Friday, June 30, 2017

Weekly Commentary: The Road to Normalization

The past week provided important support for the “peak monetary stimulus” thesis. There is mounting evidence that global central bankers are monitoring inflating asset prices with heightened concern. The intense focus on CPI is beginning to blur. They would prefer to be on a cautious path toward policy normalization.

June 25 – Financial Times (Claire Jones): “Global financial stability will be in jeopardy if low inflation lulls central banks into not raising interest rates when needed, the Bank for International Settlements has warned. The message about the dangers of sticking too closely to inflation targets comes as central banks in some of the world’s largest economies are considering how to end years of ultra-loose monetary policy after the global financial crisis… ‘Keeping interest rates too low for long could raise financial stability and macroeconomic risks further down the road, as debt continues to pile up and risk-taking in financial markets gathers steam,’ the bank said in its annual report. The BIS acknowledged that raising rates too quickly could cause a panic in markets that have grown used to cheap central bank cash. However, delaying action would mean rates would need to rise further and faster to prevent the next crisis. ‘The most fundamental question for central banks in the next few years is going to be what to do if the economy is chugging along well, but inflation is not going up,’ said Claudio Borio, the head of the BIS’s monetary and economics department… ‘Central banks may have to tolerate longer periods when inflation is below target, and tighten monetary policy if demand is strong — even if inflation is weak — so as not to fall behind the curve with respect to the financial cycle.’ …Mr Borio said many of the factors influencing wage growth were global and would be long-lasting. ‘If, as we think, the forces of globalisation and technology are relevant [in keeping wages low] and have not fully run their course, this will continue to put downward pressure on inflation,’ he said.”

While global markets easily ignored ramifications from the BIS’s (the central bank to central banks) annual report, the same could not be said for less than super dovish comments from Mario Draghi, my nominee for “the world’s most important central banker.”

June 27 – Financial Times (Katie Martin): “What’s that, you say? The ‘R-word’? Judging from the markets, Mario Draghi’s emphasis on reflation changes everything, and highlights the communications challenge lying ahead of the president of the European Central Bank. The ECB’s crisis-fighter-in-chief threw investors into a fit of the vapours on Tuesday when he said he was growing increasingly confident in the currency bloc’s economic recovery, and that ‘deflationary forces have been replaced by reflationary ones’.”

June 27 – Bloomberg (Annie Massa and Elizabeth Dexheimer): “Mario Draghi hinted at how he may sell a gradual unwinding of European Central Bank stimulus. The ECB president repeated his mantra that the Governing Council needs to be patient in letting inflation pressures build in the euro area and prudent in withdrawing support. At the same time, there’s room to tweak existing measures. ‘As the economy continues to recover, a constant policy stance will become more accommodative, and the central bank can accompany the recovery by adjusting the parameters of its policy instruments -- not in order to tighten the policy stance, but to keep it broadly unchanged.’ The comments echo an argument first made by Bundesbank President Jens Weidmann… With his nod to a frequent critic of quantitative easing who has been calling for an end of the 2.3 trillion-euro ($2.6 trillion) program, Draghi may have set the stage for a discussion in the coming months on phasing out asset purchases.”

When the ECB chose not to offer any policy clarification coming out of its June 8th meeting, wishful markets had Draghi holding out until September. The timeline was moved up, with the ECB president using the bank’s annual meeting, held this year in Sintra Portugal, to offer initial thoughts on how the ECB might remove accommodation. Market reaction was swift.

German 10-year bund yields surged 13 bps Tuesday and almost doubled this week to 47bps. French yield jumped 14 bps Tuesday – and 21 bps for the week - to 82 bps. European periphery bonds were under pressure. Italian 10-year yields rose 16 bps Tuesday and 24 bps for the week to 2.16%. Portuguese yields rose 14 bps Tuesday, ending the week at 3.03%. Draghi’s comments rattled bond markets around the globe. Ten-year Treasury yields rose seven bps to 2.21% (up 16 bps for the week), Canadian bonds 11 bps to 1.57% and Australian bonds 10 bps to 2.46%. Emerging market bonds also came under heavy selling pressure, with Eastern European bonds taking a pounding.

June 28 – Bloomberg (Robert Brand): “This is what it sounds like when doves screech. Less than 24 hours Mario Draghi jolted financial markets by saying ‘deflationary forces’ have been replaced by reflationary ones, European Central Bank officials reversed the script, saying markets had misinterpreted the central banker’s comments. What was perceived as hawkish was really meant to strike a balance between recognizing the currency bloc’s economic strength and warning that monetary support is still needed, three Eurosystem officials familiar with policymakers’ thinking said. Their dovish interpretation sparked a rapid unwinding of moves in assets from the euro to stocks and sovereign bonds.”

I don’t see it as the markets misinterpreting Draghi. Understandably, inflated Bubble markets have turned hyper-sensitive to the course of ECB policymaking. The ECB’s massive purchase program inflated a historic Bubble throughout European debt markets, a speculative Bubble that I believe unleashed a surge of global liquidity that has underpinned increasingly speculative securities markets.

If not for massive QE operations from the ECB and BOJ, I believe the 2016 global reversal in bond yields would have likely ushered in a major de-risking/deleveraging episode throughout global markets. Instead, powerful liquidity injections sustained speculative Bubbles throughout global fixed income, in the process spurring blow-off excess throughout global equities and risk assets more generally. Recalling the summer of 2007, everyone is determined to see the dance party rave indefinitely.

First-half QE has been estimated (by Bank of America) at (an incredible) $1.5 TN. Bubbling markets should come as no stunning surprise. At May highs, most European equities indices were sporting double-digit year-to-date gains. The S&P500 returned (price + dividends) almost 10% for the first half, with the more speculative areas of U.S. equities outperforming. The Nasdaq Composite gained 14.1% in the first-half, with the large company Nasdaq 100 (NDX) rising 16.1%. Despite this week’s declines, the Morgan Stanley High Tech index rose 20.3%, and the Semiconductors (SOX) jumped 14.2% y-t-d. The Biotechs (BTK) surged 9.7% during Q2, boosting y-t-d gains to 25.6%. The NYSE Healthcare Index gained 7.7% for the quarter and 15.3% y-t-d. The Nasdaq Transports jumped 9.7% during Q2, with the DJ Transports up 5.3%. The Nasdaq Other Financials rose 7.9% in the quarter.

Central banks have closely collaborated since the financial crisis. While always justifying policy stimulus on domestic grounds, it’s now been almost a decade of central bankers coordinating stimulus measures to address global system fragilities. I doubt the Fed would have further ballooned its balance sheet starting in late-2012 if not for the “European” financial crisis. In early-2016, the ECB and BOJ would not have so aggressively expanded QE programs – and the Fed not postponed “normalization” – if not for global ramifications of a faltering Chinese Bubble. All the talk of downside inflation risk was convenient cover for global crisis worries.

As Mario Draghi stated, the European economy is now on a reflationary footing. At least for now, Beijing has somewhat stabilized the Chinese Bubble. Powered by booming securities markets, global Credit continues to expand briskly. Even in Europe, the employment backdrop has improved markedly. It’s just become difficult for central bankers to fixate on tame consumer price indices with asset prices running wild.

Global market liquidity has become fully fungible, a product of multinational financial institutions, securities lending/finance and derivatives markets. The ECB and BOJ’s ultra-loose policy stances have worked to counteract the Fed’s cautious normalization strategy. Determined to delay the inevitable, Draghi now faces the scheduled year-end expiration of the ECB’s latest QE program, along with an impending shortage of German bunds available for purchase. Behind the scenes and otherwise, Germany is surely losing patience with open-ended “money” printing. This week’s annual ECB gathering provided an opportunity for Draghi to finally get the so-called normalization ball rolling. Despite his cautious approach, markets immediately feared being run over.

June 28 – Bloomberg (Alessandro Speciale): “Mario Draghi just got evidence that his call for ‘prudence’ in withdrawing European Central Bank stimulus applies to his words too. The euro and bond yields surged on Tuesday after the ECB president said the reflation of the euro-area economy creates room to pull back unconventional measures without tightening the stance. Policy makers noted the jolt that showed how hypersensitive investors are to statements that can be read as even mildly hawkish… Draghi’s speech at the ECB Forum in Sintra, Portugal, was intended to strike a balance between recognizing the currency bloc’s economic strength and warning that monetary support is still needed, said the officials…”

June 28 – Bloomberg (James Hertling, Alessandro Speciale, and Piotr Skolimowski): “Global central bankers are coalescing around the message that the cost of money is headed higher -- and markets had better get used to it. Just a week after signaling near-zero interest rates were appropriate, Bank of England Governor Mark Carney suggested on Wednesday that the time is nearing for an increase. His U.S. counterpart, Janet Yellen, said her policy tightening is on track and Canada’s Stephen Poloz reiterated he may be considering a rate hike. The challenge of following though after a decade of easy money was highlighted by European Central Bank President Mario Draghi’s attempt to thread the needle. Financial markets whipsawed as Eurosystem officials walked back comments Draghi made Tuesday that investors had interpreted as signaling an imminent change in monetary policy. ‘The market is very sensitive to the idea that a number of central banks are appropriately and belatedly reassessing the need for emergency policy accommodation,’ said Alan Ruskin, co-head of foreign exchange research at Deutsche Bank AG.”

Draghi and the ECB are hoping to duplicate the Fed blueprint – quite gingerly removing accommodation while exerting minimal impact on bond yields and risk markets more generally: Normalization without a meaningful tightening of financial conditions. This is unrealistic.

Current complacency notwithstanding, turning down the ECB QE spigot will dramatically effect global liquidity dynamics. Keep in mind that the removal of Fed accommodation has so far coincided with enormous counteracting market liquidity injections courtesy of the other major central banks. The ECB will not enjoy a similar luxury. Moreover, global asset prices have inflated significantly over the past 18 months, fueled at least in part by a major increase in speculative leverage.

There are three primary facets to QE dynamics worth pondering as central banks initiate normalization. The first is the size and scope of previous QE operations. The second is the primary target of liquidity-induced market flows. And third, to what extent have central bank measures and associated market flows spurred self-reinforcing speculative leveraging and market distortions. Inarguably, ECB and BOJ-induced flows over recent quarters have been massive. It is also reasonably clear that market flows gravitated primarily to equities and corporate Credit, asset classes demonstrating the most enticing inflationary biases. And there are as well ample anecdotes supporting the view that major speculative leveraging has been integral to myriad Bubbles throughout global risk markets. The now deeply ingrained view that the cadre of global central banks will not tolerate market declines is one of history’s most consequential market distortions.

And while the timing of the removal of ECB and BOJ liquidity stimulus remains uncertain, markets must now at least contemplate an approaching backdrop with less accommodation from the ECB and central banks more generally. With this in mind, Draghi’s comments this week could mark an important juncture for speculative leveraging. Increasingly unstable currency markets are consistent with this thesis. The days of shorting yen and euros and using proceeds for easy profits in higher-yielding currencies appear to have run their course. I suspect de-leveraging dynamics have commenced, though market impact has thus far been muted by ongoing ECB and BOJ liquidity operations.

June 27 – Reuters (William Schomberg, Marc Jones, Jason Lange and Lindsay Dunsmuir): “U.S. Federal Reserve Chair Janet Yellen said on Tuesday that she does not believe that there will be another financial crisis for at least as long as she lives, thanks largely to reforms of the banking system since the 2007-09 crash. ‘Would I say there will never, ever be another financial crisis?’ Yellen said… ‘You know probably that would be going too far but I do think we're much safer and I hope that it will not be in our lifetimes and I don't believe it will be,’ she said.”

