[Reuters] In bombshell, Trump says U.S. backs out of G7 communique, criticizes Trudeau
[CNBC] Trump refuses to back G-7 declaration, calls Trudeau 'weak' and threatens car tariffs
[Reuters] G7 agrees to fight protectionism as Trump threatens allies on trade
[Reuters] Trump to leave G7 early, missing environmental talks
[BBC] G7 summit dogged by divisions between Trump and allies
[Reuters] Fed, ECB to tighten policy in tandem
[Reuters] Investors focusing on profit margins as rising prices, wages start to bite
[FT] Trump stuns allies with call for tariff-free G7
[FT] Donald Trump clashes with America’s G7 allies over Russia and trade
[FT] Inside the chaos of Donald Trump’s trade wars
[FT] SocGen’s Albert Edwards says his ‘Ice Age Thesis’ is coming
[FT] Funds ‘snowball’ means big firms can only get bigger
Saturday, June 9, 2018
Friday, June 8, 2018
Weekly Commentary: Q1 2018 Z.1 Flow of Funds
The first-quarter 2018 Z.1 "flow of funds" report can be viewed in two ways. From one perspective, key conventional data are un-extraordinary. Household debt expanded at a 3.3% rate during the quarter, down from Q4's 4.6%. Home Mortgage borrowings slowed from 3.4% to 2.9%. Total Business debt grew at a 4.4% pace, unchanged from Q4 and down from Q1 '17's 6.1%. Financial sector borrowings were little changed, after expanding 1.6% during Q4. Bank lending was, as well, unremarkable.
From another perspective, extraordinary Credit growth runs unabated. Total System (non-financial, financial and foreign) Credit expanded at a (record) seasonally-adjusted and annualized rate (SAAR) of $3.513 TN during 2018's first quarter, compared to Q4's SAAR $1.411 TN and Q1 '17's SAAR $860 billion. This booming Credit expansion was fueled by an SAAR $2.519 TN increase of federal borrowings. Granted, this was partially a makeup from Q4's slight contraction in federal debt growth.
In nominal dollars, Total U.S. System Credit expanded a blazing $962 billion during Q1 to a record $69.717 TN (349% of GDP). Non-financial Debt (NFD) expanded a record (nominal) $874 billion, with one-year growth of $2.413 TN. One must return to booming 2007 for a larger ($2.508 TN) four quarter-period of Credit expansion. NFD ended Q1 at a record $49.831 TN, matching a record 250% of GDP. NFD expanded $4.086 TN over the past two years, the strongest expansion since '07/'08.
Outstanding Treasury Securities ended Q1 at a record $17.046 TN, increasing a nominal $615 billion during the quarter. Treasury Securities jumped $1.172 TN during the past four quarters and $1.669 TN over two years. Outstanding Treasury Securities has increased $10.995 TN, or 182%, since the end of 2007. Treasury debt-to-GDP ended Q1 at 85%, more than double 2007's 41%. It's worth adding that total Treasury and Agency Securities ended Q1 at a record $25.920 TN, or 130% of GDP.
Not coincidently, the historic securities boom also runs unabated. Total Debt Securities (TDS) expanded $789 billion during the quarter to a record $43.868 TN. TDS began 2000 at $15.606 TN and closed 2007 at $28.828 TN. TDS ended Q1 at a near-record 220% of GDP, up from 2007's 200%. Equities ended Q1 at $45.156 TN, or a near-record 226% of GDP. Equities-to-GDP posted cycle peaks at 181% in Q3 2007 and 202% in Q1 2000. Total (Debt and Equity) Securities ended Q1 at a record $89.024 TN, or 446% of GDP. For comparison, Total Securities were at 379% to end Q3 2007 and 359% at Q1 2000. When it comes to perceived wealth of U.S. securities markets, "Off the Charts," as they say.
The ballooning Household Balance Sheet continues to be a key Bubble metric. Total Household (and Non-Profits) Assets ended Q1 at a record $116.343 TN, gaining $1.072 TN during the quarter. Household Assets were up $7.169 TN in four quarters and $14.955 TN over two years. Q1 saw Real Estate assets increase $490 billion (up $1.868 TN y-o-y) and Financial Assets gain $511 billion (up $5.054 TN y-o-y). With perceived wealth inflating so rapidly, why would spending not be strong?
Household Liabilities increased $44 billion for the quarter ($538bn y-o-y) to $15.574 TN. Household Net Worth (Assets less Liabilities) surged $1.028 TN during Q1 - surpassing $100 TN ($100.77 TN) for the first time. Household Net Worth inflated $6.630 TN (7.0%) in four quarters and a stunning $13.959 TN (16.1%) the past two years. Household Net Worth-to-GDP, a key stat in Bubble Analysis, ended Q1 at a record 505% of GDP. For comparison, this ratio closed the seventies at 342%, the eighties at 378%, the nineties at 445% and 2007 at 459%. A bonus stat: Household Net Worth ended Q1 about 50% higher than the peak from Q2 2007 ($67.744 TN).
Such an historic inflation requires extraordinary monetary fuel. Today's monetary inflation is atypical and, candidly, rather convoluted. Commercial Banks ("Private Depository Institutions") expanded (financial assets) SAAR $1.139 TN during the quarter. But of this, SAAR $632 billion was an increase in Reserves at the Fed. Loans expanded SAAR $429 billion, down from Q4's $537 billion and the slowest growth in four quarters. To be sure, there's nothing conventional about this Bubble.
International flows have played a major role in the prolonged U.S. boom. Rest of World (ROW) holdings of U.S. financial assets increased SAAR $753 billion to a record $26.901 TN. This was up from Q3's $535 billion but below typical levels from recent years. After reducing holdings by SAAR $228 billion during Q4, ROW added to Treasuries by SAAR $302 billion in Q1. ROW increased Agency and GSE MBS by a notably large SAAR $130 billion. Also funneling liquidity into U.S. securities markets, ROW increased U.S. Corporate Equities SAAR $192 billion. ROW assets have expanded $13.152 TN since the end of 2008, or 96%. ROW holdings ended the nineties at $5.621 TN.
The Security Broker/Dealers expanded assets SAAR $225 billion to $3.273 TN (high since Q2 '09), although this growth was basically in "Miscellaneous Assets" (to a 14-quarter high $881bn). There was a big (SAAR $283bn) drop in Security Repo assets, with an even larger (SAAR $350bn) gain in Security Repo liabilities. Broker/Dealers expanded Treasury holdings SAAR $84 billion during the quarter.
Wall Street off-balance sheet "Funding Corps" increased financial asset holdings by a notable SAAR $458 billion (second-largest increase since 2008) to $1.804 TN, the highest level since 2009. Funding Corp assets have surged nominal $418 billion in two years, or 27% (four-year growth of 47%). Reminiscent of 2006/07.
We know that corporations have been returning about $1.0 TN annually to shareholders (buybacks and dividends). What's more, corporations are now benefitting from a dramatic reduction in taxes. This was apparent in Q1 data. Non-financial Corporate Businesses paid taxes at SAAR $165 billion, down from Q1 '17's $278 billion. Corporate Checkable Deposits and Currency jumped another (nominal) $50 billion during the quarter to $1.193 TN. It is not obvious in the data what impact repatriation of overseas assets is having, but it could be influencing U.S. market liquidity (at the expense of foreign U.S. dollar securities liquidity).
Federal Tax Receipts were reported at SAAR $3.478 TN during Q1, down $110 billion, or 3.1%, from Q1 '17. Meanwhile, federal Expenditures increased $146bn, or 3.4%, to a record SAAR $4.388 TN. Federal Government Total (excluding contingent) Liabilities jumped nominal $492 billion during Q1 to a record $19.696 TN (99% of GDP). State and Local Government Liabilities expanded a notable $130 billion during Q1, explained by rapid growth in "Claims of Pension Fund or Sponsor."
A few miscellaneous categories are deserving of brief mention. Credit Unions expanded assets by nominal $61.5 billion, or 18% annualized, during the quarter to a record $1.404 TN. Open Market Paper surged nominal $82.6 billion, or 34% annualized, to $1.049 TN (almost seven-year high). Checkable Deposits & Currency jumped $137 billion, or 13% annualized - and surged $402 billion, or 10.2%, over the past year - to a record $4.352 TN. Time & Savings Deposits expanded $206 billion, or 7% annualized - and $363 billion, or 3.2%, in four quarters - to a record $11.899 TN. Awash in cash, the growth in outstanding Corporate Bonds slowed to $104 billion, or 3.2%, to $13.055 TN (up $627bn, or 5.0%, y-o-y). Led by an SAAR $159 billion increase in "World Equity Funds," ETF holdings expanded SAAR $250 billion during Q1 to a record $3.411 TN.
Bank Loans expanded SAAR $429 billion during Q1, about in line with the average over the past eight quarters. Keep in mind that this amounts to only 12% of Q1's SAAR $3.513 TN expansion of Total System Credit. Back in the four-year boom period 2004 through 2007, Bank Loans increased quarterly on average SAAR $670 billion. More than ever before, market-based finance dominates. And while everyone marvels at the wondrous U.S economy these days, I would warn of serious and mounting vulnerability to a market liquidity event.
Again this week, no end in sight for EM liquidity challenges. The South African rand dropped another 2.9%, the Mexican peso 1.7% and the Argentine peso 1.4%. Central banks were forced to aggressively hike rates in defense of dislocating currencies in Turkey and Brazil. The Turkish lira rallied 3.9%. Friday's wild 5.3% rise in Brazil's currency, erased earlier losses (two-year lows against the dollar) and saw the real muster a 1.5% gain for the week. Brazilian stocks sank 5.6% this week, with one-month losses of 14.4%.
Global market instability was not limited to EM. Italian 10-year yields surged 44 bps this week to 3.13%. Italian two-year yields jumped 66 bps to 1.67%. Italy's bank stocks were slammed 6.5% this week. Portuguese 10-year yields rose 18 bps to 2.06%, and Greece yields gained 18 bps to 4.65%. Up three bps to 1.47%, Spanish yields were relatively well-behaved.
The ECB signaled it will discuss a QE exit strategy at next week's meeting. For Italy, and to a lesser extend the Eurozone periphery, this is untimely news. Perhaps there is some recognition in the global central banking community that dollar strength now poses acute risk to the faltering EM Bubble. A more hawkish ECB and stronger euro takes some of the gas out of the appreciating dollar. It also risks taking more air out of the European bond Bubble. Even at the eurozone's "core", German 10-year yields rose six bps (to 45bps) this week and French yields jumped 11 bps (to 82bps). The ECB faces quite a dilemma.
Here at home, there's a speculative Bubble problem in U.S. equities. Reminiscent of Q1 2000, there is a heck of a short squeeze and derivative-related melt-up in the face of a deteriorating global backdrop. The S&P500 rose 1.6% and the Mid Caps jumped 2.2% this week, but these gains don't do justice to some of the pain being meted out on the short side. The retail sector (XRT) jumped 6.3% this week. The S&P Department Store index spiked 11.5%. With almost 39 million shares short, Tesla surged 26 points (8.9%) in five sessions. Other notable short squeezes included Five Below (41.7%), Endo Intl (21.8%), Under Armour (15.9%), Williams-Sonoma (13.5%), Twitter (12.4%), Macy's (12.2%), Wendy's (10.1%) and JD.Com (10.6%) - to name only a few. When the marketplace is transfixed by a short squeeze, little else matters.
An overheated economy and highly speculative equities market should weigh on the FOMC during Tuesday and Wednesday's meeting. And a potentially critical ECB gathering comes Thursday. Currency instability, fragile EM and European periphery and a Bubbling U.S. create quite a challenge for our global monetary commanders. Cracks in the global Bubble have markets betting central bankers don't have the guts to normalize.
And there's this weekend's Trump Tariff-focused G7 ("G6 plus the U.S.") meeting in Quebec, followed by Tuesday's Trump/Kim summit in Singapore. Prospects for a breakthrough with North Korea seem brighter than on the trade front. After Singapore, attention will turn to U.S. and Chinese trade negotiations. It's bound to get interesting.
June 8 - Reuters (Ben Blanchard and Denis Pinchuk): "Chinese President Xi Jinping gave visiting Russian President Vladimir Putin China's first friendship medal on Friday, calling him his best friend, underscoring the close ties between the two despite deep reservations many Western nations have of Putin. Meeting in Beijing's Great Hall of the People, Xi lauded their relationship. 'No matter what fluctuations there are in the international situation, China and Russia have always firmly taken the development of relations as a priority,' Xi told Putin at the start of their formal talks."
For the Week:
The S&P500 gained 1.6% (up 3.9% y-t-d), and the Dow jumped 2.8% (up 2.4%). The Utilities fell 3.0% (down 8.3%). The Banks rallied 2.3% (up 3.1%), and the Broker/Dealers rose 1.7% (up 11.3%). The Transports added 0.4% (up 3.1%).The S&P 400 Midcaps jumped 2.2% (up 5.3%), and the small cap Russell 2000 rose 1.5% (up 8.9%). The Nasdaq100 advanced 1.0% (up 11.8%). The Semiconductors were little changed (up 12.7%). The Biotechs added 0.5% (up 14.7%). While bullion gained $6, the HUI gold index slipped 0.2% (down 7.0%).
Three-month Treasury bill rates ended the week at 1.87%. Two-year government yields added three bps to 2.50% (up 61bps y-t-d). Five-year T-note yields gained four bps to 2.78% (up 58bps). Ten-year Treasury yields rose four bps to 2.95% (up 54bps). Long bond yields gained four bps to 3.09% (up 35bps). Benchmark Fannie Mae MBS yields jumped eight bps to 3.70% (up 70bps).
Greek 10-year yields rose 18 bps to 4.65% (up 57bps y-t-d). Ten-year Portuguese yields jumped 18 bps to 2.06% (up 11bps). Italian 10-year yields surged 44 bps to 3.13% (up 112bps). Spain's 10-year yields increased three bps to 1.47% (down 10bps). German bund yields gained six bps to 0.45% (up 2bps). French yields rose 11 bps to 0.82% (up 3bps). The French to German 10-year bond spread widened five to 37 bps. U.K. 10-year gilt yields jumped 11 bps to 1.39% (up 20bps). U.K.'s FTSE equities index slipped 0.3% (down 0.1%).
Japan's Nikkei 225 equities index rallied 2.4% (down 0.3% y-t-d). Japanese 10-year "JGB" yields were unchanged at 0.05% (unchanged). France's CAC40 slipped 0.3% (up 2.6%). The German DAX equities index increased 0.3% (down 1.2%). Spain's IBEX 35 equities index gained 1.2% (down 3.0%). Italy's FTSE MIB index dropped 3.4% (down 2.3%). EM equities were mixed. Brazil's Bovespa index sank 5.6% (down 4.5%), while Mexico's Bolsa recovered 2.1% (down 6.9%). South Korea's Kospi index gained 0.5% (down 0.6%). India’s Sensex equities index added 0.6% (up 4.1%). China’s Shanghai Exchange slipped another 0.3% (down 7.3%). Turkey's Borsa Istanbul National 100 index fell 3.3% (down 16.9%). Russia's MICEX equities declined 1.2% (up 7.5%).
Investment-grade bond funds saw inflows of $1.325 billion, while junk bond funds suffered outflows of $2.240 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates declined two bps to 4.54% (up 65bps y-o-y). Fifteen-year rates fell five bps to 4.01% (up 85bps). Five-year hybrid ARM rates dropped six bps to 3.74% (up 63bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up six bps to 4.62% (up 63bps).
Federal Reserve Credit last week declined $10.2bn to $4.279 TN. Over the past year, Fed Credit contracted $144bn, or 3.2%. Fed Credit inflated $1.468 TN, or 52%, over the past 292 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $3.9bn last week to $3.398 TN. "Custody holdings" were up $140bn y-o-y, or 4.3%.
M2 (narrow) "money" supply expanded $32.9bn last week to a record $14.066 TN. "Narrow money" gained $546bn, or 4.0%, over the past year. For the week, Currency increased $1.0bn. Total Checkable Deposits gained $5.0bn, and savings Deposits jumped $25.3bn. Small Time Deposits added $3.4bn. Retail Money Funds dipped $1.8bn.
Total money market fund assets surged $37.5bn to $2.878 TN. Money Funds gained $219bn y-o-y, or 8.2%.
Total Commercial Paper dropped $9.9bn to $1.098 TN. CP gained $101bn y-o-y, or 10.1%.
Currency Watch:
The U.S. dollar index slipped 0.7% to 93.535 (up 1.5% y-t-d). For the week on the upside, the Norwegian krone increased 1.9%, the Brazilian real 1.5%, the Swedish krona 1.2%, the euro 0.9%, the New Zealand dollar 0.7%, the British pound 0.4%, the Australian dollar 0.4%, the Singapore dollar 0.3%, the Swiss franc 0.3%, and the Canadian dollar 0.2%. For the week on the downside, the South African rand declined 2.9%, the Mexican peso 1.7% and the South Korean won 0.1%. The Chinese renminbi increased 0.21% versus the dollar this week (up 1.56% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index slipped 0.2% (up 7.6% y-t-d). Spot Gold recovered 0.4% to $1,299 (down 0.3%). Silver gained 1.8% to $16.741 (down 2.4%). Crude slipped seven cents to $65.74 (up 9%). Gasoline declined 1.3% (up 18%), and Natural Gas fell 2.4% (down 2%). Copper surged 6.5% (unchanged). Wheat declined 0.6% (up 22%). Corn fell 3.5% (up 8%).
Market Dislocation Watch:
June 4 - Bloomberg (Tracy Alloway and Samuel Potter): "What do Toys 'R' Us bonds, the populist threat to the European Union, and Turkish external debt have in common? All were tolerated by market players until, quite suddenly, they weren't. Investors seem increasingly prone to flee assets at the first hint of trouble, fueling concern more cracks are appearing in global markets that have been papered over for years by easy money. That climate saw cash simply herded into any investment with a respectable yield. The swift reaction to a twist in Italy's political drama last week looks like the latest sign. 'The binary 'all-in/all-out' behavior, which up until now was relegated to the fringes of the financial markets, has gone mainstream,' Peter Atwater, president of Financial Insyghts, said of the market's rapid repricing of Italian default risk. 'Investors are becoming increasingly manic,' he wrote in a note."
June 4 - Financial Times (Martin Arnold and Judith Evans): "A clear lesson from last week's sharp sell-off in Italian bond markets: the 'doom loop' that creates a direct link between eurozone countries and their banking systems is still a powerful force. Within hours of Sergio Mattarella, Italy's president, causing political palpitations in Rome by blocking the appointment of a Eurosceptic economy minister by populist parties, investors were scurrying to check which banks were most exposed to Italian sovereign bonds."
June 5 - Bloomberg (Dani Burger): "Here's one to file under the market's memory-loss. The volatility complex -- the selling or shorting of options tied to U.S. stocks -- is back with a vengeance, shrugging off February's vol-mageddon in its wake. Hedge funds hold the most number of short positions on the Cboe Volatility Index since late January -- before the record spike in the gauge that wiped out over $5 trillion in global stocks and jolted investors from their complacent slumber. Meanwhile, money managers are back to selling products linked to equity price swings en masse, either to speculate conditions will remain subdued or hedge underlying exposures."
June 6 - Financial Times (Chloe Cornish): "Investors have pulled nearly $11bn out of European equity exchange traded funds in the past three months, with financials bearing the brunt of withdrawals. During May, more than $3.7bn worth of investment left Europe equity ETFs on a net basis… It marks the most money flowing out of European companies' shares via tracker funds since data-gathering began in 2008…"
Trump Administration Watch:
June 7 - Wall Street Journal (Emre Peker in Brussels, Paul Vieira and Bojan Pancevski): "U.S. allies Canada, Japan and the European Union are banding together to increase pressure on Washington following the Trump administration's metals tariffs as they head to a meeting of Group of Seven industrialized countries in Quebec… With trade likely to dominate the agenda of the summit, the U.S. tariff move has driven a wedge between the U.S. and the other six nations, say leaders and officials, and has dashed hopes that the group would focus on a coordinated response to another longstanding trade issue: the global steel glut driven by Chinese production. 'Tariffs imposed last week by President Trump on EU and Canada have increased significantly tensions before the meeting,' a senior EU official said, adding that a breakthrough to ease trade tensions was unlikely. 'We have extremely low expectations.'"
June 6 - Wall Street Journal (Jacob Bunge, Heather Haddon and Benjamin Parkin): "U.S. farmers, already losing sales to China, are facing new threats to sales in other big overseas markets as trade tensions spread globally. Mexico this week imposed tariffs on major U.S. exports such as cheese and pork, while Canada and the European Union are considering tariffs on imports of U.S. food and farm goods from corn to orange juice to peanut butter, in response to the U.S. placing tariffs last week on steel and aluminum imports from those countries. In addition, analysts say, China could target other crops and products after Trump administration officials last week outlined potential tariffs on $50 billion worth of Chinese goods. The rapid-fire exchange of tariffs and trade threats leaves U.S. farmers and agricultural groups fearing tougher sells in their most important overseas markets…"
June 4 - Financial Times (Tom Mitchell): "The world's two largest economies remained on track to commence a $100bn trade war as early as this month, after a third round of China-US trade negotiations ended in Beijing on Sunday without a breakthrough. Last week US president Donald Trump said he would move to implement previously threatened tariffs on $50bn worth of Chinese industrial exports 'shortly' after June 15, which Beijing has promised to reciprocate."
June 5 - New York Times (Ana Swanson and Jim Tankersley): "Mexico hit back at the United States on Tuesday, imposing tariffs on around $3 billion worth of American pork, steel, cheese and other goods in response to the Trump administration's steel and aluminum levies, further straining relations between the two countries as they struggle to rewrite the North American Free Trade Agreement. The tariffs, which were announced last week, came into effect as the Trump administration threw yet another complication into the fractious Nafta talks."
June 6 - CNBC (Philip Blenkinsop): "The European Union expects to hit U.S. imports with additional duties from July, ratcheting up a transatlantic trade conflict after Washington imposed its own tariffs on incoming EU steel and aluminum. EU members have given broad support to a European Commission plan to set 25% duties on up to 2.8 billion euros ($3.3bn) of U.S. exports in response to what is sees as illegal U.S. action. EU exports that are now subject to U.S. tariffs are worth 6.4 billion euros."
June 8 - Reuters (Andrea Shalal): "German Economy Minister Peter Altmaier called on Friday for Europe to remain unified in the face of rising trade tensions with the United States, saying it was unclear how a summit of the Group of Seven rich nations would end. 'We have a serious situation, not just since last night or this morning, but rather the entire last few weeks,' Altmaier told broadcaster ZDF."
EM Bubble Watch:
June 7 - Financial Times (Orla McCaffrey): "Investors have taken the gloves off against the Brazilian real in retaliation for rising political uncertainty, driving it to two-year lows of about R$3.94 against the dollar. The next threshold for the currency is R$4.00 as local weakness combines with external pressure from expected further rate tightening by the US Federal Reserve. The sell-off was sparked by the government's intervention in diesel prices to placate striking truckers- a throwback to the country's blighted history of price controls and a bad sign for efforts to undertake much-needed fiscal reforms. The central bank has twice intervened by selling US dollar swaps, effectively a bet against the greenback in favour of the real. Since last Friday, the stock of outstanding swaps has increased 13.5% and since end-April by 44.5%."
