Friday, October 27, 2023

Weekly Commentary: Off the Rails

Please join Doug Noland and David McAlvany this coming Thursday, November 2nd, at 4:00 pm Eastern/ 2:00 pm Mountain time for the Tactical Short Q3 recap conference call, “New Paradigm Dynamics.” Click here to register.

October 25 – Bloomberg (Hema Parmar): “Citadel founder Ken Griffin rebuffed regulators’ critique of the so-called basis trade, saying their efforts are ‘utterly beyond me.’ Hedge funds and others who employ the strategy are helping to provide liquidity and fund the Treasury market efficiently, reducing costs for taxpayers, Griffin said… ‘This is totally lost on Gary Gensler and totally lost on the Fed,’ Griffin said… Gensler, the Securities and Exchange Commission chair, and the central bank ‘seem to be more consumed with this theory of systemic risk from this trade than from the fact that we’re saving tens of basis points in cost for the American taxpayer, which is billions of dollars a year by allowing this trade to exist,’ Griffin said.”

“Utterly beyond me.” “Theory of systemic risk.” Is Ken Griffin serious? Leveraged speculation poses a clear and immediate threat to system stability. It has for years. The bond market almost came unglued during 1994 deleveraging. Leverage and derivatives were instrumental in many EM currency and bond market collapses. The blowup of LTCM leverage pushed global debt markets to the brink in 1998. De-risking/deleveraging almost sparked global collapse in 2008. Bond market speculative leverage was instrumental in the 2011/2012 European debt crisis. Trillions of QE were required in 2020. More recently, market leverage was at the epicenter of last year’s UK gilts crisis.

I’ve long been frustrated by 1929 historical revisionism. To read Ben Bernanke (and Milton Friedman before him), one would believe that misguided tightening caused the crash, and the Fed’s post-crash failure to print sufficient money (chiefly for bank recapitalization) was the root cause of the Great Depression.

Let’s be clear on a few key points. Leveraged speculation played momentous roles both in the “Roaring Twenties” boom and the subsequent crash and Great Depression. Importantly, broker call loans and trust leverage were key sources of liquidity that inflated asset prices while stoking unsustainable spending and capital investment in the real economy. And there should be no doubt that the collapse of speculative leverage was instrumental in market crash dynamics. Moreover, the “Great Crash” abruptly ended what had become the marginal source of liquidity for a maladjusted Credit system and Bubble Economy.

For Ken Griffin to argue that taxpayers benefit from Citadel’s leveraged Treasury position is laughable (“grotesque” more fitting). Americans and the world have paid a steep price for the instability wrought by an era of leveraged speculation run amok. Having analyzed this dynamic for more than three decades, there is no doubt that leveraged speculation has been fundamental to a series of ever larger and more dangerous speculative Bubbles.

Importantly, each bursting Bubble induced increasingly forceful monetary easing, stimulus that fueled the next more powerful Bubble dynamic. What started with Greenspan rate cuts and bailouts morphed into Bernanke actively accommodating mortgage lending and speculative excesses; to $1 TN of 2008 QE (and much bigger bailouts); to Yellen’s policy normalization heel dragging; to Powell’s restart of QE in 2019 and the outrageous $5 TN pandemic monetary fiasco. If the line between leveraged speculation and today’s inflation and world of acrimony is not direct – it’s pretty darn close.

In a world of unfettered “money” and Credit, speculative leverage has been a leading source of boom-time liquidity excess and monetary disorder. There will always be a degree of market speculation financed by borrowed money. But markets over the past thirty years have grown to have commanding effects over economic growth and development. Moreover, leveraged speculation has ballooned to become the marginal source of trading and market liquidity.

Speculative leverage expanded significantly prior to the Fed’s restart of QE in September 2019 and the March 2020 crisis. The “repo” market, a key source of funding for leveraged speculation, expanded $1.24 TN, or 31%, in the year ended September 2019 (from Fed Z.1 data). And it was instability in securities financing markets that induced a restart of QE in September 2019, despite economic and market strength – and an unemployment rate at multi-decade lows.

Not surprisingly, QE further stoked leveraged speculation. By March 2020, 18-month growth in “repo” assets had hit $1.60 TN, or 41%, to a then record $5.547 TN.

From a March 19, 2020, Wall Street Journal article (Juliet Chung): “A wide swath of hedge funds was hit by the recent unwinding of the so-called basis trade last week… Citadel LLC’s global fixed-income unit last week was among those stung by the trade… The Federal Reserve rushed to repair disorderly trading conditions in the Treasury market last Thursday. Analysts and investors said conditions had broken down in large part because of unwinding risk-parity and basis trades. The Fed’s intervention Thursday and over the weekend ended up aiding Citadel and many funds deploying the basis trade, said people familiar with the matter.”

More from Bloomberg’s Wednesday article: “[Paul Tudor] Jones, who runs hedge fund Tudor Investment Corp., said his firm’s basis trade portfolio ‘was in extreme duress’ in March 2020, and that ‘the Fed’s entrance in the market bailed that particular book out.’”

Recall that the Fed was forced to repeatedly ratchet up its March 2020 QE operations to reverse vigorous de-risking/deleveraging. If not for the Trillions of speculative leverage (and hundreds of Trillions of notional derivatives exposures), pandemic QE would have been smaller and less destabilizing. The subsequent Bubble would not have been as powerful, manias not as manic, inflationary pressures not as robust, and economic maladjustment not as deep. We’re paying a very steep price for the Fed and global central bank community’s repeated bailouts of leveraged speculation.

While graciously saving U.S. taxpayers money, Citadel also managed to eke out (an industry record) $16 billion of 2022 returns for Griffin and investors. For posterity, a Tuesday New York Post headline: “Inside Ken Griffin’s Property and Art Empire: $1B Palm Beach Spread is Only the Beginning.”

It’s worth updating “repo” market data. “Repo” assets ended June at $7.734 TN, about 40% larger than March 2020 (then a record). One-year growth totaled $1.264 TN, or 19.5%. Broker/Dealer “repo” liabilities posted one-year growth of $521 billion, or 34%, to a record $2.054 TN. Money Market Fund “repo” assets were up $637 billion, or 24.5%, over the past year. Money Funds “repo” assets surged $2.0 TN, or 160%, over 14 quarters.

Bloomberg: “Griffin also addressed his market-making business, Citadel Securities, saying that the largest risk it faces is when pricing correlations between assets go ‘off the rails.’ The firm uses its own balance sheet to facilitate trading across securities including stocks, bonds and rates and takes on an ‘enormous amount of overnight risk’ as it seeks to provide liquidity to the markets, Griffin said. ‘When you see repeated divestitures by market participants in the same direction day in and day out, that really puts a lot of pain into our portfolio.’”

If I were managing a highly levered portfolio of risk assets, I’d be updating my contingency planning for price correlations going “Off the Rails.” I guess it’s just me, but if I were right now holding an “enormous amount of overnight risk,” sound sleep would not come easily. Yet Citadel and the leveraged speculating community, more broadly, have every reason to position portfolio exposures as “too big to fail” market operators.

At this stage of the cycle, financial and market power has become concentrated within the leveraged speculating community. These are smart, market savvy, masters of technologies, and highly sophisticated operators. They know better than to make big directional bets. They prefer to play spread trades and market anomalies across markets, gaining the benefits of liquidity and diversification. But they are highly levered. Some Treasury basis trades are said to be 50 to 100 times levered.

These operators run incredibly stable money-making machines – that is, until trading goes “Off the Rails.” They are well-oiled machines, so long as some development doesn’t throw sand in the gears - force an urgent unwind of popular spread trades across markets. And the risk of exactly such a scenario is rising.

