Friday, June 22, 2018

Weekly Commentary: Performance Chase

The Nasdaq Composite, Nasdaq 100, small cap Russell 2000, Value Line Arithmetic and the NYSE Arca Biotechnology were among U.S. indices trading to all-time highs during Wednesday's session. In the real world, there is escalating risk of a destabilizing global trade war. The Shanghai Composite sank 4.4% this week to two-year lows. It was another week of instability for emerging market equities, bonds and currencies - especially in Asia.

Here at home, it's difficult to envisage a more divided electorate or a more hostile political environment. Record securities and asset prices and such a sour social mood appear quite the extraordinary dichotomy. Yet I would argue that speculative financial market Bubbles, heightened global tensions and domestic social and political angst all have at their root cause decades of unsound "money" and Credit (an archaic notion, I fully appreciate).

"Inflation is always and everywhere a monetary phenomenon…", Milton Friedman explained some 50 years ago. At the time, Dr. Friedman was contemplating goods and services inflation. Financial, monetary management and technological developments over recent decades ensured that asset inflation evolved into the much more destabilizing form of inflation. A Bubble collapse presented Dr. Bernanke the opportunity to test his academic theories, unleashing unprecedented monetary inflation specifically targeting securities markets. His policies spurred similar monetary inflation around the world that has continued for almost a full decade.

Cut short rates to zero, print "money," buy bonds; force market yields lower; spur buying of risk assets and higher securities prices; orchestrate powerful wealth effects; households and businesses borrow and spend; the economy expands; inflation rises back to target - and all is good. Sure, there's some risk that asset prices get ahead of the real economy. Not to worry. Central banks will ensure a steadily rising general price level - and inflating earnings and incomes - to catch up to elevated asset prices. All will be well.

All is not well. With such complexity in the world, central bankers should be disinclined from grand experiments. A decade of central bank rate manipulation, "money" printing and market intervention has ensured deep structural changes in the marketplace. Central bankers failed to appreciate the evolving nature of contemporary Inflation Dynamics. Over time, a potent inflationary bias took hold in asset prices, while for a variety of reasons disinflationary dynamics held sway in the pricing of many goods.

A decade of unprecedented global monetary stimulus has stoked speculative assets Bubbles, replete with history's greatest redistribution of wealth. Central bankers now face acute market fragility, while governments face electorate enmity (along with other shaky governments). With U.S. stocks at or near record highs, my warning that free market Capitalism is today at great risk surely sounds ridiculous.

At this point, the key market issue goes far beyond securities valuation. Too many years of too much "money" chasing too few financial assets have imparted deep structural impairment. Or phrased differently, there has been too much "money" playing the game; too much liquidity and leverage aggressively playing a historic speculative Bubble has wrecked the game. Financial markets have become maladjusted and dysfunctional, although much remains unrecognizable to the naked eye.

Thursday from Zero Hedge: "This Is The Greatest Short-Squeeze In History." The Goldman Sachs Most Short (50 highest short interest names above $1bn) is up 18.8% y-t-d. From May 3rd intraday lows, the GS Most Short has surged 20% - one of the past decade's more spectacular squeezes. This squeeze saw Tesla, with 39 million shares short, spike almost 100 points.

The Retail Index (XRT) jumped 15% in about seven weeks. Ascena Retail Group (and Fossil) doubled in price. Signet Jewelers surged 55%, Rent-A-Center 55%, Carvana 54%, Wayfair 50%, Tripadvisor 50%, Express 50% and Conn's 50%. Since the May 3rd trading reversal, Food Retail and Department Stores have been two of the strongest industry groups in the S&P500. Footlocker gained 32%, Carmax 28%, Kroger 24%, Macy's 20%, Lowe's 20% and Kohls 18%. Hanesbrands jumped 33%, Under Armour 35% and Ralph Lauren 22%. Twitter surged 48%, AMD 44%, Netflix 33% and Micron 23%.

Squeezes have been spectacular in the mid and small cap universe. Since May 3rd in the S&P Mid Cap 400, Chesapeake Energy, Mallinckrodt and Genworth Financial have all jumped more than 50%. Akorn, Five Below, Southwestern Energy, and Boston Beer gained more than a third. Short squeezes in the small cap space have been even more dramatic.

The speculative melt-up in segments of the U.S. marketplace is the antithesis of the faltering EM Bubble. This week saw indications of strengthening EM contagion. Ominously, the Chinese renminbi dropped 1.0% versus the dollar (offshore CNH down 1.15%), now having given up previous solid y-t-d gains. The Thai baht fell 1.5%, the Indonesian rupiah 1.1%, the Taiwanese dollar 1.0%, the South Korean won 0.9% and the Singapore dollar 0.6%. China's small cap CSI 500 index sank 5.9% (down 17.5% y-t-d), and the growth/tech ChiNext index fell 5.6% (down 11.6%). The CSI 300/Telecommunications Services Index collapsed 15.7% (down 37.5%).

Elsewhere in Asia, major indexes were down 4.1% in Indonesia, 4.1% in Thailand, 3.8% in Malaysia, 6.2% in Philippines, 2.0% in South Korea, 1.0% in Taiwan, 3.3% in Vietnam and 4.3% in Pakistan. Hong Kong's Hang Seng index sank 3.6%, and Singapore's STI index fell 2.1%. Japan's TOPIX dropped 2.5%. Winning distinction as the most likely prophetic indicator of the week, Japan's TOPIX Bank Index sank 5.4% and Hong Kong's Hang Seng Financials dropped 5.1%.

