Saturday, November 8, 2014

Weekly Commentary, June 1, 2012: And This Week a Turn for the Worse

Swiss two-year yields ended the week at a negative 48 bps. Two-year yields were also negative in Denmark (-21 bps) and traded slightly negative for much of Friday’s trading session in Germany. Ten-year German bund yields closed the week at a record low 1.17%. Ten year Treasury yields dropped 11 bps today, pushing yields to a record low 1.46%. Long bond yields fell 12 bps today to a record low 2.52%. Today’s trading saw Gold jump $64. Spain Credit default swap (CDS) prices ended the session at a record 602 bps, up 258 bps from February lows. The Spain to bund 10-year yield spread widened 37 bps this week to a record 529 bps. Italian CDS surged 50 bps this week to 569 bps, nearing last December’s record high (582bps). Germany’s DAX index sank 3.4% today. Crude oil (July) dropped 3.8%, with a 3-day decline of 8.3%. The Goldman Sachs Commodities Index dropped 6.4% this week. For the week, the Russian ruble dropped 4.8%, the Brazilian real 2.6%, the Hungarian forint 2.4%, the Mexican peso 2.0%, the Czech koruna 2.3%, the Polish zloty 1.6%, and the South African rand 2.0%. Some market stress indicators remain significantly below 2008-type levels, while important indicators (including safe haven sovereign yields) have moved beyond ‘08.

The bottom line is that the global financial system has again succumbed to crisis dynamics. And these days a powerful confluence of risk factors creates extraordinary systemic vulnerabilities. Europe and its faltering currency regime is a potential financial and economic calamity. A maladjusted global economy is slowing rapidly – which ensures unpleasant revelations. “Developing” economic and Credit systems are demonstrating fragility. The gigantic “global leveraged speculating community” is impaired and highly susceptible to faltering risk markets and the specter of illiquidity. And, importantly, there is the distinct possibility that global policymakers are losing control of the situation. I’ll attempt to briefly touch upon these factors one at a time.

First, Europe. If things went from “bad to worse” two weeks ago, they took a major “turn for the worse” this past week. Even European Central Bank (ECB) President Draghi this week questioned the sustainability of the euro structure: “That configuration that we had with us for 10 years which was considered sustainable has been shown to be unsustainable unless further steps are taken.” Alarmingly, fears of a disorderly Greek exit have seemingly been overtaken by a rapidly deteriorating situation in Spain. At about $1.5 TN, Spain’s economy is generally ranked the 12th largest globally. The country’s GDP is about double the size of Greece, Ireland and Portugal combined. It is a “core” European economy – and the harsh reality is that this cancerous debt crisis at Europe’s periphery has now afflicted the system’s weakened core.

The Bank of Spain reported yesterday that 100bn euros had exited the country during the first quarter. One is left fearing the scope of outflows during April, May and now June. It is worth noting that the spread between Spain and German 10-year yields widened 37 this week to a record 509 bps – with today the fourth consecutive session where the spread traded wider than 500 bps. The Financial Times this week noted that Greek debt traded wider than 500 bps for 16 days before it required a bailout, while it took 24 days for Ireland and 34 days for Portugal.

Market confidence in both Spain’s banking system and its indebted regional governments has evaporated. While I generally sympathize with post-Bubble policymakers, Spain’s leadership is now viewed as ineffective and inept. They have dragged their feet in the face of an acutely unaccommodating financial environment. The Spanish government remains unable to provide a viable plan for recapitalizing its crumbling banking system or for backstopping distressed borrowers from Spain’s regional governments. With finance now fleeing the country (Greece, euro and domestic fears), the economy in a tailspin, and market access now effectively closing, Spanish government finances have hit the wall. And it’s an especially inopportune time to hit a funding wall, whether you’re a highly indebted bank, a government unit, a corporation or leveraged speculator.

Spain has called for the ECB to buy its debt and for the EFSF/ESM (European Financial Stability Facility/European Stability Mechanism) to help finance bank recapitalization. Both requests are viewed as significantly beyond respective organizational mandates. Essentially, Madrid has been playing high-stakes poker – yet bluffing is a risky strategy when you’re about out of chips and beads of sweat are dripping from your forehead.

