Saturday, November 8, 2014

Weekly Commentary, June 8, 2012: Pavlovian

Global systemic stress has been gaining critical momentum, and markets this week were heartened that global policymakers were in the process of mustering meaningful responses. Scores of headlines offered encouragement that European officials were working diligently on a plan to help Spain resolve its banking crisis. While reports were conflicting - and often contradictory - there was a general sense that circumstances had forced the Germans into a softer approach. And as global markets rallied, the fallback view again held sway that when global policymakers recognize the seriousness of a situation they will surely act accordingly – and, as such, “risk on” is alive if not well. Pavlovian.

Confidence in politicians may be rather shallow, yet there remains deep faith in the capacity of central bankers to rise to the occasion and bolster global risk markets. First came comments from ECB president Mario Draghi: “We monitor all developments closely and we stand ready to act.” Fed vice chair Janet Yellen made it clear the Fed was poised to do more: “There are a number of significant downside risks to the economic outlook, and hence it may well be appropriate to insure against adverse shocks that could push the economy into territory where self-reinforcing downward spiral of economic weakness would be difficult to arrest… I am convinced that scope remains for [the Federal Reserve] to provide further policy accommodation either through its forward guidance or through additional balance-sheet actions.”

Yet on the policy response front, the biggest surprise this week arrived courtesy of Beijing. The People’s Bank of China reduced lending and deposit rates by 25 bps, the first cut in official rates since 2008. China’s central bank also took measures to loosen lending standards, allowing banks additional flexibility to both discount loans and attract deposits. There were also reports that Chinese bank regulators had delayed the implementation of more onerous bank capital requirements. From Bloomberg: “New draft rules from the China Banking Regulatory Commission aim to set ‘reasonable’ schedules for banks to meet capital targets in a way that helps ‘maintain appropriate credit growth’.” This week Beijing confirmed the bullish consensus view that China’s policymakers will ensure strong economic growth. Meanwhile, data continue to support the thesis that China’s economic and Credit engines are really sputtering.

In Europe, there were reports of special weekend meetings – and perhaps even Spain requesting emergency financial assistance. There are important French parliamentary elections Sunday. And, of course, there is the final countdown to Greece’s June 17th national election, which may be disrupted by a municipal workers strike. Markets confront a minefield of issues, although attention for now seems fixated on renewed policymaker largesse.

In studying past monetary fiascos, I've often been struck by the predictable nature of Credit inflations. Credit booms would be followed by busts – and the arduous downside of the Credit cycle would invariably provoke aggressive policy responses. Historically, governments would resort to printing larger amounts of currency (or simply incorporate more zeros), in increasingly desperate attempts to support post-Bubble faltering economic output, rising unemployment and sinking prices levels (goods and asset prices).

Often it would come down to a critical dynamic: Policymakers would eventually recognize (admit) that their money printing operations were having deleterious effects. A consensus view would even develop that inflationary policies had to be wound down – if not scuttled altogether. Throughout history, there have been many derivations of the typical pronouncement, “Be on notice, this will be the last time this government resorts to the printing press.” And rarely would it ever work out that way. Indeed, not only would monetary inflations continue, the scope of the money printing would too often escalate to the point of being completely out of control. Once unleashed, monetary inflations take on a life of their own – and turn unwieldy on many levels. And this complex dynamic explains why monetary history is littered with worthless currencies.

Years of “activist” central banking have conditioned markets to envisage eager-to-please policymakers with flasks in hands at the fountain of everlasting market vigor. Meanwhile, policymakers at this point (four years into crisis management mode) more clearly appreciate both the limits of their monetary tools and the costs associated with ultra-loose monetary conditions and sure-fire market interventions. Markets were nonetheless this week content to cling firmly to the view that markets and policymakers remain on the same page.

Curiously, ECB president Draghi and Fed chairman Bernanke this week seemed to be reading from similar scripts. While both, of course, assured market participants of their respective central banks’ commitment to providing market backstops in times of crisis, each also seemed determined to try to signal to the markets that monetary policy has done about all it can do. Both seemed to recognize that ultra-loose monetary policy has played an integral role in political foot-dragging when it comes to implementing fiscal reform/responsibility. Both were measured in their comments, as if reluctant to incite market animal spirits (i.e. destabilizing speculation).

There is also a view that Drs. Draghi and Bernanke are keen to save some of their central banks’ depleted arsenals in the event of destabilizing fallout post the Greek election. And there is certainly the possibility that the Spanish debt crisis rapidly spirals out of control. When I read a Reuter’s report with sources claiming that Spain would request bailout aid Saturday, I immediately assumed that capital flight must be turning unmanageable. But then a Financial Times article (Peter Spiegel) quoted “a senior European official”: “It is essential that the other euro-area member states are pre-emptively and effectively ringfenced and protected from any possible Greek fallout, before the elections.” This explanation for why Spain would do an about face on EU financial assistance - even before the completion of IMF and private audits of its banking system - seems as reasonable as problematic capital flight.

