Saturday, December 6, 2014

Weekly Commentary, April 26, 2013: The Global Reflation Trade

April 26 – Financial Times (Michael Steen): “Germany’s Bundesbank has criticized the bond-buying program designed by the European Central Bank to save the euro, questioning whether it is really necessary and suggesting it represents a great risk to taxpayers. Bundesbank president Jens Weidmann has been public from the outset in his institution’s opposition to the Outright Monetary Transactions program launched in September by Mario Draghi, ECB president, after pledging to do ‘whatever it takes’ to save the euro. But revealed in an opinion written by the Bundesbank for the German constitutional court are a series of detailed objections to the plan…”

April 26 – Bloomberg (Jana Randow): “The Bundesbank criticized the European Central Bank’s bond-buying plan in an opinion for Germany’s Constitutional Court, saying diverging interest rates within the euro region aren’t necessarily something the ECB should fix. ‘Even though monetary policy is having different effects within the euro area, it is questionable whether these differences constitute a malfunctioning to be addressed by monetary policy,’ the Bundesbank wrote in an opinion… dated Dec. 21… Rising sovereign bond yields ‘cannot be used definitively as an explanation for a disturbance of monetary- policy transmission,’ the Bundesbank opinion says. Germany’s top court has scheduled hearings for June 11 and 12 to look into cases challenging the nation’s participation in the European Stability Mechanism and ECB policies… ‘It’s not possible to say whether a ‘distortion’ in yield developments for sovereign bonds is due to fundamentally justified causes or whether there are potential exaggerations, irrationalities or other forms of inefficiencies… Higher refinancing costs for the private sector could also reflect higher national fiscal risks… That wouldn’t be a development for monetary policy to address, but rather a direct consequence of national fiscal policy.”

Draghi’s OMT (Outright Monetary Transactions) Plan has been heralded as “one of the most successful central bank operations in history”. After trading above 7.50% last summer, Spanish yields ended the week at 4.26%. Italian yields closed out the week at 4.05%, down from July 2012’s 6.50%. Since last summer, Spain’s economy and fiscal standing have deteriorated significantly. Italy’s economy has weakened and its political situation has become more unstable. Yet fundamentals have mattered little in the market for pricing Spanish and Italian debt, not with Draghi’s market backstop “bazooka” ready for action (and the Japanese apparently lined up to buy and the speculators lined up to front-run the Japanese).

It is widely expected that the German constitutional court will not rule against the ECB’s OMT. I have argued that Draghi’s market backstop altered European and global finance. Anytime the marketplace moves to place appropriate (based upon individual country fundamentals) risk premiums on troubled European borrowers, debt loads for the likes of Spain and Italy quickly turn unmanageable. The “Draghi Plan” placed the ECB’s balance sheet – open-ended purchases/“money printing” – as support underpinning troubled borrowers. Draghi acted despite strong opposition from German’s Bundesbank.

The Bundesbank has now detailed its objections in a 29 page document. Interestingly, the German central bank took exception to Draghi’s assurances that the ECB would guarantee the irreversibility of the euro. That’s not within a central bank’s mandate. The Bundesbank also questioned the credibility of the “conditionality” aspect of the OMT (troubled countries must agree to strict bailout terms before the ECB will purchase their bonds). The Germans noted that ECB liquidity assistance provided to Greek banks had been used to buy Greek government debt. “Monetary policy thus enabled the financing of a state by making liquidity available, although the conditions of a fiscal help program were not being met and fiscal policy had stopped the payment of further aid.” The German central bank also objected to the ECB purchasing risky debt at taxpayers’ expense, as well as the ECB’s loosening of collateral requirements.

I’ve always questioned the legitimacy of the ECB’s open-ended market backstop in the face of strong Bundesbank opposition. Yet with global QE liquidity abundantly available, the markets have felt no need to fret OMT issues. And, clearly, Japan’s recent incredible QE measures have further inflated European (and global) bond prices. I’ll assume the Japanese effect will have dissipated by the time of the German Constitutional Court ruling expected this summer. I’ll further presume that the issue of the OMT, the ECB, troubled European borrowers and reform backsliding will be front and center heading into this fall’s German elections. The Bundesbank is held in notably high regard by the German people.

