Weekly Commentary: Powell, Greenspan and Whatever it Takes

Fed Chairman Powell is in a tough spot, one made no easier now that he's on the receiving end of disapproving presidential tweets. The global Bubble has begun to falter, which only exacerbates divergences between various markets and economies. The U.S. is booming, while China struggles and EM economies now stumble into the dark downside of an epic cycle. The U.S. economy and markets beckon for tighter financial conditions, while higher U.S. rates pose significant danger to fragile global markets already confronting a major tightening of financial conditions.

Powell played it safe in Jackson Hole. I imagine he'd have preferred to sit this one out. As such, his presentation was too heavy on rationalization and justification. The FOMC is trapped in Greenspan-style "baby steps," and it is curious that the Fed Chairman would choose to praise Alan Greenspan for his nineties policy approach:

"Under Chairman Greenspan's leadership, the committee converged on a risk-management strategy that can be distilled into a simple request: 'Let's wait one more meeting; if there are clearer signs of inflation, we will commence tightening.' Meeting after meeting, the committee held off on rate increases while believing that signs of rising inflation would soon appear. And meeting after meeting, inflation gradually declined."

If the Greenspan Fed had in fact adopted a "risk management strategy," it was a failed attempt. It's too easy these days to disregard the highly disruptive boom and bust cycles that have been prominent in U.S. and global markets (and economies) over recent decades. And here we are today, the Federal Reserve still accommodating Bubble Dynamics because of its failure to respond to financial developments and contain excess back in the nineties.

The bursting of the nineties "tech" and corporate debt Bubbles spurred the Greenspan Fed to slash rates to 1% by June 2003. At that time, double-digit mortgage Credit was already fueling self-reinforcing home price inflation. Short rates were then "baby stepped" upward until June 2004 and remained below 4% all the way into late-2005. The lesson not learned from that episode was that small, gradual telegraphed rate increases are ineffective in the face of an inflating Bubble. Such a policy course ensured a progressive loosening of financial conditions when tightening was clearly required from a risk management perspective.

Accommodating the nineties Bubble basically ensured the Greenspan Fed would later adopt even more aggressive post-Bubble accommodation. Indeed, the Fed specifically targeted mortgage finance as the source of reflationary Credit. This greatly compounded the fateful error from earlier in the Greenspan era: nurturing market-based Credit and financial speculation in response to banking system impairment following the collapse of late-eighties ("decade of greed") Bubbles.

The financial world changed momentously during the nineties. Out with the staid bank loan, in with dynamic market-based finance: Asset-backed securities, MBS, GSE Credit, money-market funds, derivatives and Wall Street "structured finance". In with repurchase agreements ("repos") and essentially unlimited cheap market-based securities Credit. In short, out with reserve and capital requirements that traditionally restrained Credit growth; in with unfettered asset-based finance the likes the world had never experienced.

From Powell's opening paragraph: "Fifteen years ago, during the period now referred to as the Great Moderation, the topic of this symposium was 'Adapting to a Changing Economy.' In opening the proceedings, then-Chairman Alan Greenspan famously declared that 'uncertainty is not just an important feature of the monetary policy landscape; it is the defining characteristic of that landscape.'"

The Fed and global central banks never successfully adapted to the new paradigm they themselves had championed. Unfettered market-based and speculative finance beckoned for more stringent monetary management. Yet the Fed, fretting the instability and associated uncertainties, erred on the side of easy "money." And, despite it all, this error compounds to this day.

The "great moderation" period saw powerful inflation dynamics take hold throughout the securities and asset markets, at home and abroad. This new finance had a strong inflationary bias that created a propensity for inflating powerful Bubbles. Asset inflation and Bubbles emerged as the most consequential form of inflation, yet central banks were too content to take Credit for the so-called "great moderation" in consumer price inflation (that clearly had much more to do with profound changes in finance, technologies, globalization and the nature of economic output - rather than effective monetary management).

As the nineties unfolded, policy focused on the "real economy sphere" - the New Paradigm, electrifying technological innovation and the so-called "productivity miracle" - along with various measures omnipotent central bankers would employ to support such obviously constructive advancements. Policymakers should have instead been fixated on momentous "financial sphere" developments, and how the associated structural loosening of financial conditions warranted a counterbalance of tighter monetary policy and a more stringent regulatory regime.

Adopting the view that the New Paradigm favored a more permissive approach to monetary management, Greenspan got it dreadfully wrong. In the end, perhaps the most consequential analysis in the history of central banking was deeply flawed. The "maestro's" asymmetrical monetary policy approach was instrumental in bolstering inflationary psychology throughout the markets, with the Greenspan "put" repeatedly resuscitating vulnerable Bubbles. All the while, huge infrastructure was being erected to support the worldwide enterprise of financial speculation, and the Greenspan Fed gave an enthusiastic thumbs up.

Ironically, the free-market ideologue sowed the seeds for unsound markets increasingly incapable of self-correction and adjustment. Asset inflation: the most dangerous form of inflation specifically because there are powerful constituencies beholden to it and essentially none in opposition.

In the sixties, Alan Greenspan was said to have explained to his fellow Ayn Rand colleagues that the Great Depression was the result of the Federal Reserve repeatedly placing "coins in the fuse box." Ironically, Greenspan initiated a process that has seen the Fed and global central bankers resorting to coins to circumvent market forces for going on three decades - culminating with "whatever it takes" directing the one-way, free-flow of "money" into the securities markets.

I try to cut Chairman Powell some slack. I understand he's trapped in gradualism and flawed central bank doctrine, more generally. But I was hoping he would over time initiate a retreat from the Greenspan/Bernanke/Yellen market "put." Powell: "I am confident that the FOMC would resolutely 'do whatever it takes' should inflation expectations drift materially up or down or should crisis again threaten." Why is this language necessary on a day with the S&P500 and Nasdaq trading to all-time highs?

Bond yields (and the dollar) dropped on the release of Powell's speech. The market essentially presumes zero probability of the Fed ever aggressively tightening policy under any circumstance. Aggressive cuts and market support, well that's an altogether different story. I would argue that the prospect for a return of aggressive QE and zero rates is fundamental to ongoing extraordinarily low market yields along with the flat yield curve. Greenspan's "asymmetrical" globally on steroids.

Low yields clearly support price Bubbles in equities, real estate and asset markets more generally. And the longer Bubbles inflate the more confident speculators become that future "activist" policy measures will bolster bond and fixed-income prices. The comprehensive "whatever it takes" central banking "put" provides unprecedented Bubble support - and, I would argue, amounts to yet another highly destabilizing and dangerous policy error. The egregious masquerading as conventional mainstream. To be sure, the problem with discretionary monetary policy is that one mistake invariably leads to bigger - and inevitably much bigger - mistakes.

"Changing Market Structures and Implications for Monetary Policy" is the theme for the 2018 Jackson Hole symposium. Pro-Bubble central bank monetary policy doctrine has for much too long been instrumental in fostering unstable market structures. Chairman Powell missed an opportunity to dial back the "whatever it takes" central bank approach to backstopping unsound securities markets. It's been a full decade since the crisis, for heaven's sake.

The nineties were on my mind throughout the week. An odd coincidence that Powell's Jackson Hole presentation harkened back to Alan Greenspan and the nineties. In what is being called "the longest bull market in history," the duration of the current bull run this week surpassed the previous record, October 1990 through March 2000.

One person's record bull is another's greatest Bubble. GSE Credit and corporate debt were key sources of fuel for the nineties Bubble. And each bursting Bubble is to be reflated by a more formidable Bubble inflation. The post-nineties reflation was led by booming mortgage finance, much of it of the (money-like) "AAA" GSE and Wall Street structured finance ilk. The 2008 collapse of this much grander Bubble provoked unprecedented reflationary measures. This historic reflation went to the very foundation of global finance, sovereign debt and central bank Credit. It has corrupted the very heart of contemporary "money."

The problem with "money" is that it enjoys insatiable demand, creating the potential for extraordinarily dangerous Bubbles. "Whatever it takes" has deeply perverted market structure across the globe. Myriad risks have been inflated and totally distorted. Today's market view holds that central bankers will not tolerate a crisis. Perceived risk remains extraordinarily low, as illustrated by Friday's closing VIX price of 11.99. But true underlying risk is sky high and rising - market, economic, policy, political and geopolitical. Market structure and global imbalances, among others, are accidents in the making.

When this Bubble bursts, there will be no new source of "money" sufficient to fuel the next round of reflation. It's sovereign debt and central bank Credit for the duration. In the meantime, loose monetary policy will continue to accommodate an unprecedented expansion of government borrowings. As EM is now recognizing, the market mechanism for disciplining profligate borrowers doesn't function until it's too late. While the global Bubble falters at the periphery (Brazilian real down 4.7% this week!), boom-time excesses run unabated at the core.

Powell: "Whatever the cause, in the run-up to the past two recessions, destabilizing excesses appeared mainly in financial markets rather than in inflation. Thus, risk management suggests looking beyond inflation for signs of excesses."

A risk management approach would be working to extricate extreme central bank "activism" from the markets. Financial markets should stand on their own; the market mechanism needs to be operable. But rates, once again, remain too accommodative. Moreover, this is no time to be reminiscing about Alan Greenspan or trumpeting "whatever it takes." A missed opportunity Chairman Powell - and an important one at that.


For the Week:

The S&P500 gained 0.9% (up 7.5% y-t-d), and the Dow added 0.5% (up 4.3%). The Utilities declined 1.6% (up 1.1%). The Banks added 0.2% (up 3.3%), and the Broker/Dealers increased 0.2% (up 3.7%). The Transports gained 0.5% (up 6.3%). The S&P 400 Midcaps jumped 1.2% (up 7.1%), and the small cap Russell 2000 surged 1.9% (up 12.4%). The Nasdaq100 advanced 1.5% (up 17.0%). The Semiconductors rallied 4.0% (up 9.8%). The Biotechs rose 1.4% (up 21.9%). With bullion gaining $21, the HUI gold index recovered 3.1% (down 23.7%).

Three-month Treasury bill rates ended the week at 2.05%. Two-year government yields rose four bps to 2.62% (up 74bps y-t-d). Five-year T-note yields slipped three bps to 2.71% (up 51bps). Ten-year Treasury yields declined five bps to 2.81% (up 40bps). Long bond yields dropped six bps to 2.96% (up 22bps). Benchmark Fannie Mae MBS yields declined three bps to 3.57% (up 57bps).

Greek 10-year yields dropped 15 bps to 4.16% (up 9bps y-t-d). Ten-year Portuguese yields declined three bps to 1.82% (down 12bps). Italian 10-year yields gained three bps to 3.15% (up 114bps). Spain's 10-year yields declined six bps to 1.39% (down 17bps). German bund yields rose four bps to 0.35% (down 8bps). French yields gained two bps to 0.69% (down 10bps). The French to German 10-year bond spread narrowed two to 34 bps. U.K. 10-year gilt yields rose four bps to 1.28% (up 9bps). U.K.'s FTSE equities index increased 0.3% (down 1.4%).

Japan's Nikkei 225 equities index rallied 1.5% (down 0.7% y-t-d). Japanese 10-year "JGB" yields were little changed at 0.10% (up 5bps). France's CAC40 jumped 1.6% (up 2.3%). The German DAX equities index rose 1.5% (down 4.0%). Spain's IBEX 35 equities index jumped 1.8% (down 4.5%). Italy's FTSE MIB index rallied 1.6% (down 5.1%). EM equities were mostly higher. Brazil's Bovespa index increased 0.3% (down 0.2%), and Mexico's Bolsa jumped 2.8% (up 0.6%). South Korea's Kospi index ralllied 2.1% (down 7.1%). India’s Sensex equities index gained 0.8% (up 12.3%). China’s Shanghai Exchange recovered 2.3% (down 17.5%). Turkey's Borsa Istanbul National 100 index gained 1.6% (down 21.8%). Russia's MICEX equities index rose 1.1% (up 8.1%).

Investment-grade bond funds saw inflows of $2.678 billion, and junk bond funds had inflows of $344 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates dipped two bps to 4.51% (up 65bps y-o-y). Fifteen-year rates declined three bps to 3.98% (up 82bps). Five-year hybrid ARM rates dropped five bps to 3.82% (up 65bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates unchanged at 4.52% (up 49bps).

Federal Reserve Credit last week dropped $27.2bn to $4.190 TN. Over the past year, Fed Credit contracted $228bn, or 4.8%. Fed Credit inflated $1.379 TN, or 49%, over the past 303 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $2.5bn last week to $3.430 TN. "Custody holdings" were up $100bn y-o-y, or 3.0%.

M2 (narrow) "money" supply jumped $54.5bn last week to $14.203 TN. "Narrow money" gained $559bn, or 4.1%, over the past year. For the week, Currency increased $2.7bn. Total Checkable Deposits rose $39.2bn, and Savings Deposits gained $5.5bn. Small Time Deposits added $1.7bn. Retail Money Funds gained $5.5bn.

Total money market fund assets added $3.7bn to $2.864 TN. Money Funds gained $129bn y-o-y, or 4.7%.

Total Commercial Paper jumped $11.9bn to $1.067 TN. CP gained $68bn y-o-y, or 6.9%.

