday, pushing losses for the week to 8.9% - for the month to 22.1% and for 2021 to about 40%. Turkey’s 10-year (lira) yields spiked 80 bps this week, trading above 20% for the first time since May 2019. Turkey CDS surged 28 Friday (58 for the week) to a one-year high 504 bps. For a country with a population of 84 million – that saw living standards and expectations inflate right along with its Credit Bubble – the collapse is turning increasingly desperate.
Mexico is another key EM domino – with self-inflicted wounds placing it directly in the line of fire.
November 24 – Financial Times (Christine Murray and Eric Platt): “Mexico’s president unnerved financial markets on Wednesday by nominating an obscure public sector economist to head the country’s central bank, causing the peso to slide to its lowest level since March. The announcement came a day after unexpected news that President Andrés Manuel López Obrador had withdrawn his previous nominee Arturo Herrera — a former finance minister better known to investors. At his morning news conference, López Obrador gave little explanation for his change of heart but tried to calm fears that he wants to interfere in the bank’s policymaking.”
The Mexican peso sank 5.0% this week, boosting y-t-d losses to 9.2%. Mexico’s local currency yields jumped 21 bps to 7.68%, the high since the March 2020 market crisis. Mexico’s dollar bond yields rose 16 bps to 3.16% (high since March). Mexico CDS jumped 14 Friday to 125 bps (October 2020), with the week’s 27 bps jump the largest gain since June 2020. Mexican stocks dropped 2.6% this week.
Fragile Brazil’s dollar bond yields surged another 34 bps this week to 4.99%, the high since June 2020. Brazil’s mid-November annual inflation jumped to 10.73%. From Goldman Sachs chief Latin America economist Alberto Ramos (from Bloomberg): “Overall, inflation is now very generalized with overwhelming evidence of significant second-round effects.”
So-called “strongmen” leaders from Ankara to Mexico City and beyond have not taken inflationary surges seriously. They act as if the world hasn’t changed from earlier halcyon days of seemingly endless global liquidity and yield-chasing EM “hot money” inflows. Especially these days, there is no overstating the critical role played by disciplined, principled, and independent central banking. Enormous speculative leverage throughout the emerging markets left no room for error. Tons of erroneous policies and market misperceptions created currency and bond market fragilities, with Crisis Dynamics having now been unleashed.
Bubbles at their core are pernicious mechanisms for wealth redistribution and destruction. Geopolitical risk is a key Bubble manifestation, with the current most protracted global Bubble unmatched in this regard. Competing head-to-head with Covid in terms of stubborn persistency, there was similarly no relief this week from mounting geopolitical risks.
November 26 – Wall Street Journal (Ann M. Simmons): “Ukrainian President Volodymyr Zelensky accused Russia of backing a plan to overthrow him, in remarks that threaten to aggravate tense relations between Kyiv and Moscow as Western officials warn of a possible Russian invasion of Ukraine. Mr. Zelensky told reporters Friday that he had received information through Ukrainian security services that a coup would be undertaken on Dec. 1-2, according to Ukraine’s national news agency, Ukrinform. He said the Ukrainian government had intelligence as well as audio intercepts.”
November 22 – Bloomberg (Alberto Nardelli and Jennifer Jacobs): “The U.S. has shared intelligence including maps with European allies that shows a buildup of Russian troops and artillery to prepare for a rapid, large-scale push into Ukraine from multiple locations if President Vladimir Putin decided to invade… That intelligence has been conveyed to some NATO members over the past week to back up U.S. concerns about Putin’s possible intentions and an increasingly frantic diplomatic effort to deter him from any incursion, with European leaders engaging directly with the Russian president. The diplomacy is informed by an American assessment that Putin could be weighing an invasion early next year as his troops again mass near the border.”
The Russian ruble was slammed 2.8% this week. Russia’s 10-year yields traded to an almost three-year high 8.64% in Tuesday trading, before ending the week up 10 bps to 8.46%. Russia CDS jumped 12 Friday (24 for the week) to a one-year high 124 bps. Russian stocks were pummeled 5.1%. Ukraine dollar bond yields surged 30 bps Friday - and 91 bps for the week - to 8.31% (high since May 2020). Ukraine CDS jumped 33 Friday – 66 bps for the week – to 554 bps, the high back to April 2020.
With Crisis Dynamics now in full swing within the global “Periphery,” the “Core” is in heightened jeopardy. European stocks were hammered this week. France’s CAC40 sank 4.8% in Friday trading (down 5.2% for the week), with major indices falling 4.2% in Germany (down 5.6%), 5.0% in Spain (down 4.0%), 4.6% in Italy (down 5.4%), and 3.6% in the U.K. (down 2.5%). Ominously, Italian bank stocks were slammed 7.8%, with European banks sinking 5.9%. An index of bank (subordinate) debt CDS surged 19 this week to 131 bps, the largest increase in over a year.
Greek yields jumped 13 bps to 1.28%, trading Thursday to the high since June 2020. Italian yields surged to 1.12% in Wednesday trading, before ending the week up 11 bps at 0.97%. With German bund yields increasing only one basis point, European periphery yield spreads (to bunds) widened meaningfully this week.
JPMorgan CDS jumped 4.8 Friday (6 for the week) to a 13-month high 52.25 bps, the largest one-day increase since June 11, 2020. Bank of America CDS rose five Friday to the high since July 2020. Highflying U.S. bank stocks sank 4.2% Friday, in what could prove a wake-up call for stocks that have remained oblivious to mounting risks.
“Core” U.S. corporate Credit is indicating vulnerability. Investment-grade CDS jumped 4.5 Friday (largest gain in two months) to an eight-month high 57.5 bps. High-yield CDS surged 20 (biggest gain since March) to a one-year high 327 bps. High-yield bond funds suffered outflows over the past week of a notable $3.3 billion.
The week brought no respite to the wild west Treasury marketplace. Ten-year Treasury yields rose to 1.69% in Wednesday trading, only to reverse sharply lower Friday to close the week down seven bps to 1.48%. The market Wednesday priced in 2.8 rate increases by the Fed’s December 14, 2022 meeting. It had dropped to 2.1 by Friday’s close.
It was definitely Black Friday for crude and some other commodities. WTI was slammed $10.24, or 13%, to an 11-week low $68.15. The Bloomberg Commodities Index dropped 2.2%. If there were any doubts, the cryptocurrencies are vulnerable speculative vehicles. Bitcoin was hammered for more than 7%.
Where is it safe these days for levered speculation? It is a fundamental CBB tenet that contemporary finance works wonderfully, so long as leverage and speculation are expanding. It does not function well in reverse. Global “risk off” de-risking/deleveraging took a meaningful leap forward this week. China’s historic Bubble continues to deflate, while virulent contagion ruthlessly targets the weak and vulnerable throughout the emerging markets. And, importantly, a bout of risk aversion Friday slammed the “Core.” At this point, a lot has to go right to restrain energized Crisis Dynamics hellbent on engulfing an unprepared world.
For the Week:
The S&P500 fell 2.2% (up 22.3% y-t-d), and the Dow slumped 2.0% (up 14.0%). The Utilities declined 1.0% (up 6.5%). The Banks lost 1.1% (up 37.6%), and the Broker/Dealers fell 1.6% (up 27.1%). The Transports declined 1.8% (up 29.7%). The S&P 400 Midcaps dropped 3.2% (up 20.5%), and the small cap Russell 2000 sank 4.1% (up 13.7%). The Nasdaq100 slumped 3.3% (up 24.3%). The Semiconductors sank 4.0% (up 34.4%). The Biotechs dipped 0.5% (down 5.9%). With bullion down $43, the HUI gold index dropped 4.3% (down 14.6%).
Three-month Treasury bill rates ended the week at 0.0375%. Two-year government yields slipped a basis point to 0.50% (up 38bps y-t-d). Five-year T-note yields declined six bps to 1.16% (up 80bps). Ten-year Treasury yields dropped seven bps to 1.48% (up 56bps). Long bond yields fell nine bps to 1.83% (up 18bps). Benchmark Fannie Mae MBS yields dipped two bps to 2.01% (up 66bps).
Greek 10-year yields jumped 13 bps to 1.28% (up 66bps y-t-d). Ten-year Portuguese yields rose five bps to 0.35% (up 32bps). Italian 10-year yields surged 11 bps to 0.97% (up 43bps). Spain's 10-year yields gained five bps to 0.43% (up 38bps). German bund yields added a basis point to negative 0.34% (up 23bps). French yields increased three bps to 0.04% (up 37bps). The French to German 10-year bond spread widened 3 to 38 bps. U.K. 10-year gilt yields fell five bps to 0.83% (up 63bps). U.K.'s FTSE equities index fell 2.5% (up 9.0% y-t-d).
Japan's Nikkei Equities Index dropped 3.3% (up 4.8% y-t-d). Japanese 10-year "JGB" yields slipped a basis point to 0.07% (up 5bps y-t-d). France's CAC40 sank 5.2% (up 21.4%). The German DAX equities index slumped 5.6% (up 11.2%). Spain's IBEX 35 equities index fell 4.0% (up 4.1%). Italy's FTSE MIB index sank 5.4% (up 16.3%). EM equities were under pressure. Brazil's Bovespa index declined 0.8% (down 14.1%), and Mexico's Bolsa fell 2.6% (up 12.3%). South Korea's Kospi index declined 1.2% (up 2.2%). India's Sensex equities index dropped 4.2% (up 19.6%). China's Shanghai Exchange was little changed (up 2.6%). Turkey's Borsa Istanbul National 100 index gained 2.2% (up 20.3%). Russia's MICEX equities index sank 5.1% (up 15.9%).
Investment-grade bond funds saw inflows of $1.528 billion, while junk bond funds had outflows of $3.315 billion (from Lipper).
Federal Reserve Credit last week jumped $24.8bn to a record $8.651 TN. Over the past 115 weeks, Fed Credit expanded $4.925 TN, or 132%. Fed Credit inflated $5.841 Trillion, or 208%, over the past 472 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week gained $7.2bn to $3.475 TN. "Custody holdings" were up $16bn, or 0.5%, y-o-y.
Total money market fund assets rose $22.4bn to $4.598 TN. Total money funds increased $274bn y-o-y, or 6.3%.
Total Commercial Paper declined $13.1bn to $1.103 TN. CP was up $119bn, or 12.1%, year-over-year.
Freddie Mac 30-year fixed mortgage rates were unchanged at 3.10% (up 38bps y-o-y). Fifteen-year rates increased three bps to 2.42% (up 14bps). Five-year hybrid ARM rates declined two bps to 2.47% (down 69bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down three bps to 3.17% (up 20bps).
Currency Watch:
For the week, the U.S. Dollar Index was little changed at 96.09 (up 6.9% y-t-d). For the week on the upside, the Japanese yen increased 0.5%, the Swiss franc 0.5%, and the euro 0.2% For the week on the downside, the Mexican peso declined 5.0%, the South African rand 3.4%, the New Zealand dollar 2.6%, the Swedish krona 2.3%, the Norwegian krone 1.8%, the Australian dollar 1.6%, the Canadian dollar 1.2%, the British pound 0.9%, the Singapore dollar 0.8%, and the South Korean won 0.7%. The Chinese renminbi declined 0.1% versus the dollar (up 2.09% y-t-d).
Commodities Watch:
November 22 – Bloomberg (Grant Smith, Salma El Wardany and Jennifer A. Dlouhy): “OPEC+ officials warned they’re likely to respond to plans by the world’s largest oil consumers to release oil from their strategic stockpiles, setting up a fight for control of the global energy market… OPEC+ delegates said the release of millions of barrels from the inventories of their biggest customers is unjustified by current market conditions and the group may have to reconsider plans to add more oil production when they meet next week.”
The Bloomberg Commodities Index fell 2.2% (up 28.2% y-t-d). Spot Gold declined $43 to $1,803 (down 5.1%). Silver sank 5.9% to $23.16 (down 12.3%). WTI crude sank $7.79 to $68.15 (up 41%). Gasoline dropped 8.3% (up 44%), while Natural Gas surged 7.5% (up 115%). Copper fell 2.4% (up 22%). Wheat added 0.7% (up 31%), and Corn jumped 2.6% (up 22%). Bitcoin sank $4,285 or 7.4%, this week to $53,717 (up 85%).
Coronavirus Watch:
November 25 – Bloomberg: “Scientists in South Africa are studying a recently identified new coronavirus variant of concern, stoking fears the country may face a potentially severe fourth wave that could spread internationally. The new discovery, called B.1.1529 until a Greek letter is assigned, carries an unusually large number of mutations and is ‘clearly very different’ from previous incarnations, Tulio de Oliveira, a bio-informatics professor who runs gene-sequencing institutions at two South African universities, said… ‘Here is a mutation variant of serious concern,’ Health Minister Joe Phaahla said…”
November 22 – Bloomberg (Jonathan Levin): “The latest U.S. Covid-19 wave is taking its toll on some states’ intensive-care units, with several parts of the country seeing outbreaks that are as bad as ever. In 15 states, patients with confirmed or suspected Covid are taking up more ICU beds than a year earlier, according to Department of Health and Human Services data. Colorado, Minnesota and Michigan have 41%, 37% and 34% of ICU beds occupied by Covid-19 patients, respectively, the data show.”
