Credit Bubble Bulletin

Monday, July 15, 2019

Monday Afternoon Links

[Reuters] S&P 500 closes flat as earnings season starts

[Reuters] Treasury's Mnuchin says deal to raise U.S. debt ceiling getting closer

[Reuters] Trump says has 'better' plan if Congress doesn't pass U.S.-Mexico-Canada trade deal

[Axios] The global debt binge begins anew

[AP] Trade wars cool market for small businesses

[AP] After years of plenty, auto workers want a bigger slice

[Bloomberg] Global Debt Quickened in First Quarter, Outpacing World Economy

[Bloomberg] China Controls Housing Market by Making Up Rules as It Goes

[WSJ] Putting the Equity Back Into Private Equity

[FT] Debt in developing economies hits all-time high

Monday's News Links

[Reuters] Reassuring Chinese data nudges shares higher

[Reuters] Wall Street higher as banks rise after Citi results

[Reuters] Oil prices edge lower as China's GDP growth slows

[Reuters] Trump sees slowing Chinese growth pressuring Beijing on trade

[Reuters] China second quarter GDP growth slows to 6.2% year-on-year, 27-year low

[Reuters] China home price growth cools in June, but investment quickens

[Reuters] China June industrial output up 6.3% y/y, beats forecasts, retail sales up 9.8%

[Reuters] China says will freeze out U.S. companies that sell arms to Taiwan

[Reuters] Groping for new tools, central banks look at Japan's yield controls

[NBC] Trump weighs ousting Commerce chief Wilbur Ross after census defeat

[Reuters] South Korea calls Japan reports of North Korea sanctions breach 'grave challenge'

[Bloomberg] China’s Growth Slides to Weakest Pace in Almost Three Decades

[Bloomberg] Full-Blown Currency War Can No Longer Be Ruled Out, Pimco Says

[Bloomberg] Not Everyone Gets a Piece of China's $2 Trillion Pie

[Bloomberg] India Lender Shares Hit Six-Year Low as Lending Grinds to a Halt

[NYT] China’s Economic Growth Slows as Trade War With U.S. Deepens

[WSJ] Slowing Growth Raises Pressure on China’s Stimulus Efforts

[FT] Debt in developing economies hits all-time high

[FT] Trump’s currency war rhetoric persists as Powell prepares to act

Sunday, July 14, 2019

Sunday Evening Links

[Reuters] Asian shares, dollar brace for China GDP

[The Hill] Trump puts hopes for Fed revolution on unconventional candidate

[Reuters] U.S. proposes barring big tech companies from offering financial services, digital currencies

[Reuters] Exclusive: U.S. firms may get nod to restart Huawei sales in 2-4 weeks - official

[Reuters] China second-quarter GDP growth set to slow to 6.2%, 27-year low, as trade war bites

[Reuters] U.S. Fed seen launching repo facility in early 2020: Deutsche Bank

[Reuters] Erdogan says Turkey will make serious rate cuts: Haberturk

[SCMP] China to Conduct Military Exercises Near Taiwan After US Agrees US$2.2 billion Arms Deal

[Bloomberg] China's Stock Market Is Flashing Too Many Warning Signs

[Bloomberg] China Struggles Add to Emerging-Market Risks as Rate Cuts Beckon

[WSJ] Oxymoron Alert: Some ‘High Yield’ Bonds Go Negative

Sunday's News Links

[Reuters] Pelosi sets spending demands for two-year budget deal

[Reuters] South Korea trade ministry to raise Japan export curbs at WTO general council meeting

[Reuters] Indian housing lender DHFL warns it may not survive as a going concern

[Reuters] After Taiwan buys arms, China holds military drills on southeast coast

[Bloomberg] Central Banks Are Tossing Grenades Rather Than Firing Bazookas

[WSJ] Manufacturers Move Supply Chains Out of China

[WSJ] Second-Quarter Earnings to Test Soaring Market

[FT] Tech crunch could herald US ‘earnings recession’

Saturday, July 13, 2019

Saturday's News Links

[Reuters] Wall St. Week Ahead: Union Pacific, other freight co earnings eyed for tariff effects

[Reuters] Japan-South Korea feud deepens with disputed accounts of trade meeting

[Reuters] Hong Kong protesters, police clash as demonstrations target Chinese traders

[AP] Taiwan defends US arms deal after China sanctions threat

[Bloomberg] The Black Hole Engulfing the World's Bond Markets

[FT] US yield curve steepens by most in three years

Weekly Commentary: Central Banker to the World

Please join Doug Noland and David McAlvany Thursday, July 18th, at 4:00PM EST/ 2:00pm MST for the Tactical Short Q2 recap conference call, "What's Behind the Global Yield Collapse?" Click here to register.

July 11 – Bloomberg (Rich Miller): “Federal Reserve Chairman Jerome Powell is starting to sound a bit like he’s the world’s central banker. In Congressional testimony this week, he repeatedly cited a slower global economic expansion in laying out the case for easier U.S. monetary policy. ‘There’s something going on with the growth around the world, particularly around manufacturing and investment and trade,’ he told the House Financial Services Committee… as he all but promised an interest-rate cut at the end of this month.”

Chairman Powell was decisive. While not directly announcing an imminent cut, he essentially pre-committed to reducing rates at the July 31st meeting. Record stock prices don’t matter. Booming corporate Credit is no issue. June’s big gain in payrolls and a 3.7% unemployment rate are not part of the decision function. A Friday afternoon Bloomberg headline resonated: “A Stock Market Dying to Know What Powell Knows About the Economy.”

The so-called “insurance” rate cut is all about the global environment, with monetary policy’s traditional domestic focus relegated to history. The reduction will be justified by “crosscurrents,” “uncertainties” and below-target inflation. But is the global economy really in such bad shape to warrant preemptive monetary stimulus during a period of market ebullience? What Does Powell – and his cadre of global central bankers - Know?

China’s GDP is expected to expand between 6.0% and 6.5% this year. While slowing, growth throughout EM is forecast between three and four percent. Nothing to write home about, but euro zone GDP is expected to exceed 1.0% this year. Japan could see 3.0% 2019 GDP growth. Bank American Merrill Lynch today lowered their forecast for 2019 global GDP growth to 3.3% from 3.6%. Deserving of even lower rates and more QE?

I don’t believe the primary impetus behind the global central bank swing toward additional stimulus is economic. Indeed, I see Powell, Draghi, Carney, Kuroda and the like confirming the Acute Global Financial Fragilities Thesis. This fanciful notion of “insurance” stimulus will be debated for years to come. A system suffering from risk aversion, illiquidity and Credit contraction would be expected to experience some perk from monetary stimulus. But a global financial “system” already excessively embracing risk, wallowing in liquidity abundance and generating record Credit growth will be only further destabilized by greater stimulus.

I’ve been long fascinated by how things turn “crazy” at the end of cycles. My thesis is the world is in the late stage of an extraordinary multi-decade Credit Bubble. From this perspective, we should not be surprised by phenomenal late-cycle excess.

July 9 - Bloomberg (Samuel Potter, Laura Benitez, and Anooja Debnath): “The global bond rally is so fierce that even on an off-day investors keep piling in. Such is the frenzy for government debt just now that Italy, long considered Europe’s fiscal problem child, on Tuesday attracted demand of around 17.5 billion euros ($19.6bn) for bonds that won’t mature until 2067. With yields near the lowest since before the populist coalition came to power in June 2018, investors fell over themselves to allocate to the 3 billion euro offering… Negative yields are creeping in at Europe’s fringes. The number of corporate junk bonds trading with a sub-zero handle in euros now stands at 14 -- at the start of the year there were none. Money managers are killing it on debt that won’t mature for nearly 100 years.”