Indonesian 10-year (local currency) yields jumped 20 bps to a 15-month high 7.43%, and Philippine yields rose 12 bps to a seven-year high 6.31%. Financial conditions continue to tighten throughout EM, though there was some relief this week with rallies in the Argentine peso (4.6%) and Mexican peso (3.1%). The Turkish lira recovered 1.1% ahead of Sunday's election. Notably absent from the EM currency rally list, Brazil's real declined another 1.5% (down 12.6% y-t-d).

It was only back in January that EM was in full melt-up mode - a speculative blow-off right in the face of tightening global financial conditions. With a veritable flood of flows into the $5.0 TN global ETF complex ($100bn inflow in January!), EM was a major beneficiary (EM equities and bonds both saw record inflows in January). Recall that EM ETFs enjoyed record inflows in 2017, with the inundation continuing well into 2018. What's more, EM flows benefitted from the U.S. market stumble in early February. Amazingly, EM ETFs were at the top of the ETF inflow leaderboard all the way into early May.

And a Friday afternoon headline from "Massive Weekly Inflows For Russell-Indexed ETFs." And from ETF Trends, "Small-Cap ETFs Big Winners in U.S., China Trade War." The iShares Russell 2000 ETF enjoyed its largest inflow since March. A Bloomberg headline: "Trade War Fears Spur Rotation From Industrials Into Small Caps."

The culminating shot of "hot money" into EM earlier in the year - benefitting both from the U.S. market swoon and the drumbeat of "global synchronized economic boom" - set the stage for today's trouble. So, it's only fitting that cracks at the Periphery of the global Bubble would incite a surge of "hot money" into outperforming U.S. securities markets. At this point, global finance has regressed to one big game of Performance Chase.

Am I the only analyst that views the manic interest in U.S. small caps portentously? I have highlighted the concept of the "moneyness of risk assets" - central bank backstops having nurtured the misperception of safety and liquidity throughout the risk markets. Incredibly, as fissures materialize in the global Bubble, performance-chasing "hot money" now floods into the least liquid corner of the U.S. equities market.

The gargantuan ETF complex has been instrumental in perpetuating this dynamic, intermediating less liquid securities into perceived highly liquid ETF shares. This was the situation earlier in the year for emerging market securities, and it remains the case in U.S. markets. And as the global Bubble navigates a worst-case scenario, it's only fitting that small caps lead the charge in U.S. equities and junk bonds outperform in fixed income. Over generations, market structures evolve and instruments change. Yet amazingly, through it all everyone seems compelled to get all ebullient and hunkered together at major market tops.

June 22 - Bloomberg (Shelly Hagan): "Corporate bond spreads jumped to the widest level in 16 months Friday as large deals flooded the U.S. market and rising trade tensions scared off some investors. Investment-grade bond spreads saw the biggest weekly increase since February as companies sold $43 billion of debt, including $31 billion from Bayer AG and Walmart Inc. alone. The market was also shaken by escalating trade tensions between the U.S. and its major partners… Corporate bond spreads have been widening since February, when they reached the tightest since before the financial crisis. Fewer foreign buyers, rate volatility and trade tensions are chipping away at investor confidence in the U.S. market, according to Thomas Murphy, a portfolio manager at Columbia Threadneedle… 'A lot of people pushed into our market because of QE overseas. They can now go back to their home markets. Hedging costs have gone up dramatically,' said Murphy…"

Global contagion and tightening financial conditions are making steady headway toward "Core" U.S. securities markets. The Trump administration is bluffing, aren't they? Or is the era of Trump Tariffs and trade war retaliation soon upon us? It's got to be the President playing hardball dealmaker with Beijing - right? Or could a momentous Washington crackdown on China be in the offing? Appearing increasingly vulnerable, China may emerge the cornered pit bull. It was another ominous week. China and Asian Contagion. Widening Italian spreads. But, then again, with a short squeeze in play and only a week or so until the end of a big performance quarter, why be bothered with global market instability or unfolding trade wars… These are deviant markets.

For the Week:

The S&P500 declined 0.9% (up 3.0% y-t-d), and the Dow fell 2.0% (down 0.6%). The Utilities jumped 2.6% (down 4.0%). The Banks declined 0.9% (unchanged), and the Broker/Dealers lost 1.6% (up 8.2%). The Transports dropped 2.7% (up 1.5%). The S&P 400 Midcaps were little changed (up 4.7%), while the small cap Russell 2000 added 0.1% (up 9.8%). The Nasdaq100 declined 0.8% (up 12.5%). The Semiconductors sank 3.6% (up 9.4%). The Biotechs slipped 0.2% (up 16.7%). With bullion down $10, the HUI gold index declined 0.5% (down 8.0%).

Three-month Treasury bill rates ended the week at 1.87%. Two-year government yields were little changed at 2.54% (up 66bps y-t-d). Five-year T-note yields declined three bps to 2.77% (up 56bps). Ten-year Treasury yields fell three bps to 2.90% (up 49bps). Long bond yields slipped a basis point to 3.04% (up 30bps). Benchmark Fannie Mae MBS yields dipped one basis point to 3.64% (up 65bps).

Greek 10-year yields sank 34 bps to 4.11% (up 4bps y-t-d). Ten-year Portuguese yields were unchanged at 1.82% (down 12bps). Italian 10-year yields rose nine bps to 2.69% (up 68bps). Spain's 10-year yields rose six bps to 1.35% (down 21bps). German bund yields dropped seven bps to 0.34% (down 9bps). French yields declined two bps to 0.71% (down 8bps). The French to German 10-year bond spread widened five to 37 bps. U.K. 10-year gilt yields declined a basis point to 1.32% (up 13bps). U.K.'s FTSE equities index gained 0.6% (down 0.1%).