June 5 - Bloomberg (Colleen Goko and Thembisile Augustine Dzonzi): "The rand weakened, yields on benchmark bonds rose and retail and banking stocks fell as a report showed that South Africa's economy shrank the most in nine years in the first quarter, casting a pall over President Cyril Ramaphosa's promise to boost growth. Ramaphosa, who replaced Jacob Zuma in February, has pledged measures to fuel the economy, boost employment and attract investment after four years in which output never managed to expand more than 2% annually. But the latest data show he has a mountain to climb: gross domestic product contracted an annualized 2.2% in the first quarter of the year compared with the prior three months."
June 6 - Reuters (Dave Graham and Frank Jack Daniel): "The front-runner to win the Mexican presidency, Andres Manuel Lopez Obrador, would aim to bring 'fresh blood' to the central bank's board as members' terms expire if he wins election on July 1, one of his top economic advisers said. Carlos Urzua, the leftist Lopez Obrador's pick for finance minister, said it was important to bring new perspectives onto the board of the Bank of Mexico, while rejecting the idea of altering the central bank's focus on price stability."
U.S. Bubble Watch:
June 4 - Financial Times (Jeff Cox): "Money is pouring into the U.S. economy and in turn helping provide support for the otherwise struggling stock market. If current conditions persist, corporations are likely this year to inject more than $2.5 trillion into what UBS strategists term 'flow' - the combination of share buybacks, dividends, and mergers and acquisitions activity. The development comes as companies find themselves awash in cash, thanks primarily to years of stashing away profits plus the benefits of a $1.5 trillion tax break this year that slashed corporate rates and encouraged firms to bring back money idling overseas."
June 8 - Bloomberg (Craig Torres): "U.S. economic growth could face a challenging slowdown as the Trump Administration's powerful fiscal stimulus fades after two years, according to former Federal Reserve Chairman Ben Bernanke. Bernanke said the $1.5 trillion in personal and corporate tax cuts and a $300 billion increase in federal spending signed by President Donald Trump 'makes the Fed's job more difficult all around' because it's coming at a time of very low U.S. unemployment. 'What you are getting is a stimulus at the very wrong moment,' Bernanke said… 'The economy is already at full employment.'"
June 6 - CNBC (Jeff Cox): "The jobs market has reached what should be some kind of inflection point: there are now more openings than there are workers. April marked the second month in a row this historic event has occurred, and the gap is growing. According to the monthly Job Openings and Labor Turnover Survey…, there were just shy of 6.7 million open positions in April... That represented an increase of 65,000 from March and is a record. The number of vacancies is pulling well ahead of the number the Bureau of Labor Statistics counts as unemployed. This year is the first time the level of the unemployed exceeded the jobs available since the BLS started tracking JOLTS numbers in 2000."
June 5 - Reuters (Lucia Mutikani): "U.S. services sector activity accelerated in May, pointing to robust economic growth in the second quarter, but trade tariffs and a shortage of workers posed a threat to the outlook. Other data… showed job openings rising to a record high in April, far outpacing hiring."
June 3 - Bloomberg (Sally Bakewell and Erik Schatzker): "The need to deploy cash is forcing fund managers to accept terms they wouldn't otherwise like in the new issues market, particularly in the lowest ranks of investment grade, KKR's Jamie Weinstein says… For investment funds to keep cash balances down they have to keep buying new issues and that's where they get squeezed. There's been a 'big explosion' in the BBB market, which 'might be" the seeds of a debt crisis.'"
June 8 - CNBC (Diana Olick): "Fast-rising home prices may be a roadblock for buyers, but they are putting some homeowners on Easy Street. As home prices rise, so does the percentage of home equity for those owners with a mortgage. Home equity jumped 13.3% in the first quarter of this year compared from a year earlier, according to CoreLogic. For the average borrower, that translates to $16,300 in additional home equity gained during the year, or a collective $1.01 trillion. That is the biggest gain in four years."
June 5 - Wall Street Journal (Ryan Dezember): "The good news for home builders and house hunters is that lumber prices have sold off since hitting an all-time high in mid May. The bad news: wood prices are still up 67% over the past year, adding thousands of dollars to the cost of each new house. The historic run-up in lumber prices-attributable to a trade dispute with Canada, wildfires and limited rail capacity-comes as U.S. home builders are already struggling to meet demand amid shortages in buildable lots and labor… Meanwhile plywood prices have risen 43% over the last year… 'We've never seen anything like this,' said Deb Maples, risk management consultant at… INTL FCStone Financial Inc. 'It's been unprecedented.'"
June 7 - Wall Street Journal (Orla McCaffrey): "Twitter Inc. said… it plans to sell at least $1 billion in bonds that convert to equity, joining a rush of tech companies taking advantage of soaring share prices to issue convertible debt. The move comes as Twitter shares have surged to three-year highs after S&P Dow Jones Indices said the company would be added to the S&P 500… Twitter's move is the latest in a recent series of publicly traded technology companies issuing convertible bonds-debt that grants investors the right to exchange the securities for equity once a company's stock hits a certain price. Nearly half of convertible-bond issuers in the U.S. this year have been tech companies, with offerings totaling over $11 billion…"
June 6 - Wall Street Journal (Doug Cameron and Alison Sider): "Jet-fuel prices have surged more than 50% over the past year, pushing carriers to raise fares and Delta Air Lines Inc. to cut its profit expectations. Delta… said… it could take six to 12 months to recoup the extra fuel costs via pricier tickets. Fuel is again the single-largest expense for most airlines, accounting for about a quarter of operating costs. The recent run-up in prices echoes the jump seen from 2009 to 2011, which first spawned stand-alone surcharges on many international flights."
June 5 - Wall Street Journal (David Harrison): "The Social Security program's costs will exceed its income this year for the first time since 1982, forcing the program to dip into its nearly $3 trillion trust fund to cover benefits. This is three years sooner than expected a year ago…, according to the latest annual report the trustees of Social Security and Medicare released… The trust fund will be depleted in 2034 and Social Security will no longer be able to pay its full scheduled benefits unless Congress takes action to shore up the program's finances… The report also said that Medicare's hospital insurance fund would be depleted in 2026, three years earlier than anticipated in last year's report."
June 6 - CNBC (Stephanie Landsman): "David Stockman is intensifying his bear case. President Ronald Reagan's Office of Management and Budget director blames a bull market that's getting longer in the tooth - paired with headwinds ranging from President Donald Trump's leadership to fiscal policy decisions to questionable earnings. 'I call this a daredevil market. It's all risk and very little reward in the path ahead,' Stockman said… 'This market is just way, way over-priced for reality.'"
China Watch:
June 4 - Bloomberg (Boris Cerni): "China's banks, scrambling to adjust to the government's deleveraging campaign, are likely to add to pressures on the corporate bond market as they shed more of their massive note holdings and de-risk their balance sheets. Further payment problems are likely in a market that has already seen at least 14 corporate bond defaults this year, according to Logan Wright, …director at research firm Rhodium Group LLC. As well as cutting their own holdings, Chinese banks have pulled back from lending to other firms that use the funds to buy bonds, exacerbating the pressure on the market."
June 8 - Bloomberg (Gregor Hunter and Narae Kim): "China's efforts to connect the world's third-biggest bond market with the international financial system are hitting dual headwinds -- a climb in global borrowing costs, and the country's own campaign to reduce financial leverage. The dynamics have contributed to defaults by 12 bond issuers in 2018 through June 4, after 18 for the whole of 2017, according to Fitch... Firms from JPMorgan… to Fidelity International are warning to prepare for more. But with about 8.2 trillion yuan ($1.3 trillion) of domestic corporate and local-government securities due to mature in the coming 12 months, it's an open question whether China is prepared to let chips fall where they may. Authorities started shifting away from the old model of implicit guarantees for practically all debt securities in 2014, allowing defaults for the first time."
June 7 - Financial Times (Don Weinland): "When other acquisitive Chinese groups were insisting they were not an arm of the state, China Energy Reserve and Chemicals Group was making the opposite case: trying to convince bankers and investors it belonged to the government. But the company's recent default on a payment for a $350m bond, and its withdrawal from a $5.2bn property deal earlier in the year, was a sign that its state backing was not as strong as advertised. The matter is sensitive for investors in Chinese bonds. The presumption of state backing - the so-called implicit guarantee- for debt issued by government owned groups lets the companies borrow at dramatically reduced cost. The state guarantee is rarely spelt out in bond documents and must be taken as an article of faith - a crucial market matter given Chinese state-backed groups issued $315bn of debt in 2017…"
June 3 - Reuters (Stella Qiu and Ryan Woo): "China's debt crackdown is a key risk to the country's economic growth and will have significant knock-on effects for the global economy, particularly emerging markets with high commodity dependence or close Chinese trade links, Fitch Ratings said. Beijing's campaign to put a lid on debt could also lead to a sharp slowdown in business investment…, forecasting that growth in the world's second-biggest economy would slow to around 4.5% over the medium term."June 4 - Bloomberg: "China's banks, scrambling to adjust to the government's deleveraging campaign, are likely to add to pressures on the corporate bond market as they shed more of their massive note holdings and de-risk their balance sheets. Further payment problems are likely in a market that has already seen at least 14 corporate bond defaults this year… As well as cutting their own holdings, Chinese banks have pulled back from lending to other firms that use the funds to buy bonds, exacerbating the pressure on the market… Strains have already spread from high-yield trust products to corporate bonds this year as China's campaign against its $10 trillion shadow banking industry has choked off refinancing for the weaker borrowers."
June 4 - Financial Times (Don Weinland): "Debt collectors in China are harnessing new technologies such as artificial intelligence in a bid to collect on an estimated Rmb1.3tn ($200bn) debt bubble that has formed in the country's peer-to-peer lending industry. Thousands of online businesses connecting private lenders to people in need of cash sprang up across the country over the past five years, but a spate of scandals has put these lenders in the crosshairs of regulators. Many P2P lenders have been shut down since mid-2017 as lending controls have been implemented and licences required."
Central Bank Watch:
June 6 - Bloomberg (Crispian Balmer and Angelo Amante): "Mario Draghi is on the verge of a watershed moment in the European Central Bank's efforts to leave behind its crisis-fighting monetary policy. Chief Economist Peter Praet… signaled the bank's first formal round of talks on when to stop buying bonds is imminent. That would start the process of bringing down the curtain on stimulus efforts that have resulted in almost 2.5 trillion euros ($2.9 trillion) of bond purchases since 2015. While Draghi… could still delay a public announcement until July, Praet's comments sent bonds lower and pushed the euro to its strongest level in two weeks, as investors prepared for the conclusion of emergency stimulus and a potential shift toward higher interest rates in 2019. 'The bottom line is that this is the end,' said Nick Kounis, head of macro and financial markets research at ABN Amro Bank NV... 'This is a signal that the ECB judges that the inflation conditions to wind down net asset purchases have been met.'"
June 6 - Reuters (Michelle Martin and Reinhard Becker): "Expectations that the European Central Bank will wind down its bond-buying programme by the end of this year are plausible, the head of Germany's central bank said… 'For some time now, financial market participants have been expecting that the asset purchases will end before 2018 is out,' Jens Weidmann told a conference in Berlin… 'As things stand, I find these market expectations plausible,' he said, adding that this would be the first step towards normalising monetary policy.'"
Global Bubble Watch:
June 4 - Wall Street Journal (Richard Barley): "If last year in markets was all about strong returns, this year is about rising risks: a brewing trade war, renewed political turmoil and concerns about growth. The difference is that central-bank policy that helped insulate markets from risk is changing. Investors are increasingly looking after themselves. Last week's wild swings in Italian bonds are just the latest in a series of shocks that have made 2017's smooth market ride a distant memory. Surging Treasury yields, equity-market volatility and trouble in Argentina and Turkey are all part of the same picture. These have been episodes where the moves in financial-market prices have become news themselves-something that hardly happened at all in 2017, and a sign of their sheer scale. In financial jargon, risk premia are being repriced."
June 6 - Wall Street Journal (Paul VieiraRachel Pannett and Dominique Fong): "Crowds swept into the Beijing Exhibition Center on a recent morning for a real-estate expo that drew thousands of people interested in foreign property. That kind of surging interest has created a flood of capital that is washing over cities throughout the globe, distorting home prices, irritating local residents-and defying almost every attempt to restrain it. In Vancouver, Chinese home buyers snapped up properties so fast in 2016 that prices escalated at a rate of 30% a month compared with a year earlier. Officials imposed a 15% foreign-buyers tax, and Chinese buyers turned to Toronto… The hot pursuit of places to park money abroad by Chinese investors drove an estimated $100 billion in property purchases outside China in 2016, according to Juwai.com, a Chinese real-estate website. The buying frenzy, which grew from $5 billion in 2010, helped swell prices for housing and commercial real estate in cities on the Pacific Rim and beyond."
June 6 - Financial Times (Shawn Donnan): "Rising trade tensions are dragging down long-term cross-border investment by companies around the world, UN figures showed… Global foreign direct investment fell by 23% in 2017 and is expected to grow only modestly, if at all, this year… Threatening this year's picture are the growing prospects of a trade war between the US and China and the EU. The US last week imposed steel and aluminium tariffs on the EU, Canada and Mexico. It is due to release lists of tariffs and investment restrictions against China by the end of this month and is also threatening to impose import taxes on the $190bn of cars brought into the US from overseas annually."
Europe Watch:
June 5 - Reuters (Steve Scherer and Gavin Jones): "Italy's new prime minister promised… to bring radical change to the country, including more generous welfare and a crackdown on immigration, as the two party bosses who hold the keys to his anti-establishment government nodded their approval. Prime Minister Giuseppe Conte addressed the Senate, flanked by the leaders of two formerly fringe parties that shoved aside mainstream groups at an election in March to form a coalition with little-known law expert Conte as its head."
June 5 - AFP (Ana Swanson and Jim Tankersley): "Italy's incoming prime minister used his maiden policy speech to demand a review of sanctions against Russia, in a departure from the stance of his European allies. Giuseppe Conte also called for an 'obligatory' redistribution of asylum seekers around the EU. His government, made up of a coalition of far-right and Eurosceptic parties, was sworn in last Friday after almost three months of political turmoil that alarmed European officials and spooked financial markets. Conte, a lawyer with little political and no governmental experience, was nominated by the far-right League leader, Matteo Salvini, and the head of the anti-establishment Five Star Movement (M5S), Luigi di Maio - both of whom are now his deputy prime ministers. In his first speech to lawmakers since being sworn in, Conte reaffirmed several of the coalition's key manifesto themes, including a tough line on migrants, rejection of economic austerity and conciliatory gestures towards Moscow."
June 4 - Financial Times (Kate Allen, Claire Jones and Rachel Sanderson): "The ECB has come under fire from Italy's new populist government after revealing that it scaled back the proportion of Italian sovereign bonds it bought as part of its economic stimulus programme during Rome's political turmoil last month. The central bank purchased a net €3.6bn of Italian government debt under its long-running programme in May… Although this is higher than the amount it bought in some recent months, such as March and January, it was smaller as an overall proportion of its net purchases."
June 2 - Reuters (Jesús Aguado and Ingrid Melander): "Nationalists regained control of Catalonia's government on Saturday and immediately pledged to seek independence for the wealthy region, posing a swift challenge to new Spanish Prime Minister Pedro Sanchez who took office on the same day. The new Catalan cabinet was sworn in after months of tensions with the central government, ending Madrid's seven-month direct rule of the region, imposed by Sanchez's predecessor after separatists declared independence."
June 3 - Bloomberg (Boris Cerni): "Nationalists won Slovenia's general elections, setting another euro-area nation on course for political deadlock as rival parties united in condemnation of their anti-refugee rhetoric and vowed to block them from government. Former Prime Minister Janez Jansa followed the tactics that led anti-immigrant populists to victory in three of Slovenia's neighbors -- Italy, Austria and Hungary -- challenging the European Union's mainstream."
Fixed Income Bubble Watch:
From another perspective, extraordinary Credit growth runs unabated. Total System (non-financial, financial and foreign) Credit expanded at a (record) seasonally-adjusted and annualized rate (SAAR) of $3.513 TN during 2018's first quarter, compared to Q4's SAAR $1.411 TN and Q1 '17's SAAR $860 billion. This booming Credit expansion was fueled by an SAAR $2.519 TN increase of federal borrowings. Granted, this was partially a makeup from Q4's slight contraction in federal debt growth.
In nominal dollars, Total U.S. System Credit expanded a blazing $962 billion during Q1 to a record $69.717 TN (349% of GDP). Non-financial Debt (NFD) expanded a record (nominal) $874 billion, with one-year growth of $2.413 TN. One must return to booming 2007 for a larger ($2.508 TN) four quarter-period of Credit expansion. NFD ended Q1 at a record $49.831 TN, matching a record 250% of GDP. NFD expanded $4.086 TN over the past two years, the strongest expansion since '07/'08.
Outstanding Treasury Securities ended Q1 at a record $17.046 TN, increasing a nominal $615 billion during the quarter. Treasury Securities jumped $1.172 TN during the past four quarters and $1.669 TN over two years. Outstanding Treasury Securities has increased $10.995 TN, or 182%, since the end of 2007. Treasury debt-to-GDP ended Q1 at 85%, more than double 2007's 41%. It's worth adding that total Treasury and Agency Securities ended Q1 at a record $25.920 TN, or 130% of GDP.
Not coincidently, the historic securities boom also runs unabated. Total Debt Securities (TDS) expanded $789 billion during the quarter to a record $43.868 TN. TDS began 2000 at $15.606 TN and closed 2007 at $28.828 TN. TDS ended Q1 at a near-record 220% of GDP, up from 2007's 200%. Equities ended Q1 at $45.156 TN, or a near-record 226% of GDP. Equities-to-GDP posted cycle peaks at 181% in Q3 2007 and 202% in Q1 2000. Total (Debt and Equity) Securities ended Q1 at a record $89.024 TN, or 446% of GDP. For comparison, Total Securities were at 379% to end Q3 2007 and 359% at Q1 2000. When it comes to perceived wealth of U.S. securities markets, "Off the Charts," as they say.
The ballooning Household Balance Sheet continues to be a key Bubble metric. Total Household (and Non-Profits) Assets ended Q1 at a record $116.343 TN, gaining $1.072 TN during the quarter. Household Assets were up $7.169 TN in four quarters and $14.955 TN over two years. Q1 saw Real Estate assets increase $490 billion (up $1.868 TN y-o-y) and Financial Assets gain $511 billion (up $5.054 TN y-o-y). With perceived wealth inflating so rapidly, why would spending not be strong?
Household Liabilities increased $44 billion for the quarter ($538bn y-o-y) to $15.574 TN. Household Net Worth (Assets less Liabilities) surged $1.028 TN during Q1 - surpassing $100 TN ($100.77 TN) for the first time. Household Net Worth inflated $6.630 TN (7.0%) in four quarters and a stunning $13.959 TN (16.1%) the past two years. Household Net Worth-to-GDP, a key stat in Bubble Analysis, ended Q1 at a record 505% of GDP. For comparison, this ratio closed the seventies at 342%, the eighties at 378%, the nineties at 445% and 2007 at 459%. A bonus stat: Household Net Worth ended Q1 about 50% higher than the peak from Q2 2007 ($67.744 TN).
Such an historic inflation requires extraordinary monetary fuel. Today's monetary inflation is atypical and, candidly, rather convoluted. Commercial Banks ("Private Depository Institutions") expanded (financial assets) SAAR $1.139 TN during the quarter. But of this, SAAR $632 billion was an increase in Reserves at the Fed. Loans expanded SAAR $429 billion, down from Q4's $537 billion and the slowest growth in four quarters. To be sure, there's nothing conventional about this Bubble.
International flows have played a major role in the prolonged U.S. boom. Rest of World (ROW) holdings of U.S. financial assets increased SAAR $753 billion to a record $26.901 TN. This was up from Q3's $535 billion but below typical levels from recent years. After reducing holdings by SAAR $228 billion during Q4, ROW added to Treasuries by SAAR $302 billion in Q1. ROW increased Agency and GSE MBS by a notably large SAAR $130 billion. Also funneling liquidity into U.S. securities markets, ROW increased U.S. Corporate Equities SAAR $192 billion. ROW assets have expanded $13.152 TN since the end of 2008, or 96%. ROW holdings ended the nineties at $5.621 TN.
The Security Broker/Dealers expanded assets SAAR $225 billion to $3.273 TN (high since Q2 '09), although this growth was basically in "Miscellaneous Assets" (to a 14-quarter high $881bn). There was a big (SAAR $283bn) drop in Security Repo assets, with an even larger (SAAR $350bn) gain in Security Repo liabilities. Broker/Dealers expanded Treasury holdings SAAR $84 billion during the quarter.
Wall Street off-balance sheet "Funding Corps" increased financial asset holdings by a notable SAAR $458 billion (second-largest increase since 2008) to $1.804 TN, the highest level since 2009. Funding Corp assets have surged nominal $418 billion in two years, or 27% (four-year growth of 47%). Reminiscent of 2006/07.
We know that corporations have been returning about $1.0 TN annually to shareholders (buybacks and dividends). What's more, corporations are now benefitting from a dramatic reduction in taxes. This was apparent in Q1 data. Non-financial Corporate Businesses paid taxes at SAAR $165 billion, down from Q1 '17's $278 billion. Corporate Checkable Deposits and Currency jumped another (nominal) $50 billion during the quarter to $1.193 TN. It is not obvious in the data what impact repatriation of overseas assets is having, but it could be influencing U.S. market liquidity (at the expense of foreign U.S. dollar securities liquidity).
Federal Tax Receipts were reported at SAAR $3.478 TN during Q1, down $110 billion, or 3.1%, from Q1 '17. Meanwhile, federal Expenditures increased $146bn, or 3.4%, to a record SAAR $4.388 TN. Federal Government Total (excluding contingent) Liabilities jumped nominal $492 billion during Q1 to a record $19.696 TN (99% of GDP). State and Local Government Liabilities expanded a notable $130 billion during Q1, explained by rapid growth in "Claims of Pension Fund or Sponsor."
A few miscellaneous categories are deserving of brief mention. Credit Unions expanded assets by nominal $61.5 billion, or 18% annualized, during the quarter to a record $1.404 TN. Open Market Paper surged nominal $82.6 billion, or 34% annualized, to $1.049 TN (almost seven-year high). Checkable Deposits & Currency jumped $137 billion, or 13% annualized - and surged $402 billion, or 10.2%, over the past year - to a record $4.352 TN. Time & Savings Deposits expanded $206 billion, or 7% annualized - and $363 billion, or 3.2%, in four quarters - to a record $11.899 TN. Awash in cash, the growth in outstanding Corporate Bonds slowed to $104 billion, or 3.2%, to $13.055 TN (up $627bn, or 5.0%, y-o-y). Led by an SAAR $159 billion increase in "World Equity Funds," ETF holdings expanded SAAR $250 billion during Q1 to a record $3.411 TN.
Bank Loans expanded SAAR $429 billion during Q1, about in line with the average over the past eight quarters. Keep in mind that this amounts to only 12% of Q1's SAAR $3.513 TN expansion of Total System Credit. Back in the four-year boom period 2004 through 2007, Bank Loans increased quarterly on average SAAR $670 billion. More than ever before, market-based finance dominates. And while everyone marvels at the wondrous U.S economy these days, I would warn of serious and mounting vulnerability to a market liquidity event.
Again this week, no end in sight for EM liquidity challenges. The South African rand dropped another 2.9%, the Mexican peso 1.7% and the Argentine peso 1.4%. Central banks were forced to aggressively hike rates in defense of dislocating currencies in Turkey and Brazil. The Turkish lira rallied 3.9%. Friday's wild 5.3% rise in Brazil's currency, erased earlier losses (two-year lows against the dollar) and saw the real muster a 1.5% gain for the week. Brazilian stocks sank 5.6% this week, with one-month losses of 14.4%.
