Weekly Commentary: Covid Uncertainties

It significantly raises the stakes for a potential nightmare scenario: with less than five weeks until election day, the President contracts COVID-19. As if this election cycle wasn’t chaotic enough. As CNN put it: “A stunning new twist in a tumultuous year, throwing an election that is only 32 days away into chaos and raising the grave possibility of more American crises over governance and national security at an already perilous moment.” And from the Wall Street Journal: “The law of unknown consequences now is in full effect. The uncertainty starts, of course, with the actual state of the president’s health going forward. In the coronavirus pandemic, the world has seen that the difference between a mild case and severe reactions can be an enormous one.”

Whether it’s the recession, Credit issues, COVID consequences more generally, or even the President’s illness – markets have been well-conditioned for “mild case.” The S&P500 ended Friday’s session down just under 1% (the broader market actually closed higher on the day), a notably mild reaction to such a potentially destabilizing development. The perceived higher likelihood of a stimulus deal helped underpin financial markets. A Friday evening Bloomberg headline: “Escalating Chaos Again Proves Incapable of Derailing the S&P 500.”

Clearly, markets have grown comfortable seeing bad news in positive light. But to see the President – less than 24 from his positive test result - board Marine One for a planned several-day stay at Walter Reed Medical Center is unsettling to say the least.

A phenomenal market backdrop has become only more so. Let’s take the analysis back a year as we strive for an informed perspective. Federal Reserve Credit jumped $170 billion (to $3.946 TN) in the four weeks preceding October 2, 2019 – as the Fed restarted QE in response to heightened repo market instability. Fed Credit expanded an additional $252 billion between October and February 19th.

Bloomberg’s Tom Keene (September 23, 2020 TV interview): “It’s all great. I look at the Fed policy and the hope and the prayer. But the great conundrum out there… is this fear of asset Bubbles. Is a consumer discretionary stock with a 32 P/E the definition of an asset Bubble? …Are these asset Bubbles?”

Mike Schumacher – Wells Fargo Securities Head of Macro Strategy: “The Bubble term is interesting. People talk about it quite a bit. It’s hard to define it. What exactly is a Bubble? To me a bubble is something where prices explode upward with no tie to fundamentals and no clear link to policy changes. And what we’ve had in the last six months is a little different, because policy shifts have really boosted assets dramatically. So, I’d say it’s too soon to tell the Federal Reserve or the ECB that they’ve really put forth a Bubble. But that could happen in six or twelve months.”

“A bubble is something where prices explode upward with no tie to fundamentals and no clear link to policy changes.” There’s a big hole in this definition: Government policies typically play an instrumental role in Bubble Dynamics.

Fed Credit has expanded $3.294 TN over the past 56 weeks, an unprecedented expansion of central bank liquidity. Did the Fed further inflate a historic speculative Bubble, exacerbating market and economic fragilities heading into a pivotal election?

It is almost universally accepted that the Fed has acted responsibly and effectively in countering negative pandemic effects. Markets remain near all-time highs in the face of economic weakness and myriad uncertainties. Booming equities and Credit markets have provided powerful underpinnings to the real economy.

For most, the Bubble debate is not even relevant. General sentiments are harmonious with Treasury Secretary Steven Mnuchin’s comments from a couple weeks back: “Now is not the time to worry about shrinking the deficit or shrinking the Fed balance sheet. There was a time when the Fed was shrinking the balance sheet and coming back to normal. The good news is that gave them a lot of room to increase the balance sheet, which they did. And I think both the monetary policy working with fiscal policy and what we were able to get done in an unprecedented way with Congress is the reason the economy is doing better.”

I had serious issues last September when the Fed introduced this notion of “insurance” monetary stimulus, moving forward with aggressive measures despite stocks near record highs and unemployment at 50-year lows. It was a move that clearly risked ratcheting up already severe market distortions. Then in January the risk of a highly problematic global pandemic became increasingly apparent. U.S. equities, however, completely disregarded this risk well into February (record highs on Feb. 19th). The S&P500 returned 16.7% between September 1st and February 19th, with the Nasdaq100 up 27%.

Were Fed stimulus measures responsible for extraordinary pre-COVID market gains? Did the restart of QE contribute to market COVID complacency? And most pertinent to this analysis, did the powerful advance and risk complacency contribute meaningfully to latent market fragility? Or, more directly, did a Fed-orchestrated Bubble create a dangerous speculative market dynamic whereby risks were disregarded until reaching the point where the dam broke and crash dynamics erupted? Did “policy changes” directly contribute to acute Bubble fragilities and a near market breakdown?

The VIX index traded as low as 14.49 on February 20th – a remarkably depressed level considering escalating pandemic risks. I would strongly argue the low cost of market “insurance” was a direct consequence of the Fed’s September adoption of an “insurance” policy stimulus approach. Why not sell put options and other market derivatives insurance with the Fed committed to moving early and aggressively to counter nascent market instability?

I’ve over the years used a flood insurance analogy in an attempt to underscore anomalies in market “insurance.” It was as if in February the cost of flood insurance remained unusually cheap in the face of torrential rainfall – knowing the barriers local authorities had erected up the river were restricting water-flow.

The longer a Bubble’s duration the easier it becomes to rebut its existence. Meanwhile, Bubble effects over time turn more structural. Protracted bull markets crystallize perceptions, while financial innovation ensures myriad instruments and strategies that work to perpetuate bullish flows and trading dynamics.

There becomes little doubt. It’s best to remain fully invested. Managed risk, not by adjusting portfolio composition but with options and other derivatives. “All weather” portfolios can be structured with Treasuries and other diversification tools functioning as internal hedges. And, in the event of acute market instability, there are myriad highly liquid ETFs that can be immediately shorted (or, in other cases, purchased) to efficiently hedge market risk.

Given time, risk embracement ensures mighty and unflagging flows into the risk markets. The bull market functions elegantly – validating perceptions of robust fundamentals and market conditions. Risks are downplayed, with complacency reinforced by readily available risk insurance and risk-mitigation strategies. It all works miraculously until it doesn’t - until the eventual disruptive eruption of “risk off” de-risking/deleveraging.

It is impossible for “the market” to offload risk. Any time a meaningful segment of the marketplace seeks to de-risk there becomes the critical issue of who has the wherewithal to “take the other side of the trade.” With market “insurance” remaining so inexpensive, it made sense back in January and February to maintain a “risk on” posture while also purchasing put options and other derivatives to hedge potential pandemic risks. Yet the accumulation of huge quantities of option protection created vulnerability to downside market dislocation. If large amounts of flood insurance were purchased and then the dam breaks – it immediately becomes a systemic issue.

When pandemic risk materialized (economic lockdowns, acute uncertainty and fear), those that had sold market insurance rushed to sell underlying instruments (futures, stocks, ETFs, etc.) to (dynamically/“delta”) hedge their rapidly expanding risk exposures. At the same time, a highly speculative market experienced an abrupt bout of liquidation. All the plans to sell highly liquid (equities and corporate bond) ETF shares – liquidation of speculative long positions and hedging-related shorting - quickly sparked illiquidity, dislocation and panic.

And what did we learn from such a terrifying experience? That “whatever it takes” Federal Reserve measures will embrace trillions of liquidity creation; the Fed is willing to expand purchases to include corporate bonds, ETF shares and, surely at some point, stocks; there are no longer limits to the type and scope of various Fed special financing vehicles; and the Federal Reserve is willing to greatly expand the scope of international swap arrangements.

We’re now a month away from pivotal elections with a high probability for general chaos, contested outcomes, and protracted uncertainty and instability. And now the President is in the hospital with COVID; infections are mounting within the halls of power; and general disarray has engulfed Washington. At about 3,350, the S&P500 remains within striking distance of last month’s all-time high.

The bottom line: The November 3rd election could be the most heavily hedged-against event in market history. Moreover, the most hedged event comes in the most speculative of market backdrops – which follows history’s greatest expansion of central bank liquidity. Tinderbox.

The marketplace has had months to purchase put options and other derivatives “insurance.” Too much of the marketplace has acquired products or adopted trading strategies that are expected to offload risk in the event of a meaningful market drop. In the event of negative developments and a resulting market downturn, massive sell-programs would kick in as sellers of market insurance move to hedge escalating risks. Moreover, an extraordinarily speculative market is susceptible to any shift in risk tolerance. In short, the potential for a self-reinforcing cascade of selling and market dislocation is today even greater than March.

Why do markets remain so dismissive of election-related risks and latent market fragility? The Fed, of course. And this has created a dangerous dynamic. Markets have become completely incapable of adjustment and correction. The nightmare scenario would see problematic developments, market dislocation, and Fed impotency in the face of acute market instability. Markets, of course, have faith in “whatever it takes” ensuring nightmares don’t become reality. But years of QE and bailouts (certainly including March) have nurtured a high-risk Bubble backdrop with the potential for mayhem.

Markets needed to have been left to stand on their own. The pandemic unleashed myriad risks – including market and economic dislocation, social upheaval and, even, the President and top government officials becoming ill. The pandemic elevated the risk of social, political and geopolitical instability. And it was not the Fed’s role to have so numbed the markets to risk. Such numbness has only exacerbated market and financial fragilities.

We’re now living the perilous consequence of the Fed using the securities markets as its key mechanism for system reflation. The system would today be less fragile had air been allowed to come out of equities and corporate bond Bubbles. Instead, highly inflated Bubbles create increasingly unwieldy risk dynamics in a pandemic backdrop of extraordinary instability and uncertainty.

We’re about a month from a potentially cataclysmic market reaction in the event of a highly unfavorable election outcome. I’ve written this in the past. Contemporary finance works miraculously so long as financial claims and asset prices continue inflating. It just doesn’t function well in reverse. And, importantly, the degree of dysfunction worsens following each repeated market bailout and resulting speculative Bubble resurgence.

Bloomberg’s Lisa Abramowicz: “Fund manager after fund manager has come on this show and said that we are at risk of creating an asset price Bubble if not having created it already. How does that factor into your calculus about when to tighten policy?”

Federal Reserve Vice Chairman Richard Clarida: “Well, that’s a good question, and obviously financial stability is always – and certainly as Powell said – an important consideration. We get regular briefings on financial stability. We issue a twice-yearly report, and we’re very attentive and attuned to that risk. But it’s also important to remember, Lisa, we have a dual mandate assigned from Congress which is maximum employment and price stability. If, hypothetically, we were to become concerned that financial stability put our maximum employment and price stability goals at risk, then we’d have to factor that in. But Lisa, we also believe that monetary policy – raising or lowering rates – is a pretty blunt instrument. And our inclination and our preference at the Fed is to work with other agencies on regulation, supervision, bank liquidity and other dimensions than simply raising or lowering rates to deal with financial stability.”

“If… financial stability put our maximum employment and price stability goals at risk…” “A consideration”? Clarida’s comments gets right to the heart of the problem. Financial stability should never have been subordinate to prices and employment; it is, instead, the overarching mandate to be nurtured and safeguarded with intense focus and steadfast resolve. We’re today in the most financially unstable environment of my over 30 years of analysis. Hopefully the President recovers quickly, the election goes smoothly, the pandemic abates, social tensions subside, and a semblance of normalcy returns. But even in the unlikely event of a series of best-case outcomes, this historic Bubble will continue to overhang financial stability.


For the Week:

The S&P500 rallied 1.5% (up 3.6% y-t-d), and the Dow rose 1.9% (down 3.0%). The Utilities jumped 3.4% (down 4.0%). The Banks recovered 5.1% (down 34.1%), and the Broker/Dealers jumped 4.8% (down 1.9%). The Transports added 0.2% (up 3.6%). The S&P 400 Midcaps surged 4.7% (down 7.8%), and the small cap Russell 2000 rose 4.4% (down 7.7%). The Nasdaq100 gained 0.9% (up 28.9%). The Semiconductors advanced 2.0% (up 20.1%). The Biotechs slipped 0.2% (up 4.2%). With bullion rallying $38, the HUI gold index rallied 1.4% (up 34.1%).

Three-month Treasury bill rates ended the week at 0.085%. Two-year government yields were little changed at 0.13% (down 144bps y-t-d). Five-year T-note yields increased two bps to 0.29% (down 140bps). Ten-year Treasury yields rose five bps to 0.70% (down 122bps). Long bond yields jumped nine bps to 1.49% (down 90bps). Benchmark Fannie Mae MBS yields slipped a basis point to 1.39% (down 132bps).

Greek 10-year yields fell four bps to 0.98% (down 45bps y-t-d). Ten-year Portuguese yields dropped five bps to 0.22% (down 22bps). Italian 10-year yields sank 10 bps to 0.78% (down 63bps). Spain's 10-year yields declined three bps to 0.22% (down 25bps). German bund yields slipped a basis point to negative 0.54% (down 35bps). French yields declined one basis point to negative 0.26% (down 38bps). The French to German 10-year bond spread was little changed at 28 bps. U.K. 10-year gilt yields jumped six bps to 0.25% (down 58bps). U.K.'s FTSE equities index rallied 1.0% (down 21.7%).

Japan's Nikkei Equities Index declined 0.8% (down 2.6% y-t-d). Japanese 10-year "JGB" yields increased a basis point to 0.02% (up 3bps y-t-d). France's CAC40 recovered 2.0% (down 19.3%). The German DAX equities index rallied 1.8% (down 4.2%). Spain's IBEX 35 equities index gained 1.9% (down 29.3%). Italy's FTSE MIB index rose 2.0% (down 18.9%). EM equities were mixed. Brazil's Bovespa index dropped 3.1% (down 18.7%), while Mexico's Bolsa increased 0.2% (down 15.9%). South Korea's Kospi index rose 2.2% (up 5.9%). India's Sensex equities index rallied 3.5% (down 6.2%). China's Shanghai Exchange was little changed (up 5.5%). Turkey's Borsa Istanbul National 100 index gained 1.9% (unchanged). Russia's MICEX equities index fell 1.5% (down 6.4%).

Investment-grade bond funds saw inflows of $2.077 billion, while junk bond funds posted outflows of $3.589 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates declined two bps to 2.88% (down 77bps y-o-y). Fifteen-year rates fell four bps to 2.36% (down 78bps). Five-year hybrid ARM rates were unchanged at 2.90% (down 48bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up eight bps to 3.11% (down 87bps).

Federal Reserve Credit last week declined $15.7bn to $7.016 TN. Over the past year, Fed Credit expanded $3.124 TN, or 80.3%. Fed Credit inflated $4.206 Trillion, or 150%, over the past 412 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week dropped $12.0bn to $3.412 TN. "Custody holdings" were down $29.3bn, or 0.9%, y-o-y.

M2 (narrow) "money" supply fell $19.6bn last week $18.720 TN, with an unprecedented 30-week gain of $3.213 TN. "Narrow money" surged $3.664 TN, or 24.3%, over the past year. For the week, Currency increased $3.9bn. Total Checkable Deposits slipped $1.2bn, while Savings Deposits rose $23.4bn. Small Time Deposits fell $5.5bn. Retail Money Funds declined $1.1bn.