Japan's Nikkei 225 equities index fell 1.5% (down 1.1% y-t-d). Japanese 10-year "JGB" yields were little changed at 0.04% (down one bp). France's CAC40 dropped 2.1% (up 1.4%). The German DAX equities index sank 3.3% (down 2.6%). Spain's IBEX 35 equities index declined 0.6% (down 2.5%). Italy's FTSE MIB index fell 1.4% (up 0.2%). EM equities were mostly lower. Brazil's Bovespa index slipped 0.2% (down 7.5%), and Mexico's Bolsa declined 0.4% (down 5.3%). South Korea's Kospi index dropped 1.9% (down 4.5%). India’s Sensex equities index added 0.2% (up 4.8%). China’s Shanghai Exchange sank 4.4% (down 12.6%). Turkey's Borsa Istanbul National 100 index recovered 1.4% (down 16.9%). Russia's MICEX equities gained 0.5% (up 6.6%).

Investment-grade bond funds saw inflows of $411 million, while junk bond funds had outflows of $232 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates fell five bps to 4.57% (up 67bps y-o-y). Fifteen-year rates declined three bps to 4.04% (up 87bps). Five-year hybrid ARM rates were unchanged at 3.83% (up 69bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down five bps to 4.61% (up 61bps).

Federal Reserve Credit last week declined $2.1bn to $4.279 TN. Over the past year, Fed Credit contracted $151bn, or 3.4%. Fed Credit inflated $1.469 TN, or 52%, over the past 294 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $2.2bn last week to $3.404 TN. "Custody holdings" were up $114bn y-o-y, or 3.5%.

M2 (narrow) "money" supply rose $18.0bn last week to a record $14.098 TN. "Narrow money" gained $580bn, or 4.3%, over the past year. For the week, Currency increased $2.2bn. Total Checkable Deposits sank $54.0bn, while savings Deposits surged $64.9bn. Small Time Deposits added $3.5bn. Retail Money Funds gained $1.5bn.

Total money market fund assets dropped $52.55bn to $2.802 TN. Money Funds gained $185bn y-o-y, or 7.1%.

Total Commercial Paper declined $6.6bn to $1.103 TN. CP gained $124bn y-o-y, or 12.6%.

Currency Watch:

The U.S. dollar index slipped 0.3% to 94.52 (up 2.6% y-t-d). For the week on the upside, the Mexican peso increased 3.1%, the Swiss franc 1.0%, the Norwegian krone 0.6%, the Japanese yen 0.6% and the euro 0.4%. For the week on the downside, the Brazilian real declined 1.5%, the South Korean won 0.9%, the Swedish krona 0.8%, the Canadian dollar 0.6%, the New Zealand dollar 0.6%, the Singapore dollar 0.6%, the British pound 0.1% and the South African rand 0.1%. The Chinese renminbi declined 1.02% versus the dollar this week (up 0.02% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index gained 1.7% (up 6.6% y-t-d). Spot Gold declined 0.8% to $1,269 (down 2.6%). Silver increased 0.4% to $16.539 (down 3.5%). Crude surged $3.52 to $68.58 (up 14%). Gasoline rallied 2.3% (up 15%), while Natural Gas fell 2.5% (unchanged). Copper sank 3.0% (down 4%). Wheat fell 1.8% (up 18%). Corn declined 1.2% (up 8%).

Market Dislocation Watch:

June 16 - CNBC (Jeff Cox): "The Federal Reserve may have telegraphed a fourth interest rate hike this year, but markets didn't quite get the message. After the conclusion Wednesday of its two-day meeting, the Federal Open Market Committee, through the so-called dot plot of individual members' expectations, indicated that it would increase rates two more times before 2018 ends… As of Friday afternoon, traders were implying just a 55% chance of a fourth hike in December - a little better than a coin flip and just 10 percentage points or so above the chances before the meeting and the surprise dot-plot change."

June 21 - Wall Street Journal (Jon Sindreu): "As a full blown trade war between the U.S. and China looms, investors are already picking winners: Shares of small companies that are insulated from overseas turmoil. The S&P Small Cap 600 is on a tear, up 12.4% since the start of the year to a fresh record high, compared with a 3.5% gain for the S&P 500. The Russell 2000, another index of small U.S. companies, has gained 11.2%. A rising dollar and concerns about weaker global growth are also driving investors into the relative safety of smaller companies, as measured by market capitalization, that tend to earn most of their money at home."

June 21 - Bloomberg (Issei Hazama): "It must be tough out there in volatile emerging-debt markets. Overseas investors including Asian buyers this month bought a chunk of yen bonds from a Japanese highway operator yielding 0.0000027%. East Nippon Expressway Co. sold one-year notes at a coupon of 0.001% and an issue price of 100.001 yen on June 13. That means that an investor buying 100 million yen ($904,000) of the notes will receive 2.7 yen in interest… Even so, investors' orders for the debt came to about 4.3 times the 65 billion yen that was offered… Asian investors hit by a rout in emerging market bonds and in search of safe assets participated in the yen deal…"

Trump Administration Watch:

June 19 - Wall Street Journal (Chelsey Dulaney): "The Trump administration's threat to slap tariffs on another $200 billion in Chinese goods has reignited fears that Beijing will turn to a powerful but risky weapon: a depreciation of its currency. The latest salvo in the brewing trade conflict between the world's first and second-largest economies would raise the amount of Chinese goods taxed by the U.S. to $450 billion. That would mean tariffs on nearly all of the $505 billion in goods that China exported to the U.S. last year. Analysts say the tariff escalation could eventually lead China to depreciate its currency, the yuan-a maneuver that would help to offset the economic impact of the tariffs but also threatens to worsen trade tensions and rattle global markets."

