The Turkish lira sank 13.7% in chaotic Friday trading. The lira's 21.0% "worst week in 17 years" collapse pushed y-t-d losses to 41.1%. Turkish 10-year yields spiked to almost 21%, before retreating somewhat. After beginning the year at 155, Turkey sovereign credit default swaps (CDS) spiked 166 bps during Friday trading (up 199 bps for the week) to 437 bps (high since Feb. 2009).
EM Contagion Effects gained momentum this week. Friday trading saw the Argentine peso hit 3.8% and the South African rand sink 2.7%. For the week, the Argentine peso fell 6.6%, the South African rand 5.5%, the Brazilian real 4.0%, the Hungarian forint 2.2%, the Romanian leu 2.1%, the Polish zloty 2.2% and the Mexican peso 1.8%. On the (local) bond yield front, 10-year yields in Brazil jumped 66 bps, Russia 40 bps, Hungary 15 bps and South Africa 13 bps. As global "hot money" frets faltering liquidity and the next shoe to drop, Brazilian equities sank 5.9% (as Brazil sovereign CDS jumped 24 bps to 237 bps).
August 10 - Bloomberg (Lionel Laurent): "Turkish President Recep Tayyip Erdogan has been standing firm as investors dump his country's assets at an alarming pace, saying: 'They have got dollars, we have got our people, our right, our Allah.' European banks with substantial investments in Turkey will hope some of that divine providence rubs off on them, too, after sticking with a bet that has gotten more perilous over time."
Fears of contagion this week were not limited to the emerging markets. With significant exposure to Turkey, European bank stocks were slammed in Friday trading. Unicredit sank 4.7% and ING Groep fell 4.3%. The big German banks, Deutsche Bank and Commerzbank, dropped 4.1% and 3.5%. European Banks (STOXX600) fell 1.9% Friday.
August 10 - Financial Times (Claire Jones, Ayla Jean Yackley and Martin Arnold): "The eurozone's chief financial watchdog has become concerned about the exposure of some of the currency area's biggest lenders to Turkey - chiefly BBVA, UniCredit and BNP Paribas - in light of the lira's dramatic fall… According to cross-border banking statistics from the Bank for International Settlements, local lenders, including foreign-owned subsidiaries, have dollar claims worth $148bn, up from $36bn in 2006 and euro claims worth $110bn. Spanish banks are owed $83.3bn by Turkish borrowers, French banks are owed $38.4bn and Italian lenders $17bn in a mix of local and foreign currencies. Banks' Turkish subsidiaries tend to lend in local currency."
The above FT article was written prior to Friday's currency collapse. As Contagion gathers momentum at the "periphery," the "core" is indicating heightened vulnerability. European fragilities are again rising to the surface. Italy's MIB 35 stock index dropped 2.5% in Friday trading. Germany's DAX fell 2.0%.
Safe haven buying saw German 10-year yields fall six bps to 0.31%. Italian 10-year yields jumped 9 bps Friday to 2.98%, as the Italian to German 10-year yield spread widened 15 bps. For the week, this spread widened 16 to 268 bps, the widest since the May spike to 290 bps (which was the wide since 2013). Elsewhere in the European "periphery," Greek spreads (to bunds) widened 22 bps (to 387 bps) this week and Portuguese spreads widened nine bps (to 146 bps).
August 10 - Financial Times (Daniel Dombey): "Some analysts have long seen Turkey as a 'quantitative easing play' - a country that benefited from developed economies' huge asset purchase schemes. But as US and eurozone quantitative easing becomes history - at least for this economic cycle - the funds that Turkey needs are getting harder to come by. Those funds are far from negligible. An ABN Amro report on Thursday said investors were worried Turkey would not be able to finance its annual external financing requirement of about $218bn - which includes funds needed to maintain Turkish companies' foreign-denominated debt as well as the country's hefty current account deficit."
Turkey is the poster child for systems that for a decade have luxuriated in abundant cheap global liquidity. Once again, dysfunctional global finance furnished plentiful rope for economies to hang themselves. A spectacular Turkish borrowing binge fueled a formidable Bubble. A spending boom, ongoing low savings and persistent Current Account Deficits (surpassing 6% this year) have been for years financed with cheap international (chiefly dollar) finance. Turkish corporations have more than doubled foreign-denominated borrowings since the crisis to over $200 billion, approaching 50% of GDP. Inflation is running at 15% but poised to go much higher.
Turkey now faces funding requirements (current acct deficit and maturing debt) of over $200 billion over the next year in the face of an acute "hot money" exodus. It's untenable. The situation has evolved into a full-fledged crisis of confidence, which typically foreshadows the violent end to a country's existing financial and economic structure.
In ways, Turkey's crisis resembles previous bursting EM Bubble episodes: too much cheap international "hot money" financing an unsound boom, replete with excessive spending and malinvestment. The protracted nature of Turkey's Bubble ensured deep structural maladjustment. Today, the Turkish "economic miracle," as many before it, is exposed in harsh terms. The reversal of speculative flows has illuminating latent fragilities and an unsound currency. The banking system and scores of corporate borrowers of dollar-denominated debt are at the brink of insolvency. Suddenly, the whole Bubble is coming crashing down. Similar scenarios recurred in absolute dismal fashion throughout the nineties.
August 10 - Xinhua (China's official state-run press agency): "Turkish President Recep Tayyip Erdogan urged on Friday his nation to change all savings in U.S. dollar and gold into Turkish lira. [The] Dollar will not block our way. Let's respond them with our national currency,' Erdogan said in his address to crowds… 'Change your dollars and gold under the mattress to the local currency,' he added. The Turkish president described the campaign as a "national struggle" in response to 'those who declared economic war' against Turkey. Meanwhile, Erdogan ascribed the current 'economic problems' to 'artificial financial instability waves' stoked by foreign actors, rather than structural issues involving employment or the banking system. He also blamed foreign meddling in Turkey's economy because of 'some bilateral disagreements,' hinting at the tension between Turkey and the United States."
I fear Erdogan pinpointing sinister foreign forces behind Turkey's problems will garner adherent elsewhere - with measures from the U.S. administration stoking conspiracy suspicions. Calls for Turks to sell dollars and gold to support the lira recalls South Korean citizens donating their gold to help the government stabilize the Korean won (and service an IMF loan) back in 1997/98. We'll see if Turkey's population can match the extraordinary patriotism demonstrated by the South Koreans - and if so, whether it will even matter.
Typically, market expectations would have Turkey immediately commencing negotiations with the IMF (didn't take Argentina long). Yet these are neither normal times nor is Recep Erdogan a typical head of state. In this age of the strongman leader, bowing to the demands of an institution domiciled in Washington (while backing down to Trump) may be unacceptable in Ankara and throughout Turkey.
From the FT (Ayla Jean Yackley and Demetri Sevastopulo): "Mr Erdogan urged Turks to stand firm and defend their currency. 'If there is anyone who has dollars, euros or gold under the pillow, he should go and convert this at the bank,' Mr Erdogan said. He also held talks by telephone with Russian president Vladimir Putin to discuss economic and commercial ties."
Putin will lend a sympathetic ear. For some time now, the strongman Russian president has assailed U.S. dominance over global financial and economic institutions and arrangements. Putin's outrage was surely further elevated this week with the imposition of additional U.S. sanctions.
August 10 - Politico (Emily Goldberg): "Russian Prime Minister Dmitry Medvedev warned Friday that his nation could retaliate against the United States' newly issued economic sanctions, saying it would consider any action against its banks an act of economic war. 'I would not like to comment on talks about future sanctions, but I can say one thing: If some ban on banks' operations or on their use of one or another currency follows, it would be possible to clearly call it a declaration of economic war… And it would be necessary, it would be needed to react to this war economically, politically, or, if needed, by other means. And our American friends need to understand this…'"
The Russian ruble declined 1.4% Friday and was down 6.4% for the week (down 14.8% y-t-d). Russian 10-year (ruble) yields increased eight bps Friday and surged 40 bps for the week to the high since December 2016. Russian dollar-denominated yields jumped 32 bps this week to multi-year highs (5.14%). Moscow must be feeling under assault - and increasingly bereft of patience.
To have the strongmen of Turkey and Russia speaking the same language ("economic war") in the midst of currency and market turmoil is noteworthy, to say the least. A three-way conference call with China's president Xi would be only fitting. Might as well tie in the Iranians and others.
Donald J. Trump - 5:47 AM - 10 Aug 2018: "I have just authorized a doubling of Tariffs on Steel and Aluminum with respect to Turkey as their currency, the Turkish Lira, slides rapidly downward against our very strong Dollar! Aluminum will now be 20% and Steel 50%. Our relations with Turkey are not good at this time!"
Those are fighting words. Teetering at the edge, a presidential tweet Nudges Turkey Over the Cliff. I cringed. Leaders around the world surely recoiled. Does President Trump appreciate the consequences and ramifications of a destabilizing currency crisis in a world of lurking financial, economic and geopolitical fragilities? Our President is tough, enthralled with disruption and clearly sending a message. But does he appreciate the extent to which he is playing with fire?
The world order is fraying before our eyes - and, for many, the impulse is to revel. Careful what you wish for. I'll assume recent events push forward the move to develop financial and economic institutions outside of the U.S. sphere of influence. In recent years, Putin has surely been preaching to his close comrade Xi Jinping that the U.S. is a hostile and untrustworthy rival. At least publicly, Beijing had remained non-aligned, content to foster a non-adversarial relationship with the U.S. Much has changed. The world is now on a trajectory that will shatter pretenses - the façade is being unmasked.
Bloomberg Friday headline: "Trump Embraces Market Pain With Little Concern for Contagion."
The dollar index gained 1.2% this week to a 13-month high. With Turkey now in full-fledged crisis, the unfolding EM de-risking/de-leveraging dynamic attained important momentum this week. Meanwhile, the U.S. vs. China trade war further escalated. President Trump admitted that playing hardball is "my thing." The Chinese invoked "American trade blackmail"; "waving the stick of hegemony everywhere"; "playing double-faced tactics" and "mobster mentality" (to name but a few). Perhaps heightened global market instability will have the Trump administration backing down from their hardline approach with China. I seriously doubt that U.S. unilateral actions in dealing with Turkey, Russia and Iran will inspire a softening in Beijing's resolve.
Turkey, a nation of 80 million, is a long-time U.S. ally and NATO member. The U.S. Air Force has significant operations at the Incirlik Air Base, and Turkey was a staging ground for major U.S. military operations including the two gulf wars and, more recently, in Syria. I see the unfolding financial, economic and geopolitical crisis in Turkey as an ominous development for a region sliding into an intractable geopolitical maelstrom.
Despite Friday's decline, the S&P500 ended the week a little more than 1% below all-time highs. With Treasuries enjoying safe haven demand - and visions of jittery Fed officials glued to Bloomberg screens, longing to conclude rate hikes - there's still little worrying the bulls. But the global backdrop is now in a state of transformation - and not for the better. And on various fronts this became increasingly apparent this week.
When I began posting the CBB almost twenty years ago, my focus was on "money," Credit and the U.S. boom. I didn't anticipate geopolitical developments would some day play a role in my analysis. But I also never contemplated a global Bubble of today's dimensions and characteristics.
I never imagined how an explosion of government debt and central bank Credit would be used so recklessly to inflate intertwined Bubbles spanning the globe. Never did I contemplate how this new age global "system" (already highly unstable two decades ago) would be nurtured, backstopped and resuscitated into today's monstrosity. I never could have envisioned how the U.S. would run huge Current Account Deficits for another 20 years and still maintain such command over a dollar-based global financial apparatus. Who would have believed a global financial arms race was even possible - especially amidst such escalating animosity and hostility?
This is a strange period. It's strange here at home - in society, in politics and in the markets. It is strange globally. The unprecedented nature of what we see at home, abroad and in the markets provides a lot of leeway with interpretation and analysis. Somehow, there's a dominant contingent that believes the U.S. is on the right course - that the economic boom will accelerate, markets will, as they always do, continue to rise. The future is bright, all the polarization and social angst notwithstanding. Markets offer unassailable confirmation.
It would be great if the optimists were right. But this was a week that corroborated a much darker interpretation of developments. A decade of unrelenting easy "money" and booming finance has masked a metastasis of festering issues - financial, economic, social and geopolitical. And we're now only a more general bursting of the global financial Bubble away from having to simultaneously face a bevy of very serious issues. As they tend to do, developments can seem to move at glacial pace - and then, rather suddenly, they can be more akin to lava.
As I have posited repeatedly and expounded in more detail last week, the global Bubble has been pierced at the "periphery." I also believe the backdrop is now conducive to contagion at the "periphery" (finally) gravitating toward the "core." The Turkey-induced risk aversion that erupted this week in European equities (bank shares!) is an important escalation in "Periphery to Core Crisis Dynamics." "Risk off" is gaining a firm foothold, and global financial conditions now tighten by the week. Market pundits expect cooler heads in Ankara and Washington to prevail over the weekend. If not, it could intensify what was already a particularly long and hot summer.
I lost a dear friend, mentor and teacher this past week. Gordy Ringoen gave me my first opportunity in the money-management industry back in 1990. In my bio, I refer to Gordy as "one of the most brilliant individuals I've met." He was also one of the kindest and most generous individuals you'll ever meet. To know Gordy (and his family) was to love him (them). I spoke to Gordy for the final time a few weeks back. Downplaying his fragile health, he was upbeat and excited to chat about the state of the world. Gordy and I shared deep concerns for how things were unfolding at home and abroad. His deeply analytical mind hadn't lost a beat.
But Gordy was most electrified when discussing a trip to the Shakespearean Festival with his wonderful wife Carole and grandkids Jenn and Joe. Gordy so loved his family (Carole, Jenn, Joe, son Todd and daughter-in-law Sue). And, being Gordy, he ended the conversation suggesting what a great experience it would be to take our ten-year old to the festival - and offering to send us tickets. Gordy will be so missed by many. Meeting Gordy changed my life, and I will be forever grateful. A great man.
Sadly, we also recently lost another great man at the very top of my list of individuals I most respect and admire. Tom Dulcich lost his battle with cancer. Tom was a devoted family man, a preeminent attorney and recipient of the prestigious "Significant Sig" award from the Sigma Chi Fraternity (along with an impressive list of lifetime achievements). An avid Oregon Duck fan, Columbia River salmon fisherman and all-around great guy, Tom will be dearly missed by so many. Like the Ringoens, you won't find a finer group than the Dulcich family.
For the Week:
The S&P500 slipped 0.2% (up 6.0% y-t-d), and the Dow declined 0.6% (up 2.4%). The Utilities fell 0.7% (up 0.1%). The Banks declined 1.1% (up 2.3%), while the Broker/Dealers were little changed (up 2.9%). The Transports were about unchanged (up 4.5%). The S&P 400 Midcaps dipped 0.2% (up 5.0%), while the small cap Russell 2000 gained 0.8% (up 9.9%). The Nasdaq100 added 0.2% (up 15.8%). The Semiconductors dropped 1.9% (up 8.1%). The Biotechs jumped 1.5% (up 21.6%). With bullion down $2, the HUI gold index sank 2.9% (down 16.8%).
Three-month Treasury bill rates ended the week at 2.01%. Two-year government yields declined four bps to 2.61% (up 72bps y-t-d). Five-year T-note yields fell seven bps to 2.75% (up 54bps). Ten-year Treasury yields dropped eight bps to 2.87% (up 47bps). Long bond yields fell six bps to 3.03% (up 29bps). Benchmark Fannie Mae MBS yields dropped seven bps to 3.60% (up 60bps).
Greek 10-year yields jumped 13 bps to 4.19% (up 11bps y-t-d). Ten-year Portuguese yields were unchanged at 1.78% (down 17bps). Italian 10-year yields rose seven bps to 2.99% (up 98bps). Spain's 10-year yields slipped a basis point to 1.41% (down 16bps). German bund yields dropped nine bps to 0.32% (down 11bps). French yields fell seven bps to 0.67% (down 12bps). The French to German 10-year bond spread widened two to 35 bps. U.K. 10-year gilt yields dropped nine bps to 1.24% (up 5bps). U.K.'s FTSE equities index was little changed (down 0.3%).
Japan's Nikkei 225 equities index fell 1.0% (down 2.1% y-t-d). Japanese 10-year "JGB" yields slipped a basis point to 0.10% (up 5bps). France's CAC40 declined 1.2% (up 1.9%). The German DAX equities index dropped 1.5% (down 3.8%). Spain's IBEX 35 equities index lost 1.4% (down 4.4%). Italy's FTSE MIB index dropped 2.2% (down 3.5%). EM equities were mostly under pressure. Brazil's Bovespa index sank 5.9% (up 0.1%), and Mexico's Bolsa fell 1.9% (down 2.0%). South Korea's Kospi index slipped 0.2% (down 7.5%). India’s Sensex equities index gained 0.8% (up 11.2%). China’s Shanghai Exchange rallied 2.0% (down 15.5%). Turkey's Borsa Istanbul National 100 index declined 0.7% (down 17.7%). Russia's MICEX equities index fell 1.0% (up 7.8%).
Investment-grade bond funds saw inflows of $2.804 billion, and junk bond funds had inflows of $828 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates slipped a basis point to 4.59% (up 69bps y-o-y). Fifteen-year rates declined three bps to 4.05% (up 87bps). Five-year hybrid ARM rates fell three bps to 3.90% (up 76bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down four bps to 4.59% (up 56bps).
Federal Reserve Credit last week declined $14.8bn to $4.218 TN. Over the past year, Fed Credit contracted $194bn, or 4.4%. Fed Credit inflated $1.407 TN, or 50%, over the past 301 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $8.0bn last week to $3.442 TN. "Custody holdings" were up $101bn y-o-y, or 3.0%.
M2 (narrow) "money" supply was little changed last week at a record $14.156 TN. "Narrow money" gained $528bn, or 3.9%, over the past year. For the week, Currency increased $1.6bn. Total Checkable Deposits slipped $1.1bn, and Savings Deposits declined $2.5bn. Small Time Deposits rose $2.5bn. Retail Money Funds were little changed.
Total money market fund assets gained $13bn to $2.864 TN. Money Funds gained $171bn y-o-y, or 6.3%.
Total Commercial Paper expanded $5.2bn to $1.072 TN. CP gained $97bn y-o-y, or 10.3%.
Currency Watch:
August 7 - Wall Street Journal (Shen Hong): "The yuan's recent slide has been dramatic. Without some discreet expectations management on Beijing's part, it could have been even more striking. Traders at four major financial institutions in Shanghai said the People's Bank of China has shifted away from traditional intervention, or selling billions of dollars to buy yuan, instead acting through lower-profile foreign-exchange swaps. 'The PBOC is guiding people's expectations in the forward market as it doesn't want to waste money in the spot market. Without action in the forward market, the yuan's depreciation could have been far worse,' said Suan Teck Kin, an economist at United Overseas Bank."
The U.S. dollar index jumped 1.2% to 96.357 (up 4.6% y-t-d). For the week on the downside, the South African rand declined 5.5%, the Brazilian real 4.0%, the New Zealand dollar 2.3%, the Swedish krona 2.1%, the British pound 1.9%, the Mexican peso 1.8%, the Australian dollar 1.4%, the euro 1.3%, the Norwegian krone 1.2%, the Canadian dollar 1.1%, the Singapore dollar 0.6%, the Swiss franc 0.1% and the South Korean won 0.1%. The Chinese renminbi declined 0.28% versus the dollar this week (down 4.96% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index declined 1.3% (up 3.6% y-t-d). Spot Gold dipped 0.2% to $1,212 (down 7.0%). Silver fell 1.1% to $15.295 (down 10.8%). Crude declined 86 cents to $67.63 (up 12%). Gasoline fell 1.3% (up 14%), while Natural Gas jumped 3.2% (unchanged). Copper declined 0.8% (down 17%). Wheat fell 1.8% (up 33%). Corn dropped 3.3% (up 6%).
Trump Administration Watch:
August 4 - Bloomberg (Margaret Talev): "President Donald Trump defended his use of tariffs that have inflamed tensions with China and Europe, telling an audience of diehard supporters… that playing hardball on trade is 'my thing.' 'We have really rebuilt China, and it's time that we rebuild our own country now,' Trump said Saturday during about an hour of free-wheeling remarks at a rally outside Columbus, Ohio. He added that Chinese stocks are down, weakening that nation's bargaining power in the escalating trade war… 'Every country on earth wants to take wealth out of the U.S., always to our detriment,' Trump tweeted, 'I say, as they come, Tax them.'"