April 25 - Dow Jones (Lingling Wei): “Chinese regulators are investigating certain bond-trading activities that could amplify risks in one of the world's fastest-growing debt markets, according to people with direct knowledge of the matter, after a recent slew of arrests of traders and other fixed-income personnel at Chinese financial institutions. The move, which follows recent regulatory actions aimed at cutting risks in China’s financial system, represents further evidence that Chinese authorities are taking seriously the country’s mounting debt load, especially funds raised outside of traditional banking channels…. The regulators are especially worried about trades used by banks or brokerage firms to move bonds off their balances sheets - which would move the bonds away from the scrutiny of regulators who are trying to limit the overall surge in domestic credit… China’s bond market, totaling more than 24 trillion yuan ($3.8 trillion) in debt outstanding, is the second largest in Asia after Japan.”

Moving along to another key Fault Line, there were further anecdotes this week supporting the view of unfolding Chinese financial fragility. The Shanghai Composite dropped 3.0% this week, with Chinese stocks notable nonparticipants in this week’s emerging market equities rally. Additional data confirmed economic sluggishness, while top government officials convened a special meeting to address economic issues. 

April 26 – Bloomberg: “Borrowing costs for top-rated Chinese companies rose to a three-month high as the central bank’s probe into the $3.7 trillion interbank bond market drove investors into safer government securities. The People’s Bank of China asked market participants to examine trading histories as it cracks down on short-term transactions designed to bypass month-end risk evaluations… The investigation will force some investors to cut their bond investments as they can no longer ask others to hold the debt during regulatory reviews, according to Bank of America Merrill Lynch and Guotai Junan Securities Co. That may damp demand just as Premier Li Keqiang seeks to spur fundraising to revive the world’s second-biggest economy… ‘The bond market investigation is intensifying,’ Ethan Mou… strategist at Bank of America Merrill Lynch…said… ‘Many small banks, securities companies and funds are de-leveraging their credit holdings due to fear of exposure…’ ‘As growth slows, pressure on the government is building to loosen policy further,’ Zhang Zhiwei, Nomura’s chief China economist in Hong Kong, said… The Standing Committee’s comments show ‘the senior leadership has reached a consensus to tolerate slower growth’ and indicate that policy stimulus is unlikely, he said.”

I’m not about to run around the block shouting “the end of the financial system as we know it!” after Chinese corporate bond spreads widened to three-month highs. At the same time, talk of “de-leveraging” and heightened risk-aversion in China gets me keenly focused on Bubble analysis. My view holds that China is in the midst of a historic Credit Bubble with myriad unappreciated fragilities. I believe the Chinese government’s move to address asset Bubble risk coupled with efforts to more tightly regulate its fledgling (but gigantic!) bond markets and “shadow banking” system may mark a major Bubble inflection point.

Recall that cracks in subprime in the Spring of ’07 marked the beginning of the end of the great U.S. mortgage finance Bubble, although few at the time appreciated either the significance of subprime or systemic (financial and economic) fragilities. Actually, most at the time were quite dismissive of the view that subprime was even relevant.

Major Bubbles at some point inevitably turn susceptible to the marginal risky borrower losing access to cheap finance. Tightening might initially be imposed by the authorities or it could just be the marketplace beginning its eventual transition from greed to fear. And the larger the Bubble and the greater the excesses, the more high-risk borrowers and market distortions tend to dominate late-cycle (“terminal phase”) Credit expansion. The more protracted the Bubble, the more the entire system seems determined to push the risk envelope. And, best I can tell, in this regard risky Chinese Credit and attendant fragilities are at a grander scale than U.S. subprime.

I often ponder the nature of “subprime” lending, but this week I also found myself contemplating dynamics going back to the nineties “technology” Bubble. During that Bubble period, the media was absolutely infatuated with New Era and New Paradigm analysis. Technological innovation was making the economy more efficient and productive. And it was all right there in the data, indisputable, for all to see! Chairman Greenspan argued that the productivity revolution had fundamentally altered the inflation backdrop, allowing a higher “speed limit” for the U.S. economy. The Fed could err on the side of accommodating sound economic growth with low rates, with the tech revolution and economic paradigm shift justifying higher securities and asset prices. It doesn’t seem an inopportune time to be reminded that policy and conventional wisdom can be absolutely flawed. Especially when it comes to speculative markets, what is recognized as obvious can be susceptible to the less than obvious.