June 19 - Financial Times (Tom Mitchell and Shawn Donnan): "By threatening to expand US tariffs on Chinese goods on Monday, President Donald Trump greatly increased the chances of Beijing responding with non-tariff measures. US executives fear that Mr Trump's latest threat to assess punitive tariffs on as much as $250bn of Chinese exports- roughly twice what the US ships to China every year - will trigger responses such as ad hoc regulatory probes of US companies by Chinese authorities. There already has been circumstantial evidence of just such a response over recent months, with Chinese imports of some US food, cars and pet food delayed at customs for more stringent inspections."

June 19 - Wall Street Journal (Bob Davis and Lingling Wei): "President Donald Trump's escalation of trade threats against China reflects his belief that Washington increasingly has the upper hand in the dispute, administration officials said, adding he is prepared to withstand pressure from U.S. businesses that might suffer from the conflict. Mr. Trump caught Chinese officials off guard with his announcement Monday evening about potential new tariffs. Should China retaliate against U.S. trade policies, the White House said, the U.S. would apply tariffs of 10% on as much as $400 billion in Chinese imports."

June 20 - CNBC (Huileng Tan): "The Trump administration ratcheted up its criticism of China in a report released by the White House… detailing its claims of 'economic aggression' by the Asian giant. The 35-page report titled 'How China's Economic Aggression Threatens the Technologies and Intellectual Property of the United States and the World' came a day after President Donald Trump threatened to slap additional tariffs on goods from China… China 'has experienced rapid economic growth to become the world's second largest economy while modernizing its industrial base and moving up the global value chain. However, much of this growth has been achieved in significant part through aggressive acts, policies, and practices that fall outside of global norms and rules (collectively, 'economic aggression'),' the… report said in its opening."

June 20 - Wall Street Journal (Peter Navarro): "The Chinese government's Made in China 2025 blueprint reveals Beijing's audacious plans to dominate emerging technology industries. Many of these targeted sectors, such as artificial intelligence and robotics, have clear implications for defense. China seeks to achieve its goal of economic and military domination in part by acquiring the best American technology and intellectual property. President Trump's new tariffs will provide a critical shield against this aggression. China acquires American technology in multiple ways. Theft, both physical and cyber, occurs through orchestrated industrial espionage campaigns. For years the U.S. intelligence community has acknowledged China as a persistent leader in economic espionage. Many American companies are forced to accept technology transfers to gain access to the Chinese market."

June 19 - New York Times (Ana Swanson): "President Trump's threat to impose tariffs on almost every Chinese product that comes into the United States intensified the possibility of a damaging trade war, sending stock markets tumbling… The Trump administration remained unmoved by those concerns, with a top trade adviser, Peter Navarro, insisting that China has more to lose from a trade fight than the United States. He also declared that Mr. Trump would not allow Beijing to simply buy its way out of an economic dispute by promising to import more American goods. 'President Trump has given China every chance to change its aggressive behavior,' Mr. Navarro said… 'China does have much more to lose than we do.' In threatening tariffs on as much as $450 billion worth of Chinese goods, the administration is betting that Beijing will blink first. It's a risky gamble by a White House that appears ready to forgo diplomatic negotiations in favor of punishing tariffs that could pinch consumers and companies on both sides of the Pacific."

June 19 - Bloomberg: "China doesn't import enough from the U.S. to match Donald Trump's tariffs dollar for dollar, but President Xi Jinping can still squeeze American companies in other ways in retaliation. American businesses from Apple Inc. and Walmart Inc. to Boeing Co. and General Motors Co. all operate in China and are keen to expand. That hands Xi room to impose penalties such as customs delays, tax audits and increased regulatory scrutiny if Trump delivers on his threat of bigger duties on Chinese trade. U.S. shares slumped Tuesday as part of a broad sell-off in global markets in response to Trump's threat."

June 20 - CNBC (Philip Blenkinsop): "The European Union will begin charging import duties of 25% on a range of U.S. products on Friday, in response to U.S tariffs imposed on EU steel and aluminum early this month, the European Commission said…

June 17 - Politico (Burgess Everett and John Bresnahan): "The first clues over whether President Donald Trump will risk a shutdown fight this fall over his border wall will come Monday in a private meeting with Sen. Shelley Moore Capito. Trump is increasingly frustrated with Congress' failure to fund the wall - his No. 1 campaign promise - and has threatened a shutdown in September if he doesn't get his way."

June 19 - Financial Times (Gideon Rachman): "In the midst of an escalating trade war with China and fresh from a nuclear summit with North Korea, Donald Trump took time out to attack Angela Merkel. 'The people of Germany are turning against their leadership,' tweeted the US president, adding that 'migration is rocking the already tenuous Berlin coalition'. The US president's direct attempt to undermine the German chancellor is remarkable. It is also very telling. For the two leaders have taken radically different approaches to the explosive questions of refugees and illegal migration. For Mr Trump and his alt-right allies in Europe, the fall of Ms Merkel would be a kind of vindication - proof that her decision to allow more than 1m migrants into Germany in 2015 has been decisively rejected by the electorate."

June 20 - Financial Times (Edward Luce): "In Canada they call it the Love, Actually effect. Justin Trudeau's rebuke of Donald Trump won him the type of kudos a fictional British prime minister earned in the 2003 movie for standing up to a US president. Canada will 'not be pushed around,' said Mr Trudeau to loud applause. That sentiment is rising on all sides. In Mexico, which looks set next weekend to elect its most anti-American administration in a generation, it might be dubbed the 'Amlo' effect - short for Andrés Manuel López Obrador, the country's likely next president. Mexico's foreign minister this week called America's child border camps 'cruel and inhumane'. A French spokesperson said the US had different 'civilisational values' to the rest of the west. Nobody batted an eyelid. From Ottawa to Wellington, because of one outrage or another, condemnations of America are becoming routine."