August 8 - The Hill (Niv Elis): "The federal deficit jumped 20% in the first 10 months of the 2018 fiscal year, the Congressional Budget Office (CBO) reported… Spending outpaced revenue between the beginning of the fiscal year, on Oct. 1, and July by $682 billion, $116 billion more than over the same period in the last fiscal year… The CBO projects that the deficit will reach $793 billion by the end of the year and approach $1 trillion next year. White House estimates have the deficit surpassing $1 trillion in 2019. Budget watchers have warned that interest payments - the amount the Treasury has to pay just to service the debt - are slated to become the fastest-growing annual expenditure."
August 7 - New York Times (Jim Tankersley): "President Trump has a new plan for how to pay down the national debt: Taxing American consumers and businesses when they buy certain goods from countries subject to his tariffs. Math is not on his side. Mr. Trump contended over the weekend that the tariffs his administration has imposed on steel, aluminum and a variety of imported Chinese goods will soon begin to generate sufficient revenue to reduce the federal debt… For this fiscal year, the Congressional Budget Office projects the federal budget deficit will be $800 billion. Mr. Trump's own Office of Management and Budget projects the deficit will top $1 trillion in 2019. That means that to pay down any of the debt - let alone 'large amounts' - tariffs will need to bring in at least $800 billion this year."
August 7 - Reuters (Babak Dehghanpisheh and Peter Graff): "Companies doing business with Iran will be barred from the United States, President Donald Trump said…, as new U.S. sanctions took effect despite pleas from Washington's allies… 'These are the most biting sanctions ever imposed, and in November they ratchet up to yet another level. Anyone doing business with Iran will NOT be doing business with the United States. I am asking for WORLD PEACE, nothing less!' Trump tweeted…"
Federal Reserve Watch:
August 9 - Bloomberg (Matthew Boesler): "The Federal Reserve may need to raise interest rates to 'somewhat restrictive' levels to combat the effects of recent fiscal stimulus on the U.S. economy, said Chicago Fed President Charles Evans in hawkish comments from one of the central bank's most reliable doves. 'If inflation continues to be on the order of 2, 2.2% -- I'm not expecting it to get as high as 2.5 -- that suggests only a modest amount of restrictiveness above our neutral rate might be called for in 2020,' Evans told reporters…"
August 8 - Reuters (Jason Lange): "The U.S. economy is strong enough to warrant further interest rate increases by the Federal Reserve, Richmond Fed President Thomas Barkin said… In a speech on the U.S. economy, Barkin argued that the Fed's benchmark interest rate was below normal levels, a suggestion that Fed policy was still stimulating economic growth…"
U.S. Bubble Watch:
August 8 - Bloomberg (Lananh Nguyen): "Investors had better start paying more attention to November's U.S. midterm elections, according to Standard Chartered Plc. As the campaign for control of Congress enters a crucial phase, Republicans defending seats in some of the most competitive races in the House of Representatives have more cash on hand than their Democratic challengers, a Bloomberg tabulation of Federal Election Commission reports shows. But polls, turnout and fundraising show Democrats have a credible shot at winning the House in November. Should Democrats regain majorities in the House or even the Senate, it could put them in a position to step up scrutiny of President Donald Trump's administration and might raise the likelihood of Congressional gridlock that slows the president's policy initiatives."
August 6 - Reuters (Lindsay Dunsmuir): "Loan officers at U.S. banks reported easing lending standards for business loans for firms of all sizes while keeping terms for commercial real estate loans almost unchanged in the second quarter, a Federal Reserve survey showed… The officers also said they were seeing stronger demand for business loans from small firms and weaker interest in commercial real estate loans. 'Notably, almost all domestic banks that reportedly eased standards or terms on [business] loans over the past three months cited increased competition from other lenders as a reason for easing,' the U.S. central bank said…"
August 8 - Reuters (Lucia Mutikani): "U.S. job openings held near record highs in June amid a modest decline in hiring, pointing to further tightening labor market conditions, which economists hope will soon spur faster wage growth… 'The labor market continues to run hot and this guarantees that more rate hikes are on the way,' said Chris Rupkey, chief economist at MUFG… 'Fed officials are increasingly skeptical that this economy requires any monetary policy support whatsoever.'"
August 9 - Wall Street Journal (Jennifer Smith): "Empty trucks are so hard to come by right now that Dean Foods Co., one of North America's largest milk suppliers, cut its full-year earnings outlook in part because it simply can't move its goods for anything close to what it expected to pay this year. 'Industry capacity for truck drivers remains extremely tight. This is driving third-party hauling rates to record levels, up 26% versus prior year,' Chief Executive Ralph Scozzafava said… The warning from the… dairy processor puts Dean in a growing line of U.S. businesses struggling with the tightest freight market in recent memory. Distribution channels that carry goods to retailers, factories and consumers are struggling to keep up the fast-growing U.S. economy as more companies caution that the strains in the transport sector are holding back their ability to grow."
August 7 - New York Times (Jamie Condliffe): "American companies are set to hand a record amount back to shareholders in the coming quarters. Corporate boards have authorized the repurchase of $754 billion of stock so far this year, up 80% from the same period last year, according to a Goldman Sachs report. And that figure could reach a record $1 trillion by the end of the year."
August 8 - Reuters (Richard Leong): "U.S. mortgage application activity decreased to its lowest in 2-1/2 years last week as loan requests to refinance an existing home fell to their weakest level since December 2000… MBA's measure on loan applications to buy a home, a proxy on future housing activity, fell 2% to 233.1 in the latest week, which was the lowest since 225.5 in the week of Feb. 16."
August 8 - Wall Street Journal (Laura Kusisto): "Western states experienced the sharpest decline for existing-home sales in the second quarter, a sign that rising prices, higher mortgage rates and, to a limited extent, the new tax law are weighing on pricier markets. Existing-home sales in the western region, including California, Washington and Arizona, declined 4.1% in the second quarter compared with the first quarter... Sales in the Northeast were unchanged from the first quarter, while sales in the more affordable Midwest and South rose 1.6% and declined 2.7%, respectively."
August 5 - Financial Times (Chris Flood): "US private equity managers have extracted $400bn in fees and expenses from investors since 2006 but on average they failed to beat the returns from an S&P 500 tracker fund… The findings are an analysis by Oxford Saïd Business School… Pension funds and other institutional investors hunting better returns after the 2007-08 financial crisis ramped up allocations to illiquid private equity strategies. This created a gold rush for managers such as Blackstone, KKR, Apollo, Carlyle and CVC Capital. Investors, however, have difficulty in assessing value for money because of complex and opaque agreements that allow private equity managers to charge multiple layers of hidden fees. About $2tn in new cash was raised from investors by US private equity managers between 2006 and the end of 2015."
August 7 - Wall Street Journal (Anne Tergesen): "The rate at which Americans age 65 and older are filing for bankruptcy has more than tripled since 1991 amid reductions in the social safety net and a shift away from pensions, according to a new study. 'Older Americans are more likely than ever to find themselves in bankruptcy court, seeking protection from creditors,' said the study written by academics at institutions including the University of Idaho and University of Illinois. It also said that among Americans in bankruptcy, the percentage of older people 'has never been higher.' The study, titled 'Graying of U.S. Bankruptcy: Fallout from Life in a Risk Society,' found that between 2013 and 2016, the average rate at which 65- to 74-year-old Americans filed for bankruptcy increased to 3.6 out of every 1,000 individuals from a rate of 1.2 per 1,000 in 1991."
China Watch:
August 8 - Wall Street Journal (Yoko Kubota): "Beijing warned it would match the Trump administration step for step should it move ahead with new tariffs on Chinese imports, as trade data showed the country is shoring up its economy for a long trade conflict with the U.S. China's Ministry of Commerce… criticized the U.S.'s plan to impose new 25% tariffs on $16 billion in Chinese goods on Aug. 23, and released an updated list of items it would target with similar tariffs… 'This is very unreasonable,' the ministry said. 'In order to defend China's rightful interests and the multilateral trade system, China has to retaliate as necessary.' …State media… said that China will get through this storm, and those placing tariffs on it would end up hurting themselves, without resolving economic imbalances. 'Some people selfishly swim against the tide and act against morality, wantonly raising the barrier of tariffs and waving the stick of hegemony everywhere,' said the editorial…"
August 7 - CNBC (Huileng Tan): "China's state media continued its aggressive rhetoric against U.S. President Donald Trump's administration, accusing Washington of being 'double-faced' amid an ongoing trade dispute. 'Pointing China with (sic) gun and artillery and then asking for a talk, the U.S. showed zero sincerity,' said the People's Daily newspaper… 'Washington is playing double-faced tactics in the ongoing trade war,' the official newspaper of the Chinese Communist Party said in its editorial… 'From $50 billion, to $200 billion and then the proposed $500 billion, from 10% to 25%, Washington's tariff game has been seen through by China,' it added. The U.S. is using 'carrot-and-stick diplomacy to bully China into unilateral trade concessions,' but any move to 'defeat China' will be futile, said the People's Daily. The Communist Party paper said that Beijing would overcome the American 'trade blackmail,' adding: 'China will not surrender to the US, nor could it ignore the trade war. The only way is to face it and win it.'"
August 8 - Reuters (Ryan Woo and David Lawder): "China is slapping additional tariffs of 25% on $16 billion worth of U.S. imports from fuel and steel products to autos and medical equipment, the Chinese commerce ministry said, as the world's largest economies escalated their trade dispute. The tariffs will be activated on Aug. 23, the ministry said, the same day that the United States plans to begin collecting 25% extra in tariffs on $16 billion of Chinese goods."
August 8 - The Hill (Brenda Goh): "Chinese state media on Thursday accused the United States of a 'mobster mentality' in its move to implement additional tariffs on Chinese goods, and warned Beijing had all the necessary means to fight back."
August 7 - CNBC (Arjun Kharpal): "Apple has benefited from cheap labor and a strong supply chain in China and needs to share more of its profit with the Chinese people or face 'anger and nationalist sentiment' amid the ongoing trade war, an article in the state-backed People's Daily warned… But the continuing trade war between the U.S. and China could leave Apple and other U.S. firms vulnerable as 'bargaining chips' for Beijing, according to the article. 'The eye-catching success achieved in the Chinese market may provoke nationalist sentiment if U.S. President Donald Trump's recently adopted protectionist measures hit Chinese companies hard,' the People's Daily said."
August 9 - Reuters (Ben Blanchard and Kevin Yao): "A growing trade war with the United States is causing rifts within China's Communist Party, with some critics saying that an overly nationalistic Chinese stance may have hardened the U.S. position, according to four sources close to the government. President Xi Jinping still has a firm grip on power, but an unusual surge of criticism about economic policy and how the government has handled the trade war has revealed rare cracks in the ruling Communist Party. A backlash is being felt at the highest levels of the government, possibly hitting a close aide to Xi, his ideology chief and strategist Wang Huning, according to two sources…"
August 7 - Wall Street Journal (James Kynge): "China's leader, Xi Jinping, has called it the 'project of the century' and said it will usher in a 'golden age' of globalisation. With Beijing-backed projects in 78 countries, the 'Belt and Road Initiative' (BRI) is one of the world's most ambitious development programmes. But critics fear it could become the conduit through which some of China's debt problems are transmitted overseas. A series of controversies that have flared in countries as far apart as Pakistan, Sri Lanka, Laos, Malaysia, Montenegro and others are all related to debt sustainability - either because of the perceived inability of countries to handle outsized debts to China, or because some Beijing-funded infrastructure projects do not appear likely to justify their price tag. 'Disconnects between the creditworthiness of a project or a country and the size of the loans that China offers have led to project delays, political turmoil and allegations of wrongdoing in contract award procedures,' said Andrew Davenport, chief operating officer at RWR Advisory Group…"
August 8 - Bloomberg: "Chinese car sales slumped for a second consecutive month as a slowing economy and a tit-for-tat trade war with the U.S. kept consumers away from showrooms. Retail sales of cars, SUVs and multipurpose vehicles fell 5.4% to 1.6 million units in July… That compares with a 3.7% drop in June and trimmed the year-to-date growth in the world's biggest automobile market to 2%. China's economy is showing signs of weakness as a weakening yuan and a slump in stocks cost the country its rank as the world's second-biggest equity market."
August 8 - Bloomberg: "China is increasing its monitoring of indebted state-owned enterprises by creating watch lists and setting alarm levels, underscoring that the government hasn't abandoned the goal of controlling borrowing. The government will set two debt thresholds for state-owned firms -- one level would trigger alarms and the other would require higher regulatory attention… With the economy slowing and trade tensions rising, officials are now placing more emphasis on curbing debt at state firms and in parts of the property market."
August 5 - Financial Times (Tom Hancock and Wang Xueqiao): "Struggling to find well-paid work after arriving in Shanghai as a graduate from a middle-ranked Chinese university, Tom Wang turned to another source to fund his spending: credit cards… To cover repayments and keep spending, Mr Wang took on more debt - borrowing Rmb60,000 over four credit cards - before turning to online lenders for a further Rmb70,000. Interest payments 'snowballed' to Rmb1,500 a month, he said. Mr Wang is part of a generation of young consumers who have rejected the thrifty habits of their elders and become used to spending with borrowed money. Outstanding consumer loans - used for vehicle purchases, holidays, household renovations and buying expensive household goods - in China grew nearly 40% last year to reach Rmb6.8tn, according to Chinese investment bank CICC."
August 5 - Financial Times: "In 2009 China launched probably the biggest ever peacetime stimulus, issuing debt to fund an investment programme amounting to 12.5% of gross domestic product. It aimed to offset the impact of the 2008 global financial crisis, which had clobbered the country's export markets and thrown tens of millions of workers out of their jobs within a few months. China's actions then spurred a recovery in emerging markets that eventually helped restore the world's economic equilibrium. But… the debts incurred now rank as Beijing's greatest economic frailty. Its ratio of gross debt to GDP surged from about 171% before the crisis to 299% this year… Its corporate sector is the world's most indebted, and its most highly leveraged. A huge and loosely regulated shadow finance system conceals eruptive risks. Small and medium-sized banks, which have doubled in size over the past decade to account for 43% of total banking assets, are riddled with risky funding models and a few have already had to be bailed out."
August 5 - Financial Times (Gabriel Wildau and Yizhen Jia): "Chinese alternative asset managers have become the latest casualty of the country's crackdown on debt and financial risk, with a record number of private equity and hedge funds dissolving in recent months as new regulations limit their fundraising. In the first six months of this year, the Asset Management Association of China (Amac) - a government-controlled industry body - 'lost contact' with 163 private fund institutions, more than 70% of the total for which contact was lost for 2017. The 'lost contact' designation refers to private funds that have failed to renew their registration status with the association every three months as required."
EM Watch:
August 5 - Financial Times (Colby Smith): "Turkey's lira is one of the worst-performing currencies this year. In the last 12 months, it has weakened some 40% against the dollar and now hovers near all-time lows. A slide of this magnitude is especially worrisome when it comes to repaying debt that's denominated in non-domestic, 'hard' currencies like the dollar or the euro. Emerging-market borrowers in Asia and Latin America learned this lesson in the 1990s. Turkey's private sector apparently has not. Through May 2019, the country's banks and corporations have billions of dollars of hard-currency debt coming due. Here is HSBC's Melis Metiner on the repayment schedule… According to Metiner, banks are scheduled to repay $51bn over the next year, while the remaining $18.5bn sits on non-financial corporate balance sheets. These bills are coming due at a time when corporate indebtedness sits at 62% of GDP, half of which is denominated in foreign currencies (dollars and euros, mostly)."
August 7 - Bloomberg (Selcuk Gokoluk): "Turkey has replaced Argentina as the year's worst performer in local-currency bonds and the carry trade following the lira's plunge to a record. Losses for both nations far exceed the 4.7% average decline in emerging market local-currency debt in 2018. Investors holding lira-denominated bonds have lost 38% in dollar terms as the securities plunged 8% in just one week, while Argentina's losses stabilized at 36%..."
August 9 - Reuters (Andrew Osborn): "The Turkish lira sank to a record low as concern about souring relations with the U.S. and runaway inflation outweighed the nation's plans to stem a market rout. The lira sank about 4%, while the iShares MSCI Turkey ETF extended a two-day plunge. The currency had initially pared losses after the government set a growth target of less than 4%, down from 5.5%. The move represents Treasury and Finance Minister Berat Albayrak's first whack at fixing the $880 billion economy's vulnerabilities since a market meltdown sparked by last week's U.S. sanctions."
August 8 - Bloomberg (Pablo Gonzalez): "Argentina's century bonds fell to a record and the peso sunk to a two-week low as concern grows that a widening graft scandal will derail government efforts to shore up the economy. Yields on the overseas debt due in 2117 edged up to 9.14% early Wednesday, bringing the increase to 0.18 percentage point since July 31, when journalists at La Nacion newspaper published the findings of an investigation into more than a decade of alleged corruption under former President Cristina Fernandez de Kirchner and her late husband."
Global Bubble Watch:
August 7 - Bloomberg (Dani Burger and Sid Verma): "From excess to scarcity, a liquidity crunch has climbed to the top of the credit market's wall of worry -- a volte face from June when debt investors fretted bubbles. Angst over 'vanishing' liquidity is now the chief concern among credit buyers in Europe, according to Bank of America's client survey this month. Late-cycle worries, European political risk and sharp price moves this year -- particularly in Italy -- are feeding fears money managers will be unable to relinquish their positions in the next downturn. 'It's not trade wars or an equity market correction that look to be keeping credit investors up at night,' Bank of America strategists, led by Barnaby Martin, wrote… 'The concern is a more pervasive rush for the exit at some point in the future.'"
August 8 - Reuters (Jamie McGeever): "Financial market volatility is slumping across the board to historically - or, dangerously - low levels, potentially fanning the flames for a repeat of February's 'volmageddon' explosion that sparked a 10% correction in U.S. and world stocks. Then, major bond and currency markets remained reasonably insulated from the turmoil that swept through equities. They may not be so lucky next time around, because positioning in some cases is even more extreme than it is in stocks. A breakdown of how speculative investors like hedge funds are positioned across U.S. futures markets shows that short VIX positions as a share of overall open interest are higher now than they were just before that record surge in February."
August 6 - Wall Street Journal (Manju Dalal): "Beijing's softening stance on deleveraging and defaults has helped fuel a mini-revival across Asia's credit markets, pushing up bond prices in recent weeks and sparking debt issuance. Issuers from China to South Korea and India sold about $9.2 billion in new U.S. dollar bonds during the week… New deals had nearly ground to a halt in early July over fears of rising defaults among Chinese borrowers."
Europe Watch:
August 8 - Wall Street Journal (Laurence Norman and Drew Hinshaw): "The European Union has spent nearly $1 trillion to unify the continent by delivering highways and trains into places where there were once gravel paths. In current dollars, that is over eight times the Marshall Plan that rebuilt Europe after World War II. The EU has bought airports and bridges, trams and swimming pools. It has repaired castles and medieval churches. It hasn't bought love. To the vexation of European leaders, some of the biggest recipients of funding are now hotbeds of discontent, brimming with voters disquieted by the cultural and political pressures that have accompanied European integration, and threatening the bloc's cohesion."
Fixed Income Bubble Watch:
August 8 - The Hill (Niv Elis): "The amount of debt the federal government owes could be double the size of the entire U.S. economy in the next 30 years, according to a new report from the Congressional Budget Office (CBO). Debt would surpass an unprecedented 200% of gross domestic product (GDP) by 2048 under any of three scenarios explored by the CBO in its report…, while the nation's economy would be smaller than under current projections."
August 7 - Bloomberg (Margaret Talev): "Not content with a previous warning investors should brace for U.S. yields of 4%, Jamie Dimon went one further at the weekend, suggesting 5% was a distinct possibility. The JPMorgan Chase & Co. chief executive officer said Saturday people should be prepared to deal with the benchmark 10-year bond yield at 5% or higher. 'I think rates should be 4% today,' Dimon said... 'You better be prepared to deal with rates 5% or higher - it's a higher probability than most people think.'"
