Monday, July 31, 2017

Tuesday's News Links

[Bloomberg] Stocks Gain as Earnings, Data Boost Confidence: Markets Wrap

[Bloomberg] Americans' Spending Barely Grew in June as Incomes Stagnated

[Bloomberg] U.S. Auto Market Slump Persists

[Reuters] China factory activity accelerates in July on strong export orders: Caixin PMI

[Bloomberg] Euro-Area Economy Steams Ahead as ECB Waits for Inflation

[Bloomberg] China Forex Regulator Is Examining Top Dealmakers, Sources Say

[Reuters] Anbang denies regulators told it to sell overseas assets

[Bloomberg] Europe Becomes Hedge-Fund Hotspot as Economic Recovery Takes Off

[Bloomberg] 1MDB Misses $603 Million Payment to Abu Dhabi Sovereign Wealth Fund

[NYT] Debt-Ridden Chinese Giant Now a Shadow of Its Former Size

[WSJ] ETFs Now Have $1 Trillion More Than Hedge Funds

[WSJ] Auto Lender’s Risks Larger Than They Appear

[FT] Investors hedge against sharp stock market correction

[Reuters] President Xi says China loves peace but won't compromise on sovereignty

[WSJ] As Washington Churns, the World Grows More Dangerous

Monday Evening Links

[Bloomberg] Asia Stocks Point Lower as Yen, Euro Extend Gains: Markets Wrap

[Bloomberg] U.S. Stocks Limp to the Finish of a Healthy July: Markets Wrap

[Bloomberg] Chicago Pension Bills Soar as City Pays Up to Keep Funds Solvent

[CNBC] History says there's a 99% chance stock market returns will be subpar from here

[Bloomberg] Potential U.S. Oil Sanctions Boost Risk of Venezuela Default

[Bloomberg] Greenspan Sees Return of Stagflation Unseen Since 1970s

[FT] Trump tax reform plan heads into quagmire

[FT] Multinationals in China brace for online crackdown

[WSJ] Pentagon Offers Plan to Arm Ukraine

Friday, July 28, 2017

Weekly Commentary: Five Years of Whatever It Takes

July 25 – Bloomberg (Paul Gordon and Carolynn Look): “Five years ago today, Mario Draghi was talking about bumblebees. The European Central Bank president’s speech in London on July 26, 2012, became instantly famous because of his pledge to do ‘whatever it takes’ to save the euro. But for all the power and clarity of that phrase, he started his remarks more obliquely. ‘The euro is like a bumblebee. This is a mystery of nature because it shouldn’t fly but instead it does. So the euro was a bumblebee that flew very well for several years. And now -- and I think people ask ‘how come?’-- probably there was something in the atmosphere, in the air, that made the bumblebee fly. Now something must have changed in the air, and we know what after the financial crisis.’ At the time, the currency bloc was being buffeted by soaring bond yields in peripheral nations as speculators bet the union’s fundamental flaws would rip it apart. Draghi’s answer was to state unequivocally that the immediate crisis fell under the ECB’s responsibility and he would deal with it. ‘The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.’ That pledge was followed by a program to buy the debt of stressed countries in return for structural reforms, and in that respect the words alone proved to be enough. Yield spreads collapsed even though the program has never been tapped.”

This week marks the five-year anniversary of Draghi’s “whatever it takes.” I remember the summer of 2012 as if it were yesterday. From the Bubble analysis perspective, it was a Critical Juncture – for financial markets and risk perceptions, for policy and for the global economy. Italian 10-year yields hit 6.60% on July 24, 2012. On that same day, Spain saw yields surge to 7.62%. Italian banks were in freefall, while European bank stocks (STOXX600) were rapidly approaching 2009 lows. Having risen above 55 in 2011, Deutsche Bank traded at 23.23 on July 25, 2012.

It was my view at the time that the “European” crisis posed a clear and immediate threat to the global financial system. A crisis of confidence in Italian debt (and Spanish and “periphery” debt) risked a crisis of confidence in European banks – and a loss of confidence in European finance risked dismantling the euro monetary regime.

Derivatives markets were in the crosshairs back in 2012. A crisis of confidence in European debt and the euro would surely have tested the derivatives marketplace to the limits. Moreover, with the big European banks having evolved into dominant players in derivatives trading (taking share from U.S. counterparts after the mortgage crisis), counter-party issues were at the brink of becoming a serious global market problem. It’s as well worth mentioning that European banks were major providers of finance for emerging markets.

From the global government finance Bubble perspective, Draghi’s “whatever it takes” was a seminal development. The Bernanke Fed employed QE measures during the 2008 financial crisis to accommodate deleveraging and stabilize dislocated markets. Mario Draghi leapfrogged (helicopter) Bernanke, turning to open-ended QE and other extreme measures to preserve euro monetary integration. No longer would QE be viewed as a temporary crisis management tool. And just completely disregard traditional monetary axiom that central banks should operate as lender of last resort in the event of temporary illiquidity – but must avoid propping up the insolvent. “Whatever it takes” advocates covert bailouts for whomever and whatever a small group of central bankers chooses – illiquid, insolvent, irredeemable or otherwise. Now five years after the first utterance of “whatever it takes,” the Draghi ECB is still pumping out enormous amounts of “money” on a monthly basis (buying sovereigns and corporates) with rates near zero.

Keep in mind that while “whatever it takes” first radiated from Draghi’s lips, markets soon surmised that the ECB president was speaking on behalf of the cadre of leading global central bankers. After all, ECB (desperate) measures were followed promptly by the return of QE by the Federal Reserve, the Bank of Japan, the Swiss National Bank and others. It’s worth mentioning that the Fed’s balance sheet totaled about $2.8 TN in July 2012, only to rise to $4.4 TN by September 2014. Amazingly, Bank of Japan assets have expanded about three-fold since 2012 to approach $5.0 TN.

Going back to 2002, the burst “tech” Bubble was evolving into a full-fledged U.S. corporate debt crisis. Back then Fed governor Bernanke’s talk of “helicopter money” and the “government printing press” profoundly altered market dynamics. It may not have at the time been loud and clear. But putting markets on notice that the Fed was contemplating extraordinary reflationary measures was a far-reaching development for corporate debt. Facing a liquidity crisis in 2002, Ford bonds had become a popular short in the marketplace. Almost single-handedly, Dr. Bernanke’s speeches proved a catalyst for the speculating community reversing the Ford (and corporate debt) bond short - and then going long. The impact on general market liquidity was profound. And with the corporate debt crisis resolved there was nothing to hold back the burgeoning mortgage finance Bubble.

What “Helicopter Ben” accomplished with U.S. corporate bonds, “Super Mario” surpassed with Trillions of European sovereign, corporate and financial debt. Italian bond yields ended 2012 at 4.5%, down 210 bps from July highs. Spain’s 10-yields declined about 250 bps to 5.00% in less than six months. “Whatever it takes” almost immediately transformed Italian and Spanish debt from favored shorts to about the most enticing speculative long securities anywhere in the world.

Draghi’s utterance ‘The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough,’ was a direct declaration to speculators with short positions in the euro currency, along with shorts in Italian, Spanish and periphery debt. Immediately Cover Your Shorts and Go Long. Five years on, Italian yields hover around 2.10% and Spanish yields sit at about 1.50% - emblematic of arguably one of history’s most spectacular securities market mispricings. European bank stocks have gained better than 50%. Draghi not only bloodied the shorts, be ensured spectacular profits for those levered long European debt – and the riskier the Credit the greater the reward.

Central bankers should not be in the business of playing favorites in the markets. So how did it get to the point where they seek to incentivize longs (levered and otherwise) while routinely punishing the shorts? Because central bankers followed the Bernanke Fed into a policy course of using rising securities and asset prices as a reflationary mechanism for the overall economy. As we’ve witnessed now for going on a decade, that’s a slippery slope. Adopt pro-Bubble policies and there will be no turning back. Inflate an epic Bubble and you own it for the duration.

“The euro is like a bumblebee. This is a mystery of nature because it shouldn’t fly but instead it does.” The euro flew and it soared incredibly high, trading above 1.50 to the dollar in early-2008. As fundamentally flawed as the euro monetary experiment has been, it has been buoyed by the fundamentally weaker dollar. The euro flew on the back of highly speculative flows, much of it flowing from an overcharged U.S. Credit system.  U.S. monetary policy had been too loose for too long. Unstable finance has been nurtured for what seems like an eternity. The U.S. exported its Credit Bubble to the world.

Going all the way back to the late-nineties, Italy and the European periphery were a leveraged speculator community darling. Indeed, the Euro Convergence Trade granted huge profits to the hedge fund community. The egregious amounts of leverage employed (directly and through derivatives) was illuminated with the 1998 implosion of Long-Term Capital Management (LTCM).

The LTCM fiasco contributed to an 18-month bear market that saw the euro trade down to 0.87 vs. the dollar in early 2002. With Dr. Bernanke and his radical theories on reflationary policymaking arriving on the scene in 2002, it’s no coincidence that the euro then embarked on a multiyear rally. The euro traded up to 1.00 late in 2002, 1.20 in 2003, 1.35 in 2004, 1.45 in 2007 and 1.58 in 2008. It’s furthermore no coincidence that Italian bond prices tracked the euro higher. After trading at 5.5% in the first-half of 2002, Italian yields dropped to 3.22% by October 2005. Greek bonds followed an almost identical trajectory, as both already highly-indebted nations took full advantage of the market’s insatiable demand for European peripheral debt.

Draghi has lately grown accustomed to patting himself on the back. He saved the euro. He saved Europe’s big banks. He kept Greece and Italy in the euro currency. His policies have spurred European economic recovery. But Draghi and global central bankers also inflated history’s greatest speculative Bubble. Celebration will be in order only if policies can be normalized without the whole thing coming crashing down.

July 25 – BloombergBusinessweek (Jana Randow): “Euro-area governments have saved almost 1 trillion euros ($1.16 trillion) in interest payments since 2008 as record-low European Central Bank rates depress bond yields at a time when state treasurers are also reducing debt. That’s according to calculations by Germany’s Bundesbank, which is urging finance ministers in the 19-nation region to make provisions for when interest rates start to rise. Italy, the world’s third-most indebted country, has benefited most, with savings exceeding 10% of gross domestic product.”

Italy has been the biggest beneficiary of collapsing market yields. The problem is that its debt load still expanded to a distressing 130% of GDP. Italy remains only a jump in yields away from trouble, and I suspect this helps explain why Draghi has been so reticent to pull back on the stimulus throttle. After trading below 1.90% in mid-June, Italian yields surged to 2.33% earlier this month as markets began to contemplate global central bankers moving toward concerted normalization.

The FOMC this week confirmed the dovishness of Yellen’s testimony before congress. Apparently, over the past month Fed rate “normalization” has been scaled back to perhaps one more hike this year – and that could be about it. And I just don’t buy the Fed’s recent fixation on below target inflation (GSCI Commodities Index up 4.2% this week on further dollar weakness!).

Something has raised concerns at the FOMC. Could it be European debt markets, with ECB stimulus to be significantly reduced in the months ahead. Or perhaps it’s China and Beijing's determination to rein in some financial excess. EM and all their dollar-denominated debt? Maybe a dysfunctional Washington has supplanted international developments on the worry list – or, understandably, it could be a combination of things.

