Friday, November 30, 2018

Weekly Commentary: Framework for Monitoring Financial Stability

Upon the public release of Jerome Powell's Wednesday speech came the Bloomberg headline: "Powell: No Preset Policy Path, Rates 'Just Below' Neutral Range." When the Fed Chairman began his presentation to the New York Economic Club just minutes later, the Dow had already surged 460 points. From Powell's prepared comments: "Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy‑‑that is, neither speeding up nor slowing down growth." When he read his speech, he used "range," as opposed to "broad range" of estimates.

Equities responded to the Chairman's seeming dovish transformation with jubilation (and quite a short squeeze). It certainly appeared a far cry from, "We may go past neutral, but we're a long way from neutral at this point, probably," back on the third of October. Powell's choice of language was viewed consistent with the 'much closer' to the neutral level, as headlines ascribed to vice chair Richard Clarida. What he actually said in Tuesday's speech: "Although the real federal funds rate today is just below the range of longer-run estimates presented in the September [Summary of Economic Projections], it is much closer to the vicinity of r* than it was when the FOMC started to remove accommodation in December 2015. How close is a matter of judgment, and there is a range of views on the FOMC."

The "neutral rate" framework is problematic. Back in early October, the Fed was almost three years into its "tightening" cycle (first rate increase in December 2015). Yet the Atlanta Fed GDP Forecast was signaling 4% growth; consumer confidence was near decade highs; manufacturing indices were near multi-year highs; corporate Credit conditions remained quite loose; and WTI crude had just surpassed $75 a barrel. The S&P500 traded only fractionally below record highs in the hours before Powell's evening of October 3rd "long way from neutral…" With unemployment at (a multi-decade low) 3.7% and CPI up 2.3% y-o-y, there was a reasonable case at the time that significantly higher interest rates would be necessary for policy to reach some so-called "neutral rate."

In our age of speculative financial markets dictating overall financial conditions, major backdrop shifts unfold in spans of days and weeks. The S&P500 dropped about 10% from early-October highs, while corporate Credit conditions tightened meaningfully. The Atlanta Fed GDP forecast has dropped to 2.6%. Consumer confidence has weakened, and housing has slowed. WTI is trading near $50, down about one-third from early-October. One could argue the so-called "neutral rate" has collapsed in recent weeks. Did it jump, along with hyper-volatile stocks, this week?

I'm not taking exception with the market's view of a more dovish Fed. Of course, they are going to turn more cautious in the face of a significant tightening of financial conditions. At the same time, I expect they'll be keen to jump back on the normalization track if markets rally and financial conditions loosen. When the Fed says "data dependent," I would read "market dependent." Market conditions will lead the data. The substance of both Powell and Clarida's presentations were more balanced than dovish.

Powell's Wednesday presentation was titled, "The Federal Reserve's Framework for Monitoring Financial Stability" (with a reference to Hyman Minsky!). The Fed's introductory Financial Stability Report had been published the previous day. "This report summarizes the Federal Reserve Board's framework for assessing the resilience of the U.S. financial system and presents the Board's current assessment. By publishing this report, the Board intends to promote public understanding and increase transparency and accountability for the Federal Reserve's views on this topic. Promoting financial stability is a key element in meeting the Federal Reserve's dual mandate for monetary policy regarding full employment and stable prices."

I appreciate the Fed's attention to financial stability, stating explicitly the central role it plays within its broader mandate. Powell's speech offered a definition of "financial stability:" "A stable financial system is one that continues to function effectively even in severely adverse conditions. A stable system meets the borrowing and investment needs of households and businesses despite economic turbulence. An unstable system, in contrast, may amplify turbulence and prolong economic hardship in the face of stress by failing to provide these essential services when they are needed most."

It's a commendable effort to craft such complex subject matter into a characterization accessible to the general public. However, I would broadly argue that unfettered contemporary finance - dominated by securities markets, derivatives and speculative trading - is an "unstable system." Conditions will gravitate to excessive looseness during booms, only to tightened dramatically come the inevitable eruption of "risk off." The monetary policy approach that evolved from serial boom and bust dynamics has been to backstop marketplace liquidity, while assuring participants that central banks will respond aggressively in the event of market or economic instability. By extending boom phases, this policy doctrine has created the illusion of stability for an innately unstable system.

Significant thought and effort went into crafting the Fed's 37-page document. It is full of important data and insight. And, from my perspective, it as well illuminates key holes in the Fed's approach to monitoring financial stability. There's certainly a "generals fighting the last war" predisposition embedded within the Fed's analytical framework.

The Fed's "framework focuses primarily on monitoring vulnerabilities and emphasizes four broad categories based on research:" "Elevated Valuation Pressure;" "Excessive Borrowing by Businesses and Households;" "Excessive Leverage in the Financial Sector;" and "Funding Risks."

The Fed's current "financial stability" framework would have been generally suitable for the previous "tech" and "mortgage finance" Bubbles. These periods were characterized by major expansions in corporate debt, household borrowings and U.S. financial sector leverage, with financial intermediaries issuing huge quantities of perceived safe short-term liabilities to finance increasingly risky long-term assets.

Today's "global government finance Bubble" has markedly different dynamics. Most consequential, rapid expansion and leverage have characterized government and central bank balance sheets - across the globe. The U.S. cycle, in particular, has experienced an extraordinary expansion of government borrowings. After ending 2007 at $6.051 TN, outstanding Treasury debt expanded 182%, to end June at $17.091 TN. Treasury debt growth is now projected to surpass $1.0 TN annually for the foreseeable future.

For this cycle, traditional analysis of household and corporate balance sheets will underrate systemic risk. The problematic balance sheet expansion has been in the government sector, debt growth that has worked to this point to bolster Household and Corporate finances. The federal borrowing and spending boom has inflated Household incomes, while inflating Corporate sector profits. Nonetheless, according to the report, "After growing faster than GDP through most of the current expansion, total business-sector debt relative to GDP stands at a historically high level."

Traditional analysis has also been distorted by the past decade's extraordinary monetary policy backdrop. Low rates and QE (growth in central bank liabilities) significantly reduced debt service costs (slowing Household debt growth), while dramatically inflating Household Net Worth (Net Worth up 80% since the crisis to a record $107 TN). For the Corporate sector, unprecedented loose finance reduced debt service and the overall growth in corporate borrowings, while providing inexpensive finance for stock buybacks, M&A and easy EPS growth. QE-related liquidity was funneled into corporate coffers already bloated from enormous federal deficit spending.

With ongoing extraordinarily low market yields and federal deficits, I would argue that traditional valuation metrics will also understate systemic vulnerabilities. The previous crisis illuminated how quickly a perceived sustainable profit boom can implode spectacularly. Fed analysis has stock market valuation on the high-end of the historical range. I would argue that today's inflated profits are unsustainable and extremely vulnerable to the downside of a phenomenal boom cycle.

