Saturday, November 8, 2014

07/20/2012 Risk On Risk Off and the Spanish_Chinese Tug of War *

“Global macro” has of late been relegated more of a backseat role, with earnings and market “technicals” driving a largely upbeat marketplace. Things might have changed today, with spiking Spanish bond yields proving increasingly difficult to disregard. Spain’s 10-year yields surged 26 bps Friday to 7.19%, increasing the rise for the week to 61 bps. Perhaps more alarming, Spanish two-year sovereign yields jumped 61 bps Friday and were up 134 bps for the week. At 5.62%, two-year yields are almost back to panic spike highs from last November – and are essentially at the highest level since 1997. Despite the EU’s recently negotiated 100bn euro bailout, Spain’s borrowing costs have moved only further into unsustainable territory. The Spanish stock market was hit for 5.8% today. Things have reached the boiling point, as mass public discontent with the latest round of austerity measures recalls Greece’s unraveling.

And while the EU’s plan to finance a Spanish banking bailout has come together, the market takes no comfort. There is today little foreign interest in owning Spanish debt. Meanwhile, recent poor auction results indicate that domestic demand, chiefly from Spain’s troubled banks, has also meaningfully waned. Problematically, Spain has huge deficits and large debt maturities to finance going forward, as the scope of the holes in banking system and local government finances seemingly expands by the week. Between the sovereign, the banks and regional governments, the markets fear an unending and, in the end, unmanageable quantity of debt to refinance. Friday saw the cash-strapped Valencia region prepare to tap Spain’s newly created 18bn euro facility for bailing out the regions. The highly-leveraged and badly maladjusted Spanish economy has begun to buckle.

Spain sovereign Credit default swap (CDS) prices rose 25 bps Friday and were up 50 bps for the week, jumping back above 600 bps. I still grapple with prominent, advanced and perceived wealthy sovereign nations such as Spain and Italy with CDS trading above 500 and even 600 bps. Spain CDS surpassed 100 bps for the first time during 2008. Credit deterioration has been even more devastating throughout Spain’s banking system. For example, troubled Bankia and Banco Popular saw their (subordinated) CDS trade to about 2,000 bps this week, as the markets increasingly price in a run of costly Spanish bank failures.

It was not that many months ago that Spain was viewed as part of a financially stable European “core.” Indeed, Spain (5-yr) CDS ended Q1 2010 at about 100 bps. Spain commenced 2010 with government debt at a seemingly healthy 54% of GDP. Few anticipated the incredible pace of fiscal deterioration. With the federal government on the hook for the EU’s 100bn euro bank bailout package, the IMF now projects Spain will end 2012 with debt at about 90% of GDP – and poised for continued rapid growth.

My thesis remains that, with Spain now fully engulfed, the European debt crisis has irreversibly afflicted the “core.” Following in the footprints of Greece, Portugal and Ireland, markets assume the 100bn euro bailout will prove just the opening tranche of what would be an enormous financial commitment necessary to stabilize Spain within the eurozone. In particular, Spain’s banking system is large and fragile. And with Spain succumbing to crisis dynamics, the markets will now increasingly anticipate Italy as the next wobbling domino. Italian banks appear especially susceptible, as does the European banking system more generally. And let’s not forgot Greece, a troubled nation that very well could be a euro short-timer. There is ample justification for markets further questioning the viability of euro monetary integration.

Yet market concerns and focus tend to ebb and flow, and global markets have been content of late to downplay the European doomsday scenario. And, actually, from my analytical framework this disregard has not necessarily been irrational (from a more game theory perspective).

The thesis has been one of a historic global Credit Bubble comprised of myriad Bubbles, certainly including European sovereign debt, U.S. Treasuries/agencies/fixed income, China and “developing” debt more generally. I have suggested that the sequencing of faltering Bubbles is significant, especially the fact that European debt troubles have boosted demand for Treasuries and the dollar. From my analytical framework, I have viewed U.S. (government-dominated) Credit as relatively stable in the near-term. At the same time, I have posited that “developing” debt and economies might prove more susceptible to European debt troubles and associated global de-risking/de-leveraging dynamics than generally believed. Especially during May, global risk markets came under heightened pressure as evidence mounted supporting the view of vulnerability in China, India, Brazil and the “developing” world more generally.