Greenspan and others disregarded key Bubble aspects. Sure, technology was improving efficiencies in the real economy. But integral to the so-called “productivity revolution” was actually an epic increase in capacity to manufacture technology products. And the longer over-liquefied and exuberant markets were allowed to run, the greater the degree of financial and economic distortion – the vast majority residing within the technology industry.

On the real economy side of the equation, virtually unlimited cheap finance spurred massive technology over-investment. On the financial side, huge speculative excess just accumulated- in stocks, bonds, derivatives and M&A. Importantly, the Fed’s Bubble accommodation proved highly destabilizing. When the equity and corporate debt Bubbles belatedly burst, rapid industry expansion abruptly reversed course and the true scope of boom-time excess began to surface.

So, what on earth could the tech Bubble have to do with the present? Well, the unimpressive performance of the “emerging markets” has been garnering a lot of attention. Commodities prices have been surprisingly weak in the face of massive global central bank quantitative easing measures. How could this be? The technology revolution thesis was undeniable; the investment opportunities obviously unprecedented. Global central bank policies have ensured an undeniable “global reflation” thesis; the investment opportunities have been seemingly unprecedented. Tech was a major Bubble. The emerging markets and the global “reflation trade”?

The longer the tech Bubble inflation was accommodated the more internal boom-time technology industry dynamics came to dominate – actually outweighing more generalized demand for technology products. The inundation of the industry with cheap finance ensured massive over-investment, mal-investment and associated shenanigans. Basically, Bubble dynamics doomed the nineties tech boom. One might today contemplate to what extent Bubble dynamics have “doomed” the emerging markets.

Most analysts remain bullish. They note that developing central banks are sitting on treasure troves of international reserves, ensuring that these financial systems can readily manage the type of “hot money” outflows that proved catastrophic back in the nineties. Besides, with endless QE and a world awash in liquidity, there’s little reason to fret capital flight. It’s still commonly argued that the emerging economies have significantly more attractive debt profiles than many developed countries. And most extrapolate 7-8% Chinese growth as far as the eye can see. I suspect these views are too complacent.

Extremely loose financial conditions post the 2008 crisis fueled unprecedented emerging economy debt growth. I have highlighted the historic growth in Chinese Credit. While not on the same scale, major (and compounding) Credit expansions have transformed finance in Brazil, India, Russia, Eastern Europe and seemingly throughout the entire developing world universe. These economies have been on the receiving end of both unmatched direct investment and speculative flows.

As such, when it comes to “global reflation,” do the emerging markets remain an ongoing beneficiary? Or, have things quietly, but important, evolved? Did overheated “developing” Credit systems and economies evolve to the point of actually becoming the driving force behind global reflation? While global investors and speculators fixate on endless QE, would time be better spent these days focusing on domestic Credit systems throughout the “emerging” world? If so, then one must consider the possibility that “developing” Bubble fragility has been weighing on commodities prices. At the same time, a faltering commodities boom would work to tighten lending and financial conditions for the commodities players, while also tending to foster some isolated risk aversion and, perhaps, even less vigor for “risk on” overall. Has speculation, over-investment, mal-investment and shenanigans associated with all things “global reflation” ensured a huge bust?

The accommodation associated with the Fed-orchestrated 1998 bailout of Long-Term Capital Management was instrumental in inciting “blow-off” technology Bubble excesses. It is my view that ongoing post-2008 crisis policy measures have fueled a protracted period of unprecedented excess throughout the emerging economies and Credit systems. I would posit that most “developing” financial systems and economic structures are particularly susceptible to prolonged boom-time maladjustment. At least on a historical basis, “emerging” Credit systems have demonstrated a proclivity for runaway inflations.

The conventional view holds that large reserve positions safeguard against destabilizing outflows. One could argue that this perception has only worked to entice unprecedented speculative inflows. Federal Reserve policies have instilled a market perception of endless dollar liquidity, dollar devaluation, and robust global reflationary forces. This backdrop has incited enormous dollar-denominated borrowings by governments, corporations and financial institutions throughout the emerging economies.

