Friday, May 31, 2019

Weekly Commentary: So Much for the Trump Put

So Much for the “Trump Put.”

May 31 – Bloomberg (Felice Maranz): “President Trump’s promise to impose tariffs on goods until Mexico halts a flow of undocumented immigrants is being panned by analysts and economists… Here’s a sample of the latest commentary: MUFG, Chris Rupkey: ‘If you are going to turn the world upside down with these America First trade sanctions against imports from China, car imports from Europe, and now immigration from Mexico, you risk turning the economy upside down… Keep your eye trained on stock market valuations as the magnitude of the decline will tell you when investors have had enough and are rushing to the safety of cash in an increasingly dangerous and uncertain world.’ Cowen, Chris Krueger: ‘In the space of a few hours last night, Trump overturned all we thought we understood about the near term direction of the Administration’s trade strategy’… The president ‘unveiled a one-two punch that we believe will make USMCA extremely hard to pass in both Mexico and the U.S.’ ‘When Tariff Man returned on a rainy Sunday (May 4) to announce tariff escalations on China, we detected a consensus that this was merely a negotiating tactic… In the 27 days that have followed, no public talks have been held and the tariff escalation for goods in-transit along with China’s escalation on $60 billion in U.S. exports is hours away.’ AGF Investments, Greg Valliere: ‘These tariffs break new ground’ …because ‘they’re political, a punishment to Mexico for not stopping the surge of immigrants from Central America.’ He listed five ‘enormous implications’: Damage to USMCA ratification process; potential that a ‘slumbering’ Congress may awaken; Trump may not be finished with new tariffs, triggering higher prices for products…; Trump doesn’t seem to be listening to advisers, appears unconcerned by market and economic damage; Federal Reserve may now be forced to cut rates, but that may not be enough to reverse the damage.’”

May 31 – Bloomberg (Michelle Jamrisko and Enda Curra): “Prospects for a U.S.-China trade deal just became even more remote after President Donald Trump whacked tariffs that could rise to 25% on Mexico until that country stops immigrants from entering the U.S. illegally. ‘A U.S.-China trade deal will be even less likely,’ said Khoon Goh, head of research at Australia & New Zealand Banking Group… ‘At the end of the day, what’s the point of doing a deal if the U.S. can just impose tariffs arbitrarily?’ Investors are already bracing for a prolonged economic stand-off between the world’s two biggest economies. One potential beneficiary of the impasse was likely to be Mexico as companies considered shifting supply chains away from China toward lower-cost markets closer to American consumers. The latest escalation of Trump tariffs threatens that process.”

May 31 – Bloomberg (Michael Sin): “‘Trade policy and border security are separate issues. This is a misuse of presidential tariff authority and counter to congressional intent,’ U.S. Senate Finance Committee Chairman Chuck Grassley (R-Iowa) says… ‘Following through on this threat would seriously jeopardize passage of USMCA.’”

May 31 – Bloomberg (Michael R. Bloomberg): “President Donald Trump’s approach to trade policy had set new benchmarks of incoherence and irresponsibility even before his threat to impose escalating tariffs on imports from Mexico — but this latest maneuver takes the cake. The administration plans to harm businesses north and south of the border, and to impose additional new taxes on U.S. consumers, not to remedy a real or imagined trade grievance but to force Mexico to curb migration to the U.S. This is a radical and disturbing development. The administration is invoking a law that allows it to impose emergency economic sanctions. It’s safe to say that Congress never envisaged that those powers would be used in a case like this.”

According to CNBC reporting (Kayla Tausche and Tucker Higgins), the President’s Mexico tariff move was “spearheaded by advisor Stephen Miller.” That the decision was made despite opposition from both Treasury Secretary Mnuchin and Trade Representative Lighthizer is only more troubling to the markets (and the world more generally). Has the President “gone off the rails”? CNBC: “The surprise decision to announce the tariff plan came as Trump was ‘riled up’ by conservative radio commentary about the recent surge in border crossings… As the tariff plan was formulated, top advisors, including Vice President Mike Pence, who was traveling, and Larry Kudlow, who was undergoing surgery, were away.”

“‘Unreliable’ Trump Throws Markets Into Tizzy as Traders Scramble,” read a Friday afternoon Bloomberg headline. With the S&P500 index wobbling just above the key 200-day moving average technical indicator, traders had been looking for a supportive tweet. Who would have expected the President to be nudging markets toward the cliff’s edge? Meanwhile, increasingly anxious currency traders hit a landmine, as the Mexican peso was slammed 2.4% in Friday trading (2.9% for the week). Mexico’s S&P IPC equities index dropped 1.4%. As if awakening to how incredibly uncertain the backdrop has become, gold surged $21 this week. Seemingly experiencing nightmares of global depression, WTI crude collapsed 8.7% for the week.

For a day, the dramatic threat of tariffs on Mexican imports almost took the spotlight off the rapidly escalating China-U.S. trade war. Almost.

May 31 – New York Times (Alexandra Stevenson and Paul Mozur): “The Chinese government said on Friday that it was putting together an ‘unreliable entities list’ of foreign companies and people, an apparent first step toward retaliating against the United States for denying vital American technology to Chinese companies. China’s Ministry of Commerce said the list would contain foreign companies, individuals and organizations that ‘do not follow market rules, violate the spirit of contracts, blockade and stop supplying Chinese companies for noncommercial reasons, and seriously damage the legitimate rights and interests of Chinese companies.’”

This is turning serious. The “Unreliable Entities List” follows reports earlier in the week that China is preparing to restrict the export of rare earth minerals. Friday from the New York Times: “As China Takes Aim, Silicon Valley Braces for Pain.” Another Friday headline, “U.S. is Dependent on China for Almost 80% of its Medicine,” played into the narrative that the trade war is suddenly appearing much more complex and ominous than previously envisioned. China clearly has the capacity to play hardball; preparations have commenced.

May 29 – Reuters (Ben Blanchard, Michael Martina and Tom Daly): “China is ready to use rare earths to strike back in a trade war with the United States, Chinese newspapers warned… in strongly worded commentaries on a move that would escalate tensions between the world’s two largest economies… In a commentary headlined ‘United States, don’t underestimate China’s ability to strike back’, the official People’s Daily noted the United States’ ‘uncomfortable’ dependence on rare earths from China. ‘Will rare earths become a counter weapon for China to hit back against the pressure the United States has put on for no reason at all? The answer is no mystery,’ it said. ‘Undoubtedly, the U.S. side wants to use the products made by China’s exported rare earths to counter and suppress China’s development. The Chinese people will never accept this!’ the ruling Communist Party newspaper added. ‘We advise the U.S. side not to underestimate the Chinese side’s ability to safeguard its development rights and interests. Don’t say we didn’t warn you!’”