Geopolitical Watch:
August 3 - Bloomberg (Nicholas Wadhams and Jason Koutsoukis): "U.S. Secretary of State Michael Pompeo warned against easing up on sanctions until North Korea gives up its nuclear weapons, drawing a rebuke from the regime that underscored how far apart the two sides remain almost two months after their leaders met in Singapore. Back in Singapore for a regional security forum, Pompeo… called out Russia and China, highlighting reports that they are violating United Nations Security Council resolutions restricting trade with North Korea. 'We expect the Russians and all countries to abide by the UN Security Council resolutions and enforce sanctions on North Korea,' Pompeo said. 'Any violation that detracts from the world's goal of finally fully denuclearizing North Korea would be something that America would take very seriously.'"
August 8 - Reuters (Ben Blanchard and Michelle Martin): "China and Germany defended their business ties with Iran… in the face of President Donald Trump's warning that any companies trading with the Islamic Republic would be barred from the United States. The comments from Beijing and Berlin signaled growing anger from partners of the United States, which reimposed strict sanctions against Iran…, over its threat to penalize businesses from third countries that continue to operate there. 'China has consistently opposed unilateral sanctions and long-armed jurisdiction,' the Chinese foreign ministry said."
August 6 - Wall Street Journal (Asa Fitch and Aresu Eqbali): "Iranians are hoarding gold as a safeguard against a collapsing local currency and soaring cost of living as the U.S. is poised to impose economic sanctions on Iran, pushing the metal's price to records in Tehran. On Tuesday… the Trump administration is set to bring back a first wave of restrictions that had been waived under the Iran nuclear deal, an Obama-era agreement that gave Iran sanctions relief in exchange for curbs on its nuclear program."
August 7 - Financial Times (Andrew England and Simeon Kerr): "Since Mohammed bin Salman's swift rise to heir apparent last year, the young Saudi crown prince has earned a reputation for assertiveness as he seeks to shake up the conservative kingdom. Under his watch, the authorities have arrested powerful members of Prince Mohammed's own family and launched a sweeping crackdown against voices of dissent. Riyadh has also been at the forefront of a regional embargo against Qatar; alleged to have detained and forced the brief resignation of Lebanon's prime minister; and quarrelled with Germany over criticism of Saudi Arabia's interventionist foreign policy. But the country's extraordinary row with Canada and the bellicose language emanating from Riyadh this week still came as a shock to the kingdom's western allies and long-time Saudi watchers."
Friday, August 10, 2018
Friday Evening Links
[Reuters] Wall Street ends lower as Turkey woes hit banks
[CNBC] Turkey fallout could continue to hit global markets, as Erdogan 'hangs tough'
[BloombergQ] Turkey’s Meltdown Ripples Across Emerging Markets: Inside EM
[BloombergQ] Trump Embraces Market Pain With Little Concern of Contagion
[CNBC] US budget deficit increases 21%, on track for biggest gap in six years
[Reuters] Russia tells Washington curbs on its banks would be act of economic war
[Reuters] China says business ties with Iran no harm to any other country
[WSJ] Turkish Crisis Rattles Global Markets Amid Escalating Spat With U.S.
[FT] Turkey’s deepening crisis triggers retreat from equities
[FT] Turkey delivers August crisis for markets
[CNBC] Turkey fallout could continue to hit global markets, as Erdogan 'hangs tough'
[BloombergQ] Turkey’s Meltdown Ripples Across Emerging Markets: Inside EM
[BloombergQ] Trump Embraces Market Pain With Little Concern of Contagion
[CNBC] US budget deficit increases 21%, on track for biggest gap in six years
[Reuters] Russia tells Washington curbs on its banks would be act of economic war
[Reuters] China says business ties with Iran no harm to any other country
[WSJ] Turkish Crisis Rattles Global Markets Amid Escalating Spat With U.S.
[FT] Turkey’s deepening crisis triggers retreat from equities
[FT] Turkey delivers August crisis for markets
Thursday, August 9, 2018
Friday's News Links
[Reuters] Turkey turmoil sends ripples across world stock markets, euro falls
[CNBC] Turkish lira plunges 20% versus dollar after Trump authorizes doubling metals tariffs on Turkey
[Reuters] Currency volatility gauges ignite as Turkish lira turmoil spreads
[Reuters] Russian rouble sinks to lowest since June 2016
[Reuters] Trump doubles tariffs on Turkish steel and aluminum, says relations 'not good'
[Reuters] Erdogan tells Turks to buy plunging lira as Trump doubles metals tariffs
[BloombergQ] Highest Core Inflation in Decade Flattens Real U.S. Wage Growth
[BloombergQ] Turkish Meltdown a Test for Global Leaders: Balance of Power
[BloombergQ] Erdogan Answers Lira's Pleas With an Ottoman Slap
[Reuters] China expects its U.S. agricultural imports to fall sharply
[Reuters] China paper rebuts trade war criticism, says 'an elephant can't hide'
[Reuters] Japan's economy rebounds on brisk spending but trade rifts cloud outlook
[BloombergQ] Asia's $184 Billion Debt Wall to Spark Buybacks, Bond Swaps
[NYT] As Chinese Investors Panic Over Dubious Products, Authorities Quash Protests
[WSJ] Turkish Crisis Rattles Currency Markets
[WSJ] Parts Shortages Crimp U.S. Factories
[FT] ECB concerns grow over EU banks’ Turkey exposure as lira slides
[FT] Erdogan calls on Turks to buy lira in ‘economic war’
[FT] Why is Turkish lira falling?
[FT] Currencies in focus as Turkish lira plumbs new low
[CNBC] Turkish lira plunges 20% versus dollar after Trump authorizes doubling metals tariffs on Turkey
[Reuters] Currency volatility gauges ignite as Turkish lira turmoil spreads
[Reuters] Russian rouble sinks to lowest since June 2016
[Reuters] Trump doubles tariffs on Turkish steel and aluminum, says relations 'not good'
[Reuters] Erdogan tells Turks to buy plunging lira as Trump doubles metals tariffs
[BloombergQ] Highest Core Inflation in Decade Flattens Real U.S. Wage Growth
[BloombergQ] Turkish Meltdown a Test for Global Leaders: Balance of Power
[BloombergQ] Erdogan Answers Lira's Pleas With an Ottoman Slap
[Reuters] China expects its U.S. agricultural imports to fall sharply
[Reuters] China paper rebuts trade war criticism, says 'an elephant can't hide'
[Reuters] Japan's economy rebounds on brisk spending but trade rifts cloud outlook
[BloombergQ] Asia's $184 Billion Debt Wall to Spark Buybacks, Bond Swaps
[NYT] As Chinese Investors Panic Over Dubious Products, Authorities Quash Protests
[WSJ] Turkish Crisis Rattles Currency Markets
[WSJ] Parts Shortages Crimp U.S. Factories
[FT] ECB concerns grow over EU banks’ Turkey exposure as lira slides
[FT] Erdogan calls on Turks to buy lira in ‘economic war’
[FT] Why is Turkish lira falling?
[FT] Currencies in focus as Turkish lira plumbs new low
Thursday Evening Links
[BloombergQ] U.S. Stocks Retreat as Treasuries, Dollar Rise: Markets Wrap
[BloombergQ] Argentina’s Bonds Slump as Graft Probe Pushes Economy to the Brink
[Reuters] U.S. labor market tightening; inflation steadily rising
[BloombergQ] U.S. Consumer Comfort Rose to New 17-Year High on Economic Views
[BloombergQ] Fed Dove Evans Veers in Hawkish Direction Over Rate Outlook
[Reuters] U.S. built Mercedes-Benz SUV's held up by Chinese customs
[BloombergQ] Erdogan to Break Rare Silence After Turkish Market Bloodbath
[BloombergQ] Californians Have Reason to Believe in Global Warming
[BloombergQ] Argentina’s Bonds Slump as Graft Probe Pushes Economy to the Brink
[Reuters] U.S. labor market tightening; inflation steadily rising
[BloombergQ] U.S. Consumer Comfort Rose to New 17-Year High on Economic Views
[BloombergQ] Fed Dove Evans Veers in Hawkish Direction Over Rate Outlook
[Reuters] U.S. built Mercedes-Benz SUV's held up by Chinese customs
[BloombergQ] Erdogan to Break Rare Silence After Turkish Market Bloodbath
[BloombergQ] Californians Have Reason to Believe in Global Warming
Wednesday, August 8, 2018
Thursday's News Links
[BloombergQ] Stocks Mixed Amid Trade Salvos; Dollar Advances: Markets Wrap
[Reuters] U.S. sanctions whack Russia's rouble, Turkey's lira free-falls
[Reuters] U.S. producer prices unchanged in July
[The Hill] Federal deficit jumps 20 percent after tax cuts, spending bill
[The Hill] CBO: National debt could be twice the size of GDP by 2048
[Reuters] Chinese state media accuse U.S. of 'mobster mentality', vow to fight tariffs
[Reuters] Handling of U.S. trade dispute causes rift in Chinese leadership: sources
[Reuters] China's July factory inflation slows but consumer prices accelerate
[CNN] China has an online lending crisis and people are furious about it
[BloombergQ] Turkey Curbs Growth Ambitions in a Bid to Stem Market Rout
[Reuters] Russia reels, denounces new U.S. sanctions as illegal, unfriendly
[WSJ] Trucking’s Tight Capacity Squeezes U.S. Businesses
[WSJ] Investors Doubt Turkey Will Easily Fall Into IMF Safety Net
[WSJ] China’s Central Bank Lets the Credit Flow
[FT] The Italian budget that has bond markets on edge
[FT] China and Russia’s dangerous liaison
[FT] Turkey to set out ‘new economic model’ as lira tumbles
[Reuters] U.S. sanctions whack Russia's rouble, Turkey's lira free-falls
[Reuters] U.S. producer prices unchanged in July
[The Hill] Federal deficit jumps 20 percent after tax cuts, spending bill
[The Hill] CBO: National debt could be twice the size of GDP by 2048
[Reuters] Chinese state media accuse U.S. of 'mobster mentality', vow to fight tariffs
[Reuters] Handling of U.S. trade dispute causes rift in Chinese leadership: sources
[Reuters] China's July factory inflation slows but consumer prices accelerate
[CNN] China has an online lending crisis and people are furious about it
[BloombergQ] Turkey Curbs Growth Ambitions in a Bid to Stem Market Rout
[Reuters] Russia reels, denounces new U.S. sanctions as illegal, unfriendly
[WSJ] Trucking’s Tight Capacity Squeezes U.S. Businesses
[WSJ] Investors Doubt Turkey Will Easily Fall Into IMF Safety Net
[WSJ] China’s Central Bank Lets the Credit Flow
[FT] The Italian budget that has bond markets on edge
[FT] China and Russia’s dangerous liaison
[FT] Turkey to set out ‘new economic model’ as lira tumbles
Wednesday Evening Links
[BloombergQ] U.S. Stocks Halt Rally, Dollar Slips With Crude: Markets Wrap
[CNBC] US crude drops 3.2% to 7-week low
[Reuters] Italy's bond yields rise after budget comments by deputy PM
[WSJ] China Retaliates With New Tariffs, Hunkering Down for a Long Trade Fight
[WSJ] Pricey Housing Markets in West Are Cooling Off Most Quickly
[WSJ] The EU Spent a Bundle to Unify the Continent. It’s Not Working.
[CNBC] US crude drops 3.2% to 7-week low
[Reuters] Italy's bond yields rise after budget comments by deputy PM
[WSJ] China Retaliates With New Tariffs, Hunkering Down for a Long Trade Fight
[WSJ] Pricey Housing Markets in West Are Cooling Off Most Quickly
[WSJ] The EU Spent a Bundle to Unify the Continent. It’s Not Working.
Tuesday, August 7, 2018
Wednesday's News Links
[Reuters] Wall St. flat as trade tensions mute earnings optimism
[Reuters] World shares hold at one-week high, sterling's slide gathers pace
[Reuters] China shares resume skid as fresh US tariffs overshadow stimulus pledges
[Reuters] Turkish lira weakens again, eyes on Washington talks
[Reuters] U.S. finalizes next China tariff list targeting $16 billion in imports
[Reuters] China to slap additional tariffs on $16 billion worth of U.S. goods
[Reuters] Fed's Barkin says U.S. interest rates need to rise further
[Reuters] U.S. mortgage activity falls to two-and-a-half year low: MBA
[BloombergQ] U.S. Midterms Pose Big Risk for Markets, Standard Chartered Says
[Reuters] Volatility slump stokes flames for post-summer blow up: McGeever
[BloombergQ] China Car Sales Drop Accelerates on Slowing Economy, Trade War
[Reuters] Italy's economy minister sees lower growth, higher deficit next year
[Reuters] China, Germany defend business with Iran in face of U.S. threats
[WSJ] China Hunkers Down for a Long Trade Fight
[WSJ] Traders Pile Into Bets That Stock Rally Will Continue
[FT] Why Japan is an unexpected threat to financial stability
[Reuters] World shares hold at one-week high, sterling's slide gathers pace
[Reuters] China shares resume skid as fresh US tariffs overshadow stimulus pledges
[Reuters] Turkish lira weakens again, eyes on Washington talks
[Reuters] U.S. finalizes next China tariff list targeting $16 billion in imports
[Reuters] China to slap additional tariffs on $16 billion worth of U.S. goods
[Reuters] Fed's Barkin says U.S. interest rates need to rise further
[Reuters] U.S. mortgage activity falls to two-and-a-half year low: MBA
[BloombergQ] U.S. Midterms Pose Big Risk for Markets, Standard Chartered Says
[Reuters] Volatility slump stokes flames for post-summer blow up: McGeever
[BloombergQ] China Car Sales Drop Accelerates on Slowing Economy, Trade War
[Reuters] Italy's economy minister sees lower growth, higher deficit next year
[Reuters] China, Germany defend business with Iran in face of U.S. threats
[WSJ] China Hunkers Down for a Long Trade Fight
[WSJ] Traders Pile Into Bets That Stock Rally Will Continue
[FT] Why Japan is an unexpected threat to financial stability
Tuesday Evening Links
[Reuters] S&P nears record as bank, tech stocks climb
[Reuters] U.S. job openings hover at record highs in June
[Reuters] Record U.S. 1-month bill supply sold at lower demand
[CNBC] 20% interest rates, crashing capital markets: Trump's sanctions causing turmoil in Turkey
[Reuters] Elon Musk considers taking Tesla private in tweet, shares rise
[Reuters] Trump says firms doing business in Iran to be barred from U.S. as sanctions hit
[UK Guardian] Turkey under pressure to raise interest rates as economic crisis looms
[WSJ] Bankruptcy Filings Surge Among Older Americans
[WSJ] China Uses Lower-Profile Swaps Market to Bolster Yuan
[FT] China’s Belt and Road projects drive overseas debt fears
[FT] Saudi Arabia’s furious attack on Canada shocks western allies
[FT] Turkey: how investors turned on Erdogan
[Reuters] U.S. job openings hover at record highs in June
[Reuters] Record U.S. 1-month bill supply sold at lower demand
[CNBC] 20% interest rates, crashing capital markets: Trump's sanctions causing turmoil in Turkey
[Reuters] Elon Musk considers taking Tesla private in tweet, shares rise
[Reuters] Trump says firms doing business in Iran to be barred from U.S. as sanctions hit
[UK Guardian] Turkey under pressure to raise interest rates as economic crisis looms
[WSJ] Bankruptcy Filings Surge Among Older Americans
[WSJ] China Uses Lower-Profile Swaps Market to Bolster Yuan
[FT] China’s Belt and Road projects drive overseas debt fears
[FT] Saudi Arabia’s furious attack on Canada shocks western allies
[FT] Turkey: how investors turned on Erdogan
Monday, August 6, 2018
Tuesday's News Links
[Reuters] China bounce pushes world shares toward six-month high
[Reuters] Dollar posts biggest drop in a week as rally fades
[Reuters] Turkey's lira, bonds hit again on U.S. trade threat, central bank worries
[Reuters] Chinese state newspaper says Trump's claims of winning trade war are 'wishful thinking'
[CNBC] Apple could be used as a 'bargaining chip' in the trade war, Chinese state media warns
[CNBC] Beijing 'will not surrender' to US 'trade blackmail,' Chinese media says
[BloombergQ] Turkey Replaces Argentina as Worst Market for Bond Investors
[CNBC] The US and India are squaring off on trade. That spells trouble for Modi
[BloombergSub] Liquidity Crunch Is the New Bubble Gripping Credit Investors
[BloombergSub] Faster Euro-Area Wages Signal Inflation Will Return, ECB Says
[NYT] No, Tariffs Aren’t Going to Pay Down the National Debt
[NYT] The Stock Market’s Next $1 Trillion Milestone: Buybacks
[WSJ] The Unseen Risk in the Booming Loan Market
[Reuters] Dollar posts biggest drop in a week as rally fades
[Reuters] Turkey's lira, bonds hit again on U.S. trade threat, central bank worries
[Reuters] Chinese state newspaper says Trump's claims of winning trade war are 'wishful thinking'
[CNBC] Apple could be used as a 'bargaining chip' in the trade war, Chinese state media warns
[CNBC] Beijing 'will not surrender' to US 'trade blackmail,' Chinese media says
[BloombergQ] Turkey Replaces Argentina as Worst Market for Bond Investors
[CNBC] The US and India are squaring off on trade. That spells trouble for Modi
[BloombergSub] Liquidity Crunch Is the New Bubble Gripping Credit Investors
[BloombergSub] Faster Euro-Area Wages Signal Inflation Will Return, ECB Says
[NYT] No, Tariffs Aren’t Going to Pay Down the National Debt
[NYT] The Stock Market’s Next $1 Trillion Milestone: Buybacks
[WSJ] The Unseen Risk in the Booming Loan Market
Monday Evening Links
[BloombergQ] Asia Stocks Open Mixed; Dollar, Treasuries Steady: Markets Wrap
[Reuters] Wall Street closes higher as strong earnings cheer investors
[Reuters] Turkish lira hits record low after U.S. reviews duty-free access
[Reuters] U.S. banks further eased business loan standards in Q2 2018
[BloombergQ] China’s Gas Tariffs Are a Permian-Size Problem for Oil
[BloombergQ] Turkey Changes Reserve Rules to Boost Banks' Dollar Liquidity
[Reuters] Canada defiant after Saudi Arabia freezes new trade over human rights call
[BloombergQ El-Erian] Making Sense of Two Very Busy Weeks for Markets
[FT] Central bank move fails to halt lira drop to record low
[Reuters] Wall Street closes higher as strong earnings cheer investors
[Reuters] Turkish lira hits record low after U.S. reviews duty-free access
[Reuters] U.S. banks further eased business loan standards in Q2 2018
[BloombergQ] China’s Gas Tariffs Are a Permian-Size Problem for Oil
[BloombergQ] Turkey Changes Reserve Rules to Boost Banks' Dollar Liquidity
[Reuters] Canada defiant after Saudi Arabia freezes new trade over human rights call
[BloombergQ El-Erian] Making Sense of Two Very Busy Weeks for Markets
[FT] Central bank move fails to halt lira drop to record low
Sunday, August 5, 2018
Monday's News Links
[BloombergQ] U.S. Stocks Turn Higher, Dollar Pares Advance: Markets Wrap
[Reuters] China's stocks, yuan slide as Beijing, Washington step up trade threats, rhetoric
[BloombergQ] Turkish Yields Increase to Record Amid Threat of U.S. Sanctions
[Reuters] Chinese state media slams Trump for 'extortion' in trade dispute
[BloombergQ] China Prepared for Long Trade War With U.S., State Media Says
[Reuters] U.S. bond market takes looming Treasuries deluge in stride
[BloombergQ] Emerging-Market Volatility Bets Rise as Trade War Rattles Yuan
[BloombergQ] Jamie Dimon Warns of 5% Treasury Yields
[NYT] Too Little Too Late’: Bankruptcy Booms Among Older Americans
[WSJ] China’s Softer Stance on Defaults Spurs Asian Bond Market
[WSJ] Iranians Hoard Gold Ahead of U.S. Sanctions
[FT] China millennials’ love of credit cards raise debt fears
[FT] Private equity challenged over $400bn fee haul
[FT] China private equity funds suffer wave of closures
[FT] Turkey's corporates need “the mother and father of all evil”
[Reuters] China's stocks, yuan slide as Beijing, Washington step up trade threats, rhetoric
[BloombergQ] Turkish Yields Increase to Record Amid Threat of U.S. Sanctions
[Reuters] Chinese state media slams Trump for 'extortion' in trade dispute
[BloombergQ] China Prepared for Long Trade War With U.S., State Media Says
[Reuters] U.S. bond market takes looming Treasuries deluge in stride
[BloombergQ] Emerging-Market Volatility Bets Rise as Trade War Rattles Yuan
[BloombergQ] Jamie Dimon Warns of 5% Treasury Yields
[NYT] Too Little Too Late’: Bankruptcy Booms Among Older Americans
[WSJ] China’s Softer Stance on Defaults Spurs Asian Bond Market
[WSJ] Iranians Hoard Gold Ahead of U.S. Sanctions
[FT] China millennials’ love of credit cards raise debt fears
[FT] Private equity challenged over $400bn fee haul
[FT] China private equity funds suffer wave of closures
[FT] Turkey's corporates need “the mother and father of all evil”
Sunday Evening Links
[BloombergQ] Yuan Steadies After PBOC, Asia Stocks Tick Higher: Markets Wrap
[BloombergQ] China's Markets in the Spotlight After Tariff Threats, Yuan Levy
[CNBC] China's monetary policy is complex and shifting. Here's what you need to know
[BloombergQ] Italy Is Building Defenses Against Speculators Amid Budget Talks
[BloombergQ] Saudi Arabia Suspends Diplomatic, Trade Ties With Canada
[BloombergQ] China's Markets in the Spotlight After Tariff Threats, Yuan Levy
[CNBC] China's monetary policy is complex and shifting. Here's what you need to know
[BloombergQ] Italy Is Building Defenses Against Speculators Amid Budget Talks
[BloombergQ] Saudi Arabia Suspends Diplomatic, Trade Ties With Canada
Saturday, August 4, 2018
Saturday's News Links
[Reuters] China won't accept U.S. trade 'blackmail': state media
[Reuters] China's Wang says response to U.S. trade measures necessary, legitimate
[BloombergQ] Pompeo Warns Russia, China Over Violating North Korea Sanctions
[BloombergQ] Turkey on Trump Blacklist as Sanctions Spell Trouble for Economy
[WSJ] Global Heat Wave Toasts Wheat and Prices Soar
[Reuters] China's Wang says response to U.S. trade measures necessary, legitimate
[BloombergQ] Pompeo Warns Russia, China Over Violating North Korea Sanctions
[BloombergQ] Turkey on Trump Blacklist as Sanctions Spell Trouble for Economy
[WSJ] Global Heat Wave Toasts Wheat and Prices Soar
Friday, August 3, 2018
Weekly Commentary: "Periphery to Core Crisis Dynamics"
The renminbi traded at 6.8935 in early-Friday trading, with intensified selling pushing the Chinese currency to its lowest level (vs. the $) since May 26, 2017. The People's Bank of China (PBOC) was compelled to support their currency, imposing a 20% reserve requirement on foreign-exchange forward contracts (raising the cost of shorting the renminbi). The PBOC previously adopted this measure back during 2015 tumult, before removing it this past September.
