Monday, April 30, 2018

Tuesday's News Links

[Bloomberg] U.S. Stocks Start May Lower, With Eyes on Apple: Markets Wrap

[Bloomberg] Oil Slides While Traders Await Trump Decision on Iran Accord

[Reuters] Fed likely to keep rates steady; investors bet on June hike

[Reuters] Trump delays metal tariffs on Canada, EU, Mexico, exempts some others

[Bloomberg] Forget 3%. That Amazing Bull Run in Treasuries Ended Years Ago

[Bloomberg] These Assets Are in Firing Line If Treasury Yields Rise Further

[Reuters] February volatility 'hurricane' upended VIX-linked trading

[Reuters] Senator Rubio says US workers get little benefit from tax reform: Report

[NYT] White House Considers Restricting Chinese Researchers Over Espionage Fears

[FT] Federal Reserve increases pace of balance-sheet reduction

[FT] Wrongfooted dollar traders brace for Fed hawkishness

[FT] New correlations spell concern for bond and equity investors

[FT] The AI arms race: China and US compete to dominate big data

[FT] Has economics failed?

Monday Evening Links

[Bloomberg] Stock Losses Deepen as Techs, Drugmakers Falter: Markets Wrap

[CNBC] The Fed is about to get more aggressive, and 'collateral damage' may ensue

[Bloomberg] The U.S. Just Borrowed $488 Billion, a Record High for the First Quarter

[Bloomberg] Tire Plunge Shows ‘No Margin for Error’ in U.S. Junk Bond Market

[CNBC] Computer engineers now make up a quarter of Goldman Sachs' workforce

[CNBC] China's HNA isn't buying Scaramucci's SkyBridge, after all: Report

[WSJ] How Bad Is the Labor Shortage? Cities Will Pay You to Move There

[FT] Merger mania whips up $120bn of tie-ups in just one day

Sunday, April 29, 2018

Monday's News Links

[Bloomberg] This Hedge Fund Trade Is Stirring Fresh Controversy in the CDS Market

[Bloomberg] U.S. March Consumer Spending Picks Up; Inflation Hits Fed Goal

[Reuters] U.S. annual inflation measures jump; consumer spending picks up

[Bloomberg] Here's How the EU Will Punch Back Against Trump Trade Tariffs

[Bloomberg] China's Economy Gives Little Sign of Slowdown as PMIs Hold Up

[Bloomberg] China Factory Gauge Holds Up as Services Exceed Estimates

[Reuters] China April official services PMI edges up to 54.8

[Bloomberg] This Hedge Fund Trade Is Stirring Fresh Controversy in the CDS Market

[Bloomberg] Jumping Mortgage Rates Further Tighten Debt Vise for Canadians

[NYT/CNBC] China Prepares a Hard-Line Stance on Trump’s Trade Demands

[NYT] U.S. Allies Brace for Trade War as Tariff Negotiations Stall

[WSJ] Growing Concern: Foreign Investors Lose Some Hunger for U.S. Debt

[WSJ] China and Dollar Test Emerging Markets’ Bull Run

[FT] Interest rate rises: when will the Fed act?

[FT] Oil at $75: the five factors driving the price

[FT] The yield curve’s signalling power isn’t what it used to be

[FT] Next liquidity crisis could be hiding in plain sight

[FT] Nordic noir: the outlook darkens for Sweden’s banks

Sunday Evening Links

[Bloomberg] Southeast Asian Stocks Are Set for Worst Rout Since '16

[Bloomberg] Treasury Yield Above 3% Dents Demand for Risk Assets

[Bloomberg] The ‘Father of ETFs’ Warns About the Dangers of Leveraged Funds

Sunday's News Links

[Reuters] Trump threatens government shutdown in September if there's no funding for wall

[Reuters] U.S. Secretary of State Pompeo stresses need for Gulf unity against Iran

[WSJ] Fed’s Interest-Rate Plans Come Under Pressure

Friday, April 27, 2018

Weekly Commentary: Conventional Wisdom

Conventional Wisdom is so often proved wrong. Thinking back over my career, it's amazing how many times what is believed true without a doubt in the markets turns out completely erroneous. There's no mystery behind this phenomenon. Responsibility lies foremost in flawed analytical frameworks. Fundamentally, bull market psychology rests on the basic premise that underlying fundamentals are sound - economic growth, earnings, inflation dynamics, new technologies, global trade, etc. No need to look further or dig any deeper.

When securities markets are strong (inflating), it's taken as a given that the financial system is robust. The problem, however, is that the underlying finance fueling the recent bull market has been patently unsound - and has been so for three decades of recurring boom and bust cycles.

A wise person said that it's not true that we don't learn from history. It's that our learning is dominated by recent history. It becomes too easy to ignore everything beyond the past few years. Over a relatively short time horizon, the previous bust cycle becomes ancient history. What matters for the markets - especially as the cycle evolves to the speculative phase - is the here and now. It's assumed that everyone acquired understanding and insight from the crisis experience - especially policymakers. They'll ensure there is no repeat; they have the tools and have amassed experience and comfort employing them. The previous crisis was a "100-year flood." Good not to have to ponder a recurrence for a few generations.

Conventional Wisdom will look especially foolish when this protracted cycle comes to its fateful conclusion. Not only was the mortgage finance Bubble not the proverbial "100-year flood," it set the stage for historic global government finance Bubble excesses. The real once-in-a-lifetime crisis lies in wait. Not only do we not learn from our mistakes, we instead seem to go out of our way to create bigger ones. This time much Bigger. This predicament was on full display this week.

April 26 - CNBC (Jeff Cox): "The $21 trillion debt the U.S. has amassed on its balance sheet isn't weighing on the minds of credit rating agencies. Moody's and Fitch in recent days have reaffirmed the nation's top-notch credit standing, reasoning that even with the massive pile of IOUs, the nation has sufficient resources to keep its standing. 'The affirmation of the US' Aaa rating reflects the US' exceptional economic strength, the very high strength of its institutions and its very low exposure to credit-related shocks given the unique and central roles of the US dollar and US Treasury bond market in the global financial system,' Moody's analysts said in a report…"

I tended to cut the rating agencies some slack after the mortgage finance Bubble collapse. Clearly, their models were deeply flawed, and they allowed financial interests to sway their judgement and outlook (during a lavish boom, who doesn't?) In general, it becomes quite a challenge to accurately assess underlying Credit quality while the system is in the throes of such an extended self-reinforcing Credit boom. Clearly, the Credit rating agencies hold some responsibility for what in hindsight was atrocious ratings blunders throughout the mortgage universe. Yet when compared to Fed policies, the GSEs and Wall Street finance, the ratings companies were in the crisis causing minor leagues.

I'll assume that the rating agencies received the message loud and clear: Don't mess with the Uncle Sam's "AAA." If the U.S. Credit standing is today "top notch," then we've reached the point of an incredibly extended Credit cycle where top notch basically means nothing. Our government is amassing debt and obligations it will not repay. There's the $21 TN of rapidly expanding debt, along with tens of Trillions of future entitlements. And let's not forget the government-sponsored enterprises. The GSEs ended 2017 with a record $8.857 TN of securities outstanding (record assets of $6.826 TN, along with a record $2.125 TN of guaranteed MBS).

April 25 - Financial Times (Alistair Gray): "From the spotted bronze pumpkin in the valet court to the light sculpture above the marble concierge desk, few expenses have been spared at Sky Residences. Residents of the glistening 71-storey tower in Manhattan's Hell's Kitchen have access to a basketball court, a private art collection and a billiards lounge. The luxury lifestyle does not come cheap: one-bedroom apartments are on the rental market for as much as $6,500 a month. High-earning New York professionals who live in the building take the rents in their stride, though they may be surprised to discover who financed it. Last summer, Freddie Mac, the home loans guarantor propped up by US taxpayers a decade ago after the subprime housing crisis, backed by a $550m loan to the building's owners - Moinian Group, among New York's largest private landlords, and SL Green Realty… It was the latest in a series of deals to support top-end commercial property developments by Freddie Mac and its counterpart Fannie Mae… By the end of last year the pair had a financial interest in almost $500bn of commercial mortgages, equivalent to 38% of the total outstanding across the US. That compares with almost $200bn, or 25% of the market, a decade ago."

Did we learn nothing? GSE Securities ended 2008 at a then record $8.167 TN. Remember all the talk of GSE reform - and possibly even winding down the (insolvent) behemoth agencies? Not going to happen. Outstanding GSE Securities did decline to $7.560 TN by the end 2012. Then a funny thing happened along the path of reformation: GSE Securities expanded $238 billion in 2013, $150 billion in 2014, $221 billion in 2015, $352 billion in 2016 and another $337 billion in 2017. It adds up to GSE growth of about $1.3 TN in five years, as the GSEs once again become willing boom-time instigators. It's worth adding that Fannie Mae increased "Total MBS and Other Guarantees" by about $23.5 billion during the first two months of 2018, with Freddie Mac's up $16.4 billion in three months.

For years, I argued that the thinly capitalized GSEs were destined for failure. It's not clear what I should be arguing these days. Their position is even more precarious, but no one could care less. The GSEs have become only bigger and have essentially no capital buffer - remitting earnings to their guardian, the U.S. Treasury. I suggest the ratings agencies ponder the trajectory of U.S. deficits in the event of a financial crisis and economic downturn. On top of exploding traditional deficits, taxpayers (more accurately, future generations) will be on the hook (again) for what will surely be massive recurring losses at the government-sponsored enterprises. A yield spike and the party marathon is over.

But why give one scintilla of attention to the GSEs when Amazon is reporting quarterly revenues of $51 billion, up 43% from comparable 2017. Net Income of $1.629 billion compares to Q1 17's $724 million. Facebook's $11.966 billion Q1 revenues were up 49%. Google saw revenues surge 26% y-o-y to $31.146 billion. Even Microsoft saw revenues jump 16%, to $26.819 billion.

If big tech revenue growth is not clear enough indication of a boom, I'm not sure where else to point. Indeed, it's reached multiples of the late-nineties technology Arms Race. This degree of growth concurrent with three-month T-bills at only 1.75% indicates finance remains much too loose. And while mortgage borrowing costs have been rising modestly, housing data confirm that rates remain artificially low for this key economic sector as well. I would argue excesses at the upper-end of housing markets nationally exceed those from the mortgage financial Bubble period.

April 25 - Bloomberg (Vince Golle): "The U.S. housing market's storyline for the last several years has been one of steady demand and limited supply, pushing prices ever higher. Now, a new chapter has opened up for the industry and its customers: soaring costs for building materials. Reports on Tuesday underscored both resilient purchase activity and accelerating home prices. The S&P CoreLogic Case-Shiller index showed property values in 20 major U.S. cities climbed 6.8% in February, the biggest year-over-year gain since June 2014. Government data revealed a faster-than-projected rate of new-home sales in March and huge upward revisions to the prior two months. Inventories of previously owned homes are plumbing the lowest levels in at least 19 years, a key reason why resilient demand by itself has fueled price appreciation that's extending to the new-homes market. Now, with the costs of lumber and other building materials soaring together, buyers are unlikely to see any relief for some time."

April 24 - Bloomberg (Katia Dmitrieva): "Sales of previously owned U.S. homes rose to a four-month high as buyers, fueled by a solid job market and tax cuts, quickly snapped up the limited number of available properties, National Association of Realtors data showed… Inventory of available properties fell 7.2% y/y to 1.67m, lowest for March in data back to 1999…"

Early in the mortgage finance Bubble, Conventional Wisdom held that home prices were supported by the limited availability of buildable lots across much of the country. Few anticipated the building boom that was to unfold over subsequent years. It just took the homebuilders some time to get situated. By 2003, housing starts exceeded two million units, the strongest level since the seventies.