But despite risk aversion having recently gained momentum throughout global markets, fears of a destabilizing de-risking/deleveraging episode remain well-contained. Years of bailouts have certainly emboldened the big levered players. Confidence runs high that central banks would move swiftly to ameliorate market liquidity issues and thwart more systemic de-risking/deleveraging. Having witnessed the precipice a few times, they’ve developed deep trust in their lifelines.

The old Hyman Minsky “stability can be destabilizing” comes to mind. There is evidence that speculative leverage today surpasses even March 2020 levels. I would argue there is more speculative leverage, “Crowded Trades,” and potentially crash-inducing derivative exposures. Potential for a highly destabilizing de-risking/deleveraging episode exists. Moreover, an expanding Middle East war, especially in the current fraught geopolitical environment, provides a likely catalyst.

October 27 – Bloomberg (Iain Marlow and Augusta Saraiva): “Iran’s foreign minister warned that new fronts would open against the US if it keeps up unequivocal support for Israel, and said Prime Minister Benjamin Netanyahu’s government would regret its actions if it proceeds with a full-scale invasion. Foreign Minister Hossein Amirabdollahian declined to detail the consequences Iran might have in store… ‘The US is advising others to show self-restraint, but it has sided with Israel totally,’ Amirabdollahian said… ‘If the US continues what it has been doing so far, then new fronts will be opened up against the US.’ ‘I’d like to warn that the continuation of killing of women and children will make the situation in the region get out of control… The US side has to decide — does it want to intensify the war?’”

“Amirabdollahian warned that a ground invasion would have dire consequences for Israel. ‘Opening of new fronts will be unavoidable and that will put Israel in a new situation that will make Israel regret its actions… It has reached the point of explosion. Anything is possible and any front can be opened up.’”

October 26 – New York Times (Ivan Nechepurenko): “A group of high-ranking members of Hamas arrived in Moscow on Thursday, meeting with a senior Russian official in what looked like an affront to the West aimed at demonstrating how the Kremlin still holds sway over key players in the bloody conflict in the Middle East. A deputy foreign minister of Iran… was also in Moscow on Thursday… The meetings highlighted how, despite a slow start, Russia is trying to retain the role of an important power broker in the Middle East, presenting itself as an alternative platform for possible mediation. They also underscored President Vladimir V. Putin’s vision of international conflicts as an extension of the grand collision between Western states and the rest of the world, with Moscow at the forefront of that fight.”

Writing here on Friday night, the IDF has launched a significant operation into Gaza. Hours of heavy bombardment, along with the loss of telephone and Internet service, suggest a major escalation. An Israeli reporter has said thousands of IDF military have entered northern Gaza. It is unclear how much information will come out of Gaza over the coming days.

Whether this is the start of the much-anticipated full invasion, or something less, seems almost moot. Israel is moving forward with its Gaza operation, regardless of calls for a ceasefire, threats from Iran and others, and condemnation from around the globe. Odds that this erupts into a multi-front war increased tonight. The odds that Hezbollah and other militant groups further ratchet up attacks – against Israel and the U.S. - certainly jumped. The likelihood that the U.S. is pulled deeper into this conflict rose.

An expanding regional conflict, where Israel and the U.S. clash with Iranian-sponsored groups, drawing in Iran – with its tightening alliance with Russia and China – does not seem like a low probability scenario tonight.

One doesn’t need to resort to “World War III” terminology to state the obvious: This is an extremely dangerous situation that could easily spiral into a major geopolitical crisis. Risks are highly elevated – and the nature of this risk is unlike anything the world has faced in decades.

As for the markets, this is not the time to be highly levered in global financial assets. I would expect de-risking/deleveraging to gain further momentum. As such, we can assume there will be mounting liquidity and market function concerns. And it’s this unfolding backdrop that has me worried about the likes of “basis trades,” derivative hedging, and levered speculation more generally.

I’ll also suggest that currency markets have been in the proverbial calm before the storm. Disorderly currency markets are problematic for highly levered “carry trades,” especially in EM debt markets. Of late, currency markets have been relatively subdued. It has certainly helped that two major currency fault lines have been temporarily stabilized. The Japanese yen has been locked near 150 to the dollar, with markets respecting the threat of Japanese intervention. Meanwhile, China’s currency has been similarly locked around 7.32, apparently Beijing’s red line, as signs of stress mount (see “China Watch” below).

In the event of a forceful global “risk off” dynamic, jolts to these key currencies could unleash the type of general currency instability that causes havoc for levered trades across markets. It’s worth highlighting that EM “carry trades” have been under pressure. Many players are nursing losses and surely have “weak hands.” This increases the likelihood of de-risking/deleveraging contagion, along with more systemic market liquidity issues. And this is how deleveraging and illiquidity turn systemic and trading goes “Off the Rails.”

For the Week:

The S&P500 dropped 2.5% (up 7.2% y-t-d), and the Dow fell 2.1% (down 2.2%). The Utilities recovered 1.4% (down 18.4%). The Banks slumped 2.1% (down 28.9%), and the Broker/Dealers declined 1.4% (up 1.3%). The Transports sank 6.2% (up 1.2%). The S&P 400 Midcaps lost 2.8% (down 4.3%), and the small cap Russell 2000 dropped 2.6% (down 7.1%). The Nasdaq100 fell 2.6% (up 29.6%). The Semiconductors were hit 2.7% (up 27.4%). The Biotechs sank 4.6% (down 1.2%). While bullion jumped $25, the HUI gold equities index declined 1.2% (down 1.7%).

Three-month Treasury bill rates ended the week at 5.305%. Two-year government yields fell seven bps this week to 5.00% (up 57bps y-t-d). Five-year T-note yields dropped 10 bps to 4.76% (up 76bps). Ten-year Treasury yields dropped eight bps to 4.84% (up 96bps). Long bond yields declined six bps to 5.02% (up 105bps). Benchmark Fannie Mae MBS yields dropped 11 bps to 6.78% (up 129bps).

Italian yields dropped 12 bps to 4.80% (up 11bps). Greek 10-year yields sank 21 bps to 4.16% (down 41bps y-t-d). Spain's 10-year yields declined seven bps to 3.93% (up 41bps). German bund yields fell six bps to 2.83% (up 39bps). French yields declined six bps to 3.45% (up 47bps). The French to German 10-year bond spread was unchanged at 62 bps. U.K. 10-year gilt yields dropped 11 bps to 4.54% (up 87bps). U.K.'s FTSE equities index declined 1.5% (down 2.2% y-t-d).

Japan's Nikkei Equities Index declined 0.9% (up 18.8% y-t-d). Japanese 10-year "JGB" yields rose four bps to 0.88% (up 46bps y-t-d). France's CAC40 slipped 0.3% (up 5.0%). The German DAX equities index dipped 0.8% (up 5.5%). Spain's IBEX 35 equities index declined 1.2% (up 8.4%). Italy's FTSE MIB index declined 0.3% (up 15.1%). EM equities were mixed. Brazil's Bovespa index was little changed (up 3.3%), while Mexico's Bolsa index advanced 1.4% (up 1.1%). South Korea's Kospi index dropped 3.0% (up 3.0%). India's Sensex equities index fell 2.5% (up 4.8%). China's Shanghai Exchange Index rallied 1.2% (down 2.3%). Turkey's volatile Borsa Istanbul National 100 index recovered 2.6% (up 39.9%). Russia's MICEX equities index lost 1.4% (up 49.7%).