Ignoring the federal government balance sheet is a critical shortcoming of the Federal Reserve's "financial stability" framework. Fed officials would surely prefer to stay clear of fiscal politics, but the harsh reality is that monetary policy promoted unprecedented debt issuance and a tolerance for fiscal irresponsibility that has run unabated throughout a protracted economic boom. Treasury yields remain extraordinarily low in the face of a rapid deterioration in the Treasury's Credit profile. The report also didn't address potential financial stability issues associated with the scantly-capitalized government-sponsored enterprises and their almost $9.0 TN of outstanding agency (debt and MBS) securities. A spike in yields - a scenario not to be dismissed considering the risk trajectory of Treasury and agency obligations - would have a momentous impact on U.S. and global financial stability.

The Fed's analysis of "leverage in the financial sector" is interesting, especially considering their own balance sheet provided much of the leverage for this cycle. "Leverage at financial firms is low relative to historical standards…" "A greater amount and a higher quality of capital improve the ability of banks to bear losses…" "Capital levels at broker-dealers have also increased substantially relative to pre-crisis levels, and major insurance companies have strengthened their financial positions since the crisis."

The Fed then turns nebulous. "…Some indicators suggest that hedge fund leverage is at post-crisis highs." "Several indicators suggest hedge fund leverage has been increasing over the past two years."

Our central bank (along with others) doesn't have a good handle on speculative leverage. They place hedge fund "total assets" at $7.27 TN, having expanded 13.5% over the most recent year (2017). "A comprehensive measure that incorporates margin loans, repurchase agreements (repos), and derivatives-but is only available with a significant time lag-suggests that average hedge fund leverage has risen by about one-third over the course of 2016 and 2017." "The increased use of leverage by hedge funds exposes their counterparties to risks and raises the possibility that adverse shocks would result in forced asset sales by hedge funds that could exacerbate price declines."

Without a well-defined and comprehensive analysis of global speculative finance, an insightful appraisal of financial stability will remain forever elusive. There are questions fundamental to gauging financial stability. Rest of World (from the Fed's Z.1) holdings of U.S. financial assets have more than doubled since the end of 2008 to $27.5 TN. U.S. Debt Securities holdings were up 55% to $11.252 TN. How much foreign-sourced leverage has been behind the enormous flows into U.S. securities and financial assets - speculative, financial sector and central bank leverage? How vulnerable is global dollar liquidity to a bout of "risk off" speculative deleveraging? How vulnerable are inflated U.S. asset markets to the end of global QE and the deleveraging of central bank balance sheets (i.e. EM central banks selling U.S. securities to support faltering local currencies)?

The Fed's financial stability report touches on global risks, including Brexit, Europe, dollar-denominated EM debt and China. But I would argue that the U.S. economy and markets are more susceptible to global forces today than ever before. It's difficult to envisage a scenario of a bursting Chinese Bubble and faltering EM and Europe that doesn't have profound consequences for U.S. financial stability. Global fragilities alone pose great systemic risk for the U.S.  Combined with our stock market and asset Bubbles, escalating fiscal risk, corporate Credit vulnerability and deep structural economic maladjustment, the prognosis for financial stability is dire.

The Fed's fourth broad category is "Funding Risk." "A measure of the total amount of liabilities that are most vulnerable to runs, including those issued by nonbanks, is relatively low." I don't disagree that "bank funding is less susceptible to runs now than in the period leading up to the financial crisis." "An aggregate measure of private short-term, whole- sale, and uninsured instruments that could be prone to runs-a measure that includes repos, commercial paper, money funds, uninsured bank deposits, and other forms of short-term debt-currently stands at $13 trillion, significantly lower than its peak at the start of the financial crisis."

But… "Total assets under management in corporate bond mutual funds and loan mutual funds have more than doubled in the past decade to over $2 trillion… The mismatch between the ability of investors in open-end bond or loan mutual funds to redeem shares daily and the longer time often required to sell corporate bonds or loans creates, in principle, conditions that can lead to runs, although widespread runs on mutual funds other than money market funds have not materialized during past episodes of stress."

Throughout this Bubble period, I have referred to the "Moneyness of Risk Assets." A "run" on perceived money-like Credit instruments sparked the collapse of the mortgage finance Bubble. Runs unfold when holders of perceived safe and liquid instruments suddenly recognize risk is much greater than previously appreciated. Past crises have typically originated in the money markets. But never have central bank and government policies so fostered the perception of safety and liquidity ("moneyness") for risk assets - equities and corporate Credit, in particular. I would argue the proliferation and massive growth of index fund products poses a major risk to financial stability. And when it comes to policy-induced distortions, already extraordinary risks to financial stability are only compounded by the proliferation and growth of derivative trading strategies, both retail and institutional.

One might ponder the notion of financial stability when the S&P500 sinks 3.8% one week and then rallies 4.8% the next. Expectations are now high that the Fed will be soon winding down "normalization," and that President Trump is hankering to strike a deal with the Chinese. Should be an interesting weekend. It was an interesting market rally - or lack of a rally in corporate Credit. Leveraged loans had a notably poor week. High yield debt remains suspect with crude at $50. Weak link GE was notably weak in the face of market strength. And while some Powell-induced dollar weakness stoked the short squeeze in EM, the Shanghai Composite struggled to end the week little changed. Moreover, seeing German bund yields decline another three bps (to 0.31%) hardly conjures bullish imagery. Financial Instability.

For the Week:

The S&P500 surged 4.8% (up 3.2% y-t-d), and the Dow rose 5.2% (up 3.3%). The Utilities rallied 2.9% (up 4.3%). The Banks jumped 3.6% (down 4.8%), and the Broker/Dealers gained 2.2% (down 1.0%). The Transports recovered 4.4% (up 2.0%). The S&P 400 Midcaps rallied 2.9% (down 1.2%), and the small cap Russell 2000 jumped 3.0% (down 0.1%). The Nasdaq100 surged 6.5% (up 8.6%). The Semiconductors rallied 5.1% (down 1.1%). The Biotechs jumped 4.7% (up 12.6%). While bullion was little changed, the HUI gold index fell 1.9% (down 24.6%).

Three-month Treasury bill rates ended the week at 2.30%. Two-year government yields slipped two bps to 2.79% (up 90bps y-t-d). Five-year T-note yields declined five bps to 2.81% (up 61bps). Ten-year Treasury yields fell five bps to 2.99% (up 58bps). Long bond yields dipped a basis point to 3.30% (up 55bps). Benchmark Fannie Mae MBS yields fell eight bps to 3.86% (up 87bps).

Greek 10-year yields sank 29 bps to 4.25% (up 18bps y-t-d). Ten-year Portuguese yields fell 12 bps to 1.83% (down 12bps). Italian 10-year yields dropped 19 bps to 3.21% (up 120bps). Spain's 10-year yields fell 13 bps to 1.50% (down 6bps). German bund yields declining three bps to 0.31% (down 11bps). French yields fell four bps to 0.68% (down 10bps). The French to German 10-year bond spread narrowed one to 37 bps. U.K. 10-year gilt yields declined two bps to 1.36% (up 17bps). U.K.'s FTSE equities index increased 0.4% (down 9.2%).