I’ll assume the Mexican tariff issue is resolved relatively soon, while the trade war with China appears poised to be a major and protracted problem. As I’ve highlighted in previous CBBs, this confrontation comes at a tenuous juncture for China’s financial system and economy. The assumption – for the markets and, apparently, within the administration – has been that fragilities would incentivize Beijing to play nice and succumb to a deal.

The Trump administration pushed aggressively, and the deal blew apart. And the longer conciliatory tones go missing from both sides, the more likely it is that the Rubicon has been crossed. This significantly increases the likelihood that China is heading into a crisis backdrop, with Beijing enjoying a larger-than-life “foreigner” “bully” to blame, berate and villainize before a population with expectations perhaps as great as the challenges they now confront.

What could be the most consequential development of the past week received little press attention in the U.S. – and maybe even less in China.

May 28 – Bloomberg: “Is it the start of a new era for China’s $42 trillion financial industry, or a one-time shock that will be quickly forgotten? Five days after the first government seizure of a Chinese bank in 20 years, investors are still grasping for answers. The takeover of Baoshang Bank Co. -- announced with scant explanation on Friday night -- left China watchers guessing at whether it marks an end to the implicit backstop for banks that has served as a linchpin of the country’s financial stability for decades. Regulators have said they’ll guarantee Baoshang’s smaller depositors, and while they’ve warned some creditors of potential losses, they haven’t said what the final payouts could be or given public guidance on whether the takeover will be a blueprint for other lenders. Complicating matters is the fact that Baoshang has been linked to a conglomerate under investigation by Chinese authorities.”

It’s a testament to the incredible growth of China’s banking system (from about $7 TN to $40 TN since the ’08 crisis) that Baoshang, with its $80 billion of assets, is one of a very large group of “small banks.” Along with most “small” Chinese banking institutions, Baoshang tapped the “money” markets for much of its gluttonous financing needs. It issued institutional negotiable certificates of deposit (NCD) and aggressively borrowed in the interbank lending market. The first Chinese government bank seizure in 20 years is further notable for Beijing’s decision to impose losses on some Baoshang creditors. While retail depositors are to receive 100% of their funds, corporate and financial creditors face painful haircuts.

May 29 – Reuters (Cheng Leng, Zheng Li and Andrew Galbraith): “Chinese regulators have issued instructions for the repayment of debts owed by China’s beleaguered Baoshang Bank that could see larger debts facing haircuts of as much as 30%, two sources with knowledge of the matter told Reuters. According to oral instructions detailed by the sources, regulators will guarantee the principal but not the interest on interbank debts between 50 million yuan and 100 million yuan. Debts of more than 5 billion yuan ($723.47 million) will have no less than 70% of their principal guaranteed, the sources said. For debts between 100 million and 2 billion yuan, regulators will guarantee no less than 90% of principal, and for debts of 2 billion yuan to 5 billion yuan, no less than 80% of principal will be guaranteed.”

May 31 – Bloomberg: “Holders of bankers’ acceptances worth more than 50m yuan ($7.2m) issued by Baoshang Bank will be repaid at least 80% of the principal, said people familiar with the matter. Investors were told on Friday that while they will be repaid 80% initially, they may still have recourse to the rest of the repayment as regulators progress in resolving Baoshang’s finances…”

Beijing has moved to invalidate the implicit 100% state guarantee of all large bank liabilities – deposits, NCDs, bankers’ acceptances, interbank loans, etc. Such a critical issue should have been decisively addressed years ago - certainly long before China’s Bubble inflated in “Terminal Phase” excess. Now, with the colossal sizes of China’s banking system and money market complex - coupled with rapidly expanding problem loans - a banking crisis would add Trillions (U.S. $) to the central government’s debt load. Bank losses will have to be shared by the marketplace, a prospect few to this point have been willing to contemplate. Going forward, investors will increasingly question the perceived “money-like” attributes of safety and liquidity for Chinese financial instruments.

Baoshang is part of an organization controlled by a Chinese tycoon under criminal investigation. While not a typical bank, its vulnerable financial structure is typical of scores of Chinese financial institutions whose breakneck growth was financed by cheap loans readily available for all from China’s booming (“shadow”) money market. Reminiscent of America’s GSE experience, it was all made possible by implied government guarantees Beijing was for too long content to empower. Beijing has now moved to adjust the rules of the game, with major ramifications for China’s fragile historic Bubble – right along with world markets and the global economy more generally.

May 28 – Bloomberg (Ina Zhou): “Pressure is building in a corner of Chinese lenders’ offshore debt after the nation’s first government seizure of a bank in about two decades. Loss-absorbing bonds, known at Additional Tier 1 instruments or AT1s, plunged across several small lenders on Tuesday after a sell-off on Monday. Huishang Bank Corp.’s 5.5% AT1s sank by a record 3 cents on the dollar Tuesday, while Bank of Jinzhou Co.’s 5.5% note fell most since July and China Zheshang Bank Co.’s 5.45% bond had the steepest drop in a year.”

The Shanghai Composite jumped 1.6% this week, while China’s currency was down only slightly (.07%). Superficially, it was easy to dismiss the Baoshang seizure as “no harm, no foul.” Thank the PBOC.

May 29 – Reuters (John Ruwitch and Simon Cameron-Moore): “China’s central bank made its biggest daily net fund injection into the banking system in more than four months on Wednesday, a move traders saw as an attempt to calm the money market after the rescue of a troubled bank. The government announced its takeover of Baoshang Bank on Friday… Worries that Baoshang’s plight might herald wider problems among China’s regional banks had driven money market rates higher, until the People’s Bank of China (PBOC) delivered a mighty infusion of cash on Wednesday.”

The PBOC’s $36 billion Wednesday injection raises a crucial question: What will be the scope of liquidity needs when a major bank finds itself in trouble - when escalating systemic stress begins fomenting a crisis of confidence? It’s worth noting that Chinese sovereign CDS jumped six bps this week to 59 bps, the high since January. Overnight repo and interbank lending rates rose, along with Chinese corporate bond yields. According to Bloomberg, issuance of negotiable certificates of deposit slowed sharply this week. Chinese finance is tightening, an ominous development for a fragile Bubble.

