Saturday's News Links

[Reuters] California governor calls wildfires 'deadly moment,' urges residents to flee

[Reuters] Wall Street Week Ahead: No elk or trout, but Fed's virtual retreat may stoke market's 'animal spirits'

[WSJ] Covid-19 Is Dividing the American Worker

[WSJ] Even With a Strong Crop This Year, U.S. Farmers Are Suffering

[WSJ] U.S. Existing-Home Sales Rose Nearly 25% in July

[FT] US public pension plans face ‘vicious cycle’ as funding gap soars

Weekly Commentary: Moral Hazard Quagmire

The Nasdaq100 (NDX) jumped another 3.5% this week, increasing 2020 gains to 32.3%. Amazon gained 4.3% during the week, boosting y-t-d gains to 77.8% - and market capitalization to $1.626 TN. Apple surged 8.2% this week, increasing 2020 gains to 69.4%. Apple’s market capitalization ended the week at a world-beating $2.127 TN. Microsoft rose 2.0% (up 35.1% y-t-d, mkt cap $1.612 TN). Google rose 4.8% (18.2%, $1.073 TN), and Facebook gained 2.2% (30.1%, $761bn). The NDX now trades with a price-to-earnings ratio of 37.4.

This era will be analyzed and debated for decades to come – if not much longer. Market Bubbles, over-indebtedness, inequality, financial instability and economic maladjustment - festering for years - can no longer be disregarded as cyclical phenomena. Ben Bernanke has declared understanding the forces behind the Great Depression is the “Holy Grail of economics”. It’s ironic. That the Fed never repeats its failure to aggressively expand the money supply in time of crisis is a key facet of the Bernanke doctrine – policy failing he asserts was a primary contributor to Depression-era financial and economic collapse. Yet this era’s unprecedented period of monetary stimulus is fundamental to current financial, economic, social and geopolitical instabilities.

August 18 – Bloomberg (Craig Torres): “The concentration of market power in a handful of companies lies behind several disturbing trends in the U.S. economy, like the deepening of inequality and financial instability, two Federal Reserve Board economists say in a new paper. Isabel Cairo and Jae Sim identify a decline in competition, with large firms controlling more of their markets, as a common cause in a series of important shifts over the last four decades. Those include a fall in labor share, or the chunk of output that goes to workers, even as corporate profits increased; and a surge in wealth and income inequality, as the net worth of the top 5% of households almost tripled between 1983 and 2016. This fueled financial risks and higher leverage, the economists say, as poorer households borrowed to make ends meet while richer ones shoveled their wealth into bonds… ‘The rise of market power of the firms may have been the driving force’ in all of these trends, Cairo and Sim write in the paper.”

My analytical framework’s “money” and Credit focus is at times lacking in capturing non-monetary macro factors. To blame the Fed and global central banks for all that ails the world (while a valid starting point) represents a too simplified view of complex dynamics. To be sure, technological innovation and advancement along with “globalization” continue to exert momentous influence – arguably at an accelerated pace. Indeed, analysis with technological and globalization trends at its focal point could offer a plausible explanation of many macro developments - to the exclusion of policymaking and finance. As the above Fed research asserts, it is increasingly tempting to deflect blame for inequality upon monopoly power.

Isabel Cairo and Jae Sim’s Fed research paper, “Market Power, Inequality, and Financial Instability,” is a technical research piece: “A few secular trends have emerged in the U.S. economy over the last four decades… First, real wage growth has stagnated behind productivity growth over the last four decades and, as a result, the labor income share has steadily declined… Second, the before-tax profit share of U.S. corporations has shown a dramatic increase in the last few decades… Third, income inequality has been exacerbated over the last four decades… Fourth, wealth inequality has also been exacerbated during the last four decades… Finally, the rising household sector leverage has been coupled with rising financial instability…” “We develop a real business cycle model and show that the rise of market power of the firms in both product and labor markets over the last four decades can generate all of these secular trends.”

“In this paper, we quantitatively investigate the role of rising firms’ market power in both product and labor markets in explaining the six secular trends. In so doing, we are inspired by Kalecki (1971), who… predicted that the market power of the firms would increase over time and consequently, labor share would fall in the long-run.”

Understandably, Amazon lost money in its initial years. Losses mounted steadily from 1995, jumping to $720 million by 1999, $1.4 billion in the year 2000 and $567 million in 2001. The company posted a 2003 profit of $35 million on revenues of $5.3bn. Net Income jumped to $589 million in 2004 (pre-tax $365 million), earnings not exceeded until 2008’s $645 million (on revenues of $19.2bn). Amazon reported Net Income last year of $13.18 billion on Revenues of $280.5bn.

What impact did loose monetary policies have on Amazon’s evolution to an online retail juggernaut, crushing traditional retailers and online competitors alike? Enjoying limitless access to virtually free finance, there were no constraints on investment spending (or acquisitions). And as competitors increasingly struggled to retain profitability and affordable finance, there was nothing holding back Amazon’s rein of dominance.

Tesla’s stock price closed the week at $2,050, up almost 400% y-t-d, with a market capitalization of $390 billion, exceeding the combined capitalization of five global auto heavyweights (Ford $26.7bn, GM $41.0bn, Toyota $218bn, Honda $45.3bn, and Daimler $51.8bn). Tesla reported losses of $725 million in 2016, $1.8bn in 2017, $742 million in 2018 and $629 million in 2019. After reporting cumulative profits of about $450 million over the past four quarters, Tesla’s stock currently trades with a price/earnings ratio of 895.

How would Tesla appear these days if not for ongoing aggressive Federal Reserve stimulus and the resulting loosest financial conditions imaginable? Would it have survived? I’m all for zero emissions vehicles – as well as a proponent for Schumpeter’s “creative destruction.” But zero rates, QE, mispriced finance and market Bubbles have created financial and economic distortions with momentous consequences. Years of ultra-cheap finance, booming securities markets, and a most elongated business cycle have created powerful industry behemoths. Pandemic crisis measures now cement monopoly power.

To be sure, whether it is Amazon, Tesla, Netflix, Apple, Microsoft, Google, Facebook or scores of other market darlings, a hot stock price is essential to achieving market dominance. For one, it provides a currency for acquisitions, purchases that often include fledgling competitors. And as these companies grow increasingly dominant in both the markets and real economy, surging stock prices ensure these heavyweights attract and retain the best and brightest talent (further cementing competitive advantage).

There is today no more powerful factor in exacerbating inequality than the stock market. A position (with stock grants) at one of the hundreds of market darlings is today a ticket to extraordinary riches. While tens of millions have lost their jobs and financial security over recent months, those fortunate to be riding the bull market wave have enjoyed spectacular wealth gains.

August 20 - Bloomberg (Liz Capo McCormick): “The unprecedented speed and scale of the Federal Reserve’s buying of Treasuries and mortgage debt to aid a severely impaired bond market has accomplished that without raising the specter of moral hazard, Federal Reserve Bank of New York researchers wrote… Pandemic-sparked volatility in March caused liquidity in the world’s biggest bond market to plunge to its worst since the 2008 financial crisis. The Fed responded with purchases of Treasuries and mortgage securities that peaked at more than $100 billion a day combined. It’s still soaking up about $80 billion of Treasuries and at least $40 billion of mortgage securities a month, and some bond veterans warn that the central bank’s involvement in the market could potentially be encouraging risky behavior, such as excessive borrowing. But a post… in the New York Fed’s Liberty Street blog argued against that. ‘The magnitude of the Desk’s purchase program in 2020 ‘to support the smooth functioning’ of the Treasury and agency MBS markets marked those purchases as highly unusual,’ wrote Kenneth Garbade, a senior vice president in the New York Fed’s Research and Statistics Group, and Frank Keane, a senior policy advisor. But they also say that the tool has been used before and ‘the infrequency of Federal Reserve intervention suggests that relying on the Fed on those rare occasions when markets are in extremis has not materially exacerbated moral hazard.”

The Fed’s stunning pandemic response has greatly exacerbated at least two pernicious dynamics – Inequality and Moral Hazard. Only Fed economists could argue the Federal Reserve’s crisis response measures haven’t stoked risk-taking throughout the markets (and in the real economy). Indeed, any doubt that the Fed would invoke “whatever it takes” to support the securities markets has been allayed.

It is strangely flawed analysis deserving of a response. “The magnitude of the Desk’s purchase program in 2020 ‘to support the smooth functioning’ of the Treasury and agency MBS markets marked those purchases as highly unusual. From an operational perspective the speed and size of the program were unprecedented, yet as a policy response, as the three episodes discussed here show, it was not unique.”

The Fed economists point to three episodes as evidence recent Fed crisis measures were not unique: 1) Fed purchases of $800 million of Treasuries during September 1939, at the start of WWII. 2) Several hundred million Treasury purchases in response to disorderly markets in July 1958. 3) The buying of several billion Treasury securities in May 1970, in response to disorderly markets after President Nixon announced a military escalation with large-scale operations in Cambodia – along with anti-war protests and the Kent State tragedy. The analysis concludes with a bold assertion: “…The infrequency of Federal Reserve intervention suggests that relying on the Fed on those rare occasions when markets are in extremis has not materially exacerbated moral hazard.”

Arguably, the three highlighted historical interventions have little or no bearing whatsoever on today’s Moral Hazard Quagmire.

I would point to more than three decades of serial – and escalating - market interventions and bailouts – including Greenspan’s 1987 post-crash liquidity assurances; early ‘90’s aggressive rate cuts and yield curve manipulation; 1994 GSE quasi-central bank liquidity operations; the 1995 Mexican bailout; Greenspan’s pro-markets “asymmetric” policy responses; the ’98 LTCM bailout to safeguard global derivatives markets; Bernanke’s 2002 “helicopter money” and “government printing press” speeches; the Fed’s post-tech Bubble accommodation of rapid mortgage Credit growth as the primary system reflation mechanism – and the subsequent blatant disregard for mortgage finance and housing excesses; the post-Bubble $1 TN QE program, bailouts and various extraordinary crisis measures in 2008/09; the Bernanke Fed’s coercion of savers into the debt and equities markets; Draghi’s “whatever it takes” 2012 crisis response; Bernanke’s 2013 assurance that the Fed would “push back” against any market tightening of financial conditions (i.e. market corrections); the Bernanke and Yellen Feds’ decade-long aversion to policy normalization; the Powell Fed’s abrupt market instability-induced December 2018 abandonment of policy “normalization”; the September 2019 “insurance” rate cut and QE in the face of record stock prices and generally overheated securities markets.

“Moneyness of Credit” was an analytical focus of mine during the mortgage finance Bubble period. It was a historic Moral Hazard episode, with the government-sponsored enterprises, the Treasury and Federal Reserve all contributing to the perception that federal backing insured mortgage finance would remain safe and liquid (money-like) – irrespective of the risk profile of the underlying mortgages. The view that Washington would never allow a housing (or mortgage finance) bust was fundamental to egregious risk-taking and excess (in both the Real Economy and Financial Spheres).

I coined “Moneyness of Risk Assets” in 2009 upon recognizing that Bernanke was targeting rising equities and corporate Credit markets as the primary mechanism for post-Bubble system reflation. Epic Moral Hazard was unleashed. Markets accurately assumed the Fed had taken a giant leap with respect to market intervention and support – with the greater the degree of Bubble excess the more confident the marketplace became that the Fed wouldn’t risk pulling back.

In the realm of Moral Hazard, last autumn’s “insurance” monetary stimulus was a catastrophic policy blunder. Stress was building in leveraged speculation and within global derivatives markets – air was beginning to leak from the global financial Bubble. The Fed’s aggressive measures quashed the incipient market correction and stoked only greater speculative excess. This ensured the acute market fragility that contributed to March’s near-financial meltdown.

And the financial crisis spurred an unprecedented $3 TN expansion of Fed market liquidity. M2 money supply surged an unparalleled $2.9 TN in only six months, in an ongoing episode of historic Monetary Disorder. And when it comes to Moral Hazard, one cannot overstate the significance of the Fed’s giant leap to purchasing corporate bonds and even ETFs that hold junk bonds. With rates back to zero and the Fed now directly backstopping corporate Credit, “money” has flooded into perceived safe and liquid bond ETFs (in the face of the steepest economic downturn in decades). A debt issuance bonanza ensued.

Once more for posterity: “…The infrequency of Federal Reserve intervention suggests that relying on the Fed on those rare occasions when markets are in extremis has not materially exacerbated moral hazard.”

Rather than infrequent, Fed intervention has become incessant. Market “extremis” has turned commonplace. And any assertion that Fed policies have not materially exacerbated Moral Hazard completely lacks credibility. In fact, it’s foolish.

Friday afternoon from Bloomberg (Lu Wang): “Bears Are Going Extinct in Stock Market’s $13 Trillion Rebound.” “Skeptics are a dying breed in American Equities.” “Going by the short positions of hedge funds, resistance to rising prices is the lowest in 16 years… At the start of August, the median S&P 500 stock had outstanding short interest equating to just 1.8% of market capitalization, the lowest level since at least 2004…” “At 26 times forecast earnings, the S&P 500 was trading at the highest multiple since the dot-com era.” “Consider the internet frenzy 20 years ago. Back then, large speculators, mostly hedge funds, were net short on S&P 500 futures in all but five weeks in 1998 and 1999. Those mostly losing bets were completely squeezed out in 2000. That’s when the crash came.”

For the Week:

The S&P500 added 0.7% (up 5.1% y-t-d), while the Dow closed little unchanged (down 2.1%). The Utilities fell 1.4% (down 7.2%). The Banks sank 6.0% (down 34.5%), and the Broker/Dealers dropped 2.0% (down 0.4%). The Transports slipped 0.2% (up 0.4%). The S&P 400 Midcaps fell 2.0% (down 7.4%), and the small cap Russell 2000 declined 1.6% (down 7.0%). The Nasdaq100 jumped 3.5% (up 32.3%). The Semiconductors were little changed (up 18.9%). The Biotechs dropped 2.9% (up 6.4%). Though bullion slipped $5, the HUI gold index rallied 2.0% (up 39.2%).

Three-month Treasury bill rates ended the week at 0.0875%. Two-year government yields were little changed at 0.14% (down 143bps y-t-d). Five-year T-note yields declined three bps to 0.27% (down 143bps). Ten-year Treasury yields dropped eight bps to 0.63% (down 129bps). Long bond yields fell 12 bps to 1.32% (down 107bps). Benchmark Fannie Mae MBS yields declined three bps to 1.32% (down 137bps).