At least for the week, global markets lost a bit of their recent swagger. While Boeing helped push the Dow to yet another record high, the S&P500 ended the week little changed. The broader market underperformed. The highflying technology stocks were unimpressive in the face of generally robust earnings. The VIX rose to 10.29, with some volatility beginning to seep into stock trading. Commodities caught a big bid, while bond yields began moving north again. The currencies remain unsettled.

Thinking back five years, U.S. markets at the time were incredibly complacent. The risk of crisis in Europe was downplayed: Policymakers had it all under control. Sometime later, the Financial Times - in a fascinating behind-the-scenes expos̩ - confirmed the gravity of the situation and how frazzled European leaders were at the brink of losing control. Yet central bankers, once again, saved the day Рfurther solidifying their superhero status.

I’m convinced five years of “whatever it takes” took the global government finance Bubble deeper into perilous uncharted territory. Certainly, markets are more complacent than ever, believing central bankers are fully committed to prolonging indefinitely the securities bull market. Meanwhile, leverage, speculative excess and trend-following flows have had an additional five years to accumulate. Market distortions – including valuations, deeply embedded complacency, and Trillions of perceived safe securities – have become only further detached from reality. And the longer all this unstable finance flows freely into the real economy, the deeper the structural maladjustment.

For the Week:

The S&P500 was about unchanged (up 10.4% y-t-d), while the Dow jumped 1.2% (up 10.5%). The Utilities slipped 0.3% (up 8.4%). The Banks added 0.5% (up 3.7%), and the Broker/Dealers rose 1.0% (up 14.0%). The Transports dropped 2.6% (up 2.0%). The S&P 400 Midcaps declined 0.7% (up 6.1%), and the small cap Russell 2000 dipped 0.5% (up 5.3%). The Nasdaq100 slipped 0.2% (up 21.5%), and the Morgan Stanley High Tech index fell 0.8% (up 25.5%). The Semiconductors dropped 1.3% (up 20.6%). The Biotechs declined 1.0% (up 29.7%). With bullion up $15, the HUI gold index rallied 2.3% (up 7.7%).

Three-month Treasury bill rates ended the week at 106 bps. Two-year government yields added a basis point to 1.35% (up 16bps y-t-d). Five-year T-note yields increased three bps to 1.83% (down 9bps). Ten-year Treasury yields rose five bps to 2.29% (down 16bps). Long bond yields jumped nine bps to 2.90% (down 17bps).

Greek 10-year yields rose 11 bps to 5.33% (down 170bps y-t-d). Ten-year Portuguese yields added two bps to 2.93% (down 82bps). Italian 10-year yields gained five bps to 2.12% (up 31bps). Spain's 10-year yields rose seven bps to 1.53% (up 15bps). German bund yields increased four bps to 0.54% (up 34bps). French yields rose five bps to 0.81% (up 13bps). The French to German 10-year bond spread widened one to 27 bps. U.K. 10-year gilt yields gained four bps to 1.22% (down 2bps). U.K.'s FTSE equities index fell 1.1% (up 3.2%).

Japan's Nikkei 225 equities index declined 0.7% (up 4.4% y-t-d). Japanese 10-year "JGB" yields added a basis point to 0.08% (up 4bps). France's CAC40 gained 0.3% (up 5.5%). The German DAX equities index declined 0.6% (up 5.9%). Spain's IBEX 35 equities index rallied 1.1% (up 12.7%). Italy's FTSE MIB index rose 1.1% (up 11.4%). EM equities were mixed. Brazil's Bovespa index gained 1.3% (up 8.7%), while Mexico's Bolsa declined 0.7% (up 12.2%). South Korea's Kospi sank 2.0% (up 18.5%). India’s Sensex equities index added 0.9% (up 21.3%). China’s Shanghai Exchange increased 0.5% (up 4.8%). Turkey's Borsa Istanbul National 100 index rose 0.8% (up 37.8%). Russia's MICEX equities index slipped 0.4% (down 14.2%).

Junk bond mutual funds saw outflows of $21 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates declined four bps to 3.92% (up 44bps y-o-y). Fifteen-year rates slipped three bps to 3.20% (up 42bps). The five-year hybrid ARM rate fell three bps to 3.18% (up 40bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up five bps to 4.11% (up 42bps).

Federal Reserve Credit last week declined $5.1bn to $4.435 TN. Over the past year, Fed Credit added $0.4bn. Fed Credit inflated $1.625 TN, or 58%, over the past 246 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $6.0bn last week to $3.325 TN. "Custody holdings" were up $105bn y-o-y, or 3.3%.

M2 (narrow) "money" supply last week gained $6.0bn to a record $13.608 TN. "Narrow money" expanded $740bn, or 5.8%, over the past year. For the week, Currency increased $2.7bn. Total Checkable Deposits dropped $50.2bn, while Savings Deposits jumped $52.1bn. Small Time Deposits added $1.3bn. Retail Money Funds were little changed.

Total money market fund assets jumped $23.28bn to $2.640 TN. Money Funds fell $75bn y-o-y (2.8%).

Total Commercial Paper gained $7.4bn to $978bn. CP declined $49bn y-o-y, or 4.7%.

Currency Watch:

The U.S. dollar index declined 0.6% to 93.26 (down 8.9% y-t-d). For the week on the upside, the Swedish krona increased 1.5%, the Norwegian krone 1.3%, the British pound 1.1%, the Australian dollar 0.9%, the Canadian dollar 0.9%, the New Zealand dollar 0.8%, the euro 0.8%, the Singapore dollar 0.4%, the Japanese yen 0.4% and the Brazilian real 0.4%. On the downside, the Swiss franc declined 2.4%, the South African rand 0.8%, the Mexican peso 0.7% and the South Korean won 0.3%. The Chinese renminbi gained 0.44% versus the dollar this week (up 3.09% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index jumped 4.2% (down 3.0% y-t-d). Spot Gold gained 1.2% to $1,270 (up 10.2%). Silver rose 1.4% to $16.695 (up 4.5%). Crude surged $3.94 to $49.71 (down 8%). Gasoline surged 7.2% (unchanged), while Natural Gas declined 1.0% (down 21%). Copper jumped 5.6% (up 15%). Wheat dropped 3.7% (up 18%). Corn fell 1.4% (up 10%).

Trump Administration Watch:

July 27 – Bloomberg (Sahil Kapur and Erik Wasson): “The House is set to leave for its August recess without having taken the first essential step to overhauling the U.S. tax code: agreeing on a 2018 budget resolution. Disputes among House Republicans over spending levels and the controversial border-adjusted tax proposal are preventing Speaker Paul Ryan from winning enough support to schedule a floor vote on the budget that a House panel approved last week. With House members planning to leave Washington Friday for a five-week recess, the lack of a budget is raising doubts that a tax rewrite -- one of President Donald Trump’s top priorities -- can get done this year, or even before the 2018 elections. ‘Clearly, no budget, no tax reform,’ said the House’s chief tax writer, Representative Kevin Brady, a Texas Republican.”

July 25 – Bloomberg (Erik Wasson and Roxana Tiron): “House Republicans this week are increasing the possibility of a government shutdown in October by moving forward with a $788 billion spending bill that complies with President Donald Trump’s demands to boost the military, reduce clean-energy programs and fund a wall on the U.S.-Mexico border. Those priorities, especially $1.6 billion in wall funding, guarantee House and Senate Democratic leaders will oppose the bill. Trump has urged his Republican supporters in Congress to fight, saying in May that a ‘good’ shutdown may be needed to advance his agenda. Republicans are trying to demonstrate unity after months of division over major legislation, including a repeal of Obamacare.”

July 24 – Bloomberg (Alex Harris): “The Treasury Department got a clear message from investors that they’re starting to get concerned another showdown over the U.S. debt ceiling may get ugly. The government’s auction Monday of $39 billion of three-month bills attracted the lowest demand of any other sale of the securities since June 2009. The bills, which mature around when the Treasury is estimated to run out of money unless lawmakers agree to extend the statutory limit on the nation’s borrowing, were sold at a rate of 1.18%, the highest since October 2008.”

July 27 – Bloomberg (Margaret Talev): “White House chief strategist Steve Bannon supports paying for middle-class tax cuts with a new top rate of 44% for Americans who make more than $5 million a year, according to a person familiar… It’s unclear whether President Donald Trump would support the move, which would bring the top rate, currently 39.6%, to the highest level in 30 years. Trump has said he’s focused on tax changes that would help the middle class, but an analysis this month of the tax outline the White House released in April shows it would mostly benefit top earners.”

July 25 – Reuters (John Benny): “A final decision on a steel trade policy may have to wait until other top-priority issues on his agenda get addressed, U.S. President Donald Trump told the Wall Street Journal… The administration would take time in making a decision on whether to block steel imports… Trump had previously initiated a 'Section 232' review of the U.S. steel industry that allows for the imposition of tariffs or quotas on imports if they are found to threaten national security. The law, which has been used twice before - to investigate oil in 1999 and iron and steel in 2001 - allows the president to impose restrictions on imports for reasons of national security.”

China Bubble Watch:

July 23 – New York Times (Keith Bradsher and Sui-Lee Wee): “Let the West worry about so-called black swans, rare and unexpected events that can upset financial markets. China is more concerned about ‘gray rhinos’ — large and visible problems in the economy that are ignored until they start moving fast. The rhinos are a herd of Chinese tycoons who have used a combination of political connections and raw ambition to create sprawling global conglomerates. Companies like Anbang Insurance Group, Fosun International, HNA Group and Dalian Wanda Group have feasted on cheap debt provided by state banks, spending lavishly to build their empires. Such players are now so big, so complex, so indebted and so enmeshed in the economy that the Chinese government is abruptly bringing them to heel. President Xi Jinping recently warned that financial stability is crucial to national security, while the official newspaper of the Communist Party pointed to the dangers of a ‘gray rhinoceros,’ without naming specific companies.”

July 24 – New York Times (David Barboza): “The acquisitive Chinese conglomerate HNA Group moved to allay concerns about its ownership structure… by releasing a statement showing that its biggest shareholder had recently shifted from a mysterious businessman to a foundation it set up in New York. The company said that its largest shareholder, a private businessman in China named Guan Jun, had recently donated his 30% stake in the company to HNA’s charitable organization, the Hainan Cihang Charity Foundation. Combined with the 22.8% stake held by HNA’s sister charity in China, HNA says it is now 52% owned by the Cihang foundations.”

July 23 – Bloomberg: “Several Chinese banks that helped fund HNA Group Co.’s global acquisition spree are losing their appetite for financing the company, according to people familiar with the matter. Three of the banks have decided to stop extending new loans to HNA, said the people… One made the decision early this year, the second acted a couple of months ago and the third moved recently, the people said. A fourth bank trimmed its exposure to the company over the past few months and reduced the size of a credit line, one of the people said, without providing further details.”

July 25 – Bloomberg (Laurence Arnold and Prudence Ho): “For a company regularly in the news for its frequent and wide-ranging acquisitions, China’s HNA Group Co. remains shrouded in mystery. Chinese and American government officials are seeking more information about the company’s ownership -- though for very different reasons -- and the European Central Bank may open a review of its own. Once a little-known airline operator, the company took on billions of dollars in debt as it made more than $40 billion of acquisitions over six continents since the start of 2016. With interests in tourism, logistics and financial services, it’s now the biggest shareholder of such well-known names as Hilton Worldwide Holdings Inc. and Deutsche Bank AG.”