Total money market fund assets declined $10.4bn to a six-month low $4.404 TN. Total money funds surged $941 y-o-y, or 27.2%.

Total Commercial Paper sank $40.2bn to a three-year low $945bn. CP was down $147bn, or 13.5% year-over-year.

Currency Watch:

October 1 – Bloomberg (Kriti Gupta): “The Chinese yuan’s best quarter in 12 years is drawing renewed international attention to the currency. The onshore renminbi gained 3.8% in the three-month period ending Sept. 30, the most since early 2008, while its offshore counterpart advanced more than 4%. That’s more than Group-of-10 currencies including traditional havens like the Swiss franc and Japanese yen.”

For the week, the U.S. dollar index declined 0.8% to 93.81 (down 2.8% y-t-d). For the week on the upside, the South African rand increased 3.7%, the Mexican peso 3.3%, the Norwegian krone 2.8%, the Swedish krona 2.8%, the Australian dollar 1.9%, the British pound 1.5%, the New Zealand dollar 1.5%, the Singapore dollar 1.0%, the Swiss franc 0.8%, the euro 0.7%, the Canadian dollar 0.6%, the Japanese yen 0.3%, and the South Korean won 0.3%. For the week on the downside, the Brazilian real declined 2.2%. The Chinese renminbi increased 0.5% versus the dollar this week (up 2.54% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index declined 1.3% (down 13.7% y-t-d). Spot Gold rallied 2.1% to $1,900 (up 25.1%). Silver recovered 4.1% to $24.029 (up 34.1%). WTI crude dropped $3.20 to $37.05 (down 39%). Gasoline fell 7.5% (down 34%), and Natural Gas sank 13.1% (up 11%). Copper added 0.2% (up 7%). Wheat surged 5.3% (up 3%). Corn rallied 4.0% (down 2%).

Coronavirus Watch:

October 1 – CNBC: “Participants in two of the leading coronavirus vaccine trials told CNBC that they are experiencing high fever, body aches, bad headaches, day-long exhaustion and other symptoms after receiving the shots. In interviews, all five participants — three in Moderna’s study and two in Pfizer’s late-stage trials — said they think the discomfort is worth it to protect themselves against the coronavirus. Luke Hutchison… said he was bed bound with a fever of over 101, shakes, chills, a pounding headache and shortness of breath after receiving his second dose in Moderna’s phase three trial. Another participant, testing Pfizer’s candidate, similarly woke up with chills, shaking so hard he cracked a tooth after taking the second dose.”

September 28 – Reuters (Andreas Rinke and Alexander Huebner): “Chancellor Angela Merkel told leaders of her Christian Democrats (CDU) on Monday that coronavirus infection rate could hit 19,200 per day in Germany if the current trend continues but stressed that the economy must be kept running…”

Market Instability Watch:

September 27 – Wall Street Journal (Amrith Ramkumar and Julia-Ambra Verlaine): “Investors are betting on one of the most volatile U.S. election seasons on record, wagering on unusually large swings in everything from stocks to currencies as they brace for what could be a weekslong haul of unpredictable events. The bets go beyond the Wall Street hedging that typically precedes an election. Traders are scooping up a variety of investments that would pay out if volatility extends far beyond Election Day itself, concerned that the outcome of the presidential contest could remain unclear into December. Whether fueled by a slow or contested counting process, futures and options prices show that an ambiguous election result is now the stock market’s baseline expectation…”

September 28 – Financial Times (Robin Wigglesworth in Oslo and Eric Platt): “Investors are growing more jumpy about the risk of a disputed US presidential election, stepping up preparations for a potential period of market volatility as the costs of insuring against turbulence rise. Futures tied to the Vix volatility index… have long reflected investor concerns that the result could become contentious. This has led to what some traders term a ‘volatility kink’ around the November vote. But that kink has grown more pronounced since President Donald Trump indicated he might not concede if he were defeated in the November 3 election. Futures markets suggest that investors now fret that any turmoil could last for several months.”

October 1 – Financial Times (Gillian Tett): “Once upon a time — say, a decade ago — equity and debt investors classified countries into two buckets. There were ‘emerging markets’ countries, where investors often had to price in political risk due to fragile institutions, capricious leaders or populist swings. Then there were ‘developed’ countries, where the political institutions were presumed to be so stable that risks could be measured with spreadsheets and uncertainty was driven more by policy than the political process itself. No longer. Even before the full swing of the US presidential election exploded on to television screens this autumn, investors had started to realise that the source of political risk and instability is shifting between developed and emerging markets.”

September 29 – Financial Times (Robert Armstrong): “A dramatic gap has opened in how banks and the bond market perceive the health of corporate America, with banks setting aside billions against bad loans even while bond prices suggest a dramatic recuperation from the Covid-19 shock. US banks’ loan loss reserves have risen by $110bn since the crisis began, and are now equivalent to 2.2% of their loan portfolios, the highest level since after the financial crisis in 2012. Meanwhile, the difference in yield between US government debt and corporate bonds with the lowest investment-grade rating appears to indicate that the pandemic crisis is all but over. The spread has tightened from almost 5 percentage points in March to well under 2 points now — as narrow as it was early last year.”

October 1 – Reuters (Tom Arnold): “Large outflows from emerging market investments towards the end of September point to a big ‘risk-off’ shift brewing, Institute of International Finance economists say. Emerging markets sucked in $2.1 billion in portfolio flows in a month marked by fresh market turmoil, uncertainty arising from the U.S. election, a rejuvenated dollar and uncertainty about the recovery from the coronavirus, the IIF said -- more than the $700 million seen in August. But it said high frequency outflows from emerging markets towards the end of the month were almost as big as in the 2013 ‘taper tantrum’ or during 2015 when the Chinese yuan was devalued.”

September 28 – Bloomberg (Joanna Ossinger): “Safe-haven assets seen as traditional hedges aren’t panning out as they once did, according to JPMorgan... Easy-money policies may actually be keeping investors in cash and away from other traditional buffers, strategists led by John Normand wrote… That’s because such policies create a zero-yield environment where cyclical assets might be too difficult to hedge, they said… ‘Defensive assets are delivering their weakest performance and therefore worst hedge protection of any equity sell-off in at least a decade,’ Normand said. ‘The wall of cash some hypothesize will inevitably flow into equity, credit and EM may remain very high indefinitely.’”

Global Bubble Watch:

September 26 – Associated Press (Cara Anna): “In a year of cataclysm, some world leaders at this week’s annual United Nations meeting are taking the long view, warning: If COVID-19 doesn’t kill us, climate change will. With Siberia seeing its warmest temperature on record this year and enormous chunks of ice caps in Greenland and Canada sliding into the sea, countries are acutely aware there’s no vaccine for global warming. ‘We are already seeing a version of environmental Armageddon,’ Fiji’s Prime Minister Frank Bainimarama said, citing wildfires in the western U.S. and noting that the Greenland ice chunk was larger than a number of island nations.”

October 1 – Reuters (Colby Smith): “The IMF has called for urgent action and ambitious reforms to prevent a much more pronounced debt crisis in some of the world’s poorest countries, underscoring its concerns that many emerging economies will struggle following the Covid-19 pandemic. IMF managing director Kristalina Georgieva warned there was a risk of a spate of sovereign bankruptcies unless temporary debt relief measures put in place earlier this year are extended and sovereign debt contracts and processes are overhauled. ‘No debt crisis has happened yet thanks to decisive policy actions by central banks, fiscal authorities, official bilateral creditors and international financial institutions in the early days of the pandemic,’ she wrote… ‘These actions, while essential, are fast becoming insufficient.’”

September 29 – Financial Times (Ortenca Aliaj, Kaye Wiggins, James Fontanella-Khan and Arash Massoudi): “A resurgence in mergers and acquisitions activity led to the busiest summer for blockbuster deals in three decades… The combined value of $5bn-plus deals worldwide soared to $456bn in the three months to September, figures from Refinitiv show. That makes it the busiest third quarter on record, as bankers raced to make up for a dearth of activity at the height of the coronavirus crisis. ‘The pace of the rebound in August and September somewhat surprised us,’ said Dirk Albersmeier, global co-head of M&A at JPMorgan. ‘It’s been an amazing third quarter in terms of the rebound.’”

September 27 – Financial Times (Rana Foroohar): “Two of the most important economic questions over the next few years are: how will the US-China relationship play out, and how will nations curb corporate monopoly power? The biggest global economic winners over the past three decades have been China and large corporations, research by the United Nations Conference on Trade and Development shows. As they have risen, local labour’s share of gross domestic product has fallen in the US and most parts of the world.”

Trump Administration Watch:

September 25 – Reuters (Andy Sullivan): “U.S. President Donald Trump said… Americans might not know the winner of the November presidential election for months due to disputes over mail ballots, building on his criticism of a method that could be used by half of U.S. voters this year… ‘I like watching television and have, ‘The winner is’, right? You might not hear it for months, because this is a mess,’ he said. ‘It’s very unlikely that you’re going to hear a winner that night… I could be leading and then they’ll just keep getting ballots, and ballots, and ballots and ballots. Because now they’re saying the ballots can come in late.’”

September 28 – The Hill (Alexander Bolton): “Senators in both parties are bracing for what they fear will be a ‘chaotic’ election, heightening the stakes of next month’s Supreme Court confirmation battle. President Trump has said he wants a ninth Supreme Court justice to be confirmed so that the court is full before it potentially has to make any decisions on an election. If Trump’s nominee, Amy Coney Barrett, is confirmed, it would cement a conservative majority on the court that would include three justices nominated by the president. Polls showing a close race against Democrat Joe Biden in several battleground states have lawmakers predicting the results won’t be known immediately after Election Day, particularly with millions expected to vote via mail-in ballots given the coronavirus pandemic.”

September 30 – Reuters (Alexandra Alper): “The Trump administration has proposed including a $20 billion extension in aid for the battered airline industry in a new stimulus proposal to House Democrats worth over $1.5 trillion, White House chief of staff Mark Meadows said… ‘There’s $20 billion in the most recent proposal for the airlines that would give them a six month extension,’ Meadows told reporters…”

September 28 – Wall Street Journal (Dan Strumpf): “The Commerce Department has told U.S. computer-chip companies that they must obtain licenses before exporting certain technology to China’s largest manufacturer of semiconductors, a blow to China’s efforts to compete in advanced technology. The department laid out the requirement in a letter… The letter… says exports to Semiconductor Manufacturing International Corp. or its subsidiaries risk being used for Chinese military activities. The U.S. action threatens to cut off SMIC from equipment used to manufacture chips.”

September 30 – Reuters (Angelo Amante): “U.S. Secretary of State Mike Pompeo delivered a warning to Italy over its economic relations with China…, and described Chinese mobile telecoms technology as a threat to Italy’s national security and the privacy of its citizens. ‘The foreign minister and I had a long conversation about the United States’ concerns at the Chinese Communist Party trying to leverage its economic presence in Italy to serve its own strategic purposes,’ Pompeo told a joint news conference with Foreign Minister Luigi Di Maio.”

Federal Reserve Watch:

September 30 – Wall Street Journal (Nick Timiraos): “Federal Reserve officials’ promises to hold interest rates very low for a long time could pose a dilemma once the pandemic is over: how to deal with the risk of asset bubbles. Those concerns flared when Dallas Fed President Robert Kaplan dissented from the central bank’s Sept. 16 decision to spell out those promises. The Fed committed to hold short-term rates near zero until inflation reaches 2% and is likely to stay somewhat above that level… ‘There are costs to keeping rates at zero for a prolonged period,’ Mr. Kaplan said… He added that he worries such a commitment ‘causes people to take more risk in that they know it’s much less likely that they’re going to be able to earn on savings.’ …’I share a lot of Rob’s concerns,’ said Boston Fed President Eric Rosengren… ‘I am worried about financial-stability aspects of this policy. I think we’re going to need to address it over the next couple of years,’ he said…”

September 28 – Wall Street Journal (James Mackintosh): “If it feels like the price of everything you buy has been soaring, that’s because it has—even as central bankers everywhere worry about the danger of deflation. The gap between everyday experience and the yearly inflation rate of 1.3% in August is massive. The price of the stuff we’re buying is rising much faster, while the stuff we’re no longer buying has been falling, but still counts for the figures. Economists will be relieved that the laws of supply and demand are still working… But for investors it hangs a veil over the outlook for perhaps the single most important issue for the markets: whether we’re headed for a future of inflation, deflation or a continuation of the past decade’s lackluster price rises.”

September 28 – Reuters (Jonnelle Marte): “While the U.S. economy has seen improvement in areas that benefit from low interest rates, such as housing, there are areas that will take longer to rebound and that will depend on the coronavirus, Cleveland Federal Reserve Bank President Loretta Mester said… ‘It’s almost like a tale of two cities,’ Mester said… ‘You have a lot of the economy now where activity is picking up, but you have a great part of the economy - travel, leisure and hospitality - where you’re not seeing a pickup. I think that’s going to continue for some time.’”

U.S. Bubble Watch:

October 2 – CNBC (Jeff Cox): “Nonfarm payroll rose by a lower than expected 661,000 in September and the unemployment rate was 7.9%... Economists surveyed by Dow Jones had been expecting a payrolls gain of 800,000 and the unemployment rate to fall to 8.2% from 8.4% in August. The payrolls miss was due largely to a drop in government hiring as at-home schooling continued and Census jobs fell.”

October 1 – Wall Street Journal (Shane Shifflett): “The coronavirus brought an end to the longest economic expansion in U.S. history. That wasn’t the only problem. When the U.S. barreled into the deep downturn that followed, it was laden with debt. Why does this matter? Economies carrying a lot of debt generally have weaker recoveries. Businesses and consumers focus on cutting their liabilities during downturns rather than spending cash—and spending is what an economy needs to rebound. All told, the borrowing spurred by years of low interest rates adds up to $64 trillion in consumer, business and government debt. How much is that? It’s more than triple the country’s gross domestic product.”

September 29 – Reuters (Lucia Mutikani): “The United States’ trade deficit in goods widened in August, with imports rising as businesses rebuild inventories which were depleted when the COVID-19 pandemic upended the flow of goods. The …goods trade gap increased 3.5% to $82.9 billion last month. Imports of goods rose 3.1% to $201.3 billion, eclipsing a 2.8% increase in goods exports to $118.3 billion.”

September 28 – Associated Press (Christopher Rugaber): “The solid growth that the United States enjoyed before the viral pandemic paralyzed the economy this spring failed to reduce racial disparities in Americans’ income and wealth from 2016 through 2019, according to a Federal Reserve report… Though Black and Hispanic households reported sharper gains in wealth than white households did, those increases weren’t enough to noticeably narrow the racial gaps. The typical white family possessed eight times the wealth of Black families and five times the wealth of Hispanic families in 2019, the Fed said.”