Global market instability was not limited to EM. Italian 10-year yields surged 44 bps this week to 3.13%. Italian two-year yields jumped 66 bps to 1.67%. Italy's bank stocks were slammed 6.5% this week. Portuguese 10-year yields rose 18 bps to 2.06%, and Greece yields gained 18 bps to 4.65%. Up three bps to 1.47%, Spanish yields were relatively well-behaved.
The ECB signaled it will discuss a QE exit strategy at next week's meeting. For Italy, and to a lesser extend the Eurozone periphery, this is untimely news. Perhaps there is some recognition in the global central banking community that dollar strength now poses acute risk to the faltering EM Bubble. A more hawkish ECB and stronger euro takes some of the gas out of the appreciating dollar. It also risks taking more air out of the European bond Bubble. Even at the eurozone's "core", German 10-year yields rose six bps (to 45bps) this week and French yields jumped 11 bps (to 82bps). The ECB faces quite a dilemma.
Here at home, there's a speculative Bubble problem in U.S. equities. Reminiscent of Q1 2000, there is a heck of a short squeeze and derivative-related melt-up in the face of a deteriorating global backdrop. The S&P500 rose 1.6% and the Mid Caps jumped 2.2% this week, but these gains don't do justice to some of the pain being meted out on the short side. The retail sector (XRT) jumped 6.3% this week. The S&P Department Store index spiked 11.5%. With almost 39 million shares short, Tesla surged 26 points (8.9%) in five sessions. Other notable short squeezes included Five Below (41.7%), Endo Intl (21.8%), Under Armour (15.9%), Williams-Sonoma (13.5%), Twitter (12.4%), Macy's (12.2%), Wendy's (10.1%) and JD.Com (10.6%) - to name only a few. When the marketplace is transfixed by a short squeeze, little else matters.
An overheated economy and highly speculative equities market should weigh on the FOMC during Tuesday and Wednesday's meeting. And a potentially critical ECB gathering comes Thursday. Currency instability, fragile EM and European periphery and a Bubbling U.S. create quite a challenge for our global monetary commanders. Cracks in the global Bubble have markets betting central bankers don't have the guts to normalize.
And there's this weekend's Trump Tariff-focused G7 ("G6 plus the U.S.") meeting in Quebec, followed by Tuesday's Trump/Kim summit in Singapore. Prospects for a breakthrough with North Korea seem brighter than on the trade front. After Singapore, attention will turn to U.S. and Chinese trade negotiations. It's bound to get interesting.
June 8 - Reuters (Ben Blanchard and Denis Pinchuk): "Chinese President Xi Jinping gave visiting Russian President Vladimir Putin China's first friendship medal on Friday, calling him his best friend, underscoring the close ties between the two despite deep reservations many Western nations have of Putin. Meeting in Beijing's Great Hall of the People, Xi lauded their relationship. 'No matter what fluctuations there are in the international situation, China and Russia have always firmly taken the development of relations as a priority,' Xi told Putin at the start of their formal talks."
For the Week:
The S&P500 gained 1.6% (up 3.9% y-t-d), and the Dow jumped 2.8% (up 2.4%). The Utilities fell 3.0% (down 8.3%). The Banks rallied 2.3% (up 3.1%), and the Broker/Dealers rose 1.7% (up 11.3%). The Transports added 0.4% (up 3.1%).The S&P 400 Midcaps jumped 2.2% (up 5.3%), and the small cap Russell 2000 rose 1.5% (up 8.9%). The Nasdaq100 advanced 1.0% (up 11.8%). The Semiconductors were little changed (up 12.7%). The Biotechs added 0.5% (up 14.7%). While bullion gained $6, the HUI gold index slipped 0.2% (down 7.0%).
Three-month Treasury bill rates ended the week at 1.87%. Two-year government yields added three bps to 2.50% (up 61bps y-t-d). Five-year T-note yields gained four bps to 2.78% (up 58bps). Ten-year Treasury yields rose four bps to 2.95% (up 54bps). Long bond yields gained four bps to 3.09% (up 35bps). Benchmark Fannie Mae MBS yields jumped eight bps to 3.70% (up 70bps).
Greek 10-year yields rose 18 bps to 4.65% (up 57bps y-t-d). Ten-year Portuguese yields jumped 18 bps to 2.06% (up 11bps). Italian 10-year yields surged 44 bps to 3.13% (up 112bps). Spain's 10-year yields increased three bps to 1.47% (down 10bps). German bund yields gained six bps to 0.45% (up 2bps). French yields rose 11 bps to 0.82% (up 3bps). The French to German 10-year bond spread widened five to 37 bps. U.K. 10-year gilt yields jumped 11 bps to 1.39% (up 20bps). U.K.'s FTSE equities index slipped 0.3% (down 0.1%).
Japan's Nikkei 225 equities index rallied 2.4% (down 0.3% y-t-d). Japanese 10-year "JGB" yields were unchanged at 0.05% (unchanged). France's CAC40 slipped 0.3% (up 2.6%). The German DAX equities index increased 0.3% (down 1.2%). Spain's IBEX 35 equities index gained 1.2% (down 3.0%). Italy's FTSE MIB index dropped 3.4% (down 2.3%). EM equities were mixed. Brazil's Bovespa index sank 5.6% (down 4.5%), while Mexico's Bolsa recovered 2.1% (down 6.9%). South Korea's Kospi index gained 0.5% (down 0.6%). India’s Sensex equities index added 0.6% (up 4.1%). China’s Shanghai Exchange slipped another 0.3% (down 7.3%). Turkey's Borsa Istanbul National 100 index fell 3.3% (down 16.9%). Russia's MICEX equities declined 1.2% (up 7.5%).
Investment-grade bond funds saw inflows of $1.325 billion, while junk bond funds suffered outflows of $2.240 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates declined two bps to 4.54% (up 65bps y-o-y). Fifteen-year rates fell five bps to 4.01% (up 85bps). Five-year hybrid ARM rates dropped six bps to 3.74% (up 63bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up six bps to 4.62% (up 63bps).
Federal Reserve Credit last week declined $10.2bn to $4.279 TN. Over the past year, Fed Credit contracted $144bn, or 3.2%. Fed Credit inflated $1.468 TN, or 52%, over the past 292 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt increased $3.9bn last week to $3.398 TN. "Custody holdings" were up $140bn y-o-y, or 4.3%.
M2 (narrow) "money" supply expanded $32.9bn last week to a record $14.066 TN. "Narrow money" gained $546bn, or 4.0%, over the past year. For the week, Currency increased $1.0bn. Total Checkable Deposits gained $5.0bn, and savings Deposits jumped $25.3bn. Small Time Deposits added $3.4bn. Retail Money Funds dipped $1.8bn.
Total money market fund assets surged $37.5bn to $2.878 TN. Money Funds gained $219bn y-o-y, or 8.2%.
Total Commercial Paper dropped $9.9bn to $1.098 TN. CP gained $101bn y-o-y, or 10.1%.
Currency Watch:
The U.S. dollar index slipped 0.7% to 93.535 (up 1.5% y-t-d). For the week on the upside, the Norwegian krone increased 1.9%, the Brazilian real 1.5%, the Swedish krona 1.2%, the euro 0.9%, the New Zealand dollar 0.7%, the British pound 0.4%, the Australian dollar 0.4%, the Singapore dollar 0.3%, the Swiss franc 0.3%, and the Canadian dollar 0.2%. For the week on the downside, the South African rand declined 2.9%, the Mexican peso 1.7% and the South Korean won 0.1%. The Chinese renminbi increased 0.21% versus the dollar this week (up 1.56% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index slipped 0.2% (up 7.6% y-t-d). Spot Gold recovered 0.4% to $1,299 (down 0.3%). Silver gained 1.8% to $16.741 (down 2.4%). Crude slipped seven cents to $65.74 (up 9%). Gasoline declined 1.3% (up 18%), and Natural Gas fell 2.4% (down 2%). Copper surged 6.5% (unchanged). Wheat declined 0.6% (up 22%). Corn fell 3.5% (up 8%).
Market Dislocation Watch:
June 4 - Bloomberg (Tracy Alloway and Samuel Potter): "What do Toys 'R' Us bonds, the populist threat to the European Union, and Turkish external debt have in common? All were tolerated by market players until, quite suddenly, they weren't. Investors seem increasingly prone to flee assets at the first hint of trouble, fueling concern more cracks are appearing in global markets that have been papered over for years by easy money. That climate saw cash simply herded into any investment with a respectable yield. The swift reaction to a twist in Italy's political drama last week looks like the latest sign. 'The binary 'all-in/all-out' behavior, which up until now was relegated to the fringes of the financial markets, has gone mainstream,' Peter Atwater, president of Financial Insyghts, said of the market's rapid repricing of Italian default risk. 'Investors are becoming increasingly manic,' he wrote in a note."
June 4 - Financial Times (Martin Arnold and Judith Evans): "A clear lesson from last week's sharp sell-off in Italian bond markets: the 'doom loop' that creates a direct link between eurozone countries and their banking systems is still a powerful force. Within hours of Sergio Mattarella, Italy's president, causing political palpitations in Rome by blocking the appointment of a Eurosceptic economy minister by populist parties, investors were scurrying to check which banks were most exposed to Italian sovereign bonds."
June 5 - Bloomberg (Dani Burger): "Here's one to file under the market's memory-loss. The volatility complex -- the selling or shorting of options tied to U.S. stocks -- is back with a vengeance, shrugging off February's vol-mageddon in its wake. Hedge funds hold the most number of short positions on the Cboe Volatility Index since late January -- before the record spike in the gauge that wiped out over $5 trillion in global stocks and jolted investors from their complacent slumber. Meanwhile, money managers are back to selling products linked to equity price swings en masse, either to speculate conditions will remain subdued or hedge underlying exposures."
June 6 - Financial Times (Chloe Cornish): "Investors have pulled nearly $11bn out of European equity exchange traded funds in the past three months, with financials bearing the brunt of withdrawals. During May, more than $3.7bn worth of investment left Europe equity ETFs on a net basis… It marks the most money flowing out of European companies' shares via tracker funds since data-gathering began in 2008…"
Trump Administration Watch:
June 7 - Wall Street Journal (Emre Peker in Brussels, Paul Vieira and Bojan Pancevski): "U.S. allies Canada, Japan and the European Union are banding together to increase pressure on Washington following the Trump administration's metals tariffs as they head to a meeting of Group of Seven industrialized countries in Quebec… With trade likely to dominate the agenda of the summit, the U.S. tariff move has driven a wedge between the U.S. and the other six nations, say leaders and officials, and has dashed hopes that the group would focus on a coordinated response to another longstanding trade issue: the global steel glut driven by Chinese production. 'Tariffs imposed last week by President Trump on EU and Canada have increased significantly tensions before the meeting,' a senior EU official said, adding that a breakthrough to ease trade tensions was unlikely. 'We have extremely low expectations.'"
June 6 - Wall Street Journal (Jacob Bunge, Heather Haddon and Benjamin Parkin): "U.S. farmers, already losing sales to China, are facing new threats to sales in other big overseas markets as trade tensions spread globally. Mexico this week imposed tariffs on major U.S. exports such as cheese and pork, while Canada and the European Union are considering tariffs on imports of U.S. food and farm goods from corn to orange juice to peanut butter, in response to the U.S. placing tariffs last week on steel and aluminum imports from those countries. In addition, analysts say, China could target other crops and products after Trump administration officials last week outlined potential tariffs on $50 billion worth of Chinese goods. The rapid-fire exchange of tariffs and trade threats leaves U.S. farmers and agricultural groups fearing tougher sells in their most important overseas markets…"
June 4 - Financial Times (Tom Mitchell): "The world's two largest economies remained on track to commence a $100bn trade war as early as this month, after a third round of China-US trade negotiations ended in Beijing on Sunday without a breakthrough. Last week US president Donald Trump said he would move to implement previously threatened tariffs on $50bn worth of Chinese industrial exports 'shortly' after June 15, which Beijing has promised to reciprocate."
June 5 - New York Times (Ana Swanson and Jim Tankersley): "Mexico hit back at the United States on Tuesday, imposing tariffs on around $3 billion worth of American pork, steel, cheese and other goods in response to the Trump administration's steel and aluminum levies, further straining relations between the two countries as they struggle to rewrite the North American Free Trade Agreement. The tariffs, which were announced last week, came into effect as the Trump administration threw yet another complication into the fractious Nafta talks."
June 6 - CNBC (Philip Blenkinsop): "The European Union expects to hit U.S. imports with additional duties from July, ratcheting up a transatlantic trade conflict after Washington imposed its own tariffs on incoming EU steel and aluminum. EU members have given broad support to a European Commission plan to set 25% duties on up to 2.8 billion euros ($3.3bn) of U.S. exports in response to what is sees as illegal U.S. action. EU exports that are now subject to U.S. tariffs are worth 6.4 billion euros."
June 8 - Reuters (Andrea Shalal): "German Economy Minister Peter Altmaier called on Friday for Europe to remain unified in the face of rising trade tensions with the United States, saying it was unclear how a summit of the Group of Seven rich nations would end. 'We have a serious situation, not just since last night or this morning, but rather the entire last few weeks,' Altmaier told broadcaster ZDF."
EM Bubble Watch:
June 7 - Financial Times (Orla McCaffrey): "Investors have taken the gloves off against the Brazilian real in retaliation for rising political uncertainty, driving it to two-year lows of about R$3.94 against the dollar. The next threshold for the currency is R$4.00 as local weakness combines with external pressure from expected further rate tightening by the US Federal Reserve. The sell-off was sparked by the government's intervention in diesel prices to placate striking truckers- a throwback to the country's blighted history of price controls and a bad sign for efforts to undertake much-needed fiscal reforms. The central bank has twice intervened by selling US dollar swaps, effectively a bet against the greenback in favour of the real. Since last Friday, the stock of outstanding swaps has increased 13.5% and since end-April by 44.5%."
June 5 - Bloomberg (Colleen Goko and Thembisile Augustine Dzonzi): "The rand weakened, yields on benchmark bonds rose and retail and banking stocks fell as a report showed that South Africa's economy shrank the most in nine years in the first quarter, casting a pall over President Cyril Ramaphosa's promise to boost growth. Ramaphosa, who replaced Jacob Zuma in February, has pledged measures to fuel the economy, boost employment and attract investment after four years in which output never managed to expand more than 2% annually. But the latest data show he has a mountain to climb: gross domestic product contracted an annualized 2.2% in the first quarter of the year compared with the prior three months."
June 6 - Reuters (Dave Graham and Frank Jack Daniel): "The front-runner to win the Mexican presidency, Andres Manuel Lopez Obrador, would aim to bring 'fresh blood' to the central bank's board as members' terms expire if he wins election on July 1, one of his top economic advisers said. Carlos Urzua, the leftist Lopez Obrador's pick for finance minister, said it was important to bring new perspectives onto the board of the Bank of Mexico, while rejecting the idea of altering the central bank's focus on price stability."
U.S. Bubble Watch:
June 4 - Financial Times (Jeff Cox): "Money is pouring into the U.S. economy and in turn helping provide support for the otherwise struggling stock market. If current conditions persist, corporations are likely this year to inject more than $2.5 trillion into what UBS strategists term 'flow' - the combination of share buybacks, dividends, and mergers and acquisitions activity. The development comes as companies find themselves awash in cash, thanks primarily to years of stashing away profits plus the benefits of a $1.5 trillion tax break this year that slashed corporate rates and encouraged firms to bring back money idling overseas."
June 8 - Bloomberg (Craig Torres): "U.S. economic growth could face a challenging slowdown as the Trump Administration's powerful fiscal stimulus fades after two years, according to former Federal Reserve Chairman Ben Bernanke. Bernanke said the $1.5 trillion in personal and corporate tax cuts and a $300 billion increase in federal spending signed by President Donald Trump 'makes the Fed's job more difficult all around' because it's coming at a time of very low U.S. unemployment. 'What you are getting is a stimulus at the very wrong moment,' Bernanke said… 'The economy is already at full employment.'"
June 6 - CNBC (Jeff Cox): "The jobs market has reached what should be some kind of inflection point: there are now more openings than there are workers. April marked the second month in a row this historic event has occurred, and the gap is growing. According to the monthly Job Openings and Labor Turnover Survey…, there were just shy of 6.7 million open positions in April... That represented an increase of 65,000 from March and is a record. The number of vacancies is pulling well ahead of the number the Bureau of Labor Statistics counts as unemployed. This year is the first time the level of the unemployed exceeded the jobs available since the BLS started tracking JOLTS numbers in 2000."
June 5 - Reuters (Lucia Mutikani): "U.S. services sector activity accelerated in May, pointing to robust economic growth in the second quarter, but trade tariffs and a shortage of workers posed a threat to the outlook. Other data… showed job openings rising to a record high in April, far outpacing hiring."
June 3 - Bloomberg (Sally Bakewell and Erik Schatzker): "The need to deploy cash is forcing fund managers to accept terms they wouldn't otherwise like in the new issues market, particularly in the lowest ranks of investment grade, KKR's Jamie Weinstein says… For investment funds to keep cash balances down they have to keep buying new issues and that's where they get squeezed. There's been a 'big explosion' in the BBB market, which 'might be" the seeds of a debt crisis.'"
June 8 - CNBC (Diana Olick): "Fast-rising home prices may be a roadblock for buyers, but they are putting some homeowners on Easy Street. As home prices rise, so does the percentage of home equity for those owners with a mortgage. Home equity jumped 13.3% in the first quarter of this year compared from a year earlier, according to CoreLogic. For the average borrower, that translates to $16,300 in additional home equity gained during the year, or a collective $1.01 trillion. That is the biggest gain in four years."
June 5 - Wall Street Journal (Ryan Dezember): "The good news for home builders and house hunters is that lumber prices have sold off since hitting an all-time high in mid May. The bad news: wood prices are still up 67% over the past year, adding thousands of dollars to the cost of each new house. The historic run-up in lumber prices-attributable to a trade dispute with Canada, wildfires and limited rail capacity-comes as U.S. home builders are already struggling to meet demand amid shortages in buildable lots and labor… Meanwhile plywood prices have risen 43% over the last year… 'We've never seen anything like this,' said Deb Maples, risk management consultant at… INTL FCStone Financial Inc. 'It's been unprecedented.'"
June 7 - Wall Street Journal (Orla McCaffrey): "Twitter Inc. said… it plans to sell at least $1 billion in bonds that convert to equity, joining a rush of tech companies taking advantage of soaring share prices to issue convertible debt. The move comes as Twitter shares have surged to three-year highs after S&P Dow Jones Indices said the company would be added to the S&P 500… Twitter's move is the latest in a recent series of publicly traded technology companies issuing convertible bonds-debt that grants investors the right to exchange the securities for equity once a company's stock hits a certain price. Nearly half of convertible-bond issuers in the U.S. this year have been tech companies, with offerings totaling over $11 billion…"
June 6 - Wall Street Journal (Doug Cameron and Alison Sider): "Jet-fuel prices have surged more than 50% over the past year, pushing carriers to raise fares and Delta Air Lines Inc. to cut its profit expectations. Delta… said… it could take six to 12 months to recoup the extra fuel costs via pricier tickets. Fuel is again the single-largest expense for most airlines, accounting for about a quarter of operating costs. The recent run-up in prices echoes the jump seen from 2009 to 2011, which first spawned stand-alone surcharges on many international flights."
June 5 - Wall Street Journal (David Harrison): "The Social Security program's costs will exceed its income this year for the first time since 1982, forcing the program to dip into its nearly $3 trillion trust fund to cover benefits. This is three years sooner than expected a year ago…, according to the latest annual report the trustees of Social Security and Medicare released… The trust fund will be depleted in 2034 and Social Security will no longer be able to pay its full scheduled benefits unless Congress takes action to shore up the program's finances… The report also said that Medicare's hospital insurance fund would be depleted in 2026, three years earlier than anticipated in last year's report."
June 6 - CNBC (Stephanie Landsman): "David Stockman is intensifying his bear case. President Ronald Reagan's Office of Management and Budget director blames a bull market that's getting longer in the tooth - paired with headwinds ranging from President Donald Trump's leadership to fiscal policy decisions to questionable earnings. 'I call this a daredevil market. It's all risk and very little reward in the path ahead,' Stockman said… 'This market is just way, way over-priced for reality.'"
China Watch:
June 4 - Bloomberg (Boris Cerni): "China's banks, scrambling to adjust to the government's deleveraging campaign, are likely to add to pressures on the corporate bond market as they shed more of their massive note holdings and de-risk their balance sheets. Further payment problems are likely in a market that has already seen at least 14 corporate bond defaults this year, according to Logan Wright, …director at research firm Rhodium Group LLC. As well as cutting their own holdings, Chinese banks have pulled back from lending to other firms that use the funds to buy bonds, exacerbating the pressure on the market."
June 8 - Bloomberg (Gregor Hunter and Narae Kim): "China's efforts to connect the world's third-biggest bond market with the international financial system are hitting dual headwinds -- a climb in global borrowing costs, and the country's own campaign to reduce financial leverage. The dynamics have contributed to defaults by 12 bond issuers in 2018 through June 4, after 18 for the whole of 2017, according to Fitch... Firms from JPMorgan… to Fidelity International are warning to prepare for more. But with about 8.2 trillion yuan ($1.3 trillion) of domestic corporate and local-government securities due to mature in the coming 12 months, it's an open question whether China is prepared to let chips fall where they may. Authorities started shifting away from the old model of implicit guarantees for practically all debt securities in 2014, allowing defaults for the first time."
June 7 - Financial Times (Don Weinland): "When other acquisitive Chinese groups were insisting they were not an arm of the state, China Energy Reserve and Chemicals Group was making the opposite case: trying to convince bankers and investors it belonged to the government. But the company's recent default on a payment for a $350m bond, and its withdrawal from a $5.2bn property deal earlier in the year, was a sign that its state backing was not as strong as advertised. The matter is sensitive for investors in Chinese bonds. The presumption of state backing - the so-called implicit guarantee- for debt issued by government owned groups lets the companies borrow at dramatically reduced cost. The state guarantee is rarely spelt out in bond documents and must be taken as an article of faith - a crucial market matter given Chinese state-backed groups issued $315bn of debt in 2017…"
June 3 - Reuters (Stella Qiu and Ryan Woo): "China's debt crackdown is a key risk to the country's economic growth and will have significant knock-on effects for the global economy, particularly emerging markets with high commodity dependence or close Chinese trade links, Fitch Ratings said. Beijing's campaign to put a lid on debt could also lead to a sharp slowdown in business investment…, forecasting that growth in the world's second-biggest economy would slow to around 4.5% over the medium term."June 4 - Bloomberg: "China's banks, scrambling to adjust to the government's deleveraging campaign, are likely to add to pressures on the corporate bond market as they shed more of their massive note holdings and de-risk their balance sheets. Further payment problems are likely in a market that has already seen at least 14 corporate bond defaults this year… As well as cutting their own holdings, Chinese banks have pulled back from lending to other firms that use the funds to buy bonds, exacerbating the pressure on the market… Strains have already spread from high-yield trust products to corporate bonds this year as China's campaign against its $10 trillion shadow banking industry has choked off refinancing for the weaker borrowers."
June 4 - Financial Times (Don Weinland): "Debt collectors in China are harnessing new technologies such as artificial intelligence in a bid to collect on an estimated Rmb1.3tn ($200bn) debt bubble that has formed in the country's peer-to-peer lending industry. Thousands of online businesses connecting private lenders to people in need of cash sprang up across the country over the past five years, but a spate of scandals has put these lenders in the crosshairs of regulators. Many P2P lenders have been shut down since mid-2017 as lending controls have been implemented and licences required."