From a macro Credit analytical framework, it may help to condense and simplify the analysis: With European debt fragility counterbalanced in the short-term by U.S. debt resiliency, it had somewhat become a near-term case of the “developing” world becoming the key “at the margin” factor for global risk markets. In particular, a weak China would drag a struggling world down, while a resurgent China would be expected to keep the world afloat. With global policymakers intensively focused and the EU prepared to begin cutting Spain large bailout checks, the markets were trading as if they enjoyed a window of relative European stability. Marketplace attention shifted to bearishly positioned global risk markets, the latest round of global policy responses and, in particular, China. And leave it to the Chinese to not disappoint, with policy stimulus and notable improvement in the data dovetailing so well with the bullish view of the world. “Risk on” saw an opening.

Most approach Chinese data with a healthy dose of skepticism. This only adds fuel to an intriguing dynamic: the marketplace can see about whatever it wants in China’s data. When the mood is on the sour side, the viewpoint toward China can easily gravitate to the dark-side. But when things shift back in the direction of market “risk on,” Mr. Brightside is willing to cut China a lot of slack. Sentiment over recent weeks has shifted back to the view that policymakers have things well under control. China’s role as global stabilizer is seen as secure, although Chinese equities seem curiously less sanguine.

Importantly, China bank lending was reported to have increased to $150bn during June, this after anecdotal evidence suggested that lending had begun to slow markedly the previous month. And there were reports this week that the major Chinese banks had increased lending from a month ago, while home (apartment) sales activity and prices were said to have improved. Back in June it appeared we were witnessing a very problematic scenario of faltering Chinese home prices, an abrupt end to historic debt growth, and serious fissures in an epic Credit Bubble. More recently, the consensus view has pivoted back to government-commanded $150bn monthly bank lending and a re-energized – global “risk on”-friendly - Credit-driven Chinese economy.

I admit to being awestruck by a Chinese banking system cranking out $150bn of loans in a single month. Where all this finance is being directed would be interesting to know, while I remain skeptical that such historic lending is sustainable (especially with declining real estate prices). And while such data is viewed constructively when “risk on” is in command, there are much less constructive analyses of Chinese finances that could easily resurface when global risk markets again turn more circumspect of the overall global backdrop.

And as a generally bullish market week came to an end, a scenario ushering back “risk off” didn’t seem all that farfetched: The markets increasingly shut off the financial spigot to the Spanish sovereign, regional governments and banks. The flight out of the Spanish banking system intensifies. The market turns increasingly nervous of Italy and its financial sector. Flight out of the euro turns increasingly problematic.

And, stunning as it may be, I have a theory. Indeed, the entire notion of the overwhelming benefits associated with central bank liquidity buying time for structural reform comes with a serious flaw: intervention ensures the marketplace an extended period to (relatively inexpensively) hedge risk exposures and speculate on particular outcomes. If structural reform is successful and specific market-feared outcomes do not materialize – well, there’s no issue. But in the unusual circumstance – i.e. perhaps a major structural debt crisis – where policymaking is incapable of resolving the issue, the accumulation of enormous market hedges and bearish bets creates one hell of a systemic predicament. Currency derivatives in South East Asia, Russia and Argentina quickly come to mind, along with put options on Nasdaq in 2000 and myriad systemic hedges in 2008.

Well, global central banks have for too long accommodated those wishing to hedge exposures to - or bet against - the euro. I’ll assume that much of this hedging was done well below what had been typical euro trading ranges. The nice round number 1.20 euro to the dollar seems like a reasonable “strike price” for significant hedging exposures. After today’s decline pushed the euro to a 25-month low, 1.20 is now less than 1.5% away.

The vast majority of (risk/market “insurance”) hedging strategies these days are sold by thinly capitalized financial players reliant on dynamic hedging trading strategies (i.e. computer models that would automatically sell the euro into declining markets to offset rising exposures to derivative protection sold). Of course, the markets assume that global central banks will ensure orderly currency markets. And, yes, they’ve succeeded thus far. Yet, in past crises this type of complacent market mindset proved integral to unappreciated market fragility. History teaches us that currency crises are dangerous and extremely difficult to control. And with Spain now in serious trouble, Italy in the crosshairs and euro monetary integration hanging in the balance, I expect market focus to shift back to Europe and global currency trading. I worry when markets so confidently presume that policymakers can avert so-called “tail risk.”

For the Week:

The S&P500 added 0.4% (up 8.4% y-t-d), and the Dow gained 0.4% (up 5.0%). The Morgan Stanley Cyclicals increased 0.3% (up 3.1%), while the Transports gave back 2.3% (up 1.1%). The Morgan Stanley Consumer index rose 0.6% (up 5.5%), and the Utilities gained 0.7% (up 4.2%). The Banks were down 2.3% (up 13.9%), and the Broker/Dealers were hit for 5.2% (down 2.3%). The S&P 400 Mid-Caps slipped 0.3% (up 6.9%), and the small cap Russell 2000 declined 1.2% (up 6.8%). The Nasdaq100 was up 1.3% (up 14.9%), and the Morgan Stanley High Tech index rallied 2.5% (up 7.9%). The Semiconductors recovered 2.2% (up 0.2%). The InteractiveWeek Internet index rose 2.4% (up 5.6%). The Biotechs gained 1.3% (up 37.8%). With bullion down $5, the HUI gold index declined 1.4% (down 20.0%).

