Credit Bubble Bulletin : 04/23/21

Friday, April 23, 2021

Weekly Commentary: Peak Monetary Stimulus

Not again. Bloomberg is referring to “the bond market riddle.” The Financial Times went with the headline, “US Government Bond Investors Left Bewildered by ‘Bonkers’ Market Move.” It’s been three weeks of declining Treasury yields in the face of robust economic data (and surging commodities prices!). Too soon to be discussing a new “conundrum,” but I am finding the various explanations of Treasury market behavior interesting – if not convincing.

Treasury market sentiment had turned negative. A decent short position had developed, and it’s perfectly reasonable to expect the occasional squeeze. Squeezes, after all, have become commonplace throughout the markets. But could there be something more fundamental unfolding?

Over the years, I’ve relied upon a “Core vs. Periphery” model of market instability as a key facet of my analytical framework. Instability and financial crises typically emerge at the “periphery” – at the fringe where the structurally weakest and most vulnerable to risk aversion and tightening financial conditions - reside. I believe this dynamic is already in play for the global Bubble, with the emerging markets earlier in the year experiencing an opening round of instability. Are we in the “quiet” before the next EM storm?

The dog that didn’t bark. Ten-year Treasury yields are down 18 bps this month. Meanwhile, the dollar index dropped 2.5% to a six-week low. Why haven’t the emerging markets mustered a more impressive rally, especially considering the degree of bearish sentiment that had developed? Could this be as good as it gets? The week’s developments lent support to the latent fragility at the “Periphery” thesis. Are central bank responses to liquidity overabundance and mounting inflationary pressures an escalating risk to fragile EM Bubbles?

The Bank of Russia surprised markets Friday with a 50 bps rate increase (to 5.0%), while warning additional hikes could be in the offing. At her press conference, central bank governor Elvira Nabiullina commented: “There’s a real risk of delaying the return to neutral monetary policy. These risks may make it necessary for a more serious, significant increase in the rate in the future.” Russia’s annual consumer price inflation has risen to almost 6%.

April 20 – Bloomberg (Josue Leonel and Matthew Malinowski): “Brazilian policy makers should have been more cautious when cutting interest rates last year and now need to stress they will raise them as needed to bring inflation to target, according to former central bank President Ilan Goldfajn. Rather than committing to a ‘partial adjustment’ of monetary stimulus, the bank needs to show it’s ready to do whatever is necessary to control prices that will soon be rising by 8% a year, Goldfajn said… Likewise, the bank may have gone too far when it cut rates to an all-time low of 2% and signaled they would stay there for the foreseeable future, he added. ‘In an emerging market like Brazil, using forward guidance is brave,’ said Goldfajn... ‘Unfortunately, I feel that this instrument isn’t available for us yet.’”

Brazil’s year-over-year inflation rate has jumped to 7%, the high since 2016, and is projected to even move higher. CPI has surged from last year’s below 2.5% rate. The Brazilian real is down 5.4% versus the dollar year-to-date, exacerbating Brazil’s inflation problem.

April 22 – Bloomberg (Maria Eloisa Capurro): “Mexico’s annual inflation surged further above the target ceiling to the highest in over three years, a spike that for now closes the window for the central bank to resume its cycle of interest rates reductions. Consumer prices rose 6.05% in early April from the same period last year due in part to base effects, the national statistics institute reported...”

Following news of the strongest consumer price inflation since 2017, Mexico’s central bank deputy governor Gerardo Esquivel tweeted, “Inflation isn’t out of control and won’t stay in elevated levels for a prolonged period. It’s primarily an arithmetic and transitory phenomenon.” After trending lower for three years (CPI up 2.2% y-o-y in April 2020), Mexico’s inflation trend has shifted markedly. Taking pressure off Mexico’s central bank thus far (and differentiating itself from other EM banks), the Mexican peso holds a slightly positive year-to-date gain versus the dollar.

After rising above 7.5% last year, India’s y-o-y consumer price inflation had subsided to about 4% in January. India’s March (y-o-y) inflation rate was reported at a stronger-than-expected 5.52%, as inflation regains momentum. With an out of control pandemic threatening economic recovery, the Reserve Bank of India in its April meeting remained focused on spurring growth. Yet India’s loose monetary and fiscal stances are increasingly being poorly received in currency and bond markets.

April 18 – Financial Times (Hudson Lockett in Hong Kong and Benjamin Parkin): “India’s currency has swung from emerging market leader to laggard as the country battles a ferocious wave of coronavirus infections, prompting concerns among global investors that a nascent economic recovery will crumble. The rupee has dropped about 3% to 75.14 per dollar since the start of April, the worst performance among a basket of two dozen emerging market peers…”

April 18 – Bloomberg (Subhadip Sircar): “India ended up selling fewer bonds than planned for a second straight week, highlighting the weak appetite for debt even as the nation is in the grip of the world’s worst virus outbreak. The central bank sold 220b rupees of bonds as against 320b rupees planned on Friday. It scrapped all bids for a five-year bond after it had rejected all bids similarly for the benchmark 10-year bond last week. Traders now speculate that the sharp increase in virus cases means the government will have to spend and subsequently borrow more. Comments from the finance minister didn’t bring much calm when she said that the government wouldn’t hesitate to front-load borrowing as much as needed.”

India’s sovereign Credit default swap prices jumped a notable 20 bps this week to 101 bps, up from a February low 64 - to a near nine-month high. State Bank of India ($557bn of assets) CDS surged 25 bps this week to 123 bps, the high since July. India’s multinational Reliance Industries’ (largest publicly traded company in India) CDS jumped 23 bps to a seven-month high 102 bps. India’s rupee declined 0.9% this week to the low versus the dollar since August. India’s Sensex Equities Index has dropped 4.3% over the past three weeks.

April 21 – Financial Times (Ayla Jean Yackley): “When a flood of posters and banners appeared this month bearing the number 128 on them, police were quick to tear them down — arguing that they insulted President Recep Tayyip Erdogan, a crime in Turkey. ‘Where is the $128bn?’ asked the opposition Republican People’s party (CHP) on banners hung from its offices across Turkey, referring to the money it says the central bank has used to shore up the lira in recent years. Estimates vary widely over the amount spent, and Erdogan… put the figure at $165bn — the highest assessment yet.”

April 23 – New York Times (Jack Ewing): “A cryptocurrency exchange in Turkey suspended operations this week amid accusations of fraud, freezing an estimated $2 billion in investors’ money, and authorities said they were seeking the company’s founder. The Turkish authorities raided offices in Istanbul associated with Thodex, a cryptocurrency trading platform, on Friday morning and arrested more than 60 people, the private news agency Demiroren reported. Thodex’s 27-year-old founder, Faruk Fatih Ozer, left Turkey for Albania on Tuesday… The cryptocurrency firm has nearly 400,000 active users, whose accounts were nominally worth a total of $2 billion…”

As numerous EM nations can these days attest, a horde of international reserves tends to support a nation’s currency even in the face of some shaky fundamentals. Using those reserves to bolster a currency under pressure generally buoys market confidence. In short, it works until it doesn’t. When a troubled nation blows through much of its reserve position in a failed attempt to keep an unsound currency elevated and its Bubble inflating, the end result is widespread dismay (from Turkey's citizens to international holders of Turkish assets). Turkey’s 10-year bond yields surged 55 bps this week to 17.73%, the high since the spike to 18.22% on March 31st (yields ended February at 12.86%). The Turkish lira dropped 3.9% this week, pushing y-t-d losses to 11.3%. Turkey’s BIST 100 Equities Index sank 4.5% this week (down 8.9% y-t-d), trading to the low since the March 23rd panic decline.

April 23 – Bloomberg (Maria Elena Vizcaino and Ezra Fieser): “Peru’s currency hit a record low as investors dumped everything from stocks to sovereign bonds after a little-known leftist candidate gained a clear lead in presidential polls, rattling investor confidence… Pedro Castillo, a former school teacher whose party has praised Latin American leftists such as Hugo Chavez, came from no-where to lead the first-round election on April 11. Now, he is ahead in the polls for the runoff and investors are spooked.”

The Peruvian currency (sol) sank 4.1% this week, closing Friday at an all-time low versus the dollar. Peru’s 10-year local currency yields surged 54 bps this week to 5.41%, up from 3.50% to begin 2021 - to the high since the March 2020 yield spike. Peru sovereign CDS jumped 17 bps to an 11-month high 93 bps. Outside of last year’s Covid spike, Peru CDS traded this week near four-year highs. Peru’s major equities indices dropped more than 10% this week. Colombia CDS rose eight bps, and Uruguay gained seven bps.