Central Bank Watch:
June 6 - Bloomberg (Crispian Balmer and Angelo Amante): "Mario Draghi is on the verge of a watershed moment in the European Central Bank's efforts to leave behind its crisis-fighting monetary policy. Chief Economist Peter Praet… signaled the bank's first formal round of talks on when to stop buying bonds is imminent. That would start the process of bringing down the curtain on stimulus efforts that have resulted in almost 2.5 trillion euros ($2.9 trillion) of bond purchases since 2015. While Draghi… could still delay a public announcement until July, Praet's comments sent bonds lower and pushed the euro to its strongest level in two weeks, as investors prepared for the conclusion of emergency stimulus and a potential shift toward higher interest rates in 2019. 'The bottom line is that this is the end,' said Nick Kounis, head of macro and financial markets research at ABN Amro Bank NV... 'This is a signal that the ECB judges that the inflation conditions to wind down net asset purchases have been met.'"
June 6 - Reuters (Michelle Martin and Reinhard Becker): "Expectations that the European Central Bank will wind down its bond-buying programme by the end of this year are plausible, the head of Germany's central bank said… 'For some time now, financial market participants have been expecting that the asset purchases will end before 2018 is out,' Jens Weidmann told a conference in Berlin… 'As things stand, I find these market expectations plausible,' he said, adding that this would be the first step towards normalising monetary policy.'"
Global Bubble Watch:
June 4 - Wall Street Journal (Richard Barley): "If last year in markets was all about strong returns, this year is about rising risks: a brewing trade war, renewed political turmoil and concerns about growth. The difference is that central-bank policy that helped insulate markets from risk is changing. Investors are increasingly looking after themselves. Last week's wild swings in Italian bonds are just the latest in a series of shocks that have made 2017's smooth market ride a distant memory. Surging Treasury yields, equity-market volatility and trouble in Argentina and Turkey are all part of the same picture. These have been episodes where the moves in financial-market prices have become news themselves-something that hardly happened at all in 2017, and a sign of their sheer scale. In financial jargon, risk premia are being repriced."
June 6 - Wall Street Journal (Paul VieiraRachel Pannett and Dominique Fong): "Crowds swept into the Beijing Exhibition Center on a recent morning for a real-estate expo that drew thousands of people interested in foreign property. That kind of surging interest has created a flood of capital that is washing over cities throughout the globe, distorting home prices, irritating local residents-and defying almost every attempt to restrain it. In Vancouver, Chinese home buyers snapped up properties so fast in 2016 that prices escalated at a rate of 30% a month compared with a year earlier. Officials imposed a 15% foreign-buyers tax, and Chinese buyers turned to Toronto… The hot pursuit of places to park money abroad by Chinese investors drove an estimated $100 billion in property purchases outside China in 2016, according to Juwai.com, a Chinese real-estate website. The buying frenzy, which grew from $5 billion in 2010, helped swell prices for housing and commercial real estate in cities on the Pacific Rim and beyond."
June 6 - Financial Times (Shawn Donnan): "Rising trade tensions are dragging down long-term cross-border investment by companies around the world, UN figures showed… Global foreign direct investment fell by 23% in 2017 and is expected to grow only modestly, if at all, this year… Threatening this year's picture are the growing prospects of a trade war between the US and China and the EU. The US last week imposed steel and aluminium tariffs on the EU, Canada and Mexico. It is due to release lists of tariffs and investment restrictions against China by the end of this month and is also threatening to impose import taxes on the $190bn of cars brought into the US from overseas annually."
Europe Watch:
June 5 - Reuters (Steve Scherer and Gavin Jones): "Italy's new prime minister promised… to bring radical change to the country, including more generous welfare and a crackdown on immigration, as the two party bosses who hold the keys to his anti-establishment government nodded their approval. Prime Minister Giuseppe Conte addressed the Senate, flanked by the leaders of two formerly fringe parties that shoved aside mainstream groups at an election in March to form a coalition with little-known law expert Conte as its head."
June 5 - AFP (Ana Swanson and Jim Tankersley): "Italy's incoming prime minister used his maiden policy speech to demand a review of sanctions against Russia, in a departure from the stance of his European allies. Giuseppe Conte also called for an 'obligatory' redistribution of asylum seekers around the EU. His government, made up of a coalition of far-right and Eurosceptic parties, was sworn in last Friday after almost three months of political turmoil that alarmed European officials and spooked financial markets. Conte, a lawyer with little political and no governmental experience, was nominated by the far-right League leader, Matteo Salvini, and the head of the anti-establishment Five Star Movement (M5S), Luigi di Maio - both of whom are now his deputy prime ministers. In his first speech to lawmakers since being sworn in, Conte reaffirmed several of the coalition's key manifesto themes, including a tough line on migrants, rejection of economic austerity and conciliatory gestures towards Moscow."
June 4 - Financial Times (Kate Allen, Claire Jones and Rachel Sanderson): "The ECB has come under fire from Italy's new populist government after revealing that it scaled back the proportion of Italian sovereign bonds it bought as part of its economic stimulus programme during Rome's political turmoil last month. The central bank purchased a net €3.6bn of Italian government debt under its long-running programme in May… Although this is higher than the amount it bought in some recent months, such as March and January, it was smaller as an overall proportion of its net purchases."
June 2 - Reuters (Jesús Aguado and Ingrid Melander): "Nationalists regained control of Catalonia's government on Saturday and immediately pledged to seek independence for the wealthy region, posing a swift challenge to new Spanish Prime Minister Pedro Sanchez who took office on the same day. The new Catalan cabinet was sworn in after months of tensions with the central government, ending Madrid's seven-month direct rule of the region, imposed by Sanchez's predecessor after separatists declared independence."
June 3 - Bloomberg (Boris Cerni): "Nationalists won Slovenia's general elections, setting another euro-area nation on course for political deadlock as rival parties united in condemnation of their anti-refugee rhetoric and vowed to block them from government. Former Prime Minister Janez Jansa followed the tactics that led anti-immigrant populists to victory in three of Slovenia's neighbors -- Italy, Austria and Hungary -- challenging the European Union's mainstream."
Fixed Income Bubble Watch:
June 6 - Bloomberg (Sid Verma and Cecile Gutscher): "Students of history will find two parallels to today's credit market -- and neither will provide much comfort. According to a key valuation metric, investors are headed for the kind of bullishness on high-yield bonds that's been seen just twice before: during the halcyon days of 1997's tech bubble before the Asia crash, and on the eve of the global financial crisis a decade later. The ratio between U.S. junk-bond yields and their high-grade counterparts has reached levels that 'hearken back to the high risk appetite days of October 1997 and June 2007,' CreditSights Inc. strategists Glenn Reynolds and Kevin Chun Wrote…"
June 5 - Bloomberg (Vivian Li): "Risky loans are coming to the U.S. with fewer protections for investors just as rising interest rates make it more costly for leveraged companies to pay off debt… Leveraged loans, issued by companies with a below-investment grade debt rating, often have covenants to protect lenders, such as a limit to the borrower's long-term debt to total assets ratio, or the debt service to free cash flow ratio. So-called 'cov-lite' loans have fewer restrictions."
June 1 - Bloomberg (Claire Boston): "Commercial mortgage bonds are getting stuffed with the lowest-quality loans since the financial crisis by one measure, according to Moody's…, a warning sign that the $517 billion market may be headed for harder times. The securities are backed by as many interest-only mortgages as they were in late 2006 and early 2007… Those loans are riskier because borrowers don't pay any principal early in the debt's life. When that period expires, the property owners are on the hook for much higher payments. The percentage of interest-only loans in a commercial mortgage bond is an 'important bellwether' for the industry, according to Moody's analysts, because the loans are more likely to default and to bring bigger losses to lenders when they do."
Leveraged Speculator Watch:
June 5 - Bloomberg (Josh Friedman): "Bridgewater Associates, the hedge fund firm led by billionaire Ray Dalio, told clients it's bearish on almost all financial assets, the website ZeroHedge reported… '2019 is setting up to be a dangerous year, as the fiscal stimulus rolls off while the impact of the Fed's tightening will be peaking,' the hedge fund giant said in a recent note written by Co-Chief Investment Officer Greg Jensen… Bridgewater, the world's largest hedge fund firm, manages about $160 billion."
June 6 - CNBC (Michael Sheetz): "Investors betting against Tesla lost more than $1 billion Wednesday as the company's shares rallied the most in over two years… Tesla stock closed Wednesday up 9.7% at $319.50 per share, meaning investors who sold the stock short lost a collective $1.07 billion in a single day, estimates S3. Tesla bears have lost nearly $5 billion in mark-to-market losses since 2016, S3's head of predictive analytics Ihor Dusaniwsky told CNBC."
Geopolitical Watch:
June 7 - CNBC (Holly Ellyatt): "A fear of mutual destruction should stop global powers from attacking each other and prompting World War III, Russian President Vladimir Putin said Thursday during a public phone-in. 'The understanding that a third world war could be the end of civilization should restrain us from taking extreme steps on the international arena that are highly dangerous for modern civilization,' Putin said during his annual question and answer session with Russian citizens. 'The threat of mutual destruction has always restrained participants of the international arena, prevented leading military powers from making hasty moves, and compelled participants to respect each other,' he added."
June 4 - Reuters (Phil Stewart and Idrees Ali): "The United States is considering sending a warship through the Taiwan Strait, U.S. officials say, in a move that could provoke a sharp reaction from Beijing at a time when Sino-U.S. ties are under pressure from trade disputes and the North Korean nuclear crisis. A U.S. warship passage, should it happen, could be seen in Taiwan as a fresh sign of support by President Donald Trump after a series of Chinese military drills around the self-ruled island."
June 3 - Bloomberg (Rosalind Mathieson and Keith Zhai): "Even as defense ministers and military chiefs meeting in Singapore called out China for parking missiles on outposts in the disputed South China Sea, a bigger potential China-related hot spot looms. Concern about Taiwan -- and recent sparring between Beijing and Washington over the democratically run island -- percolated discussions at the annual IISS Shangri-La Dialogue… U.S. Secretary of Defense James Mattis warned China against disrupting the 'status quo' on Taiwan, as Beijing steps up air-and-sea maneuvers nearby and accelerates efforts to isolate Taipei."
June 2 - Reuters (Greg Torode and Idrees Ali): "The United States is considering intensified naval patrols in the South China Sea in a bid to challenge China's growing militarization of the waterway, actions that could further raise the stakes in one of the world's most volatile areas. The Pentagon is weighing a more assertive program of so-called freedom-of-navigation operations close to Chinese installations on disputed reefs, two U.S. officials and Western and Asian diplomats close to discussions said."
June 6 - Reuters (Ben Blanchard): "No military ship or aircraft can scare China away from its resolve to protect its territory, China's Foreign Ministry said… after two U.S. Air Force B-52 bombers were reported to have flown near disputed islands in the South China Sea… The United States was willing to work with China on a 'results-oriented' relationship, but its actions in the South China Sea were coercive and the Pentagon would 'compete vigorously' if needed, U.S. Defense Secretary Jim Mattis said…"
June 3 - Reuters (Christian Shepherd and Ben Blanchard): "The United States urged China to make a full public account of a crackdown on student-led pro-democracy protests in and around Beijing's Tiananmen Square in 1989 as tens of thousands in Hong Kong held a candlelight vigil for the victims. The Chinese government sent tanks to quell the June 4, 1989 protests, and has never released a death toll… The Tiananmen crackdown is a taboo subject in China…"
June 5 - Bloomberg (Vivian Li): "Risky loans are coming to the U.S. with fewer protections for investors just as rising interest rates make it more costly for leveraged companies to pay off debt… Leveraged loans, issued by companies with a below-investment grade debt rating, often have covenants to protect lenders, such as a limit to the borrower's long-term debt to total assets ratio, or the debt service to free cash flow ratio. So-called 'cov-lite' loans have fewer restrictions."
June 1 - Bloomberg (Claire Boston): "Commercial mortgage bonds are getting stuffed with the lowest-quality loans since the financial crisis by one measure, according to Moody's…, a warning sign that the $517 billion market may be headed for harder times. The securities are backed by as many interest-only mortgages as they were in late 2006 and early 2007… Those loans are riskier because borrowers don't pay any principal early in the debt's life. When that period expires, the property owners are on the hook for much higher payments. The percentage of interest-only loans in a commercial mortgage bond is an 'important bellwether' for the industry, according to Moody's analysts, because the loans are more likely to default and to bring bigger losses to lenders when they do."
Leveraged Speculator Watch:
June 5 - Bloomberg (Josh Friedman): "Bridgewater Associates, the hedge fund firm led by billionaire Ray Dalio, told clients it's bearish on almost all financial assets, the website ZeroHedge reported… '2019 is setting up to be a dangerous year, as the fiscal stimulus rolls off while the impact of the Fed's tightening will be peaking,' the hedge fund giant said in a recent note written by Co-Chief Investment Officer Greg Jensen… Bridgewater, the world's largest hedge fund firm, manages about $160 billion."
June 6 - CNBC (Michael Sheetz): "Investors betting against Tesla lost more than $1 billion Wednesday as the company's shares rallied the most in over two years… Tesla stock closed Wednesday up 9.7% at $319.50 per share, meaning investors who sold the stock short lost a collective $1.07 billion in a single day, estimates S3. Tesla bears have lost nearly $5 billion in mark-to-market losses since 2016, S3's head of predictive analytics Ihor Dusaniwsky told CNBC."
Geopolitical Watch:
June 7 - CNBC (Holly Ellyatt): "A fear of mutual destruction should stop global powers from attacking each other and prompting World War III, Russian President Vladimir Putin said Thursday during a public phone-in. 'The understanding that a third world war could be the end of civilization should restrain us from taking extreme steps on the international arena that are highly dangerous for modern civilization,' Putin said during his annual question and answer session with Russian citizens. 'The threat of mutual destruction has always restrained participants of the international arena, prevented leading military powers from making hasty moves, and compelled participants to respect each other,' he added."
June 4 - Reuters (Phil Stewart and Idrees Ali): "The United States is considering sending a warship through the Taiwan Strait, U.S. officials say, in a move that could provoke a sharp reaction from Beijing at a time when Sino-U.S. ties are under pressure from trade disputes and the North Korean nuclear crisis. A U.S. warship passage, should it happen, could be seen in Taiwan as a fresh sign of support by President Donald Trump after a series of Chinese military drills around the self-ruled island."
June 3 - Bloomberg (Rosalind Mathieson and Keith Zhai): "Even as defense ministers and military chiefs meeting in Singapore called out China for parking missiles on outposts in the disputed South China Sea, a bigger potential China-related hot spot looms. Concern about Taiwan -- and recent sparring between Beijing and Washington over the democratically run island -- percolated discussions at the annual IISS Shangri-La Dialogue… U.S. Secretary of Defense James Mattis warned China against disrupting the 'status quo' on Taiwan, as Beijing steps up air-and-sea maneuvers nearby and accelerates efforts to isolate Taipei."
June 2 - Reuters (Greg Torode and Idrees Ali): "The United States is considering intensified naval patrols in the South China Sea in a bid to challenge China's growing militarization of the waterway, actions that could further raise the stakes in one of the world's most volatile areas. The Pentagon is weighing a more assertive program of so-called freedom-of-navigation operations close to Chinese installations on disputed reefs, two U.S. officials and Western and Asian diplomats close to discussions said."
June 6 - Reuters (Ben Blanchard): "No military ship or aircraft can scare China away from its resolve to protect its territory, China's Foreign Ministry said… after two U.S. Air Force B-52 bombers were reported to have flown near disputed islands in the South China Sea… The United States was willing to work with China on a 'results-oriented' relationship, but its actions in the South China Sea were coercive and the Pentagon would 'compete vigorously' if needed, U.S. Defense Secretary Jim Mattis said…"
June 3 - Reuters (Christian Shepherd and Ben Blanchard): "The United States urged China to make a full public account of a crackdown on student-led pro-democracy protests in and around Beijing's Tiananmen Square in 1989 as tens of thousands in Hong Kong held a candlelight vigil for the victims. The Chinese government sent tanks to quell the June 4, 1989 protests, and has never released a death toll… The Tiananmen crackdown is a taboo subject in China…"
Thursday, June 7, 2018
Friday's News Links
[BloombergQ] Stocks Drop, Bonds Mixed as Emerging Assets Suffer: Markets Wrap
[Reuters] Trump vows to 'straighten out' G7 trade ahead of tense meeting
[Reuters] Germany urges European unity in face of trade tensions with U.S.
[BloombergQ] Brazil's Central Bank President Defends Policies Amid Rout
[BloombergQ] Brazil Joins Turkey With Stepped-Up Currency Defenses Amid Rout
[Reuters] G7 leaders set to clash with combative Trump over tariffs, trade
[BloombergQ] World's Big-Three Central Banks to Meet With Different Agendas
[BloombergQ] Bernanke Says U.S. Economy Faces `Wile E. Coyote' Moment in 2020
[BloombergQ] China's $11 Trillion Bond Market Tested by Rising Defaults
[Reuters] China May exports rise 12.6 percent, imports up 26 percent
[Reuters] Brazil May inflation ticks up more than expected
[BloombergQ] Deutsche Bank Chair Talks Commerzbank Deal to Snap Doom Loop
[BloombergQ] Bond Bears Pummeled by Three Minutes of Frenzied Futures Trading
[Reuters] Chinese paper slams U.S. stance on Taiwan, says should prepare for 'crisis'
[Reuters] China's Xi awards 'best friend' Putin friendship medal, promises support
[WSJ] Brazil Selloff Feeds Global Emerging-Markets Retreat
[WSJ] ‘Get Moving’: How Trump Ratcheted Up the Trade Battle With China
[FT] Risk segregation and market fragility in the eurozone
[Reuters] Trump vows to 'straighten out' G7 trade ahead of tense meeting
[Reuters] Germany urges European unity in face of trade tensions with U.S.
[BloombergQ] Brazil's Central Bank President Defends Policies Amid Rout
[BloombergQ] Brazil Joins Turkey With Stepped-Up Currency Defenses Amid Rout
[Reuters] G7 leaders set to clash with combative Trump over tariffs, trade
[BloombergQ] World's Big-Three Central Banks to Meet With Different Agendas
[BloombergQ] Bernanke Says U.S. Economy Faces `Wile E. Coyote' Moment in 2020
[BloombergQ] China's $11 Trillion Bond Market Tested by Rising Defaults
[Reuters] China May exports rise 12.6 percent, imports up 26 percent
[Reuters] Brazil May inflation ticks up more than expected
[BloombergQ] Deutsche Bank Chair Talks Commerzbank Deal to Snap Doom Loop
[BloombergQ] Bond Bears Pummeled by Three Minutes of Frenzied Futures Trading
[Reuters] Chinese paper slams U.S. stance on Taiwan, says should prepare for 'crisis'
[Reuters] China's Xi awards 'best friend' Putin friendship medal, promises support
[WSJ] Brazil Selloff Feeds Global Emerging-Markets Retreat
[WSJ] ‘Get Moving’: How Trump Ratcheted Up the Trade Battle With China
[FT] Risk segregation and market fragility in the eurozone
Thursday Evening Links
[Reuters] Tech rally loses steam, McDonald's pushes Dow higher
[CNBC] Trump spars with Trudeau, Macron on trade ahead of G7 summit
[CNBC] Japanese Prime Minister Shinzo Abe faces pressure to join trade war against the US
[Reuters] Brazil real plummets despite central bank intervention
[AFP] Trump trade war threat sets up G7 summit clash
[CNBC] US homeowners gained $1 trillion in the last year as their housing values jumped
[CNBC/NYT] Betting on crisis, hedge funds short Italian bonds
[MarketWatch] ‘Something lurking out there’ will upset the stock market, says Blackstone’s Wien
[WSJ] Brazil Selloff Feeds Global Emerging-Markets Retreat
[WSJ] Lawmakers Take Aim at Chinese Tech Firms
[FT] Default reignites questions over China group’s state backing
[CNBC] Trump spars with Trudeau, Macron on trade ahead of G7 summit
[CNBC] Japanese Prime Minister Shinzo Abe faces pressure to join trade war against the US
[Reuters] Brazil real plummets despite central bank intervention
[AFP] Trump trade war threat sets up G7 summit clash
[CNBC] US homeowners gained $1 trillion in the last year as their housing values jumped
[CNBC/NYT] Betting on crisis, hedge funds short Italian bonds
[MarketWatch] ‘Something lurking out there’ will upset the stock market, says Blackstone’s Wien
[WSJ] Brazil Selloff Feeds Global Emerging-Markets Retreat
[WSJ] Lawmakers Take Aim at Chinese Tech Firms
[FT] Default reignites questions over China group’s state backing
Wednesday, June 6, 2018
Thursday's News Links
[BloombergQ] Stocks Edge Up as Momentum Eases; Treasuries Slip: Markets Wrap
[Reuters] Euro and bond yields extend rally on ECB while risk appetite grows
[CNBC] Trump is likely to face a chilly reception at the G-7 conference
[BloombergQ] Fed on Track to Hike Rates Regardless of Emerging-Market Woe
[BloombergQ] Trump Pressures GOP Allies to Block Restrictions on Tariff Power
[Reuters] China says it does not want U.S. trade frictions to escalate
[CNBC] US hits China's ZTE with $1 billion penalty in deal to end crippling sanctions
[BloombergQ] Turkey Central Bank Is Latest to Surprise With Rate Increase
[Reuters] Turkey's central bank raises rates again, says ready to tighten further
[BloombergQ] Brazil's Opposing Presidential Frontrunners Harden Their Stances
[Reuters] Fear of World War III should stop global disputes, Russia's Putin says
[NYT] Betting on Crisis, Hedge Funds Short Italian Bonds
[WSJ] After Steel and Aluminum Tariffs, U.S. Allies Move to Coordinate Retaliation Efforts
[WSJ] Economic, Political Turbulence Hits Brazil’s Real
[WSJ] Twitter Plans to Sell $1 Billion in Convertible Debt
[FT] Donald Trump, Italy and the threat to Germany
[FT] Political uncertainty drives Brazilian real to 2-year lows
[Reuters] Euro and bond yields extend rally on ECB while risk appetite grows
[CNBC] Trump is likely to face a chilly reception at the G-7 conference
[BloombergQ] Fed on Track to Hike Rates Regardless of Emerging-Market Woe
[BloombergQ] Trump Pressures GOP Allies to Block Restrictions on Tariff Power
[Reuters] China says it does not want U.S. trade frictions to escalate
[CNBC] US hits China's ZTE with $1 billion penalty in deal to end crippling sanctions
[BloombergQ] Turkey Central Bank Is Latest to Surprise With Rate Increase
[Reuters] Turkey's central bank raises rates again, says ready to tighten further
[BloombergQ] Brazil's Opposing Presidential Frontrunners Harden Their Stances
[Reuters] Fear of World War III should stop global disputes, Russia's Putin says
[NYT] Betting on Crisis, Hedge Funds Short Italian Bonds
[WSJ] After Steel and Aluminum Tariffs, U.S. Allies Move to Coordinate Retaliation Efforts
[WSJ] Economic, Political Turbulence Hits Brazil’s Real
[WSJ] Twitter Plans to Sell $1 Billion in Convertible Debt
[FT] Donald Trump, Italy and the threat to Germany
[FT] Political uncertainty drives Brazilian real to 2-year lows
Wednesday Evening Links
[Reuters] Italy's Conte wins parliamentary backing, promises tough EU talks
[BloombergQ] Draghi's ECB on Verge of Watershed for Its Bond Purchases
[BloombergQ] ECB's Praet Confirms June Meeting Pivotal as Inflation Picks Up
[BloombergQ] Draghi's ECB on Verge of Watershed for Its Bond Purchases
[BloombergQ] ECB's Praet Confirms June Meeting Pivotal as Inflation Picks Up
[Reuters] Exclusive: Mexico election front-runner wants new blood for cenbank - adviser
[CNBC] Short sellers betting against Tesla lose more than $1 billion in single day as stock pops
[WSJ] Battle Lines for House Take Shape
[WSJ] Airlines Raise Ticket Prices as Fuel Costs Surge
[WSJ] Western Cities Want to Slow Flood of Chinese Home Buying. Nothing Works.