It’s now abundantly clear that Spain is facing much worse than liquidity issues; questions of solvency abound – the banks, the regional governments, and a sovereign trying desperately to hold things together. So the ECB will resist monetizing additional Spanish borrowings. And the rules of engagement for Europe’s fledgling sovereign “firewall” lending facilities (EFSF&ESM) forbid lending directly to banks. So the view of German and other policymakers will be that if Spain requires a bailout, the International Monetary Fund and the EFSF/ESM will play predominant roles in supporting the Spanish sovereign. Spain’s leaders, especially after having witnessed the plights of Greece, Ireland and Portugal, have been determined to avoid relinquishing national sovereignty. Meanwhile, the scope of Spain’s potential borrowing needs sets off alarm bells for the emergency lenders and the marketplace more generally.

Today’s weak U.S. payroll data throws gas on a fire. Inarguably, economic data for the week had already strongly supported the view of a rapidly slowing global economy. European data was more of the abysmal. The Italian jobless rate jumped to the highest level in 12 years (10.2%), while contagion effects push the UK economy back into recession. Yet these economies appear robust when compared to Greece and Spain. Perhaps more alarming, news from the developing world has turned sour. There was more weak manufacturing and housing data out of China, as Asian economic indicators almost universally point toward a synchronized regional slowdown. India’s GDP sank to a nine-year low, with Q1’s 5.3% growth down from Q4’s 6.1% and Q1 2011's 9.2%. Reporting on Brazil’s slight (0.2%) Q1 GDP expansion, Bloomberg’s headline was spot on: “Weaker Brazil Economy Raises Doubts About Credit-Led Growth.” There is increasing evidence of a dramatic tightening of financial conditions throughout the emerging markets, a harbinger of buffeting economic headwinds.

It will take some time for performance numbers to begin trickling in. There will undoubtedly be major carnage reported throughout the hedge fund and leveraged speculator community. Global stock prices have been hammered; emerging debt, equities and currencies have been under pressure; global Credit spreads have widened dramatically; crude and many commodities prices have tanked; and risk markets in general have faltered in unison. For players with a portfolio of diversified bets among various asset classes, recent performance has been a stark reminder of how quickly disparate markets can all turn highly correlated. Those positioned for “risk on” have been bloodied. I’ll assume virtually everyone has been compelled to begin reducing risk exposures, as de-risking/de-leveraging dynamics take full control.

Markets turned increasingly disorderly to end the week. Of course, market participants have become conditioned to anticipate a policy response. Market professionals will be monitoring their screens attentively Sunday evening. Yet it’s an extraordinarily high-risk environment for policymakers. They’ve intervened too often, too predictably and too obtrusively. The markets will now quickly loseW patience if major policy support measures are not immediately forthcoming. At the same time, policymakers surely appreciate the serious predicament they face if markets sell on the policy news. Hence, to more than momentarily jam global risk markets will require a significant and coordinated policy response. And it must be more than simply announcing global central bank liquidity assurances and dollar swap lending facilities. European leaders must demonstrate that they can come to some agreement on a comprehensive and credible stabilization plan. This is clearly anything but a slam dunk.

It is an exceptionally troubling backdrop. I have always feared the day when reflationary policy measures finally wouldn’t suffice. I’ve worried that the leveraged speculators would eventually blow up – a dynamic I expect to occur concurrently with policy measure impotence. I’ve feared derivative and counter party problems that, yes, would occur concurrently with hedge fund and market illiquidity issues. In short, I’ve always worried about a global crisis of confidence with respect to the contemporary “global financial infrastructure.

I don’t claim to have a good feel for how far we might be from such a critical juncture. I do know that extremely serious issues have been met with incredible complacency. I see no reason for confidence in the capacity for policymakers’ to grasp what is developing. There are reasons to question the efficacy of policy measures. I fear there are latent global financial and economic fragilities of an extraordinary nature. And I am confident that what is unfolding has the potential to be more problematic than 2008.