One-month Treasury bill rates ended the week at 6 bps and three-month bills closed at 9 bps. Two-year government yields were down 3 bps to 0.21%. Five-year T-note yields ended the week down 5 bps to 0.57%. Ten-year yields fell 4 bps to 1.46%. Long bond yields declined 3 bps to 2.54%. Benchmark Fannie MBS yields dropped 10 bps to 2.29%. The spread between benchmark MBS and 10-year Treasury yields narrowed 6 to 83 bps. The implied yield on December 2013 eurodollar futures declined 5.5 bps to 0.465%. The two-year dollar swap spread increased one to 24 bps. The 10-year dollar swap spread increased about one to 13.5 bps. Corporate bond spreads were volatile and ended mixed for the week. An index of investment grade bond risk declined one to 111 bps. An index of junk bond risk increased 4 to 591 bps.

Debt issuance was strong. Investment grade issuers included Ebay $3.0bn, Morgan Stanley $2.0bn, Toyota Motor Credit $1.5bn, US Bancorp $1.3bn, New York Life $600 million, HPC $300 million and Federal Investment Realty Trust $250 million.

Junk bond funds saw inflows ebb somewhat to $837 million (from Lipper). Junk Issuers included Hologic $1.0bn, Smithfield Foods $1.0bn, Laureate Education $350 million, Lennar $350 million, Level 3 Communications $300 million, J2 Global Communications $250 million, and Nationstar Mortgage $100 million.

I saw no convertible debt issued.

International dollar bond issuers included Ukraine $2.0bn, Sberbank $1.5bn, Interamerican Development Bank $1.1bn, Sri Lanka $1.0bn, Transnet $1.0bn, Meg Energy $800 million, Macquarie Bank $750 million, Korea Gas $700 million, Innovation Ventures $450 million, Ardagh $560 million, Temasek Financial $1.7bn, Empresas ICA $350 million, Access Finance $350 million, and Horsehead Holding $175 million.

Spain's 10-year yields surged 61 bps this week to 7.19% (up 215bps y-t-d). Italian 10-yr yields rose 10 bps to 6.13% (down 90bps). German bund yields dropped another 9 bps to 1.17% (down 66bps), and French yields sank 15 bps to 2.06% (down 108bps). The French to German 10-year bond spread narrowed 6 to 89 bps. Ten-year Portuguese yields increased 3 bps to 10.07% (down 270bps). The new Greek 10-year note yield jumped 68 bps to 24.73%. U.K. 10-year gilt yields fell 6 bps to 1.48% (down 49bps). Irish yields fell 6 bps to 5.94% (down 232bps).

The German DAX equities index gained 1.1% (up 12.4% y-t-d). Spain's IBEX 35 equities index sank 6.3% (down 27.1%), and Italy's FTSE MIB fell 4.7% (down 13.4%). Japanese 10-year "JGB" yields dropped 4 bps to 0.73% (down 25bps). Japan's Nikkei slipped 0.6% (up 2.5%). Emerging markets were mostly lower. Brazil's Bovespa equities index dipped 0.3% (down 4.5%), while Mexico's Bolsa added 0.8% (up 10.1%). South Korea's Kospi index rose 0.6% (down 0.2%). India’s Sensex equities index declined 0.3% (up 11.0%). China’s Shanghai Exchange lost 0.8% (down 1.4%).

Freddie Mac 30-year fixed mortgage rates declined 3 bps to a record low 3.53% (down 99bps y-o-y). Fifteen-year fixed rates fell 3 bps to 2.83% (down 83bps). One-year ARMs were unchanged at 2.69% (down 28bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates unchanged at 4.20% (down 79bps).

Federal Reserve Credit declined $3.3bn to $2.857 TN. Fed Credit was up $2.4bn from a year ago, or 0.1%. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 7/18) increased $1.7bn to $3.515 TN. "Custody holdings" were up $95bn y-t-d and $61bn year-over-year, or 1.8%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $374bn y-o-y, or 3.7% to $10.432 TN. Over two years, reserves were $1.990 TN higher, for 24% growth.