October 1 – Reuters (David Henry): “As big U.S. commercial banks close their books on the third quarter, analysts expect them to report a 30% to 60% plunge in profits on the year-ago period due to the pandemic-induced recession and near record low interest rates.”

October 2 – Bloomberg (Benjamin Stupples): “The penthouse at 15 Central Park West has everything you’d expect for an $88 million property: 6,744-square-feet of space, a wraparound terrace and killer views of Manhattan. Since June, the apartment owned by the family of Russian billionaire Dmitry Rybolovlev has an added feature available just for the super rich: a $42.5 million mortgage from JPMorgan… With a 2.9% interest rate, payments are about $177,000 a month. Rybolovlev… bought the apartment from Sandy Weill about a decade ago for his daughter Ekaterina. The family tried to sell it a few years later as prices for ultra-expensive properties in the city had started to slip. Instead they choose to leverage the asset. While the super-sized mortgage is one of the biggest arranged in recent months, it’s far from the only one. Lenders are increasingly providing credit to their most valuable clients after central banks slashed interest rates to protect the economy from the effects of the Covid-19 pandemic.”

October 1 – Reuters (Karen Pierog): “A trio of Democrat-run U.S. states could go deeper into debt with billions of dollars in new issuance to plug holes in their coronavirus-hit budgets, if a new round of federal aid fails to materialize this year. With revenue dropping due to the fallout from the pandemic, New York already sold $4.5 billion of short-term notes out of an $8 billion authorization, while New Jersey gave final approval this week to $4.5 billion of debt, and Illinois lawmakers earlier this year agreed to issue up to $5 billion of bonds.”

October 2 – Bloomberg (Danielle Moran and Martin Z Braun): “New York City and state both had their credit ratings lowered Thursday by Moody’s…, which said the impact from the coronavirus on the most populous U.S. city -- the core of the state’s economic engine -- is among the most severe in the nation. In a pair of downgrades announced within an hour of each other Thursday, Moody’s dropped both the city and state by one notch to Aa2, the third-highest investment grade rating, and warned of a long return to normal as the region tries to rebound from the pandemic.”

September 30 – CNBC (Diana Olick): “Despite another interest rate drop, demand for refinancing and purchasing mortgages fell last week, with total mortgage application volume down 4.8% from the previous week… Mortgage applications to purchase a home fell 2% for the week and were 22% higher than a ago.”

October 1 – CNBC (Jeff Cox): “First-time claims for unemployment insurance totaled 837,000 last week, …as the jobs market continues its plodding recovery from the coronavirus pandemic… Continuing claims provided some better news, with those collecting benefits for at least two weeks falling by 980,000 to 11.77 million. The continuing claims number runs a week behind.”

October 1 – Reuters (Lucia Mutikani): “U.S. employers announced another 118,804 job cuts in September, with bars, restaurants, hotels and amusement parks leading the pack amid sluggish demand several months after the COVID-19 pandemic struck the nation. The layoffs reported by… Challenger, Gray & Christmas… were up 2.6% from August and boosted total job cuts so far this year to a record 2.082 million. The previous all-time annual high was 1.957 million in 2001.”

September 30 – CNBC (Leslie Josephs): “The terms of billions in federal airline aid expire early Thursday, setting the stage for more than 30,000 job cuts. Airline executives including the CEOs of American, United, Southwest and JetBlue have been making last-ditch attempts in Washington to persuade lawmakers and Trump officials to provide additional aid as the job cuts are set to begin Thursday.”

September 29 – CNBC (Sarah Whitten): “Prolonged closures at Disney’s California-based theme parks and limited attendance at its open parks has forced the company to lay off 28,000 employees across its parks, experiences and consumer products division, the company said. In a memo sent to employees…, Josh D’Amaro, head of parks at Disney, detailed several ‘difficult decisions’ the company has had to make in the wake of the coronavirus pandemic, including ending its furlough of thousands of employees.”

September 29 – MarketWatch (Ciara Linnane): “The U.S. initial public offering market is expected to see 11 deals and two direct listings this week, adding fuel to what will be the biggest third quarter since the dot.com era… The IPO market is ending the busiest third quarter for deals since 2000, with 81 IPOs expected to raise $28.5 billion…”

September 30 – Bloomberg (Vildana Hajric): “SPACs, direct listings, traditional IPOs. No matter how companies have made the switch from private to public markets, they’ve been met with exuberance. The market for newly minted stocks has exploded this year, with U.S. initial public offerings raising more than $80 billion so far, surpassing prior highs from the dot-com era, according to Bespoke Investment Group. An exchange-traded fund of recently listed companies has surged 67%, far outpacing the broader market. And the third-quarter deal count has been the busiest since 2000, according to Renaissance Capital.”

September 29 – Wall Street Journal (Aisha Al-Muslim): “Retail store closings in the U.S. reached a record in the first half of 2020 and the year is on pace for record bankruptcies and liquidations as the Covid-19 pandemic accelerates industry changes… This year’s collapse in American retail could overtake that of 2010, when 48 retailers filed for bankruptcy in the wake of the 2007-09 recession, according to… BDO USA LLP. Including filings through mid-August, BDO said 29 retailers have sought bankruptcy protection in 2020, surpassing the 22 such filings recorded last year.”

October 1 – Financial Times (Joshua Chaffin): “As many as half of New York City’s restaurants could close permanently over the next year due to the coronavirus pandemic, eliminating up to 159,000 jobs, according to an audit issued by the state comptroller. The report offers a dire assessment of an industry that has been especially hard hit by the pandemic but whose precise financial condition has been difficult to pinpoint. Based on credit card transactions and other data, the report concluded that about a third of the city’s restaurants and half of its bars that were open before the pandemic have shut their doors.”

September 29 – Wall Street Journal (Peter Grant and Emma Tucker): “Manhattan office employees are returning to work at a much slower pace than those in most other major U.S. cities, raising the risk that New York faces a more protracted and painful recovery from the coronavirus pandemic… Wall Street bankers have been trickling back to their glass towers, while real-estate firms have tried to set an example by encouraging staff to return in force. But most of the city’s lawyers, media and publishing employees, tech industry workers and others have stayed away, real-estate brokers say. Overall, about 10% of Manhattan office workers were back as of Sept. 18, according to CBRE Group Inc…”

October 1 – Bloomberg (Natalie Wong): “Office space is flooding the market in Manhattan, as companies look to cut costs during the pandemic. Tenants put 2.5 million square feet up for sublease in the third quarter, more than double the space a year earlier and the biggest quarterly increase since the end of 2008, according to… Savills. Manhattan offices, which emptied out when the pandemic hit in March, are still largely vacant. And with workers staying home, employers in New York are rethinking how much space they need. The sublease space added in the third quarter brought the supply to 16.1 million square feet, just 200,000 shy of the high from 2009, when the financial crisis battered New York City.”

October 1 – CNBC (Jessica Bursztynsky): “Rent prices continued to plunge across the U.S. last month, with San Francisco leading the decline, according to… Zumper… The median rent for a one-bedroom apartment in San Francisco dropped more than 20% from a year ago, to $2,830… That’s the largest decline the company has recorded. Month-to-month, the price of a median one-bedroom in the city dropped nearly 7%... Zumper CEO Anthemos Georgiades pointed toward a flood of supply in the market.”

October 2 – Wall Street Journal (Collin Eaton): “It’s been a bad few years for investors in shale companies, but a pretty good few years for shale company CEOs. The leaders of U.S. shale companies received some of the largest executive pay increases in corporate America, even as their shareholders lost billions of dollars… The median pay for chief executives of large U.S. oil and gas drillers rose for four straight years, hitting $13 million in 2019. That was up from about $9.9 million in 2015, a stretch when the companies’ median total returns to shareholders fell 35%, according to the WSJ analysis of executive compensation data…”

October 1 – Wall Street Journal (Jesse Newman and Donald Morrison): “For the first time in its 46-year history, Alexander Eisele’s Napa Valley vineyard won’t turn the grapes it grows into wine this fall. Mr. Eisele’s scorched and smoke-damaged grapes are part of the toll from the record start to wildfire season this year in the American West. More than 7.4 million acres have burned and 40 people have died. Many agricultural businesses have been affected as well, particularly vineyards in Northern California and Oregon that produce some of the premier wines in a U.S. industry whose worth analysts put at a little more than $70 billion. ‘Losing the entire year for a family operation, it’s devastating,’ said Mr. Eisele, who evacuated on Monday due to wildfire threat for the second time in a month.”

Fixed Income Watch:

September 29 – Bloomberg (Max Reyes and Fabian Graber): “U.S. investment-grade bond issuance toppled another monthly record, fueled by a rush among blue-chip companies to take advantage of cheap borrowing costs in the final weeks before election night. Best Buy Co. Inc. and medical products provider Danaher Corp. were among 10 companies that… pushed the total volume above $162 billion, beyond the previous record of $158 billion set in 2019. That makes September the sixth out of the last seven months that saw all-time highs, leaving July as the sole exception.”

September 27 – Financial Times (Joe Rennison): “In the midst of the worst market sell-off in a decade, as the spread of coronavirus sent asset prices tumbling, capital markets shut down. Just as they needed it most, companies were locked out of a crucial source of funding… Then, on March 23, the Federal Reserve stepped in… The intervention helped to bring down corporate borrowing costs, which had spiralled to a 10-year high for investment grade companies during the coronavirus-induced sell-off in March. This led to the fastest pace of fundraising on record, with the total number of US corporate bonds sold so far this year topping $2tn, an annual threshold that had previously never been breached — and there is still a full quarter of the year left. So where now for corporations and investors ? ‘All issuers were, and some still are, fighting for their life,’ says Robert Tipp, chief investment strategist at PGIM… ‘It really behoves corporate managers to go and borrow to make sure they survive. If things turn out to be better than expected or there are just other opportunities out there for strategic acquisitions, having that money is going to be easy for them to justify.”

September 27 – Reuters (David Randall): “The economic effects of the coronavirus are battering the U.S. commercial-backed securities market, raising the question of the value of hotels, malls, and other buildings that act as collateral for mortgages, according to a report in the Financial Times… Wells Fargo estimates that U.S. properties that have gotten into trouble are being written down by 27% on average… Declining appraisal values could hammer portfolio managers that have moved into the commercial mortgage-backed securities market in search for yield at a time when the Federal Reserve has indicated that it will keep benchmark yields near zero until 2023 at the earliest.”

October 1 – Reuters (Jessica Resnick-Ault and Arathy Nair): “Oasis Petroleum Inc and Lonestar Resources US Inc's bankruptcy filings are the latest in a slew of restructurings that put oil-and-gas producers on track for their biggest year of bankruptcies since the 2016 shale downturn. Thirty-six producers with $51 billion in debt filed for bankruptcy protection in the first eight months of the year, according to… Haynes and Boone. The coronavirus pandemic crushed fuel demand and left debt-laden producers without access to credit. The number of companies filing still lags 2016, when 70 companies filed for bankruptcy. However, those firms were generally smaller and left a total of $56 billion in debt.”

September 28 – Wall Street Journal (Jon Sindreu): “Aviation’s worst crisis in decades is almost eight months old. For aircraft investors, especially those that bought complex products, it could be just the beginning. Investors who piled into plane-backed securities during the long travel boom have so far been spared some of the pain, as leasing firms and investment vehicles have tapped security deposits and overdraft facilities to keep payments going. But airlines have missed out on their important summer season and face the winter with hundreds of jets they don’t need and can’t afford. A new wave of payment deferrals seems likely. This may explain a pickup in acrimony in the $150 billion aircraft-finance market.”

China Watch:

September 29 – Bloomberg: “China’s central bank is seeking to normalize monetary policy as the ‘economy recovers steadily,’ in another sign that the country’s policy makers are gradually pulling back from the stimulus measures enacted amid the Covid-19 pandemic. The People’s Bank of China will make monetary policy more precise and targeted, it said… The PBOC called on banks to make full use of structured monetary tools to increase the ‘directness’ of its policies and vowed to achieve a long-term balance between stabilizing growth and preventing risks.”

September 30 – Bloomberg (Alessandra Migliaccio, Chiara Albanese and John Follain): “Italy’s market crisis may have subsided, but the debt worries that caused it will haunt Europe for a while yet. That’s the bleak outlook that Finance Minister Roberto Gualtieri will reveal this week when he unveils budget targets that are likely to show his ambitions to fix the region’s third-biggest economy after its coronavirus calamity remain limited for now. Even with European Central Bank support to help keep a lid on its borrowing, and 209 billion euros ($245bn) of European Union aid due to start flowing its way, Italy will struggle to bring its debt-to-gross domestic product ratio down. It will jump to 158% of output this year on the back of a dramatic spending increase spurred by the coronavirus outbreak…”

September 27 – Bloomberg: “China’s economic rebound showed signs of plateauing in September, weighed down by lackluster home and car sales, a weaker stock market and worsening business confidence. That’s the assessment from the earliest available indicators, which showed China’s recovery is losing pace. The aggregate index combining eight indicators tracked by Bloomberg this month slipped into contraction, compared to accelerated expansion in August.”

September 28 – Reuters (Kevin Yao): “China will need a plethora of reforms if it is to make a new economic strategy that relies mainly on domestic consumption work, advisers to the Chinese cabinet said… To rely mainly on domestic circulation, we indeed face a very arduous task,’ Yao Jingyuan, the former chief economist for the country’s National Bureau of Statistics, told a briefing.”

September 28 – Financial Times (Tom Mitchell in Singapore and Xinning Liu): “Senior Chinese Communist party officials have been sending an ominous message to private sector entrepreneurs in recent weeks. In a series of policy announcements and meetings, they have emphasised that private companies have an important role to play in ‘United Front work’ — a euphemism for efforts aimed at ensuring that non-party organisations and entities support the party’s top policy objectives as well as its iron grip on power. The officials added that they wanted to assemble a ‘team of representatives’ from the private sector. They would be recruited either as party members or to join formal advisory bodies, with a particular focus on younger entrepreneurs in strategically important technology sectors.”

September 28 – Bloomberg (Shuli Ren): “China doesn’t care about its bottom 60%. The country seems to have bounced back from the Covid-19 slowdown. Exports are growing by double digits, and retail sales, which had been lagging for months, are back to pre-virus levels. With daily life mostly back to normal, the country seems to be humming again. But poorer households are still struggling. The rebound Beijing engineered is K-shaped, exacerbating widening income inequality, which was already a problem before the pandemic. Most households in the bottom 60%, or those earning less than 100,000 yuan ($14,650) a year, said their wealth declined in the first half of 2020, the China Household Finance Survey finds. Those earning more than 300,000 yuan a year reported net gains.”

September 29 – Bloomberg: “China’s top financial officials are evaluating the risks posed by China Evergrande Group… The Chinese cabinet and its financial stability committee, chaired by Vice Premier Liu He, have discussed Evergrande without making any decisions on whether to intervene, the people said. Some regulators are considering options to support the developer, such as directing state-owned companies to take stakes in Evergrande… The discussions underscore the degree to which Evergrande’s debt challenges have alarmed senior government officials. The property behemoth… has a complex web of liabilities that includes $88 billion owed to banks, shadow lenders and individual investors across the country. Evergrande has also borrowed $35 billion from bondholders around the world and received down payments on yet-to-be-completed properties from more than 2 million homebuyers.”