Spain and the EU face a serious dilemma. Several analysts have gone so far as to state that the euro will be made or lost in Spain. And while the markets seemed to welcome leaks of an imminent Spanish bailout, it might be one of those “be careful what you wish for” moments. Spain – it’s sovereign, banks, regional governments, corporations and economy – today suffers a market crisis of confidence. Estimates place (guess) the banking system’s capital shortfall in the wide range of between 40bn to 250bn euros. A full-scale Spain IMF/EU bailout program could tally in the hundreds of billions. The chatter is of some “bailout light” strategy that would tide Spain over – at least through the Greek election and its immediate aftermath. Do too little and the plan lacks credibility; promise too much and the markets will question where the money is to come from.

The Telegraph’s Ambrose Evans-Pritchard (“Spain too big for EU rescue fund as China recoils”) reminded readers of potential problems associated with the EU’s “firewall” facilities. The EFSF, for example, is backed by euro zone member/creditors. But once a country taps emergency funds it can longer back EFSF borrowings. So the firewall shrinks or the additional liabilities accrue to the other member states. There is also the issue of prospective market appetite for EFSF/ESM debt. Mr. Evans-Pritchard’s article noted that China’s sovereign wealth fund is backing away from European debt. Quoting the chairman of China Investment Corporation: “The risk is too big, and the return too low.”

I have written previously that Europe’s “firewall” was created with the hope/intention that it would never be deployed – a big bazooka that sits there with everyone just kind of assuming it’s loaded and operational. Well, it’s likely to be called upon in a big way and in a hurry. And when the headline crosses that Spain has requested aid, it might very well be seen as good news (“resolves uncertainty”) in the marketplace. I don’t expect it to be long, however, before serious questions arise as to the credibility of the bailout structure. Is the bazooka legit? Will global investors be willing to buy hundreds of billions of euros of EFSF/ESM debt in an environment where the marketplace surely will have serious questions as to the sustainability of the euro currency regime? Can bailout bond and the euro credibility persevere through the failure of a “core” euro zone country?

There were reports that Greek government revenues during May were down 20 to 25% y-o-y. No matter the outcome of the Greek election – or even whether Greece stays or exits the euro – there is little to suggest that this deeply troubled little economy will anytime soon end its status as a quite formidable financial “blackhole”. This post-Bubble dynamic makes one really fear for Spain – and the euro. I’ve believed that a preferred strategy – and perhaps the only hope for salvaging the euro - would have been to push the Greeks out of the euro to ensure that the full weight of policymaker attention and European resources could be deployed to “ring-fence” the euro zone’s vulnerable “core.” Over the coming days and weeks we’ll instead be faced with the spectacle of a failed periphery (Greece) and a failing core (Spain) perhaps working in concert to pull the fabric of the euro apart at the seams.

The view that this week provided only the opening policy response salvo is anything but unjustified. If things proceed in Europe (and globally) as I fear, we can expect the ECB to cut rates and implement additional liquidity measures, as the Fed moves forward with additional quantitative easing. The Chinese, Indians, Brazilians and others will stimulate in hope of sustaining faltering booms. And I expect all of these measures to have little, if any, constructive impact on deepening global Credit and economic crises. At the same time, the impact on financial markets is less clear. Even NYC taxi drivers are confident that policy measures are sure to bolster the markets. To what extent will the sophisticated operators now use generous market accommodation to head for the exits? It’s traditionally been referred to as “distribution.” Think Facebook IPO.

For the Week:

The S&P500 rallied 3.7% (up 5.4% y-t-d), and the Dow gained 3.6% (up 2.8%). The S&P 400 Mid-Caps increased 3.3% (up 5.3%), and the small cap Russell 2000 surged 4.3% (up 3.8%). The Morgan Stanley Cyclicals jumped 4.4% (up 3.9%), and the Transports rose 3.1% (up 0.8%). The Morgan Stanley Consumer index increased 3.1% (up 2.4%), and the Utilities rose 3.1% (up 1.5%). The Banks rallied 4.0% (up 10.7%), and the Broker/Dealers gained 3.5% (up 3.1%). The Nasdaq100 was 4.1% higher (up 12.4%), and the Morgan Stanley High Tech index jumped 4.8% (up 7.6%). The Semiconductors surged 5.5% (up 2.3%). The InteractiveWeek Internet index jumped 4.8% (up 6.3%). The Biotechs increased 2.5% (up 29.8%). With bullion declining $31, the HUI gold index slipped 0.4% (down 11.3%).

