Sunday, December 14, 2014

Weekly Commentary, September 6, 2013: Difficult Decisions Ahead

The latest G20 meeting was dominated by deep divisions over Syria in an increasingly divisive global backdrop. The Middle East is precariously divided. In Europe, leaders remain deeply divided over how best to deal with Eurozone issues. The American population is deeply divided on political, social and economic issues. Congress is deeply, deeply divided on seemingly everything. The Federal Reserve is divided on the merits of unconventional measures and the future course of policymaking. The emerging markets (EM) see developing world monetary policy as highly destabilizing, with QE having stoked “hot money” inflows and “tapering” risking problematic outflows.

Within the G20, common interests have been largely supplanted by mistrust and, seemingly, irreconcilable differences. Members these days lack even a European crisis response to try to rally around. I believe the “G” conferences have basically lost the capacity to have real impact on very serious ongoing global financial and economic issues. One could argue that traditional frameworks for myriad key policy decisions – from monetary policy to crisis response to acts of war – are being transformed before our eyes. This ensures added uncertainty in an already uncertain world. Markets see only QE.

The “Credit Bubble Bulletin” focuses (ok, fixates) on Credit. I strive to keep my analysis close to home, steering clear of political debate and geopolitical pontification. Yet Credit – sound or, more pertinently, otherwise – has a profound impact on wealth (creation and destruction) and wealth distribution. Protracted Credit Cycles – with their attendant booms, busts and destruction - have momentous impacts on societies and geopolitics. I work to provide an accurate chronicle of relevant events.

It’s been my thesis that we’re at the late phase of a historic global Credit boom. During much of the Bubble’s upside, the global economic pie was getting bigger. This provided powerful impetus to mutual interests, cooperation and integration. There was the capacity to forge international consensus on various pressing financial and economic issues – as well as even the ability to muster a “coalition of the willing” for major military operations.

The world is transitioning into a quite different environment. Despite desperate measure after desperate measure, a most over-extended global Bubble is convulsing erratically. The economic pie is stagnating - and on its way to contracting. This dynamic ensures an increasingly powerful pull of diverging interests, disagreement, fragmentation and confrontation.

The world has turned increasingly skeptical of U.S. policymaking, certainly including monetary policy. Round the globe, citizens and their leaders have grown tired of cooperating on just about everything - from finance to climate change to global policing. This runs up against heightened need for all of the above in an increasingly disorderly and hostile - faltering Bubble - world.

I have argued that desperate monetary inflation stoked a dangerous divergence between inflated global securities prices and deteriorating fundamental prospects. With U.S. equities near all-time highs, the market and media focus remains on 'Mr. Brightside'. The cautious and darn right skeptical have been discredited and shoved out of the way. It has been easy to disregard the unstable global geopolitical backdrop. It’s been easy to ignore the rapidly deteriorating situation in the Middle East. With the Fed injecting unprecedented amounts of liquidity into overheated markets, it has been effortless – and highly profitable – to ignore risk more generally. Indeed, the bullish view holds that we’re in the initial phase of a new bull market – and, surely, a return to robust global growth, prosperity and cooperation.

There will come a point where the divergence between Bubbling securities markets and a sobering reality is narrowed. The longer massive monetary inflation extends this gap, the more destabilizing the eventual market dislocation. The greater the global market dislocation the greater the strain on economies, societies and alliances. And, in contrast to conventional thinking and that of the Fed, a lot of damage can be wrought in relatively short order when finance is running amuck. It’s reached the point where QE has minimal benefit, while dilly dallying and “tapering” bear great costs.

Yet with global markets having come to wield unprecedented influence on Credit, perceived wealth, economic activity and overall cohesion, the temptation for central banks to continue sustaining market Bubbles is just too great. This dynamic creates great uncertainty, while at the same time further opening the window of opportunity for destabilizing speculative excess.

Understandably focused on economic issues at home, American public opinion is strongly opposed to intervention in Syria. Understandably focused on economic and domestic interests at home, few in the global community are willing to join the U.S. on Syria. President Obama has very Difficult Decisions Ahead.

The Federal Open Market Committee faces its own Difficult Decisions of its own making. It’s notoriously difficult to withdraw monetary accommodation. Central banks are invariably late in removing the punchbowl. Perhaps more pertinent, there is never a painless path to ending aggressive monetary inflation. And that’s precisely why history demonstrates that once the process of “money” printing (currency or “virtual”) is embraced it becomes nearly impossible to dis-embrace. The past five years (or, if you choose, go back 20) have illustrated how one bout of seemingly innocuous monetary inflation invariably begets proliferation and, in the end, intransigent monetary disorder. The big unknown is how this historic global experiment in central bank management of unrestrained, market-based electronic “digital” money and Credit plays itself out.