[FT] Trade war talk drives down cross-border investment
[CNBC] Short sellers betting against Tesla lose more than $1 billion in single day as stock pops
[WSJ] Battle Lines for House Take Shape
[WSJ] Airlines Raise Ticket Prices as Fuel Costs Surge
[WSJ] Western Cities Want to Slow Flood of Chinese Home Buying. Nothing Works.
[FT] Trade war talk drives down cross-border investment
Tuesday, June 5, 2018
Wednesday's News Links
[BloombergQ] Trade Hopes Sustain Risk-On Mood; ECB Sinks Bonds: Markets Wrap
[Reuters] Euro boosted but bonds and stocks sag after hawkish ECB comments
[Reuters] Italian CDS jump 22 bps as markets wobble on ECB rate hike debate
[Reuters] Rising exports push U.S. trade deficit to seven-month low
[CNBC] Weekly mortgage applications rise 4.1% as rates hit lowest levels in 6 weeks
[Reuters] EU plans to hit U.S. imports with duties from July
[CNBC] The ECB is about to take a key step toward an easy-money exit
[Reuters] Plausible that ECB can end bond buys this year - Weidmann
[Reuters] U.S. house prices to rise at twice the speed of inflation and pay: Reuters poll
[CNBC] David Stockman: Stocks will plunge 50% in this 'daredevil market'
[BloombergQ] How Brazil's Economic Recovery Got Run Off the Road: QuickTake
[NYT] Mexico Hits U.S. With Tariffs, Escalating Global Trade Tensions
[UK Guardian] Italy's PM takes aim at migrants and austerity in maiden speech
[Reuters] China says not scared after reported U.S. bomber trip over South China Sea
[WSJ] Mexico and Canada Add to Nations Striking Fear in U.S. Farmers
[FT] Banks feel the heat as investors exit eurozone equities
[FT] Eurozone bond yields rise on ECB policymakers’ remarks on stimulus
[Reuters] Euro boosted but bonds and stocks sag after hawkish ECB comments
[Reuters] Italian CDS jump 22 bps as markets wobble on ECB rate hike debate
[Reuters] Rising exports push U.S. trade deficit to seven-month low
[CNBC] Weekly mortgage applications rise 4.1% as rates hit lowest levels in 6 weeks
[Reuters] EU plans to hit U.S. imports with duties from July
[CNBC] The ECB is about to take a key step toward an easy-money exit
[Reuters] Plausible that ECB can end bond buys this year - Weidmann
[Reuters] U.S. house prices to rise at twice the speed of inflation and pay: Reuters poll
[CNBC] David Stockman: Stocks will plunge 50% in this 'daredevil market'
[BloombergQ] How Brazil's Economic Recovery Got Run Off the Road: QuickTake
[NYT] Mexico Hits U.S. With Tariffs, Escalating Global Trade Tensions
[UK Guardian] Italy's PM takes aim at migrants and austerity in maiden speech
[Reuters] China says not scared after reported U.S. bomber trip over South China Sea
[WSJ] Mexico and Canada Add to Nations Striking Fear in U.S. Farmers
[FT] Banks feel the heat as investors exit eurozone equities
[FT] Eurozone bond yields rise on ECB policymakers’ remarks on stimulus
Tuesday Evening Links
[Reuters] Asia stocks edge up as techs lift Wall Street, Italy still a worry
[Reuters] Nasdaq ends at record close, S&P edges higher on data
[Reuters] Mexico peso slumps on NAFTA, Brazil currency eases
[Reuters] U.S. yields fall as worries about Italy resurface
[Reuters] Expect disagreements over tariffs at G7 summit: Canada official
[CNBC] There are more jobs than people out of work, something the American economy has never experienced before
[Reuters] Eye on Trump strongholds, Mexico hits back with pork, bourbon tariffs
[Reuters] Trump to meet trade advisers over $70 billion China offer -sources
[Reuters] Italy's new PM vows radical change, flanked by party bosses
[BloombergQ] Short-Volatility Complex Returns, Defying Wall Street Warnings
[BloombergQ] Dalio's Bridgewater Bearish on Financial Assets, ZeroHedge Says
[WSJ] Social Security Expected to Dip Into Its Reserves This Year
[FT] Brazilian real back on the ropes despite central bank intervention
[Reuters] Nasdaq ends at record close, S&P edges higher on data
[Reuters] Mexico peso slumps on NAFTA, Brazil currency eases
[Reuters] U.S. yields fall as worries about Italy resurface
[Reuters] Expect disagreements over tariffs at G7 summit: Canada official
[CNBC] There are more jobs than people out of work, something the American economy has never experienced before
[Reuters] Eye on Trump strongholds, Mexico hits back with pork, bourbon tariffs
[Reuters] Trump to meet trade advisers over $70 billion China offer -sources
[Reuters] Italy's new PM vows radical change, flanked by party bosses
[BloombergQ] Short-Volatility Complex Returns, Defying Wall Street Warnings
[BloombergQ] Dalio's Bridgewater Bearish on Financial Assets, ZeroHedge Says
[WSJ] Social Security Expected to Dip Into Its Reserves This Year
[FT] Brazilian real back on the ropes despite central bank intervention
Monday, June 4, 2018
Tuesday's News Links
[BloombergQ] Stocks Struggle to Keep Momentum; Crude Declines: Markets Wrap
[Reuters] Italy's bonds yields rise after new PM promises "radical change"
[Reuters] Turkish bonds fall, lira weakens as central bank meeting nears
[Reuters] U.S. services sector activity picks up; job openings at record high
[CNBC] US trade talks appear to be at 'a low' with China and allies
[Reuters] Trump considering separate trade deals with Canada, Mexico: Kudlow
[Reuters] Mexico slaps tariffs on U.S. steel, agricultural products
[BloombergQ] Why Trump's Trade War Isn't Worrying Most Economists, Yet
[CNBC] More than half of US housing markets were overvalued in April
[Reuters] Italy's Conte promises radical change in address to parliament
[CNBC] Bank chairman's apparent suicide brings attention to China's troubled lenders
[BloombergQ] Dollar Is Driving Some Carry-Trade Returns Despite Volatility
[BloombergQ] South African Assets Tumble as Ramaphosa's Growth Pledge Palls
[Reuters] Exclusive: At delicate moment, U.S. weighs warship passage through Taiwan Strait
[Reuters] White House says 'powerful' sanctions to remain on North Korea
[WSJ] Historic Rise in Lumber Costs Ripples Through Economy
[WSJ] Global Markets: A New, More Difficult Stage
[WSJ] A Decade Later, U.S. Stocks Behave Like Lehman Never Happened
[FT] Fed’s dilemma grows more acute after EM and Europe turmoil
[FT] Italy turmoil shows banking ‘doom loop’ still a powerful force
[FT] China’s debt collectors focus in on $200bn P2P arrears
[FT] Global property watch: the week that was
[Reuters] Italy's bonds yields rise after new PM promises "radical change"
[Reuters] Turkish bonds fall, lira weakens as central bank meeting nears
[Reuters] U.S. services sector activity picks up; job openings at record high
[CNBC] US trade talks appear to be at 'a low' with China and allies
[Reuters] Trump considering separate trade deals with Canada, Mexico: Kudlow
[Reuters] Mexico slaps tariffs on U.S. steel, agricultural products
[BloombergQ] Why Trump's Trade War Isn't Worrying Most Economists, Yet
[CNBC] More than half of US housing markets were overvalued in April
[Reuters] Italy's Conte promises radical change in address to parliament
[CNBC] Bank chairman's apparent suicide brings attention to China's troubled lenders
[BloombergQ] Dollar Is Driving Some Carry-Trade Returns Despite Volatility
[BloombergQ] South African Assets Tumble as Ramaphosa's Growth Pledge Palls
[Reuters] Exclusive: At delicate moment, U.S. weighs warship passage through Taiwan Strait
[Reuters] White House says 'powerful' sanctions to remain on North Korea
[WSJ] Historic Rise in Lumber Costs Ripples Through Economy
[WSJ] Global Markets: A New, More Difficult Stage
[WSJ] A Decade Later, U.S. Stocks Behave Like Lehman Never Happened
[FT] Fed’s dilemma grows more acute after EM and Europe turmoil
[FT] Italy turmoil shows banking ‘doom loop’ still a powerful force
[FT] China’s debt collectors focus in on $200bn P2P arrears
[FT] Global property watch: the week that was
Sunday, June 3, 2018
Monday's News Links
[Reuters] Global shares shrug off trade tensions as U.S. data reassures
[BloombergQ] Trade Tensions Intensify With Trump, Allies Set for Showdown
[BloombergQ] It's Trump Against the World in Any Trade War
[Reuters] China says it regrets EU's WTO action over patent rights
[Reuters] Trump aide says Canada's Trudeau overreacting to trade dispute
[BloombergQ] PBOC's Collateral Move a Targeted Tweak, Not Major Easing Step
[BloombergQ] China Banks' Waning Demand Hints at More Bond Defaults Ahead
[Reuters] China's corporate debt challenges a key downside risk to growth: Fitch
[BloombergQ] Turkey Inflation Accelerates in May on Weak Currency
[BloombergQ] Another Euro Member Heads for Turmoil After Nationalist Win
[Reuters] U.S. urges China to come clean on Tiananmen anniversary
[WSJ] U.S. Weighs Expanding Military Role in Yemen War
[BloombergQ] Trade Tensions Intensify With Trump, Allies Set for Showdown
[BloombergQ] It's Trump Against the World in Any Trade War
[Reuters] China says it regrets EU's WTO action over patent rights
[Reuters] Trump aide says Canada's Trudeau overreacting to trade dispute
[BloombergQ] PBOC's Collateral Move a Targeted Tweak, Not Major Easing Step
[BloombergQ] China Banks' Waning Demand Hints at More Bond Defaults Ahead
[Reuters] China's corporate debt challenges a key downside risk to growth: Fitch
[BloombergQ] Turkey Inflation Accelerates in May on Weak Currency
[BloombergQ] Another Euro Member Heads for Turmoil After Nationalist Win
[Reuters] U.S. urges China to come clean on Tiananmen anniversary
[WSJ] U.S. Weighs Expanding Military Role in Yemen War
Sunday's News Links
[Reuters] Talks end with China warning trade benefits at risk if U.S. imposes tariffs
[Reuters] Moscovici 'not optimistic' trade row with U.S. will be resolved at G7
[Reuters] Italy's euroskeptics and their currency ideas take center-stage
[The Hill] When it comes to handling China, plenty of action but no clear plan
[BloombergQ] As U.S. Confronts China on Trade, Taiwan Tensions Quietly Build
[Reuters] U.S. weighs more South China Sea patrols to confront 'new reality' of China
[FT] US-China $100bn trade war nears as talks end without deal
[FT] Italy’s eclectic new cabinet raises eyebrows
[FT] Emerging markets face a dollar double whammy
[Reuters] Moscovici 'not optimistic' trade row with U.S. will be resolved at G7
[Reuters] Italy's euroskeptics and their currency ideas take center-stage
[The Hill] When it comes to handling China, plenty of action but no clear plan
[BloombergQ] As U.S. Confronts China on Trade, Taiwan Tensions Quietly Build
[Reuters] U.S. weighs more South China Sea patrols to confront 'new reality' of China
[FT] US-China $100bn trade war nears as talks end without deal
[FT] Italy’s eclectic new cabinet raises eyebrows
[FT] Emerging markets face a dollar double whammy
Saturday, June 2, 2018
Saturday's News Links
[Reuters] US isolated at G7 meeting as tariffs prompt retaliation
[BloombergQ] Japan's Aso `Feels Sorry' for Mnuchin Amid Outrage Over Tariffs
[Reuters] U.S. commerce secretary to press China to buy as allies seethe over tariffs
[BloombergQ] It’s 2007 Again for Commercial Mortgage Bonds, Moody’s Says
[CNN] Europe is on the verge of a big new crisis, just six years after the last one
[MarketWatch] Falling Deutsche Bank shares reignite ‘black swan’ worries
[Reuters] Catalan nationalists back in power, target secession in challenge to Sanchez
[Reuters] Mattis warns of Chinese 'intimidation'; says U.S. seeks 'results-oriented' ties
[NYT] Within Trump’s Trade Factions, Nations Look for a Friendly Face
[WSJ] Aftereffects of Eurozone Crisis Plague Europe’s South
[BloombergQ] Japan's Aso `Feels Sorry' for Mnuchin Amid Outrage Over Tariffs
[Reuters] U.S. commerce secretary to press China to buy as allies seethe over tariffs
[BloombergQ] It’s 2007 Again for Commercial Mortgage Bonds, Moody’s Says
[CNN] Europe is on the verge of a big new crisis, just six years after the last one
[MarketWatch] Falling Deutsche Bank shares reignite ‘black swan’ worries
[Reuters] Catalan nationalists back in power, target secession in challenge to Sanchez
[Reuters] Mattis warns of Chinese 'intimidation'; says U.S. seeks 'results-oriented' ties
[NYT] Within Trump’s Trade Factions, Nations Look for a Friendly Face
[WSJ] Aftereffects of Eurozone Crisis Plague Europe’s South
Friday, June 1, 2018
Weekly Commentary: Italian Drama
As I see it, cracks are opening in the greatest Bubble of all time. Serious fissures have developed in EM, Europe and China. Meanwhile, the stimulus-driven U.S. economic boom runs unabated. Global fragilities place downward pressure on U.S. market yields, while faltering Bubbles elsewhere stoke (self-reinforcing) outperformance - and speculative excess - within the U.S. equities market. The Fed faces a difficult challenge of weighing buoyant U.S. economic data and inflating asset prices against heightened global market fragilities.
Let's begin with U.S. data. May non-farm payrolls increased a stronger-than-expected 223,000. The Unemployment Rate declined a tenth to 3.8%, matching the low going all the way back to 1969. Average hourly earnings were up 0.3% in May and 2.7% y-o-y. The ISM Manufacturing Index increased 1.4 points to a stronger-than-expected 58.7. There have been only nine stronger monthly readings looking all the way back to August 2004. Prices Paid rose slightly to 79.5, the high since April 2011. ISM New Orders jumped 2.5 points to 63.7, the high since February. The Employment component rose 2.1 points to a solid 56.3. The Chicago Purchasing Managers index surged 5.1 points to 62.7, the high since January. The Dallas Manufacturing Outlook recovered five points to the high since February. A Friday afternoon CNBC (Jeff Cox) headline: "The US economy suddenly looks like it's unstoppable."
April Construction Spending was up a much stronger-than expected 1.8% (strongest since January), led by an 8.7% y-o-y increase in residential construction. This followed stronger-than-expected S&P CoreLogic house price inflation (up 6.79% y-o-y). May Conference Board Consumer Confidence gained 2.4 points to 128, just below February's 130, the strongest reading going all the way back to November 2000. The Conference Board Present Situation component jumped 4.2 points to 161.7, the high back to March 2001. Also indicative of boom time conditions, Personal Spending jumped 0.6% in April. May auto sales almost across the board surpassed expectations, with sales estimated up 5% from a year ago.
In most backdrops, such robust data would have the markets fretting both a more diligent Federal Reserve and surging market yields. Yet 10-year Treasury yields traded as low as 2.76% during Tuesday's session, before closing the week down three bps to 2.90%. Interestingly - and reflective of rapidly shifting expectations for Fed policy - after beginning the week at 2.48%, two-year yields dropped to 2.29% on Tuesday before reversing course and ending the week little changed.
Global markets, of course, were buffeted this week by developments in Italy. Italian 10-year yields surged 47 bps Tuesday to a four-year high 3.13%. At that point, Italy's 10-year yields were up more than 100 bps in six sessions. The spike at the front end of the yield curve was even more dramatic. Italian two-year yields jumped an extraordinary 181 bps Tuesday to 2.64%, the highest level since the 2012 European crisis. Panic buying saw German 10-year yields drop to 18 bps, after trading as high as 58 bps on May 21. Incredibly, German two-year yields dropped to negative 82 bps after ending the previous week at negative 63 bps.
Tuesday's mayhem followed the Italian President's veto of the Five Star and League coalition government. With the rejection of the coalition's first choice for Finance Minister, it appeared Italian voters would be heading back to the polls in an election that could have evolved into a referendum on the EU and the euro. The crisis backdrop spurred political compromise. By week's end, a new - and seemingly less hostile to the euro - Finance Minister had been proposed and a new coalition populist government formed. In a big relief for the markets, the need to call a snap election had been averted.
May 29 - Bloomberg (Nikos Chrysoloras and Helene Fouquet): "A surging dollar and a capital flight from emerging markets may lead to another 'major' financial crisis, investor George Soros said, warning the European Union that it's facing an imminent existential threat. The 'termination' of the nuclear deal with Iran and the 'destruction' of the transatlantic alliance between the EU and the U.S. are 'bound to have a negative effect on the European economy and cause other dislocations,' including a devaluing of emerging-market currencies, Soros said in a speech… 'We may be heading for another major financial crisis.'"
May 31 - Bloomberg: "Morgan Stanley Chief Executive Officer James Gorman said that investor George Soros's contention another major global crisis may be in store is unrealistic, and that the Federal Reserve will probably hike interest rates three more times in 2018 despite recent volatility. 'Honestly I think that's ridiculous,' Gorman said in an interview… when asked about Soros's comments this week, which included a warning that the European Union is at risk of breaking up amid Italy's challenges. 'I don't think we're facing an existential threat at all,' Gorman said of the EU."
I regret that George Soros has become such a polarizing political figure. My analytical framework owes considerable debt to his analysis and philosophy with respect to Credit, the markets and finance more generally. Soros' decades of experience, analysis and success navigating global markets are unequaled. I would not dismiss his warnings.
I hold the view that the euro monetary experiment has been deeply flawed in both its structure and implementation. European nations sacrificed sovereignty for the considerable benefits provided by a common currency that would compete globally against the U.S. dollar. Sharing the euro with Germany and others dramatically lowered borrowing costs and loosened Credit Availability more generally. Regrettably, there was no mechanism to effectively regulate Credit expansion, especially for members at the "periphery" that rather suddenly enjoyed access to cheap global finance like never before.
The boom was spectacular; the subsequent bust is proving rather everlasting. Since 2012, Draghi's "whatever it takes" collapsed borrowing costs and market yields, while stoking asset inflation and economic recovery. Historic monetary inflation has not, however, changed economic structure, history or distinctive cultures. ECB policies, along with central bank reflationary policies globally, have only exacerbated wealth inequalities, economic maladjustment and financial Bubbles. This is an especially intractable problem for the eurozone.
In an interview on German television, the EU's budget chief made a headline-grabbing assertion about the prospects for another Italian election: "My concern and my expectation is that the coming weeks will show that markets, that government bonds, that Italy's economic development could be [affected in a manner so] drastic that this could be a possible signal to voters not to choose populists from the left and right."
Understandably, this type of rhetoric doesn't sit well in Italy or in other countries that see outside political bodies holding a gun to their heads. It is, however, a view held as the gospel in the markets. As financial markets have evolved to command the world, there are two unassailable truths: First, central banks will do whatever it takes to ensure strong markets and economic expansion. And, second, markets are prepared to dish out sufficiently brutal punishment to ensure that politicians and voters fall in line. The electorate may be disgruntled and openly hostile, but they're not suicidal.
Eventually, fed up electorates will refuse being held hostage by the securities markets. I expect the euro system will at some point badly falter, and I suspect this view is quietly shared within the marketplace. This helps explain why things can so abruptly go haywire in the markets. As I have posited in the past, I don't believe the Germans and Italians will share a common currency forever. As cultures, societies and governments, they grow only more discordant. So, there will come a time when savers, investors and speculators choose not to wait and see how the inevitable destabilizing transition plays out. The genie was almost out of the bottle back in 2012.
There are, as well, sophisticated market operators with plans to be among the first wave out, appreciating that ECB and Italian government support will go only so far in stabilizing a hopelessly unstable arrangement. Expect more attention to ECB "Target2" balances (assets/liabilities to the euro financial system created from surpluses/deficits in trade and financial flows). Italy's accumulated Target2 liabilities ended April at an astounding $426 billion, much of it owed to Germany. This obligation will likely expand rapidly as flows exit Italian banks for refuge elsewhere. Perhaps the latest Italian Drama will spur an upswell of German support for Bundesbank President Jens Weidmann taking the helm of the ECB when Draghi's term ends in November 2019.
I have long admired Bill Gross. His long-term performance speaks for itself. Mr. Gross is struggling in this market environment, not unlike other seasoned market operators. The appearance of markets operating normally is only superficial. I'm compelled to mention the extraordinary 3% loss experienced by Bill Gross' unconstrained bond fund in wild Tuesday trading. Many public funds of this ilk posted notably large losses Tuesday, and I'll assume there were scores of hedge funds that were hit as hard or harder.
For the almost four-year period June 2, 2014, to May 7, 2018, the Italian to German two-year sovereign yield spread averaged 49.5 bps. The high for this period was 98 bps briefly back in February 2017. This spread had averaged about 30 bps for 2018 through early-May. Well, the Italian to German two-year yield spread blew out to 353 bps in chaotic Tuesday trading. After trading last week as high as 58 bps, ten-year German yields sank Tuesday to as low as 18 bps. At Tuesday's highs, Italian 10-year yields were 288 bps higher than bund yields, widening 113 bps in a week. Derivatives and leveraged speculation run amuck.
Wild market gyrations were not limited to European bonds. Ten-year Treasury yields, after trading as high as 3.13% the previous week, sank to 2.76% in Tuesday trading. In just five sessions, two-year yields dropped 30 bps to Tuesday morning's low of 2.29%.
May 29 - Financial Times (Robert Smith): "Yields on Italian bank bonds surged dramatically on Tuesday, as increasing political turmoil in the eurozone's third-biggest economy put heavy selling pressure on the debt of the country's lenders. Riskier forms of bank debt that count towards financial institutions' capital ratios have seen the sharpest sell-off. These bonds are more exposed to losses when banks need to be rescued, as seen when Spanish lender Banco Popular's additional tier 1 and tier 2 bonds were wiped out last year. Monte dei Paschi di Siena's €750m 10-year tier 2 bond plummeted as much as seven cents to 81.5 cents on the euro… This equates to a yield of more than 9.5%, a sharp increase from the 5.375% the bond was originally sold at in January."
A semblance of calm returned to Italian (and periphery) markets with Friday's swearing in of political novice Giuseppe Conte as Italy's new prime minister. Meanwhile in Madrid, socialist Pedro Sanchez appears poised to replace Mariano Rajoy who suffered a humiliating vote of no confidence after members of his People Party were convicted in a widespread political corruption scandal. The immediate risk to the euro may have subsided, but the political instability that has erupted in the eurozone's periphery will overhang increasingly fragile European financial markets. A Friday evening Financial Times headline: "Italy's new government: Europe on edge after palace takeover."
If messy European politics weren't enough, there were the Trump Tariffs.