November 22 – Bloomberg (Jonathan Levin): “The latest U.S. Covid-19 wave is taking its toll on some states’ intensive-care units, with several parts of the country seeing outbreaks that are as bad as ever. In 15 states, patients with confirmed or suspected Covid are taking up more ICU beds than a year earlier, according to Department of Health and Human Services data. Colorado, Minnesota and Michigan have 41%, 37% and 34% of ICU beds occupied by Covid-19 patients, respectively, the data show.”
November 24 – Financial Times (Jamie Smyth and Caitlin Gilbert): “Twenty months into a pandemic that has claimed almost 770,000 American lives and nearly a year after Covid-19 vaccinations became available, US health experts warn that a fifth wave of infections risks overwhelming health systems in the worst-affected states. Fears of another surge in infections come on the cusp of the Thanksgiving holiday, when tens of millions of Americans will travel to reconnect with their families, some of them for the first time since the start of the pandemic.”
November 24 – Reuters (Francesco Guarascio and Jason Hovet): “Coronavirus infections broke records in parts of Europe on Wednesday, with the continent once again the epicentre of a pandemic that has prompted new curbs on movement and seen health experts push to widen the use of booster vaccination shots. Slovakia, the Czech Republic, the Netherlands and Hungary all reported new highs in daily infections as winter grips Europe… New cases have jumped 23% in the Americas in the last week, mostly in North America, in a sign that region might also face a resurgence of infections.”
November 22 – Bloomberg (Arne Delfs and Naomi Kresge): “Chancellor Angela Merkel said the latest surge in Covid-19 infections is worse than anything Germany has experienced so far and called for tighter restrictions to help check the spread. Merkel told officials from her Christian Democratic party… the situation is ‘highly dramatic’ and warned that some hospitals would soon be overwhelmed unless the fourth wave of the pandemic is broken, according to a person familiar with her remarks.”
Global Crisis Watch:
November 26 – Bloomberg (Maria Elena Vizcaino and Robert Fullem): “Volatility in developed-market currencies spiked by the most in a year as traders digest the impact of the new coronavirus variant discovered in South Africa. Gauges of euro and yen volatility climbed the most since October 2020, a time when investors were girding for the U.S. presidential election.”
November 26 – Bloomberg (Prinesha Naidoo and Monique Vanek): “South Africa’s recovery from its deepest economic contraction in almost three decades risks being derailed by the identification of a new coronavirus variant that prompted several European nations to ban travel to and from the country right before its summer holiday season. The restrictions deal another blow to South Africa’s battered tourism industry, which buckled under the weight of border shutdowns and stop-start domestic lockdowns over the past year and a half.”
November 26 – Bloomberg (Ignacio Olivera Doll): “Argentina’s central bank tightened access to hard currency further, the latest attempt by the crisis-prone country to contain dwindling reserves amid growing devaluation expectations. The central bank published late Thursday one rule change affecting banks and another affecting consumers, as it tries to preserve its store of dollars to help defend the value of the peso.”
Market Mania Watch:
November 25 – Bloomberg (Ksenia Galouchko): “If there’s a single stat to capture the insatiable appetite for stocks this year, it’s the sum of cash that went into equity funds. Investors have poured almost $900 billion into equity exchange-traded and long-only funds in 2021 -- exceeding the combined total from the past 19 years -- according to… Bank of America Corp. and EPFR Global. It’s a data point that underscores just how extraordinary and record-breaking this year has been… The amount of money moving into the stock market dwarfed anything else this year. Bond funds attracted just $496 billion and money market funds received about $260 billion. ETFs continue to be the product of choice. Stock ETFs absorbed $785 billion inflows this year, compared with about $108 billion for long-only funds.”
November 26 – Bloomberg (Joanna Ossinger and Emily Graffeo): “Bitcoin tumbled 20% from the record high it notched earlier this month as a potentially worrisome new variant of the coronavirus spurred traders to dump risk assets across the globe. The world’s largest cryptocurrency fell as much as 9% to $53,552 on Friday. Ether, the second-largest digital currency, dropped more than 12%, while the wider Bloomberg Galaxy Crypto Index declined as much as 7.7%.”
November 25 – Wall Street Journal (Caitlin McCabe): “Conventional Wall Street wisdom says inflation is bad for growth and technology stocks. Many small investors don’t care. Individual investors continue to stampede into shares of growth companies, the types of buzzy stocks that have enjoyed explosive price gains this year. Advanced Micro Devices Inc., Nvidia Corp. and Apple Inc. are the three stocks most purchased this month by individual investors, according to VandaTrack… Investors are typically willing to pay higher prices for such companies when they don’t see many alternatives for making sizable profits. For example, 18 of the stocks that are most favored by individual investors, including the chip makers AMD and Nvidia, trade on average at nearly 13 times their trailing 12-month sales…”
November 20 – Bloomberg (Swetha Gopinath, Myriam Balezou and Julia Fioretti): “Global initial public offerings have smashed their previous record this year, propelled by a blank-check boom and companies cashing in on high valuations. With six weeks to go, about 2,850 businesses and special purpose acquisition companies have raised more than $600 billion in IPOs, leaving the records for both deal count and proceeds reached in 2007 in the dust… Leading the pack is electric-truck startup Rivian Automotive Inc., which raised nearly $12 billion... Asia’s biggest was China Telecom Corp.’s 54 billion-yuan ($8.4bn) IPO in August, while Polish parcel-locker provider InPost SA seized the top spot in Europe with its 2.8 billion-euro ($3.2bn)…. These companies took advantage of record-high stock prices, as central bank support kept investors flush with cash.”
November 22 – Wall Street Journal (Heather Gillers): “Bigger private-market bets, inflation fears and a surge of retirees are putting public retirement funds at risk of a cash crunch that would force them to sell assets at losses to pay pension checks. Cash allocations have dropped to a seven-year low at the funds that manage more than $4.5 trillion in retirement savings for America’s teachers, police and firefighters. Public pension funds, which have increasingly turned to illiquid private markets to drive up returns, are now aiming to keep about 0.8% of their holdings in cash, according to… the Boston College Center for Retirement Research.”
November 19 – Wall Street Journal (Kelly Crow): “The art market is sizzling. The world’s chief auction houses sold more than $2.3 billion worth of art during a two-week sale series in New York that ends Friday. Back in person en masse for the first time since early 2019, collectors chased after high-end art with a voraciousness not seen since a few years before the pandemic. Rarely do auction houses sell every single object they have to offer, but Sotheby’s and Christie’s achieved that feat a couple of times as collectors splurged on everything from classic paintings of windswept fields by Vincent Van Gogh to spray-painted images by street artists such as Banksy to a rare edition of the U.S. Constitution. The series also marked the mainstream arrival of cryptocurrency on the auction scene. Sotheby’s auctioneer Oliver Barker took bids in the cryptocurrency ether for some Banksy works, while NFT artists populated high-profile livestreamed sales.”
November 23 – Wall Street Journal (Leslie Scism): “U.S. life insurers are backing Americans’ policies with bigger slugs of riskier, higher-yielding investments. Holdings of real estate, below-investment-grade bonds, mortgage loans, private equity, hedge funds, limited partnerships and privately placed debt increased 39% from 2015 to 2020, outpacing the 26% increase in total cash and invested assets, according to a new report by Moody’s… As a result, these so-called illiquid assets represented about 35% of insurers’ $4.04 trillion in investments as of Dec. 31, 2020, up from 32% out of $3.2 trillion in 2015.”
Market Instability Watch:
November 24 – Bloomberg (Anchalee Worrachate and Liz Capo McCormick): “The surge in U.S. inflation is sending some of the biggest names on Wall Street into rethink mode, forcing them to recalibrate strategies that depended on bonds as a shock absorber against equity downturns. Pacific Investment Management Co., the bond-investor giant that dismissed inflation as a ‘head fake’ earlier this year, now expects price pressures to endure. Both BlackRock Inc. and DoubleLine Capital LP have brought forward their forecasts for the next Federal Reserve rate increase to next year from 2023.”
Inflation Watch:
November 24 – Financial Times (Aime Williams, Matthew Rocco, Kate Duguid and Eric Platt): “A US inflation measure closely watched by the Federal Reserve posted its biggest year-on-year jump since the 1990s last month, adding to pressure on President Joe Biden as his White House scrambles to tame rising costs. The commerce department’s core personal consumption expenditure index, which strips out volatile food and energy costs, rose 4.1% in October compared with a year ago. The jump represents a significant increase from the 3.7% annual rise in September…”
November 24 – Bloomberg (Sophie Caronello): “If rising costs for food weren’t enough for Americans celebrating Thanksgiving this year, wait until you hit the road. The national average for unleaded gasoline is $3.40 a gallon, the highest level heading into the holiday weekend since 2012…”
November 24 – Reuters (Rod Nickel): “A global shortage of nitrogen fertilizer is driving prices to record levels, prompting North America's farmers to delay purchases and raising the risk of a spring scramble to apply the crop nutrient before planting season. Farmers apply nitrogen to boost yields of corn, canola and wheat, and higher fertilizer costs could translate into higher meat and bread prices.”
November 20 – Bloomberg (Maxwell Adler): “Amid the inflation surge that’s rippled through the U.S. economy and touched thousands upon thousands of products, one of the more obscure items on the list is firewood. It’s a fuel from earlier times, so niche an industry that no one appears to even try to track pricing on a national level. Talk to firewood vendors in state after state, though, and they’ll all tell you the same thing: Sales are booming on the eve of winter, and prices are soaring.”
November 23 – Bloomberg (Maria Eloisa Capurro): “Inflation shocks are spreading pain around the world, but nowhere is it as bad as Latin America. Price surges are busting through policy makers’ targets in all the region’s major economies, with annual inflation prints this month of 6% in Chile, 6.2% in Mexico, 10.7% in Brazil and a whopping 52% in Argentina. Major Wall Street banks are forecasting average cost-of-living increases across Latin America will end the year above 10%, the highest globally, and predict pressure on consumer prices will extend well into 2022. The world’s worst inflation is adding to the pain Latin America has been going through as one of the hardest hit regions during the pandemic.”
Biden Administration Watch:
November 24 – Reuters (Timothy Gardner): “The administration of U.S. President Joe Biden announced… it will release millions of barrels of oil from strategic reserves in coordination with China, India, South Korea, Japan and Britain, to try to cool prices after OPEC+ producers repeatedly ignored calls for more crude. Biden, facing low approval ratings and accelerating inflation ahead of next year's congressional elections, has grown frustrated at repeatedly asking the Organization of the Petroleum Exporting Countries and its allies, known as OPEC+, to pump more oil without any response.”
November 21 – Wall Street Journal (James Mackintosh): “The infrastructure act signed into law last week marked a defeat for the faction of progressive economists in ascendancy in 2020. For these advocates of modern monetary theory, the insistence by both political parties that all the $550 billion of new spending be matched by offsetting revenue, known as ‘payfors,’ goes against their belief that money is merely a tool for government. This is a temporary rhetorical setback. The reality is that MMT’s ideas have insinuated themselves deep into government, central banking and even Wall Street—and the infrastructure act is in fact deficit-financed anyway. MMTers detest payfors as wrongheaded thinking about money. Money only exists because of government spending, and under MMT, the government should just create as much as it needs to finance its projects.”
Federal Reserve Watch:
November 22 – Bloomberg (Steve Matthews): “Federal Reserve Chair Jerome Powell pledged to ‘use our tools’ to aid jobs and battle fast-rising consumer prices as President Joe Biden chose him to lead the U.S. central bank for another four years and elevated Governor Lael Brainard to be vice chair. ‘We know that high inflation takes a toll on families, especially those less able to meet the higher costs of essentials like food, housing, and transportation,’ Powell said… in brief remarks at the White House after Biden announced his pick. ‘We will use our tools both to support the economy and a strong labor market, and to prevent higher inflation from becoming entrenched.’”
November 24 – Wall Street Journal (Nick Timiraos): “Federal Reserve officials expressed greater concern at their meeting earlier this month about how long inflation would stay elevated and discussed whether they should prepare to raise interest rates in the first half of next year to cool off the economy. The Fed closed a chapter on its aggressive pandemic policy response when it approved plans at the Nov. 2-3 meeting to shrink its $120-billion-a-month asset purchases by $15 billion each in November and December, a pace that would end the program by next June. They want to end the asset purchases before they lift interest rates… But some officials signaled concern that inflation pressures were broadening and that they might want to wrap up the asset-purchase program sooner in case they feel greater urgency to raise interest rates…”
November 24 – Reuters (Lindsay Dunsmuir): “A growing number of Federal Reserve policymakers indicated they would be open to speeding up the elimination of their bond-buying program if high inflation held and move more quickly to raise interest rates, minutes of the U.S. central bank's last policy meeting showed. The readout… was the latest indication that anxiety about rising inflation at the Fed has now taken root, with many officials at the Nov. 2-3 meeting also suggesting elevated price pressures could prove more persistent. The durability and broadening in price pressures has taken the White House and the central bank by surprise and prompted both to respond.”
