Friday, August 17, 2018

Weekly Commentary: Instability

With the Turkish lira down another 6.6% in Monday trading, global "Risk Off" market Instability was turning acute. The U.S. dollar index jumped to an almost 14-month high Monday, as the Turkish lira, Argentine peso, Indian rupee and others traded to record lows versus the greenback. The South African rand "flash crashed" 10%, before recovering to a 2.3% decline. Brazil's sovereign CDS jumped 14 bps Monday to a six-week high 252. Italian 10-year yields jumped 11 bps to 3.10%, near the high going back to June 2014, as the euro declined to one-year lows.

The Turkish lira surged 8.4% Tuesday, jumped another 6.8% Wednesday and then gained an additional 1.9% Thursday. Wild Instability then saw the Turkish lira drop 3.1% during Friday's session, ending the week up 6.9%. Qatar's $15 billion pledge, along with central bank measures, supported the tenuous lira recovery.

August 17 - Wall Street Journal (Lingling Wei and Bob Davis): "Chinese and U.S. negotiators are mapping out talks to try to end their trade impasse ahead of planned meetings between President Trump and Chinese leader Xi Jinping at multilateral summits in November, said officials in both nations. The planning represents an effort on both sides to keep a spiraling trade dispute-which already has involved billions of dollars in tariffs and comes with the threat of hundreds of billions more-from torpedoing the U.S.-China relationship and shaking global markets. Scheduled midlevel talks in Washington next week, which both sides announced on Thursday, will pave the way for November. A nine-member delegation from Beijing, led by Vice Commerce Minister Wang Shouwen, will meet with U.S. officials led by the Treasury undersecretary, David Malpass, on Aug. 22-23. The negotiations are aimed at finding a way for both sides to address the trade disputes, the officials said, and could lead to more rounds of talks."

Apparently, global "Risk Off" attained a level of momentum that compelled Chinese and Trump administration officials to jointly calm the markets. After trading as low as 24,966 in Wednesday trading, the Dow rallied more than 700 points to end the (option expiration!) week at 25,669. For yet another week, U.S. markets were rewarded for disregarding mounting risk. Extraordinary market complacency is at this point No Conundrum. A Trump and Xi trade-focused meeting in late-November is conveniently timed soon after the midterms.

And while U.S. stocks rallied on happy prospects, the same cannot be said for global markets. The South African rand sank 3.8% this week to the low versus the dollar since June 2016. Brazil's real declined another 1.2% this week, trading the weakest against the dollar going back to early-2016. The Colombian peso, Chilean peso and Argentine peso all fell at least 2.0% this week. European equities were under pressure. Italian banks fell 3.2%, with European banks down 3.0%. Hong Kong's Hang Seng Financial index lost 4.1%.

The Shanghai Composite sank 4.5% this week, trading Friday at the lowest closing level since December 2014. China's renminbi traded to 6.93 (vs. $) in Wednesday trading, rapidly approaching the 2016 low of 6.96 to the dollar. The renminbi has now declined 8.7% from March 30th trading highs and 6.9% since June 14th. Increasingly fearful of a disorderly devaluation, Chinese officials implemented measures this week to support their sickly currency.

August 13 - Bloomberg: "China's broadest measure of new credit slowed, underlining concerns about the economy that have prompted authorities to start doing more to support growth. Aggregate financing stood at 1.04 trillion yuan ($151bn) in July… That was slower than the 1.39 trillion yuan in June, using the central bank's new calculation method for this data. The new index includes more types of credit and so isn't comparable to Bloomberg's survey or the data reported in previous months. New yuan loans stood at 1.45 trillion yuan, versus a projected 1.275 trillion yuan and 1.84 trillion yuan the previous month. Broad M2 money supply rose 8.5%, rebounding from record low expansion in June."

The PBOC has somewhat tweaked China's aggregate Credit data. Total Aggregate Financing for July ($151bn) was down 13% from July 2017. After 2018's first seven months, y-t-d Total Aggregate Financing of 10.137 TN yuan ($1.475 TN at current exchange rates) is running 18% below last year's comparable period. Beijing's crackdown has stopped shadow banking in its tracks, with July seeing another contraction in key shadow lending components.

And while bank lending moderated somewhat from a huge June, New (bank) Loans continue to expand rapidly. At 1.450 TN yuan ($210bn), New Loans for the month were up 76% compared to July 2017's 826 billion yuan. New Loans have expanded 10.479 TN ($1.52 TN) y-t-d, up 19% from comparable 2017. To be sure, the household borrowing binge runs unabated. At 44.756 TN yuan, China's Household Debt was up 19% over the past year and 47% in two years.

August 14 - Bloomberg: "There's no stopping China's property market. New-home prices rose at the fastest pace in 22 months in July, climbing 1.2% from the previous month… The jump in values in third-tier cities was the biggest in data going back to 2009, signaling the potential for the government to roll out more housing curbs in a cooling campaign that began more than two years ago. The dilemma for officials is how to restrain prices without tanking the property sector during a broader economic slowdown. 'A persistently high home price is going to lead to a very strong response from the government,' Phillip Zhong, a Hong Kong-based equity analyst at Morningstar… Asia, said… 'We are going to expect to see more tightening measures being put in place.'"

"China's state planning authorities pledged on Wednesday to keep debt levels under control as it expressed confidence that the year's growth target will be achieved in spite of the trade war with the US."

Accepting that growth has slowed and recognizing trade risks, the bullish consensus view holds that China retains the tools to ensure uninterrupted steady growth. Most believe China is adeptly managing Credit growth. I believe their policy dilemma is in the process of turning much more challenging.

Seemingly lost in the discussion is the reality that China's historic economic boom is turning dangerously unbalanced. While Beijing has moved aggressively to contain high-risk "shadow" lending, it has remained too timid in restraining household borrowing. Indeed, China is now facing full-fledged mortgage finance and apartment Bubbles - in the face of rapidly waning prospects elsewhere. Beijing seeks to continue cracking down on risky Credit, while pursuing measures to stimulate a slowing economy. Chinese officials would hope to spur ample productive Credit and sound economic investment to sustain the boom. The harsh reality is that there are limited opportunities for both. They're stuck, for the duration, with risky non-productive Credit and additional malinvestment and overcapacity.