May 30 - Reuters (Jason Lange and Ingrid Melander): "Canada and Mexico retaliated on Thursday after Washington imposed tariffs on steel and aluminum imports while the European Union had its own reprisals ready to go, reviving investor fears of a global trade war. Germany's Economy Minister said early on Friday the EU might look to coordinate its response with Canada and Mexico. The tariffs, announced by Commerce Secretary Wilbur Ross, ended months of uncertainty about potential exemptions and suggested a hardening of the U.S. approach to trade negotiations. The measures, touted by President Donald Trump in March, drew condemnation from Republican lawmakers and the country's main business lobbying group and sent a chill through financial markets."
With the small caps ending the week at all-time highs, that's a rather balmy market chill. Believing strong equities remain presidential Priority One, markets now scoff at administration trade threats. Surely, tariffs are but a negotiating ploy to extract favorable trade concessions. But if markets don't take the administration's trade threats seriously, why would our trading partners/adversaries? And that we are negotiating trade terms with various parties concurrently, why wouldn't these countries be motivated to all covertly band together in a strategy to forcefully nip Trump's Tariffs in the bud. Reuters: "U.S. isolated at G7 meeting as tariffs prompt retaliation."
I understand market complacency with respect to steel and aluminum tariffs. It's the unfolding trade confrontation with China with the distinct potential to rattle markets. More than trade, it's a brewing battle royale pitting the world's lone superpower against the aspiring superpower. And as fissures continue to surface in Chinese Credit, I can envisage Beijing contriving scenarios where they will lay blame upon the U.S. and other foreigners. It's worth mentioning that the Shanghai Composite dropped 2.1% this week, trading Wednesday at a one-year low. China's currency declined 0.45% vs. the dollar to a four-month low.
Largely overlooked as attention turned to Italy, stress continued to mount in EM. The Brazilian real dropped 3.0% this week, pushing one-month losses to 6.9%. The Mexican peso fell 2.0%, and the Argentine peso declined 1.6%, with one-month losses of 5.0% and 17.8%. The South African rand lost 1.6% this week, with the Chilean peso down 1.2%. The beleaguered Turkish lira sank 2.6% in Friday trading, quickly wiping out much of the recovery from earlier in the week. Turkish 10-year dollar yields surged 20 bps this week to 6.73%. Brazil's dollar bond yields surged 39 bps to a two-year high 5.68%, and Mexico's dollar yields rose 16 bps to near multi-year highs at 4.53%. Local currency bond yields surged 25 bps in Brazil (11.45%) and 18 bps in Mexico (7.62%).
It was another week of important corroboration of the Global Bubble Thesis. Market historians might look back at Tuesday's Italian debt "flash crash" and sovereign bond dislocation as another warning of impending illiquidity and general market mayhem. How much leverage and systemic risk are embedded in perceived low-risk derivative trading strategies? Keep in mind that it's not unusual for U.S. equities to go on their merry way right into trouble. The S&P500 rallied to record highs after the subprime eruption in 2007. U.S. stocks advanced strongly right into July 1998 - only weeks from near Financial Armageddon. Q1 2000. 1987. 1929.
Let's begin with U.S. data. May non-farm payrolls increased a stronger-than-expected 223,000. The Unemployment Rate declined a tenth to 3.8%, matching the low going all the way back to 1969. Average hourly earnings were up 0.3% in May and 2.7% y-o-y. The ISM Manufacturing Index increased 1.4 points to a stronger-than-expected 58.7. There have been only nine stronger monthly readings looking all the way back to August 2004. Prices Paid rose slightly to 79.5, the high since April 2011. ISM New Orders jumped 2.5 points to 63.7, the high since February. The Employment component rose 2.1 points to a solid 56.3. The Chicago Purchasing Managers index surged 5.1 points to 62.7, the high since January. The Dallas Manufacturing Outlook recovered five points to the high since February. A Friday afternoon CNBC (Jeff Cox) headline: "The US economy suddenly looks like it's unstoppable."
April Construction Spending was up a much stronger-than expected 1.8% (strongest since January), led by an 8.7% y-o-y increase in residential construction. This followed stronger-than-expected S&P CoreLogic house price inflation (up 6.79% y-o-y). May Conference Board Consumer Confidence gained 2.4 points to 128, just below February's 130, the strongest reading going all the way back to November 2000. The Conference Board Present Situation component jumped 4.2 points to 161.7, the high back to March 2001. Also indicative of boom time conditions, Personal Spending jumped 0.6% in April. May auto sales almost across the board surpassed expectations, with sales estimated up 5% from a year ago.
In most backdrops, such robust data would have the markets fretting both a more diligent Federal Reserve and surging market yields. Yet 10-year Treasury yields traded as low as 2.76% during Tuesday's session, before closing the week down three bps to 2.90%. Interestingly - and reflective of rapidly shifting expectations for Fed policy - after beginning the week at 2.48%, two-year yields dropped to 2.29% on Tuesday before reversing course and ending the week little changed.
Global markets, of course, were buffeted this week by developments in Italy. Italian 10-year yields surged 47 bps Tuesday to a four-year high 3.13%. At that point, Italy's 10-year yields were up more than 100 bps in six sessions. The spike at the front end of the yield curve was even more dramatic. Italian two-year yields jumped an extraordinary 181 bps Tuesday to 2.64%, the highest level since the 2012 European crisis. Panic buying saw German 10-year yields drop to 18 bps, after trading as high as 58 bps on May 21. Incredibly, German two-year yields dropped to negative 82 bps after ending the previous week at negative 63 bps.
Tuesday's mayhem followed the Italian President's veto of the Five Star and League coalition government. With the rejection of the coalition's first choice for Finance Minister, it appeared Italian voters would be heading back to the polls in an election that could have evolved into a referendum on the EU and the euro. The crisis backdrop spurred political compromise. By week's end, a new - and seemingly less hostile to the euro - Finance Minister had been proposed and a new coalition populist government formed. In a big relief for the markets, the need to call a snap election had been averted.
May 29 - Bloomberg (Nikos Chrysoloras and Helene Fouquet): "A surging dollar and a capital flight from emerging markets may lead to another 'major' financial crisis, investor George Soros said, warning the European Union that it's facing an imminent existential threat. The 'termination' of the nuclear deal with Iran and the 'destruction' of the transatlantic alliance between the EU and the U.S. are 'bound to have a negative effect on the European economy and cause other dislocations,' including a devaluing of emerging-market currencies, Soros said in a speech… 'We may be heading for another major financial crisis.'"
May 31 - Bloomberg: "Morgan Stanley Chief Executive Officer James Gorman said that investor George Soros's contention another major global crisis may be in store is unrealistic, and that the Federal Reserve will probably hike interest rates three more times in 2018 despite recent volatility. 'Honestly I think that's ridiculous,' Gorman said in an interview… when asked about Soros's comments this week, which included a warning that the European Union is at risk of breaking up amid Italy's challenges. 'I don't think we're facing an existential threat at all,' Gorman said of the EU."
I regret that George Soros has become such a polarizing political figure. My analytical framework owes considerable debt to his analysis and philosophy with respect to Credit, the markets and finance more generally. Soros' decades of experience, analysis and success navigating global markets are unequaled. I would not dismiss his warnings.
I hold the view that the euro monetary experiment has been deeply flawed in both its structure and implementation. European nations sacrificed sovereignty for the considerable benefits provided by a common currency that would compete globally against the U.S. dollar. Sharing the euro with Germany and others dramatically lowered borrowing costs and loosened Credit Availability more generally. Regrettably, there was no mechanism to effectively regulate Credit expansion, especially for members at the "periphery" that rather suddenly enjoyed access to cheap global finance like never before.
The boom was spectacular; the subsequent bust is proving rather everlasting. Since 2012, Draghi's "whatever it takes" collapsed borrowing costs and market yields, while stoking asset inflation and economic recovery. Historic monetary inflation has not, however, changed economic structure, history or distinctive cultures. ECB policies, along with central bank reflationary policies globally, have only exacerbated wealth inequalities, economic maladjustment and financial Bubbles. This is an especially intractable problem for the eurozone.
In an interview on German television, the EU's budget chief made a headline-grabbing assertion about the prospects for another Italian election: "My concern and my expectation is that the coming weeks will show that markets, that government bonds, that Italy's economic development could be [affected in a manner so] drastic that this could be a possible signal to voters not to choose populists from the left and right."
Understandably, this type of rhetoric doesn't sit well in Italy or in other countries that see outside political bodies holding a gun to their heads. It is, however, a view held as the gospel in the markets. As financial markets have evolved to command the world, there are two unassailable truths: First, central banks will do whatever it takes to ensure strong markets and economic expansion. And, second, markets are prepared to dish out sufficiently brutal punishment to ensure that politicians and voters fall in line. The electorate may be disgruntled and openly hostile, but they're not suicidal.
Eventually, fed up electorates will refuse being held hostage by the securities markets. I expect the euro system will at some point badly falter, and I suspect this view is quietly shared within the marketplace. This helps explain why things can so abruptly go haywire in the markets. As I have posited in the past, I don't believe the Germans and Italians will share a common currency forever. As cultures, societies and governments, they grow only more discordant. So, there will come a time when savers, investors and speculators choose not to wait and see how the inevitable destabilizing transition plays out. The genie was almost out of the bottle back in 2012.
There are, as well, sophisticated market operators with plans to be among the first wave out, appreciating that ECB and Italian government support will go only so far in stabilizing a hopelessly unstable arrangement. Expect more attention to ECB "Target2" balances (assets/liabilities to the euro financial system created from surpluses/deficits in trade and financial flows). Italy's accumulated Target2 liabilities ended April at an astounding $426 billion, much of it owed to Germany. This obligation will likely expand rapidly as flows exit Italian banks for refuge elsewhere. Perhaps the latest Italian Drama will spur an upswell of German support for Bundesbank President Jens Weidmann taking the helm of the ECB when Draghi's term ends in November 2019.
I have long admired Bill Gross. His long-term performance speaks for itself. Mr. Gross is struggling in this market environment, not unlike other seasoned market operators. The appearance of markets operating normally is only superficial. I'm compelled to mention the extraordinary 3% loss experienced by Bill Gross' unconstrained bond fund in wild Tuesday trading. Many public funds of this ilk posted notably large losses Tuesday, and I'll assume there were scores of hedge funds that were hit as hard or harder.
For the almost four-year period June 2, 2014, to May 7, 2018, the Italian to German two-year sovereign yield spread averaged 49.5 bps. The high for this period was 98 bps briefly back in February 2017. This spread had averaged about 30 bps for 2018 through early-May. Well, the Italian to German two-year yield spread blew out to 353 bps in chaotic Tuesday trading. After trading last week as high as 58 bps, ten-year German yields sank Tuesday to as low as 18 bps. At Tuesday's highs, Italian 10-year yields were 288 bps higher than bund yields, widening 113 bps in a week. Derivatives and leveraged speculation run amuck.
Wild market gyrations were not limited to European bonds. Ten-year Treasury yields, after trading as high as 3.13% the previous week, sank to 2.76% in Tuesday trading. In just five sessions, two-year yields dropped 30 bps to Tuesday morning's low of 2.29%.
May 29 - Financial Times (Robert Smith): "Yields on Italian bank bonds surged dramatically on Tuesday, as increasing political turmoil in the eurozone's third-biggest economy put heavy selling pressure on the debt of the country's lenders. Riskier forms of bank debt that count towards financial institutions' capital ratios have seen the sharpest sell-off. These bonds are more exposed to losses when banks need to be rescued, as seen when Spanish lender Banco Popular's additional tier 1 and tier 2 bonds were wiped out last year. Monte dei Paschi di Siena's €750m 10-year tier 2 bond plummeted as much as seven cents to 81.5 cents on the euro… This equates to a yield of more than 9.5%, a sharp increase from the 5.375% the bond was originally sold at in January."
A semblance of calm returned to Italian (and periphery) markets with Friday's swearing in of political novice Giuseppe Conte as Italy's new prime minister. Meanwhile in Madrid, socialist Pedro Sanchez appears poised to replace Mariano Rajoy who suffered a humiliating vote of no confidence after members of his People Party were convicted in a widespread political corruption scandal. The immediate risk to the euro may have subsided, but the political instability that has erupted in the eurozone's periphery will overhang increasingly fragile European financial markets. A Friday evening Financial Times headline: "Italy's new government: Europe on edge after palace takeover."
If messy European politics weren't enough, there were the Trump Tariffs.
May 30 - Reuters (Jason Lange and Ingrid Melander): "Canada and Mexico retaliated on Thursday after Washington imposed tariffs on steel and aluminum imports while the European Union had its own reprisals ready to go, reviving investor fears of a global trade war. Germany's Economy Minister said early on Friday the EU might look to coordinate its response with Canada and Mexico. The tariffs, announced by Commerce Secretary Wilbur Ross, ended months of uncertainty about potential exemptions and suggested a hardening of the U.S. approach to trade negotiations. The measures, touted by President Donald Trump in March, drew condemnation from Republican lawmakers and the country's main business lobbying group and sent a chill through financial markets."
With the small caps ending the week at all-time highs, that's a rather balmy market chill. Believing strong equities remain presidential Priority One, markets now scoff at administration trade threats. Surely, tariffs are but a negotiating ploy to extract favorable trade concessions. But if markets don't take the administration's trade threats seriously, why would our trading partners/adversaries? And that we are negotiating trade terms with various parties concurrently, why wouldn't these countries be motivated to all covertly band together in a strategy to forcefully nip Trump's Tariffs in the bud. Reuters: "U.S. isolated at G7 meeting as tariffs prompt retaliation."
I understand market complacency with respect to steel and aluminum tariffs. It's the unfolding trade confrontation with China with the distinct potential to rattle markets. More than trade, it's a brewing battle royale pitting the world's lone superpower against the aspiring superpower. And as fissures continue to surface in Chinese Credit, I can envisage Beijing contriving scenarios where they will lay blame upon the U.S. and other foreigners. It's worth mentioning that the Shanghai Composite dropped 2.1% this week, trading Wednesday at a one-year low. China's currency declined 0.45% vs. the dollar to a four-month low.
Largely overlooked as attention turned to Italy, stress continued to mount in EM. The Brazilian real dropped 3.0% this week, pushing one-month losses to 6.9%. The Mexican peso fell 2.0%, and the Argentine peso declined 1.6%, with one-month losses of 5.0% and 17.8%. The South African rand lost 1.6% this week, with the Chilean peso down 1.2%. The beleaguered Turkish lira sank 2.6% in Friday trading, quickly wiping out much of the recovery from earlier in the week. Turkish 10-year dollar yields surged 20 bps this week to 6.73%. Brazil's dollar bond yields surged 39 bps to a two-year high 5.68%, and Mexico's dollar yields rose 16 bps to near multi-year highs at 4.53%. Local currency bond yields surged 25 bps in Brazil (11.45%) and 18 bps in Mexico (7.62%).
It was another week of important corroboration of the Global Bubble Thesis. Market historians might look back at Tuesday's Italian debt "flash crash" and sovereign bond dislocation as another warning of impending illiquidity and general market mayhem. How much leverage and systemic risk are embedded in perceived low-risk derivative trading strategies? Keep in mind that it's not unusual for U.S. equities to go on their merry way right into trouble. The S&P500 rallied to record highs after the subprime eruption in 2007. U.S. stocks advanced strongly right into July 1998 - only weeks from near Financial Armageddon. Q1 2000. 1987. 1929.
For the Week:
The S&P500 increased 0.5% (up 2.3% y-t-d), while the Dow declined 0.5% (down 0.3%). The Utilities slipped 0.6% (down 5.5%). The Banks fell 1.3% (up 0.7%), and the Broker/Dealers lost 1.3% (up 9.4%). The Transports were little changed (up 2.7%). The S&P 400 Midcaps added 0.6% (up 3.0%), and the small cap Russell 2000 jumped 1.3% (up 7.3%). The Nasdaq100 advanced 1.8% (up 10.7%).The Semiconductors rose 1.5% (up 12.6%). The Biotechs surged 3.0% (up 14.2%). With bullion down $8, the HUI gold index dipped 0.6% (down 6.8%).
Three-month Treasury bill rates ended the week at 1.87%. Two-year government yields were little changed at 2.47% (up 59bps y-t-d). Five-year T-note yields slipped two bps to 2.75% (up 54bps). Ten-year Treasury yields declined three bps to 2.90% (up 50bps). Long bond yields fell four bps to 3.05% (up 31bps). Benchmark Fannie Mae MBS yields dipped two bps to 3.62% (up 62bps).
Greek 10-year yields jumped 10 bps to 4.47% (up 39bps y-t-d). Ten-year Portuguese yields fell seven bps to 1.88% (down 6bps). Italian 10-year yields surged 23 bps to 2.69% (up 67bps). Spain's 10-year yields declined two bps to 1.44% (down 13bps). German bund yields dipped two bps to 0.39% (down 4bps). French yields were unchanged at 0.71% (down 8bps). The French to German 10-year bond spread widened two to 32 bps. U.K. 10-year gilt yields declined four bps to 1.28% (up 9bps). U.K.'s FTSE equities index declined 0.4% (up 0.2%).
Japan's Nikkei 225 equities dropped 1.2% (down 2.6% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.05% (unchanged). France's CAC40 fell 1.4% (up 2.9%). The German DAX equities index lost 1.7% (down 1.5%). Spain's IBEX 35 equities index sank 2.0% (down 4.1%). Italy's FTSE MIB index dropped 1.3% (up 1.2%). EM equities were mixed. Brazil's Bovespa index fell 2.1% (up 1.1%), and Mexico's Bolsa slipped 0.2% (down 8.8%). South Korea's Kospi index declined 0.9% (down 1.2%). India’s Sensex equities index gained 0.9% (up 3.4%). China’s Shanghai Exchange dropped 2.1% (down 7.0%). Turkey's Borsa Istanbul National 100 index sank 3.9% (down 14.0%). Russia's MICEX equities declined 0.5% (up 8.8%).
Investment-grade bond funds saw inflows of $849 million, and junk bond funds had outflows of $18 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates dropped 10 bps to 4.56% (up 62bps y-o-y). Fifteen-year rates fell nine bps to 4.06% (up 87bps). Five-year hybrid ARM rates declined seven bps to 3.80% (up 69bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 14 bps to 4.56% (up 54bps).
Federal Reserve Credit last week declined $10.2bn to $4.289 TN. Over the past year, Fed Credit contracted $132bn, or 3.0%. Fed Credit inflated $1.478 TN, or 53%, over the past 291 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt recovered $12.0bn last week to $3.394 TN. "Custody holdings" were up $157bn y-o-y, or 4.8%.
M2 (narrow) "money" supply expanded $14.8bn last week to a record $14.013 TN. "Narrow money" gained $490bn, or 3.6%, over the past year. For the week, Currency increased $5.4bn. Total Checkable Deposits added $3.0bn, while savings Deposits dipped $6.9bn. Small Time Deposits gained $1.6bn. Retail Money Funds jumped $11.7bn.
Total money market fund assets rose $14.5bn to $2.840 TN. Money Funds gained $187bn y-o-y, or 7.0%.
Total Commercial Paper jumped $16.1bn to $1.108 TN. CP gained $114bn y-o-y, or 11.5%.
Currency Watch:
The U.S. dollar index was little changed at 94.156 (up 2.2% y-t-d). For the week on the upside, the New Zealand dollar increased 0.9%, the Swiss franc 0.3%, the Australian dollar 0.3%, the British pound 0.3%, the South Korean won 0.3%, the Singapore dollar 0.2%, the Canadian dollar 0.2%, and the euro 0.1%. For the week on the downside, the Brazilian real declined 3.0%, the Mexican peso 2.0%, the South African rand 1.5%, the Swedish krona 0.6%, the Norwegian krone 0.2% and the Japanese yen 0.1%. The Chinese renminbi declined 0.45% versus the dollar this week (up 1.34% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index dropped 2.9% (up 7.8% y-t-d). Spot Gold slipped 0.6% to $1,294 (down 0.7%). Silver dipped 0.5% to $16.441 (down 4.1%). Crude fell $1.69 to $65.81 (up 9%). Gasoline declined 1.2% (up 19%), while Natural Gas gained 1.1% (unchanged). Copper increased 0.7% (down 6%). Wheat dropped 3.6% (up 23%). Corn sank 3.6% (up 12%).
Market Dislocation Watch:
May 29 - Reuters (Dhara Ranasinghe and Abhinav Ramnarayan): "A deepening political crisis in Italy, the euro zone's third biggest economy, fuelled a selloff in Italian assets and the euro on Tuesday that was reminiscent of the euro zone debt crisis of 2010-12. Short-term Italian bond yields suffered the biggest one-day jump since 1992, while Italian and wider euro zone banking stocks saw their worst day since August 2016."
May 30 - Wall Street Journal (James Mackintosh): "Market reporting can be prone to hyperbole, but Tuesday's Italian bond selloff and Wednesday's partial recovery was truly astonishing. Short-dated bonds that can usually be treated as a close proxy for cash turned toxic, and bond prices suggested a full-blown panic, then the relief of a rescue. Prices fell, and yields on short-dated bonds rose as much or more than when the euro was fighting for survival in 2011 and 2012, before a massive reverse. The reaction of other markets was muted by comparison. Sure, stocks and the flakier end of European government bonds sold off, and there was a flight to the safety of U.S. Treasurys. But this wasn't much more than a run-of-the-mill bad day, mostly reversed on Wednesday."
May 29 - Bloomberg (Samuel Potter): "Reports of the death of the sovereign-bank 'doom loop' are greatly exaggerated. Italian government bonds have blown up, with the yield on two-year notes skyrocketing by as much as 192 bps on Tuesday to the highest level since 2012. Spreads on subordinated debts from euro-area financial companies, meanwhile, have jumped in sympathy as Rome's political turmoil reverberates across markets. The Markit iTraxx Europe Subordinated Financial Index, a gauge of credit default swaps tied to junior debt sold by the region's lenders, has surged to the highest in more than a year."
May 29 - Bloomberg (Jana Randow): "Italy's political stalemate is forcing investors to once again contemplate the survival of the euro. A gauge measuring the likelihood of Italy leaving the currency union within the next 12 months jumped to 11.3% in May from 3.6% in April, according to research group Sentix. That's pushed an index for the entire euro area to 13%, the highest level in more than a year.
May 29 - Financial Times (Kate Allen and Miles Johnson): "Until this weekend, many investors thought eurozone politics were inevitably messy but no longer had the power to trigger volatile and disorderly markets. Italy has forced a rapid and painful reappraisal. Those exposed to eurozone markets, and Italy in particular, are nursing heavy paper losses after near unrelenting selling in bonds and equities since Friday. The shift in markets has been profound, ensnaring the debt of other peripheral countries such as Portugal and hurting banks as investors contemplate the possibility of Italy's political turbulence escalating into another eurozone crisis. The scale of the moves in Italian debt has stunned some. Italy's two-year government bond price has plunged over the past three trading days, sending its yield soaring from 0.27% to as high as 2.72% on Tuesday. The 10-year bond yield has jumped from 2.4% to a high of 3.39% over the same period."
June 1 - Bloomberg (Sridhar Natarajan, Yalman Onaran and Sonali Basak): "Deutsche Bank AG just ended a roller-coaster week. June doesn't look any less harrowing. Shares of Europe's largest investment bank are trading near a record low, as short sellers pile on and credit derivative traders once again signal doubts about the firm's health. It's part of a painful pattern for the bank and its investors: Another spate of bad headlines keeps outweighing the good."