This is an inopportune time for the emerging markets to face any moderation of Federal Reserve accommodation. But this dilemma was inevitable. When the U.S. and the developed world moved aggressively with post-mortgage finance Bubble reflationary measures, EM was the “fledgling Bubble” poised to be on the receiving end of unparalleled liquidity flows. Global Credit systems and economies diverged. In time, interests would diverge. For going on five years now, loose money and increasingly aggressive QE pushed EM financial and economic Bubbles to precarious extremes. Meanwhile, developed world recoveries badly lagged. The “money” flowed and latent global fragilities mounted.

Over the past year, incredible measures by the ECB, Fed and BOJ have had major effects. EM “terminal phase” Bubble excess was granted a bonus year to wreak havoc. In the U.S., stock prices inflated about 30%, as speculation went into overdrive. Throughout the U.S. corporate debt market (and only to a somewhat lesser extent globally), Bubble excesses ran wild. In the real economy, rapid price inflation reemerged in housing markets across the country. Quite simply, powerful Bubble conditions intensified, and an expanding number of sectors within the economy began to participate.

Considering the backdrop, $85bn monthly QE is inappropriate – I would argue reckless, a 7.3% unemployment rate notwithstanding. But both the global financial and economic spheres have grown addicted to aggressive monetary inflation. EM Bubble fragility has turned conspicuous. There is the global securities market Bubble, most obvious in mis-priced bond markets around the world. There are less appreciated Bubbles in global equities and the “global leveraged speculating community” more generally. All in all, there is ample global financial and economic fragility to ensure the most timid rendition of monetary policy restraint imaginable.

On the one hand, I believe a global re-pricing of debt securities has commenced. On the other, there remains sufficient global monetary inflation and emboldened “animal spirits” to beg the question: How crazy do things get?

Syria is a frightening place. It’s in a tough and rapidly disintegrating region. The situation has regressed into the much feared “proxy war” on too many fronts. And it doesn’t take a wild imagination to see Syria as a catalyst for escalating global tensions that could stumble into a major confrontation. The Russians and Iranians are staring President Obama down.

Meanwhile, outside of crude oil, global markets show minimal concern. After all, analysts suggest it could be up to two more weeks – a veritable eternity for a speculative marketplace - before the President might act. Besides, non-farm payroll data were soft. This is expected to only further embolden the dovish contingent that was already pushing against any move to reduce accommodation (this week from Kocherlakota and Evans). It was another week that illuminated dichotomies. The reality is that the world is in the midst of far-reaching – I’m convinced troubling - changes. The market reality is that primary focus remains on the monetary backdrop.

For the Week:

The S&P500 gained 1.4% (up 16.1% y-t-d), and the Dow added 0.8% (up 13.9%). The Morgan Stanley Consumer index increased 1.1% (up 19.9%), while the Utilities declined 0.9% (up 3.8%). The Banks recovered 1.5% (up 23.2%), and the Broker/Dealers jumped 4.0% (up 44.5%). The Morgan Stanley Cyclicals were 2.5% higher (up 20.4%), and the Transports gained 1.9% (up 20.1%). The S&P 400 MidCaps gained 1.3% (up 17.5%), and the small cap Russell 2000 jumped 1.8% (up 21.2%). The Nasdaq100 rose 1.9% (up 17.8%), and the Morgan Stanley High Tech index surged 3.3% (up 16.4%). The Semiconductors jumped 3.8% (up 23.7%). The InteractiveWeek Internet index rose 3.5% (up 24.2%). The Biotechs surged 5.0% (up 39.6%). Bullion gained $3, though the HUI gold index was little changed (down 42.9%).

One-month Treasury bill rates ended the week at two bps and three-month bill rates closed at two bps. Two-year government yields rose 6 bps to 0.46%. Five-year T-note yields ended the week 12 bps higher at 1.76%. Ten-year yields jumped 15 bps to 2.94%. Long bond yields rose 16 bps to 3.86%. Benchmark Fannie MBS yields advanced 14 bps to 3.71%. The spread between benchmark MBS and 10-year Treasury yields narrowed one to 77 bps. The implied yield on December 2014 eurodollar futures jumped 8 bps to 0.775%. The two-year dollar swap spread was little changed at 16 bps, while the 10-year swap spread declined about one to 18 bps. Corporate bond spreads narrowed. An index of investment grade bond risk narrowed 2 to 82 bps. An index of junk bond risk fell 7 to 399 bps. An index of emerging market (EM) debt risk dropped 10 to 348 bps.