For the Week:

The S&P500 declined 3.0% (up 1.7% y-t-d), and the Dow fell 2.7% (down 0.8%). The Morgan Stanley Cyclicals were hit for 4.7% (down 0.5%), and the Transports were down 3.2% (down 2.2%). The Morgan Stanley Consumer index declined 2.9% (down 0.7%), and the Utilities slipped 0.2% (down 1.5%). The Banks were down 4.9% (up 6.5%), and the Broker/Dealers were 3.5% lower (down 0.3%). The S&P 400 Mid-Caps fell 4.1% (up 1.9%), and the small cap Russell 2000 dropped 3.8% (down 0.5%). The Nasdaq100 declined 2.7% (up 8.0%), and the Morgan Stanley High Tech index sank 4.7% (up 2.7%). The Semiconductors fell 5.1% (down 3.1%). The InteractiveWeek Internet index declined 3.6% (up 1.5%). The Biotechs sank 5.8% (up 26.6%). With bullion rising $51, the HUI gold index rallied 3.9% (down 10.9%).

One-month Treasury bill rates ended the week at 3 bps and three-month bills closed at 7 bps. Two-year government yields were down 4 bps to 0.25%. Five-year T-note yields ended the week 14 bps lower to 0.62%. Ten-year yields sank 29 bps to a record low 1.45%. Long bond yields fell 32 bps to a record low 2.52%. Benchmark Fannie MBS yields fell 20 bps to 2.52%. The spread between benchmark MBS and 10-year Treasury yields widened 9 to 107 bps (wide since December). The implied yield on December 2013 eurodollar futures declined 5 bps to 0.67%. The two-year dollar swap spread increased 2 to 37.5 bps. The 10-year dollar swap spread jumped 7 to 22 bps. Corporate bond spreads widened. An index of investment grade bond risk ended the week 9 higher to 127 bps (high since 12/19). An index of junk bond risk jumped 47 to 704 bps.

Debt issuance slowed notably. Investment grade issuers included Kraft Foods $6.0bn, Eastman Chemical $2.4bn, Whirlpool $300 million, Tampa Electric $300 million, and Boston Properties $200 million.

Junk bond funds saw outflows decline to $383 million (from Lipper). Junk issuers included Rivers Pittsburgh $275 million.

I saw no convertible debt issued.

International dollar bond issuers included Kommunalbanken $1.5bn, Danone $850 million, Guatemala $700 million, and Nara Cable $310 million.

German bund yields were down 20 bps to a record low 1.17% (down 66bps y-t-d), and French yields sank 28 bps to 2.23% (down 90bps). The French to German 10-year bond spread narrowed 8 to 106 bps. Spain's 10-year yields jumped 17 bps to 6.46% (up 142bps). Italian 10-yr yields rose 6 bps to 5.71% (down 132bps). Ten-year Portuguese yields dropped 60 bps to 11.39% (down 138bps). The new Greek 10-year note yield declined 46 bps to 28.99%. U.K. 10-year gilt yields sank 22 bps to 1.53% (down 45bps). Irish yields declined 11 bps to 7.09% (down 117bps).

The German DAX equities index sank 4.6% (up 2.6% y-t-d). Spain's IBEX 35 equities index was clobbered for 7.3% (down 29.2%), and Italy's FTSE MIB fell 3.2% (down 15.6%). Japanese 10-year "JGB" yields dropped 8 bps to 0.81% (down 18bps). Japan's Nikkei declined 1.6% (down 0.2%). Emerging markets were mostly lower. Brazil's Bovespa equities index fell 2.0% (down 5.9%), and Mexico's Bolsa declined 0.8% (up 0.3%). South Korea's Kospi index increased 0.6% (up 0.5%). India’s Sensex equities index lost 1.6% (up 3.3%). China’s Shanghai Exchange gained 1.7% (up 7.9%).

Freddie Mac 30-year fixed mortgage rates declined 3 bps to a record low 3.75% (down 80bps y-o-y). Fifteen-year fixed rates were down 6 bps to 2.97% (down 77bps). One-year ARMs were unchanged at 2.75% (down 38bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 4 bps to 4.34% (down 76ps).

Federal Reserve Credit declined $7.9bn to $2.835 TN. Fed Credit was up $64bn from a year ago, or 2.3%. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 5/30) slipped $0.7bn to $3.506 TN. "Custody holdings" were up $86n y-t-d and $74bn year-over-year, or 2.1%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $615bn y-o-y, or 6.2% to $10.473 TN. Over two years, reserves were $2.106 TN higher, for 25% growth.

M2 (narrow) "money" supply increased $6.9bn to a record $9.882 TN. "Narrow money" has expanded 6.3% annualized year-to-date and was up 9.2% from a year ago. For the week, Currency increased $1.0bn. Demand and Checkable Deposits declined $17.0bn, while Savings Deposits jumped $26.4bn. Small Denominated Deposits declined $3.1bn. Retail Money Funds slipped $0.5bn.