This is where the analysis turns absolutely fascinating – and becomes as important as it is chilling. The PBOC is at increasing risk of confronting the same predicament that other emerging central banks faced when their Bubbles succumbed: in the event of a mounting crisis of confidence in the stability of the financial system and the local currency, large central bank injections work to fan market fears while generating additional liquidity available to flow out of the system. “Everyone has a plan until they get punched in the mouth.”

Markets ended the week pricing in a 95% probability of a Federal Reserve rate cut by the December 11th meeting. Ten-year Treasury yields sank 20 bps this week to 2.12%, falling all the way back to the lows from September 2017 (2.57% 30-yr yield to pre-2016 election level). German bund yields dropped nine bps to a record low negative 0.20%. Swiss yields fell five bps to negative 0.51%, with Japanese JGB yields down two bps to negative 0.10%. I view the ongoing global yield collapse as powerful confirmation of the acute fragility of Chinese and global Bubbles.

If President Trump is determined to squeeze rate cuts out of the Federal Reserve, he made impressive headway this week. This CBB began with, “So Much for the Trump Put.” As for the “Beijing put,” a $36 billion PBOC liquidity injection was indiscernible beyond Chinese markets. Investors in U.S. securities would be wise to anticipate zero favors from China.

As such, markets are left with the “Fed put.” And for the most part, U.S. stocks, equities derivatives and corporate Credit have been comfortable banking on the Federal Reserve backstop. But with things turning dicey in China, risk aversion is gaining a foothold. U.S. investment-grade funds saw outflows surge to $5.1 billion the past week (“most since 2015”). Corporate spreads and CDS prices have begun to indicate liquidity concerns.

With the “Fed put” now in play, there are important questions to contemplate: Where’s the “strike price” – what degree of market weakness will it take to compel the Fed to move – and, then, to what effect? Markets, after all, have already priced in aggressive cuts. It could very well require some “shock and awe” central banking to reverse markets once panic has begun to set in. And it’s as if global safe haven bond markets are anticipating a bout of panic in the not too distant future.

For the Week:

The S&P500 dropped 2.6% (up 9.8% y-t-d), and the Dow fell 3.0% (up 6.4%). The Utilities lost 2.7% (up 10.3%). The Banks sank 4.2% (up 7.0%), and the Broker/Dealers dropped 4.0% (up 6.3%). The Transports were hit 3.9% (up 6.2%). The S&P 400 Midcaps declined 2.8% (up 8.9%), and the small cap Russell 2000 fell 3.2% (up 8.7%). The Nasdaq100 lost 2.4% (up 12.6%). The Semiconductors declined 1.2% (up 12.2%). The Biotechs slumped 3.2% (up 3.4%). With bullion jumping $21, the HUI gold index rallied 5.4% (down 2.2%).

Three-month Treasury bill rates ended the week at 2.30%. Two-year government yields sank 29 bps to 1.92% (down 57bps y-t-d). Five-year T-note yields fell 21 bps to 1.91% (down 60bps). Ten-year Treasury yields dropped 20 bps to 2.12% (down 56bps). Long bond yields declined 18 bps to 2.57% (down 45bps). Benchmark Fannie Mae MBS yields sank 24 bps to 2.86% (down 64bps).

Greek 10-year yields sank 46 bps to 2.89% (down 151bps y-t-d). Ten-year Portuguese yields dropped 17 bps to 0.81% (down 91bps). Italian 10-year yields jumped 12 bps to 2.67% (down 7bps). Spain's 10-year yields fell 11 bps to 0.72% (down 70bps). German bund yields declined nine bps to negative 0.20% (down 44bps). French yields fell seven bps to 0.21% (down 50bps). The French to German 10-year bond spread widened two to 41 bps. U.K. 10-year gilt yields declined seven bps to 0.89% (down 39bps). U.K.'s FTSE equities index fell 1.6% (up 6.4% y-t-d).

Japan's Nikkei Equities Index dropped 2.4% (up 2.9% y-t-d). Japanese 10-year "JGB" yields declined two bps to negative 0.09% (down 9bps y-t-d). France's CAC40 fell 2.0% (up 10.1%). The German DAX equities index dropped 2.4% (up 11.1%). Spain's IBEX 35 equities index slumped 1.9% (up 5.4%). Italy's FTSE MIB index sank 2.8% (up 8.1%). EM equities outperformed. Brazil's Bovespa index surged 3.6% (up 6.6%), and Mexico's Bolsa added 0.3% (up 2.7%). South Korea's Kospi index slipped 0.2% (unchanged). India's Sensex equities index added 0.7% (up 10.1%). China's Shanghai Exchange rallied 1.6% (up 16.2%). Turkey's Borsa Istanbul National 100 index jumped 5.2% (down 0.7%). Russia's MICEX equities index gained 1.8% (up 12.5%).

Investment-grade bond funds saw outflows surge to $5.096 billion, and junk bond funds posted outflows of $1.27 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates dropped seven bps to 3.99% (down 57bps y-o-y). Fifteen-year rates declined five bps to 3.46% (down 60bps). Five-year hybrid ARM rates fell eight bps to 3.06% (down 20bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down two bps to 4.19% (down 45bps).

Federal Reserve Credit last week declined $4.5bn to $3.820 TN. Over the past year, Fed Credit contracted $469bn, or 10.9%. Fed Credit inflated $1.009 TN, or 36%, over the past 343 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $5.5bn last week to $3.463 TN. "Custody holdings" rose $69bn y-o-y, or 2.0%.

M2 (narrow) "money" supply surged $45.5bn last week to a record $14.602 TN. "Narrow money" rose $565bn, or 4.0%, over the past year. For the week, Currency increased $0.5bn. Total Checkable Deposits gained $13.8bn, and Savings Deposits jumped $27.4bn. Small Time Deposits added $1.5bn. Retail Money Funds increased $2.2bn.

Total money market fund assets rose $18.0bn to $3.148 TN. Money Funds gained $336bn y-o-y, or 11.9%.

Total Commercial Paper added $1.8bn to $1.085 TN. CP was down $23bn y-o-y, or 2.1%.

Currency Watch:

May 26 – Bloomberg: “China advised traders against shorting the yuan, after a recent slide took the currency to the brink of the critical 7 per dollar level. Guo Shuqing, head of China’s banking and insurance regulator, said… speculators ‘shorting the yuan will inevitably suffer from a huge loss.’ The speech… also included comments on the trade war, making Guo the highest-level financial official to publicly comment on the issue since tensions between China and the U.S. escalated this month. Most local media ran front-page articles on the speech.”