July 10 – Financial Times (Tommy Stubbington): “In the bizarro world of global debt, even bonds from Europe’s emerging markets are spewing out negative yields. Sky-high bond prices… are increasingly spilling into what was once considered risky territory. All of the Czech Republic’s euro-denominated debt, for example, now trades at sub-zero yields… Short-dated Hungarian bonds and a growing slice of Poland’s debt are following suit, with Warsaw’s 10-year yields just fractionally above zero. Emerging market investors, who traditionally viewed these markets as their domain, are being forced to look further afield for returns, fueling a debt rally from Croatia to Kazakhstan.”

Bizarro World, indeed. Why is financial history strewn with markets succumbing to bouts of end-of-cycle insanity? The obvious answer is greed – greed that became deeply ingrained after a protracted period of being richly rewarded (with fear and caution punished mercilessly). The longer the cycle the more intense and resilient the greed dynamic. The more of the “house’s” money available to gamble, the more extravagant the bets. I would add that prolonged cycles typically have some type of underlying government support that over time comes to underpin confidence and risk-taking (playing an especially critical role late in the cycle).

The great late-twenties Bubble doesn’t inflate if not for confidence that the Federal Reserve possessed both the will and capacity to sustain the boom. The mortgage finance Bubble doesn’t inflate without implicit Treasury mortgage debt guarantees and the prevailing view “Washington will never allow a housing bust.” The ongoing historic Chinese Credit Bubble deflates years ago without faith that Beijing will backstop virtually the entire financial system. And confidence that global central bankers will do “whatever it takes” to sustain the boom is fundamental to the unrelenting inflation of the all-encompassing “global government finance Bubble.”

But greed and governmental support are insufficient to inflate Bubbles. Bubbles are fueled by Credit. I would add that “money” is also key. Credit booms can’t survive to become “protracted” without the expansion of perceived safe and liquid (money-like) Credit instruments (enjoying insatiable demand). Some monetary disturbance takes root. A self-reinforcing expansion of “money” and Credit foments Monetary Disorder and, if not contained, culminates in a parabolic spike in the prices of speculative assets.

I have long argued that speculative leverage plays an instrumental role as the marginal source of system liquidity. Especially in our age of contemporary unfettered finance, there is endless capacity to expand finance for the purpose of levering securities holdings. In a “risk on” market backdrop, risk-taking and leverage create liquidity abundance. But as we witnessed again in December, the shift to “risk off” de-risking/deleveraging can swiftly unmask the liquidity illusion.

With China’s financial fragilities turning more acute, EM finance/economies generally vulnerable, the global economy susceptible to heightened trade tensions, and speculative market Bubbles highly exposed to fear and waning confidence – “risk off” lies in wait. Enter Chairman Powell, Central Banker to the World, with assurances of an “insurance” rate cut. The Fed has not only provided extra juice to “risk on,” it has splashed cold water on the dollar. King dollar, after all, would pressure the vulnerable Chinese renminbi and EM more generally.

Curiously, global markets these days seem less focused on China’s economic data and more on Chinese Credit. There’s some rationale. Beijing is ready with additional stimulus when the economy weakens more than expected. What matters most is Chinese lending and Credit growth. Sufficient Credit expansion sustains the Chinese Bubble - that in many ways is sustaining EM economies, markets and global growth more generally.

Poor June trade data confirm Chinese economic weakness. China’s June exports were down 1.3% y-o-y. Indicating notably soft domestic demand, June Imports were down 7.3% from June ’18. China’s trade surplus jumped to a stronger-than-expected $50.98 billion. China posted an almost $30 billion trade surplus with the U.S. Imports from the U.S. sank 31.4% from a year ago (soybean imports down 37%!) to only $9.4 billion. Exports to the U.S. ($39.3bn) were 7.8% below June ’18.

Despite increasing cracks at the “periphery,” China’s Credit boom endures. Total Aggregate Financing (roughly total Credit less most governmental borrowing) expanded a stronger-than-expected $329 billion in June, up more than 50% from May’s $203 billion. June is typically a strong month for Chinese Credit growth, but last month’s growth was 50% above June ’18. Aggregate Financing increased $1.921 TN during 2019’s first half, 31% ahead of H1 2018 growth. Total Aggregate Financing ended June at $31.19 TN, up 10.9% over the past year.

New (yuan) Loans expanded $241 billion during June, the strongest monthly expansion since March ($245bn). June new Loans were up from May’s $172 billion but down from June ‘18’s $267 billion. First half Loan growth of $1.405 TN ran 7% ahead of comparable 2018. One-year Loan growth of $2.442 TN was 15% stronger than comparable growth from the previous year.

Consumer (chiefly mortgage) Loans expanded $110 billion last month, up from May’s $96 billion, and 8% ahead of growth from June ’18. Consumer Loans expanded 17.1% over the past year; 39% over two years; 72% in three years; and 138% in five years. No mystery surrounding ongoing apartment price inflation and robust consumer spending.

China’s Special Government Debt issuance jumped to $52 billion during June, triple May’s volume to the strongest expansion since September ’18. At $173 billion, first half issuance was triple comparable 2018. Corporate Loan growth also bounced back strongly in June, rising to $132 billion. First half Corporate loan growth of $909 billion ran 21% ahead of comparable ’18.

China’s economy is experiencing less and less bang for each renminbi of new Credit. China’s Bubble is acutely vulnerable, yet the borrowing and lending binge runs unabated. Runaway Credit expansion, maladjusted economic structure, and faith in Beijing’s power to sustain the boom have fomented Acute Monetary Disorder. And with China leading the global Credit boom in concert with extremely loose monetary policies globally, one has the recipe for rather historic global end-of-cycle craziness.

Combine China’s historic Credit expansion with an ECB balance sheet that almost doubled to $4.75 TN in three years of QE; a Bank of Japan balance sheet that expanded $1.2 TN to $5.2 TN since the end of 2016; and U.S. Credit growth back to record levels, and one sees ample fuel for global craziness. Rampant speculative leverage pushes things past the breaking point.

It’s become an acutely fragile global Bubble. The Fed, ECB and global central banks have moved to provide support, effectively throwing gas on the fire. There are conspicuous cracks, yet liquidity abundance and speculative impulses prevail. Turkey’s strongman President fires the head of the central bank for not aggressively cutting interest rates, and the lira is down less than 2%. Cracks in India’s financial system widen, and the world barely notices. Italy’s 50-year bond auction is massively oversubscribed with a yield of only 2.88% - with foreign “investors” accounting for 80% of the demand. Negative yields for junk issuers in the euro zone. Eastern European sovereign debt at or near negative yields. S&P500 surpasses 3,000 in the face of a deteriorating earnings outlook.

There was the “permanent plateau” shortly before the 1929 crash. Tech stocks embarked on a final speculative melt-up in Q1 2000 in the face of rapidly deteriorating industry and economy fundamentals. And don't forget “still dancing” in the summer of 2007, and so on. Monetary Disorder ensures late-cycle market detachment from reality.

Lost in all the exuberance, late-cycle excesses sow the seeds of self-destruction. After trading at negative 38 basis points in Monday trading, 10-year bund yields jumped almost 20 bps to trade to negative 18.5 bps by Friday morning. Spanish yields surged 25 bps this week - Portuguese yields 22 bps, Greek 21 bps and French yields 15 bps. Yields this week surged 46 bps in Lebanon, 42 bps in Turkey and 25 bps in Cyprus. Stronger-than-expected French industrial production were said to ameliorate concerns for the European economy. It has the early appearance of a key reversal following a speculative blow-off.

Ten-year Treasury yields jumped nine bps this week to 2.09%. June core CPI was reported up a non-disinflationary 2.1% y-o-y. Perhaps, with trade wars, a tight job market and rising real wages, inflation is not dead and buried after all. Things get interesting if the Treasury market starts to focus on massive supply, waning foreign demand and the potential for an inflation surprise.