The re-imposition of currency trading reserve requirements indicates heightened concern in Beijing. Officials likely viewed modest devaluation as a constructive counter to U.S. trade pressures. In no way, however, do they want to face disorderly trading and the risk of a full-fledged currency crisis.
The renminbi rallied 1% on the PBOC move, ending slightly positive for the day (but down for the eighth straight week). Trading strongly prior to the PBOC move, the dollar index reversed into negative territory. Many EM currencies moved sharply on the renminbi rally. The South African rand reversed course and posted a 1.2% gain. The Brazilian real also jumped 1%. Curiously, the Japanese yen gained about 0.5%.
Overnight S&P500 futures, having traded slightly negative, popped higher on the renminbi rally. But EM equities were the bigger beneficiary. Brazil Ibovespa index gained 2.3% Friday. It increasingly appears the fortunes of the renminbi and EM markets are tightly intertwined.
The unfolding trade war is turning more serious. Beyond Friday's currency move, China's Finance Ministry - in measures to "guard its interests" - announced plans for significantly broader retaliation tariffs on U.S. goods.
August 3 - CNBC (Michael Sheetz): "China is preparing to retaliate in the escalating trade war with tariffs on about $60 billion worth of U.S. goods. The import taxes would range in rates from 5% to 25%, China's Ministry of Commerce said… There are four lists of goods, one for each of the rates proposed. Many of the goods are agricultural-related, with others on various metals and chemicals. 'The implementation date of the taxation measures will be subject to the actions of the US, and China reserves the right to continue to introduce other countermeasures,' China's release said… 'Any unilateral threat or blackmail will only lead to intensification of conflicts and damage to the interests of all parties.'"
President Trump had already threatened to place tariffs on $200 billion of Chinese goods if Beijing moved to retaliate on earlier U.S. measures. Shortly after the Chinese retaliatory tariff announcement (and post-U.S. payrolls data), Larry Kudlow, Director of the National Economic Council, appeared on Bloomberg Television.
Bloomberg's Jonathan Ferro: "You've sat across the table with the Chinese many, many times. What is your opinion - your insight - into what is happening to the Chinese economy currently?"
Kudlow: "Well, I'm not an expert. I do try to follow it and it looks to me - you all may disagree - it looks to me like the China economy is declining in growth - it's weakening - almost across the board. And it looks like the People's Bank of China is trying to pump it up by adding high-powered money and new credit and so forth. The currency fall is partly [because] they've stopped defending the yuan. They think it's going to help offset the U.S. efforts to get rid of their unfair trading. Some of the currency fall, though, I think is just money leaving China because it's a lousy investment. And if that continues that will really damage the Chinese economy. If money leaves China - and the currency could be a leading indicator - they're going to be in a heap of trouble. And so I'm going to make the case that they are in a weak economic position - that's not a good place for them to be vis-à-vis the trade negotiations - first point. Second point, they better not underestimate President Trump's determination to follow through on our asks - IP theft is a no-go. Forced transfer of technology - no go. Non-reciprocal trading, on tariffs and non-tariff barriers. The President, he's a trade reformer. We've said many times: "no tariffs, no tariff barriers, no subsidies. We want to see trade reforms." China is not delivering. Their economy is weak; their currency is weak; people leaving the country. Don't underestimate President Trump's determination to follow through. I'm just telling you. I can't speak for the Communist Party in China. I can speak for our President. Do not underestimate his determination to change trading practices on a fair, reciprocal plane."
Ferro: "One thing you can definitely speak to, Larry, is the strategy of the President. It just seems to me the strategy of the administration at the moment is to exert maximum pain on the Chinese economy. Is that the direction of travel for you guys, Larry?"
Kudlow: "I would maybe rephrase it a bit. I think what we're saying is we are serious. And in trade, as you well know, your guests know, negotiations often include the use of tariffs. And the President has said time and time again that targeted tariffs are going to be part of the game plan with China - unless and until they begin to meet our requests, which so far they have not. In fact, in the recent month or so we've had hardly any conversations with them at all. There is some hint now that they may wish to talk, although I can't say that with certainty."
The Shanghai Composite sank another 4.6% this week, increasing y-t-d losses to 17.1%. Meanwhile, the S&P500 gained 0.6%, boosting the S&P500's 2018 return to 7.4%. As a large net importer, the U.S. is seemingly less economically sensitive to a trade war than the Chinese economy. U.S. equities have become immune to trade threats. Announcements that would have previously rattled stocks no longer carry much of a punch. As the market sees it, the administration may bluster, but they surely won't risk jeopardizing the great bull market - especially leading up to the midterms.
As Mr. Kudlow stated rather unequivocally, the administration believes it has a very strong hand to play, while China's hand is feeble - and turning only feebler. They have somewhat of a point. The U.S. economy is booming, and our securities markets remain resilient. Meanwhile, cracks in the Chinese Bubble seem to widen by the week. Beijing is feeling the heat. Yet I see important shortcomings in the administration's analysis.
First, I'll be surprised if hardball tactics work on Beijing. For one, the Chinese recognize Trump administration issues go way beyond unfair trade. Negotiations on trade are but the first salvo - so Beijing must be tough and show unflappable resolve. As they see it, give in now and they'll face an unrelenting Washington power play. Display weakness on trade and the Americans would be emboldened to confront Beijing on the South China Sea or Taiwan. Chinese leadership sees the U.S. as trying to contain China's ascent to their rightful place of global power, influence and prestige.
I also believe the Trump administration is overstating the strength of the hand it's playing. The U.S. economic boom has attained significant momentum. Animal spirits are running hot and there remains a potent inflationary bias throughout the asset markets. But I would argue that the U.S. is today much more exposed to a shift in the global financial backdrop than is appreciated in Washington or by the markets. In my view, the unfolding trade war with China poses a clear and present threat to global finance.
The U.S. boom is built on a foundation of loose finance. Finance has meaningfully tightened globally. I'll reiterate my view that the global Bubble has been pierced at the "periphery" - more specifically, within the emerging markets. There are now serious fissures in China's Bubble, a circumstance exacerbated both by EM fragilities and rising U.S. trade tensions.
In this incipient faltering global Bubble phase, instability at the "periphery" has so far engendered somewhat looser financial conditions in "core" markets. U.S. Treasury yields turned sharply lower following the May EM eruption, reversing what had the potential to evolve into tightened financial conditions. Lower market yields, along with looser conditions more generally, incited a rally and powerful short squeeze in U.S. equities.
A critical question going forward: How will evolving conditions at the global Bubble's "periphery" impact the "core"? Recently, some stabilization at the "periphery" has seen waning safe haven Treasury demand. Treasury yields were back above 3.0% this week, before Friday's rally saw yields decline to 2.95%.
Markets remain at this point comfortable that stress at the "periphery" will continue to bolster the "core." This has been, after all, the case in recent years. After beginning 2016 at 2.27%, China and EM instabilities were behind a drop in Treasury yields through mid-year (as low as 1.36%). After a relatively brief pullback early in the year, U.S. equities disregarded global issues as they rallied for much of 2016. Importantly, loose U.S. financial conditions only loosened further, as global Bubble vulnerabilities had the FOMC sitting on its hands for a year between their initial and second "baby step" rate increases.
There remains a prevalent market view that unfolding global instability will have the Fed winding down "normalization" long before rate increases turn restrictive for the booming U.S. economy and securities markets. Besides, any unfolding bout of global risk aversion would ensure booming international flows into U.S. dollar securities markets.
To be sure, extended periods of loose finance deeply alter market perceptions, dynamics and structure. Years of QE market liquidity backstops fundamentally changed the way market participants view risk. There is today little concern for trouble at the "periphery" gravitating to the "core." After all, the U.S. has been the primary beneficiary during repeated episodes of risk aversion and outflows from China, EM or even periphery Europe, for that matter.
Indeed, markets have been conditioned to view instability at the "periphery" as an opportunity. It's now been a decade since tumult afflicted the "core." Long forgotten is the traditional dynamic where risk aversion at the "periphery" commences a process of de-risking and de-leveraging - with expanding market illiquidity and contagion. This old market problem was seemingly nullified by activist central bankers.
Well, I believe the current backdrop creates extraordinary risk for a (surprising) reemergence of "Periphery to Core Crisis Dynamics". It's my view that massive global QE measures have for years been responsible for nipping de-risking/de-leveraging dynamics in the bud. The overabundance of cheap global finance ensured a surfeit of market liquidity that would readily accommodate incipient de-risking/de-leveraging at the "periphery." In short, a global "system" awash in "money" ensured de-leveraging dynamics never attained momentum. Contagion risk stopped being an issue - quite a boon for global leveraged speculation. Moreover, even the mildest "risk off" dynamic at the "periphery" would ensure waves of inbound liquidity for the "core." Latent fragilities at the "periphery" were kept under wraps, as global central bankers dragged their heels when contemplating the start of policy normalization.
An analyst on Bloomberg Television made the important point that global QE is today in the neighborhood of $25 billion monthly, down from $125 billion one year ago. Global QE will likely turn negative by year-end. This, I believe, significantly increases the likelihood of an unanticipated return of a destabilizing global contagion dynamic. Rather than instability at the "periphery" doing its usual handiwork to buoy Bubbles at the "core," de-risking/de-leveraging dynamics increasingly have the potential to attain sufficient momentum to negatively impact the "core."
The global liquidity backdrop is in the process of profound - if not yet obviously discernable - change. EM is increasingly vulnerable to a destabilizing bout of de-leveraging in a world of waning liquidity. Thus far, the faltering EM Bubble has incited flows to U.S. Bubble markets. However, an escalation of the unfolding EM crisis is at heightened risk of inciting a very problematic global de-leveraging - a "risk off" backdrop that would risk piercing vulnerable Bubbles even at the "core." The consensus bullish view - holding EM as a buying opportunity and the U.S. as the mighty pillar of growth and stability - could prove dangerously complacent.
I believe there are great latent fragilities associated with the "Periphery to Core Crisis Dynamic." Distorted markets have over years been conditioned to disregard such risk. I'll presume the administration is simply oblivious, believing it's deftly playing a hand of robust U.S. financial and economic systems. With such a competitive advantage, in their minds there's never been a better opportunity to play hardball and put Beijing in its place.
It's worth noting that 10-year Treasury yields declined four bps Friday. The Japanese yen (up 0.37%) also enjoyed a safe haven bid. Treasuries and the yen seemed to take a different view of developments than U.S. equities.
Friday afternoon Bloomberg headline: "Tit-For-Tat Becomes the Norm as U.S., China Dig In for Trade War." The odds are not small that this Game of Chicken goes unresolved for a while. Clearly, it would be uncharacteristic of President Trump to back down. At the same time, President Xi has shown zero tolerance for any sign of weakness. Increasingly, Beijing is being very publicly backed into a corner (Bloomberg headline: "U.S.'s Kudlow Trash Talks China Calling It 'Lousy Investment'"). Difficult to see China responding cordially.
"Trash Talking" China a few hours after the PBOC is compelled to intervene to bolster the flagging renminbi leaves me uncomfortable. There's a problematic scenario that doesn't seem all that improbable at this point: China faces increased financial instability, including capital flight and de-risking/de-leveraging. The PBOC becomes trapped in the dreadful EM dynamic of bolstering system liquidity in the face of mounting risk of a full-fledged currency crisis. Global markets fret the imposition of Chinese capital controls.
Meanwhile, China instability and trade fears see EM markets take another leg lower, with particular market concern for the highly levered Asian economies. De-risking/de-leveraging dynamics attain self-reinforcing momentum, as contagion effects engulf the global "periphery." Fears of global financial fragility and economic vulnerability see risk aversion begin to gravitate toward the "core." Fears of EM central bank and Chinese selling of U.S. Treasuries overwhelm safe haven buying, as de-risking/de-leveraging dynamics see a widening of Credit spreads and illiquidity begin to impact "core" fixed-income markets.
In such a problematic global scenario, I ponder whether Beijing might perceive it's playing with a relatively stronger hand than their U.S. adversary. Meanwhile, contagion effects would set their sights on the "periphery of the core." This just doesn't seem all that far-fetched.
It's worth noting that Italian yields jumped another 18 bps points this week to 2.93% (Greek yields up 25 bps). And while the Bank of Japan sought to comfort markets with "easy forever," the badly-distorted Japanese bond market is indicating instability. Mainly, it's a problematic market and geopolitical backdrop pointing increasingly to "Periphery to Core Crisis Dynamics." China, EM and the world are now just a disorderly collapse of the renminbi away from, in the words of Mr. Kudlow, "a heap of trouble."
For the Week:
The S&P500 gained 0.8% (up 6.2% y-t-d), while the Dow was little changed (up 3.0%). The Utilities rose 1.2% (up 0.9%). The Banks added 0.7% (up 3.4%), while the Broker/Dealers lost 1.7% (up 3.0%). The Transports jumped 1.3% (up 4.6%). The S&P 400 Midcaps rose 1.3% (up 5.2%), and the small cap Russell 2000 increased 0.6% (up 9.0%). The Nasdaq100 advanced 1.4% (up 15.6%). The Semiconductors gained 0.7% (up 10.3%). The Biotechs added 0.5% (up 19.8%). With bullion down $10, the HUI gold index slipped 0.6% (down 14.4%).
Three-month Treasury bill rates ended the week at 1.97%. Two-year government yields declined three bps to 2.64% (up 76bps y-t-d). Five-year T-note yields dipped three bps to 2.81% (up 61bps). Ten-year Treasury yields slipped one basis point to 2.95% (up 54bps). Long bond yields added a basis point to 3.09% (up 35bps). Benchmark Fannie Mae MBS yields declined two bps to 3.66% (up 71bps).
Greek 10-year yields jumped 25 bps to 4.06% (down 1bp y-t-d). Ten-year Portuguese yields rose six bps to 1.78% (down 16bps). Italian 10-year yields surged 18 bps to 2.93% (up 91bps). Spain's 10-year yields rose five bps to 1.42% (down 15bps). German bund yields were little changed at 0.41% (down 2bps). French yields rose four bps to 0.74% (down 5bps). The French to German 10-year bond spread widened four to 33 bps. U.K. 10-year gilt yields gained five bps to 1.33% (up 14bps). U.K.'s FTSE equities index declined 0.5% (down 0.4%).
Japan's Nikkei 225 equities index fell 0.8% (down 1.1% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.11% (up 6bps). France's CAC40 slipped 0.6% (up 3.1%). The German DAX equities index dropped 1.9% (down 2.3%). Spain's IBEX 35 equities index fell 1.3% (down 3.0%). Italy's FTSE MIB index sank 1.7% (down 1.2%). EM equities were mixed. Brazil's Bovespa index jumped 1.9% (up 6.5%), while Mexico's Bolsa declined 0.7% (down 0.1%). South Korea's Kospi index slipped 0.3% (down 7.3%). India’s Sensex equities index added 0.6% (up 10.3%). China’s Shanghai Exchange sank 4.6% (down 17.1%). Turkey's Borsa Istanbul National 100 index was little changed (down 17.1%). Russia's MICEX equities index added 0.2% (up 8.9%).
Investment-grade bond funds saw inflows of $1.211 billion, and junk bond funds had inflows of $37 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates rose six bps to 4.60% (up 67bps y-o-y). Fifteen-year rates jumped six bps to 4.08% (up 90bps). Five-year hybrid ARM rates gained six bps to 3.93% (up 78bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up five bps to 4.63% (up 58bps).
Federal Reserve Credit last week declined $16.8bn to $4.232 TN. Over the past year, Fed Credit contracted $194bn, or 4.4%. Fed Credit inflated $1.422 TN, or 51%, over the past 300 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt jumped $22.4bn last week to $3.434 TN. "Custody holdings" were up $101bn y-o-y, or 3.0%.
M2 (narrow) "money" supply added $7.8bn last week to a record $14.156 TN. "Narrow money" gained $518bn, or 3.8%, over the past year. For the week, Currency increased $1.8bn. Total Checkable Deposits slipped $2.0bn, while Savings Deposits gained $4.3bn. Small Time Deposits increased $2.1bn. Retail Money Funds gained $1.3bn.
Total money market fund assets increased $8.6bn to $2.851 TN. Money Funds gained $191bn y-o-y, or 7.2%.
Total Commercial Paper declined $1.4bn to $1.067 TN. CP gained $97bn y-o-y, or 10.0%.
Currency Watch:
August 3 - Financial Times (Gabriel Wildau): "China's central bank has raised the cost of betting on renminbi depreciation, a move intended to stabilise its currency following a sharp fall in recent weeks. The People's Bank of China late on Friday announced the re-imposition of a 20 per cent reserve requirement on banks that sell dollars to clients using currency forwards. Banks will pass the cost of this requirement on to their clients, raising the cost of betting on renminbi weakness. The decision late in Beijing on Friday sparked a rally in the offshore yuan, which trades at major hubs outside of mainland China."
