Friday, February 23, 2018

Weekly Commentary: Anbang and China's Mortgage Bubble

The Shanghai Composite traded as high as 3,587 intraday on Monday, January 29th, a more than two-year high. This followed the S&P500’s all-time closing high (2,873) on the previous Friday. On February 9th, the Shanghai Composite traded as low as 3,063, a 14.6% decline from trading highs just nine sessions earlier. In U.S. trading on February 9th, the S&P500 posted an intraday low of 2,533, a 10.7% drop from January 26th highs. Based on Friday’s closing prices, the Shanghai Composite had recovered 43% of recent declines and the S&P500 70%.

Global equities markets demonstrated notably strong correlations during the recent selloff. Few markets, however, tracked U.S. trading closer than Chinese shares. From the Bubble analysis perspective, tight market correlations provide confirmation of the global Bubble thesis. It’s also not surprising that Chinese markets were keenly sensitive to the abrupt drop in U.S. stocks. The U.S. and China are dual linchpins to increasingly vulnerable global Bubble Dynamics. Moreover, intensifying fragilities in Chinese Credit – and finance more generally – ensure China is keenly sensitive to any indication of a faltering U.S. Bubble.

February 21 – Bloomberg: “China stopped updating its homegrown version of the VIX Index, taking another step to discourage speculation in equity-linked options after authorities tightened trading restrictions last week. State-run China Securities Index Co. didn’t publish a value for the SSE 50 ETF Volatility Index on its website Thursday. An employee who answered CSI’s inquiry line said the company stopped updating the measure to work on an upgrade. The move was designed to curb activity in the options market, said people familiar with the matter… It’s unclear when the index will resume.”

Derivatives rule the world. Of course, Chinese authorities had few issues with booming options trading when markets were posting gains. Here in the U.S., regulators will supposedly now keep a more watchful eye on VIX-related products. In China, “the VIX goes dark,” as regulators place various restrictions on options trading. It’s not clear to me why international investors at this point would be drawn to Chinese markets. As Bubble fragilities turn more acute, Chinese officials will assume an even more heavy-handed approach.

February 23 – Wall Street Journal (James T. Areddy): “When Anbang Insurance Group Co. paid about $2 billion to buy New York City’s Waldorf Astoria Hotel three years ago, the deal seemed to define an era for China Inc. President Xi Jinping shortly afterward dropped in to stay at the Park Avenue landmark. China’s business priorities have since changed, turning real-estate trophies into symbols of risk. Regulators in Beijing on Friday said they seized control of Anbang to keep the privately held insurer from collapsing, while prosecutors in Shanghai said they indicted Wu Xiaohui, Anbang’s swashbuckling ex-chairman, for alleged fraudulent fundraising and abuse of power. China’s government makes no secret of its penchant to guide commerce, even with private companies, but the boardroom takeover still rattled analysts used to Beijing’s applying its influence more quietly. ‘This is an unprecedented step, putting into receivership a Chinese company in such a public direct way,’ said Scott Kennedy at the… Center for Strategic and International Studies. ‘They are so worried about risks that they will stop at nothing to avoid them.’”

Wu Xiaohui, Anbang’s former chairman, disappeared (was detained) this past June. Married to the granddaughter of Deng Xiaoping, Wu for years operated as if protected by the Chinese establishment. As the WSJ article noted, Chinese President Xi stayed at the Waldorf Astoria hotel shortly after it was purchased by Anbang in 2015. At breakneck speed, Wu built a financial (“insurance”) empire with assets surpassing $300 billion, largely financed through high-yield wealth management/“shadow” deposits. Anbang’s ownership structure was opaque, which didn’t matter so long as Wu was in good graces with Beijing.

How quickly the world changes. Wu has been charged with fraud and embezzlement - “illegal business operations which may seriously endanger the company’s solvency”. It would appear the game of freewheeling – and well-connected – billionaire Chinese dealmakers tapping the shadow “money” spigot to buy prized international real estate assets has come to an end. The immediate impact on global trophy property values is unclear. Yet the government takeover and charges against Wu certainly send a strong message to the Chinese business community. Beijing is exerting control and pursuing President Xi’s priority to rein in financial risks.

February 23 - Bloomberg Gadfly (Nisha Gopalan): “Beijing’s interventions in the economy don't always merit applause, but the government's unprecedented seizure of Anbang Insurance Group Co. deserves a round. Anbang was a toxic threat to China's financial system after a debt-fueled global acquisition spree -- including trophy assets such as New York's Waldorf Astoria hotel -- that was funded by the sale of high-yield insurance policies. Those risky products propelled the company from obscurity into the ranks of the country's biggest insurers in the space of a few years. The government will take temporary control of Anbang for a year starting Friday… Markets reacted calmly to the announcement, underpinning the sense that regulators have acted in time to head off potentially bigger problems down the road.”