August 13 - Reuters (Yawen Chen and Kevin Yao): "China's property investment growth accelerated to its quickest pace in nearly two years in July, driven by faster transactions and stronger developer appetite for land as funding conditions improved. Real estate investment rose 13.2% in July from the same period a year earlier, the fastest pace since October 2016 and higher than June's 8.4% rise… It grew 10.2% in the first seven months of the year."

Runaway mortgage finance Bubbles turn increasingly precarious. Late in the cycle, systemic risk grows exponentially. As we saw unfold during the U.S. mortgage finance Bubble, there is a ("Terminal Phase") rapid acceleration of loan growth of rapidly deteriorating Credit quality. The unparalleled Chinese real estate Bubble is backed by, too commonly, poorly constructed residential complexes. If the P2P lending Bubble collapse is causing public angst, just wait until apartment prices start sinking.

While Beijing has over the years made numerous attempts to tighten real estate lending, mortgage rates have remained significantly below the rate of apartment price inflation. I would argue that China's real estate Bubble is today acutely vulnerable to an unexpected jump in rates and/or tightening of lending conditions.

August 13 - Bloomberg (Yalman Onaran): "In 1988, 9 of the 10 largest banks in the world were Japanese. Three years later the country's financial system, along with its lenders, collapsed, sending Japan into its infamous lost decade (or three, considering the country is still struggling to escape deflation and low growth). The nine Japanese companies in the top ranks by assets 30 years ago have since consolidated into four successors. Only one turns up in this year's ranking. By 2007 all of the top 10 slots were filled by U.S. and European lenders. A year later the subprime mortgage meltdown hit the U.S. The sovereign debt crisis followed in Europe. Four of the 10 had to be bailed out by their respective governments… U.S. and European economies, like Japan's, have contended for most of the past decade with low growth. It's 2018, and the rankings teem with Asian banks again. This time the top four by assets are Chinese."

There was further confirmation this week of the faltering global Bubble thesis. Monday saw acute instability in EM currencies, in particular. With the Argentine peso down as much as 4.4%, the Argentine central bank hiked interest rates 500 bps (to 45%) to support the peso. Indonesia Wednesday unexpectedly raised rates another 25 bps (to 5.5%) after the rupiah sank to almost three-year lows. And with "hot money" fleeing EM, worries for the sustainability of the Hong Kong dollar peg returned.

August 13 - Bloomberg (Emma Dai): "Hong Kong's interbank borrowing costs climbed across the curve, as the city's currency interventions continued overnight, taking this week's total to HK$16.8 billion ($2.1bn). The three-month Hong Kong dollar interbank offered rate, known as Hibor, jumped by the most in more than two months… The Hong Kong Monetary Authority bought HK$14.6 billion of local dollars Wednesday…, after the currency declined to the weak end of its trading band."

At $432 billion, the Hong Kong Monetary Authority is viewed by the markets as having sufficient resources to indefinitely maintain the peg to the U.S. dollar. But with faltering global markets and increasingly nervous officials in Beijing, analysis has turned more complex. With a massive and vulnerable financial sector, along with its own formidable real estate Bubble, Hong Kong could find itself in the crosshairs of faltering global, EM and Chinese Bubbles.

August 13 - UK Telegraph (Ambrose Evans-Pritchard): "Hong Kong's housing boom is starting to fray as monetary tightening by the US Federal Reserve forces the enclave's authorities to tighten credit. A rash of home buyers has pulled out of purchases at the last moment despite losing large deposits, a sign that financial stress is biting harder or that fear is creeping into the market… This is happening as regulators in mainland China clamp down on capital outflows through interbank accounts using the Hong Kong-Shanghai Connect, aiming to stem any further fall in the yuan. The People's Bank (PBOC) is squeezing liquidity in the offshore Hong Kong market and has lifted the risk requirement ratio for forward yuan contracts to 20pc. This makes it harder to short the Chinese currency."

The late-week rally in U.S. equities did not pull the metals out of their deep funk. Copper sank 4.2% this week, pushing 2018 losses to almost 20%. "Zinc heads for Worst Week Since 2011," closing Friday down 6.2%. Lead dropped 5.2%, and Tin fell 4.1%. Aluminum declined 3.6%. Precious metals were only somewhat firmer. Platinum fell 4.7%, Silver 3.3% and Gold 2.2%.

The metals are surely not responding to currency issues in Turkey. Turkey is, after all, only symptomatic of the faltering global Bubble. This week provided important evidence of "Risk Off" dynamics turning more systemic for the emerging markets. With China's stocks and currency under heavy pressure again this week, the negative feedback loop between EM and China has turned quite threatening.

August 17 - Bloomberg: "China's government bonds declined as funding costs rebounded amid expectations of rising supply, giving the 10-year yield its biggest two-week advance since December 2016. The yield on notes due in a decade rose four bps to 3.65% Friday, taking its two-week increase to 19 bps… Bond futures also declined… The Ministry of Finance on Tuesday urged local governments to accelerate bond issuance to support economic expansion, spurring speculation that supply will jump in the coming weeks. The overnight repurchase rate surged 76 bps this week, after the People's Bank of China suspended reverse-repurchase operations for 18 days in a row… 'The previous market-supportive factors such as ample liquidity and gloomy economic outlook seem to have waned this week,' said Li Qilin, chief macroeconomic researcher at Lianxun Securities Co."

Beijing faces a huge dilemma. The faltering EM Bubble poses significant risk to the unbalanced Chinese economy. Moreover, global de-risking/deleveraging dynamics exacerbate risk to Chinese finance and the renminbi. Of course, the policymaker impulse is to orchestrate another round of fiscal and monetary stimulus. Meanwhile, China's historic mortgage finance and apartment Bubbles maintain powerful momentum. Stimulus measures at this stage of the cycle pose extreme risk. For one, it would surely push non-productive Credit growth to perilous extremes. Second, the combination of additional system liquidity and escalating systemic instability would exacerbate already significant risk of a disorderly Chinese currency devaluation.

That things look "terrible" in China, in contrast to obvious greatness in the U.S., is to provide the Trump administration a decisive trade negotiation advantage. And I can see the perceived benefits of scheduling low-level trade discussions ahead of a big trade meeting with the Chinese after the midterms. A temporary "truce" would be viewed as bolstering U.S. equities and supporting "great again" campaigning into November. I'm not, however, convinced this gambit will reverse the bursting of the EM Bubble. And I don't believe pushing serious negotiations out to November will in anyway resolve China's deteriorating financial and economic positions.