China Huarong International CDS dropped 368 bps this week to 684 bps, though the price remains far above the 149 bps that began the month. According to a Bloomberg report, the People’s Bank of China is considering absorbing $15 billion of troubled Huarong assets. China’s asset management companies (“AMCs”) have $50 billion of dollar-denominated bonds. In a signal the storm has yet to pass, China Orient Asset Management Company CDS jumped 22 bps this week to (a contract high) 157 bps. This CDS began the month at 97 bps. Market concerns persist regarding offshore debt structures and the protections foreign investors will be afforded, and these concerns are causing a rise in yields and CDS for offshore borrowers (highly levered financial institutions and real estate companies, in particular).

April 21 – South China Morning Post (Karen Yeung): “‘On the one hand, they [Beijing] are keen to reduce a moral hazard by forcing investors to take a haircut – thereby teaching them the hard way that even state-controlled institutions such as Huarong do not enjoy blanket government guarantees,’ said Wei He, China economist at Gavekal. ‘On the other, they want to prevent any disorderly knock-on effects in the domestic financial system and to limit the damage to confidence in China’s offshore market.’ China’s onshore corporate bond market has stayed calm so far... But the issue is with Huarong’s so-called Keepwell provisions that enable China’s banks and non-bank finance companies to access foreign currency financing in the global bond markets. Essentially, a Keepwell provision is a pledge, not a guarantee, to keep an offshore subsidiary that issues the bonds solvent in the event of distress. The immediate risk is that Huarong’s offshore issuance vehicles may not be supported in any restructuring, Hank Calenti, credit analyst at research firm CreditContinuum, wrote…”

Beyond the bond market riddle, it was a kooky week in the markets. Bitcoin sank 18%. French 10-year yields jumped nine bps to a 10-month high 0.08%, as European bonds continue to disregard declining Treasury yields. The five-year Treasury inflation “breakeven rate” dropped 18 bps to a six-week low 2.44%. Meanwhile, the Bloomberg Commodities Index jumped 2.2% to an almost three-year high (even as energy prices declined). Corn surged 10.2%, Wheat jumped 8.7% and Soybeans advanced 7.4%. Coffee rose 6.0%, and Cotton was up 4.5%. Copper rose 4.2% (up 23% y-t-d), and Iron Ore jumped 5.0%. Lumber surged another 6.0%, increasing 2021 gains to 57%.

April 22 – Bloomberg (Theophilos Argitis and Ye Xie): “The Bank of Canada sent out a warning to investors this week that inflation still matters. In a surprise move, it accelerated the timetable for a possible interest-rate increase and began paring back its bond purchases... That made Canada the first major economy to signal its intent to reduce emergency levels of monetary stimulus. It’s a turn in policy by Governor Tiff Macklem that shows there’s a limit to how much he’s willing to test the upper boundaries of inflation, with new forecasts showing the central bank expects the biggest persistent overshoot of its 2% target in at least two decades. The question is whether Canada’s situation is unique, or foreshadowing the start of a global exit from stimulus.”

Give the Bank of Canada Credit. “Inflation Forces the Bank of Canada’s Hand Ahead of Fed and ECB” was the headline for the above article. Economies are recovering more quickly than expected. Inflationary pressures are much more robust. Central banks should be responding. They’re surely turning increasingly apprehensive. Another Bloomberg headline, this one from Friday: “ECB Officials Expect Heated June Decision on Crisis Program.”

It sure appears the world has embarked on a treacherous descent from Peak Monetary Stimulus. This bodes poorly for the fragile “Periphery.” And while trouble at the “Periphery” has been known to somewhat prolong Bubble excess at the “Core” (i.e. subprime blowup and the greater mortgage finance Bubble), extending the U.S. mania would come at a very steep price. From this perspective, a modicum of safe haven demand might be just what untangles the Treasury riddle.

April 21 – Bloomberg (Matthew Brooker): “Mohamed El-Erian, former co-chief investment officer of Pacific Investment Management Co., says the Federal Reserve needs to find a way to exit its extremely loose monetary policy, and delaying a start to the process is risky. It still has a window to exit in a relatively orderly manner but this is getting smaller by the day. Markets are likely to see something between the 2013 taper tantrum and the 2008 Lehman moment if the Fed misses its window, according to the former Pimco executive.”

For the Week:

The S&P500 was little changed (up 11.3% y-t-d), while the Dow slipped 0.5% (up 11.2%). The Utilities fell 1.1% (up 5.8%). The Banks were unchanged (up 25.6%), while the Broker/Dealers declined 0.7% (up 21.6%). The Transports rose 1.4% (up 21.0%). The S&P 400 Midcaps gained 0.9% (up 19.0%), and the small cap Russell 2000 added 0.4% (up 15.0%). The Nasdaq100 fell 0.7% (up 8.2%). The Semiconductors dropped 1.7% (up 14.4%). The Biotechs advanced 1.5% (down 1.9%). While bullion was little changed, the HUI gold index declined 0.6% (down 3.1%).

Three-month Treasury bill rates ended the week at 0.015%. Two-year government yields were little changed at 0.16% (up 4bps y-t-d). Five-year T-note yields declined two bps to 0.82% (up 46bps). Ten-year Treasury yields slipped two bps to 1.56% (up 64bps). Long bond yields fell three bps to 2.24% (up 59bps). Benchmark Fannie Mae MBS yields declined two bps to 1.84% (up 50bps).

Greek 10-year yields were unchanged at 0.90% (up 28bps y-t-d). Ten-year Portuguese yields were little changed at 0.40% (up 37bps). Italian 10-year yields rose three bps to 0.78% (up 24bps). Spain's 10-year yields added a basis point to 0.40% (up 35bps). German bund yields increased one basis point to negative 0.26% (up 31bps). French yields jumped nine bps to 0.08% (up 42bps). The French to German 10-year bond spread widened about nine to 34 bps. U.K. 10-year gilt yields declined two bps to 0.74% (up 55bps). U.K.'s FTSE equities index fell 1.2% (up 7.4% y-t-d).

Japan's Nikkei Equities Index dropped 2.2% (up 5.7% y-t-d). Japanese 10-year "JGB" yields declined two bps to 0.07% (up 5bps y-t-d). France's CAC40 slipped 0.5% (up 12.7%). The German DAX equities index fell 1.2% (up 11.4%). Spain's IBEX 35 equities index was little changed (up 6.7%). Italy's FTSE MIB index dropped 1.4% (up 9.7%). EM equities were mixed. Brazil's Bovespa index declined 0.5% (up 1.3%), while Mexico's Bolsa gained 0.7% (up 11.4%). South Korea's Kospi index slipped 0.4% (up 10.9%). India's Sensex equities index dropped 2.0% (up 0.3%). China's Shanghai Exchange rallied 1.4% (unchanged). Turkey's Borsa Istanbul National 100 index sank 4.5% (down 8.9%). Russia's MICEX equities index was unchanged (up 9.4%).

Investment-grade bond funds saw inflows of $4.881 billion, while junk bond funds posted outflows of $1.325 billion (from Lipper).

Federal Reserve Credit last week expanded $69.5bn to a record $7.762 TN. Over the past 84 weeks, Fed Credit expanded $4.035 TN, or 108%. Fed Credit inflated $4.951 Trillion, or 176%, over the past 441 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week increased $5.8bn to $3.560 TN. "Custody holdings" were up $240bn, or 7.2%, y-o-y.

Total money market fund assets increased $15.6bn to $4.470 TN. Total money funds dropped $182bn y-o-y, or 3.9%.

Total Commercial Paper rose $11.6bn to an 11-year high $1.219 TN. CP was up $85bn, or 14.1%, year-over-year.

Freddie Mac 30-year fixed mortgage rates dropped seven bps to 2.97% (down 36bps y-o-y). Fifteen-year rates fell six bps to 2.29% (down 57bps). Five-year hybrid ARM rates increased three bps to 2.83% (down 45bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up a basis point to 3.07% (down 63bps).

Currency Watch:

April 18 – Bloomberg: “China sought to allay fears it wants to topple the dollar as the world’s main reserve currency as Beijing makes bigger strides in creating its own digital yuan. People’s Bank of China Deputy Governor Li Bo said the goal for internationalizing its currency is not to replace the dollar, and the efforts to create a digital yuan are aimed at domestic use. ‘For the internationalization of the renminbi, we have said many times that it’s a natural process, and our goal is not to replace the U.S. dollar or other international currencies,’ Li said… ‘I think our goal is to allow the market to choose, to facilitate international trade and investment.’”