Greek 10-year yields declined four bps to 1.09% (down 34bps y-t-d). Ten-year Portuguese yields fell four bps to 0.33% (down 11bps). Italian 10-year yields declined four bps to 0.94% (down 47bps). Spain's 10-year yields dropped six bps to 0.30% (down 17bps). German bund yields sank nine bps to negative 0.51% (down 32bps). French yields fell seven bps to negative 0.20% (down 32bps). The French to German 10-year bond spread widened two to 31 bps. U.K. 10-year gilt yields declined four bps to 0.21% (down 62bps). U.K.'s FTSE equities index fell 1.4% (down 20.4%).

Japan's Nikkei Equities Index declined 1.6% (down 3.1% y-t-d). Japanese 10-year "JGB" yields declined two bps to 0.03% (up 5bps y-t-d). France's CAC40 fell 1.3% (down 18.1%). The German DAX equities index lost 1.1% (down 3.7%). Spain's IBEX 35 equities index dropped 2.4% (down 26.9%). Italy's FTSE MIB index fell 1.7% (down 16.2%). EM equities were mixed. Brazil's Bovespa index increased 0.2% (down 12.2%), while Mexico's Bolsa dropped 2.2% (down 12.5%). South Korea's Kospi index sank 4.3% (up 4.9%). India's Sensex equities index rallied 1.5% (down 6.8%). China's Shanghai Exchange added 0.6% (up 10.8%). Turkey's Borsa Istanbul National 100 index gained 2.4% (down 3.0%). Russia's MICEX equities index fell 2.2% (down 1.7%).

Investment-grade bond funds saw inflows of $5.130 billion, while junk bond funds posted outflows of $301 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates rose three bps to 2.99% (down 56bps y-o-y). Fifteen-year rates jumped eight bps to 2.54% (down 49bps). Five-year hybrid ARM rates added a basis point to 2.91% (down 41bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down 12 bps to 3.05% (down 100bps).

Federal Reserve Credit last week gained $54.2bn to $6.965 TN, with a 50-week gain of $3.243 TN. Over the past year, Fed Credit expanded $3.238 TN, or 86.9%. Fed Credit inflated $4.154 Trillion, or 148%, over the past 406 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week gained $9.6bn to $3.417 TN. "Custody holdings" were down $53.9bn, or 1.6%, y-o-y.

M2 (narrow) "money" supply surged $144bn last week to a record $18.402 TN, with an unprecedented 24-week gain of $2.895 TN. "Narrow money" surged $3.480 TN, or 23.3%, over the past year. For the week, Currency increased $6.7bn. Total Checkable Deposits dropped $82.1bn, while Savings Deposits surged $233bn. Small Time Deposits declined $6.6bn. Retail Money Funds fell $6.9bn.

Total money market fund assets declined $10.6bn to $4.544 TN. Total money funds surged $1.166 TN y-o-y, or 34.5%.

Total Commercial Paper slipped $2.8bn to $1.007 TN. CP was down $123bn, or 10.9% year-over-year.

Currency Watch:

August 16 – Financial Times (Dimitri Simes): “Russia and China are partnering to reduce their dependence on the dollar — a development some experts say could lead to a ‘financial alliance’ between them. In the first quarter of 2020, the dollar’s share of trade between Russia and China fell below 50% for the first time on record… The greenback was used for only 46% of settlements between the two countries. At the same time, the euro made up an all-time high of 30%, while their national currencies accounted for 24%, also a new high.”

August 19 – Axios (Dion Rabouin): “Experts are again sounding the alarm that the dollar could lose its role as the world’s reserve currency. This is a frequent and historically unconsummated concern — but things may actually be different this time. What's happening: New data from the Bank of Russia show the country now receives more euros than dollars for its exports to China, with the share of goods purchased in euros rising from 0.3% at the start of 2014 (and just 1.3% in the second quarter of 2018) to nearly 51% at the end of Q1 this year. The share of euros Russia receives for exports to the European Union increased to 43% from 38% at the end of last year…”

For the week, the U.S. dollar index was little changed at 93.201 (down 3.4% y-t-d). For the week on the upside, the South African rand increased 1.4%, the Japanese yen 0.8%, and the Canadian dollar 0.7%. For the week on the downside, the Brazilian real declined 3.5%, the Norwegian krone 1.4%, the Swedish krona 1.2%, the euro 0.4%, the Swiss franc 0.3%, the South Korean won 0.1%, the Australian dollar 0.1% and the Singapore dollar 0.1% The Chinese renminbi increased 0.45% versus the dollar this week (up 0.63% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index gained 0.9% (down 11.7% y-t-d). Spot Gold slipped 0.2% to $1,940 (up 27.8%). Silver rallied 2.4% to $26.877 (up 50.0%). WTI crude added 33 cents to $42.34 (down 31%). Gasoline rose 3.2% (down 24%), and Natural Gas jumped 3.9% (up 12%). Copper advanced 1.8% (up 5%). Wheat surged 5.0% (down 4%). Corn increased 0.7% (down 12%).

Coronavirus Watch:

August 19 – Wall Street Journal (Matthew Dalton, Ruth Bender and Margherita Stancati): “Coronavirus infections are surging again across much of Europe and governments are racing to prevent a full-fledged second wave of the pandemic —without resorting to the kind of broad lockdowns that devastated their economies in the spring. The seven-day moving average of reported new daily cases has more than doubled since the end of July in the five largest European countries, nearing 11,000. That is the biggest sustained rise on the continent since it beat back the virus’s initial spike in March and April. Outbreaks are multiplying around vacation hot spots, shopping centers, parties and some workplaces. Authorities are also reporting that many cases have no known origin…”

Market Instability Watch:

August 18 – Reuters (Gertrude Chavez-Dreyfuss): “The S&P 500 closed at a record high on Tuesday, rebounding from huge losses triggered by the coronavirus pandemic and crowning one of the most dramatic recoveries in the index’s history. Trillions of dollars in fiscal and monetary stimulus have made Wall Street flush with cash, pushing yield-seeking investors into equities. Amazon and other high growth technology-related stocks have been viewed as the most reliable to ride out the crisis. The S&P record confirms, according to a widely accepted definition, that Wall Street’s most closely followed index entered a bull market after hitting its pandemic low on March 23. It has surged about 55% since then. That makes the bear market that started in late February the S&P 500’s shortest in its history.”

August 18 – Bloomberg (Lu Wang): “From professional investors to market handicappers, it’s becoming next to impossible to stay bearish in the face of the rally in equities. Fund managers who went to cash when the pandemic broke out have been forced back in to stocks, pushing measures of positioning toward historical highs. Wall Street forecasters, some of whom threw up their hands in surrender four months ago, are pushing up targets each day. Even Goldman Sachs…, which once warned that bad loans and falling dividends could drive a second leg of the bear market, now sees another 6% of upside in the S&P 500. While testament to the career pressure missing a $12 trillion rally creates, the unanimity has become one of the biggest risk factors in markets right now, with positions getting crowded as everyone is forced to buy. A custom gauge of sentiment compiled by Citigroup Inc. showed ‘euphoria’ just hit the highest level since the dot-com era.”

August 17 – Bloomberg (Skyler Rossi): “U.S. corporate investment-grade issuance reached a record $1.346 trillion Monday, surpassing 2017’s full-year total in less than eight months amid seemingly endless investor appetite following the Federal Reserve’s unprecedented steps to bolster liquidity. The Fed’s March pledge to use its near limitless balance sheet to buy corporate bonds has lifted nearly every corner of the market, allowing struggling cruise lines, plane makers and hotels to tap much needed financing while providing top-rated companies…. access to some of the cheapest funding ever seen.”

August 18 – Financial Times (Joe Rennison): “Investors’ ravenous appetite for higher-yielding assets is boosting some of the riskiest classes of bonds… The additional yield above US government debt on corporate bonds with a triple C rating or lower, placing them near the bottom of the ladder, has fallen more than 1 percentage point to 12.38 percentage points over the past month… The debt has done much better than the wider high-yield bond market, often referred to as ‘junk’, where the average spread has dropped 0.45 percentage points to 5.34 percentage points. It is a sign that yield-hungry investors are beginning to venture down to the very riskiest companies that have underperformed since the market trough in March, and still offer the potential of juicy returns.”

August 16 – Wall Street Journal (Gunjan Banerji and Gregory Zuckerman): “The presidential election is three months away, but some traders are preparing for the possibility that prolonged political uncertainty will stoke stock-market mayhem. The investors are going beyond the normal hedging ahead of a potential change in power in Washington. Instead they are betting on volatility and a possible market tumble later in the year. Among the concerns expressed by some: speculation that President Trump could try to delay the election or disrupt mail-in voting, as well as the chance that a result remains unclear for weeks after polls close. The election worries amplify existing concerns about the weak economy, a possible second wave of coronavirus infections in the fall and the highflying market.”

August 18 – Bloomberg (Jill Ward and Anil Varma): “The U.S. dollar is driving a wedge between volatility expectations for global currencies and U.S. stocks. The greenback’s plunge last month jolted currencies so profoundly that a gauge of expected swings in the market is no longer moving in tandem with a similar measure for U.S. equities. So much so that the 40-day correlation between the JPMorgan Global FX Volatility Index and the VIX Index of U.S. stock swings fell below zero this month to the lowest since 2009. ‘It’s a reminder that dollar moves could be an outsized driver of risk, sentiment and narrative over the next few months, if they continue with the recent volatility experiences,’ said… John Roe, head of multi asset funds at Legal & General Investment Management.”

August 21 – Bloomberg (Paula Seligson): “After tapping the bond market at a record-shattering pace in recent months, Corporate America is more indebted today than ever before. And while much of that fresh cash -- more than $1.6 trillion in total -- helped scores of companies stay afloat during the pandemic lockdown, it now threatens to curb an economic recovery that was already showing signs of sputtering. Many companies will have to divert even more cash to repaying these obligations at the same time that their profits sink, leaving them with less to spend on expanding payrolls or upgrading facilities in months ahead. The over-leveraging of America’s corporate sector is not a brand-new development… It’s been building for more than a decade, ever since the last crisis… prompted the Federal Reserve to pump unprecedented amounts of cash into the economy, a policy tool that it has taken to new heights during the pandemic as it has supported corporate credit markets.”

August 17 – Bloomberg (Sonali Basak): “Robinhood Financial raised new funding at a valuation of about $11.2 billion, as Dan Sundheim’s D1 Capital Partners poured $200 million into the online trading company. The seven-year-old firm was most recently valued at $8.6 billion during its July funding round, before it posted record trading figures for June. It revealed daily average revenue trades of 4.31 million for the month, greater than any of its publicly traded rivals… Robinhood’s surge during the Covid-19 pandemic has garnered both fascination and criticism from Wall Street…”

August 19 – Bloomberg (Marianna Aragao): “S&P Global Ratings expects the European trailing-12-month speculative-grade corporate default rate to rise to 8.5% by June 2021 from 3.35% in the same month this year, the firm said in an Aug. 18 report. The baseline forecast implies 62 defaults from speculative-grade companies. In a pessimistic scenario, the default rate would reach 11.5%, 3.5% in an optimistic scenario…”

Global Bubble Watch:

August 21 – Wall Street Journal (Paul Hannon): “Europe’s economic recovery slowed in August while Japan saw another drop in activity, an indication that the return to pre-pandemic levels of global output is likely to be slow and uneven for as long as fresh outbreaks of the novel coronavirus continue to threaten. Economies around the world saw record contractions in the three months through June as governments imposed lockdowns… With many of those restrictions having been lifted as the second quarter drew to a close, economists expect a big rebound in activity during the three months through September. However, surveys of purchasing managers at businesses in Europe and Japan released Friday suggest that the rebound may be smaller than hoped for…”

August 18 – CNBC (Elliot Smith): “Foreign firms looking to move their manufacturing processes outside of China in the wake of coronavirus could face $1 trillion in costs over five years, according to new Bank of America research… Even before the pandemic, BofA’s survey of global analysts found that companies were shifting away from globalization and towards a more localized approach when it came to their supply chains. This was due to a host of factors that threatened the network that supplies modern factories, including trade disputes, national security concerns, climate change and the rise of automation.”

Trump Administration Watch:

August 18 – Bloomberg: “President Donald Trump said he called off last weekend’s trade talks with China, raising questions about the future of a deal that is now the most stable point in an increasingly tense relationship. ‘I canceled talks with China’; Trump said… ‘I don’t want to talk to China right now.’ The phase-one trade deal, which came into force in February, had called for discussions on implementation of the agreement every six months. Chinese Vice Premier Liu He was supposed to hold a video conference call with U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin, but it was postponed indefinitely.”

August 17 – Wall Street Journal (Dan Strumpf and Katy Stech Ferek): “The U.S. Commerce Department issued new rules curbing Huawei Technologies Co.’s access to foreign-made chips, expanding the Trump administration’s restrictions on the Chinese telecom company’s link to crucial components. The new rules prohibit non-U.S. companies from selling any chips made using U.S. technology to Huawei without a special license. The rule covers even widely available, off-the-shelf chips made by overseas firms, placing potentially severe new limits on Huawei’s ability to source parts.”

August 19 – Bloomberg (Kevin Cirilli and Shelly Banjo): “The U.S. State Department is asking colleges and universities to divest from Chinese holdings in their endowments, warning schools… to get ahead of potentially more onerous measures on holding the shares. ‘Boards of U.S. university endowments would be prudent to divest from People’s Republic of China firms’ stocks in the likely outcome that enhanced listing standards lead to a wholesale de-listing of PRC firms from U.S. exchanges by the end of next year,’ Keith Krach, undersecretary for economic growth, energy and the environment, wrote in the letter addressed to the board of directors of American universities and colleges… ‘Holding these stocks also runs the high risks associated with PRC companies having to restate financials,’ he said.”

August 20 – Bloomberg (Saleha Mohsin, Justin Sink, and Mario Parker): “President Donald Trump threatened… that if he’s re-elected, he’ll impose tariffs on U.S. companies that refuse to move jobs back to the country from overseas. ‘We will give tax credits to companies to bring jobs back to America, and if they don’t do it, we will put tariffs on those companies, and they will have to pay us a lot of money,’ Trump said during a campaign event in Pennsylvania.”