November 24 – Bloomberg (Matthew Boesler): “Federal Reserve officials at their last meeting were open to removing policy support at a faster pace to keep inflation in check, even before data showed price pressures accelerating. ‘Various participants noted that the Committee should be prepared to adjust the pace of asset purchases and raise the target range for the federal funds rate sooner than participants currently anticipated if inflation continued to run higher,’ according to minutes… of the Nov. 2-3 meeting of the Federal Open Market Committee.”
November 22 – Bloomberg (Steve Matthews): “Federal Reserve Bank of Atlanta President Raphael Bostic said the central bank may need to speed up its removal of monetary stimulus in response to strong employment gains and surging inflation, allowing for an earlier-than-planned increase in interest rates. ‘A faster taper would certainly give us more optionality as we move into 2022 and see sort of where the data takes us,’ Bostic said... ‘I definitely think it is appropriate for us to be talking about the pace of tapering and being open to a faster one.’”
November 24 – Bloomberg (Simon Kennedy): “Former U.S. Treasury Secretary Lawrence Summers said that Federal Reserve policy makers are signaling a ‘new era’ in which they recognize the U.S. economy is overheating as inflation runs at its fastest in three decades… Summers said that Fed Chairman Jerome Powell and Governor Lael Brainard this week used rhetoric that ‘portends a new era here for the Fed.’ ‘They know we do have an overheating economy,’ he said. ‘The new problem is how do you land this economy softly.’”
U.S. Bubble Watch:
November 24 – Associated Press (Martin Crutsinger): “Americans are doing the main thing that drives the U.S. economy — spending — but accelerating inflation is casting a pall. A raft of economic data… showed the economy on solid footing, with Americans’ incomes rising and jobless claims falling to a level not seen since the Beatles were still together. The spike in prices for everything from gas to rent, however, will likely be the chief economic indicator Americans discuss over Thanksgiving Day dinner… U.S. consumer spending rebounded by 1.3% in October.”
November 24 – Reuters (Lucia Mutikani): “The number of Americans filing new claims for unemployment benefits dropped to a 52-year low last week, suggesting economic activity was accelerating as a year ravaged by shortages, high inflation and an unrelenting pandemic draws to a close… ‘There might be some seasonal adjustment problems, but the handwriting is on the wall and all the anecdotal reports on how companies cannot find the help they need are true,’ said Christopher Rupkey, chief economist at FWDBONDS…”
November 22 – Wall Street Journal (Nicole Friedman): “U.S. home sales rose in October as buyers continued to compete for a limited number of homes for sale. Existing-home sales increased 0.8% in October from the prior month to a seasonally adjusted annual rate of 6.34 million, the highest pace since January… Still, October sales fell 5.8% from a year earlier, when the market was at its peak for this cycle… At the same time, the number of homes on the market has remained low, and new homes that are listed for sale are often snapped up quickly… Even so, the market is on pace for its strongest sales in 15 years, said Lawrence Yun, NAR’s chief economist. ‘The housing market is remaining strong’ due to continued low interest rates, a robust job market and rising stock-market values, he said.”
November 22 – Bloomberg (Nic Querolo): “Spending by U.S. states in the most recent fiscal year grew at the fastest pace in at least 35 years as the governments deployed a surge of federal relief funds. Total spending, including stimulus, rose about 16% to an estimated $2.65 trillion in fiscal 2021…, according to… The National Association of State Budget Officers. In the past two years, states reported spending $427.9 billion in federal Covid-19 aid, the report said. The unprecedented spending clip last fiscal year highlights the sheer scale of pandemic aid the federal government handed to states…”
November 24 – CNBC (Diana Olick): “An unusual surge in home buying, just as the market enters the historically slow holiday season, is driving mortgage demand higher. Total mortgage application volume rose 1.8% last week compared with the previous week, according to the Mortgage Bankers Association... The increase was largely driven by applications to purchase a home, which rose 5% for the week but were still 4% lower than the same week one year ago. That was the third-straight weekly gain.”
November 24 – Bloomberg (Prashant Gopal): “Apartment rents are soaring across the U.S., with South Florida in the lead. New York isn’t far behind. In Miami, West Palm Beach and Fort Lauderdale, rents jumped 36% in October from a year earlier, while the New York City metro area -- including Westchester County and parts of northern New Jersey -- posted a 31% gain, according to… Redfin Corp. The average increase in monthly rents nationwide was 13%, the highest growth rate in at least two years, Redfin said.”
November 24 – Wall Street Journal (Jiyoung Sohn): “Investment in U.S. chip production is on the rise. But so too, is semiconductor spending elsewhere. Samsung Electronics Co. ’s planned $17 billion chip factory in Texas is expected to crank out top-end semiconductors that are essential to 5G cellular networks, self-driving cars and artificial intelligence. It follows hefty bets on U.S. soil by Intel Corp., Taiwan Semiconductor Manufacturing Co. and Texas Instruments Inc. The new factories won’t be operational for years. But the investment promises to boost America’s production foothold in advanced chip making…”
Fixed-Income Bubble Watch:
November 22 – Bloomberg (Gowri Gurumurthy): “The rally in U.S. junk bonds is losing steam as investors focus on locking in returns with the year end in view. Yields have risen for eight straight sessions, the longest such streak in 18 months, to an eight-month high of 4.41%. The high-yield index posted losses for two consecutive weeks and also the biggest weekly loss in eight months…”
November 26 – Wall Street Journal (Sebastian Pellejero): “Investors’ hunt for higher fixed-income returns has powered sales of low-rated corporate bonds to a record. U.S. companies… have sold more than $455 billion of bonds with speculative-grade credit ratings this year through Monday, according to S&P Global Market Intelligence’s LCD. That already beats the full-year total for 2020, when junk-bond sales set a then-record of $435 billion.”
November 22 – Wall Street Journal (Brian Chappatta): “The credit markets are no place for discerning investors these days. U.S. junk bond and leveraged loan sales have surpassed $1 trillion in 2021, an unprecedented amount for a calendar year. Loan funds have experienced inflows during all but two weeks this year, bringing the S&P/LSTA Leveraged Loan Price Index close to an all-time high, and year-to-date issuance of collateralized-loan obligations is also at a record. Even municipal-bond buyers are turning to the riskiest corners of the market, plowing $1.2 billion into high-yield muni funds in the week ended Nov. 10, the second-most ever… Simply put, in the world of corporate credit, many companies want to borrow cheaply and a lot of investors are all too willing to lend at rock-bottom rates.”
November 23 – Bloomberg (Adam Tempkin): “Bankers are repackaging everything from fast food franchises to fitness-center fees into bonds at the fastest clip since the global financial crisis as investors chase yield and inflation protection. This year’s sales of U.S. asset-backed securities have already surpassed $300 billion… -- and more is expected by year-end. Post-crisis issuance records have also been set in private-label commercial mortgage bonds and collateralized loan obligations… ‘Solar, consumer loans, container lease and whole business transactions to some degree all offer attractive yields and spreads,’ said Dave Goodson, head of securitized credit at Voya Investment Management. ‘These so-called esoteric sectors remain well supported with plenty of money to invest.’”
China Watch:
November 22 – Bloomberg: “China’s central bank signaled possible easing measures to aid the economy’s recovery after a sharp downturn in recent months fueled by a property slump. In its latest quarterly monetary policy report…, the People’s Bank of China removed from its policy outlook a few key phrases cited in previous reports, including sticking with ‘normal monetary policy.’ That suggests a shift in stance toward more supportive measures, several major banks… said. The report dropped previous phrases to ‘control the valve on money supply’ and vowing not to ‘flood the economy with stimulus,’ signaling more credit support in coming months. ‘We expect Beijing to soon significantly step up its monetary easing and fiscal stimulus to counteract the increasing downward pressure,’ Nomura’s Lu Ting wrote…”
November 22 – Financial Times (Sun Yu): “Chinese regulators have eased pressure on property developers by loosening credit controls and allowing more bond issuance in recent weeks in an effort to prevent the sector from collapsing. But analysts and government advisers say the measures do not represent a retreat from President Xi Jinping’s crackdown on the sector. Real estate is estimated to account for as much as one-third of overall economic activity in the world’s second-largest economy, highlighting the wider implications of any significant shift in policy… ‘There are still systemic risks posed by a real estate meltdown to the broader economy,’ said Deng Haozhi, a Guangzhou-based property analyst. ‘It is up to regulators to avoid that scenario.’”
November 23 – Bloomberg (Tom Hancock): “China’s top economic official called for stabilizing house prices while sticking with curbs on speculation as a property market slowdown continues to take a toll on the economy. Vice Premier Liu He, China’s top economic policy official, vowed to stick to curbs on the housing market under the slogan of ‘houses are for living in, not for speculation,’ in an article published by the ruling Communist Party’s flagship newspaper, the People’s Daily. Officials should ‘focus on stabilizing land prices, house prices, and stabilize expectations,’ in order to ‘solve household’s housing problems and promote the healthy development of real-estate companies,’ Liu said…”
November 22 – Reuters (Xiangming Hou, Kevin Huang and Ryan Woo): “Some Chinese banks have been told by financial regulators to issue more loans to property firms for project development, two banking sources… told Reuters…, in efforts to marginally ease liquidity strains across the industry. Chinese authorities have yet to publicly give any signal that they will relax the ‘three red lines’ - financial requirements introduced by the central bank last year that developers must meet to get new bank loans. But lenders have recently adjusted their lending practices to reflect the latest central bank guidance of ‘meeting the normal financing needs’ of the sector.”
November 24 – Bloomberg: “China’s State Council called on local governments to sell more special bonds this year in order to boost investment amid a slowdown in the economy. Premier Li Keqiang chaired a meeting of the State Council, China’s cabinet…, urging local governments to have more ongoing construction of projects at the beginning of next year, the official Xinhua News Agency reported… Regional governments should step up project preparation, facilitate the launch of projects that are mature, and make reasonable requests for special bond quotas next year…”
November 23 – Bloomberg: “China’s marked economic slowdown in the second half of the year is testing the central bank’s policy mettle and dividing economists over whether more aggressive action is needed to avoid a deeper downturn. The People’s Bank of China is having to juggle multiple economic risks, pulling policy in different directions. Growth is heading for lows not seen since 1990 -- if last year’s pandemic year is excluded -- factory-gate inflation is soaring, while the currency is rallying on the back of record trade surpluses.”
November 23 – Bloomberg (Rebecca Choong Wilkins and Olivia Tam): “China Aoyuan Group’s dollar bonds tumbled, leading a decline by the nation’s junk notes, as a report the company failed to pay a trust loan in full reignited concern over stress in the property sector. Aoyuan missed payment on 66 million yuan ($10.3 million) of a 78 million yuan trust loan on Nov. 12… Separately, Moody’s… cut the company’s rating by three notches, citing concern over the size of the firm’s debt maturing next year.”
November 22 – Bloomberg (Jan Dahinten): “China Evergrande Group shares worth almost $1 billion appeared in Hong Kong’s Central Clearing and Settlement System, a sign that founder Hui Ka Yan may be pledging part of his stake as collateral for loans. Billionaire owners of Chinese developers have dipped into their own pockets for at least $3.8 billion to save their companies from default, as a cash crunch engulfs the industry.”
November 20 – Bloomberg: “China’s economy could enter a period of ‘quasi-stagflation’ with relatively slow growth and excessively high producer-price inflation, said Liu Shijin, an adviser to the nation’s central bank. Such a scenario is ‘very likely’ if demand remains weak, producer prices stay high, corporate profits are squeezed, and existing risks in the economy are ‘released too quickly,’ he told an online forum, the China Macroeconomy Forum…”
November 23 – Financial Times (William Langley and Edward White): “Chinese regulators have intensified a crackdown on celebrities and their fans on the grounds that online hordes create ‘chaos’ and promote ‘extravagant pleasure’. The Cyberspace Administration of China… released a set of rules to regulate celebrities, as well as their advertising and fan groups, as part of President Xi Jinping’s drive to reform social values in the country. The CAC lambasted ‘the supremacy of [internet] traffic’ and ‘abnormal aesthetics’ for deteriorating ‘mainstream values’ in Chinese society.”
