[AP] With passage already uncertain, Senate leadership postpones health care vote after McCain's surgery
[Reuters] U.S.-China trade talks sputtering at 100-day deadline
[Reuters] China central bank told by Xi to play bigger role in managing financial risk
[Bloomberg] Dollar Bears' Case Grows Stronger as Wagers on Fed Hikes Fade
[Reuters] In shadow of crackdown, Turkey commemorates failed coup
[NYT] Chinese Finance Meeting’s Meager Results Reflect Nation’s Problems
[WSJ] From $2 Billion to Zero: A Private-Equity Fund Goes Bust in the Oil Patch
[FT] How Brazil’s Michel Temer could be tried for corruption
Saturday, July 15, 2017
Saturday's News LInks
[Reuters] U.S. deficits to jump $248 billion over next two years due to tax shortfall
[Reuters] China central bank to play bigger role managing financial risk: state TV
[CNBC] China closed-door policy meeting fuels speculation that it's building its financial 'super regulator'
[WSJ] Optimism in Financial Markets Fails to Show in Real Economy
[Reuters] China central bank to play bigger role managing financial risk: state TV
[CNBC] China closed-door policy meeting fuels speculation that it's building its financial 'super regulator'
[WSJ] Optimism in Financial Markets Fails to Show in Real Economy
Friday, July 14, 2017
Weekly Commentary: Yellen on Inflation
Global Markets rallied sharply this week. The DJIA rose 223 points to a record 21,638. The S&P500 gained 1.4% to a new all-time high. The Nasdaq100 (NDX) surged 3.2%, increasing 2017 gains to 20.0%. The Morgan Stanley High Tech Index rose 3.4% (up 24.6% y-t-d), and the Semiconductors surged 4.7% (up 21.8%).
Emerging markets were notably strong. Equities rallied 5.0% in Brazil, 5.5% in Hong Kong, 5.1% in Turkey, 2.5% in Russia, 2.2% in Mexico and 2.1% in India. The Brazilian real gained 3.2%, the Mexican peso 3.0%, the South African rand 2.7% and the Turkish lira 2.3%. Global bond markets also rallied. Yields (local currency) dropped 27 bps in Brazil, 18 bps in South Africa, 16 bps in Turkey and 22 bps in Argentina. Here at home, five-year Treasury yields dropped eight bps (to 1.87%). U.S. corporate Credit also enjoyed solid gains. Across global markets, it appeared that short positions were under pressure.
Markets reacted with elation to Janet Yellen’s Washington testimony – widely perceived as dovish. In particular, the chair’s timely comments on inflation were cheered throughout global securities markets. A headline from the Financial Times: “Fed Chair Yellen’s Inflation Concern Buoys Markets.” And Friday afternoon from Bloomberg: “S&P 500 Hits Record as Inflation View Turns Iffy”.
July 12 – Financial Times (Sam Fleming): “Janet Yellen acknowledged… that the US’s persistently subdued inflation could raise questions about the Federal Reserve’s current path of gradually raising interest rates and vowed to watch prices ‘very closely’ for signs they were stagnating. The Fed chair insisted it was ‘premature’ to second guess policymakers’ determination inflation was slowly headed to the central bank’s target of 2%. But her note of caution helped spark a rally in US Treasuries and equities, with investors hopeful Ms Yellen would keep the Fed’s easy money stance for longer… Ms Yellen was broadly positive about the economy’s recent performance…, stressing there had been a rebound in household spending over recent months and the Fed was still anticipating further rate increases. But she also said she was studying the low inflation numbers for signs that short-term drags on prices may not be the only factors holding it back. She added that rates may not need to be lifted a lot more to get back to a neutral stance. ‘We are watching inflation very carefully,’ Ms Yellen said... ‘I do believe part of the weakness in inflation reflects transitory factors, but well recognise that inflation has been running under our 2% objective, that there could be more going on there.’ Analysts said Ms Yellen’s remarks marked a small but significant change of thinking, putting the Fed’s path of gradually pulling back on economic stimulus in question. ‘Yellen’s statement today reveals that the Fed isn’t as sure about inflation as they led us to believe,’ said Luke Bartholomew, investment strategist at Aberdeen Asset Management.”
It’s fair to say that the whole issue of “inflation” confounds the Fed these days. Despite antiquated analytical frameworks and econometric models, the Federal Reserve is showing zero inclination to rethink its approach. At the minimum, objective policy analysis would recognize today’s nebulous link between monetary stimulus and consumer price inflation. Rational thinking would downgrade CPI as a policy guidepost, especially relative to indicators of broader price and financial stability. Still, consumer prices rising slightly below 2% have somehow become central to the argument for maintaining aggressive monetary accommodation.
The nature of economic output has fundamentally changed – from mass-produced high tech hardware, to limitless software and digitalized content, to endless pharmaceuticals and wellness to energy alternatives to, even, the proliferation of organic foods - just to get started. There is today essentially unlimited capacity to supply many of the things we now use in everyday life (sopping up purchasing power like a sponge). Much of this supply is sourced overseas, which further diminishes the traditional relationship between domestic monetary conditions and consumer price inflation.
These dynamics have unfolded over years and are well recognized in the marketplace. To be sure, ongoing tepid consumer price inflation seems to be the one view that markets hold with strong conviction. So when Yellen suggested that below target inflation would alter the trajectory of Fed “normalization,” the markets immediately took notice. When she again referred to the “neutral rate” and implied that the Fed was currently near neutral, this further signaled a Fed that has developed its own notion of what these days constitutes “normal.” Throw in that the FOMC plans to pause rate increases while gauging market reaction to its (cautious) balance sheet operations, and it has become apparent to the markets that the Fed won’t be pushing rates much higher any time soon.
We’ll wait to see if Fed officials push back against the market’s dovish interpretation of Yellen testimony. There’s certainly no conundrum. If the Fed is confused that financial conditions have loosened in the face of “tightening” measures, look in the mirror. Chair Yellen needed to choose her words carefully, especially on the subject of inflation. The markets were near all-time highs, with what has likely been a decent amount of hedging/shorting over the past month. An upside breakout risks a bout of destabilizing speculation. At the same time, there were early indications of fledgling risk aversion. Global yields had recently jumped. Weakness was notable in the periphery debt markets (i.e. Italy, EM), and even U.S. corporate Credit was hinting vulnerability.
Importantly, there was heightened market concern that a concerted effort was underway to begin removing central bank accommodation – that booming markets and stubbornly loose financial conditions might force central bankers to adopt more aggressive tightening measures.
Understandably, the markets will interpret a dovish Yellen – especially the nuanced language on the topic of inflation – as rushing to the markets’ defense. The view that the Fed won’t tolerate even a modest market pullback is, again, further emboldened. And quickly global markets will return to the view that central bankers may talk “normalization,” while their overarching anxiety for upsetting markets has diminished little.
July 12 – Bloomberg (Vivien Lou Chen): “Fed Chair Janet Yellen says that in looking at asset prices and valuations, the central bank is ‘not trying to opine on whether they’re correct’; instead, policy makers are assessing the risk of potential spillovers. As asset prices rise, there hasn’t been a substantial increase in borrowing, Yellen said. [The] financial system is strong and resilient.”
I assume chair Yellen is referring to U.S. non-financial and non-government borrowings. Clearly, central bank Credit and government borrowings have expanded spectacularly around the globe. I suspect as well there has been a major expansion in speculative leveraging and securities Credit at home and abroad.
Georgia Senator David Purdue: “Thank you for being here and for your service. I just have two quick questions. I’m very concerned about global debt. The Institute of International Finance recently reported that their estimate of total global debt is $217 trillion, or more than 300% of global GDP. Do you agree with that?”
Chair Yellen: “So, I haven’t heard that number. That could be. I don’t have that number.”
Purdue: “Of that, $60 trillion is estimated to be sovereign debt. We have about $20 trillion of the $60 trillion. With that as background, the four large central banks also have their largest historic balance sheets. Japan, China, EU and US have collectively close to approaching $20 trillion now of balance sheet size. As you talk about reducing the size of the Fed’s balance sheet, are you coordinating with these other central banks and looking at emerging market debt - particularly the $300 billion that’s coming due by the end of 2018 - relative to the size of your balance sheet here in the United States?”
Yellen: “I wouldn’t say coordinate. We try to make sure we meet regularly and discuss our policy approaches; to make sure that central banks understand how we are looking at economies and policy options. I think the major central banks understand the approach that others are taking. But trying to ask in an aggregate sense how much debt is outstanding is something we’re not doing. Our economies are in rather different situations. While we all encountered weaknesses that were sufficiently severe that Japan, the ECB, the Bank of England, the United States, we all resorted to purchases of longer-term assets to support growth. It leaves the Bank of Japan and the ECB.”
Purdue: “Are you concerned about so much of that [debt] denominated in dollars today?”
Yellen: “It is a risk. A significant amount of that is in China, but that’s not the only country where there are substantial corporate dollar-denominated debts. And certainly that is a risk that we have considered that affects the global economy.”
Senator Bob Menendez: “Let me ask you finally, how does—we see high rising levels of household debt, widening inequality, a neutral interest rate at historically low levels. To me, it’s critical that the Fed has the ability to respond in the event of another economic decline. How does below target inflation impact household debt? And what signs do you see of inflation coming close to the Fed’s 2% target, let alone exceeding it by dangerous amounts?”
Yellen: “As I said, I think the risks with respect to inflation are two-sided. But we’re very aware of the fact that inflation has been running below our 2% objective now for many years, and we’re very focused on trying to bring inflation up to our 2% objective. That’s a symmetric objective and not a ceiling. We know from periods [when] we’ve had deflation, which of course we don’t have in this country. But that is something that has a very adverse effect on debtors and can leave debtors drowned in debt. Now, we don’t have a situation nearly that serious. But it is important when we have a 2% inflation objective to make sure that we achieve it and we’re focused on doing that.”
Yellen stated during that the Fed’s inflation mandate is “symmetrical.” Yet it’s unimaginable that the FOMC would keep monetary conditions extraordinarily tight for nine years in response to CPI modestly above its 2% target?
It’s by this point abundantly clear that contemporary monetary management exerts major direct influences on the structure of asset prices, while having dubious effect on aggregate consumer prices. This now discernable dynamic creates a momentous dilemma for central banks. Especially after the worldwide adoption of the Bernanke doctrine, it’s fundamental to their approach that central banks retain the power to inflate out of trouble as necessary. Why fret debt accumulation, speculation and asset price Bubbles when central banks can always inflate the general price level, thereby reducing debt burdens and asset overvaluation?
Central bankers have a penchant for speaking in terms of “fighting the scourge of deflation.” More specifically, they view inflation as the indispensable mechanism for reflating systems out of the consequences of debt and asset Bubbles. If central bankers were to admit they don’t control “inflation,” then their policy doctrine of promoting reflationary debt growth and higher asset prices turns spurious.
It has been my longstanding position that it’s not possible to inflate out of major Credit and asset Bubbles. As we’ve witnessed for years now, central bank stimulus fuels self-reinforcing speculative excess, with a resulting accumulation of speculative leverage and securities-related Credit more generally. At the same time, years of abundant cheap global liquidity work to feed overcapacity and attendant downward price pressure on many things. Rampant inflation within the Financial Sphere nurtures pricing vulnerabilities and instability throughout the Real Economy Sphere. Bubbles Inflate Only Bigger.
As such, if one accepts the reality that central banks don’t control inflation, the policy course of repeatedly inflating serial Bubbles can be viewed as risking eventual catastrophic policy failure. There’s simply no escaping the day of reckoning. This analysis certainly applies to China. Led by strong lending ($214bn), June growth in Total Social Financing jumped to $263bn. This puts first-half non-government Credit growth at $1.65 TN (up 14% from last year’s record pace), consistent with my expectation for total Chinese Credit growth this year to exceed $3.5 TN.
Along with Yellen’s testimony, China developments were likely a factor in this week’s global risk market rally. The view is taking hold that Chinese officials have at least temporarily pulled back from tightening measures, perhaps in preparation for this autumn’s 19th National Congress of the Communist Party of China.
July 12 – Wall Street Journal (Grace Zhu): “Chinese banks extended higher-than-expected volume of loans last month even as growth in the money supply continued to slow amid Beijing’s efforts to reduce leverage in its financial system. New yuan loans issued by Chinese banks surged to 1.54 trillion yuan ($226.38bn) in June, up from 1.11 trillion yuan in May… The volume was well above the 1.3 trillion yuan forecast by economists… June is typically a high point for new credit from Chinese banks’ as loan officers rush to meet quarterly targets. Beyond that, demand for credit from households—mostly for mortgages in the hot property market—remained strong, and companies too turned to banks for loans, instead of issuing bonds.”
July 12 – Financial Times (Gabriel Wildau): “China’s central bank injected $53bn into the banking system on Thursday, the latest sign that policymakers have eased up on a fierce deleveraging campaign that has caused turmoil among lenders in recent months. President Xi Jinping told the politburo in April that ‘financial security’ was a top policy priority for the year. That led the central bank to tighten liquidity, while the ambitious new banking regulator unleashed a ‘regulatory windstorm’ that sent shockwaves through the banking system. The storm appears to be passing, as the People’s Bank of China has become more generous with cash injections while the China Banking Regulatory Commission has delayed implementation of a significant new directive. ‘There are clear signs in recent weeks of monetary and supervisory tightening being eased,’ Tao Wang, co-head of Asia economics at UBS in Hong Kong, wrote…”
For the Week:
The S&P500 gained 1.4% (up 9.8% y-t-d), and the Dow rose 1.0% (up 9.5%). The Utilities added 0.6% (up 6.0%). The Banks declined 0.9% (up 4.9%), while the Broker/Dealers increased 0.8% (up 11.3%). The Transports rose 0.5% (up 7.7%). The S&P 400 Midcaps gained 1.0% (up 6.3%), and the small cap Russell 2000 increased 0.9% (up 5.3%). The Nasdaq100 jumped 3.2% (up 20.0%), and the Morgan Stanley High Tech index advanced 3.4% (up 24.6%). The Semiconductors surged 4.7% (up 21.8%). The Biotechs were little changed (up 27.1%). With bullion rallying $16, the HUI gold index recovered 3.9% (up 2.0%).
Three-month Treasury bill rates ended the week at 102 bps. Two-year government yields dipped four bps to 1.36% (up 17bps y-t-d). Five-year T-note yields declined eight bps to 1.87% (down 6bps). Ten-year Treasury yields fell five bps to 2.33% (down 11bps). Long bond yields slipped a basis point to 2.92% (down 15bps).
Greek 10-year yields fell eight bps to 5.28% (down 174bps y-t-d). Ten-year Portuguese yields slipped a basis point to 3.15% (down 59bps). Italian 10-year yields declined five bps to 2.29% (up 48bps). Spain's 10-year yields dropped eight bps to 1.65% (up 27bps). German bund yields added two bps to 0.60% (up 39bps). French yields fell eight bps to 0.86% (up 18bps). The French to German 10-year bond spread narrowed 10 bps to 26 bps. U.K. 10-year gilt yields were little changed at 1.31% (up 8bps). U.K.'s FTSE equities index added 0.4% (up 3.3%).
Japan's Nikkei 225 equities index gained 1.0% (up 5.3% y-t-d). Japanese 10-year "JGB" yields were little changed at 0.083% (up 4bps). France's CAC40 gained 1.8% (up 7.7%). The German DAX equities index rose 2.0% (up 10%). Spain's IBEX 35 equities index added 1.6% (up 13.9%). Italy's FTSE MIB index jumped 2.3% (up 11.7%). EM equities posted strong gains. Brazil's Bovespa index surged 5.0% (up 8.6%), and Mexico's Bolsa rose 2.2% (up 5.3%). South Korea's Kospi gained 1.5% (up 19.2%). India’s Sensex equities index advanced 2.1% (up 20.3%). China’s Shanghai Exchange was little changed (up 3.8%). Turkey's Borsa Istanbul National 100 index surged 5.1% (up 34.6%). Russia's MICEX equities index rallied 2.5% (down 12.2%).
Junk bond mutual funds saw outflows of $1.144 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates jumped seven bps to 4.03% (up 61bps y-o-y). Fifteen-year rates gained seven bps to 3.29% (up 57bps). The five-year hybrid ARM rate rose seven bps to 3.28% (up 52bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up four bps to 4.14% (up 47bps).
Federal Reserve Credit last week slipped $0.2bn to $4.427 TN. Over the past year, Fed Credit declined $4.9bn. Fed Credit inflated $1.616 TN, or 57%, over the past 244 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $6.5bn last week to $3.323 TN. "Custody holdings" were up $100bn y-o-y, or 3.1%.
M2 (narrow) "money" supply last week declined $30.8bn to $13.515 TN. "Narrow money" expanded $691bn, or 5.4%, over the past year. For the week, Currency increased $0.6bn. Total Checkable Deposits jumped $43.5bn, while Savings Deposits dropped $79.9bn. Small Time Deposits added $2.6bn. Retail Money Funds gained $2.4bn.
Total money market fund assets were little changed at $2.627 TN. Money Funds fell $94bn y-o-y (3.4%).
Total Commercial Paper jumped $13.8bn to $961bn. CP declined $87bn y-o-y, or 8.3%.
Currency Watch:
July 11 – Wall Street Journal (Saumya Vaishampayan and Shen Hong): “China’s central bank is finding that some of the most stubborn yuan skeptics are lurking in its backyard. A tug of war between the People’s Bank of China and investors in the country’s domestic foreign-exchange market has played out almost daily in recent months, with the yuan consistently closing weaker than the level set by the central bank. While the central bank’s support has helped the yuan gain 2.2% against the U.S. dollar this year, after three years of declines, Chinese investors have been focusing in recent weeks on factors that could drag the currency lower in the coming months, traders say.”
The U.S. dollar index declined 0.9% to 95.153 (down 7.1% y-t-d). For the week on the upside, the Brazilian real increased 3.2%, the Australian dollar 3.0%, the Mexican peso 3.0%, the South African rand 2.7%, the Norwegian krone 2.2%, the South Korean won 1.9%, the Canadian dollar 1.8%, the British pound 1.6%, the Swedish krona 1.4%, the Japanese yen 1.2%, the New Zealand dollar 0.9%, the Singapore dollar 0.8%, the euro 0.6% and the Danish krone 0.6%. The Chinese renminbi gained 0.45% versus the dollar this week (up 2.50% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index rallied 2.2% (down 6.3% y-t-d). Spot Gold gained 1.3% to $1,229 (up 6.6%). Silver recovered 3.3% to $15.933 (down 0.3%). Crude rallied $2.31 to $46.54 (down 14%). Gasoline popped 4.1% (down 7%), and Natural Gas also jumped 4.1% (down 20%). Copper gained 1.7% (up 7%). Wheat gave back 4.5% (up 25%). Corn fell 4.1% (up 7%).
Trump Administration Watch:
July 8 – Bloomberg (Bryce Bashuk): “Group of 20 leaders agreed to address growing overcapacity and rock-bottom prices in global steel markets, bowing to pressure from the Trump administration after it threatened to impose punitive tariffs on its allies. In talks that stretched into the early hours of Saturday, U.S. officials managed to get language inserted into the communique that sets deadlines for G-20 members to address excess steel production… Countries like China will also have to be more transparent about how they subsidize domestic producers. In return, the U.S. agreed to boilerplate language reiterating the G-20’s commitment to fight protectionism. The threat of a trade war on steel hung over this week’s G-20 summit in Hamburg and those fears were compounded Friday when German Chancellor Angela Merkel said negotiations were proving to be difficult.”
July 10 – Reuters (Susan Cornwell and Amanda Becker): “Republican senators returned to Washington… following a 10-day holiday recess still at odds with one another over legislation President Donald Trump wants passed to repeal major portions of Obamacare. With only three weeks left before a summer recess scheduled to stretch until Sept. 5, Senate Majority Leader Mitch McConnell appeared determined to keep trying to find agreement on a partisan, all-Republican bill. If he cannot, he will be faced with giving up on a seven-year Republican promise to repeal the 2010 Affordable Care Act, popularly known as Obamacare - and possibly turning to Democrats for help in fixing problems with U.S. health insurance markets.”
July 13 – Reuters (Susan Cornwell and Yasmeen Abutaleb): “Senate Republican leaders released… a revised plan to dismantle the Obamacare law, playing to the party's disparate factions by letting insurers sell cheap, bare-bones policies while retaining taxes on the wealthy, but quick criticism showed the healthcare overhaul is already in jeopardy. U.S. Senate Majority Leader Mitch McConnell, pushed hard by President Donald Trump to pass a healthcare bill and make good on Republicans' seven-year mission to gut Democratic former President Barack Obama's signature legislative achievement, is walking a tightrope. With Democrats united against it, McConnell cannot afford to lose more than two Republican senators to win passage. But moderate Susan Collins and conservative Rand Paul voiced opposition to even bringing the new plan up for debate.”
July 11 – Financial Times (Sam Fleming and Barney Jopson): “While Donald Trump once vowed to ‘do a number’ on Dodd-Frank, Washington’s central piece of post-crisis financial legislation, his regulatory appointees will probably prove more effective agents of change than Congress, which remains locked in a legislative logjam. The administration… named one of the key figures in its quest to ease the load of regulation, nominating Randal Quarles to be vice-chair for financial supervision at the Federal Reserve. Bankers are hoping Mr Quarles will reverse the hardline approach to bank oversight — and in particular capital standards — that was developed after the crisis by Daniel Tarullo, a former Fed governor who was the central bank’s chief regulator but who never formally occupied the role.”
China Bubble Watch:
July 12 – Wall Street Journal (Lingling Wei and Dominique Fong): “The more China tries to rein in its roaring housing market, the more obsessed people get about buying. In February, with this southern megalopolis in the throes of a property frenzy, state banks raised mortgage rates. Then came higher down-payment rules for second homes and limits on owning multiple apartments. The result: Prices in Guangzhou continue to climb, and the market one town over has heated up. Pei Zhiyong, a 56-year-old advertising executive, was barred by the new restrictions from buying a third apartment in Guangzhou. One Sunday in April, he drove his BMW SUV to Foshan, an hour away, to check out a new riverfront high-rise. He figures it’s the ideal time to buy. ‘The harder the government tries to control the market, the more prices will rise,’ Mr. Pei said. With each new policy intended to restrict home purchases, buyers are piling in. Stressed about the prospect of being left behind, many are borrowing heavily, believing prices will continue to rise... Another article of faith is that the Communist Party won’t allow housing prices to collapse.”
July 9 – Bloomberg: “On a recent morning in Shanghai’s Lujiazui financial district, Xiong Yun’s eyes darted around the four computer screens at his desk, scanning activity in China’s bond and futures markets. Staring at the matrix of numbers, the former BNP Paribas SA trader was making sure his algorithms pounced on any arbitrage opportunities that popped up between government notes and their derivatives contracts… While Xiong’s approach would seem standard in credit markets around the world, debt-linked derivatives have until recently been a non-factor in China. But they’re being used more after a central bank clampdown ended a three-year bull run and increased volatility: in the past year, trading in bond futures more than doubled and interest rate swaps volume rose by a third. The shift brings China’s $10 trillion bond market closer in line with developed economies…”
July 10 – Bloomberg: “China’s producer price gains held up, signaling that demand in the world’s second-largest economy is maintaining pace for now, even in the face of regulatory curbs. The producer price index rose 5.5% in June from a year earlier…”
July 12 – Bloomberg: “China’s overseas shipments rose from a year earlier as global demand held up and trade tensions with the U.S. were kept in check amid ongoing talks. At home, resilient demand led to a rise in imports. Exports rose 11.3% in June in dollar terms…, more than the estimate of 8.9%. Imports increased 17.2% in dollar terms, leaving a trade surplus of $42.8 billion.”
July 10 – New York Times (Sui-Lee Wee): “A year ago, the Chinese billionaire Wang Jianlin declared the dominance of his vast entertainment empire, Dalian Wanda Group, boasting that his theme parks were a ‘pack of wolves’ that would defeat the lone ‘tiger’ of Disney’s Shanghai resort. Now, Mr. Wang is retreating, in a sign that Wanda could be reaching the limits of its debt-fueled expansion. Wanda said… that it would sell the theme parks as part of a $9.3 billion deal that includes 76 hotels and a major chunk of 13 tourism projects. The cash from the deal… would be used to pay down debt. Wanda appears to be caught in a political and financial downdraft that has hit many big Chinese deal makers.”
July 8 – Reuters (Sumeet Chatterjee): “When Horan Fu decided to buy a 500-sq-foot apartment for HK$7.4 million last year, the biggest draw was the developer's offer of 85% financing with an option to defer interest payments for the first three years. ‘The interest rate could be a lot higher after three years, but there's also a chance that the interest would still be cheap because finance companies are competing fiercely,’ said Fu, who works in Hong Kong's financial services industry. ‘There's risk but there's also an upside. It's a good investment opportunity.’ With traditional financing drying up in Hong Kong at a time when property prices are at a record high, home buyers like Fu are looking to non-bank lenders, many of them the financing arms of developers, to get in on the boom.”