Anbang has been considered “too big to fail,” so the government takeover had little general market impact. And I suppose we can applaud Beijing for actions against one of the more conspicuously egregious high-risk financial operators. But in terms of an effect on overall systemic risk, this move barely registers on the risk-o-meter. Analysts have noted that Anbang’s assets have ballooned to a hefty 3% of Chinese GDP. But as a percentage of banking system assets, Anbang is less than 1%. With unrelenting rapid growth in Credit of deteriorating quality, systemic risk continues its parabolic ascent.

February 12 – Reuters (Kevin Yao, Fang Cheng): “China’s banks extended a record 2.9 trillion yuan ($458.3bn) in new yuan loans in January, blowing past expectations and nearly five times the previous month as policymakers aim to sustain solid economic growth while reining in debt risks. While Chinese banks tend to front-load loans early in the year to get higher-quality customers and win market share, the lofty figure was even higher than the most bullish forecast… Net new loans surpassed the previous record of 2.51 trillion yuan in January 2016, which is likely to support growth not only in China but may underpin liquidity globally as major Western central banks begin to withdraw stimulus… Corporate loans surged to 1.78 trillion yuan from 243.2 billion yuan in December, while household loans rose to 901.6 billion yuan in January from 329.4 billion yuan in December…”

The crackdown in shadow finance was surely a factor in January’s record-setting bank lending. The first month of 2018 saw major slowdowns in trust loans, entrusted loans and bankers’ acceptance lending, all key shadow instruments. Overall, Total Social Financing increased $483 billion in January, seasonally the strongest month of lending annually. This was gargantuan Credit growth, but actually 17% below January 2017. And looking at the most recent four-month period, growth in Total Social Financing was actually down 15% from the comparable year ago period.

Notably, household debt jumped $145 billion during January. This was easily a record and 21% above what at the time were record monthly household borrowings back in January 2017. For perspective, Chinese household debt growth averaged about $90 billion monthly in 2017, $80 billion in 2016, $50 billion in 2015 and $40 billion in 2014.

China faces major Credit issues from years of excessive corporate and local government borrowings. Chinese officials have moved somewhat to rein in these sectors. Meanwhile, household debt growth continues to accelerate. Apartment mortgages represent the largest component of China’s household borrowings, and I would argue that the Chinese mortgage finance Bubble is operating in the perilous “Terminal Phase.” It’s worth noting that the trajectory of China household borrowings is similar to mortgage Credit growth during the U.S. Bubble period.

Chinese officials used to claim they had studied and learned lessons from the Japanese Bubble period. They clearly learned little from the U.S. mortgage crisis. To be sure, mortgage Credit is seductive and too easily manipulated by government officials. It appears sound so long as housing prices are inflating. And the greater housing inflation, the greater the growth of self-reinforcing Credit. Risk, while growing exponentially, remains largely hidden.

Mortgage Credit is prone to rapid acceleration, as housing inflation spurs both rising prices and increasing quantities of transactions. Especially during the boom period, mortgage Credit becomes a major – and unrecognized - source of system liquidity, both in the financial system and throughout the real economy. As was certainly the case in the U.S., boom-time mortgage finance spurs consumption excesses along with mal-investment. A prolonged mortgage finance Bubble inflation fosters deep structural maladjustment.

China’s crackdown is no doubt having a major disciplining effect on the Chinese billionaire business community. Meanwhile, the Chinese mortgage and apartment Bubble runs mostly unchecked. Literally hundreds of millions of Chinese aspire to rising wealth and social mobility through the purchase of apartments that only go up in price. Virtually everyone believes Beijing will never tolerate a housing bust. This unwieldy episode of borrowing and speculation will continue to prove quite difficult for Beijing to control. The bust will be brutal.

I understand why Beijing would choose to crackdown on the likes of Anbang, HNA and Wanda. They’re conspicuous risk-takers outside of the core of the banking system (paying top renminbi for international non-essential assets). They can be easily and publicly disciplined, providing a stark warning to the business community without risking a systemic shock. I also assume it is somewhat of an opening act to what will evolve into broadening measures to rein in total system Credit growth and accompanying excesses. Such a strategy makes some sense, except for the reality that mortgage Credit is in the throes of dangerous “Terminal Phase” excess. Household debt expanded 21% in 2017, after 23% growth in 2016. And if January borrowings are any indication, 2018 could see Chinese household debt growth surpassing $1.3 TN, about three times the level from 2015.