I was reminded of this dynamic with last week's release of stronger-than-expect March Housing Starts and Permits data. Building Permits were at the highest level since July 2007, with Starts near the high going back to 2007. And then there was this week's reports on Transactions, Prices and Inventories. Case-Shiller had y-o-y price gains up 6.8% vs. estimates of 6.35%. After stabilizing somewhat in 2017, home price gains have accelerated.

February New Home Sales, at 694,000 (annualized), crushed estimates of 630,000. There was also a significant upward revision to January sales. New Home Sales are running at about the highest level since 2007. March Existing Home Sales (5.60 million annualized) were somewhat above estimates, also near highs since 2007. While up for the month (and somewhat above recent historic lows), the 1.67 million available inventory was down 7.2% y-o-y. At 3.6 months, meager home inventories are below levels from the mortgage finance Bubble era. Weekly mortgage purchase applications were 11% above the year ago level.

Ten-year Treasury yields traded to 3.03% in Wednesday trading, before settling back down to end the week little changed at 2.96%. During Wednesday's session, benchmark MBS yields rose to 3.74%, at that point up eight bps for the week to the highest yield since July 2011. Conventional Wisdom holds that higher mortgage borrowing costs will temper home buying. At least at this point, I'm skeptical. Home price inflation continues to run significantly above after-tax mortgage borrowing costs - and is accelerating. There is likely decent pent-up home purchase demand - and a surge of increasingly anxious buyers cannot be ruled out.

The narrative over recent years - really, since the financial crisis - has been that inflation is no longer an issue. From the standpoint of monetary policy and, accordingly, for financial markets, inflation has been thoroughly suppressed: global overcapacity and wage stagnation have from a secular standpoint quashed inflationary pressures. It would seem time for Conventional Wisdom to start wising up.

I tend to believe that so-called "globalization" has been misunderstood from a global inflation perspective. Conventional thinking has it that the globalization of manufacturing, trade and finance will permanently contain inflationary pressures. But in the U.S. and elsewhere, there is a populist backlash against the loss of manufacturing and higher paying jobs to cheap imports. The rise of tariffs, protectionism and fair trade sentiments would seem to mark an important juncture for "globalization's" headlock on inflation.

The aggressive U.S. stance with trade comes, not coincidently, with an aggressive posture toward fiscal policy. It's the type of policy mix one might expect at the trough of the economic cycle. But nearing the 10-year anniversary of crisis onset? It may have taken longer than normal, but when it comes to inflation prospects we're witnessing a plethora of typical late-cycle characteristics and developments.

April 27 - Bloomberg (Sho Chandra): "U.S. employment costs increased more than forecast in the first quarter as worker pay and benefits accelerated, according to Labor Department data… Employment cost index rose 0.8% q/q (est. 0.7%); after 0.6% gain. Wages and salaries advanced 0.9% q/q; benefits costs climbed 0.7%. Total compensation, which includes wages and benefits, climbed 2.7% over past 12 months, strongest since 3Q 2008, after 2.6% gain. Private-sector wages and salaries advanced 2.9% y/y, also the largest since 3Q 2008, after rising 2.8%."

There is mounting evidence that wage growth has attained sustainable momentum. This dynamic should work over time to broaden inflationary pressures. Rising compensation comes as energy prices gain momentum, while import prices more generally risk surprising to the upside. Moreover, I believe housing has begun to demonstrate an increasingly vigorous inflationary bias. With notable gains in construction and sales transactions, rising prices and inflating home equity, the surprise going forward could be a meaningful jump in mortgage borrowings.

If a few pieces fall into place, before you know it we'll have settled into an inflationary backdrop that looks a lot more normal than this deflated "r star" the Fed and economics community have been enchanted with over recent years. Conventional Wisdom that additional years of Fed accommodation will be required to sustain a 2.0% inflation target falls flat on its face. From my perspective, there are reasonable scenarios where a so-called "neutral" Fed funds rate of 4%, 5%, or perhaps even 6%, no longer seem unthinkable.

The other side of the story: there's a serious global Bubble that risks bursting in spectacular fashion: Fragility in China, economic stagnation in Europe and vulnerabilities throughout EM. I'll assume global fragilities go a long way in explaining 3% Treasury yields in the face of percolating U.S. inflationary pressures.

Conventional Wisdom holds that a flat yield curve indicates elevated recession risk. Some on the FOMC have cited the flatting curve as justification for proceeding cautiously with rate normalization. I would counter that 10-year Treasury yields remain low specifically because of global Bubble risk. The bond market discerns the likelihood that the Fed will at some point reverse course, moving to slash rates and redeploy bond purchases (QE). There is, as well, ongoing QE from the European Central Bank and Bank of Japan. Global bonds were supported this week from dovish indications from both central banks.

Developed bond markets were also likely supported by instability that seems to have afflicted EM currencies. The resurgent U.S. dollar came at the expense of the Polish zloty (down 2.1%), the Chilean peso (down 2.0%), the Hungarian forint (down 1.9%), the South African rand (down 1.8%), the Czech koruna (down 1.7%), the Argentine peso (down 1.7%), and the Colombian peso (down 1.6%). EM bonds were under additional pressure this week.

The dollar short and EM long are two prominent Crowded Trades. That both are currently moving against the Crowd adds credence to the incipient global de-risking/de-leveraging thesis. Unfolding pressure on global "carry trade" leverage? And it was another wild week in big tech. The Nasdaq100 traded as high as 6,721 during Monday trading, dropped as low as 6,427 by Wednesday, opened Friday trading at 6,750 before ending the week at 6,656. The VIX almost made it back to 20 Wednesday, before closing the week at 15.41.

I don't see a VIX with a 15-handle doing justice to current stock market risk. Wednesday, in particular, had that unsettling dynamic of concurrent pressure on equities, Treasuries, corporate Credit and EM. On the other hand, if risk markets somehow turn quiescent, I would expect the bond market's focus to rather swiftly shift back to supply and mounting inflation risk.

For the Week:

The S&P500 was unchanged (down 0.1% y-t-d), while the Dow slipped 0.6% (down 1.7%). The Utilities jumped 2.7% (down 2.3%). The Banks gained 0.9% (up 1.5%), while the Broker/Dealers fell 1.5% (up 9.1%). The Transports slipped 0.3% (down 0.6%). The S&P 400 Midcaps declined 0.4% (down 0.4%), and the small cap Russell 2000 slipped 0.5% (up 1.3%). The Nasdaq100 dipped 0.2% (up 4.1%). The Semiconductors fell 1.0% (up 0.4%). The Biotechs declined 0.2% (up 7.9%). With bullion down $12, the HUI gold index dropped 1.2% (down 5.3%).

Three-month Treasury bill rates ended the week at 1.77%. Two-year government yields rose three bps to 2.48% (up 60bps y-t-d). Five-year T-note yields were unchanged at 2.80% (up 59bps). Ten-year Treasury yields were unchanged at 2.96% (up 55bps). Long bond yields declined two bps to 3.13% (up 38bps). Benchmark Fannie Mae MBS yields dipped one basis point to 3.65% (up 65bps).

Greek 10-year yields dropped 12 bps to 3.90% (down 17bps y-t-d). Ten-year Portuguese yields were unchanged at 1.65% (down 29bps). Italian 10-year yields fell four bps to 1.74% (down 28bps). Spain's 10-year yields declined two bps to 1.26% (down 31bps). German bund yields slipped two bps to 0.57% (up 14bps). French yields declined two bps to 0.80% (up 1bp). The French to German 10-year bond spread was unchanged at 23 bps. U.K. 10-year gilt yields declined three bps to 1.45% (up 26bps). U.K.'s FTSE equities index jumped 1.8% (down 2.4%).

Japan's Nikkei 225 equities index gained 1.4% (down 1.3% y-t-d). Japanese 10-year "JGB" yields were little changed at 0.055% (up 1bp). France's CAC40 rose 1.3% (up 3.2%). The German DAX equities index increased 0.3% (down 2.6%). Spain's IBEX 35 equities index gained 0.4% (down 1.2%). Italy's FTSE MIB index added 0.4% (up 9.5%). EM equities were mixed. Brazil's Bovespa index rose 1.0% (up 13.1%), while Mexico's Bolsa slipped 0.3% (down 2.2%). South Korea's Kospi index gained 0.6% (up 1.0%). India’s Sensex equities index jumped 1.6% (up 2.7%). China’s Shanghai Exchange gained 0.3% (down 6.8%). Turkey's Borsa Istanbul National 100 index fell 3.0% (down 6.7%). Russia's MICEX equities rallied 3.1% (up 9.1%).

Investment-grade bond funds saw inflows of $2.01 billion, while junk bond funds posted outflows of $2.489 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates jumped 11 bps to 4.58% (up 55bps y-o-y). Fifteen-year rates rose eight bps to 4.02% (up 75bps). Five-year hybrid ARM rates gained seven bps to 3.74% (up 62bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates surging 21 bps to 4.73% (up 59bps).

Federal Reserve Credit last week declined $5.1bn to $4.343 TN. Over the past year, Fed Credit contracted $96bn, or 2.2%. Fed Credit inflated $1.533 TN, or 55%, over the past 286 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $25.3bn last week to $3.412 TN. "Custody holdings" were up $201bn y-o-y, or 6.3%.

M2 (narrow) "money" supply rose $10.0bn last week to $13.947 TN. "Narrow money" gained $508bn, or 3.8%, over the past year. For the week, Currency increased $3.3bn. Total Checkable Deposits fell $11bn, while savings Deposits gained $11.8bn. Small Time Deposits increased $3.1bn. Retail Money Funds added $2.7bn.

Total money market fund assets slipped $1.3bn to $2.792 TN. Money Funds gained $150bn y-o-y, or 5.7%.

Total Commercial Paper declined $8.4bn to $1.056 TN. CP gained $76bn y-o-y, or 7.8%.

Currency Watch:

The U.S. dollar index jumped 1.4% to 91.542 (down 0.6% y-t-d). For the week on the downside, the Swedish krona declined 2.5%, the South African rand 1.8%, the Norwegian krone 1.7%, the New Zealand dollar 1.7%, the British pound 1.6%, the Swiss franc 1.3%, the euro 1.3%, the Brazilian real 1.3%, the Japanese yen 1.3%, the Australian dollar 1.2%, the South Korean won 0.9%, the Singapore dollar 0.6%, the Canadian dollar 0.5% and the Mexican peso 0.5%. The Chinese renminbi declined 0.57% versus the dollar this week (up 2.75% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index was little changed (up 6.9% y-t-d). Spot Gold declined 0.9% to $1,323 (up 1.6%). Silver sank 3.9% to $16.497 (down 3.8%). Crude slipped 30 cents to $68.10 (up 13%). Gasoline gained 1.5% (up 18%), and Natural Gas rose 1.4% (down 0.6%). Copper fell 2.7% (down 7%). Wheat jumped 4.5% (up 17%). Corn rose 3.4% (up 14%).

Market Dislocation Watch:

April 27 - Wall Street Journal (Asjylyn Loder): "Investors are dumping U.S. stock funds at one of the fastest paces in a decade as rising market turbulence erodes confidence in the nine-year-old bull market. U.S. equity mutual funds and exchange-traded funds recorded $2.4 billion in outflows for the week ended April 18… That followed $41 billion in outflows from these funds in February-the biggest monthly exodus since January 2008… Overall, investors have yanked $67 billion out of these stock funds since the start of February. That rush for the exits marked a sharp reversal from January, when investors poured $10.8 billion into U.S. equity funds, helping propel major indexes to records."