While headlines somewhat paraphrased Yellen’s actual comment, “We Will not see Another Crisis in Our Lifetime” is reminiscent of Irving Fisher’s “permanent plateau” just weeks before the great crash of 1929. While on the subject, I never bought into the popular comparison between 2008 and 1929 – and the related notion of 2008 as “the 100-year flood”. The 2008/09 crisis was for the most part a private debt crisis associated with the bursting of a Bubble in mortgage Credit – not dissimilar to previous serial global crises, only larger and somewhat more systemic. It was not, however, a deeply systemic debt crisis akin to the aftermath of 1929, which was characterized by a crisis of confidence in the banking system, the markets and finance more generally, along with a loss of faith in government policy and institutions. But after a decade of unprecedented expansion of government debt and central bank Credit, the stage has now been set for a more systemic 1929-like financial dislocation.

As such, it’s ironic that the Fed has branded the banking system cured and so well capitalized that bankers can now boost dividends, buybacks and, presumably, risk-taking. As conventional central bank thinking goes, a well-capitalized banking system provides a powerful buffer for thwarting the winds of financial crisis. Chair Yellen, apparently, surveys current bank capital levels and extrapolates to systemic stability. Yet the next crisis lurks not with the banks but within the securities and derivatives markets: too much leverage and too much “money” employed in trend-following trading strategies. Too much hedging, speculating and leveraging in derivatives. Market misperceptions and distortions on an epic scale.

Compared to 2008, the leveraged speculating community and the ETF complex are significantly larger and potentially perilous. The derivatives markets are these days acutely more vulnerable to liquidity issues and dislocation. Never have global markets been so dominated by trend-following strategies. It’s a serious issue that asset market performance – stocks, bond, corporate Credit, EM, real estate, etc. – have all become so tightly correlated. There are huge vulnerabilities associated with various markets having become so highly synchronized on a global basis. And in the grand scheme of grossly inflated global securities, asset and derivatives markets, the scope of available bank capital is trivial.

I realize that, at this late stage of the great bull market, such a question sounds hopelessly disconnected. Yet, when markets reverse sharply lower and The Crowd suddenly moves to de-risk, who is left to take the other side of what has become One Gargantuan “Trade”? We’re all familiar with the pat response: “Central banks. They’ll have no choice.” Okay, but I’m more interested in the timing and circumstances.

Central bankers are now signaling their desire to proceed with normalization, along with noting concerns for elevated asset prices. As such, I suspect they will be somewhat more circumspect going forward when it comes to backstopping the markets - than, say, back in 2013 with Bernanke’s “flash crash” or with the China scare of early-2016. Perhaps this might help to explain why the VIX spiked above 15 during Thursday afternoon trading. Even corporate debt markets showed a flash of vulnerability this week.

For the Week:

The S&P500 dipped 0.6% (up 8.2% y-t-d), and the Dow slipped 0.2% (up 8.0%). The Utilities fell 2.5% (up 6.2%). The Banks surged 4.4% (up 4.2%), and the Broker/Dealers jumped 2.6% (up 9.8%). The Transports rose 1.9% (up 5.7%). The S&P 400 Midcaps added 0.2% (up 5.2%), while the small cap Russell 2000 was unchanged (up 4.3%). The Nasdaq100 dropped 2.7% (up 16.1%), and the Morgan Stanley High Tech index sank 3.0% (up 20.3%). The Semiconductors were hit 4.9% (up 14.2%). The Biotechs dropped 3.9% (up 25.5%). With bullion dropping $15, the HUI gold index sank 4.5% (up 1.9%).

Three-month Treasury bill rates ended the week at 100 bps. Two-year government yields gained four bps to 1.38% (up 19bps y-t-d). Five-year T-note yields rose 13 bps to 1.89% (down 4bps). Ten-year Treasury yields jumped 16 bps to 2.30% (down 14bps). Long bond yields increased 12 bps to 2.84% (down 23bps).

Greek 10-year yields were little changed at 5.36% (down 166bps y-t-d). Ten-year Portuguese yields rose 10 bps to 3.03% (down 72bps). Italian 10-year yields surged 24 bps to 2.16% (up 35bps). Spain's 10-year yields jumped 16 bps to 1.54% (up 16bps). German bund yields surged 21 bps to 0.47% (up 26bps). French yields rose 21 bps to 0.82% (up 14bps). The French to German 10-year bond spread was unchanged at 35 bps. U.K. 10-year gilt yields jumped 23 bps to 1.26% (up 2bps). U.K.'s FTSE equities index fell 1.5% (up 11.2%).

Japan's Nikkei 225 equities index declined 0.5% (up 4.8% y-t-d). Japanese 10-year "JGB" yields gained three bps to 0.09% (up 5bps). France's CAC40 sank 2.8% (up 5.3%). The German DAX equities index was hit 3.2% (up 7.4%). Spain's IBEX 35 equities index fell 1.8% (up 11.7%). Italy's FTSE MIB index declined 1.2% (up 7.0%). EM equities were mostly higher. Brazil's Bovespa index rallied 3.0% (up 4.4%), and Mexico's Bolsa gained 1.8% (up 9.2%). South Korea's Kospi increased 0.6% (up 18%). India’s Sensex equities index declined 0.7% (up 16.1%). China’s Shanghai Exchange rose 1.1% (up 2.9%). Turkey's Borsa Istanbul National 100 index added 0.8% (up 28.5%). Russia's MICEX equities index gained 0.6% (down 15.8%).

Junk bond mutual funds saw outflows of $1.735 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates dipped two bps to 3.88% (up 40bps y-o-y). Fifteen-year rates were unchanged at 3.17% (up 39bps). The five-year hybrid ARM rate gained three bps to 3.17% (up 47bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up a basis point to 4.01% (up 34bps).

Federal Reserve Credit last week added $0.8bn to $4.431 TN. Over the past year, Fed Credit declined $5.0bn. Fed Credit inflated $1.620 TN, or 58%, over the past 242 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt jumped another $17.9bn last week to $3.310 TN. "Custody holdings" were up $83bn y-o-y, 2.6%.

M2 (narrow) "money" supply last week slipped $4.3bn to $13.510 TN. "Narrow money" expanded $686bn, or 5.4%, over the past year. For the week, Currency increased $2.7bn. Total Checkable Deposits fell $12.7bn, while Savings Deposits gained $6.9bn. Small Time Deposits were little changed. Retail Money Funds fell $4.1bn.

Total money market fund assets added $4.2bn to $2.621 TN. Money Funds fell $96bn y-o-y (3.5%).

Total Commercial Paper declined $5.4bn to $973.6bn. CP declined $77bn y-o-y, or 7.4%.

Currency Watch:

The U.S. dollar index fell 1.7% to 95.628 (down 6.6% y-t-d). For the week on the upside, the Swedish krona increased 3.4%, the British pound 2.4%, the Canadian dollar 2.3%, the euro 2.1%, the Australian dollar 1.6%, the Norwegian krone 1.3%, the Swiss franc 1.2%, the Brazilian real 1.1%, the Singapore dollar 0.8% and the New Zealand dollar 0.7%. For the week on the downside, the South African rand declined 1.6%, the Japanese yen 1.0%, the Mexican peso 0.6% and the South Korean won 0.4%. The Chinese renminbi gained 0.82% versus the dollar this week (up 2.42% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index surged 5.3% (down 6.5% y-t-d). Spot Gold declined 1.2% to $1,242 (up 7.7%). Silver slipped 0.5% to $16.627 (up 4.0%). Crude rallied $3.03 to $46.04 (down 15%). Gasoline jumped 5.6% (down 9%), and Natural Gas rose 3.6% (down 19%). Copper gained 2.9% (up 8%). Wheat surged 11.1% (up 29%). Corn jumped 4.2% (up 8%).

Trump Administration Watch:

June 27 – Bloomberg (Steven T. Dennis and Laura Litvan): “Senate Majority Leader Mitch McConnell’s decision to delay a vote on health-care legislation came as a relief to some Republican holdouts, but it sets off what will be a furious few weeks of talks to deliver on the GOP’s seven-year promise to repeal the Affordable Care Act. Senate Republicans went to the White House Tuesday afternoon to meet with President Donald Trump, who also promised his political supporters he would do away with Obamacare. ‘We’re going to solve the problem,’ the president told senators. But Trump also conceded the possibility that the health bill wouldn’t pass. ‘If we don’t get it done, it’s just going to be something that we’re not going to like,’ he said… ‘And that’s OK, and I understand that very well.’”

June 29 – Reuters: “Congress will need to raise the nation's debt limit and avoid defaulting on loan payments by ‘early to mid-October,’ the Congressional Budget Office said in a report… Treasury Secretary Steve Mnuchin has encouraged Congress to raise the limit before the legislative body leaves for their August recess. But it remains unclear if a bipartisan agreement has been struck to allow the limit to be raised, as both chambers continue to be weighed down by health care and tax reform and trying to find an agreement to fund the government after the September 30 deadline.”

June 30 – CNBC (Fred Imbert): “President Donald Trump's White House is ‘hell-bent’ on imposing tariffs on steel and other imports, Axios reported Friday. The plan — which was pushed by Commerce Secretary Wilbur Ross and was supported by National Trade Council Peter Navarro, and policy adviser Stephen Miller — would potentially impose tariffs in the 20% range… During a ‘tense’ meeting Monday, the president made it clear he favors tariffs, yet the plan was met with heavy opposition by most officials in the room, with one telling Axios about 22 were against it and only three in favor, including Trump.”

June 29 – Financial Times (Stefan Wagstyl): “Angela Merkel threw down the gauntlet to Donald Trump as Germany’s chancellor pledged to fight at next week’s G20 summit for free trade, international co-operation and the Paris climate change accord. In a combative speech on Thursday in the German parliament, Ms Merkel also promised to focus on reinforcing the EU, in close co-operation with France, despite the pressing issue of Brexit. But in a sign that it may be difficult to maintain European unity around a tough approach to Mr Trump, Ms Merkel later softened her tone, as she prepares to host G20 leaders in Hamburg next Friday.”

June 27 – Bloomberg (Joe Light): “Two U.S. senators working on a bipartisan overhaul of Fannie Mae and Freddie Mac are seriously considering a plan that would break up the mortgage-finance giants, according to people with knowledge of the matter. The proposal by Tennessee Republican Bob Corker and Virginia Democrat Mark Warner would attempt to foster competition in the secondary mortgage market… Corker and Warner’s push to develop a plan marks Congress’ latest attempt to figure out what to do with Fannie and Freddie, an issue that has vexed lawmakers ever since the government took control of the companies in 2008 as the housing market cratered. The lawmakers’ plan is still being developed, and a Senate aide who asked not to be named cautioned that no decisions had been made on any issues.”

China Bubble Watch:

June 25 – Financial Times (Minxin Pei): “The Chinese government has just launched an apparent crackdown on a small number of large conglomerates known in the west chiefly for their aggressive dealmaking. The list includes Dalian Wanda, Anbang, Fosun and HNA Group. The news that Chinese banking regulators have asked lenders to examine their exposure to these companies has sent the stocks of groups wholly or partly owned by these conglomerates tumbling in Shanghai and Hong Kong. Obviously, the market was caught by surprise. But it should not be… The immediate trigger is Beijing’s growing alarm over the risks in China’s financial sector and attempt to cut capital outflows. In late April, President Xi Jinping convened a politburo meeting specifically focused on stability in the financial system. Foreshadowing the crackdown, he ordered that those ‘financial crocodiles’ that destabilise China’s financial system must be punished.”

June 26 – Wall Street Journal (Anjani Trivedi): “As Beijing looks to rein in companies that have splurged on overseas deals, it is talking up the systemic risks to its financial system. But just how serious is the problem? After all, for years Beijing has urged leading companies to ‘go global,’ and encouraged banks to support them with lending. Its words were taken to heart: Companies like sprawling conglomerate HNA Group and insurer Anbang pushed the country’s outbound acquisitions to more than $200 billion last year… Now… regulators are investigating leverage and risks at banks associated with China Inc.’s bulging overseas deals. It’s clear that Chinese banks are already heavily exposed to China’s big deal makers through basic lending. Chinese lenders had extended more than 500 billion yuan ($73.14bn) of loans to HNA alone as of last year…”

June 26 – Bloomberg: “China may finally be ready to cut the cord when it comes to the country’s troubled local government financing vehicles. Beijing’s deleveraging drive has seen rules impacting LGFV debt refinancing tightened, spurring a slump in issuance by the vehicles, which owe about 5.6 trillion yuan ($818bn) to bondholders and are seen by some as the poster children for China’s post-financial crisis debt woes. Signs the authorities may be taking a less sympathetic view of the sector has ratings companies flagging the possibility that 2017 could see the first ever default by a local financing vehicle.”