Debt issuance bounced back. Investment grade issuers included Home Depot $3.25bn, Lowes Companies $1.0bn, CME Group $750 million, Starbucks $750 million, Unilever Capital $750 million, Caterpillar $750 million, Branch Banking & Trust $750 million, Nabors Industries $700 million, Ameriprise Financial $600 million, San Diego G&E $450 million, Duke Energy $450 million, Macy's $400 million, and Kohl's $300 million.

Junk bond funds saw outflows of $416 million (from Lipper). Junk issuers this week included Sprint $6.5bn, Ally Financial $750 million, Regency Energy $400 million, Wolverine World $375 million, and Silgan Holdings $300 million.

Convertible debt issuers included Cubist Pharmaceuticals $400 million and Liberty Interactive $350 million.

International dollar debt issuers included International Bank of Reconstruction & Development $5.1bn, Toronto Dominion Bank $3.75bn, Bank of Tokyo-Mitsubishi $3.0bn, Royal Bank of Canada $2.0bn, Asian Development Bank $2.0bn, Bank Nederlandse Gemeenten $1.75bn, Japan Finance Org. for Municipalities $1.5bn, South Korea $1.0bn, Municipality Finance Plc $1.0bn, American Movil $750 million, Nakama RE $300 million and Holcim $250 million.

Ten-year Portuguese yields surged 39 bps to 6.98% (up 23bps y-t-d). Italian 10-yr yields gained 10 bps to 4.50% (unchanged). Spain's 10-year yields slipped a basis point to 4.52% (down 75bps). German bund yields rose 9 bps to 1.95% (up 63bps). French yields were up 8 bps to 2.54% (up 54bps). The French to German 10-year bond spread narrowed one to 59 bps. Greek 10-year note yields rose 19 bps to 10.21% (down 26bps). U.K. 10-year gilt yields jumped 17 bps to 2.94% (up 112bps).

Japan's Nikkei equities index ended the week up 3.5% (up 33.3% y-t-d). Japanese 10-year "JGB" yields jumped 6 bps to 0.71% (down one bp). The German DAX equities index gained 2.1% for the week (up 8.7%). Spain's IBEX 35 equities index was up 4.4% (up 6.0%). Italy's FTSE MIB rose 2.2% (up 4.8%). Emerging markets rallied. Brazil's Bovespa index surged 8.1% (down 11.4%), and Mexico's Bolsa rose increased 1.1% (down 8.7%). South Korea's Kospi index gained 1.5% (down 2.1%). India’s Sensex equities index rallied 3.5% (down 0.8%). China’s Shanghai Exchange jumped 2.0% (down 5.7%).

Freddie Mac 30-year fixed mortgage rates jumped 6 bps to 4.57% (up 102bps y-o-y). Fifteen-year fixed rates rose 5 bps to 3.59% (up 73bps). One-year ARM rates were up 7 bps to 2.71% (up 10bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates 10 bps higher to 4.79% (up 59bps).

Federal Reserve Credit expanded $5.5bn to a record $3.607 TN. Over the past year, Fed Credit was up $809bn, or 29%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $577bn y-o-y, or 5.4%, to $11.177 TN. Over two years, reserves were $951bn higher, for 9% growth.

M2 (narrow) "money" supply jumped $35.9bn to $10.778 TN. "Narrow money" expanded 7.2% ($722bn) over the past year. For the week, Currency increased $2.7bn. Total Checkable Deposits jumped $25.7bn, and Savings Deposits rose $5.2bn. Small Time Deposits declined $3.0bn. Retail Money Funds gained $5.6bn.

Money market fund assets declined $4.9bn to $2.639 TN. Money Fund assets were up $69bn from a year ago, or 2.7%.

Total Commercial Paper outstanding fell $5.1bn to $1.015 TN. CP has declined $51bn y-t-d and $7bn, or 0.7%, over the past year.

Currency and 'Currency War' Watch:

September 5 – Bloomberg (Neal Armstrong and John Detrixhe): “Foreign-exchange trading surged to an average $5.3 trillion a day in April 2013, boosted by greater yen volumes, the Bank for International Settlements said. Trading increased 33% since the same period in 2010… That’s an acceleration from a 20% increase in the three years through 2010. The yen had the biggest jump in trading activity among major currencies, while the euro’s role as the second-most traded currency was reduced. Emerging-market currencies increased their share, with the Mexican peso entering the top 10 most-actively traded currencies. Volumes in the global foreign-exchange market are increasing as traders expand activities in developing nations and banks focus on the currency markets while stricter regulations after the financial crisis threaten earnings from other divisions…”

The U.S. dollar index added 0.1% to 82.146 (up 3.0% y-t-d). For the week on the upside, the New Zealand dollar increased 3.5%, the Brazilian real 3.4%, the Australian dollar 3.2%, the South African rand 2.6%, the Mexican peso 1.6%, the South Korean won 1.6%, the Canadian dollar 1.3%, the British pound 0.8%, the Norwegian krone 0.6%, the Taiwanese dollar 0.3% and the Singapore dollar 0.1%. For the week on the downside, the Japanese yen declined 1.0%, the Swiss franc 0.9% the euro 0.3%, the Danish krone 0.3% and the Swedish krona 0.2%.