Total Money Fund assets rose $7.5bn to $2.572 TN. Money Fund assets were down $123bn y-t-d and $154bn over the past year, or 5.7%.

Total Commercial Paper outstanding jumped $20.0bn to $1.029 TN. CP was up $69bn y-t-d, while declining $173bn from one year ago, or down 14.4%.

Global Credit Watch:

June 1 – Bloomberg (Emma Ross-Thomas): “Spanish Economy Minister Luis de Guindos said the euro’s future will be played out in the coming weeks in Italy and Spain, as data showed record levels of capital leaving his country. ‘I don’t know if we’re on the edge of the precipice, but we’re in a very, very, very difficult situation,’ he told a conference… Spain and Italy are where the ‘battle for the euro’ is being fought, he said. The International Monetary Fund denied that it was preparing financial aid for Spain…”

June 1 – Bloomberg (Michael Shanahan): “The cost of insuring against a default on Spanish government bonds rose to a record as the nation’s debt crisis deepened. Credit-default swaps linked to Spain’s notes climbed nine basis points to 609 at 10:40 a.m. in London… Swaps on Telefonica SA, the nation’s biggest phone company, climbed 13 bps to an all-time high of 481… The International Monetary Fund denied it was preparing financial aid for Spain. ‘It’s important that any support for Spain allows it to maintain market access as a full-blown bailout would pretty much exhaust bailout funds,’ Elisabeth Afseth, an analyst at Investec Bank Plc in London, said…’The most likely path to achieve this is to separate banking and sovereign support.’”

June 1 – Financial Times: “As Spain’s debt crisis deepens, investors are warily eyeing a trigger that could send yields on the country’s sovereign debt into bailout territory. The number to watch is the difference between Spanish 10-year yields and that of a basket of triple-A rated European debt. If the premium demanded to hold Spanish government bonds stays at more than 450 bps – it has been trading above that since Monday – the situation facing Madrid could deteriorate. The reason is LCH.Clearnet, Europe’s dominant clearing house. At that level, LCH could decide to impose additional margin requirements on banks using Spain’s government debt as collateral to secure short-term funding in repurchase – or ‘repo’ – deals. Such a move risks aggravating the liquidity issues affecting Spanish lenders. LCH is expected by analysts to raise the margin payment, or extra deposit, it demands, possibly in days.”

May 31 - New York Times (Landon Thomas Jr.): “As Spain’s deepening financial problems make a European bailout a more distinct possibility, a looming question is where the money will come from. Spain is the euro zone’s fourth-largest economy, after Germany, France and Italy, and the cost of a rescue would strain the resources of Europe’s new 700 billion euros ($867bn) bailout fund that is to become available this summer. That would leave little margin for any additional bailouts. Spanish and European officials hope a bailout will not be needed. But each day, financial turmoil mounts over the government takeover of the giant Spanish mortgage lender Bankia, the flight of money to safer borders and a worsening recession. Compounding Spain’s problems has been an outflow of foreign capital from the country, meaning the Spanish banks in recent months have been the only major buyers of its government bonds needed to finance the nation’s budget deficits. With those bonds now plummeting in value, the fate of Spain’s banks and government are intertwined in a financial tailspin.”

May 31 – Bloomberg (Charles Penty): “Bankia group risks dragging the rest of Spain into its vortex. As Spain’s third-biggest bank asks Prime Minister Mariano Rajoy’s government for 19 billion euros ($24bn), international investors are tallying the potential cost for the rest of the industry and betting he won’t be able to foot the bill. With foreign investors shunning Spanish debt, leaving national banks to fund the government, the nation’s 10-year borrowing costs compared with Germany’s are near a record. ‘The problem for Spain is that they can’t simply finance all this by issuing debt,’ said Edward Thomas, who helps manage $6 billion as head of fixed income investment at Quantum Global Wealth Management in Zug, Switzerland. ‘It’s a perfect storm for Spain, with more banks now being sucked in.’”

May 30 – Bloomberg (Ben Martin and Esteban Duarte): “Spain’s biggest banks had the worst-performing junior bonds this month on concern investors will be wiped out in a rescue of the nation’s financial system. Banco Bilbao Vizcaya Argentaria SA securities suffered the most of any European bank subordinated bonds, losing an average of 8.6%.... Notes of Banco Santander SA, Spain’s biggest lender, lost 5.7%, the second-biggest decline.”