Federal Reserve Credit declined $19.2bn last week to $7.886 TN. Fed Credit was down $1.015 TN from the June 22nd, 2022, peak. Over the past 215 weeks, Fed Credit expanded $4.160 TN, or 112%. Fed Credit inflated $5.075 TN, or 181%, over the past 572 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt fell $7.6bn last week to $3.426 TN. "Custody holdings" were up $88bn, or 2.6%, y-o-y.

Total money market fund assets recovered $24.9bn to $5.633 TN, with a 33-week gain of $739bn (24% annualized). Total money funds were up $1.048 TN, or 22.9%, y-o-y.

Total Commercial Paper declined $5.7bn to $1.210 TN. CP was down $90bn, or 6.9%, over the past year.

Freddie Mac 30-year fixed mortgage rates rose eight bps to 7.79% (up 71bps y-o-y) - the high since November 2000. Fifteen-year rates were unchanged at 7.12% (up 76bps) - the high since December 2000. Five-year hybrid ARM rates sank 33 bps to 7.06% (up 110bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates unchanged at 8.03% (up 96bps) - the high since September 2000.

Currency Watch:

October 22 – Bloomberg: “Capital is exiting China at the fastest pace in more than seven years, piling extra pressure on the yuan. The exodus has intensified in recent weeks as the nation’s teetering real estate industry casts a shadow over the world’s second-largest economy… China’s currency regulator… said Friday onshore banks sold a net $19.4 billion of foreign currencies to their clients last month, the most since November 2018, the height of the US-China trade war. Banks also sent a net $53.9 billion overseas on behalf of their customers, the biggest monthly outflow since January 2016… Goldman Sachs… said it’s seeing a similar trend in its preferred gauge… Net outflows climbed to around $75 billion in September, the most since late 2016 and an almost 80% increase from August…”

October 25 – Reuters (Tetsushi Kajimoto and Leika Kihara): “Japanese policymakers maintained their warning to investors against selling the yen on Thursday in the wake of the currency's renewed slide beyond 150 to the dollar, a level seen by traders as authorities' threshold for intervention. ‘It's important for currency rates to move stably reflecting fundamentals. Excess volatility is undesirable,’ Deputy Chief Cabinet Secretary Hideki Murai told a regular news conference…”

For the week, the U.S. Dollar Index increased 0.4% to 106.56 (up 3.0% y-t-d). For the week on the upside, the South African rand increased 0.9%, the Mexican peso 0.7%, the Brazilian real 0.4%, the Australian dollar 0.3%, the Singapore dollar 0.2%, and the Japanese yen 0.1%. On the downside, the Swedish krona declined 1.5%, the Swiss franc 1.1%, the Canadian dollar 1.1%, the Norwegian krone 1.0%, the British pound 0.4%, the New Zealand dollar 0.3%, the euro 0.3%, and the South Korean won 0.3%. The Chinese (onshore) renminbi declined 0.03% versus the dollar (down 5.72%).

Commodities Watch:

October 21 – Financial Times (Harry Dempsey): “Gold prices have rallied sharply since the Hamas-Israel conflict broke out, further highlighting the divergence in its long-term relationship with US Treasuries as investors flee to the haven asset. Prices of the precious metal have surged as much as 10% to $1,996 per troy ounce, hitting a five-month high, after Hamas launched attacks on Israel a fortnight ago. With the region at risk of tipping into wider conflict, investors have bought gold, which is regarded as a store of value during times of geopolitical and market uncertainty.”

October 21 – Associated Press (Matthew Daly, David McHugh and Stan Choe): “Fifty years after the 1973 Arab oil embargo, the current crisis in the Middle East has the potential to disrupt global oil supplies and push prices higher. But don’t expect a repeat of the catastrophic price hikes and long lines at the gasoline pump, experts say. The Israel-Hamas war is ‘definitely not good news’ for oil markets already stretched by cutbacks in oil production from Saudi Arabia and Russia and expected stronger demand from China, the head of the International Energy Agency said. Markets will remain volatile, and the conflict could push oil prices higher, ‘which is definitely bad news for inflation,’ Fatih Birol, executive director of the… IEA, told The Associated Press.”

The Bloomberg Commodities Index dipped 0.2% (down 6.4% y-t-d). Spot Gold rose 1.3% to $2,006 (up 10.0%). Silver declined 1.1% to $23.12 (down 3.5%). WTI crude dropped $3.21, or 3.6%, to $85.54 (up 7%). Gasoline fell 2.6% (down 6%), while Natural Gas rallied 9.1% to $3.16 (down 29%). Copper recovered 2.3% (down 4%). Wheat dropped 1.8% (down 27%), and Corn fell 3.0% (down 29%). Bitcoin surged $4,130, or 13.9%, to $33,838 (up 104%).

Middle East War Watch:

October 26 – Reuters (Nidal Al-Mughrabi and Emily Rose): “Israeli forces carried out their biggest Gaza ground attack in their 20-day-old war with Hamas overnight as anger grew in the Arab world over Israel's relentless bombardment of the besieged Palestinian territory. Prime Minister Benjamin Netanyahu had said Israeli troops were still preparing for a full ground invasion, while the U.S. and other countries urged Israel to delay, fearing it could ignite hostilities on other Middle East fronts. The United Nations agency for Palestinian refugees, UNRWA, said it may soon have to shut down operations in Gaza if no fuel reaches the Hamas-ruled territory amid a desperate need for shelter, water, food and medical services. The Israeli military says Hamas is holding large reserves of fuel which could be used by hospitals.”

October 24 – New York Times (Damien Cave): “Heavy fire from rooftops and booby-trapped apartments. Armor-piercing projectiles blowing up troop carriers. Fighters blending in with civilians, launching drone ambushes, or surging from tunnels full of enough ammunition, food and water to sustain a long war. As the Israeli Army gathers tanks at the Gaza border for a threatened invasion aimed at crushing Hamas, experts are warning that the country’s troops could face some of the fiercest street-to-street combat since World War II in Gaza City and other densely packed areas. Urban warfare studies and American officials offer dire comparisons to Iraq: Think of Falluja in 2004, the most intense battles that American troops had faced since Vietnam, or the nine-month fight to defeat the Islamic State in Mosul in 2016, which led to 10,000 civilian deaths. Then multiply the destructive toll, possibly exponentially.”

October 22 – Reuters (Henriette Chacar and Dan Williams): “Israel expanded planned evacuations of communities on its northern front with Lebanon on Sunday as cross-border clashes with fighters from Lebanese group Hezbollah have intensified since the war in Gaza erupted more than two weeks ago. After enacting a plan last week to move residents out of 28 border-area villages, and the nearby town of Kiryat Shmona…, the Defence Ministry said it was adding 14 communities to the list.”

October 25 – Wall Street Journal (Summer Said, Dov Lieber and Benoit Faucon): “In the weeks leading up to Hamas’s Oct. 7 attack on Israel, hundreds of the Palestinian Islamist militant group’s fighters received specialized combat training in Iran, according to people familiar... Roughly 500 militants from Hamas and an allied group, Palestinian Islamic Jihad, participated in the exercises in September, which were led by officers of the Quds Force, the foreign-operations arm of Iran’s Islamic Revolutionary Guard Corps, the people said. Senior Palestinian officials and Iranian Brig. Gen. Esmail Qaani, the head of Quds Force, also attended, they said.”

October 27 – New York Times (Eric Schmitt): “The Pentagon said the airstrikes against facilities used by the Islamic Revolutionary Guards Corps and its proxies were in retaliation for recent rocket and drone attacks on American forces. The United States carried out two airstrikes against facilities used by Iran’s Islamic Revolutionary Guards Corps and its proxies in eastern Syria… in retaliation for a flurry of recent rocket and drone attacks against American forces in Iraq and Syria. The strikes by Air Force F-16 jets, against a weapons storage facility and an ammunition storage facility, were intended to send a strong signal to Iran to rein in the attacks the Biden administration has blamed on Tehran’s proxies in Syria and Iraq without escalating the conflict in the Middle East, U.S. officials said.”