Currency Watch:

The U.S. dollar index fell 1.0% to 95.163 (up 3.3% y-t-d). For the week on the upside, the South African rand increased 3.5%, the euro 1.6%, the Norwegian krone 1.5%, the Swiss franc 1.3%, the British pound 0.8%, the South Korean won 0.5%, the New Zealand dollar 0.5%, the Singapore dollar 0.4%, the Canadian dollar 0.3%, the Swedish krona 0.3%, and the Australian dollar 0.2%. For the week on the downside, the Brazilian real declined 4.7%, the Japanese yen 0.7% and the Mexican peso 0.1%. The Chinese renminbi rallied 0.98% versus the dollar this week (down 4.46% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index rallied 2.2% (up 3.8% y-t-d). Spot Gold jumped 1.8% to $1,206 (down 7.5%). Silver gained 0.8% to $14.895 (down 13.1%). Crude recovered $2.60 to $68.52 (up 13%). Gasoline surged 5.0% (up 16%), while Natural Gas declined 1.1% (down 1%). Copper rallied 2.5% (down 18%). Wheat sank 7.5% (up 26%). Corn fell 4.2% (up 3%).

Trump Administration Watch:

August 23 - CNBC (John Melloy): "President Donald Trump said the stock market would plummet if he were to be removed from office. 'If I ever got impeached, I think the market would crash. I think everybody would be very poor,' the president said in a Fox News interview… 'Because without this thinking, you would see numbers that you wouldn't believe in reverse,' Trump said, pointing at his head. 'I got rid of regulations. The tax cut was a tremendous thing.' The stock market has had little reaction so far to Trump's renewed legal troubles this week with two former advisors now guilty of criminal acts and one implicating him directly."

August 22 - Bloomberg (Toluse Olorunnipa): "President Donald Trump said China's economy is no longer on a swift pace to be larger than the U.S., a comment likely to stoke concerns in Beijing that his administration wants to contain the Asian nation's rise. Speaking at a rally in West Virginia…, Trump noted that China's market was 'way down' even while saying he has 'tremendous respect' for the country. He added that various trade talks would take time… 'When I came we were heading in a certain direction that was going to allow China to be bigger than us in a very short period of time,' Trump said. 'That's not going to happen anymore. 'I want to be their friend,' he added. 'But we had to do things that we had to do.'"

August 21 - CNBC (Mike Calia): "President Donald Trump said Tuesday night that the U.S. would slap a 25% tariff on cars coming from the European Union. The president's statement came hours after The Wall Street Journal reported that Commerce Secretary Wilbur Ross said he had postponed an August timeline to publish a report on auto tariffs. 'We're going to put a 25% tax on every car that comes into the United States from the European Union,' Trump said at a campaign rally…"

August 22 - Reuters (Michael Martina and David Lawder): "The United States and China escalated their acrimonious trade war on Thursday, implementing punitive 25% tariffs on $16 billion worth of each other's goods, even as mid-level officials from both sides resumed talks in Washington. The world's two largest economies have now slapped tit-for-tat tariffs on a combined $100 billion of products since early July, with more in the pipeline, adding to risks to global economic growth. China's Commerce Ministry said Washington was 'remaining obstinate'…"

August 21 - Bloomberg (Kathleen Hunter): "Donald Trump has never shied away from expressing an opinion about people who've been part of his inner circle - criticizing Attorney General Jeff Sessions, while offering qualified support to his former campaign chairman, Paul Manafort. Now Federal Reserve Chairman Jerome Powell is in his sights. Like Sessions and others, the fact that Trump hired Powell isn't insulating him from public fault-finding. Nor is a long-held practice of presidents considering the central bank above the fray. Trump on Friday lamented Powell's job performance to wealthy Republicans at a Hamptons fundraiser, telling them that he'd expected a cheap-money chairman and was disappointed with the Fed's interest-rate increases."

August 20 - Reuters (Jeff Mason and Steve Holland): "U.S. President Donald Trump said on Monday he was 'not thrilled' with the Federal Reserve under his own appointee, Chairman Jerome Powell, for raising interest rates and said the U.S. central bank should do more to help him to boost the economy… American presidents have rarely criticized the Fed in recent decades because its independence has been seen as important for economic stability. Trump has departed from this past practice and said he would not shy from future criticism should the Fed keep lifting rates."

August 21 - Reuters (Bozorgmehr Sharafedin and Dan Williams): "Iran warned… it would hit U.S. and Israeli targets if it were attacked by the United States after President Donald Trump's security adviser said Washington would exert maximum pressure on Tehran going beyond economic sanctions… U.S. National Security Adviser John Bolton told Reuters the return of U.S. sanctions was having a strong effect on Iran's economy and popular opinion. 'There should not be any doubt that the United States wants this resolved peacefully, but we are fully prepared for any contingency that Iran creates,' Bolton said…"

Federal Reserve Watch:

August 22 - CNBC (Jeff Cox): "Federal Reserve Chairman Jerome Powell is resolved to keep the central bank independent despite ongoing criticism from President Donald Trump, according to Sen. Tim Scott. Powell 'reinforced the fact that their goal is to [address] unemployment, our economy, and that is their only objective,' the South Carolina Republican told The Washington Post. Scott said he asked Powell 'specifically about the independence of the Fed' and was assured it would not be compromised. The report comes as Trump has stepped up his critiques of Fed monetary policy."

August 22 - Reuters (Jason Lange): "Federal Reserve officials discussed raising interest rates soon to counter excessive economic strength but also examined how global trade disputes could batter businesses and households, minutes of the U.S. central bank's last policy meeting showed… 'Many participants suggested that if incoming data continued to support their current economic outlook, it would likely soon be appropriate to take another step in removing policy accommodation,' according to the minutes."

August 23 - Reuters (Ann Saphir): "The Federal Reserve should raise U.S. interest rates further this year and probably next year as well, despite President Donald Trump's displeasure at tighter policy, Kansas City Federal Reserve Bank President Esther George said… 'Based on what I see today, I think two more rate hikes could be appropriate,' along with several more next year as the Fed aims to move interest rates to a neutral setting of about 3%, George told Bloomberg TV."

August 22 - Reuters (Ann Saphir): "With the U.S. economy at full employment and inflation at the Federal Reserve's 2% goal, the U.S. central bank should press on with its plan for gradual interest rate hikes at least for the next nine to 12 months, a policymaker said… Only once short-term rates reach a 'neutral' level where they are neither stimulating nor braking the economy should the central bank potentially stop raising rates and figure out what to do next, Dallas Fed President Robert Kaplan said in an essay."

August 20 - Wall Street Journal (Nick Timiraos): "Federal Reserve officials left many important questions unanswered when they decided last year to begin shrinking the central bank's $4.5 trillion portfolio of mostly mortgage and Treasury securities. They are now beginning an internal debate to answer one of the most important of those questions: What exactly will this portfolio look like when they are done shrinking it? The Fed has decided it wants to hold primarily Treasury securities rather than mortgage securities once it is done. But it hasn't worked out what the mix of those Treasury securities will look like. Will it be mostly very short-term bills? Or will it include a hefty share of longer-term bonds? The difference is critical."

August 22 - Bloomberg (Liz Capo McCormick): "Donald Trump may want to watch what he wishes for. If Federal Reserve boss Jerome Powell does what the president wants, American assets could lose their appeal as a global haven. Strategists warn that more than just the central bank's credibility would be hurt if the Fed were to put the brakes on monetary policy tightening. Trump would get his desire for a weaker dollar, but rising inflation expectations would dent the perceived safety of U.S. assets and eventually boost longer-term financing costs for the government and American consumers. On the other hand, global liquidity and growth could receive a lift, at least initially, and emerging markets that have been maligned by Trump could benefit. While few expect the Fed to acquiesce to the pressure, Trump's policy jawboning has been persistent enough for investors to start factoring its effects into their trading calculus."

U.S. Bubble Watch:

August 19 - Financial Times (Andrew Edgecliffe-Johnson): "Blue-chip US companies are confident they can pass on rising costs to their customers and protect record profit margins as inflationary pressure is offset by buoyant business and consumer sentiment. Cost inflation has been a recurring theme of US second-quarter earnings announcements from companies in industries as diverse as retail and industrial equipment. Executives have pointed to a combination of higher freight and labour costs with increased prices for raw materials, some of which has been driven by the Trump administration's tariffs on imported steel and aluminium, and by other countries' retaliatory tariffs on US goods. "

August 22 - Bloomberg Businessweek (Steve Matthews, Matthew Boesler and Jeanna Smialek): "America's labor market is a jigsaw puzzle whose pieces don't quite fit together. Unemployment has plummeted to 3.9%, the lowest level since the early 2000s. Earnings calls are replete with chief executive officers bemoaning employee shortages. Small businesses are also feeling the pinch. In a July survey by the National Federation of Independent Business, 37% of owners reported at least one vacancy, and more than half said there were few or no qualified candidates for the job."

August 22 - Reuters (Jason Lange): "U.S. home sales fell for a fourth straight month in July as a shortage of properties on the market pushed up house prices, likely sidelining some potential buyers. …Existing home sales fell 0.7% to a seasonally adjusted annual rate of 5.34 million units last month… Existing home sales, which make up about 90% of U.S. home sales, fell 1.5% from a year ago in July. Sales have been stymied by an acute shortages of homes on the market for several months, although… inventory showed signs of stabilizing last month. There were 1.92 million homes on the market in July, unchanged from a year earlier. It was the first month in three years in which inventory did not fall on a year-on-year basis…"¬

August 23 - Reuters: "Sales of new U.S. single-family homes unexpectedly fell in July to a nine-month low in a sign the housing market was cooling and could give less support to the overall economy. …New home sales decreased 1.7% to a seasonally adjusted annual rate of 627,000 units last month, the lowest level since October 2017. June's sales pace was revised up to 638,000 units from the previously reported 631,000 units."

August 22 - Bloomberg (Katia Dmitrieva): "Scarce supplies of U.S. homes for sale are propping up prices and pushing some buyers to the sidelines, leading to fewer transactions -- but not for those with big budgets. Deals for the most expensive properties jumped to a record share of the U.S. total in the last two months… Existing single-family homes with a price tag of at least $1 million made up 3.7% of all transactions in July and 3.8% in June, the highest in data starting in 2013. Sales in the category rose 16.2% in July from a year earlier, faster than the five cheaper price groups…"

August 23 - Wall Street Journal (Heather Gillers): "Chicago tried to lower its pension deficit with budget cuts, benefit reductions and tax increases. Now the third-largest U.S. city is considering a controversial new fix: more debt. Finance Chief Carole Brown said she would decide in the next week whether to endorse a $10 billion taxable bond offering that would be used to help close Chicago's $28 billion pension funding gap. If the proposal is accepted by Mayor Rahm Emanuel and approved by the City Council, it would become the biggest pension obligation bond ever issued by a U.S. city. The bet is that Chicago can earn more investing the proceeds than it paid to issue the new debt, setting an example for other large governments wrestling with sizable pension deficits."

August 18 - Wall Street Journal (Ryan Dezember): "Freddie Mac is expanding its role in financing one of Wall Street's postcrisis success stories: the booming business of investing in single-family rental houses. The government-backed mortgage-financing firm this month guaranteed a $509 million loan that helped Front Yard Residential Corp. , an acquirer of rental homes, buy a rival. It also backed a $7.8 million loan that enabled Promise Homes Co., a midsize Atlanta landlord, to buy 117 houses in Southeastern working-class neighborhoods. The… company already is the country's largest backer of apartment loans. The deals announced this month are part of its push to finance more rental-home purchases as investors are eager to put money to work in rental markets…"

August 23 - Bloomberg (John Gittelsohn): "Fewer stock pickers are beating their indexes, with value managers among the worst performers. Just 36% of actively managed stock funds topped indexes in the year through June, down from 43% in 2017, according to a Morningstar Inc. report. Pickers of value stocks saw their success rates drop as much as 27 percentage points compared with the prior year."

August 20 - Wall Street Journal (Josh Barbanel): "Sales of the most expensive New York apartments fell sharply in the first half of the year, but many sellers have adjusted by cutting asking prices to make deals, brokers said. 'This is simply a market that is adjusting itself to chronic overpricing relative to buyers' perception of value,' said Kirk Henckels, a broker and vice chairman of Stribling & Associates… Overall sales of apartments priced at $5 million or more fell by 31% during the first half of the year, compared with the same period in 2017, according to a luxury market report by Stribling."

China Watch:

August 19 - Reuters (Tom Daly and Muyu Xu): "China's banking and insurance regulator has asked financial institutions to give more support to infrastructure investment, importers and exporters, and creditworthy companies experiencing temporary problems."

August 20 - CNBC (Evelyn Cheng): "China's hot real estate market remains a challenge for authorities trying to maintain stable economic growth in the face of trade tensions with the U.S. In fact, property is the country's biggest risk in the next 12 months, much greater than the trade war, according to Larry Hu, head of greater China economics at Macquarie. He said he is especially watching whether the real estate market in lower-tier, or smaller, cities will see a downturn in prices or housing starts after recent sharp increases. Real estate investment accounts for about two-thirds of Chinese household assets, according to wealth manager Noah Holdings. The property market also plays a significant role in local government revenues, bank loans and corporate investment."