Commodities Watch:

The CRB index gained 0.7% this week (down 0.6% y-t-d). The Goldman Sachs Commodities Index jumped 1.1% (up 2.7%). Spot Gold slipped 0.2% to $1,392 (down 17%). Silver rose 1.6% to $23.89 (down 21%). October Crude gained $2.88 to $110.53 (up 20%). October Gasoline declined 1.3% (up 3%), and October Natural Gas fell 1.4% (up 5%). December Copper rallied 0.9% (down 11%). September Wheat dropped 1.3% (down 18%), and September Corn slipped 0.7% (down 30%).

U.S. Fixed Income Bubble Watch:

September 6 – Bloomberg (Sarika Gangar): “Junk-bond sales are extending their lead over last year’s record pace in the U.S. as investors snap up debt that’s been beating investment-grade securities for the longest stretch in more than a decade. Sprint Corp. raised $6.5 billion this week in the largest speculative-grade deal since 2008, leading $249.4 billion of issuance that is $44.8 billion ahead of offerings by this time last year… The gap has more than doubled over the past four months, putting sales on track to surpass 2012’s unprecedented $353.1 billion. Junk bonds, which have returned more than high-grade notes for seven straight months, are getting a boost from buyers seeking securities that offer better protection from rising interest rates.”

September 3 – Bloomberg (Lisa Abramowicz and Liz Capo McCormick): “The worst losses in U.S. debt in at least 37 years are being magnified by investors exiting the market at the same time new regulations prompt Wall Street firms to cut back on trading corporate bonds. Bank of America Merrill Lynch’s U.S. Broad Market Index is on pace to drop 4.41%, the biggest annual loss since at least 1976. Investors pulled $123 billion from bond funds since May, according to TrimTabs… Trading in corporate fixed-income securities is the lowest ever as a proportion of outstanding debt, and volumes in Treasuries are little changed from 2007 levels even though the market has almost tripled to $11.5 trillion, Financial Industry Regulatory Authority and ICAP Plc data show. Bonds are getting riskier even with inflation at bay and corporate profits hitting new highs. ‘When bond investors start to meaningfully divest themselves of their positions, it will be analogous to yelling fire in a crowded theater,’ Michael Underhill, the chief investment officer at Capital Innovations LLC, which manages $1.5 billion, said…”

September 4 – Bloomberg (Brian Chappatta): “The biggest losses since 1999 for municipal debt signal that Detroit’s bankruptcy and 14 weeks of withdrawals from mutual funds are overwhelming historical trends pointing to a rebound in the $3.7 trillion market. Local debt lost 1.6% in August, the steepest drop for the month in 14 years… It marked just the second time in 25 years that the obligations fell in both July and August, a period in which the market usually rallies as investors get cash from coupon and principal payments while issuance dwindles… Benchmark yields are the highest since 2011 and exceed those on Treasuries and AAA company debt by the most in at least 20 months…”

September 4 – Bloomberg (Charles Mead and Matt Robinson): “Verizon Communications Inc.’s plan to sell as much as $50 billion of bonds is helping to put a record year for global issuance back within reach following the slowest month in two years. An initial Verizon offering to help it take full control of its wireless unit may exceed Apple Inc.’s record $17 billion issue in April… The Verizon bonds, along with sales this week by companies from Home Depot Inc. to Unilever, would boost offerings that have fallen $61 billion behind the pace in 2012, when an unprecedented $3.99 trillion was issued… Sales this year had been exceeding 2012 by as much as $144 billion through May… Borrowers would need to sell about $1.5 trillion of securities by year-end to match the record.”