Mortgage finance Bubbles don’t function well in reverse. At some point, lending tightens and the marginal buyers lose the capacity to bid up home/apartment prices. In China, a lot of serious problems are being masked by ever-rising apartment prices. It is said that in many markets up to one in four apartments remain vacant, purchased purely to speculate on higher prices. Deflating prices would likely see tens of millions of empty units transferred to lenders. Credit losses will no doubt be enormous, compounded by widespread fraud and shoddy construction.

A case can be made that household debt is rapidly becoming the greatest threat to China’s banking system and economy. They’ve clearly waited much too long to get mortgage Credit under control. At this point, the boom is an expedient to meet GDP targets. A burst apartment Bubble would now pose great systemic risk. Of course, the Beijing meritocracy believes they can adeptly manage through any circumstance. Their dilemma is that this type of Bubble becomes only more perilous over time, though mounting latent risks remain unappreciated. Chinese officials would prefer that new Credit finances productive endeavors. But at this late stage of the cycle, reliance on productive Credit would leave the system with woefully insufficient finance to keep the the Bubble levitated.

In years past, it received a decent amount of attention. Yet few analysts these days even bother to mention the Chinese housing Bubble, despite its historic inflation. The problem didn’t go away; it instead got much bigger than anyone could have imagined. Indeed, Bubble risk has inflated to the point of risking peril for China as well as the world – financially and economically. And while January’s lending data evidenced a boom replete with momentum, I would caution that there may be more near-term risk than is generally perceived.

The shadow banking crackdown will likely have a significant impact on higher-risk lending generally, including mortgage Credit. Moreover, regulators are demanding bankers slow loan growth, this after household lending expanded to a significant proportion of overall system Credit expansion. Total system Credit has already slowed.  There are indications of tighter lending conditions and even an incipient slowdown in housing transactions. And let’s not forget rising global yields, one more factor to weigh on inflated Chinese apartment prices. Anbang, HNA and their ilk make for interesting reading, full of nuance and intrigue as Beijing plots a financial crackdown. The real story, however, might be unfolding in Chinese household and mortgage finance.

For the Week:

The S&P500 added 0.6% (up 2.8% y-t-d), and the Dow increased 0.4% (up 2.4%). The Utilities gained 0.6% (down 5.1%). The Banks added 0.4% (up 7.0%), while the Broker/Dealers slipped 0.4% (up 6.4%). The Transports gained 0.7% (down 0.3%). The S&P 400 Midcaps increased 0.2% (up 0.2%), and the small cap Russell 2000 rose 0.4% (up 0.9%). The Nasdaq100 jumped 1.9% (up 7.8%). The Semiconductors advanced 2.5% (up 7.8%). The Biotechs were little changed (up 11.2%). With bullion down $18, the HUI gold index fell 4.5% (down 8.1%).

Three-month Treasury bill rates ended the week at 1.61%. Two-year government yields rose five bps to 2.24% (up 36bps y-t-d). Five-year T-note yields slipped a basis point to 2.62% (up 41bps). Ten-year Treasury yields dipped one basis point to 2.87% (up 46bps). Long bond yields added two bps to 3.16% (up 42bps).

Greek 10-year yields jumped 12 bps to 4.36% (up 28bps y-t-d). Ten-year Portuguese yields gained three bps to 2.04% (up 9bps). Italian 10-year yields rose eight bps to 2.07% (up 5bps). Spain's 10-year yields jumped 14 bps to 1.60% (up 3bps). German bund yields fell five bps to 0.65% (up 23bps). French yields declined two bps to 0.93% (up 15bps). The French to German 10-year bond spread widened three to 28 bps. U.K. 10-year gilt yields fell six bps to 1.52% (up 33bps). U.K.'s FTSE equities index declined 0.7% (down 5.8%).

Japan's Nikkei 225 equities index gained 0.8% (down 3.8% y-t-d). Japanese 10-year "JGB" yields dipped one basis point to 0.05% (up 1bp). France's CAC40 rose 0.7% (up 0.1%). The German DAX equities index increased 0.3% (down 3.4%). Spain's IBEX 35 equities index was little changed (down 2.2%). Italy's FTSE MIB index declined 0.6% (up 3.7%). EM markets were mostly higher. Brazil's Bovespa index surged 3.3% (up 14.3%), while Mexico's Bolsa declined 0.5% (down 1.4%). South Korea's Kospi index rose 1.2% (down 0.6%). India’s Sensex equities index gained 0.4% (up 0.3%). China’s Shanghai Exchange jumped 2.8% (down 0.5%). Turkey's Borsa Istanbul National 100 index gained 0.9% (up 1.9%). Russia's MICEX equities index jumped 3.6% (up 10.8%).