One-month Treasury bill rates ended the week at 3 bps and three-month bills closed at 8 bps. Two-year government yields were up 2 bps to 0.27%. Five-year T-note yields ended the week 9 bps higher at 0.71%. Ten-year yields rose 18 bps to 1.64%. Long bond yields jumped 23 bps to 2.75%. Benchmark Fannie MBS yields increased 9 bps to 2.61%. The spread between benchmark MBS and 10-year Treasury yields narrowed 9 to 97 bps. The implied yield on December 2013 eurodollar futures declined 5.5 bps to 0.615%. The two-year dollar swap spread dropped 7 to 30 bps. The 10-year dollar swap spread declined 3 to 19 bps. Corporate bond spreads narrowed. An index of investment grade bond risk ended the week 6 bps lower at 120 bps. An index of junk bond risk sank 66 to 638 bps.

Total debt issuance was on the slow side. Investment grade issuers included GE Capital $2.25bn, American Express $2.0bn, Ford Motor Credit $1.5bn, Deere & Co $2.25bn, Time Warner $1.0bn, Tyson Foods $1.0bn, Viacom $900 million, Sysco $750 million, Union Pacific $600 million, Liberty Property LP $400 million, Gulf South Pipeline $300 million, Paccar $550 million, Duke Realty $300 million, GATX $250 million, Safeway $250 million and TCF National Bank $110 million.

Junk bond funds saw outflows jump to $2.9bn (from Lipper), with notable three-week outflows of about $6bn. Junk issuers included Fifth & Pacific $150 million.

I saw no convertible debt issued.

International dollar bond issuers included Corp Andina de Fomento $600 million and Norbord $165 million.

German bund yields rose 16 bps to 1.33% (down 50bps y-t-d), and French yields jumped 26 bps to 2.50% (down 64bps). The French to German 10-year bond spread widened 10 to 117 bps. Spain's 10-year yields fell 29 bps to 6.17% (up 113bps). Italian 10-yr yields increased 3 bps to 5.75% (down 128bps). Ten-year Portuguese yields dropped 86 bps to 10.54% (down 223bps). The new Greek 10-year note yield sank 130 bps to 27.69%. U.K. 10-year gilt yields rose 9 bps to 1.62% (down 35bps). Irish yields declined 6 bps to 7.03% (down 123bps).

The German DAX equities index rallied 1.3% (up 3.9% y-t-d). Spain's IBEX 35 equities index recovered 8.3% (down 23.5%), and Italy's FTSE MIB jumped 5.5% (down 10.9%). Japanese 10-year "JGB" yields rose 4 bps to 0.85 (down 18bps). Japan's Nikkei inched 0.2% higher (unchanged). Emerging markets were mostly higher. Brazil's Bovespa equities index rose 1.9% (down 4.1%), and Mexico's Bolsa increased 0.4% (up 0.7%). South Korea's Kospi index added 0.1% (up 0.5%). India’s Sensex equities index rallied 4.7% (up 8.2%). China’s Shanghai Exchange sank 3.8% (up 3.7%).

Freddie Mac 30-year fixed mortgage rates sank 8 bps to a record low 3.77% (down 82bps y-o-y). Fifteen-year fixed rates were down 3 bps to 2.94% (down 71bps). One-year ARMs were 4 bps lower at 2.79% (down 17bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 5 bps to 4.29% (down 74ps).

Federal Reserve Credit declined $3.7bn to $2.831 TN. Fed Credit was up $46.7bn from a year ago, or 1.7%. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 5/30) jumped $11.7bn to $3.518 TN. "Custody holdings" were up $97.4bn y-t-d and $74.5bn year-over-year, or 2.2%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $550bn y-o-y, or 5.6% to $10.410 TN. Over two years, reserves were $2.083 TN higher, for 25% growth.

M2 (narrow) "money" supply slipped $2.8bn to $9.879 TN. "Narrow money" has expanded 6.0% annualized year-to-date and was up 9.0% from a year ago. For the week, Currency increased $0.5bn. Demand and Checkable Deposits declined $6.3bn, while Savings Deposits rose $6.8bn. Small Denominated Deposits declined $3.3bn. Retail Money Funds dipped $0.5bn.

Total Money Fund assets declined $7.0bn to $2.565 TN. Money Fund assets were down $130bn y-t-d and $177bn over the past year, or 6.5%.

Total Commercial Paper outstanding dropped $14.7bn to $1.014 TN. CP was up $55bn y-t-d, while declining $211bn from a year ago, or down 17.2%.