Europe Watch:
July 8 – Wall Street Journal (Simon Nixon): “The recent volatility in bond markets has stirred up old fears in Europe. Investors have long been concerned about the possible impact of the end of the European Central Bank’s quantitative easing program on the eurozone’s periphery, not least Italy—the country long-regarded as too big to save. Now with markets abuzz with talk of central bank monetary policy ‘normalization,’ those concerns are once again front of mind: Without the fire blanket of ECB government bond-buying, will Italian borrowing costs soar once again, plunging the eurozone back into crisis?”
Central Bank Watch:
July 13 – Reuters (Francesco Canepa): “The European Central Bank is likely to signal in September that its bond-buying scheme will be gradually wound down next year and ECB chief Mario Draghi could give the next clue on the plans in late August, the Wall Street Journal said… Financial markets overwhelmingly expect the ECB to decide in September on the future of its stimulus policy beyond the end of this year. Some investors expect an extension with a one-off reduction while others see a gradual but steady wind-down, known as tapering.”
July 8 – Bloomberg (Carolynn Look, Mark Deen, and Caroline Connan): “The European Central Bank is likely to decide on the next change in its stimulus settings in the fall, when it will continue the process of tweaking its measures to reflect the euro area’s upturn, according to Governing Council member Francois Villeroy de Galhau. ‘What we have to do, and what we started to do, is to adapt the intensity of this accommodative monetary policy to the progress toward our inflation target and toward economic recovery,’ Villeroy de Galhau said... ‘In the future, and this will be our decision next fall, we will go on adapting the intensity of this monetary policy.’”
July 8 – Bloomberg (Carolynn Look): “European Central Bank policy makers continued to air their differences over when to rein in stimulus, sending conflicting signals on whether pumping cash into the economy for much longer will help the euro area or hurt it. ‘Underlying inflationary pressure remains subdued’ and ‘we still need a long period of accommodative policy,’ Executive Board member Peter Praet, the ECB’s chief economist, told Belgian newspaper De Standaard… Governing Council member Klaas Knot… warned that the central bank is ‘very close to the point’ of keeping quantitative easing for too long.”
July 12 – Bloomberg (Luke Kawa): “A North American central bank hiking rates in the face of strong job growth and deteriorating core inflation rates, citing temporary factors for the drop-off in price pressures. No, it’s not Janet Yellen’s Federal Reserve -- it’s Stephen Poloz’s Bank of Canada. On Wednesday, the Bank of Canada delivered its first interest-rate hike in almost seven years, becoming the first Group of Seven central bank to join the Fed in policy normalization, the first concrete step toward global monetary policy convergence.”
July 12 – Financial Times (Roger Blitz): “Canada’s first rate rise in nearly seven years puts it in the vanguard of central banks outside the US Federal Reserve shifting monetary policy in response to better global economic growth. The market had fully priced in the move upwards of 25 bps to 0.75%, which leaves two obvious questions for investors: what next for Canada, and how soon could other central banks join the retreat from easy monetary policy? Judging by the reaction of the ‘loonie’, nickname for the Canadian dollar, the answer to the first question has already been answered by investors.”
Global Bubble Watch:
July 11 – Bloomberg (Cindy Roberts): “JPMorgan… Chairman Jamie Dimon said the unwinding of central bank bond-buying programs is an unprecedented challenge that may be more disruptive than people think. ‘We’ve never have had QE like this before, we’ve never had unwinding like this before,” Dimon said at a conference in Paris… ‘Obviously that should say something to you about the risk that might mean, because we’ve never lived with it before… When that happens of size or substance, it could be a little more disruptive than people think,” Dimon said. ‘We act like we know exactly how it’s going to happen and we don’t.’”
July 7 – Financial Times (Chris Flood): “BlackRock pulled more cash into its exchange traded fund arm in the first six months of 2017 than over the whole of last year, when the world’s largest asset manager attracted record ETF inflows. Investors have ploughed around $140bn into BlackRock’s ETF business so far this year, already exceeding the annual record of $138bn gathered over the whole of 2016… Vanguard… registered ETF inflows of around $82bn by the end of June. It is on course to beat its annual record of $97bn, also registered in 2016… Global investor inflows into ETFs have reached around $335bn so far in 2017, comfortably on track to beat 2016’s record of $390bn.”
July 12 – Reuters (Simon Jessop): “European corporate bond markets could prove a bigger source of market instability during the next big shock than during the 2008 financial crisis, a study by the Bank of England showed. The study is the first to try to model how non-bank lenders would react in a stressed market environment, with the BoE particularly concerned about the effect on corporate funding rates and their impact on the real economy. The need to model the risk has arisen because capital markets have provided a bigger slice of corporate funding since the financial crisis and many of the often-illiquid bonds are held in mutual funds offering daily exits to investors.”
July 12 – Reuters (Marc Jones): “More governments are likely to see their sovereign credit ratings cut this year, S&P Global said… An average of more than one country a week has had its rating cut by the big rating agencies - S&P, Moody's and Fitch - since the start of 2014. A new report from S&P showed it had 30 sovereigns on downgrade warnings, or ‘negative outlooks’ in rating firm parlance, at the start of the month, compared with just six on positive outlooks. ‘This outlook distribution suggests that negative rating actions are likely to continue to outnumber positive actions over the coming 12 months,’ S&P said in a mid-year review of its rating moves.”
July 12 – Bloomberg: “China’s outbound investment slumped in the first half of the year as policy makers imposed curbs on companies’ foreign acquisitions following a record spending spree in 2016. Outward direct investment dropped to $48.19 billion in the six-month period, down 45.8% from a year ago… Spending fell 11.3% to $13.6 billion in June alone… Foreign direct investment fell 0.1% in yuan terms in the first half, to 441.5 billion yuan… A surge in overseas purchases last year saw firms snap up everything from soccer teams to property.”
July 10 – Bloomberg (Colin Simpson): “There could be trouble ahead for developed world equity markets with ‘frothy’ valuations as central banks start shifting policy, according to Deutsche Bank AG. Price-to-earnings ratios increased steadily after the global financial crisis as waves of monetary stimulus pulled down the yields on safe assets, spurring investors into riskier options. That dynamic may be on the verge of reversing with a turnaround in policy now underway in developed nations other than Japan, Mikihiro Matsuoka, chief economist of the Japanese unit of Deutsche Bank AG, wrote… The average of the standard deviation of stock-market capitalization as a percentage of GDP in seven major developed countries has been approaching the previous peaks of 2000 and 2008, Matsuoka highlighted.”
Fixed Income Bubble Watch:
July 12 – Bloomberg (Sid Verma): “Credit markets didn’t get the memo. After hawkish rhetoric two weeks ago by central bankers led by Mario Draghi set off a sharp surge in government bond yields, the investment-grade and high-yield debt markets have collectively shrugged. Since then, the extra compensation investors demand to hold high-yield bonds around the world over similar-maturity government debt has increased by a whisker at five bps…, while spreads on high-rated debt in euros and dollars have tightened -- now sitting near post-crisis lows. If markets are braced for a new dawn for risk assets bereft of monetary stimulus to juice returns amid record U.S. corporate leverage, credit investors remain remarkably sanguine. That’s in contrast to the tantrums of 2013 and 2015, when the fear of a fading central bank put triggered a disorderly selloff across debt markets.”
Federal Reserve Watch:
July 12 –CNBC (Jeff Cox): “Interest rates may not have to rise that much for the Federal Reserve to meet its goals, central bank Chair Janet Yellen said… In prepared remarks to Congress, Yellen reiterated statements that Fed Governor Lael Brainard gave Tuesday, namely that rates are close to a ‘neutral’ level and not in need of a significant move higher. The neutral level is the point where the Fed's benchmark rate is neither accelerating nor restraining the economy. The current target for the funds rate is 1% to 1.25%, while inflation is around 1.4%. That puts the real rate close to zero, where Yellen and her dovish allies on the Federal Open Market Committee believe it needs to be. ‘Because the neutral rate is currently quite low by historical standards, the federal funds rate would not have to rise all that much further to get to a neutral policy stance,’ Yellen will tell Congress.”
July 12 –Bloomberg (Craig Torres and Christopher Condon): “Federal Reserve Chair Janet Yellen said the U.S. economy should continue to expand over the next few years, allowing the central bank to keep raising interest rates, while also stressing the Fed is monitoring too-low inflation. ‘Considerable uncertainty always attends the economic outlook,’ Yellen said… in remarks prepared for delivery to the U.S House Financial Services Committee. ‘There is, for example, uncertainty about when -- and how much -- inflation will respond to tightening resource utilization.’”
July 12 – Wall Street Journal (Nick Timiraos): “Federal Reserve Chairwoman Janet Yellen, faced with a recent, puzzling slowdown in global inflation, said she expects the forces holding down consumer prices to fade in the months ahead, allowing the central bank to stick to its plans for gradual interest-rate increases. But she left herself an out, saying the Fed could veer from its policy plans if inflation weakness proved more stubborn than officials expect. Ms. Yellen repeated her view that a tightening labor market would put upward pressure on wages and prices. ‘It’s premature to reach the judgment that we’re not on the path to 2% inflation over the next couple of years,’ she said… during a hearing of the House Financial Services Committee. But, she added, ‘We’re watching this very closely and stand ready to adjust our policy if it appears that the inflation undershoot will be persistent.’ Stocks rallied and bond yields fell after her testimony.”
July 11 – Reuters (Swati Pandey and Wayne Cole): “A top U.S. central banker… said he still expected one more rise in interest rates from the Federal Reserve this year and for it to start unwinding its massive balance sheet in the next few months. …San Francisco Federal Reserve Bank President John Williams said he believed a recent softening in U.S. inflation was transitory and that inflation would pick up to around 2% over the coming year. Williams emphasized that if inflation did not accelerate as expected, that would argue for a much slower pace of rate rises than currently projected.”
July 8 – Financial Times (Sam Fleming): “The Federal Reserve has set out a vigorous argument to retain broad discretion over monetary policy, in the teeth of a campaign by Republican lawmakers to push it to a more rules-based system ahead of the possible departure of Janet Yellen next year. Five days ahead of what could be one of Ms Yellen’s final testimonies on Capitol Hill as Fed chair, the central bank argued that relying too heavily on rate-setting rules could lead to perverse outcomes for the US economy. Conservative lawmakers argue the Fed has made use of its broad discretion to conduct hazardous policies that risk inflation or asset price bubbles. The Fed’s report suggests it is preparing for further battles with GOP lawmakers at a particularly sensitive time given changes in personnel in the Fed board and the potential for President Donald Trump to decline to give Ms Yellen a second term.”
U.S. Bubble Watch:
July 12 –CNBC (John W. Schoen): “Faced with tight revenues, tax-weary voters and uncertainty about the impact of federal tax and budget policies, lawmakers and governors are wrestling over what has become one of the toughest rounds of annual state budget battles since the Great Recession. More than a week after the start of the traditional July 1 fiscal year, seven states are still operating without an approved budget. In Connecticut, Rhode Island and Wisconsin, lawmakers have yet to resolve disagreements about how to close ongoing budget gaps in their states or fund new budget initiatives. Legislatures in Massachusetts, Pennsylvania, Oregon and Michigan have approved their tax and spending plans, which are waiting for signature or veto in those states. Lawmakers in a dozen states have called special sessions to resolve outstanding differences over the latest tax and spending plans.”
July 10 – Financial Times (John Plender): “It is 10 years, almost to the day, that Chuck Prince, then chief executive of Citigroup, told the Financial Times: ‘When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.’ Those fateful words bear thinking about, especially when looking at today’s equity market where investors are dancing furiously despite the Federal Reserve, the European Central Bank and the Bank of England adopting increasingly hawkish rhetoric about tightening policy. While the bond markets have been rattled, the party in equities continues with a swing. And quite a party it has been. According to Harry Colvin of Longview Economics, the US equity bull market is now the second longest since 1896. It is also the third largest, delivering a cumulative 328% total return to early July… The cyclically adjusted price/earnings ratio is at a level previously only seen before the 1929 Wall Street Crash and in the dotcom bubble of the late 1990s. With the Fed likely to raise rates further this year and actively discussing how to shrink its balance sheet, the more nervous dancers may be tempted to make an exit.”
July 10 – Bloomberg (Adam Tempkin and Claire Boston): “‘I’d like to know: Why now?’ asked Steve Eisman. It was July 10, 2007, and the hedge fund manager was on a 10 a.m. conference call with analysts at Standard & Poor’s, which had just decided to put $7.3 billion of subprime mortgage bonds on watch for downgrade. A growing number of investors like Eisman had been betting on a crash as overdue home loans rose. But up to that point, much of the world was still putting its faith in the safe-as-Treasuries ratings that had been awarded to the bonds, which helped bankroll $445 billion of risky mortgages in 2006 alone. From that day onward, even the most cautiously optimistic economist or sanguine Federal Reserve governor should have known that the housing mess and the subprime debacle wasn’t going to be contained. ‘The news has been out on subprime now for many, many months; the delinquencies have been a disaster for many, many months,’ Eisman said on the call. ‘I’d like to know why you’re making this move today instead of many months ago.’ Over the next year, S&P analysts (who told Eisman they had to wait until the bonds were adequately ‘seasoned’ before they would downgrade them), would join Moody’s… and other credit raters in downgrading more than $1 trillion of mortgage-related securities.”
July 8 – Barron’s (Kopin Tan): “We still call it a stock market, but these days it has many more indexes than it does stocks: There are nearly 6,000 indexes today, up from fewer than 1,000 a decade ago. Meanwhile, the number of stocks in the Wilshire 5000 Total Market Index has shriveled to 3,599, from 7,562 in 1998… How is this boom in index products affecting the stock market? The question is especially pertinent these days, as benchmarks such as the Standard & Poor’s 500 index and the Nasdaq Composite nuzzle serial new highs, and actively managed funds struggle to keep up… Investors have been pulling money from active funds and plowing it into their passive peers. Through the first five months of this year, investors steered $338 billion into passive mutual funds and ETFs—that’s on top of last year’s record inflows of $506 billion… If this pace keeps up, passive funds could take in more than $800 billion in 2017, a 60% jump from 2016’s record and nearly double the haul from 2015.”
July 12 – Bloomberg (Charles Stein): “Investors haven’t soured on all active fund managers -- only those who pick U.S. stocks. Actively managed mutual funds and exchange-traded funds that own domestic stocks experienced $98.5 billion in net redemptions in the first six months of 2017, according to… Morningstar Inc. Active funds that buy international stocks attracted inflows of $8.7 billion and active funds that buy bonds gathered $106.5 billion. ‘The trend for U.S. stocks funds keeps going and going,’ said Russel Kinnel, director of manager research at Morningstar. ‘There is a perception that they can’t beat their benchmarks, especially when it comes to large-cap stocks.’”
July 13 – Reuters (Ernest Scheyder): “U.S. shale producers survived an oil price crash and confounded OPEC's efforts to drain a global glut by employing innovative drilling and production techniques. Now, some of these producers are turning to creative investments to pump more oil. Drilling joint ventures, called ‘DrillCos’ for short, combine cash from investors like Carlyle Group LP with drillable-but-idle land already owned by producers. Investors get a pledge of double-digit returns within a few years, while producers can raise productivity without spending more of their own money.”
July 12 – CNBC (Diana Olick): “The appetite for riskier mortgages is rising, and a small cadre of investment firms is ready to feed it. Angel Oak Capital Advisors just announced its second rated securitization of nonprime residential mortgages this year, a deal worth just more than $210 million and its largest ever. Its first deal was slightly less, but demand from borrowers and investors alike is growing, and the securitizations are growing with it. Angel Oak is one of very few firms offering these private-label mortgage-backed securities — the ones that were so very popular during the last housing boom and which were later blamed for the financial crisis.”
Japan Watch:
July 9 – Reuters (Kaori Kaneko and Elaine Lies): “Japanese Prime Minister Shinzo Abe will reshuffle his cabinet and party leaders early next month, moving to shore up his worst levels of popular support since returning to power in 2012, following a historic loss in a Tokyo assembly election. Last week's loss… spotlights Abe's potential vulnerability after nearly five years in power, with many blaming voter perceptions of arrogance on his part and that of his powerful Chief Cabinet Secretary, Yoshihide Suga. Opinion polls… showed Abe's popularity at its lowest since he returned to power late in 2012, with support of 36%...”
July 11 – Bloomberg (Isabel Reynolds): “Unpopular policies and a slew of scandals triggered a slide in public support for Japanese Prime Minister Shinzo Abe that led to a heavy election defeat. That was in 2007, when he abruptly resigned, citing health issues, after losing in the upper house of parliament. Ten years on, his situation looks uncomfortably familiar. Abe returned to Tokyo… from a curtailed European trip to face lost public trust and record low voter support. Ministerial gaffes and his failure to allay suspicions over a cronyism scandal involving a close friend contributed to his ruling party suffering an historic defeat in a recent Tokyo election. The public is wary of his plan to rush through a revision to the pacifist constitution.”
July 13 – Reuters (Leika Kihara, Sumio Ito, Tetsushi Kajimoto, Stanley White, Minami Funakoshi and Kaori Kaneko): “Bank of Japan policymakers see little to cheer in successfully defending their yield target as European and U.S. central banks start to pull the plug on ultra-cheap money, casting doubt on their view that global bond yield gains will be short-lived. Rising global yields forced the Japanese central bank to rev up bond buying last Friday to cap 10-year Japanese government bond (JGB) yields around its zero percent target, putting it at odds with its counterparts eyeing an exit from ultra-loose policy. On top of an increase in regular bond buying, the BOJ offered to buy unlimited amounts of 10-year JGBs at 0.110% - employing its most powerful tool for only the third time since adopting yield curve control (YCC) in September.”
July 10 – Financial Times (Leo Lewis and Dan McCrum): “The Bank of Japan faces a ‘protracted battle’ for control over yields on the benchmark 10-year government bond, say analysts, as global markets and the sliding popularity of Prime Minister Shinzo Abe threaten to push market interest rates higher. Warnings of repeated summer confrontations between the BoJ and the Japanese government bond (JGB) market come as investors spent Monday adjusting to BoJ governor Haruhiko Kuroda’s decision last week to draw a clear line in the sand, after the 10-year JGB yield crept above 0.1%... By stepping into the market with an offer to buy an unlimited amount of JGBs on Friday, traders said the BoJ was deploying the most potent weapon at its disposal as the central bank defended its 10-month-old policy of holding the 10-year benchmark at ‘around 0.0%’.”
July 10 – Bloomberg (Chikafumi Hodo and Netty Idayu Ismail): “While the Bank of Japan faced down the market on Friday with its offer to buy an unlimited amount of bonds, the battle over yield control may have only just begun. The swift action allowed the BOJ to quickly assert authority over the 10-year yield, bringing it down from a five-month high of 0.105%. The question is how far the central bank would have to go, and at what costs to its balance sheet, as the hawkish tilt adopted by its peers increases the extra yield offered by U.S. Treasuries and German bunds over Japanese bonds. ‘It hinges on whether the BOJ can inspire confidence and establish credibility on its intent to hold yields,’ said Vishnu Varathan, head of economics and strategy at Mizuho Bank… ‘The option of shifting to a target referenced to spreads -- as global yields move higher -- rather than fixed levels, may be a policy consideration.’”
EM Bubble Watch:
July 10 – Bloomberg (Lisa Abramowicz): “Emerging-market debt funds had a phenomenal first half of 2017, with record inflows and solid returns. But the ebullience is running out of steam and that sentiment will most likely deteriorate even further in the weeks to come. The biggest emerging-market debt ETF just had its largest one-week outflow in its history. In the past week, investors withdrew $826.8 million from the biggest emerging-market debt exchange-traded fund, the largest withdrawals in the $11.5 billion fund's history.”
Leveraged Speculation Watch:
July 10 – Bloomberg (Dani Burger and Sid Verma): “The trend is not your friend -- at least not lately. Between sleepy movements in global assets and short-lived macro shocks, programmatic investors who make their fortunes chasing momentum have had a particularly rough year. In fact, by some measures, commodity trading advisers are on track to post the worst yearly return since 1987... CTAs, the majority of which bet on price trends using futures contracts across asset classes, are known for being volatile strategies, billed for their low correlation to equities. Hit by choppy trends, especially in fixed income and the dollar, they’re are now finding it difficult to live up to return and diversification expectations, said Pravit Chintawongvanich, head of Derivatives Strategy at Macro Risk Advisors. ‘From 2014 to early 2015, the combination of a rising dollar, falling crude, and declining yields led to strong performance among trend followers,’ Chintawongvanich wrote… ‘Over the past year, the only trend that is working is equities. Clearly, that is not a very helpful diversifier to long equities.’”
July 10 – Bloomberg (Saijel Kishan): “Financial markets no longer make sense to macro managers like Mark Spindel. After spending three decades focusing on things like economic trends, currency moves, politics and policy, Spindel has been confounded by markets shaped by low volatility, algorithms and more. He finally gave up and closed his nine-year-old hedge fund. ‘I felt the intensity of following markets at a time of increasing political and economic confusion very hard,’ said Spindel, founder of Potomac River Capital… ‘My entire career had centered on an understanding of monetary politics and I had trouble getting my head around it all. It was exhausting.’ These are troubled -- and troubling -- times for macro managers, those figurative heirs of famed investor George Soros who were once dubbed the masters of the universe. They’ve barely made money this year and once again, their returns pale next to those of cheaper index funds. Many investors are looking elsewhere.”
July 12 – CNBC (Leslie Picker): “A revitalization in the hedge-fund industry may be more dependent on machines than humans. After years of outflows, new reports show many of the larger funds and their current and prospective investors, are keenly focused on words like ‘quant’ and ‘data science.’ As one indication, take a look at this chart that was highlighted in a recent client report by Jefferies that was obtained by CNBC. This is based on Google Trends, showing the relative interest in the words ‘hedge fund’ versus ‘data science.’ ‘2016 seems to have marked a tipping point for the hedge fund industry's mainstream embrace of data science,’ Jefferies wrote…”
July 11 – Bloomberg (Hema Parmar): “Investor interest in hedge funds is back on the upswing. Hedge funds saw the biggest jump in demand among asset classes examined in a Credit Suisse Group AG report... More allocators plan to boost their exposure to the funds than reduce it this year, it said. That’s a pivot from mid-2016, when more investors intended to make redemptions, according to the survey which polled 212 investors globally last month representing almost $660 billion invested in the industry. Continuing the bullish sentiment, 81% of investors surveyed said they plan to put at least some money to work in hedge funds over the next six months, compared with 73% last year.”
Geopolitical Watch:
July 11 – Reuters (Ben Blanchard): “China hit back… in unusually strong terms at repeated calls from the United States to put more pressure on North Korea, urging a halt to what it called the ‘China responsibility theory’, and saying all parties needed to pull their weight. U.S President Trump took a more conciliatory tone at a meeting with Chinese President Xi Jinping on Saturday, but he has expressed some impatience that China, with its close economic and diplomatic ties to Pyongyang, is not doing enough to rein in North Korea.”
Emerging markets were notably strong. Equities rallied 5.0% in Brazil, 5.5% in Hong Kong, 5.1% in Turkey, 2.5% in Russia, 2.2% in Mexico and 2.1% in India. The Brazilian real gained 3.2%, the Mexican peso 3.0%, the South African rand 2.7% and the Turkish lira 2.3%. Global bond markets also rallied. Yields (local currency) dropped 27 bps in Brazil, 18 bps in South Africa, 16 bps in Turkey and 22 bps in Argentina. Here at home, five-year Treasury yields dropped eight bps (to 1.87%). U.S. corporate Credit also enjoyed solid gains. Across global markets, it appeared that short positions were under pressure.
Markets reacted with elation to Janet Yellen’s Washington testimony – widely perceived as dovish. In particular, the chair’s timely comments on inflation were cheered throughout global securities markets. A headline from the Financial Times: “Fed Chair Yellen’s Inflation Concern Buoys Markets.” And Friday afternoon from Bloomberg: “S&P 500 Hits Record as Inflation View Turns Iffy”.
July 12 – Financial Times (Sam Fleming): “Janet Yellen acknowledged… that the US’s persistently subdued inflation could raise questions about the Federal Reserve’s current path of gradually raising interest rates and vowed to watch prices ‘very closely’ for signs they were stagnating. The Fed chair insisted it was ‘premature’ to second guess policymakers’ determination inflation was slowly headed to the central bank’s target of 2%. But her note of caution helped spark a rally in US Treasuries and equities, with investors hopeful Ms Yellen would keep the Fed’s easy money stance for longer… Ms Yellen was broadly positive about the economy’s recent performance…, stressing there had been a rebound in household spending over recent months and the Fed was still anticipating further rate increases. But she also said she was studying the low inflation numbers for signs that short-term drags on prices may not be the only factors holding it back. She added that rates may not need to be lifted a lot more to get back to a neutral stance. ‘We are watching inflation very carefully,’ Ms Yellen said... ‘I do believe part of the weakness in inflation reflects transitory factors, but well recognise that inflation has been running under our 2% objective, that there could be more going on there.’ Analysts said Ms Yellen’s remarks marked a small but significant change of thinking, putting the Fed’s path of gradually pulling back on economic stimulus in question. ‘Yellen’s statement today reveals that the Fed isn’t as sure about inflation as they led us to believe,’ said Luke Bartholomew, investment strategist at Aberdeen Asset Management.”