Junk bond mutual funds saw outflows of $335 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates increased two bps to 4.40%, the high going back to April 2014 (up 24bps y-o-y). Fifteen-year rates added a basis point to 3.85% (up 48bps). Five-year hybrid ARM rates gained two bps to 3.65% (up 49bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up 11 bps to 4.66% (up 38bps).

Federal Reserve Credit last week declined $15.9bn to $4.369 TN. Over the past year, Fed Credit contracted $54.5bn, or 1.2%. Fed Credit inflated $1.558 TN, or 55%, over the past 277 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $13.8bn last week to $3.412 TN. "Custody holdings" were up $231bn y-o-y, or 7.3%.

M2 (narrow) "money" supply fell $10.0bn last week to $13.848 TN. "Narrow money" expanded $568bn, or 4.3%, over the past year. For the week, Currency slipped $1.3bn. Total Checkable Deposits dropped $20.9bn, while savings Deposits added $1.3bn. Small Time Deposits increased $1.6bn. Retail Money Funds jumped $9.4bn.

Total money market fund assets gained $15.6bn to $2.844 TN. Money Funds gained $164bn y-o-y, or 6.1%.

Total Commercial Paper contracted $23.1bn to $1.095 TN. CP gained $127bn y-o-y, or 13.2%.

Currency Watch:

The U.S. dollar index recovered 0.9% to 89.883 (down 2.4% y-o-y). For the week on the upside, the South African rand increased 0.3%. For the week on the downside, the Swedish krona declined 2.5%, the New Zealand dollar 1.1%, the Swiss franc 1.0%, the Norwegian krone 0.9%, the euro 0.9%, the Australian dollar 0.8%, the Japanese yen 0.6%, the Singapore dollar 0.6%, the Canadian dollar 0.6%, the British pound 0.4%, the Brazilian real 0.3%, the South Korean won 0.2% and the Mexican peso 0.2%. The Chinese renminbi added 0.07% versus the dollar this week (up 2.67% y-t-d).

Commodities Watch:

February 21 – Bloomberg (Eddie Van Der Walt): “Russia has overtaken China as the fifth-biggest sovereign holder of gold, allowing it to diversify its foreign currency holdings amid a deepening rift with the U.S. The Bank of Russia in January increased its holdings by almost 20 metric tons to 1,857 tons, topping the People’s Bank of China’s reported 1,843 tons. While Russia has increased its holdings every month since March 2015, China last reported buying gold in October 2016.”

The Goldman Sachs Commodities Index jumped 1.8% (up 2.1% y-t-d). Spot Gold declined 1.4% to $1,329 (up 2.0%). Silver fell 1.0% to $16.549 (down 3.5%). Crude rallied $1.87 to $63.55 (up 5%). Gasoline advanced 3.3% (up 1%), and Natural Gas gained 2.6% (down 11%). Copper declined 1.1% (down 2%). Wheat fell 1.5% (up 9%). Corn was little changed (up 7%).

Market Dislocation Watch:

February 23 – Bloomberg (Benjamin Bain and Matt Robinson): “U.S. regulators are scrutinizing this month’s implosion of investments that track stock-market turmoil, including whether wrongdoing contributed to steep losses for VIX exchange-traded products offered by Credit Suisse Group AG and other firms, several people familiar with the matter said. The Securities and Exchange Commission and the Commodity Futures Trading Commission have been conducting a broad review of trading since Feb. 5, when volatility spiked and investors lost billions of dollars, the people said.”

Trump Administration Watch:

February 21 – Wall Street Journal (John F. Cogan): “The federal deficit is big and getting bigger. President Trump’s budget estimates a deficit of nearly $900 billion for 2018 and nearly $1 trillion (with total spending of $4.4 trillion) for 2019. Its balance sheet reveals that the public debt will reach $15.7 trillion by October. This works out to $48,081.61 for every man, woman and child in the U.S. That doesn’t count unfunded liabilities, reported by the Social Security and Medicare Trustees, that are four times the current public debt. How did the federal government’s finances degenerate this far? It didn’t happen overnight. For seven decades, high tax rates and a growing economy have produced record revenue, but not enough to keep pace with Congress’s voracious appetite for spending. Since the end of World War II, federal tax revenue has grown 15% faster than national income—while federal spending has grown 50% faster.”