Global Credit Watch:

June 8 – Bloomberg (Ben Sills and James Hertling): “Spain is poised to become the fourth of the 17 euro-area countries to require emergency assistance as the currency bloc’s finance chiefs plan weekend talks on a potential aid request to shore up the nation’s lenders. A bid for help may come as soon as tomorrow when euro finance ministers hold a conference call, said a German government official and a European Union aide, each of whom declined to be identified because the matter is confidential. The prospect of action underscores officials’ concerns amid speculation that Greece may be forced out of the euro and as Spain struggles to persuade markets it can protect troubled banks and finance its budget deficit.”

June 7 – Bloomberg (Emma Ross-Thomas): “Spanish banks may need as much as 100 billion euros ($126bn) from European allies, and the aid will be channeled through Spain’s bank rescue fund, Antonio Lopez Isturiz, head of the European People’s Party, said. ‘The conditions will be for the banks and it’s up to the sovereign, elected Spanish government to take the decision,’ Lopez Isturiz, who heads the group that includes Prime Minister Mariano Rajoy and Chancellor Angela Merkel, told broadcaster TVE… Spain’s FROB rescue-fund ‘will be the final receiver of this money,’ he said.”

June 7 – Bloomberg (Ben Sills): “Fitch Ratings cut Spain’s long-term credit rating to BBB and left it two notches from junk, citing the cost of recapitalizing the country’s banking industry and a lengthening recession. Spain, which saw its rating lowered from A, may need as much as 100 billion euros ($126 billion) to bolster its banking system, compared with an earlier estimate of about 30 billion euros, Fitch said… The Spanish economy is set to remain in recession through 2013, the ratings company added, having previously forecast a recovery for next year. ‘The much reduced financing flexibility of the Spanish government is constraining its ability to intervene decisively in the restructuring of the banking sector and has increased the likelihood of external financial support,’ Fitch said… ‘Spain’s high level of foreign indebtedness has rendered it especially vulnerable to contagion from the ongoing crisis in Greece.’”

June 8 – MarketNews International: “The German government on Friday reaffirmed that the European bailout funds were ready to support Spain if Madrid applies for aid and accepts the conditions tied to it. ‘The decision is up to Spain. If it makes it, then the European instruments for it are ready,’ government spokesman Steffen Seibert said… ‘Then everything will run under the usual procedure: a state makes a request, it will be liable and it accepts the conditions tied to it.’ Seibert declined to comment on rumours of a possible Eurogroup teleconference this weekend to consider an aid request from Spain that might be forthcoming.”

June 7 – Bloomberg (Adam Ewing and Rebecca Christie): “European policy makers are fighting a ‘complete lack of confidence’ in their ability to resolve the crisis after failing to persuade investors they’re united in their choice of tools to handle the turmoil, Fitch Ratings President Paul Taylor said. ‘The key issue in European markets is very much about confidence,’ Taylor said… ‘There is a complete lack of confidence in the system, in the use of tools that could be available and even in the ones that have been announced. The problem through this crisis is that there has been the lack of a central view point.’ Officials inside the currency union remain divided on how to support Spain as its undercapitalized banks threaten to destabilize the euro area’s fourth-largest economy.”

June 8 – Bloomberg (Adam Ewing and Josiane Kremer): “Spain’s banks need urgent aid plugged directly into their balance sheets and Europe can no longer allow itself to deploy half measures, according to the leaders of some of the world’s biggest banking and finance groups. ‘It must be done with full magnitude,’ Christian Clausen, the president of the European Banking Federation and chief executive officer of Nordea Bank AB, said… Recapitalizing Spain’s banks has become the key hurdle that European policy makers need to overcome, and fixing the turmoil in the nation’s financial system would calm markets, he said. Bankers are stepping up their pleas for action as Spain’s financial crisis risks engulfing the euro area’s fourth-largest economy and policy makers remain divided on how best to tackle the issue.”

June 4 – Bloomberg (Patrick Donahue): “Chancellor Angela Merkel’s spokesman said that Spain knows where to look for aid if it’s needed, giving no ground to Prime Minister Mariano Rajoy’s pleas that Germany consider new ideas to resolve the debt crisis… Rajoy sought to open a new avenue of crisis fighting on June 2, when he added his voice to calls for a ‘banking union’ in Europe involving a centralized system to re-capitalize lenders. Merkel shut off another potential solution the same day as she toughened her opposition to euro-area debt sharing, telling members of her party that ‘under no circumstances’ would she agree to euro bonds. Options ‘that resemble euro bonds’ are conceivable after a process of European integration lasting ‘many years,’ Merkel’s chief spokesman, Steffen Seibert, told reporters… For now, ‘it’s up to national governments to decide whether they want to avail themselves of aid from the backstop and accept the conditions linked to it, and that of course also applies to Spain.’”