July 23 – Wall Street Journal (Lingling Wei and Chao Deng): “China’s government reined in one of its brashest conglomerates with the approval of President Xi Jinping, according to people with knowledge of the action—a mark that the broader government clampdown on large private companies comes right from the top of China’s leadership. The measures, with President Xi’s previously unreported approval last month, bar state-owned banks from making new loans to property giant Dalian Wanda Group to help fuel its foreign expansion. The cutoff in bank financing for the company’s foreign investments highlights Beijing’s changing view of a series of Wanda’s recent overseas acquisitions as irrational and overpriced, these people say.”

July 22 – New York Times (Paul Mozur and Carolyn Zhang): “Facebook is the world’s largest social network, with more than two billion users. LinkedIn was sold to Microsoft for $26 billion last year. And Apple is Apple, the most valuable company in the world. In most local markets, it would be a surprise if any one of these companies were floundering. But in China, the real shock is that their troubles no longer surprise anyone. Just in the past few weeks, Facebook had one of its most popular apps blocked by the Chinese government. LinkedIn… had its local boss step down amid tepid results in the country. And Apple announced a billion-dollar investment to comply with local law as it continued to watch Chinese demand for its iPhones fade. This summer of challenge for the three companies offers a broad illustration of just how varied the obstacles have become for foreign companies in China. They also show in stark terms why this vast market has been frustratingly difficult for outsiders.”

July 25 – Reuters (Ryan Woo, Kevin Yao and Stella Qiu): “All major Chinese enterprises owned by the central government will be turned into limited liability companies or joint-stock firms by the end of the year as part of reforms aimed at overhauling their unwieldy structures. Beijing is trying to revive China's bloated state-owned sector and create ‘bigger and stronger’ conglomerates capable of competing on the global stage. Restructuring state-owned enterprises (SOEs) will separate government administration from management of day-to-day business operations, one step toward greater efficiency.”

Europe Watch:

July 27 – Bloomberg (Alessandro Speciale): “Germany’s grip over the euro area’s financial institutions is getting firmer. With the reappointment… of Werner Hoyer as president of the European Investment Bank, Germany’s hold over three key roles for the region’s economy was reaffirmed. A fourth one -- by far the most important -- could follow. Bundesbank President Jens Weidmann is a frequently mentioned candidate to replace Italy’s Mario Draghi when his term as European Central Bank’s president runs out in October 2019… Further complicating the succession talks will be the large number of European posts coming up for grabs in the next two years, as well as French President’s Emmanuel Macron stated intention of creating a euro-area finance minister.”

July 24 Financial Times (Michael Hunter): “Could zombies be keeping Mario Draghi awake at night? Investors remain highly sensitive to the outlook for the start of the reduction, or tapering, of the European Central Bank’s €60bn monthly stimulus spending. As the scrutiny of the ECB president’s every utterance continues, there is some eye-catching analysis from Bank of America Merrill Lynch on what could be an important factor in his thinking on tapering. It points toward so-called ‘zombie’ companies, or those that depend on ultra-loose monetary policy for credit provision. ‘Although corporate leverage has helpfully declined over the last few years, we still find that 9% of firms have very weak interest coverage metrics in Europe,’ says the bank’s Barnaby Martin, credit strategist. The research defines a zombie company as one with an interest coverage ratio ‘at or below 1 times’ earnings.”

July 25 – Reuters (Paul Carrel and Irene Preisinger): “German business morale hit a record high in July as ‘euphoric’ manufacturers, shrugging off the impact of a strong euro, anticipated a surge in already robust exports from Europe's biggest economy. The Munich-based Ifo economic institute said… its business climate index, based on a monthly survey of some 7,000 firms, hit its third record high in as many months with a rise to 116.0 from 115.2 in June.”

Central Bank Watch:

July 24 – Bloomberg (Tanvir Sandhu): “The European Central Bank has given the green light to summer carry trades as volatility remains contained and the policy meetings in September and October are likely reserved to outline further details on quantitative easing, buying more time for carry, Bloomberg strategist Tanvir Sandhu writes. Italian bonds offer one of the most attractive carry and rolldown across European government bonds, with the five-year bucket three-month carry and roll at 16 bps and one-year at 70 bps. That compares with one-year of 30 bps for 10-year bunds and 42 bps for bonos. Given that carry trades are implicitly short volatility, two-year Italy stands out as the most attractive on a vol-adjusted basis. Since earning the full carry and rolldown assumes an unchanged yield curve, adjusting for volatility will provide a more realistic indicator of profitability.”

Global Bubble Watch:

July 22 – Financial Times (Chris Flood): “Vanguard is closing in on BlackRock’s title as the world’s largest asset manager after pulling in more than $1bn a day of investor money since the start of the year. The two heavyweights of the investment industry are attracting unprecedented inflows into their low-cost exchange traded funds amid rising investor dissatisfaction with the high fees and poor performance of active managers that strive to beat the market. Investors ploughed $215bn into Vanguard’s funds in the first six months of the year, far outpacing new business growth for BlackRock, which pulled in $168bn over the same period.”

July 26 – Financial Times (Eric Platt): “Investor enthusiasm for corporate debt has neared levels not seen since before the start of the credit crisis, in a deepening endorsement of a global economic recovery that has already propelled US stock markets to record heights. In several parts of the US bond markets, companies are now able to raise money at a lower cost, relative to government bonds, than they have for the past decade… ‘This is a continuation of this hunt for yield that you have seen for the last couple of years,’ said Brian Kennedy, a portfolio manager with Loomis Sayles. ‘Between the economic backdrop, lack of yield around the world and the buyers out of Asia and Europe, the investment grade and high-yield markets are the sweet spots for people who want yield.’”

July 23 – Financial Times (Laura Noonan): “The men running two of Wall Street’s biggest banks saw the value of their shareholdings rise by a combined $314m in 2016 as stock market prices rocketed in the aftermath of Donald Trump’s election as US president. But while Jamie Dimon and Lloyd Blankfein each enjoyed $150m-plus rises in the value of their stock and options in JPMorgan Chase and Goldman Sachs, respectively, the average gains for the other 18 best-paid chief executives at international banks last year was $4m.”

July 25 – Reuters (Gertrude Chavez-Dreyfuss and Anna Irrera): “Wall Street's main regulator said on Tuesday that initial coin offerings (ICOs), a means of crowdfunding for blockchain technology companies, should be subject to the same safeguards required in traditional securities sales. ICOs have become a bonanza for digital currency entrepreneurs, allowing them to raise millions quickly by creating and selling digital ‘tokens’ with no regulatory oversight. But the Securities and Exchange Commission (SEC) has said that the tokens can be considered securities, and therefore, may need to be registered unless a valid exemption applies.”

Fixed Income Bubble Watch:

July 23 – Financial Times (Attracta Mooney): “Investors piled more than $355bn into bond funds in the first five months of 2017 despite concerns that the fixed-income market is set for an unprecedented shake-up as central banks shift towards normalising monetary policy. The surge of money has put fixed-income funds on course to beat 2016’s full-year inflows of $375bn… The net inflows are already larger than the amount of money invested in fixed income funds over the entire 2013 and 2015. The biggest winners this year include Pimco’s income fund, T Rowe Price’s new income fund that invests in US bonds, and a Vanguard index fund investing in global fixed income. These products have had inflows of between $4bn and $27bn since the start of the year.”

July 23 – Financial Times (Attracta Mooney): “Bob Michele, a bond fund veteran, is more worried than he has ever been. The head of global fixed income at JPMorgan Asset Management, the US fund house, has spent almost four decades investing in bonds. The 57-year-old… is gearing up for the most demanding period of his career. ‘The next 18 months are going to be incredibly challenging. I am not an equity investor, but I can just imagine how equity investors felt in 1999, during the dotcom bubble,’ he says… The Nasdaq Composite, the index, lost 78% of its value in the 18 months after the tech bubble collapsed. Mr Michele, like many fixed-income investors, is acutely worried about how central banks’ retreat from monetary easing will affect the bond market.”

Federal Reserve Watch:

July 25 – Wall Street Journal (Kate Davidson): “President Donald Trump is considering renominating Janet Yellen as Federal Reserve chairwoman but also views his economic adviser Gary Cohn as a top candidate, he told The Wall Street Journal… Mr. Trump reiterated that he thinks Ms. Yellen is doing a good job and he has ‘a lot of respect for her,’ and said she is still in the running to serve a second four-year term as leader of the central bank. But he said he also is considering replacing Ms. Yellen with Mr. Cohn, who became Mr. Trump’s National Economic Council director after a 26-year career at Goldman Sachs…”

July 23 – Reuters (Marius Zaharia): “In September 2015, the U.S. Federal Reserve cited risks from China as a key reason for delaying its first interest rate hike in a decade. A wall of Chinese debt maturing in the next few years could jolt the country back into the U.S. central bank's policy deliberations. Two years ago, it was a collapse in Chinese stocks, a surprise yuan devaluation and shrinking foreign exchange reserves that roiled financial markets that delayed the Fed, but it did raise rates three months later and has tightened further since. Now, some see risks emerging in China's dollar-denominated bonds that could give the Fed greater pause for thought as it raises rates, even as other central banks signal a shift from ultra-easy policy. To be sure, Fed officials have not publicly flagged China's debt as a major risk in their policy discussions. However, debt analysts point to the possibility of another September 2015 moment in which the Fed takes its cues from concerns about China.”

July 23 – Financial Times (Gavyn Davies): “Janet Yellen, in an unusually ebullient mood, suggested last month that there may not be a repeat of the Global Financial Crash (GFC) ‘in our lifetimes’. Given the extreme severity of the GFC, that is perhaps a fairly easy hurdle for the central bankers to clear. As a result of the co-ordinated efforts of Basel III and the Financial Stability Board under Mark Carney, the fault lines in the pre-2008 financial architecture have been largely repaired. A more difficult question is whether the current phase of rising markets, which began in 2009, will end because financial asset prices implode under their own weight. There may not be a complete collapse of the entire financial system this time, but there could still be a very unpleasant bear market for investors to endure. It is clear from the latest Fed minutes that ‘a few’ members of the FOMC are more worried about the risk of financial instability than Chair Yellen, but even they seem reluctant to tighten monetary or prudential policy unless the Fed’s dual mandate, aimed at low inflation and maximum employment, is under threat.”

July 26 – Bloomberg (Craig Torres): “Federal Reserve officials said they would begin running off their $4.5 trillion balance sheet ‘relatively soon’ and left their benchmark policy rate unchanged as they assess progress toward their inflation goal. The start of balance-sheet normalization -- possibly as soon as September -- is another policy milestone in an economic recovery now in its ninth year. The Fed bought trillions of dollars of securities to lower long-term borrowing costs after cutting the main interest rate to zero in December 2008.”

U.S. Bubble Watch:

July 25 – Reuters (Lucia Mutikani): “U.S consumer confidence jumped to a near 16-year high in July amid optimism over the labor market while house prices maintained their upward trend in May, which could boost consumer spending after recent sluggishness… ‘This brightens the outlook for the economy as we enter the second half of the year,’ said Chris Rupkey, chief economist at MUFG... ‘We expect Fed officials will continue with their gradual pace of rate hikes secure in the knowledge that a confident consumer means that more spending is on the way.’”