It’s fair to say that the whole issue of “inflation” confounds the Fed these days. Despite antiquated analytical frameworks and econometric models, the Federal Reserve is showing zero inclination to rethink its approach. At the minimum, objective policy analysis would recognize today’s nebulous link between monetary stimulus and consumer price inflation. Rational thinking would downgrade CPI as a policy guidepost, especially relative to indicators of broader price and financial stability. Still, consumer prices rising slightly below 2% have somehow become central to the argument for maintaining aggressive monetary accommodation.
The nature of economic output has fundamentally changed – from mass-produced high tech hardware, to limitless software and digitalized content, to endless pharmaceuticals and wellness to energy alternatives to, even, the proliferation of organic foods - just to get started. There is today essentially unlimited capacity to supply many of the things we now use in everyday life (sopping up purchasing power like a sponge). Much of this supply is sourced overseas, which further diminishes the traditional relationship between domestic monetary conditions and consumer price inflation.
These dynamics have unfolded over years and are well recognized in the marketplace. To be sure, ongoing tepid consumer price inflation seems to be the one view that markets hold with strong conviction. So when Yellen suggested that below target inflation would alter the trajectory of Fed “normalization,” the markets immediately took notice. When she again referred to the “neutral rate” and implied that the Fed was currently near neutral, this further signaled a Fed that has developed its own notion of what these days constitutes “normal.” Throw in that the FOMC plans to pause rate increases while gauging market reaction to its (cautious) balance sheet operations, and it has become apparent to the markets that the Fed won’t be pushing rates much higher any time soon.
We’ll wait to see if Fed officials push back against the market’s dovish interpretation of Yellen testimony. There’s certainly no conundrum. If the Fed is confused that financial conditions have loosened in the face of “tightening” measures, look in the mirror. Chair Yellen needed to choose her words carefully, especially on the subject of inflation. The markets were near all-time highs, with what has likely been a decent amount of hedging/shorting over the past month. An upside breakout risks a bout of destabilizing speculation. At the same time, there were early indications of fledgling risk aversion. Global yields had recently jumped. Weakness was notable in the periphery debt markets (i.e. Italy, EM), and even U.S. corporate Credit was hinting vulnerability.
Importantly, there was heightened market concern that a concerted effort was underway to begin removing central bank accommodation – that booming markets and stubbornly loose financial conditions might force central bankers to adopt more aggressive tightening measures.
Understandably, the markets will interpret a dovish Yellen – especially the nuanced language on the topic of inflation – as rushing to the markets’ defense. The view that the Fed won’t tolerate even a modest market pullback is, again, further emboldened. And quickly global markets will return to the view that central bankers may talk “normalization,” while their overarching anxiety for upsetting markets has diminished little.
July 12 – Bloomberg (Vivien Lou Chen): “Fed Chair Janet Yellen says that in looking at asset prices and valuations, the central bank is ‘not trying to opine on whether they’re correct’; instead, policy makers are assessing the risk of potential spillovers. As asset prices rise, there hasn’t been a substantial increase in borrowing, Yellen said. [The] financial system is strong and resilient.”
I assume chair Yellen is referring to U.S. non-financial and non-government borrowings. Clearly, central bank Credit and government borrowings have expanded spectacularly around the globe. I suspect as well there has been a major expansion in speculative leveraging and securities Credit at home and abroad.
Georgia Senator David Purdue: “Thank you for being here and for your service. I just have two quick questions. I’m very concerned about global debt. The Institute of International Finance recently reported that their estimate of total global debt is $217 trillion, or more than 300% of global GDP. Do you agree with that?”
Chair Yellen: “So, I haven’t heard that number. That could be. I don’t have that number.”
Purdue: “Of that, $60 trillion is estimated to be sovereign debt. We have about $20 trillion of the $60 trillion. With that as background, the four large central banks also have their largest historic balance sheets. Japan, China, EU and US have collectively close to approaching $20 trillion now of balance sheet size. As you talk about reducing the size of the Fed’s balance sheet, are you coordinating with these other central banks and looking at emerging market debt - particularly the $300 billion that’s coming due by the end of 2018 - relative to the size of your balance sheet here in the United States?”
Yellen: “I wouldn’t say coordinate. We try to make sure we meet regularly and discuss our policy approaches; to make sure that central banks understand how we are looking at economies and policy options. I think the major central banks understand the approach that others are taking. But trying to ask in an aggregate sense how much debt is outstanding is something we’re not doing. Our economies are in rather different situations. While we all encountered weaknesses that were sufficiently severe that Japan, the ECB, the Bank of England, the United States, we all resorted to purchases of longer-term assets to support growth. It leaves the Bank of Japan and the ECB.”
Purdue: “Are you concerned about so much of that [debt] denominated in dollars today?”
Yellen: “It is a risk. A significant amount of that is in China, but that’s not the only country where there are substantial corporate dollar-denominated debts. And certainly that is a risk that we have considered that affects the global economy.”
Senator Bob Menendez: “Let me ask you finally, how does—we see high rising levels of household debt, widening inequality, a neutral interest rate at historically low levels. To me, it’s critical that the Fed has the ability to respond in the event of another economic decline. How does below target inflation impact household debt? And what signs do you see of inflation coming close to the Fed’s 2% target, let alone exceeding it by dangerous amounts?”
Yellen: “As I said, I think the risks with respect to inflation are two-sided. But we’re very aware of the fact that inflation has been running below our 2% objective now for many years, and we’re very focused on trying to bring inflation up to our 2% objective. That’s a symmetric objective and not a ceiling. We know from periods [when] we’ve had deflation, which of course we don’t have in this country. But that is something that has a very adverse effect on debtors and can leave debtors drowned in debt. Now, we don’t have a situation nearly that serious. But it is important when we have a 2% inflation objective to make sure that we achieve it and we’re focused on doing that.”
Yellen stated during that the Fed’s inflation mandate is “symmetrical.” Yet it’s unimaginable that the FOMC would keep monetary conditions extraordinarily tight for nine years in response to CPI modestly above its 2% target?
It’s by this point abundantly clear that contemporary monetary management exerts major direct influences on the structure of asset prices, while having dubious effect on aggregate consumer prices. This now discernable dynamic creates a momentous dilemma for central banks. Especially after the worldwide adoption of the Bernanke doctrine, it’s fundamental to their approach that central banks retain the power to inflate out of trouble as necessary. Why fret debt accumulation, speculation and asset price Bubbles when central banks can always inflate the general price level, thereby reducing debt burdens and asset overvaluation?
Central bankers have a penchant for speaking in terms of “fighting the scourge of deflation.” More specifically, they view inflation as the indispensable mechanism for reflating systems out of the consequences of debt and asset Bubbles. If central bankers were to admit they don’t control “inflation,” then their policy doctrine of promoting reflationary debt growth and higher asset prices turns spurious.
It has been my longstanding position that it’s not possible to inflate out of major Credit and asset Bubbles. As we’ve witnessed for years now, central bank stimulus fuels self-reinforcing speculative excess, with a resulting accumulation of speculative leverage and securities-related Credit more generally. At the same time, years of abundant cheap global liquidity work to feed overcapacity and attendant downward price pressure on many things. Rampant inflation within the Financial Sphere nurtures pricing vulnerabilities and instability throughout the Real Economy Sphere. Bubbles Inflate Only Bigger.
As such, if one accepts the reality that central banks don’t control inflation, the policy course of repeatedly inflating serial Bubbles can be viewed as risking eventual catastrophic policy failure. There’s simply no escaping the day of reckoning. This analysis certainly applies to China. Led by strong lending ($214bn), June growth in Total Social Financing jumped to $263bn. This puts first-half non-government Credit growth at $1.65 TN (up 14% from last year’s record pace), consistent with my expectation for total Chinese Credit growth this year to exceed $3.5 TN.
Along with Yellen’s testimony, China developments were likely a factor in this week’s global risk market rally. The view is taking hold that Chinese officials have at least temporarily pulled back from tightening measures, perhaps in preparation for this autumn’s 19th National Congress of the Communist Party of China.
July 12 – Wall Street Journal (Grace Zhu): “Chinese banks extended higher-than-expected volume of loans last month even as growth in the money supply continued to slow amid Beijing’s efforts to reduce leverage in its financial system. New yuan loans issued by Chinese banks surged to 1.54 trillion yuan ($226.38bn) in June, up from 1.11 trillion yuan in May… The volume was well above the 1.3 trillion yuan forecast by economists… June is typically a high point for new credit from Chinese banks’ as loan officers rush to meet quarterly targets. Beyond that, demand for credit from households—mostly for mortgages in the hot property market—remained strong, and companies too turned to banks for loans, instead of issuing bonds.”
July 12 – Financial Times (Gabriel Wildau): “China’s central bank injected $53bn into the banking system on Thursday, the latest sign that policymakers have eased up on a fierce deleveraging campaign that has caused turmoil among lenders in recent months. President Xi Jinping told the politburo in April that ‘financial security’ was a top policy priority for the year. That led the central bank to tighten liquidity, while the ambitious new banking regulator unleashed a ‘regulatory windstorm’ that sent shockwaves through the banking system. The storm appears to be passing, as the People’s Bank of China has become more generous with cash injections while the China Banking Regulatory Commission has delayed implementation of a significant new directive. ‘There are clear signs in recent weeks of monetary and supervisory tightening being eased,’ Tao Wang, co-head of Asia economics at UBS in Hong Kong, wrote…”
For the Week:
The S&P500 gained 1.4% (up 9.8% y-t-d), and the Dow rose 1.0% (up 9.5%). The Utilities added 0.6% (up 6.0%). The Banks declined 0.9% (up 4.9%), while the Broker/Dealers increased 0.8% (up 11.3%). The Transports rose 0.5% (up 7.7%). The S&P 400 Midcaps gained 1.0% (up 6.3%), and the small cap Russell 2000 increased 0.9% (up 5.3%). The Nasdaq100 jumped 3.2% (up 20.0%), and the Morgan Stanley High Tech index advanced 3.4% (up 24.6%). The Semiconductors surged 4.7% (up 21.8%). The Biotechs were little changed (up 27.1%). With bullion rallying $16, the HUI gold index recovered 3.9% (up 2.0%).
Three-month Treasury bill rates ended the week at 102 bps. Two-year government yields dipped four bps to 1.36% (up 17bps y-t-d). Five-year T-note yields declined eight bps to 1.87% (down 6bps). Ten-year Treasury yields fell five bps to 2.33% (down 11bps). Long bond yields slipped a basis point to 2.92% (down 15bps).
Greek 10-year yields fell eight bps to 5.28% (down 174bps y-t-d). Ten-year Portuguese yields slipped a basis point to 3.15% (down 59bps). Italian 10-year yields declined five bps to 2.29% (up 48bps). Spain's 10-year yields dropped eight bps to 1.65% (up 27bps). German bund yields added two bps to 0.60% (up 39bps). French yields fell eight bps to 0.86% (up 18bps). The French to German 10-year bond spread narrowed 10 bps to 26 bps. U.K. 10-year gilt yields were little changed at 1.31% (up 8bps). U.K.'s FTSE equities index added 0.4% (up 3.3%).
Japan's Nikkei 225 equities index gained 1.0% (up 5.3% y-t-d). Japanese 10-year "JGB" yields were little changed at 0.083% (up 4bps). France's CAC40 gained 1.8% (up 7.7%). The German DAX equities index rose 2.0% (up 10%). Spain's IBEX 35 equities index added 1.6% (up 13.9%). Italy's FTSE MIB index jumped 2.3% (up 11.7%). EM equities posted strong gains. Brazil's Bovespa index surged 5.0% (up 8.6%), and Mexico's Bolsa rose 2.2% (up 5.3%). South Korea's Kospi gained 1.5% (up 19.2%). India’s Sensex equities index advanced 2.1% (up 20.3%). China’s Shanghai Exchange was little changed (up 3.8%). Turkey's Borsa Istanbul National 100 index surged 5.1% (up 34.6%). Russia's MICEX equities index rallied 2.5% (down 12.2%).
Junk bond mutual funds saw outflows of $1.144 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates jumped seven bps to 4.03% (up 61bps y-o-y). Fifteen-year rates gained seven bps to 3.29% (up 57bps). The five-year hybrid ARM rate rose seven bps to 3.28% (up 52bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up four bps to 4.14% (up 47bps).
Federal Reserve Credit last week slipped $0.2bn to $4.427 TN. Over the past year, Fed Credit declined $4.9bn. Fed Credit inflated $1.616 TN, or 57%, over the past 244 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $6.5bn last week to $3.323 TN. "Custody holdings" were up $100bn y-o-y, or 3.1%.
M2 (narrow) "money" supply last week declined $30.8bn to $13.515 TN. "Narrow money" expanded $691bn, or 5.4%, over the past year. For the week, Currency increased $0.6bn. Total Checkable Deposits jumped $43.5bn, while Savings Deposits dropped $79.9bn. Small Time Deposits added $2.6bn. Retail Money Funds gained $2.4bn.
Total money market fund assets were little changed at $2.627 TN. Money Funds fell $94bn y-o-y (3.4%).
Total Commercial Paper jumped $13.8bn to $961bn. CP declined $87bn y-o-y, or 8.3%.
Currency Watch:
July 11 – Wall Street Journal (Saumya Vaishampayan and Shen Hong): “China’s central bank is finding that some of the most stubborn yuan skeptics are lurking in its backyard. A tug of war between the People’s Bank of China and investors in the country’s domestic foreign-exchange market has played out almost daily in recent months, with the yuan consistently closing weaker than the level set by the central bank. While the central bank’s support has helped the yuan gain 2.2% against the U.S. dollar this year, after three years of declines, Chinese investors have been focusing in recent weeks on factors that could drag the currency lower in the coming months, traders say.”
The U.S. dollar index declined 0.9% to 95.153 (down 7.1% y-t-d). For the week on the upside, the Brazilian real increased 3.2%, the Australian dollar 3.0%, the Mexican peso 3.0%, the South African rand 2.7%, the Norwegian krone 2.2%, the South Korean won 1.9%, the Canadian dollar 1.8%, the British pound 1.6%, the Swedish krona 1.4%, the Japanese yen 1.2%, the New Zealand dollar 0.9%, the Singapore dollar 0.8%, the euro 0.6% and the Danish krone 0.6%. The Chinese renminbi gained 0.45% versus the dollar this week (up 2.50% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index rallied 2.2% (down 6.3% y-t-d). Spot Gold gained 1.3% to $1,229 (up 6.6%). Silver recovered 3.3% to $15.933 (down 0.3%). Crude rallied $2.31 to $46.54 (down 14%). Gasoline popped 4.1% (down 7%), and Natural Gas also jumped 4.1% (down 20%). Copper gained 1.7% (up 7%). Wheat gave back 4.5% (up 25%). Corn fell 4.1% (up 7%).
Trump Administration Watch:
July 8 – Bloomberg (Bryce Bashuk): “Group of 20 leaders agreed to address growing overcapacity and rock-bottom prices in global steel markets, bowing to pressure from the Trump administration after it threatened to impose punitive tariffs on its allies. In talks that stretched into the early hours of Saturday, U.S. officials managed to get language inserted into the communique that sets deadlines for G-20 members to address excess steel production… Countries like China will also have to be more transparent about how they subsidize domestic producers. In return, the U.S. agreed to boilerplate language reiterating the G-20’s commitment to fight protectionism. The threat of a trade war on steel hung over this week’s G-20 summit in Hamburg and those fears were compounded Friday when German Chancellor Angela Merkel said negotiations were proving to be difficult.”
July 10 – Reuters (Susan Cornwell and Amanda Becker): “Republican senators returned to Washington… following a 10-day holiday recess still at odds with one another over legislation President Donald Trump wants passed to repeal major portions of Obamacare. With only three weeks left before a summer recess scheduled to stretch until Sept. 5, Senate Majority Leader Mitch McConnell appeared determined to keep trying to find agreement on a partisan, all-Republican bill. If he cannot, he will be faced with giving up on a seven-year Republican promise to repeal the 2010 Affordable Care Act, popularly known as Obamacare - and possibly turning to Democrats for help in fixing problems with U.S. health insurance markets.”
July 13 – Reuters (Susan Cornwell and Yasmeen Abutaleb): “Senate Republican leaders released… a revised plan to dismantle the Obamacare law, playing to the party's disparate factions by letting insurers sell cheap, bare-bones policies while retaining taxes on the wealthy, but quick criticism showed the healthcare overhaul is already in jeopardy. U.S. Senate Majority Leader Mitch McConnell, pushed hard by President Donald Trump to pass a healthcare bill and make good on Republicans' seven-year mission to gut Democratic former President Barack Obama's signature legislative achievement, is walking a tightrope. With Democrats united against it, McConnell cannot afford to lose more than two Republican senators to win passage. But moderate Susan Collins and conservative Rand Paul voiced opposition to even bringing the new plan up for debate.”
July 11 – Financial Times (Sam Fleming and Barney Jopson): “While Donald Trump once vowed to ‘do a number’ on Dodd-Frank, Washington’s central piece of post-crisis financial legislation, his regulatory appointees will probably prove more effective agents of change than Congress, which remains locked in a legislative logjam. The administration… named one of the key figures in its quest to ease the load of regulation, nominating Randal Quarles to be vice-chair for financial supervision at the Federal Reserve. Bankers are hoping Mr Quarles will reverse the hardline approach to bank oversight — and in particular capital standards — that was developed after the crisis by Daniel Tarullo, a former Fed governor who was the central bank’s chief regulator but who never formally occupied the role.”
China Bubble Watch:
July 12 – Wall Street Journal (Lingling Wei and Dominique Fong): “The more China tries to rein in its roaring housing market, the more obsessed people get about buying. In February, with this southern megalopolis in the throes of a property frenzy, state banks raised mortgage rates. Then came higher down-payment rules for second homes and limits on owning multiple apartments. The result: Prices in Guangzhou continue to climb, and the market one town over has heated up. Pei Zhiyong, a 56-year-old advertising executive, was barred by the new restrictions from buying a third apartment in Guangzhou. One Sunday in April, he drove his BMW SUV to Foshan, an hour away, to check out a new riverfront high-rise. He figures it’s the ideal time to buy. ‘The harder the government tries to control the market, the more prices will rise,’ Mr. Pei said. With each new policy intended to restrict home purchases, buyers are piling in. Stressed about the prospect of being left behind, many are borrowing heavily, believing prices will continue to rise... Another article of faith is that the Communist Party won’t allow housing prices to collapse.”
July 9 – Bloomberg: “On a recent morning in Shanghai’s Lujiazui financial district, Xiong Yun’s eyes darted around the four computer screens at his desk, scanning activity in China’s bond and futures markets. Staring at the matrix of numbers, the former BNP Paribas SA trader was making sure his algorithms pounced on any arbitrage opportunities that popped up between government notes and their derivatives contracts… While Xiong’s approach would seem standard in credit markets around the world, debt-linked derivatives have until recently been a non-factor in China. But they’re being used more after a central bank clampdown ended a three-year bull run and increased volatility: in the past year, trading in bond futures more than doubled and interest rate swaps volume rose by a third. The shift brings China’s $10 trillion bond market closer in line with developed economies…”
July 10 – Bloomberg: “China’s producer price gains held up, signaling that demand in the world’s second-largest economy is maintaining pace for now, even in the face of regulatory curbs. The producer price index rose 5.5% in June from a year earlier…”
July 12 – Bloomberg: “China’s overseas shipments rose from a year earlier as global demand held up and trade tensions with the U.S. were kept in check amid ongoing talks. At home, resilient demand led to a rise in imports. Exports rose 11.3% in June in dollar terms…, more than the estimate of 8.9%. Imports increased 17.2% in dollar terms, leaving a trade surplus of $42.8 billion.”
July 10 – New York Times (Sui-Lee Wee): “A year ago, the Chinese billionaire Wang Jianlin declared the dominance of his vast entertainment empire, Dalian Wanda Group, boasting that his theme parks were a ‘pack of wolves’ that would defeat the lone ‘tiger’ of Disney’s Shanghai resort. Now, Mr. Wang is retreating, in a sign that Wanda could be reaching the limits of its debt-fueled expansion. Wanda said… that it would sell the theme parks as part of a $9.3 billion deal that includes 76 hotels and a major chunk of 13 tourism projects. The cash from the deal… would be used to pay down debt. Wanda appears to be caught in a political and financial downdraft that has hit many big Chinese deal makers.”
July 8 – Reuters (Sumeet Chatterjee): “When Horan Fu decided to buy a 500-sq-foot apartment for HK$7.4 million last year, the biggest draw was the developer's offer of 85% financing with an option to defer interest payments for the first three years. ‘The interest rate could be a lot higher after three years, but there's also a chance that the interest would still be cheap because finance companies are competing fiercely,’ said Fu, who works in Hong Kong's financial services industry. ‘There's risk but there's also an upside. It's a good investment opportunity.’ With traditional financing drying up in Hong Kong at a time when property prices are at a record high, home buyers like Fu are looking to non-bank lenders, many of them the financing arms of developers, to get in on the boom.”
Europe Watch:
July 8 – Wall Street Journal (Simon Nixon): “The recent volatility in bond markets has stirred up old fears in Europe. Investors have long been concerned about the possible impact of the end of the European Central Bank’s quantitative easing program on the eurozone’s periphery, not least Italy—the country long-regarded as too big to save. Now with markets abuzz with talk of central bank monetary policy ‘normalization,’ those concerns are once again front of mind: Without the fire blanket of ECB government bond-buying, will Italian borrowing costs soar once again, plunging the eurozone back into crisis?”
Central Bank Watch:
July 13 – Reuters (Francesco Canepa): “The European Central Bank is likely to signal in September that its bond-buying scheme will be gradually wound down next year and ECB chief Mario Draghi could give the next clue on the plans in late August, the Wall Street Journal said… Financial markets overwhelmingly expect the ECB to decide in September on the future of its stimulus policy beyond the end of this year. Some investors expect an extension with a one-off reduction while others see a gradual but steady wind-down, known as tapering.”
July 8 – Bloomberg (Carolynn Look, Mark Deen, and Caroline Connan): “The European Central Bank is likely to decide on the next change in its stimulus settings in the fall, when it will continue the process of tweaking its measures to reflect the euro area’s upturn, according to Governing Council member Francois Villeroy de Galhau. ‘What we have to do, and what we started to do, is to adapt the intensity of this accommodative monetary policy to the progress toward our inflation target and toward economic recovery,’ Villeroy de Galhau said... ‘In the future, and this will be our decision next fall, we will go on adapting the intensity of this monetary policy.’”
July 8 – Bloomberg (Carolynn Look): “European Central Bank policy makers continued to air their differences over when to rein in stimulus, sending conflicting signals on whether pumping cash into the economy for much longer will help the euro area or hurt it. ‘Underlying inflationary pressure remains subdued’ and ‘we still need a long period of accommodative policy,’ Executive Board member Peter Praet, the ECB’s chief economist, told Belgian newspaper De Standaard… Governing Council member Klaas Knot… warned that the central bank is ‘very close to the point’ of keeping quantitative easing for too long.”
July 12 – Bloomberg (Luke Kawa): “A North American central bank hiking rates in the face of strong job growth and deteriorating core inflation rates, citing temporary factors for the drop-off in price pressures. No, it’s not Janet Yellen’s Federal Reserve -- it’s Stephen Poloz’s Bank of Canada. On Wednesday, the Bank of Canada delivered its first interest-rate hike in almost seven years, becoming the first Group of Seven central bank to join the Fed in policy normalization, the first concrete step toward global monetary policy convergence.”
July 12 – Financial Times (Roger Blitz): “Canada’s first rate rise in nearly seven years puts it in the vanguard of central banks outside the US Federal Reserve shifting monetary policy in response to better global economic growth. The market had fully priced in the move upwards of 25 bps to 0.75%, which leaves two obvious questions for investors: what next for Canada, and how soon could other central banks join the retreat from easy monetary policy? Judging by the reaction of the ‘loonie’, nickname for the Canadian dollar, the answer to the first question has already been answered by investors.”
Global Bubble Watch:
July 11 – Bloomberg (Cindy Roberts): “JPMorgan… Chairman Jamie Dimon said the unwinding of central bank bond-buying programs is an unprecedented challenge that may be more disruptive than people think. ‘We’ve never have had QE like this before, we’ve never had unwinding like this before,” Dimon said at a conference in Paris… ‘Obviously that should say something to you about the risk that might mean, because we’ve never lived with it before… When that happens of size or substance, it could be a little more disruptive than people think,” Dimon said. ‘We act like we know exactly how it’s going to happen and we don’t.’”
July 7 – Financial Times (Chris Flood): “BlackRock pulled more cash into its exchange traded fund arm in the first six months of 2017 than over the whole of last year, when the world’s largest asset manager attracted record ETF inflows. Investors have ploughed around $140bn into BlackRock’s ETF business so far this year, already exceeding the annual record of $138bn gathered over the whole of 2016… Vanguard… registered ETF inflows of around $82bn by the end of June. It is on course to beat its annual record of $97bn, also registered in 2016… Global investor inflows into ETFs have reached around $335bn so far in 2017, comfortably on track to beat 2016’s record of $390bn.”