Trump Administration Watch:
May 30 - New York Times (Mark Landler and Ana Swanson): "President Trump, stung by criticism that he has gone soft on China and less worried about Beijing's ability to disrupt a potential summit meeting with North Korea, reversed course on Tuesday and declared that the United States would impose tariffs and other punitive measures on China. Barely a week after Treasury Secretary Steven Mnuchin said that the trade war was 'on hold' and that tariffs would be suspended as negotiations continued, the White House issued a statement saying the United States would move ahead with its plan to impose 25% tariffs on $50 billion worth of imported Chinese goods within the next month. Mr. Trump's reversal was yet another twist in a long-running ideological battle in the West Wing between economic nationalists, who channel Mr. Trump's protectionist instincts, and more mainstream advisers like Mr. Mnuchin, who worry that tariffs and investment restrictions will hurt the stock market and hobble long-term growth."
May 30 - Bloomberg (Jenny Leonard and Rich Miller): "White House trade adviser Peter Navarro criticized Treasury Secretary Steven Mnuchin for declaring the U.S.-China trade war was on hold, calling the remarks an 'unfortunate sound bite' and acknowledging there's a dispute that needs to be resolved. 'What we're having with China is a trade dispute, plain and simple,' Navarro said… 'We lost the trade war long ago' with deals such as Nafta and China's entry into the World Trade Organization, he said. The remarks from Navarro, a hard-liner on President Donald Trump's trade team, come just days before U.S. Commerce Secretary Wilbur Ross is scheduled to meet with his counterparts in Beijing to discuss ways to reduce the U.S. trade deficit with China."
May 29 - Wall Street Journal (William Mauldin and Lingling Wei): "The Trump administration sent a sudden, harsh message to its Chinese counterparts, saying the U.S. was moving forward with its threat to apply tariffs on Chinese imports and other actions to restrict Beijing from accessing sensitive U.S. technology. Tuesday's move surprised many observers after the White House had for days trumpeted the outlines of a deal in which any trade war with China would be put on hold while negotiators-led on the U.S. side by Treasury Secretary Steven Mnuchin -worked on a deal that would have China reduce its $375 billion annual trade advantage by buying more U.S. goods."
May 30 - Reuters (Michael Martina and Ben Blanchard): "China lashed out… at renewed threats from the White House on trade, warning that it was ready to fight back if Washington was looking for a trade war, days ahead of a planned visit by U.S. Commerce Secretary Wilbur Ross. In an unexpected change in tone, the United States said on Tuesday that it still held the threat of imposing tariffs on $50 billion of imports from China unless it addressed the issue of theft of American intellectual property. Washington also said it will press ahead with restrictions on investment by Chinese companies in the United States as well as export controls for goods exported to China."
May 28 - Reuters (Tom Miles): "Chinese and U.S. envoys sparred at the World Trade Organization… over U.S. President Donald Trump's claims that China steals American ideas, the subject of two lawsuits and a White House plan to slap huge punitive tariffs on Chinese goods. U.S. Ambassador Dennis Shea said 'forced technology transfer' was often an unwritten rule for companies trying to access China's burgeoning marketplace… China's licensing and administrative rules forced foreign firms to share technology if they wanted to do business, while government officials could exploit vague investment rules to impose technology transfer requirements, he said. 'This is not the rule of law. In fact, it is China's laws themselves that enable this coercion,' Shea told the WTO's dispute settlement body…"
May 30 - Reuters (Madeline Chambers and Edward Taylor): "A report that U.S. President Donald Trump has threatened to pursue German carmakers until there are no Mercedes-Benz rolling down New York's Fifth Avenue dented shares in the luxury car manufacturers on Thursday… The news and current affairs magazine said Trump had told French President Emmanuel Macron in April that he aimed to push German carmakers out of the United States altogether. Macron's administration in Paris declined to comment on the report."
May 31 - Reuters (Michael Nienaber): "German Chancellor Angela Merkel said… that the European Union would give a 'smart, determined and jointly agreed' response if the United States decides to impose tariffs on European steel and aluminum imports. 'We don't know the decision yet but if tariffs were to be imposed, then we have a clear stance within the European Union,' Merkel said…"
May 30 - Bloomberg (Bryce Baschuk): "President Donald Trump's unilateral tariff measures are necessary to fix a broken global trade system and the U.S., like other nations, should focus on its own interests, according to Commerce Secretary Wilbur Ross. 'Every country's primary obligation is to protect its own citizens and their livelihood,' Ross said at an Organisation for Economic Cooperation and Development conference… 'Maybe that's a populist saying but it's one we feel very strongly about.'"
EM Bubble Watch:
May 29 - Reuters (Simon Webb): "Brazilian President Michel Temer said… there was no chance that a nationwide truckers' protest that has paralyzed Latin America's biggest economy will spark a military coup and topple his government."
May 29 - Bloomberg (Mac Margolis): "After a week of anger and protests, Brazilian truck drivers agreed late Sunday to ease their strike. That's the good news. For more than a week, the truckers had all but staggered this country of 208 million people, jamming the highways with semis and strangling commerce from the grain silos to cargo ports. What's less heartening are the terms of the shaky truce, including cheaper fuel and a tax break for cargo transport workers, which emboldened a powerful pressure group at the expense of Brazilian taxpayers, may well encourage other aggrieved groups to do the same, and did nothing to address the fiscal disarray and ailing infrastructure sapping the region's biggest economy."
May 26 - Reuters (Daren Butler): "Turkish President Tayyip Erdogan called on Turks… to convert their dollar and euro savings into lira, as he sought to bolster the ailing currency which has lost some 20 percent of its value against the U.S. currency this year. 'My brothers who have dollars or euros under their pillow. Go and convert your money into lira. We will thwart this game together,' Erdogan said at a rally…"
Federal Reserve Watch:
June 1 - Bloomberg (Nathan Crooks): "San Francisco Fed President John Williams says federal reserve should continue with gradual rate increases over next two years… Says Fed is about three rate hikes away from reaching a 'neutral' level, where interest rates are neither adding to or taking away from economic growth. Williams sees need for less forward guidance from fed as rates near neutral. Fed does not necessarily need to pause on rate hikes once rates reach neutral…"
U.S. Bubble Watch:
May 25 - Reuters (Noel Randewich): "S&P 500 companies have returned a record $1 trillion to shareholders over the past year, helped by a recent surge in dividends and stock buybacks following sweeping corporate tax cuts introduced by Republicans… In the 12 months through March, S&P 500 companies paid out $428 billion in dividends and bought up $573 billion of their own shares, according to S&P Dow Jones Indices analyst Howard Silverblatt. That compares to combined dividends and buybacks worth $939 billion during the year through March 2017…"
May 29 - CNBC (Diana Olick): "Home values have been rising for six straight years, and the gains have been accelerating for the past two years... 'The continuing run-up in home prices above the pace of income growth is simply not sustainable,' wrote Lawrence Yun, chief economist for the National Association of Realtors… 'From the cyclical low point in home prices six years ago, a typical home price has increased by 48% while the average wage rate has grown by only 14%.'"
May 29 - Wall Street Journal (Rachel Louise Ensign and Lillian Rizzo): "Faced with tepid loan growth and heated competition for clients, banks are sweetening their deals on loans to businesses, a development that is concerning regulators. Lenders are giving corporate borrowers lower rates and looser terms, even if they operate in industries that are under strain… The development is a boon to companies looking to borrow cheaply while the economy is doing well. But regulators are raising red flags, particularly since rising interest rates may make it harder for businesses to pay off the loans. The Office of the Comptroller of the Currency, or OCC, in a report last week identified the easing of commercial loan standards as a top risk in the industry."
May 31 - Reuters (Lucia Mutikani): "U.S. consumer spending increased more than expected in April, a further sign that economic growth was regaining momentum early in the second quarter, while inflation continued to rise steadily. …Consumer spending, which accounts for more than two-thirds of U.S. economic activity, jumped 0.6% last month, the biggest gain in five months. …March was revised up to show spending rising 0.5%... Prices continued to gradually rise. The personal consumption expenditures (PCE) price index excluding the volatile food and energy components increased 0.2% for the third straight month."
May 28 - CNBC (Jaden Urbi): "Retailers are facing a shipping squeeze, and the trucking industry just can't keep up. According to the American Trucking Associations, there's a shortage of roughly 50,000 truck drivers across the country. And it's hitting both businesses and consumers in the wallet. Companies are complaining about how the driver shortage is impacting their business. Meanwhile, the cost of convenient shipping is starting to catch up with consumers. Amazon recently hiked its Prime membership to $119 a year from $99 a year. The retail giant said one of the reasons for the price jump was increased shipping costs."
May 25 - CNN Money (Matt Egan): "Get ready for sticker shock at the gas station if you're one of the estimated 36 million Americans hitting the roads this Memorial Day weekend. Gone are the days of $2-a-gallon gasoline. A spike in crude oil prices has lifted the national average price of gas by 31% over the past year to an average of $2.97 a gallon… Prices at the pump haven't been this high heading into the biggest driving holiday of the year since 2014, when crude was sitting in triple-digit territory."
May 30 - Reuters (Jason Lange): "U.S. factories ramped up production in late April and early May despite the risk of a global trade war, but soft consumer spending kept the economy growing at a moderate rate, the Federal Reserve reported… In its periodic 'Beige Book'… the U.S. central bank pointed to strong output in fabricated metals, heavy machinery and electronics equipment. The assessment of growth across the economy represented a slight upgrade from the Fed's prior Beige Book report, which said economic activity was expanding at a 'modest to moderate pace.' 'Manufacturing shifted into higher gear,' the Fed said…"
May 31 - CNBC (Phil LeBeau): "There was a time when new car and truck buyers pushed hard to keep their monthly payment under $500. Those days are quickly fading away. In the first quarter of this year, the average monthly loan payment for a new vehicle climbed $15 compared with last year, hitting an all-time high of $523, according to Experian. The credit analysis company's review of new and open auto loans for the first three months of this year found buyers of new cars, trucks and SUVs borrowed an average of $31,453 - also a record high."
May 30 - Bloomberg (Lucy Meakin, Rich Miller and Catherine Bosley): "A staggering number of American homeowners remain under water on their mortgages a decade after the housing bubble burst. Almost 4.5 million households -- or 9.1% -- owed more than their homes are worth in the fourth quarter of 2017, according to data firm Zillow, with an estimated 713,000 owing at least twice as much as their property's value. While the percentage is declining, families in communities with stagnant property values are 'trapped in their homes with no easy options to regain equity other than waiting,' said Aaron Terrazas, a senior economist at Zillow."
China Watch:
May 28 - Bloomberg: "Strains are spreading in China's $15 trillion shadow banking industry as investors pull back from the debt-like savings products that helped drive leverage to dangerous levels. Most affected are some $3.8 trillion of so-called trust products, until now the fastest-growing shadow banking segment and a popular way for debt-ridden property developers and local governments to raise funds from millions of ordinary Chinese. In recent weeks, at least two of the products have been forced to delay payments as the market started to freeze up, making it harder to refinance maturing issues with new ones. 'On the one hand you have cash-strapped borrowers scrambling for refinancing; on the other you have cash-rich investors not knowing where to put their money for fear of getting burned,' said James Yang, a sales manager at Shanghai Xiangyi Asset Management Co."
May 28 - Wall Street Journal (Manju Dalal and Shen Hong): "Less than seven months ago, an investor consortium led by an obscure Chinese energy conglomerate reached an ambitious deal to buy one of Hong Kong's landmark skyscrapers for a record-setting price. Not long after, the Beijing-based conglomerate known as China Energy Reserve and Chemicals Group backed out of the $5.2 billion deal, and this month it defaulted on a set of U.S. dollar bonds. A subsidiary of the group said in a regulatory filing that it failed to repay the principal amount on $350 million in three-year dollar bonds that matured on May 11. The missed payment triggered default provisions on $655 million in other debt securities that were due to mature in 2021 and 2022. The privately held group blamed a 'tightening in credit conditions' in China over the past two years…"
May 30 - Bloomberg: "The case for the People's Bank of China to cut the amount of cash lenders are required to hold is getting stronger. Chinese banks racked up 2.93 trillion yuan ($457bn) in medium-term loans extended by the PBOC scheduled for repayment during the rest of 2018. That has prompted some analysts to raise bets the PBOC may soon repeat a tactic used in April: cutting the Reserve Requirement Ratio to hand lenders liquidity so they can pay back the debt."
May 31 - Reuters (Stella Qiu and Ryan Woo): "China's vast manufacturing sector grew at the fastest pace in eight months in May, blowing past expectations and easing concerns about an economic slowdown even as risks from trade tensions with the United States and a crackdown on debt point to a bumpy ride ahead. The official Purchasing Managers' Index (PMI) released on Thursday rose to 51.9 in May, from 51.4 in April, and remained well above the 50-point mark that separates growth from contraction for the 22nd straight month."
Central Bank Watch:
May 30 - Bloomberg (Lucy Meakin, Rich Miller and Catherine Bosley): "Just when central bankers thought they were about to get out of the business of emergency economic stimulus, jittery financial markets are threatening to pull some of them back in. For the European Central Bank, the latest threat requiring vigilance is political turmoil in Italy that's reviving memories of the debt crisis that threatened to fracture the euro area. The Bank of England's path is complicated by Brexit and, across emerging markets, central banks are trying to push back against the strong dollar. The People's Bank of China recently eased liquidity conditions for banks, while Indonesia's central bank is forecast to hike rates at an extraordinary policy meeting on Wednesday."
Global Bubble Watch:
May 31 - CNBC (Evelyn Cheng): "The Federal Reserve has designated Deutsche Bank's U.S. business as being in 'troubled condition,' The Wall Street Journal reported… The downgrade to one of the lowest designations occurred about a year ago and has not been previously reported, the report said. The Financial Times also reported… that Deutsche Bank's U.S. subsidiary was added to the Federal Deposit Insurance Corporation's list of 'problem banks,' or those with weaknesses that threaten their financial survival."
The S&P500 increased 0.5% (up 2.3% y-t-d), while the Dow declined 0.5% (down 0.3%). The Utilities slipped 0.6% (down 5.5%). The Banks fell 1.3% (up 0.7%), and the Broker/Dealers lost 1.3% (up 9.4%). The Transports were little changed (up 2.7%). The S&P 400 Midcaps added 0.6% (up 3.0%), and the small cap Russell 2000 jumped 1.3% (up 7.3%). The Nasdaq100 advanced 1.8% (up 10.7%).The Semiconductors rose 1.5% (up 12.6%). The Biotechs surged 3.0% (up 14.2%). With bullion down $8, the HUI gold index dipped 0.6% (down 6.8%).
Three-month Treasury bill rates ended the week at 1.87%. Two-year government yields were little changed at 2.47% (up 59bps y-t-d). Five-year T-note yields slipped two bps to 2.75% (up 54bps). Ten-year Treasury yields declined three bps to 2.90% (up 50bps). Long bond yields fell four bps to 3.05% (up 31bps). Benchmark Fannie Mae MBS yields dipped two bps to 3.62% (up 62bps).
Greek 10-year yields jumped 10 bps to 4.47% (up 39bps y-t-d). Ten-year Portuguese yields fell seven bps to 1.88% (down 6bps). Italian 10-year yields surged 23 bps to 2.69% (up 67bps). Spain's 10-year yields declined two bps to 1.44% (down 13bps). German bund yields dipped two bps to 0.39% (down 4bps). French yields were unchanged at 0.71% (down 8bps). The French to German 10-year bond spread widened two to 32 bps. U.K. 10-year gilt yields declined four bps to 1.28% (up 9bps). U.K.'s FTSE equities index declined 0.4% (up 0.2%).
Japan's Nikkei 225 equities dropped 1.2% (down 2.6% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.05% (unchanged). France's CAC40 fell 1.4% (up 2.9%). The German DAX equities index lost 1.7% (down 1.5%). Spain's IBEX 35 equities index sank 2.0% (down 4.1%). Italy's FTSE MIB index dropped 1.3% (up 1.2%). EM equities were mixed. Brazil's Bovespa index fell 2.1% (up 1.1%), and Mexico's Bolsa slipped 0.2% (down 8.8%). South Korea's Kospi index declined 0.9% (down 1.2%). India’s Sensex equities index gained 0.9% (up 3.4%). China’s Shanghai Exchange dropped 2.1% (down 7.0%). Turkey's Borsa Istanbul National 100 index sank 3.9% (down 14.0%). Russia's MICEX equities declined 0.5% (up 8.8%).
Investment-grade bond funds saw inflows of $849 million, and junk bond funds had outflows of $18 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates dropped 10 bps to 4.56% (up 62bps y-o-y). Fifteen-year rates fell nine bps to 4.06% (up 87bps). Five-year hybrid ARM rates declined seven bps to 3.80% (up 69bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 14 bps to 4.56% (up 54bps).
Federal Reserve Credit last week declined $10.2bn to $4.289 TN. Over the past year, Fed Credit contracted $132bn, or 3.0%. Fed Credit inflated $1.478 TN, or 53%, over the past 291 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt recovered $12.0bn last week to $3.394 TN. "Custody holdings" were up $157bn y-o-y, or 4.8%.
M2 (narrow) "money" supply expanded $14.8bn last week to a record $14.013 TN. "Narrow money" gained $490bn, or 3.6%, over the past year. For the week, Currency increased $5.4bn. Total Checkable Deposits added $3.0bn, while savings Deposits dipped $6.9bn. Small Time Deposits gained $1.6bn. Retail Money Funds jumped $11.7bn.
Total money market fund assets rose $14.5bn to $2.840 TN. Money Funds gained $187bn y-o-y, or 7.0%.
Total Commercial Paper jumped $16.1bn to $1.108 TN. CP gained $114bn y-o-y, or 11.5%.
Currency Watch:
The U.S. dollar index was little changed at 94.156 (up 2.2% y-t-d). For the week on the upside, the New Zealand dollar increased 0.9%, the Swiss franc 0.3%, the Australian dollar 0.3%, the British pound 0.3%, the South Korean won 0.3%, the Singapore dollar 0.2%, the Canadian dollar 0.2%, and the euro 0.1%. For the week on the downside, the Brazilian real declined 3.0%, the Mexican peso 2.0%, the South African rand 1.5%, the Swedish krona 0.6%, the Norwegian krone 0.2% and the Japanese yen 0.1%. The Chinese renminbi declined 0.45% versus the dollar this week (up 1.34% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index dropped 2.9% (up 7.8% y-t-d). Spot Gold slipped 0.6% to $1,294 (down 0.7%). Silver dipped 0.5% to $16.441 (down 4.1%). Crude fell $1.69 to $65.81 (up 9%). Gasoline declined 1.2% (up 19%), while Natural Gas gained 1.1% (unchanged). Copper increased 0.7% (down 6%). Wheat dropped 3.6% (up 23%). Corn sank 3.6% (up 12%).
Market Dislocation Watch:
May 29 - Reuters (Dhara Ranasinghe and Abhinav Ramnarayan): "A deepening political crisis in Italy, the euro zone's third biggest economy, fuelled a selloff in Italian assets and the euro on Tuesday that was reminiscent of the euro zone debt crisis of 2010-12. Short-term Italian bond yields suffered the biggest one-day jump since 1992, while Italian and wider euro zone banking stocks saw their worst day since August 2016."
May 30 - Wall Street Journal (James Mackintosh): "Market reporting can be prone to hyperbole, but Tuesday's Italian bond selloff and Wednesday's partial recovery was truly astonishing. Short-dated bonds that can usually be treated as a close proxy for cash turned toxic, and bond prices suggested a full-blown panic, then the relief of a rescue. Prices fell, and yields on short-dated bonds rose as much or more than when the euro was fighting for survival in 2011 and 2012, before a massive reverse. The reaction of other markets was muted by comparison. Sure, stocks and the flakier end of European government bonds sold off, and there was a flight to the safety of U.S. Treasurys. But this wasn't much more than a run-of-the-mill bad day, mostly reversed on Wednesday."
May 29 - Bloomberg (Samuel Potter): "Reports of the death of the sovereign-bank 'doom loop' are greatly exaggerated. Italian government bonds have blown up, with the yield on two-year notes skyrocketing by as much as 192 bps on Tuesday to the highest level since 2012. Spreads on subordinated debts from euro-area financial companies, meanwhile, have jumped in sympathy as Rome's political turmoil reverberates across markets. The Markit iTraxx Europe Subordinated Financial Index, a gauge of credit default swaps tied to junior debt sold by the region's lenders, has surged to the highest in more than a year."
May 29 - Bloomberg (Jana Randow): "Italy's political stalemate is forcing investors to once again contemplate the survival of the euro. A gauge measuring the likelihood of Italy leaving the currency union within the next 12 months jumped to 11.3% in May from 3.6% in April, according to research group Sentix. That's pushed an index for the entire euro area to 13%, the highest level in more than a year.
May 29 - Financial Times (Kate Allen and Miles Johnson): "Until this weekend, many investors thought eurozone politics were inevitably messy but no longer had the power to trigger volatile and disorderly markets. Italy has forced a rapid and painful reappraisal. Those exposed to eurozone markets, and Italy in particular, are nursing heavy paper losses after near unrelenting selling in bonds and equities since Friday. The shift in markets has been profound, ensnaring the debt of other peripheral countries such as Portugal and hurting banks as investors contemplate the possibility of Italy's political turbulence escalating into another eurozone crisis. The scale of the moves in Italian debt has stunned some. Italy's two-year government bond price has plunged over the past three trading days, sending its yield soaring from 0.27% to as high as 2.72% on Tuesday. The 10-year bond yield has jumped from 2.4% to a high of 3.39% over the same period."
June 1 - Bloomberg (Sridhar Natarajan, Yalman Onaran and Sonali Basak): "Deutsche Bank AG just ended a roller-coaster week. June doesn't look any less harrowing. Shares of Europe's largest investment bank are trading near a record low, as short sellers pile on and credit derivative traders once again signal doubts about the firm's health. It's part of a painful pattern for the bank and its investors: Another spate of bad headlines keeps outweighing the good."
Trump Administration Watch:
May 30 - New York Times (Mark Landler and Ana Swanson): "President Trump, stung by criticism that he has gone soft on China and less worried about Beijing's ability to disrupt a potential summit meeting with North Korea, reversed course on Tuesday and declared that the United States would impose tariffs and other punitive measures on China. Barely a week after Treasury Secretary Steven Mnuchin said that the trade war was 'on hold' and that tariffs would be suspended as negotiations continued, the White House issued a statement saying the United States would move ahead with its plan to impose 25% tariffs on $50 billion worth of imported Chinese goods within the next month. Mr. Trump's reversal was yet another twist in a long-running ideological battle in the West Wing between economic nationalists, who channel Mr. Trump's protectionist instincts, and more mainstream advisers like Mr. Mnuchin, who worry that tariffs and investment restrictions will hurt the stock market and hobble long-term growth."
May 30 - Bloomberg (Jenny Leonard and Rich Miller): "White House trade adviser Peter Navarro criticized Treasury Secretary Steven Mnuchin for declaring the U.S.-China trade war was on hold, calling the remarks an 'unfortunate sound bite' and acknowledging there's a dispute that needs to be resolved. 'What we're having with China is a trade dispute, plain and simple,' Navarro said… 'We lost the trade war long ago' with deals such as Nafta and China's entry into the World Trade Organization, he said. The remarks from Navarro, a hard-liner on President Donald Trump's trade team, come just days before U.S. Commerce Secretary Wilbur Ross is scheduled to meet with his counterparts in Beijing to discuss ways to reduce the U.S. trade deficit with China."
May 29 - Wall Street Journal (William Mauldin and Lingling Wei): "The Trump administration sent a sudden, harsh message to its Chinese counterparts, saying the U.S. was moving forward with its threat to apply tariffs on Chinese imports and other actions to restrict Beijing from accessing sensitive U.S. technology. Tuesday's move surprised many observers after the White House had for days trumpeted the outlines of a deal in which any trade war with China would be put on hold while negotiators-led on the U.S. side by Treasury Secretary Steven Mnuchin -worked on a deal that would have China reduce its $375 billion annual trade advantage by buying more U.S. goods."