November 23 – Associated Press (Huizhong Wu): “Huang Xueqin, who publicly supported a woman when she accused a professor of sexual assault, was arrested in September. Wang Jianbing, who helped women report sexual harassment, was detained along with her. Neither has been heard from since. Meanwhile, several other women’s rights activists have faced smear campaigns on social media and some have seen their accounts shuttered. When tennis star Peng Shuai disappeared from public view this month after accusing a senior Chinese politician of sexual assault, it caused an international uproar. But back in China, Peng is just one of several people — activists and accusers alike — who have been hustled out of view, charged with crimes or trolled and silenced online for speaking out about the harassment, violence and discrimination women face every day.”
November 24 – Reuters (Scott Murdoch and Matt Scuffham): “JPMorgan… Chief Executive Jamie Dimon said… he regretted his remarks that the Wall Street bank would last longer than China's Communist Party, moving quickly to avoid any longer-term fallout. Dimon's comments had risked jeopardizing JPMorgan's growth ambitions in China where it won regulatory approval in August to become the first full foreign owner of a securities brokerage in the country.”
Central Banker Watch:
November 22 – Bloomberg (William Horobin): “The European Central Bank is ‘serious’ about ending its emergency bond-buying program in March and may not need to expand regular asset purchases to cover the shortfall, according to Governing Council member Francois Villeroy de Galhau. The Bank of France chief’s reluctance to commit to more stimulus comes amid a bout of elevated inflation -- but also as Europe’s economic outlook is clouded by a spike in Covid-19 infections that have triggered lockdowns in some countries.”
November 23 – Bloomberg (Alexander Weber and Carolynn Look): “European Central Bank Governing Council member Klaas Knot said new restrictions in parts of the euro area to battle record Covid-19 infections are unlikely to change the planned wind-down of monetary stimulus. While the measures ‘will surely have a moderating impact on economic activity, the impact on inflation will actually be more ambiguous, because it might also reinforce some of the concerns we have around supply bottlenecks,’ Knot said…”
November 20 – Bloomberg (James Ludden): “U.K. economic activity is slowing and supply-side issues are stoking prices, underlining the ‘two-sided’ debate over inflation, Bank of England Governor Andrew Bailey said. Reinforcing comments Friday from Chief Economist Huw Pill, Bailey said it’s not the bank’s job to fix supply chain issues that have hampered economies around the world. ‘The proximate cause of many of these inflation issues is on the supply side, and monetary policy isn’t going to solve those directly,’ Bailey told the Sunday Times… ‘It doesn’t get more gas, more computer chips, more lorry drivers.’”
November 24 – Bloomberg (Matthew Brockett): “New Zealand’s central bank raised interest rates for the second time in two months and signaled it will need to tighten policy more quickly than previously expected to contain inflation. The Reserve Bank’s Monetary Policy Committee lifted the official cash rate by a quarter percentage point to 0.75% Wednesday… New forecasts published by the RBNZ show the cash rate rising to 2% by the end of 2022, a year sooner than projected just three months ago. ‘Capacity pressures have continued to tighten’ and ‘employment is now above its maximum sustainable level,’ the RBNZ said.”
November 25 – Bloomberg (Ksenia Galouchko): “Bank of Korea Governor Lee Ju-yeol said interest rates are still accommodative after two hikes since August, suggesting further tightening is in the pipeline as inflation risks mount in the recovering economy. The board considered the price pressures building in the economy and financial imbalances when it decided to raise rates by 25 bps to 1% on Thursday, Lee said…”
Global Bubble Watch:
November 23 – Wall Street Journal (Paul Hannon and David Harrison): “Firms on both sides of the Atlantic reported robust demand in November that, combined with persistent shortages of parts and labor, has led to record price increases. In the U.S. the lifting of Covid-19 restrictions has boosted business output, particularly in the services sector. Businesses in Europe also reported a pickup in production despite a fresh surge of Covid-19 cases that has prompted fears of new pandemic restrictions. In both places, the combination of strong demand and shortages has resulted in accelerating inflation for business costs and in selling prices, according to surveys of businesses by IHS Markit.”
EM Watch:
November 26 – Bloomberg (Onur Ant): “President Recep Tayyip Erdogan blamed a sharp slump in the lira on ‘money barons’ attacking Turkey’s economy, vowing to pursue lower borrowing costs to turbo-boost growth and revive his flagging popularity ahead of elections in 2023… Speaking to supporters… on Friday, Erdogan doubled down on a newly unveiled policy that prioritizes lower interest rates to charge up growth and job creation.”
November 23 – Bloomberg (Onur Ant): “The unraveling of the Turkish lira threatens to erode Recep Tayyip Erdogan’s grasp on the economy and is already emboldening his political opponents. Small protests erupted in Istanbul and Ankara overnight, calling for an end to economic mismanagement that’s unleashed rapid inflation and triggered the currency’s longest losing streak in two decades. Police erected barriers in parts of the commercial capital as protesters vented their fury against the ruling AK Party.”
November 20 – Wall Street Journal (Jared Malsin and Patricia Kowsmann): “Turkey’s currency crisis is driving up the cost of food, medicine and other essentials for average Turks, and poses a threat to the country’s banks and large companies if the lira’s slide isn’t arrested, economists said. The steep drop in the lira, which has lost more than a third of its value to the dollar in eight months, is shaking a Turkish society that had long prided itself as an ascendant economy that rivaled its European neighbors. Ordinary people are now struggling with a decline in their living conditions, with rampant inflation putting pressure on wages and eating into savings.”
November 26 – Reuters (Ceyda Caglayan): “Some Turks are struggling to buy medicines as the industry warns that stocks are shrinking after an ‘unsustainable’ crash in the lira has pushed up import prices and disrupted supplies. Industry leaders and pharmacies said the 48 billion lira ($4bn) sector was facing steep losses on some products, and warned of disruptions in coming months for drugs…”
November 22 – Reuters (Michelle Nichols): “The United Nations… pushed for urgent action to prop up Afghanistan's banks, warning that a spike in people unable to repay loans, lower deposits and a cash liquidity crunch could cause the financial system to collapse within months. In a three-page report on Afghanistan's banking and financial system seen by Reuters, the U.N. Development Programme (UNDP) said the economic cost of a banking system collapse - and consequent negative social impact – ‘would be colossal.’”
Europe Watch:
November 22 – Bloomberg (Zoe Schneeweiss): “German inflation may spike even higher than previously forecast this month with a rate just under 6%, according to the Bundesbank. About 1 1/2 percentage points of that will reflect a temporary cut in value-added tax and very low prices for travel-related services in 2020, the… central bank said… German inflation already hit a three-decade high of 4.6% in October, but that was always flagged as a prelude to an even faster surge in November.”
November 25 – CNBC (Silvia Amaro): “Germany’s central bank warned… about skewed valuations in the housing market, calling it a ‘specific vulnerability’ as property prices continue to soar. ‘We have basically seen all indicators — prices, credit — those indicators kept increasing in Germany and you don’t really see a big effect of the pandemic,’ Claudia Buch, vice-president at the Bundesbank said… She added that her team at the Bundesbank has come up with estimates of about 10% to 30% for price deviations from their fundamentals.”
November 24 – Bloomberg (Carolynn Look): “German business confidence took another hit in November, with a new wave of Covid-19 infections looming over the economy and rising inflationary pressures threatening to weigh on manufacturing. A gauge compiled by the Munich-based Ifo Institute dropped for a fifth straight month to its lowest since April.”
November 24 – CNBC (Holly Ellyatt): “A coalition deal has been announced in Germany after almost two months of talks following the country’s inconclusive federal election in September. Olaf Scholz, the center-left Social Democratic Party’s candidate, will be Germany’s next chancellor, replacing Angela Merkel who has led Germany for 16 years. The agreement between the SPD, the Greens and the Free Democratic Party, will see them govern together in a three-way coalition for the first time. The alliance has been described as a ‘traffic light’ coalition in reference to the parties’ traditional colors.”
November 24 – Financial Times (Sam Fleming and Mehreen Khan): “Brussels has warned Italy to rein in government spending growth and pursue a ‘prudent’ fiscal policy next year as the European Commission flags budget risks in high-debt economies. In its annual review of EU member states’ budget plans, Brussels found that Rome had not sufficiently limited the growth of its ‘nationally financed current expenditure’ in its 2022 budget and urged it to take the ‘necessary measures’ to address the overshoot given its debt-to-GDP ratio of more than 150%. ‘Given the level of Italy’s government debt and high sustainability challenges in the medium term before the outbreak of the Covid-19 pandemic . . . it is important to preserve prudent fiscal policy in order to ensure sustainable public finances,’ the commission said.”
Japan Watch:
November 26 – Financial Times (Robin Harding and Andy Lin): “Japan’s cabinet has signed off a $6.8bn package of extra defence spending as new prime minister Fumio Kishida signals his concern about China’s rising power. In an unusual move that will take defence spending to its highest level for decades as a share of national income, Japan will bring forward purchases of patrol aircraft and surface-to-air missiles from next year’s budget. The decision highlights Tokyo’s growing concern about military tensions across the Taiwan Strait as well as Kishida’s wish to send a clear statement of intent on defence spending to the Biden administration...”
Social, Political, Environmental, Cybersecurity Instability Watch:
November 23 – Reuters (Julia Harte and Uday Sampath Kumar): “A Nordstrom department store in a Los Angeles mall on Monday night became the latest target in a string of ‘smash-and-grab’ robberies that have hit luxury retailers in California and Illinois as the holiday shopping season approaches… Local reports said as many as 20 people may have been involved in the break-in and theft. Law enforcement authorities say they are alarmed by the brazen nature of the burglaries -- some involving dozens of people -- which have targeted high-end stores in the two states in the past week. Videos from the chaotic burglaries, called ‘smash-and-grabs’, have flooded social media in recent days, showing masked figures breaking into stores, running out with bags of merchandise, and fleeing in cars idling outside. The San Francisco Bay Area has been particularly hard hit…”
November 20 – Bloomberg (Sybilla Gross): “The world’s fish population is in a dire state, with about half of assessed stocks being overfished, according to a study backed by Australian billionaire Andrew Forrest. The rate of depletion is worse than previous estimates of just over a third, Forrest’s Minderoo Foundation said in a report... A tenth of fish stocks worldwide is now on the brink of collapse, reduced to 10% of their original size, the study shows.”
Leveraged Speculation Watch:
November 24 – Bloomberg (Lu Wang and Melissa Karsh): “A plunge in dizzily priced software and internet stocks is setting off a quick exodus among professional speculators who were counting on the group to salvage their year. Hedge funds stepped up selling as the rout gathered pace Monday, bailing at the fastest pace in more than two months, according to Goldman Sachs…”
November 24 – Bloomberg (Jesse Hamilton): “The collapse of Archegos Capital Management revealed vulnerabilities at the banks supervised by the Federal Reserve, the U.S. central bank said… ‘The event has so far revealed weaknesses in margin practices and counterparty risk management at some firms,’ the Fed said in its twice-yearly supervision report, also noting the importance of coordinating with other global regulators in activities that cross borders. The Fed’s Archegos review isn’t yet finished, and the agency said it will be notifying individual firms on ‘areas of weak practices.’”
November 23 – Bloomberg: “China is tightening approvals for quantitative hedge funds in the latest sign that officials are concerned about the potential market impact of trading driven by algorithms after a year of rapid asset expansion.”
Geopolitical Watch:
November 24 – Reuters (Alexander Marrow and Pavel Polityuk): “Russia staged military drills in the Black Sea, south of Ukraine, on Wednesday and said it needed to sharpen the combat-readiness of its conventional and nuclear forces because of heightened NATO activity near its borders. Ukraine, which says it believes Russia may be preparing an invasion, held exercises of its own near the frontier with Belarus. An independent Russian investigative group posted photos and videos it said showed movements of tanks and other military vehicles in southern Russia in the past few days.”
November 24 – Reuters (Pavel Polityuk): “Ukraine, which has accused Russia of massing troops and says Belarus could send migrants over its borders, launched an operation on Wednesday to strengthen its frontier, including military drills for anti-tank and airborne units. The Ukrainian state border service said the ‘special operation’ at the border with Belarus involved troops of the National Guard, police, Armed Forces and other reserves.”
November 22 – Bloomberg (John Harney and Jennifer Jacobs): “President Joe Biden’s administration is considering whether to send American military advisers to Ukraine as Russian forces on that country’s border pose the threat of invasion, CNN reported… The network… said the U.S. was also looking into providing more weapons to Ukraine’s armed forces, including anti-aircraft stinger missiles.”
November 22 – Reuters (Tom Balmforth): “Russia's foreign intelligence agency… compared current tensions over Ukraine with the build-up to a 2008 war in which Russia's forces crushed those of neighbouring Georgia. In a statement on its website, the SVR said Georgia's then-president Mikheil Saakashvili had ‘paid a high price’ in that conflict… Russia comprehensively defeated Georgia in their five-day war and around one-fifth of Georgia's territory remains outside Tbilisi's control, defended by Russian troops.”