July 12 – Reuters (Simon Jessop): “European corporate bond markets could prove a bigger source of market instability during the next big shock than during the 2008 financial crisis, a study by the Bank of England showed. The study is the first to try to model how non-bank lenders would react in a stressed market environment, with the BoE particularly concerned about the effect on corporate funding rates and their impact on the real economy. The need to model the risk has arisen because capital markets have provided a bigger slice of corporate funding since the financial crisis and many of the often-illiquid bonds are held in mutual funds offering daily exits to investors.”
July 12 – Reuters (Marc Jones): “More governments are likely to see their sovereign credit ratings cut this year, S&P Global said… An average of more than one country a week has had its rating cut by the big rating agencies - S&P, Moody's and Fitch - since the start of 2014. A new report from S&P showed it had 30 sovereigns on downgrade warnings, or ‘negative outlooks’ in rating firm parlance, at the start of the month, compared with just six on positive outlooks. ‘This outlook distribution suggests that negative rating actions are likely to continue to outnumber positive actions over the coming 12 months,’ S&P said in a mid-year review of its rating moves.”
July 12 – Bloomberg: “China’s outbound investment slumped in the first half of the year as policy makers imposed curbs on companies’ foreign acquisitions following a record spending spree in 2016. Outward direct investment dropped to $48.19 billion in the six-month period, down 45.8% from a year ago… Spending fell 11.3% to $13.6 billion in June alone… Foreign direct investment fell 0.1% in yuan terms in the first half, to 441.5 billion yuan… A surge in overseas purchases last year saw firms snap up everything from soccer teams to property.”
July 10 – Bloomberg (Colin Simpson): “There could be trouble ahead for developed world equity markets with ‘frothy’ valuations as central banks start shifting policy, according to Deutsche Bank AG. Price-to-earnings ratios increased steadily after the global financial crisis as waves of monetary stimulus pulled down the yields on safe assets, spurring investors into riskier options. That dynamic may be on the verge of reversing with a turnaround in policy now underway in developed nations other than Japan, Mikihiro Matsuoka, chief economist of the Japanese unit of Deutsche Bank AG, wrote… The average of the standard deviation of stock-market capitalization as a percentage of GDP in seven major developed countries has been approaching the previous peaks of 2000 and 2008, Matsuoka highlighted.”
Fixed Income Bubble Watch:
July 12 – Bloomberg (Sid Verma): “Credit markets didn’t get the memo. After hawkish rhetoric two weeks ago by central bankers led by Mario Draghi set off a sharp surge in government bond yields, the investment-grade and high-yield debt markets have collectively shrugged. Since then, the extra compensation investors demand to hold high-yield bonds around the world over similar-maturity government debt has increased by a whisker at five bps…, while spreads on high-rated debt in euros and dollars have tightened -- now sitting near post-crisis lows. If markets are braced for a new dawn for risk assets bereft of monetary stimulus to juice returns amid record U.S. corporate leverage, credit investors remain remarkably sanguine. That’s in contrast to the tantrums of 2013 and 2015, when the fear of a fading central bank put triggered a disorderly selloff across debt markets.”
Federal Reserve Watch:
July 12 –CNBC (Jeff Cox): “Interest rates may not have to rise that much for the Federal Reserve to meet its goals, central bank Chair Janet Yellen said… In prepared remarks to Congress, Yellen reiterated statements that Fed Governor Lael Brainard gave Tuesday, namely that rates are close to a ‘neutral’ level and not in need of a significant move higher. The neutral level is the point where the Fed's benchmark rate is neither accelerating nor restraining the economy. The current target for the funds rate is 1% to 1.25%, while inflation is around 1.4%. That puts the real rate close to zero, where Yellen and her dovish allies on the Federal Open Market Committee believe it needs to be. ‘Because the neutral rate is currently quite low by historical standards, the federal funds rate would not have to rise all that much further to get to a neutral policy stance,’ Yellen will tell Congress.”
July 12 –Bloomberg (Craig Torres and Christopher Condon): “Federal Reserve Chair Janet Yellen said the U.S. economy should continue to expand over the next few years, allowing the central bank to keep raising interest rates, while also stressing the Fed is monitoring too-low inflation. ‘Considerable uncertainty always attends the economic outlook,’ Yellen said… in remarks prepared for delivery to the U.S House Financial Services Committee. ‘There is, for example, uncertainty about when -- and how much -- inflation will respond to tightening resource utilization.’”
July 12 – Wall Street Journal (Nick Timiraos): “Federal Reserve Chairwoman Janet Yellen, faced with a recent, puzzling slowdown in global inflation, said she expects the forces holding down consumer prices to fade in the months ahead, allowing the central bank to stick to its plans for gradual interest-rate increases. But she left herself an out, saying the Fed could veer from its policy plans if inflation weakness proved more stubborn than officials expect. Ms. Yellen repeated her view that a tightening labor market would put upward pressure on wages and prices. ‘It’s premature to reach the judgment that we’re not on the path to 2% inflation over the next couple of years,’ she said… during a hearing of the House Financial Services Committee. But, she added, ‘We’re watching this very closely and stand ready to adjust our policy if it appears that the inflation undershoot will be persistent.’ Stocks rallied and bond yields fell after her testimony.”
July 11 – Reuters (Swati Pandey and Wayne Cole): “A top U.S. central banker… said he still expected one more rise in interest rates from the Federal Reserve this year and for it to start unwinding its massive balance sheet in the next few months. …San Francisco Federal Reserve Bank President John Williams said he believed a recent softening in U.S. inflation was transitory and that inflation would pick up to around 2% over the coming year. Williams emphasized that if inflation did not accelerate as expected, that would argue for a much slower pace of rate rises than currently projected.”
July 8 – Financial Times (Sam Fleming): “The Federal Reserve has set out a vigorous argument to retain broad discretion over monetary policy, in the teeth of a campaign by Republican lawmakers to push it to a more rules-based system ahead of the possible departure of Janet Yellen next year. Five days ahead of what could be one of Ms Yellen’s final testimonies on Capitol Hill as Fed chair, the central bank argued that relying too heavily on rate-setting rules could lead to perverse outcomes for the US economy. Conservative lawmakers argue the Fed has made use of its broad discretion to conduct hazardous policies that risk inflation or asset price bubbles. The Fed’s report suggests it is preparing for further battles with GOP lawmakers at a particularly sensitive time given changes in personnel in the Fed board and the potential for President Donald Trump to decline to give Ms Yellen a second term.”
U.S. Bubble Watch:
July 12 –CNBC (John W. Schoen): “Faced with tight revenues, tax-weary voters and uncertainty about the impact of federal tax and budget policies, lawmakers and governors are wrestling over what has become one of the toughest rounds of annual state budget battles since the Great Recession. More than a week after the start of the traditional July 1 fiscal year, seven states are still operating without an approved budget. In Connecticut, Rhode Island and Wisconsin, lawmakers have yet to resolve disagreements about how to close ongoing budget gaps in their states or fund new budget initiatives. Legislatures in Massachusetts, Pennsylvania, Oregon and Michigan have approved their tax and spending plans, which are waiting for signature or veto in those states. Lawmakers in a dozen states have called special sessions to resolve outstanding differences over the latest tax and spending plans.”
July 10 – Financial Times (John Plender): “It is 10 years, almost to the day, that Chuck Prince, then chief executive of Citigroup, told the Financial Times: ‘When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.’ Those fateful words bear thinking about, especially when looking at today’s equity market where investors are dancing furiously despite the Federal Reserve, the European Central Bank and the Bank of England adopting increasingly hawkish rhetoric about tightening policy. While the bond markets have been rattled, the party in equities continues with a swing. And quite a party it has been. According to Harry Colvin of Longview Economics, the US equity bull market is now the second longest since 1896. It is also the third largest, delivering a cumulative 328% total return to early July… The cyclically adjusted price/earnings ratio is at a level previously only seen before the 1929 Wall Street Crash and in the dotcom bubble of the late 1990s. With the Fed likely to raise rates further this year and actively discussing how to shrink its balance sheet, the more nervous dancers may be tempted to make an exit.”
July 10 – Bloomberg (Adam Tempkin and Claire Boston): “‘I’d like to know: Why now?’ asked Steve Eisman. It was July 10, 2007, and the hedge fund manager was on a 10 a.m. conference call with analysts at Standard & Poor’s, which had just decided to put $7.3 billion of subprime mortgage bonds on watch for downgrade. A growing number of investors like Eisman had been betting on a crash as overdue home loans rose. But up to that point, much of the world was still putting its faith in the safe-as-Treasuries ratings that had been awarded to the bonds, which helped bankroll $445 billion of risky mortgages in 2006 alone. From that day onward, even the most cautiously optimistic economist or sanguine Federal Reserve governor should have known that the housing mess and the subprime debacle wasn’t going to be contained. ‘The news has been out on subprime now for many, many months; the delinquencies have been a disaster for many, many months,’ Eisman said on the call. ‘I’d like to know why you’re making this move today instead of many months ago.’ Over the next year, S&P analysts (who told Eisman they had to wait until the bonds were adequately ‘seasoned’ before they would downgrade them), would join Moody’s… and other credit raters in downgrading more than $1 trillion of mortgage-related securities.”
July 8 – Barron’s (Kopin Tan): “We still call it a stock market, but these days it has many more indexes than it does stocks: There are nearly 6,000 indexes today, up from fewer than 1,000 a decade ago. Meanwhile, the number of stocks in the Wilshire 5000 Total Market Index has shriveled to 3,599, from 7,562 in 1998… How is this boom in index products affecting the stock market? The question is especially pertinent these days, as benchmarks such as the Standard & Poor’s 500 index and the Nasdaq Composite nuzzle serial new highs, and actively managed funds struggle to keep up… Investors have been pulling money from active funds and plowing it into their passive peers. Through the first five months of this year, investors steered $338 billion into passive mutual funds and ETFs—that’s on top of last year’s record inflows of $506 billion… If this pace keeps up, passive funds could take in more than $800 billion in 2017, a 60% jump from 2016’s record and nearly double the haul from 2015.”
July 12 – Bloomberg (Charles Stein): “Investors haven’t soured on all active fund managers -- only those who pick U.S. stocks. Actively managed mutual funds and exchange-traded funds that own domestic stocks experienced $98.5 billion in net redemptions in the first six months of 2017, according to… Morningstar Inc. Active funds that buy international stocks attracted inflows of $8.7 billion and active funds that buy bonds gathered $106.5 billion. ‘The trend for U.S. stocks funds keeps going and going,’ said Russel Kinnel, director of manager research at Morningstar. ‘There is a perception that they can’t beat their benchmarks, especially when it comes to large-cap stocks.’”
July 13 – Reuters (Ernest Scheyder): “U.S. shale producers survived an oil price crash and confounded OPEC's efforts to drain a global glut by employing innovative drilling and production techniques. Now, some of these producers are turning to creative investments to pump more oil. Drilling joint ventures, called ‘DrillCos’ for short, combine cash from investors like Carlyle Group LP with drillable-but-idle land already owned by producers. Investors get a pledge of double-digit returns within a few years, while producers can raise productivity without spending more of their own money.”
July 12 – CNBC (Diana Olick): “The appetite for riskier mortgages is rising, and a small cadre of investment firms is ready to feed it. Angel Oak Capital Advisors just announced its second rated securitization of nonprime residential mortgages this year, a deal worth just more than $210 million and its largest ever. Its first deal was slightly less, but demand from borrowers and investors alike is growing, and the securitizations are growing with it. Angel Oak is one of very few firms offering these private-label mortgage-backed securities — the ones that were so very popular during the last housing boom and which were later blamed for the financial crisis.”
Japan Watch:
July 9 – Reuters (Kaori Kaneko and Elaine Lies): “Japanese Prime Minister Shinzo Abe will reshuffle his cabinet and party leaders early next month, moving to shore up his worst levels of popular support since returning to power in 2012, following a historic loss in a Tokyo assembly election. Last week's loss… spotlights Abe's potential vulnerability after nearly five years in power, with many blaming voter perceptions of arrogance on his part and that of his powerful Chief Cabinet Secretary, Yoshihide Suga. Opinion polls… showed Abe's popularity at its lowest since he returned to power late in 2012, with support of 36%...”
July 11 – Bloomberg (Isabel Reynolds): “Unpopular policies and a slew of scandals triggered a slide in public support for Japanese Prime Minister Shinzo Abe that led to a heavy election defeat. That was in 2007, when he abruptly resigned, citing health issues, after losing in the upper house of parliament. Ten years on, his situation looks uncomfortably familiar. Abe returned to Tokyo… from a curtailed European trip to face lost public trust and record low voter support. Ministerial gaffes and his failure to allay suspicions over a cronyism scandal involving a close friend contributed to his ruling party suffering an historic defeat in a recent Tokyo election. The public is wary of his plan to rush through a revision to the pacifist constitution.”
July 13 – Reuters (Leika Kihara, Sumio Ito, Tetsushi Kajimoto, Stanley White, Minami Funakoshi and Kaori Kaneko): “Bank of Japan policymakers see little to cheer in successfully defending their yield target as European and U.S. central banks start to pull the plug on ultra-cheap money, casting doubt on their view that global bond yield gains will be short-lived. Rising global yields forced the Japanese central bank to rev up bond buying last Friday to cap 10-year Japanese government bond (JGB) yields around its zero percent target, putting it at odds with its counterparts eyeing an exit from ultra-loose policy. On top of an increase in regular bond buying, the BOJ offered to buy unlimited amounts of 10-year JGBs at 0.110% - employing its most powerful tool for only the third time since adopting yield curve control (YCC) in September.”
July 10 – Financial Times (Leo Lewis and Dan McCrum): “The Bank of Japan faces a ‘protracted battle’ for control over yields on the benchmark 10-year government bond, say analysts, as global markets and the sliding popularity of Prime Minister Shinzo Abe threaten to push market interest rates higher. Warnings of repeated summer confrontations between the BoJ and the Japanese government bond (JGB) market come as investors spent Monday adjusting to BoJ governor Haruhiko Kuroda’s decision last week to draw a clear line in the sand, after the 10-year JGB yield crept above 0.1%... By stepping into the market with an offer to buy an unlimited amount of JGBs on Friday, traders said the BoJ was deploying the most potent weapon at its disposal as the central bank defended its 10-month-old policy of holding the 10-year benchmark at ‘around 0.0%’.”
July 10 – Bloomberg (Chikafumi Hodo and Netty Idayu Ismail): “While the Bank of Japan faced down the market on Friday with its offer to buy an unlimited amount of bonds, the battle over yield control may have only just begun. The swift action allowed the BOJ to quickly assert authority over the 10-year yield, bringing it down from a five-month high of 0.105%. The question is how far the central bank would have to go, and at what costs to its balance sheet, as the hawkish tilt adopted by its peers increases the extra yield offered by U.S. Treasuries and German bunds over Japanese bonds. ‘It hinges on whether the BOJ can inspire confidence and establish credibility on its intent to hold yields,’ said Vishnu Varathan, head of economics and strategy at Mizuho Bank… ‘The option of shifting to a target referenced to spreads -- as global yields move higher -- rather than fixed levels, may be a policy consideration.’”
EM Bubble Watch:
July 10 – Bloomberg (Lisa Abramowicz): “Emerging-market debt funds had a phenomenal first half of 2017, with record inflows and solid returns. But the ebullience is running out of steam and that sentiment will most likely deteriorate even further in the weeks to come. The biggest emerging-market debt ETF just had its largest one-week outflow in its history. In the past week, investors withdrew $826.8 million from the biggest emerging-market debt exchange-traded fund, the largest withdrawals in the $11.5 billion fund's history.”
Leveraged Speculation Watch:
July 10 – Bloomberg (Dani Burger and Sid Verma): “The trend is not your friend -- at least not lately. Between sleepy movements in global assets and short-lived macro shocks, programmatic investors who make their fortunes chasing momentum have had a particularly rough year. In fact, by some measures, commodity trading advisers are on track to post the worst yearly return since 1987... CTAs, the majority of which bet on price trends using futures contracts across asset classes, are known for being volatile strategies, billed for their low correlation to equities. Hit by choppy trends, especially in fixed income and the dollar, they’re are now finding it difficult to live up to return and diversification expectations, said Pravit Chintawongvanich, head of Derivatives Strategy at Macro Risk Advisors. ‘From 2014 to early 2015, the combination of a rising dollar, falling crude, and declining yields led to strong performance among trend followers,’ Chintawongvanich wrote… ‘Over the past year, the only trend that is working is equities. Clearly, that is not a very helpful diversifier to long equities.’”
July 10 – Bloomberg (Saijel Kishan): “Financial markets no longer make sense to macro managers like Mark Spindel. After spending three decades focusing on things like economic trends, currency moves, politics and policy, Spindel has been confounded by markets shaped by low volatility, algorithms and more. He finally gave up and closed his nine-year-old hedge fund. ‘I felt the intensity of following markets at a time of increasing political and economic confusion very hard,’ said Spindel, founder of Potomac River Capital… ‘My entire career had centered on an understanding of monetary politics and I had trouble getting my head around it all. It was exhausting.’ These are troubled -- and troubling -- times for macro managers, those figurative heirs of famed investor George Soros who were once dubbed the masters of the universe. They’ve barely made money this year and once again, their returns pale next to those of cheaper index funds. Many investors are looking elsewhere.”
July 12 – CNBC (Leslie Picker): “A revitalization in the hedge-fund industry may be more dependent on machines than humans. After years of outflows, new reports show many of the larger funds and their current and prospective investors, are keenly focused on words like ‘quant’ and ‘data science.’ As one indication, take a look at this chart that was highlighted in a recent client report by Jefferies that was obtained by CNBC. This is based on Google Trends, showing the relative interest in the words ‘hedge fund’ versus ‘data science.’ ‘2016 seems to have marked a tipping point for the hedge fund industry's mainstream embrace of data science,’ Jefferies wrote…”
July 11 – Bloomberg (Hema Parmar): “Investor interest in hedge funds is back on the upswing. Hedge funds saw the biggest jump in demand among asset classes examined in a Credit Suisse Group AG report... More allocators plan to boost their exposure to the funds than reduce it this year, it said. That’s a pivot from mid-2016, when more investors intended to make redemptions, according to the survey which polled 212 investors globally last month representing almost $660 billion invested in the industry. Continuing the bullish sentiment, 81% of investors surveyed said they plan to put at least some money to work in hedge funds over the next six months, compared with 73% last year.”
Geopolitical Watch:
July 11 – Reuters (Ben Blanchard): “China hit back… in unusually strong terms at repeated calls from the United States to put more pressure on North Korea, urging a halt to what it called the ‘China responsibility theory’, and saying all parties needed to pull their weight. U.S President Trump took a more conciliatory tone at a meeting with Chinese President Xi Jinping on Saturday, but he has expressed some impatience that China, with its close economic and diplomatic ties to Pyongyang, is not doing enough to rein in North Korea.”
Friday Evening Links
[Bloomberg] S&P 500 Hits Record as Inflation View Turns Iffy: Markets Wrap
[Bloomberg] Inflation Data Weakens the Fed's Case for Another Hike
[Bloomberg] JPMorgan Just Had the Most Profitable Year in the History of Banking
[Reuters] JPMorgan's Jamie Dimon lashes out against Washington politics
[Bloomberg] Inflation Data Weakens the Fed's Case for Another Hike
[Bloomberg] JPMorgan Just Had the Most Profitable Year in the History of Banking
[Reuters] JPMorgan's Jamie Dimon lashes out against Washington politics
Thursday, July 13, 2017
Friday's News Links
[Bloomberg] Bonds Gain, Stocks Steady as CPI Tests Fed Resolve: Markets Wrap
[Reuters] US Consumer Price Index unchanged in June vs 0.2% increase expected
[Bloomberg] Second Straight Drop in U.S. Retail Sales Shows Tepid Spending
[Bloomberg] Inflation May Take Longer to Reach Fed's Goal After Today's CPI Report
[Reuters] Exclusive: ECB wary of putting end-date on quantitative easing - sources
[Bloomberg] Markets Worry Trump May Have to Use Obama’s Secret Debt Ceiling Plan
[Bloomberg] Anbang's Fall Closes Wild Chapter in China's Insurance Industry
[Bloomberg] Same Rules, Flatter Curve No Problem for Invincible Bank Stocks
[Bloomberg] Climate Change May Bring Disasters and Deeper Poverty to Asia
[WSJ] First-Time Home Buyers Show More Interest in Market
[Reuters] 'Get Used to It' China Says as It Flies Bombers Near Japan
[Reuters] US Consumer Price Index unchanged in June vs 0.2% increase expected
[Bloomberg] Second Straight Drop in U.S. Retail Sales Shows Tepid Spending
[Bloomberg] Inflation May Take Longer to Reach Fed's Goal After Today's CPI Report
[Reuters] Exclusive: ECB wary of putting end-date on quantitative easing - sources
[Bloomberg] Markets Worry Trump May Have to Use Obama’s Secret Debt Ceiling Plan
[Bloomberg] Anbang's Fall Closes Wild Chapter in China's Insurance Industry
[Bloomberg] Same Rules, Flatter Curve No Problem for Invincible Bank Stocks
[Bloomberg] Climate Change May Bring Disasters and Deeper Poverty to Asia
[WSJ] First-Time Home Buyers Show More Interest in Market
[Reuters] 'Get Used to It' China Says as It Flies Bombers Near Japan
Thursday Evening Links
[Bloomberg] U.S. Stocks Rise, Treasuries Slide as Oil Rebounds: Markets Wrap
[Reuters] Trump says he is considering quotas, tariffs on Chinese steel dumping
[Bloomberg] They’re The World’s Fastest Traders. Why Aren’t They Thriving?
[NYT] Yellen Treads Carefully on Regulatory Issues in Senate Panel Appearance
[FT] Cohn in the frame to lead Fed as Trump looks beyond economists
[FT] Uncoordinated QE shift has investors worried
[Reuters] Exclusive: U.S. prepares new sanctions on Chinese firms over North Korea ties - officials
[Reuters] Trump says he is considering quotas, tariffs on Chinese steel dumping
[Bloomberg] They’re The World’s Fastest Traders. Why Aren’t They Thriving?
[NYT] Yellen Treads Carefully on Regulatory Issues in Senate Panel Appearance
[FT] Cohn in the frame to lead Fed as Trump looks beyond economists
[FT] Uncoordinated QE shift has investors worried
[Reuters] Exclusive: U.S. prepares new sanctions on Chinese firms over North Korea ties - officials
Wednesday, July 12, 2017
Thursday's News Links
[Bloomberg] Relief Rally Spurs Stocks to Record; Dollar Falls: Markets Wrap
[Reuters] ECB to announce winding down of bond purchases in September: WSJ
[Reuters] US producer prices unexpectedly rise on services
[Reuters] Feuding U.S. Senate Republicans to get revised healthcare bill
[Reuters] Global policy shift exposes BOJ yield curve control flaw
[Bloomberg] China June Exports Rise 17.3% as Global Trade Rebound Continues
[Reuters] First tech, now financing: U.S. shale firms get creative to pump more oil
[Bloomberg] Used-Car ‘Time Bomb’ Expected to Drag on U.S. Auto Sales
[Bloomberg] Volatility Index Could Double in the Next 12 Months, Says Natixis
[Bloomberg] Behind China's Boldest Dealmaker, Billions in Pledged Shares
[Bloomberg] China's Outbound Investment Slumps 46% as Company Spree Curbed
[WSJ] Draghi May Address Future of ECB Stimulus at Jackson Hole
[WSJ] Chinese Banks Continued to Exceed Loan-Volume Expectations in June
[FT] Fed chair Yellen gives succour to inflation doves
[FT] Who will chair the Federal Reserve after Yellen?
[FT] China financial ‘windstorm’ eases as central bank injects cash
[FT] Canada’s rate rise is latest shift in global central bank policy
[Reuters] ECB to announce winding down of bond purchases in September: WSJ
[Reuters] US producer prices unexpectedly rise on services
[Reuters] Feuding U.S. Senate Republicans to get revised healthcare bill
[Reuters] Global policy shift exposes BOJ yield curve control flaw
[Bloomberg] China June Exports Rise 17.3% as Global Trade Rebound Continues
[Reuters] First tech, now financing: U.S. shale firms get creative to pump more oil
[Bloomberg] Used-Car ‘Time Bomb’ Expected to Drag on U.S. Auto Sales
[Bloomberg] Volatility Index Could Double in the Next 12 Months, Says Natixis
[Bloomberg] Behind China's Boldest Dealmaker, Billions in Pledged Shares
[Bloomberg] China's Outbound Investment Slumps 46% as Company Spree Curbed
[WSJ] Draghi May Address Future of ECB Stimulus at Jackson Hole
[WSJ] Chinese Banks Continued to Exceed Loan-Volume Expectations in June
[FT] Fed chair Yellen gives succour to inflation doves
[FT] Who will chair the Federal Reserve after Yellen?