May 28 – Bloomberg (Emma Ross-Thomas): “Spain’s plan to help cash-strapped regions sell debt risks piling additional liabilities on the central government as borrowing costs approach the level that pushed other nations into bailouts. The government is under pressure to devise a way to help the nation’s 17 regions regain access to capital markets. Yields on 2013 debt issued by Catalonia, the biggest and most-indebted region, traded at 8.3% today, compared with 3.6% for equivalent Spanish securities and 4.3% for state-guaranteed bonds. Spain is weighing how to rescue the regions as the rate on its 10-year debt moves closer to the 7% level that led Greece, Ireland and Portugal to seek aid from the European Union and the International Monetary Fund. The regions, which owe a combined 140 billion euros ($175bn), are adding to the burden as liabilities swell following the bailout of Bankia group, the country’s third-biggest lender.”

May 30 – National Post (John Shmuel): “Money has been flowing out of periphery eurozone countries like Greece for some time now. But evidence it is no longer entering wealthier eurozone countries, but leaving Europe entirely, threatens to dangerously intensify the crisis, warned a strategist… ‘Anecdotal evidence suggests that over most of 2010, 2011 and early 2012, the largest portfolio shifts out of peripheral Europe took place into Bund and surrounding credits,’ said Peter Schaffrik, head of European rates strategist at RBC Capital Markets. ‘Yet, there is accumulating evidence that this behaviour is changing and actual capital flight out of Europe (rather than within Europe) is taking place.’”

June 1 – Telegraph (Louise Armitstead): “The head of the European Central Bank hit out at the political paralysis gripping the region as he warned the eurozone's set-up was ‘unsustainable’. Mario Draghi said the central bank could not ‘fill the vacuum’ left by member states' lack of action as it was claimed the zone is on the point of ‘disintegration’. Amid escalating talk of a potential bail-out for Spain, the president of the ECB said the central bank was powerless to stop the debt tornado. ‘It's not our duty, it's not in our mandate’ to ‘fill the vacuum left by the lack of action by national governments on the fiscal front,’ he said. Olli Rehn, the EU's top economic official, called for urgent action to ‘avoid a disintegration of the eurozone.’ The economic affairs commissioner said that politicians had made progress but it had been ‘uneven and seemingly inefficient.’”

May 31 – Dow Jones (Costas Paris): “The European department of the International Monetary Fund has started discussing contingency plans for a rescue loan to Spain in the event that the country fails to find the funds needed to bailout its third-largest bank by assets, Bankia SA, people involved in the handling of the Spanish crisis said… Both the EU and IMF want to avoid having to bailout Spain at all costs, the people said, but initial planning is under way given that the country is struggling to raise a EUR10 billion shortfall in funds to bail out Bankia. The stakes are extremely high because a three-year rescue loan for Spain could be as much as EUR300 billion, one person said, although any bailout could involve smaller, shorter-term loans. ‘A better picture will emerge after the IMF review of the Spanish economy starting June 4,’ one of the people said. ‘But thoughts are already being discussed (within the European department)’.”

May 31 – Bloomberg (Esteban Duarte): “Landlords of commercial properties in Europe are struggling to repay mortgages as banks pull back from refinancing the loans, according to Moody’s… Seventy-nine percent of the loans packaged into commercial mortgage-backed securities rated by Moody’s that came due in the first quarter weren’t repaid on time, Frankfurt-based analyst Oliver Moldenhauer wrote… The non-payment rate more than doubled from 35% in 2009 and reflects ‘the current weak state of the lending market,’ Moldenhauer wrote.”

May 30 – MarketNews International: “Bailing out troubled banks with the Eurozone's permanent rescue fund, the European Stability Mechanism, could help break the unhealthy mutual dependency of the currency bloc's banks and governments, the European Commission said… ‘To sever the link between banks and the sovereigns, direct recapitalisation by the ESM might be envisaged,’ the Commission said in its analysis. The idea, however, could prove difficult to implement since the treaty creating the ESM explicity states that the fund can only lend to governments in return for promises of reforms. The treaty has yet to be ratified by most governments.”