November 25 – Bloomberg (Ilya Arkhipov, Henry Meyer and Irina Reznik): “Vladimir Putin is an expert at bluffing and keeping the West on its toes, pushing relations to the edge before pivoting without warning. But, hemmed in and fuming, he is deadly serious about being heard on Ukraine. Those close to the Kremlin say the Russian president doesn’t want to start another war in Ukraine. Still, he must show he’s ready to fight if necessary in order to stop what he sees as an existential security threat: the creeping expansion of the North Atlantic Treaty Organization in a country that for centuries had been part of Russia.”
November 22 – Reuters (Anna Wlodarczak-semczuk and Andrius Sytas): “Polish Prime Minister Mateusz Morawiecki warned… that the migrant crisis on the Belarus border may be a prelude to ‘something much worse’, and Poland's border guard said Belarusian forces were still ferrying migrants to the frontier. The European Union accuses Belarus of flying in thousands of people from the Middle East and pushing them to cross into EU and NATO members Poland, Lithuania and Latvia, in response to European sanctions.”
November 24 – Reuters (Humeyra Pamuk): “The Biden administration has invited Taiwan to its ‘Summit for Democracy’ next month…, a move that infuriated China, which views the democratically governed island as its territory. The first-of-its-kind gathering is a test of President Joe Biden's assertion, announced in his first foreign policy address in office in February, that he would return the United States to global leadership to face down authoritarian forces led by China and Russia.”
November 25 – Reuters (Ben Blanchard): “There is no room for compromise over Taiwan and the United States should not have any illusions about this, China's Defence Ministry said…, adding that Washington had of late made a series of ‘provocations’ on several issues. China says the issue of Taiwan, which it claims as Chinese territory, is the most sensitive in its ties with the United States, the country that is also Taiwan's most important international backer and arms supplier.”
November 22 – Wall Street Journal (Alastair Gale): “China is expanding its capacity to develop weapons that can be fired from hypersonic missiles, suggesting a test this summer that surprised U.S. military officials with its technological accomplishment is part of a program to create new threats for U.S. missile defenses… A hypersonic glide vehicle is a maneuverable warhead that sits on the tip of a long-range missile and, once released, glides to its target on an unpredictable path that makes it difficult to intercept. In a test in July, U.S. officials said, China fired a missile that traveled around the globe in a low-earth orbit before releasing the glide vehicle. That glide vehicle then separately fired a projectile of its own, they said—a feat that pushes the boundaries of physics.”
November 23 – Bloomberg (Debby Wu): “China said it will punish businesses and political donors with links to individuals supporting Taiwan independence after it fined Taiwanese conglomerate Far Eastern Group. ‘Businesses and financial sponsors associated with supporters of Taiwan independence will be penalized according to law,’ Taiwan Affairs Office spokeswoman Zhu Fenglian told reporters… Zhu said that backers of independence undermine cross-strait relations and risk instability in the region.”
November 25 – Reuters (Ben Blanchard): “Five members of the U.S. House of Representatives arrived in Taiwan on Thursday for a short trip expected to focus on security matters, the second time in a month U.S. lawmakers have visited. The trip comes as China has stepped up military and political pressure to assert its sovereignty claims over the island, spurring anger in Taipei where the government has vowed to defend Taiwan's freedom and democracy.”
November 26 – Reuters (Colin Packham and Byron Kaye): “China's ‘alarming’ actions do not match its rhetoric about promoting peace and prosperity in the region, Australia's defence minister said… after a Chinese navy ship was tracked sailing through the country's exclusive economic zone.”
The S&P500 fell 2.2% (up 22.3% y-t-d), and the Dow slumped 2.0% (up 14.0%). The Utilities declined 1.0% (up 6.5%). The Banks lost 1.1% (up 37.6%), and the Broker/Dealers fell 1.6% (up 27.1%). The Transports declined 1.8% (up 29.7%). The S&P 400 Midcaps dropped 3.2% (up 20.5%), and the small cap Russell 2000 sank 4.1% (up 13.7%). The Nasdaq100 slumped 3.3% (up 24.3%). The Semiconductors sank 4.0% (up 34.4%). The Biotechs dipped 0.5% (down 5.9%). With bullion down $43, the HUI gold index dropped 4.3% (down 14.6%).
Three-month Treasury bill rates ended the week at 0.0375%. Two-year government yields slipped a basis point to 0.50% (up 38bps y-t-d). Five-year T-note yields declined six bps to 1.16% (up 80bps). Ten-year Treasury yields dropped seven bps to 1.48% (up 56bps). Long bond yields fell nine bps to 1.83% (up 18bps). Benchmark Fannie Mae MBS yields dipped two bps to 2.01% (up 66bps).
Greek 10-year yields jumped 13 bps to 1.28% (up 66bps y-t-d). Ten-year Portuguese yields rose five bps to 0.35% (up 32bps). Italian 10-year yields surged 11 bps to 0.97% (up 43bps). Spain's 10-year yields gained five bps to 0.43% (up 38bps). German bund yields added a basis point to negative 0.34% (up 23bps). French yields increased three bps to 0.04% (up 37bps). The French to German 10-year bond spread widened 3 to 38 bps. U.K. 10-year gilt yields fell five bps to 0.83% (up 63bps). U.K.'s FTSE equities index fell 2.5% (up 9.0% y-t-d).
Japan's Nikkei Equities Index dropped 3.3% (up 4.8% y-t-d). Japanese 10-year "JGB" yields slipped a basis point to 0.07% (up 5bps y-t-d). France's CAC40 sank 5.2% (up 21.4%). The German DAX equities index slumped 5.6% (up 11.2%). Spain's IBEX 35 equities index fell 4.0% (up 4.1%). Italy's FTSE MIB index sank 5.4% (up 16.3%). EM equities were under pressure. Brazil's Bovespa index declined 0.8% (down 14.1%), and Mexico's Bolsa fell 2.6% (up 12.3%). South Korea's Kospi index declined 1.2% (up 2.2%). India's Sensex equities index dropped 4.2% (up 19.6%). China's Shanghai Exchange was little changed (up 2.6%). Turkey's Borsa Istanbul National 100 index gained 2.2% (up 20.3%). Russia's MICEX equities index sank 5.1% (up 15.9%).
Investment-grade bond funds saw inflows of $1.528 billion, while junk bond funds had outflows of $3.315 billion (from Lipper).
Federal Reserve Credit last week jumped $24.8bn to a record $8.651 TN. Over the past 115 weeks, Fed Credit expanded $4.925 TN, or 132%. Fed Credit inflated $5.841 Trillion, or 208%, over the past 472 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week gained $7.2bn to $3.475 TN. "Custody holdings" were up $16bn, or 0.5%, y-o-y.
Total money market fund assets rose $22.4bn to $4.598 TN. Total money funds increased $274bn y-o-y, or 6.3%.
Total Commercial Paper declined $13.1bn to $1.103 TN. CP was up $119bn, or 12.1%, year-over-year.
Freddie Mac 30-year fixed mortgage rates were unchanged at 3.10% (up 38bps y-o-y). Fifteen-year rates increased three bps to 2.42% (up 14bps). Five-year hybrid ARM rates declined two bps to 2.47% (down 69bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down three bps to 3.17% (up 20bps).
Currency Watch:
For the week, the U.S. Dollar Index was little changed at 96.09 (up 6.9% y-t-d). For the week on the upside, the Japanese yen increased 0.5%, the Swiss franc 0.5%, and the euro 0.2% For the week on the downside, the Mexican peso declined 5.0%, the South African rand 3.4%, the New Zealand dollar 2.6%, the Swedish krona 2.3%, the Norwegian krone 1.8%, the Australian dollar 1.6%, the Canadian dollar 1.2%, the British pound 0.9%, the Singapore dollar 0.8%, and the South Korean won 0.7%. The Chinese renminbi declined 0.1% versus the dollar (up 2.09% y-t-d).
Commodities Watch:
November 22 – Bloomberg (Grant Smith, Salma El Wardany and Jennifer A. Dlouhy): “OPEC+ officials warned they’re likely to respond to plans by the world’s largest oil consumers to release oil from their strategic stockpiles, setting up a fight for control of the global energy market… OPEC+ delegates said the release of millions of barrels from the inventories of their biggest customers is unjustified by current market conditions and the group may have to reconsider plans to add more oil production when they meet next week.”
The Bloomberg Commodities Index fell 2.2% (up 28.2% y-t-d). Spot Gold declined $43 to $1,803 (down 5.1%). Silver sank 5.9% to $23.16 (down 12.3%). WTI crude sank $7.79 to $68.15 (up 41%). Gasoline dropped 8.3% (up 44%), while Natural Gas surged 7.5% (up 115%). Copper fell 2.4% (up 22%). Wheat added 0.7% (up 31%), and Corn jumped 2.6% (up 22%). Bitcoin sank $4,285 or 7.4%, this week to $53,717 (up 85%).
Coronavirus Watch:
November 25 – Bloomberg: “Scientists in South Africa are studying a recently identified new coronavirus variant of concern, stoking fears the country may face a potentially severe fourth wave that could spread internationally. The new discovery, called B.1.1529 until a Greek letter is assigned, carries an unusually large number of mutations and is ‘clearly very different’ from previous incarnations, Tulio de Oliveira, a bio-informatics professor who runs gene-sequencing institutions at two South African universities, said… ‘Here is a mutation variant of serious concern,’ Health Minister Joe Phaahla said…”
November 22 – Bloomberg (Jonathan Levin): “The latest U.S. Covid-19 wave is taking its toll on some states’ intensive-care units, with several parts of the country seeing outbreaks that are as bad as ever. In 15 states, patients with confirmed or suspected Covid are taking up more ICU beds than a year earlier, according to Department of Health and Human Services data. Colorado, Minnesota and Michigan have 41%, 37% and 34% of ICU beds occupied by Covid-19 patients, respectively, the data show.”
November 22 – Bloomberg (Jonathan Levin): “The latest U.S. Covid-19 wave is taking its toll on some states’ intensive-care units, with several parts of the country seeing outbreaks that are as bad as ever. In 15 states, patients with confirmed or suspected Covid are taking up more ICU beds than a year earlier, according to Department of Health and Human Services data. Colorado, Minnesota and Michigan have 41%, 37% and 34% of ICU beds occupied by Covid-19 patients, respectively, the data show.”
November 24 – Financial Times (Jamie Smyth and Caitlin Gilbert): “Twenty months into a pandemic that has claimed almost 770,000 American lives and nearly a year after Covid-19 vaccinations became available, US health experts warn that a fifth wave of infections risks overwhelming health systems in the worst-affected states. Fears of another surge in infections come on the cusp of the Thanksgiving holiday, when tens of millions of Americans will travel to reconnect with their families, some of them for the first time since the start of the pandemic.”
November 24 – Reuters (Francesco Guarascio and Jason Hovet): “Coronavirus infections broke records in parts of Europe on Wednesday, with the continent once again the epicentre of a pandemic that has prompted new curbs on movement and seen health experts push to widen the use of booster vaccination shots. Slovakia, the Czech Republic, the Netherlands and Hungary all reported new highs in daily infections as winter grips Europe… New cases have jumped 23% in the Americas in the last week, mostly in North America, in a sign that region might also face a resurgence of infections.”
November 22 – Bloomberg (Arne Delfs and Naomi Kresge): “Chancellor Angela Merkel said the latest surge in Covid-19 infections is worse than anything Germany has experienced so far and called for tighter restrictions to help check the spread. Merkel told officials from her Christian Democratic party… the situation is ‘highly dramatic’ and warned that some hospitals would soon be overwhelmed unless the fourth wave of the pandemic is broken, according to a person familiar with her remarks.”
Global Crisis Watch:
November 26 – Bloomberg (Maria Elena Vizcaino and Robert Fullem): “Volatility in developed-market currencies spiked by the most in a year as traders digest the impact of the new coronavirus variant discovered in South Africa. Gauges of euro and yen volatility climbed the most since October 2020, a time when investors were girding for the U.S. presidential election.”
November 26 – Bloomberg (Prinesha Naidoo and Monique Vanek): “South Africa’s recovery from its deepest economic contraction in almost three decades risks being derailed by the identification of a new coronavirus variant that prompted several European nations to ban travel to and from the country right before its summer holiday season. The restrictions deal another blow to South Africa’s battered tourism industry, which buckled under the weight of border shutdowns and stop-start domestic lockdowns over the past year and a half.”
November 26 – Bloomberg (Ignacio Olivera Doll): “Argentina’s central bank tightened access to hard currency further, the latest attempt by the crisis-prone country to contain dwindling reserves amid growing devaluation expectations. The central bank published late Thursday one rule change affecting banks and another affecting consumers, as it tries to preserve its store of dollars to help defend the value of the peso.”