Federal Reserve Watch:

August 20 – Financial Times (Martin Arnold and Eva Szalay): “Four of the world’s leading central banks have further scaled back the US dollar liquidity they offer via emergency swap lines with the Federal Reserve, in the latest illustration of the global financial system’s recovery from the market panic caused by coronavirus earlier this year. The European Central Bank, the Bank of England, the Bank of Japan and the Swiss National Bank said… they would offer short-term dollar funding via the Fed’s swap lines only once a week, instead of three times, because of ‘continuing improvements in US dollar funding conditions and the low demand’ at recent auctions.’”

August 20 – Reuters (Balazs Koranyi): “The U.S. Federal Reserve will cut the number of seven-day swap operations with major central banks to one tender per week from three from Sept. 1 as funding conditions have improved, the European Central Bank said… The Fed will, however, maintain its schedule for 84-day tenders with the Bank of England, the Bank of Japan, the ECB and the Swiss National Bank at one per week, the ECB said. The Fed increased the frequency of its dollar liquidity operations at the height of the coronavirus crisis…”

August 19 – CNBC (Jeff Cox): “Federal Open Market Committee members expressed concern at their latest meeting over the future of the economy, saying that the coronavirus likely would continue to stunt growth and potentially pose dangers to the financial system. At the July 28-29 session, the Federal Reserve’s policymaking arm voted to keep short-term interest rates anchored near zero, citing an economy that was falling short of its pre-pandemic levels. Officials at the meeting ‘agreed that the ongoing public health crisis would weigh heavily on economic activity, employment, and inflation in the near term and was posing considerable risks to the economic outlook over the medium term,’ the meeting summary said.”

August 19 – Bloomberg (Christopher Condon, Matthew Boesler, and Craig Torres): “U.S. central bankers backed off from an earlier readiness to clarify their guidance on the future path of interest rates when they met in July, according to a record of the gathering… ‘With regard to the outlook for monetary policy beyond this meeting, a number of participants noted that providing greater clarity regarding the likely path of the target range for the federal funds rate would be appropriate at some point,’ minutes of the Federal Open Market Committee’s July 28-29 meeting showed.”

August 19 – Reuters (Howard Schneider): “A stock market hitting record highs in a pandemic might seem out of touch, but St. Louis Federal Reserve President James Bullard says Wall Street has got it right and he expects the United States to do better than many forecasters anticipate as businesses and households learn to manage coronavirus risks. Though the situation seems chaotic, with federal, state and local officials laying out competing ideas about what activities are safe and under what conditions, Bullard said that shows adaptation in process, and will allow the country to fine-tune behavior and economic activity to what a ‘persistent’ health threat allows. ‘I think Wall Street has called this about right so far,’ he said… ‘There is a lot of ability to mitigate and proceed and most of the data has surprised to the upside...So I think we are going to do somewhat better… I expect more businesses to be able to operate and more of the economy to be able to run...successfully in the second half of 2020.’”

August 20 – Bloomberg (Christopher Condon): “A group of former Federal Reserve officials and staffers, including former Vice Chairman Alan Blinder, published an open letter… calling on the U.S. Senate to reject President Donald Trump’s nomination of Judy Shelton to the central bank’s Board of Governors. ‘Ms. Shelton’s views are so extreme and ill-considered as to be an unnecessary distraction from the tasks at hand,’ the letter said.”

U.S. Bubble Watch:

August 18 – New York Times (Matt Phillips): “Widespread economic devastation, severe unemployment and a grim prognosis for recovery have not stopped the stock market’s exuberance. And on Tuesday, that undying optimism propelled the market to a new high, pushing it past a milestone reached only six months ago, when the coronavirus was just beginning its harrowing journey across the United States. ‘This market is nuts,’ said Howard Silverblatt, senior index analyst for S&P Dow Jones Indices. To those outside Wall Street, the market’s rise may appear inexplicable given the human and economic toll of the virus, and a stalemate in Washington that has paralyzed efforts to provide more relief… Still, investors have cast the nearly relentless drumbeat of bad news aside to focus on any signs that the worst might be over. They have also been emboldened by the Federal Reserve’s steadfast support of the markets and unwavering embrace of low interest rates.”

August 17 – Bloomberg (Prashant Gopal): “Federal Housing Administration mortgages… now have the highest delinquency rate in at least four decades. The share of late FHA loans rose to almost 16% in the second quarter, up from about 9.7% in the previous three months and the highest level in records dating back to 1979… The delinquency rate for conventional loans, by comparison, was 6.7%. Millions of Americans stopped paying their mortgages after losing jobs in the coronavirus crisis. Those on the lower end of the income scale are most likely to have FHA loans, which allow borrowers with shaky credit to buy homes with small down payments. For now, most of them are protected from foreclosure by the federal forbearance program… As of Aug. 9, about 3.6 million homeowners were in forbearance, representing 7.2% of loans…”

August 20 – CNBC (Fred Imbert): “The number of people filing for unemployment benefits last week was greater than expected, raising concern about the state of the economy as lawmakers struggle to move forward on a new pandemic stimulus package. …Initial jobless claims for the week ended Aug. 15 came in at 1.106 million. Economists polled by Dow Jones expected a total of 923,000. Initial claims for the previous week were also revised higher by 8,000 to 971,000. Last week marked the first time in 21 weeks that initial claims came in below 1 million.”

August 18 – Bloomberg (Reade Pickert): “U.S. home construction starts increased in July by more than forecast and applications to build surged by the most in three decades, indicating builders are responding to robust housing demand fueled by record-low interest rates. Residential starts jumped by 22.6%, the most since October 2016, to a 1.5 million annualized rate from a month earlier… Applications to build, a proxy for future construction, increased 18.8%, the most since January 1990.”

August 17 – Reuters (Dan Burns and Jonnelle Marte): “U.S. home builder confidence rose for a third straight month in August to match its highest level ever as record-low interest rates spur buyer traffic, …the latest indication the housing market is a rare bright spot in the economic crisis triggered by the coronavirus pandemic.”

August 19 – New York Times (Jennifer Valentino-DeVries, Ella Koeze and Sapna Maheshwari): “Strict lockdowns ended weeks ago, but many people across the country are still avoiding malls, restaurants and other businesses. The shift in behavior points to a reshaping of American commerce, fueling questions about the strength and speed of the economic recovery as the coronavirus continues to spread. Through the end of last week, daily visits to businesses were down 20% from last year, according to a New York Times analysis of foot traffic data from the smartphones of more than 15 million people. After an initial plunge in the spring, consumer habits have been slow to recover…”

August 20 – Bloomberg (Jennifer Surane): “U.S. credit-card lenders are beginning to pull back on the business even as consumers keep up with their bills during the coronavirus pandemic. Total credit on new accounts slumped 8.3% in the second quarter from a year earlier, to $78 billion, the first decline in more than two years, according to… TransUnion. The average credit line issued for new accounts fell 9% to $5,257, with declines across all tiers of borrower riskiness…”

August 19 – Financial Times (Richard Henderson and Eric Platt): “Stock buybacks by US companies nearly halved in the second quarter to the lowest level in eight years as businesses grappled with a sharp rise in uncertainty and a swift decline in profits. Provisional figures show the total spent on buybacks by companies in the S&P 500 was about $89.7bn, according to S&P Dow Jones Indices, down 46% from the same quarter last year.”

August 17 – Bloomberg (Eric Roston): “The current heatwave broiling Californians like no event in decades is also elevating the risk for another potential disaster in the weeks ahead: wildfires. While heat and dry conditions have contributed to the Lake and Ranch fires burning now in Los Angeles County, fear of larger blazes looms in the weeks ahead. As a result of climate change, California sees more than twice as many fall days with ‘fire weather’ as it did a generation ago. The current heatwave raises the odds of ‘wildfires later in 2020, that’s for sure,’ says Daniel Swain, a climate scientist at UCLA and the National Center for Atmospheric Research.”

Fixed Income Watch:

August 17 – Bloomberg (Amanda Albright): “Businesses that flooded the municipal-bond market with debt sold through government agencies are helping drag the industry into its biggest wave of financial distress in nearly a decade… This year, more than 50 municipal-bond issues worth $5 billion have defaulted, the most since 2011, according to Municipal Market Analytics… Nearly two dozen more have drawn on reserve funds since the start of the year to cover debt payments when revenue fell short, a potential sign of more stress to come, according to data compiled by Bloomberg.”

August 18 – Bloomberg (Donal Griffin and Yalman Onaran): “The pile of the murkiest trades at global banks, long the bane of regulators, got much bigger during Covid-19. Lenders including Barclays Plc, Citigroup Inc., BNP Paribas SA and Societe Generale SA reported a surge of more than 20% in their most opaque assets during the chaotic first half of 2020… The banks are now sitting on hard-to-value trades that they say are worth about $250 billion, including categories that gained notoriety during the financial crisis, such as complex debt securities. There’s no single, clear-cut explanation for the jump in these so-called Level 3 assets. For some, the surge was a natural consequence of pandemic turmoil: safer assets became difficult to price as markets froze, and risk managers had to shunt them into a different category, according to analysts and people familiar with the situation. Others are likely to have added to their riskiest bets after seeing the potential for a windfall in the chaos, said Jerome Legras, managing partner at Axiom Alternative Investments.”

China Watch:

August 20 – Reuters (Yawen Chen and Ryan Woo): “China will take ‘all necessary measures” to protect its firms’ legitimate interests, the Commerce Ministry said…, in response to the U.S. move this week to further tighten restrictions on Huawei Technologies Co… ‘The U.S. side should immediately correct its wrong behaviours,’ the ministry said…”

August 20 – Reuters (Yawen Chen and Ryan Woo): “China and the United States have agreed to hold trade talks ‘in the coming days’ to evaluate the progress of their Phase 1 trade deal six months after it took effect in February, the Chinese commerce ministry said…”

August 16 – Reuters (Winni Zhou and Andrew Galbraith): “China’s central bank… rolled over maturing medium-term loans while keeping borrowing costs unchanged for the fourth straight month. The People’s Bank of China (PBOC) said… it was keeping the rate on 700 billion yuan ($100.74bn) worth of one-year medium-term lending facility (MLF) loans to financial institutions steady at 2.95% from previous operations… The fresh fund injection well exceeds two batches of MLF loans that are set to expire in August, with a total volume of 550 billion yuan.”

August 17 – Financial Times (Sun Yu and Yuan Yang): “Amanda Wang’s family businesses — a call centre and two restaurants in Beijing — are grappling with a plunge in revenue following the coronavirus outbreak. She imposed a company-wide 30% pay cut on about 120 workers in July even after receiving tax cuts and employment subsidies from the government designed to help companies survive the pandemic. ‘My biggest challenge is a lack of business and policy support [from the government] isn’t helpful [on this],’ says Ms Wang, referring to her decision to cut workers’ salaries. ‘I have to make savings where I can.’ Yet Ms Wang had no qualms about renewing her annual Rmb150,000 ($21,000) membership at a downtown beauty salon in the Chinese capital. ‘I am not going to cut corners on my basic needs,’ says the 41-year-old, who in July sold one of her six apartments in Beijing for a profit of Rmb3m. ‘There are ways to make up for the income loss.’ …The contrast between the two Beijing residents highlights China’s unbalanced two-speed economic recovery. While the nation’s wealthier citizens have so far emerged largely unscathed financially from the pandemic, many on low incomes are struggling.”

August 20 – Reuters (Ma Rong and Tony Munroe): “China’s outstanding loans to small businesses stood at 13.7 trillion yuan ($1.98 trillion) by the end of July, up 27.5% from a year earlier, the central bank said… Interest rates on those loans averaged 5.27% in July, 0.91 percentage points lower than a year ago, the People’s Bank of China said…”

August 18 – Bloomberg: “Chinese households are putting more of their savings into property but still holding back on discretionary spending, as a slow and fragile economic recovery keeps confidence in check. That is the insight from the latest data ranging from property spending to dining out, gambling to travel, as part of a regular, comprehensive look at the health of the Chinese consumer… Retail sales shrank 1.1% in July from a year ago, according to data released last week. In the first seven months of this year, total sales were down almost 10% from 2019.”

August 18 – Reuters (Andrew Galbraith): “Rating agency S&P Global warned… China’s economic recovery from the novel coronavirus pandemic could be at risk as a combination of rising interest rates and slowing inflation pushes real rates higher. An unbalanced recovery, weak private demand and excessive market optimism have combined to drive real rates up, increasing debt-servicing burdens even as financial conditions tighten, S&P economists Shaun Roache and Vishrut Rana said in a report.”

August 17 – Financial Times (Kathrin Hille): “China’s share of global exports has been hit by its trade dispute with the US which — together with the pandemic, corporate governance demands and the rise of artificial intelligence — is pushing multinational companies to reduce their dependency on the Asian powerhouse. Last year Chinese exports of 1,200 products accounted for 22% of the world’s exports, 3 percentage points down on the previous year, according to a new study by Baker McKenzie… and Silk Road Associates… For consumer goods the country’s global market share fell by 4 percentage points to 42%. The findings come as Washington targets China with wide-ranging measures aimed at weaning itself off China-based supply chains and hobbling Beijing’s ambitions to become a global tech power.”

August 15 – Reuters (Ryan Woo and Yingzhi Yang): “China must guard against any rebound in off-balance sheet lending in the so-called shadow banking sector, and must dispose of non-performing assets as soon as possible, the head of the country’s banking and insurance regulator said… In recent years, China has clamped down on shadow banking, concerned about the hidden risks in the high volume of complex and potentially risky loans in the sector. But as a weakening economy puts pressure on businesses and individuals, authorities fear shadow lending and illegal loans might surge.”

August 18 – Wall Street Journal (Chun Han Wong): “A senior ally of Chinese leader Xi Jinping called for a Mao-style purge of China’s domestic-security apparatus last month, saying it was time to ‘turn the blade inwards and scrape the poison off the bone.’ The cleansing commenced swiftly. Within the first week after the call to action, Communist Party enforcers had launched investigations into at least 21 police and judicial officials, according to a media tally cited by the party’s top law-enforcement commission. Dozens more have since been taken down, including the police chief of Shanghai, the most senior target thus far, and cadres who have won awards for good performance. The rash of investigations marks the first time that Mr. Xi has unleashed a sweeping and systematic clean-up of the country’s powerful domestic-security apparatus. His push to forge police, prosecutors and judges who are ‘absolutely loyal, absolutely pure and absolutely reliable’—as officials running the campaign have demanded—points to thorny concerns that Mr. Xi faces at home even as he seeks to slow a downward spiral in relations with the U.S.”