All in all, it was another ominous week for highly unstable global financial markets. Bubbles bursting, Bubbles faltering and Bubbles inflating. Global financial and economic prospects are dimming rapidly. I would be less apprehensive if U.S. equities (and Chinese apartment prices!) were adjusting to new realities. But it's not as if Bubble resilience is without precedent.

The S&P500 peaked on July 20, 1998, just weeks prior to near global financial meltdown. Back on August 25, 1987, the S&P hit a record high about six weeks before the "Black Monday" market crash. And looking back to fateful 1929, the DJIA traded to a record high on September 1st, with the Great Crash erupting the following month. Those that have studied the late-twenties should recognize ominous parallels. How on earth were they so completely blindsided?

For the Week:

The S&P500 gained 0.6% (up 6.6% y-t-d), and the Dow rose 1.4% (up 3.8%). The Utilities rallied 2.7% (up 2.8%). The Banks gained 0.9% (up 3.1%), and the Broker/Dealers added 0.6% (up 3.5%). The Transports rose 1.2% (up 5.8%). The S&P 400 Midcaps increased 0.7% (up 5.8%), and the small cap Russell 2000 added 0.4% (up 10.3%). The Nasdaq100 slipped 0.4% (up 15.3%). The Semiconductors fell 2.3% (up 5.6%). The Biotechs declined 1.0% (up 20.3%). With bullion down $27, the HUI gold index sank 10.9% (down 25.9%).

Three-month Treasury bill rates ended the week at 1.99%. Two-year government yields were little changed at 2.61% (up 72bps y-t-d). Five-year T-note yields were about unchanged at 2.74% (up 53bps). Ten-year Treasury yields slipped a basis point to 2.86% (up 45bps). Long bond yields declined one basis point to 3.02% (up 28bps). Benchmark Fannie Mae MBS yields were unchanged at 3.60% (up 61bps).

Greek 10-year yields jumped 13 bps to 4.31% (up 24bps y-t-d). Ten-year Portuguese yields rose eight bps to 1.86% (down 9bps). Italian 10-year yields jumped 13 bps to 3.12% (up 111bps). Spain's 10-year yields increased four bps to 1.45% (down 12bps). German bund yields slipped a basis point to 0.31% (down 12bps). French yields were unchanged at 0.67% (down 12bps). The French to German 10-year bond spread widened one to 36 bps. U.K. 10-year gilt yields declined one basis point to 1.24% (up 5bps). U.K.'s FTSE equities index fell 1.4% (down 1.7%).

Japan's Nikkei 225 equities index was about unchanged (down 2.2% y-t-d). Japanese 10-year "JGB" yields were little changed at 0.10% (up 5bps). France's CAC40 fell 1.3% (up 0.6%). The German DAX equities index dropped 1.7% (down 5.5%). Spain's IBEX 35 equities index lost 1.9% (down 6.2%). Italy's FTSE MIB index sank 3.2% (down 6.6%). EM equities were under pressure. Brazil's Bovespa index declined 0.9% (down 0.5%), and Mexico's Bolsa slipped 0.2% (down 2.2%). South Korea's Kospi index fell 1.6% (down 8.9%). India’s Sensex equities index added 0.2% (up 11.4%). China’s Shanghai Exchange sank 4.5% (down 19.3%). Turkey's Borsa Istanbul National 100 index fell 6.5% (down 23.1%). Russia's MICEX equities index declined 0.9% (up 6.9%).

Investment-grade bond funds saw inflows of $1.453 billion, and junk bond funds had inflows of $197 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates dropped six bps to 4.53% (up 64bps y-o-y). Fifteen-year rates declined four bps to 4.01% (up 85bps). Five-year hybrid ARM rates slipped three bps to 3.87% (up 71bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down seven bps to 4.52% (up 45bps).

Federal Reserve Credit last week dipped $0.6bn to $4.217 TN. Over the past year, Fed Credit contracted $211bn, or 4.8%. Fed Credit inflated $1.406 TN, or 50%, over the past 302 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt fell $10bn last week to $3.432 TN. "Custody holdings" were up $106bn y-o-y, or 3.2%.

M2 (narrow) "money" supply declined $8.2bn last week to $14.148 TN. "Narrow money" gained $526bn, or 3.9%, over the past year. For the week, Currency was little changed. Total Checkable Deposits declined $20.2bn, while Savings Deposits gained $8.2bn. Small Time Deposits rose $5.2bn. Retail Money Funds slipped $1.2bn.

Total money market fund assets slipped $3.7bn to $2.860 TN. Money Funds gained $154bn y-o-y, or 5.7%.

Total Commercial Paper dropped $16.8bn to $1.055 TN. CP gained $92bn y-o-y, or 9.4%.

Currency Watch:

The U.S. dollar index slipped 0.3% to 96.116 (up 4.3% y-t-d). For the week on the upside, the New Zealand dollar increased 0.7%, the Canadian dollar 0.6%, the South Korean won 0.4%, the Japanese yen 0.3%, the euro 0.2%, the Singapore dollar 0.2%, the Australian dollar 0.2% and the Mexican peso 0.1%. For the week on the downside, the South African rand declined 3.7%, the Brazilian real 1.2%, the Norwegian krone 1.1%, the Swedish krona 0.3%, the British pound 0.1% and the Swiss franc 0.1%. The Chinese renminbi declined 0.45% versus the dollar this week (down 5.39% y-t-d).

Commodities Watch:

August 16 - Reuters (Winni Zhou, Zheng Li and Andrew Galbraith): "China has banned banks in its ground-breaking free trade zones from certain lending activities to ease pressure on the yuan currency in offshore markets, two sources with direct knowledge of the matter said… The restrictions, announced by the Shanghai branch of the People's Bank of China (PBOC) on Thursday morning, have closed off channels used to deposit and lend yuan offshore through the trade zones as the currency plumbs 15-month lows, the sources said."

The Goldman Sachs Commodities Index fell 1.9% (up 1.6% y-t-d). Spot Gold dropped 2.2% to $1,185 (down 9.1%). Silver sank 3.4% to $14.775 (down 13.8%). Crude fell $1.71 to $65.93 (up 9%). Gasoline dropped 3.0% (up 10%), while Natural Gas was little changed (unchanged). Copper fell 2.3% (down 19%). Wheat gained 1.8% (up 36%). Corn jumped 1.9% (up 8%).