M2 (narrow) "money" supply added $1.1bn to a record $9.993 TN. "Narrow money" has expanded 6.9% annualized year-to-date and was up 8.3% from a year ago. For the week, Currency increased $0.4bn. Demand and Checkable Deposits jumped $60bn, while Savings Deposits dropped $56.7bn. Small Denominated Deposits declined $3.5bn. Retail Money Funds increased $0.9bn.

Total Money Fund assets fell $12.3bn to $2.539 TN. Money Fund assets were down $156bn y-t-d and $133bn over the past year, or 5.0%.

Total Commercial Paper outstanding added $0.6bn to $983bn. CP was up $23bn y-t-d, while having declined $226bn from a year ago, or down 18.7%.

Global Credit Watch:

July 20 – Bloomberg (James Hertling): “European policy makers received another vote of no-confidence in their efforts to stem economic turmoil as the euro fell to its lowest in more than two years following final approval for a bailout of Spanish banks. The decision by euro finance chiefs failed to offset trouble elsewhere. Spanish Prime Minister Mariano Rajoy forecast a second year of recession and Valencia became the first state to say it would seek a rescue from the central government. Italian Prime Minister Mario Monti blamed unrest in Spain for surging borrowing costs, and an ally of German Chancellor Angela Merkel endorsed the prospect of Greece exiting the euro. ‘We’re looking at a situation when people are realizing we’re at a point of debt restructuring and repudiation,’ Marc Ostwald, a fixed-income strategist at Monument Securities…said… ‘It’s cold-hearted reality. The great blag and bluff of the euro zone has always managed to kick the can down the road, but it is no longer a viable strategy. We’re getting to a crunch point.’”

July 18 – Dow Jones (Jessica Mead): “The embattled euro is in danger of losing one of its key pillars of support: demand by reserve managers to diversify their foreign-exchange holdings out of dollars and into euros. Over the past 10 years, the common currency has been viewed by central banks and sovereign wealth funds as a viable alternative to the dollar, with its share of global FX reserves rising to almost 30% in 2010, according to Morgan Stanley. However, recent evidence suggests central banks no longer need nor want to shift out of dollars. That's bad news for the euro's value, which has been underpinned by this dollar diversification even as the euro-zone crisis has intensified. ‘Given the rising importance of the euro over the last decade, that diversification out of dollar intervention proceeds was an ongoing support for the euro--and other currencies--versus the dollar. But official reserve flows now are likely pushing in the opposite direction,’ said Robert Sinche, chief currency strategist at Royal Bank of Scotland Group…”

July 20 – Bloomberg (Ben Sills and Emma Ross-Thomas): “Spain’s plan to offer cash-strapped regional administrations emergency loans leaves the Treasury with 12 billion euros ($15 billion) of additional funding needs that the government says won’t affect its borrowing plans. The central government will tap the lottery for part of the 18 billion-euro fund for regions, leaving 12 billion euros for the Treasury to finance. While Economy Minister Luis de Guindos said yesterday that the plan won’t affect the nation’s borrowing program, economists including Jose Carlos Diez at Intermoney SA say it will be hard to sustain without selling more debt. ‘Where will it come from?’ said Diez, chief economist at the Madrid-based brokerage, which is Spain’s biggest bond trader. ‘In the end it has to add to their financing needs.’”

July 19 – Bloomberg (Emma Ross-Thomas and Lukanyo Mnyanda): “Spain’s five-year borrowing costs surged as the government braced for protests against spending cuts, while France paid record-low yields of less than 1% to sell similar securities. Spanish five-year notes yielded an average 6.459% at auction today, compared with 6.072% a month ago… Spain sold debt as lawmakers debated spending cuts in Parliament, where police erected barriers and stood guard. Spain, which asked other euro nations for 100 billion euros ($123bn) of aid last month to bail out its banks, is fighting to maintain enough market access to be able to fund its budget deficit.”

July 20 – Bloomberg (Lorenzo Totaro and Andrew Frye): “Italian Prime Minister Mario Monti, facing a surge in spreads on his country’s 10-year bonds, said anti-austerity demonstrations in Spain are adding to investor concerns about European debt. The difference between the yield on 10-year Italian debt and similar maturity German bunds rose 19 bps to 497 bps… Italian spreads haven’t ended a trading day above that level since Jan. 11. ‘It’s difficult to say to what extent the contagion comes or came from Greece or from Portugal or from Ireland or from the situation of the Spanish banks or of the one apparently emerging from the streets and the squares of Madrid,’ Monti told reporters… ‘Obviously, without the problems in those countries, Italy’s interest rates would be lower.’”