June 29 – Reuters (Yawen Chen and Thomas Peter): “The struggles of China's small and medium-sized firms have grown so acute that many are expected to become unprofitable or even go belly-up this year, boding ill for an economy running short on strong growth drivers. The companies - which account for over 60% of China's $11 trillion gross domestic product - have entered the most challenging funding environment in years as Beijing cracks down on easy credit to contain a dangerous debt build-up. Many of the firms - mostly in the industrial, transport, wholesale, retail, catering and accommodation sectors - are already grappling with soaring costs, fierce competition and thinning profits. The strains faced by small and medium-sized enterprises (SMEs) are expected to grow more visible as Beijing deflates a real estate bubble and eases infrastructure spending to dial back its fiscal stimulus.”

June 29 – Reuters (Leika Kihara and Stanley White): “One of Chinese banks’ favorite tools for increasing leverage has staged a remarkable but worrisome comeback just two months after a regulatory crackdown on leveraged investment… Chinese banks’ issuance of negotiable certificates of deposit in June nearly hit the high recorded in March… NCDs, a type of short-term loan, have become extremely popular in recent years with Chinese banks, especially smaller lenders due to their weaker ability to attract deposits. During a clampdown on runaway debt in April, Chinese regulators warned banks against abusing the tool for speculative, leveraged bets in capital markets. But after a deep but brief drop, NCD issuance has risen again as regulatory attention appeared to ease in recent weeks, hitting 1.96 trillion yuan ($287.73bn) this month, up sharply from 1.23 trillion yuan in May and just a touch below March’s record 2.02 trillion yuan."

June 28 – Financial Times (Gabriel Wildau): “Capital flight disguised as overseas tourism spending has artificially cut China’s reported trade surplus while masking the extent of investment outflows, according to research by the US Federal Reserve. A significant share of overseas spending classified in official data as travel-related shopping, entertainment and hospitality may over a 12-month period have instead been used for investment in financial assets and real estate, the Fed paper argued… Disguised capital outflows in the year to September may have amounted to $190bn, or 1.7% of gross domestic product… Chinese households have in recent years looked at ways to skirt government-imposed limitations on foreign investment as its economy slowed and the renminbi depreciated.”

June 28 – Bloomberg (Joe Ryan): “As Elon Musk races to finish building the world’s biggest battery factory in the Nevada desert, China is poised to leave him in the dust. Chinese companies have plans for additional factories with the capacity to pump out more than 120 gigawatt-hours a year by 2021, according to a report… by Bloomberg Intelligence. That’s enough to supply batteries for around 1.5 million Tesla Model S vehicles or 13.7 million Toyota Prius Plug-in Hybrids per year… By comparison, when completed in 2018, Tesla Inc.’s Gigafactory will crank out up to 35 gigawatt-hours of battery cells annually.”

June 28 – CNBC (Geoff Cutmore): “China's economic growth will accelerate because the country will finally get leaders who aren't scared, a former advisor to China's central bank said Wednesday. ‘The most important reason is that there is a new group of officials being appointed ... (who will emerge) around the 19th Party Congress which will be in mid to late October,’ said Li Daokui, who is now Dean of the Schwarzman College at Tsinghua University in Beijing. …Li said the Chinese economy will grow 6.9 to 7 percent by 2018 from 6.7 percent in 2017. China posted 6.7% GDP growth in 2016, the slowest in 26 years. ‘These (new) officials have been carefully, carefully scrutinized before they are appointed so they are clean. They are not worried about becoming targets of anti-corruption investigations,’ he added.”

Europe Watch:

June 26 – Bloomberg (Sonia Sirletti and Alexander Weber): Italy orchestrated its biggest bank rescue on record, committing as much as 17 billion euros ($19bn) to clean up two failed banks in one of its wealthiest regions, a deal that raises questions about the consistency of Europe’s bank regulations. The intervention at Banca Popolare di Vicenza SpA and Veneto Banca SpA includes state support for Intesa Sanpaolo SpA to acquire their good assets for a token amount… Milan-based Intesa can initially tap about 5.2 billion euros to take on some assets without hurting capital ratios, Padoan said. The European Commission approved the plan.”

June 28 – Reuters (Gernot Heller and Joseph Nasr): “Finance Minister Wolfgang Schaeuble… underscored Germany's concerns about what he called a regulatory loophole after the EU cleared Italy to wind up two failed banks at a hefty cost to local taxpayers. Schaeuble told reporters that Europe should abide by rules enacted after the 2008 collapse of U.S. financial services firm Lehman Brothers that were meant to protect taxpayers. Existing European Union guidelines for restructuring banks aimed to ensure ‘what all political groups wanted: that taxpayers will never again carry the risks of banks,’ he said. Italy is transferring the good assets of the two Veneto lenders to the nation's biggest retail bank, Intesa Sanpaolo (ISP.MI), as part of a transaction that could cost the state up to 17 billion euros ($19 billion).”

June 25 – Reuters (Balazs Koranyi and Erik Kirschbaum): “The time may be nearing for the European Central Bank to start discussing the end of unprecedented stimulus as growth and inflation are both moving in the right direction, Bundesbank president Jens Weidmann told German newspaper Welt am Sonntag. Weidmann, who sits on the ECB's rate-setting Governing Council, also said that the bank should not make any further changes to the key parameters of its bond purchase scheme, comments that signal opposition to an extension of asset buys since the ECB will soon hit its German bond purchase limits. Hoping to revive growth and inflation, the ECB is buying 2.3 trillion euros worth of bonds…, a scheme known as quantitative easing and long opposed by Germany… The purchases are set to run until December and the ECB will decide this fall whether to extend it… ‘As far as a possible extension of the bonds-buying program goes, this hasn't yet been discussed in the ECB Council,’ Weidmann told the newspaper…”

June 26 – Bloomberg (Carolynn Look): “It seems the sky is the limit for Germany’s economy. Business confidence -- logging its fifth consecutive increase -- jumped to the highest since 1991 this month, underpinning optimism by the Bundesbank that the upswing in Europe’s largest economy is set to continue. With domestic demand supported by a buoyant labor market, risks to growth stem almost exclusively from global forces. ‘Sentiment among German businesses is jubilant,’ Ifo President Clemens Fuest said… ‘Germany’s economy is performing very strongly.’”

June 29 – Reuters (Pete Schroeder and David Henry): “German inflation probably accelerated in June, regional data suggested on Thursday, suggesting a solid upswing in the economy is pushing up price pressures as euro zone inflation moves closer to the European Central Bank's target. The data comes only days after ECB head Mario Draghi hinted that the bank's asset-purchase program would become less accommodative going into 2018 as regional growth gains pace and inflation trends return following a period of falling prices. In another sign of rising price pressures in the 19-member single currency bloc, Spanish consumer prices rose more than expected in June… In the German state of Hesse, annual inflation rose to 1.9% in June from 1.7% in May…”

June 28 – Reuters (Gavin Jones and Steve Scherer): “He is an 80-year-old convicted criminal whose last government ended with Italy on the brink of bankruptcy - and he may well be kingmaker at the next election within a year. Mayoral elections on Sunday showed four-time Prime Minister Silvio Berlusconi's center-right Forza Italia party remains a force to be reckoned with... ‘Berlusconi sees this as the last challenge of his career,’ said Renato Brunetta, a close ally for over 20 years and Forza Italia's lower house leader. ‘He feels he has suffered many injustices and deserves one last shot. Who can deny him that?’ Matteo Renzi, leader of the ruling Democratic Party (PD), and Beppe Grillo's anti-establishment 5-Star Movement have dominated the national scene in recent years, relegating Forza Italia to a distant third or fourth in the polls. Yet in the mayoral ballots, Forza Italia and its anti-immigrant Northern League allies trounced the PD and 5-Star in cities all over the country, suggesting they have momentum behind them just as the national vote comes into view.”

Central Bank Watch:

June 27 – Wall Street Journal (Tom Fairless): “The euro soared to its biggest one-day gain against the dollar in a year and eurozone bond prices slumped after European Central Bank President Mario Draghi hinted the ECB might start winding down its stimulus in response to accelerating growth in Europe. Any move by the ECB toward reducing bond purchases would put it on a similar policy path as the Federal Reserve, which first signaled an intent to taper its own stimulus program in 2013. But the ECB is likely to remain far behind: The Fed has been raising interest rates gradually since December 2015, while the ECB’s key rate has been negative since June 2014. Mr. Draghi’s comments, made Tuesday at the ECB’s annual economic policy conference in Portugal, were laced with caution and caveats. But investors interpreted them as a cue to buy euros and sell eurozone bonds, a reversal of a long-term trade that has benefited from the central bank’s €60 billion ($67.15bn) of bond purchases each month. ‘All the signs now point to a strengthening and broadening recovery in the euro area,’ Mr. Draghi said.”

June 28 – Financial Times (Dan McCrum and Chris Giles in London and Claire Jones): “Bond and currency markets whipsawed on Wednesday as Europe’s two most influential central bankers struggled to communicate to investors how they would exit from years of crisis-era economic stimulus policies. The euro surged to a 52-week high against the dollar after investors characterised remarks by Mario Draghi as a signal he was preparing to taper the European Central Bank’s bond-buying scheme — only to drop almost a full cent after senior ECB figures made clear he had been misinterpreted. Similarly, the British pound jumped 1.2% to $1.2972 after Mark Carney, Bank of England governor, said he was prepared to raise interest rates if UK business activity increased — just a week after saying ‘now is not yet the time’ for an increase. The sharp moves and sudden reversals over two days of heavy trading highlight the acute sensitivity of financial markets to any suggestion of a withdrawal of stimulus measures after a prolonged period of monetary accommodation.”

June 25 – Reuters (Marc Jones): “Major central banks should press ahead with interest rate increases, the Bank for International Settlements said…, while recognizing that some turbulence in financial markets will have to be negotiated along the way. The BIS, an umbrella body for leading central banks, said in one of its most upbeat annual reports for years that global growth could soon be back at long-term average levels after a sharp improvement in sentiment over the past year. Though pockets of risk remain because of high debt levels, low productivity growth and dwindling policy firepower, the BIS said policymakers should take advantage of the improving economic outlook and its surprisingly negligible effect on inflation to accelerate the ‘great unwinding’ of quantitative easing programs and record low interest rates.”

Brexit Watch:

June 27 – Reuters (Guy Faulconbridge and Kate Holton): “Prime Minister Theresa May struck a deal on Monday to prop up her minority government by agreeing to at least 1 billion pounds ($1.3bn) in extra funding for Northern Ireland in return for the support of the province's biggest Protestant party. After over two weeks of talks and turmoil sparked by May's failure to win a majority in a June 8 snap election, she now has the parliamentary numbers to pass a budget and a better chance of passing laws to take Britain out of the European Union.”