U.S. Bubble Economy Watch:

September 3 – Bloomberg (Whitney Kisling and Nick Taborek): “U.S. companies, which have almost doubled profits since the financial crisis, are losing the benefit of record-low debt expenses as Federal Reserve plans to taper bond purchases send borrowing costs higher. Borrowing costs for Standard & Poor’s 500 Index companies fell to 1.4% of sales the last 12 months, a record low in 11 years of data compiled by Bloomberg. While interest rates on corporate bonds are below the 5.7% average since the start of the financial crisis, yields are increasing the most since 2009 and rose to about 4.3% from a 17-year low of 3.35% in May, as economists project the Fed will start reducing economic stimulus this month. Higher debt costs will reduce buybacks and dividend increases that have boosted returns in the four-year bull market, investors say. Companies that repurchased the most shares or regularly increased payouts beat the benchmark for U.S. equity by more than 27 percentage points since 2009. S&P 500 members returned $82.4 billion to shareholders in dividends last quarter, up from $71.2 billion a year earlier…”

September 5 – Bloomberg (Jeanna Smialek): “Service industries in the U.S. expanded in August at the fastest pace in almost eight years as a pickup in demand encouraged companies to step up hiring, showing the world’s biggest economy is gaining momentum. The Institute for Supply Management’s non-manufacturing index increased to 58.6 from 56 the prior month… The August figure, which exceeded the median forecast of 55, was the strongest since December 2005… The ISM’s measure of orders rose to the highest since February 2011.”

Federal Reserve Watch:

September 6 – Bloomberg (Joshua Zumbrun): “Kansas City Federal Reserve Bank President Esther George, who has consistently dissented against additional stimulus, called for tapering the Fed’s $85 billion in monthly bond buying at its Sept. 17-18 meeting while cautioning that such reductions may prompt market volatility. ‘An appropriate next step toward normalizing monetary policy could be to reduce the pace of purchases from $85 billion to something around $70 billion per month,’ George said… Such a move would be ‘appropriate’ at the next meeting, and future purchases could be ‘split evenly between’ Treasuries and mortgage-backed securities. George voted this year against all five decisions by the Federal Open Market Committee to press on with bond buying, saying the program risks creating imbalances in the economy and financial markets and pushing up long-term inflation expectations.”

September 6 – Bloomberg (Steve Matthews): “Federal Reserve Bank of Chicago President Charles Evans, a voter on policy this year, said the Fed shouldn’t taper its $85 billion in monthly bond buying until inflation and economic growth pick up. ‘To start the wind-down, it will be best to have confidence that the incoming data show that economic growth gained traction during the third quarter of this year and that the transitory factors that we think have held down inflation really do turn out to be transitory,’ Evans said… He has consistently supported record stimulus.”

Global Bubble Watch:

September 4 – Financial Times (Victor Mallet): “Manmohan Singh, Indian prime minister, on Wednesday urged the developed world to help emerging markets by managing an ‘orderly exit’ from the monetary easing policies that have flooded the world with liquidity since the 2008 financial crisis. …Mr Singh said he would emphasize ‘the need for an orderly exit from the unconventional monetary policies being pursed by the developed world for the last few years, so as to avoid damaging the growth prospects of the developing world’.”

September 5 – Bloomberg (Scott Rose and Olga Tanas): “China urged the U.S. to limit global risks from shifts in monetary policy, with Indonesia warning the changing stance is spurring capital outflows as Group of 20 leaders met at a summit in St. Petersburg. An exit from monetary-easing policies poses a major challenge for the world economy, Chinese Vice Finance Minister Zhu Guangyao told reporters… The U.S. should be mindful of a possible ‘very significant spillover effect,’ said Zhu… Emerging markets, which helped pull the world out of a recession after the global financial crisis, now face an exodus of cash and sliding currencies in anticipation of the Federal Reserve’s eventual tapering of its $85 billion in monthly bond purchases.”

September 6 – Bloomberg (Unni Krishnan and Keiko Ujikane): “India reached an agreement to more than triple its bilateral currency-swap line with Japan as Prime Minister Manmohan Singh’s government seeks to stem a record slide in the rupee. The size of the swap agreement was increased to $50 billion from $15 billion… The earlier accord was sealed in December 2011.”

Global Economy Watch:

September 6 – Bloomberg (Greg Quinn): “Canadian employment rose three times faster than economists forecast in August on gains in part-time work and service industries. Employment increased by 59,200 and the jobless rate fell to 7.1% from 7.2%...”

September 5 – Bloomberg (Theophilos Argitis): “Home sales in Canada’s two largest real estate markets continued their surge in August from a year earlier. Sales in Toronto, the largest market, rose 21% from August last year to 7,569 units…, with average prices gaining 5.4%. Vancouver existing home sales rose 52%... Housing-market data are showing few signs of a hard landing after warnings from economists and policy makers that a bubble may have been forming.”