February 20 – Reuters (Richard Leong): “Some of the U.S. government’s short-term borrowing costs rose to their highest level in more than nine years on Tuesday as the government raised $179 billion in the Treasury securities market to fund spending and make debt payments. Tuesday’s auctions made up more than half of the $258 billion in Treasury debt supply scheduled for sale this week, which is projected to raise nearly $48 billion in new cash for the government.”

February 21 – Reuters (David Lawder): “The U.S. Treasury’s top diplomat ramped up his criticisms of China’s economic policies on Wednesday, accusing Beijing of ‘patently non-market behavior’ and saying that the United States needed stronger responses to counter it. David Malpass, Treasury undersecretary for international affairs, said… that China should no longer be ‘congratulated’ by the world for its progress and policies. ‘They went to Davos a year ago and said ‘We’re into trade,’ when in reality what they’re doing is perpetuating a system that worked for their benefit but ended up costing jobs in most of the rest of the world,’ Malpass said…”

February 17 – Bloomberg: “China said proposed U.S. tariffs on imported steel and aluminum products are groundless and that it reserves the right to retaliate if they are imposed. The U.S. recommendations, unveiled by the Commerce Department on Friday, aren’t consistent with the facts, Wang Hejun, chief of the trade remedy and investigation bureau at China’s Ministry of Commerce, said…”

February 20 – Financial Times (Barney Jopson): “The Trump administration is proposing to recast a central pillar of post-crisis financial regulation with a new ‘Chapter 14’ bankruptcy process designed to eliminate the risk that taxpayers will have to pick up the cost of a bank failure. The Treasury, which was ordered to examine the area by President Donald Trump in April, on Wednesday took aim at the ‘orderly liquidation’ regime established to deal with collapsing lenders. Both Wall Street and overseas regulators have warned the administration over the dangers of dismantling the system but the Treasury said it wanted to narrow its use so it could serve only as a last resort.”

U.S. Bubble Watch:

February 18 – Bloomberg (Chris Anstey): “An historic expansion in U.S. borrowing during a period of economic growth, alongside rising bond yields, will cause a surge in the cost of servicing American debt, according to Goldman Sachs… ‘Federal fiscal policy is entering uncharted territory,’ Goldman analysts including Alec Phillips in Washington wrote… ‘In the past, as the economy strengthens and the debt burden increases, Congress has responded by raising taxes and cutting spending. This time around, the opposite has occurred.’”

February 20 – Wall Street Journal (Heather Gillers): “Public pension funds that lost hundreds of billions during the last financial crisis still face significant risk from one basic investment: stocks. That vulnerability came into focus earlier this month as markets descended into correction territory for the first time since February 2016. The California Public Employees’ Retirement System, the largest public pension fund in the U.S., lost $18.5 billion in value over a 10-day trading period ended Feb. 9… The sudden drop represented 5% of total assets held by the pension fund, which had roughly half of its portfolio in equities as of late 2017… By the end of 2017, equities had surged to an average 53.6% of public pension portfolios from 50.3% one year earlier… Those average holdings were the highest on a percentage basis since 2010…, and near the 54.6% average these funds held at the end of 2007.”

February 20 – Bloomberg (Chris Anstey): “The U.S. stock market only had a taste of the potential damage from higher bond yields earlier this year, with the biggest test yet to come, according to Morgan Stanley. ‘Appetizer, not the main course,’ is how the bank’s strategists led by… Andrew Sheets described the correction of late January to early February. Although higher bond yields proved tough for equity investors to digest, the key metric of inflation-adjusted yields didn’t break out of their range for the past five years, they said in a note…”

February 21 – CNBC (Diana Olick): “The sharp drop in January home sales was not due to a shortage of homes for sale. It was due to a shortage of affordable homes for sale. While real estate economists continue to blame the pitiful 3.4-month supply of total listings (a six-month supply is considered a balanced market), a better indicator is a chart on the second-to-last page of the National Association of Realtors' monthly sales report… Sales of homes priced below $100,000 fell 13% in January year over year. Sales of homes priced between $100,000 and $250,000 dropped just more than 2%. The share of first-time buyers also declined to 29%, compared with 33% a year ago.”

February 16 – Wall Street Journal (Liz Hoffman, Christina Rexrode and Aaron Lucchetti): “Wall Street CEOs are getting paid the big bucks again. Goldman Sachs… and Citigroup Inc. said Friday that they gave their CEOs raises for 2017, meaning all five large U.S. banks with significant trading and investment-banking operations have done so. The chief executives of the banks, which include JPMorgan…, Bank of America Corp., and Morgan Stanley, were paid on average $25.3 million for their work last year, up 17% from 2016... For the group as a whole, combined total compensation of about $126 million is the highest annual tally since before the financial crisis. The gains mark the fifth consecutive year in which pay rose for Wall Street’s top CEOs.”