Global Bubble Watch:

June 28 – Wall Street Journal (Richard Barley): “Sometimes financial markets are surprisingly bad at connecting the dots—until they can’t ignore the picture forming before their eyes. The screeching U-turn in bond markets is a good example. The world’s central banks are sending out a message that loose monetary policy can’t last forever. The shift is mainly rhetorical, and action may yet be some way off. But expectations matter, as they did when the Federal Reserve indicated in 2013 that its quantitative-easing program could be wound down. That caused global bond yields to surge, led by the U.S., and sparked extended turmoil in emerging markets. This time, the bond reversal has been centered on Europe. Ten-year German bund yields started Tuesday just below 0.25%, but by Wednesday afternoon stood at 0.37%. That helped lift bond yields elsewhere, since low German yields have been acting as an anchor. The selloff in the bund Tuesday was the worst in 22 months…”

June 28 – Reuters (Sujata Rao): “Global debt levels have climbed $500 billion in the past year to a record $217 trillion, a new study shows, just as major central banks prepare to end years of super-cheap credit policies. World markets were jarred this week by a chorus of central bankers warning about overpriced assets, excessive consumer borrowing and the need to begin the process of normalizing world interest rates from the extraordinarily low levels introduced to offset the fallout of the 2009 credit crash. This week, U.S. Federal Reserve chief Janet Yellen has warned of expensive asset price valuations, Bank of England Governor Mark Carney has tightened controls on bank credit and European Central Bank head Mario Draghi has opened the door to cutting back stimulus, possibly as soon as September. Years of cheap central bank cash has delivered a sugar rush to world equity markets, pushing them to successive record highs. But another side effect has been explosive credit growth as households, companies and governments rushed to take advantage of rock-bottom borrowing costs. Global debt, as a result, now amounts to 327% of the world's annual economic output, the Institute of International Finance (IIF) said in a report…”

June 26 – Bloomberg (Garfield Clinton Reynolds and Adam Haigh): “Greed seems to be running the show in global markets. Fear has fled, and that may be the biggest risk of all. Currency volatility just hit a 20-month low, Treasury yields are in their narrowest half-year trading range since the 1970s and the U.S. equities fear gauge, the VIX, is stuck near a two-decade nadir. While markets have signaled complacency in the face of Middle East tensions, the withdrawal of Federal Reserve stimulus and President Donald Trump’s tweetstorms, the Bank for International Settlements flagged on Sunday that low volatility can spur risk-taking with the potential to unwind quickly.”

June 27 – Bloomberg (Annie Massa and Elizabeth Dexheimer): “The growing market for exchange-traded funds hasn’t been fully put to the test, according to one of the top U.S. speed trading firms. Ari Rubenstein, chief executive officer and co-founder of Global Trading Systems LLC, told lawmakers… that while investment dollars have flooded the U.S. ETF market, the new order has not endured an extreme period of stress. Volatility, a measure of market uncertainty, has remained low. ‘In some ways the markets are a bit untested,’ Rubenstein said… ‘It’s definitely something we should talk about to make sure industry participants are prepared in those instruments.’”

June 29 – Financial Times (Javier Espinoza): “Private equity buyouts have enjoyed the strongest start to a year since before the financial crisis as fund managers have come under intense pressure from investors to deploy some of the record amount of capital they hold. The volume of deals involving private equity firms climbed 29% to $143.7bn in the first half of the year, the highest level since 2007, according to… Thomson Reuters.”

June 27 – Bloomberg (Enda Curran and Stephen Engle): “Investors aren’t sufficiently pricing in a growing threat to economic and financial market stability from geopolitical risks, and the latest global cyberattack is an example of the damage that can be wreaked on trade, Cornell University Professor Eswar Prasad said. His remarks came as a virus similar to WannaCry reached Asia after spreading from Europe to the U.S. overnight, hitting businesses, port operators and government systems.”

Fixed Income Bubble Watch:

June 27 – CNBC (Ann Saphir): “Bond investors may soon pay a hefty price for being too pessimistic about the economy, according to portfolio manager Joe Zidle. Zidle, who is with Richard Bernstein Advisors, believes the vast amount of money flowing into long-duration bonds is signaling a costly mistake. ‘Last week alone, there is a 20-year plus treasury bond ETF that in one week got more inflows than all domestic equity mutual funds, and all domestic equity ETFs combined year-to-date,’ he said… He added: ‘I think investors are going to be in a real painful trade.’”

June 26 – Bloomberg (Mary Williams Walsh): “The United States Virgin Islands is best known for its powdery beaches and turquoise bays, a constant draw for the tourists who frequent this tiny American territory. Yet away from the beaches the mood is ominous, as government officials scramble to stave off the same kind of fiscal collapse that has already engulfed its neighbor Puerto Rico. The public debts of the Virgin Islands are much smaller than those of Puerto Rico, which effectively declared bankruptcy in May. But so is its population, and therefore its ability to pay. This tropical territory of roughly 100,000 people owes some $6.5 billion to pensioners and creditors.”

Federal Reserve Watch:

June 28 – Bloomberg (Jill Ward, Lucy Meakin, and Christopher Condon): “Federal Reserve Chair Janet Yellen gave no indication her plans for continued monetary policy tightening had shifted while acknowledging that some asset prices had become ‘somewhat rich.’ ‘We’ve made very clear that we think it will be appropriate to the attainment of our goals to raise interest rates very gradually,’ she said… In her first public remarks since the U.S. central bank hiked rates on June 14, Yellen said that asset valuations, by some measures ‘look high, but there’s no certainty about that.’ ‘Asset valuations are somewhat rich if you use some traditional metrics like price earnings ratios, but I wouldn’t try to comment on appropriate valuations, and those ratios ought to depend on long-term interest rates,” she said.”

June 27 – Bloomberg (Christopher Condon): “Federal Reserve Vice Chairman Stanley Fischer pointed to higher asset prices as well as increased vulnerabilities for both household and corporate borrowers in warning against complacency when gauging the safety of the global financial system. ‘There is no doubt the soundness and resilience of our financial system has improved since the 2007-09 crisis,’ Fischer said… ‘However, it would be foolish to think we have eliminated all risks.’”

June 28 – Bloomberg (Luke Kawa): “When a trio of Federal Reserve officials delivered remarks on Tuesday, the state of U.S. financial markets came in for a little bit of criticism. When all was said and done, U.S. equities sank the most in six weeks, yields on 10-year Treasuries rose and the dollar weakened to the lowest level versus the euro in 10 months. Fed Chair Janet Yellen said that asset valuations, by some measures ‘look high, but there’s no certainty about that.’ Earlier, San Francisco Fed President John Williams said the stock market ‘seems to be running very much on fumes’ and that he was ‘somewhat concerned about the complacency in the market.’ Fed Vice-Chair Stanley Fischer suggested that there had been a ‘notable uptick’ in risk appetite that propelled valuation ratios to very elevated levels.”

June 27 – Reuters (Guy Faulconbridge and Kate Holton): “With the U.S. economy at full employment and inflation set to hit the Federal Reserve's 2% target next year, the U.S. central bank needs to keep raising rates gradually to keep the economy on an even keel, a Fed policymaker said… ‘If we delay too long, the economy will eventually overheat, causing inflation or some other problem,’ San Francisco Fed President John Williams said… ‘Gradually raising interest rates to bring monetary policy back to normal helps us keep the economy growing at a rate that can be sustained for a longer time.’”

June 29 – Financial Times (Alistair Gray and Barney Jopson): “Regulators have given US banks the go-ahead to pay out almost all their earnings to shareholders this year in a signal of their confidence in the health of the financial system. The Federal Reserve has given the green light to a record level of post-crisis distributions, including an estimated total of almost $100bn from the six largest banks. All 34 institutions passed the second part of its annual stress test, although the Fed did call out weaknesses in capital planning at Capital One… The big six US banks — Bank of America, Citigroup, Goldman Sachs, Morgan Stanley, JPMorgan Chase and Wells Fargo — are set to return to shareholders between $95bn and $97bn over the next four quarters, according to RBC Capital Markets analyst Gerard Cassidy. That is about 50% more than they were able to hand out after last year’s exam.”

U.S. Bubble Watch:

June 27 – Wall Street Journal (Shibani Mahtani and Douglas Belkin): “This is what happens when a major American state lets its bills stack up for two years. Hospitals, doctors and dentists don’t get paid for hundreds of millions of dollars of patient care. Social-service agencies help fewer people. Public universities and the towns that surround them suffer. The state’s bond rating falls to near junk status. People move out. A standoff in Illinois between Republican Governor Bruce Rauner and Democratic Speaker of the House Michael Madigan over spending and term limits has left Illinois without a budget for two years. State workers and some others are still getting paid because of court orders and other stopgap measures, but bills for many others are piling up. The unpaid backlog is now $14.6 billion and growing.”

June 28 – Bloomberg Business Week (Elizabeth Campbell and John McCormick): “Two years ago, Illinois’s budget impasse meant that the state’s lottery winners had to wait for months to get their winnings. Now, with $15 billion in unpaid bills, Illinois is on the brink of being unable to even sell Powerball tickets. For the third year in a row, the state is poised to begin its fiscal year on July 1 with no state budget and billions of dollars in the red. If that happens, S&P Global Ratings says Illinois will probably lose its ­investment-grade status and become the first U.S. state on record to have its general obligation debt rated as junk. Illinois is already the worst-rated state at BBB-, S&P’s lowest investment-grade rating. The state owes at least $800 million in interest and late fees on its unpaid bills.”

June 26 – Wall Street Journal (Lev Borodovsky): “Commercial real estate prices are starting to roll over after reaching record highs, capping a long postcrisis rally. While there is no sign that a decline would mean imminent danger for the economy, Federal Reserve Bank of Boston President Eric Rosengren recently warned that valuations represent a risk he ‘will continue to watch carefully.’ So far, prices have proven resilient, reflecting in part the unexpected 2017 decline of interest rates and the rising capital flows from diverse sources such as U.S. pensions and overseas investors.”

June 28 – Wall Street Journal (Chris Dieterich): “Booming demand for passive investments is making exchange-traded funds an increasingly crucial driver of share prices, helping to extend the long U.S. stock rally even as valuations become richer and other big buyers pare back. ETFs bought $98 billion in U.S. stocks during the first three months of this year, on pace to surpass their total purchases for 2015 and 2016 combined… These funds owned nearly 6% of the U.S. stock market in the first quarter—their highest level on record—according to an analysis of Fed data by Goldman Sachs… Surging demand for ETFs this year has to an unprecedented extent helped fuel the latest leg higher for the eight-year stock-market rally.”

June 27 – Reuters (Kimberly Chin): “U.S. single-family home prices rose in April due to tight inventory of houses on the market and low mortgage rates… and economists see no imminent change in the trend. The S&P CoreLogic Case-Shiller composite index of 20metropolitan areas rose 5.7% in April on a year-over-year basis after a 5.9% gain in March, which matched the fastest pace in nearly three years.”

June 27 – Bloomberg (Andrew Mayeda): “The International Monetary Fund cut its outlook for the U.S. economy, removing assumptions of President Donald Trump’s plans to cut taxes and boost infrastructure spending to spur growth. The IMF reduced its forecast for U.S. growth this year to 2.1%, from 2.3% in the fund’s April update to its world economic outlook. The… fund also cut its projection for U.S. growth next year to 2.1%, from 2.5% in April.”

Japan Watch:

June 29 – Reuters (Leika Kihara and Stanley White): “Japan's industrial output fell faster in May than at any time since the devastating earthquake of March 2011 while inventories hit their highest in almost a year, suggesting a nascent economic recovery may stall before it gets properly started. Household spending also fell in May, leaving the Bank of Japan's 2% target seemingly out of reach.”

EM Watch:

June 28 – Reuters (Brad Brooks and Silvio Cascione): “President Michel Temer called a corruption charge filed against him by Brazil's top prosecutor a ‘fiction’ on Tuesday, as the nation's political crisis deepened under the second president faced with possible removal from office in just over a year. Temer, who was charged Monday night with arranging to receive millions of dollars in bribes, said the move would hurt Brazil's economic recovery and possibly paralyze efforts at reform. The conservative leader said executives of the world's biggest meatpacker, JBS SA , who accused him in plea-bargain testimony of arranging to take 38 million reais ($11.47 million) in bribes in the coming months, did so only to escape jail for their own crimes.”

Geopolitical Watch:

June 29 – New York Times (Nicole Perlroth and David E. Sanger): “Twice in the past month, National Security Agency cyberweapons stolen from its arsenal have been turned against two very different partners of the United States — Britain and Ukraine. The N.S.A. has kept quiet, not acknowledging its role in developing the weapons. White House officials have deflected many questions, and responded to others by arguing that the focus should be on the attackers themselves, not the manufacturer of their weapons. But the silence is wearing thin for victims of the assaults, as a series of escalating attacks using N.S.A. cyberweapons have hit hospitals, a nuclear site and American businesses. Now there is growing concern that United States intelligence agencies have rushed to create digital weapons that they cannot keep safe from adversaries or disable once they fall into the wrong hands.”