July 26 – Bloomberg (Patricia Laya): “The U.S. housing market is stabilizing near 10-year highs, according to government data Wednesday that showed sales of new homes were slightly less than forecast. Single-family home sales increased 0.8% m/m to 610k annualized pace (est. 615k). Median sales price fell 3.4% y/y to $310,800. Supply of homes crept up to 5.4 months from 5.3 months; 272,000 new houses were on market at end of June.”

July 25 – Bloomberg (Patricia Laya): “Steady price gains in 20 U.S. cities in May indicate that a tight supply of properties paired with increased demand is boosting home values, according… S&P CoreLogic Case-Shiller… 20-city property values index increased 5.7% y/y (est. 5.8%). National price gauge advanced 5.6% y/y. An shortage of listings is still behind the rapid appreciation of home prices, particularly in high-demand areas such as Portland, Oregon, and Seattle, where values have surpassed pre-recession peaks.”

July 27 – Wall Street Journal (Michael Wursthorn): “Wall Street brokerages are pushing customers to take out billions of dollars in loans backed by stocks and bonds, a trend that yields lucrative fees for the firms but poses risks for borrowers. Executives at Morgan Stanley earlier this month highlighted these loans to individuals as a big growth area and revenue driver, saying the loans helped expand the bank’s overall wealth lending by about $3.5 billion, or 6%, in the second quarter. On Thursday, Goldman Sachs… took a step toward growing its securities-based lending business through a new partnership with Fidelity Investments. For brokerages, these so-called securities-backed loans have become a reliable source of revenue in the years since the financial crisis as firms have begun moving away from a business model of charging commissions for trading to a system of fees based on assets under management.”

Japan Watch:

July 24 – Bloomberg (Andy Sharp): “Former Defense Minister Shigeru Ishiba overtook scandal-hit Prime Minister Shinzo Abe as the best person to lead Japan, an opinion poll showed… Ishiba was seen as the most appropriate choice for prime minister by 20.4% of respondents to the poll conducted by the Sankei newspaper and FNN TV network, while 19.7% picked Abe. In a similar survey in December, Ishiba’s 10.9% lagged behind the 34.5% who favored Abe.”

July 25 – Reuters (Tetsushi Kajimoto): “The two new members of the Bank of Japan's policy board said… that the central bank should continue efforts to achieve its 2% inflation goal and it was premature to debate an exit from its massive monetary stimulus. Goushi Kataoka, a 44-year-old former economist… and an advocate of massive money printing, said he wants to see the price goal achieved quickly although he cannot say when that can be. The other new board member, Hitoshi Suzuki, a 63-year-old former deputy president of Bank of Tokyo-Mitsubishi UFJ… said it was ‘dangerous’ to markets to debate an exit from the stimulus now.”

EM Bubble Watch:

July 24 – Bloomberg (Natasha Doff): “The rapid growth of a BlackRock Inc. exchange-traded fund that tracks emerging-market debt is causing jitters among investors. The iShares JP Morgan EM Local Government Bond ETF, ticker IEML, has doubled in size this year, mopping up more than $3 billion of inflows as investors reach for average yields as high as 4.72% in developing economies. The risk is that if the carry trade unwinds, as tends to happen eventually, investors could race for the exit all at once and send the fund tumbling.”

July 24 – Wall Street Journal (Carolyn Cui): “Venezuelan bond prices tumbled to their lowest levels of the year as default fears grew following U.S. President Donald Trump’s threat to impose sanctions on the country. State-owned oil producer Petróleos de Venezuela SA’s bonds due in November fell 2.9% late in New York trading Monday and have tumbled 7.6% over the past six sessions, now at their lowest levels since December… The government’s bonds due in 2038 were down 10% during the period after falling 4.3% on Monday.”

Leveraged Speculation Watch:

July 26 – Bloomberg (Katia Porzecanski): “Paulson & Co., the investment firm that shot to fame betting on the collapse of the U.S. housing market, is closing its 2-year-old long-short equity fund in an effort to shift strategies after a steep drop in assets. ‘We are re-focusing the funds on our core areas of expertise in merger arbitrage and distressed credit, where our assets have been growing,’ founder John Paulson said in a letter to investors… ‘We thank the long-short team for their efforts on behalf of the company.’”

Geopolitical Watch:

July 26 – Bloomberg (Stepan Kravchenko): “Russia threatened to retaliate against new sanctions passed by the U.S. House of Representatives, saying they made it all but impossible to achieve the Trump administration’s goal of improved relations. The measures push U.S.-Russia ties into uncharted territory and ‘don’t leave room for the normalization of relations’ in the foreseeable future, Deputy Foreign Minister Sergei Ryabkov said… Hope ‘is dying’ for improved relations because the scale of ‘the anti-Russian consensus in Congress makes dialogue impossible and for a long time,’ Konstantin Kosachyov, chairman of the international affairs committee in Russia’s upper house of parliament, said… Russia should prepare a response to the sanctions that’s ‘painful for the Americans,’ he said.”

July 25 – CNBC (Nyshka Chandran): “The rivalry between India and China is heating up as the heavyweight economies face territorial tensions on both land and sea. A fierce border standoff in Bhutan's Doklam region — triggered by a Chinese road construction project in a disputed area and a Bhutanese request for Indian help — is now entering its second month with soldiers from both sides engaged in skirmishes. But a new confrontation in the relationship is arising as New Delhi is growing concerned about a Chinese naval presence in its own backyard: the Indian Ocean. ‘As the [Doklam] crisis stretches on, China is likely to seek ways to pressure India, both on the border and elsewhere, and this will compound the cycle of competition that is already well underway,’ Shashank Joshi, research fellow at the Royal United Services Institute, said…”

July 24 – South China Morning Post (David Barboza): “China… issued its strongest warning yet to India over their month-long border ­dispute, saying Beijing would ­protect its sovereignty ‘at all costs’. Observers believe that China's stepping up of its rhetoric, which came before a high-level security meeting that involves both Chinese and Indian security officials, gives Beijing more bargaining power in the talks with New Delhi. Defence ministry spokesman Wu Qian also said that China planned to strengthen its ‘targeted deployment and exercises’ along the disputed border, and that India should ‘have no ­illusions’ about its military's capabilities or commitment.”

July 24 – Reuters (Michael Martina and Matthew Tostevin): “China’s Foreign Ministry has urged a halt to oil drilling in a disputed part of the South China Sea, where Spanish oil company Repsol had been operating in cooperation with Vietnam. Drilling began in mid-June in Vietnam's Block 136/3… The block lies inside the U-shaped 'nine-dash line' that marks the vast area that China claims in the sea and overlaps what it says are its own oil concessions. Foreign Ministry spokesman Lu Kang said China had indisputable sovereignty over the Spratly Islands, which China calls the Nansha islands, and jurisdiction over the relevant waters and seabed.”

Friday's News Links

[Bloomberg] U.S. Stocks Fall, Dollar Weakens After Growth Data: Markets Wrap

[Reuters] U.S. economic growth picks up in second quarter, wages continue to lag

[Bloomberg] German Inflation Unexpectedly Steady as ECB Nears Exit Debate

[Reuters] Russia orders out U.S. diplomats in sanctions retaliation

[CNBC] North Korea fired a missile that may have landed in Japan: Japanese PM

[Reuters] U.S. orders Venezuela embassy families out, crisis deepens

[Reuters] Pakistan faces political turmoil as PM Sharif ousted in wealth probe

Wednesday, July 26, 2017

Thursday's News Links

[Bloomberg] Stocks Mixed Amid Slew of Earnings; Dollar Steady: Markets Wrap

[Bloomberg] Tax Overhaul in Doubt as House GOP Stuck on Budget Disagreements

[Reuters] Senate poised for healthcare showdown

[Bloomberg] Bannon Is Said to Call for 44% Tax on Incomes Above $5 Million

[Bloomberg] Germany Tightens Grip on EU Posts as Draghi Succession Nears

[Bloomberg] Libor: The Rise and Fall of ‘The World’s Most Important Number’

[Bloomberg] Deutsche Bank Warns on Outlook as Cryan's Turnaround Slows

[NYT] Behind an $18 Billion Donation to a New York Charity, a Shadowy Chinese Conglomerate

[WSJ] Investors May Feel Left Out of Fed’s Plans

[WSJ] Wall Street Needs You to Borrow Against Your Stock

[WSJ] HNA’s Biggest Shareholder Doesn’t Really Exist Yet

[FT] China’s HNA to be held by little-known charities

[FT] Covered bonds: the European link to Canada’s house price boom

Wednesday Evening Links

[Bloomberg] Dollar Drops, Treasuries Rise on Inflation View: Markets Wrap

[Bloomberg] Fed Says Balance-Sheet Unwind to Start ‘Relatively Soon’

[Bloomberg] The Fed May Not Be the Master of Its Balance-Sheet Fate

[CNBC] Fed leaves rates unchanged

[CNBC] Federal Reserve 'dragging its feet' on rate hikes: Expert

[Bloomberg] Tax Overhaul Framework May Go Public This Week

[WSJ] The Speech That Transformed European Markets—Five Years Later

[FT] Fed ready to unwind crisis-era stimulus from next meeting

[FT] Enthusiasm for US corporate debt near post-crisis high

[FT] Trump, Sessions and America’s looming constitutional crisis

Tuesday, July 25, 2017

Wednesday's News Links

[Bloomberg] Stocks Lifted by Earnings, Commodities; Bonds Gain: Markets Wrap

[Bloomberg] Fed Balance Sheet Shifts Into Limelight Absent Rate Hike Urgency

[Reuters] Fed expected to leave rates unchanged; balance sheet in focus

[Bloomberg] Pace of U.S. New-Home Sales Suggests Steady Housing Strength

[Reuters] Wall Street regulator sets sights on digital coin offerings

[Bloomberg] U.S. Signals Clampdown on Red-Hot Digital Coin Offerings

[Bloomberg] HNA's $416 Million Global Eagle Investment Deal Collapses

[Bloomberg] HNA, the Curious Company Worrying China and U.S.: QuickTake Q&A

[Reuters] Japanese firms avoiding price hikes now but sentiment is changing: BOJ's Nakaso

[Reuters] China to turn all centrally owned giants into joint-stock firms by 2017

[CNBC] As India and China face off in the mountains, a new confrontation is growing in the ocean

[FT] Fixation with end of easy money puts Australia in the crosshairs

[Bloomberg] Russia Warns of ‘Painful’ Response If Trump Backs U.S. Sanctions

Tuesday Evening Links

[Bloomberg] Stocks Extend Global Rally on Earnings, Bonds Fall: Markets Wrap

[Reuters] Trump says Yellen and Cohn possible Fed chair picks: WSJ

[Bloomberg] It's Five Years Since Draghi's 'Whatever It Takes'

[Reuters] Final decision on steel trade policy may have to wait, Trump tells WSJ

[Bloomberg] Fund Managers and Strategists Think the Bull Market Is Ending Next Year