Federal Reserve Watch:

February 21 – New York Times (Binyamin Appelbaum): “Robust economic growth has increased the confidence of Federal Reserve officials that the economy is ready for higher interest rates, according to an official account of the central bank’s most recent policymaking meeting in late January… The account said Fed officials have upgraded their economic outlooks since the beginning of the year and listed three main reasons: The strength of recent economic data, accommodative financial conditions and the expected impact of the $1.5 trillion tax cut that took effect in January. ‘The effects of recently enacted tax changes — while still uncertain — might be somewhat larger in the near term than previously thought,’ said the meeting account…”

February 21 – Bloomberg (Craig Torres): “U.S. central bankers sent a strong message Wednesday that an expansion with ‘substantial underlying economic momentum’ could sustain additional increases in interest rates this year. Federal Reserve officials ‘anticipated that the rate of economic growth in 2018 would exceed their estimates of its sustainable longer-run pace and that labor market conditions would strengthen further,’ the minutes of their Jan. 30-31 meeting… showed. A number of participants ‘indicated that they had marked up their forecasts for economic growth in the near term relative to those made for the December meeting.’ Their collective position on inflation, meanwhile, remained one of cautious optimism that it will move toward their 2% target in the medium term.”

February 21 – Reuters (Ann Saphir): “Philadelphia Federal Reserve Bank President Patrick Harker… said he still thinks just two interest-rate hikes this year is ‘likely appropriate,’ but signaled he is open to more if needed. ‘Based on the relatively strong economy, but the continued stubbornness of inflation, I’ve penciled in two hikes for 2018,’ Harker said… ‘I use pencil because the data can change, and sometimes they don’t accurately point to future events.’”

China Watch:

February 20 – Financial Times (John Gapper): “When Ant Financial, the payments affiliate of the internet group Alibaba, goes public, its potential $120bn valuation could exceed that of Goldman Sachs. Alipay, Ant’s mobile payments platform with 520m users, is innovative as well as valuable, having devised a new method of credit rating. Sesame Credit, Alipay’s alternative to traditional credit scores such as Fico in the US and Schufa in Germany, is intriguing. It broadens access to loans in a developing market by monitoring people’s buying habits and social circles as well as their credit records. But it is also troubling, as China has recognised. The central bank is getting cold feet about the ‘social credit’ ratings schemes adopted by Alibaba and its competitors. The bank this month told Tencent to stop a national rollout of its rival to Sesame Credit after having encouraged such efforts in 2015.”

February 20 – Bloomberg (Lianting Tu): “While there’s no indication that China’s embattled HNA Group Co. is facing such financial difficulties that a default is in the offing, some market participants are starting to game plan scenarios, and a variety of takes have emerged. The amount of dollar bonds outstanding for the conglomerate and its units -- at $13.7 billion, it accounts for more than 1% of Asian high-yield bonds outside of Japan -- raises the question of the impact on the broader market. Many see little wider impact in the event of a default, though the case of a default by China’s Kaisa Group Holdings Ltd. three years ago, when Asian dollar junk bond premiums widened considerably, serves as a warning.”

Central Bank Watch:

February 22 – Financial Times (Claire Jones): “The extent of European officials’ concerns over the weakness of the dollar was laid bare on Thursday in a set of European Central Bank accounts that highlighted fears that the US administration was deliberately trying to engage in currency wars. The accounts of the ECB’s January monetary policy vote also reveal that the governing council’s hawks pushed for a change in the bank’s communications, saying economic conditions were now strong enough to drop a commitment to boost the quantitative easing programme in the event of a slowdown.”

February 22 – Bloomberg (Jana Randow, Piotr Skolimowski, and Alessandro Speciale): “The European Central Bank got its communication largely back under control on the third anniversary of the publication of its policy accounts. Aside from a brief spike, the euro stayed relatively calm after the summary of January’s Governing Council meeting was released… That’s in contrast to the report on December’s session, which rocked currency and bond markets when it suggested that officials might move faster than expected toward reining in stimulus. That outcome should be a relief for President Mario Draghi. He’s shown a reluctance to allow too much discussion of potential policy changes in recent meetings, according to people familiar with the matter who asked not to be identified. The general concern is that any sign of a looming shift in stance could stoke market volatility and undermine the ECB’s stimulus plans.”