The U.S. dollar index added 0.6% to 95.194 (up 3.3% y-t-d). For the week on the upside, the Canadian dollar increased 0.5%, the Mexican peso 0.4%, and the Brazilian real 0.1%. For the week on the downside, the South African rand declined 1.1%, the Swedish krona 1.0%, the South Korean won 0.9%, the Norwegian krone 0.8%, the British pound 0.8%, the euro 0.8%, the New Zealand dollar 0.7%, the Singapore dollar 0.3% and the Japanese yen 0.2%. The Chinese renminbi declined 0.20% versus the dollar this week (down 4.69% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index declined 0.6% (up 4.4% y-t-d). Spot Gold lost 0.8% to $1,214 (down 6.9%). Silver slipped 0.2% to $15.462 (down 9.8%). Crude declined 20 cents to $68.49 (up 13.4%). Gasoline dropped 4.5% (up 15%), while Natural Gas gained 2.6% (down 3%). Copper fell 1.4% (down 16%). Wheat surged 5.4% (up 36%). Corn gained 2.1% (up 10%).
Trump Administration Watch:
August 1 - Bloomberg (Bob Davis and Lingling Wei): "The U.S. turned up the heat… on China, with the Trump administration threatening to more than double proposed tariffs on imports while Congress passed a defense bill designed to restrict Beijing's economic and military activity. The moves come as Beijing and Washington have failed to ease an escalating trade dispute, prompting the administration to seek additional leverage. The administration, which has already affixed tariffs on billions of dollars in Chinese imports, said it would consider more than doubling proposed tariffs on a further $200 billion worth of Chinese goods to 25%, up from an original 10%. Meantime, the Senate approved a defense-policy bill that both tightens U.S. national-security reviews of Chinese corporate deals and revamps export controls over which U.S. technologies can be sent abroad."
August 1 - Bloomberg (Kathleen Hunter): "When it comes to coaxing China back to the trade negotiation table, the Trump administration is favoring the stick over the carrot. And China is tired of it… In a sign the standoff is reverberating in China, the Politburo signaled yesterday that policy makers will focus more on supporting economic growth and noted 'blackmailing and pressuring' will never work."
July 30 - Reuters (Lesley Wroughton and David Brunnstrom): "U.S. Secretary of State Mike Pompeo announced $113 million in new technology, energy and infrastructure initiatives in emerging Asia…, at a time when China is pouring billions of dollars in investments into the region."
August 1 - Wall Street Journal (Kate O'Keeffe and Siobhan Hughes): "Congress passed a defense-policy bill that some lawmakers say is tougher on China than any in history, as a bipartisan movement to confront Beijing gathers steam. The measure, an annual policy bill that authorizes $716 billion in total defense spending for the coming fiscal year, seeks to counter a range of Chinese government policies, including increased military activity in the South China Sea, the pursuit of cutting-edge U.S. technology and the spread of Communist Party propaganda at American institutions."
August 1 - Wall Street Journal (Josh Zumbrun and Daniel Kruger): "Rising federal budget deficits are boosting the U.S. Treasury's borrowing and could restrain a fast-growing economy as the cost of credit rises, too. The yield of 10-year Treasury notes climbed above 3% for the first time since June, as the Treasury Department announced it would increase auctions of U.S. debt by an additional $30 billion over the next three months… In all, the Treasury plans to borrow $329 billion from July through September-up $56 billion from the agency's April estimate-in addition to $440 billion in October through December. The figures are 63% higher than what the Treasury borrowed during the same six-month period last year."
July 29 - The Hill (Lloyd Green): "The economy hums while storm clouds darken the White House. Welcome to the final 100 days before the 2018 midterms. Even as the economy is experiencing is highest rate of growth since 2014, the electorate is angry. Donald Trump has taken command of center stage, and the public is not thrilled with what it sees. When Trump is underwater in Wisconsin, Michigan, and Minnesota, it is time for Republicans to worry. The question is how large a bite does Trump extract from Republican candidates this fall. Real Clear Politics puts the Democrats lead on the generic ballot at over 7 points, while FiveThirtyEight pegs the Democrats lead a tick higher. No, those numbers do not reflect a blue wave. But at the same time, they provide Republicans with little room for error, and even less reason for comfort."
July 29 - Reuters (Lindsay Dunsmuir): "U.S. Treasury Secretary Steven Mnuchin said… that he believes the quickening pace of growth in the nation's economy in the second quarter will persist for the next few years. 'I don't think this is a one- or two-year phenomenon. I think we definitely are in a period of four or five years of sustained 3% growth at least,' Mnuchin said…"
July 27 - Reuters (Tucker Higgins): "President Donald Trump told talk show host Sean Hannity that he could imagine the economy growing at 8 or 9% on Friday - just hours after the Bureau of Economic Analysis showed that the GDP rose 4.1% in the second quarter. The president said that the gains could come from cutting the nation's trade deficit 'in half.' 'If I cut it in half, right there we will pick up three or four points,' Trump said… 'We'd be at eight or nine' percent, he added."
August 2 - Bloomberg (Ryan Beene, John Lippert and Jennifer A. Dlouhy): "The Trump administration, taking aim at one of former President Barack Obama's signature environmental achievements, is proposing to suspend required increases in vehicle fuel economy after 2020 and unwind California's authority to limit tailpipe greenhouse gas emissions in the state. The Environmental Protection Agency and National Highway Traffic Safety Administration jointly proposed on Thursday to cap fuel economy requirements at a fleet average of 37 mpg starting in 2020. Under the Obama plan, the fleetwide fuel economy would have risen gradually to roughly 47 mpg by 2025"
Federal Reserve Watch:
August 1 - Bloomberg (Cragi Torres): "Federal Reserve officials left U.S. interest rates unchanged and stuck with a plan to gradually lift borrowing costs amid 'strong' growth that backs bets for a hike in September. Economic activity has been 'rising at a strong rate,' and unemployment 'has stayed low,' the Federal Open Market Committee said… 'Household spending and business fixed investment have grown strongly.' While leaving rates on hold as expected, the committee repeated guidance for 'further gradual increases' in its policy benchmark, lining up September's FOMC meeting for the third hike of the year."
U.S. Bubble Watch:
August 1 - Bloomberg (Liz Capo McCormick and Saleha Mohsin): "The U.S. Treasury Department will raise the amount of long-term debt it sells to $78 billion this quarter while launching a new two-month bill. It also will lean more heavily on maturities out to five years. In its quarterly refunding announcement on Wednesday, the Treasury boosted the auction sizes of coupon-bearing and floating-rate debt from $73 billion the previous quarter. It was the third consecutive quarterly increase, as President Donald Trump's fiscal policies widen the nation's budget deficit."
July 30 - Wall Street Journal (Sarah Krouse): "For the past century, a public pension was an ironclad promise. Whatever else happened, retired policemen and firefighters and teachers would be paid. That is no longer the case. Many cities and states can no longer afford the unsustainable retirement promises made to millions of public workers over many years. By one estimate they are short $4 trillion… Certain pension funds face the prospect of insolvency unless governments increase taxes, divert funds or persuade workers to relinquish money they are owed. It is increasingly likely that retirees, as well as new workers, will be forced to take deeper benefit cuts."
August 2 - CNBC (Fred Imbert): "Private payrolls in the U.S. increased by more than expected last month as companies get a boost from lower corporate taxes, ADP and Moody's Analytics said… Jobs in the U.S. increased by 219,000 in July, while economists… expected a gain of 185,000. July's job gains were the best since February, when 241,000 jobs were added. Jobs growth for the previous month was also revised up to 181,000 from 177,000. 'The job market is booming, impacted by the deficit-financed tax cuts and increases in government spending,' said Mark Zandi, chief economist of Moody's Analytics…"
July 31 - Wall Street Journal (Laura Kusisto): "Home-price gains held steady in May, as a lack of sale inventory helped prevent a meaningful slowdown in price growth despite rising mortgage rates and growing affordability challenges. The S&P CoreLogic Case-Shiller National Home Price Index, which measures average home prices in major metropolitan areas across the nation, rose 6.4% in May, identical to the year-over-year increase reported in April. An index of 10 cities gained 6.1% over the year, down from 6.4% the prior month. The 20-city index gained 6.5%, down from 6.7% the previous month."
August 1 - CNBC (Diana Olick): "The long list of housing headwinds is finally taking its toll on potential buyers. Housing demand fell 9.6% in June, compared with June 2017, according… Redfin. That is the largest decline since April 2016. Red-hot home prices, rising mortgage interest rates, very few listings at the entry level and a high rate of student loan debt have weighed on buyers for a while, but a strong economy and growing employment had mitigated those factors. Now, however, a market stalemate is developing as rates and prices continue to rise, further weakening affordability."
July 31 - Reuters (Lucia Mutikani): "U.S. consumer spending increased solidly in June as households spent more at restaurants and on accommodation, building a strong base for the economy heading into the third quarter, while inflation rose moderately… The Commerce Department said consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.4% last month. Data for May was revised up to show consumer spending advancing 0.5% instead of the previously reported 0.2% gain."
July 29 - Wall Street Journal (Kelsey Gee): "Americans looking to land a first job or break into a dream career face their best odds of success in years. Employers say they are abandoning preferences for college degrees and specific skill sets to speed up hiring and broaden the pool of job candidates. Many companies added requirements to job postings after the recession, when millions were out of work and human-resources departments were stacked with résumés… 'Candidates have so many options today,' said Amy Glaser, senior vice president of Adecco Group, a staffing agency with about 10,000 company clients in search of employees. 'If a company requires a degree, two rounds of interviews and a test for hard skills, candidates can go down the street to another employer who will make them an offer that day.'"
July 31 - Wall Street Journal (Laura Kusisto): "The construction business is having trouble attracting young job seekers. The share of workers in the sector who are 24 years old or younger has declined in 48 states since the last housing boom in 2005, according to… Issi Romem, chief economist at construction data firm BuildZoom. Nationally, the share of young construction workers declined nearly 30% from 2005 through 2016… While there's no single reason why younger folks are losing interest in a job that is generally well-paid and doesn't require a college education, their indifference is exacerbating a labor shortage that has meant fewer homes being built and rising prices, possibly for years to come."
July 31 - Reuters (Richa Naidu and Martinne Geller): "With toilet roll and tissues swept up in an escalating international trade row, it's not just Procter & Gamble's Charmin that's going to get the squeeze. Higher prices in the wake of possible tariffs would exacerbate what is already mounting pressure on consumer product company profits from soaring costs from pulp, a main ingredient in tissues, diapers and sanitary towels. P&G, the purveyor of Charmin toilet paper, Bounty towels and Puffs tissues, said on Tuesday that it had recently begun notifying retailers of a 5% average price increase…"
July 29 - Reuters (Patrick McGroaty and Bob Tita): "Consumers are starting to see higher prices for recreational vehicles, soda, beer and other goods that now cost more to make as a result of recent tariffs on metals and parts. When costs rise, manufacturers generally must choose whether to absorb bigger bills for aluminum, steel and imported components, or pass the increases along to customers. In recent days many manufacturers, including Coca-Cola Co. and Polaris Industries Inc., have said they plan to raise prices. U.S. steel and aluminum prices are up 33% and 11%, respectively, since the start of the year…"
July 31 - CNBC (Tae Kim): "Morgan Stanley believes the dramatic drops in some high-flying technology stocks this month is further evidence the stock market will go lower. 'The weaker earnings beat from several Tech leaders and outright misses from Netflix and Facebook were simply additional support for our [defensive] call,' chief U.S. equity strategist Michael Wilson said… And the average investor could suffer even more this time, Wilson said. 'We think a coming correction will be biggest since February, although it could very well have more of a negative impact on the average portfolio if it is centered on Tech, Discretionary, and small caps,' the note said."
July 31 - Financial Times (John Plender): "If value investors have been on the rack in recent times, their experience has stemmed, at least in part, from inadequate exposure to Faang stocks - the fabled Facebook, Amazon, Apple, Netflix and Google/Alphabet. Since last Thursday's spectacular $120bn fall in Facebook's market capitalisation we have witnessed a great tech sell-off that may point to a watershed in the value versus passive investment saga. Yet by now, as in the tech bubble of the late 1990s, many value investors (who buy stocks that they think are undervalued) have thrown in the towel and bought into the Faangs. So is this a rerun of the dot.com story?"
July 30 - Wall Street Journal (Liz Hoffman): "In December 2008, with the financial world in a tailspin, Goldman Sachs… issued stock options to 350 of its top executives and board members. By the time they expire later this year, these options will have earned their owners-most of whom left Goldman years ago-at least $3 billion… The windfall shows how far Wall Street firms, or at least their stock prices, have come since the crisis. Goldman is less profitable than it was a decade ago, but its share price last year surpassed the previous high set in 2006. Shares of JPMorgan… continue to hit new heights."
August 1 - Bloomberg (Oshrat Carmiel and Jeremy Hill): "This has become a summer of discontent for those trying to sell their homes in New York City's leafy suburbs -- in no small part because of the Trump administration. In affluent enclaves in Westchester County, New Jersey and Connecticut, a federal cap on state and local property tax deductions has begun to bite hard. Longtime homeowners who dreamed of offloading their empty nests are finding their plans complicated by the tax bill, as would-be buyers hold back… The issue is especially acute in areas of Westchester, the county with the nation's highest-property taxes, where annual bills of $35,000, $50,000 and more are not uncommon."
China Watch:
August 2 - CNBC (Fred Imbert): "China is not taking the United States' latest tariff threat lightly and vows to hit back if the U.S. moves forward. 'China is fully prepared and will have to retaliate to defend the nation's dignity and the interests of the people, defend free trade and the multilateral system, and defend the common interests of all countries,' the Chinese Ministry of Commerce said in a statement… 'The carrot and stick tactic won't work.' The ministry's remarks came after President Donald Trump instructed U.S. Trade Representative Robert Lighthizer to consider raising proposed tariffs on $200 billion in Chinese goods to 25% from 10%."
August 1 - Financial Times (Gabriel Wildau): "China's leadership has signalled a shift towards supporting short-term economic growth following a nearly two-year battle against excessive debt, just as a trade war with the US also threatens the economy. Communist party leaders agreed at a politburo meeting to adjusted the official monetary policy stance from 'prudent and neutral' to merely 'prudent' - a clear move towards loosening. The politburo communiqué also cited 'maintaining steady and healthy economic growth' as the number one task. Some critics warn that the country is resorting to its old playbook of debt-fuelled spending to ease a slide in growth - an approach that could worsen the long-term risks that the deleveraging campaign had sought to tame. Tuesday's politburo's declaration follows a series of new growth-supporting measures announced over the past fortnight, from tax cuts and new infrastructure spending to central-bank cash injections and a softening of regulations designed to curb shadow banking."
July 31 - Wall Street Journal: "The bad economic numbers keep coming from China. Second-quarter GDP growth slowed to 6.7%, due in part to a record low increase in fixed-asset investment. On Tuesday the manufacturing purchasing managers' index, a leading indicator, hit a five-month low, and on Monday the yuan fell to a 13-month low against the U.S. dollar. Chinese stocks have lost one-fifth of their value since January and are near a two-year low. All these lows have caused some in Washington to conclude that Beijing is losing the trade war. With the grim statistics, the thinking goes, Chinese leaders will have to make concessions and cut a deal quickly."
August 1 - Bloomberg: "China's central bank has started actively encouraging banks to extend more credit by taking a softer stance on loan quotas, people familiar…said, as authorities ratchet up efforts to bolster a cooling economy. The People's Bank of China has delivered the message via so-called window guidance… The central bank hasn't provided specific targets, but it indicated a willingness to be more flexible on banks' government-imposed lending caps, the people said."
July 30 - Financial Times (Gabriel Wildau and Tom Mitchell): "Foreigners seeking 'strategic' stakes in listed Chinese companies could face broader national security reviews under new rules drafted by China's commerce ministry, a sign Beijing is preparing to hit back at western efforts to curb Chinese acquisitions of sensitive technologies. The proposed amendments to existing investment rules… expand the universe of foreign investments covered by China's formal national security review process."
August 2 - Bloomberg: "China is building a very 21st century empire-one where trade and debt lead the way, not armadas and boots on the ground. If President Xi Jinping's ambitions become a reality, Beijing will cement its position at the center of a new world economic order spanning more than half the globe. Already, China has extended its influence far beyond that of the Tang Dynasty's golden age more than a millennium ago. The most tangible manifestation of Xi's designs is the new Silk Road he first proposed in 2013. The enterprise morphed into the 'Belt and Road' initiative, a mix of foreign policy, economic strategy, and charm offensive that, nurtured by a torrent of Chinese money, is rebalancing global political and economic alliances. Xi calls the grand initiative 'a road for peace.' Other world powers such as Japan and the U.S. remain skeptical about its stated aims and even more worried about unspoken ones, especially those hinting at military expansion."
July 29 - Financial Times: "China's Belt and Road Initiative is commonly seen as a programme to fund and build infrastructure in some 78 countries around the globe. It is also Beijing's bid to reshape the world by offering an alternative developmental vision to the US-led world order. In the Chinese context, it is the linchpin of President Xi Jinping's grand design to create a 'community with a shared future for mankind'. As such, the Belt and Road (BRI) is officially intended to showcase an open, inclusive form of development which benefits all countries that participate. To criticise BRI, therefore, is to censure a rising China's proposition to the world. Yet there is growing evidence that the infrastructure projects are falling short of Beijing's ideals and stirring controversy in the countries they were intended to assist. Debt sustainability, governance flaws and general opacity are some of the main issues."
July 29 - Bloomberg (Chris Anstey and Narae Kim): "China used to rail against the outsize role of the U.S. dollar. But in a major turnaround, the world's second-biggest economy has started embracing the currency of its larger rival. Chinese companies and banks-and even the government-sold bonds denominated in dollars at a record pace last year, and underwriters expect that growth to continue for years. The roughly half-trillion-dollar market has two key attractions for China's borrowers. For some, it's an easier place to raise cash than at home… For others, dollars are simply easier to use to fund acquisitions and investments abroad. The upshot: There's a large and growing supply of dollar securities that offer exposure to Chinese companies for investors wary of diving into the country's increasingly accessible yuan-denominated domestic debt. The offshore bond market is also set to provide a stake in President Xi Jinping's 'Belt and Road' initiative (BRI)-a grand plan that envisions deepening trade and investment ties with countries across the Eurasian landmass and beyond. Bankers see the BRI as a key source of growth in Chinese dollar bonds."
August 1 - Bloomberg: "Recent optimism in China's debt market will soon be put to the test, with investors able to demand early repayment for as much as 544.7 billion yuan ($80bn) of debt by year-end. The amount of local bonds with put options that hit trigger points in the coming five months comes to almost 1.4 times the tally from January to July… While China's credit markets are still functioning relatively smoothly -- even as corporate defaults run at a record pace -- the worry is that a swathe of repayment demands from puttable bondholders may upset that equilibrium."
July 31 - Bloomberg: "Chinese investors flocked into money-market products at a rate outpacing equities and bonds last quarter, adding to what is already the biggest segment of the nation's mutual fund industry. Mutual funds investing in low-risk, short-term debt instruments grew 5.4% last quarter to 7.7 trillion yuan ($1.1 trillion), compared to the 3.7% increase in bond funds and a drop of 1.3% in equity funds…"
July 31 - New York Times (Chris Buckley): "China's top leader, Xi Jinping, seemed indomitable when lawmakers abolished a term limit on his power early this year. But months later, China has been struck by economic headwinds, a vaccine scandal and trade battles with Washington, emboldening critics in Beijing who are questioning Mr. Xi's sweeping control. Censorship and punishment have muted dissent in China since Mr. Xi came to power. So Xu Zhangrun, a law professor at Tsinghua University in Beijing, took a big risk last week when he delivered the fiercest denunciation yet from a Chinese academic of Mr. Xi's hard-line policies, revival of Communist orthodoxies and adulatory propaganda image. 'People nationwide, including the entire bureaucratic elite, feel once more lost in uncertainty about the direction of the country and about their own personal security, and the rising anxiety has spread into a degree of panic throughout society,' Professor Xu wrote…"
July 29 - Financial Times (Ben Bland): "Andy Chan, a young independence activist, and his Hong Kong National party's tiny band of supporters do not look - or sound - like a serious threat to the territorial integrity of an emerging superpower. So the recent proposal by the Beijing-appointed government in Hong Kong to ban his fledgling organisation on 'national security' grounds looks to some observers like a serious overreaction… But from Beijing's perspective, its intensifying squeeze on opposition groups in semi-autonomous Hong Kong - and its pushback against de facto independent Taiwan - is not only proportionate and justified, but essential. Communist party officials see Taiwan and Hong Kong's democratic values as a direct threat to Beijing's one-party rule - and to its new mission to promote the Chinese authoritarian model of development overseas."