July 20 – Reuters (Sakari Suoninen and Marc Jones): “The European Central Bank turned up the heat on Greece on Friday ahead of a review of its bailout program, saying it would stop accepting Greek bonds and other collateral used by Greek banks to tap ECB funding, at least until after the review. The ECB move, which analysts said was aimed at stepping up pressure on Athens to adhere to the commitments of its EU/IMF bailout, will force Greek banks to turn to their national central bank for Emergency Liquidity Assistance (ELA) funds.”

July 18 – Bloomberg (John Glover): “The shelter available to bondholders in senior bank debt is starting to fracture as the escalating cost of reinforcing Europe’s financial institutions prompts policy makers to seek to share the burden more widely. Bank bonds that rank ahead of subordinated and junior debt for payment have been almost unscathed by the debt crisis. Bankia SA, Spain’s third-biggest lender, has seen the value of its 4.625% undated subordinated bonds plummet to 28.5% of face value, while its 4.25% senior securities repayable in May 2013 trade at about 92.16 cents per euro.”

July 17 – Bloomberg (Steven Norton and Elisa Martinuzzi): “UniCredit SpA and Intesa Sanpaolo SpA were among 13 Italian banks that had credit ratings cut by Moody’s…, which cited the nation’s weakening economy and government finances. UniCredit, Italy’s biggest bank, and Intesa, its second- largest, had their debt and deposit ratings lowered two steps to Baa2 and may face further downgrades, Moody’s said… It was the second time in two months that Moody’s downgraded the firms, which have ‘high direct exposure to sovereign debt.’ ‘Despite UniCredit’s substantial international activities, its important exposure to its domestic market means that its stand-alone rating is constrained by the level of the sovereign rating,’ Moody’s said. ‘Intesa’s business is almost entirely domestic in nature.’”

July 18 – Bloomberg (Charles Penty): “Spanish banks’ bad loans jumped to an 18-year-high in May, stoking concern that the costs of covering defaults will further weaken their financial strength. Bad debts as a percentage of total lending climbed to 8.95% from 8.72% the previous month as 3.1 billion euros ($3.8bn) of borrowing soured… Lending and deposits in Spain’s banking system declined, the regulator said.”

July 18 – Bloomberg (Lisa Abramowicz): “U.S. and European corporate bonds are diverging by the most in five months as demand rises for debt of American borrowers seen insulated from the sovereign crisis. The difference between relative yields on investment-grade notes from the regions expanded to 27 bps as of July 16 from this year’s low of 9 on July 5…”

July 18 – Bloomberg: “A rebound in China’s M1 money-supply growth from the slowest pace since at least 1996 signals expansion in the world’s second-largest economy will accelerate this quarter, if history is any guide. ...The gauge’s growth accelerated in June for a second month after reductions in benchmark interest rates and bank reserve requirements… ‘China’s economy is still very much credit driven,’ said Stephen Green, head of Greater China research with Standard Chartered…. ‘So when money growth picks up, activity picks up.’”

July 18 – Bloomberg (Joe Brennan and Jeff Black): “European Central Bank President Mario Draghi said the question of senior bondholders sharing the burden of ailing banks is ‘evolving’ in Europe and he expects developments to be reflected in Ireland’s bailout program. Draghi acknowledged the ‘successful implementation’ of Ireland’s program in a meeting with Irish Finance Minister Michael Noonan in Frankfurt… As there aren’t bondholders now in Irish banks where burden-sharing ‘would be of any great solution,’ Ireland will benefit from policy changes ‘in some other way,’ Noonan said.”

July 19 – Wall Street Journal (Stacy Meichtry and Liam Moloney): “Prime Minister Mario Monti said he would meet on July 24 with the governor of Sicily to discuss the region's finances as business leaders raised questions about the Italian island's solvency. Mr. Monti's office said the premier had written to Sicilian Gov. Raffaele Lombardo regarding the ‘grave concerns over the possibility that Sicily could default’ and to seek clarification over the governor’s plans to resign.”

July 18 – Bloomberg (Brian Parkin and Rainer Buergin): “Election-year politics may prevent German Chancellor Angela Merkel from backing a debt redemption fund the 17-member euro region may need to survive, government adviser Lars Feld said. Merkel, who hinted this week that she will stand for a third term in national elections due in the fall of 2013, is resisting the proposal made by her council of economic advisers, even as ‘interest in the administration is increasing,’ said Feld, a member of the panel and an architect of the fund. ‘I have the impression that Chancellor Merkel is positioning herself as the only bulwark against those profligate governments from the south trying to get their hands into the German pockets,’ Feld, 45, a professor of political economy at Freiburg University, said…”

July 20 – Bloomberg (John Glover): “Speculative-grade corporate debt in Europe is the most expensive to insure against losses in 1 1/2 years relative to sovereign bonds as companies need to refinance as much as $180 billion of debt by 2014. An index of credit-default swaps on junk-rated European companies exceeds one for government bonds by 2.44 times, up from 1.65 in March… Borrowers in Europe, the Middle East and Africa face $84 billion of junk-rated debt maturing next year and $96 billion in 2014, compared with 2011’s record bond sales of $70 billion, Moody’s Investors Service said.”