Japan's Nikkei 225 equities index rallied 3.3% (down 1.8% y-t-d). Japanese 10-year "JGB" yields slipped one basis point to 0.09% (up 4bps). France's CAC40 gained 1.2% (down 5.8%). The German DAX equities index increased 0.6% (down 12.9%). Spain's IBEX 35 equities index rose 1.8% (down 9.6%). Italy's FTSE MIB index recovered 2.5% (down 12.2%). EM equities were higher. Brazil's Bovespa index surged 3.8% (up 17.1%), and Mexico's Bolsa recovered 1.4% (down 15.4%). South Korea's Kospi index jumped 1.9% (down 15.0%). India's Sensex equities index surged 3.5% (up 6.3%). China's Shanghai Exchange increased 0.3% (down 21.7%). Turkey's Borsa Istanbul National 100 index rose 2.6% (down 17.3%). Russia's MICEX equities index gained 2.1% (up 13.4%).

Investment-grade bond funds saw outflows of $1.688 billion, and junk bond funds posted outflows of $1.20 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates were unchanged at 4.81% (up 91bps y-o-y). Fifteen-year rates added a basis point to 4.25% (up 95bps). Five-year hybrid ARM rates gained three bps to 4.12% (up 80bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down one basis point to 4.68% (up 55bps).

Federal Reserve Credit last week declined $6.2bn to $4.064 TN. Over the past year, Fed Credit contracted $342bn, or 7.8%. Fed Credit inflated $1.253 TN, or 45%, over the past 316 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $3.3bn last week to a four-month low $3.402 TN. "Custody holdings" were up $14.5bn y-o-y, or 0.4%.

M2 (narrow) "money" supply jumped $35.7bn last week to a record $14.315 TN. "Narrow money" gained $541bn, or 3.9%, over the past year. For the week, Currency increased $1.2bn. Total Checkable Deposits declined $4.7bn, while Savings Deposits jumped $39.5bn. Small Time Deposits gained $4.1bn. Retail Money Funds dipped $4.3bn.

Total money market fund assets gained $6.6bn to $2.944 TN - the high back to May 2010. Money Funds gained $145bn y-o-y, or 5.2%.

Total Commercial Paper added $2.1bn to $1.091 TN. CP rose $48bn y-o-y, or 4.6%.

Currency Watch:

The U.S. dollar index added 0.3% to 97.197 (up 5.5% y-t-d). For the week on the upside, the New Zealand dollar increased 1.3%, the Australian dollar 1.0%, the South Korean won 0.9%, the Mexican peso 0.2% and the Singapore dollar 0.2%. For the week on the downside, the Brazilian real declined 1.0%, the Japanese yen 0.5%, the British pound 0.5%, the Canadian dollar 0.4%, the Norwegian krone 0.3%, the euro 0.2%, the Swedish krona 0.1%, the South African rand 0.1% and the Swiss franc 0.1%. The Chinese renminbi declined 0.17% versus the dollar this week (down 6.52% y-t-d).

Commodities Watch:

November 29 - Bloomberg (Yash Upadhyaya): "Industrial metal prices have tumbled to their lowest in 17 months as falling demand in China and trade war concerns have made commodities cheaper. The Bloomberg Industrial Metals Sub-index tracking aluminium, copper, nickel and zinc has plunged close to 19% in 2018 to its worst level since July 2017. That tracks a fall in the base metals after they hit 52-week highs in the beginning of the year."

The Goldman Sachs Commodities Index recovered 1.1% (down 7.8% y-t-d). Spot Gold was about unchanged at $1,223 (down 6.2%). Silver declined 0.8% to $14.25 (down 16.9%). Crude recovered 32 cents to $50.72 (down 16%). Gasoline increased 0.6% (down 22%), and Natural Gas surged 6.5% (up 57%). Copper rallied 2.0% (down 15%). Wheat jumped 1.7% (up 21%). Corn rose 2.0% (up 8%).

Market Dislocation Watch:

November 28 - Wall Street Journal (Telis Demos and Gunjan Banerji): "As markets get wilder, some Wall Street traders are getting richer. The return of volatility might be making many rank-and-file investors queasy, but it is proving to be a boon to some trading desks at the biggest banks. Many desks focused on derivatives tied to stocks are set to generate billions of dollars more in revenue this year… It is a contrast to recent years, when these desks slumped amid calm and steady markets. As a result, the top traders on banks' equity derivatives desks are expected to take home some of Wall Street's biggest paychecks. Pay for the highest ranks could top $3 million this year, a few hundred thousand dollars more than a year ago… For the dozen largest investment banks globally, equity derivatives revenue in the Americas soared 84% in the first half of 2018 from the same period a year ago, to $3.8 billion…"

November 29 - Bloomberg (Shelly Hagan): "Leon Cooperman blasted algorithmic trading for exaggerating price moves and said it's 'scaring the hell out of the public.' 'Everyone I know of that has accumulated wealth, whether it's Warren Buffett or Mario Gabelli, they buy weakness and they sell strength,' Cooperman said… 'These algos, when it's up they want to buy it, when it's down they want to sell it. It increases volatility.'"

Trump Administration Watch:

November 29 - Wall Street Journal (Bob Davis and Lingling Wei): "The U.S. and China, looking to defuse tensions and boost markets, are exploring a trade deal in which Washington would hold off on further tariffs through the spring in exchange for new talks looking at big changes in Chinese economic policy, said officials on both sides of the Pacific. The talks have been conducted, via telephone, for several weeks, and are coming to a head shortly before President Trump and Chinese President Xi Jinping meet for dinner on Saturday at the end of the Group of 20 leaders summit in Buenos Aires. But it is far from clear whether the discussions will produce any agreement. New talks would focus on what both sides are calling trade 'architecture,' a broad term that could encompass many issues the U.S. has wanted Beijing to address, including intellectual property protection, coerced technology transfer, subsidies to state-owned enterprises, and even non-trade issues such as cyberespionage."

November 28 - Financial Times (Tom Mitchell and Sherry Fei Ju): "Three months ago, Chinese officials saw the meeting between Xi Jinping and Donald Trump at the G20 as their best hope for a settlement that would end Beijing's trade war with Washington. Then they hoped for a truce. Now they will consider themselves lucky if this week's encounter passes without any embarrassment for Mr Xi, as they brace themselves for a new round of US tariffs early next year. As the leaders of the world's two largest economies prepare to meet for the first time in more than a year… the gulf between the two sides remains large. According to people briefed on the talks, Beijing's position has not fundamentally changed since May, when Mr Trump contradicted an assertion by China's lead negotiator that the two sides had agreed not to proceed with tariffs."

November 27 - Financial Times (James Politi and James Kynge): "The White House's top economic adviser cast doubt over the prospect of a ceasefire in the escalating trade war with China, saying negotiations in the run-up to a high-stakes summit this week had made no progress and a new round of tariffs was likely. Larry Kudlow, director of the US National Economic Council, said it was up to Chinese President Xi Jinping to 'step up and come up with new ideas' to break the deadlock at Friday's G20 summit in Argentina… 'We can't find much change in their approach,' Mr Kudlow told reporters. 'President Xi may have a lot more to say in the bilateral [with Mr Trump], I hope he does by the way, I think we all hope he does . . . but at the moment, we don't see it.'"