October 25 – Financial Times (Felicia Schwartz and James Politi): “The US is using Israel’s delay in launching a ground offensive in Gaza to rush defensive systems into the region amid growing fears that Iran and its proxies will escalate attacks on US forces and allied interests once the invasion begins, according to officials. The move to stiffen its security in the region and build up a sufficient defence capability to deter Iran comes after a dozen or so attacks on US troops since October 18… Washington is girding for more as Israel prepares for its military assault on Gaza. The leader of Hizbollah, Hassan Nasrallah, met senior figures of Hamas and Palestinian Islamic Jihad in Lebanon on Wednesday. The three Tehran-backed groups ‘agreed to continue coordination’ in pursuit of a ‘real victory for the resistance in Gaza and Palestine’.”

October 26 – Reuters (Idrees Ali and Phil Stewart): “About 900 more U.S. troops have arrived in the Middle East or are heading there to bolster air defenses for U.S. personnel amid a surge in attacks by Iran-affiliated groups, the Pentagon said... As tensions soar over the Israel-Hamas war, U.S. and coalition troops have been attacked at least 12 times in Iraq and four times in Syria in the last week… A total of 21 U.S. forces have suffered minor injuries, the vast majority of them traumatic brain injuries.”

October 25 – Associated Press (Kareem Chehayeb): “The leader of Lebanon’s Hezbollah group held talks on Wednesday in Beirut with senior Hamas and Palestinian Islamic Jihad figures in a key meeting of three top anti-Israel militant groups amid the war raging in Gaza. In neighboring Syria, meanwhile, state media said an Israeli airstrike hit the international airport in the northern city of Aleppo on Wednesday, damaging its runway and putting it out of service.”

October 23 – CNN (Natasha Bertrand, Katie Bo Lillis, Zachary Cohen and Jennifer Hansler): “The US has intelligence that Iranian-backed militia groups are planning to ramp up attacks against US forces in the Middle East, as Iran seeks to capitalize on the backlash in the region to US support for Israel, according to multiple US officials. The militia groups have already launched multiple drone attacks on US forces in Iraq and Syria. But the US now has specific intelligence that those same groups could escalate even further as the war between Israel and Hamas continues. There are ‘red lights flashing everywhere,’ a US official in the region told CNN.”

October 24 – Wall Street Journal (Michael R. Gordon, Nancy A. Youssef and Gordon Lubold): “U.S. Secretary of State Antony Blinken warned… that Washington would react ‘swiftly and decisively’ if Iran or its proxy forces attack U.S. personnel after Tehran raised the risk of a larger Middle East conflict in recent days by unleashing the regional militias it has spent years arming. For more than six months, these Iranian-backed militia groups refrained from launching drones or rockets against American troops in Iraq and Syria, as part of what appeared to be an undeclared truce between Tehran and Washington. That came to an abrupt end when U.S. officials said that Iran-backed groups launched 10 drone and rocket attacks against bases that U.S. troops use in Iraq and another three on a U.S. base in southeast Syria.”

October 22 – Financial Times (John Reed, James Shotter, Neri Zilber, Raya Jalabi and Felicia Schwartz): “The US has warned that American troops and other personnel in the Middle East face the risk of a ‘significant escalation’ of attacks against them as the Israel-Hamas war threatens to broaden into a regional conflict. Lloyd Austin, the US secretary of defence, said… he was ‘concerned about potential escalation’ of fighting in the region. The US is worried the war between Israel and Hamas… will draw in Iran-backed militants across the Middle East.”

October 26 – Reuters (Michelle Nichols and Parisa Hafezi): “Iran's Foreign Minster Hossein Amirabdollahian warned at the United Nations… that if Israel's retaliation against Palestinian militants Hamas in the Gaza Strip doesn't end then the United States will ‘not be spared from this fire.’ ‘I say frankly to the American statesmen, who are now managing the genocide in Palestine, that we do not welcome (an)expansion of the war in the region. But if the genocide in Gaza continues, they will not be spared from this fire,’ he told a meeting of the 193-member General Assembly on the Middle East.”

Market Instability Watch:

October 22 – Bloomberg (Liz Capo McCormick and Michael Mackenzie): “A surprisingly strong US economy and mixed signals from the Federal Reserve have fueled some of the wildest swings in Treasuries in recent memory. Add geopolitical angst and a surge in debt supply and you have a recipe for sustained volatility for months to come, market watchers say. Dubbed the ‘world’s safest asset,’ Treasuries have not lived up to that title lately as dramatic moves in yields become an almost daily occurrence. Just last week, the rate on the 10-year swung in a range of almost 40 bps…”

October 25 – Financial Times (Harriet Clarfelt): “Turmoil in government bond markets has forced US companies to delay borrowing plans, making this the slowest October for debt issuance in more than a decade. US firms have raised just under $70bn from sales of bonds and leveraged loans so far this month, the quietest month so far this year and the weakest pace of borrowing in any October since 2011… By number of deals, the total of 50 is the lowest at this point in the month in records going back 20 years.”

October 23 – Bloomberg (Yumi Teso and Hidenori Yamanaka): “The Bank of Japan announced yet another unscheduled bond-purchase operation to curb rising sovereign yields as traders challenge its resolve ahead of a policy decision next week. Tuesday marks the fifth time the central bank has stepped into the market with such buying since it adjusted its yield-curve control program in late July. It has also resorted to increasing purchase amounts in regular operations and loans to commercial banks that help them buy debt cheaply. Despite all this, Japan’s benchmark 10-year yield has repeatedly set fresh decade highs this month as a global debt selloff pressures bonds from Tokyo to Europe and the US.”

October 21 – Financial Times (Harriet Clarfelt): “Europe’s riskiest corporate borrowers are paying the highest premium in seven years to tap the region’s €412bn junk bond market, highlighting growing fears that a long period of high interest rates and an economic slowdown could trigger further defaults. The so-called ‘spread’ — or gap — between the yields on euro-denominated corporate debt rated triple C or lower and government paper has widened to more than 18 percentage points on average, according to an ICE BofA index. That marks the biggest spread since June 2016 and surpasses levels seen in 2020 when the Covid-19 crisis triggered fears of messy defaults and bankruptcies. At the start of last year, the spread was as low as 6.7 percentage points.”

Bubble and Mania Watch:

October 22 – Wall Street Journal (Carol Ryan): “Getting on the property ladder has rarely been tougher for first-time buyers. But a tight housing market isn’t turning out to be a bonanza for landlords either. The cost of buying a home versus renting one is at its most extreme since at least 1996. The average monthly new mortgage payment is 52% higher than the average apartment rent, according to CBRE analysis. The last time the measure looked out of whack was before the 2008 housing crash. Even then, the premium peaked at 33% in the second quarter of 2006.”

October 24 – Bloomberg (Michael Msika): “Corporate America’s spending on share buybacks, a driver of the US stock market rally for over a decade, is slowing in the face of higher-for-longer interest rates and an uncertain economic backdrop. US stock repurchases are tracking a 3% decline in the third quarter after falling 26% in the previous three months, according to Bank of America... Though the reversal appears to be becoming less severe, BofA says tightening credit conditions and increased cost of capital mean buybacks remain at risk.”