August 21 - Reuters (Elias Glenn and Stella Qiu): "China's central bank said… that it will not resort to strong stimulus to support the slowing economy but will keep liquidity reasonably ample and offer more help to companies which are having trouble obtaining financing. Officials also reiterated that China will not use the yuan as a weapon to deal with trade frictions, a day after U.S. President Donald Trump told Reuters Beijing was manipulating its currency in response to U.S tariffs on imported Chinese goods."

August 19 - Financial Times (Edward White): "The contraction of shadow banking activity in China is expected to moderate in the second half of the year, in a further sign of policy easing as Beijing seeks to boost economic growth. Shadow banking, which refers to higher-risk non-bank financial products and lending, has been decreasing in China amid tighter regulation aimed at curbing runaway debt levels. According to Moody's, shadow banking assets as a share of China's gross domestic product dropped to 73% at the end of June, from 79% 12 months earlier and a peak of 87% in late 2016. That reflected a fall of Rmb2.7tn in the first six months of the year, to Rmb62.9tn. However, regulators are now 'taking a more gradualist approach in response to slower domestic credit growth and a more challenging external environment', said Moody's Asia Pacific managing director Michael Taylor."

August 23 - Bloomberg (Lianting Tu, Narae Kim and Carrie Hong): "China's town builders may have gotten some respite after the government took steps to ensure adequate funding for them, but their weaker peers may still suffer, analysts say. That's because these local government financing vehicles now need to repay the pile of debt that was sold over the last few years to support economic growth. Domestic maturities average 340 billion yuan ($49bn) each quarter through to the April-June period of 2019… That's 40% higher than the average in 2017. The maturities will peak in the first quarter next year, the data show."

August 23 - Reuters (Hallie Gu and Josephine Mason): "China's grain imports plunged in July after Beijing imposed hefty tariffs on shipments from the United States as part of its trade conflict and as rising international prices curbed buying… China brought in 220,000 tonnes of sorghum in July, down 62.5% from 588,364 tonnes a year ago…"

August 20 - Reuters (Chen Aizhu and Florence Tan): "Chinese buyers of Iranian oil are starting to shift their cargoes to vessels owned by National Iranian Tanker Co. for nearly all of their imports to keep supply flowing amid the re-imposition of economic sanctions by the United States. The shift demonstrates that China, Iran's biggest oil customer, wants to keep buying Iranian crude despite the sanctions, which were put back after the United States withdrew in May from a 2015 agreement to halt Iran's nuclear program. The United States is trying to halt Iranian oil exports…"

August 21 - Wall Street Journal (Shen Hong): "Chinese banks are taking on new risks as they scramble to lure savers, turning a previously obscure line of business into a $1 trillion industry. The explosion marks the latest effort by lenders to circumvent Beijing's campaign against financial risk, and to head off rising competition from the lightly regulated shadow-banking sector and upstart high-tech rivals… It also reflects an old struggle in a country where banks can't freely set their own interest rates. Structured deposits offer higher returns than regular savings accounts and are tied to bets on assets from currencies to gold. They have been around for years, but the sums outstanding have soared recently. In July they stood at a record 9.71 trillion yuan ($1.42 trillion), up 52% in a year… Banks aren't competing only with one another for funds, which they need to extend more loans; savers also are switching to more attractive options, such as high-yielding wealth-management products, and to money-market funds…"

August 20 - Financial Times (Sherry Fei Ju and Hudson Lockett): "Monthly rent in Beijing has risen by about a quarter in 2018, according to a research report that has stoked criticism from many of the millions of tenants who live in China's capital. A research report issued by property search engine Zhuge showed rental costs up 25.6% year on year at the end of July, with some areas seeing a rise of nearly 40%, says the report."

EM Watch:

August 20 - Reuters (Ilaria Polleschi and Gavin Jones): "President Tayyip Erdogan appealed to Turks' religious and patriotic feelings ahead of a major Muslim holiday on Monday, promising they would not be brought 'to their knees' by an economic crisis that has battered the lira currency."

August 22 - Reuters (Anthony Boadle and Brad Brooks): "The popularity of imprisoned former Brazilian president Luiz Inacio Lula da Silva's has grown strongly despite his corruption conviction, an election poll on Wednesday showed, a result that rattled markets and raised the possibility that Lula's running mate could ultimately become the next occupant of the country's presidential palace. Investors reacted unfavorably to the poll…"

August 21 - Bloomberg (Eduardo Thomson and Fabiola Zerpa): "Venezuelan President Nicolas Maduro carried out one of the greatest currency devaluations in history over the weekend -- a 95% plunge that will test the capacity of an already beleaguered population to stomach even more pain. One likely outcome is that inflation, which already was forecast to reach 1 million percent this year, will get fresh fuel from the measures. Prices are currently rising at an annualized rate of 108,000%, according to Bloomberg's Café con Leche index. A massive exodus of Venezuelans fleeing the crisis to neighboring countries will likely increase and with it, tensions and restrictions like the ones seen over the past few days."

August 19 - PTI News: "India's current account deficit is expected to widen to 2.8% of the gross domestic product in this financial year, according to a Nomura report. With rising oil prices, depreciating rupee and outflow of portfolio investments, there are concerns that the current account deficit might rise in the current fiscal, it said. 'Overall, we expect the current account deficit to widen to 2.8% of GDP in financial year 2019 from 1.9% in financial year 2018,' the Japanese financial services major said. 'The balance of payment funding to remain a challenge in the ongoing financial year as the basic balance of payment is negative and portfolio flows also remain negative,' it said."

Global Bubble Watch:

August 21 - Bloomberg (Carolynn Look): "Jens Weidmann, a top candidate to lead the European Central Bank next year, said policy makers must be willing to act if needed to prevent financial imbalances. While arguing that monetary officials should have only one mandate -- price stability -- and generally let national authorities in the euro area handle tasks such as reining in asset prices, he acknowledged that those macroprudential tools are still poorly understood. 'Should monetary policy remain completely passive if financial imbalances were to build up? In my view, this would be a mistake,' Weidmann, who heads Germany's Bundesbank, said at a conference… 'As we have witnessed, financial crises have a considerable impact on macroeconomic outcomes and, ultimately, central banks' ability to guarantee price stability.'"

August 20 - Bloomberg (Nisha Gopalan): "Doors are slamming shut in the developed world not just to Chinese investment in technology but potentially to a wave of acquisitions with a tech element, as diverse as smart heaters and robotic lawnmowers. President Donald Trump last week signed an update to legislation for the Committee on Foreign Investment in the U.S. that broadened the inter-agency vetting committee group's scope to encompass even minority and passive investments in three areas: critical technology, infrastructure, and businesses that handle personal data. This tightening of the rules has been happening for some time, but it's now explicit… China's challenges aren't limited to a more protectionist U.S., or to similar stances in Australia and Canada. Europe, the favored destination of late, is getting a lot tougher."

August 21 - Bloomberg (Shuli Ren): "China's willingness to extend credit has transformed it into the best friend of emerging markets. But there are reasons to believe the flow of easy money may suddenly dry up - just as distressed economies from Argentina and Venezuela to Turkey and Pakistan look to Beijing for a lifeline that would be less onerous than an International Monetary Fund bailout. In the last decade, China made more than $62 billion of loans to Venezuela, where hyperinflation prompted the government to devalue the bolivar by 95% at the weekend… China has also signed currency swaps with 32 counterparties since 2009. While mainly aimed at facilitating trade in the yuan, these arrangements also served to boost foreign-exchange reserves at troubled partners."

August 20 - New York Times (Hannah Beech): "In the world's most vital maritime chokepoint, through which much of Asian trade passes, a Chinese power company is investing in a deepwater port large enough to host an aircraft carrier. Another state-owned Chinese company is revamping a harbor along the fiercely contested South China Sea. Nearby, a rail network mostly financed by a Chinese government bank is being built to speed Chinese goods along a new Silk Road. And a Chinese developer is creating four artificial islands that could become home to nearly three-quarters of a million people… Each of these projects is being built in Malaysia, a Southeast Asian democracy at the heart of China's effort to gain global influence. But where Malaysia once led the pack in courting Chinese investment, it is now on the front edge of a new phenomenon: a pushback against Beijing as nations fear becoming overly indebted for projects that are neither viable nor necessary - except in their strategic value to China or use in propping up friendly strongmen."

August 22 - Wall Street Journal (Suryatapa Bhattacharya and Saumya Vaishampayan): "Turkey's financial trouble has claimed some distant victims: small investors in Japan, who have dabbled in emerging-market assets to escape superlow domestic returns. The upset illustrates the appetite for risk among an army of punters often dubbed 'Mrs. Watanabe,' after the stereotypical Japanese homemaker. Last year, Deutsche Bank researchers said these buyers had fueled a rally in bitcoin and made up half of global foreign-exchange trading using borrowed money. Individuals have snapped up Uridashi, high-yielding bonds marketed to households that are frequently denominated in foreign currencies like the lira, Brazilian real and South African rand."

Central Bank Watch:

August 23 - Bloomberg (Carolynn Look and Birgit Jennen): "The European Central Bank's expansive monetary-policy stance is out of touch with the euro area's economic upturn, making it all the more important for the institution to begin changing course, according to Governing Council member Jens Weidmann. Weidmann, who is also the president of Germany's Bundesbank, argued in Berlin on Thursday that with inflation heading toward the ECB's goal, it's 'time to begin exiting the very expansionary monetary policy and the non-standard measures, especially considering their possible side effects.'"

August 23 - Financial Times (Claire Jones): "The European Central Bank has become increasingly confident that it can wean the eurozone off some of its crisis-era support without endangering the region's economy. According to minutes… from the July 26 meeting of the bank's governing council, the eurozone was set to grow at a 'solid pace', with the risks to the outlook 'broadly balanced' despite the threat of a global trade war. The ECB remains on track to end its €2.5tn quantitative easing programme by the end of 2018."

August 19 - Reuters (Frank Siebelt and Andrea Shalal): "The European Central Bank is on course towards a less expansive monetary policy, and the projected inflation rate of 1.7% for 2020 is in line with its medium term stability goals, the head of Germany's Bundesbank said… 'After the latest decisions, a normalisation of monetary policy is foreseeable, Weidmann told the newspaper, adding that interest rates would likely edge up as a result."

Europe Watch:

August 23 - Financial Times (Claire Jones): "The race for the top job for the European Central Bank looks wide open. Jens Weidmann, president of Germany's Bundesbank, is considered by many to be favourite. But reports that Angela Merkel would prefer a German at the top of the Commission, rather than push for him to succeed Mario Draghi in November 2019, would appear to dent his chances substantially. Handelsblatt… reported… that the German chancellor was prepared to sacrifice Mr Weidmann in order to ensure someone from Berlin will succeed Jean-Claude Juncker as Commission President after the European Parliamentary elections next June."

August 20 - Reuters (Daren Butler): "Italian Deputy Prime Minister Matteo Salvini said… the government will stand up any against market attacks or debt downgrades that may come its way… 'This government wants to help Italians and I think it isn't liked by many ...representatives of finance and technocracy that wanted to exploit Italy and obtain cheaply the last companies left in this country,' Salvini told reporters… 'They won't manage it and so we will resist against (rises in bond) spreads, speculation, (debt) downgrades and attacks.'"

August 19 - Financial Times (Claire Jones): "A prominent member of Italy's coalition government has called for the European Central Bank to hold fire on withdrawing its crisis-era stimulus measures, in a sign of Rome's concern that the country's borrowing costs will shoot up after the bank ends purchases of government debt this year. Giancarlo Giorgetti, the Italian cabinet undersecretary, indicated that he wanted the ECB to continue buying fresh bonds - including Italian government debt - under its quantitative easing programme should markets launch a speculative attack on Italy. '[Bank president Mario] Draghi and the ECB have played a very important role over the years, and I hope that the quantitative easing programme will continue,' said Mr Giorgetti…"

August 19 - Euromoney (Jeremy Weltman): "With a viscous cycle of rising trade protectionism and inflation slowing economic growth, a gross debt burden totalling 130% of GDP and a populist-left government planning to increase budget spending, a recipe is forming for financial distress, especially if factoring in [Italy's] fragile banking system. Bank stability is one of five economic risk factors included in Euromoney's country risk survey, and it remains a concern for Europe generally, according to analysts, despite stronger economies, and tighter capitalization and liquidity requirements since the global financial crisis: Italy remains the biggest concern of all, from a systemic risk perspective, with a high level of non-performing loans and rating decisions due over the next few weeks."

Japan Watch:

August 17 - Reuters (Tomo Uetake): "Japan's central bank appears to be growing more comfortable with larger declines in the country's stock prices, a sign it may have begun in the share market what analysts describe as 'stealth tapering' of its massive monetary stimulus. The Bank of Japan refrained from buying stocks on two days this week when the Topix index was down more than 0.4% by midday, a departure from a previous pattern in which it bought exchange-traded funds (ETFs) on days when the index fell more than 0.2%. The BOJ already has a precedent of stealth tapering in its bond buying and similar moves in its stock market operations come after it said last month it would make its asset purchases 'more flexible'."