June 28 – New York Times (Sheera Frenkel, Mark Scott and Paul Mozur): “As governments and organizations around the world grappled… with the impact of a cyberattack that froze computers and demanded a ransom for their release, victims received a clear warning from security experts not to pay a dime in the hopes of getting back their data. The hackers’ email address was shut down and they had lost the ability to communicate with their victims, and by extension, to restore access to computers. If the hackers had wanted to collect ransom money, said cybersecurity experts, their attack was an utter failure. That is, if that was actually their goal. Increasingly sophisticated ransomware assaults now have cybersecurity experts questioning what the attackers are truly after. Is it money? Mayhem? Delivering a political message?”

June 25 – Reuters: “Qatar is reviewing a list of demands presented by four Arab states imposing a boycott on the wealthy Gulf country, but said on Saturday the list was not reasonable or actionable. ‘We are reviewing these demands out of respect for ... regional security and there will be an official response from our ministry of foreign affairs,’ Sheikh Saif al-Thani, the director of Qatar's government communications office, said… Saudi Arabia, Egypt, Bahrain and the United Arab Emirates, which imposed a boycott on Qatar, issued an ultimatum to Doha to close Al Jazeera, curb ties with Iran, shut a Turkish military base and pay reparations among other demands.”

June 27 – Reuters (Foo Yun Chee): “EU antitrust regulators hit Alphabet unit Google with a record 2.42-billion-euro ($2.7bn) fine on Tuesday, taking a tough line in the first of three investigations into the company's dominance in searches and smartphones. It is the biggest fine the EU has ever imposed on a single company in an antitrust case, exceeding a 1.06-billion-euro sanction handed down to U.S. chipmaker Intel in 2009. The European Commission said the world's most popular internet search engine has 90 days to stop favoring its own shopping service or face a further penalty per day of up to 5% of Alphabet's average daily global turnover.”

Thursday, June 29, 2017

Friday's News Links

[Bloomberg] Technology Shares Lead Stock Rebound; Oil Gains: Markets Wrap

[Bloomberg] Tepid U.S. Consumer Spending Keeps Economic Rebound On Track

[CNBC] Trump reportedly 'hell-bent' on imposing steel tariff despite objections from most advisors

[Reuters] As credit dries up, China's small firms face shrinking profits, bankruptcies

[Bloomberg] China Manufacturing Rose in June Amid Global Upturn

[Reuters] Japan factory output tumbles, flashes warning signs on growth

[Reuters] Brightening economy sets euro up for strongest quarter since debt crisis

[Reuters] China builds new military facilities on South China Sea islands: think tank

[WSJ] Central Banks and the New Abnormal

[FT] Global bond market sell-off infects equities

[NYT] Fear of an End to Easy Money Prompts Sell-Off

[WSJ] Twisted Geniuses or Bumbling Ex-Academics?

[WSJ] It’s Whac-A-Mole for Chinese Regulators Trying to Clamp Down on Speculation

Thursday Evening Links

[Bloomberg] Tech Spoils Bank Party as Stocks, Dollar Slide: Markets Wrap

[Reuters] Wall Street bond traders get no reprieve from Fed's taper plan

[CNBC] Congress must raise debt ceiling by mid-October: CBO

[Bloomberg] Dollar's Battle Gets Harder With Fed No Longer Only Hawk in Town

[Bloomberg] Yuan Rides a Roller Coaster in June as China Fights With Market

[NYT] U.S. Seeks to Keep Closer Tabs on Chinese Money in America

Wednesday, June 28, 2017

Thursday's News Links

[Bloomberg] Tech Spoils Bank Party as Stocks Slip; Euro Gains: Markets Wrap

[Reuters] End of easy money? Surging euro, bond yields say yes

[Bloomberg] Investors Scramble to Keep Pace With New Market Outlook

[Reuters] Fed gives big U.S. banks a green light for buyback, dividend plans

[Bloomberg] Money Markets Wake Up After Central Banks Turn Hawkish

[Reuters] Senate Republicans struggle to salvage healthcare effort

[Reuters] German inflation picks up unexpectedly in June, state data suggest

[WSJ] Global Bond Selloff Deepens Amid Hints at End of Stimulus

[WSJ] Signals on Stimulus Roil Global Markets

[WSJ] Global Bonds Gyrate as Investors Try to Parse Central Banks’ Next Stimulus Moves

[WSJ] Illinois Is in Deep Trouble: What Investors Need to Know

[FT] Stress tests clear big US banks for $100bn payout

[FT] Merkel throws down gauntlet to Trump on trade before G20 summit

[FT] Buyouts rise to highest level for a decade

[FT] Catalonia’s referendum exposes a divided Spain

[NYT] Hacks Raise Fear Over N.S.A.’s Hold on Cyberweapons

Wednesday Evening Links

[Bloomberg] Equity Rally Extends to Asia as Higher Rates Seen: Markets Wrap

[Bloomberg] Central Banks Roil Markets as Stocks, Euro Jump: Markets Wrap

[Reuters] Banks, tech stocks lead broad Wall St. rebound

[Bloomberg] Central Bankers Tell the World Borrowing Costs Are Headed Higher

[Reuters] Global borrowing hits record as big central banks prepare to tighten credit

[Reuters] Germany's Schaeuble bemoans EU 'loophole' after Italy banks' rescue

[Bloomberg] Suddenly the U.S. Is Exporting More Crude Than a Bunch of OPEC Members

[Reuters] New computer virus spreads from Ukraine to disrupt world business

[WSJ] Global Bonds Gyrate as Investors Try to Parse Central Banks’ Next Stimulus Moves

[FT] Confusion as Carney and Draghi struggle to clarify stimulus exit

Tuesday, June 27, 2017

Wednesday's News Links

[Bloomberg] U.S. Stocks Rebound, Euro Flat After ECB Comments: Markets Wrap

[Reuters] ECB chief was overinterpreted by skittish markets: sources

[Bloomberg] Draghi Tried to Be Cautious But Spooked the Market Anyway

[Reuters] Euro, bond yields drive higher on ECB scale-back bets

[Bloomberg] Draghi's Reflation Talk Sparks a Sell-off in Stocks and Bonds

[Forbes, Keen] There Is No Excuse For Janet Yellen's Complacency

[Bloomberg] Illinois Is in a $6 Billion Budget Hole and Flirting With Junk

[Reuters] Brazil's Temer calls graft charge a 'fiction' as crisis deepens

[CNBC] China growth will accelerate as it gets leaders who aren't scared: Former PBOC adviser

[Bloomberg] China Is About to Bury Elon Musk in Batteries

[Bloomberg] Cyberattack Is Vivid Example of Underpriced Threat, Prasad Says

[Bloomberg] Cyberattacks Lay Bare Our Lack of Knowledge

[Bloomberg] China Set to Expand Opening to $9 Trillion Bond Market

[WSJ] Central Banks Give Sleepy Markets a Wake-Up Call

[WSJ] Global Bonds Sell Off, Sparking Fears of Further ‘Taper Tantrum’

[WSJ] ETF Buyers Propel Stock Market Rally

[NYT] Ransomware Attack Raises Concerns Over Future Assaults

[FT] Asia bond prices fall after bullish ECB commentary

[FT] China fake travel spending masks capital flight, warns Fed

Tuesday Evening Links

[Bloomberg] U.S. Stocks, Bonds Decline as Trump Agenda Stalls: Markets Wrap

[Bloomberg] Yellen Keeps Fed on Track for Rate Hikes

[Bloomberg] Trio of Fed Speakers Warn on Valuations With Eyes on Tightening

[Bloomberg] Fed's Fischer Warns Against Complacency Over Stability Risks

[Reuters] Not another financial crisis in 'our lifetimes': Fed's Yellen

[Bloomberg] GOP Leaders Delay Health Bill Vote Until After July 4 Recess

[Bloomberg] 'Untested' ETF Market Worries Top Speed Trader in U.S. Equities

[Bloomberg] 50 Cent Isn't the Only One Seeking Big Protection in VIX Options

[Reuters] Ransomware virus hits computer servers across the globe

[Reuters] Italy's Berlusconi dusts himself down in final bid for power

[NYT] Global Cyberattack: What We Know and Don’t Know

[WSJ] How Bad Is the Crisis in Illinois? It Has $14.6 Billion in Unpaid Bills

[WSJ] ECB’s Draghi Hints at Possible Winding Down of Eurozone Stimulus

[FT] Michel Temer faces fight for survival after corruption charge

[FT] Smooth talking Draghi drops the R word

Monday, June 26, 2017

Tuesday's News Links

[Bloomberg] U.S. Stocks, Dollar Fall as Treasuries Strengthen: Markets Wrap

[Reuters] Stocks, dollar ease as central bank officials take center stage

[Reuters] Euro surges nearly one percent after Draghi comments, dollar slips

[Bloomberg] Draghi Sees Room for Paring Stimulus Without Tightening Policy

[Bloomberg] IMF Cuts U.S. Outlook, Calls Trump's Growth Target Unrealistic

[Reuters] U.S. home prices for April rise slower than expected

[Bloomberg] Senators Considering Breaking Fannie-Freddie Into Pieces, Sources Say

[Reuters] EU fines Google record $2.7 billion in first antitrust case

[Bloomberg] Markets Have Nothing Left to Fear But Fearlessness Itself

[Bloomberg] China Debt Squeeze Has Moody's Awaiting First Local Default

[Bloomberg] Rising Inequality May Be the Real Risk of Automation

[WSJ] Anxious Investors Try to Hedge Against a Big Selloff, Even as Good Times Roll

[WSJ] Hostage to China’s Insecurity—Its Markets

[WSJ] Trump Administration Struggles to Find Community Banker for Fed Board

[WSJ] A Turning Point for Commercial Property

Monday Evening Links

[Bloomberg] Small Gains Seen for Asian Stocks as Yen Weakens: Markets Wrap

[Bloomberg] Bitcoin, Ether Lead Digital Currency Slide From Highs

[Reuters] Brazil's top prosecutor charges President Temer with corruption

[Bloomberg] China's Pension Gap is Growing and Nobody Wants to Talk About It

[CNBC] Here's the worrisome 'conundrum' taking place in the bond market right now

Sunday, June 25, 2017

Monday's News Links

[Bloomberg] Treasuries Erase Loss, Dollar Slips on Orders Data: Markets Wrap

[Bloomberg] Gold Plunges as 1.8 Million Ounces Traded in a New York Minute

[Reuters] UK PM May strikes $1.3 billion deal to get Northern Irish DUP support for her government

[Reuters] Fed's Williams sees gradual rate hikes as key to further U.S. growth

[CNBC] Bond investors are setting themselves up for ‘real painful trade,’ this strategist warns

[Bloomberg] Why China's Secretive Regulators Are An Issue for Asian Dollar Debt

[Bloomberg] Only the World Can Stop Germany as Business Climate Hits Record

[Bloomberg] Berlusconi Stages Comeback in Italy's Mayoral Elections

[NYT] After Puerto Rico’s Debt Crisis, Worries Shift to Virgin Islands

[WSJ] Italy Is Prepared to Spend Billions in Shutdown of Two Banks

[WSJ] Deal on Italian Banks Raises Questions About Eurozone Rules

[WSJ] Ties Between Chinese Banks and Deal Makers Run Deep

[FT] Xi Jinping’s war on the ‘financial crocodiles’ gathers pace

Sunday Evening Links

[Bloomberg] Asia Stocks Advance as Crude Gains for Third Day: Markets Wrap

[Reuters] Oil climbs on weaker dollar, but rise in U.S. drilling drags

[Reuters] Takata decides to file for bankruptcy: source

Sunday's News Links

[Bloomberg] Italy Commits Up to $19 Billion to Keep Veneto Banks Afloat

[Bloomberg] Italy Rushes to Approve Decree Law to Keep Two Veneto Banks Open

[Reuters] Time may be nearing for ECB stimulus exit: Weidmann

[Reuters] Push on with the 'great unwinding', BIS tells central banks

[CNBC] BIS warns of geopolitical events and four other risks that could undermine global upswing

[Bloomberg] U.K. Credit Binge May Spur BOE's Carney to Rein in Exuberance

[NYT, Morgenson] Lessons From the Collapse of Banco Popular

[FT] Anbang’s predicament amid bank-risk probe

Friday, June 23, 2017

Weekly Commentary: Washington Finance and Bubble Illusion

June 18 – Financial Times (Mohamed El-Erian): “In hiking rates and, more notably, reaffirming its forward policy guidance and setting out plans for the phased contraction of its balance sheet, the Federal Reserve signalled last week that it has become less data dependent and more emboldened to normalise monetary policy. Yet, judging from asset prices, markets are failing to internalise sufficiently the shift in the policy regime. Should this discrepancy prevail in the months to come, the Fed could well be forced into the type of policy tightening process that could prove quite unpleasant for markets."