For the week, the U.S. dollar index declined 0.8% to 90.859 (up 1.0% y-t-d). For the week on the upside, the Brazilian real increased 2.1%, the euro 1.0%, the Norwegian krone 0.9%, the Japanese yen 0.9%, the New Zealand dollar 0.8%, the Swiss franc 0.7%, the Swedish krona 0.6%, the Singapore dollar 0.5%, the Mexican peso 0.4%, the British pound 0.3%, the Canadian dollar 0.3%, the South African rand 0.2%, and the Australian dollar 0.1%. On the downside, the South Korean won declined 0.1%. The Chinese renminbi increased 0.37% versus the dollar this week (up 0.48% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index rose 2.2% (up 13.3% y-t-d). Spot Gold was little changed at $1,777 (down 6.4%). Silver was about unchanged at $26.005 (down 1.5%). WTI crude declined 99 cents to $62.14 (up 28%). Gasoline fell 2.2% (up 42%), while Natural Gas jumped 1.9% (up 8%). Copper rose 4.2% (up 23%). Wheat surged 8.7% (up 11%). Corn jumped 10.2% (up 31%). Bitcoin sank $11,438, or 18.4%, this week to $50,568 (up 74%).

Coronavirus Watch:

April 21 – Reuters (David Shepardson): “The U.S. State Department has added at least 116 countries this week to its ‘Level Four: Do Not Travel’ advisory list, putting the UK, Canada, France, Israel, Mexico, Germany and others on the list, citing a ‘very high level of COVID-19.’”

April 22 – CNBC (Rich Mendez): “Scientists at Texas A&M University’s Global Health Research Complex say they’ve detected a new Covid-19 variant that shows signs of a more contagious strain that causes more severe illness and appears to be resistant to antibodies. The new variant, BV-1, named after its Brazos Valley origin, was found during Texas A&M’s routine coronavirus screening via saliva sample in a young student who had mild cold-like symptoms.”

April 22 – Bloomberg (Bhuma Shrivastava and Upmanyu Trivedi): “India saw the world’s biggest one-day jump in coronavirus cases ever as a ferocious new wave grips the country, overwhelming hospitals and crematoriums and prompting frantic cries for help on social media. The South Asian nation reported 314,835 new infections Thursday, topping a peak of 314,312 recorded in the U.S. on Dec. 21. People took to Twitter and Instagram to call for everything from hospital beds to medicine and doorstep Covid-19 tests.”

April 22 – Bloomberg (Enda Curran and Eric Martin): “The renewed surge in Covid-19 infections is threatening to further divide the world economy between the rich and poor, potentially damaging overall global growth if the fresh outbreaks spread or if key sources of demand falter. More people were diagnosed with Covid-19 last week than any other since the pandemic began. The World Health Organization this week warned that new infections are increasing everywhere except Europe, led by rocketing numbers in India with cases also rising in Argentina, Turkey and Brazil. That’s casting a shadow over a previously vigorous global economic rebound…”

April 21 – CNBC (Berkeley Lovelace Jr.): “The chief medical officer of BioNTech told CNBC… people will likely need a third shot of its two-dose Covid-19 vaccine as immunity against the virus wanes, agreeing with previous comments made by Pfizer CEO Albert Bourla. Dr. Ozlem Tureci, co-founder and CMO of BioNTech, which developed a Covid vaccine with Pfizer, said she also expects people will need to get vaccinated against the coronavirus annually, like for the seasonal flu.”

Market Mania Watch:

April 21 – Bloomberg (Misyrlena Egkolfopoulou, Annie Massa, and Anders Melin): “In Silicon Valley, Nir Eyal is the habits guy. Want to understand how to get app users to come back again and again? Then Eyal is your man. A former lecturer at Stanford’s Graduate School of Business and an angel investor, he’s studied how companies such as Facebook Inc. and Twitter Inc. encourage users to spend time on their platforms. He didn’t invent the techniques, some of which were also being observed and taught by others on the Stanford campus by the 2010s. The place was a hotbed of behaviorally informed design. But Eyal summed up what he saw in a PowerPoint-friendly four-step model that showed how the smartest designers were turning their products into habits. In blog posts and articles in 2012, he called it ‘the desire engine.’ It was around this time Eyal says he was approached in a Palo Alto coffee shop by a young techie named Baiju Bhatt with a bold plan for a no-fee stock-trading app. He wanted to show it to Eyal. A year later, Bhatt and his business partner, Vlad Tenev, would launch their company, Robinhood.”

April 19 – Bloomberg (Katie Greifeld and Vildana Hajric): “A rocky weekend for the legions that poured into all things crypto after Coinbase Global Inc.’s direct listing did little to undermine its grip on retail traders. Dogecoin rallied another 20% or so Monday, even after most of the biggest tokens, including Bitcoin slumped further. To Mike McGlone, a Bloomberg Intelligence commodity strategist, the recent run-up in the joke token is exemplary of retail’s involvement in crypto markets. His plumber told him recently that he’d bought in. To McGlone, it’s a result of the ‘perfect storm’ of pandemic lock-ups, lots of cash in the system, and investors’ ability to speculate around the clock. ‘Markets will never change -- this one is just 24/7 and the easiest to access in history,’ he said. It’s ‘a prime example of just plain gambling for fun -- unless participants lose too much money, notably because they took too much risk at the casino.’”

April 22 – Wall Street Journal (Nicole Friedman): “The relentless climb in U.S. home prices and tightening supply threaten to cool the hottest housing market in 15 years, sending frustrated home buyers to the sidelines. The median price for existing home sales rose to $329,100 in March, a new high… Prices soared 17.2% last month from a year earlier, marking the biggest price increase in NAR data going back to 1999. Steepening prices, combined with a scarcity of inventory that has left the U.S. housing market millions of homes short of buyer demand, have taken some steam out of the market at the start of the peak spring selling season.”

April 21 – Financial Times (Tobias Levkovich): “For equity markets, the parallels between current conditions and those of 1999 are striking and worrisome. The investor mood in markets has been in ebullient territory since last November… That is the signal from Citigroup’s gauge of investor sentiment — the Panic/Euphoria Model — which takes into account factors including the amount of investor positions anticipating a fall in stocks, the level of funds borrowed to purchase securities and commodity price futures. The last time we saw such an upbeat zeitgeist that did not coincide with an immediate equity market correction was in 1999 when the dotcom bubble was in full bloom. Typically in the past, when our gauge is at such high levels, it would indicate a 100% probability of lower share prices over the next 12 months.”

April 21 – Wall Street Journal (Heather Somerville): “Deal flow and valuations are reaching new heights in technology startups, as a flood of cheap cash fuels efforts to find the industry’s next big winners, from software to social media. In the first quarter this year, U.S. startups raised $69 billion from investors—41% more than the previous record, set in the fourth quarter of 2018, according to… PitchBook Data Inc. The average valuation for startups at all stages also reached a new high, and more than tripled from last year to $1.6 billion for late-stage companies. ‘I’ve never seen it this frenzied,’ said Larry Albukerk, who started his investment fund EB Exchange… in 1999. ‘It’s lightning-fast rounds with a lot of cash.’”

April 23 – Wall Street Journal (Matt Wirz): “The wave of cash raised by special-purpose acquisition companies is rolling into the junk debt market, aiding distressed companies and rewarding investors who own their bonds and loans. SPACs, also known as blank-check companies, have issued roughly $100 billion of stock this year, a record, to buy private companies and take them public. Some SPACs are targeting companies with below-investment-grade credit ratings, hoping to use their cash piles to pay down debt and grow the businesses. Not since the dot.com-boom two decades ago has stock-market enthusiasm been hot enough to fuel such activity in debt markets, bond investors and analysts say.”

April 21 – CNBC (Yun Li): “SPAC mania has come to a screeching halt. Just last month, special purpose acquisition companies celebrated a head-turning milestone by breaking their 2020 issuance record in just three-month’s time. After more than 100 new deals in March alone, issuance is nearly at a standstill with just 10 SPACs in April… The drastic slowdown came after the Securities and Exchange Commission issued accounting guidance that would classify SPAC warrants as liabilities instead of equity instruments.”

Market Instability Watch:

April 21 – Wall Street Journal (Sam Goldfarb): “A key measure of the perceived risk in low-rated corporate bonds is hovering around its lowest level in more than a decade, highlighting investors’ mounting confidence in the economic outlook. The average extra yield, or spread, investors demand to hold speculative-grade corporate bonds over U.S. Treasurys dropped below 3 percentage points this month to as low as 2.90 percentage points for the first time since 2007, when it set a record of 2.33 percentage points… Yields on low-rated corporate bonds already hit a record low of 3.89% in February.”