Fixed Income Bubble Watch:

August 22 - Bloomberg (Liz Capo McCormick): "Moody's… last week published an in-depth look at U.S. leveraged loans. And it seems the more the analysts dug in, the more alarmed they became. Yes, the nearly $1.4 trillion market can take comfort in a low 3.4% default rate that Moody's projects will only get lower, most likely dropping to 2.2% over the next year. But that's largely where the good news ends. In its report, the credit-rating firm is emphatic that when the credit cycle takes a turn for the worse, leveraged-loan investors will be in for a rude awakening, even compared with the financial crisis. The loans have become popular in recent years because they carry floating interest rates, which better shield buyers from losses as the Federal Reserve tightens monetary policy. They've also been promoted as a safer alternative to high-yield bonds because they're usually backed by collateral. It's all led to an explosion in popularity, particularly through collateralized loan obligations…"

August 22 - Wall Street Journal (Daniel Kruger): "A robust August rally in the Treasury market is foiling one of Wall Street's most popular trades, a bet that solid U.S. economic growth, rising inflation and eroding government finances will compel investors around the world to sell bonds. A record number of hedge funds and other speculative investors are betting on lower U.S. government bond prices and higher yields… The bets on lower prices, or 'shorts' in traders' parlance, however, have been squeezed by this month's price rise in Treasurys, which has pushed the yield on the 10-year note to 2.83%."

August 23 - Reuters: "The U.S. Treasury Department on Thursday sold $14 billion of five-year Treasury Inflation Protected Securities at a yield of 0.724%, the highest yield since October 2009…"

Leveraged Speculation Watch:

August 21 - Bloomberg (Dani Burger): "Choppy markets around the world are hurting one of Wall Street's hottest quantitative trades, belying its status as a port in the storm. The commodity train wreck, emerging-market turmoil and shifts in government bonds have created a wave of turbulence for risk-parity funds, a strategy first popularized by Ray Dalio that weighs exposures according to volatility measures. Two-month realized price swings for the investing style hit the highest in more than two years last week, before easing. And it's the second-worst performing portfolio tracked by JPMorgan… so far this year.... Beloved by math whizzes and increasingly adopted by the mom-and-pop crowd, the leveraged strategy has boomed in the post-crisis era driven by diversification-minded algorithms, and faith in the hedging power of bonds."

August 22 - Bloomberg (Yakob Peterseil): "Call it the volatility trade, squared. As macro shocks hit global markets, a complex strategy that bets the gap between stock winners and losers will grow is spreading across hedge funds, real-money managers and even private banks. The so-called dispersion trades offer a way to play a slew of market themes, everything from splits among tech stocks to the prey and predators of the M&A boom and the trade-war fallout. Known as a short-correlation bet, it pairs a long and short position in equity options to profit from diverging prices. Those betting economic shifts will separate the wheat from the chaff with renewed vigor can earn steady returns… The exotic investing strategy typically only falters when tracked shares move together."

August 20 - Financial Times (Adam Samson): "Hedge funds have boosted their bullish bets on the buck to the highest level since late 2015, according to newly released data that highlight the upbeat sentiment of investors towards the US dollar. Net long positions among leveraged funds rose $1.8bn to $30.8bn in the week to August 14, according to a BMO Capital Markets analysis of data from the US Commodity Futures Trading Commission."

Geopolitical Watch:

August 21 - Newsweek (Tom O'Connor): "Germany's top diplomat has argued that Europe should create a new system for financial transactions that would exclude the U.S., which has abandoned a nuclear deal with Iran and threatened sanctions against those who stood by it. Germany has joined European allies France and U.K. along with Russia and China in backing the 2015 nuclear accord that President Donald Trump withdrew from in May, triggering new U.S. sanctions on nations doing business with Iran. In an op-ed… by Germany's Handelsblatt business newspaper, German Foreign Minister Heiko Maas hailed the strong post-World War II ties traditionally enjoyed by Washington and Berlin, but he warned, 'Where the U.S. crosses red lines, we as Europeans must counterbalance-as hard as that is.' 'It is therefore essential that we strengthen European autonomy by setting up payment channels independent of the U.S.A., creating a European Monetary Fund and building an independent Swift system,' Maas wrote."

August 17 - Reuters (Ben Blanchard): "China's Defence Ministry has lodged a complaint with the United States about a Pentagon report that said China's military was likely training for strikes against the United States and its allies, saying it was 'pure guesswork'. The assessment, at a time of heightened U.S.-China tensions over trade, was contained in an annual report that highlighted China's efforts to increase its global influence, with defense spending that the Pentagon estimated exceeded $190 billion in 2017."

Friday's News Links

[BloombergQ] Stocks Advance as Trade Talks End; Dollar Slips: Markets Wrap

[CNBC] Powell sees 'further, gradual' rate hikes ahead as economy continues to hum

[CNBC] Australian Treasurer Scott Morrison to become next prime minister, ousting Malcolm Turnbull

[BloombergQ] No Major Progress in U.S.-China Trade Talks as Tariffs Bite

[Reuters] Exclusive: China to keep hitting back at U.S. over trade, to boost government spending - finance minister

[Reuters] Fed's Bullard wants to pause rate hikes, Mester does not

[Reuters] Fed policymakers see rate hikes, blurring dove-hawk divide

[Reuters] Australian Treasurer Scott Morrison to become new prime minister

[CNBC] Treasury, IRS move to block blue state workarounds on tax caps

[BloombergQ] The Complex Calculations Behind Angela Merkel's ECB Strategy

[Reuters] China seeks domination, U.S. says, after El Salvador dumps Taiwan

[NYT] Chill Remains Between China and United States in Latest Trade Talks

[WSJ] Lenders Shunned Risky Personal Loans. Now They’re Competing for Them

[FT] Leveraged loan boom is storing up nasty problems

[FT] China injects $22bn into banking system

[FT] Erdogan’s conspiracy claims strike chord in Turkey

[FT] Emerging markets spur deflationary headwinds

[BloombergSub] U.S.-China Talks Draw a Blank, Bringing Fresh Tariffs Into View

[BloombergSub] China’s Deposit-Hungry Banks Start to Get Fancy

Thursday Evening Links

[CNBC] Asia mixed in early trade as US-China tariff talks end with no breakthrough

[Reuters] Wall St. falters as trade worries weigh

[Reuters] U.S. 5-year TIPS sold at highest yield since 2009

[Reuters] U.S.-China trade talks end with no breakthrough as tariffs kick in

[Reuters] U.S. Senate passes massive spending bill for defense and domestic programs

[CNBC] The housing recovery isn't over, it just feels like it is

[BloombergQ] Why Trump Is Pressuring the Fed on Rates

[BloombergQ] A 1998 Paper May Yield Clues to Powell’s Themes for Jackson Hole

[BloombergQ] Active Managers Fall Further Behind the Indexes They Aim to Beat

[BloombergQ] Climate Change Has Already Hit Home Prices, Led by Jersey Shore

[WSJ] Chicago’s New Idea to Fix Its Pension Deficit? Take On More Debt

Thursday's News Links

[BloombergQ] Dollar Jumps Ahead of Jackson Hole; Stocks Mixed: Markets Wrap

[Reuters] Turkey says U.S. waging 'economic war', lira weakens

[Reuters] New home sales fall to 9-month low

[Reuters] U.S. jobless claims fall, point to labor market strength

[Reuters] U.S., China impose further tariffs, escalating trade war

[BloombergQ] China Policy Levers Jammed in Trump’s Flip-Flop World

[Reuters] China's July grain imports plunge as tariffs on U.S. supplies bite

[Reuters] Fed's George sees more rate hikes, despite Trump: interviews

[CNBC] Fed's George says Trump isn't influencing her votes on rate hikes

[CNBC] Trump says the stock market would crash if he were impeached: 'Everybody would be very poor'

[BloombergQ] Turnbull Says He'll Only Step Down If Rivals Produce Signatures

[BloombergQ] Weidmann Says Time for ECB to Exit ‘Very Expansionary’ Policy

[Reuters] ECB hawk Weidmann sees chances dim of succeeding Draghi

[Reuters] Iran threatens to hit U.S., Israel after Trump aide warns of 'maximum pressure'

[NYT] A Brief History of Bull Markets, From Postwar Boom to Housing Bust

[WSJ] U.S. Seizes on Chinese Economic Vulnerability as Trade Talks Start

[WSJ] What to Watch for at Fed’s Jackson Hole Symposium

[WSJ] As Central Bankers Meet, Economic Uncertainties Weigh on Sunny Outlook

[WSJ] Short Squeeze Roils Wall Street’s Favorite Bond Trade

[FT] What to expect from Federal Reserve chair’s Jackson Hole speech

[FT] The tricky politics of being a central banker

[FT] ECB policymakers increasingly confident in inflation reaching target

[FT] Berlin reportedly ready to ditch ECB hopes in favour of EU top job

Wednesday Evening Links

[Reuters] Caution creeps into Asian markets as U.S. tariff deadline looms

[BloombergQ] U.S. Stocks Mixed; Treasuries Rise, Dollar Falls: Markets Wrap

[Reuters] Fed suggests interest rate hike could come soon

[CNBC] Fed officials worry that the trade war poses the biggest threat to 'strong' economy

[Reuters] Exclusive: Bolton remarks proof U.S. targeting Turkey in economic war - Erdogan spokesman

[Reuters] Lula's rising star in Brazil election poll rattles markets

[BloombergQ] When and Why the World Went Wrong

[NYT] Fed Minutes Suggest No Pause in Rate Hikes

[WSJ] Fed Signals Rate Increase at Next Month’s Meeting

[FT] Fed frets over ability to fight next recession

Wednesday's News Links

[Reuters] Wall St. slightly lower on Trump legal woes

[Reuters] U.S. existing home sales fall for fourth straight month

[Reuters] Trump legal woes and trade talks cause nerves while EM enjoys respite

[Reuters] Dollar remains on defensive, U.S.-China trade talks awaited

[Reuters] U.S., China to resume trade talks in Washington amid low expectations

[CNBC] Trump: We are going to put a 25% tariff on every car from the European Union

[CNBC] Trump and China are ratcheting up tariffs. Here's what that means

[CNBC] Fed chairman Powell assured senator he's not swayed by Trump's criticism

[BloombergQ] If Trump Can Strong-Arm the Fed, U.S. Assets May Not Be So Great

[BloombergQ] Leveraged-Loan Lovefest Will End in Heartbreak

[BloombergQ] Volatility Trades Are Reborn as Two-Tier Market Spurs New Short

[WSJ] Jackson Hole Gets Added Attention as Key Fed Rate Ticks Higher

[WSJ] For U.S. to Stay in WTO, China May Have to Leave

[WSJ] Turkey’s Meltdown Hits Japanese Mom-and-Pop Investors

[FT] Ten years after Lehman collapse few lessons have been heeded

Tuesday Evening Links

[Reuters] U.S. stock futures open lower after Cohen pleads guilty

[Reuters] S&P touches record high, equals longest-ever bull run

[Reuters] Brazil currency falls to more than two-year low

[Reuters] Oil hits one-week high as Iran-driven rally gathers pace

[Reuters] Fed's Kaplan sees three or four more rate hikes, then a pause

[Reuters] U.S. lawmakers seek more sanctions on 'menace' Russia

[CNBC] Trump's former lawyer Michael Cohen pleads guilty, admits to making illegal payments at direction of candidate

[CNBC] Former Trump campaign chief Paul Manafort found guilty of bank and tax fraud

[Newsweek] Europe Must Create New Monetary Fund That Leaves U.S. Out to Save Iran Deal, Germany Says

[NYT] 8 Ways the Next Round of China Tariffs Could Pinch Consumers

[BloombergSub] Fed Minutes May Drop Clue About How Long Powell Will Hike Rates

Tuesday's News Links

[BloombergQ] U.S. Stocks Edge Higher; Dollar Pares Drop: Markets Wrap

[CNBC] Dollar heads lower a day after Trump rips Fed and calls China and EU currency manipulators

[Reuters] Exclusive: Trump demands Fed help on economy, complains about interest rate rises

[Reuters] Exclusive: Trump doesn't expect much from China trade talks this week

[Reuters] China says won't resort to strong stimulus but will keep liquidity ample

[CNBC] China's biggest risk may be its property market — not the trade war

[BloombergQ] Emerging Markets May Lose Their Friendly Banker

[BloombergQ] Fed Boss Powell Feels Trump’s Fleeting Loyalty

[CNBC] Trump's attack on Fed crossed 'red line' for markets, could weaken dollar

[BloombergQ] Could Trade War Lead to the Real Thing?