[FT] China financial ‘windstorm’ eases as central bank injects cash
[FT] Canada’s rate rise is latest shift in global central bank policy
Wednesday Evening Links
[Bloomberg] U.S. Stocks, Bonds Jump on Go-Slow Fed; Oil Climbs: Markets Wrap
[Reuters] Fed's Yellen says rate and portfolio plans on track, cautions on inflation
[Bloomberg] Yellen's Take on Inflation Shifts Subtly in Remarks to Congress
[Bloomberg] Beige Book Adds to Fed's Conundrum Over Jobs and Wages
[Bloomberg] Why Credit Spreads Are Resisting Threats From Rising Rates
[Bloomberg] Investors Don't Hate All Fund Managers, Just U.S. Stock-Pickers
[CNBC] A big deal in nonprime mortgages proves leery investors are finally hungry again
[Reuters] S&P warns more sovereign downgrades likely this year
[Reuters] Credit market a bigger systemic risk than during 2008 crisis: Bank of England
[CNBC] Two major Wall Street banks are saying stocks will struggle the rest of the summer
[CNBC] Machines taking over hedge funds despite lack of evidence they outperform humans
[Bloomberg] The Bank of Canada Shows It's the Federal Reserve of the North
[WSJ] Yellen: Inflation Should Rebound, but Fed Could Alter Policy if Softness Persists
[WSJ] China’s Booming Housing Market Proves Impossible to Tame
[Reuters] Fed's Yellen says rate and portfolio plans on track, cautions on inflation
[Bloomberg] Yellen's Take on Inflation Shifts Subtly in Remarks to Congress
[Bloomberg] Beige Book Adds to Fed's Conundrum Over Jobs and Wages
[Bloomberg] Why Credit Spreads Are Resisting Threats From Rising Rates
[Bloomberg] Investors Don't Hate All Fund Managers, Just U.S. Stock-Pickers
[CNBC] A big deal in nonprime mortgages proves leery investors are finally hungry again
[Reuters] S&P warns more sovereign downgrades likely this year
[Reuters] Credit market a bigger systemic risk than during 2008 crisis: Bank of England
[CNBC] Two major Wall Street banks are saying stocks will struggle the rest of the summer
[CNBC] Machines taking over hedge funds despite lack of evidence they outperform humans
[Bloomberg] The Bank of Canada Shows It's the Federal Reserve of the North
[WSJ] Yellen: Inflation Should Rebound, but Fed Could Alter Policy if Softness Persists
[WSJ] China’s Booming Housing Market Proves Impossible to Tame
Tuesday, July 11, 2017
Wednesday's News Links
[Bloomberg] U.S. Stocks, Bonds Jump on Go-Slow Fed; Oil Climbs: Markets Wrap
[Reuters] Oil rises above $48 as API reports drop in U.S. fuel stocks
[CNBC] Yellen indicates that Fed may not need to hike rates much more
[Bloomberg] Janet Yellen Says Low Inflation Still Major Source of Uncertainty
[CNBC] States in crisis: Embroiled in the worst budget battles since the Great Recession
[Bloomberg] Latin America's Roiling Scandals Burn Emerging-Market Bond Funds
[WSJ] Yellen: ‘Gradual’ Rate Increases Will Be Needed to Sustain Economic Expansion
[WSJ] Shifting Monetary-Policy Outlook Imperils Rally in Emerging Markets
[FT] Fed’s new banking watchdog likely to ease burden of stress tests
[Reuters] Taiwan says Chinese carrier sails into its defense zone
[Bloomberg] Scientists Say Massive Iceberg Has Broken Off in Antarctica
[Reuters] Oil rises above $48 as API reports drop in U.S. fuel stocks
[CNBC] Yellen indicates that Fed may not need to hike rates much more
[Bloomberg] Janet Yellen Says Low Inflation Still Major Source of Uncertainty
[CNBC] States in crisis: Embroiled in the worst budget battles since the Great Recession
[Bloomberg] Latin America's Roiling Scandals Burn Emerging-Market Bond Funds
[WSJ] Yellen: ‘Gradual’ Rate Increases Will Be Needed to Sustain Economic Expansion
[WSJ] Shifting Monetary-Policy Outlook Imperils Rally in Emerging Markets
[FT] Fed’s new banking watchdog likely to ease burden of stress tests
[Reuters] Taiwan says Chinese carrier sails into its defense zone
[Bloomberg] Scientists Say Massive Iceberg Has Broken Off in Antarctica
Tuesday Evening Links
[Reuters] Trump seen replacing Yellen at Fed with NEC's Cohn: Politico
[Reuters] Wall Street partly recovers after falling on Trump Jr emails
[Reuters] Fed should start reducing balance sheet 'soon': Brainard
[Bloomberg] Three Key Economic Questions Facing Yellen in Congress This Week
[Bloomberg] Investors Are Jumping Back Into Hedge Funds
[Reuters] Wall Street partly recovers after falling on Trump Jr emails
[Reuters] Fed should start reducing balance sheet 'soon': Brainard
[Bloomberg] Three Key Economic Questions Facing Yellen in Congress This Week
[Bloomberg] Investors Are Jumping Back Into Hedge Funds
Monday, July 10, 2017
Tuesday's News Links
[Bloomberg] Stocks Follow Crude Prices Lower as Dollar Climbs: Markets Wrap
[Bloomberg] Oil Slides as Saudi Arabia Is Said to Produce Above Output Cap
[Reuters] Trump to nominate Quarles to be Fed's top banking regulator
[Bloomberg] When Janet Yellen Talks, This Is What Traders Will Be Listening For
[Reuters] Fed's Williams still sees rate hike, asset unwinding this year
[Bloomberg] Dimon Says Unwinding QE May Be More Disruptive Than You Think
[Bloomberg] Winds Shift for Emerging-Market Debt
[Bloomberg] The $68 Billion Reason Why China May Start Adding Cash Again
[Bloomberg] Abe Seeks to Avoid Repeat of His Swift Demise a Decade Ago
[WSJ] Trump to Nominate Randal Quarles as Fed Bank Regulator
[WSJ] China’s Central Bank Is Battling Investors at Home Over the Yuan
[FT] A decade later investors are once more dancing furiously
[Reuters] China says 'China responsibility theory' on North Korea has to stop
[Bloomberg] Oil Slides as Saudi Arabia Is Said to Produce Above Output Cap
[Reuters] Trump to nominate Quarles to be Fed's top banking regulator
[Bloomberg] When Janet Yellen Talks, This Is What Traders Will Be Listening For
[Reuters] Fed's Williams still sees rate hike, asset unwinding this year
[Bloomberg] Dimon Says Unwinding QE May Be More Disruptive Than You Think
[Bloomberg] Winds Shift for Emerging-Market Debt
[Bloomberg] The $68 Billion Reason Why China May Start Adding Cash Again
[Bloomberg] Abe Seeks to Avoid Repeat of His Swift Demise a Decade Ago
[WSJ] Trump to Nominate Randal Quarles as Fed Bank Regulator
[WSJ] China’s Central Bank Is Battling Investors at Home Over the Yuan
[FT] A decade later investors are once more dancing furiously
[Reuters] China says 'China responsibility theory' on North Korea has to stop
Sunday, July 9, 2017
Monday's News Links
[Bloomberg] U.S. Stocks Rise on Tech Bounce, Commodities Gain: Markets Wrap
[Reuters] Oil falls as evidence points to rising global supply
[Bloomberg] Trading Halts, Confusion From India to Indonesia on Manic Monday
[Bloomberg] Deutsche Sees Trouble Ahead for the World's ‘Frothy’ Stock Markets
[Reuters] Trump's healthcare push faces trouble as Congress returns
[USAT] Yellen could give clues on rates, balance sheet
[Bloomberg] Crisis Flashback: The Big Downgrade That Fueled a Subprime Crash
[Bloomberg] China's Producer Price Inflation Steadies as Demand Remains Robust
[Reuters] Japan PM Abe to reshuffle cabinet as support plunges to lowest since 2012
[Bloomberg] BOJ Draws Line in Sand But Faces Battle to Cap Bond Yields
[Bloomberg] Markets No Longer Make Sense to Macro Managers
[WSJ] ECB Taper Talk Puts Spotlight on Italy
[WSJ] Weak Inflation Raises Questions About Traditional Model Linking Output and Prices
[WSJ] Oil Up? Oil Down? Blame the Algorithms
[FT] Warning of BoJ battle to keep bond yields near zero
[NYT] Wanda Signals Retreat on Debt-Fueled Acquisition Binge
[Reuters] Oil falls as evidence points to rising global supply
[Bloomberg] Trading Halts, Confusion From India to Indonesia on Manic Monday
[Bloomberg] Deutsche Sees Trouble Ahead for the World's ‘Frothy’ Stock Markets
[Reuters] Trump's healthcare push faces trouble as Congress returns
[USAT] Yellen could give clues on rates, balance sheet
[Bloomberg] Crisis Flashback: The Big Downgrade That Fueled a Subprime Crash
[Bloomberg] China's Producer Price Inflation Steadies as Demand Remains Robust
[Reuters] Japan PM Abe to reshuffle cabinet as support plunges to lowest since 2012
[Bloomberg] BOJ Draws Line in Sand But Faces Battle to Cap Bond Yields
[Bloomberg] Markets No Longer Make Sense to Macro Managers
[WSJ] ECB Taper Talk Puts Spotlight on Italy
[WSJ] Weak Inflation Raises Questions About Traditional Model Linking Output and Prices
[WSJ] Oil Up? Oil Down? Blame the Algorithms
[FT] Warning of BoJ battle to keep bond yields near zero
[NYT] Wanda Signals Retreat on Debt-Fueled Acquisition Binge
Sunday Evening Links
[Bloomberg] Stocks Signal Small Gain as Bonds Remain Pressured: Markets Wrap
[Reuters] Plan for U.S. tax increase on rich not being considered: Mnuchin
[Bloomberg] Sovereign Wealth Fund GIC Warns Investors Aren't Fearful Enough
[Bloomberg] China's Bond Trading Takes on a New Twist
[Reuters] Plan for U.S. tax increase on rich not being considered: Mnuchin
[Bloomberg] Sovereign Wealth Fund GIC Warns Investors Aren't Fearful Enough
[Bloomberg] China's Bond Trading Takes on a New Twist
Saturday, July 8, 2017
Sunday, July 9, 2017
[Reuters] Hong Kong's mortgage lenders doing booming business in the shadows
[Barron's] Man vs. Machine: How Has Indexing Changed the Market?
[The Hill] GOP pessimism rising on ObamaCare repeal
[FT] Federal Reserve hits back at monetary policy critics
[FT] What will Janet Yellen say about US rates policy before Congress?
[FT] Volatility flickers back to life in financial markets
[Barron's] Man vs. Machine: How Has Indexing Changed the Market?
[The Hill] GOP pessimism rising on ObamaCare repeal
[FT] Federal Reserve hits back at monetary policy critics
[FT] What will Janet Yellen say about US rates policy before Congress?
[FT] Volatility flickers back to life in financial markets
Saturday's News Links
[Bloomberg] U.S. Squeezes Steel Concessions From G-20 After Tariff Threat
[Reuters] G20 communique agreed apart from climate issue: EU officials
[Bloomberg] ECB's Villeroy Sees Autumn as the Season to Adapt Stimulus Plan
[Bloomberg] ECB Officials Disagree on How Much Is Too Much for Stimulus Plan
[FT] The shadow of tighter money falls on markets
[FT] BlackRock exchange traded funds hit new record inflows of $140bn
[Reuters] G20 communique agreed apart from climate issue: EU officials
[Bloomberg] ECB's Villeroy Sees Autumn as the Season to Adapt Stimulus Plan
[Bloomberg] ECB Officials Disagree on How Much Is Too Much for Stimulus Plan
[FT] The shadow of tighter money falls on markets
[FT] BlackRock exchange traded funds hit new record inflows of $140bn
Friday, July 7, 2017
Weekly Commentary: Wonderful Monetary Policy and Beautiful Deleveragings
“Generally speaking (depending on the country), it is appropriate for central banks to lessen the aggressiveness of their unconventional policies because these policies have successfully brought about beautiful deleveragings. In my opinion, at this point of transition, we should savor this accomplishment and thank the policy makers who fought to bring about these policies. They had to fight hard to do it and have been more maligned than appreciated. Let’s thank them.” Ray Dalio, July 6, 2017
I find his choice of words inflammatory, but I guess when you’re worth $16.8bn (Forbes) you can write what and how you please. In past CBBs I took strong exception with Ray Dalio’s “beautiful deleveraging” thesis. Data these days speak incontrovertibly to the fact that from a systemic standpoint there has been a huge accumulation of additional debt – at home and globally. The notion of deleveraging is a myth. It is the unprecedented inflation of “money” at the very foundation of global finance that is real. As for “wonderful monetary policy,” at best the jury’s still out. I’ll be shocked if we look back in five or ten years and tag this period’s monetary management in a positive light.
Dalio is somewhat of an enigma. Highly intelligent and hugely successful in the markets ($160bn hedge fund empire), he is one of this era’s foremost “deep thinkers”. I enjoy reading his analysis and share his concerns for social and geopolitical instability. But I see flawed monetary management - and resulting Bubbles/busts and wealth redistribution/destruction - as a major agent to these instabilities. Dalio sees “wonderful monetary policy” as a positive force, while I see radical policy experimentation with disastrous consequences.
It’s what Dalio doesn’t address that I find most intriguing: How much financial sector leverage has accumulated over the past nine years of near-zero rates and unprecedented central bank market liquidity injections and backstopping? How has the expansion of global financial sector leverage (including central bank balance sheets and speculative leveraging) distorted traditional indicators of systemic stability – such as corporate and household debt, debt service capacity and market risk premia.
Monetary policy and associated financial leveraging have significantly reduced debt service burdens for going on a decade, in the process lessening overall debt growth for households and businesses alike. I would also argue that Trillions of liquidity injections into the markets have flowed into real economies, again working to mitigate private-sector debt accumulation. The massive inflation of central bank and government balance sheets has indeed improved the outward appearance of private-sector finances. This has superficially “brought about balance sheet repairs” for traditional weak-link household and corporate borrowers. I’m just not convinced these remain the most germane structures for gauging global Bubble systemic fragilities.
Dalio has been a hedge fund “risk parity” pioneer. “Risk parity is a portfolio allocation strategy based on targeting risk levels across the various components of an investment portfolio… Risk parity considers four different components: equities, credit, interest rates and commodities, and attempts to spread risk evenly across the asset classes. The goal of risk parity investing is to earn the same level of return with less volatility and risk, or to realize better returns with an equal amount of risk and volatility…” (Investopedia).
Few strategies have so greatly benefited from nine years of radical monetary management. A portfolio of diversified asset classes (most notably equities, bonds and corporate Credit) - all enjoying simultaneous central bank-induced price inflation - has been a huge and surefire winner. The more leverage the better. And, importantly, no drag on performance from hedging or de-risking during recurring bouts of market instability, not with the inherent market “hedge” from managing a diversified portfolio with a significant bond component. It’s just been the best of all worlds.
“Wonderful Monetary Policy” has ensured that any successful strategy is inundated with financial inflows. Dalio’s Bridgewater has seen assets under management swell to $160 billion. Hundreds of billions more have gravitated to similar strategies. The proliferation of diversified multi-asset class strategies (leveraged and otherwise) has been a powerful force behind the synchronized inflation of prices for securities and corporate Credit across the globe. As central banks prepare to remove aggressive stimulus, I would expect many strategies that have enjoyed long (nine years!) and consistent success to now face significant challenges.
July 7 – Bloomberg (Dani Burger): “Hawkish signals from central bankers have punished stocks and bonds alike in the past week. Also punished: investors who make a living operating in several asset classes at once. They’ve been stung by the concerted selloff that lifted 10-year Treasury yields by 25 bps and sent tech stocks to the biggest losses in 16 months. Among the hardest-hit were systematic funds who -- either to diversify or maximize gains -- dip their toes in a hodgepodge of different markets all at the same time. Losses stand out in two of the best-known quant strategies, trend-following traders known as commodity trading advisers, and risk parity funds. CTAs dropped 5.1% over the past two weeks, their worst stretch since 2007, according to a Societe General SA database of the 20 largest managers. The Salient Risk Parity Index dropped 1.8%, the most in four months.”
Dalio: “Central bankers have clearly and understandably told us that henceforth those flows from their punch bowls will be tapered rather than increased—i.e., that the directions of policy are reversing so we are at a) the end of that nine-year era of continuous pressings down on interest rates and pushing out of money that created the liquidity-fueled moves in the economies and markets, and b) the beginning of the late-cycle phase of the business/short-term debt cycle, in which central bankers try to tighten at paces that are exactly right in order to keep growth and inflation neither too hot nor too cold, until they don’t get it right and we have our next downturn. Recognizing that, our responsibility now is to keep dancing but closer to the exit and with a sharp eye on the tea leaves.”
Fascinating analysis. “Central bankers have clearly and understandably told us that henceforth those flows from their punch bowls will be tapered… that the directions of policy are reversing… Our responsibility now is to keep dancing but closer to the exit and with a sharp eye on the tea leaves.”
The problem is that tea leaves reading “head for the exits” risk inciting a stampede. These fund complexes and speculative strategies have become gigantic within an overall marketplace structure more vulnerable than ever. In what will now be a common theme, who will take the other side of the trade when the enormous “risk parity” crowd moves to de-risk. Who will have the wherewithal to step up and buy when asset prices across the board come under pressure? How quickly will perceived low-risk strategies face major redemptions when performance turns sour? This has become a systemic issue, recognizing the massive flows into equities, bonds and corporate Credit – with the ETF complex surpassing $4.0 TN of assets. There has never been anything similar to trend-following (speculative) finance so dictating market dynamics.
This is not some nebulous issue going unexplored by market players. There are, however, three key aspects to this issue that are unknowable – and have, to this point, been easily dismissed in the exuberance of a central bank-administered marketplace: First, how much leverage has been employed throughout the securities markets – in the U.S. and globally? Second, how much embedded leverage has accumulated in global derivatives markets? And third, what is the scope of market risk that has (or expects to be) offloaded to dynamically hedged derivatives trading strategies (that will be forced to sell into declining markets to hedge exposures)?
And a few thoughts on Dalio’s, “The beginning of the late-cycle phase of the business/short-term debt cycle, in which central bankers try to tighten at paces that are exactly right in order to keep growth and inflation neither too hot nor too cold, until they don’t get it right and we have our next downturn.”
I have issues with such analysis. “Central bankers” trying to get things “exactly right”? The next downturn comes when they “don’t get it right”? Well, let’s not lose sight of the reality that central bankers are nine years into an unprecedented reflationary experiment. To this point, rightly or wrongly, they’ve orchestrated historic securities and asset market inflation. Yet central banks will at some point lose control of the global financial Bubble, at which time they will have fully lost control of inflation and growth dynamics. The notion that this continues so long as they “get it right” really suggests that central bankers must remain pro-Bubble.
It’s these days not difficult to explain how the structure of the U.S. household balance sheet appears in good shape (net worth approaching $100 TN!). The structure of the corporate balance sheet is surely solid as well, at least from the perspective of strong earnings and cash-flow. With rates so low and markets abundantly liquid, it’s easy to argue that the federal government balance sheet, while having ballooned massively, remains quite manageable. Conventional analysis, then, views the entire structure of the greater U.S. balance sheet as solid and immune to crisis dynamics.
Yet traditional analysis misses the prevailing vulnerability that emanates from this most unusual of Credit and Speculative Cycles: The Structure of Global Financial Market Risk. Central banks inflated an unprecedented market Bubble, slashing rates, adding Trillions of liquidity and repeatedly intervening to stem fledgling “Risk Off” Dynamics. Perceptions of low risk have over years stoked the accumulation of unprecedented systemic risk (including price, liquidity, Credit, counterparty, policy, economic, social, political, geopolitical and so on)
Over nine years, this has led to deeply embedded market misperceptions, perhaps most importantly that risk assets enjoy money-like attributes of liquidity and safety. Moreover, that central banks will ensure rising asset prices. These misperceptions have spurred Trillions of flows, with a major chunk jumping aboard the equity and fixed-income bull markets via the ETF complex.
Within the leveraged speculating community, hundreds of billions flowed into “risk parity,” CTAs (“a CTA fund is a hedge fund that uses futures contracts to achieve its investment objective”) and other trend-following strategies. Meanwhile, zero rates and central bank control over securities markets have ensured a derivatives boom like no other – derivatives to leverage securities, to employ international “carry trade” speculations, to exploit Credit spreads, to write myriad variations of market “insurance,” to hedge risk and to implement about whatever strategy imaginable.
I would posit that global market Bubbles today rest tenuously upon the false premise that central banks can get it right when it comes to managing market risk and liquidity. In reality, central banks have created an Unsustainable Market Structure with increasingly acute latent fragilities. It’s impossible to “get it right,” because Bubbles are by their nature unsustainable.
Today’s global Bubble works only so long as securities values continue to inflate. Market inflation is dependent upon unrelenting central bank stimulus and backstops. It will all falter badly in reverse. And all the “money” that has chased central bank-induced market returns – from “risk parity” to corporate bond and equity index ETFs to derivatives strategies – creates vulnerability to an abrupt shift in perceptions, followed by illiquidity and market dislocation.
Markets this week were again showing indications of vulnerability. Global yields remain on the rise. German bund yields jumped 11 bps to an 18-month high 0.57%. French yields rose 13 bps to 0.94%. The largest yield spikes, however, were at the “periphery.” Italian and Spanish 10-year yields surged 19 bps to 2.34% and 1.73% - with Italian yields near two-year highs.
It’s also worth noting that emerging bond markets faced increased selling (EM bond ETF down 1.3% this week). Local EM bond markets were under heavy selling pressure. Ten-year yields surged 28 bps in Turkey, 21 bps in Indonesia, 21 bps in Russia, 22 bps in Colombia, 12 bps in Brazil and 11 bps in South Africa. Dollar-denominated EM bonds were not spared. Yields rose 20 bps in Turkey, 19 bps in Argentina, 13 bps in Brazil, 12 bps in Mexico, 15 bps in Colombia and 10 bps in Russia.
July 6 – Bloomberg (Liz McCormick and Lananh Nguyen): “With yields surging across major economies as more central banks hint at joining the Federal Reserve in tightening policy, strategists are pointing to a likely loser: emerging-market currencies. The fallout is already being felt in the foreign-exchange market as investors eye the end of an era of unprecedented stimulus. An MSCI index of emerging-market currencies hovered near a seven-week low Thursday as yields on Treasuries and bunds rose to fresh highs. In 2006, the last time investors braced for steeper borrowing costs in the biggest economies, the index lost almost 5% of its value in a span of weeks, while developing-market stocks plunged.”
When it comes to Market Structures vulnerable after nine years of runaway global monetary stimulus, look no further than EM. Despite all the corruption, fraud, political turmoil and nonsense that one would anticipate from a prolonged period of egregiously easy “money,” finance has nonetheless flowed lavishly to EM (with its relatively high-yielding debt markets and growth opportunities). Over recent months, with blow-off dynamics enveloping risk markets worldwide, huge flows gravitated to EM. Much of this “money” was intermediated through the ETF complex. How much was purely trend-following?
While traditional analysis would look first to U.S. economic fundamentals (including household and corporate debt, earnings, employment and inflation) for indications of underlying market vulnerability, I would point instead to Global Market Bubble Dynamics – while reminding readers that the current backdrop is distinct to previous Bubble experiences. As such, market indicators this week at the periphery – EM as well as European – were flashing heightened susceptibility to de-risking/de-leveraging and the potential for liquidity challenges. Considering the enormity of recent flows, perhaps EM will provide an early test for the thesis of Market Structural Vulnerabilities.
Here at home, 10-year Treasury yields rose eight bps to 2.39%. In equities, there was more of this choppy topping-action rotation away from tech/high-flyers and into financials/laggards. Corporate debt markets are beginning to feel the strain of rising global yields. High-yield bond funds saw another $1.1bn of outflows, though investment-grade corporates are still attracting large inflows. The high-yield ETF (HYG) traded near a two-month low. Commodities, as well, seemed to support the thesis of fledgling “Risk Off” and waning liquidity. With crude down almost 4%, the GSCI Commodities Index dropped 1.8%. Copper fell 2.4% and gold lost 2.3%. But it was wild trading in silver (down 7.2%) that might have provided a harbinger of more general market liquidity issues to come.
That Treasuries, equities, corporate Credit and commodities all seem to be indicating a (thus far subtle) shift in market liquidity, we can look to “risk parity” - and similar multi-asset class strategies that incorporate leverage – as a possible weak link in a Vulnerable Global Market Structure. And we’re supposed to savor this moment and pay a debt of gratitude to courageous central bankers? Strange world.