Inflation Watch:

April 21 – Bloomberg (Grant Smith and Julian Lee): “The unprecedented oil inventory glut that amassed during the coronavirus pandemic is almost gone, underpinning a price recovery that’s rescuing producers but vexing consumers. Barely a fifth of the surplus that flooded into the storage tanks of developed economies when oil demand crashed last year remained as of February, according to the International Energy Agency. Since then, the lingering remnants have been whittled away as supplies hoarded at sea plunge and a key depot in South Africa is depleted.”

April 20 – Wall Street Journal (Sharon Terlep): “Procter & Gamble Co. this fall will start charging more for household staples from diapers to tampons, the latest and biggest consumer-products company to announce price increases. The maker of Gillette razors and Tide detergent cited rising costs for raw materials, such as resin and pulp, and higher expenses to transport goods. The announcement, which P&G said could be a precursor to broader increases, follows a similar move last month by rival Kimberly-Clark Corp. ‘This is one of the bigger increases in commodity costs that we’ve seen over the period of time that I’ve been involved with this, which is a fairly long period of time,’ said P&G Operating Chief Jon Moeller…”

April 21 – Wall Street Journal (Ruth Simon and Dave Sebastian): “An Oklahoma restaurant is paying nearly $200 for a case of gloves that normally costs $40. A medical-device maker in Colorado is tweaking the way it manufactures its products to offset higher plastic costs. A clothing wholesaler in Michigan has hundreds of hoodies it has yet to sell because winter was over by the time they arrived from Bangladesh. The supply-chain disruptions rippling across the business world are taking a heavy toll on small U.S. companies, which have fewer resources to absorb or push back on price increases and less leverage to pass along the higher costs to customers. Forty-four percent of small businesses reported temporary shortages or other supply-chain problems in March, according to a survey of roughly 800 companies by Vistage Worldwide Inc…”

April 22 – Bloomberg: “Steel futures in Shanghai hit record levels, as China’s attempts to talk down commodities prices and head off inflation fail to have the desired effect. The last intervention from the industry ministry on Tuesday was a promise to work across departments to stabilize raw materials markets and crack down on a familiar litany of sins, including panic buying, hoarding, monopolistic behavior and malicious speculation. The effort to jawbone prices lower seems to be wearing thin, though. In addition to the records set for sheet steel and rebar, copper and aluminum have resumed their ascent to the decade highs hit earlier in the year. Thermal and coking coal futures are both near their all-time bests, while crop prices also remain elevated.”

April 22 – Bloomberg (Kim Chipman and Bre Bradham): “Corn extended its ascent to the highest in almost eight years, leading a rally in crop futures on bets that voracious Chinese demand, rebounding economies and adverse weather will leave silos depleted. Corn jumped by the exchange limit, with wheat following and soybeans topping $15 a bushel for the first time since 2014. Cold and drought in some regions are stoking concern there won’t be enough grain and oilseed to satisfy China’s massive need for livestock feed or to meet growing biofuel demand as the world economy recovers from the virus pandemic. China is so eager for more corn that it’s already scooping up next season’s crop, and demand isn’t expected to slow this year.”

April 21 – Reuters (Naveen Thukral): “Chicago corn futures gained more ground on Thursday, with prices jumping to a new eight-year high as cold weather in the United States and declining crop conditions in Brazil raised worries over global supplies. Soybeans rose to their highest since June 2014, gaining 1.3, while wheat was up for a third consecutive session.”

April 19 – Reuters (Rajesh Kumar Singh): “Farmers flush with cash after a run-up in grain prices are clamoring for farm machinery maker AGCO Corp to get them new equipment in time for this year’s harvest. This is a boom time for the Georgia-based company after years of depressed demand. But AGCO is scrambling to keep up because disruptions all along its supply chain have left it short of the steel, plastics, microchips and tires it needs to make tractors and combines. Some of its suppliers in the United States and Europe are facing a labor crunch because of the coronavirus pandemic. The supply logjam has hit AGCO, one of the world’s largest farm machinery makers, just as planting season gets under way in the Northern Hemisphere.”

Biden Administration Watch:

April 22 – Bloomberg (Laura Davison and Allyson Versprille): “President Joe Biden will propose almost doubling the capital gains tax rate for wealthy individuals to 39.6% to help pay for a raft of social spending that addresses long-standing inequality, according to people familiar… For those earning $1 million or more, the new top rate, coupled with an existing surtax on investment income, means that federal tax rates for wealthy investors could be as high as 43.4%. The new marginal 39.6% rate would be an increase from the current base rate of 20%... A 3.8% tax on investment income that funds Obamacare would be kept in place, pushing the tax rate on returns on financial assets higher than rates on some wage and salary income, they said.”

April 22 – New York Times (Jim Tankersley): “The next phase of President Biden’s $4 trillion push to overhaul the American economy will seek to raise taxes on millionaire investors to fund education and other spending plans, but it will not take steps to expand health coverage or reduce prescription drug prices, according to people familiar with the proposal. Administration officials had planned to include a health care expansion of up to $700 billion, offset by efforts to reduce government spending on prescription drugs. But they have decided to instead pursue health care as a separate initiative, a move that sidesteps a fight among liberals on Capitol Hill but that risks upsetting some progressive groups that have pushed Mr. Biden to prioritize health issues.”

April 20 – Bloomberg (Laura Davison and Gregory Korte): “President Donald Trump’s 2017 tax law disproportionately targeted Democrats in high-tax states by eliminating a popular federal deduction. Now Trump’s legislative triumph has put President Joe Biden in a bind. Newly released Internal Revenue Service data show the politically lopsided impact of the $10,000 cap on deducting state and local taxes, or SALT -- and why Democrats from the hardest-hit SALT states may be willing to cost Biden the crucial victory of passing his $2.25 trillion infrastructure and social services plan if he continues to insist on keeping Trump’s cap in place.”

April 21 – New York Times (Matthew Goldstein): “Wall Street’s new watchdog, Gary Gensler, is coming to the job with an ambitious agenda that includes taking a hard look at how to regulate digital currencies and requiring more environmental disclosures of companies. But the market may already be dictating some of the agenda for Mr. Gensler. A former banker and regulator, Mr. Gensler, 63… took office on Saturday. One of the first things he will probably have to weigh in on as chairman is whether to assert more control over the red-hot market for special purpose acquisition companies, or SPACs, those speculative businesses that have raised well over $100 billion from investors. He must also decide whether the S.E.C. should do more to protect small investors, who have recently become a major force in the stock markets…”

April 22 – Reuters (Patricia Zengerle and Michael Martina): “A bipartisan U.S. congressional push to counteract China picked up steam… as a Senate committee overwhelmingly backed a bill pressing Beijing on human rights and economic competition, while other lawmakers introduced a measure seeking billions for technology research. The Senate Foreign Relations Committee backed the ‘Strategic Competition Act of 2021’ by 21-1, sending the bill for consideration by the 100-member Senate, even as committee members voiced a need to do even more to counteract Beijing. The committee added dozens of amendments to the bill.”

April 20 – Associated Press (Eric Tucker): “The Biden administration is taking steps to protect the country’s electricity system from cyberattacks through a new 100-day initiative combining federal government agencies and private industry. The initiative… encourages owners and operators of power plants and electric utilities to improve their capabilities for identifying cyber threats to their networks. It includes concrete milestones for them to put technologies into use so they can spot and respond to intrusions in real time.”

Federal Reserve Watch:

April 20 – Reuters (Ann Saphir): “The U.S. economy is going to temporarily see ‘a little higher’ inflation this year as the recovery strengthens and supply constraints push up prices in some sectors, but the Federal Reserve is committed to limiting any overshoot, Fed Chair Jerome Powell said in a… letter to Senator Rick Scott. ‘We do not seek inflation that substantially exceeds 2%, nor do we seek inflation above 2% for a prolonged period,’ Powell said in a five-page response to a March 24 letter in which the Florida Republican raised concerns about rising inflation and the U.S. central bank’s bond-buying program. Those modifiers – ‘substantially’ exceeding 2% inflation or above that level for a ‘prolonged’ period - help to more sharply define the upper bounds of the Fed's comfort zone as prices rise.”

April 19 – New York Times (Jeanna Smialek): “In mid-2019, Jerome H. Powell fielded a question from reporters that he often faced in those days: Were politics, and particularly a pressure campaign coming from Donald J. Trump’s White House to cut interest rates, influencing the Federal Reserve’s policy stance? Mr. Powell… tried as he had for months to convince the public that he and his colleagues were not bowing to the Republican administration. ‘We never take into account political considerations,’ he said. Nearly two years later, the Fed again faces warnings of politicization — but this time from Republican lawmakers who say it risks veering out of its lane as it focuses on what they portray as social priorities. Fed officials have ramped up their attention to climate change risks, racial economic equity and labor market inclusion, issues that many economists say are critical to the nation’s future, but which Washington often treats as the purview of the partisan left.”