I’m not yet ready to move beyond the recent focus on global monetary policy. Belatedly, the Fed has become “more emboldened to normalise monetary policy.” Global policymakers may finally be turning more emboldened, though taking their precious time has nurtured alarming market complacency.

Over a period of years, securities markets became progressively more emboldened to the view that higher asset prices were the top priority of global central banks. For years I’ve argued that this is one policy slippery slope. For good reason, markets do not these days take seriously the threat of a tightening of financial conditions. The Fed and fellow central banks will surely seek to avoid what at this point would be a painful development for the global securities markets. When faced with a well-established Bubble, the notion of a painless tightening of financial conditions is a myth.

The current debate, focusing simplistically on interest rates and the level consumer price inflation, misses the overarching issue. U.S. and global central banking shifted to an untested and radical regime of directly inflating securities prices. No longer do central banks attempt to loosen or tighten bank lending through subtle changes in reserve holdings and interbank lending rates. Why not just purchase securities, supporting prices while injecting liquidity directly into the marketplace?

This momentous transformation of monetary management unfolded over a couple of decades – somehow seemingly unnoticed. Financial innovation played a key role. As more debt was securitized, the impact of marketplace liquidity upon system Credit dynamics became increasingly important. Much to its delight, the Fed recognized that small policy adjustments could exert big effects on risk-taking and leveraging – hence marketplace liquidity, pricing and overall system stimulus.

It was a case of booming Wall Street finance affording the Greenspan Fed the most powerfully alluring monetary policy transmission in history. At the same time, it was power our central bank was ill-equipped to administer. The Fed became increasingly supportive of the debt and equities markets – of Wall Street more generally - nurturing speculation, securities leveraging, derivatives and myriad deleterious financial and economic effects.

In terms of overall system stimulus, securities markets eventually came to dominate traditional bank lending. After disregarding repeated market warnings, the fragility of such a financial regime became obvious in 2008. Rather than using the crisis and its lessons to reposition to a more well-grounded monetary regime, the Fed and other central banks doubled down. Reflating securities markets became priority one, and central banks went so far as to be willing to inject newly created “money” directly into the markets to achieve their objective.

Central banks should not be in the business of favoring individual asset classes, sectors or groups in society. Never should a small group of unelected officials have such discretion to create Trillions of “money” and allocate wealth. After all, if “printing” Trillions to buy marketable debt was such a fine idea, why did central bankers wait until deep crisis to implement such a doctrine?

The new regime that developed specifically favored securities markets, Wall Street and the wealthy. It has fancied the financial speculator at the expense of the saver. The new regime favored financial engineering to productive investment – the white collar to the blue collar. There was no problem seen with deindustrialization and persistent huge Current Account Deficits. No issue whatsoever exchanging new financial claims for Chinese imports.

The new regime has spurred wealth redistribution that is at the root of a divided country, political dysfunction and escalating geopolitical risk. And there is little mystery surrounding weak economic underpinnings, dismal productivity trends and stagnant wages and living standards. Contemporary finance has proven itself especially deficient in allocating resources throughout the economy. Markets have been over-liquefied, too distorted, grossly speculative and too monstrous to be an effective mechanism for resource allocation.

All these consequences of precarious financial and policy regimes - and resulting Credit and assets Bubbles – apparently ensure that the Fed and global central bankers are trapped in policy doctrine beholden to the securities and derivatives markets.

This week I found myself again contemplating contemporary “money” and monetary theory. I pondered the attributes of “insatiable demand” and “preciousness” - and how governments throughout history abused the insatiable demand for money, eventually destroying its preciousness with dire consequences for financial systems, economies and societies.

Contemporary central bankers have become way too comfortable creating new “money” and using it to drive the markets. Over-liquefied markets, then, turned too comfortable financing (and leveraging) endless government borrowings. It has amounted to a historic inflation of “money” at the heart of the financial system. Especially since the crisis and Bernanke Reflation aftermath, Washington Finance has come to completely dominate the foundation of contemporary global finance.

Looking back to 1990, there were about $2.5 TN of Treasury Securities, $1.5 TN of Agency Securities and $340bn of Federal Reserve Credit. The three main sources of Washington Finance combined to $4.25 TN, or 71% of GDP. The explosive growth of the GSEs helped push Washington Finance to $8.34 TN (Treasury $3.36 TN, Agency $4.35 TN, and Fed $635bn) by the end of 2000, or 81% of GDP. Nearing the end of the mortgage finance Bubble in 2007, Washington Finance had inflated to $14.4 TN (Treasury $6.05 TN, Agency $7.40 TN, and Fed $950bn), or 99% of GDP.

In terms of Washington Finance, it is simply astonishing to contemplate what has unfolded since the crisis. Outstanding Treasury securities have reached $16.0 TN, with the Fed’s balance sheet ending 2016 at $4.43 TN. After all the fraud, insolvency and receivership, one might have assumed a downsized Agency sector. Not to be. Once Washington Finance takes hold, there’s apparently no letting loose. After a notably strong year of GSE growth, outstanding Agency Securities ended 2016 at a record $8.52 TN. Total Washington Finance ended the year at an incredible $28.93 TN, or 156% of GDP.

This almost $29.0 TN of “money-like” Credit provides a deceptively (Bubble Illusion) solid foundation to U.S. and global finance. Here at home, this unprecedented inflation of Washington “money” has significantly bolstered asset prices, spending, corporate profits and government revenues. Globally, the flow of Washington “money” abroad (Current Account Deficits and financial flows) inflated international reserve holdings, integral to what became booming post-crisis EM financial systems. I would furthermore argue that the unprecedented inflation of Washington “money” was instrumental in bolstering Chinese Bubble inflation to epic proportions. Chinese financial and economic Bubbles then became elemental to powering Bubbles around the globe. And particularly over the past two years, unprecedented U.S.-inspired inflation of government “money” in Europe and Japan (and elsewhere) provided the liquidity to propel a financial Bubble in the face of an increasingly troubling fundamental backdrop.

This has now been going on so long that is seems business as usual. Central banking and contemporary monetary doctrine are held in high esteem. Yet the history of great monetary inflations shows that, once going, they’re virtually impossible to control. And that’s where we are today. Understandably, after accommodating Bubbles to this point, markets assume that policymakers (i.e. Washington, Beijing, Frankfurt, Tokyo, etc.) will not dare risk popping them. At the same time, central bankers must by now appreciate that ultra-loose policies are a clear and present danger to financial stability. Beijing at least recognizes the risk of letting their (out of control) Bubble run.

Surely officials in Washington, Beijing, Europe, Tokyo and elsewhere would prefer to begin normalizing policy at this point. But this now goes so far beyond interest rates. We’re talking tens of Trillions of specious “money” and money-like securities and even much larger quantities of equities and corporate Credit whose values have been inflated by the massive expansion of government finance. To be sure, the current backdrop so dwarfs market misperceptions, distortions and mispricing from the mortgage finance Bubble period.

Policymakers everywhere prefer a go slow approach to “tightening,” determined not to upset the securities markets. Beijing this week provided aggressive liquidity injections, taking some pressure off Chinese bond yields, interbank lending rates and stock prices. Market wishful thinking has it that both Chinese officials and the Federal Reserve have largely completed “tightening” measures. Both systems, however, have powerful Bubble Dynamics feeding off the perception of safe government “money” and ongoing government support for securities and asset prices. Policy “normalization” would require that governments retreat from backstopping the markets and dictating system finance more generally.

At this late-stage of the Bubble, markets have no fear that policymakers are willing to risk bursting Bubbles. A cautious go slow approach to tightening and normalization may seem perfectly logical to central bankers, but it’s tantamount to not going at all. Inflation psychology has become deeply engrained throughout global financial markets – and it will be broken only through significant disappointment and anguish.

For the Week:

The S&P500 added 0.2% (up 8.9% y-t-d), while the Dow was unchanged (up 8.3%). The Utilities dropped 1.8% (up 9.0%). The Banks fell 2.3% (down 0.3%), and the Broker/Dealers lost 1.6% (up 7.1%). The Transports slipped 0.3% (up 3.8%). The S&P 400 Midcaps declined 0.5% (up 5.0%), while the small cap Russell 2000 gained 0.6% (up 4.2%). The Nasdaq100 rallied 2.1% (up 19.3%), and the Morgan Stanley High Tech index jumped 3.0% (up 24%). The Semiconductors rose 2.0% (up 20.1%). The Biotechs surged 8.8% (up 30.6%). With bullion gaining $3, the HUI gold index recovered 4.4% (up 6.6%).

Three-month Treasury bill rates ended the week at 94 bps. Two-year government yields rose 3 bps to 1.34% (up 15bps y-t-d). Five-year T-note yields increased a basis point to 1.76% (down 17bps). Ten-year Treasury yields slipped a basis point to 2.14% (down 30bps). Long bond yields fell six bps to 2.72% (down 35bps).

Greek 10-year yields dropped 24 bps to 5.37% (down 165bps y-t-d). Ten-year Portuguese yields were unchanged at 2.92% (down 82bps). Italian 10-year yields dropped seven bps to 1.92% (up 10bps). Spain's 10-year yields fell eight bps to 1.38% (unchanged). German bund yields slipped two bps to 0.26% (up 5bps). French yields declined three bps to 0.61% (down 7bps). The French to German 10-year bond spread narrowed one to 35 bps. U.K. 10-year gilt yields added a basis point to 1.03% (down 20bps). U.K.'s FTSE equities index slipped 0.5% (up 3.9%).

Japan's Nikkei 225 equities index gained 0.9% (up 5.3% y-t-d). Japanese 10-year "JGB" yields were little changed at 0.06% (up 2bps). France's CAC40 was about unchanged (up 8.3%). The German DAX equities index slipped 0.2% (up 10.9%). Spain's IBEX 35 equities index fell 1.2% (up 13.7%). Italy's FTSE MIB index dipped 0.5% (up 8.3%). EM equities were mixed. Brazil's Bovespa index lost 0.9% (up 1.4%), and Mexico's Bolsa declined 0.5% (up 7.3%). South Korea's Kospi increased 0.7% (up 17.4%). India’s Sensex equities index added 0.3% (up 16.9%). China’s Shanghai Exchange rallied 1.1% (up 1.7%). Turkey's Borsa Istanbul National 100 index jumped 1.5% (up 27.5%). Russia's MICEX equities index recovered 2.4% (down 16.4%).

Junk bond mutual funds saw outflows of $198 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates slipped a basis point to 3.90% (up 34bps y-o-y). Fifteen-year rates declined one basis point to 3.17% (up 34bps). The five-year hybrid ARM rate fell a basis point to 3.14% (up 40bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates unchanged at 4.0% (up 29bps).

Federal Reserve Credit last week expanded $2.4bn to $4.430 TN. Over the past year, Fed Credit declined $8.0bn. Fed Credit inflated $1.619 TN, or 58%, over the past 241 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt jumped $19.7bn last week to $3.290 TN. "Custody holdings" were up $51.5bn y-o-y, 1.6%.