The U.S. dollar index added 0.2% to 97.75 (up 1.6% y-t-d). For the week on the upside, the Brazilian real increased 2.5%, the Japanese yen 0.9%, the Swedish krona 0.5%, and the Australian dollar 0.2%. For the week on the downside, the Mexican peso declined 2.9%, the South African rand 1.2%, the Norwegian krone 0.8%, the British pound 0.7%, the Canadian dollar 0.6%, the New Zealand dollar 0.3%, the euro 0.3% and the South African rand 0.2%. The Chinese renminbi declined 0.07% versus the dollar this week (down 0.38% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index declined 1.3% this week (up 0.9% y-t-d). Spot Gold jumped 1.6% to $1,305 (up 1.8%). Silver increased 0.2% to $14.567 (down 6.3%). WTI crude sank $5.13 to $53.50 (up 18%). Gasoline slumped 8.9% (up 34%), and Natural Gas dropped 5.5% (down 17%). Copper fell 2.2% (unchanged). Wheat jumped 2.8% (unchanged). Corn surged 5.6% (up 14%).

Market Instability Watch:

May 28 – Bloomberg: “The Chinese government’s first seizure of a bank in more than two decades reverberated through markets for a second day, driving up funding costs for smaller lenders and adding pressure to shares that already trade at rock-bottom valuations. A Bloomberg index of Hong Kong-listed Chinese banks is set for its biggest monthly loss this year after regulators assumed control of Baoshang Bank Co. on Friday citing ‘serious’ credit risks. With the interbank repurchase rate jumping to the highest in a month and loss-absorbing bonds, known at AT1s, slumping across several small lenders, policy makers on Tuesday injected more cash into the banking system.”

May 28 – Financial Times (Don Weinland and Sherry Fei Ju): “When Baoshang Bank published its most recent annual financial statement in mid-2017, it claimed to have a non-performing loan ratio of just 1.68%. Two years later, Baoshang, which has Rmb576bn ($83bn) in assets, has been taken over by the government because of its ‘serious credit risk’, the first such move in 18 years and a reminder of the hidden perils lurking within China’s financial system. The need for a state rescue has raised questions about financial contagion. It has also led to worries that regulators may have allowed a destabilising build-up in bad debt to go unchecked for far too long. ‘Is Baoshang part of a corruption-related clean-up or the start of what could become a series of bank failures?’ J Capital, an independent research house focused on China, wrote in a research note.”

May 28 – Bloomberg: “Beijing’s threat to use its dominance of rare earths in the trade war risks serious disruption to U.S. industry, by starving manufacturers of components commonplace in everything from cars to dishwashers and military equipment. And, it’s a stranglehold that might take years to break. China could wreak maximum havoc by squeezing supplies of the magnets and motors that use the elements, said Jack Lifton, co-founder of Technology Metals Research LLC, who’s been involved with rare earths since 1962. The impact on American industry could be ‘devastating,’ he said from Michigan.”

May 27 – Financial Times (Don Weinland): “Foreign investors beware: a byzantine regulatory framework and patchy trading volumes could cause a shock in the country’s debt market, say analysts — just as Beijing is opening it up to outsiders. Three years ago a domestic brokerage called Sealand Securities suffered huge losses on a highly leveraged financing deal which was funded by banks. When the investment went sour and Sealand defaulted on its loans, banks pulled credit from brokers and other nonbank financial institutions. The mini-meltdown led to interbank lending rates shooting up and liquidity in the bond market evaporating. ‘It took a few days to figure out what had actually happened,’ said one foreign investor who weathered the December 2016 storm… Since then foreign investment in the country’s bond market has nearly tripled to about $300bn, but for some investors the incident cuts to the heart of the risks lurking in the system. Despite China’s status as the world’s third-largest bond market, foreign investors complain that bond holdings are highly concentrated among a circle of large government institutions that rarely trade them.”

May 28 – Bloomberg (John Ainger): “Italian bonds declined as investors faced a renewed budget standoff between the nation and the European Union after the region’s elections strengthened the hand of Deputy Prime Minister Matteo Salvini. Yields rose for a second day amid concern that the League Party’s increased vote share in the EU parliamentary elections could strain the country’s fragile government and spur a bond sell-off, similar to one that rattled Italy’s markets last year.”

Trump Administration Watch:

May 26 – Bloomberg (Shannon Pettypiece and Iain Marlow): “The U.S. isn’t ready to make a trade deal with China, President Donald Trump said while on a state visit to Japan. ‘I think they probably wish they made the deal that they had on the table before they tried to renegotiate it,’ Trump said… ‘They would like to make a deal. We’re not ready to make a deal.’ Trump said American tariffs on Chinese goods ‘could go up very, very substantially, very easily.’”

May 29 – Reuters (Ernest Scheyder): “U.S. companies are years away from challenging Chinese dominance of rare earth minerals due to a lack of domestic processing facilities, ensuring the Asian nation will maintain its near-monopoly on refining and powerful leverage in trade talks… Although, according to U.S. Geological Survey data, China contains only a third of the world’s rare earth reserves, it accounts for 80% of U.S. imports of the group of 17 minerals used in military equipment and high-tech consumer electronics.”

May 29 – Bloomberg (Pratish Narayanan and Joe Deaux): “China’s grip on the global market for rare-earth metals gives it the ability to target American weaponry in its trade war with the U.S. Everything from Lockheed Martin Corp.’s F-35 Joint Strike Fighter jet to guided missiles and lasers used to determine targets rely on the elements to perform key functions. China accounts for as much as 95% of global output and the U.S. relies on the Asian nation for 80% of its rare-earths requirement.”

May 29 – Reuters (Phil Stewart and Andrea Shalal): “The U.S. Defense Department is seeking new federal funds to bolster domestic production of rare earth minerals and reduce dependence on China, the Pentagon said…, amid mounting concern in Washington about Beijing’s role as a supplier. The Pentagon’s request was outlined in a report that has been sent to the White House and briefed to Congress, said Air Force Lieutenant Colonel Mike Andrews…”

May 27 – CNBC (Arjun Kharpal): “China and America’s trade war looks more and more like a tech war, and the United States appears to be widening its focus on to another category of Chinese technology: surveillance. The U.S. may put Chinese surveillance equipment company Hikvision on a blacklist that would limit its ability to acquire American components — expanding the tech rivalry between the countries and even bringing attention to the ways China monitors its own people.”