April 22 - Wall Street Journal (Gunjan Banerji): "Investors are starting to wonder if Wall Street's fear gauge is broken. The Cboe Volatility Index tracks how much investors pay for options they often use as insurance against future stock-market declines. Known as the VIX, it typically rises as stocks fall or vice versa, reflecting shifting demand for options used to hedge investments. Playing the VIX has become a cottage industry in recent years, with billions of dollars flowing into investment products aimed at hedging or exploiting volatility trends. This past Wednesday morning, futures contracts that track the VIX spiked despite little movement in U.S. stock futures. The 12% rise within 30 minutes set off alarm bells on trading floors-it was the biggest such move going back to 2010, according to data from Macro Risk Advisors…"

April 25 - Bloomberg (Katherine Greifeld): "Two of the world's most crowded trades are headed south at precisely the same time, resulting in a double-dose of pain for global fund managers. Shares of the FAANG-BAT complex -- which includes U.S. tech giants Facebook, Amazon, Apple, Netflix, and Google parent Alphabet, as well as China's Baidu, Alibaba and Tencent -- have lost more than $200 billion in market value since late last week. Money managers in a Bank of America survey earlier this month labeled being long the companies the most crowded bet in markets. Meanwhile, the dollar resumed its best run since 2016 Wednesday. That's after hedge funds and other large speculators amassed the biggest net-short position in more than five years, Commodity Futures Trading Commission data show."

April 24 - Financial Times (Robin Wigglesworth): "The increasing concentration of buying and selling of US stocks in the final 30 minutes of the day has some investors calling for a shorter trading period to help limit the market's growing operational risk. A seismic shift towards exchange traded funds and other index-tracking investment vehicles has heightened the importance of the last half-hour of the US trading day, from 3.30 to 4pm, when these passive funds typically conduct most of their activity… That has prompted traditional active managers to conduct more of their trading during this window to benefit from greater market 'liquidity'. 'This dynamic is a pretty big story,' said Bob Minicus, head of global equity trading at Fidelity. 'We view the close as an opportunity. As more volumes migrate towards the close, we will follow it.'"

April 22 - Wall Street Journal (Gunjan Banerji and Sam Goldfarb): "Investors are having a tougher time trading in a number of financial markets, a development that is weakening their ability to raise cash or to protect against big stock declines. The capacity to get in or out of an investment, known as liquidity, was rarely tested during the long stretch when stocks and bonds rallied with little volatility. Now as inflation concerns, trade anxiety and tension in Syria roil markets, investors notice it is getting harder to trade as easily."

Trump Administration Watch:

April 26 - Reuters (Roberta Rampton and Susan Heavey): "U.S. President Donald Trump's top economic adviser Larry Kudlow said… he hoped upcoming trade talks with China would yield progress but that resolving U.S. complaints would be 'a long process.' Trump is preparing to send a delegation to China to try to head off a trade war. He has threatened a new round of $100 billion in tariffs on Chinese products that could target cellphones, computers and other consumer goods."

April 27 - Reuters (Koh Gui Qing): "The U.S. government may start scrutinizing informal partnerships between American and Chinese companies in the field of artificial intelligence, threatening practices that have long been considered garden variety development work for technology companies, sources familiar with the discussions said. So far, U.S. government reviews for national security and other concerns have been limited to investment deals and corporate takeovers. This possible new expansion of the mandate - which would serve as a stop-gap measure until Congress imposes tighter restrictions on Chinese investments - is being pushed by members of Congress, and those in U.S. President Donald Trump's administration who worry about theft of intellectual property and technology transfer to China…"

April 25 - Reuters (Karen Freifeld and Eric Auchard): "U.S. prosecutors in New York have been investigating whether Chinese tech company Huawei violated U.S. sanctions in relation to Iran, according to sources familiar with the situation. Since at least 2016, U.S. authorities have been probing Huawei's alleged shipping of U.S.-origin products to Iran and other countries in violation of U.S. export and sanctions laws… News of the Justice Department probe follows a series of U.S. actions aimed at stopping or reducing access by Huawei and Chinese smartphone maker ZTE Corp to the U.S. economy amid allegations the companies could be using their technology to spy on Americans."

April 22 - Financial Times (Gavyn Davies): "A familiar dispute has erupted between Republican and Democrat macro-economists in the US about the causes of the permanently high budget deficits and public debt ratios shown in new CBO projections for the medium term. The Republican economists blame excessive entitlement programmes, while the Democrats blame abnormally low taxation following the Trump budget. No surprises there: the non-partisan truth is that both spending and taxation have to be adjusted in hugely unpopular directions if the debt ratio is to be stabilised. The political discipline to do this has been absent since the Clinton era. In the absence of early policy changes, economists on both sides believe that America is facing a looming debt 'crisis'. The Republicans say this could hit 'like an earthquake as short-term bondholders attempt to escape fiscal carnage'. The Democrats agree that 'a debt crisis is coming; none of that is in dispute'. "

April 24 - CNBC (Sarah O'Brien): "The number of homeowners who will benefit from the mortgage tax break is expected to plummet this year by more than half, according to a congressional report… About 13.8 million taxpayers will be able to claim the mortgage-interest deduction in 2018, down from more 32.3 million in 2017… That's about a 57% drop."

Federal Reserve Watch:

April 24 - CNBC (Jeff Cox): "The market is finally coming around to the idea that the Federal Reserve this year will be raising interest rates a total of four times. Though some big forecasting firms on Wall Street for months have been predicting a more aggressive Fed, traders thus far had been anticipating three moves this year… However, the fed funds futures market Monday morning gave almost a 50% probability that the central bank would move one more time in December. The CME's FedWatch tool, which has been a reliable gauge of the Federal Open Market Committee's actions, assigned a 48.2% chance in early trade."

U.S. Bubble Watch:

April 24 - CNBC (Diana Olick): "The critical shortage of homes for sale continues to drive home prices higher nationwide. Values jumped 6.3% nationally in February compared with a year earlier, according the S&P CoreLogic Case-Shiller Home Price Index. That is a wider gain than January's 6.1% annual jump. Home prices nationally were 6.7% higher than their peak in July 2006… Prices are increasing more sharply in the nation's largest metropolitan markets. The largest 10 cities saw an annual increase of 6.5% compared with 6% in February. The largest 20 cities saw 6.8% gains, up from 6.4% in January. Local leaders continue to be Seattle (+12.7%), Las Vegas (+ 11.6%) and San Francisco (+10.1%). Thirteen of the top 20 cities saw bigger annual price increases in February than in January."

April 26 - Bloomberg (Prashant Gopal and Matthew Boesler): "The U.S. homeowner vacancy rate dropped to 1.5% in the first quarter, the lowest level since 2001, a sign that houses aren't going to waste amid a residential supply crunch. The rate was down from 1.7% a year earlier and 1.6% in the fourth quarter, the U.S. Census Bureau said… The vacancy rate is the proportion of the non-vacation-home inventory that is vacant and for sale. The declining vacancy rate only adds to concerns about record low housing supplies…"

April 25 - CNBC (Evelyn Cheng): "Several companies, including chipmaker Nvidia and toymaker Hasbro, are reporting how a shortage of truck drivers is affecting their business. 'Trucking is right now … experiencing a severe crisis,' Robert Csongor, vice president and general manager of automotive at Nvidia, said… 'There's a shortage of trucking drivers driven by the Amazon age.' Trucks account for more than 70% of all tonnage moved in the U.S… A shortage of drivers has persisted for years due primarily to an aging workforce and poor compensation for the long hours away from home coupled with increasing demand led by Amazon, according to industry experts."

April 26 - Wall Street Journal (Liyan Qi): "The U.S. threat of investment restrictions is already damping the enthusiasm of Chinese businesses, with some canceling or slowing plans to invest in the American market, China's Commerce Ministry said. Ministry spokesman Gao Feng… said Beijing is prepared to respond if the U.S. goes ahead with the plan. 'We are sticking to our bottom-line thinking and are prepared to take action,' he told reporters… Rising uncertainty about the possible U.S. restrictions has already led some Chinese firms to reconsider their investment plans there, Mr. Gao said."

April 26 - Bloomberg (Keith Naughton): "Ford Motor Co. is cleaving an additional $11.5 billion from spending plans and dropping several sedans, including the Fusion and Taurus, from its lineup to more quickly reach an elusive profit target. The automaker is almost doubling a cost-cutting goal to $25.5 billion by 2022… By not investing in next generations of any car for North America except the Mustang, the company now anticipates it'll reach an 8% profit margin by 2020, two years ahead of schedule."

China Watch:

April 22 - Bloomberg: "Investors who pushed up Chinese bank shares last week on news of lower reserve requirements may have been celebrating too soon. The subtext to Tuesday's move is an effort to prepare the banks for a painful new phase in China's campaign to reduce financial-sector risks, as regulators free up deposit rates and accelerate their crackdown on the nation's $16 trillion shadow banking sector. 'China is gearing up to crack a hard nut with deleveraging and financial reforms, and the central bank is offering some coordinated policies to ensure it will be a smooth transition,' said Xia Le, chief Asia economist at Banco Bilbao Vizcaya Argentaria SA in Hong Kong."

April 24 - Financial Times (Gabriel Wildau): "Chinese banks have embarked on a new round of capital raising, prompted by regulations on shadow banking that are forcing lenders to bring shadow loans back on to their balance sheets. Pressure on banks to boost capital is a key element of Beijing's broader effort to contain financial risks from the country's extraordinary debt growth over the past decade. For most of the past decade, banks' dominance of China's financial system has waned as non-bank lenders and capital markets expanded. But the new rules forbid banks from packaging off-balance-sheet loans into 'wealth management products' that combine high yields with an implicit guarantee against default. That has spurred a revival of traditional bank lending. The resulting swell in bank balance sheets is boosting lenders' need for capital to comply with Chinese regulators' aggressive implementation of global Basel III capital adequacy rules."

April 24 - Bloomberg: "The next front in China's crackdown on debt is the one closest to home. On the back of a boom in property prices, household borrowing has been climbing for 10 years straight, at a pace that rivals any such run-up in major economies. At $6.7 trillion, and a record 50% of gross domestic product, private debt is now approaching developed-world levels and crimping consumer spending power. Take Huang Panpan, a 33-year-old public-relations executive from Beijing. Last year, he took the plunge on a 2.9-million-yuan ($460,000) mortgage on a 385-square-foot home and now faces monthly loan payments of about half of his take-home salary."

April 21 - Wall Street Journal (Josh Chin): "Chinese President Xi Jinping outlined an updated vision for China's future as an internet and technology power, pledging more state support for sectors caught in the crosshairs of a trade fight with the U.S. Speaking at a two-day conclave on cyberspace that ended Saturday, Mr. Xi called on officials, enterprises and researchers to redouble already extensive national efforts to achieve breakthroughs in 'core technologies' like semiconductors-an area where China still lags behind the U.S. The development of new information technologies 'presents the Chinese people with an opportunity you rarely see in a thousand years,' Mr. Xi said, according to an account of his speech… 'We must keenly seize the historic opportunity.'"

April 21 - Reuters (Adam Jourdan): "China must strengthen its grip on the internet to ensure broader social and economic goals are met, state news agency Xinhua reported… citing comments from President Xi Jinping, underlining a hardening attitude towards online content. Under Xi's rule China has increasingly tightened its grip on the internet, concerned about losing influence and control over a younger generation who are driving a diverse and vibrant online culture from livestreaming to blogs. 'Without web security there's no national security, there's no economic and social stability, and it's difficult to ensure the interests of the broader masses,' Xinhua cited Xi as saying."

Central Bank Watch:

April 22 - Financial Times (Claire Jones and Delphine Strauss): "Mario Draghi, European Central Bank president, acknowledged a 'moderation' in the pace of the eurozone recovery, but signalled no change in monetary policy. Speaking… after a meeting of the ECB's governing council that kept in place the bank's promise to maintain its asset purchase programme at least until the end of September, Mr Draghi said there had been 'a loss of momentum that is pretty broad based across countries and all sectors'. But he added that his overall assessment was one of 'caution tempered by an unchanged confidence" of moving towards the ECB's inflation target of just below 2%."