[Bloomberg] U.S. Signals Clampdown on Red-Hot Digital Coin Offerings

[Reuters] Jobs lift U.S. consumer confidence to near 16-year high

[WSJ] Cohn and Yellen Are Among Trump’s Contenders to Lead Fed

Monday, July 24, 2017

Tuesday's News LInks

[Bloomberg] Stocks Rally as Bonds Slip, Industrial Metals Gain: Markets Wrap

[Bloomberg] Oil Extends Advance to $47 as Saudis Pledge Deep Export Cuts

[Bloomberg] Steady Home-Price Gains in 20 U.S. Cities Show Tight Inventory

[Bloomberg] Government Shutdown Odds Grow With GOP Border Wall Funding Bill

[Reuters] 'Euphoric' exporters lift German business morale to new high

[Bloomberg] BOJ newcomers back 2 percent price goal, say too early to debate stimulus exit

[Bloomberg] Economists Raise China GDP Forecast After Growth Beats Estimates

[Businessweek] Record-Low ECB Rates Are a €1 Trillion Government Windfall

[NYT] China’s HNA Discloses Shift of Ownership Stake to Foundation

[SCMP] China will protect border with India ‘at all costs’

[WSJ] Venezuela Bonds Slide Following Sanctions Threat

[FT] Credit default swaps: a $10tn market that leaves few happy

[FT] Zombie companies keep ECB policymakers awake at night

[Bloomberg] Abe Overtaken by Rival as Top Choice for Japan Premier in Poll

[Reuters] China urges halt to oil drilling in disputed South China Sea

[NYT] For China’s Global Ambitions, ‘Iran Is at the Center of Everything’

Monday Evening Links

[Bloomberg] Tech Shares Rise as Dollar Stabilizes, Oil Gains: Markets Wrap

[Bloomberg] Investors Shy Away From T-Bill Auction With Debt Ceiling Looming

[CNBC] Echoes of 1994 bond meltdown stoke market's Fed fear

[FT] Fed likely to signal it is on course for tighter monetary policy

[FT] Wall St banks’ borrowing premium hits lowest since financial crisis

[FT] Weak global inflation is a mystery investors must unlock

[WSJ] China Prepares for a Crisis Along North Korea Border

Sunday, July 23, 2017

Monday's News Links

[Bloomberg] U.S. Stocks Fluctuate as Dollar Weakens, Oil Gains: Markets Wrap

[Bloomberg] Oil Rises as Saudi Arabia Pledges Deep Cut to August Exports

[Reuters] Federal Reserve now faces prospect of global monetary policy tightening

[Bloomberg] Draghi's Master Plan Keeps Summer Rates Volatility Suppressed

[CNBC] Market movers this week: Get ready for the Fed, housing reports and earnings

[Reuters] China's debt specter could haunt Fed's policy meetings

[Bloomberg] Traders Fear Hard Landing in Emerging Markets

[Bloomberg] Banks That Funded HNA's $40 Billion Spending Spree Halt New Loans

[Reuters] After $50 billion deal spree, China's HNA sets out to clear ownership questions

[NYT] U.S. Inflation Remains Low, and That’s a Problem

[NYT] In China, Herd of ‘Gray Rhinos’ Threatens Economy

[FT] Two top Wall Street chiefs celebrate $314m share bonanza

[FT] Have they really fixed financial instability?

[FT] Bond funds attract $355bn in first five months of 2017

[FT] Bond bubble brews as central banks retreat from QE

Sunday's News Links

[Reuters] Oil market rebalancing to speed up in second half: OPEC's Barkindo

[Reuters] Japanese PM Abe's support slides again before parliament appearance

[WSJ] Xi’s Sign-Off Deals Blow to China Inc.’s Global Spending Spree

[FT] Vanguard closes in on BlackRock’s number-one spot

Friday, July 21, 2017

Weekly Commentary: New Age Mandate

A journalist’s question during Mario Draghi’s ECB post-meeting press conference: “…There was a sharp reaction from financial markets to your Sintra speech. You must have looked at the Fed experience of 2013. Is there any concern in the Governing Council that the so-called tantrum or a similar reaction can happen in the eurozone when you start discussing changes in your stance?”

Draghi: “I won’t comment on market reactions, but let me give you the bottom line of our exchanges: basically, inflation is not where we want it to be, and where it should be. We are still confident that it will gradually get there, but it isn’t there yet, and that’s why the Governing Council reiterated the forward guidance, the asset purchase programme, the interest rates and all this package of monetary accommodation; and reiterated that the present very substantial monetary accommodation is still necessary. Let me read the introductory statement: ‘Therefore a very substantial degree of monetary accommodation is still needed for underlying inflation pressures to gradually build up and support headline inflation developments in the medium term.’

Draghi continued: “But let me just make clear one thing: after a long time, we are finally experiencing a robust recovery, where we only have to wait for wages and prices to move towards our objective. Now, the last thing that the Governing Council may want is actually an unwanted tightening of the financing conditions that either slows down this process or may even jeopardise it; and that’s why we retain the second bias, or let’s call it, reaction function. ‘If the outlook becomes less favourable or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, we stand ready to increase our asset purchase programme in terms of size and/or duration.’ And I think the Governing Council has given enough evidence that when flexibility is needed to achieve its objectives, it has been very able to find all that was needed. So that’s why we keep this bias.

This exchange gets to the heart of a momentous issue. Recall the swift market reaction to “hawkish” Draghi’s comments from Sintra (June 26-28 ECB Forum on Central Banking) and, soon after, ECB officials expressing that markets had misinterpreted his remarks. Markets this week were awaiting “dovish” clarification. Draghi soundly beat expectations.

The above (astute) question referred to the Fed’s 2013 “taper tantrum” experience. While it received scant attention at the time, Bernanke’s - “The Fed will push back against a tightening of financial conditions” - response to incipient market instability proved a pivotal extension to his historic monetary experiment. In hindsight, this was the chairman’s vague introduction of a New Age Mandate: Central Banks Will Underpin Risk Embracement Throughout the Financial Markets. The Fed was prepared to employ aggressive stimulus measures in the event of self-reinforcing risk aversion and resulting marketplace liquidity issues. The Federal Reserve was signaling that it was ready to respond quickly to de-risking/de-leveraging dynamics – over time profoundly impacting risk-taking and securities and derivatives pricing throughout the markets.

No longer would the Federal Reserve confine market-supporting measures to crisis backdrops. Apparently no reason not to upgrade the Fed put to 24/7. Their liquidity backstop was to ensure that selling momentum was not allowed to materialized. Sure enough, Bernanke’s New Mandate was a huge hit in the marketplace (S&P500 up more than 50% since 2013) and has been readily adopted by central bankers around the globe, certainly including Draghi’s ECB. So few detractors. And typical of government “mandates,” once adopted they’re almost impossible to repeal.

“Will push back against a tightening of financial conditions” explains at least a few so-called “conundrums.” Why is the VIX (and risk premia more generally) so low? Why are sovereign yields remaining near historic lows despite the Fed raising rates and other central banks planning to do the same? How can equities ignore mounting political and geopolitical risks?

If central banks have become so keen to protect markets from risk aversion, why shouldn’t the cost of market “insurance” remain extraordinarily low. Why wouldn’t speculators gravitate to products fashioned to profit from providing myriad forms of market risk mitigation (hawking flood insurance during a drought)? And, importantly, as Bubble risks escalate, why would sovereign yields around the globe not discount the high probability that central banks will at some point be called upon to make good on their New Mandate – i.e. respond to faltering Bubbles with aggressive new QE programs with enormous quantities of bonds/securities to purchase?

I am reminded of chairman Greenspan’s asymmetrical policy approach – aggressively slashing rates when markets falter, while quite cautiously increasing rates while loose conditions fuel destabilizing excess. The Greenspan Fed’s policy approach during the nineties provided a competitive advantage to U.S. securities markets. This “advantage” was a powerful magnet attracting global speculative flows, inflows instrumental in fueling “king dollar” distortions.

I refer to Mario Draghi as “the world’s most important central banker.” He these days holds command over the markets’ preeminent liquidity backstop - in the most explicit terms. The Yellen Fed, raising rates and discussing balance sheet normalization, lacks the readiness enjoyed by Draghi. As such, the Fed now takes a backseat when it comes to the competitive advantage Draghi confers upon European securities markets.

In his press conference, Draghi refused to bite when questioned about the strong euro. This was taken as a lack of concern – and the euro surged.  I expect Draghi is monitoring euro strength with increasing concern, though he prefers not to publicly challenge the currency market. I also assume he is skeptical of euro strength, expecting Fed policy normalization to be dollar positive. Perhaps he doesn’t at this point fully appreciate the degree to which his market backstop underpins the euro, especially with a more dovish Yellen Fed and increasingly combustible Washington.

Italian 10-year yields sank 22bps this week to 2.07%. The Italian government borrowing for 10 years at about 2% is today’s poster child for wildly distorted markets and inflated securities values. Spanish yields dropped 20 bps this week to 1.45%, and Portuguese yields fell 24 bps to 2.91%. Now down 180 bps y-t-d, Greek 10-year yields ended the week at 5.22%. Draghi’s “whatever it takes” has worked wonders, especially for European periphery debt markets.

It’s worth mentioning that Germany’s DAX equities index sank 3.1% this week. France’s CAC 40 fell 2.3%, with major equities indices down 2.1% in Spain and 1.4% in Italy. European equities have been a hot, crowd-favorite trade – and this week took their turn for a bout of Crowded Trade Punishment. Draghi’s explicit liquidity backdrop provided a competitive advantage for the euro, as well as for European debt compared to European equities.

Draghi’s predecessor, Jean-Claude Trichet, had it right with his “I will not pre-commit to anything.” The Trichet ECB appreciated that pre-committing on policy would spur financial speculation and distortions. Trichet’s resolve on such an important issue must have been at least partially a reaction to Fed policymaking – and how Greenspan’s penchant for signaling the future course of policy cultivated destabilizing hedge fund and derivatives leveraged speculation. It’s ironic that Draghi not only discarded “will not pre-commit to anything,” he adopted the Greenspan and Bernanke approach but in a more audacious scheme.

There is no doubt that central bank liquidity backstops have promoted speculation, securities leveraging and derivatives market excess/distortions. I also believe they have been instrumental in bolstering passive/index investing at the expense of active managers. Who needs a manager when being attentive to risk only hurts relative performance? And the greater the risk associated with these Bubbles – in leveraged speculation, derivatives and passive trend-following – the more central bankers are compelled to stick with ultra-loose policies and liquidity backstops.

After all, who will be on the other side of the trade when all this unwinds? Who will buy when The Crowd moves to hedge/short bursting Bubbles? This is a huge problem. Central bankers have become trapped in policies that promote risk-taking, leveraging and hedging at this precarious late-stage of an historic Global Bubble. These days, central bankers cannot tolerate a “tightening of financial conditions,” and they will have a difficult time convincing speculative markets otherwise.