November 27 - Reuters (Roberta Rampton): "U.S. President Donald Trump is open to reaching a deal on U.S.-China trade irritants over dinner on Saturday with Chinese leader Xi Jinping but is ready to hike tariffs on Chinese imports if there is no breakthrough, White House economic adviser Larry Kudlow said… Kudlow said Trump had told advisers that 'in his view, there is a good possibility that a deal can be made, and that he is open to that.' But he said 'certain conditions have to be met,' listing intellectual property theft, forced technology transfer, ownership of American companies in China, high tariffs and non-tariff barriers on commodities, and commercial hacking as examples of issues that 'must be solved.'"

November 28 - Financial Times (Richard Blackden): "Jay Powell is to address Wall Street bankers on Wednesday amid an intensifying White House campaign to undermine the Federal Reserve chairman's rate increase plans, an unorthodox offensive led by a sitting president who believes tightening monetary policy is choking off an economic boom. Donald Trump on Tuesday escalated his criticisms by telling the Washington Post he believed the Fed, which next month is expected to lift rates for a fourth time this year, 'is way off base with what they're doing'. Mr Trump added: 'So far, I'm not even a little bit happy with my selection of Jay.'"

November 28 - CNBC (Jeff Cox): "With the Federal Reserve under fire for raising interest rates, Treasury Secretary Steven Mnuchin has been looking to see if there are other ways to normalize monetary policy... Mnuchin has been asking some of the biggest players in the bond market if they would rather see the Fed step up the rundown of its balance sheet than hike short-term rates… The balance sheet consists mostly of bonds the central bank purchased in its efforts to stimulate the economy during and after the financial crisis. It currently totals $4.15 trillion, down from $4.51 trillion where it stood before it started allowing a capped level of proceeds from the bond holdings to run off each month."

November 27 - Bloomberg (Jennifer Jacobs and Saleha Mohsin): "Donald Trump plans to keep Treasury Secretary Steven Mnuchin and Commerce Secretary Wilbur Ross amid speculation of a broader shakeup in the president's Cabinet, according to three people familiar with his thinking. Trump has signaled that he plans to make changes at the most senior levels of his administration following midterm elections earlier this month in which his party lost control of the House of Representatives. But Mnuchin and Ross, who each have been the subject of reports that Trump is dissatisfied with them, will remain in their posts, the people said."

November 27 - CNBC (Jacob Pramuk): "President Donald Trump will consider cutting all subsidies to General Motors after the company announced plans to slash production at several American plants, he said… 'We are now looking at cutting all @GM subsidies, including ... for electric cars,' the president wrote in a pair of tweets. The automaker's shares fell following the tweets and were down more than 3% on Tuesday afternoon, on track for their worst day in a month."

Federal Reserve Watch:

November 28 - Reuters (Jonathan Spicer and Ann Saphir): "U.S. Federal Reserve Chair Jerome Powell injected investors with a strong dose of optimism on Wednesday, saying that the central bank's policy rate is now 'just below' estimates of a level that neither brakes nor boosts a healthy U.S. economy, comments that many investors read as signaling the Fed's three-year tightening cycle is drawing to a close. Stocks and interest-rate futures jumped, even while economists wrestled to interpret whether Powell intended to send a message or was simply misunderstood. On their face, the comments were a reversal from early last month, when Powell said the key interest rate was probably still a 'long way' from a so-called neutral level and that the Fed might even tighten policy beyond that level."

November 27 - CNBC (Jeff Cox): "Federal Reserve Vice Chairman Richard Clarida expressed a cautious view Tuesday about how the central bank should proceed in raising interest rates. The Federal Open Market Committee's newest member… emphasized the importance of policymakers being 'data dependent' in how they approach future moves. 'A monetary policy strategy must find a way to combine incoming data and a model of the economy with a healthy dose of judgment - and humility! - to formulate, and then communicate, a path for the policy rate most consistent with our policy objectives,' he said… Assessing the current state of interest rates, Clarida said the FOMC, which sets Fed monetary policy, is 'much closer' to a so-called neutral level…"

November 27 - Reuters (Jonathan Spicer): "The Federal Reserve should be even more attentive to new economic data as its gradual interest-rate hikes edge it ever closer to a neutral stance, the U.S. central bank's second-in-command said… In a carefully worded speech that comes on the heels of another volatile market drop, Fed Vice Chair Richard Clarida stressed how difficult it is for the U.S. central bank to determine both the neutral interest rate and the maximum level of employment."

November 27 - Wall Street Journal (Nick Timiraos): "Federal Reserve officials are moving into a more unpredictable phase of policy-making after two years of removing economic stimulus in regular, quarterly intervals. They will be deciding whether and when to raise interest rates more on the basis of the latest signs of economic vigor… and less on forecasts of how the economy is expected to perform in the months and years to come… This could mean increased uncertainty for markets about the likely path of interest rates more than a few months or even weeks ahead. Most Fed officials in September penciled in one more rate increase this year, which is expected when they meet Dec. 18-19. But their outlook for next year is wide open…"

November 28 - CNBC (Jeff Cox): "The Federal Reserve issued a cautionary note… about risks to financial stability, saying trade tensions, geopolitical uncertainty and a buildup in corporate debt among firms with weak balance sheets pose strong threats. In a lengthy first-time report on the banking system and corporate and business debt, the Fed warned of 'generally elevated' asset prices that 'appear high relative to their historical ranges.' In addition, the central bank said ongoing trade tensions… coupled with an uncertain geopolitical environment could combine with the high asset prices to provide a notable shock. 'An escalation in trade tensions, geopolitical uncertainty, or other adverse shocks could lead to a decline in investor appetite for risks in general,' the report said. 'The resulting drop in asset prices might be particularly large, given that valuations appear elevated relative to historical levels.'"

November 27 - Reuters (Jonathan Spicer and Howard Schneider): "Bankers, executives and investors are warning Federal Reserve officials behind closed doors that record leveraged lending to companies from lightly-regulated corners of Wall Street could make any economic downturn harder to manage. With the second-longest U.S. expansion in its advanced stages, the worry is that a key part of the credit market could be particularly vulnerable to a slowdown, as highly-indebted companies face a greater risk of default. Some of those involved in the debate who spoke to Reuters expressed frustration that the Fed is not taking the risk seriously enough. 'There is a sense at the Fed that it needs to watch this area, leveraged credit, but it's still in the infancy and it's unclear how far will it go,' said an economist familiar with the Fed's efforts."