August 19 – Reuters (Samuel Shen and Andrew Galbraith): “China reported the largest number of new stock investors in five years in July, as millions of individuals rushed into a buoyant share market, boosting trading turnover and brokerage earnings. The number of new investors in mainland Chinese shares totaled 2.4 million in July, the most since June 2015, the peak of China’s massive stock bubble that later burst…”

EM Watch:

August 18 – Wall Street Journal (Caitlin Ostroff): “The dollar is having a bad year, but some emerging markets’ currencies have it worse, with no reprieve in sight. The Brazilian real, the South African rand and the Turkish lira have lost about 20% of their value against the dollar this year, putting the former two on course for their biggest annual declines since 2015. The Russian ruble and the Mexican peso have dropped roughly 15%. The rout has occurred despite the dollar’s slide against major world currencies to its weakest level in over two years.”

August 18 – Bloomberg (Kartik Goyal): “Global funds used to clamor for more access to India’s debt markets. The high-yielding bonds are now the least popular in Asia as the nation struggles to contain the coronavirus pandemic. Overseas funds have sold $14.6 billion of Indian corporate and government bonds this year… Indonesia has also seen outflows, but almost half that of India, while South Korea and Malaysia have attracted inflows.”

Europe Watch:

August 18 – Financial Times (Martin Arnold): “Europe will only fully recover from the economic impact of coronavirus if governments use their vastly increased debts to invest in young people, innovation and research, Mario Draghi has said in his first speech since leaving the European Central Bank last year. Mr Draghi… said debt levels would be high for a long time, but they would only be sustainable if ‘good debt’ was ‘used for productive purposes’ instead of ‘bad debt’ being used for unproductive purposes. ‘Low interest rates are not in themselves a guarantee of sustainability; the perception of the quality of the debt incurred is just as important… The more that perception deteriorates, the more uncertain our framework of references will become, which would jeopardise employment, investment and consumption.’”

August 18 – Reuters (Inti Landauro and Jose Rodriguez): “Spanish public debt rose to a new record of 1.29 trillion euros ($1.53 trillion) in June, mainly lifted by spending linked to the impact of the coronavirus pandemic… The total debt rose by 32 billion euros from the preceding month, pushing the debt-to-GDP ratio to 110%... The government revised the 2020 budget deficit forecast to 10.34% of GDP in May and said it expected the debt ratio to rise to 115.5% of GDP at the end of 2020.”

August 17 – Financial Times (Victor Mallet and Martin Arnold): “Desiccated pastures in France’s Loire valley, campsites near Marseille destroyed by a forest fire, hosepipe bans in western Germany and fish farms in Saxony running short of fresh water: parts of continental Europe have been struck by drought for the third year in a row. While summer thunderstorms have provided sporadic relief for parched fields in the past week, farmers, scientists and politicians say global warming is triggering multiyear droughts — 2018 and 2019 were also dry — and changing the climate of continental Europe in ways that will affect agriculture and the rest of the economy. This year’s July was the driest in France since 1959…, while the average temperature between January and July was the highest since its records began.”

Japan Watch:

August 16 – Reuters (Leika Kihara and Tetsushi Kajimoto): “Japan was hit by its biggest economic slump on record in the second quarter as the coronavirus pandemic emptied shopping malls and crushed demand for cars and other exports… The third straight quarter of declines knocked the size of real gross domestic product (GDP) to decade-low levels, wiping out the benefits brought by Prime Minister Shinzo Abe’s ‘Abenomics’ stimulus policies deployed in late 2012… The world’s third-largest economy shrank an annualised 27.8% in April-June…”

August 18 – Reuters (Leika Kihara and Tetsushi Kajimoto): “Japan’s exports extended their double-digit slump into a fifth month in July as the coronavirus pandemic took a heavy toll on auto shipments to the United States… Total exports fell 19.2% in July from a year earlier, roughly in line with market expectations for a 21.0% decrease… It was, however, smaller than a 26.2% drop in June… Shipments to the United States plunged 19.5% in the year to July as demand for engines and automobile remained weak…”

Leveraged Speculation Watch:

August 17 – Bloomberg (Masaki Kondo and David Ramli): “Hedge funds turned bearish on the dollar for the first time since May 2018, an indication that a summer slump in the world’s reserve currency will be prolonged. Net futures and options positions held by leveraged funds against eight other currencies dropped to minus 7,881 contracts last week… The swing was driven by growing bullish bets on the euro.”

Geopolitical Watch:

August 17 – Financial Times (Gideon Rachman): “When a familiar and comfortable situation changes dramatically, the human instinct is to believe that things will soon get back to normal. The idea that life may have changed permanently is too unsettling to deal with. We are seeing this mentality with Covid-19. We are also witnessing it as business responds to the downward spiral in US-Chinese relations. After 40 years of ever deeper economic integration between the US and China, it is hard to imagine a real severance of ties. Many executives believe that politicians in Washington and Beijing will patch up their differences when they realise the true implications of ‘decoupling’ the world’s two largest economies. The hope is that a trade deal will stabilise things, even if it has to wait until after the US presidential election. But that is too complacent. The reality is that decoupling has much further to go. It is already spreading beyond technology and into finance. In time, it will affect every large industry, from manufacturing to consumer goods.”

August 20 – Reuters (Ben Blanchard): “China should not underestimate Taiwan’s resolve to defend itself, and China’s military threats will only cause Taiwan’s people to be even more resolute, the island’s defence ministry said… responding to repeated Chinese threats. China has stepped up its military activity around the democratic island Beijing claims as sovereign Chinese territory, sending fighter jets and warships on exercises close to Taiwan, including last week when the U.S. health secretary was in Taipei.”

August 14 – Bloomberg (Alfred Liu): “The U.S. Navy sent an aircraft carrier strike group to the South China Sea Friday to conduct maritime air defense operations amid rising tensions between Washington and Beijing. The group led by the USS Ronald Reagan conducted flight operations with fixed and rotary wing aircraft, and high-end maritime stability operations and exercises… ‘Integration with our joint partners is essential to ensuring joint force responsiveness and lethality, and maintaining a free and open Indo-Pacific,’ Joshua Fagan, an air operations officer aboard the USS Ronald Reagan, said…”

August 19 – Reuters (Yew Lun Tian): “China’s military said… the latest U.S. navy sailing near Chinese-claimed Taiwan was ‘extremely dangerous’ and stirring up such trouble was in neither country’s interests. The U.S. guided-missile destroyer USS Mustin sailed through the narrow and sensitive Taiwan Strait on Tuesday, the U.S. navy said, in what have become relatively routine trips in recent months, though they always anger China.”

Friday Evening Links

[Reuters] S&P 500, Nasdaq end at records after upbeat business surveys

[Reuters] Oil falls 1% on sluggish coronavirus recovery, supply concerns

[Reuters] Dollar beats euro for first week since mid-June after bullish data

[AP] Low rates and heavy buyer demand send US home sales surging

[CNBC] Coronavirus live updates: U.S. hotspots spread to Midwest; former FDA chief warns of a ‘third act’ of the virus

[Bloomberg] Bears Are Going Extinct in Stock Market’s $13 Trillion Rebound

[FT] Pandemic triggers wave of billion-dollar US bankruptcies

[FT] US-China: is Huawei ‘too big to fail’?

Friday's News Links

[Yahoo/Bloomberg] Stocks Lose Oomph; Bonds Gain With Dollar: Markets Wrap

[Reuters] Waning European recovery saps stocks momentum, knocks euro

[Reuters] Euro sinks as business rebound stutters in August

[Yahoo/Bloomberg] Oil Extends Decline With Demand Headwinds Mounting

[CNBC] July home sales spike a record 24.7% as prices set a new high

[Yahoo/Bloomberg] Corporate America Is Choking on Debt and Imperiling the Recovery

[CNBC] Struggling retailers rush to file for bankruptcy as fears of a second wave of coronavirus linger

[CNBC] Coronavirus live updates: Former FDA chief warns of a ‘third act’ of the virus that could be ‘more pervasive’

[CNBC] Report finds $50 billion of cryptocurrency moved out of China hinting at capital flight against Beijing rules

[Reuters] Amid heightened tensions, Taiwan tells China not to underestimate its resolve

[Bloomberg] Trump Threatens Tariffs for U.S. Companies That Won’t Move Jobs Back

[Bloomberg] The Blackout Trade: How a Power Market Went Dark in California

[Bloomberg] China Just Killed Its $491 Billion Private Loan Market

[Bloomberg] Record Ice Loss in Greenland Is a Threat to Coastal Cities Worldwide

[NYT] We Have Crossed the Line Debt Hawks Warned Us About for Decades

[WSJ] When the Stock Market and Economy Seem Disconnected

[WSJ] Global Economies Show Signs of Stuttering Recovery From Coronavirus Lockdowns

[WSJ] Student Loan Borrowers Would See a Big Chunk of Debt Disappear Under Biden Plan

[FT] Eurozone economic rebound is losing steam, surveys suggest

[FT] Robinhood upstarts who ambushed the financial establishment

Thursday Evening Links

[Reuters] Asian stocks set to rise after Wall Street tech-driven rally

[Reuters] Dollar on defensive as fresh jobs pain hits U.S. economy

[Reuters] U.S., China differ over plans for Phase 1 trade deal talks

[Reuters] Working from home raises questions about U.S. inequality: Fed panel

[Reuters] U.S. moves to restore all U.N. sanctions on Iran in dispute over nuclear deal

Thursday Afternoon Links

[Reuters] Wall Street ekes out gains as tech stocks eclipse data gloom 

[Reuters] Fear fading on Wall Street as investors learn to love the new bull market

[Reuters] Rise in U.S. weekly jobless claims clouds labor market recovery

[Bloomberg] Money Managers Bracing for Upheaval With Stocks Near Record

[Bloomberg] Banks Are Putting Lower Limits on New Credit Cards

[Bloomberg] Trump Nominee Shelton Blasted by Fed Alums in Open Letter

[Bloomberg] Brazil’s Real Falls as Shock Senate Vote Fuels Fiscal Woes

Thursday's News Links

[Yahoo/Bloomberg] Stocks Slide, Bonds Rise After Jobs Data: Markets Wrap

[Yahoo/Bloomberg] Traders Dump TSMC, Samsung in Worst Day in Asia Tech Since March

[Reuters] Oil and stocks fall as markets still rattled by Fed minutes

[Reuters] Most Asian currencies weaken, Thai baht falls most

[CNBC] U.S. weekly jobless claims jump back above 1 million

[Reuters] Fed to cut one-week dollar swap operations with major central banks

[Reuters] China, United States agree to hold trade talks, Chinese commerce ministry says

[CNBC] Coronavirus live updates: Teachers threaten strikes in Detroit and NYC; WHO warns of resurgence in Europe

[Yahoo/Bloomberg] Wall Street Rethinks Stock Strategy as Dollar Risks Rise

[AP] Northern California wildfires threatening thousands of homes

[Reuters] China vows all necessary measures to protect its firms following U.S. curbs on Huawei

[Reuters] China's outstanding loans to small businesses up 27.5% year-on-year by end-July

[Reuters] Millions of Chinese investors rushed into July's stock market rally

[Yahoo/Bloomberg] Gold to Gain on Massive Currency Debasement, SkyBridge Says

[Bloomberg] China’s Stock Mania Lures Most New Traders Since 2015

[FT] Central banks scale back dollar lending operation as demand drops

[FT] Today’s ultra-low interest rates are anything but ‘natural’

[FT] US share buybacks almost cut in half by pandemic

[FT] Macro hedge funds enjoy unlikely renaissance

[FT] Why is the ‘anti-vaxxer’ movement growing during a worldwide pandemic?

Wednesday Evening Links

[CNBC] Stock futures tick lower after the Fed highlights economic uncertainty

[Yahoo/Bloomberg] Stocks Fall While Dollar Rallies After Fed Minutes: Markets Wrap

[Reuters] Gold tumbles 3% as Fed minutes lift dollar, Treasury yields

[Yahoo/Bloomberg] Fed Minutes Show FOMC Backs Away From Sept Guidance Shift

[Reuters] Several Fed policymakers see more easing ahead to help brace economy

[CNBC] Coronavirus live updates: Universities scramble to respond to outbreak, schools likely years away from ‘normal’

[NYT] Fed Officials Said the Economy Needed More Help From Congress

[FT] Fed advances policy review on ‘very elevated’ uncertainty

Wednesday Afternoon Links

[Reuters] Wall Street ends lower after Fed minutes highlight difficult economic recovery

[CNBC] Fed officials expect that coronavirus will ‘weigh heavily’ on the economy, minutes show

[CNBC] Coronavirus live updates: CDC to monitor sewage systems for virus; schools likely years from return to ‘normal’

[Reuters] Exclusive: Fed's Bullard - Wall Street 'about right' as U.S. muddles through virus risk

[CNBC] California wildfires force more evacuations amid record heat and lightning strikes

[Bloomberg] Fed Minutes Note Consumer Spending Rebound, Business Uncertainty

[WSJ] Fed Resumed Deliberations Over Policy-Setting Revamp

[WSJ] Covid-19 Appeared to Be Under Control in Europe. Now It’s Surging Again

[WSJ] Flooding Again Pounds China’s Three Gorges Dam

Wednesday's News Links

[Reuters] Shares gain as Wall Street record outweighs jitters over growth

[Reuters] Dollar struggles near 27-month lows as Fed minutes eyed

[Reuters] Oil slips as demand worries outweigh U.S. stocks draw

[Reuters] U.S. official sees 'real desire' for smaller coronavirus relief bill

[Reuters] No new U.S.-China talks scheduled: White House chief of staff

[CNBC] Weekly mortgage refinances fall as interest rates suddenly turn higher

[CNBC] Coronavirus live updates: Britain to ramp up mass testing; Roche and Regeneron team up on new drug

[Yahoo/Bloomberg] Big Banks Sit on $250 Billion of Murkiest Trades After Covid

[Reuters] Japan's exports tumble, capex outlook sags as demand wilts

[Reuters] China says latest U.S. sailing near Taiwan 'extremely dangerous'

[Bloomberg] Trump Cancels China Talks, Raising Questions About Trade Deal

[NYT] Virus Alters Where People Open Their Wallets, Hinting at a Halting Recovery