Trump Administration Watch:

August 16 - Reuters (Michael Martina and Elias Glenn): "China will hold a fresh round of trade talks with the United States in Washington later this month, Beijing said on Thursday, offering a glimmer of hope for progress in resolving a conflict that has set world financial markets on edge. While the engagement was seen by analysts and business officials as positive, they cautioned that the talks were unlikely to lead to a breakthrough given they are among lower level officials and led on the U.S. side by the Treasury Department, not the U.S. Trade Representative (USTR)."

August 11 - Wall Street Journal (Jacob M. Schlesinger): "President Trump's decision to double steel tariffs on Turkey as its government battled a currency collapse marked a departure for the U.S. from how it traditionally handles financial turmoil hitting emerging markets. Washington has generally tried to calm global markets in such moments, especially when investors are gripped by fear of contagion. Mr. Trump instead squeezed Ankara further, raising tariffs on Turkish steel imports to 50% and aluminum to 20%, which deepened the Turkish lira's drop and worsened market fears that its banks could be shaken. Administration officials didn't clarify Mr. Trump's motives."

August 16 - Financial Times (Katie Martin): "Mr Trump certainly picked his moment. While the lira was crashing on Friday (that is not hyperbole - it dropped by 16% on that day alone), he swooped in to declare that he was doubling tariffs on steel and aluminium imports from the country. What is more, he suggested with his own special logic that this was a specific response to the slide in the lira 'against our very strong Dollar!' Mr Trump did not start the lira's slide, far from it. He briefly made it worse, though. And crucially, he provided President Recep Tayyip Erdogan with precisely the cover he has been seeking. Turkey's problems have been bubbling up for years."

August 15 - Reuters (Tim Ahmann and Lesley Wroughton): "The United States imposed sanctions on a Russian port service agency and Chinese firms for aiding North Korean ships and selling alcohol and tobacco to Pyongyang in breach of U.S. sanctions… 'The tactics that these entities based in China, Singapore, and Russia are using to attempt to evade sanctions are prohibited under U.S. law, and all facets of the shipping industry have a responsibility to abide by them or expose themselves to serious risks,' U.S. Treasury Secretary Steven Mnuchin said…"

August 16 - Financial Times (Laura Pitel): "Mike Pence, the US vice-president, has warned Turkey not to test America's resolve in an escalating row between the two countries, as Qatar announced $15bn in support for Ankara. Mr Pence said Andrew Brunson, an evangelical pastor whose detention in Turkey has triggered tit-for-tat sanctions between the two Nato allies, must be released immediately and hinted at further punitive steps if he was not allowed to go free. 'Pastor Andrew Brunson is an innocent man held in Turkey & justice demands that he be released,' Mr Pence, who is himself an evangelical Christian, wrote… 'Turkey would do well not to test @POTUS Trump's resolve to see Americans who are wrongfully imprisoned in foreign lands returned home to the United States.'"

Turkey Watch:

August 11 - Reuters (Humeyra Pamuk): "President Tayyip Erdogan denied on Saturday that Turkey is in a currency crisis, dismissing a plunge in the lira as 'fluctuations' which have nothing to do with economic fundamentals. Speaking after U.S. President Donald Trump doubled tariffs on Turkish steel and aluminum imports, Erdogan described Friday's 18% fall in the lira to a record low as the 'missiles' of an economic war waged against Turkey. Erdogan said those who plotted against Turkey in a failed coup attempt in July 2016 were now trying to target the country through its economy, and pledged to fight back… 'Those who can't compete with us on the ground have brought online fictional currency plots that have nothing to with the realities of our country, production and real economy,' Erdogan told a provincial meeting of his AK Party…"

August 14 - Bloomberg (Onur Ant): "President Recep Tayyip Erdogan vowed to boycott iPhones in a demonstration of defiance as the U.S. held firm to its demand that Turkey release an evangelical pastor and Turkish executives called for action to bolster the lira. Erdogan said the nation of 80 million people would stop buying American electronics, condemning the 'explicit economic attack' against his country."

August 16 - Financial Times (Colby Smith): "Last June Saudi Arabia, Egypt and other Arab states severed ties with Qatar. Turkey offered food and military aid. Now Qatar has returned the favour, with a pledge of $15bn in direct investment. Turkey desperately needs the help. But Qatar's lifeline… simply isn't going to cut it. Over the next year, the country's external financing needs will approach $238bn, according to HSBC. The lira has only barely stabilised after weakening as much as 24% in a week, and foreign reserves are dwindling. There is no way around it. Turkey will need the IMF. In recent days, Erdogan has hinted that a distinctly non-Western list of countries including Russia and China could come to his aid."

August 14 - Bloomberg (Selcuk Gokoluk): "Bonds of Turkish banks plunged deeper into stressed territory as the lira's 45% slump this year makes it more costly for lenders to repay dollar debts. Nine bonds issued by Turkish banks listed in a Bloomberg Barclays index were trading below 80 cents on the dollar as of Monday, compared with just one a month ago. Bonds of Yapi Kredi Bankasi AS maturing in March 2026 were among the hardest hit, losing almost 30 cents on the dollar in the past week."

August 14 - Wall Street Journal (Patricia Kowsmann): "Turkey's banks are feeling the brunt of the country's steep currency slide. Their health will be a barometer of how deeply the pain will be felt in the economy. The banking system is chock-full of foreign-currency debt to companies and, to a lesser extent, consumers. Borrowers who took out loans in U.S. dollars and euros will see the value of their payment obligations skyrocket in lira terms. A slowing economy will also intensify the pain. The country's banking regulator moved Tuesday to ease banks' burden of souring loans to consumers and companies. Measures include allowing lenders to extend loan maturities and facilitate debt restructuring."

August 16 - Wall Street Journal (Jon Sindreu and Sarah McFarlane): "Turkey faces another big problem after it deals with the immediate impact of its currency crisis: How is it going to pay for its dependence on imported oil and natural gas? Turkey imports the vast majority of its fuel needs. Its devalued lira makes paying for such imports more expensive. Meanwhile, the economy is rapidly running out of hard currency to pay for that imported energy and support all its other foreign-currency needs, especially among Turkish companies who have borrowed heavily in U.S. dollars. While oil is roughly 6% more expensive year to date for international traders, its price tag has risen more than 60% for Turkish buyers because of the plunge in their currency against the dollar."