Global Bubble Watch:

July 19 – Bloomberg (Charles Mead): “Yields on U.S. corporate bonds of all ratings fell below 4% for the first time as Europe’s sovereign-debt crisis boosts demand for U.S. assets deemed safer even with a slowing economic recovery… The gauge was at 4.81% at year-end and 4.59% a year ago…”

July 19 – Bloomberg (Liam Vaughan and Gavin Finch): “Regulators from Stockholm to Seoul are re-examining how benchmark borrowing costs are set amid concern they are just as vulnerable to manipulation as the London interbank offered rate. Stibor, Sweden’s main interbank rate, Sibor, the leading rate in Singapore, and Tibor in Japan are among rates facing fresh scrutiny because, like Libor, they are based on banks’ estimated borrowing costs rather than real trades.”

July 19 – Bloomberg (Donal Griffin): “Wall Street, grappling with mounting regulatory probes and investor claims over alleged interest-rate manipulation, may face yet another formidable foe: Itself. Goldman Sachs… and Morgan Stanley are among financial firms that may bring lawsuits against their biggest rivals as regulators on three continents examine whether other banks manipulated the London interbank offered rate, known as Libor, said Bradley Hintz, an analyst with Sanford C. Bernstein… Even if Goldman Sachs and Morgan Stanley forgo claims on their own behalf, they oversee money-market funds that may be required to pursue restitution for injured clients, he said.”

Currency Watch:

The U.S. dollar index added 0.2% to 83.48 (up 4.1% y-t-d). For the week on the upside, the Japanese yen added 0.1%. On the downside, the South African rand declined 1.4%, the Mexican peso 1.0%, the Danish krone 1.0%, the Swiss franc 1.0%, the euro 1.0%, the British pound 0.7%, the Brazilian real 0.6%, the Canadian dollar 0.5%, the Australian dollar 0.5%, the Swedish krona 0.3%, the Singapore dollar 0.2%, the South Korean won 0.2%, and the Norwegian krone 0.1%.

Commodities Watch:

July 20 – Financial Times (Jack Farchy in London and Gregory Meyer): “The world is facing a new food crisis as the worst US drought in more than 50 years pushes the agricultural commodity prices to record highs. Corn and soyabean prices surged to record highs on Thursday, surpassing the peaks of the 2007-08 crisis that sparked food riots in more than 30 countries. Wheat prices are not yet at record levels but have rallied more than 50% in five weeks… ‘I’ve been in the business more than 30 years and this is by far and away the most serious weather issue and supply and demand problem that I have seen by a mile,’ said a senior executive at a trading house. ‘It’s not even comparable to 2007-08.”

July 16 – Bloomberg (Joshua Zumbrun and Mark Drajem): “Cloudless skies seldom look so ominous. A worst-in-a-generation drought from Indiana to Arkansas to California is damaging crops, rural economies, and threatening to drive food prices to record levels. Agriculture, though a small part of the $15.5 trillion U.S. economy, had been one of the most resilient industries in the past three years as the country struggled to recover from the recession. ‘It might be a $50 billion event for the economy as it blends into everything over the next four quarters,’ said Michael Swanson, agricultural economist at Wells Fargo…, the largest commercial agriculture lender. ‘Instead of retreating from record highs, food prices will advance.’”

The CRB index jumped 3.6% this week (down 0.2% y-t-d). The Goldman Sachs Commodities Index surged 4.9% (up 1.1%). Spot Gold slipped 0.3% to $1,585 (up 1.3%). Silver was down 0.2% to $27.30 (down 2.2%). September Crude jumped $4.33 to $91.83 (down 7%). August Gasoline gained 4.5% (up 11%), and July Natural Gas jumped 7.2% (up 3.1%). September Copper declined 1.6% (up 0.3%). September Wheat rose 11.3% (up 45%) and September Corn jumped 11.3% (up 28%).