September 27 – Bloomberg (Shuli Ren): “For years, investors happily bought into the dollar bonds of Chinese real-estate developers, betting that the biggest and most aggressive would become too big to fail. Even during the global markets selloff in March, private bankers told their wealthy clients not to worry. In the worst case, they could just hold those notes until maturity, and enjoy the juicy coupon payments. China Evergrande Group’s recent tumble is a wake-up call. Beijing’s latest policy shifts show it is confident that killing a dragon or two won’t cause a wildfire.”

September 30 – Bloomberg: “China Evergrande Group’s stock and local bonds soared after the developer took a major step toward avoiding a cash crunch that had threatened to roil the nation’s $50 trillion financial system and reverberate across global markets. After a turbulent few days during which banks, bondholders and senior government officials became increasingly alarmed about Evergrande’s financial health, the world’s most indebted developer said late Tuesday it reached an agreement with a group of strategic investors to avoid repayments that would have placed a sizable strain on the junk-rated company’s balance sheet.”

September 27 – Wall Street Journal (Quentin Webb and Jing Yang): “China’s most ambitious and fastest-growing companies once flocked to U.S. markets to raise money. Now rising U.S. hostility and the increased attractions of listing closer to home are tipping the scales toward Hong Kong and Shanghai. Since November, eight Chinese companies that originally went public on the New York Stock Exchange or the Nasdaq Stock Market have added listings in Hong Kong, raising a total of $25.6 billion, according to Refinitiv.”

September 28 – Bloomberg (Apple Lam): “Taiwanese banks’ contributions to offshore loans for mainland Chinese firms fell to their lowest levels in at least 10 years as lenders turn increasingly anxious to limit their credit exposure to the economic fallout of the pandemic and rising political tensions.”

October 1 – Bloomberg (Kari Lindberg and Eric Lam): “Hours after Hong Kong leader Carrie Lam declared that stability had returned to the city, police in riot gear flooded the streets Thursday, checking IDs and backpacks and confronting passers-by in an effort to quash any protest activity on the National Day holiday. With about 70 arrests and few crowds, the day was a marked departure from the mass demonstrations that paralyzed the Asian financial hub a year ago… ‘Stability has been restored to society while national security has been safeguarded,’ Lam said…”

Central Bank Watch:

September 29 – Bloomberg (Ranjeetha Pakiam and Elena Mazneva): “Gold buying by central banks, an important driver of bullion’s advance in recent years, is forecast to pick up in 2021 after a slowdown this year. Citigroup Inc. sees demand from the official sector rising to about 450 tons after a drop to 375 tons this year, which would be the lowest in a decade. HSBC Securities (USA) Inc. expects a slight up-tick to 400 tons from an estimated 390 tons in 2020, potentially the second-lowest amount in 10 years.”

September 30 – Bloomberg (Alexander Weber and Piotr Skolimowski): “European Central Bank President Christine Lagarde said it’s worth examining a Federal Reserve-style strategy that allows inflation to temporarily rise above the institution’s target. A policy of committing to make up for low inflation after missing the goal for a while ‘could be examined’ as part of the institution’s strategic review, Lagarde said… ‘If credible, such a strategy can strengthen the capacity of monetary policy to stabilize the economy when faced with the lower bound… This is because the promise of inflation overshooting raises inflation expectations and therefore lowers real interest rates.’”

September 30 – Bloomberg (Catherine Bosley): “The Swiss National Bank spent 90 billion francs ($98bn) on interventions in the first half of 2020, the most in years, amid a market rout in the early days of the coronavirus pandemic. The SNB was forced to step up its battle against the strong franc as investors drove the haven currency to the strongest level in five years against the euro. The activity means it spent more in just six months than in the previous three years combined.”

September 27 – Reuters (David Randall): “The Bank of England’s investigation into whether negative rates might help the British economy through its current downturn has found ‘encouraging’ evidence, policymaker Silvana Tenreyro said in an interview…”

EM Watch:

September 27 – Financial Times (Jonathan Wheatley): “Investors’ appetite for emerging market debt, driven by low global interest rates, has averted a fiscal catastrophe in developing countries reeling under the shock of coronavirus. But by attempting to borrow their way out of trouble, governments are storing up bigger problems for the future, analysts warn. In the panic that gripped markets when the pandemic struck in March, many feared emerging markets would be plunged into a debt crisis like the ones that battered them in the late 20th century. Rather than debt default, however, there has been new borrowing. Since April 1, developing countries have raised more than $100bn on international bond markets.”

September 28 – Bloomberg (Netty Ismail, Karl Lester M. Yap and Sydney Maki): “Emerging markets are heading toward the end of the third quarter with more reasons to be cautious than optimistic. Developing-nation stocks, currencies and bonds had their worst week in the five days through Friday since the coronavirus pandemic rocked global markets in March. The gap between implied volatility in emerging-market currencies and their Group-of-Seven peers is at the widest since June amid concerns over renewed lockdown measures and delays to further U.S. fiscal stimulus. Emerging-market exchange-traded funds suffered the biggest weekly outflow since early July as assets tumbled.”

September 30 – Bloomberg (Mario Sergio Lima): “Brazil’s public debt reached a record in August as the government increases spending to fight the impact of the coronavirus pandemic. The country’s gross debt rose to 88.8% of gross domestic product last month, the highest ever… The primary budget deficit, which excludes interest payments, reached 611.3 billion reais ($108.2bn) in a 12-month period, or 8.5% of GDP.”

Europe Watch:

September 27 – Financial Times (Sam Fleming and Mehreen Khan): “More than two months after their triumphant recovery fund deal, EU leaders are growing increasingly nervous about getting it over the line. For weeks, the bloc’s council of ministers and parliament have been at loggerheads over details of the massive pandemic-era budget package. Talks last week descended into public recriminations. The German EU presidency has urged MEPs to quit stalling, while MEPs accused the council of blackmailing them.”

September 30 – Bloomberg (Alessandra Migliaccio, Chiara Albanese and John Follain): “Italy’s market crisis may have subsided, but the debt worries that caused it will haunt Europe for a while yet. That’s the bleak outlook that Finance Minister Roberto Gualtieri will reveal this week when he unveils budget targets that are likely to show his ambitions to fix the region’s third-biggest economy after its coronavirus calamity remain limited for now. Even with European Central Bank support to help keep a lid on its borrowing, and 209 billion euros ($245bn) of European Union aid due to start flowing its way, Italy will struggle to bring its debt-to-gross domestic product ratio down. It will jump to 158% of output this year on the back of a dramatic spending increase spurred by the coronavirus outbreak…”

October 1 – Associated Press (David McHugh and Helena Alves): “Unemployment rose for a fifth straight month in Europe in August and is expected to grow further amid concern that extensive government support programs won’t be able keep many businesses hit by coronavirus restrictions afloat forever. The jobless rate increased to 8.1% in the 19 countries that use the euro currency, from 8.0% in July… The number of people out of work rose by 251,000 during the month to 13.2 million.”

Leveraged Speculation Watch:

September 29 – Wall Street Journal (Caitlin Ostroff): “This year’s decline in the U.S. dollar is drawing investors back into a practice that they had eschewed for some years: Borrowing the greenback to buy riskier assets in what is known as a carry trade. A number of investors are pursuing higher returns by buying overseas assets… The dollar is being used to fund such trades after a drop in U.S. interest rates this year made it less attractive for investors to hold dollar-denominated assets. With the Fed pledging to keep U.S. rates near zero for the foreseeable future, it may stay that way for a while.”

September 29 – Bloomberg (John Ainger): “Hedge funds that have racked up the largest bets against the dollar in almost three years may be running headlong into a short squeeze. With markets on edge over resurgent coronavirus cases and a contentious U.S. presidential election, predictions of the currency’s demise as the world’s number one haven appear premature. Investors went into the greenback’s strongest rally since April last week expecting losses against all-but-one of the Group-of-10 currencies, the first time that’s happened since 2013, according to ING Groep NV.”

Geopolitical Watch:

September 28 – Reuters (Yew Lun Tian): “China began five military exercises simultaneously along different parts of its coast on Monday, the second time in two months it will have such concurrent drills against a backdrop of rising regional tension. Two of the exercises are being held near the Paracel Islands in the disputed South China Sea, one in the East China Sea, and one in further north in the Bohai Sea… In the southern part of the Yellow Sea, drills including live-fire exercises will be held from Monday to Wednesday…”

September 30 – Financial Times (Kathrin Hille and Katrina Manson): “Weng Hui-ping wanted to sleep in on her day off. But the Taipei yoga teacher was woken up at 7am on Monday morning by aircraft screaming overhead. ‘I thought, are the Chinese communists here? My house is not close to the airport, it sounded like fighters,’ she said. Taiwan’s defence ministry had a simple explanation: some of its jet fighters and helicopters were practising for Taiwan’s National Day on October 10. ‘Don’t you worry!’ the ministry said… But preparations for celebratory flights are not the main reason the country’s air force have been exceptionally busy. China has sharply increased military manoeuvres close to Taiwan’s borders this month, with Taipei forced to scramble fighters almost every day during the past two weeks. Taiwanese and US officials say it is the worst escalation of military activity in more than two decades.”

September 30 – Reuters (Nvard Hovhannisyan and Nailia Bagirova): “NATO allies France and Turkey traded angry recriminations… as international tensions mounted over the fiercest clashes between Azerbaijan and ethnic Armenian forces since the mid-1990s. On the fourth day of fighting, Azerbaijan and the ethnic Armenian enclave of Nagorno-Karabakh accused each other of shelling along the line of contact that divides them in the volatile, mountainous South Caucasus.”

Friday's News Links

[CNN] President Donald Trump tweets he and first lady Melania Trump test positive for Covid-19

[CNBC] Dow drops more than 300 points after President Trump tests positive for coronavirus

[Reuters] Oil drops 4% after Trump's positive coronavirus test

[CNBC] U.S. jobs rose by 661,000 in September, vs. 800,000 estimate

[AP] US hiring slows for 3rd month but jobless rate falls to 7.9%

[CNBC] Coronavirus live updates: Trump joins a short list of world leaders to become infected; VP and second lady negative

[Reuters] Trump's positive COVID test throws markets pre-election curveball

[CNN] Trump's positive Covid-19 test throws country into fresh upheaval

[Politico] Trump coronavirus diagnosis leaves lawmakers exposed

[Reuters] How Mike Pence could temporarily assume control if Trump becomes incapacitated

[Reuters] Factbox: Reactions to Donald Trump testing positive for coronavirus

[CNBC] Manhattan apartment sales tumble 46%, leaving 10,000 unsold apartments

[Bloomberg] Trump’s Covid-19 Diagnosis Reshapes Election a Month From Vote

[Bloomberg] Traders Warn of Market Volatility as Trump Tests Positive

[Bloomberg] New York Downgraded as Moody’s Warns of Long Return to Normal

[NYT] New Layoffs Add to Worries Over U.S. Economic Slowdown

[WSJ] After Record U.S. Corporate-Bond Sales, Slowdown Expected

[WSJ] Shale Companies Had Lousy Returns. Their CEOs Got Paid Anyway.

Thursday Evening Links

 [CNBC] Stock futures fall as House passes stimulus bill, but questions remain

[Reuters] Asian markets face mixed open as U.S. stimulus deal remains elusive

[AP] Top White House official tests positive for coronavirus

[Reuters] End of third quarter shows bright spots, holes in U.S. economic recovery

[Reuters] Options investor makes big bets on Nasdaq's popular 'FANG' stocks

Thursday Afternoon Links

[Reuters] Wall Street ends choppy session higher as stimulus hopes ebb and flow

[Reuters] Deal elusive as Pelosi, Mnuchin discuss fresh round of U.S. COVID-19 aid

[Reuters] U.S. oil producers on pace for most bankruptcies since last oil downturn

[Reuters] U.S. blue states build debt stockpiles as virus aid is stymied

[CNBC] San Francisco rents plunge, showing strain from pandemic and wildfires

[Bloomberg] Manhattan Office Space Floods Market in Biggest Jump Since 2008

[Bloomberg] The Yuan Just Had Its Best Quarter in 12 Years

[WSJ] The U.S. Economy Was Laden With Debt Before Covid. That’s Bad News for a Recovery.

[FT] Tett: Investors grapple with bizarre US election cycle

[FT] New York could lose 159,000 restaurant jobs due to pandemic

[FT] IMF calls for urgent action to prevent debt crisis in emerging economies

Thursday's News Links

[Yahoo/Bloomberg] Stocks Climb on Stimulus Hopes: Markets Wrap

[Reuters] Global shares extend gains on U.S. stimulus, upbeat data

[Reuters] Dollar gives ground as hopes of US stimulus leads traders to riskier currencies

[Reuters] White House stimulus proposal goes over $1.5 trillion with $20 billion for airlines

[CNBC] U.S. weekly jobless claims total 837,000, vs 850,000 estimate

[Reuters] Mnuchin reports movement on COVID-19 relief; House delays vote

[Reuters] U.S. planned job cuts increase in September: report

[CNBC] Coronavirus live updates: Vaccine trial participants report intense side effects

[Reuters] Big U.S. banks to report profit plunge as pandemic recession takes hold

[Yahoo/Bloomberg] Blistering IPO Market Is Rekindling Dot-Com Era Froth Fears

[Reuters] Outflows point to 'risk-off' brewing in emerging markets -IIF

[AP] Unemployment marches higher in Europe as pandemic grinds on

[NYT] As the Election Looms, Investors See Uncertainty. They Don’t Like It.