Speaking of credibility issues…

July 20 – Bloomberg: “China’s deleveraging campaign is taking on its toughest target yet: the public sector itself. While up to now policy makers have focused on a build-up of liabilities at smaller banks and big private-sector companies, President Xi Jinping has made clear that local government authorities and China’s behemoth state-owned enterprises too must restrain borrowing. Xi’s comments at a top financial-regulatory gathering last weekend were the latest signal of determination to head off any future destructive debt-bubble deflation. It’s perhaps the hardest leverage nut to crack, because Communist Party officials have for decades risen through the ranks by borrowing to fund growth -- whether at local authority levels or atop an SOE monopoly… ‘Policy makers will likely seize this rare opportunity to reduce leverage in the economy in a deeper, longer and more thorough campaign,’ said Helen Qiao, chief greater China economist at Bank of America Merrill Lynch in Hong Kong. ‘We will see more measures being rolled out in the second half of 2017 and 2018,’ she said… ‘Focusing on cutting excess leverage in real economy, instead of in the financial sector’ came as a surprise to some, said Zhu Haibin, chief China economist at JPMorgan… in Hong Kong. ‘Cutting leverage means the gap between credit growth and nominal GDP growth will narrow -- but that could have knock-on risks and drag on economic growth itself.’”

It’s helpful to remind ourselves that the Chinese have limited experience with runaway Credit Bubbles. This is their – borrowers, lenders, regulators and officials – first experience with a mortgage finance Bubble. They’ve never had to contend with overseeing the world’s biggest banks (involved in all kinds of things all over the place). They’ve never had small banks borrow Trillions in the inter-bank lending market. So-called “shadow banking” has never been such a powerful force – throughout the markets and real economy. The Chinese have limited experience with “repo” financing and the murky world of derivatives. They are new to corporate debt securities boom and bust cycles. They’ve never had to contemplate complex counter-party issues where the counter-parties have become massive global financial players.

For years now, I’ve chronicled Chinese policymakers taking a way too timid approach to managing mounting Credit Bubble excess. In the process, they brought new meaning to Greenspan’s “asymmetrical:” timid little baby steps against colossal financial and economic maladjustment, only to resort vehemently to the heavy hand of central control when Bubbles begin to falter.

Chinese officials appear more serious this time – though markets have over years become accustomed to not taking “tightening” measures seriously. Beijing’s policy approach has been incongruous. They’ve employed various measures to tighten mortgage lending. More recently, officials have attempted to rein in “shadow” lending and some of the more conspicuous areas of financial excess (i.e. insurance and global M&A). At the same time, from a macro level Beijing has promoted the ongoing rapid money and Credit growth necessary to meet official GDP targets. To be sure, efforts to restrain Bubbles and systemic risk while spurring massive monetary inflation were never going to end successfully.

Repeating the above quote from BofA China economist Helen Qiao: “Policy makers will likely seize this rare opportunity to reduce leverage in the economy in a deeper, longer and more thorough campaign.” And from JPMorgan economist Zhu Haibin: “Focusing on cutting excess leverage in real economy, instead of in the financial sector came as a surprise to some…” Well, at this point, Chinese officials are confronting a harsh reality: there are few alternatives left. Systemic risk has only mushroomed in spite of myriad tightening measures and policy approaches.

China is on course for $3.5 TN of Credit growth this year – with a trajectory that is as precarious as it is unsustainable. If they do in fact take the necessary more systemic approach to containing Credit excess, it’ll be a new ballgame in China and globally. Yet at this point officials are not taken seriously. That officials did not act with more resolve in previous tightening attempts creates the dilemma that only harsh measures will now suffice. Global markets met President Xi and other’s pronouncements this week with a giant yawn. The expectation is that dramatic measures will not be imposed prior this autumn’s Communist Party National Conference.

I’m reminded of the Rick Santelli central banker refrain, “What are you afraid of?” Yellen and Draghi seemingly remain deeply concerned by latent market fragilities. How else can one explain their dovishness in the face of record securities prices and global economic resilience. A headline caught my attention Thursday: “Bonds: ECB Gives ‘Green Light' to Summer Carry Trades, BofA says.” It’s been another huge mistake to goose the markets this summer with major challenges unfolding this fall – waning central bank stimulus, Credit tightening in China and who knows what in Washington and with global geopolitics.

For the Week:

The S&P500 added 0.5% (up 10.4% y-t-d), while the Dow slipped 0.3% (up 9.2%). The Utilities jumped 2.5% (up 8.7%). The Banks fell 1.6% (up 3.2%), while the Broker/Dealers gained 1.5% (up 12.9%). The Transports sank 2.8% (up 4.7%). The S&P 400 Midcaps gained 0.5% (up 6.8%), and the small cap Russell 2000 rose 0.5% (up 5.8%). The Nasdaq100 gained 1.4% (up 21.8%), and the Morgan Stanley High Tech index advanced 1.4% (up 26.4%). The Semiconductors added 0.3% (up 22.2%). The Biotechs jumped 3.0% (up 31%). With bullion gaining $26, the HUI gold index rallied 3.5% (up 5.2%).

Three-month Treasury bill rates ended the week at 114 bps. Two-year government yields slipped two bps to 1.34% (up 15bps y-t-d). Five-year T-note yields declined six bps to 1.80% (down 12bps). Ten-year Treasury yields fell nine bps to 2.24% (down 21bps). Long bond yields dropped 11 bps to 2.81% (down 26bps).

Greek 10-year yields declined six bps to 5.22% (down 180bps y-t-d). Ten-year Portuguese yields dropped 24 bps to 2.91% (down 84bps). Italian 10-year yields sank 22 bps to 2.07% (up 26bps). Spain's 10-year yields fell 20 bps to 1.45% (up 7bps). German bund yields declined nine bps to 0.51% (up 30bps). French yields fell 11 bps to 0.75% (up 7bps). The French to German 10-year bond spread narrowed two bps to 24 bps. U.K. 10-year gilt yields fell 14 bps to 1.18% (down 6bps). U.K.'s FTSE equities index gained 1.0% (up 4.3%).

Japan's Nikkei 225 equities index was little changed (up 5.2% y-t-d). Japanese 10-year "JGB" yields declined two bps to 0.07% (up 3bps). France's CAC40 fell 2.2% (up 5.3%). The German DAX equities index sank 3.1% (up 6.6%). Spain's IBEX 35 equities index fell 2.1% (up 11.5%). Italy's FTSE MIB index declined 1.3% (up 10.2%). EM equities were mixed. Brazil's Bovespa index lost 1.1% (up 7.4%), while Mexico's Bolsa added 0.8% (up 13.0%). South Korea's Kospi gained 1.5% (up 20.9%). India’s Sensex equities index was about unchanged (up 20.3%). China’s Shanghai Exchange increased 0.5% (up 4.3%). Turkey's Borsa Istanbul National 100 index rose 1.6% (up 36.7%). Russia's MICEX equities index dropped 1.8% (down 13.8%).

Junk bond mutual funds saw inflows surge to $2.221 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates fell seven bps to 3.96% (up 51bps y-o-y). Fifteen-year rates declined six bps to 3.23% (up 48bps). The five-year hybrid ARM rate dropped seven bps to 3.21% (up 43bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down five bps to 4.06% (up 35bps).

Federal Reserve Credit last week expanded $13.7bn to $4.440 TN. Over the past year, Fed Credit declined $1.2bn. Fed Credit inflated $1.630 TN, or 58%, over the past 245 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $3.3bn last week to $3.319 TN. "Custody holdings" were up $90.9bn y-o-y, or 2.8%.

M2 (narrow) "money" supply last week surged $87.5bn to a record $13.615 TN. "Narrow money" expanded $770bn, or 6.0%, over the past year. For the week, Currency increased $1.8bn. Total Checkable Deposits fell $21.9bn, while Savings Deposits jumped $106.7bn. Small Time Deposits added $0.8bn. Retail Money Funds were little changed.

Total money market fund assets declined $9.9bn to $2.617 TN. Money Funds fell $98bn y-o-y (3.6%).

Total Commercial Paper rose $9.8bn to $970.4bn. CP declined $82.8bn y-o-y, or 7.9%.

Currency Watch:

The U.S. dollar index dropped 1.4% to 93.858 (down 8.3% y-t-d). For the week on the upside, the Norwegian krone increased 2.1%, the Swiss franc 1.9%, the euro 1.7%, the New Zealand dollar 1.5%, the South Korean won 1.3%, the Japanese yen 1.3%, the Brazilian real 1.2%, the Australian dollar 1.1%, the South African rand 0.9%, the Canadian dollar 0.8%, the Swedish krona 0.8%, and the Singapore dollar 0.7%. On the downside, the British pound declined 0.8% and the Mexican peso fell 0.5%. The Chinese renminbi increased 0.13% versus the dollar this week (up 2.63% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index slipped 0.6% (down 6.9% y-t-d). Spot Gold gained 2.1% to $1,255 (up 8.9%). Silver rallied 3.3% to $16.457 (up 3%). Crude declined 77 cents to $45.77 (down 15%). Gasoline added 0.2% (down 6%), while Natural Gas slipped 0.3% (down 21%). Copper gained 1.2% (up 9%). Wheat fell 2.3% (up 22%). Corn gained 1.0% (up 12%).

Trump Administration Watch:

July 20 – Bloomberg (Greg Farrell and Christian Berthelsen): “The U.S. special counsel investigating possible ties between the Donald Trump campaign and Russia in last year’s election is examining a broad range of transactions involving Trump’s businesses as well as those of his associates, according to a person familiar with the probe… The investigation also has absorbed a money-laundering probe begun by federal prosecutors in New York into Trump’s former campaign chairman Paul Manafort… The president told the New York Times on Wednesday that any digging into matters beyond Russia would be out of bounds. Trump’s businesses have involved Russians for years, however, making the boundaries fuzzy.”

July 19 – Reuters (Amanda Becker and Susan Cornwell): “As their seven-year effort to repeal and replace Obamacare derailed in the U.S. Senate, Republicans faced the prospect of doing the once unthinkable: working with Democrats to make fixes to former President Barack Obama's 2010 healthcare law. Bipartisan breakthroughs would likely come in the form of individual bills targeted at issues such as stabilizing insurance markets or lowering prescription drug costs. A wholesale overhaul of healthcare, senators say, is a bridge too far for the two parties, locked for years in an ideological battle on that issue and many others.”

July 18 – Wall Street Journal (Richard Rubin and Kate Davidson): “House Republicans are unveiling an ambitious fiscal plan on Tuesday to rewrite the tax code, revamp medical malpractice laws, change federal employees’ retirement benefits and partially repeal the Dodd-Frank financial regulations—all in one bill that wouldn’t require any votes from Democrats to pass. The strategy, embedded in the House GOP fiscal 2018 budget, faces political and procedural obstacles, including many of the same ones that derailed the party’s health-care bill in the Senate. For instance, Republicans will have a narrow margin in the Senate and will have to comply with budgetary rules that restrict which policies can be included.”

July 19 – Bloomberg (Andrew Mayeda and Saleha Mohsin): “The brief honeymoon between the world’s two largest economies appears to be over. Three months ago, President Donald Trump had warm words for his Chinese counterpart Xi Jinping after the two leaders bonded at Trump’s Mar-a-Lago resort in Florida. Within weeks, the Trump administration was touting early wins in talks with China, including more access for U.S. beef and financial services as well as help in trying to rein in North Korea. Now, the two sides can barely agree how to describe their disagreements.”