May 28 – Bloomberg (Nariman Gizitdinov): “President Donald Trump should intensify his trade battle with China by barring Chinese businesses from U.S. capital markets and technology, his former White House chief strategist, Steve Bannon, said. ‘He has to go all the way; it’s not a trade war, it’s an economic war they’ve been running against the West… You cut off the access to the capital markets and you cut off the access to technology, they fold immediately.’ …‘I don’t think Trump backs off for a second’ because the conflict ‘is about fundamentally changing the Chinese economy so they can work with the free market economies of the West… You have two systems right now that are incompatible.’”

May 29 – Bloomberg: “China, the world’s largest soybean buyer, has put purchases of American supplies on hold after the trade war between Washington and Beijing escalated, according to people familiar with the matter. State-grain buyers haven’t received any further orders to continue with the so-called goodwill buying and don’t expect that to happen given the lack of agreement in trade negotiations… Still, China currently has no plans to cancel previous purchases of American soybeans, the people said.”

May 28 – New York Times (Keith Bradsher and Ana Swanson): “President Trump’s trade war with China has prompted a broad rethinking of how the two economies have become so intertwined, leading some manufacturers to trim supply chains in China and American authorities to start cutting off crucial technology for Chinese companies. Now another important area is getting a close look: financial markets. Some trade experts and others urging the Trump administration to keep a hawkish stance are discussing whether the White House should curb China’s access to Wall Street… Stephen K. Bannon, Mr. Trump’s former chief strategist, said there were continuing efforts inside and outside the administration to rethink China’s role in American stock markets… ‘The New York Stock Exchange and Nasdaq are breaching their fiduciary responsibility to institutional investors, the pension funds of hardworking Americans,’ Mr. Bannon said. ‘It’s outrageous. All of it should be shut down immediately.’”

May 28 – Bloomberg (Bruce Einhorn): “U.S. companies counting on China for a major part of their growth have targets on their backs as Beijing and Washington ratchet up trade-war tensions. President Donald Trump’s decision to blacklist Huawei Technologies Co., the Chinese maker of smartphones, while also threatening bans on other Chinese technology companies, could open the door to retaliation against U.S. brands from hotels to sportswear to even Captain America. State media last week said China is ‘well armed to deliver counterpunches,’ without giving specific details.”

May 28 – Reuters (David Alexanderm, John Geddie, Aradhana Aravindan, A. Ananthalakshmi and Michael Martina): “The Trump administration said… that no major trading partner met its currency manipulation criteria but nine countries, including China, required close attention as Washington presses tariffs and negotiations to address trade deficits… Ireland, Italy, Malaysia, Singapore and Vietnam were new additions to the watch list, which also includes China, Germany, Japan and South Korea. India and Switzerland were removed from the list of countries under extra scrutiny.”

Federal Reserve Watch:

May 28 – Financial Times (Joe Rennison): “Investors have increased bets that the Federal Reserve will cut US interest rates not once but twice this year, to counter concerns about slowing global economic growth that have been inflamed by the worsening US-China trade war. The probability that the central bank will cut rates two or more times by the end of 2019 rose above 48% on Wednesday morning…, according to futures prices…”

May 28 – Bloomberg (Matthew Boesler and Christopher Condon): “The Federal Reserve Bank of New York said two of its top officers are departing -- including Simon Potter, who oversees its strategically vital trading desk -- in a rare double exit from the senior ranks of the U.S. central bank. Potter and fellow executive vice president Richard Dzina, who ran the bank’s financial services group, will both step down effective June 1… Their departures -- which between them take almost 50 years of New York Fed experience with them -- come about a year into John Williams’s tenure as president of the bank.”

U.S. Bubble Watch:

May 30 – Bloomberg (Katia Dmitrieva): “The U.S. merchandise-trade deficit widened for a second month to the highest level since a record in December as exports dipped. The goods-trade gap grew to $72.1 billion in April from $71.9 billion the month earlier…”

May 28 – CNBC (Diana Olick): “National home prices rose 3.7% annually in March, down from 3.9% in February, according to the S&P CoreLogic Case-Shiller home price index. Prices had been seeing double-digit annual gains, but they are gone. The largest annual gain was 8.2% in Las Vegas; one year ago, Seattle had a 13% gain but has dropped dramatically to just 1.6%. The 20-City Composite dropped from 6.7% to 2.7% annual gains over the last year.”

May 28 – Reuters (Lucia Mutikani): “Consumer confidence jumped in May as households grew more upbeat about the labor market, suggesting the economy remained on solid ground despite signs that activity was slowing after being temporarily boosted by exports and a build-up of inventories… The Conference Board said its index of consumer attitudes increased 4.9 points to a reading of 134.1 this month, climbing up to levels seen last November when the index was hovering near 18-year highs.”

May 27 – Financial Times (Jennifer Thompson): “Investors have enthusiastically piled into private assets over the past decade, as ultra-low interest rates spurred them to hunt for returns in asset classes beyond listed stocks and bonds. They have ploughed money into areas such as real estate, infrastructure and investing in private companies. This wall of cash has forced them to pay record multiples for assets as they come under pressure to deploy capital. Tech unicorns… exemplify the trend. Slack, the workplace messaging app that plans to list on the New York Stock Exchange next month, was recently valued at about $13bn, while US room-booking site Airbnb was valued at $31bn at its fundraising in 2017. But valuations are high across the board, such as in Germany’s Mittelstand of small and medium-sized companies. This is fuelling concern that too much money is chasing too little value, and that investors could be overpaying for privately held companies.”

May 28 – Associated Press (Dee-Ann Durbin): “After more than a decade of rapid growth, Chinese travel to the U.S. is falling. And that has cities, malls and other tourist spots scrambling to reverse the trend. Travel from China to the U.S. fell 5.7% in 2018 to 2.9 million visitors… It was the first time since 2003 that Chinese travel to the U.S. slipped from the prior year. Friction between the U.S. and China is one reason for the slowdown.”

May 28 – Bloomberg (Katia Dmitrieva and Alexandre Tanzi): “In the U.S., a college degree has usually meant financial security. But increased competition and overwhelming student debt are making that outcome less of a given. That has spurred a feeling among many graduates that the qualification wasn’t worth the time, effort or money… Americans with a bachelor’s degree earned less in real terms last year than in 1990, according to New York Fed data. That’s likely contributed to one of the findings from the Federal Reserve Board’s sixth annual survey of household economics: Just two-thirds of those graduates believe their investment in education paid off.”