June 4 – DPA: “Europe is battling to agree on plans to combat the region's debt crisis as differences emerged Monday between France and Germany on propping up Spain's ailing banking system. While Germany insisted that it was up to Spain to decide whether to tap the European Union-led bailout fund to help its embattled banking sector, France said EU leaders should agree on pumping eurozone rescue funds into banks without governments first making a request for aid. Speaking during an impromptu visit to Brussels, French Finance Minister Pierre Moscovici said letting the bailout fund intervene directly in support of banks was ‘a fundamental issue on which proposals are on the table.’ ‘I hope that this will be one of the openings for the future which will be decided’ at the next EU summit on June 28-29, Moscovici said. At the same time in Berlin, however, the German government spokesman, Steffen Seibert told a regular press briefing that Madrid should decide whether to apply for a financial lifeline.”

June 8 – Bloomberg (Annette Weisbach, Nicholas Comfort and Boris Groendahl): “As Europe’s sovereign debt crisis escalates, Germany is becoming a magnet for depositors keen to stow their savings in the euro area’s safest market. Deposits in Germany rose 4.4% to 2.17 trillion euros ($2.73 trillion) as of April 30 from a year earlier, according to European Central Bank figures. Deposits in Spain, Greece and Ireland shrank 6.5% to 1.2 trillion euros in the same period, including a 16% drop for Greece…”

June 7 – Bloomberg (Jeff Black, Jana Randow and Gabi Thesing): “The European Central Bank may be running out of options it can stomach. With the euro area assailed by spreading recession, financial-market instability and political impasse over the direction the single currency should take, ECB President Mario Draghi yesterday stressed the limitations of his current policy tools, from standard interest-rate cuts to bond-buying and liquidity injections. Moves such as quantitative easing or capping bond yields to calm markets remain taboo for the ECB, which says its main job is to ensure stable prices. ‘It’s clear that they are very low on, if not completely out of, ammunition,’ said Nick Kounis, head of macro research at ABN Amro… ‘There are options that would have a more significant effect, but they’re outside of the ECB’s comfort zone. There’s an element of helplessness.’”

June 08 – Fitch: “Fitch Ratings has downgraded 11 Spanish local and regional governments and five credit-linked public sector entities (PSE). The rating actions follow the agency's downgrade of the Kingdom of Spain's Issuer Default Rating (IDR) to 'BBB'/Negative/'F2' from 'A'/Negative/'F1.”

June 7 – Telegraph (Ambrose Evans-Pritchard): “As Spain edges closer to a full sovereign rescue, economists have begun to doubt whether the EU bail-out machinery can raise such large sums funds at viable cost on global capital markets. While the International Monetary Fund thinks Spanish banks require €40bn or so in fresh capital, any loan package may have to be much larger to restore shattered confidence in the country. Megan Greene from Roubini Global Economics says Spain's banks will need up to €250bn, a claim that no longer looks extreme. New troubles are emerging daily. The Bank of Spain said on Thursday that Catalunya Caixa and Novagalicia will need a total of €9bn in new state funds. JP Morgan is expecting the final package for Spain to rise above €350bn, while RBS says the rescue will "morph" into a full-blown rescue of €370bn to €450bn over time -- by far the largest in world history. ‘Where is the money going to come from?’ said Simon Derrick from BNY Mellon. ‘Half-measures are not going to work at this stage and it is not clear that the funding is available.’”

June 7 – Bloomberg (Alan Crawford): “German Chancellor Angela Merkel said that total European aid for Greece amounts to about one-and-a-half times the country’s economic output.”

June 6 – New York Times (Liz Alderman): “As European leaders grapple with how to preserve their monetary union, Greece is rapidly running out of money. Government coffers could be empty as soon as July, shortly after this month’s pivotal elections. In the worst case, Athens might have to temporarily stop paying for salaries and pensions, along with imports of fuel, food and pharmaceuticals. Officials, scrambling for solutions, have considered dipping into funds that are supposed to be for Greece’s troubled banks. Some are even suggesting doling out i.o.u.’s. Greek leaders said that despite their latest bailout of 130 billion euros, or $161.7 billion, they face a shortfall of 1.7 billion euros because tax revenue and other sources of potential income are drying up.”