[WSJ] U.S. Consumer Spending Rose in August, but Incomes Pose Hurdle for Economic Recovery

[WSJ] West Coast Wildfires Devastate Heart of California’s Wine Industry

[FT] China’s sabre-rattling over Taiwan rises as US tensions grow

Wednesday Afternoon Links

[Reuters] Wall Street jumps on stimulus hopes, upbeat data

[CNBC] Mnuchin says he is ‘hopeful’ White House and Democrats can strike a coronavirus stimulus deal

[Reuters] Pelosi, Mnuchin hope for COVID-19 relief deal as Democrats mull new bill

[CNBC] Airlines are hours away from cutting more than 30,000 jobs without billions more in federal aid

[Reuters] U.S. dollar share of global reserves dips in second quarter

[Reuters] Pompeo delivers warning to Italy over China's economic influence, 5G

Wednesday's News Links

[Reuters] Global stocks pull back as acrimonious U.S. debate stokes caution

[Reuters] Oil extends losses as rising virus cases spur demand worries

[Reuters] Dollar holds line after Trump, Biden clash in first debate

[Reuters] Chaotic U.S. election debate fuel investors' fears of contested result

[Reuters] U.S. private payrolls increase more than expected in September

[CNBC] U.S. second-quarter GDP down 31.4%, vs 31.7% drop expected

[CNBC] Mortgage demand falls nearly 5%, even as interest rates set another record low

[Yahoo/Bloomberg] SNB Interventions Soared to $98 Billion as Virus Roiled Markets

[Yahoo/Bloomberg] ECB to Consider Inflation Overshoot in Echo of Fed Strategy

[Reuters] China's factory activity accelerates at solid pace in September on boost from overseas demand

[Yahoo/Bloomberg] Italy Won’t Defuse Time Bomb at Heart of Euro Anytime Soon

[Reuters] Azerbaijan and ethnic Armenian forces fight new clashes, international tension mounts

[WSJ] Fed’s New Strategy Confronts Old Questions on Financial Trade-Offs

[WSJ] How China Is Taking Over International Organizations, One Vote at a Time

[FT] Dealmaking rebound drives busiest summer for M&A on record

Tuesday Evening Links

[CNBC] Presidential debate live updates: Biden and Trump get ready to square off

[CNBC] Stock futures are flat amid positive virus treatment data, debate looms

[Reuters] Asian markets point to mixed open as investors await U.S. presidential debate

[CNBC] Disney to lay off 28,000 employees as coronavirus slams its theme park business

[Reuters] Money market turmoil in March shows past reforms may be insufficient-U.S. Treasury official

[Reuters] WTO backs EU tariffs on $4 billion U.S. goods over Boeing subsidies - sources

[Bloomberg] Gold-Buying by Central Banks Seen Climbing From Near Decade Low

Tuesday's News Links

[CNBC] Shares lose ground as U.S. presidential debate looms

[Reuters] U.S. goods trade deficit widens in August

[CNBC] Home prices rose 4.8% in July, according to Case-Shiller index

[CNBC] Coronavirus live updates: Death toll exceeds 1 million people worldwide

[Reuters] Fed's Mester says economic recovery is split into 'tale of two cities'

[MarketWatch] IPO market is headed for busiest third quarter since the dot-com years — and there’s lots more to come

[Yahoo/Bloomberg] Hedge Funds in Biggest Dollar Short Since 2017 Risk Squeeze

[Yahoo/Bloomberg] China Looks to Normalize Monetary Policy as Economy Stabilizes

[Reuters] China faces arduous task in achieving new economic growth model: advisor

[Yahoo/Bloomberg] China Evaluates Ways to Contain Evergrande Financial Risks

[Yahoo/Bloomberg] China’s Too-Big-to-Fail Real Estate Giant Pulls Back From Brink

[AP] Tensions mount as Armenia, Azerbaijan continue fighting

[Bloomberg] Warning Signs Are Flashing Ahead of Covid’s Second U.S. Winter

[Bloomberg] New York Region Sees 40% Bankruptcy Surge, Braces for More\

[WSJ] U.S. Retail Bankruptcies, Store Closures Hit Record in First Half

[WSJ] Gold’s Record High Gives New Life to Dollar Doomsayers

[WSJ] Dollar Regains Appeal in Carry Trades

[WSJ] Manhattan Offices Are Nearly Empty, Threatening New York City’s Recovery

[WSJ] Complex Aircraft Investments Face a Reckoning

[FT] Fears of disputed US election fuel market volatility bets

[FT] Upbeat bond market at odds with banks over scale of Covid risks

[FT] Chinese Communist party asserts greater control over private enterprise

Monday Evening Links

[CNBC] U.S. stock futures mostly flat after Monday’s rally

[Reuters] Tech, bank shares drive Wall Street higher

[The Hill] Fears grow of chaotic election

[AP] Healthy US economy failed to narrow racial gaps in 2019

[Reuters] Fiercest clashes since 1990s rage in Azerbaijan's ethnic Armenian enclave

[Bloomberg] Hedge Funds Running Biggest Dollar Short Since 2017 Risk Squeeze

[Bloomberg] Taiwan Bank Lending to Chinese Firms Declines Amid Uncertainty

[FT] Chinese Communist party asserts greater control over private enterprise

Monday's News Links

[Reuters] Banks, travel stocks lead Wall Street higher

[Reuters] Stocks bounce as China industrial profits rise

[Yahoo/Bloomberg] Oil Erases Losses With Dollar Falling But Uncertain Demand Looms

[Yahoo/Bloomberg] JPMorgan Says Usual Hedges Aren’t Working as They Once Did

[Yahoo/Bloomberg] After Deploying Almost $9 Trillion, Crisis Fighters Face New Dilemmas

[Yahoo/Bloomberg] Emerging Markets on Edge as Goldman and Deutsche Bank Flag Risks

[Yahoo/Bloomberg] Inside the JPMorgan Trading Desk the U.S. Called a Crime Ring

[Reuters] China's leaders to endorse lower 2021-2025 growth target at key meeting - sources

[CNBC] Coronavirus live updates: Positivity rate tops 25% in some Midwest states; small businesses create succession plans

[Reuters] Merkel says German coronavirus infections could hit 19,200 a day: source

[Reuters] Armenian, Azeri forces battle again, at least 21 reported killed

[Reuters] China holds simultaneous military drills in four seas, again

[Bloomberg] China’s Economic Recovery Leaves the Bottom 60% Behind

[Bloomberg] No One’s Too Big to Fail in China’s Property Market

[Bloomberg] Evergrande Tries to Stop Bond, Stock Rout From Spiraling

[FT] Tricky times follow US corporate borrowing binge

[FT] The new gold rush: western investors offset soft eastern demand 

[FT] Emerging economies tap debt markets but risks pile up ahead

[FT] EU leaders fret over pandemic economic recovery deal

Sunday Evening Links

[CNBC] Stock futures rise in overnight trading following a 4-week losing streak 

[CNBC] Pelosi believes coronavirus stimulus deal still possible as Democrats prepare new package

[Reuters] Value of U.S. commercial property slashed by 27%, Financial Times reports

[Reuters] Armenia-Azerbaijan clashes kill at least 16, undermine regional stability

[Bloomberg] Emerging Markets on Edge as Goldman and Deutsche Bank Flag Risks

[Bloomberg] China’s Rebound Lost Momentum in September, Early Data Show

Sunday's News Links

[Reuters] Rise in virus cases adds to economic uncertainty ahead of U.S. election

[CNBC] Fewer than 10% of Americans show signs of past coronavirus infection, study finds

[Reuters] BoE's Tenreyro says evidence on negative rates is 'encouraging'

[CNN] China is doubling down on its territorial claims and that's causing conflict across Asia

[Reuters] Belarusian police use tear gas, stun grenades against protesters: TASS

[Reuters] Factbox: Nagorno-Karabakh - old tensions erupt again into violence

[AP] Leaders to UN: If virus doesn’t kill us, climate change will

[WSJ] Investors Ramp Up Bets on Market Turmoil Around Election

[WSJ] Chinese Companies Head Home to Raise Money, as Beijing’s Relations With U.S. Fray

[FT] Concentrated power in Big Tech harms the US

[FT] China’s Golden Week to test tourist demand after Covid-19

Saturday's News Links

[Reuters] Wall Street Week Ahead: Trump-Biden debate could spark stock volatility

[Reuters] Trump says U.S. election winner might not be known for months

[Reuters] Rise in virus cases adds to economic uncertainty ahead of U.S. election

[Reuters] Taiwan's armed forces strain in undeclared war of attrition with China

[WSJ] U.S. Sets Export Controls on China’s Top Chip Maker

[WSJ] Inflation Is Already Here—For the Stuff You Actually Want to Buy

Weekly Commentary: Extraordinary Q2 2020 Z.1 Flow of Funds

The numbers are just monstrous. The Fed’s own data illuminate the historic Monetary Disorder that today runs wild. The Federal Reserve’s balance sheet. Treasuries. Debt and Equities Securities. The banking system. The Household balance sheet. Rest of World holdings. In short, finance has completely run amuck, with the data corroborating the super cycle “end game” thesis.

Total Non-Financial Debt (NFD) increased $3.522 TN during Q2, more than doubling Q1’s record $1.449 TN gain. This pushed first-half NFD growth to an incredible $4.971 TN. For perspective, NFD expanded $2.439 TN in 2019 and averaged $1.826 TN annually over the past decade. Q2 growth actually surpassed 2004’s annual record $2.912 TN NFD expansion.

At $59.304 TN, Non-Financial Debt surged to a record 304% of GDP. NFD-to-GDP ended 1999 at 184%, 2007 at 227%, and 2019 at 250%. “Off the charts,” as they say.

Unprecedented deficit spending saw Treasury Securities jump $2.852 TN during the quarter to a record $22.371 TN. Treasuries were up $3.352 TN for the first half. Over the past year, Treasuries jumped $4.556 TN, or 25.6%. This dwarfs the previous annual record (2010’s $1.645 TN). After ending 2007 at $6.051 TN, outstanding Treasury Securities ballooned $16.320 TN, or 270%. Treasuries ended Q2 at 115% of GDP. This is up from 44% to end the nineties; 41% to conclude 2007; and 69% to close out 2010.

Agency Securities declined $25 billion during Q2 to $9.746 TN. Agency Securities were up $481 billion over the past year and $786 billion for two years. Having increased an incredible $5.037 TN over the past four quarters, combined Treasuries and GSE Securities ended Q2 at $32.117 TN, or 165% of GDP.

Total Debt Securities jumped $3.364 TN during Q2 to a record $51.690 TN. Over the past year, Debt Securities jumped $5.959 TN (more than double 2007’s record $2.669 TN increase). As a percentage of GDP, Debt Securities surged to 265%. For comparison, Debt Securities ended 2007 at 200% of GDP; the nineties at 157%; the eighties at 126%; and the seventies at 74%.

Total Equities surged $9.121 TN during the quarter to $51.956 TN, with a one-year increase of $884 billion (1.7%). Equities as a percentage of GDP rose to a record 267%. This compares to cycle peaks 181% at the end of Q3 2007 and 202% to conclude Q1 2000.

Total (Debt and Equities) Securities increased an unprecedented $12.485 TN during Q2 to a record $103.646 TN. This growth more than doubled Q1 2019’s record $5.970 TN gain. For comparison, Q4 2009’s $3.449 TN gain was the largest quarterly increase prior to 2019. Total Securities ended Q2 at a record 532% of GDP, compared to cycle peaks 379% during Q3 2007 and 359% to end Q1 2000. Total Securities ended the eighties at 194% and the seventies at 117%.

The Household balance sheet always offers fruitful Bubble Analysis. Unprecedented growth in the Fed’s balance sheet, debt and securities translated into record Household perceived wealth. Household Assets jumped $7.637 TN during Q2 to a record $135.435 TN. And with Liabilities only increasing about $29 million, Household Net Worth inflated a quarterly record $7.607 TN - to an all-time high $118.955 TN. Net Worth was up $5.0 TN over the past year. Net Worth ended the quarter at a record 610% of GDP. This compares to previous cycle peaks 492% (Q1 2007) and 446% (Q1 2000).

Household holdings of Financial Assets increased $7.0 TN during the quarter (up $3.758 TN y-o-y) to $94.548 TN (record 485% of GDP). For comparison, Financial Assets ended 2007 at $54.557 TN (372% of GDP) and 1999 at $34.656 TN (350% of GDP). Real Estate holdings ended Q2 at a record $34.406 TN, with a y-o-y gain of $1.493 TN. At 177% of GDP, Real Estate holdings as a percentage of GDP reached the highest level since Q4 2007.

Banking system (“Private Depository Institutions”) Assets jumped $859 billion (almost 16% annualized) during the quarter to a record $22.780 TN – a gain second only to Q1’s $1.869 TN. Loans increased (a measly) $24 billion, or 0.8% annualized (with mortgages up $36bn). The Asset “Reserves at the Fed” jumped another $313 billion to a record $2.787 TN. The Asset “Fed Funds and Repos” rose $204 billion to a record $863 billion. Debt Securities holdings surged a record $359 billion to an all-time high $5.241 TN. Treasuries gained $207 billion, surpassing $1 TN ($1.102TN) for the first time, and Agency/GSE MBS rose $110 billion to a record $2.934 TN.

Over the past year, Bank Assets surged $3.268 TN, or 16.7% (more than doubling 2008’s annual record $1.249 TN). Reserves at the Fed jumped $1.366 TN, while Loans expanded $862 billion and “repos” increased $507 billion. Bank Debt Securities holdings surged $743 billion, or 16.5%, with Treasuries up $331 billion, or 43%, and Agency Securities gaining $353 billion, or 13.7%. Corporate, muni and open-market paper gained moderately during the quarter and y-o-y.

On the Bank Liability side, Total (Checking and Time & Savings) Deposits surged a record $1.376 TN during Q2 to an all-time high $18.037 TN. Total Deposits rose $2.515 TN during the first half, or 32% annualized – and were up $3.056 TN, or 20.4%, year-on-year. Over the past year, Total Deposits ballooned from 70% to 93% of GDP. Banking system Total Deposits (Liabilities) peaked at 70% of GDP in 1986; ended the eighties at 66%; and the nineties at 48% - before rising back to 65% by 2009.

Rest of World (ROW) holdings of U.S. Financial Assets increased $3.364 TN (more than reversing Q1’s $2.665 TN decline – having been significantly impacted by the recovery in equities prices) to a record $35.465 TN. Debt Securities holdings gained a record $464 billion (after declining only $34bn during Q1) to a record $12.501 TN. Treasury holdings rose $82 billion to a record $6.892 TN, while Agency Securities declined $60 billion to $1.200 TN.

In an intriguing development, ROW boosted holdings of U.S. Corporate Bonds by an unprecedented $427 billion during Q2 to a record $4.177 TN. How much of this gain was associated with buying from foreign domiciled hedge funds, offshore financial entities and structured finance, along with other elements of global leveraged speculation – following the Fed’s move to backstop U.S. corporate Credit and ETFs?

Over the past six quarters, ROW holdings of U.S. Debt Securities jumped $1.315 TN. Treasuries gained $222 billion, and Agency Securities increased $112 billion. Meanwhile, holdings of U.S. Corporate Bonds surged $572 billion. Equities holdings surged $1.608 TN over the past year.

Having doubled over the past decade, Total ROW holdings of U.S. Financial Assets jumped to a record 182% of GDP to end Q2. This compares to 108% to end 2007; 74% at the end of the nineties; 31% to conclude the eighties; and 16% to round out the seventies.

Federal Reserve Assets jumped $1.185 TN, or 19.2%, during the quarter to a record $7.364 TN. This pushed first-half growth to $2.985 TN, or 68.2%. This compares to the $729 billion increase during Q4 2008 – and 2008’s $1.320 TN second-half expansion. The Fed’s balance sheet ballooned $3.355 TN over the past year, or 83.7%.