European economic weakness has increased “global reflation” and “developing” economy vulnerabilities. At the same time, the Draghi Plan and Fed open-ended QE stoked yet another bout of destabilizing global speculative excess. And it seems that Japan’s desperate QE measures have put the icing on the cake in terms of global perceptions of endless liquidity. Ironically, the belief that Japanese institutions and retail investors will shun “developing” debt in favor of “developed” has worked to the relative disadvantage of the emerging markets (in a world dominated by performance-chasing and trend-following speculation). Meanwhile, the Fed’s $85bn monthly QE has provided a competitive advantage to U.S. securities, especially beloved equities.

And as U.S. stocks outperform the world, a resurgent “King Dollar” dynamic supports dollar appreciation when seemingly the entire world has positioned for dollar devaluation. It seems as if a backdrop especially conducive to testing the “Reflation Trade” Bubble is materializing. As always, the timing of Bubble unwinds is fraught with great uncertainty.

For the Week:

The S&P500 gained 1.7% (up 10.9% y-t-d), and the Dow gained 1.1% (up 12.3%). The Banks jumped 3.2% (up 10.3%), and the Broker/Dealers gained 2.6% (up 17.9%). The Morgan Stanley Cyclicals were up 2.5% (up 9.5%), and Transports gained 1.4% (up 15.3%). The Morgan Stanley Consumer index slipped 0.5% (up 18.6%), while the Utilities gained 0.6% (up 17.0%). The S&P 400 MidCaps rose 1.8% (up 11.8%), and the small cap Russell 2000 jumped 2.5% (up 10.1%). The Nasdaq100 advanced 2.2% (up 6.8%), and the Morgan Stanley High Tech index jumped 2.5% (up 4.7%). The Semiconductors rallied 4.4% (up 13.3%). The InteractiveWeek Internet index gained 2.5% (up 9.7%). The Biotechs were little changed (up 24.0%). With bullion rallying $58, the HUI gold index recovered 3.0% (down 37.8%). 

One-month Treasury bill rates ended the week at 3 bps and 3-month rates closed at 5 bps. Two-year government yields were down 2 bps to 0.21%. Five-year T-note yields ended the week 2 bps lower to 0.68%. Ten-year yields fell 4 bps to 1.66%. Long bond yields were little changed at 2.86%. Benchmark Fannie MBS yields were down 8 bps to 2.36%. The spread between benchmark MBS and 10-year Treasury yields narrowed 4 to 70 bps. The implied yield on December 2014 eurodollar futures declined 2 bps to 0.45%. The two-year dollar swap spread increased one to 15 bps, and the 10-year swap spread gained one to 18 bps. Corporate bond spreads narrowed. An index of investment grade bond risk narrowed 5 to a three-year low 78 bps. An index of junk bond risk sank 25 to 382 bps (low since 10/07). An index of emerging market debt risk declined one to 287 bps.

Debt issuance was strong. Investment grade issuers included Morgan Stanley $5.65bn, Microsoft $1.95bn, Goldman Sachs $1.25bn, Citigroup $1.25bn, Nike $1.0bn, Cox Communications $1.0bn, Regions Financial $750 million, and Hamilton College $100 million.

Junk bond funds saw inflows increase to $521 million (from Lipper). Junk issuers included Regency Energy $600 million, Resolute Forest Products $600 million, CST Brands $500 million, Hiland Partners $500 million, Realogy Group $500 million, AES $500 million, Rex Energy $350 million, Spencer Spirit $160 million and Associated Materials $100 million.

Convertible debt issuers included Pennymac $250 million and Supernus Pharmaceuticals $75 million. 

International issuers included African Development Bank $2.17bn, Boligkreditt $1.0bn, Costa Rica $1.0bn, Neder Waterschapsbank $900 million, Toronto Dominion Bank $2.25bn, Transport de Gas Peru $850 million, Schaeffler Finance $850 million, Panama $750 million, Turkiye Bankasi $750 million, Uralkali $650 million, Sinochem $600 million, Promsvyazbank $600 million, Saci Falabella $600 million, Andrade Gutier $500 million, Korea Resources $500 million, Credit Bank of Moscow $500 million, Far Eastern Shipping $500 million, Banco Sudameris $300 million and International Bank of Reconstruction & Development $250 million.