Fixed Income Bubble Watch:

April 26 - Bloomberg (Liz McCormick and Saleha Mohsin): "The U.S. government's need for new financing, rising in part from tax cuts and increased spending under President Donald Trump, has Wall Street predicting the Treasury will ramp up borrowing yet again next week. Treasury officials are set to announce this quarter's funding plans on May 2, and bond dealers expect another across-the-board boost to auction sizes… The nation's fiscal overseers may have little choice, with deficits projected to surpass $1 trillion by 2020. The deterioration in federal finances, which is putting the U.S. debt profile on track to resemble Italy's, is becoming more glaring ahead of crucial midterm elections in November. American taxpayers are already bearing the cost, as swelling issuance has helped drive yields on some maturities to the highest in a decade. Government debt sales will more than double this year, to a net $1.44 trillion by JPMorgan Chase & Co.'s estimate…"

April 25 - Bloomberg (Liz McCormick and Alex Harris): "With all the focus on the 10-year Treasury yield breaching 3%, investors may be missing the most important movement afoot in the world's biggest debt market. It's the spike higher in U.S. short-term rates that's really flashing a warning signal for companies, share prices and consumers, according to Peter Tchir at Academy Securities Inc. The surge in two-year yields to the highest since 2008, is 'the scariest chart for investors,' said the firm's head of macro strategy. One-year bill rates are also the highest in almost a decade. 'The 10-year yield might attract all the attention but higher short-term yields are more problematic, ' Tchir wrote… 'Consumers who want to purchase large items are faced with higher costs. Investors can allocate to less risky bonds and out of dividend stocks and still get some yield.'"

April 25 - Bloomberg (Adam Tempkin and Brian W Smith): "A huge swath of the corporate bond market is looking increasingly vulnerable. Bonds with the lowest investment grade have been a market darling over the past decade, ballooning in size as low global interest rates drew fund managers seeking higher returns. But as borrowing costs climb to a four-year high just as investors begin to anticipate a downturn in the global economy, some analysts are starting to sound the alarm. 'We're late in the credit cycle, and trying to figure out when everything turns,' said Erin Lyons, a senior credit strategist at… CreditSights Inc. 'Some of these may eventually be downgraded.' Notes in the lowest rungs above high-yield junk -- in the BBB group from S&P Global Ratings or the Baa bucket from Moody's… -- total about $3 trillion…"

Global Bubble Watch:

April 25 - Bloomberg (Joanna Ossinger): "The fear over 10-year U.S. Treasury yields breaking through 3% has been a long time coming, according to Societe Generale SA. 'Interest rates are already doing damage, people just haven't noticed,' Andrew Lapthorne, the firm's global head of quantitative strategy, said… 'Leverage in the U.S. is grotesque for this stage of the cycle. At the moment you've got peak leverage at peak prices. It's not like you have to dig deep to find a problem.' The number-one conversation Societe Generale's having with clients right now is about the correlation between bonds and equities. But risks to corporate balance sheets is a bigger problem at the moment, particularly in the U.S. and China."

April 24 - CNBC (Patti Domm): "Rising costs and rising interest rates make for a bad brew for stocks. The 10-year Treasury yield rose to 3% Tuesday for the first time in four years. The psychologically important number sent ripples across financial markets because rising interest rates are a sea change for consumers and companies that have lived with ultra-low borrowing costs for the past decade. Along with interest rates, other costs are rising for companies, with the potential to bite into profits and dampen earnings growth. This earnings season, with double-digit growth, was expected to pump up stock prices and take investors' minds off trade wars and geopolitical concerns. But strong earnings may have opened the door to a new concern - commodities and labor costs are going up along with interest rates."

Japan Watch:

April 27 - Bloomberg (Toru Fujioka and Masahiro Hidaka): "Governor Haruhiko Kuroda began his new term at the Bank of Japan much as he did the first one -- emphasizing his commitment to hitting 2% inflation. The BOJ left its policy settings intact, vowing to push ahead with stimulus even as other major central banks move further toward policy normalization, though at a moderating pace amid signs of slowing economic growth. Still there was a twist -- not uncommon in Kuroda's tenure -- as the BOJ's policy statement omitted mention of the projected time frame for hitting his longstanding 2% target."

EM Bubble Watch:

April 27 - Financial Times (Benedict Mander, Jessica Dye and Pan Kwan Yuk): "Argentina's central bank sharply raised its benchmark interest rate from 27.25% to 30.25% on Friday, in a muscular move aimed at propping up its ailing currency from sliding further against the US dollar. The surprise 300 bps rise comes amid a sharp drop in the value of the Argentine peso. The currency has shed nearly a third of its value against the dollar over the past year, dropping over 10% in the past four months alone."

April 26 - Financial Times (Michael Mackenzie): "The US dollar is attracting buyers after a long period of decline as higher bond yields finally shift the needle in favour of the reserve currency. The dollar index - a basket of major rivals dominated by the euro - is now clearly above its 100-day moving average for the first time this year, and emerging market currencies are also receiving a drubbing. The Bloomberg index of eight EM high-yield carry currencies has slid into negative territory for the year with a decline of 3% so far in April. The index - which includes Brazil, India, Mexico, Indonesia, South Africa, Hungary, Turkey and Poland - has now fallen nearly 5% from its January peak as US bond yields have climbed."

April 26 - New York Times (Clifford Krauss): "As President Trump moves to recast trade and border relations with Mexico, American oil companies are worried that the prospective winner of Mexico's presidential election will play his own nationalist card. The leading candidate, Andrés Manuel López Obrador, wants to reverse policies that have tied a knot between Mexico and the United States in recent years in energy production and consumption. And he has promised to make sure that oil never falls 'back into the hands of foreigners.' In addition to threatening refinery profits in the United States, his proposals could slow oil production in Texas and impede deepwater drilling in the Gulf of Mexico by international oil giants like Exxon Mobil and Chevron. They would also jeopardize the United States' energy trade surplus with Mexico, which reached roughly $15 billion last year."

April 25 - Bloomberg (Selcan Hacaoglu and Onur Ant): "Turkey's central bank raised interest rates for the first time this year, lending support to the lira as it seeks to contain inflation in the weeks leading up to early presidential elections in June. Policy makers increased the late liquidity window, the rate it uses to set bank funding costs, by 75 bps to 13.50%... The lira, which has fallen against all major currencies this year, strengthened 1%... Turkey is struggling to tame inflation after the weakening lira pushed price growth as high as 13% last year."

Geopolitical Watch:

April 26 - New York Times (Jochen Bittner): "To claim we are living through a new Cold War is both an understatement and a category mistake. The 20th-century face-off between the Communist East and the Capitalist West was, ideology aside, about two superpowers trying to contain each other. The global conflict of today is far less static. What we are witnessing instead is a new Great Game, a collision of great powers that are trying to roll back one another's spheres of influence. Unlike the Great Game of the 19th century between the British and the Russian Empire that culminated in the fight for dominance over Afghanistan, today's Great Game is global, more complex and much more dangerous. Call it the Game of Threes. It involves three prime players, Russia, China and the West, which are competing in three ways: geographically, intellectually and economically. And there are three places where the different claims to power clash: Syria, Ukraine and the Pacific. Many of the defining conflicts of our time can be defined through some combination of those three sets."

April 25 - Reuters (Ben Blanchard and Jess Macy Yu): "A series of Chinese drills near Taiwan were designed to send a clear message to the island and China will take further steps if Taiwan independence forces persist in doing as they please, Beijing said on Wednesday, as Taiwan denounced threats of force. Over the past year or so, China has ramped up military drills around democratic Taiwan, including flying bombers and other military aircraft around the self-ruled island. Last week China drilled in the sensitive Taiwan Strait. China claims Taiwan as its sacred territory, and its hostility towards the island has grown since the 2016 election as president of Tsai Ing-wen from the pro-independence Democratic Progressive Party."

April 24 - Reuters (Brenda Goh): "China has conducted live combat drills in the East China Sea…, the latest in a series of air and sea military exercises it has conducted over the past 10 days. Xinhua said a Chinese aircraft formation, which included the Liaoning carrier and J-15 planes, conducted anti-aircraft and anti-submarine warfare training where they intercepted 'enemy' jets, fired anti-air missiles from ships surrounding the carrier and dodged 'enemy' submarines."

Friday Evening Links

[Reuters] Wall Street flat as earnings offset inflation jitters

[Bloomberg] FANG Stocks Save the Week

[Bloomberg] Europe and the U.S. Teeter on the Brink of a Trade War

[Bloomberg] World's Central Banks Just Can't Quit on Currency Intervention

[Reuters] Despite warmth, Merkel and Trump still differ on trade and NATO

[Reuters] Trump says 'Iran will not be doing nuclear weapons'

Thursday, April 26, 2018

Friday's News Links

[Bloomberg] Stocks Mixed Amid Earnings, Data; Dollar Advances: Markets Wrap

[Bloomberg] U.S. Growth Cools to 2.3% as Gains in Consumer Spending Ease

[Bloomberg] U.S. Private-Sector Wages Lodge Biggest Gain Since 2008

[Bloomberg] U.S. Consumer Sentiment Exceeds Forecast on View of Finances

[Reuters] Exclusive: U.S. considers tightening grip on China ties to Corporate America

[Bloomberg] BOJ Maintains Stimulus While Removing Language on Timing of 2%

[Bloomberg] Fearing the Fed, Credit Investors Are Buying More Junk Instead

[Bloomberg] Europe's Big Debt Drama Enters Finale as Clock Ticks for Greece

[CNBC] Korean leaders plan an end to war and 'complete denuclearization'

[WSJ] Companies Feel the Impact of Rising Oil Prices

[WSJ] Bank of Japan Ditches Inflation Target Date

[WSJ] Stock Funds Suffering Big Outflows as Rattled Investors Rush to the Exits

[FT] This is a tech bubble, when's the crash?

Thursday Evening Links

[Reuters] Wall Street gains on strong earnings, tech resurgence

[CNBC] Amazon jumps after smashing earnings

[Bloomberg] Mnuchin's Treasury Poised to Rev Up Supply as Budget Gap Widens

[Reuters] White House adviser Kudlow says China trade talks 'long process'

[CNBC] With debt at $21 trillion and growing, ratings agencies still give US highest marks

[Reuters] Understanding Kim: Inside the U.S. effort to profile the secretive North Korean leader

[NYT] Mexican Election Could End the Welcome for U.S. Oil Giants

[FT] Resurgent dollar hits EM carry trade favourites

[FT] Chinese and US bond yields converge

Wednesday, April 25, 2018

Thursday's News Links

[Bloomberg] Stocks Advance as Results Roll In; Treasuries Jump: Markets Wrap

[Bloomberg] Oil Rises as Speculation on Iran Deal Counters Stockpile Gain

[Reuters] U.S. weekly jobless claims fall to lowest level since 1969

[Bloomberg] ECB Keeps Policy Unchanged as Slower Growth Favors Caution

[Bloomberg] U.S. Homeowner Vacancy Rate Declines to Lowest Level Since 2001

[Bloomberg] Ford Retreats From American Car Business in Penny-Pinching Push

[Bloomberg] The Next 9 Days Will Teach Us a Lot About the U.S. Economy

[Bloomberg] Selling a Home in May? These Cities Command a Premium

[NYT] The Era of Very Low Inflation and Interest Rates May Be Near an End

[NYT] Fed Officials Worry the Economy Is Too Good. Workers Still Feel Left Behind.

[NYT] Who Will Win the New Great Game?