M2 (narrow) "money" supply last week added $8.4bn to $13.516 TN. "Narrow money" expanded $708bn, or 5.5%, over the past year. For the week, Currency increased $2.2bn. Total Checkable Deposits fell $10.7bn, while Savings Deposits gained $12.1bn. Small Time Deposits rose $1.5bn. Retail Money Funds increased $1.6bn.

Total money market fund assets declined $16.2bn to $2.618 TN. Money Funds fell $85bn y-o-y (3.2%).

Total Commercial Paper jumped $10.3bn to $799bn. CP declined $60bn y-o-y, or 5.8%.

Currency Watch:

The U.S. dollar index was little changed at 97.26 (down 5.0% y-t-d). For the week on the upside, the New Zealand dollar increased 0.4%, the Swiss franc 0.4% and the Norwegian krone 0.1%. For the week on the downside, the Brazilian real declined 1.5%, the South African rand 0.9%, the Australian dollar 0.7%, the Mexican peso 0.5%, the British pound 0.5%, the South Korean won 0.4%, the Canadian dollar 0.4%, the Japanese yen 0.4%, the Singapore dollar 0.3%, and the Swedish krone 0.1%. The Chinese renminbi fell 0.38% versus the dollar this week (up 1.59% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index dropped 2.8% (down 11.2% y-t-d). Spot Gold increased 0.2% to $1,257 (up 9.1%). Silver added 0.3% to $16.707 (up 4.5%). Crude sank another $1.73 to $43.01 (down 20%). Gasoline declined 1.4% (down 14%), and Natural Gas sank 3.2% (down 22%). Copper rallied 2.3% (up 5%). Wheat fell 1.7% (up 16%). Corn sank 6.8% (up 4%).

Trump Administration Watch:

June 23 – New York Times (Jonathan Martin and Alexander Burns): “Senator Dean Heller of Nevada, perhaps the most vulnerable Republican facing re-election in 2018, said Friday that he would not support the Senate health care overhaul as written, dealing a serious blow to his party’s attempt to repeal the Affordable Care Act just days before a showdown vote. Using remarkably harsh language, Mr. Heller, who is seen as a pivotal swing vote, denounced the Senate-drafted bill in terms that Democrats swiftly seized on. He said the measure would deprive millions of health care and do nothing to lower insurance premiums. ‘I cannot support a piece of legislation that takes insurance away from tens of millions of Americans,’ he said at a news conference…”

China Bubble Watch:

June 20 – Reuters (Andrew Galbraith and Samuel Shen): “Generous money injections by China's central bank are helping to maintain some calm in the country's financial markets, but market rates are persistently high, reflecting worries that liquidity conditions remain unusually tight. Rates on 14-day repos climbed to 5.3% on Monday, their highest late April… Liquidity conditions are typically tight in China in June due to tax payments and as companies look to make their balance books look healthier at the end of the month and quarter… This year, a regulatory clampdown on riskier forms of financing, particularly between banks and non-financial institutions, has created additional strains on the system.”

June 20 – Reuters (Sue-Lin Wong and Shu Zhang): “The number of high net worth individuals (HNWIs) in China has risen nearly 9 times since a decade ago, a private survey released on Tuesday showed… Chinese with at least 10 million yuan ($1.47 million) of investable assets hit 1.6 million in 2016, up from 180,000 in 2006, according to the 2017 China Private Wealth Report by Bain Consulting and China Merchants Bank. The overall value of the private wealth market increased to 165 trillion yuan in 2016, growing at 21% annually in 2014-2016.”

June 19 – Bloomberg: “China’s home prices increased in fewer cities last month in the wake of cooling measures imposed by local authorities. New-home prices, excluding government-subsidized housing, gained from the previous month in 56 of 70 cities tracked by the government, compared with 58 in April… Prices fell in nine cities and were unchanged in five. In Beijing, the scene of the nation’s tightest property restrictions, prices of new homes were unchanged from the previous month, and prices of existing homes fell by 0.9%, the first decline since February 2015.”

June 19 – Bloomberg: “China’s workers may be starting to feel like they’re getting a raw deal. Amid soaring industrial profits, employees in the world’s second-largest economy saw slower wage growth last year -- and many are seeing the smallest raises since 1997. That’s another sign that the years of pay gains above ten percent and burgeoning spending power are coming to a close, as China confronts industrial overcapacity, mounting debt and waning competitiveness.”

June 21 – Bloomberg (Sam Mamudi and Ben Bartenstein): “Chinese stocks were little moved by their addition to MSCI Inc.’s benchmark indexes… While MSCI’s announcement was a landmark step in China’s integration with the global financial system, it will initially have a small effect on the amount of foreign money entering the nation’s $6.9 trillion stock market. Domestic shares will comprise just 0.7% of MSCI’s global emerging-markets gauge as inclusion begins in two steps: the first in May 2018 and the second in August of next year.”

June 19 – Bloomberg (Fion Li): “Hong Kong’s pegged exchange rate should stay as it has served the city well through financial crises for more than 30 years, the chief of its de facto central bank said. ‘Hong Kong is a small and open economy,’ Hong Kong Monetary Authority Chief Executive Norman Chan said… as the city approaches the 20th anniversary of Chinese rule. ‘Keeping a stable exchange rate between the Hong Kong dollar and the U.S. dollar is the most suitable arrangement. We have no need and no intention to change such an effective system.’”

Europe Watch:

June 19 – Bloomberg (Kevin Costelloe and Sonia Sirletti): “Italian finance officials and the European Commission are racing to find a solution for two troubled banks in the northern Veneto region that have weighed on the nation’s financial system. Finance Minister Pier Carlo Padoan said… the matter of Veneto Banca SpA and Banca Popolare di Vicenza SpA is being worked on ‘actively,’ without offering details. The European Commission is working ‘hand in hand’ with Italian authorities and Europe’s Single Supervisory Mechanism, and is making ‘good progress’ on reaching a solution within the bloc’s rules…”

Central Bank Watch:

June 20 – Bloomberg (Lucy Meakin and Fergal O'Brien): “Mark Carney ended more than a month of silence with a major speech that pushed back against rate hawks in the Bank of England and re-emphasized his concerns about the impact of Brexit on the economy. The U.K.’s exit from the European Union was a central theme of his address…, with the BOE governor highlighting the risks to consumer spending, business investment, the current-account deficit and financial services. He indicated he’s in no rush to raise interest rates, saying he wants to see how the economy responds to the ‘reality of Brexit negotiations.’”

June 21 – Bloomberg (Jill Ward): “Bank of England chief economist Andy Haldane is leaning toward joining the hawks on the Monetary Policy Committee, saying that the risks of leaving policy tightening too late are rising and that he considered a vote for a rate increase as early as June. ‘The risks of tightening ‘too early’ have shrunk as growth and, to lesser extent, inflation have shown greater resilience than expected,’ Haldane said in a speech… ‘Provided the data are still on track, I do think that beginning the process of withdrawing some of the incremental stimulus provided last August would be prudent moving into the second half of the year.’ The comments from Haldane, usually on the more dovish end of the panel, add to signs that policy makers are becoming increasingly restless as inflation breaches their 2% target.”

June 21 – Bloomberg (Paul Gordon): “The European Central Bank cited the government of U.S. President Donald Trump as a key reason why the risks to the global economy remain tilted to the downside. The… ECB said in an article from its Economic Bulletin… that while some concerns over the prospects for world growth have diminished, such as China’s short-term outlook and the resilience of emerging-market economies, others have appeared. ‘Since the U.S. election, pressures for more inward-looking policies have risen… In particular, there is significant policy uncertainty surrounding the intentions of the new U.S. administration regarding fiscal and, especially, trade policies, the latter entailing potentially significant negative effects on the global economy.’”

Brexit Watch:

June 23 – UK Guardian (Dan Roberts): “One year on from Britain’s vote to leave the EU, the anniversary of the referendum was overshadowed by fresh outbreaks of doubt. In Brussels, Theresa May’s farewell offer on EU citizenship was met with a shrug from commission president Jean-Claude Juncker and a chorus of voices urging Britain to stay. In Westminster, her own chancellor, Philip Hammond, is one of many dusting down alternative models of Brexit to soften its impact on a faltering economy. British officials in Whitehall have meanwhile had to temper their negotiating strategy after May’s mandate to walk away with no deal was undermined by a humiliating general election result. But what are the chances of Brexit 2.0 emerging from a second year of Britain’s post-referendum soul-searching? Has an election in which both main parties still supported departure simply flushed out the last few remoaners in denial? Or was this the week the wheels started to fall off May’s all-or-nothing exit vehicle?”

Global Bubble Watch:

June 19 – Wall Street Journal (Steven Russolillo): “The calm that has descended on U.S. financial markets is stretching around the world. Based on one commonly used measure, Asian equities are near their least volatile this century... In the U.S., Wall Street’s ‘fear gauge’ is near all-time lows, and in Europe, volatility has also largely subsided. ‘This is a global dynamic,’ said Michael Parker, head of strategy, Asia-Pacific at Bernstein Research in Hong Kong. ‘You see low volatility everywhere.’”

June 16 – CNBC (Jeff Cox): “The staggering level of government debt carrying negative yields, after falling from its peak a year ago, is back on the rise. A slew of factors converged in May to send the global total to $9.5 trillion of sovereign debt — a situation where governments effectively are getting paid to borrow money, according to Fitch Ratings. The total represented a 10.5 percent increase from April. Prominent investors have warned of the dangers of so much negative-yielding debt. Janus Henderson's Bill Gross has called it a ‘supernova’ that will ‘explode,’ while Deutsche Bank CEO John Cryan has cautioned about "fatal consequences" of central banks being enticed by slashing rates to that extent.”

June 19 – Bloomberg (Emily Cadman): “Moody’s… cut the long-term credit rating of Australia’s four biggest banks, saying surging home prices, rising household debt and sluggish wage growth pose a threat to the lenders. Australia & New Zealand Banking Group Ltd., Commonwealth Bank of Australia, National Australia Bank Ltd. and Westpac Banking Corp. were all downgraded to Aa3 from Aa2, Moody’s said… The ratings outlook for all four lenders is stable, Moody’s said. ‘Risks associated with the housing market have risen sharply in recent years… While a sharp housing downturn isn’t its core scenario, ‘the tail risk represented by increased household sector indebtedness becomes a material consideration in the context of the very high ratings assigned to Australian banks…’”

June 17 – CNBC (Robert Frank): “The world's millionaires, who represent the top 1% of the population, now own a record 45% of the global wealth and their share is growing… There are now 17.9 million households in the world, up 8% from 16.6 million last year, according to… The Boston Consulting Group. The U.S. has the most millionaires, with over 7 million millionaire households, with China ranking second with 2.1 million.”

June 20 – Financial Times (Vanessa Houlder): “Offshore companies in the British Virgin Islands have assets of more than $1.5tn, more than twice the sum estimated in 2010. Two-thirds of the offshore companies registered in the BVI are used for ‘corporate structuring’, and more than 140 listed businesses in London, New York and Hong Kong have a unit in the BVI… These units can be used for tax planning, but can also be useful as a tax-neutral hub for investors from different locations. Companies are also attracted by the BVI’s legal system, which mirrors British law.”

Fixed Income Bubble Watch:

June 19 – Wall Street Journal (Julie Wernau and Taos Turner): “Argentina sold a 100-year bond on Monday, the latest sign of investor hunger for yield as the country joined a small group to sell so-called century bonds. The Argentine government raised $2.75 billion through the debt issue with a yield of 7.9%... Proceeds from the private-placement offering will go toward financing its budget and refinancing existing debt. The yield was lower than the initial price talk of 8.25%, an indication that many investors around the world jumped at the chance to own debt with yields exceeding those of even many emerging-market issuers.”