August 12 - Financial Times (Ayla Jean Yackley): "Recep Erdogan has warned the US that Turkey would seek new friends and allies as it looked for help to halt a full blown currency crisis that has been made worse by an intensifying row with its Nato ally. He also ruled out raising the interest rate, saying it would hurt the poor. 'Turkey will emerge in a very short time from this exchange rate, interest rate, inflation spiral they are trying to force it into,' the Turkish president told a rally for members of his ruling Justice and Development Party… 'I am telling you the real formula: If we don't minimise this interest rate, it is a vehicle of exploitation that will make the rich richer and the poor poorer.'"

August 13 - Reuters (Tuvan Gumrukcu): "President Tayyip Erdogan on Monday accused 'economic terrorists' of plotting to harm Turkey by spreading false reports and said they would face the full force of the law, as authorities launched investigations of those suspected of involvement."

Federal Reserve Watch:

August 17 - Financial Times (Sam Fleming): "The potential for swelling corporate power to depress workers' wages will be debated by central bankers from around the world next week when policymakers gather for their annual meetings in Jackson Hole, Wyoming. The agenda for the event, titled 'Changing Market Structure and Implications for Monetary Policy', takes the symposium into some of the more politically charged areas of modern economics. Scholars have been asking whether the massive market power of big companies is having malign effects on the broader economy, including by depressing labour's share of income, and whether antitrust authorities need to take a tougher line."

U.S. Bubble Watch:

August 12 - Bloomberg (Sarah McGregor): "The U.S. budget deficit widened in the first four months of the fiscal year as growth in spending exceeded revenue. The U.S. fiscal gap increased by 11% to $175.7 billion between October and January from the same period a year earlier… Outlays rose by 5% to $1.3 trillion, while receipts increased by 4% to $1.1 trillion. The budget deficit widened the last fiscal year to the largest since 2013. The gap is expected to keep increasing as an aging population boosts spending on healthcare and retirement programs and from tax cuts enacted this year that are expected to cut revenue by up to $1.5 trillion over the next decade… The Trump administration's proposed budget released Monday shows the 2019 deficit widening to nearly $984 billion and totaling $7.1 trillion over the next decade."

August 14 - Bloomberg (Matthew Boesler): "U.S. household debt continued to increase in the second quarter, propelled by an advance in mortgage borrowing… Total household debt rose 3.5% from a year earlier in the April-to-June period to a record $13.3 trillion, while mortgage debt rose 3.5% to $9 trillion. The majority of newly originated mortgages continued to go to borrowers with the highest credit scores… As borrowing advanced, borrower stress continued to decline. Loans slipping into delinquency fell to 4.52% in the second quarter, the lowest in data from 2003."

August 14 - Bloomberg (Matthew Boyle): "It's getting more expensive for retailers like Walmart Inc. to stock its shelves with household staples like diapers, paper towels and bottled water. The question now is whether that translates into more pain at the check-out line. Soaring costs for transportation and raw materials -- some related to tariffs -- have prompted Procter & Gamble Co., Nestle SA, Coca-Cola Co. and others to announce price increases this summer on a wide swath of consumer staples. The companies are betting that demand will remain steady even though wage growth is tepid and Americans' wallets are already getting pinched by higher gas prices…"

August 15 - Reuters (Lucia Mutikani): "U.S. retail sales rose more than expected in July as households boosted purchases of motor vehicles and clothing, suggesting the economy remained strong early in the third quarter… Retail sales in July increased 6.4% from a year ago."

August 15 - Bloomberg (Reade Pickert and Scott Lanman): "Spending at U.S. restaurants surged over the past three months by the most on record, making it both a bright spot for the economy and a risk if appetites for eating out return to normal. Sales at food-service and drinking establishments rose 1.3% in July to $61.6 billion... That brought the three-month annualized gain to 25.3%, the fastest pace in figures going back to 1992."

August 14 - New York Times (Erin Griffith): "In late April, when Mike Massaro set out to get $40 million to $75 million in funding for his payments start-up, Flywire, he contacted a small group of investors he already knew. But word quickly got around, and other investors flooded his inbox with $200 million of investment offers... Gusto, a payroll and benefits software company, raised $140 million in July, but could have done five times that, according to Joshua Reeves, its chief executive and founder. Convene, a real estate services start-up, recently obtained $152 million and turned away more than $100 million… Soon after, another wave of hopeful investors called… Start-ups raising $100 million or more from investors - known as a mega-round in Silicon Valley - used to be a rarity. But now, they are practically routine, producing a frenzy around tech companies with enough scale and momentum to absorb a large check."

August 15 - Reuters (Lucia Mutikani): "U.S. worker productivity increased at its fastest pace in more than three years in the second quarter, depressing labor costs, but the trend in productivity growth remained moderate. …Nonfarm productivity, which measures hourly output per worker, rose at a 2.9% annualized rate in the April-June quarter."

August 13 - CNBC (Annie Nova): "More than 1 million student loan borrowers each year go into default. Outstanding education debt in the U.S. has tripled over the last decade and now exceeds $1.5 trillion, posing a greater burden to Americans than auto or credit card debt. For many, the payments are proving unmanageable. By 2023, nearly 40% of borrowers are expected to default on their student loans."

August 12 - Wall Street Journal (Rebecca Elliott and Bradley Olson): "American oil companies-primed to reap the benefits of rising prices after years of wringing more from wells for less-are seeing profits erode in the face of rising costs. Those operational challenges make balancing lofty growth objectives and demands for fiscal restraint increasingly difficult. If the companies continue to stumble, the result could be a higher cost of capital to finance the ongoing U.S. energy boom or a slower pace of growth. Two-thirds of U.S. oil producers failed to live within their means in the second quarter, even as oil rose above $70 a barrel. Collectively, 50 major U.S. oil companies reported in their second-quarter results that they have spent $2 billion more than they took in, according to… FactSet."

August 13 - Wall Street Journal (AnnaMaria Andriotis and Peter Rudegeair): "Financial-technology startups are stepping into a void increasingly left by credit-card-issuing banks: lending to customers with poor credit histories. LendUp Global Inc. and Fair Square Financial LLC, which focus more heavily on riskier borrowers, mailed out roughly 35 million credit-card offers during the first half of the year, according to market-research firm Competiscan, up from 7 million during the same period last year."