[WSJ] Beijing Ready to Hit Back if U.S. Curbs Chinese Investments

[WSJ] How Mario Draghi Could Explain Eurozone Economy’s Apparent Slowdown

[FT] US housing: how Fannie Mae and Freddie Mac became rental powerhouses

[FT] Strong earnings fizzle as Wall Street worries about peaks

Wednesday Evening Links

[Bloomberg] Asia Stocks to Gain; Dollar Holds at 3-Month High: Markets Wrap

[Bloomberg] Stocks Mixed as Optimism `Hijacked' by Rates: Markets Wrap

[Reuters] U.S. 10-year yield rises above 3 pct on supply worries

[Bloomberg] ‘Grotesque’ Leverage and Rising Rates Are Already Causing Damage, Says SocGen

[CNBC] Death of the earnings beat: Investors don't care that companies are blowing away Wall Street's estimates

[Reuters] ECB to play down soft data, keep door open to ending bond buys

[Reuters] U.S. probing Huawei for possible Iran sanctions violations: sources

[WSJ] Higher Rates Hide a World of Easy Money

[FT] A fast-changing market requires a disciplined US Federal Reserve

Tuesday, April 24, 2018

Wednesday's News Links

[Bloomberg] Stocks Extend Drop as Optimism `Hijacked' by Rates: Markets Wrap

[Bloomberg] Oil Steadies as Trump Unmoved by Macron Push for New Iran Deal

[Bloomberg] A $3 Trillion Credit Market Has Corporate Bond Investors on Edge

[Bloomberg] Two-Year U.S. Yields at 2008 Highs Are Scarier Than a 3% 10-Year

[Bloomberg] High-Yield Bond Sales Ramp Up Amid Concerns Over Volatility

[Bloomberg] As Most Crowded Trades Turn Sour, Fund Managers Brace for Pain

[Bloomberg] ‘High Water Mark’ Confusion Grabs Hold of Markets: Taking Stock

[Bloomberg] Why High-Flying U.S. Home Prices Are About to Get Another Jolt

[CNBC] Companies are complaining they can't find enough truck drivers to ship their stuff because of Amazon

[Bloomberg] China warns of more action after military drills near Taiwan

[Bloomberg] Turkey Surprises With Bigger Rate Hike to Bolster Lira

[WSJ] As ECB Contemplates Rate Move, Storm Clouds Gather Over Eurozone

[FT] US stocks hit by profit fears and rising bond yields

[FT] We must heed warnings from the 1970s bear market

[FT] N Korea summits fuel Beijing fears of losing sway over Pyongyang

Tuesday Evening Links

[Bloomberg] Stock Rout Worsens as Caterpillar Spooks Bulls: Markets Wrap

[Bloomberg] Crude Slumps as Macron Proposes Iran Deal in Washington Visit

[CNBC] Higher interest rates and rising costs are a bad brew for stocks

[Bloomberg] Global Markets Are Facing Major Milestones at Every Turn

[Bloomberg] The $7 Trillion Debt Pile Looming Large Over Chinese Households

[CNBC] Trade war with US could be the tipping point for China’s $14 trillion debt-ridden economy

[FT] Chinese banks under pressure from Beijing to boost capital

[FT] Bubble trouble and the dangers of more ‘Big Shorts’

[WSJ] Near-Junk Illinois to Sell More Bonds—Will Investors Buy In?

[WSJ] Donald Trump Warns of ‘Big Problems’ if Iran Reboots Nuclear Effort

Sunday, April 22, 2018

Monday's News Links

[Reuters] Wall Street flat as industrials offset lower oil; U.S. yields on radar

[Bloomberg] Dollar Advances as Treasury Yields Flirt With 3%: Markets Wrap

[CNBC] The 10-year Treasury yield is inches away from 3%, a level that could cause shock waves in the financial markets

[Bloomberg] U.S. Existing-Home Sales Rise as Properties Draw Quick Bids

[CNBC] US existing home sales rise more than expected in March

[Bloomberg] U.S. Softens Stance on Rusal Sanctions; Aluminum Prices Plunge

[Bloomberg] Emerging Markets Analysts Are Nervous About Rising U.S. Yields

[CNBC] Chances of a fourth rate hike this year just took a big jump higher

[Bloomberg] Netflix Is Selling $1.5 Billion of Junk Bonds to Finance More Shows

[Bloomberg] Lenovo Drives China Tech Slump as Fallout From ZTE Ban Spreads

[CNBC] Japan needs 'strong accommodative' monetary policy 'for some time,' says BOJ's Kuroda

[Reuters] China may backslide on deleveraging if trade war looms

[Bloomberg] Foreign Investors’ Love Affair With Mexico Ignores Populist’s Rise

[FT] Is the US headed for a public debt crisis?

Sunday Evening Links

[Bloomberg] Asian Stocks Head for Mixed Start; Yen Slips: Markets Wrap

[Bloomberg] China Is Bolstering Lenders Before New Assault on Shadow Banking

[Bloomberg] What Global Finance Chiefs Are Saying About the Global Economy

[WSJ] Investors’ New Headache: It’s Getting Harder to Buy or Sell When They Want

[WSJ] Flattening Yield Curve Isn’t Just the Fed’s Problem

Sunday's News Links

[Bloomberg] U.S. Hints at China Truce as World Warns of Trade-War Threat

[Reuters] Chinese central bank governor says economy strong, financial leverage under control

[WSJ] It’s a Scary Time To Be Trading Wall Street’s Fear Index

[FT] Eurozone downturn and lack of reform presage existential crisis

Friday, April 20, 2018

Weekly Commentary: Recalling 1994

Equities rallied to begin the week. With Syrian missile strikes more limited than feared and no military response from Russia, there was immediate impetus to unwind hedges. That it was option expiration week ensured plenty of firepower. The S&P500 had rallied 2.3% at Wednesday's trading high, before a resumption of selling cut the gain for the week to 0.5%.

WTI crude dropped $1.17 in Monday's trading, though selling was short-lived. Crude gained $1.01 for the week to $68.40, trading to the high since December 2014. WTI is now up a rather inflationary 13% y-t-d. The President's Friday morning tweet - "Looks like OPEC is at it again. With record amounts of Oil all over the place, including the fully loaded ships at sea, Oil prices are artificially Very High! No good and will not be accepted!" - generated media attention but only brief selling pressure. The market seems to think it knows more about crude supply dynamics than the Commander and Chief.

The GSCI Commodities Index rose another 1.2% this week (up 7.1% y-t-d), also to the high since December 2014. It wasn't only energy driving commodity gains. Silver rose 3.0% this week, with Palladium up 4.2%, Aluminum 8.1%, Zinc 3.7%, Nickel 6.4%, Tin 3.2% and Copper 2.8%.

Trade frictions, Middle East instability and general geopolitical uncertainty add up to mounting inflation concerns. The 10-year TIPS breakeven rate (implied inflation rate calculated by subtracting the 10-year TIP yield from the 10-year Treasury yield) rose four bps this week to 2.18%, the high since August 2014. It's worth noting that the breakeven rate bottomed at 1.26% in February 2016. It rallied to 2.07% by early-2017 before settling back to 1.68% near mid-year - and has been on a reasonably steady ascent now for nine months.

Ten-year Treasury yields rose 13 bps this week to 2.96%, surpassing the February 21st level to the high going back to January 2014. If 10-year Treasuries surpass 3.0% next week, it will mark the highest yield since July 2011. Two-year yields jumped nine bps to 2.45%, the high going back to August 2008. Generating surprisingly little attention, Benchmark MBS yields surged 14 bps this week to 3.66% (up 66bps y-t-d!), the high all the way back to September 2013. Expect more discussion about mortgage convexity.

Notably, 10-year Treasury yields rose eight bps during Thursday and Friday trading, despite a 1.4% fall in the S&P500. The safe haven status of Treasuries is anything but iron clad these days. Treasuries did, however, outperform investment-grade corporates. The iShares investment-grade ETF (LQD) fell 1.27% this week - most of the decline coming Wednesday through Friday - to trade below March lows. Sell Treasuries to hedge mortgage and corporate interest-rate risk. Between new issuance and hedging related selling, that's a supply glut that risks a bout of market indigestion.

Yet this week's jump in yields was not isolated to U.S. fixed-income. Key emerging bond markets were under pressure, particularly during Friday's session. Mexico saw its 10-year (dollar) yields jump 17 bps this week to 4.31%. Mexican bond yields are now up 70bps y-t-d and close to breaking out to highs going back to 2011. Brazilian bond (dollar) yields rose seven bps (to 4.99%), Peru's 15 bps, Colombia's nine bps, and Indonesia's 12 bps. Indonesia saw its local currency 10-year yields jump 20 bps to 6.74%, and India's local bond yields surged 21 bps to 7.74%.

Friday EM trading was notable. Currencies came under pressure, as the South African rand dropped 1.15%, the Colombian peso 1.0%, the Turkish lira 0.85%, the Russian ruble 0.8% and the Brazilian real 0.7%. For the week, the Mexican peso dropped 2.6%, the Colombian peso 1.8% and the Indian rupee 1.4%. Combining currency and bond losses, there was some pain this week in key emerging markets. In equities, the Shanghai Composite dropped 1.5% Friday, increasing losses for the week to 2.8% (down 7.1% y-t-d). EM inflows have been unrelenting in the face of a lengthening list of issues. Why do I sense these flows are about to reverse?

April 18 - Financial Times (Peter Wells): "The chances of the Federal Reserve delivering four interest rates in 2018 have ballooned in recent days. There is a 35.3% chance the US central bank will deliver three more rate rises this year, following its 0.25 percentage lift in March…, which is the highest probability in the history of the contract. As such, the chance of the Fed delivering at least three interest rate rises this year is sitting at 82%, also a contract-era high."

It's a far cry from "slamming on the brakes," yet the Fed is finally feeling some heat to get short-term rates up to a more reasonable level. A novel idea was offered by Dallas Federal Reserve Bank President Robert Kaplan: "I don't have a problem with being restrictive." As notably, the doves have really come around. Federal Reserve Bank of Minneapolis President Neel Kashkari: "I think it's likely that the fiscal actions that have been taken are going to on the margin help us achieve our inflation target. I was much more skeptical… It now seems much more likely that we are going to actually achieve our inflation target in the near future…" And from Governor Lael Brainard: "My anticipation is that the outlook is for continued, solid growth. The outlook looks consistent to me for continued gradual increases in the federal funds rate."

Imagining a murkier inflation outlook doesn't come easily. The global boom has decent momentum, although lurking financial fragilities could rather abruptly haunt economic prospects. Tariffs, protectionism and trade wars have the potential for consequential pricing impacts. There is, as well, significant ramifications for the global economy in the event trade disputes really heat up. And let us not forget an extraordinarily uncertain geopolitical backdrop, with myriad potential consequences for inflation and growth. Last but not least, there's the great uncertainty associated with myriad interdependent global Bubbles.

One thing we know with certainty: the world has added tremendous amounts of debt since the last debt crisis. And debt is poised to continue rising rapidly until sober markets impose some discipline on profligate borrowers. This is a momentous festering issue that will come to a head at some point. Ten-years of ultra-loose global finance destroyed discipline - by borrowers and lenders alike. "Deficits don't matter." In the markets, the view holds that central banks won't tolerate a problematic backup in market yields. So, as central bankers gaze submissively from the sidelines, governments just keep issuing debt and markets keep buying it.

April 18 - Bloomberg (Andrew Mayeda): "The world's debt load has ballooned to a record $164 trillion, a trend that could make it harder for countries to respond to the next recession and pay off debts if financing conditions tighten, the International Monetary Fund said. Global public and private debt swelled to 225% of global gross domestic product in 2016, the last year for which the IMF provided figures, the fund said… in its semi-annual Fiscal Monitor report. The previous peak was in 2009, according to the… fund. 'One hundred and sixty-four trillion is a huge number,' Vitor Gaspar, head of the IMF's fiscal affairs department, said… 'When we talk about the risks looming on the horizon, one of the risks has to do with the high level of public and private debt.'"