Bursting EM Bubble Watch:

September 2 – Wall Street Journal (Sean McLain and I Made Sentana): “Companies across Asia are facing a debt-repayment crunch as plunging local currencies make it more costly to repay foreign loans, a situation that is exacerbating stresses on the region's economies. Asian companies took out sizable foreign loans in recent years as the U.S. Federal Reserve kept interest rates low and printed money. For firms in nations like India and Indonesia, rates on U.S.-denominated debt were more attractive than local borrowing costs. But the current exodus of capital from emerging markets, amid expectations the Fed will end its period of extraordinary monetary stimulus later this year, has changed that equation. Foreign funds are pulling out of Asian bonds and other assets amid expectations U.S. rates will rise further. That is pushing currencies in Asia sharply lower and raising the cost of repaying U.S.-denominated borrowings.”

September 2 – Financial Times (Ben Bland ): “The gloom surrounding Indonesia continued to deepen on Monday after southeast Asia’s biggest economy posted a record monthly trade deficit and inflation climbed to a four-year high. The trade deficit jumped to $2.3bn, much higher than expected, in July as imports remained strong while exports fell because of the slowdown in China and ongoing troubles in Europe and the US. Annual consumer price inflation rose to 8.8% in August, from 8.6% one month earlier, with economists predicting that inflation may reach double digits by the end of the year, putting pressure on the central bank to continue hiking interest rates. Indonesia has been hit hard by the recent sell-off, which has also ensnared other emerging markets with large current account deficits and a need for foreign financing like Brazil, India, South Africa and Turkey.”

September 2 – Bloomberg (David Yong): “Asia dollar-denominated bonds have dropped below par for the first time since 2011 as investors pull money out of the region amid concerns that growth is slowing and as currencies from the rupee to rupiah plunge. Average prices of company debentures in the region fell to 98.61 cents on the dollar on Aug. 22, the least since October 2011… Dollar bonds globally have held above 100 cents since September 2009. Both investment- and non-investment-grade debt in Asia were below par on Aug. 22. The last time that happened was in September 2008, when Lehman Brothers Holdings Inc. collapsed.”

China Bubble Watch:

September 5 – Bloomberg: “China’s leaders are extending a clampdown on credit, prompting analysts from JPMorgan Chase & Co. to Societe Generale SA to caution that the economy is vulnerable to weakening after the pickup so far this quarter. New yuan loans were probably little changed in August, after aggregate financing, the broadest measure of credit, posted a fourth straight drop in July, the longest streak in 11 years of data…”

September 2 – Bloomberg: “China’s new home prices jumped in August by the most since December amid a recovery in land sales and some easing of policies by local governments, SouFun Holdings Ltd. said. Prices surged 8.6% last month from a year earlier, to 10,442 yuan ($1,706) per square meter (10.76 square feet), SouFun said… after a survey of 100 cities… ‘Buyers are expecting home prices to rise further after seeing a series of land sold at record prices, while the government didn’t take much action on this,’ Alan Jin, a Hong Kong-based property analyst at Mizuho Securities Asia Ltd., said.”

September 5 – Bloomberg: “China sold a residential land parcel in Beijing at a record price amid rising competition among developers for sites in major cities, which have led price gains even as the government maintains property curbs. The 28,100 -square-meter (302,356-square-foot) National Agriculture Exhibition Center plot, northeast of the city center, was sold for 2.1 billion yuan ($343 million)… The total purchase price of 4.3 billion yuan implies a cost per square meter of buildable space of 73,000 yuan, the most expensive in China… The number of apartments sold for more than 10 million yuan in the Chinese capital jumped 81% to 1,388 in the first half from a year earlier, as wealthy buyers favored bigger properties under the government’s purchase restrictions…”

September 2 – Bloomberg: “China’s manufacturing strengthened in August, with one index posting its biggest jump in three years, as improving demand abroad and at home underpins a recovery in the world’s second-largest economy. An official Purchasing Managers’ Index jumped more than estimated to a 16-month high of 51.0… A separate PMI released… by HSBC Holdings Plc and Markit Economics advanced to 50.1 last month from 47.7 in July, the largest gain since 2010. Readings above 50 signal expansion.”

September 4 – Bloomberg (Lilian Karunungan): “China’s short-term borrowing costs are climbing toward the peaks reached during June’s cash crunch as Goldman Sachs Group Inc. and JPMorgan Chase & Co. became the latest banks to raise their economic growth forecasts. The one-year government bond yield rose 13 bps in August to 3.62%, compared with a June 24 level of 3.65% that was the highest since September 2011… An official purchasing managers’ index published Sept. 1 indicated China’s factory output climbed in August by the most in 16 months.”