May 26 – Bloomberg (Jim Brunsden and Ben Moshinsky): “The European Union will seek to give regulators the power to impose writedowns on senior unsecured creditors at failing banks as part of measures to prevent taxpayers from footing the bill for saving crisis-hit lenders. The writedown powers would apply to senior unsecured debt and derivatives, while some other claims, including secured debt and deposits that are protected by government guarantee programs, would be shielded from the losses, according to draft…”

Global Bubble Watch:

May 29 – Bloomberg (Sridhar Natarajan and Sarika Gangar): “Company bond offerings worldwide have fallen behind the pace set in 2011 after a record first quarter fizzled out amid Europe’s escalating debt crisis and a U.S. slowdown. Sales of $1.63 trillion this year compare with the $1.73 trillion for the same period of 2011…”

June 1 – Bloomberg (Sarika Gangar): “High-yield [global] issuance at the lowest this year drove down corporate bond sales in the U.S. as concern deepens that the European debt crisis is spreading globally… Sales totaled at least $15 billion this week, down from $19.4 billion for the five days ended May 25.”

May 31 – Bloomberg (Sridhar Natarajan): “Relative yields on company bonds worldwide are poised for the biggest monthly expansion since November, lifting borrowing costs from about all-time lows as creditors demand more compensation with global growth slowing. The extra yield investors demand to buy the securities rather than government notes has increased 31 bps this month to 313 bps, the widest level since Jan. 26…”

June 1 – Bloomberg (Cristiane Lucchesi): “Banco do Brasil SA is trading below its liquidation value for the first time in almost nine years after Brazilian President Dilma Rousseff’s demand for lower borrowing costs sparked concern profit growth will stall. Federally controlled Banco do Brasil fell 16% this year through yesterday… Rousseff is turning up pressure on state-owned lenders to cut what she called unacceptable consumer borrowing rates after economic growth stalled in the first quarter. The threat lower rates pose to earnings comes as rising loan defaults and stricter regulatory requirements boost concern the company may need to raise capital. ‘The pressure on state-owned banks to reduce loan spreads and increase credit may not come at a good moment as delinquency rates are high,’ Mario Pierry, an analyst at Deutsche Bank AG in Sao Paulo, said… ‘The risk of a reduction in returns is big in an environment of growing capital needs.’”

June 1 – Bloomberg (Rachel Evans): “Chinese companies are paying the biggest premiums on record to sell dollar bonds as short sellers target businesses in the country after accusations of fraud 12 months ago drove Sino-Forest Corp.’s borrowing costs above 60% and prompted it to file for bankruptcy protection. Yields on bonds sold by the nation’s companies averaged 643 bps… more than U.S. Treasuries this year, rising 82 bps from 2011 to the biggest-ever gap…”

June 1 – Bloomberg (Ben Bain and Boris Korby): “Mexican peso bonds are handing foreign investors the biggest losses in eight months as Europe’s escalating financial crisis triggers a plunge in emerging-market currencies. Government debt denominated in pesos lost 8.5% in dollar terms in May, the largest monthly slump since September… Local-currency debt from developing countries fell 3.7% on average during the same period. The peso sank 9.5% against the dollar in May, the most among major currencies… All 25 major emerging-market currencies tracked by Bloomberg fell last month.”

Currency Watch:

May 28 – Bloomberg (Simone Meier): “Swiss National Bank President Thomas Jordan said controls on capital inflows are among measures being considered by a government-led panel to stop the franc from strengthening if the euro-area debt crisis escalates. ‘The working group focuses mainly on instruments to combat the franc strength based on a joint approach of the government and the central bank,” Jordan told the SonntagsZeitung newspaper… ‘We also need to be prepared for the possibility of the currency union collapsing, even though I don’t expect it.’ SNB spokesman Walter Meier confirmed Jordan’s remarks to the newspaper.”

The U.S. dollar index added 0.6% this week to 82.89 (up 3.4% y-t-d). For the week on the the upside, the Japanese yen increased 2.1%, the South Korean won 0.7% and the New Zealand dollar 0.1%. On the downside, the Brazilian real declined 2.6%, the Mexican peso 2.0%, the South African rand 2.0%, the British pound 2.0%, the Norwegian krone 1.7%, the Canadian dollar 1.1%, Swedish krona 1.0%, the Taiwanese dollar 1.0%, the Singapore dollar 0.9%, the Swiss franc 0.7%, the Danish krone 0.7%, the euro 0.7%, and the Australian dollar 0.6%.