For posterity, I've pulled a few paragraphs from the IMF's most recent Fiscal Monitor report:

"At $164 trillion-equivalent to 225% of global GDP-global debt continues to hit new record highs almost a decade after the collapse of Lehman Brothers. Compared with the previous peak in 2009, the world is now 12% of GDP deeper in debt, reflecting a pickup in both public and nonfinancial private sector debt after a short hiatus. All income groups have experienced increases in total debt but, by far, emerging market economies are in the lead. Only three countries (China, Japan, United States) account for more than half of global debt -significantly greater than their share of global output...

"A large number of countries currently have a high debt-to-GDP ratio, as suggested by critical thresholds identified in the IMF's debt sustainability analysis. In 2017, more than one-third of advanced economies had debt above 85% of GDP, three times more countries than in 2000. One-fifth of emerging market and middle-income economies had debt above 70% of GDP in 2017, similar to levels in the early 2000s in the aftermath of the Asian financial crisis. One-fifth of low-income developing countries now have debt above 60% of GDP, compared with almost none in 2012."

"From a longer-term perspective, global indebtedness has been driven by private sector debt-which has almost tripled since 1950. For almost six decades, advanced economies spearheaded the global leverage cycle, with the debt of the nonfinancial private sector reaching a peak of 170% of GDP in 2009, with little deleveraging since. Emerging market economies, in contrast, are relative newcomers. Their nonfinancial private debt started to accelerate in 2005, overtaking advanced economies as the main force behind global trends by 2009. Private debt ratios doubled in a decade, reaching 120% of GDP by 2016."

"The ongoing recovery presents a golden opportunity to focus fiscal policy on rebuilding buffers and raising potential growth. Forecasts indicate that economic activity will continue to accelerate, which implies that fiscal stimulus to support demand is no longer a priority in most countries. Governments should avoid the temptation of spending the revenue windfalls during good times. Starting to rebuild buffers now will ensure that policymakers have sufficient fiscal ammunition to respond in case of a downturn and prevent fiscal vulnerabilities themselves from hurting the economy."

Wishful thinking with respect to "a golden opportunity." The global government finance Bubble has been fueled by almost a decade of near zero rates, massive central bank monetization and unprecedented amounts of government borrowing. My view holds that myriad global Bubbles have become only more vulnerable to any meaningful tightening of financial conditions. And there are pressing issues that increasingly put the loose financial landscape in jeopardy.

China has belatedly moved to slow system Credit growth. On the surface, it appears they are having some success. Overall Credit expansion has decelerated, mainly on the back of significant regulator pressures over shadow banking. At the same time, mortgage and household lending has accelerated. One can make a case that the overall ongoing expansion of non-productive Credit growth remains highly problematic. Underlying financial fragility continues to worsen. Along with sinking stock prices, China's interbank lending market this week indicated tightened liquidity conditions. The People's Bank of China announced Tuesday that it would support lending with lower bank reserve requirements.

April 17 - Wall Street Journal (William A. Galston): "I know that worrying about the deficit and debt is hopelessly retro, but please indulge me for a few minutes. Last week the Congressional Budget Office issued its outlook for the next 10 years. The news was not good. Over the next decade, the annual federal deficit averages $1.2 trillion. It rises from 3.5% of gross domestic product in 2017 to 5.1% in 2027. The national debt, which is driven by annual deficits, rises from $15.7 trillion to $28.7 trillion over the same period, and surges from 78.0% to 96.2% as a share of GDP-the highest mark since just after World War II. These projections have worsened significantly since the CBO's report last June, and public-policy decisions are the culprit."

April 18 - Bloomberg (Vincent Del Giudice and Alexandre Tanzi): "Mamma Mia! In five years, the U.S. government is forecast to have a bleaker debt profile than Italy, the perennial poor man of the Group of Seven industrial nations. The U.S. debt-to-GDP ratio is projected widen to 116.9% by 2023 while Italy's is seen narrowing to 116.6%, according to the latest data from the International Monetary Fund. The U.S. will also place ahead of both Mozambique and Burundi in terms of the weight of its fiscal burden."

If China's Bubble doesn't pose enough risk for global finance, there's the unfolding fiscal fiasco in Washington. Put on so much debt and you sacrifice flexibility - that's the case for the U.S., China and globally. Especially for the behemoth importer U.S. economy, tariffs and trade wars risk stronger inflation. There is as well the risk that our foreign creditors might find less appetite for additional bonds and other U.S. financial assets. Then there's the pressure such egregious late-cycle fiscal stimulus places on the Federal Reserve. For a Fed that is already far behind the curve, the prospect of stimulus-induced economic expansion with heightened inflationary pressures must be unsettling. Long convinced that inflation was dead and buried, doubt is now making some headway.

It's hard for me to believe there's not massive leverage throughout U.S. and global fixed-income markets. This historic speculative Bubble was at risk of being pierced back in late-2016. 2017, however, proved to be a year with still enormous ongoing global QE (chiefly BOJ and ECB), rampant Chinese Credit expansion and global inflation dynamics that just didn't quite attain momentum. Along the way, financial conditions remained extraordinarily loose and markets ever more complacent.

With the bond vigilantes long extinct, an overindulgent Washington embarked on massive tax cut fiscal stimulus. Mission Accomplished. Next on the agenda, trade and China. This week saw 10-year Treasury yields a mere four bps away from the 3.00% bogey. U.S. and emerging bond markets would appear unusually poised for a negative surprise. Things get interesting if the Fed ever ponders whether monetary tightening might be necessary to calm a frazzled bond market. Thinking back, I've always been intrigued by how the bond (and derivatives!) market was so caught by surprise in 1994. IO's and PO's and such and, of course, ghastly amount of speculative leverage.

For the Week:

The S&P500 added 0.5% (down 0.1% y-t-d), and the Dow increased 0.4% (down 1.0%). The Utilities gained 1.1% (down 4.8%). The Banks rose 0.9% (up 0.6%), and the Broker/Dealers jumped 3.3% (up 10.7%). The Transports jumped 2.0% (down 0.3%). The S&P 400 Midcaps gained 0.9% (unchanged), and the small cap Russell 2000 rose 0.9% (up 1.9%). The Nasdaq100 added 0.6% (up 4.2%). The Semiconductors sank 4.4% (up 1.4%). The Biotechs fell 1.3% (up 8.1%). Though bullion was down almost $10, the HUI gold index increased 0.4% (down 4.2%).

Three-month Treasury bill rates ended the week at 1.77%. Two-year government yields rose 10 bps to 2.46% (up 57bps y-t-d). Five-year T-note yields gained 13 bps to 2.80% (up 59bps). Ten-year Treasury yields jumped 13 bps to 2.96% (up 55bps). Long bond yields gained 12 bps to 3.15% (up 41bps).

Greek 10-year yields declined five bps to 4.02% (down 5bps y-t-d). Ten-year Portuguese yields were unchanged at 1.66% (down 29bps). Italian 10-year yields slipped two bps to 1.79% (down 24bps). Spain's 10-year yields rose four bps to 1.28% (down 29bps). German bund yields jumped eight bps to 0.59% (up 16bps). French yields rose seven bps to 0.81% (up 3bps). The French to German 10-year bond spread narrowed one to 22 bps. U.K. 10-year gilt yields gained four bps to 1.48% (up 29bps). U.K.'s FTSE equities index jumped 1.4% (down 4.2%).

Japan's Nikkei 225 equities index gained 1.8% (down 2.6% y-t-d). Japanese 10-year "JGB" yields added two bps to 0.06% (up 1bp). France's CAC40 rose 1.8% (up 1.9%). The German DAX equities index gained 0.8% (down 2.9%). Spain's IBEX 35 equities index rose 1.2% (down 1.6%). Italy's FTSE MIB index jumped 2.1% (up 9.0%). EM equities were mixed. Brazil's Bovespa index gained 1.4% (up 12%), while Mexico's Bolsa declined 0.7% (down 1.9%). South Korea's Kospi index rose 0.9% (up 0.4%). India’s Sensex equities index increased 0.7% (up 1.1%). China’s Shanghai Exchange dropped 2.8% (down 7.1%). Turkey's Borsa Istanbul National 100 index rallied 1.2% (down 3.8%). Russia's MICEX equities recovered 2.6% (up 5.8%).

Investment-grade bond funds saw inflows of $1.535 billion, and junk bond funds posted inflows of $2.971 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates gained five bps to 4.47% (up 50bps y-o-y). Fifteen-year rates jumped seven bps to 3.94% (up 71bps). Five-year hybrid ARM rates rose six bps to 3.67% (up 57bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up four bps to 4.52% (up 45bps).

Federal Reserve Credit last week expanded $6.4bn to $4.349 TN. Over the past year, Fed Credit contracted $95.1bn, or 2.1%. Fed Credit inflated $1.538 TN, or 55%, over the past 285 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $13.2bn last week to $3.437 TN. "Custody holdings" were up $231bn y-o-y, or 7.2%.

M2 (narrow) "money" supply declined $11.6bn last week to $13.936 TN. "Narrow money" gained $528bn, or 3.9%, over the past year. For the week, Currency increased $2.6bn. Total Checkable Deposits rose $8.7bn, while savings Deposits fell $29bn. Small Time Deposits gained $3.4bn. Retail Money Funds added $2.8bn.

Total money market fund assets sank $33.4bn to $2.794 TN. Money Funds gained $167bn y-o-y, or 6.4%.

Total Commercial Paper rose $7.0bn to $1.065 TN. CP gained $90bn y-o-y, or 9.2%.

Currency Watch:

April 19 - Financial Times (Emma Dunkley): "Hong Kong's de facto central bank indicated there would be more currency intervention to come, after the monetary authority bought more than HK$51bn to support the Hong Kong dollar over the past week. The Hong Kong Monetary Authority had stepped in 13 times within a week by Thursday morning, using its reserves to sell US$6.54bn and buying Hong Kong dollars to prop up the local currency, after it slumped to its weakest level since 2005… The HKMA is required to support the peg if the Hong Kong dollar slips to the edges of the band…"

The U.S. dollar index gained 0.6% to 90.316 (down 2.0% y-t-d). For the week on the upside, the Swedish krona increased 0.3%, the Brazilian real 0.3% and the South Korean won 0.2%. For the week on the downside, the Mexican peso declined 2.6%, the New Zealand dollar 2.2%, the British pound 1.7%, the Swiss franc 1.3%, the Canadian dollar 1.2%, the Australian dollar 1.2%, the Norwegian krone 0.6%, the euro 0.3%, the Singapore dollar 0.3%, the Japanese yen 0.3%, and the South African rand 0.3%. The Chinese renminbi slipped 0.34% versus the dollar this week (up 3.34% y-t-d).

Commodities Watch:

April 19 - Reuters (David Gaffen): "Oil prices on Thursday hit highs not seen since 2014, built on the ongoing drawdowns in global supply and as Saudi Arabia looks to push prices higher, though U.S. crude gave back gains in the afternoon to finish lower. A global oil glut has been virtually eliminated, according to a joint OPEC and non-OPEC technical panel…, thanks in part to an OPEC-led supply cut deal in place since January 2017."

April 18 - Reuters (Rania El Gamal and Alex Lawler): "Top oil exporter Saudi Arabia would be happy to see crude rise to $80 or even $100 a barrel, three industry sources said, a sign Riyadh will seek no changes to an OPEC supply-cutting deal even though the agreement's original target is within sight. The Organization of the Petroleum Exporting Countries, Russia and several other producers began to reduce supply in January 2017 in an attempt to erase a glut. They have extended the pact until December 2018 and meet in June to review policy."

April 19 - CNBC (Jeff Cox): "Threats of a trade war and continued signs of global growth are combining to create myriad opportunities for investors in one long-dormant asset class: commodities. In fact, the geopolitical turbulence and market volatility putting downward pressure on the stock market is working out just fine for the commodities market, which languished for years under slow economic conditions and a general trading malaise. One popular commodities index just hit a 2½-year high, and investors in the space see the trend continuing."