Italian 10-yr yields fell 16 bps to 4.05% (down 45bps y-t-d). Spain's 10-year yields sank 34 bps to 4.26% (down 101bps). German bund yields declined 4 bps to 1.21% (down 12bps), and French yields fell 5 bps to 1.73% (down 27bps). The French to German 10-year bond spread narrowed one to 52 bps. Ten-year Portuguese yields dropped 21 bps to 5.77% (down 98bps). Greek 10-year note yields increased 5 bps to 11.17% (up 70bps). U.K. 10-year gilt yields were up 2 bps to 1.68% (down 14bps).

The German DAX equities index rallied 4.8% for the week (up 2.7% y-t-d). Spain's IBEX 35 equities index jumped 4.8% (up 1.6%). Italy's FTSE MIB surged 5.1% (up 1.8%). Japanese 10-year "JGB" yields ended the week up a basis point to 0.58% (down 20bps). Japan's Nikkei jumped 4.3% (up 33.6%). Emerging markets were mixed. Brazil's Bovespa equities index increased 0.6% (down 11.0%), while Mexico's Bolsa declined 2.1% (down 4.1%). South Korea's Kospi index rallied 2.0% (down 2.7%). India’s Sensex equities index jumped 2.1% (down 0.7%). China’s Shanghai Exchange sank 3.0% (down 4.0%).

Freddie Mac 30-year fixed mortgage rates dipped a basis point to a 14-week low 3.40% (down 48bps y-o-y). Fifteen-year fixed rates were down 3 bps to 2.61% (down 51bps). One-year ARM rates declined one basis point to 2.62% (down 12bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 2 bps to 3.92% (down 53bps).

Federal Reserve Credit surged $29.9bn to a record $3.271 TN. Fed Credit expanded $485bn over the past 29 weeks. Over the past year, Fed Credit expanded $410bn, or 14.3%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $662bn y-o-y, or 6.3%, to a record $11.097 TN. Over two years, reserves were $1.427 TN higher, for 15% growth.

M2 (narrow) "money" supply surged $44.4bn to a record $10.536 TN. "Narrow money" expanded 6.7% ($662bn) over the past year. For the week, Currency increased $2.7bn. Demand and Checkable Deposits jumped $69.3bn, while Savings Deposits fell $24bn. Small Denominated Deposits declined $2.5bn. Retail Money Funds dipped $1.1bn.

Money market fund assets declined $2.0bn to a 23-week low $2.593 TN. Money Fund assets were up $11bn from a year ago.

Total Commercial Paper outstanding declined $5.6bn this week to $1.010 TN. CP has declined $56bn y-t-d, while having expanded $84bn, or 9.1%, over the past year. 

Currency and 'Currency War' Watch: 

The U.S. dollar index slipped 0.3% to 82.50 (up 3.4% y-t-d). For the week on the upside, the British pound increased 1.6%, the Japanese yen 1.5%, the South African rand 1.4%, the Canadian dollar 1.0%, the Mexican peso 1.0%, the New Zealand dollar 0.7%, the Brazilian real 0.6%, the Taiwanese dollar 0.6%, the South Korean won 0.4%, and the Singapore dollar 0.1%. For the week on the downside, the Swiss franc declined 1.0%, the Norwegian krone 0.5%, the Swedish krona 0.5%, the Danish krone 0.2% and the euro 0.2%.

Commodities Watch: 

April 23 – Bloomberg (Whitney McFerron): “Goldman Sachs Group Inc. cut its ‘near-term’ outlook for commodities and reduced forecasts for oil and coffee amid prospects for weak demand from China to Europe. The bank also exited a bet on lower gold prices…. ‘Commodity returns have dropped sharply so far in April as weaker-than-expected macroeconomic data releases in the U.S., Europe and China furthered concerns around global economic growth,’ … Samantha Dart said… ‘The negative sentiment in the market has weighed on cyclical commodity prices in particular.’” 

The CRB index recovered 0.8% this week (down 3.3% y-t-d). The Goldman Sachs Commodities Index gained 2.4% (down 3.8%). Spot Gold rallied 4.1% to $1,462 (down 12.7%). Silver was up 3.4% to $23.79 (down 21%). June Crude jumped $4.73 to $93.00 (up 1%). May Gasoline gained 2.3% (up 3%), while May Natural Gas fell 4.8% (up 26%). July Copper increased 0.7% (down 13%). May Wheat fell 2.9% (down 12%), and May Corn declined 1.2% (down 8%).