October 24 – Reuters (Hadeel Al Sayegh and Rachna Uppal): “Wall Street's top financiers struck a pessimistic tone about the global economy at a flagship gathering in Saudi Arabia aimed at deal brokering, as a violent conflict between Israel and Hamas that has killed thousands of people unfolds. The annual event is typically used by attendees to build relationships with some of Saudi Arabia's biggest companies and its $778-billion sovereign wealth fund… But an escalation between Islamist group Hamas and Israel into a broader conflict overshadowed the event dubbed ‘Davos in the Desert’, a nod to the annual gathering of world leaders and corporate bosses in the Swiss Alps.”

October 23 – Bloomberg (Ben Scent): “Dealmakers are suddenly busy again, as consolidation in the energy patch helped make this one of the busiest months in years for US mergers and acquisitions… On Monday, Chevron Corp. announced a $53 billion acquisition of Hess Corp. to double down on fossil fuels, while Vista Equity Partners agreed to buy software company EngageSmart Inc. in a $4 billion deal. More than $139 billion in takeovers of publicly traded US companies have now been announced in October…”

October 22 – Bloomberg (Silla Brush and Loukia Gyftopoulou): “T. Rowe Price Group Inc. is reeling from a $127 billion exodus over just two years. At Franklin Resources Inc., the latest member of a billionaire family to run the firm is trying to reverse a nearly uninterrupted 20-quarter losing streak. Across the Atlantic, the chief of Abrdn Plc has reached a blunt conclusion: merely managing mutual funds isn’t enough of a business any more. Across the $100 trillion asset-management industry, money managers have confronted a tectonic shift in investor appetite for cheaper, passive strategies... Now they’re facing something even more dire: The unprecedented run of bull markets that buoyed their investments and masked life-threatening vulnerabilities may be a thing of the past.”

October 27 – Bloomberg (Steven Arons and Hannah Levitt): “JPMorgan... Chief Executive Officer Jamie Dimon plans to sell shares currently worth about $141 million, the first such transaction since he took the helm at the Wall Street giant almost 18 years ago. Starting next year, Dimon and his family will dispose of 1 million of the lender’s shares for financial diversification and tax-planning purposes…”

Banking Crisis Watch:

October 25 – Bloomberg (Josyana Joshua and Ethan M Steinberg): “Banks are taking a cautious approach in the investment-grade bond market amid some of the wildest swings in Treasuries in recent memory, waiting for pockets of calm to emerge as they seek to borrow before US officials can raise interest rates or tighten regulations further. Truist Financial Corp. has been the lone lender to test investor appetite for new bonds in the US this week, marking a sharp slowdown after a $24.5 billion rush of fresh, post-earnings issuance last week.”

U.S./Russia/China/Europe Watch:

October 25 – Financial Times (Demetri Sevastopulo): “President Joe Biden has warned China not to engage in dangerous and unlawful activity towards the Philippines and warned that any attack on the US ally would trigger Washington’s mutual defence treaty with Manila. Speaking alongside Australian prime minister Anthony Albanese, Biden said he wanted to send a ‘clear message’ to Beijing after China’s coastguard tried to block a Filipino supply mission in the South China Sea. ‘The United States defence commitment to the Philippines is ironclad. Any attack on Filipino aircraft, vessels or armed forces will invoke our mutual defence treaty with the Philippines,’ Biden said.”

October 25 – Wall Street Journal (Alastair Gale): “China’s jet fighters are harassing American military aircraft and stepping up sorties around Taiwan. Its coast guard is confronting a U.S. security treaty ally in the South China Sea, leading to a recent collision. Amid the tensions, talks between the U.S. and Chinese militaries remain largely frozen, which leads Washington to worry that a misstep could trigger a dangerous escalation. The latest flashpoint is a clash between the Philippines and China over control of a reef in the South China Sea that could draw in the U.S. to defend its ally. ‘If Manila requests American support for this mission, it brings into the picture a more serious Chinese challenge of American ships or aircraft,’ said Zack Cooper, a former Pentagon official.”

October 23 – Associated Press (Jim Gomez and Simian Mistreanu): “The United States renewed a warning… that it would defend the Philippines in case of an armed attack under a 1951 treaty, after Chinese ships blocked and collided with two Filipino vessels off a contested shoal in the South China Sea. Philippine diplomats summoned a Chinese Embassy official in Manila on Monday for a strongly worded protest following Sunday’s collisions off Second Thomas Shoal.”

October 25 – Reuters (Andrew Osborn): “President Vladimir Putin warned… Israel's conflict with Hamas could spread well beyond the Middle East and said it was wrong that innocent women, children and old people in Gaza were being punished for other people's crimes. Putin… said bloodshed in the region had to stop. He said he told other world leaders in phone calls that if it did not, there was a risk of a much wider conflagration… ‘Our task today, our main task, is to stop the bloodshed and violence… Otherwise, further escalation of the crisis is fraught with grave and extremely dangerous and destructive consequences. And not only for the Middle East region. It could spill over far beyond the borders of the Middle East.’”

October 24 – Reuters (Lidia Kelly): “Russia and Iran are firming up bilateral relations in a 'trusting' atmosphere, Russia's foreign ministry said… after its chief, Sergei Lavrov, was received by Iranian President Ebrahim Raisi during a visit to Tehran. ‘In a traditionally trusting atmosphere, current aspects of the bilateral agenda were substantively discussed with an emphasis on further building up the entire complex of multifaceted Russian-Iranian partnership,’ the foreign ministry said… Lavrov, who went to Tehran shortly after an Asia trip to China and North Korea, discussed energy and logistics projects with Iranian Foreign Minister Hossein Amirabdollahian.”

October 25 – Reuters: “Russia said… it planned to build close ties with North Korea in all areas, a day after South Korea, Japan and the United States condemned what they said were weapons supplies from Pyongyang to Moscow.”

De-globalization and Iron Curtain Watch:

October 23 – Bloomberg: “Chinese authorities are again shaking the confidence of foreign companies in the country with a series of arrests across industries and an investigation into Foxconn Technology Group, Apple Inc.’s most important partner and one of the largest employers in China. Over the weekend, state media said that regulators are conducting tax audits and reviewing land use by Foxconn, the Taiwanese company that makes the vast majority of iPhones at factories in China.”

October 23 – Reuters (Timothy Aeppel): “Surveys now show U.S. business leaders are eager to cut back their China exposure and are shifting investment to other, friendlier countries. This is a radical shift from the days when offshoring production to China was rewarded by Wall Street and investor calls often highlighted multi-million-dollar expansions in the world’s second-largest economy. Mexico has surpassed China as the top destination for foreign direct investment by U.S. firms, according to the U.S. Bureau of Economic Analysis, while a survey from the U.S.-China Business Council shows a growing number of U.S. firms pulling back on their China investments.”

Inflation Watch:

October 24 – CNBC (Lee Ying Shan): “How would you like your steak? Maybe rare, medium, or well done — but certainly not more expensive. Retail beef prices in the U.S. are at record highs, pushing up prices of beef-based products from burgers to steaks and steak tartare. That’s largely thanks to a shrinking cattle supply, as well as higher input costs… Retail beef prices are currently hovering around record levels of about $8 per pound… ‘All consumers will be paying more for all beef products for several more years,’ Wells Fargo’s Chief Agricultural Economist Michael Swanson told CNBC…”

October 23 – Bloomberg (Dayanne Sousa): “Cocoa surged to the highest level in 44 years as global shortages boost costs for chocolate makers. Futures traded in New York jumped as much as 2.5% to the highest for a most-active contract since 1979. Behind the gains are forecasts for poor crops in top growers Ivory Coast and Ghana just as demand is signaling an improvement.”