June 6 – Bloomberg (Marcus Bensasson): “The prolonged campaign season is worsening Greece’s chronic difficulties with tax evasion that has helped wreak havoc on the country’s finances. Greece… fell short of revenue goals by 495 million euros ($615 million) in the first four months of 2012, according to the Finance Ministry. Tax collections dropped 20% during the first 20 days of May from the same year- earlier period…”

June 7 – Associated Press (Nicholas Paphitis): “A strike announced Thursday by Greek municipal employees is threatening to derail the crucial June 17 national election, which could determine whether the debt-crippled country continues to use the euro. The POE-OTA union, which represents thousands of people who work for cities, villages and other municipalities, says its members are paid far less for doing elections-related work than other government employees. ‘The elections are up in the air,’ he said. ‘We carry the ballot boxes, set up and clean the voting centers, we transport the used ballots... Anything you can imagine in connection with the elections, we do it."

June 4 – Bloomberg (Patricia Kuo and Stephen Morris): “European companies are reassessing how they raise money as stricter capital rules prompt banks to curtail loans as a loss leader to win other business. Bond sales are about to overtake loans for the first time after corporate borrowers raised $196 billion from syndicated loans this year, a 48% drop from the same period in 2011 and the steepest decline ever…”

Global Bubble Watch:

June 8 – Bloomberg: “China cut borrowing costs for the first time since 2008 and loosened controls on banks’ lending and deposit rates, stepping up efforts to combat a deepening slowdown as Europe’s debt crisis threatens global growth… The extra leeway banks will get to determine rates at variance from the official setting was called a ‘milestone’ by UBS AG. The move, before China reports inflation, investment and output figures tomorrow, may signal that the economy is weaker than the government anticipated.”

June 7 – Bloomberg: “China delayed tightening bank capital rules to the beginning of next year, signaling support for loan growth as policy makers seek to arrest a slowdown in the world’s second-largest economy. New draft rules from the China Banking Regulatory Commission aim to set ‘reasonable’ schedules for banks to meet capital targets in a way that helps ‘maintain appropriate credit growth,’ the government said…”

June 7 – Bloomberg (Kelly Bit): “Hedge funds fell 2.9% in May, their worst month since September… The decline was driven by long-short equity, multistrategy and global macro funds, according to data compiled by Bloomberg. Hedge funds have lost 1.3% since the start of the year, trailing a 0.9% gain for equities worldwide… ‘It’s very hard for hedge funds across the board to generate positive returns if equities around the world are selling off significantly, the dollar is strengthening, commodities are selling off significantly,’ said Don Steinbrugge, managing partner of Agecroft Partners…”

June 4 – Bloomberg (Cheyenne Hopkins and Caroline Salas Gage): “When is a hedge not a hedge? That’s the question regulators from the Federal Reserve to the Office of the Comptroller of the Currency are confronting after JPMorgan Chase & Co. reported a $2 billion trading loss from a credit-derivatives position Chief Executive Officer Jamie Dimon called a ‘hedge.’ Regulators are under pressure to respond to JPMorgan’s loss as they finish writing the so-called Volcker Rule, which restricts banks' proprietary trading and is the most controversial provision in the Dodd-Frank Act. They’re scrutinizing the so-called hedging exemption in the proposed regulation and probably will narrow the exceptions for trades banks say are designed to mitigate risk, according to two people familiar with the matter. JPMorgan’s loss ‘will reinforce the position of those who want to be tough,’ Representative Barney Frank, a Massachusetts Democrat and co-author of the financial-overhaul legislation, said… ‘I do think it will mean Volcker will not allow’ such trades.”

June 8 – Bloomberg (Sarika Gangar): “Sales of corporate bonds from the U.S. to Europe and Asia slumped to their lowest levels this year and borrowing costs soared to the most since February as a global slowdown curbed demand for all but the safest assets. Deere & Co… led weekly sales of at least $39.5 billion, the smallest amount since the five days ended Dec. 30… Offerings fell below the 2012 weekly average of $76.8 billion for the fourth consecutive period as yields rose to 4.272% from the low this year of 4.06% on May 8. High-yield issuance in the U.S. was virtually shut as Federal Reserve Chairman Ben S. Bernanke said the world’s largest economy is threatened by Europe’s debt crisis and government budget cuts…”

June 5 – Bloomberg (Christine Idzelis and Krista Giovacco): “Leveraged loans are generating their biggest losses of the year as investors pull back from even the safest debt in a company’s capital structure on concern that Europe’s financial crisis will spark a global slowdown that diminishes the creditworthiness of borrowers. Syndicated loans of speculative-grade borrowers lost 1.22% last month, the most since November…”

Currency Watch:

June 8 – Bloomberg (Catherine Hickley): “It was a currency union of 15 states in 1992. Two years later, as budget deficits spiraled out of control, hyperinflation reigned and economies shriveled, just two members of the Soviet Union’s ruble zone were left. As Greek politicians threaten to break terms of the country’s bailout with international lenders, Spain calls for financial help, and northern European nations balk at funding the south, historians are asking whether the euro region is about to face a similar exodus. They take a longer view of the European Union’s crisis than economists, and it’s much bleaker. The Soviet experience tells us ‘an exit like this is messy and leads to loss of income and inflation, and people are right to be scared of it,’ said Harold James, a professor of history at Princeton University…”

June 7 – Bloomberg (Simone Meier): “The Swiss central bank’s foreign- currency reserves surged to a record in May as the euro region’s increasing turmoil forced policy makers to step up their defense of the franc floor. Currency holdings rose to 303.8 billion Swiss francs ($318bn) from 237.6 billion francs in April… Walter Meier, a spokesman at the SNB… said a ‘large part’ of the increase was due to currency purchases to defend the minimum exchange rate of 1.20 francs per euro.”