April 16 - Bloomberg (Mark Burton): "Aluminum extended last week's record gain, touching the highest in more than six and a half years in London as the market weighed the possibility that United Co. Rusal will be forced to cut production after being shut out of western markets."

The Goldman Sachs Commodities Index gained 1.2% (up 7.1% y-t-d). Spot Gold slipped 0.7% to $1,336 (up 2.5%). Silver jumped 3.0% to $17.16 (up 0.1%). Crude rose another $1.01 to $68.40 (up 13%). Gasoline gained 1.5% (up 17%), while Natural Gas was little changed (down 7%). Copper jumped 2.8% (down 4%). Wheat fell 2.5% (up 12%). Corn dropped 2.3% (up 10%).

Market Dislocation Watch:

April 18 - Bloomberg (Lu Wang, Elena Popina, and Luke Kawa): "The Cboe Volatility Index is how Wall Street measures anxiety. Lately it's the gauge's own plumbing that's making people nervous. It's a recurrent claim -- the VIX is rigged. It got a fresh airing Wednesday, when the index swung wildly just as derivatives on it were expiring. Billions of dollars are earned or lost as VIX futures settle. The concern is that owners of those wagers are willing to spend a few million to make them pay off. The suspicions are only that, suspicions. Volatility markets are too complex for easy conclusions to be drawn, and reasonable explanations have been offered for the patterns. But strange-looking outcomes have happened enough on VIX settlement day that the debate keeps being revived."

April 15 - Wall Street Journal (Chelsey Dulaney and Ira Iosebashvili): "The currencies of places as diverse as Russia, Hong Kong and Kazakhstan slid last week, an alarming sign to some investors who worry that the geopolitical volatility affecting U.S. stocks is spreading to other markets. Hong Kong's dollar hit the lowest level allowed under a more than three-decade-old U.S. dollar-peg agreement, forcing the de facto central bank to step in to defend the currency and stabilize it. Russia's ruble fell amid increased U.S. sanctions against the country and concern about a U.S. strike on Syria, a decline that also contributed to a fall in Kazakhstan's tenge."

Trump Administration Watch:

April 19 - Bloomberg (Saleha Mohsin): "The Treasury Department is considering using an emergency law to curb Chinese investments in sensitive technologies, as the Trump administration looks to punish China for what it sees as violations of American intellectual-property rights. The U.S. government is reviewing the possible use of a law known as the International Emergency Economic Powers Act, said Heath Tarbert, an assistant secretary in the agency's international affairs office. Under the 1977 law, President Donald Trump could declare a national emergency in response to an 'unusual and extraordinary threat,' allowing him to block transactions and seize assets."

April 18 - Axios (Steve LeVine): "The U.S. is experiencing a revival of Japan syndrome, harking back to the late 1970s when 'Made in Japan' abruptly stopped being a source of mirth, Americans began to snap up Toyotas and Nissans in big numbers, and Detroit sank into a profit-and-jobs bloodbath. The big picture: Five years ago, American technologists sneered at China's Baidu and its new search engine. But 'they aren't laughing anymore,' says Gregory Allen, an AI expert at the Center for a New American Security. 'Now they are marveling at Baidu's advances in artificial intelligence.' Chinese Big Tech is one dimension of a juggernaut that's collectively terrifying the Trump administration, Silicon Valley and the western foreign policy community. It's 'Made in China 2025,' Beijing's three-year old game plan for dominating the 10 biggest technologies of the future, such as AI, robotics and electric cars."

April 17 - New York Times (Raymond Zhong, Paul Mozur and Jack Nicas): "The United States undercut China's technology ambitions on Tuesday, advancing a new rule that would limit the ability of Chinese telecommunications companies to sell their products in this country. The Federal Communications Commission voted unanimously to move forward with a plan that would prevent federally subsidized telecommunications carriers from using suppliers deemed to pose a risk to American national security. The decision takes direct aim at Huawei, which makes telecommunications network equipment and smartphones, and its main Chinese rival, ZTE…"

April 16 - Reuters (Steve Stecklow, Karen Freifeld and Sijia Jiang): "The United States has banned American firms from selling parts and software to China's ZTE Corp for seven years, potentially devastating for the telecoms equipment maker and exacerbating tensions between the world's two largest economies… The U.S. Commerce Department imposed the ban following ZTE's violation of an agreement on punishing employees that was reached after it was caught illegally shipping U.S. goods to Iran."

April 19 - Reuters: "China will retaliate if the United States insists on initiating a trade war, China's ambassador to the United States was quoted as saying… Speaking at an event… Cui Tiankai said any dispute should be worked out through dialogue and a trade war would poison the atmosphere of overall China-U.S. relations."

April 16 - Reuters (Doina Chiacu, Dan Burns and James Oliphant): "U.S. President Donald Trump accused Russia and China… of devaluing their currencies while the United States raises interest rates, prompting China to accuse the United States of sending confusing messages. 'Russia and China are playing the Currency Devaluation game as the U.S. keeps raising interest rates. Not acceptable!' Trump said in a Twitter post."

April 20 - CNBC (John Melloy): "President Donald Trump blasted the oil-producing cartel OPEC on Twitter on Friday. 'Looks like OPEC is at it again,' he wrote. 'With record amounts of Oil all over the place, including the fully loaded ships at sea, Oil prices are artificially Very High! No good and will not be accepted!'"

April 17 - The Hill (Mike Lillis): "Rep. Steny Hoyer (D-Md.) said… that Democrats would seek to roll back the GOP's tax-code overhaul if they control the lower chamber next year. Hoyer, the minority whip, said the Democrats would not repeal the tax law in its entirety, citing certain provisions the party supports, such as cuts for the middle class, a reduction in the corporate rate and efforts to encourage companies to repatriate foreign-held dollars into the U.S. economy. But Hoyer said the 21% corporate tax rate adopted in the GOP bill is too low, suggesting that Democrats would raise it."

April 18 - Wall Street Journal (Greg Ip): "Among President Donald Trump's most deeply held economic convictions is that trade deficits are bad, yet his signature economic policy-a major tax cut-likely will deepen the trade deficits he abhors for years to come. For now, that's more a problem of optics than economics, albeit one that may prompt Mr. Trump to dial up trade tensions with other countries. But in the long run wider trade deficits will make Americans poorer. That's not because foreigners are stealing American jobs, as Mr. Trump often contends. Rather, it's because Americans will increasingly borrow from foreigners to sustain their standard of living. Paying them back will wipe out a sizable chunk of the tax cut's benefit."

April 17 - CNBC (Michelle Fox): "The United States has to make it clear to Russian President Vladimir Putin that there are lines that the U.S. will not allow Russia to cross, former Defense Secretary Leon Panetta told CNBC… 'There's no question we're in a new chapter of the Cold War with Russia,' Panetta said… 'There are an awful lot of steps that the Russians are taking to be very aggressive,' he said. 'Part of it is because they've read weakness into the United States, as well as our allies.'"

Federal Reserve Watch:

April 16 - Bloomberg (Rich Miller and Jennifer Jacobs): "U.S. President Donald Trump announced his intention to nominate Richard Clarida, a respected monetary economist and Pacific Investment Management Co. global strategic adviser, as vice chairman of the Federal Reserve. …Trump also announced plans to nominate Kansas State Bank Commissioner Michelle Bowman as Fed governor representing the interests of community banks… 'I would describe him as centrist and pragmatic,' said New York University professor Mark Gertler, who has co-written a number of research papers with Clarida. 'He has a nice balance between understanding and contributing to what the academic literature has to say and very practical, real world knowledge.'"

April 16 - Wall Street Journal (Nick Timiraos): "Minneapolis Federal Reserve President Neel Kashkari said recent steps by the federal government to stimulate economic growth have made him more confident the Fed will achieve its 2% inflation objective soon, allowing the central bank to press ahead with planned interest-rate increases. Mr. Kashkari had been outspoken last year against rate increases because of concerns they would hobble the economic expansion in the face of subdued inflation."

April 16 - Reuters (Ann Saphir): "Dallas Federal Reserve Bank President Robert Kaplan… said he expects the U.S. central bank to raise interest rates three times this year and further next year to levels that could put the brakes on U.S. economic growth, but that he does not want to push short-term rates above long-term borrowing costs. 'I don't have a problem with being restrictive,' Kaplan said, adding that monetary policy would be restrictive if interest rates rise above the 2.5% or 2.75% that he estimates is their 'neutral' level."

April 19 - Reuters (Michelle Price): "Federal Reserve Board Governor Lael Brainard… warned it was premature for regulators to revisit liquidity and capital requirements for the largest banks amid growing vulnerabilities in the economy. Speaking at a conference in Washington, Brainard said rising asset prices and leverage signaled it was too early in the economic cycle to review core rules introduced following the 2007-2009 global financial crisis."

U.S. Bubble Watch:

April 17 - Bloomberg (Joanna Ossinger): "Investors need to prepare for downside as the end of the economic cycle is near and U.S. markets are priced for best-case scenarios, Morgan Stanley says. While fiscal stimulus is supportive of growth in the near term, the benefits are already likely 'in the price' and increase potential downside for markets at the end of the cycle, Morgan Stanley strategists including Michael Zezas, Matthew Hornbach and Andrew Sheets wrote… 'There's less reason to behave like it's 'morning in America' than 'Happy Hour in America,'' the report said. Markets are 'closer to the end of the day than the beginning.'"

April 17 - CNBC (Jeff Cox): "Employers appear to be using proceeds from corporate tax cuts to continue the practice of rewarding shareholders and executives over workers. In the first quarter of 2018, corporate America dedicated $305 billion to stock buybacks and cash takeovers compared with $131 billion in pretax wage growth, according to TrimTabs… 'The recently enacted corporate tax cut is likely to deliver far more benefits to top management and investors than to typical American households,' said David Santschi, director of liquidity research at TrimTabs."

April 17 - Bloomberg (Sho Chandra): "U.S. new-home construction rose by more than forecast in March on a rebound in multifamily starts, giving a boost to first-quarter economic growth… Residential starts rose 1.9% to 1.32m annualized rate (est. 1.27m) after upwardly revised 1.3 mln pace in prior month. Multifamily home starts rose 14.4%; single-family fell 3.7%..."

April 19 - CNBC (Diana Olick): "Homebuyers, hold onto your wallets. The gains in home prices are getting bigger as the supply of homes for sale gets leaner. The median price of a home sold in March surged 8.9% compared with March 2017, according to Redfin, a real estate brokerage. It is the biggest annual increase in four years. Redfin tracks prices in 174 local markets and calculated the median home price at $297,000. High prices are the result of very, very low inventory. The supply of homes for sale was down 11.9% in March, compared with a year ago. As a result, sales fell 3.7%. The number of new listings in March dropped 5.6% annually…"

April 18 - CNBC (Diana Olick): "A rise in the thermometer across much of the country last week may have been just the remedy for an ailing mortgage market. Mortgage applications increased 4.9% from the previous week… Mortgage applications to purchase a home jumped 6% for the week and were 10% higher than a year ago. That is the strongest reading since January…"

April 16 - Financial Times (Alistair Gray): "US banks have finally reopened the lending taps to corporate America, expanding their loan books at the fastest pace since Donald Trump's election resulted in a lengthy credit stagnation. While the industry data published on Friday reflect only one month of recovery, bankers said they were an encouraging sign and predicted a more sustained pick up as US business gets more comfortable about taking on more debt. 'You saw a decent pick up in March and we're seeing that in our pipeline,' said Bill Demchak, chairman and chief executive of PNC Financial Services… 'That should set us up well for the rest of the year.' Commercial and industrial loan balances swelled at a seasonally adjusted rate of 9.3% last month to hit a record $2.13 trillion…"

April 20 - Reuters (Herbert Lash): "A housing shortage, strong economy and robust demand have pushed many homes in major U.S. cities over $1 million, offsetting buyers' concerns about the reduced benefits of owning a pricey property under President Donald Trump's tax reform, data show. Home sales at $750,000 and above have surged by double digits annually in the past three years, closings data from show for 30 counties on the east and west coasts."