Friday evening from the Financial Times (Robin Wigglesworth): “Has the Federal Reserve Fallen Victim to Bond Market Bullies?” “The bond market ‘vigilantes’ of old used to bully wastrel governments. Now they appear to have moved on to a grander target — the US Federal Reserve.”

Crisis-period QE changed the functioning of global markets. Permanently including QE in central banks’ standard toolkit has transformed global finance and Capitalism in ways not comprehensible at this juncture. The bond “vigilantes” are extinct. This has provided central banks unprecedented latitude to discard convention and follow their every whim. It has also conveniently removed a major risk (spike in yields) for equities. But is has also opened the fiscal floodgates, where monetary policies ensure the accommodation of huge deficit spending at extremely low borrowing costs. QE and the resulting death of the vigilantes have also empowered the strongman leader to subvert central bank independence.

Remember James Carville’s, “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.” That was before QE. Today’s bond market intimidates no one. Threatening - or even firing - the head of a central bank for not cutting rates – is a non-issue for today’s bond market. Ditto massive deficits. Why worry about supply, myriad excesses or politicizing monetary management when the magic of QE can make everything good?

Today’s “crazy” is incredibly dangerous. No check and balances. Markets have lost the capacity to self-adjust and correct. Sovereign debt, the foundation of global finance, has succumbed to unprecedented price distortions – and it only gets worse from there: The Speculative Blow-Off for Global Financial Assets. And I appreciate it all appears reasonable and unsustainable - so long as securities prices continue to inflate. But it will function poorly in reverse. The crazier things get the more unsustainable Bubble prices become.

For the Week:

The S&P500 increased 0.8% (up 20.2% y-t-d), and the Dow jumped 1.5% (up 17.2%). The Utilities were little changed (up 15.3%). The Banks were about unchanged (up 16.0%), while the Broker/Dealers slipped 0.3% (up 14.5%). The Transports rose 1.5% (up 16.0%). The S&P 400 Midcaps declined 0.3% (up 17.9%), and the small cap Russell 2000 dipped 0.4% (up 16.4%). The Nasdaq100 advanced 1.3% (up 25.5%). The Semiconductors jumped 2.9% (up 30.2%). The Biotechs fell 2.9% (up 9.8%). With bullion up $17, the HUI gold index surged 4.0% (up 25.0%).

Three-month Treasury bill rates ended the week at 2.09%. Two-year government yields dipped a basis point to 1.85% (down 64bps y-t-d). Five-year T-note yields gained four bps to 1.87% (down 64bps). Ten-year Treasury yields jumped nine bps to 2.12% (down 56bps). Long bond yields rose 11 bps to 2.65% (down 37bps). Benchmark Fannie Mae MBS yields jumped 13 bps to 2.86% (down 63bps).

Greek 10-year yields surged 21 bps to 2.33% (down 207bps y-t-d). Ten-year Portuguese yields jumped 22 bps to 0.65% (down 107bps). Italian 10-year yields declined one basis point to 1.74% (down 100bps). Spain's 10-year yields surged 25 bps to 0.57% (down 85bps). German bund yields jumped 15 bps to negative 0.21% (down 45bps). French yields rose 15 bps to 0.06% (down 65bps). The French to German 10-year bond spread was about unchanged at 27 bps. U.K. 10-year gilt yields rose 10 bps to 0.84% (down 44bps). U.K.'s FTSE equities index declined 0.6% (up 11.6% y-t-d).

Japan's Nikkei Equities Index slipped 0.3% (up 8.3% y-t-d). Japanese 10-year "JGB" yields rose four bps to negative 0.11% (down 12bps y-t-d). France's CAC40 declined 0.4% (up 17.8%). The German DAX equities index dropped 2.0% (up 16.7%). Spain's IBEX 35 equities index dipped 0.4% (up 8.8%). Italy's FTSE MIB index gained 0.9% (up 21.1%). EM equities were lower. Brazil's Bovespa index slipped 0.2% (up 14.2%), and Mexico's Bolsa fell 1.7% (up 2.4%). South Korea's Kospi index declined 1.1% (up 2.2%). India's Sensex equities index dropped 2.0% (up 7.4%). China's Shanghai Exchange sank 2.7% (up 17.5%). Turkey's Borsa Istanbul National 100 index dropped 2.5% (up 6.4%). Russia's MICEX equities index fell 2.0% (up 17.2%).

Investment-grade bond funds saw inflows of $570 million, and junk bond funds posted inflows of $619 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates were unchanged at 3.75% (down 78bps y-o-y). Fifteen-year rates rose four bps to 3.22% (down 80bps). Five-year hybrid ARM rates added a basis point to 3.46% (down 40bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up three bps to 4.13% (down 42bps).

Federal Reserve Credit last week declined $6.5bn to $3.775 TN. Over the past year, Fed Credit contracted $476bn, or 11.2%. Fed Credit inflated $964 billion, or 34%, over the past 348 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $9.3bn last week to $3.458 TN. "Custody holdings" gained $52.7bn y-o-y, or 1.5%.

M2 (narrow) "money" supply surged $46.0bn last week to a record $14.819 TN. "Narrow money" gained $677bn, or 4.8%, over the past year. For the week, Currency increased $3.2bn. Total Checkable Deposits declined $24.7bn, while Savings Deposits surged $52.6bn. Small Time Deposits added $1.0bn. Retail Money Funds jumped $13.7bn.

Total money market fund assets gained $14.2bn to $3.253 TN. Money Funds gained $450bn y-o-y, or 16.1%.

Total Commercial Paper dropped $20.0bn to $1.144 TN. CP was up $99bn y-o-y, or 6.4%.

Currency Watch:

The U.S. dollar index declined 0.5% to 96.81 (up 0.7% y-t-d). For the week on the upside, the Brazilian real increased 2.3%, the South African rand 1.6%, the Norwegian krone 1.1%, the New Zealand dollar 1.0%, the Swedish krona 0.8%, the Swiss franc 0.8%, the Australian dollar 0.6%, the Japanese yen 0.5%, the British pound 0.4%, the Canadian dollar 0.4%, the euro 0.4%, the Singapore dollar 0.2%, and the Mexican peso 0.1%. On the downside, the South Korean won declined 0.7%. The Chinese renminbi increased 0.19% versus the dollar this week (down 0.03% y-t-d).

Commodities Watch:

July 7 – Bloomberg (Ranjeetha Pakiam and Rupert Rowling): “Central banks are going after gold in 2019, boosting holdings as economic growth slows, trade and geopolitical tensions rise, and some authorities seek to diversify their reserves away from the dollar. The People’s Bank of China… raised reserves for a seventh month in June, adding 10.3 tons, following the inflow of almost 74 tons in the six months through May. Last week, Poland said it more than doubled its gold assets over this year and last, becoming the top holder in central Europe.”

The Bloomberg Commodities Index rallied 2.4% this week (up 5.2% y-t-d). Spot Gold jumped 1.2% to $1,416 (up 10.4%). Silver recovered 1.6% to $15.236 (down 2.0%). WTI crude surged $2.70 to $60.21 (up 33%). Gasoline jumped 2.5% (up 49%), and Natural Gas gained 1.4% (down 17%). Copper rose 1.2% (up 2%). Wheat gained 1.6% (up 4%). Corn jumped 3.8% (up 23%).

Market Instability Watch:

July 11 – Bloomberg (Garfield Reynolds): “More than $25 trillion of bonds worldwide offer negative real yields. That could soar past $30 trillion if the Fed cuts rates at least twice this year, as expected – a scenario that would then see more than half of the world's debt yield less than inflation. That means there’s even more sunk costs at risk than the much-touted $13 trillion or so of bonds nominally yielding below zero. What happens to the holders of what used to be known as fixed-income securities, should the bond market go into reversal? Europe is the epicenter of the negative real-yield universe, with euro-denominated debt offering yields under CPI exceeding comparable yen notes mostly because there’s more euro debt out there.”