EM Watch:
July 30 - Bloomberg (Natasha Doff): "Here's a reminder of emerging-market fragility as global financial conditions tighten: their dollar burdens are higher than ever and still rising. Credit issued to developing-economy borrowers excluding banks has surged to $3.7 trillion by the end of March, fueled by a 16 percent year-on-year rise in new debt supply, the Bank for International Settlements said on Monday. Close to $500 billion comes from China, by far the biggest single issuer, with African and Middle Eastern nations also rapidly increasing their borrowing. The latest numbers underscore the relentless boom in the dollar credit cycle, even as investors fret over rising borrowing costs and an upswing in the U.S. currency. The premium money managers demand to hold developing-economy dollar bonds over Treasuries rose to the widest since 2016 last month before easing in recent weeks."
August 1 - Reuters (Rodrigo Campos): "Trading in emerging market credit default swaps soared 79.3% to $468 billion in the second quarter of 2018 from $261 billion in the same quarter a year earlier… Trading in emerging market CDS dipped 4.1% from the previous quarter's $488 billion, according to a survey from EMTA, the emerging markets debt-trading and investment industry trade association. It was, however, the second highest quarterly volume in records going back to 2009…"
August 2 - Wall Street Journal (Christopher Whittall): "Turkey's embattled financial system needs foreign investors. Its plunging currency shows only the bravest are choosing to stick around. Turkey has one of the biggest piles of foreign-denominated debt in the developing world, much of which comes due in the next year, and a currency whose dramatic decline makes it ever more expensive to pay off. The lira has lost a quarter of its value this year against the dollar, and took another leg down Wednesday and Thursday after the Trump administration sanctioned two Turkish officials following Ankara's refusal to free an American pastor. Bond yields have exploded higher amid very high inflation and stocks have fallen."
July 30 - Financial Times (Steve Johnson and Chloe Cornish): "Turkish inflation figures released on Friday are likely to provide a reminder why investors were so stunned when the country's central bank left interest rates on hold last week. Economists predict that inflation accelerated to more than 16% in July, a reading that risks putting more pressure on a currency… And while Donald Trump's threat that the US will impose 'large sanctions' over Turkey's prosecution of an American pastor is a new headwind for the lira, investors and analysts say the currency's ailments are both longstanding and more fundamental."
July 29 - Financial Times (Kiran Stacey and Farhan Bokhari): "Pakistan is drawing up plans to seek its largest ever bailout from the IMF, with senior finance officials set to present the option to Imran Khan soon after he takes office. Any loan from the IMF, which officials believe is necessary to resolve the country's escalating foreign reserves crisis, would see the fund impose restrictions on public spending. Such limits would make it difficult for Pakistan's charismatic new leader to fulfil some of his election promises such as building an 'Islamic welfare state'."
August 1 - Reuters (Ori Lewis): "Imran Khan, Pakistan's former cricket captain and newly elected prime minister, is on a sticky wicket. His victory in last week's polls was secured in part on a pledge to ramp up spending on public services. Yet the coffers are empty and a balance of payments crisis looms. Instead of the 'Islamic welfare state' he hoped to create, his aides are forced to ponder the prospect of an IMF deal. Even that safety net may not be at hand. Mike Pompeo, US secretary of state, says Washington will oppose any bailout that pays off Chinese loans on grounds that this would be unfair to US taxpayers. For years, a dispute between China and the west has been simmering over the terms of development financing. Unfortunately for Mr Khan's new government, Pakistan is where it threatens to boil over."
Central Bank Watch:
August 2 - Financial Times (Gavin Jackson and Delphine Strauss): "The Bank of England raised interest rates to their highest level in almost a decade on Thursday, saying recent data vindicated policymakers' view that the first quarter slowdown in UK growth was temporary. Members of the Monetary Policy Committee voted unanimously for a 25 bps increase, taking the BoE's benchmark interest rate to 0.75%... The Bank of England is the third major central bank to meet this week, and has joined the US Federal Reserve in signalling further interest rate rises are on the way."
August 1 - Bloomberg (Ira Dugal): "India's Monetary Policy Committee decided to raise the benchmark interest rate by 25 bps…, while retaining a 'Neutral' monetary policy stance. The committee voted 5-1 to hike the repo rate from 6.25% to 6.5%."
Global Bubble Watch:
August 1 - Bloomberg (Dana El Baltaji): "It's been a slow July for emerging-market bond sales. Borrowers raised $118 billion this month from 981 issues, the least since July 2013… That's because yields for emerging-market debt climbed for six straight months, the longest streak since at least 1998…"
July 31 - Bloomberg (Chikako Mogi): "The day after Haruhiko Kuroda pledged to allow greater swings in Japan's giant bond market while pushing back against rapid increases, traders are putting him to the test. Moves in 10-year government debt futures were so extreme on Wednesday -- a drop of as much as 0.5%, the most in almost two years -- that they triggered an emergency margin call from the clearing house. In the cash market, the yield on benchmark securities rose 6 bps to an 18-month high of 0.12%."
July 30 - Bloomberg (Enda Curran and Alessandro Speciale): "Governments are stepping up just as central banks crawl away from crisis-era settings. While the shift is modest, it suggests more support for a global expansion buffered by trade tensions and bouts of market turbulence. Morgan Stanley estimates that the fiscal deficits in four of the world's biggest economies… will rise to 2.8% of gross domestic product in 2018 and 3% in 2019, from 2.5% last year. President Donald Trump's tax overhaul, the biggest since the Reagan era, helped push U.S. growth to 4.1% in the second quarter, the fastest since 2014. Trade foe China is using tax cuts and infrastructure spending to underpin demand. The European Central Bank estimates the euro region's fiscal stance will be 'mildly expansionary' this year."
July 31 - Bloomberg (Emily Cadman): "Australia's property slump deepened in July, with housing prices falling the most in almost seven years. National dwelling values dropped 0.6% last month -- the biggest fall since September 2011 -- as declines in Sydney and Melbourne accelerated, according to CoreLogic… Prices have now fallen for 10 straight months due to a combination of lending curbs, stretched affordability and reduced investor demand."
July 30 - Reuters (Wayne Cole): "Growth in Australian home loans for investment hit record lows in June as tighter lending standards and hikes in some mortgage rates sucked the life out of the buy-to-let sector, piling further pressure on house prices."
Europe Watch:
August 2 - Financial Times (Adam Samson): "Italian bonds sustained a fresh blow on Thursday, sparking the largest rise in yield since June, during a turbulent week for the global fixed income market. The country's benchmark 10-year bond yield was up 14.2 bps in recent trade to 2.939%. It was the biggest increase since June 21 and brought the yield to the highest level since June 11… On the shorter end of the curve, the two-year yield climbed as high as 1.023% from Wednesday's closing level of 0.783%."
July 31 - Reuters (Kevin Costelloe and Alessandro Speciale): "Italy's economic growth slowed to the weakest pace in almost two years, possibly spelling trouble for the populist government's costly projects. Gross domestic product expanded 0.2% in the three months through June, down from 0.3% in the first quarter…"
July 29 - Reuters (Madeline Chambers): "Support for German Chancellor Angela Merkel's conservative bloc, trying to move beyond a bitter dispute over migrant policy that threatened the coalition, has fallen to its lowest level since 2006, a poll showed on Sunday."
Japan Watch:
July 31 - Bloomberg (Enda Curran): "Bank of Japan Governor Haruhiko Kuroda's policy tweaks have either strengthened the long-running stimulus or mark a stealth 'baby step' toward normalizing policy. Or both? The BOJ on Tuesday made adjustments to two pillars of its policy that could be interpreted as steps toward normalization: It said it would let the 10-year yield rise just a bit higher, to 0.2% from 0.1%, and it cut in half the amount of bank reserves that would face its negative rate of minus 0.1%. On the other hand, it also introduced 'forward guidance,' pledging to keep short- and long-term rates at extremely low levels for an 'extended period of time,' though that's not dramatically different from its long-running pledge… to continue its stimulus program 'as long as it is necessary.'"
July 31 - Reuters (Jamie McGeever): "Not for the first time in the past 20 years, the challenges of global monetary policymaking have been laid bare by the Bank of Japan. By opting not to tighten policy…, as it had looked like it might, the BOJ highlighted how difficult it is for central banks to unwind extraordinary, crisis-era policy before the economy turns, no matter how much they may want to. It was another reminder that when it comes to extraordinary easing measures like QE and zero or negative interest rates, as The Eagles put it in 'Hotel California': 'You can check out any time you like, but you can never leave'."
Fixed Income Bubble Watch:
July 30 - Reuters: "The U.S. Treasury Department on Monday sold $51 billion in three-month debt at interest rate of 2.000 percent, the most it paid dealers and investors at a three-month bill auction in more than a decade…"
August 1 - Bloomberg (Cecile Gutscher and Yakob Peterseil): "Jim Schaeffer has found a glitch in his supply chain -- and reckons it could be an early warning sign that demand in the red-hot leveraged loan market is set to cool. The deputy chief investment officer at Aegon Asset Management was collecting loans to create his firm's next collateralized loan obligation. These are typically stored with a third party, which holds them on its books until there's enough to bundle into a transaction. Yet when Schaeffer called on his usual warehouse providers, they were not keen to take on more exposure. 'The market of warehouse providers is not as receptive,' said Schaeffer, who helps oversee $103 billion of fixed-income assets. 'That pause by warehouse providers is an indication that CLO demand could slow, which could impact the strong technical we have experienced.'"
Leveraged Speculator Watch:
August 2 - Financial Times (Megan Greene): "I was recently informed by the owner of an artificial intelligence fund that markets do not listen to economists any more. Rather than immediately dust off my CV and see what transferable skills I might have, I dug around for evidence of his claim and found there was something to it. A fundamental shift in market structure towards rules-based, passive investing over the past decade means a lot of trading is no longer based on fundamentals. But just because some markets do not pay attention to economists, it does not mean economists should not pay attention to these markets. On the contrary - this shift in market structure could well be a trigger for the next global downturn. The US Federal Reserve is concerned enough that 'Changing Market Structure and Implications for Monetary Policy' is the topic for this year's economic symposium in Jackson Hole."
The re-imposition of currency trading reserve requirements indicates heightened concern in Beijing. Officials likely viewed modest devaluation as a constructive counter to U.S. trade pressures. In no way, however, do they want to face disorderly trading and the risk of a full-fledged currency crisis.
The renminbi rallied 1% on the PBOC move, ending slightly positive for the day (but down for the eighth straight week). Trading strongly prior to the PBOC move, the dollar index reversed into negative territory. Many EM currencies moved sharply on the renminbi rally. The South African rand reversed course and posted a 1.2% gain. The Brazilian real also jumped 1%. Curiously, the Japanese yen gained about 0.5%.
Overnight S&P500 futures, having traded slightly negative, popped higher on the renminbi rally. But EM equities were the bigger beneficiary. Brazil Ibovespa index gained 2.3% Friday. It increasingly appears the fortunes of the renminbi and EM markets are tightly intertwined.
The unfolding trade war is turning more serious. Beyond Friday's currency move, China's Finance Ministry - in measures to "guard its interests" - announced plans for significantly broader retaliation tariffs on U.S. goods.
August 3 - CNBC (Michael Sheetz): "China is preparing to retaliate in the escalating trade war with tariffs on about $60 billion worth of U.S. goods. The import taxes would range in rates from 5% to 25%, China's Ministry of Commerce said… There are four lists of goods, one for each of the rates proposed. Many of the goods are agricultural-related, with others on various metals and chemicals. 'The implementation date of the taxation measures will be subject to the actions of the US, and China reserves the right to continue to introduce other countermeasures,' China's release said… 'Any unilateral threat or blackmail will only lead to intensification of conflicts and damage to the interests of all parties.'"
President Trump had already threatened to place tariffs on $200 billion of Chinese goods if Beijing moved to retaliate on earlier U.S. measures. Shortly after the Chinese retaliatory tariff announcement (and post-U.S. payrolls data), Larry Kudlow, Director of the National Economic Council, appeared on Bloomberg Television.
Bloomberg's Jonathan Ferro: "You've sat across the table with the Chinese many, many times. What is your opinion - your insight - into what is happening to the Chinese economy currently?"
Kudlow: "Well, I'm not an expert. I do try to follow it and it looks to me - you all may disagree - it looks to me like the China economy is declining in growth - it's weakening - almost across the board. And it looks like the People's Bank of China is trying to pump it up by adding high-powered money and new credit and so forth. The currency fall is partly [because] they've stopped defending the yuan. They think it's going to help offset the U.S. efforts to get rid of their unfair trading. Some of the currency fall, though, I think is just money leaving China because it's a lousy investment. And if that continues that will really damage the Chinese economy. If money leaves China - and the currency could be a leading indicator - they're going to be in a heap of trouble. And so I'm going to make the case that they are in a weak economic position - that's not a good place for them to be vis-à-vis the trade negotiations - first point. Second point, they better not underestimate President Trump's determination to follow through on our asks - IP theft is a no-go. Forced transfer of technology - no go. Non-reciprocal trading, on tariffs and non-tariff barriers. The President, he's a trade reformer. We've said many times: "no tariffs, no tariff barriers, no subsidies. We want to see trade reforms." China is not delivering. Their economy is weak; their currency is weak; people leaving the country. Don't underestimate President Trump's determination to follow through. I'm just telling you. I can't speak for the Communist Party in China. I can speak for our President. Do not underestimate his determination to change trading practices on a fair, reciprocal plane."
Ferro: "One thing you can definitely speak to, Larry, is the strategy of the President. It just seems to me the strategy of the administration at the moment is to exert maximum pain on the Chinese economy. Is that the direction of travel for you guys, Larry?"
Kudlow: "I would maybe rephrase it a bit. I think what we're saying is we are serious. And in trade, as you well know, your guests know, negotiations often include the use of tariffs. And the President has said time and time again that targeted tariffs are going to be part of the game plan with China - unless and until they begin to meet our requests, which so far they have not. In fact, in the recent month or so we've had hardly any conversations with them at all. There is some hint now that they may wish to talk, although I can't say that with certainty."
The Shanghai Composite sank another 4.6% this week, increasing y-t-d losses to 17.1%. Meanwhile, the S&P500 gained 0.6%, boosting the S&P500's 2018 return to 7.4%. As a large net importer, the U.S. is seemingly less economically sensitive to a trade war than the Chinese economy. U.S. equities have become immune to trade threats. Announcements that would have previously rattled stocks no longer carry much of a punch. As the market sees it, the administration may bluster, but they surely won't risk jeopardizing the great bull market - especially leading up to the midterms.
As Mr. Kudlow stated rather unequivocally, the administration believes it has a very strong hand to play, while China's hand is feeble - and turning only feebler. They have somewhat of a point. The U.S. economy is booming, and our securities markets remain resilient. Meanwhile, cracks in the Chinese Bubble seem to widen by the week. Beijing is feeling the heat. Yet I see important shortcomings in the administration's analysis.
First, I'll be surprised if hardball tactics work on Beijing. For one, the Chinese recognize Trump administration issues go way beyond unfair trade. Negotiations on trade are but the first salvo - so Beijing must be tough and show unflappable resolve. As they see it, give in now and they'll face an unrelenting Washington power play. Display weakness on trade and the Americans would be emboldened to confront Beijing on the South China Sea or Taiwan. Chinese leadership sees the U.S. as trying to contain China's ascent to their rightful place of global power, influence and prestige.
I also believe the Trump administration is overstating the strength of the hand it's playing. The U.S. economic boom has attained significant momentum. Animal spirits are running hot and there remains a potent inflationary bias throughout the asset markets. But I would argue that the U.S. is today much more exposed to a shift in the global financial backdrop than is appreciated in Washington or by the markets. In my view, the unfolding trade war with China poses a clear and present threat to global finance.
The U.S. boom is built on a foundation of loose finance. Finance has meaningfully tightened globally. I'll reiterate my view that the global Bubble has been pierced at the "periphery" - more specifically, within the emerging markets. There are now serious fissures in China's Bubble, a circumstance exacerbated both by EM fragilities and rising U.S. trade tensions.
In this incipient faltering global Bubble phase, instability at the "periphery" has so far engendered somewhat looser financial conditions in "core" markets. U.S. Treasury yields turned sharply lower following the May EM eruption, reversing what had the potential to evolve into tightened financial conditions. Lower market yields, along with looser conditions more generally, incited a rally and powerful short squeeze in U.S. equities.
A critical question going forward: How will evolving conditions at the global Bubble's "periphery" impact the "core"? Recently, some stabilization at the "periphery" has seen waning safe haven Treasury demand. Treasury yields were back above 3.0% this week, before Friday's rally saw yields decline to 2.95%.
Markets remain at this point comfortable that stress at the "periphery" will continue to bolster the "core." This has been, after all, the case in recent years. After beginning 2016 at 2.27%, China and EM instabilities were behind a drop in Treasury yields through mid-year (as low as 1.36%). After a relatively brief pullback early in the year, U.S. equities disregarded global issues as they rallied for much of 2016. Importantly, loose U.S. financial conditions only loosened further, as global Bubble vulnerabilities had the FOMC sitting on its hands for a year between their initial and second "baby step" rate increases.
There remains a prevalent market view that unfolding global instability will have the Fed winding down "normalization" long before rate increases turn restrictive for the booming U.S. economy and securities markets. Besides, any unfolding bout of global risk aversion would ensure booming international flows into U.S. dollar securities markets.
To be sure, extended periods of loose finance deeply alter market perceptions, dynamics and structure. Years of QE market liquidity backstops fundamentally changed the way market participants view risk. There is today little concern for trouble at the "periphery" gravitating to the "core." After all, the U.S. has been the primary beneficiary during repeated episodes of risk aversion and outflows from China, EM or even periphery Europe, for that matter.
Indeed, markets have been conditioned to view instability at the "periphery" as an opportunity. It's now been a decade since tumult afflicted the "core." Long forgotten is the traditional dynamic where risk aversion at the "periphery" commences a process of de-risking and de-leveraging - with expanding market illiquidity and contagion. This old market problem was seemingly nullified by activist central bankers.
Well, I believe the current backdrop creates extraordinary risk for a (surprising) reemergence of "Periphery to Core Crisis Dynamics". It's my view that massive global QE measures have for years been responsible for nipping de-risking/de-leveraging dynamics in the bud. The overabundance of cheap global finance ensured a surfeit of market liquidity that would readily accommodate incipient de-risking/de-leveraging at the "periphery." In short, a global "system" awash in "money" ensured de-leveraging dynamics never attained momentum. Contagion risk stopped being an issue - quite a boon for global leveraged speculation. Moreover, even the mildest "risk off" dynamic at the "periphery" would ensure waves of inbound liquidity for the "core." Latent fragilities at the "periphery" were kept under wraps, as global central bankers dragged their heels when contemplating the start of policy normalization.
An analyst on Bloomberg Television made the important point that global QE is today in the neighborhood of $25 billion monthly, down from $125 billion one year ago. Global QE will likely turn negative by year-end. This, I believe, significantly increases the likelihood of an unanticipated return of a destabilizing global contagion dynamic. Rather than instability at the "periphery" doing its usual handiwork to buoy Bubbles at the "core," de-risking/de-leveraging dynamics increasingly have the potential to attain sufficient momentum to negatively impact the "core."
The global liquidity backdrop is in the process of profound - if not yet obviously discernable - change. EM is increasingly vulnerable to a destabilizing bout of de-leveraging in a world of waning liquidity. Thus far, the faltering EM Bubble has incited flows to U.S. Bubble markets. However, an escalation of the unfolding EM crisis is at heightened risk of inciting a very problematic global de-leveraging - a "risk off" backdrop that would risk piercing vulnerable Bubbles even at the "core." The consensus bullish view - holding EM as a buying opportunity and the U.S. as the mighty pillar of growth and stability - could prove dangerously complacent.