February 21 – Bloomberg (David Goodman): “Mark Carney said the U.K. is headed for higher interest rates, but policy makers are reluctant to give clearer guidance on the timing of any future increase. In testimony to Parliament’s Treasury Committee…, the Bank of England governor stuck to the script from the Inflation Report released earlier this month, reiterating that the Monetary Policy Committee considers that rates will need to rise somewhat earlier and to a somewhat greater extent than previously anticipated.”

February 19 – Reuters (Jan Strupczewski and Francesco Guarascio): “Euro zone finance ministers… chose Spanish Economy Minister Luis de Guindos to succeed European Central Bank Vice President Vitor Constancio in May, a move likely to boost the chances of a German becoming head of the ECB next year. The choice of a Southern European for vice president increases the likelihood that a northerner such as German Bundesbank governor Jens Weidmann could be elected to replace Mario Draghi as head of the ECB in 2019. This could influence the bank’s ultra-loose monetary policy for the 19-country common currency area.”

February 21 – Bloomberg (Alessandro Speciale): “European Central Bank policy makers will get their first chance on Wednesday to hear directly on the outsized crisis emanating from one of their smallest member states. Latvia -- 0.2% of the euro-area economy and 0.6% of the bloc’s population -- is the week’s hot topic as ECB President Mario Draghi chairs one of the Governing Council’s regular meetings in Frankfurt. The detention on bribery allegations of the nation’s central-bank governor, Ilmars Rimsevics, isn’t on the formal agenda… But it’s guaranteed to be a talking point, at least over dinner.”

Global Bubble Watch:

February 22 – Financial Times (Kate Allen and Chris Giles): “Developed nations face a rising tide of government debt that poses ‘a significant challenge’ to budgets as interest rates increase around the world, the OECD has warned. Low interest rates have helped sustain high levels of government debt and persistent budget deficits since the financial crisis, according to the OECD, but the ‘relatively favourable’ sovereign funding environment ‘may not be a permanent feature of financial markets’. Fatos Koc, senior policy analyst at the OECD, cautioned that most members of the organization… confront an ‘increasing refinancing burden from maturing debt, combined with continued budget deficits’… The total stock of OECD countries’ sovereign debt has increased from $25tn in 2008 to more than $45tn this year.”

February 19 – Wall Street Journal (William Wilkes): “One morning last September, Dwayne Elgin unbolted the front door of his home on the island of St. Martin and gazed upon a wasteland of flipped cars, uprooted trees and flattened homes. Irma, the strongest Atlantic hurricane on record, had laid waste to the Caribbean island overnight, and as head of Nagico Insurances, a local insurance firm, Mr. Elgin knew almost all of his policyholders would turn to him for help. But he was prepared: Like many insurers, he had unloaded a large portion of firm’s risk to reinsurers, the industry’s last line of defense. Irma and an extraordinary string of other natural disasters in 2017 saddled insurers and reinsurers globally with more than $135 billion in losses, according to Munich Re ’s 2017 Natural Catastrophe Report.”

February 22 – CNBC (Sara Salinas): “Global smartphone sales fell by 5.6% in the fourth quarter of 2017 — the industry's first decline since 2004, according to a study from research firm Gartner. Chinese smartphone makers Huawei and Xiaomi were the only vendors in the top five to experience year-over-year growth in the quarter, respectively by 7.6% and 79%. ‘Upgrades from feature phones to smartphones have slowed down due to a lack of quality 'ultra-low-cost' smartphones and users preferring to buy quality feature phones,’ said Anshul Gupta, research director at Gartner. ‘Replacement smartphone users are choosing quality models and keeping them longer.’”

February 18 – Bloomberg (Jake Lloyd-Smith): “Noble Group Ltd., the commodity trader battling to survive, warned that it’ll report another vast loss including from the operations meant to sustain a revamped business, and while it signaled progress in debt-restructuring talks, hurdles to a deal remain. The Hong Kong-based company will report a net loss of $1.73 billion to $1.93 billion for the final quarter of last year, potentially bringing losses for 2017 to almost $5 billion…”

Fixed-Income Bubble Watch:'

February 22 – Bloomberg (Brian Chappatta): “The U.S. Treasury’s $29 billion auction of seven-year notes drew the highest yield for securities at that tenor since 2011, capping a $258 billion flood of debt sales over three days. As with the week’s other note offerings, there was a dip in the amount of bids relative to the amount sold, signaling weaker demand. With the Treasury ramping up borrowing as part of its plan to finance widening budget deficits, the auction was $1 billion larger than it was last month and the bid-to-cover ratio slid to 2.49 from 2.73 at the prior sale.”