U.S. Bubble Watch:

April 23 – Reuters (Lucia Mutikani): “Sales of new U.S. single-family homes rebounded more than expected in March, likely boosted by an acute shortage of previously owned houses on the market… New home sales surged 20.7% to a seasonally adjusted annual rate of 1.021 million units last month. Economists… had forecast… a rate of 886,000 units in March.”

April 22 – Associated Press (Christopher Rugaber): “The number of Americans applying for unemployment aid fell last week to 547,000, the lowest point since the pandemic struck… Applications declined 39,000 from a revised 586,000 a week earlier. Weekly jobless claims are down sharply from a peak of 900,000 in early January. At the same time, they’re still far above the roughly 230,000 level that prevailed before the viral outbreak ripped through the economy in March of last year.”

April 21 – Associated Press (Joyce M. Rosenberg): “It looks like something to celebrate: small businesses posting ‘Help Wanted’ signs as the economy edges toward normalcy. Instead, businesses are having trouble filling the jobs, which in turn hurts their ability to keep up with demand for their products or services. Owners say that some would-be workers are worried about catching COVID-19 or prefer to live off unemployment benefits that are significantly higher amid the pandemic. Child care is another issue — parents aren’t able to work when they need to tend to or home-school their children. For some people, a combination of factors go into their decision not to seek work.”

April 22 – Yahoo Finance (Brian Sozzi): “If you believe the market is a forward looking mechanism — and most investors would agree that it is — then you may want to prepare your portfolios for a sharp slowdown in economic growth later this year and into 2022 as fiscal stimulus wanes. U.S. economic growth for this year is ‘peaking,’ Goldman Sachs strategists led by Ben Snider warned… Snider said Goldman's economists predict 10.5% GDP growth for the second quarter, the strongest quarterly growth rate since 1978. The projection is also near the high-end of most economists on Wall Street. From there, well, it's all downhill for GDP growth. Goldman estimates growth in the third and fourth quarters of this year will clock in at 7.5% and 6.5%, respectively.”

April 19 – Bloomberg (Shahien Nasiripour): “The four largest U.S. banks gathered $919 billion in additional deposits last year… Deposits at JPMorgan…, Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. collectively grew by 15% to $6.9 trillion as of March 31… Their combined loan holdings fell 10% to $3.44 trillion. Trading assets and other securities increased 24% to $3.67 trillion. Cash surged by 56% to $1.65 trillion.”

April 21 – Bloomberg (Christopher Jasper and Siddharth Philip): “The airline industry’s chief lobby group widened its estimate for losses this year by a quarter, saying new Covid-19 flare-ups and mutations have pushed back the timeline for a restart of global air travel. Carriers will lose $47 billion to $48 billion in 2021, the International Air Transport Association said… It had earlier forecast a $38 billion deficit.”

April 21 – Reuters (Jessica Dinapoli): “Gamestop Corp chief executive George Sherman can step down this summer with a $179 million windfall that dwarfs CEO salaries at many larger corporations thanks to a sweetheart deal that was turbocharged by this year’s furious meme stock rally… GameStop said… that Sherman would step down by July 31. The struggling U.S. videogame retailer has been seeking a new leader to work on its e-commerce transition…”

Fixed Income Watch:

April 19 – Reuters (Yoruk Bahceli and Tom Arnold): “Junk-rated and emerging-market companies look set to raise record amounts of debt in coming months, urged on by bankers who advise taking advantage of funding markets before Treasury yields rise and push up borrowing costs… Even as Treasury markets were roiled during the first quarter, junk-rated firms raced to tap markets and raised a record $205 billion, according to Refinitiv… Leveraged loans, also used by junk-rated companies, saw $301 billion raised in the United States for the second-highest quarter ever, according to JP Morgan… Emerging-market companies, also vulnerable to higher rates, raised a record $165 billion in the first quarter…”

April 22 – Bloomberg (Alex Wittenberg): “Junk-rated U.S. companies set a record on Thursday for most bonds ever sold in April, capping a 12-month issuance boom. The wave isn’t expected to break any time soon as companies move from refinancing to acquisitions, dividends and stock buybacks… ‘As long as capital is available, I think it can go on,’ said Justin Bourgette, a high-yield portfolio manager at Eaton Vance. Jazz Pharmaceuticals’ $1.5 billion note offering… helped lift the month’s supply to $38.9 billion, edging out the prior April record of $38.8 billion set in 2014…”

April 21 – Bloomberg (Caleb Mutua and Lauren Coleman-Lochner): “Rating companies have ripped up forecasts for double-digit defaults in U.S. credit markets as cheap funding and an accelerating economic recovery pull highly-indebted companies out of trouble… Fitch Ratings cut its forecast for this year’s junk defaults to just 2%, thanks to ample liquidity amid government stimulus, as well as rising oil prices and a lack of big debt payments coming due. The rate of missed debt payments could be as little as 1%, making it the lowest since 2013, Fitch’s Eric Rosenthal and Brendan Hoelmer wrote… S&P Global Ratings is less optimistic, projecting the U.S. trailing 12-month speculative-grade corporate default will be 5.5% by December.”

April 21 – Reuters (Pete Schroeder): “Record-breaking Wall Street bank bond offerings in recent days are being driven by a combination of extraordinary market conditions and regulatory decisions that can be traced to the government’s pandemic relief efforts, said analysts. JPMorgan Chase, Bank of America, Goldman Sachs and Morgan Stanley have or are planning to issue a total of $40 billion in debt… JPMorgan's $13 billion April 15 bond sale was briefly an industry record until it was topped the next day by Bank of America's $15 billion offering.”

China Watch:

April 19 – Bloomberg: “Chinese President Xi Jinping called for greater global economic integration and warned against decoupling while calling on the U.S. and its allies to avoid ‘bossing others around.’ ‘International affairs should be conducted by way of negotiations and discussions, and the future destiny of the world should be decided by all countries,’ Xi said… ‘One or a few countries shouldn’t impose their rules on others, and the world shouldn’t be led on by the unilateralism of a few countries.’”

April 20 – Bloomberg (Shuli Ren): “The Chinese government controls valuable assets in strategic areas through state-owned enterprises. But SOEs are also inefficient, prone to corruption, and heavily indebted. As of 2019, the latest year for which data are available, SOEs had 126 trillion yuan ($19.4 trillion) of debt, or about 40% of the nation’s total government, corporate, and household debt, helping to make China one of the most heavily indebted countries in the world. China has been trying to get its SOEs to slim down. Although this is mostly a domestic affair, once in a while, its reform agenda can clash directly with foreigners’ interests. China Huarong Asset Management Co., majority-owned by the Ministry of Finance, is a prime test case.”

April 21 – Bloomberg: “China is considering a plan that would see the central bank assume more than 100 billion yuan ($15bn) of assets from China Huarong Asset Management Co., helping the state-owned company clean up its balance sheet and refocus on its core business of managing distressed debt, people familiar… said. Under a proposal that’s still being finalized and could change, a unit of the People’s Bank of China would assume assets from some of Huarong’s unprofitable operations, the people said…”

April 22 – Bloomberg (Sofia Horta e Costa): “The ride for China Huarong bondholders just gets more intense. A drip-feed of clues on what Beijing plans to do with the bad-debt manager is causing some of the most volatile swings investors have seen in years. The market’s current take is China is proactively trying to resolve a crisis -- and that’s a good thing. The unprofitable businesses are being offloaded and won’t cause further losses to the parent. This separation will allow the bank to lower its risk and to deleverage, creating a sound business model for the future. China Huarong dollar debt rose on Wednesday, with the 4.5% perpetual bond gaining 6.4 cents on the dollar to 79.8 cents. This comforting take assumes that the central bank will also absorb the majority -- if not all -- of China Huarong’s liabilities, such as its debts. According to this Bloomberg News report, the People’s Bank of China is considering taking on 100 billion yuan of China’s Huarong’s assets.”

April 20 – Bloomberg (Sofia Horta e Costa and Rebecca Choong Wilkins): “China Huarong Asset Management Co.’s dollar bonds sank Tuesday after Reorg Research reported regulators are considering options for the company that include restructuring the debt of its offshore unit. A debt restructuring is one of several options under discussion and a decision is far from finalized... Almost all of China Huarong’s $22 billion in dollar bonds are issued or guaranteed by China Huarong International Holdings Ltd., the offshore unit.”