Fed Assets ended 2008 at $2.271 TN, having ballooned from year-end 2007’s $981 billion. Fed Assets ended 1999 at $697 billion (after a $107bn Q4 gain); the eighties at $315 billion; the seventies at $167 billion; and the sixties at $81 billion. Fed Assets averaged 6.4% of GDP during the three-decade period of the seventies through the nineties. This ratio jumped to 15% in 2008, rose to as high as 28% during Q1 2015, and ended Q2 at 38%.

Unprecedented stimulus and market intervention from the Federal Reserve and global central bank community unleashed epic market speculation (in the face of rapidly deteriorating fundamental prospects). There are indications this speculative cycle has commenced the process of succumbing to reality.

“Risk off” is gathering momentum across global markets. While Friday’s rally cut U.S. equities declines for the week, painful losses were suffered elsewhere. Major equities indices were down 5.0% in France, 4.9% in Germany, 4.4% in Spain and 4.2% in Italy. Hong Kong’s Hang Seng Index sank 5.0%, with China’s CSE 300 index down 3.5%. Real estate jitters rekindle China housing Bubble anxiety.

September 25 – Bloomberg: “China Evergrande Group is facing a crisis of confidence among creditors who’ve lent the world’s most indebted developer more than $120 billion. Long-simmering doubts about the property giant’s financial health exploded to the fore on Thursday, following reports it had sent a letter to Chinese officials warning of a potential cash crunch that could pose systemic risks. The news sparked a bondholder exodus that continued into Friday, sending the price of Evergrande’s yuan note due 2023 down as much as 28% to a record low. Losses in the company’s dollar bonds spread to high-yield debt across Asia.”

September 25 – Bloomberg (Rebecca Choong Wilkins and Denise Wee): “Average spreads on Asian dollar bonds widened 3-5bps by noon in Hong Kong, reversing earlier tightening, according to a trader, amid jitters from a looming cash crunch at Evergrande. This week is set for the biggest widening since March, according to a Bloomberg Barclays index.”

Emerging Markets were under significant pressure. South Korea’s Kospi Index sank 5.5%, with India’s Sensex down 3.8%. Taiwan’s TWSE index fell 5.0%. In EM currencies, the Mexican peso lost 5.4%, the South African rand 4.7%, the Colombian peso 3.9%, the Polish zloty 3.6%, the Russian ruble 3.2%, the Brazilian real 3.1%, the Chilean peso 3.0%, and the Hungarian forint 2.6%. Ten-year (dollar) yields surged 25 bps in Brazil, 25 bps in Ukraine, 12 bps in Indonesia, and eight bps in Philippines.

Global “risk off” squeezed the U.S. dollar bears, as the dollar index rallied 1.8% to a two-month-high. The dollar rally hit commodities markets, with gold dropping 4.6%, Silver 14.9%, Copper 4.7%, and Platinum 8.8%. The industrial metals were all under pressure.

Global bank stocks were under heavy selling pressure. European banks were hit 7.8%, closing Friday near March lows. Hong Kong’s China H-Financials Index fell 5.8% to lows since March. U.S. banks sank 6.8%, trading near four-month lows. Bank debt Credit default swap (CDS) prices jumped to near three-month highs.

“Risk off” is making some headway in U.S. Credit. At $4.86 billion, high-yield bond funds suffered their largest outflows since March. High-yield CDS prices jumped about 50 bps this week to a one-month high 400 bps. A natural gas company postponed its junk bond sale. Investment-grade CDS rose a notable 13 bps this week to a four-month high 74 bps.

The unfolding global de-risking/deleveraging episode only heightens U.S. market fragility. With U.S. elections now about 40 days away, the backdrop is set for extreme instability. The degree of speculative excess experienced over recent months would typically ensure vulnerability to a disorderly downside reversal and market dislocation. These times are, of course, anything but typical. It’s an incredibly worrying backdrop, to say the least. The Q2 report presented by far the most troubling data I’ve encountered in my 20 years of chronicling quarterly Z.1 data.

 

For the Week:

The S&P500 slipped 0.6% (up 2.1% y-t-d), and the Dow fell 1.7% (down 4.8%). The Utilities jumped 1.5% (down 7.1%). The Banks sank 6.8% (down 37.3%), and the Broker/Dealers dropped 4.6% (down 6.4%). The Transports lost 1.4% (up 3.4%). The S&P 400 Midcaps dropped 2.6% (down 11.9%), and the small cap Russell 2000 sank 4.0% (down 11.6%). The Nasdaq100 rallied 2.0% (up 27.7%). The Semiconductors added 0.8% (up 17.7%). The Biotechs fell 1.4% (up 4.5%). With bullion sinking $89, the HUI gold index was hit 6.6% (up 32.3%).

Three-month Treasury bill rates ended the week at 0.09%. Two-year government yields slipped a basis point to 0.13% (down 144bps y-t-d). Five-year T-note yields declined two bps to 0.27% (down 142bps). Ten-year Treasury yields fell four bps to 0.66% (down 126bps). Long bond yields dropped five bps to 1.40% (down 99bps). Benchmark Fannie Mae MBS yields declined four bps to 1.40% (down 131bps).

Greek 10-year yields dropped five bps to 1.02% (down 41bps y-t-d). Ten-year Portuguese yields declined three bps to 0.7% (down 17bps). Italian 10-year yields dropped eight bps to 0.89% (down 53bps). Spain's 10-year yields fell four bps to 0.25% (down 22bps). German bund yields dropped four bps to negative 0.53% (down 34bps). French yields fell three bps to negative 0.25% (down 37bps). The French to German 10-year bond spread widened one to 28 bps. U.K. 10-year gilt yields added a basis point to 0.19% (down 63bps). U.K.'s FTSE equities index fell 2.7% (down 22.5%).

Japan's Nikkei Equities Index dipped 0.7% (down 1.9% y-t-d). Japanese 10-year "JGB" yields were little changed at 0.01% (up 2bps y-t-d). France's CAC40 sank 5.0% (down 20.9%). The German DAX equities index dropped 4.9% (down 5.9%). Spain's IBEX 35 equities index fell 4.4% (down 30.6%). Italy's FTSE MIB index dropped 4.2% (down 20.5%). EM equities were mostly lower. Brazil's Bovespa index declined 1.3% (down 16.1%), while Mexico's Bolsa gained 1.6% (down 16.0%). South Korea's Kospi index sank 5.5% (up 3.7%). India's Sensex equities index dropped 3.8% (down 9.4%). China's Shanghai Exchange fell 3.6% (up 5.5%). Turkey's Borsa Istanbul National 100 index gained 1.1% (down 1.8%). Russia's MICEX equities index dropped 1.9% (down 4.9%).

Investment-grade bond funds saw inflows of $4.162 billion, and junk bond funds posted outflows of $4.217 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates increased three bps to 2.90% (down 74bps y-o-y). Fifteen-year rates rose five bps to 2.40% (down 76bps). Five-year hybrid ARM rates fell six bps to 2.90% (down 48bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down a basis point to 3.03% (down 101bps).

Federal Reserve Credit last week surged $40.629bn to a three-month high $7.032 TN. Over the past year, Fed Credit expanded $3.224 TN, or 85%. Fed Credit inflated $4.221 Trillion, or 150%, over the past 411 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week jumped $17.4bn to $3.424 TN. "Custody holdings" were down $34bn, or 1.0%, y-o-y.

M2 (narrow) "money" supply surged $124bn last week to a record $18.701 TN, with an unprecedented 29-week gain of $3.193 TN. "Narrow money" surged $3.711 TN, or 24.8%, over the past year. For the week, Currency increased $6.1bn. Total Checkable Deposits spiked $165.4bn, while Savings Deposits fell $43.2bn. Small Time Deposits dipped $4.6bn. Retail Money Funds were little changed.

Total money market fund assets slipped $2.1bn to $4.414 TN. Total money funds surged $972 y-o-y, or 28.2%.

Total Commercial Paper increased $2.0bn to $986bn. CP was down $112bn, or 10.2% year-over-year.

Currency Watch:

September 23 – CNBC (Stephanie Landsman): “Economist Stephen Roach warns next year will be brutal for the dollar. Not only does he see growing odds of a double-dip recession, the Yale University senior fellow believes his ‘seemingly crazed idea’ that the dollar would crash shouldn’t be so crazy anymore. ‘We’ve got data that’s confirmed both the saving and current account dynamic in a much more dramatic fashion than even I was looking for,’ Roach told CNBC… ‘The current account deficit in the United States, which is the broadest measure of our international imbalance with the rest of the world, suffered a record deterioration in the second quarter… The so-called net-national savings rate, which is the sum of savings of individuals, businesses and the government sector, also recorded a record decline in the second quarter going back into negative territory for the first time since the global financial crisis.’”

For the week, the U.S. dollar index rallied 1.8% to a two-month high 94.577 (down 2.0% y-t-d). For the week on the downside, the Mexican peso declined 5.4%, the Norwegian krone 5.0%, the South African rand 4.7%, the Swedish krona 4.0%, the Australian dollar 3.5%, the New Zealand dollar 3.2%, the Brazilian real 3.1%, the Swiss franc 1.8%, the euro 1.8%, the Canadian dollar 1.4%, the British pound 1.3%, the Singapore dollar 1.3%, the South Korean won 1.0%, and the Japanese yen 1.0%. The Chinese renminbi declined 0.80% versus the dollar this week (up 2.04% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index fell 1.8% (down 12.6% y-t-d). Spot Gold dropped 4.6% to $1,862 (up 22.6%). Silver sank 14.9% to $23.093 (up 28.9%). WTI crude declined 86 cents to $40.25 (down 34%). Gasoline fell 1.8% (down 28%), while Natural Gas rallied 4.4% (down 2%). Copper sank 4.7% (up 6%). Wheat dropped 5.3% (down 3%). Corn fell 3.5% (down 6%).

Coronavirus Watch:

September 21 – Wall Street Journal (Ted Mann and Talal Ansari): “Deaths in the U.S. attributed to the coronavirus neared 200,000 Monday amid concerns from some health experts that the country was heading for another wave of infections. The U.S. continues to lead the world in both total confirmed cases and deaths… ‘Two hundred thousand deaths is disturbing and frustrating because in this pandemic, deaths are preventable if we utilize appropriate public-health measures,’ said Thomas Russo, head of infectious disease at Jacobs School of Medicine & Biomedical Sciences at the University of Buffalo.”

September 22 – Associated Press (Jill Lawless and Pan Pylas): “British Prime Minister Boris Johnson appealed… for resolve and a ‘spirit of togetherness’ through the winter as he unveiled new restrictions on everyday life to suppress a dramatic spike in coronavirus cases. Warning that the measures could last for six months, Johnson voiced hope that ‘things will be far better by the spring’ when a vaccine and mass testing could be in place… In a change of emphasis, Johnson urged people to work from home where possible. He said stiff fines will be imposed on anyone breaking quarantine rules or gathering in groups of more than six, while the use of face masks will be expanded to include passengers in taxis and staff at bars and shops.”

September 24 – Reuters (Daina Beth Solomon, Laura Gottesdiener and David Alire Garcia): “Mexico surpassed 75,000 confirmed coronavirus deaths on Thursday, as the pandemic ravages Latin American nations with large informal economies where workers have grappled with the twin threats of hunger and contagion… More than half of Latin America’s active population have informal jobs in areas such as street commerce and domestic labor. In Mexico, working from home or strict social-distancing measures can mean no income, since the welfare safety net is small.”

September 19 – Reuters (Shilpa Jamkhandikar): “India’s coronavirus case tally surged to 5.4 million as it added 92,605 new infections in the last 24 hours, data from the health ministry showed on Sunday. The country has posted the highest single-day caseload in the world since early August, and lags behind only the United States, which has 6.7 million cases in terms of total infections.”

September 24 – Reuters (John Irish): “France’s prime minister warned on Thursday that the government could be forced to reconfine areas if the number of COVID-19 cases did not improve in the coming weeks and defended tough restrictions taken on Wednesday.”

September 21 – Reuters (Lewis Krauskopf): “Optimism that vaccines are on the way to end the coronavirus pandemic has been a major factor in this year’s U.S. stock resurgence. That will face a critical test in coming weeks, as investors await clinical data on whether they actually work.”

Market Instability Watch:

September 23 – Bloomberg (Vivien Lou Chen): “Treasury yields would be jolted higher by Democrats winning the U.S. presidency and control of both houses of Congress, say Goldman Sachs Group Inc. strategists Praveen Korapaty and Avisha Thakkar. In a note published Wednesday, they said the benchmark 10-year note’s yield could rise 30 to 40 bps over the month following the Nov. 3 election. The adjustment would reflect the possibility of substantially higher federal spending, they said.”

September 21 – Reuters (Annie Nova): “Bored at home, many people are turning to the stock market and dabbling in day trading for entertainment and profits. However, most individual investors do not have the wealth, the time, or the temperament to make money and to sustain the losses that day trading can bring… Day trading has become very popular worldwide since the onset of the coronavirus pandemic. Activity has ‘increased dramatically’ in the first quarter of 2020 compared with 2019, according to data analyzed by Cerulli Associates.”

September 25 – Reuters (Julien Ponthus): “Investors pulled a massive $25.8 billion out of U.S. equity funds in the week to Wednesday, the third biggest outflow ever from the asset class, BofA’s weekly fund flow report showed… Money was sucked out of sectors which have been the main beneficiaries of the rebound in the wake of the Covid19 March crash, said BofA analysts, citing data for the week to Sept. 23 from financial flow tracking firm EPFR.”

September 24 – Financial Times (Joe Rennison and Colby Smith): “US junk bond funds have suffered their biggest weekly outflows since the depths of the coronavirus pandemic in March... Investors pulled $4.86bn from funds that buy US high-yield bonds in the week ending September 23, according to… EPFR Global, the worst result since $5.6bn was withdrawn in the middle of March.”

September 20 – Financial Times (Steve Johnson): “A surge of interest in leveraged and inverse exchange traded products could be luring inexperienced investors into gambling with all its attendant risks, experts warn. Globally, leveraged and inverse ETPs saw net inflows of $20.6bn in the seven months to the end of July…, compared to net outflows of $3.4bn in the same period last year and $4.1bn during the whole of 2019. This took their assets to a record $89.7bn. ‘It’s almost certain that you have got a number of people using these products who don’t know, effectively, what they are doing,’ said Kenneth Lamont, research analyst… at Morningstar. ‘They are the equivalent of spread betting rather than a legitimate long-term investment. They are gambling tools rather than trading tools. The pay-off strategies of these products can be very strange.’”

September 22 – Bloomberg (Sam Potter and Katherine Greifeld): “More than two weeks of doubt and volatility in the stock market are finally starting to show up in corporate bonds. Investors fleeing the iShares iBoxx High Yield Corporate Bond exchange-traded fund (HYG), the largest ETF tracking U.S. junk debt, pulled $1.06 billion from the product on Monday…”

September 23 – Bloomberg (Davide Scigliuzzo and Paula Seligson): “Junk-rated companies are binging on debt like never before thanks to a pledge from the Federal Reserve to keep rates low and credit markets open. But not every borrower is welcome on board. Aethon United BR LP, a… natural gas company, has postponed a $700 million high-yield bond sale that would have refinanced existing debt, according to people with knowledge of the matter who asked not to be identified because the details are private.”