China Watch:

August 11 - Financial Times (Tom Mitchell): "When China's top leaders gathered earlier this month at a seaside resort near Beijing for their annual summer retreat, US President Donald Trump loomed large over their deliberations. The Trump administration had days earlier warned that they were considering taxing Chinese exports worth $200bn at 25%... In July the world's two largest economies had formally started trade hostilities, when they slapped punitive duties on $34bn of each other's exports. Chinese officials hoped their unwanted trade war with the US would pause there, at least for the summer. 'Everyone has been surprised by Trump,' said one Chinese economist who is close to Beijing policymakers. 'Most Chinese officials assumed that Trump was just trying to push the boundary but would eventually back off.' Mr Trump has instead pressed ahead with his efforts to turn up the heat on Chinese President Xi Jinping."

August 15 - The (Bradley Keoun): In the escalating trade war with President Donald Trump, China might be digging in its heels. According to a new report, China now appears willing to undertake a major currency devaluation - similar to the policy changes that roiled global markets in late 2015 and early 2016. The move by the Chinese government would help to offset the effect of the Trump administration's enacted or threatened tariffs on some $250 billion of imports from the country, writes the economic forecaster TS Lombard… China's main reason for avoiding a major devaluation so far was that it could spark large capital outflows from the country… according to TS Lombard. But the government has imposed capital controls to keep money from flowing out, providing officials with a source of confidence as they look for ways to push back against Trump and his trade war, according to the economists."

August 14 - Reuters (Jessica Jaganathan and Chen Aizhu): "Chinese oil importers are shying away from buying U.S. crude as they fear Beijing's decision to exclude the commodity from its tariff list in a trade dispute between the world's biggest economies may only be temporary. Not a single tanker has loaded crude oil from the United States bound for China since the start of August…"

August 13 - Reuters (Ben Blanchard): "China… condemned measures targeting it in a new U.S. defense act, saying it exaggerated antagonism and that Beijing would take a close look at aspects that beef up the role of a U.S. panel that reviews foreign investment proposals… 'The U.S. side should objectively and fairly treat Chinese investors, and avoid CFIUS becoming an obstacle to investment cooperation between Chinese and U.S. firms,' the ministry said…"

August 16 - Bloomberg: "The Chinese Communist Party's top newspaper issued a rare direct criticism of President Donald Trump's agenda, saying his 'America First' policies were hurting his own people and fomenting discontent in the country. 'After more than a year of observing American diplomatic practice, people have seen the United States strides under the slogan 'America First,' but the complaints of those Americans who have not felt the benefits of 'America First' are growing,' an opinion piece… in the People's Daily said. 'Bizarrely, U.S. trade policy makers seem to be deaf.'"

August 11 - South China Morning Post (He Huifeng): "China can easily find other countries to buy agricultural goods from instead of the U.S., its vice agriculture minister said, warning that American farmers could permanently lose their share of the Chinese market as a result of the trade war. 'Many countries have the willingness and they totally have the capacity to take over the market share the U.S. is enjoying in China. If other countries become reliable suppliers for China, it will be very difficult for the U.S. to regain the market,' Han Jun told official Xinhua news agency…"

August 10 - Reuters (Alexandra Harney): "China's state media continued a barrage of criticism of the United States on Saturday as their tit-for-tat trade war escalated, while seeking to reassure readers the Chinese economy remains in strong shape. Commentaries in the People's Daily, China's top newspaper, likened the United States to a bull in a China shop running roughshod over the rules of global trade and said that China was 'still one of the best-performing, most promising and most tenacious economies in the world.'"

August 13 - Reuters (Kevin Yao and Fang Cheng): "The Chinese government is expediting plans to invest billions of dollars in infrastructure projects as its economy shows signs of cooling further, with investment growth slowing to a record low and consumers turning more cautious. With its trade war with the United States threatening to pile more pressure on China's economy, Beijing… rolled out a $14 billion urban railway plan and pushed local governments to speed up issuance of special bonds for funding infrastructure projects. Official data showed fixed-asset investment expanded by a less-than-expected 5.5% in January-July, a result of Beijing's crackdown on lavish local government borrowing for projects to boost growth."

August 13 - Financial Times (Tom Mitchell and Xinning Liu): "The December 2009 debut of China's first long-distance high-speed rail service.. was a dramatic example of the Chinese Communist party's debt-fuelled response to the global financial crisis. Such investment projects fuelled demand for concrete, steel and other industrial commodities in the world's second-largest economy in the years after the crisis. But they have also saddled China Railway and other state-owned enterprises with huge amounts of debt. In the decade to 2016, Chinese corporate debt levels rose from 100% of gross domestic product to 190%, or Rmb141tn. As of March, China Railway's total debts stood at Rmb5tn. According to Li Hongchang, a transport expert at Beijing Jiaotong University, as much as 80% of the company's debt burden is related to HSR construction."

August 14 - Financial Times (Gabriel Wildau): "An investment arm of western China's Xinjiang region has failed to repay a Rmb500m ($73m) bond, marking the first public default by a Chinese government-linked holding company. The default by the Sixth Agriculture State-Owned Assets Management Co is the first by an investment holding company and a signal to investors that even state-owned groups that are agents of fiscal policy - considered closer to Beijing than commercially operated state-owned enterprises- are not guaranteed to be bailed out by the state… The central government keeps a tight lid on direct fiscal borrowing by local governments but has allowed them to skirt these limits by borrowing via investment vehicles such as Sixth Agricultural. Using traditional accounting, China's budget deficit was a modest 3.9% of gross domestic product last year, but when such off-budget spending was included, the 'augmented deficit' was 10.8% of GDP, according to the IMF."

August 14 - Wall Street Journal (Chao Deng): "A missed bond payment by a quasi-military organization in the Xinjiang Uighur Autonomous Region is fueling fresh concerns about China's ability to shoulder its massive debt. A unit of the Xinjiang Production & Construction Corps, an organization with military heritage that runs commercial enterprises for the government, acknowledged… that it failed to pay back interest and principal for $73 million of onshore bonds. The XPCC unit, known as the Sixth Division of State-Owned Asset Management, warned in another statement that it might also have trouble paying a separate 500 million yuan bond due Sunday. 'The company is negotiating several ways to repay the money,' that statement said… Several Chinese news media reports heralded the missed payment… as the first instance of a local-government financing vehicle to default."