September 2 – Bloomberg: “Chinese Premier Li Keqiang’s efforts to curb excessive borrowing have led to an almost tenfold jump in pulled bond sales as yields surge to the highest since 2011. Borrowers have postponed or scrapped 27.1 billion yuan ($4bn) of notes this quarter, up from 2.8 billion yuan a year earlier… Ten-year AAA corporate yields jumped to 5.67% on Aug. 28, the highest since 2011.”

September 4 – Bloomberg: “Chinese Finance Minister Lou Jiwei called the scale of the nation’s local government debt controllable and said the risk of default was ‘not great.’ Lou… said the growth of borrowings by local authorities was slowing. Some local governments do face ‘relatively big’ debt problems, especially those that previously saw very rapid revenue growth, he said. ‘They thought they would have money forever, so they dared to borrow,’ said Lou, who was named finance minister in March. ‘For a period of time, their fiscal revenue grew 50%. They thought the growth would be 50% for the next five years, so they spent the money first.’”

September 5 – Bloomberg (Rachel Evans): “China ZhengTong Auto Services Holdings Ltd., the luxury car dealer that scrapped a bond last year, is planning to sell credit-enhanced notes as concern grows about Chinese companies’ $1.9 trillion of debt… Chinese and Hong Kong borrowers’ total debt has almost doubled since 2009… The country’s issuers, struggling with falling profits and mounting obligations amid the longest streak of sub-8% economic growth in at least two decades, are less able to service debt than a year ago, according to Standard & Poor’s. Yields on dollar bonds sold by Chinese companies have risen 99 bps in 2013 to 6.26%...”

Japan Watch:

September 5 – Bloomberg (Toru Fujioka, Masahiro Hidaka and Chikako Mogi): “Bank of Japan Governor Haruhiko Kuroda, seeking to overcome doubts about whether his nation should proceed with a sales-tax increase, signaled policy makers can act if needed with fiscal and monetary measures. If the tax move had a big effect on the economy, ‘fiscal policy can respond and if downside risks materialize to the 2% inflation target, we will of course take appropriate steps,’ Kuroda said… With the levy increase scheduled for April set to deal a blow to consumption and growth, most economists in a Bloomberg News survey forecast that Kuroda will add to easing in the first half of next year.”

India Watch:

September 6 – Bloomberg (Adi Narayan): “Mumbai taxi driver Saiyad Ahmed Ali has cut back on fruit and fish, from about twice weekly to once a month these days as prices surge. He’ll tell you the culprit: India’s weakening currency. ‘The rupee’s value has been falling, gas is getting more expensive and fewer people want to take cabs,’ said Ali, who has seen his daily income fall by about a third, to less than 400 rupees ($6.05) after the costs of running his taxi. ‘Life here in the big city has become more difficult.’ A 17% plunge in the rupee this year has driven up the cost of imports such as petroleum and chemicals used in packaging. As a result, companies have raised prices for consumer staples like cooking oil and soap to compensate for imported raw-material and transport costs.”

September 4 – Financial Times (James Crabtree): “Fears are rising for the health of India’s banking system as slowing economic growth and rapid currency depreciation threaten to worsen asset quality and reduce demand for bank credit from large industrial companies. The growing concerns complicate the task facing Raghuram Rajan, who takes over today as head of the Reserve Bank of India – a role that includes responsibility for bank regulation – as he attempts to chart a path through the deepening currency crisis. Non-performing and restructured loan levels in Asia’s third-largest economy have risen steadily over the past year to stand at around 9% of assets and could reach 15.5% over the next two years, according to Morgan Stanley… Indian companies hold around $225bn of US dollar-denominated debt – as much as half of that estimated to be unhedged – while some larger Indian banks including State Bank of India and ICICI have raised money via dollar-denominated bonds in recent years.”

September 4 – Bloomberg (Anurag Joshi, Santanu Chakraborty and Anoop Agrawal): “Dollar bond sales by Indian companies have stalled for the longest period in more than a year as the rupee plumbs historic lows and prospects for reduced Federal Reserve stimulus make borrowing more expensive. Yields rose 92 bps to 6.39% last month, the highest since September 2011… No Indian company has sold dollar- denominated bonds since July, with Canara Bank and IDFC Ltd. among firms postponing issuance… Default risk for Indian companies has risen to a one-year high as a plunging rupee increases the cost of repaying $17.3 billion of dollar-denominated corporate debt due by March.”

Latin America Watch:

September 6 – Bloomberg (Eric Martin and Nacha Cattan): “Mexican policy makers surprised analysts by cutting their benchmark interest rate for the second time this year, saying the economy experienced a significant and unexpected slowdown in the second quarter. Banco de Mexico reduced the overnight lending rate by 25 bps to a record-low 3.75%...”