The U.S. dollar index declined 0.5% this week to 82.51 (up 2.9% y-t-d). For the week on the the upside, the Mexican peso increased 2.8%, the South African rand 2.2%, the Australian dollar 2.2%, the New Zealand dollar 2.1%, the Swedish krona 1.7%, the Canadian dollar 1.4%, the Norwegian krone 1.2%, the Brazilian real 0.8%, the Singapore dollar 0.7%, the British pound 0.7%, the Swiss franc 0.7%, the euro 0.7%, the Danish krone 0.6%, and the South African rand 0.2%. On the downside, the Taiwanese dollar declined 0.2% and the Japanese yen fell 1.9%.

Commodities Watch:

The CRB index recovered 1.7% this week (down 10.6% y-t-d). The Goldman Sachs Commodities Index rallied 1.2% (down 8.8%). Spot Gold gave back 1.9% to $1,593 (up 1.9%). Silver was little changed at $28.47 (up 2%). July Crude gained 87 cents to $84.10 (down 15%). July Gasoline increased 1.1% (up 1%), while July Natural Gas declined 1.2% (down 23%). July Copper slipped 0.9% (down 4%). June Wheat gained 2.9% (down 3%) and June Corn rallied 8.4% (down 8%).

China Watch:

June 5 – Bloomberg: “China’s four biggest banks extended less than 250 billion yuan ($39bn) of new loans in May, said Liu Yuhui, a senior researcher at the Chinese Academy of Social Sciences… The China Securities Journal reported… that the lenders, Industrial & Commercial Bank of China Ltd., China Construction Bank Corp., Bank of China Ltd., and Agricultural Bank of China Ltd., made 253 billion yuan of new loans… ‘Demand is definitely not robust,’ said Liu, director of a financial research office at the government-backed think tank. ‘Banks are struggling to find projects that they can lend to that have controllable risks.’”

June 8 – Bloomberg (Greg Quinn): “China has begun limiting access to corporate filings after short-sellers used them to highlight accounting discrepancies that led to stock plunges and regulatory investigations over domestic companies listed abroad. ‘In recent months, the Industry & Commerce Administrations in many key cities and provinces around China have implemented measures restricting access to the AIC files of Chinese companies,’ said Nathan Bush, a Beijing-based partner at the law firm O’Melveny & Myers LLP.”

Latin America Watch:

June 5 – Bloomberg (Gabrielle Coppola and Boris Korby): “The takeover of Banco Cruzeiro do Sul SA is heightening concern that Brazil’s midsize banks will struggle to repay about $2 billion of overseas debt in the next 18 months as the real weakens and borrowing costs surge. Yields on Cruzeiro do Sul’s dollar notes due in 2020 soared 1,027 bps to a record 23.44% yesterday after the central bank ordered the seizure of the lender for 180 days, citing ‘serious violations’ of regulations.”

June 8 – Bloomberg (Katia Porzecanski and Camila Russo): “Argentine President Cristina Fernandez de Kirchner said she’s moving her savings into pesos from dollars and urged aides to do the same as she struggles to keep capital in the country and avert a plunge in the currency. The peso has posted its biggest three-month slump since 2009, falling 3.3%..., even after Fernandez tightened dollar purchase restrictions.”

June 8 – Bloomberg (Eliana Raszewski): “Argentina’s economic growth probably slowed in the first quarter to the lowest since 2009 as import restrictions undermined industrial output and a drought affected the country’s soybean harvest. Gross domestic product… grew 4.8% in the January to March period… according to the median estimate of eight economists surveyed by Bloomberg.”

European Economy Watch:

June 5 – Bloomberg (Jeff Black): “Euro-area services and manufacturing output contracted at the fastest pace in almost three years in May, adding to signs the economy is suffering under the worsening sovereign-debt crisis. A composite index based on a survey of purchasing managers in both industries dropped to 46 from 46.7 in April… The indicator has remained below 50 -- indicating contraction -- for four months.”