[Reuters] Taiwan loses another ally to China

[NYT] ‘We Cannot Afford This’: Malaysia Pushes Back Against China’s Vision

[WSJ] U.S. Moves Toward New Tariffs on China Despite Fresh Round of Trade Talks

[WSJ] Chinese Banks Turn to New Tool to Win Customers

[FT] US and China to attempt revival of trade negotiations

[FT] Fed chairman has chance to keep economic expectations in check

[FT] US bull market poised to become its longest

Monday Evening Links

[Reuters] Wall Street ends higher on optimism over trade talks

[MarketWatch] U.S. Treasury yield curve flattest in 11 years, moving one step closer to inversion

[BloombergQ] Turkish Lira Leads Global Losses on Downgrades, Sanction Concern

[Reuters] Exclusive: Trump says not thrilled with Fed's Powell for raising rates

[BloombergQ] Trump Complains to Donors in the Hamptons About Powell’s Rate Hikes

[CNBC] Trump takes another shot at Fed Chairman Jerome Powell for raising rates

[Reuters] Fed's Bostic still expects one more rate increase in 2018

[BloombergQ] ECB's Weidmann Says Central Banks May Need to Tackle Imbalances

[BloombergQ] Doors Slam Shut for China Deals Around the World

[BloombergQ] India’s Current Account Deficit Likely To Widen To 2.8% Of GDP This Fiscal, Says Nomura

Monday's News Links

[BloombergQ] U.S. Stocks Track Gains Across Europe, Asia: Markets Wrap

[Reuters] Trade war puts new strains on America Inc's factories in China

[Reuters] Exclusive: China shifts to Iranian tankers to keep oil flowing amid U.S. sanctions - sources

[Reuters] Italy's Salvini says government will stand up against market attacks

[CNBC] Don't expect a 'grand bargain' from new US-China trade talks, expert says

[Reuters] Qatar and Turkey central banks sign swap agreement: Qatar central bank

[AP] Defiant Erdogan casts Turkey currency crisis in religious, patriotic terms

[BloombergQ] Venezuela's 95% Devaluation Adds to Chaos After Drone Attack

[BloombergQ] Bridge Disaster - Italy’s Moment of Truth

[Reuters] ECB on course to normalise monetary policy - Bundesbank chief tells paper

[Reuters] BOJ may be 'stealth tapering' in stock markets, analysts say

[NYT] Greece’s Bailout Is Ending. The Pain Is Far From Over.

[WSJ] At Heart of New Fed Debate: Bonds or Bills?

[WSJ] Luxury Apartment Sales Plummet in New York City

[WSJ] Venezuelan Crisis Escalates as President’s Economic Plans Fuel Tensions

[FT] US banks tap the brakes on consumer credit

[FT] Beijing residential rents jump 25% in July

[FT] Chinese shadow banking contraction set to moderate – Moody’s

[FT] King dollar: Hedge funds sharpen bet on rising greenback

Sunday Evening Links

[BloombergQ] Asia Stocks Mixed; Dollar, Yuan Little Changed: Markets Wrap

[CNBC] David Stockman: ‘Unhinged White House’ to cause stock market crash

[Reuters] Turkish lira crisis poses additional risk to German economy: finance ministry

[FT] US companies push rising costs on to customers

[FT] Commodity prices suffer as emerging markets tumble

[FT] Renewed HK dollar pressure coming from weak renminbi

[FT] Italian call for ECB to continue bond buying programme

Sunday's News Links

[BloombergQ] Big Questions on Global Economy Hang Over Jackson Hole Gathering

[Reuters] China regulator asks financial institutions to support infrastructure investment

[Reuters] Tough talks, no agreements at Merkel, Putin meeting near Berlin

[WSJ] As Euro Crisis Ends, Italy Stokes Fear of a Revival

[WSJ] Venezuela Devalues Currency and Hikes Wages, Stoking Fears About Instability

[FT] Emerging market turmoil set to take centre stage again

Saturday's News Links

[Reuters] Turkey's Erdogan says to challenge 'games' on the economy

[Euromoney] Italian banks a bigger risk than Turkey

[BloombergQ] Gold Trading Volumes Double in Turkey Amid Currency Crisis

[Reuters] China complains about Pentagon report, says it is 'pure guesswork'

[NYT] The West Hoped for Democracy in Turkey. Erdogan Had Other Ideas.

[NYT] Merkel and Putin: A Long History of Distrust and Reconciliation

[WSJ] Freddie Mac Joins Rental-Home Boom

Weekly Commentary: Instability

With the Turkish lira down another 6.6% in Monday trading, global "Risk Off" market Instability was turning acute. The U.S. dollar index jumped to an almost 14-month high Monday, as the Turkish lira, Argentine peso, Indian rupee and others traded to record lows versus the greenback. The South African rand "flash crashed" 10%, before recovering to a 2.3% decline. Brazil's sovereign CDS jumped 14 bps Monday to a six-week high 252. Italian 10-year yields jumped 11 bps to 3.10%, near the high going back to June 2014, as the euro declined to one-year lows.

The Turkish lira surged 8.4% Tuesday, jumped another 6.8% Wednesday and then gained an additional 1.9% Thursday. Wild Instability then saw the Turkish lira drop 3.1% during Friday's session, ending the week up 6.9%. Qatar's $15 billion pledge, along with central bank measures, supported the tenuous lira recovery.

August 17 - Wall Street Journal (Lingling Wei and Bob Davis): "Chinese and U.S. negotiators are mapping out talks to try to end their trade impasse ahead of planned meetings between President Trump and Chinese leader Xi Jinping at multilateral summits in November, said officials in both nations. The planning represents an effort on both sides to keep a spiraling trade dispute-which already has involved billions of dollars in tariffs and comes with the threat of hundreds of billions more-from torpedoing the U.S.-China relationship and shaking global markets. Scheduled midlevel talks in Washington next week, which both sides announced on Thursday, will pave the way for November. A nine-member delegation from Beijing, led by Vice Commerce Minister Wang Shouwen, will meet with U.S. officials led by the Treasury undersecretary, David Malpass, on Aug. 22-23. The negotiations are aimed at finding a way for both sides to address the trade disputes, the officials said, and could lead to more rounds of talks."

Apparently, global "Risk Off" attained a level of momentum that compelled Chinese and Trump administration officials to jointly calm the markets. After trading as low as 24,966 in Wednesday trading, the Dow rallied more than 700 points to end the (option expiration!) week at 25,669. For yet another week, U.S. markets were rewarded for disregarding mounting risk. Extraordinary market complacency is at this point No Conundrum. A Trump and Xi trade-focused meeting in late-November is conveniently timed soon after the midterms.

And while U.S. stocks rallied on happy prospects, the same cannot be said for global markets. The South African rand sank 3.8% this week to the low versus the dollar since June 2016. Brazil's real declined another 1.2% this week, trading the weakest against the dollar going back to early-2016. The Colombian peso, Chilean peso and Argentine peso all fell at least 2.0% this week. European equities were under pressure. Italian banks fell 3.2%, with European banks down 3.0%. Hong Kong's Hang Seng Financial index lost 4.1%.

The Shanghai Composite sank 4.5% this week, trading Friday at the lowest closing level since December 2014. China's renminbi traded to 6.93 (vs. $) in Wednesday trading, rapidly approaching the 2016 low of 6.96 to the dollar. The renminbi has now declined 8.7% from March 30th trading highs and 6.9% since June 14th. Increasingly fearful of a disorderly devaluation, Chinese officials implemented measures this week to support their sickly currency.

August 13 - Bloomberg: "China's broadest measure of new credit slowed, underlining concerns about the economy that have prompted authorities to start doing more to support growth. Aggregate financing stood at 1.04 trillion yuan ($151bn) in July… That was slower than the 1.39 trillion yuan in June, using the central bank's new calculation method for this data. The new index includes more types of credit and so isn't comparable to Bloomberg's survey or the data reported in previous months. New yuan loans stood at 1.45 trillion yuan, versus a projected 1.275 trillion yuan and 1.84 trillion yuan the previous month. Broad M2 money supply rose 8.5%, rebounding from record low expansion in June."

The PBOC has somewhat tweaked China's aggregate Credit data. Total Aggregate Financing for July ($151bn) was down 13% from July 2017. After 2018's first seven months, y-t-d Total Aggregate Financing of 10.137 TN yuan ($1.475 TN at current exchange rates) is running 18% below last year's comparable period. Beijing's crackdown has stopped shadow banking in its tracks, with July seeing another contraction in key shadow lending components.

And while bank lending moderated somewhat from a huge June, New (bank) Loans continue to expand rapidly. At 1.450 TN yuan ($210bn), New Loans for the month were up 76% compared to July 2017's 826 billion yuan. New Loans have expanded 10.479 TN ($1.52 TN) y-t-d, up 19% from comparable 2017. To be sure, the household borrowing binge runs unabated. At 44.756 TN yuan, China's Household Debt was up 19% over the past year and 47% in two years.

August 14 - Bloomberg: "There's no stopping China's property market. New-home prices rose at the fastest pace in 22 months in July, climbing 1.2% from the previous month… The jump in values in third-tier cities was the biggest in data going back to 2009, signaling the potential for the government to roll out more housing curbs in a cooling campaign that began more than two years ago. The dilemma for officials is how to restrain prices without tanking the property sector during a broader economic slowdown. 'A persistently high home price is going to lead to a very strong response from the government,' Phillip Zhong, a Hong Kong-based equity analyst at Morningstar… Asia, said… 'We are going to expect to see more tightening measures being put in place.'"

"China's state planning authorities pledged on Wednesday to keep debt levels under control as it expressed confidence that the year's growth target will be achieved in spite of the trade war with the US."

Accepting that growth has slowed and recognizing trade risks, the bullish consensus view holds that China retains the tools to ensure uninterrupted steady growth. Most believe China is adeptly managing Credit growth. I believe their policy dilemma is in the process of turning much more challenging.

Seemingly lost in the discussion is the reality that China's historic economic boom is turning dangerously unbalanced. While Beijing has moved aggressively to contain high-risk "shadow" lending, it has remained too timid in restraining household borrowing. Indeed, China is now facing full-fledged mortgage finance and apartment Bubbles - in the face of rapidly waning prospects elsewhere. Beijing seeks to continue cracking down on risky Credit, while pursuing measures to stimulate a slowing economy. Chinese officials would hope to spur ample productive Credit and sound economic investment to sustain the boom. The harsh reality is that there are limited opportunities for both. They're stuck, for the duration, with risky non-productive Credit and additional malinvestment and overcapacity.

August 13 - Reuters (Yawen Chen and Kevin Yao): "China's property investment growth accelerated to its quickest pace in nearly two years in July, driven by faster transactions and stronger developer appetite for land as funding conditions improved. Real estate investment rose 13.2% in July from the same period a year earlier, the fastest pace since October 2016 and higher than June's 8.4% rise… It grew 10.2% in the first seven months of the year."

Runaway mortgage finance Bubbles turn increasingly precarious. Late in the cycle, systemic risk grows exponentially. As we saw unfold during the U.S. mortgage finance Bubble, there is a ("Terminal Phase") rapid acceleration of loan growth of rapidly deteriorating Credit quality. The unparalleled Chinese real estate Bubble is backed by, too commonly, poorly constructed residential complexes. If the P2P lending Bubble collapse is causing public angst, just wait until apartment prices start sinking.

While Beijing has over the years made numerous attempts to tighten real estate lending, mortgage rates have remained significantly below the rate of apartment price inflation. I would argue that China's real estate Bubble is today acutely vulnerable to an unexpected jump in rates and/or tightening of lending conditions.

August 13 - Bloomberg (Yalman Onaran): "In 1988, 9 of the 10 largest banks in the world were Japanese. Three years later the country's financial system, along with its lenders, collapsed, sending Japan into its infamous lost decade (or three, considering the country is still struggling to escape deflation and low growth). The nine Japanese companies in the top ranks by assets 30 years ago have since consolidated into four successors. Only one turns up in this year's ranking. By 2007 all of the top 10 slots were filled by U.S. and European lenders. A year later the subprime mortgage meltdown hit the U.S. The sovereign debt crisis followed in Europe. Four of the 10 had to be bailed out by their respective governments… U.S. and European economies, like Japan's, have contended for most of the past decade with low growth. It's 2018, and the rankings teem with Asian banks again. This time the top four by assets are Chinese."

There was further confirmation this week of the faltering global Bubble thesis. Monday saw acute instability in EM currencies, in particular. With the Argentine peso down as much as 4.4%, the Argentine central bank hiked interest rates 500 bps (to 45%) to support the peso. Indonesia Wednesday unexpectedly raised rates another 25 bps (to 5.5%) after the rupiah sank to almost three-year lows. And with "hot money" fleeing EM, worries for the sustainability of the Hong Kong dollar peg returned.

August 13 - Bloomberg (Emma Dai): "Hong Kong's interbank borrowing costs climbed across the curve, as the city's currency interventions continued overnight, taking this week's total to HK$16.8 billion ($2.1bn). The three-month Hong Kong dollar interbank offered rate, known as Hibor, jumped by the most in more than two months… The Hong Kong Monetary Authority bought HK$14.6 billion of local dollars Wednesday…, after the currency declined to the weak end of its trading band."

At $432 billion, the Hong Kong Monetary Authority is viewed by the markets as having sufficient resources to indefinitely maintain the peg to the U.S. dollar. But with faltering global markets and increasingly nervous officials in Beijing, analysis has turned more complex. With a massive and vulnerable financial sector, along with its own formidable real estate Bubble, Hong Kong could find itself in the crosshairs of faltering global, EM and Chinese Bubbles.

August 13 - UK Telegraph (Ambrose Evans-Pritchard): "Hong Kong's housing boom is starting to fray as monetary tightening by the US Federal Reserve forces the enclave's authorities to tighten credit. A rash of home buyers has pulled out of purchases at the last moment despite losing large deposits, a sign that financial stress is biting harder or that fear is creeping into the market… This is happening as regulators in mainland China clamp down on capital outflows through interbank accounts using the Hong Kong-Shanghai Connect, aiming to stem any further fall in the yuan. The People's Bank (PBOC) is squeezing liquidity in the offshore Hong Kong market and has lifted the risk requirement ratio for forward yuan contracts to 20pc. This makes it harder to short the Chinese currency."