September 21 – Bloomberg (Katherine Greifeld): “America’s exchange-traded funds are shutting down at a record pace and the production line is stuttering as issuers struggle to sell new products in the $5 trillion market. More than 130 ETFs have been liquidated in 2020, already the most ever, while 178 funds have started trading – roughly on course to match last year’s launches… A glance at flows helps explain why: Almost a third of all existing ETFs were launched within the past three years, yet they account for only about $2 of every $100 currently invested in the industry, according to… Bloomberg Intelligence.”

Global Bubble Watch:

September 21 – Reuters (Alun John, Sumeet Chatterjee, Donny Kwok, Lawrence White, Ritvik Carvalho, Sujata Rao, Karin Strohecker, Pete Schroeder and Paritosh Bansal): “Global banks faced a fresh scandal about dirty money on Monday as they sought to limit the fallout from a cache of leaked documents showing they transferred more than $2 trillion in suspect funds over nearly two decades. Britain-based HSBC Holdings Plc, Standard Chartered Plc and Barclays Plc, Germany's Deutsche Bank and Commerzbank AG, and… JPMorgan Chase & Co JPM.N and Bank of New York Mellon Corp BK.N were among the lenders named in the report by the International Consortium of Investigative Journalists and based on leaked documents obtained by BuzzFeed News.”

September 20 – Bloomberg (Yueqi Yang, Jennifer Surane, and Yalman Onaran): “A cache of leaked documents suggests increased scrutiny on suspect transactions at banks does little to stem the flow of trillions of dollars linked to suspicious activity. Shares of the biggest global lenders fell Monday. A new investigation by the International Consortium of Investigative Journalists says JPMorgan Chase & Co., Deutsche Bank AG and HSBC Holdings Plc were among the global banks who ‘kept profiting from powerful and dangerous players’ in the past two decades even after the U.S. imposed penalties on these financial institutions.”

September 21 – Reuters (Marc Jones): “Europe could be facing a new sovereign-bank ‘doom loop’ if a coronavirus crisis surge in government bond buying by banks in those same countries persists, rating agency S&P Global has warned. A report… by S&P said the European sovereign-bank ‘nexus’ -- where banks buy bonds issued by the countries they are based in -- has deepened by 210 billion euros ($247.76bn) since start of the pandemic. ‘Despite European governments’ efforts to increase risk sharing of the fiscal cost of the pandemic, we have seen few signs of this on the part of European banks,’ S&P said.”

September 24 – Bloomberg (Maciej Onoszko): “New bond sales in Europe are set to exceed 1.39 trillion euros ($1.62 trillion) this year, breaking the record tally from 2019 with more than three months to spare.”

Trump Administration Watch:

September 24 – Bloomberg (Christopher Anstey): “Republican lawmakers vowed that the presidential transition after November’s election will occur without disruption, in a rebuke to President Donald Trump’s refusal to commit to a peaceful transfer of power. ‘The winner of the November 3rd election will be inaugurated on January 20th. There will be an orderly transition just as there has been every four years since 1792,’ Senate Majority Leader Mitch McConnell tweeted… By contrast, Trump said Wednesday that ‘we’re going to have to see what happens,’ in response to a reporter’s question at a White House news conference about a peaceful transfer of power. ‘You know that I’ve been complaining very strongly about the ballots, and the ballots are a disaster.’”

September 19 – Wall Street Journal (Alexa Corse): “How soon Americans know the outcome of the presidential election could hinge on a few states—and how fast they count mail ballots. Many states allow election workers to start processing mail ballots before Election Day, and so count them relatively swiftly. Some states—including potentially decisive swing states like Wisconsin, Michigan and Pennsylvania—don’t open envelopes containing mail ballots until Election Day. With an unprecedented number of voters expected to vote by mail amid the coronavirus pandemic, counting ballots may take days or longer in some states, possibly delaying a tally.”

September 21 – Reuters (Andrew Chung and Steve Holland): “President Donald Trump raced… to cement a conservative majority on the U.S. Supreme Court before the Nov. 3 election, telling reporters he planned by Saturday to reveal his pick to succeed liberal icon Ruth Bader Ginsburg.”

September 19 – Bloomberg (Michael P. Regan and Felice Maranz): “While many investors are zeroing in on the U.S. presidential election in November, a trickier political equation could be even more important in determining winners and losers in markets: which party controls the Senate. Many political analysts at this point expect the Democratic Party to remain the majority in the House of Representatives regardless of who wins the presidential race. Control of the Senate is harder to predict. Of the 100 seats, 35 are up for election this year and Republicans will be defending 23 of them -- with their three-seat majority in the balance.”

September 23 – CNBC (Thomas Franck): “Larry Kudlow, President Donald Trump's top economic advisor, said… the broad economic recovery from Covid-19 doesn’t necessarily require additional fiscal stimulus even if select industries or businesses could benefit from more aid. ‘I don’t think the V-shaped recovery depends on the package, but I do think a targeted package could be a great help,’ Kudlow said… ‘Even though I think the economy is improving nicely, it could use some help in some key, targeted places.’”

September 24 – CNBC (Jacob Pramuk): “House Democrats are preparing a new, smaller coronavirus relief package expected to cost about $2.4 trillion as they try to forge ahead with talks with the Trump administration… The bill would include enhanced unemployment insurance, direct payments to Americans, Paycheck Protection Program small-business loan funding and aid to airlines, among other provisions, the person said. To reach the price tag, Democrats would chop roughly $1 trillion from their previous proposal for a fifth pandemic aid plan.”

September 21 – Reuters (Jeff Mason): “U.S. President Donald Trump… said he was rebuffed when he asked officials to adjust the exchange rate of the dollar to counteract what he described as repeated currency manipulation by China of its yuan… ‘I go to my guys, ‘What about doing a little movement on the dollar?’ he said, but they countered that was not possible. ‘Sir, we can’t do that. It has to float naturally.’”

Federal Reserve Watch:

September 23 – Bloomberg (Catarina Saraiva and Steve Matthews): “Federal Reserve Chairman Jerome Powell faced questions from U.S. lawmakers Wednesday over the central bank’s help for Americans compared with markets during the coronavirus pandemic. ‘Our actions were in no way an attempt to relieve pain on Wall Street,’ Powell told a hearing before the House Select Subcommittee on the Coronavirus Crisis. Powell also reiterated his support for further fiscal stimulus, saying it is ‘unequaled’ by anything else. Congressional stimulus talks have stalled since early August with both political parties about $1 trillion apart in their offers. On its Main Street Lending Program, the Fed chief said that he and his colleagues have “done basically all of the things that we can think of.’”

September 22 – Reuters (Jeff Cox): “Federal Reserve Chairman Jerome Powell pledged continued support for an economy that he said has shown substantial improvement but still needs more work. In remarks the central bank leader will deliver Tuesday to the House Financial Services Committee, Powell reiterated the Fed's commitment to helping the economy through the coronavirus pandemic and outlined what's been done so far. ‘We remain committed to using our tools to do what we can, for as long as it takes, to ensure that the recovery will be as strong as possible, and to limit lasting damage to the economy,’ Powell said…”

September 23 – New York Times (Jeanna Smialek): “Jerome H. Powell, the Federal Reserve chair, faced lawmaker criticism over the central bank’s program to backstop the corporate bond market, as House Democrats questioned whether the central bank has done enough for smaller companies and workers. ‘The Fed must use its tremendous resources and market power not just to bail out wealthy stockholders, but also to protect lower-income workers and struggling small businesses that are the backbone of this country’s economy,’ Representative James E. Clyburn, Democrat of South Carolina, said during a House hearing on the coronavirus crisis.”

September 23 – Bloomberg (Steve Matthews and Catarina Saraiva): “Federal Reserve Vice Chairman Richard Clarida said the central bank won’t consider raising interest rates from near zero until it actually achieves 2% inflation for at least a few months as well as full employment. ‘We’re not going to even begin to think about lifting off, we expect, until we actually get observed inflation -- and we measure it on a year-over-year basis, equal to 2%,’ Clarida said… in a Bloomberg Television interview with Tom Keene, Lisa Abramowicz and Jonathan Ferro. ‘That’s at least -- we could actually keep rates at this level even beyond that.’”

September 20 – Bloomberg (Rich Miller): “It sounded a bit like a broken record. Confronted by a pandemic that has devastated the economy, Federal Reserve Chair Jerome Powell declared no less than 10 times last week that the central bank has a ‘powerful’ new monetary policy road map for returning the U.S. to full employment and lifting inflation temporarily above 2%. ‘It was powerful,’ Mellon chief economist Vincent Reinhart said wryly of the central bank’s plan for continued rock-bottom interest rates. ‘If you say it 10 times it must be so.’”

U.S. Bubble Watch:

September 21 – Bloomberg (Scott Lanman): “The U.S. government’s debt will swell over the next 30 years to almost double the size of the economy, raising the risk of a fiscal crisis or a drop in the value of Treasuries, the Congressional Budget Office said… The nonpartisan agency, in its long-term budget outlook, projected debt will reach 195% of gross domestic product in 2050, up from 98% this year and 79% in 2019. That compares with the prior 2050 forecast of 180% from January, before the coronavirus pandemic struck the nation and spurred Congress to pass about $3 trillion of stimulus.”

September 24 – Reuters (Lucia Mutikani): “The number of Americans filing new claims for unemployment benefits unexpectedly increased last week, supporting views the economic recovery from the COVID-19 pandemic was running out of steam… The weekly jobless claims report… also showed 26 million people were on unemployment benefits in early September.”

September 23 – CNBC (Diana Olick): “After a brief lull to start the month, mortgage demand surged ahead yet again — even with the highest interest rates in several weeks… Mortgage applications to purchase a home rose just 3% for the week but were 25% higher than one year ago. Buyers continue to flood the market despite higher home prices and very tight supply. Sales have been strongest on the high end of the market, according to the National Association of Realtors…”

September 24 – CNBC (Diana Olick): “Exceptional demand for new and existing homes, brought on by the stay-at-home culture of the coronavirus pandemic, has the housing market severely depleted. Sales of newly built homes jumped to the highest level in 14 years in August, but builders’ supply dropped to just 3.3 months’ worth… A six-month supply is considered a balanced market. Supply was at 5.5 months in August 2019…”

September 21 – Wall Street Journal (Nicole Friedman): “The pandemic has aggravated the housing market’s longstanding lack of supply, creating a historic shortage of homes for sale. Buyers are accelerating purchase plans or considering homeownership for the first time, rushing to get more living space as many Americans anticipate working from home for a while. Many potential sellers, meanwhile, are keeping their homes off the market for pandemic-related reasons. The combined effect has created an extreme drought of previously owned homes for sale. At the end of July, there were 1.3 million single-family existing homes for sale, the lowest count for any July in data going back to 1982…”

September 24 – Bloomberg (Katia Dmitrieva): “Sales of new homes in the U.S. unexpectedly advanced for a fourth month in August to the highest level in almost 14 years as record-low mortgage rates continued to entice buyers into a market with ever-shrinking supply. Purchases of new single-family houses increased 4.8% to a 1 million annualized pace, led by a flurry of demand in the South, after an upwardly revised 14.7% surge in July… It’s the same picture for backlogs: the number of properties sold for which construction hadn’t yet started jumped to 342,000 in August."

September 24 – CNBC (Diana Olick): “Fierce competition for a limited supply of homes for sale has caused a surge in prices. Now, potential buyers, some fleeing urban areas hit hard by the coronavirus pandemic, are facing a national affordability crisis. The median prices of single-family homes and condos in the third quarter are less affordable than historical averages in 63% of U.S. counties, up from 54% a year ago, according to Attom Data Solutions… It calculates affordability for average wage earners on the income needed to make monthly mortgage, property tax and insurance payments on a median-priced home with a 20% down payment.”

September 20 – Wall Street Journal (Amara Omeokwe): “The housing market has led the recovery from the pandemic-induced economic downturn as Americans have rushed to buy homes amid a desire for more living space and record-low mortgage rates. But some analysts warn even as the housing boom bolsters the overall economy, it may widen the longstanding gap in homeownership between Black and white Americans. That could have broader implications for wealth disparities since homes are a core source of wealth for most Americans.”

September 24 – Bloomberg (Simon Kennedy): “Goldman Sachs Group Inc. economists halved their forecast for U.S. growth in the fourth quarter after deciding there will not be additional fiscal stimulus until next year. The researchers led by Jan Hatzius now predict the world’s largest economy will expand 3% on a quarterly annualized basis, down from the 6% they previously anticipated. ‘It is now clear that Congress will not attach additional fiscal stimulus to the continuing resolution,’ they said… ‘This implies that after a final round of extra unemployment benefits that is currently being disbursed, any further fiscal support will likely have to wait until 2021.’”

September 21 – Bloomberg (Danielle Moran): “Without federal aid, Illinois credit pressures are mounting, and the state may have to borrow more even as officials seek to cut spending and balance the budget, according to S&P Global Ratings. The coronavirus has exacerbated the worst-rated state’s challenges, including already large budget gaps and weak demographics… ‘The magnitude of the current budget gap and reliance on one-time measures make us question Illinois’ ability to achieve structural balance in a reasonable time,’ the analysts wrote. ‘Even if Illinois receives federal aid in fiscal 2021, we expect that it will face challenging budget gaps beyond the current fiscal year.’”

September 18 – Financial Times (Myles McCormick): “It is less than two months since Donald Trump travelled to Texas to declare that the US energy industry, laid low by this year’s oil price crash, was back on its feet. ‘We’re OK now,’ the president told the assembled crowd. But bankruptcy numbers released this week tell a different story. Another 16 upstream US oil and gas companies — producers and service providers — hit the wall in August, the same number as in July… Bigger drillers such as Chaparral and Valaris have joined a pile-up that has seen companies with a combined $85bn worth of debt file for protection from creditors over the past eight months.”

September 24 – Bloomberg (Hannah Levitt): “Before the pandemic emptied the city, few lenders benefited from the heady local real estate market as much as regional players New York Community Bancorp Inc. and Signature Bank. Now they’re becoming a case study for potential trouble from a sudden downturn in the Big Apple’s property sector… With retail and apartment vacancies rising and rents falling, and with the prospect of employers cutting their office space looming, the question is whether the hundreds of millions of dollars the banks have set aside for commercial-property loan losses will be enough.”