April 21 – Financial Times (Thomas Hale): “When the former chair of China’s biggest manager of distressed debt was executed in January, the focus had been on the Rmb1.8bn ($280m) of bribes he had been found guilty of taking. The amount misappropriated by Huarong Asset Management’s Lai Xiaomin, whose crimes included abusing the power to allocate credit and bigamy, was the highest since the founding of the People’s Republic of China in 1949, according to the judge that presided over the case. But investors’ attention has now turned to a number many times bigger: the $22bn of dollar-denominated bonds owed by the state-owned company.”

April 19 – Reuters (Kevin Yao): “The China Securities Regulatory Commission (CSRC) is paying close attention to risks from large inflows and outflows of foreign funds in Chinese stock markets, its vice chairman Fang Xinghai said…”

April 19 – Wall Street Journal (Frances Yoon): “A huge run-up in foreign holdings of Chinese government bonds has stalled, with international investors hitting pause on their purchases… International ownership of Chinese government debt declined slightly in March to the equivalent of $313 billion… Holdings fell about 1% to 2.04 trillion yuan, from 2.06 trillion yuan a month earlier. That was the first drop in foreign investors’ positions since February 2019.”

April 19 – Financial Times (Christian Shepherd): “China’s carmakers are stepping up their challenge to Tesla’s dominance in the country’s electric vehicle market, using this week’s Shanghai auto show to display an array of new models and technology designed to appeal to younger buyers. The groups are launching more than a dozen models at the show…, in their attempt to topple Tesla’s Model 3 saloon as the country’s best-selling electric car and capture market share... Surveys suggest Chinese brands are becoming increasingly popular with younger customers who are more likely to buy domestic models, with leading groups such as Geely, Nio and Xpeng using technology to attract interest.”

April 18 – Bloomberg: “China’s retail investors are quickly cooling their enthusiasm for mutual funds. New issuance of equity and mix-allocation funds - the latter also mostly exposed to stocks - has fallen to 16.4 billion yuan ($2.5bn) in the two weeks through April 14, according to UBS AG data. That’s less than 10% of the amount raised in March and puts April on track to be one of the worst months for fund launches in well over a year.”

April 21 – Financial Times (Ryan McMorrow): “Ant Group’s money market fund has shrunk to a more than four-year low as users shifted their cash in the face of China’s crackdown on Jack Ma’s payments group. Funds invested in Ant’s flagship Yu’e Bao fund fell 18% in the first three months of the year to Rmb972bn ($150bn) as the group pushed users to switch to other providers’ funds…”

April 20 – Financial Times (Yuan Yang): “China’s censors have restricted the spread online of a personal essay written by former premier Wen Jiabao about his late mother that some dissidents said could be construed as criticism of President Xi Jinping’s leadership. The essay, titled ‘My Mother’, was initially published by a Macau newspaper in a series of instalments around the tomb-sweeping festival this month. The essay was reposted by mainstream Chinese media outlets at the weekend but has since disappeared from those websites.”

Global Bubble Watch:

April 21 – Bloomberg (Lisa Abramowicz): “It’s fair to say that $12.3 trillion of stimulus seems to have killed off the U.S. credit default cycle. Almost all fear of bankruptcy has been obliterated from debt markets even though the global economy is still struggling under the worst health crisis in a century. The simplest way to see this is quite basic: The lowest-rated companies are enjoying the cheapest borrowing costs in history. All-in yields on corporate debt rated triple-C and below have fallen to about 8% from as high as 20.2% as recently as March 2020… Investors have raced one another to lend billions of dollars to cruise companies and airlines even as they bleed cash. The amount of U.S. junk-rated debt included in the Bloomberg Barclays U.S. High Yield bond index has surged to a record face value of $1.53 trillion from $1.2 trillion in October 2019.”

April 22 – Bloomberg (Patrick Winters and Marion Halftermeyer): “Credit Suisse Group AG is planning to slash lending to hedge funds by a third after the Archegos Capital blowup cost the bank $5.5 billion and forced it to tap investors for additional capital. The Swiss lender… said it’s conducting a review with a goal of ‘resizing and derisking prime brokerage and prime financing businesses’… It plans to focus the business on clients that have relationships with other parts of the firm and will reduce lending to hedge funds by some $35 billion, Chief Financial Officer David Mathers said… The losses -- among the costliest in the bank’s 165-year history -- have wiped out more than a year of profit…”

April 22 – Bloomberg (Joe Light and Ben Stupples): “The implosion of Archegos is giving thousands of secretive family offices the greatest challenge to their privacy in a decade. They won’t give it up without a fight. Some lawmakers, regulators and consumer advocates are pushing to expose the inner workings of family offices, which are closely held and lightly regulated yet manage an estimated $6 trillion for the ultra-rich globally. The changes the reform advocates seek would require U.S. family offices to register as investment advisers and publicly report holdings on a quarterly basis, as most other types of investment firms must.”

April 20 – Financial Times (Stephen Morris, Tabby Kinder, Owen Walker and Robert Smith): “Five months before Greensill Capital’s collapse, Credit Suisse invited a special guest to present to its top ranks in Asia. The visitor was hailed as the sort of bold entrepreneur the bank wanted to do business with: Lex Greensill. ‘The tone was this is the exact kind of client the bank wants, tell the MDs to go out and find more guys like Lex,’ said one senior manager… Yet just two months earlier Greensill Capital had been put on a ‘watchlist’ by the Swiss bank’s risk managers in Asia, according to people familiar with the matter.”

April 20 – New York Times (Paul Mozur, Cecilia Kang, Adam Satariano and David McCabe): “China fined the internet giant Alibaba a record $2.8 billion this month for anticompetitive practices, ordered an overhaul of its sister financial company and warned other technology firms to obey Beijing’s rules. Now the European Commission plans to unveil far-reaching regulations to limit technologies powered by artificial intelligence. And in the United States, President Biden has stacked his administration with trustbusters who have taken aim at Amazon, Facebook and Google. Around the world, governments are moving simultaneously to limit the power of tech companies with an urgency and breadth that no single industry had experienced before.”

April 22 – Bloomberg (Taylan Bilgic and Firat Kozok): “One of Turkey’s largest cryptocurrency exchanges said it lacked the financial strength to continue operations, leaving hundreds of thousands of investors fearing their savings have evaporated as authorities sought to locate the company’s 27-year-old founder, who fled the country. Confusion reigned about how many users of the Thodex exchange were affected and how much money was at stake… The government moved to block the company’s accounts and police raided its head office in Istanbul. Losses could be as high as $2 billion…”

April 23 – Bloomberg (Onur Ant): “Turkey launched an international manhunt for the founder of one of its major cryptocurrency exchanges after he stopped paying clients and fled the country. The Justice Ministry is seeking a so-called red notice under which Interpol would help find, provisionally arrest and return Thodex Chief Executive Officer Faruk Fatih Ozer from Albania to Turkey… Turkish police have detained 62 people in eight cities including Istanbul, where Thodex was based, while 16 others remain at large, it said.”

April 20 – Financial Times (Clive Cookson): “The launch of thousands of new satellites in ‘mega-constellations’ to improve global internet access will exacerbate the growing problem of space debris, experts at a European Space Agency conference warned… ‘We face entirely new challenges as hundreds of satellites are launched every month now — more than we used to launch in a year,’ said Thomas Schildknecht of the International Astronomical Union.”

Central Banker Watch:

April 21 – Reuters (Sujata Rao): “A multi-year boom in global house prices which even a pandemic has failed to halt is forcing central banks around the world to confront a knotty question - what, if anything, should they be doing about it? The surge in property values from Australia to Sweden is often viewed benignly by governments as creating wealth. But history also shows the risk of de-stabilising bubbles and the high social cost as millions find home ownership unaffordable. The irony is that while the cheap money created by low or negative interest rates has driven the price rises, they barely figure in central banks' calculations of inflation, one of the key drivers of their monetary policy.”

April 23 – Bloomberg (Anya Andrianova): “The Bank of Russia unexpectedly raised its key interest rate by 50 bps and signaled more tightening as ruble volatility contributed to inflation risks. The benchmark rate was raised to 5% on Friday… ‘There’s a real risk of delaying the return to neutral monetary policy,’ Bank of Russia Governor Elvira Nabiullina said… ‘These risks may make it necessary for a more serious, significant increase in the rate in the future.’”