May 30 - Reuters (Michael Martina and Ben Blanchard): "China lashed out… at renewed threats from the White House on trade, warning that it was ready to fight back if Washington was looking for a trade war, days ahead of a planned visit by U.S. Commerce Secretary Wilbur Ross. In an unexpected change in tone, the United States said on Tuesday that it still held the threat of imposing tariffs on $50 billion of imports from China unless it addressed the issue of theft of American intellectual property. Washington also said it will press ahead with restrictions on investment by Chinese companies in the United States as well as export controls for goods exported to China."
May 28 - Reuters (Tom Miles): "Chinese and U.S. envoys sparred at the World Trade Organization… over U.S. President Donald Trump's claims that China steals American ideas, the subject of two lawsuits and a White House plan to slap huge punitive tariffs on Chinese goods. U.S. Ambassador Dennis Shea said 'forced technology transfer' was often an unwritten rule for companies trying to access China's burgeoning marketplace… China's licensing and administrative rules forced foreign firms to share technology if they wanted to do business, while government officials could exploit vague investment rules to impose technology transfer requirements, he said. 'This is not the rule of law. In fact, it is China's laws themselves that enable this coercion,' Shea told the WTO's dispute settlement body…"
May 30 - Reuters (Madeline Chambers and Edward Taylor): "A report that U.S. President Donald Trump has threatened to pursue German carmakers until there are no Mercedes-Benz rolling down New York's Fifth Avenue dented shares in the luxury car manufacturers on Thursday… The news and current affairs magazine said Trump had told French President Emmanuel Macron in April that he aimed to push German carmakers out of the United States altogether. Macron's administration in Paris declined to comment on the report."
May 31 - Reuters (Michael Nienaber): "German Chancellor Angela Merkel said… that the European Union would give a 'smart, determined and jointly agreed' response if the United States decides to impose tariffs on European steel and aluminum imports. 'We don't know the decision yet but if tariffs were to be imposed, then we have a clear stance within the European Union,' Merkel said…"
May 30 - Bloomberg (Bryce Baschuk): "President Donald Trump's unilateral tariff measures are necessary to fix a broken global trade system and the U.S., like other nations, should focus on its own interests, according to Commerce Secretary Wilbur Ross. 'Every country's primary obligation is to protect its own citizens and their livelihood,' Ross said at an Organisation for Economic Cooperation and Development conference… 'Maybe that's a populist saying but it's one we feel very strongly about.'"
EM Bubble Watch:
May 29 - Reuters (Simon Webb): "Brazilian President Michel Temer said… there was no chance that a nationwide truckers' protest that has paralyzed Latin America's biggest economy will spark a military coup and topple his government."
May 29 - Bloomberg (Mac Margolis): "After a week of anger and protests, Brazilian truck drivers agreed late Sunday to ease their strike. That's the good news. For more than a week, the truckers had all but staggered this country of 208 million people, jamming the highways with semis and strangling commerce from the grain silos to cargo ports. What's less heartening are the terms of the shaky truce, including cheaper fuel and a tax break for cargo transport workers, which emboldened a powerful pressure group at the expense of Brazilian taxpayers, may well encourage other aggrieved groups to do the same, and did nothing to address the fiscal disarray and ailing infrastructure sapping the region's biggest economy."
May 26 - Reuters (Daren Butler): "Turkish President Tayyip Erdogan called on Turks… to convert their dollar and euro savings into lira, as he sought to bolster the ailing currency which has lost some 20 percent of its value against the U.S. currency this year. 'My brothers who have dollars or euros under their pillow. Go and convert your money into lira. We will thwart this game together,' Erdogan said at a rally…"
Federal Reserve Watch:
June 1 - Bloomberg (Nathan Crooks): "San Francisco Fed President John Williams says federal reserve should continue with gradual rate increases over next two years… Says Fed is about three rate hikes away from reaching a 'neutral' level, where interest rates are neither adding to or taking away from economic growth. Williams sees need for less forward guidance from fed as rates near neutral. Fed does not necessarily need to pause on rate hikes once rates reach neutral…"
U.S. Bubble Watch:
May 25 - Reuters (Noel Randewich): "S&P 500 companies have returned a record $1 trillion to shareholders over the past year, helped by a recent surge in dividends and stock buybacks following sweeping corporate tax cuts introduced by Republicans… In the 12 months through March, S&P 500 companies paid out $428 billion in dividends and bought up $573 billion of their own shares, according to S&P Dow Jones Indices analyst Howard Silverblatt. That compares to combined dividends and buybacks worth $939 billion during the year through March 2017…"
May 29 - CNBC (Diana Olick): "Home values have been rising for six straight years, and the gains have been accelerating for the past two years... 'The continuing run-up in home prices above the pace of income growth is simply not sustainable,' wrote Lawrence Yun, chief economist for the National Association of Realtors… 'From the cyclical low point in home prices six years ago, a typical home price has increased by 48% while the average wage rate has grown by only 14%.'"
May 29 - Wall Street Journal (Rachel Louise Ensign and Lillian Rizzo): "Faced with tepid loan growth and heated competition for clients, banks are sweetening their deals on loans to businesses, a development that is concerning regulators. Lenders are giving corporate borrowers lower rates and looser terms, even if they operate in industries that are under strain… The development is a boon to companies looking to borrow cheaply while the economy is doing well. But regulators are raising red flags, particularly since rising interest rates may make it harder for businesses to pay off the loans. The Office of the Comptroller of the Currency, or OCC, in a report last week identified the easing of commercial loan standards as a top risk in the industry."
May 31 - Reuters (Lucia Mutikani): "U.S. consumer spending increased more than expected in April, a further sign that economic growth was regaining momentum early in the second quarter, while inflation continued to rise steadily. …Consumer spending, which accounts for more than two-thirds of U.S. economic activity, jumped 0.6% last month, the biggest gain in five months. …March was revised up to show spending rising 0.5%... Prices continued to gradually rise. The personal consumption expenditures (PCE) price index excluding the volatile food and energy components increased 0.2% for the third straight month."
May 28 - CNBC (Jaden Urbi): "Retailers are facing a shipping squeeze, and the trucking industry just can't keep up. According to the American Trucking Associations, there's a shortage of roughly 50,000 truck drivers across the country. And it's hitting both businesses and consumers in the wallet. Companies are complaining about how the driver shortage is impacting their business. Meanwhile, the cost of convenient shipping is starting to catch up with consumers. Amazon recently hiked its Prime membership to $119 a year from $99 a year. The retail giant said one of the reasons for the price jump was increased shipping costs."
May 25 - CNN Money (Matt Egan): "Get ready for sticker shock at the gas station if you're one of the estimated 36 million Americans hitting the roads this Memorial Day weekend. Gone are the days of $2-a-gallon gasoline. A spike in crude oil prices has lifted the national average price of gas by 31% over the past year to an average of $2.97 a gallon… Prices at the pump haven't been this high heading into the biggest driving holiday of the year since 2014, when crude was sitting in triple-digit territory."
May 30 - Reuters (Jason Lange): "U.S. factories ramped up production in late April and early May despite the risk of a global trade war, but soft consumer spending kept the economy growing at a moderate rate, the Federal Reserve reported… In its periodic 'Beige Book'… the U.S. central bank pointed to strong output in fabricated metals, heavy machinery and electronics equipment. The assessment of growth across the economy represented a slight upgrade from the Fed's prior Beige Book report, which said economic activity was expanding at a 'modest to moderate pace.' 'Manufacturing shifted into higher gear,' the Fed said…"
May 31 - CNBC (Phil LeBeau): "There was a time when new car and truck buyers pushed hard to keep their monthly payment under $500. Those days are quickly fading away. In the first quarter of this year, the average monthly loan payment for a new vehicle climbed $15 compared with last year, hitting an all-time high of $523, according to Experian. The credit analysis company's review of new and open auto loans for the first three months of this year found buyers of new cars, trucks and SUVs borrowed an average of $31,453 - also a record high."
May 30 - Bloomberg (Lucy Meakin, Rich Miller and Catherine Bosley): "A staggering number of American homeowners remain under water on their mortgages a decade after the housing bubble burst. Almost 4.5 million households -- or 9.1% -- owed more than their homes are worth in the fourth quarter of 2017, according to data firm Zillow, with an estimated 713,000 owing at least twice as much as their property's value. While the percentage is declining, families in communities with stagnant property values are 'trapped in their homes with no easy options to regain equity other than waiting,' said Aaron Terrazas, a senior economist at Zillow."
China Watch:
May 28 - Bloomberg: "Strains are spreading in China's $15 trillion shadow banking industry as investors pull back from the debt-like savings products that helped drive leverage to dangerous levels. Most affected are some $3.8 trillion of so-called trust products, until now the fastest-growing shadow banking segment and a popular way for debt-ridden property developers and local governments to raise funds from millions of ordinary Chinese. In recent weeks, at least two of the products have been forced to delay payments as the market started to freeze up, making it harder to refinance maturing issues with new ones. 'On the one hand you have cash-strapped borrowers scrambling for refinancing; on the other you have cash-rich investors not knowing where to put their money for fear of getting burned,' said James Yang, a sales manager at Shanghai Xiangyi Asset Management Co."
May 28 - Wall Street Journal (Manju Dalal and Shen Hong): "Less than seven months ago, an investor consortium led by an obscure Chinese energy conglomerate reached an ambitious deal to buy one of Hong Kong's landmark skyscrapers for a record-setting price. Not long after, the Beijing-based conglomerate known as China Energy Reserve and Chemicals Group backed out of the $5.2 billion deal, and this month it defaulted on a set of U.S. dollar bonds. A subsidiary of the group said in a regulatory filing that it failed to repay the principal amount on $350 million in three-year dollar bonds that matured on May 11. The missed payment triggered default provisions on $655 million in other debt securities that were due to mature in 2021 and 2022. The privately held group blamed a 'tightening in credit conditions' in China over the past two years…"
May 30 - Bloomberg: "The case for the People's Bank of China to cut the amount of cash lenders are required to hold is getting stronger. Chinese banks racked up 2.93 trillion yuan ($457bn) in medium-term loans extended by the PBOC scheduled for repayment during the rest of 2018. That has prompted some analysts to raise bets the PBOC may soon repeat a tactic used in April: cutting the Reserve Requirement Ratio to hand lenders liquidity so they can pay back the debt."
May 31 - Reuters (Stella Qiu and Ryan Woo): "China's vast manufacturing sector grew at the fastest pace in eight months in May, blowing past expectations and easing concerns about an economic slowdown even as risks from trade tensions with the United States and a crackdown on debt point to a bumpy ride ahead. The official Purchasing Managers' Index (PMI) released on Thursday rose to 51.9 in May, from 51.4 in April, and remained well above the 50-point mark that separates growth from contraction for the 22nd straight month."
Central Bank Watch:
May 30 - Bloomberg (Lucy Meakin, Rich Miller and Catherine Bosley): "Just when central bankers thought they were about to get out of the business of emergency economic stimulus, jittery financial markets are threatening to pull some of them back in. For the European Central Bank, the latest threat requiring vigilance is political turmoil in Italy that's reviving memories of the debt crisis that threatened to fracture the euro area. The Bank of England's path is complicated by Brexit and, across emerging markets, central banks are trying to push back against the strong dollar. The People's Bank of China recently eased liquidity conditions for banks, while Indonesia's central bank is forecast to hike rates at an extraordinary policy meeting on Wednesday."
Global Bubble Watch:
May 31 - CNBC (Evelyn Cheng): "The Federal Reserve has designated Deutsche Bank's U.S. business as being in 'troubled condition,' The Wall Street Journal reported… The downgrade to one of the lowest designations occurred about a year ago and has not been previously reported, the report said. The Financial Times also reported… that Deutsche Bank's U.S. subsidiary was added to the Federal Deposit Insurance Corporation's list of 'problem banks,' or those with weaknesses that threaten their financial survival."
Europe Watch:
May 29 - Bloomberg (Tommaso Ebhardt and John Follain): "Italy's Democratic Party signaled a return to campaign mode as it charged its rivals, the League and the Five Star Movement, with having prepared a plan to pull the country out of the euro if they had succeeded in forming a government together. The two parties gambled with the country's well-being 'with a project to take Italy out of the euro zone, and they did it in a ruthless way,' acting PD leader Maurizio Martina wrote on Twitter. League head Matteo Salvini and Five Star chief Luigi Di Maio have both denied any plan to leave the euro."
May 29 - Bloomberg (Tommaso Ebhardt and John Follain): "Italy's Democratic Party signaled a return to campaign mode as it charged its rivals, the League and the Five Star Movement, with having prepared a plan to pull the country out of the euro if they had succeeded in forming a government together. The two parties gambled with the country's well-being 'with a project to take Italy out of the euro zone, and they did it in a ruthless way,' acting PD leader Maurizio Martina wrote on Twitter. League head Matteo Salvini and Five Star chief Luigi Di Maio have both denied any plan to leave the euro."
May 30 - Financial Times (Robin Wigglesworth): "For most of the past decade the main job of Doug Rediker, Washington's former top man at the International Monetary Fund, has essentially been to tell US investors to relax about Europe. Now he thinks they might not be nervous enough. Italy's political chaos has reawakened concerns over the country's future in the eurozone, but given its size, the crisis could dwarf that caused by Greece just a few years ago, Mr Rediker worries. 'My own anxiety level has increased significantly,' he admits. 'Italy is too big to save, and too big to fail.' Investors are therefore dusting off their old eurozone crisis playbooks."
May 30 - Bloomberg (John follain): "The Italian establishment is heading into a showdown against the populists with its armies in disarray. Former Prime Minister Silvio Berlusconi's center-right Forza Italia has been practically swallowed up by Matteo Salvini's League since the inconclusive election on March 4, while the center-left Democratic Party of outgoing premier Paolo Gentiloni is still casting around for a way forward after its worst-ever result. The League and its would-be coalition partner Five Star Movement, meanwhile, are increasingly setting the agenda. Efforts by former International Monetary Fund official Carlo Cottarelli to forge a short-term technocratic government stalled Tuesday with the populists baying for a fresh election… 'The pro-European ruling class is very weak,' said Giovanni Orsina, professor of government at Luiss University in Rome. 'Mattarella has picked the wrong fight.'"
May 31 - Reuters: "Euro zone inflation jumped by far more than expected in May on higher energy costs, bringing relief to the European Central Bank after market turbulence that has jeopardized its planned exit from a lavish stimulus program. Inflation in the 19 countries sharing the euro rose to 1.9% from 1.2% in April…"
Fixed Income Bubble Watch:
May 30 - Bloomberg (Shelly Hagan and Adam Tempkin): "It's gotten a lot harder to borrow money from the raft of fintech firms looking to bring online lending into the mainstream. Besieged by a wave of defaults after several years of rapid growth, the biggest online-lending platforms have been forced by bond investors to tighten underwriting standards. Social Finance, Prosper, LendingClub and Avant now demand higher average credit scores and offer shorter maturities to boost the quality of loans they repackage into asset-backed securities. The shift in the $30 billion market comes after a swarm of borrower defaults in the past three years rattled ABS investors… 'They all had a pretty tough time and took losses a lot more than expected,' said Henry Song, a portfolio manager at Diamond Hill Capital Management…, a firm that invests in online-lending securitizations… 'Some dropped certain grades and the mentality of grabbing market share to be profitable has shifted.'"
Leveraged Speculator Watch:
May 27 - Financial Times (Lindsay Fortado): "The Wall Street star system is dominating hedge-fund launches this year, with a handful of better known managers raising billions of dollars for new investment vehicles. The four biggest hedge fund launches of 2018 have attracted more than $17bn… That compares with the $13.7bn investors have put in existing funds, according to data from eVestment."
Geopolitical Watch:
May 30 - Fox News (Lukas Mikelionis): "Defense Secretary Jim Mattis said… that the U.S. will continue to confront China's increasing militarization of islands in the South China Sea -- despite the U.S. angering Beijing over the weekend by sending two Navy ships to the region. Mattis rebuked China and said the country hasn't abided by its promise to stop militarization of the Spratly Islands, a disputed territory whose ownership is contested by Brunei, Malaysia, the Philippines, Taiwan and Vietnam. Mattis said U.S. ships are maintaining a 'steady drumbeat' of naval operations and will confront 'what we believe is out of step with international law.' 'You'll notice there is only one country that seems to take active steps to rebuff them or state their resentment [to] them, but it's international waters and a lot of nations want to see freedom of navigation,' Mattis told reporters…"
May 30 - Bloomberg (Keith Zhai and Jason Koutsoukis): "Tensions are rising between the U.S. and China ahead of Asia's biggest security conference this week, even as the two powers push for peace on the Korean Peninsula. Defense Secretary James Mattis said… he was planning to raise U.S. concerns about China's recent moves to 'militarize' the South China Sea. Meanwhile, China warned the U.S…. against expanding defense ties with the democratically run island of Taiwan, which Beijing views as a province. Such exchanges have occurred almost daily in recent weeks as old disputes flare up amid the Trump administration's efforts to counter Chinese influence on everything from security to trade."
May 28 - Reuters (Joseph Nasr, Michael Nienaber and Thomas Escritt): "Germany is worried by signs of weakening in the network of multilateral organizations and agreements designed to foster international cooperation, Chancellor Angela Merkel said… Merkel blamed the fraying of the multilateral order on a 'double transition' - the gradual fading of the direct memory of searing global conflict and the sheer pace and scale of technological change. 'The people who experienced World War Two, the last true global catastrophe, are dying out and are no longer there as eyewitnesses,' she told a conference in Berlin."
May 28 - Wall Street Journal (Benoit Faucon): "Chinese and Russian state-backed companies are maneuvering to profit from European firms leaving Iran, threatening the Trump administration's bid to raise economic pressure on Tehran. Their efforts show how Iran's business landscape has shifted since the Trump administration withdrew from the nuclear pact... Secretary of State Mike Pompeo has threatened the 'strongest set of sanctions in history' if Iran doesn't rein in its military activities across the Middle East and stop testing long-range missiles. European executives who tried to make inroads in Iran since the Obama administration struck the nuclear deal in 2015 are now concerned Beijing and Moscow will seize an insurmountable advantage in a large, growing market."
May 30 - Bloomberg (John follain): "The Italian establishment is heading into a showdown against the populists with its armies in disarray. Former Prime Minister Silvio Berlusconi's center-right Forza Italia has been practically swallowed up by Matteo Salvini's League since the inconclusive election on March 4, while the center-left Democratic Party of outgoing premier Paolo Gentiloni is still casting around for a way forward after its worst-ever result. The League and its would-be coalition partner Five Star Movement, meanwhile, are increasingly setting the agenda. Efforts by former International Monetary Fund official Carlo Cottarelli to forge a short-term technocratic government stalled Tuesday with the populists baying for a fresh election… 'The pro-European ruling class is very weak,' said Giovanni Orsina, professor of government at Luiss University in Rome. 'Mattarella has picked the wrong fight.'"
May 31 - Reuters: "Euro zone inflation jumped by far more than expected in May on higher energy costs, bringing relief to the European Central Bank after market turbulence that has jeopardized its planned exit from a lavish stimulus program. Inflation in the 19 countries sharing the euro rose to 1.9% from 1.2% in April…"
Fixed Income Bubble Watch:
May 30 - Bloomberg (Shelly Hagan and Adam Tempkin): "It's gotten a lot harder to borrow money from the raft of fintech firms looking to bring online lending into the mainstream. Besieged by a wave of defaults after several years of rapid growth, the biggest online-lending platforms have been forced by bond investors to tighten underwriting standards. Social Finance, Prosper, LendingClub and Avant now demand higher average credit scores and offer shorter maturities to boost the quality of loans they repackage into asset-backed securities. The shift in the $30 billion market comes after a swarm of borrower defaults in the past three years rattled ABS investors… 'They all had a pretty tough time and took losses a lot more than expected,' said Henry Song, a portfolio manager at Diamond Hill Capital Management…, a firm that invests in online-lending securitizations… 'Some dropped certain grades and the mentality of grabbing market share to be profitable has shifted.'"
Leveraged Speculator Watch:
May 27 - Financial Times (Lindsay Fortado): "The Wall Street star system is dominating hedge-fund launches this year, with a handful of better known managers raising billions of dollars for new investment vehicles. The four biggest hedge fund launches of 2018 have attracted more than $17bn… That compares with the $13.7bn investors have put in existing funds, according to data from eVestment."
Geopolitical Watch:
May 30 - Fox News (Lukas Mikelionis): "Defense Secretary Jim Mattis said… that the U.S. will continue to confront China's increasing militarization of islands in the South China Sea -- despite the U.S. angering Beijing over the weekend by sending two Navy ships to the region. Mattis rebuked China and said the country hasn't abided by its promise to stop militarization of the Spratly Islands, a disputed territory whose ownership is contested by Brunei, Malaysia, the Philippines, Taiwan and Vietnam. Mattis said U.S. ships are maintaining a 'steady drumbeat' of naval operations and will confront 'what we believe is out of step with international law.' 'You'll notice there is only one country that seems to take active steps to rebuff them or state their resentment [to] them, but it's international waters and a lot of nations want to see freedom of navigation,' Mattis told reporters…"
May 30 - Bloomberg (Keith Zhai and Jason Koutsoukis): "Tensions are rising between the U.S. and China ahead of Asia's biggest security conference this week, even as the two powers push for peace on the Korean Peninsula. Defense Secretary James Mattis said… he was planning to raise U.S. concerns about China's recent moves to 'militarize' the South China Sea. Meanwhile, China warned the U.S…. against expanding defense ties with the democratically run island of Taiwan, which Beijing views as a province. Such exchanges have occurred almost daily in recent weeks as old disputes flare up amid the Trump administration's efforts to counter Chinese influence on everything from security to trade."
May 28 - Reuters (Joseph Nasr, Michael Nienaber and Thomas Escritt): "Germany is worried by signs of weakening in the network of multilateral organizations and agreements designed to foster international cooperation, Chancellor Angela Merkel said… Merkel blamed the fraying of the multilateral order on a 'double transition' - the gradual fading of the direct memory of searing global conflict and the sheer pace and scale of technological change. 'The people who experienced World War Two, the last true global catastrophe, are dying out and are no longer there as eyewitnesses,' she told a conference in Berlin."
May 28 - Wall Street Journal (Benoit Faucon): "Chinese and Russian state-backed companies are maneuvering to profit from European firms leaving Iran, threatening the Trump administration's bid to raise economic pressure on Tehran. Their efforts show how Iran's business landscape has shifted since the Trump administration withdrew from the nuclear pact... Secretary of State Mike Pompeo has threatened the 'strongest set of sanctions in history' if Iran doesn't rein in its military activities across the Middle East and stop testing long-range missiles. European executives who tried to make inroads in Iran since the Obama administration struck the nuclear deal in 2015 are now concerned Beijing and Moscow will seize an insurmountable advantage in a large, growing market."
May 27 - Wall Street Journal (Chun Han Wong): "China criticized the U.S. for sending two warships into South China Sea waters that Beijing considers its territory, amid simmering bilateral tensions over trade and North Korea. …China's foreign and defense ministries each expressed 'firm opposition' to what they described as violations of Chinese sovereignty by the guided-missile destroyer USS Higgins and the guided-missile cruiser USS Antietam… 'The Chinese military took immediate action, deploying ships and aircraft to identify the U.S. vessels and issued warnings to drive them away,' Chinese Defense Ministry spokesman Wu Qian said…, which said that the two vessels made 'unauthorized' entry into Chinese waters."
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