June 5 – Bloomberg (Simone Meier): “European retail sales declined more than economists forecast in April as the worsening debt crisis prompted consumers from Spain to Austria to cut spending. Sales dropped 1% from March… From a year earlier, April sales fell 2.5%. European companies are relying on faster-growing economies to bolster sales as the euro area’s deepening slump erodes consumer confidence and curbs spending… German retail sales advanced 0.6% in April from the previous month, when they rose 1.6%... In Spain, sales fell 2.4% from March, when they decreased 0.5%, while Portugal saw a 2.1% drop in the latest month. Austria reported a 3.5% fall in April, while French sales declined 1.5%.”

June 6 – Bloomberg (Angeline Benoit): “Spanish industrial production unexpectedly fell the most in more than two years in April as the fourth-largest economy in Europe’s single currency union sank deeper into recession amid surging borrowing costs. Output at factories, refineries and mines adjusted for the number of working days fell 8.3% from a year earlier, the biggest contraction since October 2009…”

June 7 – Bloomberg (Mark Deen): “France’s unemployment rate rose in the first quarter as companies eliminated jobs in the face of faltering economic growth, posing a challenge to newly elected President Francois Hollande. About 10.0% of the population was unemployed, up from 9.8 in the previous three months…”

June 8 – Bloomberg (Chiara Vasarri): “Italian industrial production declined in April as demand for the nation’s manufactured goods slumped at home and abroad… Output dropped 1.9% from March, when it rose a revised 0.6%... Production fell 9.2% from a year ago on a workday- adjusted basis.”

June 5 – Bloomberg (Lorenzo Totaro and Chiara Vasarri): “Italy’s tax revenue in the four months through April was 2.9% lower than the government forecast… Revenue totaled 119.1 billion euros ($148.4bn) in the period, the general accountant’s office said… The proceeds were about 3.5 billion euros less than expected… Italy’s economy is mired in its fourth recession since 2001.”

Global Economy Watch:

June 8 – Bloomberg (Greg Quinn): “Weaker Canadian job creation and slower housing starts, along with falling exports, add to evidence growth in the world’s 10th-largest economy is slowing. Employers added 7,700 jobs in May, the fewest in three months… The country also recorded its first merchandise trade deficit in six months in April as exports declined. Beginning home construction dropped 13%...”

Central Bank Watch:

June 8 – Bloomberg (Rich Miller): “Monetary-policy makers from around the world are being pressed into action to shore up a global economy that is suffering its steepest slowdown since the recession ended in 2009. On the heels of a June 5 interest-rate cut by Australia, China yesterday unveiled its first reduction in borrowing costs in more than three years…”

June 6 – Bloomberg (Gabi Thesing and Jana Randow): “European Central Bank President Mario Draghi said policy makers discussed cutting interest rates to a record low today, fueling expectations they will act as soon as next month as the worsening debt crisis curbs economic growth. ‘We monitor all developments closely and we stand ready to act,’ Draghi told reporters… Downside risks to the economic outlook have increased and ‘a few’ of the ECB’s Governing Council members called for rate cut at today’s meeting, he said.”

U.S. Bubble Economy Watch:

June 5 – Bloomberg (Michael McDonald and William Selway): “Connecticut Governor Dannel Malloy is learning you can’t always count on the rich. The Democrat last month deferred debt payments, trimmed programs and diverted funds as tax revenue came up short and opened a $200 million budget hole. The gap emerged about a year after Malloy… signed a $2.6 billion tax increase, the biggest in state history. Connecticut, the wealthiest U.S. state, joins California and New Jersey in facing a deficit as income-tax revenue is the most volatile in at least 30 years… Connecticut counts on the levy for almost half its revenue, with the biggest chunk coming from the hedge fund capital of Greenwich. Connecticut debt has posted the weakest returns this year among U.S. states, Barclays data show. The shortfall ‘is just the consequence of loading up on high-income individuals,’ said Philip Fischer, who runs eBooleant Consulting… ‘It is destabilizing. They have very volatile incomes. The states have that reflected in their budgets.’ Increasing volatility in tax collections is complicating local governments’ emergence from the worst fiscal crisis since the Great Depression.”

June 8 – Bloomberg (Chris Burritt): “U.S. chief executive officers are turning more pessimistic about a second-half recovery as rising unemployment and Europe’s debt turmoil threaten domestic growth prospects. CEOs from General Motors Co. to Hewlett-Packard Co. to Manpower Inc. say they are concerned about the health of the U.S. economy… The U.S. presidential election is another area of concern, CEOs said. ‘There are so many uncertainties,’ said Jeffrey Joerres, CEO of Manpower… ‘If these uncertainties keep stacking up and none get resolved, we’ll see a hiring pause rather than the current slowdown.’”