[NYT] ‘This Market Is Nuts’: S&P 500 Hits Record, Defying Economic Devastation

[WSJ] Fed Minutes to Shed Light on Central Bank Strategy Review

[WSJ] Next Steps on Coronavirus Stimulus Package Divide Both Parties

[WSJ] The Latest Pain Trade on Wall Street: Banks

Tuesday Evening Links

[CNBC] Stock futures flat after S&P 500 notches new record

[Reuters] The pandemic bull market: S&P 500 closes at record high 

[Reuters] Trump says he postponed trade talks with China

[Bloomberg] Trump Says He Delayed China Talks, Faults Beijing Over Virus

[Bloomberg] Chinese Buy Up Real Estate But Hold Off on Dining Out, Gambling

[WSJ] China’s Xi Jinping Tightens Grip on Domestic Security Forces in First Broad Purge

Tuesday Afternoon Links

[Reuters] Big Tech drives S&P 500 to record high in coronavirus rally 

[MarketWatch] Gold ends higher for a second session and retakes perch atop $2,000

[Yahoo/Bloomberg] Dollar Erases Trade-War Gains After Sinking to Lowest Since 2018

[Reuters] Dollar falls to 27-month low as U.S. stocks hit record highs

[Reuters] Pelosi: Democrats willing to cut COVID-19 bill in half to get a deal

[Yahoo/Bloomberg] U.S. Warns Colleges to Divest China Stocks Over Delisting Risk

[Axios] The war against the dollar is heating up

[CNBC] Walmart says consumer spending dropped as stimulus checks ran out

[CNBC] Coronavirus live updates: Notre Dame reports 11% positive test rate; Yale saliva test may miss some infections

[Bloomberg] Monopoly Power Lies Behind Worst Trends in U.S., Fed Study Says

Tuesday's News Links

[Yahoo/Bloomberg] U.S. Stocks Climb on Housing Data; Dollar Slips: Markets Wrap

[Reuters] Gold climbs back above $2,000/oz level as dollar slides

[Reuters] Dollar touches more than 2-year low as traders push euro longs to record high

[Reuters] Europe stocks get travel boost, dollar slides on stimulus concern

[Yahoo/Bloomberg] U.S. Housing Starts Surge by Most Since 2016 and Permits Climb

[CNBC] Coronavirus live updates: U.S. averaging over 50,000 cases a day; Singapore announces more stimulus

[Yahoo/Bloomberg] Currency Markets Warn of Turbulence Ahead

[Yahoo/Bloomberg] Rallying Stock Market Is Forcing Everyone to Become a Believer

[CNBC] U.S. and European firms face $1 trillion in costs to relocate their Chinese supply chains, BofA says

[Reuters] Wall Street holds the cards as Main Street chases blank-check deal frenzy

[Reuters] Rolling blackouts warning issued for 3 million California homes

[Reuters] S&P warns of rising real rates risk to China's recovery

[Reuters] Spanish public debt hit record in June on COVID spending, above 100%/GDP

[Yahoo/Bloomberg] High Yields Can’t Stop Global Fund Exodus From Indian Bonds

[Bloomberg] China Calls U.S. Rules on Huawei ‘Nothing Short of Bullying’

[WSJ] U.S. Tightens Restrictions on Huawei’s Access to Chips

[WSJ] Selloff in Emerging-Market Currencies Shows No Sign of Respite

[WSJ] Empire State Building Reflects New York’s Deepening Real-Estate Woes

[FT] Why China’s economic recovery from coronavirus is widening the wealth gap | Free to read

[FT] Californians point fingers as millions face power outages 

[FT] Yield-starved investors start to rummage in triple C-rated debt

[FT] The Chinese economy’s two-speed recovery from coronavirus

[FT] China’s share of global exports falls in supply chains rethink

[FT] Mario Draghi urges Europe to use soaring debt for productive purposes

[FT] Water shortages and heatwaves: Europe confronts changing climate

Monday Evening Links

[Reuters] Tech rally elevates Nasdaq to record high close

[CNBC] Coronavirus live updates: U.S. averaging over 50,000 cases a day

[Reuters] Foreigners buy U.S. Treasuries in June, after selling three straight months, data shows

[AP] Grid operator: 3.3 million California homes could lose power

[Bloomberg] U.S. High-Grade Bond Sales Set Record, Reach $1.346 Trillion

Monday Afternoon Links

[Reuters] Tech stocks gain as S&P 500 flirts with record high

[Reuters] Oil rises on China plan to boost U.S. imports, OPEC+ compliance

[Reuters] As U.S. homebuilder confidence matches record high, mortgage delinquencies rise

[Reuters] Factbox: Key dates on the 2020 U.S. presidential election calendar

[Yahoo/Bloomberg] FHA Mortgage Delinquencies Reach a Record, Led by New Jersey

[Yahoo/Bloomberg] Junk-Muni Boom Sets Up Historic Distress for Billions of Debt

[Yahoo/Bloomberg] Robinhood Now Valued at $11.2 Billion With New Fund Backing

[WSJ] China’s CDC, Built to Stop Pandemics, Stumbled When It Mattered Most

Monday's News Links

[Yahoo/Bloomberg] U.S. Stocks Rise With Europe Stocks; Metals Climb: Markets Wrap

[Reuters] Europe stuck on the ground as China markets jump

[Reuters] Dollar on defensive as markets eye U.S. politics, Fed minutes

[CNBC] Pelosi to call House back into session to vote on USPS bill

[CNBC] Homebuilder sentiment jumps to record high, but soaring lumber prices could ‘dampen momentum’

[CNBC] Coronavirus live updates: New Zealand delays election as cases climb

[Reuters] China central bank injects 700 billion yuan of MLF loans, rates steady for fourth month

[Reuters] Japan's economy shrinks at record pace as pandemic wipes out 'Abenomics' gains

[Reuters] Thai second-quarter GDP shrinks 12.2% year-on-year, weakest in 22 years

[CNBC] Southeast Asia faces more severe effects of climate change than the rest of the world, McKinsey says

[Yahoo/Bloomberg] Hedge Funds Are Short on Dollar for First Time in Two Years

[Bloomberg] Fraying U.S.-China Relations Tested by Trump Ahead of Election

[Bloomberg] New York Manufacturing Expands Less Than Forecast as Orders Drop

[Bloomberg] China Housing May Have Hit ‘Potentially Precarious Peak,’ Harvard’s Rogoff Argues

[Bloomberg] In California’s Brutal Climate Loop, Heatwaves Raise Fire Risk

[WSJ] Traders Brace for Haywire Markets Around Presidential Election

[FT] The decoupling of the US and China has only just begun

Sunday Evening Links

[CNBC] Stock futures rise as S&P 500 tries to build on last week’s gains and reach all-time high

[Yahoo/Bloomberg] Dollar Steady; Asia Stocks Point to Softer Start: Markets Wrap

[Yahoo/Bloomberg] Battered Treasuries Face Test From Stimulus Talks, Brighter Data

[Yahoo/Bloomberg] The Emerging Markets Rally Is About to Be Tested

[WSJ] California Braces for More Blackouts as Heat Wave Scorches West

[FT] China and Russia ditch dollar in move towards ‘financial alliance’

Sunday's News Links

[CNBC] A flood of job losses looms as airline industry struggles in pandemic

[Reuters] China must guard against rebound in shadow lending: regulator

[CNBC] Forty percent of U.S. Covid-19 tests come back too late to be clinically meaningful, data show

[Bloomberg] Stocks Ignore Stimulus Rift, Sowing Worries on Wall Street

[Bloomberg] Oil Companies Wonder If It’s Worth Looking for Oil Anymore

Saturday's News Links

[Reuters] Wall Street Week Ahead: Biden victory? Disputed election? Wall Street prices in November outcomes

[CNBC] ‘It’s nerve-racking’ — Millions of Americans are still furloughed and unsure when they will return to work

[Reuters] Exclusive: China ramps up U.S. oil purchases ahead of trade deal review - sources

[Reuters] Taiwan's China-friendly opposition routed in mayoral by-election

[AP] Pompeo inks deal for US troop move from Germany to Poland

[Bloomberg] U.S. Carrier Group Conducts Operations in South China Sea

[WSJ] Working Parents Are Hitting Their Coronavirus Breaking Point—And Paying for It

[WSJ] To Get Tougher on China, Trump Needs U.S. Navy, Which Is Straining

Weekly Commentary: Safe Haven Treasuries Not So Safe

A “sloppy” auction saw 30-year Treasury yields surge 21 bps this week to 1.45%, an almost seven-week closing high.  Ten-year Treasury yields jumped 14 bps to 0.71%, while benchmark MBS yields rose 17 bps to 1.38%.  But how about in dollars?  The iShares 20+ Year Treasury Bond ETF (TLT) lost 3.9% for the week.  Is a so-called “safe haven” losing almost 4% in a single week really a safe haven?  Sure, Treasury yields could decline more from current historically low levels.  But this week confirmed the risk versus reward calculus for owning Treasury bonds these days is unattractive.

Corporate bonds somewhat outperformed but posted losses for the week nonetheless.  The iShares Investment Grade Corporate Bond ETF (LQD) fell 2.4%, and the iShares High Yield Corporate Bond ETF (HYG) declined 1.3%.  We’ll see if this week’s reversal leads to any slowdown in the wall of “money” flooding into bond funds.

Perhaps of more consequence, the spectacular EM bond (price) “melt-up” came to a rather abrupt halt this week.  Brazil’s 10-year (real) yields surged 51 bps to 7.27% - trading this week to the highest yields since April.  Local currency Eastern European bonds were under notable pressure, with yields surging 30 bps in Romania, 16 bps in Hungary and 11 bps in Czech Republic. India’s 10-year yields rose 11 bps to 5.95% - the high since May.

Dollar-denominated EM yields abruptly reversed higher as well. Brazil’s 10-year yields surged 25 bps to 3.61%, with Mexico’s yields up 23 bps to 2.93%, Russian yields up 10 bps to 2.16%, and Indonesian yields up 10 bps to 2.12%.

Rising yields were a global phenomenon.  European – “core” and “periphery” -  yields surged higher, led by nine bps increases in German (negative 0.42%) and French (negative 0.13%) 10-year yields.  Greek yields rose 12 bps (1.13%), and Italian yields gained six bps (0.99%).  Portuguese (0.37%) and Spanish (0.36%) yields both rose eight bps. UK yields rose 10 bps to 0.24%.

Japanese JGB yields rose four bps to 0.45%, matching the highest yields since March. Yields rose eight bps in Singapore to 0.88% and seven bps in Australia to 0.93%.   

At $6.911 TN, the Fed’s balance sheet is little changed over the past three months.  Granted, Fed Credit is up $3.167 TN, or 85%, over the past year.  But perhaps Fed liquidity effects have begun to wane somewhat. Meanwhile, there’s absolutely no end in sight for the unprecedented supply of new fixed-income securities (Treasuries and corporates).  

August 14 – Bloomberg (Brian Smith): “With dealers calling for $30bn to price along with an already robust visible pipeline, 2020 U.S. investment-grade new issue volume is set to break 2017’s FY volume record early next week. High-grade new issue supply is up 76% YoY and less than $10bn away from breaking the new issue volume record of $1.333trl set in 2017. What started as a defensive cash grab - buoyed by the Fed’s backstop - has morphed into an opportunity to refinance, pre-fund or even add incremental debt.”

August 12 – Bloomberg (Max Reyes and Gowri Gurumurthy): “Junk-rated companies have borrowed $274.8 billion in 2020, exceeding the sum of cash raised during all of last year… The record comes after the high-yield market saw the best returns since 2011 in July, attracting hefty inflows as investors continue to hunt for yield…”

Along with never-ending supply, perhaps bond markets are also beginning to sense fledging inflation risk.  July CPI and PPI readings both posted upside surprises.  At 0.6%, consumer prices doubled estimates – and have quickly reversed the negative CPI prints from March and April.  July producer prices also doubled estimates at 0.6%, posting the strongest monthly gain since October 2018.

Data out of China were also concerning.  Challenging the bullish recovery narrative, July Retail Sales were down 1.1% (versus estimates of a small increase).  This put year-to-date sales 9.9% below comparable 2019.  July auto sales were up 16.4% for the month, though year-to-date sales were still down 12.7%.  July airline passenger numbers were 34.1% below July 2019.  Also noteworthy, July lending and money supply growth came in below estimates.

China’s Aggregate Financing expanded a weaker-than-expected $243 billion during July.  This was down from June’s $494 billion.  Year-to-date (seven months), Aggregate Financing expanded a record $3.240 TN.  This was 42% ahead of growth from 2019 ($2.29 TN) and 70% above the comparable 2018 expansion ($1.91 TN).  Over the past year, Aggregate Financing expanded $4.633 TN, or 12.9%. It’s worth noting bonds are the fastest expanding components within Aggregate Financing.  Outstanding Corporate Bonds were up 21.1% y-o-y, with Government Bonds rising 16.5%.

Bank Loans expanded $142 billion, down from June’s $261 billion.  This was about 20% below forecasts and 6% below July 2019.  It was also the weakest lending since February.  Yet year-to-date Bank Loan growth of $1.882 TN ran 22% ahead of comparable 2019 (25% above comparable 2018).  Bank Loans were up 13.0 year-over-year ($2.76 TN), with two-year growth of 27.2% and five-year growth of 84.1%.

Consumer Loans expanded a weaker-than-expected $109 billion, down from June’s $141 billion.  Yet July Consumer Loan growth was 48% ahead of net lending from July 2019.  Consumer Loans were up 14.3% year-over-year, 33% in two years, 58% in three years and 135% in five.

August 14 – Bloomberg: “After receiving dozens of phone calls and text messages from banks touting cheap, unsecured and easy-to-get consumer loans, Eric Zhang visited one of China’s largest lenders in June and borrowed 400,000 yuan ($57,600) at an interest rate of 4%. But there was a catch -- he had to sign a letter promising the money wouldn’t be invested in property or stocks. That didn’t stop Zhang. A few days later, he’d found a merchant who helped him make a fake purchase and move the cash to his brokerage account. ‘I don’t think the bank can track the money and identify its real use,’ said Zhang, who works at a… private equity firm. ‘It’s a great trade for me,’ he said, after seeing his fresh stock investments surge 6% in one month.”

Bank lending to corporations (“Non-Financial Corporations”) dropped to $38 billion from June’s $133 billion – the weakest expansion since October’s $18 billion.  July is typically slow for corporate lending.  Corporate bond issuance dropped from June’s $49 billion to $34 billion, also the weakest expansion since October. 