U.S. Bubble Watch:

November 28 - Bloomberg (Katia Dmitrieva): "The U.S. merchandise-trade deficit widened to a second straight monthly record in October as exports declined, showing how President Donald Trump's tariff war is weighing on the economy. The goods-trade gap grew to $77.2 billion from $76.3 billion in September…"

November 27 - Financial Times (Shobhana Chandra): "Home-price gains in 20 U.S. cities grew in September at the slowest pace in almost two years, adding to signs that buyer interest is waning amid higher mortgage rates and elevated property values. The 20-city index of property values increased 5.1% from a year earlier, the least since November 2016, after rising 5.5% in the prior month, according to S&P CoreLogic Case-Shiller… The median estimate… called for a gain of 5.2%. Nationally, home prices were up 5.5% from September 2017."

November 29 - Reuters (Lucia Mutikani): "U.S. consumer spending increased by the most in seven months in October, but underlying price pressures slowed, with an inflation measure tracked by the Federal Reserve posting its smallest annual increase since February… Consumer spending, which accounts for more than two-thirds of U.S. economic activity, jumped 0.6% last month… The personal consumption expenditures (PCE) price index excluding the volatile food and energy components edged up 0.1% after increasing 0.2% in September. That lowered the year-on-year increase in the so-called core PCE price index to 1.8%..."

November 25 - Wall Street Journal (Ben Eisen and Christina Rexrode): "Rising mortgage rates are crushing much of the refinancing market. But Americans are still using refis to pull cash out of their homes. More than 80% of borrowers who refinanced in the third quarter chose the 'cash out' option, withdrawing $14.6 billion in equity out of their homes, according to… Freddie Mac . That is the highest share of cash-out refis since 2007. The trend attests to the current state of the U.S. economy, which is more than nine years into an expansion that has lifted home values sharply but raised worker pay at a much slower pace. Now, many are finding their homes to be a tappable source of wealth. 'Home equity is the big pot of gold,' said Sam Khater, the chief economist at Freddie Mac."

November 28 - Wall Street Journal (Sarah Chaney and Theo Francis): "Overseas profit growth at American firms is slowing, a new sign of how the faltering global economy is reverberating back to the U.S. U.S. profits earned overseas rose 7% in the third quarter from a year earlier, a slowdown from profit growth of 13.7% in the second quarter and 15.6% in the first… Growth in China slowed, and output in Germany and Japan contracted… The third-quarter picture looks different for U.S. domestic profits, which climbed 10.8% in the third quarter from a year earlier, the strongest pace since 2012."

November 26 - Bloomberg (Sonali Basak and Hannah Levitt): "Billionaires and millionaires in the U.S. are arranging loans to have funds readily available so they won't have to sell off investments in the event of an economic downturn, according to Jim Steiner, head of Wells Fargo & Co.'s ultra-high-net-worth business. 'They always want to have lines in place for if markets do turn down and they get capital calls on private investments,' Steiner, who leads Wells Fargo's Abbot Downing unit, said… 'They want to be able to make those capital calls through use of the line as opposed to basically selling equities in the public markets.' … Global personal wealth ballooned to a record $201.9 trillion last year, according to Boston Consulting Group, with the world's 500 richest people controlling an unprecedented $5.3 trillion, a boon for the private-banking industry."

November 26 - Wall Street Journal (Christopher M. Matthews): "Plunging oil prices once again threaten to force American shale drillers to pull back on production, just as they were preparing to unleash a flood of crude. U.S. benchmark prices… recently at $51.91… have tumbled more than 30% since October and closed Friday at their lowest level in more than a year. Falling prices could force shale drillers-who fracture underground rock formations to release the oil and gas trapped inside-to moderate their growth…"

November 26 - Financial Times (Ed Crooks): "Throughout the US shale oil and gas boom of the past 15 years, one of investors' greatest concerns has been that the exploration and production companies needed continual infusions of cash to finance their investment programmes. After the rise in crude prices this year, it looked as though those fears could be put to rest: in the third quarter of this year the US E&P sector was able to cover its capital spending from its operating cash flows, if only barely. The plunge in oil prices over the past two months is bringing those concerns gushing to the surface again… Over the past decade, US E&P companies have borrowed about $300bn from bond sales and $780bn in bank loans, while raising about $140bn from share sales, according to Dealogic."

November 26 - Wall Street Journal (Laura Kusisto): "A half-hour drive straight north from downtown Dallas sits one of the fastest-growing counties in the country. Cotton fields have been replaced with Toyota's new North American headquarters, a Dallas Cowboys training facility and a sand-colored shopping strip with a Tesla dealership and a three-story food hall. Yet even with the booming growth, Dallas's once vibrant housing market is sputtering. In the high-end subdivisions in the suburb of Frisco, builders are cutting prices on new homes by up to $150,000. On one street alone, $4 million of new homes sat empty on a visit earlier this month."

China Watch:

November 27 - Reuters (David Brunnstrom, David Lawder and Matt Spetalnick): "China is going to this week's G-20 summit hoping for a deal to ease a damaging trade war with the United States, Beijing's ambassador to Washington said…, while warning of dire consequences if U.S. hardliners try to separate the world's two largest economies. …Cui Tiankai said China and the United States had a shared responsibility to cooperate in the interests of the global economy. Asked whether he thought hardliners in the White House were seeking to separate the closely linked U.S. and Chinese economies, Cui said he did not think it was possible or helpful to do so, adding: 'I don't know if people really realize the possible consequences - the impact, the negative impact - if there is such a decoupling.' He drew parallels to the tariff wars of the 1930s among industrial countries, which contributed to a collapse of global trade and heightened tensions in the years before World War Two. 'The lessons of history are still there. In the last century, we had two world wars, and in between them, the Great Depression. I don't think anybody should really try to have a repetition of history. These things should never happen again, so people have to act in a responsible way.'"

November 27 - Reuters (Noah Barkin): "China's Vice Premier Liu He told an economic conference in Hamburg… that protectionist and unilateral approaches on trade would only deepen economic uncertainty, saying no country could emerge as a winner in a trade war. 'We believe that protectionist and unilateral approaches do not offer solutions to problems on trade. On the contrary, they will only bring about more economic uncertainty to the world… The history of economic development has proven time and again that raising tariffs will only lead to economic recession and no one ever emerged as a winner from a trade war. Our approach therefore is to seek a negotiated solution to the problems we have on the basis of equality and mutual respect,' he added."

November 28 - Bloomberg: "China's banking industry assets recorded their slowest year-on-year growth ever last month, reaching 258 trillion yuan ($37 trillion) in October. The 6.6% pace is the worst since the country's banking regulator started publishing data in 2011."

November 29 - Bloomberg: "China's financing units for local governments, already grappling with bloated debts, now face an even bigger predicament -- a build-up of credit guarantees that leave them vulnerable to surging defaults. Around 2,000 of these platforms, known as local government financing vehicles, have offered a total of 7 trillion yuan ($1 trillion) of guarantees to loans, bonds and shadow financing for domestic companies, said Lv Pin, an analyst at CITIC Securities Co. That surpasses the tally of LGFVs' own outstanding local bonds… These guarantees help private companies get financing as banks prefer to lend to state-owned ones. Such external obligations form part of the hidden debt in China's local governments, which S&P Global Ratings last month called 'an iceberg with titanic credit risks.'"