China Watch:

May 29 – CNBC (Yun Li): “The biggest Chinese newspaper explicitly warned the U.S… that China would cut off rare earth minerals as a countermeasure in the escalated trade battle, using an expression the publication has only used twice in history, both of which involved full-on wars. ‘We advise the U.S. side not to underestimate the Chinese side’s ability to safeguard its development rights and interests. Don’t say we didn’t warn you!’ the People’s Daily said in a commentary titled ‘United States, don’t underestimate China’s ability to strike back.’ The publication is the official newspaper of the Communist Party of China. The phrase ‘Don’t say we didn’t warn you’ was only used two other times in history by the People’s Daily — in 1962 before China’s border war with India and ahead of the 1979 China-Vietnam War. ‘Will rare earths become a counter weapon for China to hit back against the pressure the United States has put on for no reason at all? The answer is no mystery,’ the paper said.”

May 29 – Reuters (Ben Blanchard): “Provoking trade disputes is ‘naked economic terrorism’, a senior Chinese diplomat said…, ramping up the rhetoric against the United States amid a bitter trade war that is showing no signs of ending soon… Speaking to reporters…, Chinese Vice Foreign Minister Zhang Hanhui said China opposed the use of ‘big stick’ like trade sanctions, tariffs and protectionism. ‘We oppose a trade war but are not afraid of a trade war. This kind of deliberately provoking trade disputes is naked economic terrorism, economic chauvinism, economic bullying,’ Zhang said…”

May 27 – CNBC (Evelyn Cheng): “As trade talks between the U.S. and China increasingly center on Chinese treatment of foreign companies, Beijing says major American complaints about structural aspects of its economy are running up against ‘core interests.’ The implication: Those matters are not up for negotiation. Previously, the vague ‘core interest’ term was generally understood as referring to Beijing’s territorial claims, such as those on Taiwan. But a commentary… by state news agency Xinhua emphasized that China will not yield on its prerogative about how to manage its economy. The… article… claimed there were five ways in which the U.S. is harming the growth of the global economy by launching a trade war with the Asian giant. ‘At the negotiating table, the U.S. government has made many arrogant requests, including restricting the development of state-owned enterprises… Obviously, this is beyond the field and scope of trade negotiations, (and) touches upon China’s fundamental economic system.’”

May 29 – Bloomberg: “Relevant international agencies, not the U.S., are in position to decide whether a country is a currency manipulator, China Foreign Ministry spokesman Lu Kang says… ‘We hope the U.S. will respect market rules and not politicize the currency issue’: ‘The U.S. is not in position to decide whether a country is a currency manipulator.’”

May 25 – Reuters (Yawen Chen and Ryan Woo): “The United States has called on China to curb the development of its state-owned enterprises (SOEs), a demand that China sees as an ‘invasion’ on its economic sovereignty, Chinese state news agency Xinhua said… Trade tensions between Washington and Beijing escalated sharply earlier this month after the Trump administration accused China of having ‘reneged’ on its previous promises to make structural changes to its economic practices… As trade talks stalled, both sides have appeared to be digging in. China has denied it had walked back on its promises but reiterated it would not make concessions to ‘matters of principles’ to defend its core interests… ‘At the negotiating table, the U.S. government presented a number of arrogant demands to China, including restricting the development of state-owned enterprises,’ Xinhua said in a commentary.”

May 29 – Bloomberg (Jason Rogers, David Stringer, and Martin Ritchie): “A flurry of Chinese media reports…, including an editorial in the flagship newspaper of the Communist Party, raised the prospect of Beijing cutting exports of the commodities that are critical in defense, energy, electronics and automobile sectors. The world’s biggest producer, China supplies about 80% of U.S. imports of rare earths, which are used in a host of applications from smartphones to electric vehicles and wind turbines. The threat to weaponize strategic materials ratchets up the tension between the world’s two biggest economies before an expected meeting between Presidents Xi Jinping and Donald Trump at the G-20 meeting next month.”

May 28 – South China Morning Post (Karen Yeung): “China must exercise extreme caution in handling its housing sector because it is showing signs similar to those witnessed during Japan’s bubble period of the 1980s that contributed to the collapse of Japanese asset prices and its subsequent ‘lost decades’ of weak economic growth and deflation, a Japanese financial system expert warned. The parallels between China’s current landscape and Japan’s three decades ago are readily apparent, stemming from a loose monetary policy that laid the foundation for the expansion of a housing bubble, said Naoyuki Yoshino, dean and CEO of the Asian Development Bank Institute. China flooded its economy with credit in response to the 2008 global financial crisis, fuelling rapid growth in mortgages, real estate borrowings and investments over the past decade.”

May 28 – Bloomberg: “China’s credit investors are demanding to be paid for risk - and that’s leading to explosive growth in the nation’s high-yield bond market. There are about 1.1 trillion yuan ($159 billion) of local company bonds outstanding that offer investors more than 8%, the local cutoff for what’s considered high-yield, according to AJ Securities Co. By late last year, the market was seven times larger than it was at the start of 2015, Guosen Securities Co. data show. A record wave of company defaults is forcing asset managers to spend more time doing due diligence on issuers, and account for those risks in bond-market pricing.”

May 26 – Bloomberg: “Huawei Technologies Co. founder Ren Zhengfei struck a defiant tone in the face of U.S. sanctions that threaten his company’s very survival. In an interview with Bloomberg Television, the billionaire founder of China’s largest technology company conceded that Trump administration export curbs will cut into a two-year lead Huawei had painstakingly built over rivals like Ericsson AB and Nokia Oyj. But the company will either ramp up its own chip supply or find alternatives to keep its edge in smartphones and 5G.”

May 28 – Bloomberg (Carrie Hong): “China is reining in offshore bond sales by property developers and local government financing vehicles in a bid to ease credit risk following a surge in issuance. The National Development and Reform Commission (NDRC) has tightened approvals for these firms seeking quotas for offshore bond sales since early April… The tighter rules particularly apply to real estate companies looking to sell offshore bonds for the first time and lower-tier LGFVs, said the people who aren’t authorized to speak publicly… Since April, several offshore issuance quota applications from these companies have been rejected by the authority. The greater scrutiny follows a jump in debt sales so far this year on the back of a dovish U.S. Federal Reserve…”

May 28 – CNBC (Fred Imbert): “China’s true pace of economic growth is always hard to decipher, but the country’s lagging diesel demand could be a sign that the world’s second-largest economy is in a much more dire state than official numbers indicate. Diesel demand in China fell 14% and 19% in March and April, respectively, reaching levels not seen in a decade, according to data compiled by Wells Fargo. Monthly demand has also been falling every month since December 2017…”

Brexit Watch:

May 27 – Reuters (Elizabeth Piper and Elisabeth O'Leary): “Britain’s two main parties set the stage… for a battle over a no-deal Brexit, hoping to win back voters who abandoned them for a new movement led by eurosceptic Nigel Farage and other smaller parties in European elections. After a punishing night when acrimonious divisions over Britain’s departure from the European Union were plain to see, contenders for the leadership of the governing Conservatives said the results were a demand to deliver Brexit no matter what.”