July 11 – Bloomberg (Ksenia Galouchko and Justina Lee): “Fast-money quants have scaled record heights riding the bond rally this year. Now they’re in danger of falling back down to Earth. Risk-parity funds are off to their best start since at least 2004 after ramping up exposure to government debt and levering up, while trend followers in interest rates just notched the strongest half-year in nearly three decades. But the pile-on in Treasuries has left quantitative and discretionary investors alike at the mercy of a bond market that can turn on a dime. Risk-parity funds are particularly vulnerable with their heavy weighting in fixed income.”

July 9 – Wall Street Journal (Paul J. Davies): “There’s a powerful force at work in markets that helps explain why stocks seem to do nothing for long periods and then suddenly lurch into activity. Market players have noticed this force—known by some as a ‘gamma trap’—and have been devising tools to estimate its size and direction in order to predict how markets will move and to trade around it. The force comes from brokers and investment banks. They sell investment strategies to their clients and then have to hedge their positions by trading in stocks and futures. It has become increasingly apparent that this trading by banks and brokers often goes against the markets, which suppresses daily movement of stocks and indexes. Gamma comes from the Greek letter used in mathematical formulas of options prices, and it measures how much the price of an option accelerates when the price of the security it is based on changes. When gamma is positive, options quickly get more valuable when the price of the related shares rise.”

July 12 – Bloomberg (Rachel Evans and Emily Barrett): “A couple of prominent investment funds are currently living through a portfolio manager’s worst nightmare: So many customers are demanding their money back that withdrawals need to be frozen. Amit Deshpande, a former longtime risk manager, sees it as a wake-up call. In particular, he’s watching the growing ranks of asset managers who rely on ETFs to act as cash equivalents. He wonders whether the funds can be sold off to pay fleeing clients in times of stress as seamlessly as the stewards of the $4 trillion market would like. In other words, are exchange-traded funds the ATMs many managers believe them to be?”

July 9 - Bloomberg (Cormac Mullen): “Investors banking on the ‘Fed Put’ keeping the equity rally going should be getting worried about the direction of earnings growth, according to UBS Group AG. A decline in forward earnings growth for S&P 500 Index members below 0% would likely bring an end to the ‘bad news is good news’ dynamic that’s helped propel the year’s stock rally, strategist Francois Trahan wrote… History shows the bullish effect from expectations of Federal Reserve stimulus ended after growth turned negative, he said. Twelve-month estimated earnings growth for the S&P 500 Index has slumped from over 20% late last year to just 3% currently…”

July 9 – Financial Times (Joe Rennison): “’To dispute the liquidity of a fund creates a major risk of . . . [a] ‘snowball effect,’ said a statement… from H2O Asset Management, the London-based fund manager hit by €8bn of outflows after a Financial Times investigation. Liquidity, loosely speaking, refers to the ease of buying and selling an asset without significantly moving its price. If there is a lot of liquidity then it is easy to trade, even in large sizes. If there is not much liquidity, the opposite applies. But the real difficulty is that liquidity is transient, notes Oleg Melentyev, a strategist at Bank of America Merrill Lynch: there one minute, and not there the next.”

July 7 – Financial Times (Attracta Mooney): “Investors in the US and Europe have fled active mutual funds at the highest rate in at least three years, pulling more than $30bn so far in 2019 as stockpicking comes under intense scrutiny. The active investment industry… has been under severe pressure because of disappointing performance, high fees and booming stock markets. The decisions by Swiss asset manager GAM in 2018 and British star manager Neil Woodford last month to stop investors taking their cash from some funds after a wave of redemptions intensified scrutiny of the sector. Meanwhile, passive funds, which track indices, continue to take market share, accounting for 37.5% of the mutual fund market in the US, up from 35.5% a year ago. In Europe, their market share jumped to 18.3%, from 16.6% in the same period, according to Morningstar…”

July 9 – Bloomberg (Yakob Peterseil): “BlackRock Inc.’s $14 billion Treasury ETF is fast becoming a weapon of choice for traders placing boom-to-doom bets on the fate of the world’s largest bond market. Outstanding options riding the iShares 20+ Year Treasury Bond fund, the world’s most heavily traded government debt product, are near the highest level this year. Bank of America Corp. and Macro Risk Advisors reckon bearish contracts on the long-dated ETF, or TLT, can buffer multi-asset investors from a bond tantrum as Wall Street frets the one-sided bull market.”

July 9 – Bloomberg (Gordana Filipovic and Maciej Onoszko): “The rally in eastern Europe’s sovereign bonds has left yield-hungry investors with little to grasp at, pushing many toward higher-risk alternatives. All of the Czech Republic’s outstanding euro bonds are trading at negative yields, while the rate on Poland’s 2029 note is 16 bps away from dropping below zero. Junk-rated Serbia’s 10-year bonds offer less than 1.5% and the spread on euro-area hopeful Croatia’s 2028 notes has almost halved this year.”

Trump Administration Watch:

July 11 – Washington Post (Robert Costa and David J. Lynch): “The Trump administration is increasingly concerned about prospects for a trade deal with China, amid an unexpected reshuffling of the Chinese negotiating team and a lack of progress on core issues since the Group of 20 summit in Japan… Commerce Minister Zhong Shan, regarded by some White House officials as a hard-liner, has assumed new prominence in the talks, participating in a Tuesday teleconference alongside Chinese Vice Premier Liu He, who has headed the Chinese trade team for more than a year. Hopes for a deal also have been dented by China's failure to make large new purchases of U.S. farm products — despite President Trump's claim at the G-20 that Chinese President Xi Jinping had agreed to place such orders ‘almost immediately’ — and the lack of any announced schedule for the next round of direct talks.”

July 11 – Reuters (Jeff Mason): “As trade talks resume between China and the United States, President Donald Trump’s advisers are confident he can portray his stance against Beijing as a strength in the 2020 election, despite making concessions and having no deal in sight.”

July 10 – New York Times (Ana Swanson and Keith Bradsher): “President Trump emerged from a June meeting in Japan with Xi Jinping, the Chinese president, saying that China would immediately begin purchasing American farm products in return for a trade truce that would forestall more United States tariffs on Chinese goods. China did not see it that way. People familiar with the negotiations say China has denied making any explicit commitment to buy American farm products during those discussions and instead saw large-scale purchases as contingent on progress toward a final trade deal that is still nowhere in sight. That is raising questions among trade experts about whether the United States gave up more than it got during Mr. Trump’s recent efforts to de-escalate the trade war.”

July 11 – Reuters (Doina Chiacu): “U.S. President Donald Trump said… that China was not living up to promises it made on buying agricultural products from American farmers as the world’s two largest economies work to resolve a trade dispute. ‘Mexico is doing great at the Border, but China is letting us down in that they have not been buying the agricultural products from our great Farmers that they said they would. Hopefully they will start soon!’ Trump said on Twitter.”