Japan Watch:

February 20 – Bloomberg (Masaki Kondo and James Mayger): “When the Bank of Japan reduced its purchases of government bonds in January, some investors saw it as another sign that the bank was scaling back its massive monetary stimulus program. The BOJ disagrees with that interpretation, but in February the bond market pushed yields to near the upper limit of what the bank’s targeting. While the BOJ was able to drive them lower with an offer to buy an unlimited amount of bonds, not everyone is convinced that it can continue with its current stimulus when the Federal Reserve is raising rates and the European Central Bank is starting to talk about when to end its own bond purchases.”

February 18 – Bloomberg (Connor Cislo): “Japan’s trade recovery powered into 2018, with exports and imports registering strong growth. The increase in imports resulted in the first monthly trade deficit since May 2017. The value of exports rose 12.2% in January from a year earlier (forecast +9.4%). Imports grew 7.9% (forecast +7.7%).”

EM Bubble Watch:

February 18 – Reuters (Krishna N. Das, Aditya Kalra, Devidutta Tripathy and Tom Lasseter): “The Punjab National Bank branch in south Mumbai sits just down the road from both the Bombay Stock Exchange and the Reserve Bank of India, at a physical center of one of the world’s fastest growing major economies. The branch, clad in a stately colonial edifice, is now also at the heart of a fraud case linked to billionaire jeweler Nirav Modi that has shaken confidence in a state banking sector that accounts for some 70% of India’s banking assets. It was here, according to accounts from Punjab National Bank executives and government investigators, that a lone middle-aged manager, later aided by his young subordinate, engineered fraudulent transactions totaling about $1.8 billion from 2011 to 2017.”

February 19 – Bloomberg (Srinivasan Sivabalan): “Indian equities have missed the rebound in emerging markets. The nation’s stocks have extended a slump that began late January and short sellers are betting record amounts that more declines are in store. Disappointment over the federal budget presented Feb. 1 and concern that a $2 billion bank fraud that came to light last week could turn into a contagion are applying the brakes on one of the world’s most expensive markets.”

Geopolitical Watch:

February 19 – Bloomberg (Henry Meyer): “Russian Foreign Minister Sergei Lavrov warned the Trump administration not to ‘play with fire’ as he lashed out at the U.S. over what he described as its ‘provocative’ support for autonomy-seeking Kurds in Syria. ‘The U.S. should stop playing very dangerous games which could lead to the dismemberment of the Syrian state,’ Lavrov said at a Middle East conference in Moscow…, alongside his Iranian counterpart Mohammad Javad Zarif and a top adviser of Syrian President Bashar al-Assad. ‘We are seeing attempts to exploit the Kurds’ aspirations.’”

February 18 – Reuters (Robin Emmott and Thomas Escritt): “Prime Minister Benjamin Netanyahu said… that Israel could act against Iran itself, not just its allies in the Middle East, after border incidents in Syria brought the Middle East foes closer to direct confrontation. Iran mocked Netanyahu’s tough words, saying Israel’s reputation for ‘invincibility’ had crumbled after one of its jets was shot down following a bombing run in Syria.”

February 22 – Reuters (Ellen Francis and Tuvan Gumrukcu): “The Syrian Kurdish YPG militia said… that fighters backing the Syrian government were deploying on the frontlines to help repel a Turkish assault, but that assistance would be needed from the Syrian army itself. In a move that may ease one of the Syrian government’s complaints about the YPG, the militia withdrew from an enclave it holds in Aleppo on Thursday, saying its fighters were needed for the battle in Afrin.”

February 22 – Reuters (Bozorgmehr Sharafedin): “Iran will withdraw from the 2015 nuclear deal if there is no economic benefit and major banks continue to shun the Islamic Republic, its deputy foreign minister said… Under the deal with Britain, China, France, Germany, Russia and the United States, Iran agreed to restrict its nuclear program in return for the removal of sanctions that have crippled its economy. Despite that, big banks have continued to stay away for fear of falling foul of remaining U.S. sanctions…”

February 17 – Bloomberg (Henry Meyer and Patrick Donahue): “As tensions escalate between Russia and the U.S., the nuclear-armed former Cold War rivals are risking the future of decades-old arms control agreements that have helped to keep a strategic balance and prevent the risk of accidental war. The conflict played out at a global security conference in Germany where Russia aired grievances about the U.S. and the Trump administration said a new nuclear doctrine unveiled this month doesn’t increase risks. Germany, caught in between, was among European countries voicing concern as both big powers modernize their nuclear arsenals.”