Commodities Watch:

The CRB index dropped 4.8% this week (down 12.1% y-t-d). The Goldman Sachs Commodities Index sank 6.4% (down 9.9%). Showing life as a safe haven, spot Gold rallied 3.2% to $1,624 (up 3.9%). Silver recovered 0.4% to $28.51 (up 2.1%). July Crude sank $7.63 to $82.89 (down 16%). July Gasoline dropped 6.2% (unchanged), and July Natural Gas sank 11.5% (down 22%). July Copper fell 3.9% (down 4%). June Wheat was hit for 10% (down 6%) and June Corn dropped 4.7% (down 15%).

China Watch:

May 30 – Bloomberg (Esteban Duarte): “China has no plan to introduce stimulus measures on the scale deployed during the global financial crisis to counter this year’s economic slowdown, the official Xinhua News Agency reported. ‘The Chinese government’s intention is very clear: It will not roll out another massive stimulus plan to seek high economic growth,’ Xinhua said… ‘The current efforts for stabilizing growth will not repeat the old way of three years ago.’”

June 1 – Bloomberg: “China’s home prices fell to a 16-month low in May as officials pledged to keep property curbs that have sapped buyer demand, according to SouFun Holdings Ltd., the nation’s biggest real estate website owner.”

May 28 – Bloomberg: “China’s Communist Party will boost measures to make sure government officials don’t flee the country or transfer money abroad, the party said… The Central Disciplinary Inspection Commission will set up a ‘flight-prevention coordinating mechanism’ for every province and enhance ‘passport management’ measures… Beijing has stepped up efforts to ensure party loyalty and clean up corruption after Politburo member Bo Xilai was suspended from the body on accusations of ‘serious violations of discipline,’ and his wife, Gu Kailai, was taken into custody for involvement in the murder of a British businessman.”

India Watch:

May 31 - Financial Times (James Fontanella-Khan ): “India’s economic growth fell to a nine-year low in the first three months of 2012, a clear sign that the country’s slowdown is deepening and affecting all sectors of the economy. Sharp falls in the manufacturing and agriculture sectors led Asia’s third-largest economy to grow only 5.3% year on year in the quarter, compared with 9.2% growth a year earlier. This is the worst performance of India’s economy since 2003 and far worse than the situation in the wake of the global financial crisis and the collapse of Lehman Brothers in late 2008… ‘It’s a disaster,’ said Rajiv Kumar, the secretary-general of the Federation of Indian Chambers of Commerce and Industry. ‘We are facing a crisis of slow growth and high inflation that is extremely concerning.’”

Latin America Watch:

June 1 – Bloomberg (Raymond Colitt): “Brazil’s economy grew less than analysts expected in the first quarter, reinforcing signs that its consumer-led growth model, a magnet for investment over the past decade, is running out of steam. Gross domestic product expanded 0.2% in the first quarter and 0.8% from the same period a year ago… Consumer demand driven by credit expansion, the strategy pursued by two successive presidents, is faltering even as the government cuts taxes and lowers borrowing costs to stoke spending by the 40 million Brazilians who rose out of poverty from 2003-2011. Retail sales barely rose in February and March, while vehicle sales fell 11% in April as the default rate among tapped-out consumers rose to 5.8%.”

June 1 – Bloomberg (Camila Russo and Drew Benson): “Import restrictions by Argentine President Cristina Fernandez de Kirchner are driving up yields on provincial debt as falling revenue from customs duties leads the combined deficits of regional governments to almost double. Yields on Cordoba province’s bonds due 2017 surged 947 bps… this year to 26.27%, while those on Buenos Aires province’s 2015 securities rose 939 bps to 24.71%.”

European Economy Watch:

May 29 – Bloomberg (Michael Shanahan and Katie Linsell): “Europe’s junk bond market is grinding to a halt as the region’s sovereign debt crisis deepens, with issuance slowing to the least since October and the securities losing 2% this month. …the riskiest borrowers have raised $2.5 billion in May, down from $4.4 billion in April… Losses on the bonds are the worst since November’s 5.3%. Sales are dwindling as the neediest borrowers face 230 billion euros ($300bn) of debt maturing by 2015, according to Standard & Poor’s. Europe’s default rate may soar to 8.4% or more this year from 4.8% at the end of 2011, S&P forecasts…”

May 30 – Bloomberg (Simone Meier): “Economic confidence in the euro area declined more than economists forecast in May to the lowest in 2 1/2 years after inconclusive Greek elections raised the specter of a euro breakup and Spain struggled to shore up its banks.”