November 25 - Bloomberg: "China's central bank said oversight of the nation's financial holding companies needs to be stepped up due to an increasing number of risks to their operations, deputy governor Zhu Hexin was reported as saying. Potential measures include implementing stricter controls on market access and closer supervision of sources of funding and capital-adequacy ratios, while a 'firewall' system should be set up to better regulate the industry, Zhu was cited… as saying in a speech…"

November 29 - Bloomberg: "China is preparing to end its $176 billion experiment with peer-to-peer lending. Alarmed by a surge in defaults, fraud and investor anger, Chinese authorities are planning to wind down small- and medium-sized P2P lending platforms nationwide… The planned shakeout, which broadens a city-level purge in the P2P hub of Hangzhou, is the clearest sign yet that Chinese leaders want to dramatically shrink a market that spawned the nation's biggest Ponzi scheme, protests in major cities, and life-altering losses for thousands of savers. It suggests that Xi Jinping's government isn't done cracking down on China's $9 trillion shadow banking industry, despite concern that tougher rules have choked the flow of credit to the world's second-largest economy. 'Regulators are making it even more difficult for P2P platforms to survive, especially the smaller ones, so that the public won't suffer more losses,' said Yu Baicheng, Shanghai-based head of research at 01Caijing…"

November 29 - Bloomberg: "It's official now that Jack Ma, chairman of the Chinese e-commerce giant Alibaba Group Holdings Ltd., is a member of the Communist Party. He's also the richest of a growing gaggle of high-net-worth individuals in China, who between them control $6.5 trillion… The Bloomberg Billionaires Index tracks the wealth of the 500 richest individuals globally, 38 of whom are Chinese. More broadly, global wealth research firm Wealth-X found that of the world's 2,754 billionaires, 680 (25%) were in the U.S. and 338 (12%) were in China. UBS Group AG estimates a new billionaire is minted in China every two days."

November 25 - Reuters (Yilei Sun and Adam Jourdan): "When Cao Jun, 40, an engineer from the central Chinese city of Pingdingshan, takes his old, grey MG 3 car to be serviced he always steals a few moments to pop into the Nissan and Honda dealerships next door. But the Civic and Sylphy sedans in the showrooms are just eye candy. Cao wants to upgrade his car, but he's facing a steep loan repayment on his flat, medical bills for his wife and a tough local economy in his once-prosperous coal town. Cao is far from alone. China's car market, the world's largest, is on the brink of its first sales contraction in almost three decades…, a signal of wider economic strains that are rattling the country's leaders in Beijing."

November 27 - Bloomberg (Shawna Kwan): "Hong Kong's housing market is suffering its worst declines since 2016 -- by multiple measures. New-home sales this month are on track to be the lowest by volume since January or February of that year… In addition, used-home prices have this month recorded the biggest single-week decline since March 2016, falling 1.3% week-on-week… Anecdotal evidence… is also fueling speculation that the world's least affordable housing market is heading for a correction. So far, secondary home prices have dipped 5% from an August high. Goldman Sachs… is forecasting a 15 to 20% decline over two years…"

November 26 - Bloomberg (Fox Hu): "Hong Kong's hottest initial public offerings have produced the worst returns for investors this year… Ping An Healthcare and Technology Co., in which retail investors placed orders for 654 times the shares initially available, has tumbled 37% since it started trading in May. Biotechnology firm Ascletis Pharma Inc., whose retail book was covered 10 times, is down 44% from its IPO price, and Meituan Dianping, a food-delivery giant that attracted billionaire investors including Hong Kong's richest man Li Ka-shing, has dropped 24%."

EM Watch:

November 28 - Reuters (Michael O'Boyle): "Mexico's central bank… warned the economy could suffer long-lasting damage if new policies spark a 'loss of confidence' in the country, and the bank's chief pleaded for 'clarity' from the incoming leftist government."

November 27 - Financial Times (Jonathan Wheatley): "Is history repeating itself on Mexican markets? Bonds, stocks and the currency all fell sharply before the July 1 presidential election and the widely-predicted victory of Andrés Manuel López Obrador, the leftist nationalist who was the markets' least favoured candidate. Five months later, they are falling again in the approach to the victorious Mr López Obrador's inauguration on December 1. Back in July, markets staged a big comeback. The benchmark IPC stock index, for example, rose more than 10% from its low in late May to a peak at the end of August. Yet losses in recent weeks have taken the index down more than a fifth from that peak and few investors appear confident of another rally this time. They have been rattled, above all, by the incoming president's use of controversial popular polls to decide policy issues, such as last month's vote to halt construction of a partially-built $13bn airport near Mexico City."

Central Bank Watch:

November 29 - Financial Times (Claire Jones): "A global resurgence in protectionism, political turbulence within the single currency area and turmoil in some emerging markets have made the eurozone's financial system more vulnerable to shocks, the European Central Bank has acknowledged. The ECB said in the latest edition of its twice-yearly Financial Stability Review the risks to the region's financial system had risen since May… The biggest threat was that investors dump risky assets, which could lead to a 'disorderly' drop in the value of such stocks and bonds. The second was that concerns over the debt sustainability of sovereigns such as Italy could grow."

Italy Watch:

November 25 - Bloomberg (Kevin Costelloe and Sonia Sirletti): "Italy's Deputy Prime Minister Matteo Salvini, enjoying a steady climb in public opinion polls, said he would bring down the government if the coalition's budget deficit target was changed. The remarks by Salvini were quoted… hours before the country's prime minister, Giuseppe Conte, was scheduled to make an attempt in Brussels to convince the European Commission that the country's budget is sound. That includes the 2.4% deficit goal for 2019 that has become a lightning rod for Commission objections. 'The 2.4% deficit target can't be touched, otherwise I will bring down the government,' Repubblica quoted Salvini as saying… The report said Salvini was willing to make only minor concessions in next year's spending plan."

Europe Watch:

November 26 - Financial Times (Laurence Fletcher and Robert Smith): "Little over a month ago, Spanish supermarket Dia's bonds carried solid investment-grade credit ratings. Today this debt is ranked in the lower depths of the junk bond market, after a shock profit warning fuelled concerns over the retailer's future. Bond investors, who last year charged Dia less than 1% in annual interest to borrow €300m for six years, will regret that decision. But one of these burnt lenders is very different to all the others: the European Central Bank. The mess at Dia… comes just as the ECB is starting to put the brakes on a bond-buying programme designed to kick-start Europe's sluggish economy. Under its auspices, the ECB has hoovered up €175bn of corporate debt since June 2016. The ECB is widely expected to stop making additional purchases under its so-called "corporate sector purchase programme", or CSPP for short, next year…"

November 29 - Reuters (Joseph Nasr and Rene Wagner): "German annual inflation accelerated at a slower pace in November but stayed well above the European Central Bank's target… German consumer prices… rose by 2.2% year-on-year after an increase of 2.4% in the previous month…"

November 27 - Financial Times (Guy Chazan): "In a cavernous hall in the east German town of Halle, three politicians make their pitch to a crowd of 800 Christian Democrats. One is a diminutive mother-of-three with outsize glasses, another a 38-year-old gay man and the third a millionaire lawyer. Welcome to the battle for the soul of the CDU. 'Everyone who comes to this country must commit themselves to our Christian, western culture,' says the lawyer, Friedrich Merz, to thunderous applause. 'We have values, and they hold true.' Halle is the fourth stop in an eight-city tour by the three candidates to succeed Angela Merkel as leader of the Christian Democratic Union, a party that has ruled Germany for 49 of the past 69 years. Like many CDU members, Jens Gröger, from the nearby town of Wettin, says he is wavering between Mr Merz and Annegret Kramp-Karrenbauer, universally known as AKK, who is leading in the latest opinion poll. Mr Merz 'has the best leadership qualities', he says. 'But AKK is more popular with the general public, and that's ultimately what matters.'"