China Watch:

July 19 – Reuters (Carrie Ho): “China's big four state banks doubled their pace of lending in the first half of July from a month earlier, although Chinese banks' total new lending in the month is expected to fall by about a third to 650 billion yuan ($102bn)… The surge in the big banks' lending, estimated at 50 billion yuan in the first half of the month, in large part reflects a pickup in borrowing by government-led investment programmes, the paper said. Last month, the closely watched but highly volatile figure for total new bank lending rose to a three-month high of 919.8 billion yuan…”

July 17 – Bloomberg: “China’s power consumption in June rose 4.3% y/y to 413.6b kilowatt hours, the National Energy Administration said… Power consumption rose 5.5%... for the first six months of this year…”

July 20 – Bloomberg: “The local media dubbed it the ‘King of All Sales.’ A plot of residential land in Beijing’s Haidian district sold at auction on July 10 for a record 2.63 billion yuan ($413 million), or 33,831 yuan per square meter (10.76 square feet). That makes it the most expensive tract ever sold in the capital, higher than the previous record set in 2009, when Chinese property was in the middle of a price bubble that started deflating last year.”

July 19 – Bloomberg (Katia Porzecanski and Eliana Raszewski): “Chinese developers face ‘significant liquidity issues’ and rising funding costs after regulators curbed borrowing through trust companies and property sales fell, according to KPMG LLP. Although there are ‘indications’ that restrictions on real estate trusts may ease soon, the impact is unclear with investor sentiment changing… Growth in Chinese developers’ new funding slumped by almost 16 percentage points to 5.7% in the first half from a year earlier, after the nation’s home sales dropped 6.5% as the government maintained property curbs to stem speculation…”

July 17 – Bloomberg: “China’s railway infrastructure investment may double in the second half of this year from the first six months, aiding efforts to reverse a slowdown in the world’s second-biggest economy. Full-year spending will be 448.3 billion yuan ($70.3bn) according to… the National Development and Reform Commission’s Anhui branch.”

July 19 – Reuters (Aileen Wang and Nick Edwards): “China's bank lending to the real estate sector rebounded between April and June on recovering property sales and changing market sentiment… Chinese banks lent 322.6 billion yuan ($50.64bn) to property developers and home buyers in the second quarter, up 20% from the year earlier period. The surge followed a 54% decline in the first quarter and a drop of 38% in 2011… Property loans accounted for 12.3% of total new loans issued in the first half of this year, up from 10.2% in the first quarter… Outstanding mortgage loans at the end of June rose 11% from a year earlier to 7.49 trillion yuan, while outstanding loans to property developers rose 11.3% to 2.92 trillion yuan over the same period.”

India Watch:

July 18 – Bloomberg (Anurag Joshi and Ruth David): “While Indian companies are on track for record bond sales this year, their debt burdens remain half those of the region’s average… Issuance rose 42% this year to 1.1 trillion rupees ($20bn), set to challenge the 1.9 trillion rupees for all of 2010… Equity offerings fell 25% as Asia’s third-largest economy grew at the slowest pace since 2003.”

Latin America Watch:

July 13 – Bloomberg (Francisco Marcelino): “Banco do Brasil SA, Latin America’s biggest bank by assets, increased lending almost 21% in the second quarter, a rate near the high end of the company’s forecast after cutting borrowing rates for consumers… The bank expects lending to increase 17% to 21% in 2012, according to a regulatory filing in February.”

July 20 – Bloomberg (Eliana Raszewski): “Argentina’s industrial production fell more than 4% for a second straight month in June, the biggest two-month drop in a decade, as slowing growth in Brazil undermines automobile exports and steel production. Output fell 4.7% last month from a year earlier…”

July 18 – Bloomberg (Katia Porzecanski and Eliana Raszewski): “Argentine interest rates are falling at the fastest pace in eight months as the government seeks to stoke growth by persuading banks to cut borrowing costs. The average rate on 30-day deposits plunged 1.75 percentage point to 11.4%... the day before La Nacion reported… that Interior Commerce Secretary Guillermo Moreno had asked lenders to reduce the so-called badlar rate, a benchmark for loans.”

European Economy Watch:

July 20 – Bloomberg (Gonzalo Vina): “Britain had a bigger budget deficit than economists forecast in June, casting fresh doubt on whether Chancellor of the Exchequer George Osborne can meet his full- year fiscal goals. The shortfall, which excludes government support for banks, was 14.4 billion pounds ($23bn) compared with 13.9 billion pounds a year earlier…”

July 18 – Bloomberg (Alexis Xydias): “Analysts are cutting European profit forecasts at the fastest rate since 2009 as the region heads for a recession and growth in China slows for a sixth quarter. Euro Stoxx 50 Index companies will earn 240 euros a share in 2012, 6.8% more than in 2011, according to more than 12,000 estimates compiled by Bloomberg. That compares with a 19% gain predicted at the start of the year.”