I believe there are great latent fragilities associated with the "Periphery to Core Crisis Dynamic." Distorted markets have over years been conditioned to disregard such risk. I'll presume the administration is simply oblivious, believing it's deftly playing a hand of robust U.S. financial and economic systems. With such a competitive advantage, in their minds there's never been a better opportunity to play hardball and put Beijing in its place.
It's worth noting that 10-year Treasury yields declined four bps Friday. The Japanese yen (up 0.37%) also enjoyed a safe haven bid. Treasuries and the yen seemed to take a different view of developments than U.S. equities.
Friday afternoon Bloomberg headline: "Tit-For-Tat Becomes the Norm as U.S., China Dig In for Trade War." The odds are not small that this Game of Chicken goes unresolved for a while. Clearly, it would be uncharacteristic of President Trump to back down. At the same time, President Xi has shown zero tolerance for any sign of weakness. Increasingly, Beijing is being very publicly backed into a corner (Bloomberg headline: "U.S.'s Kudlow Trash Talks China Calling It 'Lousy Investment'"). Difficult to see China responding cordially.
"Trash Talking" China a few hours after the PBOC is compelled to intervene to bolster the flagging renminbi leaves me uncomfortable. There's a problematic scenario that doesn't seem all that improbable at this point: China faces increased financial instability, including capital flight and de-risking/de-leveraging. The PBOC becomes trapped in the dreadful EM dynamic of bolstering system liquidity in the face of mounting risk of a full-fledged currency crisis. Global markets fret the imposition of Chinese capital controls.
Meanwhile, China instability and trade fears see EM markets take another leg lower, with particular market concern for the highly levered Asian economies. De-risking/de-leveraging dynamics attain self-reinforcing momentum, as contagion effects engulf the global "periphery." Fears of global financial fragility and economic vulnerability see risk aversion begin to gravitate toward the "core." Fears of EM central bank and Chinese selling of U.S. Treasuries overwhelm safe haven buying, as de-risking/de-leveraging dynamics see a widening of Credit spreads and illiquidity begin to impact "core" fixed-income markets.
In such a problematic global scenario, I ponder whether Beijing might perceive it's playing with a relatively stronger hand than their U.S. adversary. Meanwhile, contagion effects would set their sights on the "periphery of the core." This just doesn't seem all that far-fetched.
It's worth noting that Italian yields jumped another 18 bps points this week to 2.93% (Greek yields up 25 bps). And while the Bank of Japan sought to comfort markets with "easy forever," the badly-distorted Japanese bond market is indicating instability. Mainly, it's a problematic market and geopolitical backdrop pointing increasingly to "Periphery to Core Crisis Dynamics." China, EM and the world are now just a disorderly collapse of the renminbi away from, in the words of Mr. Kudlow, "a heap of trouble."
For the Week:
The S&P500 gained 0.8% (up 6.2% y-t-d), while the Dow was little changed (up 3.0%). The Utilities rose 1.2% (up 0.9%). The Banks added 0.7% (up 3.4%), while the Broker/Dealers lost 1.7% (up 3.0%). The Transports jumped 1.3% (up 4.6%). The S&P 400 Midcaps rose 1.3% (up 5.2%), and the small cap Russell 2000 increased 0.6% (up 9.0%). The Nasdaq100 advanced 1.4% (up 15.6%). The Semiconductors gained 0.7% (up 10.3%). The Biotechs added 0.5% (up 19.8%). With bullion down $10, the HUI gold index slipped 0.6% (down 14.4%).
Three-month Treasury bill rates ended the week at 1.97%. Two-year government yields declined three bps to 2.64% (up 76bps y-t-d). Five-year T-note yields dipped three bps to 2.81% (up 61bps). Ten-year Treasury yields slipped one basis point to 2.95% (up 54bps). Long bond yields added a basis point to 3.09% (up 35bps). Benchmark Fannie Mae MBS yields declined two bps to 3.66% (up 71bps).
Greek 10-year yields jumped 25 bps to 4.06% (down 1bp y-t-d). Ten-year Portuguese yields rose six bps to 1.78% (down 16bps). Italian 10-year yields surged 18 bps to 2.93% (up 91bps). Spain's 10-year yields rose five bps to 1.42% (down 15bps). German bund yields were little changed at 0.41% (down 2bps). French yields rose four bps to 0.74% (down 5bps). The French to German 10-year bond spread widened four to 33 bps. U.K. 10-year gilt yields gained five bps to 1.33% (up 14bps). U.K.'s FTSE equities index declined 0.5% (down 0.4%).
Japan's Nikkei 225 equities index fell 0.8% (down 1.1% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.11% (up 6bps). France's CAC40 slipped 0.6% (up 3.1%). The German DAX equities index dropped 1.9% (down 2.3%). Spain's IBEX 35 equities index fell 1.3% (down 3.0%). Italy's FTSE MIB index sank 1.7% (down 1.2%). EM equities were mixed. Brazil's Bovespa index jumped 1.9% (up 6.5%), while Mexico's Bolsa declined 0.7% (down 0.1%). South Korea's Kospi index slipped 0.3% (down 7.3%). India’s Sensex equities index added 0.6% (up 10.3%). China’s Shanghai Exchange sank 4.6% (down 17.1%). Turkey's Borsa Istanbul National 100 index was little changed (down 17.1%). Russia's MICEX equities index added 0.2% (up 8.9%).
Investment-grade bond funds saw inflows of $1.211 billion, and junk bond funds had inflows of $37 million (from Lipper).
Freddie Mac 30-year fixed mortgage rates rose six bps to 4.60% (up 67bps y-o-y). Fifteen-year rates jumped six bps to 4.08% (up 90bps). Five-year hybrid ARM rates gained six bps to 3.93% (up 78bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up five bps to 4.63% (up 58bps).
Federal Reserve Credit last week declined $16.8bn to $4.232 TN. Over the past year, Fed Credit contracted $194bn, or 4.4%. Fed Credit inflated $1.422 TN, or 51%, over the past 300 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt jumped $22.4bn last week to $3.434 TN. "Custody holdings" were up $101bn y-o-y, or 3.0%.
M2 (narrow) "money" supply added $7.8bn last week to a record $14.156 TN. "Narrow money" gained $518bn, or 3.8%, over the past year. For the week, Currency increased $1.8bn. Total Checkable Deposits slipped $2.0bn, while Savings Deposits gained $4.3bn. Small Time Deposits increased $2.1bn. Retail Money Funds gained $1.3bn.
Total money market fund assets increased $8.6bn to $2.851 TN. Money Funds gained $191bn y-o-y, or 7.2%.
Total Commercial Paper declined $1.4bn to $1.067 TN. CP gained $97bn y-o-y, or 10.0%.
Currency Watch:
August 3 - Financial Times (Gabriel Wildau): "China's central bank has raised the cost of betting on renminbi depreciation, a move intended to stabilise its currency following a sharp fall in recent weeks. The People's Bank of China late on Friday announced the re-imposition of a 20 per cent reserve requirement on banks that sell dollars to clients using currency forwards. Banks will pass the cost of this requirement on to their clients, raising the cost of betting on renminbi weakness. The decision late in Beijing on Friday sparked a rally in the offshore yuan, which trades at major hubs outside of mainland China."
The U.S. dollar index added 0.6% to 95.194 (up 3.3% y-t-d). For the week on the upside, the Canadian dollar increased 0.5%, the Mexican peso 0.4%, and the Brazilian real 0.1%. For the week on the downside, the South African rand declined 1.1%, the Swedish krona 1.0%, the South Korean won 0.9%, the Norwegian krone 0.8%, the British pound 0.8%, the euro 0.8%, the New Zealand dollar 0.7%, the Singapore dollar 0.3% and the Japanese yen 0.2%. The Chinese renminbi declined 0.20% versus the dollar this week (down 4.69% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index declined 0.6% (up 4.4% y-t-d). Spot Gold lost 0.8% to $1,214 (down 6.9%). Silver slipped 0.2% to $15.462 (down 9.8%). Crude declined 20 cents to $68.49 (up 13.4%). Gasoline dropped 4.5% (up 15%), while Natural Gas gained 2.6% (down 3%). Copper fell 1.4% (down 16%). Wheat surged 5.4% (up 36%). Corn gained 2.1% (up 10%).
Trump Administration Watch:
August 1 - Bloomberg (Bob Davis and Lingling Wei): "The U.S. turned up the heat… on China, with the Trump administration threatening to more than double proposed tariffs on imports while Congress passed a defense bill designed to restrict Beijing's economic and military activity. The moves come as Beijing and Washington have failed to ease an escalating trade dispute, prompting the administration to seek additional leverage. The administration, which has already affixed tariffs on billions of dollars in Chinese imports, said it would consider more than doubling proposed tariffs on a further $200 billion worth of Chinese goods to 25%, up from an original 10%. Meantime, the Senate approved a defense-policy bill that both tightens U.S. national-security reviews of Chinese corporate deals and revamps export controls over which U.S. technologies can be sent abroad."
August 1 - Bloomberg (Kathleen Hunter): "When it comes to coaxing China back to the trade negotiation table, the Trump administration is favoring the stick over the carrot. And China is tired of it… In a sign the standoff is reverberating in China, the Politburo signaled yesterday that policy makers will focus more on supporting economic growth and noted 'blackmailing and pressuring' will never work."
July 30 - Reuters (Lesley Wroughton and David Brunnstrom): "U.S. Secretary of State Mike Pompeo announced $113 million in new technology, energy and infrastructure initiatives in emerging Asia…, at a time when China is pouring billions of dollars in investments into the region."
August 1 - Wall Street Journal (Kate O'Keeffe and Siobhan Hughes): "Congress passed a defense-policy bill that some lawmakers say is tougher on China than any in history, as a bipartisan movement to confront Beijing gathers steam. The measure, an annual policy bill that authorizes $716 billion in total defense spending for the coming fiscal year, seeks to counter a range of Chinese government policies, including increased military activity in the South China Sea, the pursuit of cutting-edge U.S. technology and the spread of Communist Party propaganda at American institutions."
August 1 - Wall Street Journal (Josh Zumbrun and Daniel Kruger): "Rising federal budget deficits are boosting the U.S. Treasury's borrowing and could restrain a fast-growing economy as the cost of credit rises, too. The yield of 10-year Treasury notes climbed above 3% for the first time since June, as the Treasury Department announced it would increase auctions of U.S. debt by an additional $30 billion over the next three months… In all, the Treasury plans to borrow $329 billion from July through September-up $56 billion from the agency's April estimate-in addition to $440 billion in October through December. The figures are 63% higher than what the Treasury borrowed during the same six-month period last year."
July 29 - The Hill (Lloyd Green): "The economy hums while storm clouds darken the White House. Welcome to the final 100 days before the 2018 midterms. Even as the economy is experiencing is highest rate of growth since 2014, the electorate is angry. Donald Trump has taken command of center stage, and the public is not thrilled with what it sees. When Trump is underwater in Wisconsin, Michigan, and Minnesota, it is time for Republicans to worry. The question is how large a bite does Trump extract from Republican candidates this fall. Real Clear Politics puts the Democrats lead on the generic ballot at over 7 points, while FiveThirtyEight pegs the Democrats lead a tick higher. No, those numbers do not reflect a blue wave. But at the same time, they provide Republicans with little room for error, and even less reason for comfort."
July 29 - Reuters (Lindsay Dunsmuir): "U.S. Treasury Secretary Steven Mnuchin said… that he believes the quickening pace of growth in the nation's economy in the second quarter will persist for the next few years. 'I don't think this is a one- or two-year phenomenon. I think we definitely are in a period of four or five years of sustained 3% growth at least,' Mnuchin said…"
July 27 - Reuters (Tucker Higgins): "President Donald Trump told talk show host Sean Hannity that he could imagine the economy growing at 8 or 9% on Friday - just hours after the Bureau of Economic Analysis showed that the GDP rose 4.1% in the second quarter. The president said that the gains could come from cutting the nation's trade deficit 'in half.' 'If I cut it in half, right there we will pick up three or four points,' Trump said… 'We'd be at eight or nine' percent, he added."
August 2 - Bloomberg (Ryan Beene, John Lippert and Jennifer A. Dlouhy): "The Trump administration, taking aim at one of former President Barack Obama's signature environmental achievements, is proposing to suspend required increases in vehicle fuel economy after 2020 and unwind California's authority to limit tailpipe greenhouse gas emissions in the state. The Environmental Protection Agency and National Highway Traffic Safety Administration jointly proposed on Thursday to cap fuel economy requirements at a fleet average of 37 mpg starting in 2020. Under the Obama plan, the fleetwide fuel economy would have risen gradually to roughly 47 mpg by 2025"
Federal Reserve Watch:
August 1 - Bloomberg (Cragi Torres): "Federal Reserve officials left U.S. interest rates unchanged and stuck with a plan to gradually lift borrowing costs amid 'strong' growth that backs bets for a hike in September. Economic activity has been 'rising at a strong rate,' and unemployment 'has stayed low,' the Federal Open Market Committee said… 'Household spending and business fixed investment have grown strongly.' While leaving rates on hold as expected, the committee repeated guidance for 'further gradual increases' in its policy benchmark, lining up September's FOMC meeting for the third hike of the year."
U.S. Bubble Watch:
August 1 - Bloomberg (Liz Capo McCormick and Saleha Mohsin): "The U.S. Treasury Department will raise the amount of long-term debt it sells to $78 billion this quarter while launching a new two-month bill. It also will lean more heavily on maturities out to five years. In its quarterly refunding announcement on Wednesday, the Treasury boosted the auction sizes of coupon-bearing and floating-rate debt from $73 billion the previous quarter. It was the third consecutive quarterly increase, as President Donald Trump's fiscal policies widen the nation's budget deficit."
July 30 - Wall Street Journal (Sarah Krouse): "For the past century, a public pension was an ironclad promise. Whatever else happened, retired policemen and firefighters and teachers would be paid. That is no longer the case. Many cities and states can no longer afford the unsustainable retirement promises made to millions of public workers over many years. By one estimate they are short $4 trillion… Certain pension funds face the prospect of insolvency unless governments increase taxes, divert funds or persuade workers to relinquish money they are owed. It is increasingly likely that retirees, as well as new workers, will be forced to take deeper benefit cuts."
August 2 - CNBC (Fred Imbert): "Private payrolls in the U.S. increased by more than expected last month as companies get a boost from lower corporate taxes, ADP and Moody's Analytics said… Jobs in the U.S. increased by 219,000 in July, while economists… expected a gain of 185,000. July's job gains were the best since February, when 241,000 jobs were added. Jobs growth for the previous month was also revised up to 181,000 from 177,000. 'The job market is booming, impacted by the deficit-financed tax cuts and increases in government spending,' said Mark Zandi, chief economist of Moody's Analytics…"
July 31 - Wall Street Journal (Laura Kusisto): "Home-price gains held steady in May, as a lack of sale inventory helped prevent a meaningful slowdown in price growth despite rising mortgage rates and growing affordability challenges. The S&P CoreLogic Case-Shiller National Home Price Index, which measures average home prices in major metropolitan areas across the nation, rose 6.4% in May, identical to the year-over-year increase reported in April. An index of 10 cities gained 6.1% over the year, down from 6.4% the prior month. The 20-city index gained 6.5%, down from 6.7% the previous month."
August 1 - CNBC (Diana Olick): "The long list of housing headwinds is finally taking its toll on potential buyers. Housing demand fell 9.6% in June, compared with June 2017, according… Redfin. That is the largest decline since April 2016. Red-hot home prices, rising mortgage interest rates, very few listings at the entry level and a high rate of student loan debt have weighed on buyers for a while, but a strong economy and growing employment had mitigated those factors. Now, however, a market stalemate is developing as rates and prices continue to rise, further weakening affordability."
July 31 - Reuters (Lucia Mutikani): "U.S. consumer spending increased solidly in June as households spent more at restaurants and on accommodation, building a strong base for the economy heading into the third quarter, while inflation rose moderately… The Commerce Department said consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.4% last month. Data for May was revised up to show consumer spending advancing 0.5% instead of the previously reported 0.2% gain."
July 29 - Wall Street Journal (Kelsey Gee): "Americans looking to land a first job or break into a dream career face their best odds of success in years. Employers say they are abandoning preferences for college degrees and specific skill sets to speed up hiring and broaden the pool of job candidates. Many companies added requirements to job postings after the recession, when millions were out of work and human-resources departments were stacked with résumés… 'Candidates have so many options today,' said Amy Glaser, senior vice president of Adecco Group, a staffing agency with about 10,000 company clients in search of employees. 'If a company requires a degree, two rounds of interviews and a test for hard skills, candidates can go down the street to another employer who will make them an offer that day.'"
July 31 - Wall Street Journal (Laura Kusisto): "The construction business is having trouble attracting young job seekers. The share of workers in the sector who are 24 years old or younger has declined in 48 states since the last housing boom in 2005, according to… Issi Romem, chief economist at construction data firm BuildZoom. Nationally, the share of young construction workers declined nearly 30% from 2005 through 2016… While there's no single reason why younger folks are losing interest in a job that is generally well-paid and doesn't require a college education, their indifference is exacerbating a labor shortage that has meant fewer homes being built and rising prices, possibly for years to come."
July 31 - Reuters (Richa Naidu and Martinne Geller): "With toilet roll and tissues swept up in an escalating international trade row, it's not just Procter & Gamble's Charmin that's going to get the squeeze. Higher prices in the wake of possible tariffs would exacerbate what is already mounting pressure on consumer product company profits from soaring costs from pulp, a main ingredient in tissues, diapers and sanitary towels. P&G, the purveyor of Charmin toilet paper, Bounty towels and Puffs tissues, said on Tuesday that it had recently begun notifying retailers of a 5% average price increase…"
July 29 - Reuters (Patrick McGroaty and Bob Tita): "Consumers are starting to see higher prices for recreational vehicles, soda, beer and other goods that now cost more to make as a result of recent tariffs on metals and parts. When costs rise, manufacturers generally must choose whether to absorb bigger bills for aluminum, steel and imported components, or pass the increases along to customers. In recent days many manufacturers, including Coca-Cola Co. and Polaris Industries Inc., have said they plan to raise prices. U.S. steel and aluminum prices are up 33% and 11%, respectively, since the start of the year…"
July 31 - CNBC (Tae Kim): "Morgan Stanley believes the dramatic drops in some high-flying technology stocks this month is further evidence the stock market will go lower. 'The weaker earnings beat from several Tech leaders and outright misses from Netflix and Facebook were simply additional support for our [defensive] call,' chief U.S. equity strategist Michael Wilson said… And the average investor could suffer even more this time, Wilson said. 'We think a coming correction will be biggest since February, although it could very well have more of a negative impact on the average portfolio if it is centered on Tech, Discretionary, and small caps,' the note said."
July 31 - Financial Times (John Plender): "If value investors have been on the rack in recent times, their experience has stemmed, at least in part, from inadequate exposure to Faang stocks - the fabled Facebook, Amazon, Apple, Netflix and Google/Alphabet. Since last Thursday's spectacular $120bn fall in Facebook's market capitalisation we have witnessed a great tech sell-off that may point to a watershed in the value versus passive investment saga. Yet by now, as in the tech bubble of the late 1990s, many value investors (who buy stocks that they think are undervalued) have thrown in the towel and bought into the Faangs. So is this a rerun of the dot.com story?"
July 30 - Wall Street Journal (Liz Hoffman): "In December 2008, with the financial world in a tailspin, Goldman Sachs… issued stock options to 350 of its top executives and board members. By the time they expire later this year, these options will have earned their owners-most of whom left Goldman years ago-at least $3 billion… The windfall shows how far Wall Street firms, or at least their stock prices, have come since the crisis. Goldman is less profitable than it was a decade ago, but its share price last year surpassed the previous high set in 2006. Shares of JPMorgan… continue to hit new heights."
August 1 - Bloomberg (Oshrat Carmiel and Jeremy Hill): "This has become a summer of discontent for those trying to sell their homes in New York City's leafy suburbs -- in no small part because of the Trump administration. In affluent enclaves in Westchester County, New Jersey and Connecticut, a federal cap on state and local property tax deductions has begun to bite hard. Longtime homeowners who dreamed of offloading their empty nests are finding their plans complicated by the tax bill, as would-be buyers hold back… The issue is especially acute in areas of Westchester, the county with the nation's highest-property taxes, where annual bills of $35,000, $50,000 and more are not uncommon."