U.S. Bubble Economy Watch: 

April 26 – Bloomberg (Shobhana Chandra): “The U.S. economy grew less than forecast in the first quarter as a drop in defense outlays undercut the biggest increase in consumer spending in two years. Gross domestic product rose at a 2.5% annualized rate following a 0.4% fourth-quarter advance… The median estimate of 86 economists surveyed by Bloomberg called for a 3% gain.”

Federal Reserve Watch: 

April 25 – Bloomberg (Steve Matthews and Jeff Kearns): “Debate among Federal Reserve policy makers is shifting away from the timing of a reduction in bond buying to the need to extend record stimulus as inflation cools and 11.7 million Americans remain jobless. At their meeting last month, several members of the Federal Open Market Committee advocated slowing purchases and stopping them by year-end. Since then, seven have voiced support for maintaining the current pace…”

Central Bank Watch:

April 25 – Bloomberg (Sarah Jones): “Central banks, guardians of the world’s $11 trillion in foreign-exchange reserves, are buying stocks in record amounts as falling bond yields push even risk- averse investors toward equities. In a survey of 60 central bankers this month by Central Banking Publications and Royal Bank of Scotland Group Plc, 23% said they own shares or plan to buy them. The Bank of Japan, holder of the second-biggest reserves, said… it will more than double investments in equity exchange-traded funds to 3.5 trillion yen ($35.2bn) by 2014. The Bank of Israel bought stocks for the first time last year while the Swiss National Bank and the Czech National Bank have boosted their holdings to at least 10% of reserves. ‘In the last year or so, I have spoken with 103 central banks on diversification,’ Gary Smith… global head of official institutions at BNP Paribas Investment Partners, which oversees about $649 billion, said… ‘If reserves are growing, so are diversification pressures. Equities are not for every bank tomorrow, but more are continuing down this path.’” 

April 26 – Bloomberg (Stefan Riecher): “European Central Bank board member Joerg Asmussen said there are risks in keeping interest rates low for a long time. ‘If interest rates stay too low for too long this would reduce the incentives for governments, corporates and banks to adjust,’ Asmussen said… ‘So the costs of very low interest rates are real.’ He also said the effect of any further rate reductions may only be ‘limited’ because they are not being passed on in the economies that need them most.”

Global Bubble Watch: 

April 26 – MarketNews International (Yali N'Diaye): “‘Everywhere’ all asset markets are ‘bubbled,’ especially in countries implementing quantitative easing, and a ‘realization by asset holders that current policies are not producing real growth’ would send those bubbles bursting, PIMCO Founder and Co-Chief Investment Officer Bill Gross told MNI. The United States, the United Kingdom , and Japan - the latter’s central bank having announced a massive asset purchase program earlier this month - would all experience a burst of bubbles across asset classes, be it bonds or stocks, he warned.”

April 24 – Bloomberg (Sandrine Rastello and Kasia Klimasinska): “Treasury Secretary Jacob J. Lew urged Congress to fulfill a U.S. pledge to reinforce the war chest of the International Monetary Fund, saying the lender has helped mitigate financial crises from the Middle East to Europe. ‘When financial instability occurs in many places around the globe, such as in Europe, it creates headwinds for our economy,’ Lew told a House Appropriations subcommittee… ‘Without IMF support, more countries would experience even larger financial stresses, and the U.S. economy would suffer through reduced demand for U.S. exports and lower foreign investment in the United States, threatening millions of jobs.’ President… Obama… asked for Congress to approve a plan on the IMF’s lending capacity that tries to make good on a pledge made 2 1/2 years ago. The 2010 agreement among IMF member nations would double the amount the IMF has readily available for lending to about $717 billion… The administration is seeking to boost the U.S.’s share, or quota, at the… IMF by shifting about $63 billion from an existing credit line. ‘I firmly disagree with the administration that this is simply a bookkeeping entry,’ Campbell, a lawmaker from California, said… ‘Taxpayers would be taking on additional risk with the funds in quota’ instead of in a crisis credit line, he said.”