August 12 - Bloomberg: "The People's Bank of China is tackling a problem it rarely had to worry about until recently -- persuading banks to lend the money they have. Thanks to the central bank turning on the liquidity taps, the cost for banks to borrow from one another is now lower than the cost to borrow from the PBOC, but a large chunk of those funds is sitting idle. That money isn't feeding into the wider economy, especially not to cash-strapped smaller firms, as lenders are unwilling to make loans or buy risky bonds. With China in a worsening trade war with the U.S. and also trying to control already large debts, ensuring funds get to needy companies is vital to sustain growth. Since the start of August, the central bank has begun softening rules to encourage lending, and a top-level meeting chaired by Vice Premier Liu He called for more efforts in 'unclogging' the transmission mechanism, underlining the government's sense of urgency."

EM Watch:

August 13 - Bloomberg (Justin Villamil and Pablo Gonzalez): "It isn't just sovereigns. Argentine and Turkish corporate bonds are also racing each other to the bottom. Of the 10 worst-returning dollar-denominated, emerging market corporate bonds this month, six are Turkish and four are Argentine. The worst are Turkiye Is Bankasi bonds maturing in 2028, down almost 19%... By comparison, Argentina's sovereign bonds have lost 7.5% and Turkish sovereigns are down 6.7%. 'Argentina and Turkey are trading like Siamese twins,' said Guido Chamorro, senior investment manager at Pictet Asset Management… 'For different reasons, but similar results.'"

Global Bubble Watch:

August 14 - Wall Street Journal (Ben Eisen): "Turkey's escalating crisis is spotlighting the giant stockpile of foreign-currency debt held by emerging markets, a build-up that threatens to throw those economies off course in the coming years. Governments, financial firms and other companies in emerging markets have $2.7 trillion in U.S. dollar-denominated debt that comes due between now and the end of 2025, according to the Institute of International Finance. These countries will need to pay off or refinance their loans and bonds as they come due. The trouble: A slide in emerging-market currencies against the U.S. dollar makes it tougher to pay back that greenback debt, particularly for countries where more revenue is generated in local currencies that are suddenly less valuable on a relative basis… Hungary, Argentina, Poland and Chile all have foreign-currency denominated debt that stands at more than half of gross domestic product, according to Deutsche Bank."

August 12 - Financial Times (Eric Platt and James Fontanella-Khan): "Acquisitions worth more than $540bn have been scuppered so far this year as blockbuster takeovers have come under renewed threat from government scrutiny. Countries are increasingly turning to foreign investment laws to block deals in sensitive industries, including the technology and utility sectors, while antitrust regulators have put up barriers to several multibillion-dollar transactions this year. Among the casualties was chipmaker Broadcom's $142bn hostile bid for rival Qualcomm, which was blocked by US president Donald Trump on national security grounds… In the last week alone, a handful of marquee transactions were killed…"

Central Bank Watch:

August 14 - Financial Times (Claire Jones): "Turkey's central bank this week raised rates in all but name, in effect using a method that seems to skirt President Recep Tayyip Erdogan's deep aversion to higher borrowing costs. The question is can it work? For two days now, the central bank has stopped lenders from drawing liquidity through its usual auctions of one week cash, forcing them instead to borrow overnight at a penalty. At the one-week window, banks can borrow at 17.75%, overnight it costs 19.25% - raising the price of financing by 1.5 percentage points."

August 14 - Bloomberg (Scott Squires): "Argentina increased its benchmark interest rate to 45% from 40%..., after the peso currency tumbled in response to a local corruption scandal and Turkey's currency crisis."

August 15 - South China Morning Post (Karen Yeung): "Hong Kong's de facto central bank said it has stepped in the foreign currency market to defend the Hong Kong dollar for the first time since May, bringing a key property loan interest rate closer to a tipping point… Depreciation pressure on the local currency was exacerbated in recent days as the Turkish lira crisis roiled equities and currency markets around the world, leading traders and investors to offload emerging market and Asian assets while buying the US dollar safe-haven assets."

Europe Watch:

August 13 - Reuters (Gavin Jones): "The economic spokesman of Italy's ruling League party warned… that unless the European Central Bank offers a guarantee to cap yield spreads in the euro zone, the euro will collapse. 'The situation can't be resolved, and it is going to explode,' Claudio Borghi told Reuters after Italian, Spanish and Portuguese government bond yields rose in the wake of the financial turmoil in Turkish markets."

August 16 - Bloomberg (Samuel Potter): "The dreaded sovereign-bank 'doom loop' in Europe may have weakened. Now comes the bad news. Thanks to political risks and regulatory changes, Italian lenders may be reluctant to snap up domestic government bonds during market stresses -- a potentially huge structural shift in demand in the euro area's second-most indebted nation. Goldman Sachs… casts doubt on whether such institutions can go on serving as dutiful marginal buyers, a bid that's historically stabilized a market seen as Europe's Achilles' heel. 'Whether domestic financial institutions will continue to act as a steady (and potentially increasing) source of demand for sovereign duration remains a fundamental question', Goldman's Matteo Crimella wrote…"

August 15 - Bloomberg (Irene García Pérez): "Bonds issued by Italy's biggest highways operator sank and the cost of insuring its debt surged after the government said the collapse of a motorway bridge operated by the firm's subsidiary wouldn't go unpunished… Infrastructure group Atlantia's saw some of its bonds fall to their lowest levels ever on Wednesday while swaps that protect against default soared to the highest in almost five years… The declines came after senior figures in Italy's government… called for Autostrade management to resign and threatened to withdraw licenses to operate the country's highways. Any loss of concessions would be a major setback for Atlantia, which has 12.8 billion euros ($14bn) of bonds Outstanding…"

Japan Watch:

August 16 - Reuters (Leika Kihara): "The Bank of Japan may allow long-term interest rates to creep up to around 0.4% under new guidance introduced last month, which lays the groundwork for 'stealth' rate hikes, the central bank's former executive Hideo Hayakawa said… The Bank of Japan may allow long-term interest rates to creep up to around 0.4% under new guidance introduced last month, which lays the groundwork for 'stealth' rate hikes, the central bank's former executive Hideo Hayakawa said…"

Fixed Income Bubble Watch:

August 15 - Financial Times (Colby Smith): "Convertible debt has emerged as a rare bright spot in the beleaguered fixed-income market this year, boosted by a rallying share market and rising interest rates, and in turn triggering the fastest pace of new sales in a decade, led by technology companies. US corporate bonds that convert to stock at a given price have generated a total return of 6% for investors this year... In contrast, investment-grade-rated corporate debt has lost 5.8% and high-yield bonds have dropped 2.4% in 2018… Fast-growing technology companies dominate convertible issuance as they are a cheaper way to raise money than issuing common stock or traditional junk bonds… Companies are issuing more convertible debt, with the volume of sales reaching $31.6bn so far this year, according to Dealogic - the fastest pace since the financial crisis."