China Watch:
August 2 - CNBC (Fred Imbert): "China is not taking the United States' latest tariff threat lightly and vows to hit back if the U.S. moves forward. 'China is fully prepared and will have to retaliate to defend the nation's dignity and the interests of the people, defend free trade and the multilateral system, and defend the common interests of all countries,' the Chinese Ministry of Commerce said in a statement… 'The carrot and stick tactic won't work.' The ministry's remarks came after President Donald Trump instructed U.S. Trade Representative Robert Lighthizer to consider raising proposed tariffs on $200 billion in Chinese goods to 25% from 10%."
August 1 - Financial Times (Gabriel Wildau): "China's leadership has signalled a shift towards supporting short-term economic growth following a nearly two-year battle against excessive debt, just as a trade war with the US also threatens the economy. Communist party leaders agreed at a politburo meeting to adjusted the official monetary policy stance from 'prudent and neutral' to merely 'prudent' - a clear move towards loosening. The politburo communiqué also cited 'maintaining steady and healthy economic growth' as the number one task. Some critics warn that the country is resorting to its old playbook of debt-fuelled spending to ease a slide in growth - an approach that could worsen the long-term risks that the deleveraging campaign had sought to tame. Tuesday's politburo's declaration follows a series of new growth-supporting measures announced over the past fortnight, from tax cuts and new infrastructure spending to central-bank cash injections and a softening of regulations designed to curb shadow banking."
July 31 - Wall Street Journal: "The bad economic numbers keep coming from China. Second-quarter GDP growth slowed to 6.7%, due in part to a record low increase in fixed-asset investment. On Tuesday the manufacturing purchasing managers' index, a leading indicator, hit a five-month low, and on Monday the yuan fell to a 13-month low against the U.S. dollar. Chinese stocks have lost one-fifth of their value since January and are near a two-year low. All these lows have caused some in Washington to conclude that Beijing is losing the trade war. With the grim statistics, the thinking goes, Chinese leaders will have to make concessions and cut a deal quickly."
August 1 - Bloomberg: "China's central bank has started actively encouraging banks to extend more credit by taking a softer stance on loan quotas, people familiar…said, as authorities ratchet up efforts to bolster a cooling economy. The People's Bank of China has delivered the message via so-called window guidance… The central bank hasn't provided specific targets, but it indicated a willingness to be more flexible on banks' government-imposed lending caps, the people said."
July 30 - Financial Times (Gabriel Wildau and Tom Mitchell): "Foreigners seeking 'strategic' stakes in listed Chinese companies could face broader national security reviews under new rules drafted by China's commerce ministry, a sign Beijing is preparing to hit back at western efforts to curb Chinese acquisitions of sensitive technologies. The proposed amendments to existing investment rules… expand the universe of foreign investments covered by China's formal national security review process."
August 2 - Bloomberg: "China is building a very 21st century empire-one where trade and debt lead the way, not armadas and boots on the ground. If President Xi Jinping's ambitions become a reality, Beijing will cement its position at the center of a new world economic order spanning more than half the globe. Already, China has extended its influence far beyond that of the Tang Dynasty's golden age more than a millennium ago. The most tangible manifestation of Xi's designs is the new Silk Road he first proposed in 2013. The enterprise morphed into the 'Belt and Road' initiative, a mix of foreign policy, economic strategy, and charm offensive that, nurtured by a torrent of Chinese money, is rebalancing global political and economic alliances. Xi calls the grand initiative 'a road for peace.' Other world powers such as Japan and the U.S. remain skeptical about its stated aims and even more worried about unspoken ones, especially those hinting at military expansion."
July 29 - Financial Times: "China's Belt and Road Initiative is commonly seen as a programme to fund and build infrastructure in some 78 countries around the globe. It is also Beijing's bid to reshape the world by offering an alternative developmental vision to the US-led world order. In the Chinese context, it is the linchpin of President Xi Jinping's grand design to create a 'community with a shared future for mankind'. As such, the Belt and Road (BRI) is officially intended to showcase an open, inclusive form of development which benefits all countries that participate. To criticise BRI, therefore, is to censure a rising China's proposition to the world. Yet there is growing evidence that the infrastructure projects are falling short of Beijing's ideals and stirring controversy in the countries they were intended to assist. Debt sustainability, governance flaws and general opacity are some of the main issues."
July 29 - Bloomberg (Chris Anstey and Narae Kim): "China used to rail against the outsize role of the U.S. dollar. But in a major turnaround, the world's second-biggest economy has started embracing the currency of its larger rival. Chinese companies and banks-and even the government-sold bonds denominated in dollars at a record pace last year, and underwriters expect that growth to continue for years. The roughly half-trillion-dollar market has two key attractions for China's borrowers. For some, it's an easier place to raise cash than at home… For others, dollars are simply easier to use to fund acquisitions and investments abroad. The upshot: There's a large and growing supply of dollar securities that offer exposure to Chinese companies for investors wary of diving into the country's increasingly accessible yuan-denominated domestic debt. The offshore bond market is also set to provide a stake in President Xi Jinping's 'Belt and Road' initiative (BRI)-a grand plan that envisions deepening trade and investment ties with countries across the Eurasian landmass and beyond. Bankers see the BRI as a key source of growth in Chinese dollar bonds."
August 1 - Bloomberg: "Recent optimism in China's debt market will soon be put to the test, with investors able to demand early repayment for as much as 544.7 billion yuan ($80bn) of debt by year-end. The amount of local bonds with put options that hit trigger points in the coming five months comes to almost 1.4 times the tally from January to July… While China's credit markets are still functioning relatively smoothly -- even as corporate defaults run at a record pace -- the worry is that a swathe of repayment demands from puttable bondholders may upset that equilibrium."
July 31 - Bloomberg: "Chinese investors flocked into money-market products at a rate outpacing equities and bonds last quarter, adding to what is already the biggest segment of the nation's mutual fund industry. Mutual funds investing in low-risk, short-term debt instruments grew 5.4% last quarter to 7.7 trillion yuan ($1.1 trillion), compared to the 3.7% increase in bond funds and a drop of 1.3% in equity funds…"
July 31 - New York Times (Chris Buckley): "China's top leader, Xi Jinping, seemed indomitable when lawmakers abolished a term limit on his power early this year. But months later, China has been struck by economic headwinds, a vaccine scandal and trade battles with Washington, emboldening critics in Beijing who are questioning Mr. Xi's sweeping control. Censorship and punishment have muted dissent in China since Mr. Xi came to power. So Xu Zhangrun, a law professor at Tsinghua University in Beijing, took a big risk last week when he delivered the fiercest denunciation yet from a Chinese academic of Mr. Xi's hard-line policies, revival of Communist orthodoxies and adulatory propaganda image. 'People nationwide, including the entire bureaucratic elite, feel once more lost in uncertainty about the direction of the country and about their own personal security, and the rising anxiety has spread into a degree of panic throughout society,' Professor Xu wrote…"
July 29 - Financial Times (Ben Bland): "Andy Chan, a young independence activist, and his Hong Kong National party's tiny band of supporters do not look - or sound - like a serious threat to the territorial integrity of an emerging superpower. So the recent proposal by the Beijing-appointed government in Hong Kong to ban his fledgling organisation on 'national security' grounds looks to some observers like a serious overreaction… But from Beijing's perspective, its intensifying squeeze on opposition groups in semi-autonomous Hong Kong - and its pushback against de facto independent Taiwan - is not only proportionate and justified, but essential. Communist party officials see Taiwan and Hong Kong's democratic values as a direct threat to Beijing's one-party rule - and to its new mission to promote the Chinese authoritarian model of development overseas."
EM Watch:
July 30 - Bloomberg (Natasha Doff): "Here's a reminder of emerging-market fragility as global financial conditions tighten: their dollar burdens are higher than ever and still rising. Credit issued to developing-economy borrowers excluding banks has surged to $3.7 trillion by the end of March, fueled by a 16 percent year-on-year rise in new debt supply, the Bank for International Settlements said on Monday. Close to $500 billion comes from China, by far the biggest single issuer, with African and Middle Eastern nations also rapidly increasing their borrowing. The latest numbers underscore the relentless boom in the dollar credit cycle, even as investors fret over rising borrowing costs and an upswing in the U.S. currency. The premium money managers demand to hold developing-economy dollar bonds over Treasuries rose to the widest since 2016 last month before easing in recent weeks."
August 1 - Reuters (Rodrigo Campos): "Trading in emerging market credit default swaps soared 79.3% to $468 billion in the second quarter of 2018 from $261 billion in the same quarter a year earlier… Trading in emerging market CDS dipped 4.1% from the previous quarter's $488 billion, according to a survey from EMTA, the emerging markets debt-trading and investment industry trade association. It was, however, the second highest quarterly volume in records going back to 2009…"
August 2 - Wall Street Journal (Christopher Whittall): "Turkey's embattled financial system needs foreign investors. Its plunging currency shows only the bravest are choosing to stick around. Turkey has one of the biggest piles of foreign-denominated debt in the developing world, much of which comes due in the next year, and a currency whose dramatic decline makes it ever more expensive to pay off. The lira has lost a quarter of its value this year against the dollar, and took another leg down Wednesday and Thursday after the Trump administration sanctioned two Turkish officials following Ankara's refusal to free an American pastor. Bond yields have exploded higher amid very high inflation and stocks have fallen."
July 30 - Financial Times (Steve Johnson and Chloe Cornish): "Turkish inflation figures released on Friday are likely to provide a reminder why investors were so stunned when the country's central bank left interest rates on hold last week. Economists predict that inflation accelerated to more than 16% in July, a reading that risks putting more pressure on a currency… And while Donald Trump's threat that the US will impose 'large sanctions' over Turkey's prosecution of an American pastor is a new headwind for the lira, investors and analysts say the currency's ailments are both longstanding and more fundamental."
July 29 - Financial Times (Kiran Stacey and Farhan Bokhari): "Pakistan is drawing up plans to seek its largest ever bailout from the IMF, with senior finance officials set to present the option to Imran Khan soon after he takes office. Any loan from the IMF, which officials believe is necessary to resolve the country's escalating foreign reserves crisis, would see the fund impose restrictions on public spending. Such limits would make it difficult for Pakistan's charismatic new leader to fulfil some of his election promises such as building an 'Islamic welfare state'."
August 1 - Reuters (Ori Lewis): "Imran Khan, Pakistan's former cricket captain and newly elected prime minister, is on a sticky wicket. His victory in last week's polls was secured in part on a pledge to ramp up spending on public services. Yet the coffers are empty and a balance of payments crisis looms. Instead of the 'Islamic welfare state' he hoped to create, his aides are forced to ponder the prospect of an IMF deal. Even that safety net may not be at hand. Mike Pompeo, US secretary of state, says Washington will oppose any bailout that pays off Chinese loans on grounds that this would be unfair to US taxpayers. For years, a dispute between China and the west has been simmering over the terms of development financing. Unfortunately for Mr Khan's new government, Pakistan is where it threatens to boil over."
Central Bank Watch:
August 2 - Financial Times (Gavin Jackson and Delphine Strauss): "The Bank of England raised interest rates to their highest level in almost a decade on Thursday, saying recent data vindicated policymakers' view that the first quarter slowdown in UK growth was temporary. Members of the Monetary Policy Committee voted unanimously for a 25 bps increase, taking the BoE's benchmark interest rate to 0.75%... The Bank of England is the third major central bank to meet this week, and has joined the US Federal Reserve in signalling further interest rate rises are on the way."
August 1 - Bloomberg (Ira Dugal): "India's Monetary Policy Committee decided to raise the benchmark interest rate by 25 bps…, while retaining a 'Neutral' monetary policy stance. The committee voted 5-1 to hike the repo rate from 6.25% to 6.5%."
Global Bubble Watch:
August 1 - Bloomberg (Dana El Baltaji): "It's been a slow July for emerging-market bond sales. Borrowers raised $118 billion this month from 981 issues, the least since July 2013… That's because yields for emerging-market debt climbed for six straight months, the longest streak since at least 1998…"
July 31 - Bloomberg (Chikako Mogi): "The day after Haruhiko Kuroda pledged to allow greater swings in Japan's giant bond market while pushing back against rapid increases, traders are putting him to the test. Moves in 10-year government debt futures were so extreme on Wednesday -- a drop of as much as 0.5%, the most in almost two years -- that they triggered an emergency margin call from the clearing house. In the cash market, the yield on benchmark securities rose 6 bps to an 18-month high of 0.12%."
July 30 - Bloomberg (Enda Curran and Alessandro Speciale): "Governments are stepping up just as central banks crawl away from crisis-era settings. While the shift is modest, it suggests more support for a global expansion buffered by trade tensions and bouts of market turbulence. Morgan Stanley estimates that the fiscal deficits in four of the world's biggest economies… will rise to 2.8% of gross domestic product in 2018 and 3% in 2019, from 2.5% last year. President Donald Trump's tax overhaul, the biggest since the Reagan era, helped push U.S. growth to 4.1% in the second quarter, the fastest since 2014. Trade foe China is using tax cuts and infrastructure spending to underpin demand. The European Central Bank estimates the euro region's fiscal stance will be 'mildly expansionary' this year."
July 31 - Bloomberg (Emily Cadman): "Australia's property slump deepened in July, with housing prices falling the most in almost seven years. National dwelling values dropped 0.6% last month -- the biggest fall since September 2011 -- as declines in Sydney and Melbourne accelerated, according to CoreLogic… Prices have now fallen for 10 straight months due to a combination of lending curbs, stretched affordability and reduced investor demand."
July 30 - Reuters (Wayne Cole): "Growth in Australian home loans for investment hit record lows in June as tighter lending standards and hikes in some mortgage rates sucked the life out of the buy-to-let sector, piling further pressure on house prices."
Europe Watch:
August 2 - Financial Times (Adam Samson): "Italian bonds sustained a fresh blow on Thursday, sparking the largest rise in yield since June, during a turbulent week for the global fixed income market. The country's benchmark 10-year bond yield was up 14.2 bps in recent trade to 2.939%. It was the biggest increase since June 21 and brought the yield to the highest level since June 11… On the shorter end of the curve, the two-year yield climbed as high as 1.023% from Wednesday's closing level of 0.783%."
July 31 - Reuters (Kevin Costelloe and Alessandro Speciale): "Italy's economic growth slowed to the weakest pace in almost two years, possibly spelling trouble for the populist government's costly projects. Gross domestic product expanded 0.2% in the three months through June, down from 0.3% in the first quarter…"
July 29 - Reuters (Madeline Chambers): "Support for German Chancellor Angela Merkel's conservative bloc, trying to move beyond a bitter dispute over migrant policy that threatened the coalition, has fallen to its lowest level since 2006, a poll showed on Sunday."
Japan Watch:
July 31 - Bloomberg (Enda Curran): "Bank of Japan Governor Haruhiko Kuroda's policy tweaks have either strengthened the long-running stimulus or mark a stealth 'baby step' toward normalizing policy. Or both? The BOJ on Tuesday made adjustments to two pillars of its policy that could be interpreted as steps toward normalization: It said it would let the 10-year yield rise just a bit higher, to 0.2% from 0.1%, and it cut in half the amount of bank reserves that would face its negative rate of minus 0.1%. On the other hand, it also introduced 'forward guidance,' pledging to keep short- and long-term rates at extremely low levels for an 'extended period of time,' though that's not dramatically different from its long-running pledge… to continue its stimulus program 'as long as it is necessary.'"
July 31 - Reuters (Jamie McGeever): "Not for the first time in the past 20 years, the challenges of global monetary policymaking have been laid bare by the Bank of Japan. By opting not to tighten policy…, as it had looked like it might, the BOJ highlighted how difficult it is for central banks to unwind extraordinary, crisis-era policy before the economy turns, no matter how much they may want to. It was another reminder that when it comes to extraordinary easing measures like QE and zero or negative interest rates, as The Eagles put it in 'Hotel California': 'You can check out any time you like, but you can never leave'."
Fixed Income Bubble Watch:
July 30 - Reuters: "The U.S. Treasury Department on Monday sold $51 billion in three-month debt at interest rate of 2.000 percent, the most it paid dealers and investors at a three-month bill auction in more than a decade…"
August 1 - Bloomberg (Cecile Gutscher and Yakob Peterseil): "Jim Schaeffer has found a glitch in his supply chain -- and reckons it could be an early warning sign that demand in the red-hot leveraged loan market is set to cool. The deputy chief investment officer at Aegon Asset Management was collecting loans to create his firm's next collateralized loan obligation. These are typically stored with a third party, which holds them on its books until there's enough to bundle into a transaction. Yet when Schaeffer called on his usual warehouse providers, they were not keen to take on more exposure. 'The market of warehouse providers is not as receptive,' said Schaeffer, who helps oversee $103 billion of fixed-income assets. 'That pause by warehouse providers is an indication that CLO demand could slow, which could impact the strong technical we have experienced.'"
Leveraged Speculator Watch:
August 2 - Financial Times (Megan Greene): "I was recently informed by the owner of an artificial intelligence fund that markets do not listen to economists any more. Rather than immediately dust off my CV and see what transferable skills I might have, I dug around for evidence of his claim and found there was something to it. A fundamental shift in market structure towards rules-based, passive investing over the past decade means a lot of trading is no longer based on fundamentals. But just because some markets do not pay attention to economists, it does not mean economists should not pay attention to these markets. On the contrary - this shift in market structure could well be a trigger for the next global downturn. The US Federal Reserve is concerned enough that 'Changing Market Structure and Implications for Monetary Policy' is the topic for this year's economic symposium in Jackson Hole."
Geopolitical Watch:
July 29 - Reuters (Matthew Mpoke Bigg): "Iran's currency hit a new record low on Sunday, dropping past 100,000 rials to the U.S. dollar as Iranians brace for Aug. 7 when Washington is due to reimpose a first lot of economic sanctions."
August 1 - Reuters (Ori Lewis): "Israel would deploy its military if Iran were to try to block the Bab al-Mandeb strait that links the Red Sea to the Gulf of Aden, Prime Minister Benjamin Netanyahu said…"
August 2 - Financial Times (Guy Chazan): "An idea that was once unthinkable is, in the age of Trump, now beginning to seem like a sensible policy option. Should Germany acquire a nuclear bomb? The answer is yes, according to Christian Hacke, one of the country's most distinguished political scientists. In an article for Die Welt am Sonntag in July, he said Germany was, 'for the first time since 1949, without a US nuclear umbrella'. He added: 'In an extreme crisis [we] are defenceless! In the worst-case scenario, Germany can only rely on itself.' Many in Berlin dismissed the piece as silly season nonsense. But the anxiety it reflected is real enough. US President Donald Trump's furious attacks on Germany have sown panic in Berlin, calling into question alliances and allegiances that once seemed inviolable, and forcing a rethink of security arrangements that have underpinned Germany's world view for more than 60 years."
July 29 - Reuters (Matthew Mpoke Bigg): "Iran's currency hit a new record low on Sunday, dropping past 100,000 rials to the U.S. dollar as Iranians brace for Aug. 7 when Washington is due to reimpose a first lot of economic sanctions."
August 1 - Reuters (Ori Lewis): "Israel would deploy its military if Iran were to try to block the Bab al-Mandeb strait that links the Red Sea to the Gulf of Aden, Prime Minister Benjamin Netanyahu said…"
August 2 - Financial Times (Guy Chazan): "An idea that was once unthinkable is, in the age of Trump, now beginning to seem like a sensible policy option. Should Germany acquire a nuclear bomb? The answer is yes, according to Christian Hacke, one of the country's most distinguished political scientists. In an article for Die Welt am Sonntag in July, he said Germany was, 'for the first time since 1949, without a US nuclear umbrella'. He added: 'In an extreme crisis [we] are defenceless! In the worst-case scenario, Germany can only rely on itself.' Many in Berlin dismissed the piece as silly season nonsense. But the anxiety it reflected is real enough. US President Donald Trump's furious attacks on Germany have sown panic in Berlin, calling into question alliances and allegiances that once seemed inviolable, and forcing a rethink of security arrangements that have underpinned Germany's world view for more than 60 years."
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