October 22 – Financial Times (Susannah Savage, Jyotsna Singh, Benjamin Parkin and Aanu Adeoye): “Fried rice is normally a popular choice among diners in Lagos, the economic capital of Nigeria. Yet lately many people have stopped ordering it, says restaurant manager Toni Aladekomo. With the price of the dish shooting up to N4,000 ($5.20) from N1,500 a year ago, it has ‘stopped being affordable for most’, says Aladekomo… In Nigeria, rice is the most commonly consumed meal — and the bedrock of the national dish jollof rice. But the price of 1kg of the imported grain was up by 46.34% in August compared with the same period last year…”

Biden Administration Watch:

October 26 – Reuters (Steve Holland and Susan Heavey): “President Joe Biden has sent a rare message to Iranian Supreme Leader Ayatollah Ali Khamenei warning Tehran against targeting U.S. personnel in the Middle East, the White House said… after a spate of attacks on American forces in the region. ‘There was a direct message relayed,’ White House spokesman John Kirby said…, declining to elaborate.”

October 24 – Reuters (Steve Holland): “The White House… said Iran was in some cases ‘actively facilitating’ rocket and drone attacks by Iranian-backed proxy groups on U.S. military bases in Iraq and Syria, and President Biden has directed the Department of Defense to brace for more and respond appropriately. White House spokesman John Kirby said there had been an uptick in such attacks over the last week…, but the U.S. would not allow threats to its interests in the region to ‘go unchallenged.’ He said the United States believed these groups were supported by Iran's Islamic Revolutionary Guard (IRGC) and the Iranian government, which was also continuing to support the Hamas and Hezbollah militant groups. ‘We know that Iran is closely monitoring these events, and in some cases, actively facilitating these attacks and spurring on others who may want to exploit the conflict for their own good, or for that of Iran,’ he said.”

October 25 – Associated Press (Aamer Madhani and Lolita C. Baldor): “The White House said… ‘prudent contingency planning’ is underway to evacuate Americans from the Middle East in case the Israel-Hamas war spreads into a broad regional conflict. White House National Security Council spokesman John Kirby stressed there are currently no ‘active efforts’ to evacuate Americans from the region beyond charter flights the U.S government began operating earlier this month out of Israel. ‘It would be imprudent and irresponsible if we didn’t have folks thinking through a broad range of contingencies and possibilities,’ Kirby said. ‘And certainly evacuations are one of those things.’”

October 26 – Washington Post (Dan Lamothe): “President Biden faces mounting pressure to strike Iranian proxies that have repeatedly attacked — and injured — U.S. troops in Iraq and Syria this month, but he is weighing any decision to retaliate against his broader concern that the war in Gaza could be on the precipice of erupting into a regionwide tempest, according to U.S. officials and others familiar with the administration's deliberations. Biden said… that he warned Ayatollah Ali Khamenei, Iran's supreme leader, that if Tehran continues to ‘move against’ U.S. forces in the Middle East, ‘we will respond.’”

October 26 – Bloomberg (Viktoria Dendrinou, Christopher Condon and Margaret Collins): “Treasury Secretary Janet Yellen said the surge in longer-term bond yields in recent months is a reflection of a strong US economy, not the jump in government borrowing driven by a widening fiscal deficit. ‘I don’t think much of that is connected’ to the US budget deficit, Yellen said… ‘We’re seeing yields go up in most advanced countries.’ The increase in yields… is instead ‘largely a reflection of the resilience people are seeing in the economy,’ she said.”

Federal Reserve Watch:

October 25 – Bloomberg (Michael Mackenzie, Liz Capo McCormick and Jonnelle Marte): “The worst selloff of longer-term Treasuries in more than four decades is putting a spotlight on the market’s biggest missing buyer: the Federal Reserve. The Fed is shrinking its portfolio of government securities at a $720 billion annual pace, making the Treasury Department’s job of funding a near-$2 trillion federal deficit all the harder. Quantitative tightening… ended earlier than officials expected the last time it was executed, and some market participants predict the same this time.”

U.S. Bubble Watch:

October 24 – Bloomberg (Christopher Condon and Christopher Anstey): “In a year when the US economy exceeded almost everybody’s expectations, the underlying federal deficit roughly doubled, spotlighting a dire fiscal trajectory likely to only worsen the partisan budget battles in Washington. The government ran a $2.02 trillion deficit for the fiscal year through September, after adjustments to remove the impact of President Joe Biden’s student-loan forgiveness program, which was scotched by the Supreme Court. The gap is $1.02 trillion more than the prior year. The surge is a powerful illustration of a fiscal path that’s triggered warnings from economists, politicians and credit rating agencies.”

October 26 – Reuters (Richard Cowan and David Morgan): “Republicans in the U.S. House of Representatives… were debating their next move on how to avert a partial government shutdown next month, with one prominent lawmaker saying they needed to agree quickly on a ‘path forward.’ Newly installed Speaker Mike Johnson was floating the possibility of extending funding through mid-January or mid-April to give lawmakers more time to negotiate 12 separate bills funding the government through the fiscal year that ends Sept. 30, 2024.”

October 26 – Reuters (Lucia Mutikani): “The U.S. economy grew almost 5% in the third quarter, again defying dire warnings of a recession, as higher wages from a tight labor market helped to fuel consumer spending and businesses restocked at a brisk clip to meet the strong demand. The fastest growth pace in nearly two years… was also spurred by a rebound in residential investment after contracting for nine straight quarters.”

October 25 – Reuters (Lucia Mutikani): “Sales of new U.S. single-family homes surged to a 19-month high in September as the annual median house price dropped by the most since 2009 amid discounts offered by builders to woo buyers, but mortgage rates flirting with 8% could curb demand… New home sales rebounded 12.3% to a seasonally adjusted annual rate of 759,000 units last month, the highest level since February 2022. August's sales pace was revised up to 676,000 units… The median new house price in September was $418,800 a 12.3% drop from a year ago. That was the largest percentage decline since February 2009.”

October 25 – Bloomberg (Reade Pickert): “A measure of applications to finance home purchases slid to the lowest level since 1995 as mortgage rates approached 8%, underscoring how mounting affordability challenges are crimping demand… Taking mortgage-related fees and compound interest into account, the effective rate surpassed 8% for the first time in 23 years. The rate on a five-year adjustable mortgage climbed almost half a percentage point, the most since early June, to almost 7%.”

October 25 – Associated Press (Tom Krisher): “First it was Ford, then Stellantis, and now a General Motors factory has been added to the growing list of highly profitable plants where the United Auto Workers union is on strike. On Tuesday, about 5,000 workers walked out at GM’s factory in Arlington, Texas, that makes big, high margin SUVs such as the Chevrolet Tahoe and Cadillac Escalade.”

October 26 – Reuters (Joseph White and David Shepardson): “The United Auto Workers (UAW) union reached a tentative labor deal… with Ford Motor, the first of Detroit's Big Three car manufacturers to negotiate a settlement to strikes joined by 45,000 workers since mid-September. The proposed accord, which UAW's leadership must still approve, provides a 25% wage hike over the 4-1/2-year contract, starting with an initial increase of 11%. The Ford deal, which could help create a template for settlements of parallel UAW strikes against General Motors and… Stellantis, would amount to total pay hikes of more than 33% when compounding and cost-of-living mechanisms are factored in, the UAW said.”

October 26 – Associated Press: “The number of Americans applying for jobless benefits rose last week but remains historically low as the labor market continues to show strength amid high interest rates and inflation. Jobless claim applications rose by 10,000 to 210,000 for the week ending Oct. 21… The previous week’s applications were the fewest in eight months… Overall, 1.79 million people were collecting unemployment benefits the week that ended Oct. 14, about 63,000 more than the previous week.”