August 16 - Wall Street Journal (Matt Wirz): "Investors bought record amounts of junk-rated corporate loans in recent years, betting they would deliver more stable returns than high-yield bonds, but the loans are no longer as safe as their owners may think. A rapid deterioration in the quality of 'leveraged loans' means loanholders would recover far less in a future economic downturn than they have historically, according to research by Moody's... Years of low rates have spurred record amounts of corporate borrowing, often in the $1.4 trillion market for below-investment-grade loans."

Leveraged Speculation Watch:

August 14 - Bloomberg (Stephen Gandel): "A number of hedge fund firms have a hot product. It's not their hedge funds. Och-Ziff Capital Management's investors withdrew $418 million from its hedge funds in the second quarter. Total inflow of assets under management, however, were $1.2 billion, its largest increase in assets in four years. The firm's hot product: Collateralized loan obligations - a derivative debt investment that invests in leveraged loans and is a cousin of the type of funds that blew up in the housing bubble. Like hedge funds, CLOs are supposed to be protected from losing money, particularly now. That's because they invest generally in floating rate loans, which, unlike normal bonds, won't lose money when interest rates rise… As a result, CLOs, which are also managed by private equity firms as well as other more specialized debt investors, have become one of the hottest products on Wall Street, with inflows continuing to pick up this year, leaving hedge funds far behind. Just more than $69 billion in CLOs… were issued in the U.S. in the first half of the year… An additional $9.7 billion flowed into the credit derivatives in July. And last month, Wells Fargo predicted that U.S. CLO issuance would hit $150 billion this year, a record."

Geopolitical Watch:

August 14 - Bloomberg (Tony Halpin): "Vladimir Putin isn't letting a good crisis go to waste. While Turkey's lira troubles have gripped global markets worried about contagion risks, Russia spies an opportunity in the political frictions between Ankara and the U.S. The idea of bringing Turkey tighter into Russia's embrace isn't as unrealistic as it was even a few years ago, with Turkish President Recep Tayyip Erdogan warning that spiraling conflict with the U.S. may prompt him to find new allies. As President Donald Trump's top national security aide warned Turkey's U.S. envoy they have nothing to discuss until a detained American pastor is released, Russia's foreign minister was holding talks in Ankara. Trump doubled tariffs on Turkish steel and aluminum while Erdogan and Putin discussed economic cooperation."

August 12 - Financial Times (Kathrin Hille): "Russia is trying to reduce its dependence on the dollar by cutting US securities holdings and settling more trade payments in other currencies, Moscow's chief economic policymaker said… Anton Siluanov, finance minister and deputy prime minister for the economy, said the US currency was 'becoming a risky instrument in international settlements'. 'We have decreased to a minimum level and will further cut our investment in the US economy, in US securities,' he added, in the most direct confirmation so far of a Russian government sell-off of US Treasuries."

August 12 - Reuters (Andrey Ostroukh): "Russia will further decrease its holdings of U.S. securities in response to new sanctions against Moscow but has no plans to shut down U.S. companies in Russia, Finance Minister Anton Siluanov said on state TV…"

August 12 - Financial Times (Henry Foy): "Russia has pledged to deepen co-operation with Iran and its Central Asian neighbours through a landmark deal on carving up the Caspian Sea, potentially paving the way for long-stalled energy projects and confirming Russia's military supremacy over the world's biggest lake. The Caspian's littoral states of Azerbaijan, Iran, Kazakhstan, Russia and Turkmenistan have quarrelled for more than two decades since the collapse of the Soviet Union over how to divide the strategically-important landlocked sea. On Sunday they signed a deal to manage a resource that holds large hydrocarbon resources and is a bridge between Central Asia, the Middle East and Europe. 'This is an exceptional summit with milestone significance for the fate of the Caspian Sea,' Russian president Vladimir Putin told his fellow leaders."

August 11 - Reuters: "Iranian Supreme Leader Ayatollah Ali Khamenei… called for 'swift and just' legal action from new courts after the head of the judiciary said the country faced an 'economic war'… The rial currency has lost about half of its value since April under the threat of revived U.S. sanctions, with heavy demand for dollars among ordinary Iranians trying to protect their savings. The cost of living has also soared, sparking sporadic demonstrations…"

August 16 - Reuters (Christopher Bing and Jack Stubbs): "Hackers operating from an elite Chinese university probed American companies and government departments for espionage opportunities following a U.S. trade delegation visit to China earlier this year, security researchers told Reuters. Cybersecurity firm Recorded Future said the group used computers at China's Tsinghua University to target U.S. energy and communications companies, as well as the Alaskan state government, in the weeks before and after Alaska's trade mission to China."

August 12 - Reuters (Jess Macy Yu): "Vowing that 'no one can obliterate Taiwan's existence,' President Tsai Ing-wen left on Sunday for the United States and two of Taipei's remaining diplomatic allies, amid pressure from China to try to stamp out references to the island internationally. China, which claims self-ruled and democratic Taiwan as its own, has stepped up a campaign against the island as it tries to assert Chinese sovereignty. Beijing has ordered foreign companies to label Taiwan as part of China on their websites and is excluding Taiwan from as many international forums as it can."

Friday Afternoon Links

[Reuters] Wall Street rises on news of trade progress

[Reuters] Turkey's lira weakens 3 percent, Trump says won't take pastor's detention 'sitting down'

[CNBC] S&P cuts Turkey credit rating deeper into junk territory

[Reuters] USTR doubles length of tariff hearing on $200 billion of China goods

[WSJ] U.S., China Plot Road Map to Resolve Trade Dispute by November

[WSJ] How Erdogan’s Push for Endless Growth Brought Turkey to the Brink

[FT] Turkey: the perils of Erdogan’s power grab