Central Banking Watch:

May 26 – Reuters (Stanley White): “Bank of Japan Governor Haruhiko Kuroda said… the global economic outlook is highly uncertain, and there are downside risks due to trade friction, China’s slowing economy and Britain’s negotiations to leave the European Union. ‘There is a high degree of uncertainty... and the downside risks are large,’ Kuroda said…”

May 26 – Reuters (Frank Siebelt): “European Central Bank policymaker and presidential hopeful Jens Weidmann said… he saw no need for the ECB to change its policy at present, despite a weaker euro zone economy. The ECB’s Governing Council is due to meet on June 5-6 and decide on the terms of its third round of cheap loans to banks… ‘This isn’t a situation where prices are falling and we have to react now,’ the head of Germany’s central bank told members of the public at the Bundesbank’s open days.”

May 29 – Reuters (Leika Kihara): “Former European Central Bank President Jean-Claude Trichet said… it was not right to think that central banks must achieve exactly the level of inflation they target in a set period of time. ‘There is a consensus among central banks that real success is to solidly anchor inflation expectations in the medium- to long-term in line with their definition of price stability,’ Trichet said…”

May 28 – CNBC (Jeff Cox): “Policymakers pulled out all the stops to fix the financial crisis, but they may have to get even more extreme when the next downturn hits. Future crises could see a ‘radicalization’ of the types of measures taken to jolt the economy out of its last malaise, according to an analysis by AB Bernstein that looks both at the waning effectiveness of current attempts and the shape future efforts will take. Essentially, the view is that next time around policymakers will go even further. That means the use of ‘Modern Monetary Theory’ — in which even more government debt is used to spur growth — along with negative interest rates and the possible step of distributing ‘helicopter money’ or direct cash from central banks like the Federal Reserve.”

May 28 – Reuters (Gavin Jones): “Italian Deputy Prime Minister Matteo Salvini called… for a new role for the European Central Bank, which should ‘guarantee’ government debt in order to keep bond yields low… Fresh from a victory in European parliamentary elections, the leader of the right-wing League said… that the EU’s ‘failed’ fiscal rules should be rewritten with the focus on cutting unemployment, not capping budget deficits.”

Europe Watch:

May 29 – Financial Times (Claire Jones and Adrienne Klasa): “The voting is over and now the horse-trading begins. The EU’s 28 member countries have elected a new European Parliament, but deciding who gets appointed to the top jobs is a matter for the politicians. At the heart of the negotiations that will take place over the next few weeks is the naming of a successor to Mario Draghi as president of the European Central Bank. Mr Draghi is set to step down in October. Following in his footsteps will not be an easy task. During his eight-year tenure, the Italian economist undertook controversial and radical policies during the eurozone debt crisis but is widely credited with saving the single currency. He declared in 2012 that the ECB was prepared to do ‘whatever it takes’ to preserve the currency, a move that is seen as a turning point, shoring up confidence in shaky European economies and rebooting lending.”

May 27 – Reuters (Jan Strupczewski): “The results of the European parliamentary election are likely to lead to less ambitious euro zone integration plans and set Italy up for more clashes with the European Commission over its fiscal policy, euro zone officials said…”

May 28 – Financial Times (Miles Johnson and Mehreen Khan): “Matteo Salvini has called for a ‘fiscal shock’ of tax cuts in Italy as he exerts his political influence after a resounding victory in the European elections, but Brussels is preparing to hit back over Rome’s budget plans. Italy’s deputy prime minister and leader of the anti-immigration League party said that Italy ‘must lower taxes’. ‘We need a Trump cure, an Orban cure, a positive fiscal shock to restart the country,’ Mr Salvini said… ‘Not everything all at once, but the goal is in the government contract.’”

May 25 – Reuters (Claire Jones and Miles Johnson): “Italy’s stuttering economy is one of the greatest obstacles to eurozone growth — but just as the country needs external policy support it is at risk of losing its seat on the European Central Bank. For the first time in the history of the monetary union’s highest policymaking body, Italy may not have an appointee on its governing board after Mario Draghi… steps down this autumn after eight years in charge. Since the birth of the central bank in 1998, the eurozone’s third-largest economy has held one of six seats on a board that shapes everything from how the ECB responds to financial crises to the day-to-day running of the institution.”

May 25 – Reuters (Alastair Macdonald and Jan Strupczewski): “Parties committed to strengthening the European Union held on to two-thirds of seats in the EU parliament, official projections from the bloc’s elections showed on Sunday, though far-right and nationalist opponents saw strong gains. France’s Emmanuel Macron, who has staked his presidency on persuading Europeans that the EU is the answer to the challenges of an uncertain, globalising world economy, took a personal hit when his centrist movement was edged into second place by Marine Le Pen’s anti-immigration, anti-Brussels National Rally.”

May 28 – Reuters (Silvia Aloisi): “The European Commission could impose a 3 billion euro fine on Italy for breaking EU rules due to its rising debt and structural deficit levels, the country’s Deputy Prime Minister Matteo Salvini said… Salvini, whose far-right League party triumphed in European elections on Sunday, said he would use ‘all my energies’ to fight what he said were outdated and unfair European fiscal rules.”

May 28 – Bloomberg (Arne Delfs and Patrick Donahue): “Angela Merkel has given up hope on her heir apparent and is hunkering down in office in the face of growing turmoil in Germany’s ruling party. Merkel has decided that Annegret Kramp-Karrenbauer, who took over as leader of the Christian Democratic Union in December, is not up to the country’s top job, according to two officials… As a result, the chancellor has become more determined than ever to stay in power until her term ends in 2021, the officials said.”

May 28 – Financial Times (Valentina Romei): “Lending growth to businesses in the eurozone accelerated in April but was not broad-based, with a worrying contraction in weaker economies. Lending to eurozone businesses, adjusted for securitisation, rose by an annual rate of 3.9%, stronger than the 3.6% in March. Lending growth to households remained solid and improved marginally to 3.4%... Lending growth in France and Germany continued at a strong pace above 6%, but it contracted in Italy and Spain.”