October 21 – Bloomberg (Claire Ballentine): “Americans are falling behind on their auto loans at the highest rate in nearly three decades. With interest rate hikes making newer loans more expensive, millions of car owners are struggling to afford their payments. It’s a clear indication of distress at a time when the economy is sending mixed signals… The percent of subprime auto borrowers at least 60 days past due on their loans rose to 6.11% in September, the highest in data going back to 1994, according to Fitch... In April that figure slipped from a previous high of 5.93% in January. But after burning through tax returns, contending with a shakier job market and grappling with still-elevated inflation, more car owners have become delinquent.”

China Watch:

October 24 – Bloomberg: “Beijing has pumped a record amount of short-term cash into its financial system to shore up lending in recent days, only to elicit a refrain familiar to China watchers this year — not enough, more required. Signals in the money market show traders expect borrowing costs to remain elevated for the rest of the year, despite the cash injections. A one-year gauge of bank funding costs in the market has shot up above the level the People’s Bank of China lends at, an unusual occurrence since 2019 that points at scarce liquidity… The central bank has added a record net 1.96 trillion yuan ($268bn) in short-term cash in the past three days, while outstanding one-year policy loans are on track to reach an all-time high 5.7 trillion yuan after a mid-October operation…”

October 25 – Bloomberg (Tom Hancock): “Chinese President Xi Jinping signaled that a sharp slowdown in growth and lingering deflationary risks won’t be tolerated, making a series of rare policy moves to boost the economy while refraining from massive stimulus. The government increased its headline deficit on Tuesday to the largest in three decades and unveiled a sovereign debt package that marked a shift from its traditional model for fiscal support. Xi also made an unprecedented trip to the central bank — sending a strong message about his focus on the economy.”

October 24 – Bloomberg: “Chinese President Xi Jinping stepped up support for the world’s second-biggest economy, issuing additional sovereign debt, raising the budget deficit ratio and even making an unprecedented visit to the central bank. The nation’s legislature approved a plan to raise the fiscal deficit ratio for 2023 to about 3.8% of gross domestic product… — well above the 3% set in March which the government has generally considered a limit for the nation. The plan includes issuing additional sovereign debt worth 1 trillion yuan ($137bn) in the fourth quarter to support disaster relief and construction.”

October 24 – Bloomberg: “Xi Jinping made his first known visit to China’s central bank since he became president a decade ago…, underscoring the government’s increased focus on shoring up the economy and financial markets. Xi, along with vice premier He Lifeng and other government officials, visited the People’s Bank of China and the State Administration of Foreign Exchange… on Tuesday…”

October 27 – PTI: “Former Chinese Premier Li Keqiang, an acclaimed economist who was once a strong contender against  President Xi Jinping for the country's top leadership role, died  on Friday of a heart attack. Li, 68 died of a sudden heart attack… after all-out rescue efforts failed, according to an  official obituary notice... He was in the east Chinese metropolis for rest after  retiring from active politics in March this year, the state  media reported. He reportedly died at Dongjiao State Guest Hotel, a state-owned hotel located in Shanghai's Pudong New Area.”

October 22 – Financial Times (Thomas Hale, Cheng Leng, Andy Lin and Hudson Lockett): “China’s biggest private sector developer, Country Garden, appears to be heading for default after failing to make a payment on an offshore bond — another critical moment in the slow reckoning taking place in the country’s vast property sector. Two years ago it was the default of another developer, Evergrande, that encapsulated concern over the scale of problems in Chinese property. Evergrande had racked up $340bn of liabilities and become the world’s most indebted property developer. Country Garden was long thought more stable but its problems now show both the deterioration in the sector… and the difficulties for Beijing in getting to grips with a long crisis that has shaken the world’s second-largest economy.”

October 25 – Wall Street Journal (Lingling Wei): “With China’s property bust threatening to sink the country’s economic recovery, Xi Jinping is looking for someone to blame. After putting the billionaire founder of Evergrande…, under investigation for possible crimes, Beijing is expanding its probes to include bankers and financial institutions that facilitated developers’ risky behavior… Among those under scrutiny: a former head of Bank of China, one of the country’s biggest lenders, the people said. While meeting with senior officials last month, Xi made it clear he wants no stone left unturned when it comes to disciplining a real-estate industry that at its peak made up as much as a quarter of China’s economy.”

October 25 – Financial Times (Cheng Leng in Hong Kong and Edward White): “Beijing is putting the final touches to a powerful Communist party commission that will oversee the country’s financial sector regulation, recruiting nearly 100 officials ahead of a landmark economic policy meeting next week. The Central Financial Commission, which President Xi Jinping announced in March, will serve as the de facto watchdog, planner and decision maker for China’s $61tn financial sector, weakening the power of state institutions such as the People’s Bank of China and China Securities Regulatory Commission. China’s ruling party is rushing to staff the commission, which has quietly begun operating ahead of the National Financial Work Conference…”

October 24 – Bloomberg (Dorothy Ma): “Chinese developer Country Garden Holdings Co. was deemed to be in default on a dollar bond for the first time, underscoring its fall into distress amid a broader property debt crisis that’s shaken the world’s second-biggest economy. Country Garden’s failure to pay interest on the note within a grace period that ended last week ‘constitutes an event of default,’ according to a notice to holders from trustee Citicorp International…”

October 23 – Bloomberg (Shuli Ren): “Forget real estate developers. The gray rhino of China’s economy, and perhaps the most lucrative trade of the year, is hidden municipal debt. By some estimates, borrowings from local government financing vehicles, or off-balance-sheet entities deployed to fund infrastructure and stimulate regional economies, reached 57 trillion yuan ($7.8 trillion) last year, or 48% of China’s gross domestic product. LGFV debt is almost as big as central and local government borrowings combined, according to the International Monetary Fund.”

October 24 – Reuters: “China's cabinet has restricted the ability of local governments in 12 heavily indebted regions to take on new debt and placed limits on what new state-funded projects they can launch… The 12 regions, which cover a wide swathe of the nation, will only be allowed to take on specified projects, such as those approved by the central government, the sources said. Other projects, such new railway stations and power plants, will not be permitted.”

October 23 – Bloomberg: “China’s gauge of tech equities fell to the lowest since its inception more than three years ago… The Star 50 Index, which tracks manufacturers, chipmakers and the biggest companies on the Star Board, closed down 2.5% Monday. The gauge is set for a sixth month of declines… ‘The biggest factor that is dragging on tech is liquidity conditions,’ said Li Xuetong, a fund manager at Shenzhen Enjoy Equity Investment Fund Management Co.”

October 24 – Bloomberg: “China’s sovereign wealth fund bought exchange-traded funds on Monday, expanding its purchases beyond bank shares as authorities step up attempts to boost the country’s slumping stock market. Central Huijin Investment Ltd., a unit of the $1.4 trillion wealth fund China Investment Corp. that’s long served as the main vehicle for China’s holdings in state-run banks, bought an undisclosed amount of ETFs and vowed to keep increasing its holdings…”

October 21 – Financial Times (Joe Leahy, James Kynge and Benjamin Parkin): “‘When you give roses to others, their fragrance lingers on your hand,’ Xi Jinping told guests at the 10th anniversary celebration of his Belt and Road Initiative... ‘Helping others is also helping oneself.’ Even as China’s president played the exuberant host, welcoming world leaders from Russia’s Vladimir Putin to Indonesia’s Joko Widodo…, an undercurrent of geopolitical animosity directed at the US was evident. He did not mention Washington by name, but when he said that ‘ideological confrontation, geopolitical rivalry and bloc politics are not a choice for us’, the target of his comment was clear. For Xi, the two-day forum to celebrate the flagship $1tn global infrastructure initiative — the biggest multilateral development programme ever undertaken by a single country — was a chance to further embed China’s influence across the developing world.”