Market Mania Watch:
November 25 – Bloomberg (Ksenia Galouchko): “If there’s a single stat to capture the insatiable appetite for stocks this year, it’s the sum of cash that went into equity funds. Investors have poured almost $900 billion into equity exchange-traded and long-only funds in 2021 -- exceeding the combined total from the past 19 years -- according to… Bank of America Corp. and EPFR Global. It’s a data point that underscores just how extraordinary and record-breaking this year has been… The amount of money moving into the stock market dwarfed anything else this year. Bond funds attracted just $496 billion and money market funds received about $260 billion. ETFs continue to be the product of choice. Stock ETFs absorbed $785 billion inflows this year, compared with about $108 billion for long-only funds.”
November 26 – Bloomberg (Joanna Ossinger and Emily Graffeo): “Bitcoin tumbled 20% from the record high it notched earlier this month as a potentially worrisome new variant of the coronavirus spurred traders to dump risk assets across the globe. The world’s largest cryptocurrency fell as much as 9% to $53,552 on Friday. Ether, the second-largest digital currency, dropped more than 12%, while the wider Bloomberg Galaxy Crypto Index declined as much as 7.7%.”
November 25 – Wall Street Journal (Caitlin McCabe): “Conventional Wall Street wisdom says inflation is bad for growth and technology stocks. Many small investors don’t care. Individual investors continue to stampede into shares of growth companies, the types of buzzy stocks that have enjoyed explosive price gains this year. Advanced Micro Devices Inc., Nvidia Corp. and Apple Inc. are the three stocks most purchased this month by individual investors, according to VandaTrack… Investors are typically willing to pay higher prices for such companies when they don’t see many alternatives for making sizable profits. For example, 18 of the stocks that are most favored by individual investors, including the chip makers AMD and Nvidia, trade on average at nearly 13 times their trailing 12-month sales…”
November 20 – Bloomberg (Swetha Gopinath, Myriam Balezou and Julia Fioretti): “Global initial public offerings have smashed their previous record this year, propelled by a blank-check boom and companies cashing in on high valuations. With six weeks to go, about 2,850 businesses and special purpose acquisition companies have raised more than $600 billion in IPOs, leaving the records for both deal count and proceeds reached in 2007 in the dust… Leading the pack is electric-truck startup Rivian Automotive Inc., which raised nearly $12 billion... Asia’s biggest was China Telecom Corp.’s 54 billion-yuan ($8.4bn) IPO in August, while Polish parcel-locker provider InPost SA seized the top spot in Europe with its 2.8 billion-euro ($3.2bn)…. These companies took advantage of record-high stock prices, as central bank support kept investors flush with cash.”
November 22 – Wall Street Journal (Heather Gillers): “Bigger private-market bets, inflation fears and a surge of retirees are putting public retirement funds at risk of a cash crunch that would force them to sell assets at losses to pay pension checks. Cash allocations have dropped to a seven-year low at the funds that manage more than $4.5 trillion in retirement savings for America’s teachers, police and firefighters. Public pension funds, which have increasingly turned to illiquid private markets to drive up returns, are now aiming to keep about 0.8% of their holdings in cash, according to… the Boston College Center for Retirement Research.”
November 19 – Wall Street Journal (Kelly Crow): “The art market is sizzling. The world’s chief auction houses sold more than $2.3 billion worth of art during a two-week sale series in New York that ends Friday. Back in person en masse for the first time since early 2019, collectors chased after high-end art with a voraciousness not seen since a few years before the pandemic. Rarely do auction houses sell every single object they have to offer, but Sotheby’s and Christie’s achieved that feat a couple of times as collectors splurged on everything from classic paintings of windswept fields by Vincent Van Gogh to spray-painted images by street artists such as Banksy to a rare edition of the U.S. Constitution. The series also marked the mainstream arrival of cryptocurrency on the auction scene. Sotheby’s auctioneer Oliver Barker took bids in the cryptocurrency ether for some Banksy works, while NFT artists populated high-profile livestreamed sales.”
November 23 – Wall Street Journal (Leslie Scism): “U.S. life insurers are backing Americans’ policies with bigger slugs of riskier, higher-yielding investments. Holdings of real estate, below-investment-grade bonds, mortgage loans, private equity, hedge funds, limited partnerships and privately placed debt increased 39% from 2015 to 2020, outpacing the 26% increase in total cash and invested assets, according to a new report by Moody’s… As a result, these so-called illiquid assets represented about 35% of insurers’ $4.04 trillion in investments as of Dec. 31, 2020, up from 32% out of $3.2 trillion in 2015.”
Market Instability Watch:
November 24 – Bloomberg (Anchalee Worrachate and Liz Capo McCormick): “The surge in U.S. inflation is sending some of the biggest names on Wall Street into rethink mode, forcing them to recalibrate strategies that depended on bonds as a shock absorber against equity downturns. Pacific Investment Management Co., the bond-investor giant that dismissed inflation as a ‘head fake’ earlier this year, now expects price pressures to endure. Both BlackRock Inc. and DoubleLine Capital LP have brought forward their forecasts for the next Federal Reserve rate increase to next year from 2023.”
Inflation Watch:
November 24 – Financial Times (Aime Williams, Matthew Rocco, Kate Duguid and Eric Platt): “A US inflation measure closely watched by the Federal Reserve posted its biggest year-on-year jump since the 1990s last month, adding to pressure on President Joe Biden as his White House scrambles to tame rising costs. The commerce department’s core personal consumption expenditure index, which strips out volatile food and energy costs, rose 4.1% in October compared with a year ago. The jump represents a significant increase from the 3.7% annual rise in September…”
November 24 – Bloomberg (Sophie Caronello): “If rising costs for food weren’t enough for Americans celebrating Thanksgiving this year, wait until you hit the road. The national average for unleaded gasoline is $3.40 a gallon, the highest level heading into the holiday weekend since 2012…”
November 24 – Reuters (Rod Nickel): “A global shortage of nitrogen fertilizer is driving prices to record levels, prompting North America's farmers to delay purchases and raising the risk of a spring scramble to apply the crop nutrient before planting season. Farmers apply nitrogen to boost yields of corn, canola and wheat, and higher fertilizer costs could translate into higher meat and bread prices.”
November 20 – Bloomberg (Maxwell Adler): “Amid the inflation surge that’s rippled through the U.S. economy and touched thousands upon thousands of products, one of the more obscure items on the list is firewood. It’s a fuel from earlier times, so niche an industry that no one appears to even try to track pricing on a national level. Talk to firewood vendors in state after state, though, and they’ll all tell you the same thing: Sales are booming on the eve of winter, and prices are soaring.”
November 23 – Bloomberg (Maria Eloisa Capurro): “Inflation shocks are spreading pain around the world, but nowhere is it as bad as Latin America. Price surges are busting through policy makers’ targets in all the region’s major economies, with annual inflation prints this month of 6% in Chile, 6.2% in Mexico, 10.7% in Brazil and a whopping 52% in Argentina. Major Wall Street banks are forecasting average cost-of-living increases across Latin America will end the year above 10%, the highest globally, and predict pressure on consumer prices will extend well into 2022. The world’s worst inflation is adding to the pain Latin America has been going through as one of the hardest hit regions during the pandemic.”
Biden Administration Watch:
November 24 – Reuters (Timothy Gardner): “The administration of U.S. President Joe Biden announced… it will release millions of barrels of oil from strategic reserves in coordination with China, India, South Korea, Japan and Britain, to try to cool prices after OPEC+ producers repeatedly ignored calls for more crude. Biden, facing low approval ratings and accelerating inflation ahead of next year's congressional elections, has grown frustrated at repeatedly asking the Organization of the Petroleum Exporting Countries and its allies, known as OPEC+, to pump more oil without any response.”
November 21 – Wall Street Journal (James Mackintosh): “The infrastructure act signed into law last week marked a defeat for the faction of progressive economists in ascendancy in 2020. For these advocates of modern monetary theory, the insistence by both political parties that all the $550 billion of new spending be matched by offsetting revenue, known as ‘payfors,’ goes against their belief that money is merely a tool for government. This is a temporary rhetorical setback. The reality is that MMT’s ideas have insinuated themselves deep into government, central banking and even Wall Street—and the infrastructure act is in fact deficit-financed anyway. MMTers detest payfors as wrongheaded thinking about money. Money only exists because of government spending, and under MMT, the government should just create as much as it needs to finance its projects.”
Federal Reserve Watch:
November 22 – Bloomberg (Steve Matthews): “Federal Reserve Chair Jerome Powell pledged to ‘use our tools’ to aid jobs and battle fast-rising consumer prices as President Joe Biden chose him to lead the U.S. central bank for another four years and elevated Governor Lael Brainard to be vice chair. ‘We know that high inflation takes a toll on families, especially those less able to meet the higher costs of essentials like food, housing, and transportation,’ Powell said… in brief remarks at the White House after Biden announced his pick. ‘We will use our tools both to support the economy and a strong labor market, and to prevent higher inflation from becoming entrenched.’”
November 24 – Wall Street Journal (Nick Timiraos): “Federal Reserve officials expressed greater concern at their meeting earlier this month about how long inflation would stay elevated and discussed whether they should prepare to raise interest rates in the first half of next year to cool off the economy. The Fed closed a chapter on its aggressive pandemic policy response when it approved plans at the Nov. 2-3 meeting to shrink its $120-billion-a-month asset purchases by $15 billion each in November and December, a pace that would end the program by next June. They want to end the asset purchases before they lift interest rates… But some officials signaled concern that inflation pressures were broadening and that they might want to wrap up the asset-purchase program sooner in case they feel greater urgency to raise interest rates…”
November 24 – Reuters (Lindsay Dunsmuir): “A growing number of Federal Reserve policymakers indicated they would be open to speeding up the elimination of their bond-buying program if high inflation held and move more quickly to raise interest rates, minutes of the U.S. central bank's last policy meeting showed. The readout… was the latest indication that anxiety about rising inflation at the Fed has now taken root, with many officials at the Nov. 2-3 meeting also suggesting elevated price pressures could prove more persistent. The durability and broadening in price pressures has taken the White House and the central bank by surprise and prompted both to respond.”
November 24 – Bloomberg (Matthew Boesler): “Federal Reserve officials at their last meeting were open to removing policy support at a faster pace to keep inflation in check, even before data showed price pressures accelerating. ‘Various participants noted that the Committee should be prepared to adjust the pace of asset purchases and raise the target range for the federal funds rate sooner than participants currently anticipated if inflation continued to run higher,’ according to minutes… of the Nov. 2-3 meeting of the Federal Open Market Committee.”
November 22 – Bloomberg (Steve Matthews): “Federal Reserve Bank of Atlanta President Raphael Bostic said the central bank may need to speed up its removal of monetary stimulus in response to strong employment gains and surging inflation, allowing for an earlier-than-planned increase in interest rates. ‘A faster taper would certainly give us more optionality as we move into 2022 and see sort of where the data takes us,’ Bostic said... ‘I definitely think it is appropriate for us to be talking about the pace of tapering and being open to a faster one.’”
November 24 – Bloomberg (Simon Kennedy): “Former U.S. Treasury Secretary Lawrence Summers said that Federal Reserve policy makers are signaling a ‘new era’ in which they recognize the U.S. economy is overheating as inflation runs at its fastest in three decades… Summers said that Fed Chairman Jerome Powell and Governor Lael Brainard this week used rhetoric that ‘portends a new era here for the Fed.’ ‘They know we do have an overheating economy,’ he said. ‘The new problem is how do you land this economy softly.’”
U.S. Bubble Watch:
November 24 – Associated Press (Martin Crutsinger): “Americans are doing the main thing that drives the U.S. economy — spending — but accelerating inflation is casting a pall. A raft of economic data… showed the economy on solid footing, with Americans’ incomes rising and jobless claims falling to a level not seen since the Beatles were still together. The spike in prices for everything from gas to rent, however, will likely be the chief economic indicator Americans discuss over Thanksgiving Day dinner… U.S. consumer spending rebounded by 1.3% in October.”
November 24 – Reuters (Lucia Mutikani): “The number of Americans filing new claims for unemployment benefits dropped to a 52-year low last week, suggesting economic activity was accelerating as a year ravaged by shortages, high inflation and an unrelenting pandemic draws to a close… ‘There might be some seasonal adjustment problems, but the handwriting is on the wall and all the anecdotal reports on how companies cannot find the help they need are true,’ said Christopher Rupkey, chief economist at FWDBONDS…”
November 22 – Wall Street Journal (Nicole Friedman): “U.S. home sales rose in October as buyers continued to compete for a limited number of homes for sale. Existing-home sales increased 0.8% in October from the prior month to a seasonally adjusted annual rate of 6.34 million, the highest pace since January… Still, October sales fell 5.8% from a year earlier, when the market was at its peak for this cycle… At the same time, the number of homes on the market has remained low, and new homes that are listed for sale are often snapped up quickly… Even so, the market is on pace for its strongest sales in 15 years, said Lawrence Yun, NAR’s chief economist. ‘The housing market is remaining strong’ due to continued low interest rates, a robust job market and rising stock-market values, he said.”