May 28 – Bloomberg (Lorenzo Totaro and Chiara Vasarri): “Italian business confidence fell more than economists forecast, declining this month to the lowest level in almost three years as the country’s fourth recession since 2001 deepened.”

Central Bank Watch:

May 31 – Bloomberg (Gabi Thesing and Jonathan Stearns): “European Central Bank President Mario Draghi said policy makers will keep focusing their crisis support on solvent euro area banks as he reiterated it’s not the ECB’s job to fix the cause of the region’s turmoil. ‘The ECB will continue lending to solvent banks and will keep the liquidity lines active and alive with solvent banks,’ Draghi told a European Union Parliament committee… The ECB has shouldered the main burden of fighting the turmoil by flooding the banking system with over 1 trillion euros ($1.24 trillion), cutting its benchmark rate to a record low and buying government bonds. When pressed on whether the ECB can step up action to tame financial turmoil and help cap widening bond spreads, Draghi said that ‘it’s not our duty, it’s not in our mandate’ to ‘fill the vacuum left by the lack of action by national governments on the fiscal front,’ on ‘the structural front, and on the governance front.’”

May 29 – Bloomberg (Jeff Black): “Emergency liquidity assistance to troubled banks in the euro area probably jumped last week after the European Central Bank moved some Greek institutions off its centralized refinancing operations. In the weekly financial statement of the euro system published by the… ECB…, ‘other claims on euro-area credit institutions denominated in euro’ rose 34.1 billion euros ($42.8bn) to 246.6 billion euros in the week ending May 25. The ECB says ELA is recorded under this item… Under ELA, the 17 national central banks in the euro area are able to provide emergency liquidity to banks that can’t put up collateral acceptable to the ECB for refinancing operations.”

June 1 – Bloomberg (Cordell Eddings): “The Federal Reserve is more likely to provide added stimulus when its current effort winds down after a report showed the economy added fewer jobs in May than forecast, according to Morgan Stanley. The probability of more central bank policy action is 80%, up from 50%... ‘Any optimism related to the improvement in labor market conditions seen during the winter months is now fading away, and financial conditions have tightened significantly since the April Federal Open Market Committee meeting,’ David Greenlaw, Morgan Stanley’s chief fixed-income economist…wrote… ‘The Fed is likely to do what it can to provide some support.’”

U.S. Bubble Economy Watch:

June 1 – Bloomberg (Timothy R. Homan): “The American jobs engine sputtered in May as employers added the fewest workers in a year and the unemployment rate rose… raising the odds the Federal Reserve will step in to boost growth. Payrolls climbed by 69,000 last month, less than the most-pessimistic forecast in a Bloomberg News survey, after a revised 77,000 gain in April that was smaller than initially estimated… The median projection called for a 150,000 May advance. The jobless rate rose to 8.2% from 8.1%.”

May 29 – Bloomberg (Lu Wang and Whitney Kisling): “Stock buybacks are falling to a three-year low just as U.S. chief executive officers boost spending on plants and equipment to a record. Companies announced $1.1 billion of repurchases a day on average during the earnings season in April and May, the lowest level since mid-2009…”

May 30 – Bloomberg (Frederic Tomesco): “Nassim Taleb, author of ‘The Black Swan,’ said he favors investing in Europe over the U.S. even with the possible breakup of the single European currency in part because of the euro area’s superior deficit situation. Europe’s lack of a centralized government is another reason it’s preferable to invest in the region, said Taleb, a professor of risk engineering at New York University… A breakup of the euro ‘is not a big deal,’ Taleb said… ‘When they break it up, there will be a lot of fun currencies. This is why I am not afraid of Europe, or investing in Europe. I’m afraid of the United States.’”

California Watch:

June 1 – Bloomberg (Brian Chappatta): “California’s debt is becoming costlier to insure in a municipal credit-default swaps market that is seeing a surge in trading under new regulations. The BGOV Barometer shows the price to protect the debt of the most-populous state has increased to the highest since January…”