April 22 – Financial Times (Martin Arnold and Joshua Oliver): “Talk of tapering the European Central Bank’s emergency bond purchases is ‘simply premature’, according to Christine Lagarde, even though the bank’s officials are confident the eurozone economy will rebound strongly later this year… ‘We still have a long way to go for the economy to become sustainable… we have to cross the bridge of the pandemic and be able to walk on solid ground.’ In a statement… the central bank’s governing council said it had ‘decided to reconfirm its very accommodative monetary policy stance” and vowed to maintain the recently elevated pace of asset purchases.’”

April 21 – Financial Times (Martin Arnold): “Since the coronavirus pandemic hit Europe last year, conservative policymakers at the European Central Bank have put aside their discomfort with ultra-loose monetary policy to stand behind the region’s crisis-hit economy. But even as the continent remains mired in rising infections, the ‘hawks’ are urging the central bank to prepare to scale back its huge bond-buying programme. This potential shift, which risks dividing the ECB governing council and unsettling investors in eurozone bond markets, is expected to be discussed at the bank’s monetary policy meeting on Thursday, although any action is unlikely before its next meeting in June at the earliest.”

April 23 – Bloomberg (Carolynn Look): “European Central Bank policy makers expect a difficult discussion at the next monetary policy meeting in June over whether to start slowing their emergency bond-buying program, according to officials familiar with internal deliberations. While the Governing Council’s session this week was calm, resulting in no change to policy, talks on June 10 will be much more complicated and could be heated, the officials said… Some members are ready to argue that the pandemic emergency purchase program should start being scaled back in the third quarter as the economy is likely to stage a strong recovery from the pandemic in the second half of the year. That would keep the total size of bond-buying within the 1.85 trillion euros ($2.2 trillion) currently envisaged.”

April 20 – Bloomberg (Josue Leonel and Matthew Malinowski): “Brazilian policy makers should have been more cautious when cutting interest rates last year and now need to stress they will raise them as needed to bring inflation to target, according to former central bank President Ilan Goldfajn. Rather than committing to a ‘partial adjustment’ of monetary stimulus, the bank needs to show it’s ready to do whatever is necessary to control prices that will soon be rising by 8% a year, Goldfajn said… Likewise, the bank may have gone too far when it cut rates to an all-time low of 2% and signaled they would stay there for the foreseeable future, he added. ‘In an emerging market like Brazil, using forward guidance is brave,’ said Goldfajn... ‘Unfortunately, I feel that this instrument isn’t available for us yet.’”

Europe Watch:

April 19 – Associated Press (Raf Casert): “The European Union’s foreign policy chief said… in the face of the big military buildup of Russian troops near Ukraine’s borders, it will only take ‘a spark’ to set off a confrontation. In a glum assessment of relations with Moscow, Josep Borrell also said that the condition of imprisoned Russian opposition leader Alexei Navalny was ‘critical’ and that the 27-nation group would hold the Kremlin accountable for his health and safety.”

EM Watch:

April 23 – Financial Times (Jonathan Wheatley): “Governments and companies in developing nations borrowed on foreign markets at a record pace in early 2021, but investors say the risks are mounting... Borrowing through eurobonds — debt issued overseas, mostly in dollars, euros and yen — reached a new quarterly peak in the three months to March, with fundraising reaching $191bn, according to… Dealogic and Moody’s… The increase in issuance in the first quarter was especially strong among borrowers rated below investment grade, the data show, suggesting buoyant demand for riskier assets.”

April 21 – Bloomberg (Firat Kozok): “Turkish President Recep Tayyip Erdogan said authorities used $165 billion of central bank foreign-currency reserves to weather developments in 2019 and 2020, and may use them ‘again when needed.’ ‘The central bank currently has around $90 billion in reserves,’ he told lawmakers in Ankara…. ‘These reserves may be used again when needed or they may rise above $100 billion’ in the future, Erdogan said, referring to the monetary authority’s total gross reserves.”

April 18 – Bloomberg (Divya Patil): “Rising defaults have prompted India to tighten oversight of corporate bond sales, causing issuance to slump in a blow to a long-sought goal of expanding the market. Offerings of rupee notes have fallen to 43.8 billion rupees ($584 million) this month, the slowest start to a financial year since 2008… Firms defaulted on at least 52 billion rupees of domestic bonds so far this year, the most on record for a similar period.”

Japan Watch:

April 21 – Financial Times (Jennifer Lind): “Watchers of Japanese foreign policy become experts in nuance. We can talk at length about the legal distinction between ‘collective self-defence’ and ‘collective security’. We can explain all the different words for ‘apology’ used in Japanese leaders’ statements about the second world war. After last week’s summit between Japan’s prime minister Yoshihide Suga and US president Joe Biden, we have new subtleties to scrutinise. In their summit joint statement, the leaders said: ‘We underscore the importance of peace and stability across the Taiwan Strait and encourage the peaceful resolution of cross-Strait issues.’ It might seem innocuous, but the last time the allies mentioned Taiwan in a formal summit statement was in 1969. Now the question remains as to how far towards Taiwan’s defence Tokyo is willing to go.”

April 18 – Bloomberg (Yoshiaki Nohara and Yuko Takeo): “Japanese exports posted a double-digit gain for the first time in more than three years in March, offering another indication that a recovery in global trade is gaining strength. The value of overseas shipments jumped 16.1% from a year ago, for the biggest increase since November 2017, led by exports of cars, plastics, semi-conductors and chip-making equipment…”

April 22 – Bloomberg (Takashi Nakamichi): “News of the blowup spread through financial circles in Tokyo to the pulse of a familiar refrain: not again. Nomura Holdings Inc. had run into trouble far from home, this time, with the giant implosion of Archegos Capital Management in New York. Few institutions have been as humbled by the Archegos debacle as Nomura, the forever-striving giant of Japanese finance. The question now is how, or perhaps whether, Nomura can shake off this latest blow and press on with its global ambitions. Analysts wonder if heads will roll over the Archegos losses or if Nomura will quit certain businesses.”

Leveraged Speculation Watch:

April 21 – Wall Street Journal (Emily Glazer, Maureen Farrell and Margot Patrick): “Credit Suisse Group AG amassed more than $20 billion of exposure to investments related to Archegos Capital Management, but the bank struggled to monitor them before the fund was forced to liquidate many of its large positions, according to people familiar with the matter. The U.S. family investment firm’s bets on a collection of stocks swelled in the lead-up to its March collapse, but parts of the investment bank hadn’t fully implemented systems to keep pace with Archegos’s fast growth, the people said.”

April 20 – Bloomberg (Netty Ismail and Karl Lester M. Yap): “Carry traders blindsided by bouts of dollar strength are looking beyond the currency to fund their bets -- even if it means giving up some returns. Borrowing dollars to buy assets in higher-yielding currencies, a usually profitable strategy in emerging markets, proved loss-making in the first quarter as U.S. yields surged. That pushed money managers including Fidelity International and AMP Capital to cut dollar-short positions and fund their arbitrage with euro or yen, given the low interest rates in those currencies.”

April 21 – Bloomberg (Sridhar Natarajan and Marion Halftermeyer): “Wall Street banks have long relied on a familiar system to limit the dangers of trading with big clients: assign sales staff to win deals, and risk controllers to keep them in check -- even if it sacrifices some profit. At Credit Suisse Group AG, executives had given the point salesman to Archegos Capital Management on its swaps desk the new responsibility of instead overseeing risk-taking in the broader prime-brokerage unit… This year, Archegos’s swap bets spectacularly collapsed, saddling the bank with a $4.7 billion writedown, and setting it up as the biggest loser to emerge from the debacle at Bill Hwang’s family office.”

April 22 – Bloomberg (Patrick Winters and Marion Halftermeyer): “Credit Suisse Group AG is raising $2 billion from investors and cutting the hedge fund unit at the center of the Archegos Capital Management losses as Chief Executive Officer Thomas Gottstein seeks to recover from one of the most turbulent periods in the bank’s recent history. Credit Suisse… expects a related 600 million-franc ($654 million) loss in the second quarter, taking the total hit from the collapse to about $5.5 billion. In response, it’s cutting about a third of its exposure in the prime business catering to hedge fund clients, while strengthening capital with the sale of notes converting into shares.”

April 23 – Bloomberg (Love Liman): “As one of Sweden’s oldest hedge funds shuts its doors, its chief acknowledges the firm’s quantitative strategies failed to cope with pandemic-induced market ructions. Lars Ericsson, the chairman of soon-to-be defunct Informed Portfolio Management, said the fund’s medium-term models failed to handle the shock that hit markets in early 2020. ‘When the pandemic came, it was a total surprise for the models,’ he said… But he rejected the idea that quants have had their day. ‘There is definitely a future for quantitative hedge funds.’”