August 11 – South China Morning Post (Georgina Lee): “Chinese banks’ net profits dropped a combined 24% during the second quarter, compared with a year earlier as banks grappled with bad loans caused by the coronavirus pandemic. The industry’s net profit stood at 426.7 billion yuan (US$61.4bn), down from 559 billion yuan during the same period a year ago. Profits were 29% down from the 600 billion yuan recorded in the first quarter… The fall in second-quarter profitability was sharper than expected, said some analysts, caused mainly by banks making higher provisions for loan losses. The industry’s loan loss ratio rose to 3.54%, up 0.04 percentage points from the first quarter. The non-performing loan (NPL) ratio for the industry rose to a 10-year high, at 1.94%, up from 1.91% at the end of the first quarter.”

China’s M2 money supply declined $136 billion during July, the first contraction since October.  This followed June’s staggering $500 billion M2 surge.  M2 expanded $2.00 TN year-to-date (seven months), or 11.7% annualized.  M2 was up $2.965 TN year-over-year, or 10.7%. M2 was up 19.7% in two years, 30.5% in three and 57% over five years.

Beijing is in a tricky spot –  a quite tenuous balancing act.  While there are fears of waning domestic and international demand, speculative market Bubbles (stocks and apartments) are a major cause for concern. With system Credit (“Aggregate Financing”) up an unprecedented $4.6 TN over the past year, China’s Bubble Economy and Market Structures have turned only more unwieldy. July’s data support the view of a cautious Chinese consumer bereft of pre-COVID confidence.  

And speaking of confidence… Booming markets have assumed endless on-demand U.S. fiscal and monetary stimulus.  And this might actually hold true – in crisis environments.  When markets are flying, politics make quite a resurgence.  And there are reasons Fed officials have become such strong proponents of fiscal stimulus:  at this point they appreciate monetary stimulus comes with major risks, certainly including more destabilizing Bubble excess and worsening inequality.  Along with pivotal elections (with all the potential for fiasco) only about 80 days away, market fun and games are officially on borrowed time.

For the Week:

The S&P500 added 0.6% (up 4.4% y-t-d), and the Dow gained 1.8% (down 2.1%). The Utilities fell 2.6% (down 6.0%). The Banks rose 2.0% (down 30.4%), and the Broker/Dealers gained 1.8% (up 1.7%). The Transports surged 3.6% (up 0.5%). The S&P 400 Midcaps increased 0.6% (down 5.5%), and the small cap Russell 2000 gained 0.6% (down 5.4%). The Nasdaq100 added 0.2% (up 27.8%). The Semiconductors advanced 1.0% (up 19.0%). The Biotechs fell 2.2% (up 9.6%). With bullion dropping $90, the HUI gold index sank 5.8% (up 36.5%).

Three-month Treasury bill rates ended the week at 0.0875%. Two-year government yields increased two bps to 0.145% (down 142bps y-t-d). Five-year T-note yields rose six bps to 0.295% (down 140bps). Ten-year Treasury yields jumped 14 bps to 0.71% (down 121bps). Long bond yields surged 21 bps to 1.45% (down 94bps). Benchmark Fannie Mae MBS yields rose 17 bps to 1.38% (down 133bps).

Greek 10-year yields jumped 12 bps to 1.13% (down 31bps y-t-d). Ten-year Portuguese yields rose 8 bps to 0.37% (down 7bps). Italian 10-year yields gained six bps to 0.99% (down 43bps). Spain's 10-year yields rose eight bps to 0.36% (down 11bps). German bund yields jumped nine bps to negative 0.42% (down 24bps). French yields rose nine bps to negative 0.13% (down 25bps). The French to German 10-year bond spread little changed at 29 bps. U.K. 10-year gilt yields jumped 10 bps to 0.24% (down 58bps). U.K.'s FTSE equities index advanced 1.0% (down 19.3%).

Japan's Nikkei Equities Index surged 4.3% (down 1.6% y-t-d). Japanese 10-year "JGB" yields rose four bps to 0.05% (up 6bps y-t-d). France's CAC40 gained 1.5% (down 17.0%). The German DAX equities index rose 1.8% (down 2.6%). Spain's IBEX 35 equities index jumped 2.9% (down 25.1%). Italy's FTSE MIB index rose 2.6% (down 14.8%). EM equities were mixed. Brazil's Bovespa index declined 1.4% (down 12.4%), while Mexico's Bolsa rallied 2.5% (down 10.6%). South Korea's Kospi index gained 2.4% (up 9.5%). India's Sensex equities index slipped 0.4% (down 8.2%). China's Shanghai Exchange added 0.2% (up 10.2%). Turkey's Borsa Istanbul National 100 index recovered 2.2% (down 5.6%). Russia's MICEX equities index jumped 3.0% (up 0.5%).

Investment-grade bond funds saw inflows of $6.482 billion, and junk bond funds posted positive flows of $1.542 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates jumped eight bps to 2.96% (down 64bps y-o-y). Fifteen-year rates added two bps to 2.46% (down 61bps). Five-year hybrid ARM rates declined were unchanged at 2.90% (down 45bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up five bps to 3.17% (down 89bps).

Federal Reserve Credit last week gained $8.9bn to $6.911 TN, with a 49-week gain of $3.189 TN. Over the past year, Fed Credit expanded $3.167 TN, or 85%. Fed Credit inflated $4.100 Trillion, or 146%, over the past 405 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt billion last week declined $0.8bn to $3.408 TN. "Custody holdings" were down $60bn, or 1.7%, y-o-y.

M2 (narrow) "money" supply declined $26.6bn last week to $18.260 TN, with an unprecedented 23-week gain of $2.752 TN. "Narrow money" surged $3.337 TN, or 22.4%, over the past year. For the week, Currency increased $7.2bn. Total Checkable Deposits surged $120.5bn, while Savings Deposits sank $144.8bn. Small Time Deposits fell $10.2bn. Retail Money Funds added $0.6bn.

Total money market fund assets fell $20.8bn to $4.555 TN. Total money funds surged $1.200 TN y-o-y, or 35.8%.

Total Commercial Paper declined $8.9bn to $1.010 TN. CP was down $125bn, or 11.0% year-over-year.

Currency Watch:

For the week, the U.S. dollar index declined 0.4% to 93.096 (down 3.5% y-t-d). For the week on the upside, the Mexican peso increased 1.8%, the Norwegian krone 1.7%, South African 1.4%, Canadian dollar 0.9%, Swedish krone 0.7%, euro 0.5%, Swiss franc 0.4%, Brazilian real 0.4%, British pound 0.3%, Australian dollar 0.2%, and Singapore dollar 0.1%. For the week on the downside, the  New Zealand dollar declined 1.0% and the Japanese yen 0.6%. The Chinese renminbi increased 0.25% versus the dollar this week (up 0.19% y-t-d).

Commodities Watch:

August 11 – Wall Street Journal (Kirk Maltais): “The raw ingredients for goods including chocolate and clothes have rebounded after their pandemic-fueled declines, lifted by supply constraints and investors’ bets that a recovering economy will boost consumer demand. Cocoa, coffee and other soft commodities trading on the Intercontinental Exchange have bounced back from their lows earlier this year and now number among the world’s best-performing major assets. In the past month alone, cocoa futures have risen 15% to $2,448 a metric ton and coffee futures have climbed 14% to $1.11 a pound. Cotton and sugar futures have also surged in recent months and are up 11% and 20%, respectively, since May 1.”

The Bloomberg Commodities Index increased 0.5% (down 12.5% y-t-d). Spot Gold fell 4.4% to $1,945 (up 28.1%). Silver dropped 4.7% to $26.258 (up 46.5%). WTI crude gained 79 cents to $42.01 (down 31%). Gasoline rallied 3.1% (down 26%), and Natural Gas jumped 5.3% (up 8%). Copper jumped 3.2% (up 3%). Wheat rose 2.8% (down 9%). Corn surged 5.4% (down 13%).

Coronavirus Watch:

August 11 – Associated Press (Mark Stevenson, Nicky Forster and Michelle R. Smith): “It took six months for the world to reach 10 million confirmed cases of the coronavirus. It took just over six weeks for that number to double. The worldwide count of known COVID-19 infections climbed past 20 million on Monday, with more than half of them from just three countries: the U.S., India and Brazil… The average number of new cases per day in the U.S. has declined in recent weeks but is still running high at over 54,000, versus almost 59,000 in India and nearly 44,000 in Brazil.”

August 13 – Bloomberg (Bibhudatta Pradhan and Ragini Saxena): “Several Indian ministers in Prime Minister Narendra Modi’s cabinet have tested positive for Covid-19 in the past few days, underscoring the spread of the virus in the world’s second most populous nation. Five ministers including Modi’s key aide and minister for internal security Amit Shah have contracted the virus which has infected nearly 2.4 million Indians. The south Asian nation has the highest death toll after U.S., Brazil and Mexico. Some of the ministers, including Shah, are in hospitals while others are recovering at home.”

Market Instability Watch:

August 12 – Associated Press (Stan Choe, Alex Veiga and Christopher Rugaber): “The stock market is not the economy. Rarely has that adage been as clear as it is now. An amazing, monthslong rally means the S&P 500 is roughly back to where it was before the coronavirus slammed the U.S, even though millions of workers are still getting unemployment benefits and businesses continue to shutter across the country. The S&P 500… ended Wednesday at 3,380.35 after briefly topping its closing record of 3,386.15 set on Feb. 19. It’s erased nearly all of the 34% plunge from February into March… The U.S. and global economies have shown some improvements since the spring, when business lockdowns were widespread, but they are nowhere close to fully healed… Many industries, such as airlines, hotels and dining, could take years to recover from the damage. The Federal Reserve and the U.S. government get a lot of the credit for the rally after pouring trillions of dollars into the economy.”

August 13 – Financial Times (Colby Smith): “The US government faced lacklustre demand for its latest record auction of long-dated Treasury bonds, marking one of its first mis-steps in funding historic spending packages passed by US legislators since March. On Thursday, the Treasury department struggled to offload $26bn of 30-year bonds at record-low interest rates. Instead, the bonds were sold at a yield of 1.4%, more than 0.02 percentage points above market expectations at the time of the auction deadline. Investors submitted bids for 2.14 times the amount on offer, the lowest bid-to-cover ratio for 30-year bonds since July 2019…”

August 12 – Financial Times (Mamta Badkar and Eric Platt): “Small and medium-sized US companies suffered a complete wipeout in profits in the second quarter because of the Covid-19 crisis, in sharp contrast to large multinationals that emerged from the most intense phase of the pandemic in better shape. As the earnings season draws to a close, companies within the Russell 2000 stock index — the small-cap benchmark — have reported an aggregate loss of $1.1bn, compared to profits of almost $18bn a year earlier… Meantime, the much bigger companies within the benchmark S&P 500 index have posted a 34% aggregate drop in earnings, to $233bn.”

August 10 – CNBC (Kate Rooney): “Robinhood joined the rest of brokerage industry by publishing monthly trading data... The start-up trounced them all — at least by one metric. Robinhood saw 4.3 million daily average revenue trades, or DARTS, in June… This is the first time the start-up has shared monthly totals. Robinhood’s debut total was higher than all of the major incumbent brokerage firms, and more than E-Trade and Charles Schwab combined.”

August 10 – Blooomberg (Paula Seligson and Gowri Gurumurthy): “Ball Corp. sold $1.3 billion of junk bonds at record-low yields amid a rally triggered by the Federal Reserve’s historic support for the market and heavy inflows into funds that buy the risky debt. The aluminum packaging company priced the 10-year notes at a 2.875% yield… That’s the lowest-ever for a U.S. junk bond with a maturity of five years or longer… The debt deal comes amid a surge in issuance from high-yield borrowers seeking to cut interest expense on existing debt as yields approach unprecedented lows of 4.95%. They closed Friday at 5.31%.”

August 9 – Bloomberg (David Gaffen): “Goldman Sachs Group Inc. predicted a deeper depreciation for the Turkish currency and warned that ‘with August illiquidity ahead of us, risks of another discontinuous move in local assets are rising.’”

Global Bubble Watch:

August 7 – Financial Times (Joe Rennison): “Central bankers have spent years warning of the perils of excess corporate debt. But their solution to this year’s coronavirus storm in financial markets has led to even more of it. It is the Catch-22 of post-2008 policymaking, and of now post-pandemic policymaking, too. To stave off a debt crisis, monetary policymakers create conditions that allow companies to borrow even more, increasing the potential severity of the next crisis. No central banker wants to encourage excessive borrowing but, equally, no central banker wants to stand by while companies default, increasing unemployment and throttling economic growth. ‘The chosen solution to a debt crisis is more debt,’ said Hans Mikkelsen, a credit strategist at Bank of America. ‘There is no escaping it. You cannot cut it back unless you can create a tremendous amount of economic growth to offset it. There is nothing the central banks can do.’”

August 12 – CNBC (Saheli Roy Choudhury): “As Latin America continues to battle the coronavirus outbreak, some economies in the region could see a ‘record-breaking contraction’ not seen since World War II, according to… Goldman Sachs.  Latin America and the Caribbean have become a new global epicenter of the pandemic, and the United Nations warned several countries in the region are ‘now among those with the highest per capita infection rates worldwide.’ Countries like Brazil, Mexico, Peru, Colombia and Chile are among the ten worst-affected, according to data from Johns Hopkins University. More than 100,000 people have died from Covid-19 in Brazil alone.”

August 12 – Financial Times (Delphine Strauss): “The UK economy suffered a bigger slump than any other major European economy in the second quarter, shrinking by a fifth and falling into its deepest recession on record. Official data… showed that gross domestic product fell more than 20% quarter on quarter, with widespread contractions across all sectors.”

August 13 – Reuters (Joseph Sipalan): “Malaysia’s economy shrank by 17.1% in the second quarter from a year earlier, its worst contraction in over two decades, as strict coronavirus measures at home and abroad slammed consumer spending and exports… The downturn was far worse than the 10.0% decline forecast…”

August 8 – Reuters (David Gaffen): “The world’s five largest oil companies collectively cut the value of their assets by nearly $50 billion in the second quarter, and slashed production rates as the coronavirus pandemic caused a drastic fall in fuel prices and demand. The dramatic reductions in asset valuations and decline in output show the depth of the pain in the second quarter.”