Global Credit Watch: 

April 24 – Bloomberg (Rainer Buergin): “European Central Bank governing council member Jens Weidmann warned euro members against easing their commitment to the euro region’s debt rules, singling out France as the country that most needs to lead by example. Giving countries that are in bailout programs more time to carry out economic-policy changes means providing them with bigger funds from bailout coffers and possibly even transfers from donor countries, which need political acceptance, Weidmann said… ‘The non-program countries should not repeat the mistakes of 2004 and interpret the reinforced Stability and Growth Pact too flexibly in its first test,’ Weidmann said, referring to the agreed rules of the euro. ‘France especially has an important role model function for the credibility of rules and confidence in the sustainability of public finances.’”

China Bubble Watch: 

April 25 – Bloomberg: “China’s financial and capital account surplus surged in the first quarter as looser monetary policies in developed economies and expectations of yuan gains spurred inflows of funds. The $101.8 billion figure was the biggest since the three months ending December 2010 and compared with $56.1 billion in the same period last year… The capital and financial account returned to a surplus of $20 billion in the fourth quarter of 2012, reversing two quarters of deficits. Capital inflows are being driven by speculation that the People’s Bank of China will tolerate more yuan appreciation and by quantitative easing in Europe, the U.S. and Japan…”

April 26 – Dow Jones: “China will waive tax on the returns from investing in bonds issued by local governments, the Ministry of Finance said Friday, in a move that could encourage investment in such bonds… The waiver applies to bonds issued by local governments since the beginning of 2012…”

April 25 – Bloomberg: “China overtook Germany and the U.S. to become the world’s biggest source of tourists after the number of outbound trips taken by its citizens increased 18.4% last year. Outbound travel from China climbed to 83.2 million trips last year, Ma Yiliang, a researcher at the… China Tourism Academy said… That number has surged more than eight-fold from 2000…”

Japan Watch: 

April 26 – Bloomberg (Toru Fujioka and Andy Sharp): “Bank of Japan board members forecasting an end to more than a decade of deflation may need to add to an already unprecedented monetary stimulus plan should consumer prices fail to align with their projections by October. The nine-member panel yesterday predicted that consumer prices… will rise 0.7% in the year through March, then 1.4% and 1.9% in the following two years. The measure slid 0.5% last month.”

April 23 – Bloomberg (Isabel Reynolds and Takashi Hirokawa): “Japanese Prime Minister Shinzo Abe vowed to use force if necessary to defend islands also claimed by China as tensions rose over visits by his fellow lawmakers to a Tokyo shrine seen in Asia as a symbol of wartime aggression. China and Japan each issued formal protests… over the presence of each other’s vessels in waters around the islands, which lie in an area rich in resources including fish and oil. Abe… told a parliamentary committee that the government would not allow any Chinese boats to land on them. ‘In the unlikely event that they were to land, it would be natural to expel them by force,’ he said. His comments came as 168 Japanese lawmakers visited the Yasukuni Shrine, a day after China and South Korea complained about a weekend visit by Finance Minister Taro Aso.”

Asia Bubble Watch: 

April 23 – Financial Times (Henny Sender): “For many years, Japanese business people believed their economic malaise lay in a cheap South Korean won, rather than anything intrinsic to their country. Once the yen depreciated, all would be well. The Japanese definition of well meant that consumers around the globe would cease to buy Samsung goods and turn to Japanese products instead. Now their thesis is about to be tested. While Samsung is likely to withstand the threat, a weak yen is one of the many challenges facing many other South Korean companies in a world of shrinking total demand. Thanks to Abenomics, massive liquidity in Japan means corporate distress there is diminishing… By contrast, signs of distress in South Korean companies are starting to intensify. The country successfully weathered the 2008 global financial crisis but five years later, it isn’t faring as well. …In South Korea, leverage still remains too high. The top 30 conglomerates have 1,000tn won ($893bn) in debt… In the second half of last year, four of the top 12 groups were unable to cover their interest payments from operating profit… Things may not be as bad as the Asian financial crisis of 1997-1998 when housewives sold their gold to help the country’s finances, but it is worrying nevertheless.”