September 2 – Bloomberg (Jonathan Levin): “Even with Wall Street’s help, Mexico is struggling to lure investors to its local-currency bonds as speculation the Federal Reserve will curb stimulus sparks an exodus from emerging markets. Mexico’s sale of 25 billion pesos ($1.9bn) of five- year notes last week attracted the weakest demand since the government started using a group of banks in 2010 to help handle sales of new benchmark bonds.”

September 5 – Bloomberg (Blake Schmidt and Marisa Castellani): “Robert Shiller… is warning that a bubble is emerging in Brazil at a time when a sluggish economy and persistent inflation are eroding investor confidence. Since January 2008, home prices in Sao Paulo have soared 181% and jumped 225% in Rio de Janeiro, according to the FIPE Zap index. That’s as much as twice the increase in rent prices… The warning comes as Brazil’s economy heads for its weakest two-year expansion in more than a decade and the central bank raises interest rates by the most in the world to contain inflation.”

Europe Crisis Watch:

September 2 – Bloomberg (Marco Bertacche): “Italian Prime Minister Enrico Letta’s ruling coalition came under renewed strain as Silvio Berlusconi threatened to bring down the government if Letta’s party votes to expel the three-time ex-premier from the Senate. ‘We’re not available to keep the government going if the left decides to prevent the head of People of Liberty from remaining in politics,’ Berlusconi told a rally… He softened his rhetoric a day later, saying he ‘didn’t issue an ultimatum’ and wants the government to continue to govern. Letta has been struggling to contain tensions within the coalition government since Italy’s top court upheld Berlusconi’s tax-fraud conviction on Aug. 1. His Democratic Party, the biggest force in the coalition, has said Berlusconi’s expulsion from the Senate is required by an anti-corruption law enacted in December 2012.”

September 2 – Bloomberg (Charles Penty): “The pace at which Spanish loans to companies are shrinking suggests the country’s weakened banking system risks hobbling a nascent economic recovery. Lending by Spanish banks to non-financial corporations fell 1.3% in July from June and has declined almost 10% this year… That’s worse than the 0.9% monthly contractions in Portugal and Greece, and the 0.6% drop in Ireland. In Italy, lending climbed 0.3% in July.”

September 5 – Bloomberg (Esteban Duarte and Angeline Benoit): “Spain’s bid to meet its budget-deficit target for the first time in five years is running into trouble, fueling concerns that increased financial stability is masking deeper economic problems. The shortfall for the central government in the first seven months of the year was 4.38% of Spanish output, compared with a 3.8% goal for the year… German Finance Minister Wolfgang Schaeuble… has cited signs of economic recovery in Spain as evidence that Chancellor Angela Merkel’s prescription of forcing budget cuts on euro-area countries in exchange for support is bearing fruit. The unraveling of Spain’s consolidation program may undermine his case and jeopardize the 13-month rally in Spanish debt…”

Germany Watch:

September 5 – Bloomberg (Tony Czuczka): “German Chancellor Angela Merkel comments to reporters in St. Petersburg, Russia, before start of G-20 summit. ‘We regulated banks in the G-20 so it can never happen again that a bank gets too big and is bailed out almost automatically by taxpayers. That isn’t the case yet with shadow banks.’ …Germany is fighting for ‘an ambitious timetable. Otherwise the G-20 will look ridiculous.’”

September 5 – Bloomberg (Tony Czuczka): “German Chancellor Angela Merkel urged central banks to curb expansive monetary policies while ensuring that changes don’t cause economic shocks. ‘It will be necessary step by step to make changes to the quite accommodative monetary policy,’ Merkel told reporters in… St. Petersburg today before the Group of 20 summit… ‘We have to handle this in such a way that it doesn’t lead to breaks in economic development.’”

Portugal Watch:

September 4 – Bloomberg (Joao Lima): “Prime Minister Pedro Passos Coelho is poised to propose a package of permanent spending reductions after relying on one-off cuts and tax increases as the end of Portugal’s international bailout approaches. Coelho has to trim expenditures by about 3.3 billion euros ($4.3bn) in 2014 to meet targets set in the rescue plan. ‘The 2014 budget is decisive because it’s the one that closes the period of the aid program,’ said Jose Maria Brandao de Brito, chief economist at Banco Comercial Portugues SA in Lisbon. ‘Decisions were postponed. There is now a funneling of reforms that have to be carried out. If Portugal doesn’t comply with the terms of the aid program, it will have more difficulty in financing itself after the program ends.’”