July 11 – CNBC (Elizabeth Schulze): “France’s Senate approved a tax on the revenues of tech giants like Google, Amazon and Facebook…, defying a warning from the President Donald Trump administration that it ‘unfairly targets American companies.’ On Wednesday, Trump ordered an investigation into France’s planned ‘digital tax’ on tech companies. The 3% tax would apply to the French revenues of roughly 30 major companies, mostly from the U.S. ‘France is sovereign, and France decides its own tax rules. And this will continue to be the case,’ France’s Finance Minister Bruno Le Maire said…”

July 12 – Bloomberg (Saleha Mohsin, Jennifer Jacobs, and Austin Weinstein): “The Trump administration is growing wary of taking bold steps toward freeing Fannie Mae and Freddie Mac from federal control before the 2020 election, said people familiar with the matter, in part because of the political risk of potentially upending the U.S. mortgage market. While White House and Treasury Department officials are eager to end the companies’ decade-long conservatorships, they see the task as arduous, slow-moving and extremely complicated…”

July 10 – Reuters (Doina Chiacu and Francois Murphy): “President Donald Trump warned… that U.S. sanctions on Iran would be increased ‘substantially’ soon, as the U.N. nuclear watchdog held an emergency meeting at Washington’s request to weigh Tehran’s breach of a nuclear deal. Trump also accused Iran of secretly enriching uranium for a long time but offered no evidence, and Iran said after the 35-nation meeting in Vienna that it had ‘nothing to hide’. U.N. inspectors have uncovered no covert enrichment by Iran since long before its 2015 nuclear agreement deal with world powers.”

July 7 – Reuters (Parisa Hafezi and Tuqa Khalid): “Iran said… it will shortly boost its uranium enrichment above a cap set by a landmark 2015 nuclear deal, prompting a warning ‘to be careful’ from U.S. President Donald Trump, who has pressured Tehran to renegotiate the pact.”

July 10 – Bloomberg (Nick Wadhams): “Trump administration officials signaled support for pro-democracy protesters in Hong Kong -- and defiance toward the Chinese government -- by granting a series of high-level meetings this week to a Hong Kong publisher who has drawn Beijing’s ire. Jimmy Lai, who is also a democracy advocate, met with National Security Advisor John Bolton…, after meetings earlier this week with Vice President Mike Pence, Secretary of State Michael Pompeo and Republican Senators Ted Cruz, Cory Gardner and Rick Scott.”

Federal Reserve Watch:

July 10 – Associated Press (Martin Crutsinger): “Pointing to a weaker global economy, rising trade tensions and chronically low inflation, Chairman Jerome Powell signaled Wednesday that the Federal Reserve is likely to cut interest rates late this month for the first time in a decade. Delivering the central bank’s semiannual report to Congress, Powell said that since Fed officials met last month, ‘uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook.’ In addition, inflation has dipped further below the Fed’s annual target level. The chairman’s remarks led investors to send stock prices up, bond yields down and the value of the U.S. dollar lower on expectations of lower interest rates. The S&P 500 index briefly traded over 3,000 for the first time.”

July 7 – Bloomberg (Josh Wingrove and Saleha Mohsin): “President Donald Trump wrapped up the weekend as he started it, jawboning the Federal Reserve to lower interest rates at a time when he may be sizing up his two latest picks for Fed governor as successors to Chairman Jerome Powell. If the Fed ‘knew what it was doing’ it would cut rates, Trump told reporters… Fed policy is putting the U.S. at a disadvantage versus Europe and suppressing gains in the stock market, Trump said. Sunday’s comments came after Trump said… the central bank ‘doesn’t have a clue’ and was ‘our most difficult problem.’”

July 9 - CNBC (Jacob Pramuk): “Federal Reserve Chair Jerome Powell’s job is safe — at least for the moment. The Trump administration is making ‘no effort’ to remove the central bank chief, top White House economic advisor Larry Kudlow said… ‘I will say that unequivocally, at the present time, yes, he is safe,’ the National Economic Council director said…”

July 11 – Reuters (Howard Schneider): “Strong market expectations of an upcoming Fed rate [cut] are not a reason for the central bank to make a policy move given a U.S. economy that continues to perform well, Atlanta Federal Reserve President Raphael Bostic said… Bostic, who described himself as skeptical of the need to lower rates, said ‘our mandate is to serve the U.S. economy and not a particular market.’”

U.S. Bubble Watch:

July 11 – Wall Street Journal (Kate Davidson): “Government tax receipts rose again in June but not enough to offset higher federal spending, which pushed the U.S. budget gap to $747 billion for the first nine months of the fiscal year. The… deficit grew 23% from October through June, compared with the same period a year earlier. The government collected $2.6 trillion in receipts, a 3% increase, reflecting a substantial increase last month in corporate tax revenue, which had been running below Congressional Budget Office projections so far this year. Higher spending on the military and interest on the debt drove federal outlays up 7%, to $3.3 trillion since the start of the fiscal year… Both revenues and outlays set a record for this point in the fiscal year.”

July 11 – Reuters (Lucia Mutikani): “U.S. underlying consumer prices increased by the most in nearly 1-1/2 years in June amid solid gains in the costs of a range of goods and services, but that will likely not change expectations the Federal Reserve will cut interest rates this month… In another report…, initial claims for state unemployment benefits declined 13,000 to a seasonally adjusted 209,000 for the week ended July 6, the lowest level since April.”

July 9 - Bloomberg (Robert Burgess): “By any credible measure, the U.S. has become less creditworthy under President Donald Trump. Total debt outstanding has risen by $2 trillion to $22 trillion since Trump took office at the start of 2017, and the federal budget deficit has expanded to 4.5% of the economy, the most since 2013. Larry Kudlow… said Tuesday that the expanding debt load is ‘quite manageable’ and not ‘a huge problem right now.’ Maybe not now, but the trend at the U.S. government’s bond auctions isn’t encouraging. Investors submitted bids for 2.39 times the $38 billion of three-year notes offered by the Treasury Department on Tuesday, the smallest so-called bid-to-cover ratio for that maturity in a decade. This is no anomaly. In May, the bid-to-cover ratio at a 10-year auction was also the lowest in a decade.”

July 8 – The Hill (Niv Elis): “The U.S. government could default on its debt in early September if Congress does not raise the debt ceiling before then, according to a new study from the Bipartisan Policy Center (BPC)… ‘We now see a significant risk that the 'X date' could arrive in the first half of September,’ said Shai Akabas, BPC's director of economic policy. The U.S. officially hit its debt limit earlier this year, but the Treasury Department has been using what are known as ‘extraordinary measures’ that allow it to borrow internally in ways that do not count toward the debt. When those measures run out, the government will no longer be able to pay all its bills and would default, a move that would almost certainly trigger chaos in global financial markets. Though BPC still projects the deadlines is more likely to land in October, just the possibility of it hitting in September raises considerable political stakes.”

July 11 – Bloomberg (Ryan Haar): “Sentiment among American consumers climbed last week to a fresh 18-year high on increased optimism about the buying climate and U.S. economy.”

July 11 – Reuters (Leela Parker Deo): “US middle market syndicated loan issuance jumped 48% to US$39.6bn in the second quarter of 2019 from meager levels in the first quarter, and is poised to gain steam as the second half of the year progresses. Even though syndicated lending to middle market borrowers was down 26% compared to year-ago volume, the improving performance is encouraging after volatility roiled the loan space late last year and stalled issuance in early 2019.”

July 9 – Wall Street Journal (Dan Gallagher): “Big Tech may seem immune to the recent slowdown in stock buybacks, but even the deepest pockets have their limits. The 20 most active tech companies on the buyback scene spent a little over $261 billion over the 12-month period ended with their most recent fiscal quarter reports, according to… S&P Capital IQ. That comprised about 40% of the total dollars spent by the 100 largest buyers in the S&P 500 over that time. The largest few accounted for the lion’s share; Apple Inc., Oracle, Qualcomm, Cisco Systems and Microsoft spent a combined $175 billion over the past 12 months—triple their combined spending over the same period two years ago.”