I find his choice of words inflammatory, but I guess when you’re worth $16.8bn (Forbes) you can write what and how you please. In past CBBs I took strong exception with Ray Dalio’s “beautiful deleveraging” thesis. Data these days speak incontrovertibly to the fact that from a systemic standpoint there has been a huge accumulation of additional debt – at home and globally. The notion of deleveraging is a myth. It is the unprecedented inflation of “money” at the very foundation of global finance that is real. As for “wonderful monetary policy,” at best the jury’s still out. I’ll be shocked if we look back in five or ten years and tag this period’s monetary management in a positive light.
Dalio is somewhat of an enigma. Highly intelligent and hugely successful in the markets ($160bn hedge fund empire), he is one of this era’s foremost “deep thinkers”. I enjoy reading his analysis and share his concerns for social and geopolitical instability. But I see flawed monetary management - and resulting Bubbles/busts and wealth redistribution/destruction - as a major agent to these instabilities. Dalio sees “wonderful monetary policy” as a positive force, while I see radical policy experimentation with disastrous consequences.
It’s what Dalio doesn’t address that I find most intriguing: How much financial sector leverage has accumulated over the past nine years of near-zero rates and unprecedented central bank market liquidity injections and backstopping? How has the expansion of global financial sector leverage (including central bank balance sheets and speculative leveraging) distorted traditional indicators of systemic stability – such as corporate and household debt, debt service capacity and market risk premia.
Monetary policy and associated financial leveraging have significantly reduced debt service burdens for going on a decade, in the process lessening overall debt growth for households and businesses alike. I would also argue that Trillions of liquidity injections into the markets have flowed into real economies, again working to mitigate private-sector debt accumulation. The massive inflation of central bank and government balance sheets has indeed improved the outward appearance of private-sector finances. This has superficially “brought about balance sheet repairs” for traditional weak-link household and corporate borrowers. I’m just not convinced these remain the most germane structures for gauging global Bubble systemic fragilities.
Dalio has been a hedge fund “risk parity” pioneer. “Risk parity is a portfolio allocation strategy based on targeting risk levels across the various components of an investment portfolio… Risk parity considers four different components: equities, credit, interest rates and commodities, and attempts to spread risk evenly across the asset classes. The goal of risk parity investing is to earn the same level of return with less volatility and risk, or to realize better returns with an equal amount of risk and volatility…” (Investopedia).
Few strategies have so greatly benefited from nine years of radical monetary management. A portfolio of diversified asset classes (most notably equities, bonds and corporate Credit) - all enjoying simultaneous central bank-induced price inflation - has been a huge and surefire winner. The more leverage the better. And, importantly, no drag on performance from hedging or de-risking during recurring bouts of market instability, not with the inherent market “hedge” from managing a diversified portfolio with a significant bond component. It’s just been the best of all worlds.
“Wonderful Monetary Policy” has ensured that any successful strategy is inundated with financial inflows. Dalio’s Bridgewater has seen assets under management swell to $160 billion. Hundreds of billions more have gravitated to similar strategies. The proliferation of diversified multi-asset class strategies (leveraged and otherwise) has been a powerful force behind the synchronized inflation of prices for securities and corporate Credit across the globe. As central banks prepare to remove aggressive stimulus, I would expect many strategies that have enjoyed long (nine years!) and consistent success to now face significant challenges.
July 7 – Bloomberg (Dani Burger): “Hawkish signals from central bankers have punished stocks and bonds alike in the past week. Also punished: investors who make a living operating in several asset classes at once. They’ve been stung by the concerted selloff that lifted 10-year Treasury yields by 25 bps and sent tech stocks to the biggest losses in 16 months. Among the hardest-hit were systematic funds who -- either to diversify or maximize gains -- dip their toes in a hodgepodge of different markets all at the same time. Losses stand out in two of the best-known quant strategies, trend-following traders known as commodity trading advisers, and risk parity funds. CTAs dropped 5.1% over the past two weeks, their worst stretch since 2007, according to a Societe General SA database of the 20 largest managers. The Salient Risk Parity Index dropped 1.8%, the most in four months.”
Dalio: “Central bankers have clearly and understandably told us that henceforth those flows from their punch bowls will be tapered rather than increased—i.e., that the directions of policy are reversing so we are at a) the end of that nine-year era of continuous pressings down on interest rates and pushing out of money that created the liquidity-fueled moves in the economies and markets, and b) the beginning of the late-cycle phase of the business/short-term debt cycle, in which central bankers try to tighten at paces that are exactly right in order to keep growth and inflation neither too hot nor too cold, until they don’t get it right and we have our next downturn. Recognizing that, our responsibility now is to keep dancing but closer to the exit and with a sharp eye on the tea leaves.”
Fascinating analysis. “Central bankers have clearly and understandably told us that henceforth those flows from their punch bowls will be tapered… that the directions of policy are reversing… Our responsibility now is to keep dancing but closer to the exit and with a sharp eye on the tea leaves.”
The problem is that tea leaves reading “head for the exits” risk inciting a stampede. These fund complexes and speculative strategies have become gigantic within an overall marketplace structure more vulnerable than ever. In what will now be a common theme, who will take the other side of the trade when the enormous “risk parity” crowd moves to de-risk. Who will have the wherewithal to step up and buy when asset prices across the board come under pressure? How quickly will perceived low-risk strategies face major redemptions when performance turns sour? This has become a systemic issue, recognizing the massive flows into equities, bonds and corporate Credit – with the ETF complex surpassing $4.0 TN of assets. There has never been anything similar to trend-following (speculative) finance so dictating market dynamics.
This is not some nebulous issue going unexplored by market players. There are, however, three key aspects to this issue that are unknowable – and have, to this point, been easily dismissed in the exuberance of a central bank-administered marketplace: First, how much leverage has been employed throughout the securities markets – in the U.S. and globally? Second, how much embedded leverage has accumulated in global derivatives markets? And third, what is the scope of market risk that has (or expects to be) offloaded to dynamically hedged derivatives trading strategies (that will be forced to sell into declining markets to hedge exposures)?
And a few thoughts on Dalio’s, “The beginning of the late-cycle phase of the business/short-term debt cycle, in which central bankers try to tighten at paces that are exactly right in order to keep growth and inflation neither too hot nor too cold, until they don’t get it right and we have our next downturn.”
I have issues with such analysis. “Central bankers” trying to get things “exactly right”? The next downturn comes when they “don’t get it right”? Well, let’s not lose sight of the reality that central bankers are nine years into an unprecedented reflationary experiment. To this point, rightly or wrongly, they’ve orchestrated historic securities and asset market inflation. Yet central banks will at some point lose control of the global financial Bubble, at which time they will have fully lost control of inflation and growth dynamics. The notion that this continues so long as they “get it right” really suggests that central bankers must remain pro-Bubble.
It’s these days not difficult to explain how the structure of the U.S. household balance sheet appears in good shape (net worth approaching $100 TN!). The structure of the corporate balance sheet is surely solid as well, at least from the perspective of strong earnings and cash-flow. With rates so low and markets abundantly liquid, it’s easy to argue that the federal government balance sheet, while having ballooned massively, remains quite manageable. Conventional analysis, then, views the entire structure of the greater U.S. balance sheet as solid and immune to crisis dynamics.
Yet traditional analysis misses the prevailing vulnerability that emanates from this most unusual of Credit and Speculative Cycles: The Structure of Global Financial Market Risk. Central banks inflated an unprecedented market Bubble, slashing rates, adding Trillions of liquidity and repeatedly intervening to stem fledgling “Risk Off” Dynamics. Perceptions of low risk have over years stoked the accumulation of unprecedented systemic risk (including price, liquidity, Credit, counterparty, policy, economic, social, political, geopolitical and so on)
Over nine years, this has led to deeply embedded market misperceptions, perhaps most importantly that risk assets enjoy money-like attributes of liquidity and safety. Moreover, that central banks will ensure rising asset prices. These misperceptions have spurred Trillions of flows, with a major chunk jumping aboard the equity and fixed-income bull markets via the ETF complex.
Within the leveraged speculating community, hundreds of billions flowed into “risk parity,” CTAs (“a CTA fund is a hedge fund that uses futures contracts to achieve its investment objective”) and other trend-following strategies. Meanwhile, zero rates and central bank control over securities markets have ensured a derivatives boom like no other – derivatives to leverage securities, to employ international “carry trade” speculations, to exploit Credit spreads, to write myriad variations of market “insurance,” to hedge risk and to implement about whatever strategy imaginable.
I would posit that global market Bubbles today rest tenuously upon the false premise that central banks can get it right when it comes to managing market risk and liquidity. In reality, central banks have created an Unsustainable Market Structure with increasingly acute latent fragilities. It’s impossible to “get it right,” because Bubbles are by their nature unsustainable.
Today’s global Bubble works only so long as securities values continue to inflate. Market inflation is dependent upon unrelenting central bank stimulus and backstops. It will all falter badly in reverse. And all the “money” that has chased central bank-induced market returns – from “risk parity” to corporate bond and equity index ETFs to derivatives strategies – creates vulnerability to an abrupt shift in perceptions, followed by illiquidity and market dislocation.
Markets this week were again showing indications of vulnerability. Global yields remain on the rise. German bund yields jumped 11 bps to an 18-month high 0.57%. French yields rose 13 bps to 0.94%. The largest yield spikes, however, were at the “periphery.” Italian and Spanish 10-year yields surged 19 bps to 2.34% and 1.73% - with Italian yields near two-year highs.
It’s also worth noting that emerging bond markets faced increased selling (EM bond ETF down 1.3% this week). Local EM bond markets were under heavy selling pressure. Ten-year yields surged 28 bps in Turkey, 21 bps in Indonesia, 21 bps in Russia, 22 bps in Colombia, 12 bps in Brazil and 11 bps in South Africa. Dollar-denominated EM bonds were not spared. Yields rose 20 bps in Turkey, 19 bps in Argentina, 13 bps in Brazil, 12 bps in Mexico, 15 bps in Colombia and 10 bps in Russia.
July 6 – Bloomberg (Liz McCormick and Lananh Nguyen): “With yields surging across major economies as more central banks hint at joining the Federal Reserve in tightening policy, strategists are pointing to a likely loser: emerging-market currencies. The fallout is already being felt in the foreign-exchange market as investors eye the end of an era of unprecedented stimulus. An MSCI index of emerging-market currencies hovered near a seven-week low Thursday as yields on Treasuries and bunds rose to fresh highs. In 2006, the last time investors braced for steeper borrowing costs in the biggest economies, the index lost almost 5% of its value in a span of weeks, while developing-market stocks plunged.”
When it comes to Market Structures vulnerable after nine years of runaway global monetary stimulus, look no further than EM. Despite all the corruption, fraud, political turmoil and nonsense that one would anticipate from a prolonged period of egregiously easy “money,” finance has nonetheless flowed lavishly to EM (with its relatively high-yielding debt markets and growth opportunities). Over recent months, with blow-off dynamics enveloping risk markets worldwide, huge flows gravitated to EM. Much of this “money” was intermediated through the ETF complex. How much was purely trend-following?
While traditional analysis would look first to U.S. economic fundamentals (including household and corporate debt, earnings, employment and inflation) for indications of underlying market vulnerability, I would point instead to Global Market Bubble Dynamics – while reminding readers that the current backdrop is distinct to previous Bubble experiences. As such, market indicators this week at the periphery – EM as well as European – were flashing heightened susceptibility to de-risking/de-leveraging and the potential for liquidity challenges. Considering the enormity of recent flows, perhaps EM will provide an early test for the thesis of Market Structural Vulnerabilities.
Here at home, 10-year Treasury yields rose eight bps to 2.39%. In equities, there was more of this choppy topping-action rotation away from tech/high-flyers and into financials/laggards. Corporate debt markets are beginning to feel the strain of rising global yields. High-yield bond funds saw another $1.1bn of outflows, though investment-grade corporates are still attracting large inflows. The high-yield ETF (HYG) traded near a two-month low. Commodities, as well, seemed to support the thesis of fledgling “Risk Off” and waning liquidity. With crude down almost 4%, the GSCI Commodities Index dropped 1.8%. Copper fell 2.4% and gold lost 2.3%. But it was wild trading in silver (down 7.2%) that might have provided a harbinger of more general market liquidity issues to come.
That Treasuries, equities, corporate Credit and commodities all seem to be indicating a (thus far subtle) shift in market liquidity, we can look to “risk parity” - and similar multi-asset class strategies that incorporate leverage – as a possible weak link in a Vulnerable Global Market Structure. And we’re supposed to savor this moment and pay a debt of gratitude to courageous central bankers? Strange world.
For the Week:
The S&P500 was little changed (up 8.3% y-t-d), while the Dow added 0.3% (up 8.4%). The Utilities declined 0.8% (up 5.4%). The Banks jumped 1.6% (up 5.8%), and the Broker/Dealers added 0.6% (up 0.6%). The Transports rose 1.4% (up 7.2%). The S&P 400 Midcaps were unchanged (up 5.2%), and the small cap Russell 2000 was little changed (up 4.3%). The Nasdaq100 increased 0.2% (up 16.3%), and the Morgan Stanley High Tech index added 0.2% (up 20.5%). The Semiconductors recovered 1.9% (up 16.4%). The Biotechs gained 1.2% (up 27%). With bullion sinking $28, the HUI gold index fell 3.7% (down 1.9%).
Three-month Treasury bill rates ended the week at 101 bps. Two-year government yields added two bps to 1.40% (up 21bps y-t-d). Five-year T-note yields gained six bps to 1.95% (up 2bps). Ten-year Treasury yields rose eight bps to 2.39% (down 6bps). Long bond yields jumped nine bps to 2.93% (down 14bps).
Greek 10-year yields were unchanged at 5.36% (down 166bps y-t-d). Ten-year Portuguese yields rose 13 bps to 3.16% (down 59bps). Italian 10-year yields surged 19 bps to 2.34% (up 53bps). Spain's 10-year yields rose 19 bps to 1.73% (up 35bps). German bund yields gained 11 bps to 0.57% (up 37bps). French yields jumped 13 bps to 0.94% (up 26bps). The French to German 10-year bond spread widened two bps to 37 bps. U.K. 10-year gilt yields increased five bps to 1.31% (up 7bps). U.K.'s FTSE equities index gained 0.5% (up 2.9%).
Japan's Nikkei 225 equities index slipped 0.5% (up 4.3% y-t-d). Japanese 10-year "JGB" yields were unchanged at 0.09% (up 5bps). France's CAC40 gained 0.5% (up 5.8%). The German DAX equities index rose 0.5% (up 7.9%). Spain's IBEX 35 equities index added 0.4% (up 12.2%). Italy's FTSE MIB index recovered 2.1% (up 9.3%). EM equities were mixed to lower. Brazil's Bovespa index declined 0.9% (up 3.5%), while Mexico's Bolsa increased 0.4% (up 9.7%). South Korea's Kospi fell 0.5% (up 17.4%). India’s Sensex equities index gained 1.4% (up 17.8%). China’s Shanghai Exchange added 0.8% (up 3.7%). Turkey's Borsa Istanbul National 100 index dipped 0.4% (up 28.1%). Russia's MICEX equities index rallied 1.8% (down 14.3%).
Junk bond mutual funds saw outflows of $1.155 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates jumped eight bps to 3.96% (up 55bps y-o-y). Fifteen-year rates rose five bps to 3.22% (up 48bps). The five-year hybrid ARM rate gained four bps to 3.21% (up 53bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up nine bps to 4.10% (up 46bps).
Federal Reserve Credit last week declined $4.1bn to $4.427 TN. Over the past year, Fed Credit dipped $2.8bn. Fed Credit inflated $1.616 TN, or 58%, over the past 243 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $8.2bn last week to $3.316 TN. "Custody holdings" were up $86.6bn y-o-y, or 2.7%.
M2 (narrow) "money" supply last week jumped $35.7bn to a record $13.546 TN. "Narrow money" expanded $708bn, or 5.5%, over the past year. For the week, Currency increased $2.1bn. Total Checkable Deposits surged $45.6bn, while Savings Deposits declined $10.9bn. Small Time Deposits were little changed. Retail Money Funds dipped $1.8bn.
Total money market fund assets gained $4.7bn to $2.627 TN. Money Funds fell $74bn y-o-y (2.7%).
Total Commercial Paper dropped $26.8bn to $946.8bn. CP declined $93bn y-o-y, or 8.9%.
Currency Watch:
The U.S. dollar index recovered 0.4% to 96.008 (down 6.2% y-t-d). For the week on the upside, the Brazilian real increased 0.8%, the Canadian dollar 0.7%, the Mexican peso 0.2%, and the Swedish krona 0.1%. For the week on the downside, the South African rand declined 2.3%, the Japanese yen 1.3%, the Australian dollar 1.1%, the British pound 1.0%, the South Korean won 0.9%, the New Zealand dollar 0.7%, the Swiss franc 0.6%, the Singapore dollar 0.4%, the Norwegian krone 0.3% and the euro 0.2%. The Chinese renminbi declined 0.36% versus the dollar this week (up 2.05% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index dropped 1.8% (down 8.3% y-t-d). Spot Gold lost 2.3% to $1,213 (up 5.3%). In wild trading, Silver sank 7.2% to $15.425 (down 4%). Crude fell $3.91 to $44.23 (down 18%). Gasoline declined 1.0% (down 10%), and Natural Gas sank 5.6% (down 23%). Copper dropped 2.4% (up 6%). Wheat gained another 1.7% (up 31%). Corn rose 3.0% (up 12%).
Trump Administration Watch:
July 3 – Wall Street Journal (Kristina Peterson and Michelle Hackman): “Republican senators back home on recess this week are hearing from some influential critics of their health-law effort: GOP governors, many of whom are urging them to push back on the legislation because it would cut Medicaid funding. Governors of states including Ohio, Nevada and Arkansas, which stand to lose billions of dollars in Medicaid funding under the Senate bill, want senators to keep as much of that money as possible.”
July 1 – Financial Times (Demetri Sevastopulo, Tom Mitchell and Charles Clover): “China lashed out at the US… in protest at an apparent sea change in the Trump administration’s policy towards Beijing as the White House prepared to slap punitive restrictions on Chinese steel imports, agreed an arms deal with Taiwan, and sanctioned a Chinese bank. Cui Tiankai, the Chinese ambassador to Washington, criticised the $1.4bn Taiwanese weapons deal and what he called the ‘long-arm jurisdiction’ of the US in sanctioning Chinese companies… The deteriorating relations come less than 100 days since Mr Trump hosted Mr Xi at his Mar-a-Lago estate and said the leaders would have a ‘very great relationship’. Since then, the White House has become frustrated China was not doing enough to pressure North Korea to abandon its ballistic missile and nuclear programmes.”
July 2 – Time (Charlie Campbell): “The honeymoon, it appears, is over. On Sunday, Beijing warned the U.S. government that sending an American naval vessel into territorial waters it claims around the Paracel Islands in the disputed South China Sea was a ‘serious political and military provocation,’ in the latest of a slew of incidents that augur souring relations… Foreign Ministry spokesperson Lu Kang said… that China sent military vessels and fighter planes to ward off the USS Stethem, warning that approaching the Paracels, which are known as the Xisha Islands in China and are also claimed by Taiwan and Vietnam, ‘violated Chinese and international law, infringed upon China's sovereignty, disrupted peace, security and order of the relevant waters and put in jeopardy the facilities and personnel on the Chinese islands,’ according to the state-run China Daily newspaper.”
China Bubble Watch:
July 5 – Reuters (Yawen Chen and Ryan Woo): “China's services sector grew at a slower pace in June as new orders slumped, signaling renewed pressure on businesses after a pickup in May and pointing to a softening outlook for the economy… The findings reinforced analyst views that the world's second-largest economy is cooling after a strong start to the year, as Beijing cracks down on easy credit to contain a dangerous build-up in debt and defuse financial risks. The Caixin/Markit services purchasing managers' index (PMI) dropped to 51.6 in June from 52.8 in May…”
July 4 – Reuters (Shu Zhang): “China's central bank said… the shadow banking sector lacks sufficient regulation and the bank would give more prominence to financial risk controls. Compared with traditional bank lending, the opaque nature of shadow banking products make it easier for them to bypass regulatory requirements and provide credit to restricted areas, the People's Bank of China (PBOC) said in its annual China Financial Stability Report… The central bank will increase supervision over the rapidly growing asset management industry to curb shadow banking risks, it said.”''
July 4 – Reuters (Huileng Tan): “Growth in shadow banking in China is slowing due to coordinated government action to contain systemic financial risks, a development that will benefit banks, although it will also bring adjustment risks, Moody's… said… The ratings agency's analysis showed the effectiveness of coordinated measures by authorities by the central bank, the banking and securities regulators ‘to slow runaway growth in shadow banking.’ Actions included the central bank changing its monetary policy setting in the last quarter of 2016 to ‘moderate neutral’ from ‘moderate,’ which raised market funding costs and refinancing risks for banks, reducing the return from supporting long-term investments with short-term market funds, said Moody's.”
July 4 – Bloomberg: “China struck deal after deal to acquire companies abroad over the last few years. Now the bill is coming due. The nation’s top corporate dealmakers, including HNA Group Co. and Fosun International Ltd., must pay off the equivalent of at least $11.5 billion in bonds and loans by the end of 2018 -- a feat now complicated by government efforts to rein in their aggressive rush overseas. That figure represents just a fraction of the total debt of 1.1 trillion yuan ($162bn) that the Chinese companies have reported… The size of their obligations -- and whether they will be able to shoulder them -- has begun to worry global banks and investors now that Beijing has pressed companies to dial back their ambitions abroad.”
July 5 – Reuters (Thomas Escritt and Michelle Martin): “Ties between China and Germany are about to enter a new phase, China's president said, as he met the German chancellor before a G20 summit that is expected to highlight their differences with the United States on a host of issues. President Xi Jinping and Chancellor Angela Merkel pledged… to work together more closely on a range of issues… Trump's testy relationship with both China and Germany is pushing the two countries closer together, despite Berlin's concerns about human rights in China and frustrations over market access.”
July 1 – Reuters (James Pomfret and Venus Wu): “Chinese President Xi Jinping swore in Hong Kong's new leader on Saturday with a stark warning that Beijing won't tolerate any challenge to its authority in the divided city as it marked the 20th anniversary of its return from Britain to China… Xi said Hong Kong should crack down on moves towards ‘Hong Kong independence’. ‘Any attempt to endanger China's sovereignty and security, challenge the power of the central government ... or use Hong Kong to carry out infiltration and sabotage activities against the mainland is an act that crosses the red line and is absolutely impermissible,’ Xi said.”
Europe Watch:
July 3 – Bloomberg (Carolynn Look): “Euro-area manufacturing expanded at the strongest pace in over six years as factories across the region took on more workers to deal with surging orders. A Purchasing Managers’ Index climbed to 57.4 in June, up from 57.0 in May and above a June 23 flash estimate, IHS Markit said…”
July 3 – Reuters (Michael Nienaber): “Euro zone growth is stronger than expected and this will enable the European Central Bank to slowly normalize its monetary policy and end a ‘crazy situation’ of negative interest rates, German Finance Minister Wolfgang Schaeuble said… Senior German government officials have stepped up the pressure on the ECB to scale back its monetary stimulus of bond purchases and sub-zero rates as Germany heads toward federal elections and voters complain about meager savings returns… Speaking to voters… Schaeuble said that the euro zone was recovering surprisingly well and that the threat of deflation had vanished. ‘If we have more growth and if there is no threat of a deflation, then the ECB will -- it cannot do this fast because the problems in some countries in Europe are too big -- then it can slowly start to normalize monetary policy so that we can hopefully soon end this crazy situation of zero interest rates and negative interest rates,’ he said.”
The S&P500 was little changed (up 8.3% y-t-d), while the Dow added 0.3% (up 8.4%). The Utilities declined 0.8% (up 5.4%). The Banks jumped 1.6% (up 5.8%), and the Broker/Dealers added 0.6% (up 0.6%). The Transports rose 1.4% (up 7.2%). The S&P 400 Midcaps were unchanged (up 5.2%), and the small cap Russell 2000 was little changed (up 4.3%). The Nasdaq100 increased 0.2% (up 16.3%), and the Morgan Stanley High Tech index added 0.2% (up 20.5%). The Semiconductors recovered 1.9% (up 16.4%). The Biotechs gained 1.2% (up 27%). With bullion sinking $28, the HUI gold index fell 3.7% (down 1.9%).
Three-month Treasury bill rates ended the week at 101 bps. Two-year government yields added two bps to 1.40% (up 21bps y-t-d). Five-year T-note yields gained six bps to 1.95% (up 2bps). Ten-year Treasury yields rose eight bps to 2.39% (down 6bps). Long bond yields jumped nine bps to 2.93% (down 14bps).
Greek 10-year yields were unchanged at 5.36% (down 166bps y-t-d). Ten-year Portuguese yields rose 13 bps to 3.16% (down 59bps). Italian 10-year yields surged 19 bps to 2.34% (up 53bps). Spain's 10-year yields rose 19 bps to 1.73% (up 35bps). German bund yields gained 11 bps to 0.57% (up 37bps). French yields jumped 13 bps to 0.94% (up 26bps). The French to German 10-year bond spread widened two bps to 37 bps. U.K. 10-year gilt yields increased five bps to 1.31% (up 7bps). U.K.'s FTSE equities index gained 0.5% (up 2.9%).