The late-week rally in U.S. equities did not pull the metals out of their deep funk. Copper sank 4.2% this week, pushing 2018 losses to almost 20%. "Zinc heads for Worst Week Since 2011," closing Friday down 6.2%. Lead dropped 5.2%, and Tin fell 4.1%. Aluminum declined 3.6%. Precious metals were only somewhat firmer. Platinum fell 4.7%, Silver 3.3% and Gold 2.2%.

The metals are surely not responding to currency issues in Turkey. Turkey is, after all, only symptomatic of the faltering global Bubble. This week provided important evidence of "Risk Off" dynamics turning more systemic for the emerging markets. With China's stocks and currency under heavy pressure again this week, the negative feedback loop between EM and China has turned quite threatening.

August 17 - Bloomberg: "China's government bonds declined as funding costs rebounded amid expectations of rising supply, giving the 10-year yield its biggest two-week advance since December 2016. The yield on notes due in a decade rose four bps to 3.65% Friday, taking its two-week increase to 19 bps… Bond futures also declined… The Ministry of Finance on Tuesday urged local governments to accelerate bond issuance to support economic expansion, spurring speculation that supply will jump in the coming weeks. The overnight repurchase rate surged 76 bps this week, after the People's Bank of China suspended reverse-repurchase operations for 18 days in a row… 'The previous market-supportive factors such as ample liquidity and gloomy economic outlook seem to have waned this week,' said Li Qilin, chief macroeconomic researcher at Lianxun Securities Co."

Beijing faces a huge dilemma. The faltering EM Bubble poses significant risk to the unbalanced Chinese economy. Moreover, global de-risking/deleveraging dynamics exacerbate risk to Chinese finance and the renminbi. Of course, the policymaker impulse is to orchestrate another round of fiscal and monetary stimulus. Meanwhile, China's historic mortgage finance and apartment Bubbles maintain powerful momentum. Stimulus measures at this stage of the cycle pose extreme risk. For one, it would surely push non-productive Credit growth to perilous extremes. Second, the combination of additional system liquidity and escalating systemic instability would exacerbate already significant risk of a disorderly Chinese currency devaluation.

That things look "terrible" in China, in contrast to obvious greatness in the U.S., is to provide the Trump administration a decisive trade negotiation advantage. And I can see the perceived benefits of scheduling low-level trade discussions ahead of a big trade meeting with the Chinese after the midterms. A temporary "truce" would be viewed as bolstering U.S. equities and supporting "great again" campaigning into November. I'm not, however, convinced this gambit will reverse the bursting of the EM Bubble. And I don't believe pushing serious negotiations out to November will in anyway resolve China's deteriorating financial and economic positions.

All in all, it was another ominous week for highly unstable global financial markets. Bubbles bursting, Bubbles faltering and Bubbles inflating. Global financial and economic prospects are dimming rapidly. I would be less apprehensive if U.S. equities (and Chinese apartment prices!) were adjusting to new realities. But it's not as if Bubble resilience is without precedent.

The S&P500 peaked on July 20, 1998, just weeks prior to near global financial meltdown. Back on August 25, 1987, the S&P hit a record high about six weeks before the "Black Monday" market crash. And looking back to fateful 1929, the DJIA traded to a record high on September 1st, with the Great Crash erupting the following month. Those that have studied the late-twenties should recognize ominous parallels. How on earth were they so completely blindsided?

For the Week:

The S&P500 gained 0.6% (up 6.6% y-t-d), and the Dow rose 1.4% (up 3.8%). The Utilities rallied 2.7% (up 2.8%). The Banks gained 0.9% (up 3.1%), and the Broker/Dealers added 0.6% (up 3.5%). The Transports rose 1.2% (up 5.8%). The S&P 400 Midcaps increased 0.7% (up 5.8%), and the small cap Russell 2000 added 0.4% (up 10.3%). The Nasdaq100 slipped 0.4% (up 15.3%). The Semiconductors fell 2.3% (up 5.6%). The Biotechs declined 1.0% (up 20.3%). With bullion down $27, the HUI gold index sank 10.9% (down 25.9%).

Three-month Treasury bill rates ended the week at 1.99%. Two-year government yields were little changed at 2.61% (up 72bps y-t-d). Five-year T-note yields were about unchanged at 2.74% (up 53bps). Ten-year Treasury yields slipped a basis point to 2.86% (up 45bps). Long bond yields declined one basis point to 3.02% (up 28bps). Benchmark Fannie Mae MBS yields were unchanged at 3.60% (up 61bps).

Greek 10-year yields jumped 13 bps to 4.31% (up 24bps y-t-d). Ten-year Portuguese yields rose eight bps to 1.86% (down 9bps). Italian 10-year yields jumped 13 bps to 3.12% (up 111bps). Spain's 10-year yields increased four bps to 1.45% (down 12bps). German bund yields slipped a basis point to 0.31% (down 12bps). French yields were unchanged at 0.67% (down 12bps). The French to German 10-year bond spread widened one to 36 bps. U.K. 10-year gilt yields declined one basis point to 1.24% (up 5bps). U.K.'s FTSE equities index fell 1.4% (down 1.7%).

Japan's Nikkei 225 equities index was about unchanged (down 2.2% y-t-d). Japanese 10-year "JGB" yields were little changed at 0.10% (up 5bps). France's CAC40 fell 1.3% (up 0.6%). The German DAX equities index dropped 1.7% (down 5.5%). Spain's IBEX 35 equities index lost 1.9% (down 6.2%). Italy's FTSE MIB index sank 3.2% (down 6.6%). EM equities were under pressure. Brazil's Bovespa index declined 0.9% (down 0.5%), and Mexico's Bolsa slipped 0.2% (down 2.2%). South Korea's Kospi index fell 1.6% (down 8.9%). India’s Sensex equities index added 0.2% (up 11.4%). China’s Shanghai Exchange sank 4.5% (down 19.3%). Turkey's Borsa Istanbul National 100 index fell 6.5% (down 23.1%). Russia's MICEX equities index declined 0.9% (up 6.9%).

Investment-grade bond funds saw inflows of $1.453 billion, and junk bond funds had inflows of $197 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates dropped six bps to 4.53% (up 64bps y-o-y). Fifteen-year rates declined four bps to 4.01% (up 85bps). Five-year hybrid ARM rates slipped three bps to 3.87% (up 71bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down seven bps to 4.52% (up 45bps).

Federal Reserve Credit last week dipped $0.6bn to $4.217 TN. Over the past year, Fed Credit contracted $211bn, or 4.8%. Fed Credit inflated $1.406 TN, or 50%, over the past 302 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt fell $10bn last week to $3.432 TN. "Custody holdings" were up $106bn y-o-y, or 3.2%.

M2 (narrow) "money" supply declined $8.2bn last week to $14.148 TN. "Narrow money" gained $526bn, or 3.9%, over the past year. For the week, Currency was little changed. Total Checkable Deposits declined $20.2bn, while Savings Deposits gained $8.2bn. Small Time Deposits rose $5.2bn. Retail Money Funds slipped $1.2bn.

Total money market fund assets slipped $3.7bn to $2.860 TN. Money Funds gained $154bn y-o-y, or 5.7%.

Total Commercial Paper dropped $16.8bn to $1.055 TN. CP gained $92bn y-o-y, or 9.4%.

Currency Watch:

The U.S. dollar index slipped 0.3% to 96.116 (up 4.3% y-t-d). For the week on the upside, the New Zealand dollar increased 0.7%, the Canadian dollar 0.6%, the South Korean won 0.4%, the Japanese yen 0.3%, the euro 0.2%, the Singapore dollar 0.2%, the Australian dollar 0.2% and the Mexican peso 0.1%. For the week on the downside, the South African rand declined 3.7%, the Brazilian real 1.2%, the Norwegian krone 1.1%, the Swedish krona 0.3%, the British pound 0.1% and the Swiss franc 0.1%. The Chinese renminbi declined 0.45% versus the dollar this week (down 5.39% y-t-d).

Commodities Watch:

August 16 - Reuters (Winni Zhou, Zheng Li and Andrew Galbraith): "China has banned banks in its ground-breaking free trade zones from certain lending activities to ease pressure on the yuan currency in offshore markets, two sources with direct knowledge of the matter said… The restrictions, announced by the Shanghai branch of the People's Bank of China (PBOC) on Thursday morning, have closed off channels used to deposit and lend yuan offshore through the trade zones as the currency plumbs 15-month lows, the sources said."

The Goldman Sachs Commodities Index fell 1.9% (up 1.6% y-t-d). Spot Gold dropped 2.2% to $1,185 (down 9.1%). Silver sank 3.4% to $14.775 (down 13.8%). Crude fell $1.71 to $65.93 (up 9%). Gasoline dropped 3.0% (up 10%), while Natural Gas was little changed (unchanged). Copper fell 2.3% (down 19%). Wheat gained 1.8% (up 36%). Corn jumped 1.9% (up 8%).

Trump Administration Watch:

August 16 - Reuters (Michael Martina and Elias Glenn): "China will hold a fresh round of trade talks with the United States in Washington later this month, Beijing said on Thursday, offering a glimmer of hope for progress in resolving a conflict that has set world financial markets on edge. While the engagement was seen by analysts and business officials as positive, they cautioned that the talks were unlikely to lead to a breakthrough given they are among lower level officials and led on the U.S. side by the Treasury Department, not the U.S. Trade Representative (USTR)."

August 11 - Wall Street Journal (Jacob M. Schlesinger): "President Trump's decision to double steel tariffs on Turkey as its government battled a currency collapse marked a departure for the U.S. from how it traditionally handles financial turmoil hitting emerging markets. Washington has generally tried to calm global markets in such moments, especially when investors are gripped by fear of contagion. Mr. Trump instead squeezed Ankara further, raising tariffs on Turkish steel imports to 50% and aluminum to 20%, which deepened the Turkish lira's drop and worsened market fears that its banks could be shaken. Administration officials didn't clarify Mr. Trump's motives."

August 16 - Financial Times (Katie Martin): "Mr Trump certainly picked his moment. While the lira was crashing on Friday (that is not hyperbole - it dropped by 16% on that day alone), he swooped in to declare that he was doubling tariffs on steel and aluminium imports from the country. What is more, he suggested with his own special logic that this was a specific response to the slide in the lira 'against our very strong Dollar!' Mr Trump did not start the lira's slide, far from it. He briefly made it worse, though. And crucially, he provided President Recep Tayyip Erdogan with precisely the cover he has been seeking. Turkey's problems have been bubbling up for years."

August 15 - Reuters (Tim Ahmann and Lesley Wroughton): "The United States imposed sanctions on a Russian port service agency and Chinese firms for aiding North Korean ships and selling alcohol and tobacco to Pyongyang in breach of U.S. sanctions… 'The tactics that these entities based in China, Singapore, and Russia are using to attempt to evade sanctions are prohibited under U.S. law, and all facets of the shipping industry have a responsibility to abide by them or expose themselves to serious risks,' U.S. Treasury Secretary Steven Mnuchin said…"

August 16 - Financial Times (Laura Pitel): "Mike Pence, the US vice-president, has warned Turkey not to test America's resolve in an escalating row between the two countries, as Qatar announced $15bn in support for Ankara. Mr Pence said Andrew Brunson, an evangelical pastor whose detention in Turkey has triggered tit-for-tat sanctions between the two Nato allies, must be released immediately and hinted at further punitive steps if he was not allowed to go free. 'Pastor Andrew Brunson is an innocent man held in Turkey & justice demands that he be released,' Mr Pence, who is himself an evangelical Christian, wrote… 'Turkey would do well not to test @POTUS Trump's resolve to see Americans who are wrongfully imprisoned in foreign lands returned home to the United States.'"

Turkey Watch:

August 11 - Reuters (Humeyra Pamuk): "President Tayyip Erdogan denied on Saturday that Turkey is in a currency crisis, dismissing a plunge in the lira as 'fluctuations' which have nothing to do with economic fundamentals. Speaking after U.S. President Donald Trump doubled tariffs on Turkish steel and aluminum imports, Erdogan described Friday's 18% fall in the lira to a record low as the 'missiles' of an economic war waged against Turkey. Erdogan said those who plotted against Turkey in a failed coup attempt in July 2016 were now trying to target the country through its economy, and pledged to fight back… 'Those who can't compete with us on the ground have brought online fictional currency plots that have nothing to with the realities of our country, production and real economy,' Erdogan told a provincial meeting of his AK Party…"

August 14 - Bloomberg (Onur Ant): "President Recep Tayyip Erdogan vowed to boycott iPhones in a demonstration of defiance as the U.S. held firm to its demand that Turkey release an evangelical pastor and Turkish executives called for action to bolster the lira. Erdogan said the nation of 80 million people would stop buying American electronics, condemning the 'explicit economic attack' against his country."