July 11 – Reuters (P.J. Huffstutter and Jason Lange): “In the wake of the U.S. housing meltdown of the late 2000s, JPMorgan… hunted for new ways to expand its loan business beyond the troubled mortgage sector. The nation’s largest bank found enticing new opportunities in the rural Midwest - lending to U.S. farmers who had plenty of income and collateral as prices for grain and farmland surged… But now - after years of falling farm income and an intensifying U.S.-China trade war - JPMorgan and other Wall Street banks are heading for the exits, according to a Reuters analysis of the farm-loan holdings…”

China Watch:

July 11 – Bloomberg: “China said trade negotiations with the U.S. will restart, while stressing that its core concerns need to be addressed. ‘The trade teams in the two nations will restart trade negotiations on a basis of equality and mutual respect, following the consensus agreed by their two state leaders in Osaka,’ Gao Feng, a spokesman for the Ministry of Commerce, said…”

July 6 – South China Morning Post (Finbarr Bermingham and Cissy Zhou): “A year after the beginning of the tit-for-tat tariff war that has upended the global trading system, few trade experts see the US-China relationship improving any time soon. Instead, companies are being advised to dig in for the long haul, with the way ahead packed with volatility, hot-tempered tweets and tariffs galore. Rather than progressing towards a deal, and despite reaching a tentative truce at the G20 summit in Osaka last week, the United States and China seem are as entrenched in their positions as ever. Beijing is insisting that as a prerequisite to a deal, the US remove existing tariffs on US$250 billion worth of Chinese goods. At the same time, it is difficult to see what China can do to placate a seeming unappeasable White House, short of tearing up its entire economic model… ‘I do not foresee a scenario right now where the United States would remove all the tariffs that have been implemented so far. I think they are too deep, and I think there are a lot of deeply rooted structural concerns that are going to make it really hard to remove those,’ said Jon Cowley, a senior international trade lawyer at Baker McKenzie…”

July 11 – Bloomberg (Kari Lindberg and Miao Han): “China’s export growth slowed in June and imports shrank more than expected, as the continuing trade war with the U.S. and a global slowdown hurt trade. Exports declined 1.3% in June from a year earlier, while imports decreased 7.3%, leaving the trade surplus of $50.98 billion… Imports from the U.S. slumped 31.4% from a year earlier; exports to the U.S. fell 7.8%. The $29.9 billion surplus in trade with the U.S. was the biggest this year.”

July 9 - Bloomberg (Daniela Wei and Jinshan Hong): “The world’s largest supplier of consumer goods says China’s factories are getting ‘urgent and desperate’ as worried U.S. retailers accelerate a move out of the country amid heightened trade tensions. China will see more factory shutdowns as the trade war that’s roiled the global supply chain exacerbates an exodus, said Spencer Fung, chief executive officer of Li & Fung Ltd. The company, which designs, sources and transports consumer goods from Asia for some of the world’s biggest retailers including Walmart and Nike, is being pushed by American clients to shift production out of China.”

July 10 – Associated Press (Joe McDonald): “China’s auto sales fell 7.8% in June amid a trade fight with Washington and slower economic growth, extending an unexpectedly painful downturn for automakers that are spending heavily to develop electric cars. Drivers in the global industry’s biggest market bought 1.7 million SUVs, sedans and minivans… Total purchases in the first six months of 2019 fell 14% from a year earlier to 10.1 million vehicles…”

July 9 – Reuters (Stella Qiu and Kevin Yao): “China’s producer prices flatlined in June on lower oil prices and weak global demand, fuelling concerns that a slowdown in manufacturing from a bruising trade war will further drag on growth in the world’s second-biggest economy.”

July 11 – Wall Street Journal (Zhou Wei): “Risky borrowers are running into trouble in China and that is putting pressure on trust companies, an important corner of the country’s shadow-banking system. The fear is that this could further reduce the credit available for private businesses, acting as a drag on an economy whose growth is already slowing. Lightly regulated trust companies have been critical lenders for these firms, as traditional banks deal mostly with favored state-owned enterprises. These problems could also bounce back on many small investors. As of March, there were 68 trust companies with 22.5 trillion yuan ($3.3 trillion) of assets, including loans equivalent to 2.9% of China’s total banking assets, according to data from the China Trustee Association and Moody’s…”

July 12 – Bloomberg: “A Chinese local government financing vehicle from Tianjin has delayed its planned dollar bond deal, highlighting investors’ wariness over debt troubles at the northern port city. Tianjin Binhai New Area Construction & Investment Group Co. postponed plans to sell a three-year dollar bond offering… The delay comes amid a record week of Asian dollar bond issuance and signals growing investor angst over credit stress in Tianjin, home to several high-profile distressed cases from local state-owned companies in recent years. Worse, a record 113.6 billion yuan ($16.5bn) of onshore and offshore Tianjin LGFV bonds are due in 2019, Bloomberg-compiled datashow.”

July 11 – Bloomberg: “China’s regulators are strengthening oversight of their non-bank financial sector by asking insurers, mutual funds and brokerages to submit regular assessments of their short-term lending and borrowing positions. The People’s Bank of China sent a notice to local insurers and their asset management units last week, ordering the reports every Friday… Any anomaly must be reported by phone immediately, the watchdog said.”

July 8 – Wall Street Journal (James T. Areddy): “When she was a teenager in the 1970s, Zhou Xiaoguang peddled trinkets city to city and slept on trains, a formative chapter in her creation of the world’s largest costume jeweler, Neoglory Holdings Group Co. Leveraging her empire of baubles, China’s ‘fashion-accessory queen’ added hotels, offices and malls. The magnate took a seat in China’s national parliament, accepted business accolades, including Ernst & Young’s ‘Entrepreneur of the Year,’ and erected the tallest skyscraper in Yiwu, a trading city south of Shanghai. Now, China’s economic slowdown is making Ms. Zhou known for something else: her billions of dollars in debt. A bankruptcy court in April said Neoglory ‘is unable to repay a due debt, has insufficient assets for repaying all its debts and is apparently insolvent.’ Ms. Zhou’s turn of fortune is part of a reckoning that is ensnaring many of the star entrepreneurs who produced China’s great economic boom… In the past decade, China’s overall debt quadrupled, to around three times the value of last year’s national output. Corporate debt accounts for two-thirds of the total, or more than $26 trillion last year…”

July 8 - Bloomberg: “Noah Holdings Ltd., one of China’s largest wealth managers, levied accusations of fraud against Camsing International Holding Ltd., the Hong Kong-listed company that said last week its chairman had been detained by police. The asset manager has filed a lawsuit and reported Camsing to regulators in relation to a 3.4 billion yuan ($490 million) asset management product that’s in danger of default, Wang Jingbo, Noah’s chief executive officer and co-founder, said in an internal memo… The product’s duration will be extended by as much as one year to ensure repayment…”

July 9 – Bloomberg (Peter Elstrom): “China went through a five-year surge in venture capital investment that fostered a new generation of startups from ride-hailing giant Didi Chuxing to TikTok-parent Bytedance Ltd. Now the boom may be over. Venture deals in China plummeted in the second quarter as investors pulled back amid unpredictable trade talks and growing concerns about startup valuations. The value of investments in the country tumbled 77% to $9.4 billion in the second quarter from a year earlier, while the number of deals roughly halved to 692, according to… Preqin. The second quarter of 2018 marked the peak for China venture deals with a total of $41.3 billion invested.”

July 6 – Bloomberg: “China’s securities regulator is soliciting public opinions over a rule allowing a state fund to bail out securities companies that ‘face significant liquidity risk,’ according… the China Securities Regulatory Commission. The rule also regulates the methods and sources of liquidity support securities firms can seek -- ranging from asset sales to seeking assistance from shareholders or other brokerages.”

July 7 – Reuters (Josh Horwitz): “China’s foreign exchange reserves rose $18.23 billion in June to $3.119 trillion… The value of China’s gold reserves rose to $87.27 billion from $79.83 billion at the end of May.”