June 16 - CNBC (Andrea Hopkins): "Seventy percent of Canadians say they will start looking for ways to avoid buying U.S.-made goods in a threat to ratchet up a trade dispute between Prime Minister Justin Trudeau and U.S. President Donald Trump, an Ipsos Poll showed…"

Federal Reserve Watch:

June 20 - CNBC (Jeff Cox): "Citing robust growth and a generational low in unemployment, Federal Reserve Chairman Jerome Powell emphasized the central bank's commitment to further interest rate hikes… Economic gains are negating the need for crisis-era monetary policy, the Fed leader told a European Central Bank forum. 'Earlier in the expansion, as the economy recovered, the need for highly accommodative monetary policy was clear,' Powell said… 'But with unemployment low and expected to decline further, inflation close to our objective, and the risks to the outlook roughly balanced, the case for continued gradual increases in the federal funds rate is strong.'"

June 20 - Wall Street Journal (Nick Timiraos): "Federal Reserve Chairman Jerome Powell said sturdy U.S. economic growth has built a strong case for continuing to gradually lift interest rates, and he warned against policy complacency now that the central bank has nearly achieved its employment and price stability goals. 'Today, with the economy strong and risks to the outlook balanced, the case for continued gradual increases in the federal-funds rate remains strong and broadly supported among' participants on the Fed's rate-setting committee, Mr. Powell said…"

June 19 - Wall Street Journal (Daniel Kruger): "The Federal Reserve's move to trim the size of its bondholdings has exacerbated recent declines in prices for risky assets around the world, investors say. The central bank has scaled back its mountain of Treasury and mortgage debt by $111.9 billion since the policy was announced in September. More than half the reduction has taken place since the end of March, and the process of withdrawing money from the economy is scheduled to reach $50 billion a month in October."

U.S. Bubble Watch:

June 20 - New York Times (Nelson D. Schwartz): "The American economy has picked up speed and is now on course to expand this year at the fastest rate in more than a decade. That acceleration gives President Trump a stronger hand as he contemplates more tariffs and takes an increasingly confrontational approach with China, Canada, Mexico and other trading partners. Economists have raised their growth estimates for the second quarter to an annualized rate of nearly 5%, more than double the pace of the previous period. Some economists say the figure could hit 3% for the full year, a level last reached in 2005. As growth slows in Europe, China, Japan and elsewhere, the United States finds itself at the top of the global economy. The United States is also less exposed to the fallout from an escalating trade war since it does not rely on exports as much as other countries."

June 19 - CNBC (Michelle Fox): "There is a 'much bigger issue' for the market than concerns about trade, investing expert Richard Bernstein told CNBC… In fact, over the last three to four months, almost every sizeable market sell-off has come from pro-inflation policies out of Washington, D.C… 'There is a major sea change going on in the backdrop where we're going from a disinflationary environment to an inflationary environment," Bernstein said… 'We have tight labor markets, we have tight product markets because the economy is strong. We just got tax cuts on top of that. We're now getting fiscal spending,' he added. In addition, there are trade issues and immigration restrictions in play now. 'They are all pro-inflation policies and that's the big issue in the background here,' said Bernstein."

June 21 - Reuters (Se Young Lee and Yawen Chen): "Chinese acquisitions and investments in the U.S. fell 92% to just $1.8 billion in the first five months of this year, consulting and research firm Rhodium Group [reported]… Counting divestitures, net Chinese deal flow to the U.S. during that time was a negative $7.8 billion, the report said. The decline follows a sharp drop in the second half of last year as pressure from both Beijing and the Trump administration curbed a recent surge in cross-border investment. Completed Chinese deals in the U.S. hit a record $46 billion in 2016, and dropped to $29 billion in 2017…"

June 18 - Wall Street Journal (Matt Wirz): "A wave of expected big media mergers would transform AT&T Inc. and Comcast Corp. into the two most indebted companies in the world, a standing that carries uncharted risks for investors in the firms' bonds. AT&T has bought Time Warner Inc., and Comcast hopes to purchase most of 21st Century Fox Inc. The companies would carry a combined $350 billion of bonds and loans…"

June 19 - Bloomberg (Riley Griffin): "Despite recent job gains, rising wages and falling unemployment, almost a quarter of Americans said they still have no emergency savings, according to an annual report… The number of Americans who said they have no money readily available in either a checking, savings or money market account fell to a seven-year low of 23%, down from 24% last year… The percentage of Americans with some savings, but not enough to cover three months' worth of expenses, rose to 22% from 20% last year… And the percentage with enough to cover expenses for three to five months ticked up to 18%, from 17% last year. Still, only 29% of Americans have enough emergency savings to cover at least six months' of expenses. This is down from 31% in 2017."

June 19 - Reuters (Karen Pierog): "U.S. state and local government tax revenue climbed to $350.2 billion in the first quarter of 2018, a rise of 5.8% compared with the same time period in 2017, the U.S. Census Bureau reported…"

June 21 - Reuters (Alex Tanzi): "The American dream continues to fade for many people. Housing affordability dropped this quarter to the lowest since late 2008, according to… the National Association of Realtors. In May, the median price of a previously owned homes rose to a record $264,800… A separate report from ATTOM Data Solutions shows average wage earners would need to spend 31.2% of income to buy a median-priced home this quarter -- above the historic average of 29.6%. Home price appreciation, coupled with rising mortgage rates, have pushed three-quarters of average wage earners out of the market with property costs rising faster than wages in 64% of regions surveyed, ATTOM reported."