Federal Reserve Watch:

June 20 – Reuters (Ann Saphir and Lindsay Dunsmuir): “The outlook for inflation and the future of financial stability are emerging as dueling concerns at the heart of a debate at the U.S. central bank over how fast to proceed on future interest-rate hikes. That is a change from years past, where high unemployment was at the top of the Federal Reserve's worry list for the U.S. economy. But with the U.S. unemployment rate now at 4.3%, most Fed officials are now convinced that nearly all Americans who want jobs can and do get them. That is a main reason the Fed last week raised its target range for short-term interest rates for the second time this year… Fed Chair Janet Yellen expressed confidence inflation would eventually perk up, but some policymakers cast doubt.”

June 19 – Reuters (Jonathan Spicer): “U.S. inflation is a bit low but should rebound alongside wages as the labor market continues to improve, an influential Federal Reserve official said…, reinforcing the message that a recent patch of weak data is unlikely to derail plans to keep raising interest rates. The comments by New York Fed President William Dudley… were among the first after the U.S. central bank hiked rates last week in the face of a series of soft inflation readings… ‘We are pretty close to full employment… Inflation is a little lower than what we would like, but we think that if the labor market continues to tighten, wages will gradually pick up and with that, inflation will gradually get back to 2%.’”

June 20 – Reuters (Lindsay Dunsmuir): “Boston Fed President Eric Rosengren said… that the era of low interest rates in the United States and elsewhere poses financial stability risks and that central bankers must factor such concerns into their decision-making. ‘Monetary policy is less capable of offsetting negative shocks when rates are already low,’ Rosengren said in a speech at a conference on macroprudential policy in Amsterdam jointly organized by the Dutch and Swedish central banks. In particular, he said… ‘Reach-for-yield behavior can make financial intermediaries and the economy more risky,’ Rosengren said.”

U.S. Bubble Watch:

June 20 – Reuters: “The U.S. current account deficit widened slightly in the first quarter, as the country imported more crude oil, car parts and supplies for its factories. …The current account deficit, which measures the flow of goods, services and investments into and out of the country, expanded by 2.4% to $116.8 billion… The first-quarter current account deficit represented 2.5% of gross domestic product…”

June 17 – Associated Press (Sara Burnett): “The Illinois official responsible for paying the state's bills is warning that new court orders mean her office must pay out more each month than Illinois receives in revenue. Comptroller Susana Mendoza must prioritize what gets paid as Illinois nears its third year without a state budget. A mix of state law, court orders and pressure from credit rating agencies requires some items be paid first. Those include debt and pension payments, state worker paychecks and some school funding. Mendoza says a recent court order regarding money owed for Medicaid bills means mandated payments will eat up 100% of Illinois' monthly revenue.”

June 20 – Bloomberg (Kristy Westgard): “Even a stock market soaring to record highs won’t rescue America’s struggling state and local pension plans. A ‘best case’ scenario of a cumulative 25% investment return during the 2017-2019 period will not offer a respite for chronically underfunded U.S. public pension plans, according to a Moody’s... The growing gap between how much state and local governments are projected to pay employees and how much funds they actually have set aside has risen to over $4 trillion nationwide. New Jersey sports the widest funding gap, followed closely by Kentucky and Illinois. The optimistic ‘best case’ of cumulative 25% investment return would reduce net pension liabilities by just 1% through 2019 year-end because of past bad investment returns and weak contributions. Meanwhile, the ‘base case’ scenario of 19% returns would see net pension liabilities rise by 15%.”

June 21 – CNBC (Diana Olick): “After surging to the highest level since the presidential election, demand for home loans remained steadily elevated last week… Mortgage applications to purchase a home, which are less sensitive to weekly rate moves, fell 1% for the week, seasonally adjusted, but are 9% higher than the same week one year ago.”

June 19 – New York Times (David Streitfeld): “Joke all you want about drone-delivered kale and arugula. Amazon's $13.4 billion bet to take on the $800 billion grocery business in the United States by acquiring Whole Foods fits perfectly into the retailer's business model. Unlike almost any other chief executive, Amazon's founder, Jeff Bezos, has built his company by embracing risk, ignoring obvious moves and imagining what customers want next… Key to that strategy is his approach to failure. While other companies dread making colossal mistakes, Mr. Bezos seems just not to care. Losing millions of dollars for some reason doesn't sting. Only success counts. That breeds a fiercely experimental culture that is disrupting entertainment, technology and, especially, retail.”

June 16 – New York Times (Rachel Abrams and Julie Creswell): “Shares of Walmart, Target, Kroger and Costco, the largest grocery retailers, all tumbled on Friday. And no wonder. Grocery stores have spent the last several years fighting against online and overseas entrants. But now, with its $13.4 billion purchase of Whole Foods, Amazon has effectively started a supermarket war. Armed with giant warehouses, shopper data, the latest technology and nearly endless funds — and now with Whole Foods’ hundreds of physical stores — Amazon is poised to reshape an $800 billion grocery market that is already undergoing many changes.”

Japan Watch:

June 19 – Bloomberg (Isabel Reynolds): “Japanese Prime Minister Shinzo Abe struck an apologetic tone at a news conference Monday as he expressed his regret that a cronyism scandal had eaten into parliamentary debate on policy and triggered public mistrust in his government. Abe said that the opposition’s focus on the question of his possible intervention in the government’s approval of a school run by one of his close associates took up too much time in the current parliament session. The premier said he would fulfill his responsibility to explain the issue.”

June 19 – Reuters (Tetsushi Kajimoto and Izumi Nakagawa): “Confidence among Japanese manufacturers bounced in June to match a decade-high level recorded in April and is expected to rise for several months, a Reuters survey found, providing more evidence of economic recovery. Service-sector mood rose to a two-year high…”

EM Watch:

June 17 – Reuters (Bruno Federowski): “Brazilian President Michel Temer led a corruption scheme in which lawmakers squeezed high-profile executives for bribes, billionaire Joesley Batista told magazine Época… In his first interview since striking a leniency agreement with Brazilian prosecutors, Batista told Época that Temer asked for money several times since 2010. Batista told the magazine that Temer led a group of senior politicians regularly demanding kickbacks in exchange for political favors.”

June 21 – Reuters (Lisandra Paraguassu and Brad Brooks): “Brazil's federal police… delivered to a top court justice the bulk of their investigation into allegations that President Michel Temer took bribes in exchange for political favors doled out to the world's largest meatpacker, JBS SA. The document, made public by the top court, is a significant step in the investigation, which is widely expected to lead to Brazil's top federal prosecutor lodging corruption charges against Temer by the end of next week… It also adds to doubts that Temer will be able to push through badly needed economic reforms through congress, needed to spark Brazil's economy just as it emerges from its worst recession on record.”

Leveraged Speculator Watch:

June 20 – Bloomberg (Dani Burger): “Believe the hype. Quants have never been more popular. After doubling over the past decade, assets run by so-called systematic funds have hit a record $500 billion this year, according to… Barclays Plc. In some ways, their meteoric rise is due to the same technological advances that are disrupting most industries. Faster computers and better data has enabled asset managers to automate skills that once were limited to market legends… The most popular type of quant hedge fund strategy, managed futures funds, aim to capture broad market trends across asset classes and trade futures to do so. They oversee nearly $200 billion…”

Geopolitical Watch:

June 18 – Financial Times (Wolfgang Münchau): “Matteo Renzi, David Cameron, Theresa May — all were fooled by the polls. The problem was not that the polls were wrong. Some were quite good, and most were right at the time when the leaders took the politically fateful decisions. The former Italian and UK prime ministers clearly had the support of a majority of their electorates when they called referendums and were sure they could win. The Conservative party was indeed well ahead of Labour in April this year when the prime minister called her snap election. The speed with which the electorate changed its mind was more fateful than the polls themselves. The French electorate has been more extreme than any other. It managed to eradicate virtually the entire political establishment in a short sequence of elections… The French are in a process of exhausting all their alternatives. It is painful to think what they might do if they ever become disillusioned with Emmanuel Macron.”

June 19 – Wall Street Journal (Dion Nissenbaum and Thomas Grove): “Tensions between Washington and Moscow escalated… when Russia threatened to track American warplanes in Syria after a U.S. pilot shot down a Syrian jet for the first time in the country’s six-year war. The U.S. military responded to Moscow’s warnings by shifting the flight routes of some pilots carrying out missions in Syria, U.S. officials said, an effort to minimize risks to American pilots as the White House and the Pentagon both appealed for calm. Sunday’s U.S. downing of the Syrian regime warplane came as American forces are increasingly at risk of direct confrontation with Syrian President Bashar al-Assad and his allies from Russia and Iran.”

June 16 – Wall Street Journal (Nathan Hodge and Julian E. Barnes): “A quarter-century after the Cold War ended, U.S. and Russian tank formations are once again squaring off. This spring, the North Atlantic Treaty Organization moved armored forces to the Russian border, where they are conducting daily drills from Poland to Estonia. Less than 100 miles away, Moscow’s forces are preparing for large-scale maneuvers in the autumn, a demonstration of the country’s revitalized might... Facing off behind these front lines and shaping each side’s grand strategy are two of this generation’s most influential officers in Washington and Moscow: U.S. Army Lt. Gen. H.R. McMaster and Russian Gen. Valery Gerasimov.”

June 19 – Reuters (Stephen Kalin and William Maclean): “Two years after launching headfirst into a conflict in Yemen that has no end in sight, Saudi Arabia and the United Arab Emirates have astonished the world again, this time with a severe boycott of neighboring Qatar. Like the Yemen war, which has killed more than 10,000 people, the rift with Qatar is most closely associated with a new generation of leaders in the energy-rich Gulf who are more hawkish than conservative predecessors… While the dispute could end up costing Qatar dearly, it also has implications for the Saudis and Emiratis whose activism, critics say, is fuelling uncertainty in an already unstable neighborhood and could even push the region towards all-out conflict with arch-enemy Iran.”

June 19 – Bloomberg (Golnar Motevalli and Ladane Nasseri): “Iran said it fired missiles at Islamic State targets in Syria in retaliation for the jihadists’ deadly attacks in Tehran last week, a rare strike signaling Iran’s willingness to escalate its use of military power in the region’s conflicts. Six surface-to-surface missiles were launched on Sunday from western bases in Iran at command centers, logistic sites and suicide car bomb factories in Syria’s eastern Deir Ezzor area... The missile operation ‘is just a very small part of the capability of Iran’s punitive force against the terrorists and its enemies,’ the Islamic Students’ News Agency quoted Guards spokesman Brigadier General Ramezan Sharif…”

June 20 – Financial Times (Rebecca Collard, Erika Solomon, Najmeh Bozorgmehr and Katrina Manson): “The military activity last month around al-Tanf, a Syrian town on the Iraqi border, was an early sign that as rival forces scrambled to capture Isis territory in eastern Syria, the region risked becoming the flashpoint for international confrontation. As Syrian regime forces advanced towards a base used by US soldiers to train rebels to fight Isis, US-led coalition jets dropped leaflets carrying a stark warning. ‘Any movements toward al-Tanf will be considered an aggression that our forces [will] defend against . . . you have entered a safe zone, leave the area now.’ The fears of a confrontation materialised on Sunday when the US shot down a Syrian warplane that the Pentagon said was bombing areas near a Syrian Kurdish militia it backs in Raqqa province. The same day, Iran fired ballistic missiles into Syria for the first time to target Isis but also to put on a show of force intended to send a message to the US and Saudi Arabia, its regional rival.”

June 21 – Bloomberg (Zaid Sabah, Alaa Shahine, Vivian Nereim, and Tarek El-Tablawy): “The abrupt shake-up that made Saudi Prince Mohammed bin Salman heir to his father’s throne gives the 31-year-old extraordinary powers to push through his vision to wean the economy off oil and exert his influence in regional conflicts. Prince Mohammed replaced his elder cousin as crown prince, removing any doubt of how succession plans will unfold following the reign of King Salman, now 81. Even before the promotion, the new crown prince was dictating defense and oil policy, including overseeing plans to privatize state oil giant Aramco. The move suggests a harder foreign policy line for the key U.S. ally in a region fraught with instability.”