July 17 – Reuters (Roberta Rampton): “President Donald Trump promised… he would take more legal and regulatory steps during the next six months to protect American manufacturers, lashing out against trade deals and trade practices he said have hurt U.S. companies. Trump climbed into an American-made fire truck parked behind the White House, took a swing with a baseball bat in the Blue Room, and briefly donned a customized Stetson cowboy hat in front of cheering manufacturing company executives from all 50 states gathered to hear him praise their products. ‘I want to make a pledge to each and every one of you: No longer are we going to allow other countries to break the rules, steal our jobs and drain our wealth,’ Trump said.”

July 17 – Politico (Nancy Cook and Andrew Restuccia): “Peter Navarro, one of the White House’s top trade advisers, is widely viewed throughout the West Wing and Capitol Hill as a prickly personality with extreme policy ideas. But he has nonetheless emerged as an influential force in the White House who appeals to President Donald Trump’s protectionist impulses… His clout, dating back to the campaign, has informed the president’s thinking on everything from NAFTA to new lumber tariffs to potential trade restrictions on steel and aluminum. A former economics professor…, Navarro has a well-established reputation as an academic with hardline views on the threat that China poses to the U.S.”

July 14 – Reuters (Howard Schneider): “The budget deficit for President Donald Trump’s first two years in office will be nearly $250 billion higher than initially estimated due to a shortfall in tax collections and a mistake in projecting military healthcare costs, budget chief Mick Mulvaney reported… In a mid-year update to Congress, Mulvaney, director of the Office of Management and Budget, revised the estimates supplied in late May when the Trump administration submitted its first spending plan. Since then, Mulvaney said, the deficit projected for the current fiscal year has increased by $99 billion, or 16.4%, to $702 billion. For 2018, the deficit will be $149 billion more than first expected, increasing by 33% to $589 billion.”

China Bubble Watch:

July 17 – Bloomberg: “China’s economy grew faster than expected in the second quarter, putting the nation on track to meet its growth target this year and giving backing to officials in their campaign to corral oncoming financial risk. Data showing that the world’s second-largest economy expanded 6.9% in the second quarter… was released hours after the Communist Party’s People’s Daily newspaper warned of potential ‘gray rhinos’ -- highly probable, high-impact threats that people should see coming, but often don’t. In China’s case it’s the relentless buildup of risks caused by the debt-fueled investment that’s contributing to growth, a development tackled by a major meeting of top leaders in Beijing at the weekend. Until now, regulators have homed in on financial-sector excesses; that probe is now widening to debt in the broader economy, a shift that prompted a sell-off in domestic stocks.”

July 15 – New York Times (Keith Bradsher): “China’s top leaders have gathered every five years since 1997 for a National Financial Work Conference. At past gatherings, they have created entire regulatory agencies and rearranged the rules for huge markets, almost overnight. So economists and regulators have been almost breathlessly speculating about this summer’s work conference. Would the regulatory commissions overseeing the banking, securities and insurance industries be merged into the central bank? Would the legal definition of securities be broadened to shed some regulatory daylight on widespread activities like shadow banking, peer-to-peer online investment networks and off-balance-sheet wealth management products? But the actual results of the two-day work conference… were much more, well, modest, to put it politely. The biggest accomplishment of the conference appeared to be an announcement that a commission would be established under the auspices of the cabinet. The commission would meet regularly to discuss issues of financial stability.”

July 18 – Bloomberg: “China’s push to rein in financial risks is rippling through the economy, with regulators targeting everything from corporate acquisitions to returns on the savings products banks sell to yield-hungry consumers. On Tuesday, Bloomberg reported that the banking regulator had told lenders to lower interest rates on wealth-management products, a popular vehicle for domestic savers, after yields in the $4 trillion industry jumped in past months. Officials also extended their campaign against risky overseas acquisitions… The two developments dovetail with the theme of the past weekend’s top-level financial conference in Beijing: As President Xi Jinping prepares for a twice-a-decade leadership transition this fall, authorities will take a dim view of anything that clashes with their efforts to contain risks in the financial sector. The central bank will take a lead role in administering a cabinet-level regulatory committee that was unveiled at the conference. ‘The message from the leadership last weekend was very clear -- financial stability is now regarded as an important element of national security,’ said Raymond Yeung, the Hong Kong-based chief economist at Australia & New Zealand Banking Group Ltd.”

July 16 – Bloomberg: “For investors, possibly the most important thing that happened in China during the weekend was a closed-door conference on regulation that could set the scene for the financial sector’s next five years. Many details remain unclear. The most concrete decision out of the meeting so far is President Xi Jinping’s announcement of the creation of a cabinet-level committee to coordinate financial oversight - a task currently divided among four regulators including the People’s Bank of China. The National Financial Work Conference convenes twice a decade, yet officials follow its edicts for years to come… ‘Xi’s decision to ramp up the regulatory powers of the PBOC and to establish a commission to oversee financial stability and development reflects the increasing financial sector vulnerabilities in the Chinese financial system,’ said Rajiv Biswas, Asia-Pacific Chief Economist at IHS Markit… ‘The Chinese government wants to prevent a financial crisis in China that could create shock waves in the domestic economy and create a rising risk of social unrest.’”

July 18 – Reuters (Adam Jourdan): “China's banking regulator will tighten control over risks in the financial markets, work more closely with the central bank and other regulators, and ‘resolutely follow’ the leadership of a newly-formed financial stability committee… The China Banking Regulatory Commission's comments come after President Xi Jinping said… that the central bank would take a bigger role with a Financial Stability and Development Committee to be set up under the State Council. Beijing sees financial security as a vital part of national security and has been looking to crack down on risky behavior in the financial markets, such as insurers selling high-risk products and companies taking on excessive debt. The China Banking Regulatory Commission (CBRC) said… it would strengthen controls to avoid financial risks, including those related to liquidity, credit and shadow banking. It said there was a ‘step-by-step’ plan to reduce ‘chaos’ in the market, without giving details.”

July 15 – Financial Times (Tom Mitchell): “Xi Jinping instructed China’s state-owned enterprises to lower their debt levels but stopped short of announcing the creation of a new financial super-regulator to rein in mounting risks in the sector, as some had expected. ‘Deleveraging at SOEs is of the utmost importance,’ the Chinese president said at this weekend’s National Financial Work Conference, which convenes only once every five years. He added that the country’s financial officials must also ‘get a grip’ on so-called ‘zombie’ enterprises kept alive by infusions of cheap credit. Vigilance against mounting financial risks has become the top policy priority for Mr Xi, who wants to ensure economic and social stability in the run-up to a Communist party congress that will mark the beginning of his second five-year term.”

July 17 – Bloomberg: “China plans to cut off some funding for billionaire Wang Jianlin’s Dalian Wanda Group Co. after concluding the conglomerate breached restrictions for overseas investments… The scrutiny could rein in Wang’s ambitious attempt to create a global entertainment empire, including Hollywood production companies and a giant cinema chain he’s built up through acquisitions from the U.S. to the U.K. Six investments… were found to have violations... The retaliatory measures will include banning banks from providing Wanda with financial support linked to these projects and barring the company from selling those assets to any local companies… The move is an unprecedented setback for the country’s second-richest man, who has announced more than $20 billion of deals since the beginning of 2016. By targeting one of the nation’s top businessmen, the government is escalating its broader crackdown on capital outflows and further chilling the prospects of overseas acquisitions…”

July 17 – Bloomberg: “Home prices surged in China’s smaller cities even as property curbs dragged down values in Beijing and Shanghai in June, highlighting the challenge for authorities trying to limit bubble risks. New-home prices… rose month-on-month in 60 of 70 cities… That compared with 56 in May. In Beijing, prices fell 0.4%, the biggest decline in two years, and in Shanghai the decline was 0.2%. That compared with increases in some smaller cities, such as Bengbu in Anhui, where the gain was about 2%, translating into a 17% increase from a year earlier. Restrictions in bigger cities are spurring buying in smaller ones, underscoring the challenge China’s leaders face as they seek to cool asset bubbles and contain risks ahead of a party reshuffle later this year.”

July 18 – Financial Times (Gabriel Wildau): “China’s small-cap stocks touched a two-and-a-half-year low on Tuesday, as investors lost their appetite for speculative bets on frothy sectors like technology. Launched in 2009, the Shenzhen-based ChiNext is modelled on Wall Street’s Nasdaq as a home for start-up companies in emerging sectors. Information technology makes up almost 40% of ChiNext by market capitalisation, offering an attractive contrast with the Shanghai bourse, which is weighted towards old-economy stalwarts like banks, property developers and manufacturers.”

Europe Watch:

July 17 – Reuters (Vikram Subhedar and Valentina Za): “Italian banks could take 10 years to reduce their level of non-performing loans (NPLs) to the European average, Morgan Stanley said…, adding that setting up a ‘bad bank’ could help. A recession that ended in 2014 saddled Italian banks with 349 billion euros ($400bn) in impaired debts, one third of Europe's total, while a clogged judicial system and sluggish economic growth made it tough to recover non-performing debts. But a series of state-led steps involving capital injections and a plan to bailout Monte dei Paschi, the world’s oldest bank, have provided some relief.”

Central Bank Watch:

July 20 – Wall Street Journal (Evelyn Cheng): “The European Central Bank delayed discussion over whether to wind down its giant bond-buying program, underlining a recent tone of caution from global policy makers as they fight weak inflation. ECB President Mario Draghi on Thursday welcomed a ‘robust’ economic recovery in the 19-nation eurozone, but warned that stronger growth wasn’t yet translating into higher consumer prices. ‘We need to be persistent and patient because we aren’t there yet,’ Mr. Draghi said… The bank will discuss the future of bond purchases, known as quantitative easing, in the fall, he said. ‘Basically inflation is not where we want it to be and where it should be.’ The ECB mirrored a message of caution emanating from other major central banks, which are struggling to understand why prices aren’t picking up more rapidly despite robust economic growth.”

July 19 – Financial Times (Mehreen Khan): “Investors are back in thrall to global central banks. A shift in communication from policymakers in the eurozone and UK has prompted money managers to raise concerns about the threat to bond markets from any central bank missteps. Just under half of investors surveyed by Bank of America Merrill Lynch (48%) think global monetary policy has become ‘too stimulative’ for a brightening world economy – the highest proportion since April 2011. The shift in investor sentiment towards low interest rates across the developed world comes after the European Central Bank has begun tentative shifts in its communication over its stimulus measures. European markets were roiled at the end of June after Mario Draghi, ECB president, hinted at a change at the central bank’s bond buying scheme which has been running since March 2015.”

Global Bubble Watch:

July 19 – Wall Street Journal (Steven Russolillo): “Stock markets go up and down: It is a fact of life. Except in 2017. Three major stock-market benchmarks in the U.S., Europe and Asia have avoided pullbacks this year, commonly defined as 5% declines from recent highs. Never in at least the past 30 years have all three indexes—the S&P 500, MSCI Europe and MSCI Asia-Pacific ex-Japan—gone a calendar year without falling at some point by at least 5%. In good years and bad, markets tend to fluctuate wildly, with stock indexes often falling by double-digit percentages before bouncing back. That hasn’t been the case this year, another reflection of the historically low volatility that has gripped the world. The CBOE Volatility Index, or VIX, finished Friday at its lowest since 1993. Of course, 2017 is only a little more than half over… But the last time equity markets went this deep into a year without all three of those benchmark indexes suffering at least 5% pullbacks was nearly a quarter-century ago, in 1993…”

July 17 – CNBC (Fred Imbert): “BlackRock, the world's largest asset-management firm, said… its exchange-traded funds business had a record quarter. The company said net inflows into its iShares business totaled a record $74 billion in the second quarter, pushing the unit's assets above $1.5 trillion. ‘Growth was balanced among iShares Core funds, precision exposures and financial instruments, demonstrating that ETFs are no longer used only as passive allocations, but increasingly by active investors to generate alpha in their portfolios,’ CEO Larry Fink said… ETFs now accounts for approximately 27% of BlackRock's total assets under management of $5.689 trillion.”