Japan's Nikkei 225 equities index slipped 0.5% (up 4.3% y-t-d). Japanese 10-year "JGB" yields were unchanged at 0.09% (up 5bps). France's CAC40 gained 0.5% (up 5.8%). The German DAX equities index rose 0.5% (up 7.9%). Spain's IBEX 35 equities index added 0.4% (up 12.2%). Italy's FTSE MIB index recovered 2.1% (up 9.3%). EM equities were mixed to lower. Brazil's Bovespa index declined 0.9% (up 3.5%), while Mexico's Bolsa increased 0.4% (up 9.7%). South Korea's Kospi fell 0.5% (up 17.4%). India’s Sensex equities index gained 1.4% (up 17.8%). China’s Shanghai Exchange added 0.8% (up 3.7%). Turkey's Borsa Istanbul National 100 index dipped 0.4% (up 28.1%). Russia's MICEX equities index rallied 1.8% (down 14.3%).
Junk bond mutual funds saw outflows of $1.155 billion (from Lipper).
Freddie Mac 30-year fixed mortgage rates jumped eight bps to 3.96% (up 55bps y-o-y). Fifteen-year rates rose five bps to 3.22% (up 48bps). The five-year hybrid ARM rate gained four bps to 3.21% (up 53bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up nine bps to 4.10% (up 46bps).
Federal Reserve Credit last week declined $4.1bn to $4.427 TN. Over the past year, Fed Credit dipped $2.8bn. Fed Credit inflated $1.616 TN, or 58%, over the past 243 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $8.2bn last week to $3.316 TN. "Custody holdings" were up $86.6bn y-o-y, or 2.7%.
M2 (narrow) "money" supply last week jumped $35.7bn to a record $13.546 TN. "Narrow money" expanded $708bn, or 5.5%, over the past year. For the week, Currency increased $2.1bn. Total Checkable Deposits surged $45.6bn, while Savings Deposits declined $10.9bn. Small Time Deposits were little changed. Retail Money Funds dipped $1.8bn.
Total money market fund assets gained $4.7bn to $2.627 TN. Money Funds fell $74bn y-o-y (2.7%).
Total Commercial Paper dropped $26.8bn to $946.8bn. CP declined $93bn y-o-y, or 8.9%.
Currency Watch:
The U.S. dollar index recovered 0.4% to 96.008 (down 6.2% y-t-d). For the week on the upside, the Brazilian real increased 0.8%, the Canadian dollar 0.7%, the Mexican peso 0.2%, and the Swedish krona 0.1%. For the week on the downside, the South African rand declined 2.3%, the Japanese yen 1.3%, the Australian dollar 1.1%, the British pound 1.0%, the South Korean won 0.9%, the New Zealand dollar 0.7%, the Swiss franc 0.6%, the Singapore dollar 0.4%, the Norwegian krone 0.3% and the euro 0.2%. The Chinese renminbi declined 0.36% versus the dollar this week (up 2.05% y-t-d).
Commodities Watch:
The Goldman Sachs Commodities Index dropped 1.8% (down 8.3% y-t-d). Spot Gold lost 2.3% to $1,213 (up 5.3%). In wild trading, Silver sank 7.2% to $15.425 (down 4%). Crude fell $3.91 to $44.23 (down 18%). Gasoline declined 1.0% (down 10%), and Natural Gas sank 5.6% (down 23%). Copper dropped 2.4% (up 6%). Wheat gained another 1.7% (up 31%). Corn rose 3.0% (up 12%).
Trump Administration Watch:
July 3 – Wall Street Journal (Kristina Peterson and Michelle Hackman): “Republican senators back home on recess this week are hearing from some influential critics of their health-law effort: GOP governors, many of whom are urging them to push back on the legislation because it would cut Medicaid funding. Governors of states including Ohio, Nevada and Arkansas, which stand to lose billions of dollars in Medicaid funding under the Senate bill, want senators to keep as much of that money as possible.”
July 1 – Financial Times (Demetri Sevastopulo, Tom Mitchell and Charles Clover): “China lashed out at the US… in protest at an apparent sea change in the Trump administration’s policy towards Beijing as the White House prepared to slap punitive restrictions on Chinese steel imports, agreed an arms deal with Taiwan, and sanctioned a Chinese bank. Cui Tiankai, the Chinese ambassador to Washington, criticised the $1.4bn Taiwanese weapons deal and what he called the ‘long-arm jurisdiction’ of the US in sanctioning Chinese companies… The deteriorating relations come less than 100 days since Mr Trump hosted Mr Xi at his Mar-a-Lago estate and said the leaders would have a ‘very great relationship’. Since then, the White House has become frustrated China was not doing enough to pressure North Korea to abandon its ballistic missile and nuclear programmes.”
July 2 – Time (Charlie Campbell): “The honeymoon, it appears, is over. On Sunday, Beijing warned the U.S. government that sending an American naval vessel into territorial waters it claims around the Paracel Islands in the disputed South China Sea was a ‘serious political and military provocation,’ in the latest of a slew of incidents that augur souring relations… Foreign Ministry spokesperson Lu Kang said… that China sent military vessels and fighter planes to ward off the USS Stethem, warning that approaching the Paracels, which are known as the Xisha Islands in China and are also claimed by Taiwan and Vietnam, ‘violated Chinese and international law, infringed upon China's sovereignty, disrupted peace, security and order of the relevant waters and put in jeopardy the facilities and personnel on the Chinese islands,’ according to the state-run China Daily newspaper.”
China Bubble Watch:
July 5 – Reuters (Yawen Chen and Ryan Woo): “China's services sector grew at a slower pace in June as new orders slumped, signaling renewed pressure on businesses after a pickup in May and pointing to a softening outlook for the economy… The findings reinforced analyst views that the world's second-largest economy is cooling after a strong start to the year, as Beijing cracks down on easy credit to contain a dangerous build-up in debt and defuse financial risks. The Caixin/Markit services purchasing managers' index (PMI) dropped to 51.6 in June from 52.8 in May…”
July 4 – Reuters (Shu Zhang): “China's central bank said… the shadow banking sector lacks sufficient regulation and the bank would give more prominence to financial risk controls. Compared with traditional bank lending, the opaque nature of shadow banking products make it easier for them to bypass regulatory requirements and provide credit to restricted areas, the People's Bank of China (PBOC) said in its annual China Financial Stability Report… The central bank will increase supervision over the rapidly growing asset management industry to curb shadow banking risks, it said.”''
July 4 – Reuters (Huileng Tan): “Growth in shadow banking in China is slowing due to coordinated government action to contain systemic financial risks, a development that will benefit banks, although it will also bring adjustment risks, Moody's… said… The ratings agency's analysis showed the effectiveness of coordinated measures by authorities by the central bank, the banking and securities regulators ‘to slow runaway growth in shadow banking.’ Actions included the central bank changing its monetary policy setting in the last quarter of 2016 to ‘moderate neutral’ from ‘moderate,’ which raised market funding costs and refinancing risks for banks, reducing the return from supporting long-term investments with short-term market funds, said Moody's.”
July 4 – Bloomberg: “China struck deal after deal to acquire companies abroad over the last few years. Now the bill is coming due. The nation’s top corporate dealmakers, including HNA Group Co. and Fosun International Ltd., must pay off the equivalent of at least $11.5 billion in bonds and loans by the end of 2018 -- a feat now complicated by government efforts to rein in their aggressive rush overseas. That figure represents just a fraction of the total debt of 1.1 trillion yuan ($162bn) that the Chinese companies have reported… The size of their obligations -- and whether they will be able to shoulder them -- has begun to worry global banks and investors now that Beijing has pressed companies to dial back their ambitions abroad.”
July 5 – Reuters (Thomas Escritt and Michelle Martin): “Ties between China and Germany are about to enter a new phase, China's president said, as he met the German chancellor before a G20 summit that is expected to highlight their differences with the United States on a host of issues. President Xi Jinping and Chancellor Angela Merkel pledged… to work together more closely on a range of issues… Trump's testy relationship with both China and Germany is pushing the two countries closer together, despite Berlin's concerns about human rights in China and frustrations over market access.”
July 1 – Reuters (James Pomfret and Venus Wu): “Chinese President Xi Jinping swore in Hong Kong's new leader on Saturday with a stark warning that Beijing won't tolerate any challenge to its authority in the divided city as it marked the 20th anniversary of its return from Britain to China… Xi said Hong Kong should crack down on moves towards ‘Hong Kong independence’. ‘Any attempt to endanger China's sovereignty and security, challenge the power of the central government ... or use Hong Kong to carry out infiltration and sabotage activities against the mainland is an act that crosses the red line and is absolutely impermissible,’ Xi said.”
Europe Watch:
July 3 – Bloomberg (Carolynn Look): “Euro-area manufacturing expanded at the strongest pace in over six years as factories across the region took on more workers to deal with surging orders. A Purchasing Managers’ Index climbed to 57.4 in June, up from 57.0 in May and above a June 23 flash estimate, IHS Markit said…”
July 3 – Reuters (Michael Nienaber): “Euro zone growth is stronger than expected and this will enable the European Central Bank to slowly normalize its monetary policy and end a ‘crazy situation’ of negative interest rates, German Finance Minister Wolfgang Schaeuble said… Senior German government officials have stepped up the pressure on the ECB to scale back its monetary stimulus of bond purchases and sub-zero rates as Germany heads toward federal elections and voters complain about meager savings returns… Speaking to voters… Schaeuble said that the euro zone was recovering surprisingly well and that the threat of deflation had vanished. ‘If we have more growth and if there is no threat of a deflation, then the ECB will -- it cannot do this fast because the problems in some countries in Europe are too big -- then it can slowly start to normalize monetary policy so that we can hopefully soon end this crazy situation of zero interest rates and negative interest rates,’ he said.”
July 4 – Reuters (Foo Yun Chee, Stephen Jewkes and Antonella Cinelli): “The European Union has approved a 5.4 billion euro ($6.1bn) state bailout of Italy's fourth-largest lender, Monte dei Paschi di Siena, taking the total amount of Italian taxpayer funds deployed to rescue banks over the past week to more than 20 billion euros. Outside Greece, Europe has not seen such big state bailouts since the aftermath of the global financial crisis, raising political concerns about the continued use of public funds to mop up losses at badly run banks despite the introduction of new EU rules designed to prevent this.”
July 4 – AFP (Daniel Bosque): “Catalonia will declare independence ‘immediately’ if a majority of the Spanish region's voters opt for independence in a Scotland-style referendum called for October, its ruling coalition said. ‘If the majority of votes are for creating a Catalan republic, obviously independence will have to be declared immediately,’ said Gabriela Serra, a member of the separatist coalition that governs Catalonia.”
Central Bank Watch:
July 6 – Bloomberg (Carolynn Look): “European Central Bank policy makers considered removing a pledge to increase their bond-buying program if needed when they met last month. As the likelihood of calls for unconventional policy measures to be stepped up had ‘clearly diminished,’ the Governing Council discussed removing the easing biases in their policy communication, an account of the June 7-8 meeting showed. While they ultimately opted only to change the wording on interest rates, ‘it was argued that the improved economic environment with vanishing tail risks, in principle, suggested also revisiting the easing bias with respect to the asset-purchase program.’ The account highlighted how nervous decision-makers are about the outlook for the post-crisis recovery as they edge cautiously toward the day they start unwinding their extraordinary measures.”
July 4 – Financial Times (Roger Blitz): “A week after European Central Bank president Mario Draghi rattled markets by declaring victory against deflation, Sweden’s Riksbank said that higher inflation expectations and an easing in external risks made further rate cuts ‘less likely than before’. Forecasts of a slow summer in markets have been disabused by a sudden shift from central banks towards normalising monetary policy. For investors, this has a number of implications. Bond yields are moving higher and the dollar is weakening against the euro, the Canadian dollar, the pound and other currencies whose central banks have signalled a shift in policy.”
July 3 – Reuters (Frank Siebelt): “The European Central Bank is working on moving away from its ultra-easy monetary policy, Jens Weidmann, head of Germany's Bundesbank and a member of the ECB's rate-setting body, said… Investors are watching for any sign that the ECB may reduce its stimulus, which includes massive bond purchases and ultra-low rates, after a hint in that direction by President Mario Draghi boosted the euro and government bond yields this week. ‘It will hopefully come and we're working on that, we're also discussing it,’ Weidmann, a long-standing critic of the ECB's bond purchases, told an audience at the Bundesbank's open days.”
July 4 – Bloomberg (John Ainger and Stephen Spratt): “European Central Bank data showed it fell short of its target for purchases of German bonds under its quantitative-easing program for a third straight month in June, while favoring French and Italian securities as it combats a shortage in the euro region’s benchmark sovereign debt. The ECB fell short of its implied buying target, as dictated by the capital key, by 304 million euros ($345 million) last month, following a shortfall of 277 million euros in May… The ECB has been fudging its own bond-buying guidelines, known as the capital key, with President Mario Draghi reiterating last in a press conference last month that the asset-purchase program has enough ‘flexibility.’”
July 2 – Financial Times (Claire Jones): “For years, Jens Weidmann was the unabashed hawk at the heart of the European Central Bank, the voice of German opposition to the unconventional monetary policies intended to save the eurozone from a deflationary death spiral. Now, an uncharacteristic period of reserve from the Bundesbank president has convinced his eurozone colleagues that he is mounting a quiet campaign to take over as ECB chief. Not all of them are happy at the prospect. Mario Draghi’s term as the ECB’s president is up in late 2019 and speculation is already rife that Berlin will push for Mr Weidmann — a close ally of Angela Merkel, the chancellor — to become its first German head.”
Brexit Watch:
July 1 – Reuters (Andrew MacAskill): “British business leaders have been told to brace for the possibility that Prime Minister Theresa May's government may walk out of Brexit talks this year, according to the Sunday Telegraph. The move would be designed for ‘domestic consumption’ to show the government is negotiating hard with the European Union… The Sunday Telegraph said the briefing of business leaders by a senior May aide took place after last month's general election and the person has since left in the recent overhaul at the top of government.”
Global Bubble Watch:
July 2 – Wall Street Journal (Simon Nixon): “Central bankers around the world are grappling with a common problem: when and how to normalize monetary policy at a time of normal levels of economic growth, normal levels of unemployment but abnormal levels of wage growth that is keeping inflation lower than their economic models predict. Policy makers at the European Central Bank and Bank of England are facing political challenges that are making their task even harder. At the ECB, the political constraint is its own self-imposed rules setting limits on the size and scale of its quantitative easing program. To avoid getting foul of the European Union treaty prohibition on direct financing of governments by the central bank, the ECB limits itself to buying government bonds strictly in proportion to each eurozone member’s ECB shareholding and capping its ownership of any individual bond at 33%. As a result, its QE program will soon run into capacity constraints—starting as soon as this summer with Germany, Spain, Ireland and Portugal.”
July 6 – Bloomberg (Dani Burger): “Is this the dawn of a new era? Coordinated or not, signals from central bankers from Europe to Canada and the U.S. have roiled financial markets: The 10-year Treasury note yield jumped more than 20 bps, bund rates reclaimed 0.50% for the first time in 18 months… While a few days of trading doesn’t cement the fate of markets for months to come, the debate is heating up over whether the moves are fleeting, amplified in the short term by summer vacation-induced light volumes, or if they mark the start of the end of a decade of easy money.”
July 3 – Reuters (Huw Jones): “The rising influence of ‘open ended’ funds and the impact on developing economies if the investment flows were abruptly reversed remain a concern for global regulators, Financial Stability Board Chairman Mark Carney said… The rapid growth in the world's asset management sector since the financial crisis to $75 trillion assets by 2015, or 40% of the world's financial assets, has been a largely positive development, Carney told reporters. An issue of concern, however is around ‘open ended’ funds supplying a substantial proportion of cross border flows into developing economies… Carney said the concern comes at a time when liquidity, or the ability to sell at short notice to redeem investors, appears better than it is likely to be under stressed conditions. ‘The question is what will the consequences be when inevitably there is a period of sharp adjustment, reduced liquidity,’ Carney said.”
July 4 – Wall Street Journal (Henny Sender): “On the 20th anniversary of the Asian financial crisis it might be regarded as a fitting response to sceptics that emerging market equities have been one of the best performing asset classes so far this year. Two decades ago, no sooner had the first day of official festivities accompanying Hong Kong’s return to Chinese control finished, then the overvalued Thai baht swooned. Its drop was followed by a plunge in the Indonesia rupiah and South Korean won, while the Malaysian ringgit, and Hong Kong and new Taiwan dollar were all rapidly under pressure… And make no mistake — emerging markets are still vulnerable to rising rates. Almost $2tn in emerging markets bonds and loans come due by the end of 2018. Higher rates in the US would likely mean a stronger US dollar, making dollar debt that Asian companies more expensive to service. That may well usher in credit downgrades in emerging markets.”
July 6 – Bloomberg (Katia Dmitrieva, Erik Hertzberg, and Kristine Owram): “Toronto’s housing market is losing steam. A series of government measures and the prospect of higher interest rates boosted listings and sparked the biggest sales decline in more than eight years last month, the Toronto Real Estate Board reported… Average home prices rose just 6.3% to C$793,915 ($612,000), the smallest annual increase since January 2015. Toronto’s real estate market, mostly known for bidding wars and 20% price gains, is beginning to feel the effects of government rule changes that make it harder to get a mortgage.”
Fixed Income Bubble Watch:
July 3 – Wall Street Journal (Richard Barley): “Tiny hints from central banks about policy normalization shook markets up last week. They were also a reminder of the highly abnormal situation bond markets find themselves in, with little or no cushion for investors against rising yields. It is too easy to lose money in bonds. Returns on bonds come from two sources: the interest income that accrues to holders and changes in bond prices. But years of zero-interest-rate policy have drastically reduced the former, making the latter far more important. That shift is important, in that it has changed the way in which normally reliable bonds behave. Take Germany… The country’s benchmark 10-year bond pays a coupon of 0.25%, and at the start of last week was priced nearly close to par, with a yield of 0.25%. By the end of the week, it yielded 0.47%, but the bond’s price had dropped by around 2%...”
July 5 – Bloomberg (Robert Smith): “The US and European high-yield markets have delivered strong returns this year, but clouds are looming that threaten to make the second half of 2017 less straightforward. Bank of America Merrill Lynch’s non-financial high-yield indices returned 4.8% for US dollars and 3.7% for euros in the first half of 2017. However, the sheen came off both markets slightly at the end of these runs, with the US and euro indices having been up more than 5 and 4.1% respectively earlier in June. Two very different culprits caused these dips in performance, with a renewed slump in the oil price largely to blame for US weakness and talk of the ECB tapering bond purchases fuelling the European sell-off.”
July 3 – Reuters (Lauren Hirsch and Nick Brown): “The Puerto Rico power utility PREPA, laden with a $9 billion debt load, has filed for a form of bankruptcy, Puerto Rico's primary fiscal agent said… “
Federal Reserve Watch:
July 4 – Wall Street Journal (Nick Timiraos): “Federal Reserve officials have indicated there is a strong chance they will announce in September a decision to start shrinking the central bank’s portfolio of bonds and other assets, while putting off until December any further interest-rate increase. The moves would give officials time to assess how markets react to the balance-sheet reductions and to confirm their view that a recent slowdown in inflation will fade. Launching the balance-sheet plan in September also would afford Chairwoman Janet Yellen an opportunity to initiate it well ahead of any potential leadership transition.”
U.S. Bubble Watch:
July 5 – Wall Street Journal (Greg Ip): “If you drew up a list of preconditions for recession, it would include the following: a labor market at full strength, frothy asset prices, tightening central banks, and a pervasive sense of calm. In other words, it would look a lot like the present. Those of us who have lived through economic mayhem before feel our muscle memory twitch at times like this. Consider the worrisome absence of worry. ‘Implied volatility’ measures the cost of hedging against big market moves via options. When fear is pervasive, options are expensive so implied volatility is high. At present, implied volatility in bonds, stocks, currencies and gold sits near its lowest since mid-2007, the eve of the financial crisis… The economic expansion is now entering its ninth year and in two years will be the longest on record. The unemployment rate sits at 4.3%, the lowest in 16 years, suggesting the economy has reached, or nearly reached, full capacity.”
July 3 – Bloomberg (Sho Chandra): “American factories powered up in June at the fastest pace in nearly three years, with robust advances in production, orders and employment that indicate a firming in the economy, data from the Institute for Supply Management showed… Factory index rose to 57.8, highest since August 2014 (est. 55.3) from 54.9 in May…”
July 3 – Bloomberg (Will Davies): “It’ll take more than central bank tightening to shake volatility from its yearlong slumber, according to Goldman Sachs… A large shock such as recession or war is usually required. That’s generally been the case for the 14 similar low volatility ‘regimes’ since 1928, at least in equity markets, Goldman Sachs strategists Christian Mueller-Glissmann and Alessio Rizzi said. These periods on average lasted nearly two years, featured short-lived spikes and realized S&P 500 volatility was usually at or below 10.”
July 3 – Bloomberg (Elise Young): “Were it not for Illinois’s flirtation with a junk credit downgrade and New Jersey Governor Chris Christie’s luxuriating on a closed public beach, the budget woes of U.S. states might have assumed their annual spot in the dust bin of public-policy history. This year, spending strife is unusually widespread, with 11 states missing their July 1 fiscal-year deadlines... In a poor economy, states often freeze spending while lawmakers and the chief executive work out how to plug budget holes. This year’s standoffs, though, come amid record stock-market gains and low national unemployment.”
July 6 – Reuters (Howard Schneider): “The U.S. housing finance system continues to put taxpayers at risk in a market dominated by government-backed agencies, Federal Reserve Governor Jerome Powell said…, calling for further reform of an ‘unsustainable’ situation. A decade after doubts about the creditworthiness of mortgage-backed securities helped trigger the worst financial crisis since the Great Depression, systemic risk remains given the concentration of mortgages in Fannie Mae and Freddie Mac, he said. ‘We're almost at a now-or-never moment,’ Powell told a conference…, arguing that the window for political action on an overhaul of housing finance may not stay open for long.”
July 4 – MarketWatch (Rachel Koning Beals): “As car buyers’ obsession with bigger, pricier vehicles grows, so does their willingness to take longer to pay for them, says new analysis from Edmunds.com. The average auto-loan length reached an all-time high of 69.3 months in June. That’s 6.8% longer than five years ago… The average amount that buyers financed was hit with the biggest uptick for the year last month, at $30,945, or up $631 from May. The financing trend also lead to the highest monthly payments for the year, now averaging $517…”
Japan Watch:
July 3 – Reuters (Linda Sieg): “Prime Minister Shinzo Abe's Liberal Democratic Party suffered an historic defeat in an election in the Japanese capital on Sunday, signaling trouble ahead for the premier, who has suffered from slumping support because of a favoritism scandal. On the surface, the Tokyo Metropolitan assembly election was a referendum on Governor Yuriko Koike's year in office, but the dismal showing for Abe's party is also a stinging rebuke of his 4-1/2-year-old administration.”
July 3 – Bloomberg (Isabel Reynolds and Yuki Hagiwara): “Scandal-hit Japanese Prime Minister Shinzo Abe faces one of his biggest tests since coming to power in late 2012, after his ruling party lost to an upstart outfit in an election for Tokyo’s assembly. The Liberal Democratic Party lost more than half its seats to end up with 23, the lowest number ever in the capital, in a vote that could be a harbinger for national elections. Voter turnout was up about eight percentage points on the previous poll four years ago… Somber-faced party executives sat in silence at the opening of an extraordinary meeting on Monday morning to discuss the defeat.”
July 2 – Bloomberg (Yoshiaki Nohara, Masahiro Hidaka, and Toru Fujioka): “Haruhiko Kuroda shouldn’t serve another term as governor of the Bank of Japan because the central bank will need fresh ideas as it moves toward exiting years of unprecedented monetary easing, according to an adviser to the prime minister. ‘An exit will surely come up within the next five years and we need someone who can prepare for it,’ said Nobuyuki Nakahara, a former BOJ board member. ‘He will fall into inertia and struggle to come up with bold new ideas. It’s the same in the private sector when a corporate president stays too long,’ he said.”
July 2 – Reuters (Leika Kihara and Tetsushi Kajimoto): “Confidence among Japan's big manufacturers hit its highest level in more than three years in the June quarter, …adding to signs the recovery in the world's third largest economy is gaining pace. Big firms also saw the job market at its tightest in 25 years, offering policymakers some hope that companies may finally raise wages… The survey underscores the Bank of Japan's view that the economy is heading for a moderate expansion…”
July 3 – Bloomberg (Toru Fujioka, Keiko Ujikane, and Takashi Amano): “A change of leadership at the Bank of Japan would offer a chance to bolster public confidence in its ability to defeat deflation, according to an economic adviser to Prime Minister Shinzo Abe. ‘What’s important, especially this time, is whether we can undertake regime change,” Etsuro Honda said… ‘It should be someone who is refreshing enough and can renew people’s impressions with personal charm and sincerity.’”