August 16 - Financial Times (Colby Smith): "Last June Saudi Arabia, Egypt and other Arab states severed ties with Qatar. Turkey offered food and military aid. Now Qatar has returned the favour, with a pledge of $15bn in direct investment. Turkey desperately needs the help. But Qatar's lifeline… simply isn't going to cut it. Over the next year, the country's external financing needs will approach $238bn, according to HSBC. The lira has only barely stabilised after weakening as much as 24% in a week, and foreign reserves are dwindling. There is no way around it. Turkey will need the IMF. In recent days, Erdogan has hinted that a distinctly non-Western list of countries including Russia and China could come to his aid."

August 14 - Bloomberg (Selcuk Gokoluk): "Bonds of Turkish banks plunged deeper into stressed territory as the lira's 45% slump this year makes it more costly for lenders to repay dollar debts. Nine bonds issued by Turkish banks listed in a Bloomberg Barclays index were trading below 80 cents on the dollar as of Monday, compared with just one a month ago. Bonds of Yapi Kredi Bankasi AS maturing in March 2026 were among the hardest hit, losing almost 30 cents on the dollar in the past week."

August 14 - Wall Street Journal (Patricia Kowsmann): "Turkey's banks are feeling the brunt of the country's steep currency slide. Their health will be a barometer of how deeply the pain will be felt in the economy. The banking system is chock-full of foreign-currency debt to companies and, to a lesser extent, consumers. Borrowers who took out loans in U.S. dollars and euros will see the value of their payment obligations skyrocket in lira terms. A slowing economy will also intensify the pain. The country's banking regulator moved Tuesday to ease banks' burden of souring loans to consumers and companies. Measures include allowing lenders to extend loan maturities and facilitate debt restructuring."

August 16 - Wall Street Journal (Jon Sindreu and Sarah McFarlane): "Turkey faces another big problem after it deals with the immediate impact of its currency crisis: How is it going to pay for its dependence on imported oil and natural gas? Turkey imports the vast majority of its fuel needs. Its devalued lira makes paying for such imports more expensive. Meanwhile, the economy is rapidly running out of hard currency to pay for that imported energy and support all its other foreign-currency needs, especially among Turkish companies who have borrowed heavily in U.S. dollars. While oil is roughly 6% more expensive year to date for international traders, its price tag has risen more than 60% for Turkish buyers because of the plunge in their currency against the dollar."

August 12 - Financial Times (Ayla Jean Yackley): "Recep Erdogan has warned the US that Turkey would seek new friends and allies as it looked for help to halt a full blown currency crisis that has been made worse by an intensifying row with its Nato ally. He also ruled out raising the interest rate, saying it would hurt the poor. 'Turkey will emerge in a very short time from this exchange rate, interest rate, inflation spiral they are trying to force it into,' the Turkish president told a rally for members of his ruling Justice and Development Party… 'I am telling you the real formula: If we don't minimise this interest rate, it is a vehicle of exploitation that will make the rich richer and the poor poorer.'"

August 13 - Reuters (Tuvan Gumrukcu): "President Tayyip Erdogan on Monday accused 'economic terrorists' of plotting to harm Turkey by spreading false reports and said they would face the full force of the law, as authorities launched investigations of those suspected of involvement."

Federal Reserve Watch:

August 17 - Financial Times (Sam Fleming): "The potential for swelling corporate power to depress workers' wages will be debated by central bankers from around the world next week when policymakers gather for their annual meetings in Jackson Hole, Wyoming. The agenda for the event, titled 'Changing Market Structure and Implications for Monetary Policy', takes the symposium into some of the more politically charged areas of modern economics. Scholars have been asking whether the massive market power of big companies is having malign effects on the broader economy, including by depressing labour's share of income, and whether antitrust authorities need to take a tougher line."

U.S. Bubble Watch:

August 12 - Bloomberg (Sarah McGregor): "The U.S. budget deficit widened in the first four months of the fiscal year as growth in spending exceeded revenue. The U.S. fiscal gap increased by 11% to $175.7 billion between October and January from the same period a year earlier… Outlays rose by 5% to $1.3 trillion, while receipts increased by 4% to $1.1 trillion. The budget deficit widened the last fiscal year to the largest since 2013. The gap is expected to keep increasing as an aging population boosts spending on healthcare and retirement programs and from tax cuts enacted this year that are expected to cut revenue by up to $1.5 trillion over the next decade… The Trump administration's proposed budget released Monday shows the 2019 deficit widening to nearly $984 billion and totaling $7.1 trillion over the next decade."

August 14 - Bloomberg (Matthew Boesler): "U.S. household debt continued to increase in the second quarter, propelled by an advance in mortgage borrowing… Total household debt rose 3.5% from a year earlier in the April-to-June period to a record $13.3 trillion, while mortgage debt rose 3.5% to $9 trillion. The majority of newly originated mortgages continued to go to borrowers with the highest credit scores… As borrowing advanced, borrower stress continued to decline. Loans slipping into delinquency fell to 4.52% in the second quarter, the lowest in data from 2003."

August 14 - Bloomberg (Matthew Boyle): "It's getting more expensive for retailers like Walmart Inc. to stock its shelves with household staples like diapers, paper towels and bottled water. The question now is whether that translates into more pain at the check-out line. Soaring costs for transportation and raw materials -- some related to tariffs -- have prompted Procter & Gamble Co., Nestle SA, Coca-Cola Co. and others to announce price increases this summer on a wide swath of consumer staples. The companies are betting that demand will remain steady even though wage growth is tepid and Americans' wallets are already getting pinched by higher gas prices…"

August 15 - Reuters (Lucia Mutikani): "U.S. retail sales rose more than expected in July as households boosted purchases of motor vehicles and clothing, suggesting the economy remained strong early in the third quarter… Retail sales in July increased 6.4% from a year ago."

August 15 - Bloomberg (Reade Pickert and Scott Lanman): "Spending at U.S. restaurants surged over the past three months by the most on record, making it both a bright spot for the economy and a risk if appetites for eating out return to normal. Sales at food-service and drinking establishments rose 1.3% in July to $61.6 billion... That brought the three-month annualized gain to 25.3%, the fastest pace in figures going back to 1992."

August 14 - New York Times (Erin Griffith): "In late April, when Mike Massaro set out to get $40 million to $75 million in funding for his payments start-up, Flywire, he contacted a small group of investors he already knew. But word quickly got around, and other investors flooded his inbox with $200 million of investment offers... Gusto, a payroll and benefits software company, raised $140 million in July, but could have done five times that, according to Joshua Reeves, its chief executive and founder. Convene, a real estate services start-up, recently obtained $152 million and turned away more than $100 million… Soon after, another wave of hopeful investors called… Start-ups raising $100 million or more from investors - known as a mega-round in Silicon Valley - used to be a rarity. But now, they are practically routine, producing a frenzy around tech companies with enough scale and momentum to absorb a large check."

August 15 - Reuters (Lucia Mutikani): "U.S. worker productivity increased at its fastest pace in more than three years in the second quarter, depressing labor costs, but the trend in productivity growth remained moderate. …Nonfarm productivity, which measures hourly output per worker, rose at a 2.9% annualized rate in the April-June quarter."

August 13 - CNBC (Annie Nova): "More than 1 million student loan borrowers each year go into default. Outstanding education debt in the U.S. has tripled over the last decade and now exceeds $1.5 trillion, posing a greater burden to Americans than auto or credit card debt. For many, the payments are proving unmanageable. By 2023, nearly 40% of borrowers are expected to default on their student loans."

August 12 - Wall Street Journal (Rebecca Elliott and Bradley Olson): "American oil companies-primed to reap the benefits of rising prices after years of wringing more from wells for less-are seeing profits erode in the face of rising costs. Those operational challenges make balancing lofty growth objectives and demands for fiscal restraint increasingly difficult. If the companies continue to stumble, the result could be a higher cost of capital to finance the ongoing U.S. energy boom or a slower pace of growth. Two-thirds of U.S. oil producers failed to live within their means in the second quarter, even as oil rose above $70 a barrel. Collectively, 50 major U.S. oil companies reported in their second-quarter results that they have spent $2 billion more than they took in, according to… FactSet."

August 13 - Wall Street Journal (AnnaMaria Andriotis and Peter Rudegeair): "Financial-technology startups are stepping into a void increasingly left by credit-card-issuing banks: lending to customers with poor credit histories. LendUp Global Inc. and Fair Square Financial LLC, which focus more heavily on riskier borrowers, mailed out roughly 35 million credit-card offers during the first half of the year, according to market-research firm Competiscan, up from 7 million during the same period last year."

China Watch:

August 11 - Financial Times (Tom Mitchell): "When China's top leaders gathered earlier this month at a seaside resort near Beijing for their annual summer retreat, US President Donald Trump loomed large over their deliberations. The Trump administration had days earlier warned that they were considering taxing Chinese exports worth $200bn at 25%... In July the world's two largest economies had formally started trade hostilities, when they slapped punitive duties on $34bn of each other's exports. Chinese officials hoped their unwanted trade war with the US would pause there, at least for the summer. 'Everyone has been surprised by Trump,' said one Chinese economist who is close to Beijing policymakers. 'Most Chinese officials assumed that Trump was just trying to push the boundary but would eventually back off.' Mr Trump has instead pressed ahead with his efforts to turn up the heat on Chinese President Xi Jinping."

August 15 - The Street.com (Bradley Keoun): In the escalating trade war with President Donald Trump, China might be digging in its heels. According to a new report, China now appears willing to undertake a major currency devaluation - similar to the policy changes that roiled global markets in late 2015 and early 2016. The move by the Chinese government would help to offset the effect of the Trump administration's enacted or threatened tariffs on some $250 billion of imports from the country, writes the economic forecaster TS Lombard… China's main reason for avoiding a major devaluation so far was that it could spark large capital outflows from the country… according to TS Lombard. But the government has imposed capital controls to keep money from flowing out, providing officials with a source of confidence as they look for ways to push back against Trump and his trade war, according to the economists."

August 14 - Reuters (Jessica Jaganathan and Chen Aizhu): "Chinese oil importers are shying away from buying U.S. crude as they fear Beijing's decision to exclude the commodity from its tariff list in a trade dispute between the world's biggest economies may only be temporary. Not a single tanker has loaded crude oil from the United States bound for China since the start of August…"

August 13 - Reuters (Ben Blanchard): "China… condemned measures targeting it in a new U.S. defense act, saying it exaggerated antagonism and that Beijing would take a close look at aspects that beef up the role of a U.S. panel that reviews foreign investment proposals… 'The U.S. side should objectively and fairly treat Chinese investors, and avoid CFIUS becoming an obstacle to investment cooperation between Chinese and U.S. firms,' the ministry said…"

August 16 - Bloomberg: "The Chinese Communist Party's top newspaper issued a rare direct criticism of President Donald Trump's agenda, saying his 'America First' policies were hurting his own people and fomenting discontent in the country. 'After more than a year of observing American diplomatic practice, people have seen the United States strides under the slogan 'America First,' but the complaints of those Americans who have not felt the benefits of 'America First' are growing,' an opinion piece… in the People's Daily said. 'Bizarrely, U.S. trade policy makers seem to be deaf.'"

August 11 - South China Morning Post (He Huifeng): "China can easily find other countries to buy agricultural goods from instead of the U.S., its vice agriculture minister said, warning that American farmers could permanently lose their share of the Chinese market as a result of the trade war. 'Many countries have the willingness and they totally have the capacity to take over the market share the U.S. is enjoying in China. If other countries become reliable suppliers for China, it will be very difficult for the U.S. to regain the market,' Han Jun told official Xinhua news agency…"

August 10 - Reuters (Alexandra Harney): "China's state media continued a barrage of criticism of the United States on Saturday as their tit-for-tat trade war escalated, while seeking to reassure readers the Chinese economy remains in strong shape. Commentaries in the People's Daily, China's top newspaper, likened the United States to a bull in a China shop running roughshod over the rules of global trade and said that China was 'still one of the best-performing, most promising and most tenacious economies in the world.'"

August 13 - Reuters (Kevin Yao and Fang Cheng): "The Chinese government is expediting plans to invest billions of dollars in infrastructure projects as its economy shows signs of cooling further, with investment growth slowing to a record low and consumers turning more cautious. With its trade war with the United States threatening to pile more pressure on China's economy, Beijing… rolled out a $14 billion urban railway plan and pushed local governments to speed up issuance of special bonds for funding infrastructure projects. Official data showed fixed-asset investment expanded by a less-than-expected 5.5% in January-July, a result of Beijing's crackdown on lavish local government borrowing for projects to boost growth."

August 13 - Financial Times (Tom Mitchell and Xinning Liu): "The December 2009 debut of China's first long-distance high-speed rail service.. was a dramatic example of the Chinese Communist party's debt-fuelled response to the global financial crisis. Such investment projects fuelled demand for concrete, steel and other industrial commodities in the world's second-largest economy in the years after the crisis. But they have also saddled China Railway and other state-owned enterprises with huge amounts of debt. In the decade to 2016, Chinese corporate debt levels rose from 100% of gross domestic product to 190%, or Rmb141tn. As of March, China Railway's total debts stood at Rmb5tn. According to Li Hongchang, a transport expert at Beijing Jiaotong University, as much as 80% of the company's debt burden is related to HSR construction."