October 26 – Bloomberg (Alice Huang): “Developer China Vanke Co.’s dollar bonds plunged Thursday afternoon, with some on pace for their biggest-ever declines, as worries about the nation’s ailing property sector spread further. The firm’s note due March 2024 dropped 7.5 cents to 84 cents on the dollar while a 3.15% bond due 2025 slumped 9 cents to 59.2 cents, with both on track for record daily falls.”

Central Banker Watch:

October 26 – Financial Times (Martin Arnold): “The European Central Bank has held interest rates, bringing an end to its unprecedented streak of 10 consecutive increases in borrowing costs amid rising concerns over eurozone growth. The decision… was expected by analysts… The benchmark deposit rate stayed at 4% — four-and-a-half percentage points above its all-time low of minus 0.5%… ECB president Christine Lagarde told a press conference she would not rule out another rate increase, adding that it was ‘totally premature’ to discuss a potential cut. But analysts said Lagarde put a dovish slant on the decision, stressing how much its earlier rate rises were already squeezing activity. The ECB president said growth was ‘likely to remain weak over the remainder of the year’ as the impact of higher interest rates was ‘broadening’.”

October 25 – Bloomberg (Sotiris Nikas and Paul Tugwell): “The European Central Bank is watching the oil price for any inflationary impact from the Israel-Hamas conflict, according to President Christine Lagarde. As central bankers ‘we have to look at our mission,’ Lagarde told Greece’s ERT TV… ‘What impact it will have and we monitor carefully any form of conflict. What impact it can have on our economies.’ ‘Energy back in 2022 was a major driver of inflation and we know how much that has cost and how people have suffered because of high energy prices,’ she said…”

October 27 – Bloomberg (Zoe Schneeweiss): “Inflation is still far from reaching our target rate of 2%,” Bundesbank President Joachim Nagel said... ‘But our tight monetary policy is working. That’s why we in the ECB council are staying the course and have left interest rates unchanged. We will continue to decide on the use of our monetary policy instruments from meeting to meeting.’”

October 24 – Bloomberg (Swati Pandey): “Australia’s inflation rate came in hotter than expected in the three months through September, bolstering the case for the Reserve Bank to raise interest rates next month and sending government bond yields soaring. The consumer price index advanced 5.4% in the third quarter from a year earlier… A closely watched core inflation gauge — which strips out volatile items — rose 5.2%, also exceeding forecasts.”

October 22 – Bloomberg (Jana Randow): “After the most aggressive monetary-tightening campaign in four decades, academics and economic practitioners are running autopsies on what could have prevented the cost-of-living crisis and how to ensure the same mistakes won’t be repeated… The policy navel-gazing is centering around three debates. How much flexibility central banks can allow in reaching their inflation targets, the effectiveness of asset purchases in the policy mix, and the merits of monetary and fiscal coordination.”

Europe Watch:

October 24 – Reuters (Jonathan Cable): “Euro zone business activity took a surprise turn for the worse this month as demand fell in a broad-based downturn across the region…, entering the fourth quarter on the wrong foot and suggesting the bloc may slip into recession.”

October 24 – Reuters (Miranda Murray): “Business activity in Germany contracted for a fourth straight month in October as manufacturing's downturn was matched by a renewed decline in services… The HCOB German Flash Composite Purchasing Managers' Index (PMI), compiled by S&P Global, fell to 45.8 in October from September's 46.4, below the 46.7 forecast by economists… ‘Germany is kicking off the final quarter on a sour note,’ said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank…, ‘there is much to suggest that a recession in Germany is well underway.’”

Japan Watch:

October 24 – Bloomberg (Toru Fujioka and Sumio Ito): “Bank of Japan officials are likely to monitor bond yield movements until the last minute before making a decision on whether to adjust the yield curve control program at a policy meeting next week, according to people familiar… Officials see the possibility of adjusting the ceiling for 10-year bond yields among other options in response to rising pressure stemming from a selloff in US Treasuries… Some feel it might be better to tweak YCC preemptively rather than wait until the policy comes under attack in the market…”

October 23 – Reuters (Satoshi Sugiyama): “Japan's factory activity shrank for a fifth straight month in October while the service sector saw its weakest growth this year…, amid growing uncertainty over the outlook for the world's third-largest economy. The au Jibun Bank flash Japan manufacturing purchasing managers' index (PMI) remained flat at 48.5 in October. The index has remained below the 50.0 threshold that separates contraction from expansion since June.”

EM Watch:

October 26 – Bloomberg (Daren Butler and Ece Toksabay): “Turkey's central bank raised its policy rate by 500 bps to 35% as expected on Thursday, tightening aggressively for a third straight month as it steps up efforts to rein in inflation that has soared for years. The bank's policy committee repeated it is ready to raise rates further as needed to curb inflation, which climbed to an annual rate of 61.53% in September and is expected to rise into next year.”

Levered Speculation Watch:

October 25 – Bloomberg (William Shaw): “Goldman Sachs… is expanding its use of a technology that leverages artificial intelligence in the hopes that it will make it easier for clients to plan complex derivatives trades. After already using the software to shake up the worlds of equities and foreign exchange options, the firm in recent weeks began allowing clients to use its visual structuring product for credit derivatives. It’s aiming to offer the service for rates trading in the first half of next year, Chris Churchman, who runs Goldman’s digital trading platform Marquee, said… ‘If you want to buy a Lego, Amazon helps you go from ‘I want to buy a Lego’ to ‘this is the specific Lego I want to buy’ in an efficient and effective way,’ Churchman said. ‘Our aim with Marquee is to help clients make decisions about what to trade in global markets quickly and with high confidence, much like Amazon.’”

Social, Political, Environmental, Cybersecurity Instability Watch:

October 21 – Associated Press (Gary Fields and Linley Sanders): “For many Americans, the Republican dysfunction that has ground business in the U.S. House to a halt as two wars rage abroad and a budget crisis looms at home is feeding into a longer-term pessimism about the country’s core institutions. The lack of faith extends beyond Congress, with recent polling conducted both before and after the leadership meltdown finding a mistrust in everything from the courts to organized religion. The GOP internal bickering that for nearly three weeks has left open the speaker’s position — second in line to the presidency — is widely seen as the latest indication of deep problems with the nation’s bedrock institutions.”

Geopolitical Watch:

October 23 – Financial Times (Kathrin Hille and Mercedes Ruehl): “China and the Philippines traded blame after Chinese attempts to block a Philippine supply mission to a military outpost led to two ship collisions on Sunday, escalating the territorial dispute between the countries in the South China Sea. Both countries accused the other of illegal acts… over the confrontation near Second Thomas Shoal, a sandbank inside the Philippines’ exclusive economic zone. Manila has stationed a small group of soldiers on a second world war-era former US warship that was intentionally run aground on the shoal in 1999.”

October 25 – Reuters (Jack Kim): “South Korea, Japan and the United States strongly condemned the supply of arms and military equipment by North Korea to Russia and said they had confirmed ‘several’ deliveries of such weapons… Russia and North Korea have denied the transfer of arms from the North for use in Russia's war against Ukraine amid reports that Washington and researchers said showed movement of vessels carrying containers likely with weapons between the two countries' ports.”

October 24 – Reuters (Ben Blanchard and Yimou Lee): “Taiwan Vice President Lai Ching-te… hit out at China over its probe of major Apple supplier Foxconn, saying Beijing should ‘cherish’ Taiwanese companies and not put pressure on them during an election. Foxconn is facing a tax probe in China… The sources said they believed it was disclosed for political reasons tied to Taiwan's January elections where the company's founder Terry Gou is running as an independent candidate for president.”