July 8 – Financial Times (Gideon Rachman): “A spectre is haunting China, the spectre of democracy. The mass demonstrations that are taking place on the streets of Hong Kong have a significance that extends well beyond the territory itself. They represent the biggest challenge to the Chinese Communist party since the Tiananmen uprising of 1989. The authorities in Beijing will be hoping that the demonstrations in Hong Kong fizzle out… Something like that happened after the ‘umbrella movement’ protests of 2014. But any respite is likely to be temporary. The essential dilemma is that ordinary Hong Kongers have no desire to live in an authoritarian one-party state. Their resistance to this fate could flare up again, at any time.”

July 11 – Reuters (Anne Marie Roantree): “Hong Kong’s faceless protest movement is embarking on a bold new strategy that poses a direct challenge to the city’s political masters in Beijing: activists want to export their ‘revolution’ to mainland China. China’s censors have gone into overdrive in the past month, blocking news of Hong Kong’s biggest and most violent protests in decades from filtering through to the mainland, where stability is the Communist Party’s overwhelming priority.”

Central Banking Watch:

July 11 – Financial Times (Adam Samson and Claire Jones): “The European Central Bank’s rate-setters were in ‘broad agreement’ that ‘heightened uncertainty’ over the bloc’s economy meant the bank should be ‘ready and prepared’ to unleash new stimulus measures, according to an account of its June meeting. Minutes from the Governing Council’s meeting last month are the latest sign that policymakers are poised to act if a ‘soft patch’ in the eurozone economy drags on or becomes a deeper pullback. ‘Potential measures to be considered included the possibility of further extending and strengthening the governing council’s forward guidance, resuming net asset purchases and decreasing policy rates,’ the meeting minutes… said.”

July 11 – Bloomberg (Kristie Pladson and Carolynn Look): “European Central Bank policy makers were united in June on the plan to stand ready to provide more stimulus to the euro-area economy, a move that could be followed by interest-rate cuts as soon as this month. A number of reports on the economy have deteriorated since that meeting, which may increase the chance of stimulus sooner rather than later. ECB President Mario Draghi has also toughened his language, saying that if the outlook didn’t improve, that would be enough to warrant action.”

July 8 – Bloomberg (Cagan Koc, Nacha Cattan, and Alister Bull): “The ‘heyday of central bank independence now lies behind us,’ Pacific Investment Management Co.’s Joachim Fels declared… He is not alone among economists in delivering the last rites after Turkish President Recep Tayyip Erdogan fired his country’s top monetary policy maker and President Donald Trump continued to attack Federal Reserve Chairman Jerome Powell for raising interest rates too high… ‘Like it or not, get used to the new normal of dependent central banks, perpetually low interest rates and quantitative easing,’ Fels, Pimco’s global economic adviser, said…”

July 8 – Bloomberg (Carolynn Look and Kristie Pladson): “Financial firms including Goldman Sachs… and Morgan Stanley are predicting that the European Central Bank’s flagship crisis-fighting tool will soon make a comeback. Policy makers could relaunch bond purchases as soon as September -- barely nine months after they capped the program at 2.6 trillion euros ($3 trillion), according to Evercore ISI’s Krishna Guha. Other institutions calling for the ECB to restart purchases by early next year include ABN Amro Bank NV, Danske Bank A/S, and BNP Paribas SA… The latest boost to the likelihood of bond purchases, according to Guha, was last week’s nomination of International Monetary Fund chief Christine Lagarde to lead the ECB when Draghi steps down at the end of October.”

Europe Watch:

July 11 – Reuters (Andreas Rinke and Paul Carrel): “German Chancellor Angela Merkel’s bouts of shaking at public events are firing up a debate among some of her Christian Democrats about whether she should pass power to her protege sooner than a planned handover in 2021, senior party sources say.”

Asia Watch:

July 11 – Reuters (Fathin Ungku and John Geddie): “Singapore’s economy performed badly in the second quarter, with the slowest annual growth in a decade and sharp shrinkage from the previous three months as the manufacturing sector continued to decline… From a year earlier, gross domestic product (GDP) expanded 0.1% in the second quarter, well below the 1.1% forecast in a Reuters poll and the revised 1.1% growth for January-March. This is the slowest year-on-year GDP growth since the second quarter of 2009…”

July 8 – Reuters (Takaya Yamaguchi and Hyunjoo Jin): “Japan and South Korea raised the stakes on Tuesday in a dispute that threatens to disrupt global supplies of smartphones and chips, with South Korea denouncing Japanese reports it had transferred a sensitive chemical to North Korea. At the root of the diplomatic row between the two U.S. allies is compensation demanded by Seoul for South Koreans forced to work for Japanese firms during World War Two.”

July 8 – Bloomberg (Sohee Kim, Debby Wu, and Pavel Alpeyev): “Resurgent tensions between Japan and South Korea threaten to wallop chipmakers from Samsung Electronics Co. to SK Hynix Inc., upsetting a carefully choreographed global supply chain by smothering the production of memory chips and other components vital to widely used devices. As the world fixates on Donald Trump’s campaign to contain Huawei Technologies Co. and China’s ambitions, a concurrent dispute between Beijing’s two richest neighbors also has far-reaching implications for the production of everything from Apple Inc. iPhones to Dell Technologies Inc. laptops. The industry is now scrambling to gauge the fallout after Japan -- citing longstanding and unresolved tensions -- slapped restrictions on exports to Korea of three classes of materials crucial to the production of semiconductors and cutting-edge screens.”

July 9 - Bloomberg (Jihye Lee): “South Korean President Moon Jae-in warned top business leaders of an extended battle with Japan over its export controls on vital manufacturing materials, raising concerns their latest fight could disrupt global supply chains. …Moon told executives from about 30 companies including Samsung Electronics Co., SK Group, Hyundai Motor Co. and Lotte Group, that he saw Japan targeting South Korea’s economy for political gains.”

Japan Watch:

July 10 – Bloomberg (Isabel Reynolds and Jihye Lee): “Japan and South Korea plan to meet on Friday over Tokyo’s move to restrict vital exports to its neighbor, but neither has much political incentive to climb down from their worst dispute in decades. Decades of mistrust make it difficult for Japanese Prime Minister Shinzo Abe and South Korean President Moon Jae-in to retreat from their budding trade feud. A series of looming deadlines, including a Japanese upper house election on July 21, are only raising the political pressure on both men, who can’t afford to look weak dealing with disagreements rooted in Japan’s 1910-45 occupation of the Korean Peninsula.”

EM Watch:

July 8 – Reuters (Marc Jones): “Investors who bought into Turkey’s opportunistic $2.25 billion bond sale last week have been left baffled and battling buyers remorse after the sudden sacking of the country’s central bank chief over the weekend. Although the Turkish central bank has been under heavy political pressure for some time, President Tayyip Erdogan’s decision to replace Governor Murat Cetinkaya with his deputy Murat Uysal on Saturday caught many off guard.”

July 7 – Reuters (Ece Toksabay and Orhan Coskun): “Turkish President Tayyip Erdogan sacked the central bank governor for refusing the government’s repeated demands for rate cuts, Hurriyet newspaper on Sunday quoted Erdogan as telling a meeting with his party’s lawmakers… ‘We told him repeatedly in economy meetings that he should cut rates. We told him that the rate cut would help inflation to fall. He didn’t do what was necessary,’ Erdogan was quoted as saying.”

July 9 - Bloomberg (Selcuk Gokoluk): “President Recep Tayyip Erdogan risks pushing Turkey’s economy into an economic collapse similar to those seen in Latin America under populist regimes, according to Ashmore Group Plc. While more diversified than Venezuela’s oil-dependent economy, Turkey is currently on a very similar path of policy missteps that are likely to lead to ruin, the $85 billion emerging-market asset manager said. Capital controls, nationalization and other policies designed to prevent the private sector from protecting its property as the macroeconomic environment deteriorates are the next ‘logical policy steps’ that will follow in Turkey, Jan Dehn, the… head of research at Ashmore, said…”

July 9 - Reuters (Diego Oré): “Mexico’s moderate Finance Minister Carlos Urzua resigned on Tuesday with a letter that shocked markets by citing ‘extremism’ in economic policy, before President Andres Manuel Lopez Obrador quickly named a well-regarded deputy minister to replace him. In the unusually strongly worded resignation note…, Urzua said the government was forming economic policy without sufficient foundation. ‘I’m convinced that economic policy should always be evidence-based, careful of potential impacts and free of extremism, either from the right or the left,’ Urzua wrote. ‘These convictions did not resonate during my tenure in this administration,’ Urzua said.”