June 21 - Wall Street Journal (Janet Adamy and Paul Overberg): "The surge of retiring baby boomers is reshaping the U.S. into a country with fewer workers to support the elderly-a shift that will add to strains on retirement programs such as Social Security and sharpen the national debate on the role of immigration… For most of the past few decades, the ratio of retiree-aged adults to those of working age barely budged. In 1980, there were 19 U.S. adults age 65 and over for every 100 Americans between 18 and 64… That number-called the old-age dependency ratio-barely edged up over the next 30 years, rising to just 21 retiree-aged Americans for every 100 of working age in 2010. But there has been a rapid shift since then. By 2017, there were 25 Americans 65 and older for every 100 people in their working years… The ratio would climb to 35 retiree-age Americans for every 100 of working age by 2030…"

China Watch:

June 19 - Reuters (Ben Blanchard): "The Trump administration has 'blood lust' when it comes to pushing its trade agenda against China and wants to 'suck the lifeblood' from China's economy, a state-run newspaper said…, stepping up the angry rhetoric over their dispute. President Donald Trump threatened on Monday to hit $200 billion of Chinese imports with 10% tariffs if China follows through with retaliation against his previous targeting of $50 billion in imports, aimed at pressing China to stop what the United States sees as the theft of its intellectual property."

June 21 - Reuters (Se Young Lee and Yawen Chen): "China's commerce ministry… accused the United States of being 'capricious' over bilateral trade issues, and warned that the interests of U.S. workers and farmers ultimately will be hurt by Washington's penchant for brandishing 'big sticks'. Previous trade negotiations with the United States were constructive, but Beijing has had to respond in a strong manner due to the U.S. tariff threats, commerce ministry spokesman Gao Feng said… Washington's accusations of forced tech transfers are a distortion of reality, and China is fully prepared to respond with 'quantitative' and 'qualitative' tools if the U.S. releases a new list of tariffs, Gao told a regular briefing in Beijing."¬

June 19 - Bloomberg: "China's benchmark equity gauge tumbled to a two-year low and the yuan weakened as a worsening trade dispute with the U.S. spurred panic selling. Bonds gained. The Shanghai Composite Index plummeted almost 5% in intraday trading before paring losses, while a gauge of technology shares sank the most in two years. China's currency fell to a five-month low against the dollar and the 10 year-yield on government debt dropped two bps."

June 20 - Financial Times (Hudson Lockett): "China's central bank acted to calm markets on Wednesday, a day after Washington's threat to impose tariffs on another $200bn of Chinese goods caused turmoil in global bourses. Yi Gang, governor of the People's Bank of China… called for investors to 'stay calm and rational' and pledged that the central bank would 'ensure liquidity and reasonable stability' after the Shanghai benchmark had dropped to a near-two-year low. The PBoC also injected a net Rmb40bn ($6.2bn) into China's financial market on Wednesday morning… That followed a surprise intervention by the bank on Tuesday, when it injected Rmb200bn into the financial system and signalled that it planned to cut the amount of capital banks are required to hold."

June 19 - Bloomberg: "China's central bank called for investors to remain calm and pledged to use monetary policy 'comprehensively,' after an escalation of the stand-off with U.S. sent the nation's benchmark stock index plunging. The People's Bank of China Governor, Yi Gang, said… that policy makers are prepared for outside shocks and that investors should take a rational view. The Shanghai Composite Index earlier slid 3.8%, falling below the 3,000 level previously breached during market crashes in 2015 and 2016."

June 20 - Bloomberg (Sandy Hendry and Jeffrey Hernandez): "The debt load of China's 100 biggest companies is escalating despite the government's deleveraging campaign, with seven property developers having liabilities exceeding 10 times equity… While stronger revenues are boosting Chinese companies' ability to repay debt, there's no deleveraging in sight, Natixis SA concluded after analyzing 2017 data from 3,000 non-financial companies. The liabilities to equity ratio climbed strongly for the biggest 100 companies by assets."

June 20 - Bloomberg (Carrie Hong): "In what's increasingly a buyer's market for offshore Chinese debt, some of the country's property developers are having to offer double-digit coupons to borrow for just two years. Zhenro Properties Group Ltd. is planning to offer new two- year dollar bonds in the 11.5% area… That leaves it just under the highest-coupon dollar bond to price so far in Asia this year… Dogged by surging funding costs onshore due to the government's deleveraging drive and rising yields on U.S. Treasuries, Chinese property companies have paid some of the highest coupons on dollar bonds this year, as they look to refinance a wall of maturing debt. Others have resorted to floating-rate notes to stoke investor appetite."

EM Watch:

June 18 - Bloomberg (Yumi Teso, Garfield Reynolds and Adam Haigh): "A falling tide lowers all boats, it seems. Amid an exodus from emerging markets, investors are pulling out of even Asian economies with solid prospects for growth and debt financing. Overseas funds are pulling out of six major Asian emerging equity markets at a pace unseen since the global financial crisis of 2008 -- withdrawing $19 billion from India, Indonesia, the Philippines, South Korea, Taiwan and Thailand so far this year…"

June 19 - Reuters (Walter Bianchi): "Argentina's central bank on Tuesday hiked its interest rate on Lebac notes to 47% from 40%, and it sold 308 billion pesos ($11bn) of the securities out of some 514 billion that expired…"

June 19 - Bloomberg (Riley Griffin): "What a waste of 500 bps of rate hikes. Just when it seemed Turkish President Recep Tayyip Erdogan may have learnt the errors of his interfering ways, he's back at it again, vowing to 'deal with interest rates' if elected. And the Turkish lira has duly voted with its feet. The first round of the presidential elections, as well as general elections, are on Sunday, June 24. There could be a subsequent round on July 8. The question of how independent the central bank will be after the vote is back again in the spotlight. If Erdogan were to order interest rates lower it would have a devastating effect on the currency - and it's already about 25% weaker versus the U.S. dollar this year. Inflation is on an upward tear, having risen to 12.15% in May from 10.85% the prior month."