November 27 - Reuters (Michelle Martin, Ludwig Burger, Philip Blenkinsop, Helen Reid and Jeff Mason): "European auto stocks extended losses on Tuesday after a German magazine reported that U.S. President Donald Trump could impose tariffs on imported cars from next week. Wirtschaftswoche cited EU sources as saying a U.S. Department of Commerce investigation report was on Trump's desk, adding: 'Trump will possibly decide on tariffs as early as next week after the G20 meeting in Buenos Aires.'"

Global Bubble Watch:

November 28 - Reuters (Rodrigo Campos): "Debt among non-financial corporations across the globe rose to a record high of $75 trillion in the second quarter, driven mostly by China and the United States, the Institute of International Finance said… 'China's corporate sector has some of the highest debt levels in the world,' the report… stated, though it said businesses based in the world's second-largest economy also have significant 'cash holdings (that) provide an important cushion against risk.' Canada, India and Mexico rank first in nonfinancial corporate debt relative to cash holdings, the report said, while a 'significant proportion' of Brazilian, Canadian, American and Chinese corporations still struggle to pay interests on their debt."

November 25 - Bloomberg (Andy Mukherjee): "Liquidity is getting tight in Asia. Leave aside Japan, where the printing presses are still pumping out yen. In rest of the region, central banks' supply of currency plus bank reserves has shrunk 7% in real terms since the dollar began surging in April. This is the steepest contraction in base money since the 11% fall between January and October of 2008. Bank of America Merrill Lynch equity strategists recently looked at a similar measure of money supply for the world and asked if the squeeze was a harbinger of something ugly. The inflation-adjusted global monetary base has shrunk just five times since 1980, the analysts noted: in 1982, 1990, 1998, 2001 and 2006. All five episodes either preceded or coincided with global slowdowns."

November 27 - Bloomberg (Venus Feng): "Japan's rich have the largest accumulation of wealth in the Asia-Pacific region, at $7.7 trillion, but the legions of Chinese millionaires are rushing to catch up. The pool of wealth held by China's high-net-worth individuals grew by more than 144% between 2010 and 2017, to reach $6.5 trillion, according to the latest Asia-Pacific Wealth Report from… Capgemini. The equivalent rate of growth in Japan over the same period was about 87%. More recently, India's millionaires have been picking up the pace. Wealth held by Indian high-net-worth individuals rose close to 22% in 2017…"

November 26 - Reuters (Tom Miles): "Global growth in merchandise trade is likely to slow further this quarter, the World Trade Organization (WTO) said…, as it published a quarterly indicator showing declines in all seven of the drivers of trade that it tracks. The WTO's quarterly trade outlook indicator showed a reading of 98.6, the lowest since October 2016, reflecting a further loss of momentum since August, when the index was at 100.3. A reading below 100 signals below-trend growth in trade."

November 25 - Wall Street Journal (Akane Otani and Michael Wursthorn): "Stocks, bonds and commodities from copper to crude oil to burlap are staging a rare simultaneous retreat, putting global markets on track for one of their worst years on record and deepening a sense of unease on Wall Street. Data show global stocks and bonds could both finish the year in the red for the first time in at least a quarter-century… All told, 90% of the 70 asset classes tracked by Deutsche Bank are posting negative total returns in dollar terms for the year through mid-November. The previous high was in 1920, when 84% of 37 asset classes were negative. Last year, just 1% of asset classes delivered negative returns."

November 26 - Reuters (Tom Miles): "Global wage grew by 1.8% in 2017, down from 2.4% in 2016 and the slowest rate since the global financial crisis in 2008, the International Labour Organization said in its… Global Wage Report… 'What is now widely recognized is that slow wage growth has become an obstacle to achieving sustainable economic growth,' ILO Director-General Guy Ryder wrote…"

November 29 - Reuters (Arno Schuetze and Tom Sims): "Police raided six Deutsche Bank offices in and around Frankfurt on Thursday over money laundering allegations linked to the 'Panama Papers', the public prosecutor's office in Germany's financial capital said. Investigators are looking into the activities of two unnamed Deutsche Bank employees alleged to have helped clients set up offshore firms to launder money…"

November 25 - Reuters (Swati Pandey): "Australian regulators are 'monitoring' fast-growing non-bank lenders for possible financial stability risks, a senior central banker said… Non-banks have expanded their market share in Australia recently particularly for interest-only loans, a product category considered high-risk by policymakers. 'The Reserve Bank's liaison indicates that non-banks have been lending to some borrowers who may otherwise have obtained credit from banks in the absence of the regulatory measures,' said Christopher Kent, assistant governor of the Reserve Bank of Australia (RBA) said…"

November 26 - Bloomberg (Ian Fisher and Frederik Balfour): "A 1,000-year-old Chinese scroll rendered by the era's most important artist sold for HK$463 million ($59 million), falling short of expectations that it would set a new Asian record for a work of art at auction."

Japan Watch:

November 26 - Reuters (Leika Kihara): "Bank of Japan Governor Haruhiko Kuroda voiced confidence… that the central bank can shrink its balance sheet at an appropriate pace without disrupting markets, when it exits ultra-loose monetary policy. He also said the BOJ's huge bond buying was aimed at achieving its 2% inflation target, not at bank-rolling the government's huge public debt."

November 26 - Reuters (Tetsushi Kajimoto): "Japanese manufacturing activity expanded at the slowest pace in two years in November and new orders contracted for the first time since September 2016…, raising doubt about growth prospects for the current quarter. The Flash Markit/Nikkei Japan Manufacturing Purchasing Managers' Index (PMI) fell to a seasonally adjusted 51.8 in November from a final 52.9 in October."