Latin America Watch: 

April 26 – Bloomberg (Jonathan Levin): “Corp. Geo SAB, Mexico’s second-biggest homebuilder by revenue, plunged the most in 14 years after the company said it would miss an interest payment and that cash tumbled by 84% during the first quarter. The shares fell 22%... in Mexico City trading…”

April 24 – Bloomberg (Ben Bain): “Mexico is attracting a record amount of money from Japan’s $764 billion mutual-fund industry as investors fleeing the Asian nation’s reflation push turn to peso bonds to profit from the currency’s world-beating gain. The funds, known as toshin, increased holdings of Mexican bonds 44% this year to 233 billion yen ($2.34bn) at the end of March… Mexican government peso bonds have returned 31% in yen terms this year, almost twice the advance on local Brazilian debt and triple the gain for South African rand notes…”

Europe Watch: 

April 25 – Bloomberg (Mark Deen): “French jobless claims rose to the highest ever, increasing pressure on President Francois Hollande to revive an economy that has been stalled for two years. The number of people actively looking for work increased by 36,900, or 1.2%, to 3.225 million… The 23rd monthly increase takes the total number of jobseekers past the previous record of 3.195 million, which was set in January 1997…”

April 26 – Bloomberg (Stefan Riecher): “Lending to households and companies in the euro area contracted for an 11th month in March as the region struggled to emerge from recession. Loans to the private sector fell 0.8% from a year earlier after also dropping an annual 0.8% in February…”

Italy Watch: 

April 26 – Bloomberg (Andrew Frye): “Italy’s prime minister-designate, Enrico Letta, made progress in his bid to form a government as Silvio Berlusconi signaled he’ll back the effort. Letta, 46, is stitching together a broad coalition to join his Democratic Party, the largest force in parliament, with Berlusconi, a three-time former prime minister who heads the second-biggest group. Letta met with representatives from various political parties yesterday, and Berlusconi said his lawmakers were encouraged by the discussions.”

Spain Watch: 

April 26 – Bloomberg (Angeline Benoit and Ben Sills): “Spanish Prime Minister Mariano Rajoy is seeking two more years to tackle Europe’s widest budget deficit, testing his counterparts’ promise of greater policy flexibility after unemployment reached a record 27%. Spain’s Cabinet… approved a plan to cut the shortfall of 10.6% of gross domestic product back within the European Union limit of 3% by 2016 instead of 2014 as demanded by the European Commission…”

April 25 – Bloomberg (Angeline Benoit): “Spanish unemployment rose more than economists forecast in the first quarter to the highest in at least 37 years as efforts to tackle the European Union’s biggest budget deficit crimped economic growth. The number of jobless increased to more than 6 million for the first time, climbing to 27.2% of the workforce, compared with 26.02% in the previous three months…”

Germany Watch:

April 25 – Bloomberg (Patrick Donahue): “German Chancellor Angela Merkel rejected a central component of a planned European banking union as she hailed a crackdown on deficits for helping resolve the region’s debt crisis. Merkel said her government opposes a European deposit- insurance mechanism, ‘at least for the foreseeable future,’ urging fellow leaders to forge ahead. She dismissed a turn away from austerity, saying efforts to overcome the crisis are bearing fruit in the form of lower borrowing costs. ‘We always talk a lot about growth in Europe, but we have to ask ourselves what we mean by that,’ Merkel told Germany’s association of savings banks… ‘Growth only on the basis of state financing won’t make us more competitive in Europe.’”

April 24 – Bloomberg (Dorothee Tschampa): “Daimler AG, the world’s third-largest maker of luxury vehicles, cut its 2013 profit forecast after first-quarter earnings tumbled more than analysts expected, burdened by weaker Mercedes-Benz sales in China. Earnings before interest and taxes and excluding one-time items will fall this year rather than match 2012’s 8.1 billion euros ($10.6bn) as previously predicted… Daimler’s first-quarter Ebit plunged 56%. ‘In the first three months of this year, many markets developed worse than expected for economic reasons, especially Western Europe,’ Chief Executive Officer Dieter Zetsche said…” 

April 24 – Bloomberg (Brian Parkin and Patrick Donahue): “A German Finance Ministry official said that budget-cutting rules must allow for flexibility, opening a chink in Chancellor Angela Merkel’s austerity-first policy as the only course to rescue Europe from its debt crisis. Rules governing how the euro area’s 17 members scale back deficits are not absolute and must respond to a shifting economic outlook, Deputy Finance Minister Steffen Kampeter said. He was responding to comments by European Commission President Jose Barroso that the path of austerity had reached its limits.”