Leveraged Speculation Watch:
July 4 – Wall Street Journal (Laurence Fletcher): “After the presidential election last year, many hedge-fund managers called the U.S. a great moneymaking opportunity. It turns out Europe is the place to be. Bets on stocks in Italy, France and Spain—long laggards compared with the U.S.—have given some global hedge funds returns of more than 20% so far this year. The average hedge fund has managed only 3% through May, according to… Hedge Fund Research.”
Geopolitical Watch:
July 5 – Wall Street Journal (Jonathan Cheng): “The U.S. warned North Korea that it is ready to fight if provoked, as Pyongyang claimed another weapons-development breakthrough following its launch of an intercontinental ballistic missile a day earlier. The regime, having demonstrated its capacity to reach the U.S. with a missile, …touted another achievement of the test launch: It claimed that its missile warhead—the forward section, which carries the explosive—can withstand the extreme heat and pressure of re-entering the earth’s atmosphere.”
July 4 – Reuters (Jack Kim and Christine Kim): “North Korea said… its newly developed intercontinental ballistic missile (ICBM) can carry a large nuclear warhead, triggering a call by Washington for global action to hold it accountable for pursuing nuclear weapons. A spokeswoman for the U.S. Defense Department said it had concluded that North Korea test-launched an ICBM on Tuesday, which some experts now believe had the range to reach the U.S. state of Alaska as well as parts of the mainland United States. U.S. Secretary of State Rex Tillerson said the test, on the eve of the U.S. Independence Day holiday, represented ‘a new escalation of the threat’ to the United States and its allies, and vowed to take stronger measures.”
July 5 – Wall Street Journal (Farnaz Fassihi, Gordon Lubold and Jonathan Cheng): “The U.S. and Russia clashed at the United Nations Security Council over how to respond to North Korea’s nuclear-weapons program, a confrontation throwing into doubt U.S. hopes for an international diplomatic solution to the burgeoning crisis. The standoff between diplomats… came just two days before President Donald Trump and Russian counterpart Vladimir Putin plan to hold their first meeting during the summit of the Group of 20 leading nations in Germany, raising the stakes for both leaders as well as China, which will attend the international gathering.”
July 5 – CNBC (Cheang Ming): “Strategic ties between Russia and China were appraised in glowing terms as Chinese President Xi Jinping wrapped up a two-day state visit to Russia, concluding with at least $10 billion in agreements. Xi, who met with Russian President Vladimir Putin during the trip, told Russian media that relations between the two countries were currently at their ‘best time in history.’ The Chinese president also said Russia and China were each other's ‘most trustworthy strategic partners,’ Xinhua reported.”
July 5 – Financial Times (Heba Saleh and Simeon Kerr): “The four Arab states that have imposed an extraordinary embargo on Qatar, on Wednesday lambasted Doha for its ‘negative’ response to their demands in a sign that the month-long diplomatic crisis is deepening. After meeting in Cairo to discuss the dispute, the foreign ministers of Saudi Arabia, the United Arab Emirates, Bahrain and Egypt said Qatar’s response showed ‘a lack of seriousness in dealing with the roots of the problem’ and a ‘failure to appreciate the dangers in the situation’. Adel al-Jubeir, Saudi Arabia’s foreign minister, warned that additional steps against Doha could be taken at the appropriate time."
July 6 – Reuters (Rodi Said and Dominic Evans): “The head of the Syrian Kurdish YPG militia said… that Turkish military deployments near Kurdish-held areas of northwestern Syria amounted to a ‘declaration of war’ which could trigger clashes within days. Turkey's Deputy Prime Minister Numan Kurtulmus retorted that his country was not declaring war but that its forces would respond to any hostile move by the YPG, which he described as a small-scale army formed by the United States.”
July 5 – Associated Press (Gerry Shih and Muneeza Naqvi): “China has insisted India withdraw its troops from a disputed Himalayan plateau before talks can take place to settle the most protracted standoff in recent years between the nuclear-armed neighbors, who fought a bloody frontier war 55 years ago. India must pull back its troops ‘as soon as possible’ as a precondition to demonstrate sincerity, foreign ministry spokesman Geng Shuang told reporters… His comments came after weeks of saber-rattling in New Delhi and Beijing, as officials from both sides talk up a potential clash even bloodier than their 1962 war that left thousands dead.”
July 2 – New York Times (Sheera Frenkel): “The attack had the hallmarks of something researchers had dreaded for years: malicious software using artificial intelligence that could lead to a new digital arms race in which A.I.-driven defenses battled A.I.-driven offenses while humans watched from the sidelines. But what was not as widely predicted was that one of the earliest instances of that sort of malware was found in India… Security researchers are increasingly looking in countries outside the West to discover the newest, most creative and potentially most dangerous types of cyberattacks being deployed. As developing economies rush to go online, they provide a fertile testing ground for hackers trying their skills…”
July 1 – Reuters (Pavel Polityuk): “Ukraine said… that Russian security services were involved in a recent cyber attack on the country, with the aim of destroying important data and spreading panic. The SBU, Ukraine's state security service, said the attack, which started in Ukraine and spread around the world…, was by the same hackers who attacked the Ukrainian power grid in December 2016. Ukrainian politicians were quick to blame Russia for Tuesday's attack, but a Kremlin spokesman dismissed ‘unfounded blanket accusations’.”
July 4 – AFP (Daniel Bosque): “Catalonia will declare independence ‘immediately’ if a majority of the Spanish region's voters opt for independence in a Scotland-style referendum called for October, its ruling coalition said. ‘If the majority of votes are for creating a Catalan republic, obviously independence will have to be declared immediately,’ said Gabriela Serra, a member of the separatist coalition that governs Catalonia.”
Central Bank Watch:
July 6 – Bloomberg (Carolynn Look): “European Central Bank policy makers considered removing a pledge to increase their bond-buying program if needed when they met last month. As the likelihood of calls for unconventional policy measures to be stepped up had ‘clearly diminished,’ the Governing Council discussed removing the easing biases in their policy communication, an account of the June 7-8 meeting showed. While they ultimately opted only to change the wording on interest rates, ‘it was argued that the improved economic environment with vanishing tail risks, in principle, suggested also revisiting the easing bias with respect to the asset-purchase program.’ The account highlighted how nervous decision-makers are about the outlook for the post-crisis recovery as they edge cautiously toward the day they start unwinding their extraordinary measures.”
July 4 – Financial Times (Roger Blitz): “A week after European Central Bank president Mario Draghi rattled markets by declaring victory against deflation, Sweden’s Riksbank said that higher inflation expectations and an easing in external risks made further rate cuts ‘less likely than before’. Forecasts of a slow summer in markets have been disabused by a sudden shift from central banks towards normalising monetary policy. For investors, this has a number of implications. Bond yields are moving higher and the dollar is weakening against the euro, the Canadian dollar, the pound and other currencies whose central banks have signalled a shift in policy.”
July 3 – Reuters (Frank Siebelt): “The European Central Bank is working on moving away from its ultra-easy monetary policy, Jens Weidmann, head of Germany's Bundesbank and a member of the ECB's rate-setting body, said… Investors are watching for any sign that the ECB may reduce its stimulus, which includes massive bond purchases and ultra-low rates, after a hint in that direction by President Mario Draghi boosted the euro and government bond yields this week. ‘It will hopefully come and we're working on that, we're also discussing it,’ Weidmann, a long-standing critic of the ECB's bond purchases, told an audience at the Bundesbank's open days.”
July 4 – Bloomberg (John Ainger and Stephen Spratt): “European Central Bank data showed it fell short of its target for purchases of German bonds under its quantitative-easing program for a third straight month in June, while favoring French and Italian securities as it combats a shortage in the euro region’s benchmark sovereign debt. The ECB fell short of its implied buying target, as dictated by the capital key, by 304 million euros ($345 million) last month, following a shortfall of 277 million euros in May… The ECB has been fudging its own bond-buying guidelines, known as the capital key, with President Mario Draghi reiterating last in a press conference last month that the asset-purchase program has enough ‘flexibility.’”
July 2 – Financial Times (Claire Jones): “For years, Jens Weidmann was the unabashed hawk at the heart of the European Central Bank, the voice of German opposition to the unconventional monetary policies intended to save the eurozone from a deflationary death spiral. Now, an uncharacteristic period of reserve from the Bundesbank president has convinced his eurozone colleagues that he is mounting a quiet campaign to take over as ECB chief. Not all of them are happy at the prospect. Mario Draghi’s term as the ECB’s president is up in late 2019 and speculation is already rife that Berlin will push for Mr Weidmann — a close ally of Angela Merkel, the chancellor — to become its first German head.”
Brexit Watch:
July 1 – Reuters (Andrew MacAskill): “British business leaders have been told to brace for the possibility that Prime Minister Theresa May's government may walk out of Brexit talks this year, according to the Sunday Telegraph. The move would be designed for ‘domestic consumption’ to show the government is negotiating hard with the European Union… The Sunday Telegraph said the briefing of business leaders by a senior May aide took place after last month's general election and the person has since left in the recent overhaul at the top of government.”
Global Bubble Watch:
July 2 – Wall Street Journal (Simon Nixon): “Central bankers around the world are grappling with a common problem: when and how to normalize monetary policy at a time of normal levels of economic growth, normal levels of unemployment but abnormal levels of wage growth that is keeping inflation lower than their economic models predict. Policy makers at the European Central Bank and Bank of England are facing political challenges that are making their task even harder. At the ECB, the political constraint is its own self-imposed rules setting limits on the size and scale of its quantitative easing program. To avoid getting foul of the European Union treaty prohibition on direct financing of governments by the central bank, the ECB limits itself to buying government bonds strictly in proportion to each eurozone member’s ECB shareholding and capping its ownership of any individual bond at 33%. As a result, its QE program will soon run into capacity constraints—starting as soon as this summer with Germany, Spain, Ireland and Portugal.”
July 6 – Bloomberg (Dani Burger): “Is this the dawn of a new era? Coordinated or not, signals from central bankers from Europe to Canada and the U.S. have roiled financial markets: The 10-year Treasury note yield jumped more than 20 bps, bund rates reclaimed 0.50% for the first time in 18 months… While a few days of trading doesn’t cement the fate of markets for months to come, the debate is heating up over whether the moves are fleeting, amplified in the short term by summer vacation-induced light volumes, or if they mark the start of the end of a decade of easy money.”
July 3 – Reuters (Huw Jones): “The rising influence of ‘open ended’ funds and the impact on developing economies if the investment flows were abruptly reversed remain a concern for global regulators, Financial Stability Board Chairman Mark Carney said… The rapid growth in the world's asset management sector since the financial crisis to $75 trillion assets by 2015, or 40% of the world's financial assets, has been a largely positive development, Carney told reporters. An issue of concern, however is around ‘open ended’ funds supplying a substantial proportion of cross border flows into developing economies… Carney said the concern comes at a time when liquidity, or the ability to sell at short notice to redeem investors, appears better than it is likely to be under stressed conditions. ‘The question is what will the consequences be when inevitably there is a period of sharp adjustment, reduced liquidity,’ Carney said.”
July 4 – Wall Street Journal (Henny Sender): “On the 20th anniversary of the Asian financial crisis it might be regarded as a fitting response to sceptics that emerging market equities have been one of the best performing asset classes so far this year. Two decades ago, no sooner had the first day of official festivities accompanying Hong Kong’s return to Chinese control finished, then the overvalued Thai baht swooned. Its drop was followed by a plunge in the Indonesia rupiah and South Korean won, while the Malaysian ringgit, and Hong Kong and new Taiwan dollar were all rapidly under pressure… And make no mistake — emerging markets are still vulnerable to rising rates. Almost $2tn in emerging markets bonds and loans come due by the end of 2018. Higher rates in the US would likely mean a stronger US dollar, making dollar debt that Asian companies more expensive to service. That may well usher in credit downgrades in emerging markets.”
July 6 – Bloomberg (Katia Dmitrieva, Erik Hertzberg, and Kristine Owram): “Toronto’s housing market is losing steam. A series of government measures and the prospect of higher interest rates boosted listings and sparked the biggest sales decline in more than eight years last month, the Toronto Real Estate Board reported… Average home prices rose just 6.3% to C$793,915 ($612,000), the smallest annual increase since January 2015. Toronto’s real estate market, mostly known for bidding wars and 20% price gains, is beginning to feel the effects of government rule changes that make it harder to get a mortgage.”
Fixed Income Bubble Watch:
July 3 – Wall Street Journal (Richard Barley): “Tiny hints from central banks about policy normalization shook markets up last week. They were also a reminder of the highly abnormal situation bond markets find themselves in, with little or no cushion for investors against rising yields. It is too easy to lose money in bonds. Returns on bonds come from two sources: the interest income that accrues to holders and changes in bond prices. But years of zero-interest-rate policy have drastically reduced the former, making the latter far more important. That shift is important, in that it has changed the way in which normally reliable bonds behave. Take Germany… The country’s benchmark 10-year bond pays a coupon of 0.25%, and at the start of last week was priced nearly close to par, with a yield of 0.25%. By the end of the week, it yielded 0.47%, but the bond’s price had dropped by around 2%...”
July 5 – Bloomberg (Robert Smith): “The US and European high-yield markets have delivered strong returns this year, but clouds are looming that threaten to make the second half of 2017 less straightforward. Bank of America Merrill Lynch’s non-financial high-yield indices returned 4.8% for US dollars and 3.7% for euros in the first half of 2017. However, the sheen came off both markets slightly at the end of these runs, with the US and euro indices having been up more than 5 and 4.1% respectively earlier in June. Two very different culprits caused these dips in performance, with a renewed slump in the oil price largely to blame for US weakness and talk of the ECB tapering bond purchases fuelling the European sell-off.”
July 3 – Reuters (Lauren Hirsch and Nick Brown): “The Puerto Rico power utility PREPA, laden with a $9 billion debt load, has filed for a form of bankruptcy, Puerto Rico's primary fiscal agent said… “
Federal Reserve Watch:
July 4 – Wall Street Journal (Nick Timiraos): “Federal Reserve officials have indicated there is a strong chance they will announce in September a decision to start shrinking the central bank’s portfolio of bonds and other assets, while putting off until December any further interest-rate increase. The moves would give officials time to assess how markets react to the balance-sheet reductions and to confirm their view that a recent slowdown in inflation will fade. Launching the balance-sheet plan in September also would afford Chairwoman Janet Yellen an opportunity to initiate it well ahead of any potential leadership transition.”
U.S. Bubble Watch:
July 5 – Wall Street Journal (Greg Ip): “If you drew up a list of preconditions for recession, it would include the following: a labor market at full strength, frothy asset prices, tightening central banks, and a pervasive sense of calm. In other words, it would look a lot like the present. Those of us who have lived through economic mayhem before feel our muscle memory twitch at times like this. Consider the worrisome absence of worry. ‘Implied volatility’ measures the cost of hedging against big market moves via options. When fear is pervasive, options are expensive so implied volatility is high. At present, implied volatility in bonds, stocks, currencies and gold sits near its lowest since mid-2007, the eve of the financial crisis… The economic expansion is now entering its ninth year and in two years will be the longest on record. The unemployment rate sits at 4.3%, the lowest in 16 years, suggesting the economy has reached, or nearly reached, full capacity.”
July 3 – Bloomberg (Sho Chandra): “American factories powered up in June at the fastest pace in nearly three years, with robust advances in production, orders and employment that indicate a firming in the economy, data from the Institute for Supply Management showed… Factory index rose to 57.8, highest since August 2014 (est. 55.3) from 54.9 in May…”
July 3 – Bloomberg (Will Davies): “It’ll take more than central bank tightening to shake volatility from its yearlong slumber, according to Goldman Sachs… A large shock such as recession or war is usually required. That’s generally been the case for the 14 similar low volatility ‘regimes’ since 1928, at least in equity markets, Goldman Sachs strategists Christian Mueller-Glissmann and Alessio Rizzi said. These periods on average lasted nearly two years, featured short-lived spikes and realized S&P 500 volatility was usually at or below 10.”
July 3 – Bloomberg (Elise Young): “Were it not for Illinois’s flirtation with a junk credit downgrade and New Jersey Governor Chris Christie’s luxuriating on a closed public beach, the budget woes of U.S. states might have assumed their annual spot in the dust bin of public-policy history. This year, spending strife is unusually widespread, with 11 states missing their July 1 fiscal-year deadlines... In a poor economy, states often freeze spending while lawmakers and the chief executive work out how to plug budget holes. This year’s standoffs, though, come amid record stock-market gains and low national unemployment.”
July 6 – Reuters (Howard Schneider): “The U.S. housing finance system continues to put taxpayers at risk in a market dominated by government-backed agencies, Federal Reserve Governor Jerome Powell said…, calling for further reform of an ‘unsustainable’ situation. A decade after doubts about the creditworthiness of mortgage-backed securities helped trigger the worst financial crisis since the Great Depression, systemic risk remains given the concentration of mortgages in Fannie Mae and Freddie Mac, he said. ‘We're almost at a now-or-never moment,’ Powell told a conference…, arguing that the window for political action on an overhaul of housing finance may not stay open for long.”
July 4 – MarketWatch (Rachel Koning Beals): “As car buyers’ obsession with bigger, pricier vehicles grows, so does their willingness to take longer to pay for them, says new analysis from Edmunds.com. The average auto-loan length reached an all-time high of 69.3 months in June. That’s 6.8% longer than five years ago… The average amount that buyers financed was hit with the biggest uptick for the year last month, at $30,945, or up $631 from May. The financing trend also lead to the highest monthly payments for the year, now averaging $517…”
Japan Watch:
July 3 – Reuters (Linda Sieg): “Prime Minister Shinzo Abe's Liberal Democratic Party suffered an historic defeat in an election in the Japanese capital on Sunday, signaling trouble ahead for the premier, who has suffered from slumping support because of a favoritism scandal. On the surface, the Tokyo Metropolitan assembly election was a referendum on Governor Yuriko Koike's year in office, but the dismal showing for Abe's party is also a stinging rebuke of his 4-1/2-year-old administration.”
July 3 – Bloomberg (Isabel Reynolds and Yuki Hagiwara): “Scandal-hit Japanese Prime Minister Shinzo Abe faces one of his biggest tests since coming to power in late 2012, after his ruling party lost to an upstart outfit in an election for Tokyo’s assembly. The Liberal Democratic Party lost more than half its seats to end up with 23, the lowest number ever in the capital, in a vote that could be a harbinger for national elections. Voter turnout was up about eight percentage points on the previous poll four years ago… Somber-faced party executives sat in silence at the opening of an extraordinary meeting on Monday morning to discuss the defeat.”
July 2 – Bloomberg (Yoshiaki Nohara, Masahiro Hidaka, and Toru Fujioka): “Haruhiko Kuroda shouldn’t serve another term as governor of the Bank of Japan because the central bank will need fresh ideas as it moves toward exiting years of unprecedented monetary easing, according to an adviser to the prime minister. ‘An exit will surely come up within the next five years and we need someone who can prepare for it,’ said Nobuyuki Nakahara, a former BOJ board member. ‘He will fall into inertia and struggle to come up with bold new ideas. It’s the same in the private sector when a corporate president stays too long,’ he said.”
July 2 – Reuters (Leika Kihara and Tetsushi Kajimoto): “Confidence among Japan's big manufacturers hit its highest level in more than three years in the June quarter, …adding to signs the recovery in the world's third largest economy is gaining pace. Big firms also saw the job market at its tightest in 25 years, offering policymakers some hope that companies may finally raise wages… The survey underscores the Bank of Japan's view that the economy is heading for a moderate expansion…”
July 3 – Bloomberg (Toru Fujioka, Keiko Ujikane, and Takashi Amano): “A change of leadership at the Bank of Japan would offer a chance to bolster public confidence in its ability to defeat deflation, according to an economic adviser to Prime Minister Shinzo Abe. ‘What’s important, especially this time, is whether we can undertake regime change,” Etsuro Honda said… ‘It should be someone who is refreshing enough and can renew people’s impressions with personal charm and sincerity.’”
Leveraged Speculation Watch:
July 4 – Wall Street Journal (Laurence Fletcher): “After the presidential election last year, many hedge-fund managers called the U.S. a great moneymaking opportunity. It turns out Europe is the place to be. Bets on stocks in Italy, France and Spain—long laggards compared with the U.S.—have given some global hedge funds returns of more than 20% so far this year. The average hedge fund has managed only 3% through May, according to… Hedge Fund Research.”
Geopolitical Watch:
July 5 – Wall Street Journal (Jonathan Cheng): “The U.S. warned North Korea that it is ready to fight if provoked, as Pyongyang claimed another weapons-development breakthrough following its launch of an intercontinental ballistic missile a day earlier. The regime, having demonstrated its capacity to reach the U.S. with a missile, …touted another achievement of the test launch: It claimed that its missile warhead—the forward section, which carries the explosive—can withstand the extreme heat and pressure of re-entering the earth’s atmosphere.”
July 4 – Reuters (Jack Kim and Christine Kim): “North Korea said… its newly developed intercontinental ballistic missile (ICBM) can carry a large nuclear warhead, triggering a call by Washington for global action to hold it accountable for pursuing nuclear weapons. A spokeswoman for the U.S. Defense Department said it had concluded that North Korea test-launched an ICBM on Tuesday, which some experts now believe had the range to reach the U.S. state of Alaska as well as parts of the mainland United States. U.S. Secretary of State Rex Tillerson said the test, on the eve of the U.S. Independence Day holiday, represented ‘a new escalation of the threat’ to the United States and its allies, and vowed to take stronger measures.”
July 5 – Wall Street Journal (Farnaz Fassihi, Gordon Lubold and Jonathan Cheng): “The U.S. and Russia clashed at the United Nations Security Council over how to respond to North Korea’s nuclear-weapons program, a confrontation throwing into doubt U.S. hopes for an international diplomatic solution to the burgeoning crisis. The standoff between diplomats… came just two days before President Donald Trump and Russian counterpart Vladimir Putin plan to hold their first meeting during the summit of the Group of 20 leading nations in Germany, raising the stakes for both leaders as well as China, which will attend the international gathering.”
July 5 – CNBC (Cheang Ming): “Strategic ties between Russia and China were appraised in glowing terms as Chinese President Xi Jinping wrapped up a two-day state visit to Russia, concluding with at least $10 billion in agreements. Xi, who met with Russian President Vladimir Putin during the trip, told Russian media that relations between the two countries were currently at their ‘best time in history.’ The Chinese president also said Russia and China were each other's ‘most trustworthy strategic partners,’ Xinhua reported.”
July 5 – Financial Times (Heba Saleh and Simeon Kerr): “The four Arab states that have imposed an extraordinary embargo on Qatar, on Wednesday lambasted Doha for its ‘negative’ response to their demands in a sign that the month-long diplomatic crisis is deepening. After meeting in Cairo to discuss the dispute, the foreign ministers of Saudi Arabia, the United Arab Emirates, Bahrain and Egypt said Qatar’s response showed ‘a lack of seriousness in dealing with the roots of the problem’ and a ‘failure to appreciate the dangers in the situation’. Adel al-Jubeir, Saudi Arabia’s foreign minister, warned that additional steps against Doha could be taken at the appropriate time."
July 6 – Reuters (Rodi Said and Dominic Evans): “The head of the Syrian Kurdish YPG militia said… that Turkish military deployments near Kurdish-held areas of northwestern Syria amounted to a ‘declaration of war’ which could trigger clashes within days. Turkey's Deputy Prime Minister Numan Kurtulmus retorted that his country was not declaring war but that its forces would respond to any hostile move by the YPG, which he described as a small-scale army formed by the United States.”
July 5 – Associated Press (Gerry Shih and Muneeza Naqvi): “China has insisted India withdraw its troops from a disputed Himalayan plateau before talks can take place to settle the most protracted standoff in recent years between the nuclear-armed neighbors, who fought a bloody frontier war 55 years ago. India must pull back its troops ‘as soon as possible’ as a precondition to demonstrate sincerity, foreign ministry spokesman Geng Shuang told reporters… His comments came after weeks of saber-rattling in New Delhi and Beijing, as officials from both sides talk up a potential clash even bloodier than their 1962 war that left thousands dead.”
July 2 – New York Times (Sheera Frenkel): “The attack had the hallmarks of something researchers had dreaded for years: malicious software using artificial intelligence that could lead to a new digital arms race in which A.I.-driven defenses battled A.I.-driven offenses while humans watched from the sidelines. But what was not as widely predicted was that one of the earliest instances of that sort of malware was found in India… Security researchers are increasingly looking in countries outside the West to discover the newest, most creative and potentially most dangerous types of cyberattacks being deployed. As developing economies rush to go online, they provide a fertile testing ground for hackers trying their skills…”
July 1 – Reuters (Pavel Polityuk): “Ukraine said… that Russian security services were involved in a recent cyber attack on the country, with the aim of destroying important data and spreading panic. The SBU, Ukraine's state security service, said the attack, which started in Ukraine and spread around the world…, was by the same hackers who attacked the Ukrainian power grid in December 2016. Ukrainian politicians were quick to blame Russia for Tuesday's attack, but a Kremlin spokesman dismissed ‘unfounded blanket accusations’.”
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