Fixed Income Bubble Watch:

November 26 - New York Times (William D. Cohan): "Corporations, like people, are pretty simple: They do what they are rewarded to do. So when the Federal Reserve, by keeping interest rates very low for nearly a decade, rewards companies for borrowing money by making it historically inexpensive to do so, it can't be a surprise to anyone that that's exactly what they did. In 2008, in the wake of the financial crisis, the Fed began its 'quantitative easing' program, a determined effort to buoy the economy by lowering the cost of borrowing. It bought up trillions of dollars in Treasury and other debt securities, effectively reducing long-term interest rates. Debt issuance exploded. In the last decade, the amount of corporate bonds outstanding nearly doubled to $9 trillion, from $5.5 trillion. Much of that surge has come in the form of bonds rated BBB, near the riskier end of the investment-grade spectrum… There is now nearly $2.5 trillion of United States corporate debt rated in the BBB category, close to triple the amount of 2008, making up half of the investment-grade bond market. It's been quite a party. Now comes the hangover."

November 30 - Bloomberg (Adam Tempkin): "Sales of U.S. collateralized loan obligations have hit an all-time high… A $609 million CLO for the Carlyle Group LP sold today via Citigroup Inc. pushes issuance for the year to $124.5 billion, pushing volume over the $124 billion haul in 2014 with more than a month to spare. The market has been buoyed by higher demand for floating-rate debt and leveraged loans as rates rise."

November 28 - Wall Street Journal (Daniel Kruger): "The surge in U.S. government borrowing is beginning to warp bond indexes… The problem: Treasurys tend to offer investors lower yields and produce weaker returns than other kinds of bonds, such as high-quality company debt or securities backed by mortgage payments. Yet as the government steps up borrowing to fund last year's tax cuts, index funds end up holding more Treasurys, squeezing out the securities that pay higher rates of interest. The U.S. government is borrowing $129 billion this week, up 28% from the same series of note auctions a year ago. The increased borrowing means Treasurys now amount to almost 40% of the value in the leading bond market investment benchmark… which fund managers use to gauge their success. That is up from around 20% in 2006…"

November 27 - Financial Times (Kate Allen): "Rising geopolitical tensions are increasingly playing out in the global debt markets. Russia's launch this week of the sale of a euro-denominated bond is just the latest example. Its bid to move away from dollar-denominated issuance comes in the face of a growing threat of US sanctions on its sovereign debt investors. Some bankers have questioned whether Russia really needs to sell the bond, arguing that it is primarily a political display of defiance. But it is not the only recent instance of politics playing a role in countries' decisions about what kind of debt to sell, who to sell it to, and when to sell it. Saudi Arabia illustrated the trend in April when it gatecrashed Qatar's international bond sale, nipping in first with its own previously unannounced debt offering. The move threatened to soak up the market liquidity available to its Gulf state rival. Sovereign debt sales are not just used as hostile political manoeuvres. They can also be a diplomatic tool. Just ask eastern European countries such as Poland and Hungary. Both have sold panda bonds- renminbi denominated debt issued by foreign borrowers - as part of their efforts to woo China."

November 27 - Bloomberg (Kelsey Butler and Jeannine Amodeo): "Diversified manufacturer Jason Inc. became at least the fourth issuer to scrap a U.S. leveraged loan this month amid recent market turbulence. That's the most since July when five deals were pulled."

Leveraged Speculation Watch:

November 29 - Financial Times (Andrew Whiffin): "Emerging market hedge funds are on track for their worst annual performance since 2011 according to Hedge Fund Research… HRF said their Emerging Markets index had fallen 3.7% in October alone. The eighth consecutive month of decline pushed year to date losses to 10.7%, on track to be the worst since the index lost 14% in 2011. The company also said emerging market redemptions in the third quarter of the year were $3.1bn, the largest quarterly withdrawal since the first quarter of 2009. Hedge funds in China have performed particularly badly this year. In October, HFR's China index lost another 7.8%, bringing the year to date loss to 17%."

November 30 - Bloomberg (Ryan Collins): "Hedge funds' bearish bets on U.S. natural gas slid to the lowest in at least five years as the prospect of a winter supply crunch sent prices soaring. Hedge funds' short bets, or wagers on falling prices, in seven contracts fell by 25% in the week ended Nov. 27, the most since February. Total bearish positions dropped to the lowest in data going back to 2013…"

Geopolitics Watch:

November 28 - Reuters (Idrees Ali, Yimou Lee and Ben Blanchard): "The United States sent two Navy ships through the Taiwan Strait… in the third such operation this year, as the U.S. military increases the frequency of transits through the strategic waterway despite opposition from China. The voyage risks further heightening tensions with China but will likely be viewed in self-ruled Taiwan as a sign of support from U.S. President Donald Trump's government amid growing friction between Taipei and Beijing."

November 26 - Financial Times (Editorial Board): "Russia's seizure of three Ukrainian warships in the Black Sea is one of the most ominous incidents in Moscow's nearly five-year campaign of military, political and economic pressure on Kiev. Ukraine says six of its seamen were injured when Russian coast guards opened fire on the ships on Sunday. This is the first time Russia has admitted its own forces, rather than 'volunteers' in unmarked uniforms or the Kremlin's surrogates in east Ukraine, engaged directly with the Ukrainian military. The risk of escalation - with at least the potential to suck in Nato forces - is dangerously high."

November 26 - Bloomberg (Andrew Osborn and Natalia Zinets): "Ukraine… imposed martial law for 30 days in parts of the country most vulnerable to an attack from Russia after President Petro Poroshenko warned of the 'extremely serious' threat of a land invasion. Poroshenko said martial law was necessary to bolster Ukraine's defenses after Russia seized three Ukrainian naval ships and took their crew prisoner at the weekend."

November 28 - Bloomberg (Andrew Langley): "The flare-up between Russia and Ukraine off the coast of Crimea has stirred fears their conflict is set to reignite. Ukraine's leader has warned dramatically of such a scenario. More likely, according to an analysis by Chatham House, is that the aggression is simply the latest gambit in President Vladimir Putin's long game to chip away at his neighbor's economy to undermine the revolution that booted out its Kremlin-backed leader in 2014. By limiting access to the Sea of Azov -- to which the two one-time Soviet allies have equal access under a bilateral agreement -- Russia knows it can disrupt sea shipments of metals and agricultural goods that travel through Ukraine. Those industries are Ukraine's two biggest export earners."

November 26 - Wall Street Journal (Thomas Grove and Farnaz Fassihi): "U.S. Ambassador to the United Nations Nikki Haley warned Russia over the seizure of three Ukrainian naval ships and Kiev put its troops on military alert in response to an incident that is ratcheting up tensions between Moscow and the West. Ukrainian President Petro Poroshenko said the country's parliament had approved his declaration of martial law for 30 days…, for a number of provinces most vulnerable to Russian aggression. Ms. Haley called the seizure of the ships 'yet another reckless Russian escalation' and said, 'It will further undermine Russia's standing in the world. It will further sour Russia's relations with the U.S. and many other countries. It will further increase tensions with Ukraine.'"

Friday Afternoon Links

[Reuters] Wall Street advances as trade optimism gathers steam

[Reuters] Dollar gains as trade talks between U.S. and China take focus

[Reuters] Oil tumbles on supply glut; Wall Street up on G20 comments

[Reuters] Chinese official says 'consensus steadily increasing' in U.S. trade talks

[WSJ] U.S. Stocks Edge Up, but Outlook Darkens Across Markets