Trump Administration Watch:

August 12 – Reuters (Steve Holland and Susan Heavey): “President Donald Trump accused congressional Democrats… of not wanting to negotiate over a U.S. coronavirus aid package because he was refusing to go along with ‘ridiculous’ spending requests unrelated to the pandemic. Trump’s comments came after top Republican and Democratic negotiators traded blame for a five-day lapse in talks over relief legislation.”

August 8 – Financial Times (Emma Newburger and Jacob Pramuk): “President Donald Trump… signed a series of executive orders expanding coronavirus economic relief to Americans struggling during the pandemic. The president’s four orders extend unemployment benefits, provide a payroll tax holiday, defer student loan payments through 2020 and extend the federal protections from evictions. Trump’s orders will quickly face a legal challenge, as continuing the programs would require federal funding, which Congress controls.”

August 10 – Wall Street Journal (Eric Morath): “The federal government spent nearly $250 billion on extra $600-a-week unemployment benefits from early April to the end of July… Workers who permanently lost their jobs, were furloughed or had their hours cut were able to tap $600 in federal unemployment benefits on top of the amount they qualified for from the state, under a relief law Congress passed and President Trump signed in March. The benefits expired on July 31. Mr. Trump on Saturday signed an executive order that would replace the larger payments with $300 a week in enhanced unemployment benefits, and called on states to provide another $100 a week.”

August 11 – Reuters (Susan Heavey): “U.S. President Donald Trump… said his relationship with Chinese President Xi Jinping has frayed in the wake of the novel coronavirus pandemic and that he has not spoken to his Chinese counterpart in a long time. ‘I used to have a very good relationship with him… I had a great relationship with President Xi. I like him, but I don’t feel the same way now.’”

August 10 – Financial Times (Demetri Sevastopulo): “When US secretary of state Mike Pompeo last month declared in a speech that China was intent on ‘hegemony’, it was yet another sign of how much has changed since Donald Trump wrote in a tweet in March about his ‘respect’ for president Xi Jinping. As the pandemic has devastated the US economy, imperilling his re-election, Mr Trump has ditched his reluctance to taking a harsher stance on Beijing, as he increasingly blames the Chinese government for what he calls the ‘China virus’.  His decision to make China a bogeyman in the 2020 US presidential race has opened the door for security hawks to push policies to clamp down on threats from Beijing that Mr Trump previously ignored. But some officials privately say that they are also racing to enact tough policies in case Mr Trump ends up losing to Joe Biden in November.”

August 10 – Bloomberg (Alexandre Tanzi): “President Donald Trump’s decision to extend a student-loan freeze will take away a financial risk for tens of millions of U.S. households, who now won’t have to resume paying back about $1.2 trillion of debt until at least 2021. The measure, one of four executive actions Trump took on Aug. 8, keeps both repayments and the accumulation of interest on hold through the end of this year.”

August 7 – Wall Street Journal (Bob Davis): “The Trump administration’s cascade of actions taken against Beijing represent a new chapter in U.S.-China relations, one marked by increasing confrontation and few efforts to de-escalate the tensions. Business leaders, scholars and others involved in U.S.-China relations say that while the administration’s moves clearly have an electoral component—the president is campaigning on being tough on China—they go well beyond the 2020 election. Previous confrontations between the two nations have been limited as they sought to put business and economic relations first. But U.S. business no longer has the sway it once had in getting Beijing and Washington to back off.”

August 10 – Reuters (Jeff Mason, Andrea Shalal and Alexandra Alper): “U.S. Treasury Secretary Steven Mnuchin… said companies from China and other countries that do not comply with accounting standards will be delisted from U.S. stock exchanges as of the end of 2021. Mnuchin and other officials recommended the move to the U.S. Securities and Exchange Commission last week to ensure that Chinese firms are held to the same standards as U.S. companies, prompting China to call for frank dialogue.”

U.S. Bubble Watch:

August 12 – Reuters (David Lawder): “The U.S. federal budget deficit fell to $63 billion in July, half the amount of a year earlier and down from $864 billion in June, as a delayed July 15 tax payment deadline boosted revenues and coronavirus aid outlays shrank sharply… The July deficit brought the fiscal year-to-date deficit to $2.81 trillion, compared to $867 billion for the comparable period of 2019 and doubling the 2009 full-year record deficit of $1.4 trillion.”

August 12 – Reuters (Lucia Mutikani): “U.S. consumer prices increased more than expected in July, but high unemployment is likely to keep inflation under control, allowing the Federal Reserve to continue pumping money into the economy… The… consumer price index rose 0.6% last month after rebounding 0.6% in June. In the 12 months through July, the CPI accelerated 1.0% after climbing 0.6% in June. Economists… had forecast the CPI rising 0.3% in July…”

August 11 – Reuters (Lucia Mutikani): “U.S. producer prices rebounded more than expected in July, but the overall trend in producer inflation remained subdued amid signs the economy’s recovery from the COVID-19 recession was faltering. The… producer price index for final demand increased 0.6% last month after falling 0.2% in June. In the 12 months through July, the PPI dropped 0.4% after declining 0.8% in June.”

August 13 – CNBC (Jeff Cox): “First-time claims for unemployment insurance last week fell below 1 million for the first time since March 21 in a sign that the labor market is continuing its recovery from the coronavirus pandemic. The total claims of 963,000 for the week ended Aug. 8 was well below the estimate of 1.1 million from economists… That represented a decline of 228,000 from the previous week’s total.”

August 12 – CNBC (Diana Olick): “Two straight weeks of record low mortgage rates brought consumers back to their lenders, but rates may now be reversing course… Mortgage applications to purchase a home rose 2% for the week and were a strong 22% higher than the same week one year ago.”

August 10 – Bloomberg (Reade Pickert and Katia Dmitrieva): “The pandemic-induced downturn initially had hints of being the sharpest but shortest U.S. recession on record. Now there are increasing signs of economic scarring that resemble past slumps. Beneath a headline number showing a better-than-expected gain in July jobs, the government’s employment report contained indications of underlying weakness. Payrolls remain 13 million below pre-pandemic levels and the number of people out of work for 15 weeks or longer more than doubled from the prior month, to 8 million.”

August 11 – Bloomberg (Madeleine Ngo): “Big companies are going bankrupt at a record pace, but that’s only part of the carnage. By some accounts, small businesses are disappearing by the thousands amid the Covid-19 pandemic, and the drag on the economy from these failures could be huge. This wave of silent failures goes uncounted in part because real-time data on small business is notoriously scarce, and because owners of small firms often have no debt, and thus no need for bankruptcy court.”

August 13 – Bloomberg (Sally Bakewell): “Unprecedented government stimulus has allowed more companies to borrow at lower rates than ever before. Yet amid the credit boom, smaller firms that power America’s economic engine are often being shut out, hamstringing the recovery just as it begins. The Federal Reserve’s pledge to use its near limitless balance sheet to buy corporate bonds has aided stricken airlines, oil drillers and hotels. It’s also helped companies from Alphabet Inc. and Amazon.com Inc. to Visa Inc. and Chevron Corp. access some of the cheapest financing ever seen. All told, firms have sold about $1.9 trillion of investment-grade debt, junk bonds and leveraged loans this year… But for companies not large enough to tap fixed-income markets, the outlook is much more dire. Banks are tightening conditions on loans to smaller firms at a pace not seen since the financial crisis, while many direct lenders that have traditionally focused on the middle market are pulling back or turning to bigger deals instead.”

August 9 – CNBC (Annie Nova): “Amid one of the worst downturns in U.S. history, nearly 80% of credit card holders say they’re worried they won’t be able to continue making even the minimum payments on their debt.  The figure comes from a survey by CreditCards.com, which found millennial card holders (91%) are most at risk of missing payments. Meanwhile, 1 in 4 people say the pandemic has pushed them to take on more credit card debt.  Most of the relief measures delivered to Americans in the first stimulus package have dried up, even as the coronavirus pandemic shows no sign of abating.”

August 12 – Wall Street Journal (Kate Davidson and David Harrison): “Spending cuts by state and local governments grappling with the coronavirus pandemic pose a headwind to the U.S. economic recovery as lawmakers consider how much federal aid to provide. State and local governments reduced spending at a 5.6% annual rate in the second quarter as they laid off workers and pulled back on services to offset plunging tax revenues. More cuts are on the way. Moody’s Analytics estimates that without additional federal aid, state and local budget shortfalls will total roughly $500 billion over the next two fiscal years. That would shave more than 3 percentage points off U.S. gross domestic product and cost more than 4 million jobs, said Dan White, head of fiscal policy research at Moody’s.”

August 13 – Wall Street Journal (Scott Calvert): “Most U.S. cities say continuing economic damage from the coronavirus pandemic will leave them in worse financial shape in the coming year than they were earlier in the crisis, raising the odds of deeper municipal layoffs and service reductions… Nearly 90% of the 485 cities polled by the advocacy group National League of Cities said they will have a harder time meeting the needs of their communities in fiscal 2021 than in the prior fiscal year, the highest share since the depths of the 2007-09 recession. In 2019, just 24% of finance officers reported that their city was less able to meet fiscal needs, compared with the previous year… Municipal budget officials on average anticipate that general fund revenues for fiscal year 2021 will come in 13% below 2020 levels…”

August 10 – Associated Press (Geoff Mulvihill): “State and local government officials across the U.S. have been on edge for months about how to keep basic services running while covering rising costs related to the coronavirus outbreak as tax revenue plummeted. It’s now clear that anxiety will last a lot longer. Congressional talks over another coronavirus relief package have failed, with no immediate prospects for a restart. The negotiation meltdown raises the prospect of more layoffs and furloughs of government workers and cuts to health care, social services, infrastructure and other core programs. Lack of money to boost school safety measures also will make it harder for districts to send kids back to the classroom.”

August 9 – Wall Street Journal (Janet Adamy): “The economic hit of the coronavirus pandemic is emerging as particularly bad for millennials, born between 1981 and 1996, who as a group hadn’t recovered from the experience of entering the workforce during the previous financial crisis. For this cohort, already indebted and a step behind on the career ladder, this second pummeling could keep them from accruing the wealth of older generations.”

August 11 – Bloomberg (Eliza Ronalds-Hannon): “Frackers are failing by the dozens, spurring an unusual problem for their suppliers: What to do with thousands of tons of sand parked in hopper cars on America’s railroads. A case in point is Covia Holdings Corp., which received a lecture from Judge David Jones at a bankruptcy hearing last month about the obligation to safely dispose of more than 4,000 leased rail cars, each carrying about 100 tons of superfine frac sand. Most of it is now worse than worthless -- almost no one wants the mineral, and Covia is burning cash on rail car leases, maintenance and storage costs…”

August 12 – Bloomberg (Oshrat Carmiel): “Manhattan apartment rents plunged last month by the most in nearly nine years. That’s only one sign of weakness for the borough’s leasing market. By almost every measure, the news is dismal for landlords, who are trying to keep units filled amid a global pandemic that’s sparked an urban exodus. July’s vacancy rate climbed to a record of 4.33%, according to… Miller Samuel Inc. and Douglas Elliman Real Estate. There were 13,117 apartments listed for rent at the end of the month, the most in data going back to 2006.”

August 10 – Wall Street Journal (Karen Langley): “Shares of home builders have been on a tear since the stock market bottomed in late March… The S&P 500’s home-building subindustry index… is up 23% this year and closed Monday at its first record in 15 years.”

August 8 – Reuters (Jonathan Stempel): “Berkshire Hathaway… announced a $9.8 billion writedown and 10,000 job losses at its Precision Castparts aircraft parts unit, as the coronavirus pandemic caused widespread pain at Warren Buffett’s conglomerate.”

Fixed Income Watch:

August 12 – Bloomberg (Joanna Ossinger): “The standoff in Washington over the flow of stimulus money to state and local municipal governments is adding more risk to U.S. credit markets, according to Morgan Stanley… State and local government budgets have been severely damaged by the Covid-19 pandemic due to lost tax revenue and rapidly rising expenses, and that may have ramifications for investors, Morgan Stanley Wealth Management strategists Scott Helfstein and Monica Guerra wrote… ‘Though municipal budgets are strained, muni bond yields have reached historic lows due to constructive seasonals and risk-off sentiment… Failure to secure aid for state and local governments presents downside risk for bonds of low credit quality at a time when investors are willing to move down the credit curve.’”

August 9 – Bloomberg (Christopher Maloney): “A deluge of supply has inundated the agency mortgage-bond market this year, as a plunge in lending rates triggered a wave of homeowner refinancings. But there are signs that relief may be forthcoming. Gross supply as of the end of June has already reached $1.2 trillion, a torrid pace considering the last decade has averaged $1.3 trillion per annum… Federal Reserve policy… has certainly been a contributing factor. The Fed has bought mortgages at a blistering pace. Between March 16 and the end of June, the bank added almost $788 billion to its balance sheet. As total gross supply from March through June was $905 billion, this helped sector spreads tighten back to levels seen before the pandemic.”

August 11 – Wall Street Journal (Cezary Podkul): “Thousands of commercial-mortgage borrowers have been struggling to meet payments on their loans in the midst of the coronavirus pandemic. But there might be another reason so many are falling behind: aggressive lending practices that overstated borrowers’ ability to repay. A study of $650 billion of commercial mortgages originated from 2013 to 2019 found that even during normal economic times, the mortgaged properties’ net income often falls short of the amount underwritten by lenders. The underwritten amount should be a conservative estimate of how much a property earns. Instead, the actual net income trails underwritten net income by 5% or more in 28% of the loans, according to the study of nearly 40,000 loans by two finance academics at the University of Texas…”

August 11 – Reuters (Yoruk Bahceli): “Universities… have gone on a borrowing spree in the bond markets this year that outpaces a rise in companies’ bond sales… Bond issuance by universities is only a tiny part of the global bond market, but sales by universities worldwide are more than double full-year 2019 levels at $11.4 billion in the year to date, Dealogic data shows. In comparison, global debt issuance by companies is at around 75% of 2019 volumes, based on Dealogic data.”

China Watch:

August 10 – Bloomberg: “China said it will sanction 11 Americans in retaliation for similar measures imposed by the U.S…, but the list doesn’t include any members of the Trump administration. Those sanctioned include Senators Marco Rubio, Ted Cruz, Tom Cotton and Pat Toomey…”

August 10 – Wall Street Journal (John Lyons and Joyu Wang): “China’s campaign to quash dissent in Hong Kong accelerated with the arrest of pro-democracy media baron Jimmy Lai, sending an ominous signal about the future of a free press and the new limits on those challenging Beijing’s tightening grip on the former British colony. Mr. Lai was among 10 swept up Monday, including Agnes Chow, a 23-year-old politician who is well known for helping to lead pro-democracy protests, in the latest move by authorities to enforce a new national security law imposed by the mainland on Hong Kong.”