July 19 – Wall Street Journal (Stephanie Yang): “Oil prices are having a tough year. So are some commodity traders. Major commodity players such as banks and hedge funds have stumbled, as low volatility and a faltering oil recovery derailed returns during the first half. The S&P GSCI commodity index slumped 10.2% in that period, the worst first-half performance since 2010. Part of the troubles come from a lack of volatility this year that has made trading more challenging, traders said. Range-bound markets offer little opportunity for investors and traders to profit from major price moves and arbitrage divergences.”

July 17 – Bloomberg (Josh Wingrove and Erik Hertzberg): “Canada’s hottest housing market is definitely cooling down. Total home sales in Greater Toronto dropped to 5,977 in June, the lowest level since 2010 and down 15.1% from the month prior... Average prices are down 14.2% since March -- the fastest 3-month decline in the history of the data back to 1988 -- while the ratio of sales to new listings sits at its lowest level since 2009. The June data comes after a series of measures by policy makers to tighten access to the market -- and before the Bank of Canada hiked its benchmark interest rate last week, the first increase since 2010…”

July 17 – Reuters (Andrea Hopkins): “Resales of Canadian homes fell 6.7% in June from May, the largest monthly drop since 2010 and the third straight monthly decline as Toronto sales plunged… The industry group said actual sales… were down 11.4% from June 2016, while home prices were up 15.8% from a year earlier…”

July 20 – CNBC (Evelyn Cheng): “Just as many on Wall Street are warming up to bitcoin, one of the lone financial analysts who forecast a surge when the digital currency was just six cents now has an extremely negative view. ‘A bearish trifecta — the Elliott wave pattern, optimistic psychology and even fundamentals in the form of blockchain bottlenecks — will lead to the collapse of today's crypto-mania,’ analyst Elliott Prechter wrote in the July 13 edition of The Elliott Wave Theorist… The price activity and manic sentiment that led to present prices have dwarfed even the Tulip mania of nearly 400 years ago… The success of Bitcoin has spawned 800-plus clones (alt-coins) and counting, most of which are high-tech, pump-and-dump schemes.’ ‘Nevertheless, investors have eagerly bid them up,’ Prechter added.”

Fixed Income Bubble Watch:

July 18 – Financial Times (Peter Wells and Jennifer Hughes): “Japanese companies have tapped bond markets for record amounts this year, taking advantage of investors’ continued demand for yield amid a wider boom in the region’s dollar debt markets. Companies have sold $195.3bn worth of yen and dollar-denominated bonds so far this year, according to Dealogic. That puts the market 10% ahead of this point in 2016, and surpasses the previous year-to-date record of $187bn set in 2012. The surge has been driven by a rise in sales of dollar-denominated bonds, which at $59.8bn are running at almost twice their level of five years ago — a trend echoed across the region’s markets.”

U.S. Bubble Watch:

July 18 – Wall Street Journal (Laura Kusisto): “Foreigners are buying U.S. homes at a record rate, helping push up prices in coveted coastal cities already squeezed by supply shortages. In all, foreign buyers and recent immigrants purchased $153 billion of residential property in the U.S. in the year ended in March, nearly a 50% jump from a year earlier, according to a National Association of Realtors report… That surpassed the previous record for foreign investment set in 2015, when foreigners purchased nearly $104 billion of U.S. residential property. The dramatic increase was unexpected given the strong U.S. dollar, turmoil in the political arena and restrictions on Chinese buyers looking to take money out of the country…”

July 18 – Reuters (Adam Jourdan and Shu Zhang): “Foreign purchases of U.S. residential real estate surged to the highest level ever in terms of number of homes sold and dollar volume. Foreign buyers closed on $153 billion worth of U.S. residential properties between April 2016 and March 2017, a 49% jump from the period a year earlier… Foreign sales accounted for 10% of all existing home sales by dollar volume and 5% by number of properties. In total, foreign buyers purchased 284,455 homes, up 32% from the previous year… Chinese buyers led the pack for the fourth straight year…”

July 17 – New York Times (Adam Nagourney and Conor Dougherty): “A full-fledged housing crisis has gripped California, marked by a severe lack of affordable homes and apartments for middle-class families. The median cost of a home here is now a staggering $500,000, twice the national cost. Homelessness is surging across the state. In Los Angeles, booming with construction and signs of prosperity, some people have given up on finding a place and have moved into vans with makeshift kitchens, hidden away in quiet neighborhoods. In Silicon Valley — an international symbol of wealth and technology — lines of parked recreational vehicles are a daily testimony to the challenges of finding an affordable place to call home.”

July 19 – Bloomberg (Michelle Jamrisko): “Residential construction ended the second quarter on a stronger note as groundbreaking on new homes rebounded in June to the fastest annualized pace in four months… Residential starts increased 8.3% to a 1.22 million annualized rate (est. 1.16 million).”

July 17 – Bloomberg (Gabrielle Coppola): “It’s classic subprime: hasty loans, rapid defaults, and, at times, outright fraud. Only this isn’t the U.S. housing market circa 2007. It’s the U.S. auto industry circa 2017. A decade after the mortgage debacle, the financial industry has embraced another type of subprime debt: auto loans. And, like last time, the risks are spreading as they’re bundled into securities for investors worldwide… In 2009, $2.5 billion of new subprime auto bonds were sold. In 2016, $26 billion were, topping average pre-crisis levels, according to Wells Fargo & Co.”

July 17 – Financial Times (Joe Rennison): “A measure of loan delinquencies in bonds backed by US commercial mortgages rose by the most since July 2011 last month, according to Fitch Ratings. Loan delinquencies within an index maintained by the ratings agency moved 22 bps higher to 3.72% in June from 3.5% in May, as $1.24bn of underlying debt turned sour.”

July 18 – Reuters (Dan Freed and David Henry): “Big U.S. banks are starting to pay corporations, financial firms and rich people more to hold on to their deposits, but ordinary consumers will have to wait longer to see more than a few pennies for every $100 they stash in their accounts. Banks including JPMorgan…, Bank of America Corp, Wells Fargo & Co and PNC Financial Services Group lifted rates for sophisticated customers' deposits during the second quarter, executives said… The increases followed the Federal Reserve's decision in June to lift its key interest rate target for the third time in six months. Main Street depositors are not yet seeing the same benefits…”

July 17 – New York Times (Stacy Cowley and Jessica Silver-Greenberg): “Tens of thousands of people who took out private loans to pay for college but have not been able to keep up payments may get their debts wiped away because critical paperwork is missing. The troubled loans, which total at least $5 billion, are at the center of a protracted legal dispute between the student borrowers and a group of creditors who have aggressively pursued them in court after they fell behind on payments. Judges have already dismissed dozens of lawsuits against former students, essentially wiping out their debt, because documents proving who owns the loans are missing… Some of the problems playing out now in the $108 billion private student loan market are reminiscent of those that arose from the subprime mortgage crisis a decade ago…”

July 18 – Bloomberg (Camila Russo): “Initial coin offerings, a means of crowdfunding for blockchain-technology companies, have caught so much attention that even the co-founder of the ethereum network, where many of these digital coins are built, says it’s time for things to cool down in a big way. ‘People say ICOs are great for ethereum because, look at the price, but it’s a ticking time-bomb,’ Charles Hoskinson, who helped develop ethereum, said… ‘There’s an over-tokenization of things as companies are issuing tokens when the same tasks can be achieved with existing blockchains. People are blinded by fast and easy money.’”

Japan Watch:

July 20 – Bloomberg (Toru Fujioka): “The Bank of Japan kept its monetary stimulus program unchanged even as it pushed back the projected timing for reaching 2% inflation for a sixth time. The downgraded price outlook will raise more questions about the sustainability of the BOJ’s stimulus at time when other major central banks are turning toward normalizing their monetary policy… By again delaying the timing for hitting its price goal, the BOJ acknowledged the need to continue easing for at least several more years…”

July 17 – Bloomberg (Masahiro Hidaka and Toru Fujioka): “Some officials at the Bank of Japan are increasingly concerned about the sustainability of the BOJ’s purchases of exchange-traded funds, according to people familiar with discussions… But the chances of any change at this week’s policy meeting are low, they said… Concerns include the risk that the central bank could end up owning such large amounts of the free-floating shares of some listed companies in the Nikkei-225 Stock Average that it could seriously distort the market… Still, they say it’s unlikely the matter will be discussed in detail at the two-day policy meeting ending July 20.”

EM Bubble Watch:

July 16 – Wall Street Journal (Joe Leahy and Andres Schipani): “Michel Temer faces the fight of his political career as Brazil’s Congress considers whether the president should be tried for corruption. Mr Temer was indicted in the Supreme Court last month by the independent public prosecutors’ office after he was caught on tape allegedly discussing bribes with Joesley Batista, a former chairman of JBS, the world’s largest meatpacker. Brazil’s constitution offers special protections for politicians, making it hard to bring any one of them down… However, it is not impossible, as Dilma Rousseff, the leftwing former president, found when she was impeached last year for manipulating the budget — a move that brought Mr Temer to power. Congress is set to decide on August 2.”

Leveraged Speculation Watch:

July 18 – Bloomberg (Dakin Campbell): “Lloyd Blankfein’s roots are letting him down. Goldman Sachs Group Inc. traders turned in their worst first-half performance since Lloyd Blankfein rose from that business to become chief executive officer in 2006. Revenue from trading stocks and bonds in the first six months of 2017 tumbled 10%, dropping to the lowest level since before Blankfein took over from Hank Paulson 11 years ago. Second-quarter revenue from the fixed-income unit plunged 40%.”

July 16 – Wall Street Journal (Ryan Dezember): “A $2 billion private-equity fund that borrowed heavily to buy oil and gas wells before energy prices plunged is now worth essentially nothing, an unusual debacle that is wiping out investments by major pensions, endowments and charitable foundations. EnerVest Ltd., a Houston private-equity firm that focuses on energy investments, manages the fund. The firm raised and started investing money in 2013, when oil was trading at more than double the current price of about $45 a barrel. But the fund added $1.3 billion of borrowed money to boost its buying power. That later caused it trouble when oil prices tumbled. Now the fund’s lenders… are negotiating to take control of the fund’s assets to satisfy its debt…”

Geopolitical Watch:

July 17 – Bloomberg (Selcan Hacaoglu, Dana Khraiche, and Glen Carey): “Turkey is building up its military presence in Qatar, an adviser to President Recep Tayyip Erdogan said, in defiance of a Saudi-led bloc’s demand that the Turkish military pull out of the emirate. ‘Turkey’s steady buildup continues there, protecting the border and the security of the Qatari government,’ adviser Ilnur Cevik said… The growing Turkish military footprint further entrenches positions on either side of the Saudi-Qatar divide that broke open last month.”