November 22 – Bloomberg (Nic Querolo): “Spending by U.S. states in the most recent fiscal year grew at the fastest pace in at least 35 years as the governments deployed a surge of federal relief funds. Total spending, including stimulus, rose about 16% to an estimated $2.65 trillion in fiscal 2021…, according to… The National Association of State Budget Officers. In the past two years, states reported spending $427.9 billion in federal Covid-19 aid, the report said. The unprecedented spending clip last fiscal year highlights the sheer scale of pandemic aid the federal government handed to states…”
November 24 – CNBC (Diana Olick): “An unusual surge in home buying, just as the market enters the historically slow holiday season, is driving mortgage demand higher. Total mortgage application volume rose 1.8% last week compared with the previous week, according to the Mortgage Bankers Association... The increase was largely driven by applications to purchase a home, which rose 5% for the week but were still 4% lower than the same week one year ago. That was the third-straight weekly gain.”
November 24 – Bloomberg (Prashant Gopal): “Apartment rents are soaring across the U.S., with South Florida in the lead. New York isn’t far behind. In Miami, West Palm Beach and Fort Lauderdale, rents jumped 36% in October from a year earlier, while the New York City metro area -- including Westchester County and parts of northern New Jersey -- posted a 31% gain, according to… Redfin Corp. The average increase in monthly rents nationwide was 13%, the highest growth rate in at least two years, Redfin said.”
November 24 – Wall Street Journal (Jiyoung Sohn): “Investment in U.S. chip production is on the rise. But so too, is semiconductor spending elsewhere. Samsung Electronics Co. ’s planned $17 billion chip factory in Texas is expected to crank out top-end semiconductors that are essential to 5G cellular networks, self-driving cars and artificial intelligence. It follows hefty bets on U.S. soil by Intel Corp., Taiwan Semiconductor Manufacturing Co. and Texas Instruments Inc. The new factories won’t be operational for years. But the investment promises to boost America’s production foothold in advanced chip making…”
Fixed-Income Bubble Watch:
November 22 – Bloomberg (Gowri Gurumurthy): “The rally in U.S. junk bonds is losing steam as investors focus on locking in returns with the year end in view. Yields have risen for eight straight sessions, the longest such streak in 18 months, to an eight-month high of 4.41%. The high-yield index posted losses for two consecutive weeks and also the biggest weekly loss in eight months…”
November 26 – Wall Street Journal (Sebastian Pellejero): “Investors’ hunt for higher fixed-income returns has powered sales of low-rated corporate bonds to a record. U.S. companies… have sold more than $455 billion of bonds with speculative-grade credit ratings this year through Monday, according to S&P Global Market Intelligence’s LCD. That already beats the full-year total for 2020, when junk-bond sales set a then-record of $435 billion.”
November 22 – Wall Street Journal (Brian Chappatta): “The credit markets are no place for discerning investors these days. U.S. junk bond and leveraged loan sales have surpassed $1 trillion in 2021, an unprecedented amount for a calendar year. Loan funds have experienced inflows during all but two weeks this year, bringing the S&P/LSTA Leveraged Loan Price Index close to an all-time high, and year-to-date issuance of collateralized-loan obligations is also at a record. Even municipal-bond buyers are turning to the riskiest corners of the market, plowing $1.2 billion into high-yield muni funds in the week ended Nov. 10, the second-most ever… Simply put, in the world of corporate credit, many companies want to borrow cheaply and a lot of investors are all too willing to lend at rock-bottom rates.”
November 23 – Bloomberg (Adam Tempkin): “Bankers are repackaging everything from fast food franchises to fitness-center fees into bonds at the fastest clip since the global financial crisis as investors chase yield and inflation protection. This year’s sales of U.S. asset-backed securities have already surpassed $300 billion… -- and more is expected by year-end. Post-crisis issuance records have also been set in private-label commercial mortgage bonds and collateralized loan obligations… ‘Solar, consumer loans, container lease and whole business transactions to some degree all offer attractive yields and spreads,’ said Dave Goodson, head of securitized credit at Voya Investment Management. ‘These so-called esoteric sectors remain well supported with plenty of money to invest.’”
China Watch:
November 22 – Bloomberg: “China’s central bank signaled possible easing measures to aid the economy’s recovery after a sharp downturn in recent months fueled by a property slump. In its latest quarterly monetary policy report…, the People’s Bank of China removed from its policy outlook a few key phrases cited in previous reports, including sticking with ‘normal monetary policy.’ That suggests a shift in stance toward more supportive measures, several major banks… said. The report dropped previous phrases to ‘control the valve on money supply’ and vowing not to ‘flood the economy with stimulus,’ signaling more credit support in coming months. ‘We expect Beijing to soon significantly step up its monetary easing and fiscal stimulus to counteract the increasing downward pressure,’ Nomura’s Lu Ting wrote…”
November 22 – Financial Times (Sun Yu): “Chinese regulators have eased pressure on property developers by loosening credit controls and allowing more bond issuance in recent weeks in an effort to prevent the sector from collapsing. But analysts and government advisers say the measures do not represent a retreat from President Xi Jinping’s crackdown on the sector. Real estate is estimated to account for as much as one-third of overall economic activity in the world’s second-largest economy, highlighting the wider implications of any significant shift in policy… ‘There are still systemic risks posed by a real estate meltdown to the broader economy,’ said Deng Haozhi, a Guangzhou-based property analyst. ‘It is up to regulators to avoid that scenario.’”
November 23 – Bloomberg (Tom Hancock): “China’s top economic official called for stabilizing house prices while sticking with curbs on speculation as a property market slowdown continues to take a toll on the economy. Vice Premier Liu He, China’s top economic policy official, vowed to stick to curbs on the housing market under the slogan of ‘houses are for living in, not for speculation,’ in an article published by the ruling Communist Party’s flagship newspaper, the People’s Daily. Officials should ‘focus on stabilizing land prices, house prices, and stabilize expectations,’ in order to ‘solve household’s housing problems and promote the healthy development of real-estate companies,’ Liu said…”
November 22 – Reuters (Xiangming Hou, Kevin Huang and Ryan Woo): “Some Chinese banks have been told by financial regulators to issue more loans to property firms for project development, two banking sources… told Reuters…, in efforts to marginally ease liquidity strains across the industry. Chinese authorities have yet to publicly give any signal that they will relax the ‘three red lines’ - financial requirements introduced by the central bank last year that developers must meet to get new bank loans. But lenders have recently adjusted their lending practices to reflect the latest central bank guidance of ‘meeting the normal financing needs’ of the sector.”
November 24 – Bloomberg: “China’s State Council called on local governments to sell more special bonds this year in order to boost investment amid a slowdown in the economy. Premier Li Keqiang chaired a meeting of the State Council, China’s cabinet…, urging local governments to have more ongoing construction of projects at the beginning of next year, the official Xinhua News Agency reported… Regional governments should step up project preparation, facilitate the launch of projects that are mature, and make reasonable requests for special bond quotas next year…”
November 23 – Bloomberg: “China’s marked economic slowdown in the second half of the year is testing the central bank’s policy mettle and dividing economists over whether more aggressive action is needed to avoid a deeper downturn. The People’s Bank of China is having to juggle multiple economic risks, pulling policy in different directions. Growth is heading for lows not seen since 1990 -- if last year’s pandemic year is excluded -- factory-gate inflation is soaring, while the currency is rallying on the back of record trade surpluses.”
November 23 – Bloomberg (Rebecca Choong Wilkins and Olivia Tam): “China Aoyuan Group’s dollar bonds tumbled, leading a decline by the nation’s junk notes, as a report the company failed to pay a trust loan in full reignited concern over stress in the property sector. Aoyuan missed payment on 66 million yuan ($10.3 million) of a 78 million yuan trust loan on Nov. 12… Separately, Moody’s… cut the company’s rating by three notches, citing concern over the size of the firm’s debt maturing next year.”
November 22 – Bloomberg (Jan Dahinten): “China Evergrande Group shares worth almost $1 billion appeared in Hong Kong’s Central Clearing and Settlement System, a sign that founder Hui Ka Yan may be pledging part of his stake as collateral for loans. Billionaire owners of Chinese developers have dipped into their own pockets for at least $3.8 billion to save their companies from default, as a cash crunch engulfs the industry.”
November 20 – Bloomberg: “China’s economy could enter a period of ‘quasi-stagflation’ with relatively slow growth and excessively high producer-price inflation, said Liu Shijin, an adviser to the nation’s central bank. Such a scenario is ‘very likely’ if demand remains weak, producer prices stay high, corporate profits are squeezed, and existing risks in the economy are ‘released too quickly,’ he told an online forum, the China Macroeconomy Forum…”
November 23 – Financial Times (William Langley and Edward White): “Chinese regulators have intensified a crackdown on celebrities and their fans on the grounds that online hordes create ‘chaos’ and promote ‘extravagant pleasure’. The Cyberspace Administration of China… released a set of rules to regulate celebrities, as well as their advertising and fan groups, as part of President Xi Jinping’s drive to reform social values in the country. The CAC lambasted ‘the supremacy of [internet] traffic’ and ‘abnormal aesthetics’ for deteriorating ‘mainstream values’ in Chinese society.”
November 23 – Associated Press (Huizhong Wu): “Huang Xueqin, who publicly supported a woman when she accused a professor of sexual assault, was arrested in September. Wang Jianbing, who helped women report sexual harassment, was detained along with her. Neither has been heard from since. Meanwhile, several other women’s rights activists have faced smear campaigns on social media and some have seen their accounts shuttered. When tennis star Peng Shuai disappeared from public view this month after accusing a senior Chinese politician of sexual assault, it caused an international uproar. But back in China, Peng is just one of several people — activists and accusers alike — who have been hustled out of view, charged with crimes or trolled and silenced online for speaking out about the harassment, violence and discrimination women face every day.”
November 24 – Reuters (Scott Murdoch and Matt Scuffham): “JPMorgan… Chief Executive Jamie Dimon said… he regretted his remarks that the Wall Street bank would last longer than China's Communist Party, moving quickly to avoid any longer-term fallout. Dimon's comments had risked jeopardizing JPMorgan's growth ambitions in China where it won regulatory approval in August to become the first full foreign owner of a securities brokerage in the country.”
Central Banker Watch:
November 22 – Bloomberg (William Horobin): “The European Central Bank is ‘serious’ about ending its emergency bond-buying program in March and may not need to expand regular asset purchases to cover the shortfall, according to Governing Council member Francois Villeroy de Galhau. The Bank of France chief’s reluctance to commit to more stimulus comes amid a bout of elevated inflation -- but also as Europe’s economic outlook is clouded by a spike in Covid-19 infections that have triggered lockdowns in some countries.”
November 23 – Bloomberg (Alexander Weber and Carolynn Look): “European Central Bank Governing Council member Klaas Knot said new restrictions in parts of the euro area to battle record Covid-19 infections are unlikely to change the planned wind-down of monetary stimulus. While the measures ‘will surely have a moderating impact on economic activity, the impact on inflation will actually be more ambiguous, because it might also reinforce some of the concerns we have around supply bottlenecks,’ Knot said…”
November 20 – Bloomberg (James Ludden): “U.K. economic activity is slowing and supply-side issues are stoking prices, underlining the ‘two-sided’ debate over inflation, Bank of England Governor Andrew Bailey said. Reinforcing comments Friday from Chief Economist Huw Pill, Bailey said it’s not the bank’s job to fix supply chain issues that have hampered economies around the world. ‘The proximate cause of many of these inflation issues is on the supply side, and monetary policy isn’t going to solve those directly,’ Bailey told the Sunday Times… ‘It doesn’t get more gas, more computer chips, more lorry drivers.’”
November 24 – Bloomberg (Matthew Brockett): “New Zealand’s central bank raised interest rates for the second time in two months and signaled it will need to tighten policy more quickly than previously expected to contain inflation. The Reserve Bank’s Monetary Policy Committee lifted the official cash rate by a quarter percentage point to 0.75% Wednesday… New forecasts published by the RBNZ show the cash rate rising to 2% by the end of 2022, a year sooner than projected just three months ago. ‘Capacity pressures have continued to tighten’ and ‘employment is now above its maximum sustainable level,’ the RBNZ said.”
November 25 – Bloomberg (Ksenia Galouchko): “Bank of Korea Governor Lee Ju-yeol said interest rates are still accommodative after two hikes since August, suggesting further tightening is in the pipeline as inflation risks mount in the recovering economy. The board considered the price pressures building in the economy and financial imbalances when it decided to raise rates by 25 bps to 1% on Thursday, Lee said…”
Global Bubble Watch:
November 23 – Wall Street Journal (Paul Hannon and David Harrison): “Firms on both sides of the Atlantic reported robust demand in November that, combined with persistent shortages of parts and labor, has led to record price increases. In the U.S. the lifting of Covid-19 restrictions has boosted business output, particularly in the services sector. Businesses in Europe also reported a pickup in production despite a fresh surge of Covid-19 cases that has prompted fears of new pandemic restrictions. In both places, the combination of strong demand and shortages has resulted in accelerating inflation for business costs and in selling prices, according to surveys of businesses by IHS Markit.”