April 19 - New York Times (Cade Metz): "One of the poorest-kept secrets in Silicon Valley has been the huge salaries and bonuses that experts in artificial intelligence can command. Now, a little-noticed tax filing by a research lab called OpenAI has made some of those eye-popping figures public. OpenAI paid its top researcher, Ilya Sutskever, more than $1.9 million in 2016. It paid another leading researcher, Ian Goodfellow, more than $800,000 - even though he was not hired until March... Both were recruited from Google… Salaries for top A.I. researchers have skyrocketed because there are not many people who understand the technology and thousands of companies want to work with it."

China Watch:

April 17 - Reuters (Josephine Mason): "China's central bank announced… it will cut the amount of cash that most commercial and foreign banks must hold as reserves to pay back medium-term lending facilities. The People's Bank of China (PBOC) said… it would cut the reserve requirement ratio (RRR) - currently at 15% or 17% - by 100 bps for most commercial banks."

April 17 - Reuters (Dominique Patton and Tom Polansek): "China will slap hefty anti-dumping deposits on imports of U.S. sorghum from Wednesday…, a higher-than-expected charge on the grain used in livestock feed and the spirits industry, as trade tensions escalate between the world's top two economies. CHS Inc and other U.S. companies will have to put up a 178.6% deposit on the value of sorghum shipments to the country…"

April 19 - Reuters (Yawen Chen and Se Young Lee): "China is well prepared to handle any negative effects from its trade dispute with the United States, the commerce ministry said…, adding that Beijing's tariff hikes on U.S. imports will not have a big impact overall on its domestic industries. It would be a miscalculation by the United States if its intention is to contain China's rise, ministry spokesman Gao Feng said…"

April 16 - Bloomberg: "China's steady first-quarter expansion masked a tug-of-war between struggling old industries from mining to textiles, and booming new-economy sectors including e-commerce and health care. The key question: As President Xi Jinping strives to curb debt and jousts with Donald Trump over trade, how much of the potential drag can the new growth drivers offset? For now, the new engines are taking up the slack with the economic expansion matching the 6.8% pace for the last three months of 2017. Among the drivers, online retail sales soared 35.4% in the first quarter from a year earlier while investment in education jumped 26.9%... Consumption contributed 77.8% to the quarterly expansion…"

April 15 - Bloomberg: "China's sprawling local government financing system needs 'crucial' reforms to increase consumption, build prosperity and encourage economic rebalancing, the International Monetary Fund said. Among the IMF's recommendations is to fund local governments by imposing recurring property taxes and adding local surcharges to national individual income taxes. China's fiscal system is the world's most decentralized, with local bodies responsible for 85% of government spending, the fund said in a report, citing the breadth across 31 provincial level governments, 334 prefectures, 2,850 counties, 40,000 townships and 900,000 informal village jurisdictions. Including off-budget spending by local government financing vehicles brings the ratio up to 89% of all public expenditures."

April 17 - Bloomberg: "China's home prices rose at the fastest pace in three months in March, fueled by gains in smaller cities, even as the government maintained a two-year campaign to cool the housing market. New-home prices across 70 cities gained 0.42% from a month earlier… That compared with a 0.25% increase in February."

Central Bank Watch:

April 17 - Bloomberg (Takashi Nakamichi and Tesun Oh): "The Bank of Japan will likely find it easier to make its inflation target less binding if recent scandals throw Prime Minister Shinzo Abe from power, according to Takahide Kiuchi, a former board member at the central bank. 'If the unusually strong administration changes, the Bank of Japan could get a little more freedom,' Kiuchi said… The BOJ has faced 'considerable political pressure' these past five years, he said."

Global Bubble Watch:

IMF Fiscal Monitor: "Global debt is at historic highs, reaching the record peak of US$164 trillion in 2016, equivalent to 225% of global GDP. The world is now 12% of GDP deeper in debt than the previous peak in 2009, with China as a driving force. Public debt plays an important role in the surge in global debt, with little improvement expected over the medium term. The rise in government debt reflects the economic collapse during the global financial crisis and the policy response, as well as the effects of the 2014 fall in commodity prices and rapid spending growth in the case of emerging market and low-income developing countries. For advanced economies, debt-to-GDP ratios have plateaued since 2012 above 105% of GDP-levels not seen since World War II…"

April 18 - Bloomberg (Andrew Mayeda): "Threats to the global financial system are rising, with the price of risky assets surging in a manner reminiscent of the years before the global financial crisis, the International Monetary Fund warned. Downside risks to world financial stability have increased 'somewhat' over the past six months, the IMF said… in the latest edition of its Global Financial Stability Report. 'Financial vulnerabilities, which have accumulated during years of extremely low rates and volatility, could make the road ahead bumpy and could put growth at risk,' said the… fund."

April 18 - Reuters (Michael Martina and Robin Emmott): "China's international trade representative held a series of meetings with the ambassadors from major European nations last week to ask them to stand together with Beijing against U.S. protectionism… Amid the rapidly rising tensions between the two sides, China has sought to seize the moral high ground as a defender of the multilateral trade system, even as U.S. allies express shared concern with Washington over Beijing's highly restricted market."

April 17 - Reuters (Helen Reid): "Alarm bells are ringing over valuations of the world's leading technology stocks with worries over regulation causing many investors to cut exposure to the sector, Bank of America Merrill Lynch (BAML)'s April fund manager survey found. Long FAANG + BAT' remains the top pick for most crowded trade' for the third month running, BAML strategists said, referring to U.S. tech companies Facebook, Apple, Amazon, Netflix and Google, and China's Baidu, Alibaba and Tencent."

April 18 - Financial Times (George Hammond): "For centuries, great cities have lured the young and ambitious in search of streets paved with gold. Now those city streets seem more likely to appeal to the silver-haired as young people either flee or shun the increasingly unaffordable property prices. London has traditionally 'imported the young and exported the old', says UK housing market analyst Neal Hudson. But this equation is in danger of reversing. The city is getting older - and fast… It's a similar story in other 'global' cities, where house price rises have outstripped the wider economy…"

Europe Watch:

April 19 - Bloomberg (Liz McCormick and Elizabeth Stanton): "A wave of selling across European sovereign debt and a rally in commodities prices are giving Treasury-market bears their mojo back. The benchmark 10-year Treasury yield reached 2.93% Thursday, within about 2 bps of the 2018 high touched in February. The slump in the world's biggest bond market came as U.K. gilts slid along with German bunds amid a burst of supply out of Western Europe."

April 17 - Financial Times (Katrina Manson and Max Seddon): "Countries in western Europe are struggling to reduce their debt levels amid declining political appetite for fiscal reform, rating agency Fitch has warned. Six Western European countries have received rating upgrades from Fitch since last October, with none being downgraded, and the UK is the only country with a negative outlook. However credit ratings in the region remain sensitive to the trend in public debt in proportion to GDP, Fitch said, and 'it is difficult to foresee the current upward rating momentum being sustained without bigger reductions in government debt burdens'."

Japan Watch:

April 16 - Bloomberg (Isabel Reynolds): "Shinzo Abe's approval rating fell again amid allegations of cronyism and government cover-ups, placing new pressure on the Japanese prime minister to stage yet another comeback or risk losing his grip over the ruling party. Abe's popularity fell to a record low of 26.7% in a survey by Nippon TV…"

EM Bubble Watch:

April 19 - Financial Times (Joe Leahy): "When Brazil's populist former president Luiz Inácio Lula da Silva was jailed for corruption this month, markets were expected to cheer the end of the leftist leader`s comeback hopes in elections this year. But instead of rallying, Brazil's currency, the real, headed in the opposite direction, breaking out of its previous range of R$3.20 to R$3.30 to the dollar and touching some of its weakest levels since 2016 of above R$3.40. While politics was the catalyst for the sudden slide, the weakening of the real has been coming for some time as part of what UBS is calling the 'Great Unwind' - a mixture of the end of a carry trade in the currency combined with the liquidation by the central bank of billions of dollars of swaps that were used by investors for hedging."

April 18 - Reuters (Tuvan Gumrukcu and David Dolan): "President Tayyip Erdogan… called snap elections for June 24, saying economic challenges and the war in Syria meant Turkey must switch quickly to the powerful executive presidency that goes into effect after the vote. The presidential and parliamentary elections will take place under a state of emergency that has been in place since an attempted coup in July 2016."

Leveraged Speculator Watch:

April 20 - Bloomberg (Katherine Burton): "Hedge-fund billionaires were already struggling to keep investors from heading out the door. Then along came another problem: big tax bills. David Einhorn, John Paulson, Steve Cohen and other high-profile managers cumulatively owed billions of dollars to federal, state and local governments for taxes, thanks to a 2008 rule change tied to offshore holdings that gave them a decade to comply. To make the payments, they had to pull some of their own money from their funds."

Geopolitical Watch:

April 15 - Reuters: "Russian President Vladimir Putin warned… that further Western attacks on Syria would bring chaos to world affairs, as Washington prepared to increase pressure on Russia with new economic sanctions. In a telephone conversation with his Iranian counterpart Hassan Rouhani, Putin and Rouhani agreed that the Western strikes had damaged the chances of achieving a political resolution in the seven-year Syria conflict, according to a Kremlin statement."

April 17 - Financial Times (Katrina Manson and Max Seddon): "The US and UK issued a joint warning… that Russia was deliberately targeting critical western internet-based infrastructure with cyber intrusions that threatened home and business routers. Jeanette Manfra, assistant secretary of the US Department of Homeland Security, said Washington had 'high confidence' the Russian government was behind the alleged intrusions. 'We hold the Kremlin responsible for its malicious cyber activities,' she said, adding that officials were unable to determine the full scope of the claimed compromise."

April 17 - Wall Street Journal (Dion Nissenbaum and Rory Jones): "With tacit American support, the Israeli military targeted an advanced Iranian air-defense system at a Syrian base last week, said intelligence officials…, the latest sign the Trump administration is working with Israel to blunt Tehran's expanding influence in the Middle East. After conferring with President Donald Trump, Israeli Prime Minister Benjamin Netanyahu ordered a strike on the newly arrived antiaircraft battery to prevent Iranian forces from using it against Israeli warplanes carrying out increasing numbers of operations in Syria…"

April 19 - CNBC (Parisa Hafezi): "Iran warned the United States… of 'unpleasant' consequences if Washington pulls out of a multinational nuclear deal, Iranian state TV reported. 'Iran has several options if the United States leaves the nuclear deal. Tehran's reaction to America's withdrawal of the deal will be unpleasant,' TV quoted Iranian Foreign Minister Mohammad Javad Zarif as saying…"

April 18 - Reuters (Ben Blanchard and Judy Peng): "Chinese aircraft have again flown around self-ruled Taiwan in what China's air force… called a 'sacred mission', as Taiwan denounced its big neighbour over what it called a policy of military intimidation. Taiwan, claimed by Beijing as Chinese territory, is one of China's most sensitive issues and a potential military flashpoint. China has ramped up military exercises around Taiwan in the past year, including flying bombers and other military aircraft around the island. More recently, China has been incensed by comments by Taiwan Premier William Lai that it deemed were in support of Taiwan independence…"

April 16 - Wall Street Journal (Gerald F. Seib): "At a Wall Street Journal gathering of business leaders in London a few days ago, John Sawers, a career British diplomat and former head of the MI6 intelligence service, delivered a sober warning: For the first time in living memory, there is a realistic prospect of a superpower conflict. His declaration came as the Western missile strike at Russia's friends in Syria was imminent. But that confrontation is only a small part of the troubling equation he described. The U.S., a mature power, simultaneously confronts an aggrieved and newly assertive Russia as well as an aggressive rising power in China. This is the backdrop for not only the standoff in Syria but also rising trade tensions with China."