July 9 - Bloomberg (John Authers): “After seven months of laboriously convincing the international markets that he can be trusted with the presidency of Mexico, Andres Manuel Lopez Obrador risks seeing all his work undone by tweet. The sudden resignation of Carlos Urzua as his finance minister, and the resignation letter he posted on Twitter are deeply damaging. In combination, they are almost exactly what investors were worried could happen when they sold off Mexican assets ahead of AMLO’s inauguration last December. This is partly because of the importance of the finance minister in Mexican politics. The Finance Ministry, known as Hacienda, has a strong tradition of independence and continuity, which has remained intact over the last two decades as Mexico has gingerly embarked on democracy.”

July 7 – Bloomberg (Divya Patil): “Sales of riskier rupee corporate bonds have all but dried up in recent months, in another negative for India’s slowing economy as companies struggle to raise cash. Issuance of notes graded A+ and lower plunged 84% last quarter from a year earlier to 22.6 billion rupees ($329 million), the least in five years… Borrowing costs have also jumped for issuers with lower debt scores, as a crisis in India’s shadow banking sector saps investor demand for riskier securities.”

July 7 – Bloomberg (Iain Marlow and Suvashree Ghosh): “State lender Punjab National Bank paced losses in the Nifty Bank Index on Monday after it disclosed another incident of fraud amounting to 38 billion rupees ($553 million), roughly one year after it suffered through the country’s costliest banking scandal. Shares of the… lender lost 11% in Mumbai, making it the worst performer in the 12-member Nifty Bank Index, which was down 2.8%...”

July 8 – Reuters (Marcela Ayres): “Brazil’s government is set to slash its 2019 economic growth forecast, a senior Economy Ministry official said…, warning that weak growth is putting pressure on government revenues and could force another budget freeze. Waldery Rodrigues, special secretary to the Economy Ministry, said the new growth forecast, to be announced later this week, will likely be around 0.8%-1.2%, in line with market expectations but sharply down from the government’s current 1.6% projection.”

July 6 – Financial Times (Jonathan Wheatley): “There is bad news and good news for emerging market investors this year. The bad is that EM growth is tanking; the good is that there is money to be made while it tanks. The question is, for how long can something that is clearly bad for emerging economies be of benefit to those who invest in them? Prices of EM local currency bonds, for example, have risen almost 8% this year… Most of that gain has come over the past six weeks, as trade tensions between the US and China have eased and expectations have risen for interest-rate cuts by the US Federal Reserve and a host of EM central banks. Yet this has happened at the same time as a string of downward revisions in forecasts for global and EM growth this year. From a consensus of about 5% at the start of 2019, many economists have cut their outlook for EM growth this year to as little as 3.5%.”

July 7 – Bloomberg (Yumi Teso and Masaki Kondo): “Emerging-market carry trades are looking increasingly attractive to traders weighing risk against reward, as global central banks signal policy easing and yields in developed nations slide. India’s rupee and Turkey’s lira offer a higher yield per unit of expected risk than any Group-of-10 currency or member of the JPMorgan Emerging Market Currency Index… The ten currencies in the emerging market gauge yielded an average 5.9%, more than twice the equivalent interest rate for the dollar.”

Global Bubble Watch:

July 7 – Reuters (Tom Sims, Paulina Duran, Sumeet Chatterjee, Matt Scuffham): “Deutsche Bank laid off staff from Sydney to New York on Monday as it began to slash 18,000 jobs in a 7.4 billion euro ($8.3bn) ‘reinvention’ that will lead to yet another annual loss, a plan that knocked its already battered shares. Germany’s largest lender said on Sunday it will scrap its global equities unit and cut some fixed-income operations in a retreat from a long-held ambition to make its struggling investment bank… a force on Wall Street.”

Fixed-Income Bubble Watch:

July 11 – Financial Times (Adam Samson): “Investors have poured more than $10bn into junk bond funds since early June, highlighting the intensity of their hunt for yield amid a big rally in the bond market. Net inflows into the asset class registered $2.3bn in the week to Wednesday, according to EPFR… That brought the boost over the past five weeks to $10.6bn, the largest increase over any such period since 2017. Money managers have poured money into riskier investments… over the past few weeks. Emerging market assets, which also typically carry a higher perceived risk, have also been in vogue.”

July 11 – Wall Street Journal (Daniel Kruger): “As anxiety over an economic downturn creeps higher, investors have been avoiding one of the riskiest markets for corporate debt. The amount of extra yield, or spread, investors demand to hold company bonds rather than safe government debt has jumped since March by 0.62 percentage point for triple-C-rated company bonds versus a 0.07 percentage point decrease for junk debt with higher double-B ratings.”

July 8 – Wall Street Journal (Sam Goldfarb): “Funds that specialize in buying junk-rated corporate loans have recorded net outflows for 33 consecutive weeks, a record streak that highlights the diminished appeal of floating-rate debt at a time when the Federal Reserve is widely expected to start cutting interest rates. So-called leveraged loan funds recorded a net outflow of $754 million for the week ended July 3, according to Lipper. That extended a streak that began in late November and pushed it beyond a previous 32-week stretch of outflows that spanned from mid-2015 to early 2016.”

Leveraged Speculation Watch:

July 8 – Bloomberg (Melissa Karsh, Hema Parmar, and Katia Porzecanski): “Hedge funds reported the best first half since 2009 as equity managers capitalized on the surge in stocks. Funds rose 5.7% from January through June, according to Hedge Fund Research… Equity funds were the best-performing broad strategy, gaining almost 9% in the period.”

Geopolitical Watch:

July 10 – Reuters (Michelle Nichols and Carlo Allegri): “Taiwanese President Tsai Ing-wen arrived in the United States on Thursday on a trip that has angered Beijing, warning that democracy must be defended and that the island faced threats from ‘overseas forces,’ in a veiled reference to China. China, which claims self-ruled and democratic Taiwan as its own and views it as a wayward province, had called on the United States not to allow Tsai to transit there on her overseas tour. ‘I want to reiterate that Taiwan is not, and will never, be intimidated,’ Tsai told a reception in New York…”

July 8 - Reuters (Mohammad Zargham, Mike Stone, Patricia Zengerle, Yimou Lee and Ben Blanchard): “The U.S. State Department has approved the possible sale to Taiwan of M1A2T Abrams tanks, Stinger missiles and related equipment at an estimated value of $2.2 billion, the Pentagon said…, despite Chinese criticism of the deal. China’s foreign ministry expressed anger about the sale and urged the United States to revoke it. The timing is especially sensitive as the Washington and Beijing are seeking to resolve a bitter trade war.”

July 10 – Reuters (Idrees Ali and David Milliken): “Five boats believed to belong to Iranian Revolutionary Guards approached a British oil tanker in the Gulf… and asked it to stop in Iranian waters close by, but withdrew after a British warship warned them, U.S. officials said.”

July 9 - Reuters (Parisa Hafezi): “A commander in Iran’s elite Revolutionary Guards said… that U.S. regional bases and its aircraft carriers in the Gulf are within the range of Iranian missiles, the Tasnim news agency reported… ‘American bases are within the range of our missiles ... Our missiles will destroy their aircraft carriers if they make a mistake,’ said Hossein Nejat. ‘Americans are very well aware of the consequences of a military confrontation with Iran.’”