September 22 – Bloomberg (Jack Pitcher and Gabrielle Coppola): “Carvana Co. has yet to post a quarterly profit since going public in 2017, but it’s made Ernie Garcia II and his son Ernest Garcia III two of the richest people in America. The elder Garcia is the largest shareholder of… Carvana, the online retailer that sells cars out of massive vending machines. His son, Garcia III, is the company’s chief executive officer. Together they’re worth $21.4 billion… Shares of the company surged 31%... after it projected record revenue and profit margins. The stock has rallied almost 150% this year…”

Fixed Income Watch:

September 20 – Wall Street Journal (Sam Goldfarb and Paul J. Davies): “Surging deposits and declining lending are driving banks to dramatically increase their holdings of U.S. Treasurys… Holdings at U.S. commercial banks of Treasury and agency securities other than mortgage bonds have grown by more than $250 billion since the end of February as their total deposits have jumped by more than $2 trillion… Commercial and industrial loans initially spiked as companies drew on their credit facilities, but many have since repaid bank debt and loan-and-lease volume has fallen.”

September 23 – Bloomberg (Paula Seligson): “U.S. high-yield bond sales reached an annual record of $329.8 billion Wednesday as companies reap the benefits of the Federal Reserve’s liquidity-boosting policies and investors grasp for yield. The crush of debt offerings accelerated in April after the U.S. central bank began purchasing some high-yield bonds as part of its efforts to support the corporate credit markets. Since then, issuance has eclipsed the prior annual sales record of $329.6 billion set in 2012, according to data compiled by Bloomberg.”

September 21 – Wall Street Journal (Sebastian Pellejero): “Bundles of lower-rated mortgages tied to hotels, offices and retail properties across the U.S. have lagged behind the debt markets’ rebound, a sign of the pandemic’s lingering blow to commercial real estate. An index tracking commercial mortgage-backed securities with a triple-B rating—the lowest broad investment-grade tier—remains below pre-pandemic levels, despite a broad recovery in credit markets. Indexes tracking mortgage-backed bonds with higher concentrations of hotel and retail properties are struggling even more.”

China Watch:

September 21 – Bloomberg: “Chinese President Xi Jinping took a veiled swipe at the U.S. in a strongly worded speech, saying no country should ‘be allowed to do whatever it likes and be the hegemon, bully or boss of the world.’ Pushing for developing countries to have a greater role in world affairs, Xi said the United Nations could be ‘more balanced’ and called for the ‘international order underpinned by international law,’ the official Xinhua News Agency reported, citing remarks made at a meeting commemorating the world body’s 75th anniversary. He said countries must not be ‘lorded over by those who wave a strong fist at others.’”

September 23 – Reuters (Andrew Galbraith): “China has no reason to approve the ‘dirty and unfair’ deal based on ‘bullying and extortion’ that Oracle Corp and Walmart Inc said they struck with ByteDance, the state-backed… China Daily newspaper said… ‘What the United States has done to TikTok is almost the same as a gangster forcing an unreasonable and unfair business deal on a legitimate company,’ it said…”

September 21 – Reuters (Akanksha Rana): “Beijing has sped up development of a blacklist that could be used to punish U.S. technology firms, with Huawei Technologies Co Ltd rival Cisco Systems Inc among the companies seen as likely to be included in the list… However, Chinese leaders are hesitating to pull the trigger, with some arguing that a decision on the list should wait till after the U.S. election in November, the report said.”

September 24 – Bloomberg: “The world’s most indebted developer has warned Chinese officials it faces a potential default that could roil the nation’s $50 trillion financial system unless regulators approve the company’s long-delayed stock exchange listing. China Evergrande Group mapped out the scenario in an Aug. 24 letter to the Guangdong government…, in which the company sought support for a restructuring proposal needed to secure the listing and avert a cash crunch. Evergrande’s shares and bonds tumbled on Thursday. The developer faces a critical test on Jan. 31, when strategic investors are allowed to exit unless it gets approval for a listing on the Shenzhen stock exchange. If they refuse to extend the deadline, the company will need to repay as much as 130 billion yuan ($19bn), equivalent to 92% of its cash and cash equivalents. That may lead to ‘cross defaults’ in Evergrande’s borrowings from banks, trusts, funds and the bond market, eventually leading to systematic risks for the broader financial system, according to the document sent to the provincial government…”

September 23 – CNBC (Evelyn Cheng): “Chinese fervor for online shopping waned in August, a sign that the world's second-largest economy still faces many challenges as it tries to boost consumption at home… Online sales of consumer goods and services grew 13.3% in August, slower than the 18.8% growth in July and down from 19% in June, CNBC analysis of official data showed.”

September 22 – Bloomberg: “China jolted markets in 2019 with three high-profile bank rescues that imposed losses on some investors. The appetite for experimenting with greater market discipline has been crushed by the coronavirus pandemic. 2020 has become the year of stealth rescues… Local governments are identifying the weakest lenders among more than 4,000 rural and city banks, and drafting plans… to merge them into bigger and, hopefully, stronger banks… The behind-the-scenes maneuvering has kept crucial credit flowing through local economies, but also allows risks to persist in China’s vast network of regional banks. The sector, which accounts for 80 trillion yuan ($12 trillion) of banking assets, has been plagued for years by scandals, complex ownership structures, rampant off-book dealings and poor risk control.”

September 21 – Reuters (Clare Jim): “China is tackling unbridled borrowing in the real estate development sector anew with caps for debt ratios. But sources at developers say a rush to get around the rules by moving more debt off balance sheets is on. Dubbed ‘the three red lines’, Chinese regulators outlined caps for debt-to-cash, debt-to-assets and debt-to-equity ratios last month at a meeting with 12 major property developers in Beijing. Though not yet officially announced, developers expect the rules to be applied sector-wide as soon as Jan. 1, 2021. The move has sent shock waves through the industry, sources at four Chinese property developers told Reuters.”

September 24 – Bloomberg: “The debt woes of a Chinese state-run property developer have deepened, after plans emerged for the Tianjin-based defaulter to seek delayed repayment and restructuring of its offshore debt, according to people familiar… In a notice sent on Wednesday, Tianjin Real Estate Group Co. asked four banks that are holders of its 4.5% 3-year $100 million bond to accept a six-month maturity extension to avoid a default…”

September 23 – Financial Times (Thomas Hale, Hudson Lockett and Sun Yu): “A surge in internet trading by China’s retail investors has boosted the country’s brokers, awarding some of them a valuation in line with the world’s best-known banks. Average daily turnover on China’s stock market has hit Rmb874bn ($129bn) this year…, up nearly 60% from the average of the past five years, as the coronavirus crisis has driven interest in online equity trading.”

Central Bank Watch:

September 24 – Bloomberg (Piotr Skolimowski and James Hirai): “Euro-zone banks took 174.5 billion euros ($203bn) in another dose of ultra-cheap funding as the European Central Bank gives them every possible incentive to keep lending to the pandemic-stricken economy. The bids for the targeted loans, known as TLTROs, came from 388 banks, and the takeup was at the high end of economists’ expectations. The loans will likely push excess liquidity in the euro zone above 3 trillion euros for the first time on record.”

September 22 – Bloomberg (Carolynn Look and Paul Gordon): “The European Central Bank risks legal trouble if it tries to extend the ‘emergency powers’ of its pandemic bond-buying plan to its other asset-purchase program, according to Executive Board member Yves Mersch. The 1.35 trillion-euro ($1.6 trillion) measure ‘has been created first and foremost to be a backstop,’ Mersch, the ECB’s longest-serving policy maker, said… ‘We have always said it is linked to the assessment of the Governing Council on how long this pandemic is affecting us,’ he said. ‘So we cannot say the pandemic is over but we continue with the pandemic program, or we transfer the pandemic program features into the asset-purchase program. To my humble understanding of what the law means, this would be very curious.’”

EM Watch:

September 24 – Bloomberg (Cagan Koc): “Turkey’s central bank raised interest rates for the first time since a currency crisis in late 2018, surprising most economists after a series of backdoor measures fell short of stabilizing the lira. The Monetary Policy Committee… increased the benchmark one-week repo rate to 10.25% from 8.25% on Thursday… The decision caps a period of tightening by stealth as the central bank tried to contain the lira’s weakness by using fringe tools and ceasing to provide funding at its cheapest benchmark rate.”

Europe Watch:

September 23 – Reuters (Jonathan Cable): “Euro zone business growth ground to a halt this month, throwing the economic recovery into question, as fresh restrictions to quell a resurgence in coronavirus infections slammed the services industry into reverse… IHS Markit’s flash Purchasing Managers’ Index sank to 50.1 in September from August’s 51.9, only just above the 50 mark separating growth from contraction and well below the median forecast…”

September 20 – Reuters (Giuseppe Fonte and Gavin Jones): “Italy expects its coronavirus-hit economy to grow by more than 5% next year after shrinking 9% in 2020, two government sources told Reuters… In April, the government of the anti-establishment 5-Star Movement and the centre-left PD party forecast a fall in gross domestic product of 8% this year and a 2021 rebound of 4.7%.”

September 18 – Reuters (Bhanvi Satija): “Ratings agency S&P Global Ratings… revised Spain’s outlook to ‘negative’ from ‘stable’, saying its policy response to rising economic and fiscal challenges are at risk from political fragmentation and reform fatigue.”

Japan Watch:

September 22 – Reuters (Daniel Leussink): “Japan’s factory activity extended declines in September largely due to a sharper fall in output, as the world’s third-largest economy struggles to stage a robust recovery from the coronavirus pandemic. The au Jibun Bank Flash Japan Manufacturing Purchasing Managers’ Index (PMI) was largely unchanged at 47.3 in September… Output contracted at a faster pace for the first time in four months…”

Leveraged Speculation Watch:

September 23 – Financial Times (Robin Wigglesworth and Laurence Fletcher): “Savage stock market drops, soaring rallies and a frenzied retail trading boom. This should be a fertile environment for quantitative trend-following hedge funds. Instead, the $280bn industry has experienced widely diverging fortunes this year. Société Générale’s index of commodity-trading advisers — a common regulatory designation for ‘quant’ funds that specialise in riding market trends — is down 2.2% this year. That is below the hedge fund industry’s average 2% gain... This year has been a ‘crucible’ for CTAs, according to Edward Raymond, head of UK portfolio management at Julius Baer. ‘It’s the anatomy of the downturn that matters,’ he said. ‘Some did well and others did not, and we’ve seen a wide dispersion of performance this year.’”

September 21 – Bloomberg (Saijel Kishan): “Bridgewater Associates, billionaire Ray Dalio’s hedge fund firm, said U.S. social conditions such as inequality will increasingly affect markets as policy makers consider them more explicitly in their goals. ‘A shift is already underway in terms of how the Fed interprets its current mandate,’ a team led by director of research Karen Karniol-Tambour said… ‘In a world where fiscal policy is increasingly important, social conditions will naturally play a larger role in determining policy -- and therefore play a larger role in markets.’”

Geopolitical Watch:

September 22 – Associated Press (Edith M. Lederer): “Kept apart by a devastating pandemic and dispersed across the globe, world leaders convened electronically… for an unprecedented high-level meeting, where the U.N. chief exhorted them to unite and tackle the era’s towering problems: the coronavirus, the ‘economic calamity’ it unleashed and the risk of a new Cold War between the United States and China. As Secretary-General Antonio Guterres opened the first virtual ‘general debate’ of the U.N. General Assembly, the yawning gaps of politics and anger became evident. China and Iran clashed with the United States and leaders expressed frustration and anger at the handling of the COVID-19 pandemic… While the six-day mainly virtual meeting is unique in the U.N.’s 75-year history, the speeches from leaders hit on all the conflicts, crises and divisions facing a world that Guterres said is witnessing ‘rising inequalities, climate catastrophe, widening societal divisions, rampant corruption.’ In his grim state of the world speech, he said ‘the pandemic has exploited these injustices, preyed on the most vulnerable and wiped away the progress of decades,’ including sparking the first rise in poverty in 30 years.”

September 22 – Wall Street Journal (William Mauldin and James T. Areddy): “World leaders sounded alarms… over the widening rift between the U.S. and China, warning that a lack of cooperation could worsen the coronavirus pandemic, slow a global economic recovery or even lead to outright conflict. ‘We must do everything to avoid a new Cold War,’ United Nations Secretary-General António Guterres said in opening the annual U.N. General Assembly… ‘A technological and economic divide risks inevitably turning into a geostrategic and military divide.’ Chinese leader Xi Jinping, appearing at the U.N. like other leaders via video message, said Beijing has ‘no intention to fight either a cold war or a hot one with any country.’ Yet the growing U.S.-China divide was on display as President Trump slammed Beijing for allowing the coronavirus to spread and took aim at China’s environmental and trade record.”

September 20 – Reuters (Yew Lun Tian): “China’s air force has released a video showing nuclear-capable H-6 bombers carrying out a simulated attack on what appears to be Andersen Air Force Base on the U.S. Pacific island of Guam, as regional tensions rise. The video, released on Saturday on the People’s Liberation Army Air Force Weibo account, came as China carried out a second day of drills near Chinese-claimed Taiwan, to express anger at the visit of a senior U.S. State Department official to Taipei. Guam is home to major U.S. military facilities, including the air base, which would be key to responding to any conflict in the Asia-Pacific region.”

September 20 – Bloomberg: “China is ratcheting up the risk of military confrontation in the Taiwan Strait, as Beijing seeks to deter Taipei from continuing to deepen ties with the U.S. and other like-minded democracies. People’s Liberation Army aircraft repeatedly breached the median line between Taiwan and the Chinese mainland last week, in the latest of a series of military exercises in the area. The Chinese pilots signaled a willingness to continue the practice, telling Taiwanese personnel who attempted to warn them away that ‘there is no median line,’ the Taipei-based China Times newspaper reported…”

September 19 – Reuters (Ben Blanchard and Jeanny Kao): “Two days of Chinese military aircraft approaching Taiwan demonstrate that Beijing is a threat to the entire region and have shown Taiwanese even more clearly the true nature of China’s government, President Tsai Ing-wen said…”

September 21 – Reuters (Yimou Lee): “Taiwan President Tsai Ing-wen praised… the ‘heroic performance’ of air force pilots who have been intercepting Chinese jets that have approached the island, as its armed forces held drills to simulate repulsing an attack… ‘I have a lot of confidence in you. As soldiers of the Republic of China, how could we let enemies strut around in our own airspace?’ she said, using Taiwan’s formal name.”

September 24 – Bloomberg: “China’s military is committed to defeating Taiwanese independence ‘at all cost,’ Defense Ministry spokesman Senior Colonel Tan Kefei tells briefing… People’s Liberation Army exercises in Taiwan Strait targeted at independence forces and external forces who meddle in China’s affairs, Tan says ‘If Taiwan independence forces dare to separate Taiwan from China in any form or use any excuse, we will resolutely defeat it at all costs,’ Tan says.”

September 24 – Bloomberg: “China’s military is committed to defeating Taiwanese independence ‘at all cost,’ Defense Ministry spokesman Senior Colonel Tan Kefei tells briefing… People’s Liberation Army exercises in Taiwan Strait targeted at independence forces and external forces who meddle in China’s affairs, Tan says ‘If Taiwan independence forces dare to separate Taiwan from China in any form or use any excuse, we will resolutely defeat it at all costs,’ Tan says.”