April 22 – Bloomberg (Love Liman): “Informed Portfolio Management, a Swedish hedge fund that had relied on statistical models to devise its strategies, is set to shut its doors and return investor capital after losing roughly $4 billion during the pandemic. IPM, whose main owner is Stockholm-based investment firm Catella AB, had assets under management of close to $5 billion in late 2019, before the pandemic hit. A year later, that amount had more than halved to $2 billion, with the investor exodus since then depleting assets to about $750 million.”

April 21 – Financial Times (Robin Wigglesworth and Laurence Fletcher): “Computer-driven investment funds are rebounding from a painful stretch, with big firms such as Clifford Asness’s AQR posting dramatic rebounds after several years of struggles, cutbacks and multibillion-dollar redemptions. Few firms were hit as hard as AQR in the ‘quant winter’ that chilled the performance of quantitative investment strategies in recent years, with the firm shedding $86bn in assets from its 2018 peak. But AQR’s $1.4bn Absolute Return fund — which combines a lot of its strategies in one wrapper — climbed 21.6% in the first quarter, and is now up by a third since the end of September. About 65% of quant mutual funds have surpassed their benchmarks in 2021, according to Nomura.”

Social, Political, Environmental, Cybersecurity Instability Watch:

April 22 – Wall Street Journal (Andrew Restuccia and Timothy Puko): “President Biden sought to assert U.S. leadership in global climate talks, committing to a sharp reduction in the nation’s greenhouse-gas emissions at a summit Thursday that drew promises from other world leaders to take action and calls for rich nations to shoulder more responsibility. ‘No nation can solve this crisis on our own,’ Mr. Biden said at the start of the two-day virtual climate summit… ‘All of us, and particularly those of us that represent the world’s largest economies, we have to step up.’”

April 17 – Bloomberg (Dominic Lau and Philip Heijmans): “The U.S. and China are committed to cooperating to tackle climate change, they said in a joint statement after meetings between senior envoys last week that were held amid rising geopolitical tensions between the two countries. The two nations will work together and with other parties to support implementation of the Paris Agreement and to promote a successful United Nations climate change conference in Glasgow later this year, they said.”

April 18 – Bloomberg (Alastair Marsh): “Investors managing $11 trillion have called on the world’s biggest banks to phase out financing of fossil-fuel companies and throw their weight behind the goals of the Paris climate agreement. Asset managers… have asked 27 banks to commit to eliminating emissions across their operations by 2050, including those generated from lending, trading and underwriting, and set interim reduction targets. The group of 35 investors… also said the banks should expand their green finance activities and withdraw from any projects that are at odds with the Paris accord.”

April 17 – Associated Press: “The man-made lakes that store water supplying millions of people in the U.S. West and Mexico are projected to shrink to historic lows in the coming months, dropping to levels that could trigger the federal government’s first-ever official shortage declaration and prompt cuts in Arizona and Nevada. The U.S. Bureau of Reclamation released 24-month projections this week forecasting that less Colorado River water will cascade down from the Rocky Mountains through Lake Powell and Lake Mead and into the arid deserts of the U.S. Southwest and the Gulf of California.”

April 22 – Reuters (Kate Abnett): “Europe experienced its hottest year on record last year, while the Arctic suffered a summer of extreme wildfires partly due to low snow cover as climate change impacts intensified, the European Union’s observation service said…”

Geopolitical Watch:

April 21 – Bloomberg (Ilya Arkhipov and Henry Meyer): “President Vladimir Putin warned rival nations not to cross Russia’s ‘red line’ in their actions or face a tough response, while holding out an offer of strategic talks amid spiraling tensions with the West. ‘Those who stage any provocations that threaten key elements of our security will regret it more than they’ve regretted anything in a long time,’ Putin said in his annual state-of-the-nation speech…. ‘Russia’s response will be asymmetric, quick and harsh.’”

April 22 – Bloomberg (Ilya Arkhipov and Daryna Krasnolutska): “Russia said it will begin pulling thousands of troops back from areas near the Ukrainian border starting Friday, in a step that could calm strains with the West that have surged in recent weeks. Ukrainian President Volodymyr Zelenskiy welcomed the move, saying in a tweet it ‘reduces tension.’”

April 19 – Reuters: “More than 100,000 Russian troops have massed on Ukraine's border and in annexed Crimea, the office of the EU's top diplomat Josep Borrell said after EU foreign ministers were briefed by Ukraine's foreign minister. In a press conference on Monday, Borrell had originally spoken of more than 150,000 troops…”

April 18 – Bloomberg (Henry Meyer): “The U.S. warned Russia of ‘consequences’ if jailed opposition leader Alexey Navalny dies, deepening the conflict over the dissident who has already survived an alleged assassination attempt and is now engaged in the third week of a hunger strike.”

April 17 – Financial Times (Demetri Sevastopulo): “Japanese prime minister Yoshihide Suga said the US and Japan would oppose coercion or force in the South and East China Seas, in unusually blunt remarks about China after his summit with Joe Biden. Speaking alongside the US president at the White House on Friday, Suga said the two leaders had held serious discussions about China and the ‘severe security environment’ in the Indo-Pacific region. ‘We agreed to oppose any attempts to change the status quo by force or coercion in the East and South China Seas and intimidation of others in the region,’ Suga said.”

April 20 – Wall Street Journal (Jonathan Cheng): “Chinese leader Xi Jinping used a high-profile speech to call for equitable management of world affairs, underscoring Beijing’s attempts to reshape its relationship with the U.S. into one on a more equal footing. ‘We must not let the rules set by one or a few countries be imposed on others, or allow unilateralism pursued by certain countries to set the pace for the whole world,’ Mr. Xi said… ‘What we need in today’s world is justice, not hegemony. Big countries should behave in a manner befitting their status and with a greater sense of responsibility.’”

April 20 – Financial Times (Ryan McMorrow): “Xi Jinping has called for a new world order, launching a veiled attack against US global leadership and warning against an economic decoupling of the two superpowers. ‘International affairs should be handled by everyone,’ the Chinese president told the Boao Forum for Asia, an event billed as the country’s answer to the World Economic Forum in Davos… Xi did not name the US in his 18-minute speech but he took aim at Washington’s efforts to decouple supply chains and bar critical American semiconductors and other high-tech goods from being sold to Chinese companies such as Huawei.”

April 19 – Reuters (Gabriel Crossley and Yew Tian): “China is shoring up ties with autocratic partners like Russia and Iran, as well as economically dependent regional countries, while using sanctions and threats to try to fracture the alliances the United States is building against it. Worryingly for Beijing, diplomats and analysts say, the Biden administration has got other democracies to toughen up to a rising, more globally assertive China on human rights and regional security issues like the disputed South China Sea. ‘China has always resolutely opposed the U.S. side engaging in bloc politics along ideological lines, and ganging up to form anti-China cliques,’ the Chinese foreign ministry said…”

April 22 – Bloomberg (Jason Scott): “China has slammed Australia’s decision to cancel agreements between the Belt and Road Initiative and the Victoria state government, signaling a worsening of ties between the nations. The Australian federal government scrapped both the memorandum of understanding and framework agreement signed between Victoria and China’s National Development and Reform Commission…, Foreign Minister Marise Payne said… She described the deals as ‘inconsistent with Australia’s foreign policy or adverse to our foreign relations.’ The step ‘is another unreasonable and provocative move taken by the Australian side against China,’ the Chinese embassy… said…”

April 17 – Financial Times (Katrina Manson): “By using American banks as a cudgel against Russia, Joe Biden has shown his willingness to weaponise the US financial system against foes, continuing a tactic honed during the Obama years and dramatically ramped up under Donald Trump. Biden’s decision this week to ban US financial institutions from buying new sovereign Russian debt as punishment for an alleged cyber hacking campaign and other misdemeanours offered the first significant insight into the president’s attitude to sanctions. It has prompted renewed concerns about their overuse. ‘US financial institutions are being weaponised,’ a banking regulatory lawyer told the Financial Times… Experts this week argued that the US government was ‘outsourcing US foreign policy’ to US banks or deploying them as ‘forward basing’ — military terminology for establishing an enduring armed presence beyond home turf.”

April 21 – Wall Street Journal (Chuin-Wei Yap): “In Beijing’s push to become a maritime superpower, China’s fishing fleet has grown to become the world’s largest by far—and it has turned more aggressive, provoking tensions around the globe. The fleet brings in millions of tons of seafood a year to feed the country’s booming middle class. Foreign governments, fishermen and conservation groups have accused the fleet of illegal fishing, including by using banned equipment and venturing into other countries’ territory… The Chinese fleet is helping the country stake out a bigger presence at sea, including by building a world-wide network of ports.”