June 20 - Bloomberg (Justin Carrigan, Yumi Teso and Ben Bartenstein): "Emerging markets were left reeling as the world's two biggest economies threatened punishing tariffs in the early shots of a trade war. Stocks slid to the lowest since October and currencies dropped a sixth day. The MSCI Emerging Markets Index of equities sank below the 1,100 mark, which has historically limited losses, amid concern that a tit-for-tat tariff showdown between the U.S. and China will crimp global growth. All but five of the 24 emerging-market currencies tracked by Bloomberg retreated, while sovereign yield spreads blew out an average of 9 bps versus Treasuries."

June 18 - Bloomberg (Asli Kandemir and Cagan Koc): "Even in Recep Tayyip Erdogan's electoral stronghold, businessmen like Halit Ozkaya can't help but complain about the currency crisis the president instigated just weeks before elections. The chairman of steel and copper cable maker Has Celik was forced to halt metal imports in May when Erdogan sent the lira into freefall by vowing to interfere in monetary policy if he wins on June 24. Now Ozkaya is worried Turkey is on the cusp of a debt crisis. 'The magnitude of the lira's swings is putting us in trouble by killing predictability and creating uncertainty on debts repayment,' Ozkaya said…"

June 18 - Bloomberg (Walter Brandimarte): "Brazil's growth forecasts fell for a seventh consecutive week as economists assessed the impact of a nationwide trucker strike, growing emerging market turbulence and domestic uncertainty ahead of the October presidential election. Economists in a weekly central bank survey lowered their 2018 estimate for gross domestic product to 1.76%, the lowest level for the year since President Michel Temer took office in May 2016 and fulled hopes of faster economic recovery."

Central Bank Watch:

June 20 - Reuters (Balazs Koranyi and Francesco Canepa): "A developing trade war between the world's biggest economies is weighing on business confidence and could force central banks to downgrade their outlook, the world's most powerful policymakers argued… After imposing punitive tariffs on a number of its top trading partners, the United States earlier this week threatened China with further duties on $200 billion, escalating a conflict that has already drawn retaliatory steps from nearly all corners of the world. Sitting side by side in a Portuguese hill-top town, the heads of the U.S. Federal Reserve, the European Central Bank, the Bank of Japan and the Reserve Bank of Australia all took a gloomy view on the escalating conflict, arguing that the consequences are already evident. 'Changes in trade policy could cause us to have to question the outlook,' Fed Chair Jerome Powell said in some of his strongest remarks yet on the issue."

June 21 - Reuters (David Milliken and Alistair Smout): "The Bank of England bolstered expectations that at its next meeting it will raise rates for only the second time in a decade, after its chief economist unexpectedly joined the minority of policymakers voting for a hike… The central bank also gave new guidance on when it might start to sell its 435 billion pounds ($574bn) of British government bonds, saying this could come once rates have reached around 1.5%, compared with previous guidance of 2%"

June 18 - Bloomberg (Enda Curran, Alessandro Speciale and Rich Miller): "Don't declare the end of easy money just yet. Major central banks took significant steps last week toward dismantling the emergency stimulus they'd used to lubricate financial markets and escape recession in the decade since the financial crisis. But most are clear that they're not ready to get out of the business of supporting their economies… Such commitments mean the loose-money era endures. Bank of America Corp. estimates the combined balance sheet of the world's biggest central banks is still $11.8 trillion higher than when Lehman Brothers Holdings Inc. collapsed in September 2008, and just short of a $12.3 trillion peak."

June 15 - Financial Times (Robin Wigglesworth, Kate Allen and Roger Blitz): "A week of landmark monetary policy decisions has left investors revamping their portfolios to fit a new era of tightening global liquidity. The US Federal Reserve's seventh interest rate increase since 2015 on Wednesday came the day before the European Central Bank announced that it would end its €2.4tn bond-buying programme in December. The decision on Friday by the Bank of Japan to persevere with its quantitative easing programme leaves it as the laggard among major central banks… 'We are now in a quantitative tightening regime, not a quantitative easing regime,' said Gregory Peters, senior portfolio manager at PGIM Fixed Income. 'The halcyon days of lower volatility and rising markets are behind us. If QE lifted markets then the opposite has to have some kind of impact.'"

June 21 - Wall Street Journal (Brian Blackstone, Nina Adam and Jason Douglas): "Central banks in Europe… signaled different outlooks toward rate increases, suggesting the divergent paths of the world's largest central banks are gripping smaller ones too. The Bank of England held its benchmark interest rate steady at 0.5%, but officials said they expect economic growth in the U.K. to pick up in the months ahead…, setting the stage for a rise in borrowing costs this summer. Norway's central bank also stayed on hold but said rates will probably go up in September. In contrast, the Swiss National Bank kept its key policy rate in deeply negative territory and signaled no forthcoming changes despite signs of healthy economic activity and slowly rising inflation, as the bank remains constrained by the actions of the European Central Bank. Divergence among major central banks has emerged as a key theme recently with potential repercussions on stock, bond and currency markets."

Global Bubble Watch:

June 20 - Financial Times (Michael Mackenzie): "Debt and plenty of it was the legacy of the global financial crisis. Over the past decade of ultra low and negative interest rates, companies have more than doubled their outstanding amount of bonds and loans. Now, as central banks… retreat from the era of easy money that helped fuel huge corporate debt sales in the past decade, the bill for the debt binge looms large. The global value of corporate bonds outstanding has risen 2.7 times since 2007 to $11.7tn, doubling as a share of gross domestic product alongside a deterioration in credit ratings, noted McKinsey & Co. 'The average quality of blue-chip borrowers has declined, growth in speculative-grade corporate bonds has been particularly strong and bond issuance by companies in China and other developing countries - often denominated in foreign currency - has soared,' said the consultancy."