August 14 - Financial Times (Gabriel Wildau): "An investment arm of western China's Xinjiang region has failed to repay a Rmb500m ($73m) bond, marking the first public default by a Chinese government-linked holding company. The default by the Sixth Agriculture State-Owned Assets Management Co is the first by an investment holding company and a signal to investors that even state-owned groups that are agents of fiscal policy - considered closer to Beijing than commercially operated state-owned enterprises- are not guaranteed to be bailed out by the state… The central government keeps a tight lid on direct fiscal borrowing by local governments but has allowed them to skirt these limits by borrowing via investment vehicles such as Sixth Agricultural. Using traditional accounting, China's budget deficit was a modest 3.9% of gross domestic product last year, but when such off-budget spending was included, the 'augmented deficit' was 10.8% of GDP, according to the IMF."

August 14 - Wall Street Journal (Chao Deng): "A missed bond payment by a quasi-military organization in the Xinjiang Uighur Autonomous Region is fueling fresh concerns about China's ability to shoulder its massive debt. A unit of the Xinjiang Production & Construction Corps, an organization with military heritage that runs commercial enterprises for the government, acknowledged… that it failed to pay back interest and principal for $73 million of onshore bonds. The XPCC unit, known as the Sixth Division of State-Owned Asset Management, warned in another statement that it might also have trouble paying a separate 500 million yuan bond due Sunday. 'The company is negotiating several ways to repay the money,' that statement said… Several Chinese news media reports heralded the missed payment… as the first instance of a local-government financing vehicle to default."

August 12 - Bloomberg: "The People's Bank of China is tackling a problem it rarely had to worry about until recently -- persuading banks to lend the money they have. Thanks to the central bank turning on the liquidity taps, the cost for banks to borrow from one another is now lower than the cost to borrow from the PBOC, but a large chunk of those funds is sitting idle. That money isn't feeding into the wider economy, especially not to cash-strapped smaller firms, as lenders are unwilling to make loans or buy risky bonds. With China in a worsening trade war with the U.S. and also trying to control already large debts, ensuring funds get to needy companies is vital to sustain growth. Since the start of August, the central bank has begun softening rules to encourage lending, and a top-level meeting chaired by Vice Premier Liu He called for more efforts in 'unclogging' the transmission mechanism, underlining the government's sense of urgency."

EM Watch:

August 13 - Bloomberg (Justin Villamil and Pablo Gonzalez): "It isn't just sovereigns. Argentine and Turkish corporate bonds are also racing each other to the bottom. Of the 10 worst-returning dollar-denominated, emerging market corporate bonds this month, six are Turkish and four are Argentine. The worst are Turkiye Is Bankasi bonds maturing in 2028, down almost 19%... By comparison, Argentina's sovereign bonds have lost 7.5% and Turkish sovereigns are down 6.7%. 'Argentina and Turkey are trading like Siamese twins,' said Guido Chamorro, senior investment manager at Pictet Asset Management… 'For different reasons, but similar results.'"

Global Bubble Watch:

August 14 - Wall Street Journal (Ben Eisen): "Turkey's escalating crisis is spotlighting the giant stockpile of foreign-currency debt held by emerging markets, a build-up that threatens to throw those economies off course in the coming years. Governments, financial firms and other companies in emerging markets have $2.7 trillion in U.S. dollar-denominated debt that comes due between now and the end of 2025, according to the Institute of International Finance. These countries will need to pay off or refinance their loans and bonds as they come due. The trouble: A slide in emerging-market currencies against the U.S. dollar makes it tougher to pay back that greenback debt, particularly for countries where more revenue is generated in local currencies that are suddenly less valuable on a relative basis… Hungary, Argentina, Poland and Chile all have foreign-currency denominated debt that stands at more than half of gross domestic product, according to Deutsche Bank."

August 12 - Financial Times (Eric Platt and James Fontanella-Khan): "Acquisitions worth more than $540bn have been scuppered so far this year as blockbuster takeovers have come under renewed threat from government scrutiny. Countries are increasingly turning to foreign investment laws to block deals in sensitive industries, including the technology and utility sectors, while antitrust regulators have put up barriers to several multibillion-dollar transactions this year. Among the casualties was chipmaker Broadcom's $142bn hostile bid for rival Qualcomm, which was blocked by US president Donald Trump on national security grounds… In the last week alone, a handful of marquee transactions were killed…"

Central Bank Watch:

August 14 - Financial Times (Claire Jones): "Turkey's central bank this week raised rates in all but name, in effect using a method that seems to skirt President Recep Tayyip Erdogan's deep aversion to higher borrowing costs. The question is can it work? For two days now, the central bank has stopped lenders from drawing liquidity through its usual auctions of one week cash, forcing them instead to borrow overnight at a penalty. At the one-week window, banks can borrow at 17.75%, overnight it costs 19.25% - raising the price of financing by 1.5 percentage points."

August 14 - Bloomberg (Scott Squires): "Argentina increased its benchmark interest rate to 45% from 40%..., after the peso currency tumbled in response to a local corruption scandal and Turkey's currency crisis."

August 15 - South China Morning Post (Karen Yeung): "Hong Kong's de facto central bank said it has stepped in the foreign currency market to defend the Hong Kong dollar for the first time since May, bringing a key property loan interest rate closer to a tipping point… Depreciation pressure on the local currency was exacerbated in recent days as the Turkish lira crisis roiled equities and currency markets around the world, leading traders and investors to offload emerging market and Asian assets while buying the US dollar safe-haven assets."

Europe Watch:

August 13 - Reuters (Gavin Jones): "The economic spokesman of Italy's ruling League party warned… that unless the European Central Bank offers a guarantee to cap yield spreads in the euro zone, the euro will collapse. 'The situation can't be resolved, and it is going to explode,' Claudio Borghi told Reuters after Italian, Spanish and Portuguese government bond yields rose in the wake of the financial turmoil in Turkish markets."

August 16 - Bloomberg (Samuel Potter): "The dreaded sovereign-bank 'doom loop' in Europe may have weakened. Now comes the bad news. Thanks to political risks and regulatory changes, Italian lenders may be reluctant to snap up domestic government bonds during market stresses -- a potentially huge structural shift in demand in the euro area's second-most indebted nation. Goldman Sachs… casts doubt on whether such institutions can go on serving as dutiful marginal buyers, a bid that's historically stabilized a market seen as Europe's Achilles' heel. 'Whether domestic financial institutions will continue to act as a steady (and potentially increasing) source of demand for sovereign duration remains a fundamental question', Goldman's Matteo Crimella wrote…"

August 15 - Bloomberg (Irene García Pérez): "Bonds issued by Italy's biggest highways operator sank and the cost of insuring its debt surged after the government said the collapse of a motorway bridge operated by the firm's subsidiary wouldn't go unpunished… Infrastructure group Atlantia's saw some of its bonds fall to their lowest levels ever on Wednesday while swaps that protect against default soared to the highest in almost five years… The declines came after senior figures in Italy's government… called for Autostrade management to resign and threatened to withdraw licenses to operate the country's highways. Any loss of concessions would be a major setback for Atlantia, which has 12.8 billion euros ($14bn) of bonds Outstanding…"

Japan Watch:

August 16 - Reuters (Leika Kihara): "The Bank of Japan may allow long-term interest rates to creep up to around 0.4% under new guidance introduced last month, which lays the groundwork for 'stealth' rate hikes, the central bank's former executive Hideo Hayakawa said… The Bank of Japan may allow long-term interest rates to creep up to around 0.4% under new guidance introduced last month, which lays the groundwork for 'stealth' rate hikes, the central bank's former executive Hideo Hayakawa said…"

Fixed Income Bubble Watch:

August 15 - Financial Times (Colby Smith): "Convertible debt has emerged as a rare bright spot in the beleaguered fixed-income market this year, boosted by a rallying share market and rising interest rates, and in turn triggering the fastest pace of new sales in a decade, led by technology companies. US corporate bonds that convert to stock at a given price have generated a total return of 6% for investors this year... In contrast, investment-grade-rated corporate debt has lost 5.8% and high-yield bonds have dropped 2.4% in 2018… Fast-growing technology companies dominate convertible issuance as they are a cheaper way to raise money than issuing common stock or traditional junk bonds… Companies are issuing more convertible debt, with the volume of sales reaching $31.6bn so far this year, according to Dealogic - the fastest pace since the financial crisis."

August 16 - Wall Street Journal (Matt Wirz): "Investors bought record amounts of junk-rated corporate loans in recent years, betting they would deliver more stable returns than high-yield bonds, but the loans are no longer as safe as their owners may think. A rapid deterioration in the quality of 'leveraged loans' means loanholders would recover far less in a future economic downturn than they have historically, according to research by Moody's... Years of low rates have spurred record amounts of corporate borrowing, often in the $1.4 trillion market for below-investment-grade loans."

Leveraged Speculation Watch:

August 14 - Bloomberg (Stephen Gandel): "A number of hedge fund firms have a hot product. It's not their hedge funds. Och-Ziff Capital Management's investors withdrew $418 million from its hedge funds in the second quarter. Total inflow of assets under management, however, were $1.2 billion, its largest increase in assets in four years. The firm's hot product: Collateralized loan obligations - a derivative debt investment that invests in leveraged loans and is a cousin of the type of funds that blew up in the housing bubble. Like hedge funds, CLOs are supposed to be protected from losing money, particularly now. That's because they invest generally in floating rate loans, which, unlike normal bonds, won't lose money when interest rates rise… As a result, CLOs, which are also managed by private equity firms as well as other more specialized debt investors, have become one of the hottest products on Wall Street, with inflows continuing to pick up this year, leaving hedge funds far behind. Just more than $69 billion in CLOs… were issued in the U.S. in the first half of the year… An additional $9.7 billion flowed into the credit derivatives in July. And last month, Wells Fargo predicted that U.S. CLO issuance would hit $150 billion this year, a record."

Geopolitical Watch:

August 14 - Bloomberg (Tony Halpin): "Vladimir Putin isn't letting a good crisis go to waste. While Turkey's lira troubles have gripped global markets worried about contagion risks, Russia spies an opportunity in the political frictions between Ankara and the U.S. The idea of bringing Turkey tighter into Russia's embrace isn't as unrealistic as it was even a few years ago, with Turkish President Recep Tayyip Erdogan warning that spiraling conflict with the U.S. may prompt him to find new allies. As President Donald Trump's top national security aide warned Turkey's U.S. envoy they have nothing to discuss until a detained American pastor is released, Russia's foreign minister was holding talks in Ankara. Trump doubled tariffs on Turkish steel and aluminum while Erdogan and Putin discussed economic cooperation."

August 12 - Financial Times (Kathrin Hille): "Russia is trying to reduce its dependence on the dollar by cutting US securities holdings and settling more trade payments in other currencies, Moscow's chief economic policymaker said… Anton Siluanov, finance minister and deputy prime minister for the economy, said the US currency was 'becoming a risky instrument in international settlements'. 'We have decreased to a minimum level and will further cut our investment in the US economy, in US securities,' he added, in the most direct confirmation so far of a Russian government sell-off of US Treasuries."

August 12 - Reuters (Andrey Ostroukh): "Russia will further decrease its holdings of U.S. securities in response to new sanctions against Moscow but has no plans to shut down U.S. companies in Russia, Finance Minister Anton Siluanov said on state TV…"

August 12 - Financial Times (Henry Foy): "Russia has pledged to deepen co-operation with Iran and its Central Asian neighbours through a landmark deal on carving up the Caspian Sea, potentially paving the way for long-stalled energy projects and confirming Russia's military supremacy over the world's biggest lake. The Caspian's littoral states of Azerbaijan, Iran, Kazakhstan, Russia and Turkmenistan have quarrelled for more than two decades since the collapse of the Soviet Union over how to divide the strategically-important landlocked sea. On Sunday they signed a deal to manage a resource that holds large hydrocarbon resources and is a bridge between Central Asia, the Middle East and Europe. 'This is an exceptional summit with milestone significance for the fate of the Caspian Sea,' Russian president Vladimir Putin told his fellow leaders."

August 11 - Reuters: "Iranian Supreme Leader Ayatollah Ali Khamenei… called for 'swift and just' legal action from new courts after the head of the judiciary said the country faced an 'economic war'… The rial currency has lost about half of its value since April under the threat of revived U.S. sanctions, with heavy demand for dollars among ordinary Iranians trying to protect their savings. The cost of living has also soared, sparking sporadic demonstrations…"

August 16 - Reuters (Christopher Bing and Jack Stubbs): "Hackers operating from an elite Chinese university probed American companies and government departments for espionage opportunities following a U.S. trade delegation visit to China earlier this year, security researchers told Reuters. Cybersecurity firm Recorded Future said the group used computers at China's Tsinghua University to target U.S. energy and communications companies, as well as the Alaskan state government, in the weeks before and after Alaska's trade mission to China."

August 12 - Reuters (Jess Macy Yu): "Vowing that 'no one can obliterate Taiwan's existence,' President Tsai Ing-wen left on Sunday for the United States and two of Taipei's remaining diplomatic allies, amid pressure from China to try to stamp out references to the island internationally. China, which claims self-ruled and democratic Taiwan as its own, has stepped up a campaign against the island as it tries to assert Chinese sovereignty. Beijing has ordered foreign companies to label Taiwan as part of China on their websites and is excluding Taiwan from as many international forums as it can."