EM Watch:
November 26 – Bloomberg (Onur Ant): “President Recep Tayyip Erdogan blamed a sharp slump in the lira on ‘money barons’ attacking Turkey’s economy, vowing to pursue lower borrowing costs to turbo-boost growth and revive his flagging popularity ahead of elections in 2023… Speaking to supporters… on Friday, Erdogan doubled down on a newly unveiled policy that prioritizes lower interest rates to charge up growth and job creation.”
November 23 – Bloomberg (Onur Ant): “The unraveling of the Turkish lira threatens to erode Recep Tayyip Erdogan’s grasp on the economy and is already emboldening his political opponents. Small protests erupted in Istanbul and Ankara overnight, calling for an end to economic mismanagement that’s unleashed rapid inflation and triggered the currency’s longest losing streak in two decades. Police erected barriers in parts of the commercial capital as protesters vented their fury against the ruling AK Party.”
November 20 – Wall Street Journal (Jared Malsin and Patricia Kowsmann): “Turkey’s currency crisis is driving up the cost of food, medicine and other essentials for average Turks, and poses a threat to the country’s banks and large companies if the lira’s slide isn’t arrested, economists said. The steep drop in the lira, which has lost more than a third of its value to the dollar in eight months, is shaking a Turkish society that had long prided itself as an ascendant economy that rivaled its European neighbors. Ordinary people are now struggling with a decline in their living conditions, with rampant inflation putting pressure on wages and eating into savings.”
November 26 – Reuters (Ceyda Caglayan): “Some Turks are struggling to buy medicines as the industry warns that stocks are shrinking after an ‘unsustainable’ crash in the lira has pushed up import prices and disrupted supplies. Industry leaders and pharmacies said the 48 billion lira ($4bn) sector was facing steep losses on some products, and warned of disruptions in coming months for drugs…”
November 22 – Reuters (Michelle Nichols): “The United Nations… pushed for urgent action to prop up Afghanistan's banks, warning that a spike in people unable to repay loans, lower deposits and a cash liquidity crunch could cause the financial system to collapse within months. In a three-page report on Afghanistan's banking and financial system seen by Reuters, the U.N. Development Programme (UNDP) said the economic cost of a banking system collapse - and consequent negative social impact – ‘would be colossal.’”
Europe Watch:
November 22 – Bloomberg (Zoe Schneeweiss): “German inflation may spike even higher than previously forecast this month with a rate just under 6%, according to the Bundesbank. About 1 1/2 percentage points of that will reflect a temporary cut in value-added tax and very low prices for travel-related services in 2020, the… central bank said… German inflation already hit a three-decade high of 4.6% in October, but that was always flagged as a prelude to an even faster surge in November.”
November 25 – CNBC (Silvia Amaro): “Germany’s central bank warned… about skewed valuations in the housing market, calling it a ‘specific vulnerability’ as property prices continue to soar. ‘We have basically seen all indicators — prices, credit — those indicators kept increasing in Germany and you don’t really see a big effect of the pandemic,’ Claudia Buch, vice-president at the Bundesbank said… She added that her team at the Bundesbank has come up with estimates of about 10% to 30% for price deviations from their fundamentals.”
November 24 – Bloomberg (Carolynn Look): “German business confidence took another hit in November, with a new wave of Covid-19 infections looming over the economy and rising inflationary pressures threatening to weigh on manufacturing. A gauge compiled by the Munich-based Ifo Institute dropped for a fifth straight month to its lowest since April.”
November 24 – CNBC (Holly Ellyatt): “A coalition deal has been announced in Germany after almost two months of talks following the country’s inconclusive federal election in September. Olaf Scholz, the center-left Social Democratic Party’s candidate, will be Germany’s next chancellor, replacing Angela Merkel who has led Germany for 16 years. The agreement between the SPD, the Greens and the Free Democratic Party, will see them govern together in a three-way coalition for the first time. The alliance has been described as a ‘traffic light’ coalition in reference to the parties’ traditional colors.”
November 24 – Financial Times (Sam Fleming and Mehreen Khan): “Brussels has warned Italy to rein in government spending growth and pursue a ‘prudent’ fiscal policy next year as the European Commission flags budget risks in high-debt economies. In its annual review of EU member states’ budget plans, Brussels found that Rome had not sufficiently limited the growth of its ‘nationally financed current expenditure’ in its 2022 budget and urged it to take the ‘necessary measures’ to address the overshoot given its debt-to-GDP ratio of more than 150%. ‘Given the level of Italy’s government debt and high sustainability challenges in the medium term before the outbreak of the Covid-19 pandemic . . . it is important to preserve prudent fiscal policy in order to ensure sustainable public finances,’ the commission said.”
Japan Watch:
November 26 – Financial Times (Robin Harding and Andy Lin): “Japan’s cabinet has signed off a $6.8bn package of extra defence spending as new prime minister Fumio Kishida signals his concern about China’s rising power. In an unusual move that will take defence spending to its highest level for decades as a share of national income, Japan will bring forward purchases of patrol aircraft and surface-to-air missiles from next year’s budget. The decision highlights Tokyo’s growing concern about military tensions across the Taiwan Strait as well as Kishida’s wish to send a clear statement of intent on defence spending to the Biden administration...”
Social, Political, Environmental, Cybersecurity Instability Watch:
November 23 – Reuters (Julia Harte and Uday Sampath Kumar): “A Nordstrom department store in a Los Angeles mall on Monday night became the latest target in a string of ‘smash-and-grab’ robberies that have hit luxury retailers in California and Illinois as the holiday shopping season approaches… Local reports said as many as 20 people may have been involved in the break-in and theft. Law enforcement authorities say they are alarmed by the brazen nature of the burglaries -- some involving dozens of people -- which have targeted high-end stores in the two states in the past week. Videos from the chaotic burglaries, called ‘smash-and-grabs’, have flooded social media in recent days, showing masked figures breaking into stores, running out with bags of merchandise, and fleeing in cars idling outside. The San Francisco Bay Area has been particularly hard hit…”
November 20 – Bloomberg (Sybilla Gross): “The world’s fish population is in a dire state, with about half of assessed stocks being overfished, according to a study backed by Australian billionaire Andrew Forrest. The rate of depletion is worse than previous estimates of just over a third, Forrest’s Minderoo Foundation said in a report... A tenth of fish stocks worldwide is now on the brink of collapse, reduced to 10% of their original size, the study shows.”
Leveraged Speculation Watch:
November 24 – Bloomberg (Lu Wang and Melissa Karsh): “A plunge in dizzily priced software and internet stocks is setting off a quick exodus among professional speculators who were counting on the group to salvage their year. Hedge funds stepped up selling as the rout gathered pace Monday, bailing at the fastest pace in more than two months, according to Goldman Sachs…”
November 24 – Bloomberg (Jesse Hamilton): “The collapse of Archegos Capital Management revealed vulnerabilities at the banks supervised by the Federal Reserve, the U.S. central bank said… ‘The event has so far revealed weaknesses in margin practices and counterparty risk management at some firms,’ the Fed said in its twice-yearly supervision report, also noting the importance of coordinating with other global regulators in activities that cross borders. The Fed’s Archegos review isn’t yet finished, and the agency said it will be notifying individual firms on ‘areas of weak practices.’”
November 23 – Bloomberg: “China is tightening approvals for quantitative hedge funds in the latest sign that officials are concerned about the potential market impact of trading driven by algorithms after a year of rapid asset expansion.”
Geopolitical Watch:
November 24 – Reuters (Alexander Marrow and Pavel Polityuk): “Russia staged military drills in the Black Sea, south of Ukraine, on Wednesday and said it needed to sharpen the combat-readiness of its conventional and nuclear forces because of heightened NATO activity near its borders. Ukraine, which says it believes Russia may be preparing an invasion, held exercises of its own near the frontier with Belarus. An independent Russian investigative group posted photos and videos it said showed movements of tanks and other military vehicles in southern Russia in the past few days.”
November 24 – Reuters (Pavel Polityuk): “Ukraine, which has accused Russia of massing troops and says Belarus could send migrants over its borders, launched an operation on Wednesday to strengthen its frontier, including military drills for anti-tank and airborne units. The Ukrainian state border service said the ‘special operation’ at the border with Belarus involved troops of the National Guard, police, Armed Forces and other reserves.”
November 22 – Bloomberg (John Harney and Jennifer Jacobs): “President Joe Biden’s administration is considering whether to send American military advisers to Ukraine as Russian forces on that country’s border pose the threat of invasion, CNN reported… The network… said the U.S. was also looking into providing more weapons to Ukraine’s armed forces, including anti-aircraft stinger missiles.”
November 22 – Reuters (Tom Balmforth): “Russia's foreign intelligence agency… compared current tensions over Ukraine with the build-up to a 2008 war in which Russia's forces crushed those of neighbouring Georgia. In a statement on its website, the SVR said Georgia's then-president Mikheil Saakashvili had ‘paid a high price’ in that conflict… Russia comprehensively defeated Georgia in their five-day war and around one-fifth of Georgia's territory remains outside Tbilisi's control, defended by Russian troops.”
November 25 – Bloomberg (Ilya Arkhipov, Henry Meyer and Irina Reznik): “Vladimir Putin is an expert at bluffing and keeping the West on its toes, pushing relations to the edge before pivoting without warning. But, hemmed in and fuming, he is deadly serious about being heard on Ukraine. Those close to the Kremlin say the Russian president doesn’t want to start another war in Ukraine. Still, he must show he’s ready to fight if necessary in order to stop what he sees as an existential security threat: the creeping expansion of the North Atlantic Treaty Organization in a country that for centuries had been part of Russia.”
November 22 – Reuters (Anna Wlodarczak-semczuk and Andrius Sytas): “Polish Prime Minister Mateusz Morawiecki warned… that the migrant crisis on the Belarus border may be a prelude to ‘something much worse’, and Poland's border guard said Belarusian forces were still ferrying migrants to the frontier. The European Union accuses Belarus of flying in thousands of people from the Middle East and pushing them to cross into EU and NATO members Poland, Lithuania and Latvia, in response to European sanctions.”
November 24 – Reuters (Humeyra Pamuk): “The Biden administration has invited Taiwan to its ‘Summit for Democracy’ next month…, a move that infuriated China, which views the democratically governed island as its territory. The first-of-its-kind gathering is a test of President Joe Biden's assertion, announced in his first foreign policy address in office in February, that he would return the United States to global leadership to face down authoritarian forces led by China and Russia.”
November 25 – Reuters (Ben Blanchard): “There is no room for compromise over Taiwan and the United States should not have any illusions about this, China's Defence Ministry said…, adding that Washington had of late made a series of ‘provocations’ on several issues. China says the issue of Taiwan, which it claims as Chinese territory, is the most sensitive in its ties with the United States, the country that is also Taiwan's most important international backer and arms supplier.”
November 22 – Wall Street Journal (Alastair Gale): “China is expanding its capacity to develop weapons that can be fired from hypersonic missiles, suggesting a test this summer that surprised U.S. military officials with its technological accomplishment is part of a program to create new threats for U.S. missile defenses… A hypersonic glide vehicle is a maneuverable warhead that sits on the tip of a long-range missile and, once released, glides to its target on an unpredictable path that makes it difficult to intercept. In a test in July, U.S. officials said, China fired a missile that traveled around the globe in a low-earth orbit before releasing the glide vehicle. That glide vehicle then separately fired a projectile of its own, they said—a feat that pushes the boundaries of physics.”
November 23 – Bloomberg (Debby Wu): “China said it will punish businesses and political donors with links to individuals supporting Taiwan independence after it fined Taiwanese conglomerate Far Eastern Group. ‘Businesses and financial sponsors associated with supporters of Taiwan independence will be penalized according to law,’ Taiwan Affairs Office spokeswoman Zhu Fenglian told reporters… Zhu said that backers of independence undermine cross-strait relations and risk instability in the region.”
November 25 – Reuters (Ben Blanchard): “Five members of the U.S. House of Representatives arrived in Taiwan on Thursday for a short trip expected to focus on security matters, the second time in a month U.S. lawmakers have visited. The trip comes as China has stepped up military and political pressure to assert its sovereignty claims over the island, spurring anger in Taipei where the government has vowed to defend Taiwan's freedom and democracy.”
November 26 – Reuters (Colin Packham and Byron Kaye): “China's ‘alarming’ actions do not match its rhetoric about promoting peace and prosperity in the region, Australia's defence minister said… after a Chinese navy ship was tracked sailing through the country's exclusive economic zone.”