June 20 - Financial Times (Robin Wigglesworth): "Of all the fashionable alarm bells that market-watchers keep an eye on, the yield curve is the most timeless. It is Coco Chanel's proverbial 'little black dress' of economic indicators. The slope made up of bond yields of various maturities has a record of predicting recessions that would make even the savviest econometrician turn pea-green with envy. It is not perfect, but the curve has become flat and inverted… ahead of most economic downturns in most major countries since the second world war. This is why some analysts and investors are worryingly eyeing the US yield curve, where the difference between the two and 10-year Treasury yields has narrowed to just 37 bps. That is the slimmest spread since September 2007. But interestingly, and worryingly, the global yield curve has now already inverted."

June 16 - Bloomberg (Randall Woods): "China remained the largest foreign owner of Treasuries in April even with a slight drop in holdings, as the Asian nation's appetite for U.S. government debt shows few signs of waning amid growing tensions over trade. China's holdings of U.S. bonds, bills and notes decreased by $5.8 billion to $1.18 trillion in April… The second-biggest foreign holder, Japan, saw its Treasuries drop by $12.3 billion to $1.03 trillion, the lowest since 2011. Overall, foreign ownership of Treasuries receded in April, falling to $6.17 trillion."

June 17 - Reuters (Colin Packham): "Australia's relationship with top trading partner China faces a testing two weeks as Canberra prepares to pass laws designed to limit Beijing's influence in domestic affairs amid pressure on some of its fastest growing exports. The fallout from proposed foreign interference laws will likely be exacerbated by an expected ban on China's Huawei Technologies from supplying equipment for the soon-to-be built 5G mobile broadband network on national security grounds."

Europe Watch:

June 21 - Reuters (Gavin Jones and Giuseppe Fonte): "Two leading eurosceptics from Italy's far-right League, Claudio Borghi and Alberto Bagnai, were picked… to head important parliamentary committees, as the League and the anti-establishment 5-Star Movement put together their coalition government. Borghi will become president of the Budget Committee in the lower house of parliament and Bagnai president of the Finance Committee in the Senate. Both have repeatedly railed against EU budget restraints, and Borghi has called for the issuance of short-term government bonds, known as mini-Bots, to pay companies and individuals owed money by the state. 'The goal to balance the budget has destroyed our economy,' Bagnai said earlier this year. He said monetary union was 'destined to fail,' but added that leaving the currency bloc was not among the League's top priorities."

June 17 - Wall Street Journal (Eric Sylvers): "A youth revolt is upending Italian politics, and it could be a harbinger of things to come. Western Europe's largest antiestablishment government came to power earlier this month, driven largely by young Italian voters. Struggling with a persistent lack of job prospects over the past decade, they voted in droves for two parties in the country's March 4 elections, the 5 Star Movement and the League, an anti-immigration party. The result laid bare a stark generation gap, with older Italians, who often have to support their grown children, continuing to vote for mainstream parties. The same pattern appears across southern Europe, and the forces behind the divide show few signs of slowing. Almost 30% of Italians age 20 to 34 aren't working, studying or in a training program…, more than in any other European Union country. Greece is second at 29%, while Spain's rate is 21%."

June 20 - Bloomberg (Arne Delfs, Gregory Viscusi and Helene Fouquet): "German Chancellor Angela Merkel and French President Emmanuel Macron agreed on a plan to strengthen the euro area, seeking to fortify Europe against financial crises and strengthen its global influence. 'This is an important step that Europe will be working on for a while,' Merkel said alongside Macron… 'We can say that we've taken a small step along the road.' Macron said the measures would boost 'stability and solidarity' in the euro area."

Fixed Income Bubble Watch:

June 21 - Bloomberg (Kristine Owram): "Fixed-income indexes are 'broken,' making active management necessary for successful bond ETFs, according to the head of global exchange-traded funds at Franklin Templeton Investments. 'Investors typically have gone into passive fixed income primarily because that's all there was,' Patrick O'Connor said… 'But as a firm, and as an active manager, we don't just think indexes are flawed in fixed income, we think they're broken.' The weight of individual securities in fixed-income indexes is often determined by debt issued, meaning companies that issue more debt will have a higher weight in an index-based ETF."

June 17 - Financial Times (Gideon Rachman): "Three-letter initialisms gained notoriety during the financial crisis and again this year. In 2008 it was the CDO, or collateralised debt obligation, the asset-backed securities blamed for exacerbating the financial crisis. In February the ETN was in the spotlight, as several volatility exchange traded note products were forced to liquidate after a market spasm. Now investors are wholeheartedly embracing a third: the CLO. Collateralised loan obligations… are enjoying a boom. Institutional investors have piled into the products, which pool predominantly US or European corporate loans into one portfolio, before divvying up slices of the vehicle based on perceived risks… A surge of CLO issuance - $54bn has been raised in the US this year… has been sopped up by buyers and could eclipse the record $124bn raised in 2014."

Leveraged Speculator Watch:

June 15 - Financial Times (Robin Wigglesworth): "Hedge funds are once again betting the US stock market will remain tranquil. The volume of 'short' positions in the Vix volatility index has climbed to the highest since late January, just before the implosion of several Vix-linked funds ripped through financial markets. Investment groups are now net 'short' over 53,000 futures contracts in Cboe's Vix index… Shorting volatilit y - in practice selling insurance against market turmoil to other investors - has long been a lucrative strategy, and produced eye-watering gains in 2017. But it unravelled in dramatic fashion in February."

Geopolitical Watch:

June 19 - Reuters: "A sophisticated hacking campaign launched from computers in China burrowed deeply into satellite operators, defense contractors and telecommunications companies in the United States and southeast Asia, security researchers at Symantec Corp said… Symantec said the effort appeared to be driven by national espionage goals, such as the interception of military and civilian communications."