July 17 – Bloomberg (Lorenzo Totaro): “About one in 17 Italians lived in absolute poverty last year as rising unemployment made it harder for households to reach an acceptable living standard. The number of Italians living in absolute poverty conditions reached 3.4 million in 2011… That’s equivalent to 5.7% of the population, up from 5.2% in 2010…”

Global Economy Watch:

July 20 – Bloomberg (Christine Harper): “Wall Street’s five biggest banks reported the worst start to a year since 2008. They’re still asking investors to be patient. JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley had combined first-half revenue of $161 billion, down 4.5% from 2011 and the lowest since $135 billion four years ago. The firms blamed the decline on low interest rates and a drop in trading and deal-making driven by concerns about European government finances and slowing growth in the U.S. and China.”

Central Bank Watch:

July 18 – Bloomberg (Jeff Kearns): “Federal Reserve Chairman Ben S. Bernanke said U.S. central bankers are capable of removing record stimulus from the financial system and raising interest rates when needed to avoid triggering inflation. ‘It will be a similar pattern to what we’ve seen in previous episodes where the Fed cut rates, provided support for the recovery, and when the recovery reached a point of takeoff where it could support itself on its own, then the Fed pulled back, took away the punch bowl,’ Bernanke told the House Financial Service Committee…”

U.S. Bubble Economy Watch:

July 19 – Bloomberg (Shobhana Chandra): “The most Americans in six months said the economy in July was getting worse, indicating the slowdown in hiring is dimming moods as the third quarter begins. The share of households viewing the U.S. as heading in the wrong direction rose to 36%, the highest since January, from 33% in June.”

July 16 – Bloomberg (Alex Kowalski): “Retail sales in the U.S. unexpectedly declined for a third straight month in June, a sign limited employment gains are taking a toll on the biggest part of the economy. The 0.5% drop followed a 0.2% decrease in May… Purchases last fell for three or more months in July through December 2008.”

July 16 – Bloomberg (Steven Church): “Busted land deals and empty subdivisions bankrupted more governmental entities in Brian C. Doyle’s home state than anywhere in America. With the recent financial collapse of three of its cities, it might be easy to assume he’s from California. Doyle, however, lives in Nebraska. Quirks in local, state and federal law have made Nebraska home to almost one-fifth of the more than 220 Chapter 9 bankruptcies filed in the U.S. since 1981…”

July 17 – Bloomberg (Sarah Mulholland): “Landlords are piling the most debt onto commercial properties in five years as Wall Street banks bundle the loans into bonds to meet rising demand from investors seeking high yields amid record-low interest rates. The size of mortgages bundled into bonds will surpass 100% of building values for the first time since 2007, before the market shut down amid the worst financial crisis in seven decades, according to Moody’s… That measure of leverage on loans tied to everything from skyscrapers to strip malls is poised to climb 4.3 percentage points this quarter… Lenders are offering larger loans to win business as borrowers look to pay off a wave of debt taken out during the real estate bubble and as yield-starved investors are pushed toward riskier assets. More generous mortgages, a boon for landlords who need to refinance debt, may fuel concern that banks are reverting to practices that led to record defaults as late payments rise above 10%.”

July 19 – Bloomberg (Elise Young): “The U.S. Government Accountability Office is seeking information about toll increases and expenditures from operators of bridges and tunnels in New York, New Jersey and Pennsylvania… Passenger-car peak charges at the New York-New Jersey crossings rose last year to $9.50 for electronic transactions and $12 for cash, and are to increase again in December.”

Muni Watch:

July 19 – Bloomberg (Brian Chappatta): “Bankruptcy decisions by Stockton and San Bernardino in California signal more cities may be losing their willingness to pay debt obligations, Moody’s… said. ‘The looming defaults by Stockton and San Bernardino raise the possibility that distressed municipalities -- in California and, perhaps, elsewhere -- will begin to view debt service as a discretionary budget item, and that defaults will increase,’ Anne Van Praagh, a managing director at the ratings company, said…”

July 18 – Bloomberg (Gillian White): “Municipal-debt issuance is on a pace for a record annual increase as yields close to the lowest in a generation spur even the worst-rated states and cities to refinance borrowings. Federal Reserve Chairman Ben S. Bernanke’s policy of keeping the benchmark overnight interest rate close to zero is helping pad the coffers of issuers whose budgets are rebounding from the recession that ended in 2009… Municipalities have sold $195 billion of long-term, fixed-rate debt this year, 73% more than the same period in 2011… Refinancing is helping depress yields by contributing to a historic $142 billion flowing to bondholders in the three months through July, which they can funnel back into munis, according to Citigroup Inc.”