August 11 – Reuters (Yoruk Bahceli): “New bank lending in China fell more than expected in July from the previous month, but broad credit and liquidity growth quickened as the central bank sought to support a gradual economic recovery. Chinese banks extended 992.7 billion yuan ($142.82bn) in new yuan loans in July, down sharply from 1.81 trillion yuan in June and falling short of analysts’ expectations… Household loans, mostly mortgages, fell to 757.8 billion yuan in July from 978.8 billion yuan in June, while corporate loans dipped to 264.5 billion yuan from 927.8 billion yuan.”

August 12 – Reuters (Cheng Leng, Lusha Zhang and Ryan Woo): “China’s banking industry is expected to dispose 3.4 trillion yuan ($489.91bn) of bad loans in 2020 to contain financial risks in an economy weakened by COVID-19, the official Xinhua News Agency reported. ‘The sector will further step up bad loan disposals in 2021, as some of the problems will be exposed next year due to delayed loan payments,’ Xinhua quoted Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission (CBIRC)…” 

August 12 – Wall Street Journal (Lingling Wei): “For decades, Chinese leaders embraced foreign investments and exports to power China’s economy. Now, with the world in recession and U.S.-China tensions deepening, President Xi Jinping is laying out a major initiative to accelerate China’s shift toward more reliance on its domestic economy. The new policy is gaining urgency as Chinese companies… face increasing resistance in foreign markets, Chinese officials say. In a series of speeches to senior government officials since May, Mr. Xi has trotted out the new strategy, translated as ‘domestic circulation,’ prioritizing domestic consumption, markets and companies as China’s main growth drivers. Investments and technologies from overseas, though still desirable, would play more of a supporting role.”

August 11 – Bloomberg: “First the pandemic and now floods are slashing the spending power of Chinese households this year, as stagnant incomes and rising costs undermine the strength of the domestic recovery. That trend may also be worsening China’s already severe income inequality… The median disposable income -- about $1000 per quarter -- actually fell as the virus lockdowns hit, and the fact that it’s recovering slower than the mean likely indicates a widening gap with wealthy Chinese. On top of that, food prices are rising faster as the pandemic has slowed imports and flooding in central China damaged food crops and transport links.”

August 11 – Reuters (Yilei Sun and Brenda Goh): “China’s auto sales in July climbed 16.4% from a year earlier, the fourth consecutive month of gains as the world’s biggest vehicle market comes off lows hit during the country’s coronavirus lockdown. Sales rose to 2.11 million vehicles in July but are still down 12.7% for the year to date at 12.37 million vehicles…”

August 12 – Reuters (Stella Qiu and Brenda Goh): “China’s aviation regulator said… that passenger numbers in July fell 34.1% from a year earlier. That marked a recovery from a year-on-year decline of 42.4% in June.”

August 9 – Financial Times (Sun Yu): “Chinese rating agencies have upgraded a record number of local government bond issuers even as fiscal income plunged after the coronavirus outbreak, in a move analysts say could lead to a wave of defaults. The corporate credit ratings of 100 local government financing vehicles, the main lenders behind China’s infrastructure building boom, have been raised since January, according to Wind… This marks a sharp rise, with just 17 reporting a rise in the previous ten years combined. The shift comes despite local governments reporting a 7.9% drop in revenues in the six months ending in June. Rating agencies attributed the stronger credit score to LGFVs’ solid financial performance at the end last year and discounted the pandemic because it was unclear what long-term effect it would have on the economy.”

August 14 – Reuters (Ryan Woo and Liangping Gao): “Not yet 30, Beijing office worker Li thought she was already on her way up China’s private property ladder with two apartments bought and rented out. Then came the new coronavirus, jobless tenants leaving town and a rent falloff. She’s one of millions of Chinese landlords who have bought apartments to let in a highway to the country’s growing middle class, many now facing a first slump in rental income… Rents in 20 major cities fell 2.33% in July from the same month year earlier, according to property data provider Zhuge House Hunter - the fourth consecutive month of decline in a market that’s been buoyant for years.”

August 12 – Reuters (Samuel Shen, Cheng Leng and Ryan Woo): “It’s not a good sign for any economy when debt collectors are booming and in China right now, the industry is on a hiring spree. Whole Scene Asset Management, a debt recovery firm based in the southern province of Hunan, plans to double staff numbers to 400 people this year as it expands into new cities. ‘Debt collection companies have been mushrooming,’ said company founder Zhang Haiyan. ‘And with bad loans growing this year, everyone is adding new hands.’”

August 13 – Bloomberg: “China’s multi-year clampdown on its peer-to-peer lending industry has whittled the number to just 29 platforms, down from about 6,000 at its peak… The crackdown, which is likely to be completed at the end of this year, has left investors with more than 800 billion yuan ($115bn) in unpaid debt from failed platforms…”

August 12 – Financial Times (Christian Shepherd, Wang Xueqiao and Thomas Hale): “Beijing is on alert for flooding as China struggles with a series of severe weather events that are driving up food prices and threatening its economic recovery from coronavirus. The Beijing municipal government, worried over a repeat of 2012 when flash floods killed about 80 people — some of whom drowned in their cars in underpasses, has shut parks, advised residents to avoid unnecessary travel and cancelled flights from its Daxing airport.”

EM Watch:

August 13 – Bloomberg (Cagan Koc and Constantine Courcoulas): “Turkey’s central bank offered the nation’s lenders funding through a more expensive channel in the latest effort to reverse declines in the lira without raising its key interest rate. Policy makers… conducted a 20 billion-lira ($2.7bn) one-month repo auction through what they call the conventional method. The average simple rate for lenders that received funding was 10.96%, 271 bps higher than the central bank’s benchmark.”

August 12 – Bloomberg (Selcuk Gokoluk and Asli Kandemir): “President Recep Tayyip Erdogan says Turkey’s banks are ‘doing fine.’ But as the lira spirals ever lower, debt investors are taking a less sanguine view. The bonds of three Turkish lenders are trading at distressed levels, which shows the deteriorating opinion of investors on the ability of the companies to repay their obligations, even though the banks remain profitable and highly capitalized. That’s the same number of firms as serial-defaulter Argentina…”

Europe Watch:

August 10 – Financial Times (Mehreen Khan and Tommy Stubbington): “The EU’s plan to issue €750bn of bonds to fund its Covid-19 recovery poses no immediate threat to the bloc’s credit rating, according to the biggest agencies, despite big divisions between member states on how to pay the money back. The EU’s 27 governments agreed in July a landmark response to the coronavirus crisis by empowering the European Commission to raise €750bn of debt and to hand the proceeds to stricken economies in the form of loans and grants. The deal included a promise to explore new sources of income — such as a European digital tax or levy on carbon imports — to pay back the EU’s biggest ever exercise in joint borrowing. But governments are divided over the levies.”

Leveraged Speculation Watch:

August 9 – Wall Street Journal (Simon Constable): “The stock-market volatility in the first half of 2020 should have been a near-perfect period for ‘long-short’ mutual funds and exchange-traded funds to make a killing. Unfortunately, less than one in three such funds made money for investors during this tumultuous period.”

Geopolitical Watch:

August 12 – Reuters (Robert Muller): “China’s global economic power makes the communist country in some ways a more difficult foe to counter than the Soviet Union during the Cold War, U.S. Secretary of State Mike Pompeo said on a visit to the Czech Republic… Pompeo called on countries around Europe to rally against the Chinese Communist Party (CCP), which he said leverages its economic might to exert its influence around the world. ‘What’s happening now isn’t Cold War 2.0,’ Pompeo said in a speech to the Czech Senate. ‘The challenge of resisting the CCP threat is in some ways much more difficult.’ ‘The CCP is already enmeshed in our economies, in our politics, in our societies in ways the Soviet Union never was.’”

August 11 – Financial Times (Kathrin Hille): “US health secretary Alex Azar has raised the possibility of a trade deal with Taiwan during a historic visit to the country this week in remarks that are likely to trigger protests from Beijing. Wrapping up the three-day trip…, during which he met President Tsai Ing-wen, her national security adviser and foreign and health ministers, Mr Azar said his talks had touched upon a ‘bilateral trade arrangement’. ‘The purpose of my visit is to highlight the deep partnership and friendship between Taiwan and the US,’ Mr Azar said…”

August 13 – Financial Times (Kathrin Hille): “China’s military said… it conducted exercises near Taiwan ‘to safeguard national sovereignty’ in the face of rising US diplomatic exchanges with Taipei, underlining mounting tensions in the region. The comments came a day after Alex Azar, US health secretary, became the most senior Washington cabinet official to visit Taiwan since 1979 and marked a rare example of Beijing giving a political reason for a military exercise. ‘Recently, certain large countries are incessantly making negative moves regarding the Taiwan issue and sending wrong signals to the ‘Taiwan independence’ forces, seriously threatening peace and stability in the Taiwan Strait,’ Colonel Zhang Chunhui, spokesman of the People’s Liberation Army’s Eastern Theatre Command, said…”

August 12 – Reuters (Yimou Lee and Ben Blanchard): “Taiwan unveiled a T$42.1 billion ($1.4bn) increase for next year’s planned defence spending…, as China announced details of its latest combat drills near the democratic island. China has stepped up its military activity near Taiwan, which it regards as a breakaway province. On Monday, Taiwan said Chinese fighters briefly crossed the sensitive median line of the Taiwan Strait, the same day U.S. health chief Alex Azar met President Tsai Ing-wen in Taipei. China had denounced Azar’s trip.”

August 10 – Reuters (Yimou Lee): “U.S. Health Secretary Alex Azar attacked China’s response to the coronavirus pandemic… and said that if such an outbreak had emerged in Taiwan or the United States it could have been ‘snuffed out easily’… ‘The Chinese Communist Party had the chance to warn the world and work with the world on battling the virus. But they chose not to, and the costs of that choice mount higher every day,’ Azar said in Taipei…”

August 11 – Reuters (Doina Chiacu): “U.S. Secretary of State Mike Pompeo said… he was ‘deeply troubled’ by reports of the arrest of Hong Kong media tycoon Jimmy Lai ‘under Hong Kong’s draconian National Security Law.’ …‘Further proof that the CCP (Chinese Communist Party) has eviscerated Hong Kong’s freedoms and eroded the rights of its people,’ Pompeo said… Separately, White House national security adviser Robert O’Brien said…: ‘We are deeply troubled by the arrest of Jimmy Lai.’”

August 11 – Financial Times (Christian Shepherd and Xinning Liu): “When Chinese diplomats began spreading conspiracy theories in March suggesting that the US army had brought coronavirus to China, the claims looked set to derail an already acrimonious relationship between Beijing and Washington. But in recent weeks, despite rounds of US sanctions…, Beijing has struck a more conciliatory note. ‘China is always ready to work with the United States,’ Zhao Lijian, Chinese foreign ministry spokesperson and a previous proponent of theories linking the US military to the outbreak of Covid-19 in Wuhan, told reporters…”

August 8 – Financial Times (Michael Stott): “Home to almost half of the world’s new cases of coronavirus, Latin America is a long way from winning the war against Covid-19. But there is already one victor in the region: China. Beijing has moved swiftly in Latin America to donate medical equipment and supplies, offer technical help and express solidarity. Its ambassadors have flooded social media with messaging about Chinese co-operation and solidarity, eclipsing the US, the region’s traditional power. Wang Yi, China’s foreign minister, capped Beijing’s efforts with a virtual video conference for his Latin American and Caribbean counterparts last week, offering $1bn in loans to help buy a Chinese-made vaccine once it becomes available and calling for closer relations with the region, a key supplier of food and metals, post-pandemic.”

August 13 – Reuters (Sally Bakewell): “A sharp escalation in tensions with the United States has stoked fears in China of a deepening financial war that could result in it being shut out of the global dollar system - a devastating prospect once considered far-fetched but now not impossible. Chinese officials and economists have in recent months been unusually public in discussing worst-case scenarios under which China is blocked from dollar settlements, or Washington freezes or confiscates a portion of China’s huge U.S. debt holdings. Those concerns have galvanised some in Beijing to revive calls to bolster the yuan’s global clout as it looks to decrease reliance on the greenback. Some economists even float the idea of settling exports of China-made COVID-19 vaccines in yuan, and are looking to bypass dollar settlement with a digital version of the currency.”

August 11 – Bloomberg (Debby Wu): “A key supplier to Apple Inc. and a dozen other tech giants plans to split its supply chain between the Chinese market and the U.S., declaring that China’s time as factory to the world is finished because of the trade war. Hon Hai Precision Industry Co. Chairman Young Liu said it’s gradually adding more capacity outside of China, the main base of production for gadgets from iPhones to Dell desktops and Nintendo Switches. The proportion outside the country is now at 30%, up from 25% last June. That ratio will rise as the company -- known also as Foxconn -- moves more manufacturing to Southeast Asia and other regions to avoid escalating tariffs…”

August 8 – Financial Times (Joe Rennison): “Companies could shift a quarter of their global product sourcing to new countries in the next five years, according to a new study which warns that rising threats to supply chains are taking a heavy toll on profits.  Goods worth $2.9tn-$4.6tn, or 16-26 per cent of global exports in 2018, are in play, the McKinsey Global Institute estimates... Cost considerations and government pressures to become more self-reliant could see more than half of pharmaceutical and apparel production move to new countries, it adds.”

August 14 – Reuters (Daren Butler): “A Greek and a Turkish warship were involved in a mild collision on Wednesday during a standoff in the eastern Mediterranean, in what a Greek defence source called an accident but Ankara described as a provocation.”

August 13 – Financial Times: “Tensions between Nato allies France and Turkey have sharply intensified after Paris deployed naval vessels to the eastern Mediterranean in support of Greece, which is embroiled in a confrontation with Ankara over oil and gas exploration in disputed waters off Cyprus. Kyriakos Mitsotakis, Greece’s prime minister, warned… of ‘the risk of an accident with so many military assets gathered in an enclosed space [the eastern Mediterranean]’. The spark that ignited the latest flare-up was Turkey’s decision to pursue its claim to possible offshore oil and gas reserves by sending the survey ship Oruc Reis into disputed waters -accompanied by Turkish warships — on an exploration mission.”