Japan Watch:

May 27 – Reuters (Tim Kelly and Malcolm Foster): “U.S. President Donald Trump expects that Japan’s military will reinforce U.S. forces throughout Asia and elsewhere, he said…, as the key U.S. ally upgrades the ability of its forces to operate further from its shores. Trump’s comments followed his inspection of Japan’s largest warship, the Kaga, a helicopter carrier designed to carry submarine-hunting helicopters to distant waters.”

EM Watch:

May 27 – Bloomberg (Cagan Koc): “Turkey’s central bank took another step to boost its coffers by raising the amount of foreign currency lenders are required to park at the regulator as reserves. The monetary authority increased reserve requirements for foreign-exchange deposits by 200 bps… The measures will withdraw around $4.2 billion of liquidity from the market, it said. Data last week showed that Turkey’s net international reserves dropped to the lowest level since October as concerns linger that the central bank is trying to prop up the lira before elections next month.”

May 28 – Bloomberg (Asli Kandemir): “Turkey’s industrial giants are struggling to keep a lid on soaring finance expenses that are threatening to engulf operating income as the lira’s depreciation pushes up foreign-borrowing costs. Istanbul’s top 500 industrial firms, which together account for almost half of the nation’s exports, reported finance expenses of 95.8 billion lira ($16 billion) last year, compared with 35.2 billion liras in 2017… The ratio of financial costs to operating profits almost doubled to 88.9%, he said.”

May 29 – Reuters: “Brazil’s economy shrank in the first quarter of this year, contracting 0.2% from the prior quarter…, the first contraction since 2016.”

May 27 – Bloomberg (Suvashree Dey Choudhury and Shruti Srivastava): “India’s shadow banks are likely to see a further squeeze on their profit margins after the Reserve Bank of India signaled it will tighten liquidity requirements to bring them in line with the country’s more closely regulated commercial banks. Instead of providing a much-expected liquidity window to non-bank finance companies via the regular lenders, the central bank took a tougher stance on Friday by issuing draft guidelines requiring most NBFCs to set aside a liquidity buffer by investing in high-quality liquid assets, primarily sovereign bonds.”

Global Bubble Watch:

May 29 – New York Times (Neil Irwin): “You know the moment in a horror movie when the characters are going about their business and nothing bad has happened to them yet, but there seem to be ominous signs everywhere that only you, the viewer, notice? That’s what watching global financial markets the last couple of weeks has felt like.”

May 29 – Bloomberg (James Crombie and Jonathan Ferro): “Credit market risk is at an all-time high, according to Scott Mather, chief investment officer of U.S. core strategies at Pacific Investment Management Co… ‘We have probably the riskiest credit market that we have ever had,’ Mather said… The increased size, lower quality and lack of liquidity in corporate bond markets are all red flags, Mather said.”

Fixed-Income Bubble Watch:

May 30 – CNBC (Jeff Cox): “Low-rated companies are the biggest accumulators of debt, prompting a major credit agency to warn of significant troubles if current conditions deteriorate. The alert from Moody’s… comes as worries mount over a looming economic downturn… Should conditions continue to deteriorate, it could mean trouble for companies that are rated at the lower end of the spectrum, a group that rang up $695 billion in new debt during 2018. The danger is that these ‘B3’ companies only need to decline one notch to fall into the junk category, which would make their debt loads even more onerous… New issuers in B3 debt comprised 44% of all new paper that came to market in 2018, double the level in 2007…”

May 28 – Wall Street Journal (Sam Goldfarb and Avantika Chilkoti): “A decadelong rise in corporate borrowing is prompting new scrutiny about how debt markets might hold up in an economic downturn. While few worry that the corporate debt market is in imminent danger, both regulators and investors are grappling with how stress could ripple through it. In a speech last week, …Jerome Powell ticked through a number of topics of concern, including the near record-level of business debt as a share of the economy; the increase in debt at the bottom end of the investment-grade ratings scale; and the rapid disappearance of protections for lenders to higher-risk companies. As of the end of last year, the ratio of business debt to U.S. gross domestic product had reached 73.1%, according to Federal Reserve data, just short of the high of 73.7% set in 2009. Meanwhile, the amount of triple-B rate U.S. corporate debt… has more than doubled since the crisis.”

May 27 – Wall Street Journal (Gunjan Banerji): “Investors seeking yield are piling into the riskiest corner of the municipal bond market at a pace not seen in decades. They have poured $8 billion into funds that deal in high-yield muni bonds—or junk munis—this year, the most through May since at least 1992… Muni-bond funds overall have attracted $37 billion during that same period, the most in almost three decades. There is ‘more demand than at any time in recent memory,’ said Jeff Burger, a portfolio manager at Mellon Investments… Investors have jumped into the municipal-bond market in search of returns this year as Treasury yields have fallen…”

May 28 – Wall Street Journal (Ben Eisen): “Investment trusts that buy residential home loans are piling into mortgage bonds, taking on a more prominent role in the housing market as the government retreats. Mortgage real-estate investment trusts were once small players in housing finance, but they’ve increased their mortgage-bond portfolios by almost 28% to $308 billion over the 12 months through March. It was the largest stockpile in a half-dozen years… Annaly Capital Management Inc. and AGNC Investment Corp., the two biggest companies in the sector, accounted for the majority of the growth.”

Leveraged Speculation Watch:

May 29 – Bloomberg (Shahien Nasiripour, Sridhar Natarajan and Katherine Burton): “The New Jersey State Investment Council voted to cut its target allocation to hedge funds in half to 3% from 6%. The pension fund approved the plan… under pressure from labor unions to reduce fees to investment managers.”

Geopolitical Watch:

May 30 – Reuters (Ben Blanchard): “The United States is ‘playing with fire’ with its support for self-ruled Taiwan, China said…, in angry comments ahead of a meeting between Defence Minister Wei Fenghe and acting U.S. Defense Secretary Patrick Shanahan.”

May 29 – Wall Street Journal (Justin Scheck and Bradley Hope): “U.S. allies, looking to buck American control over international trade, are developing alternate systems that don’t rely on U.S. currency. The catalyst was the Trump administration’s decision last year to reimpose trade sanctions on Iran after pulling out of the 2015 nuclear-weapons deal. The U.K., Germany and France didn’t support the sanctions, which include a ban on dollar transactions with Iranian banks. So they are fine-tuning a system to enable companies to trade with Iran without using dollars. India wasn’t happy either. Iran is a longtime trading partner, and India wants Iranian oil. India began using a similar alternative system in November, and shipping records show it already is being used by international companies to trade with Iranian businesses subject to sanctions. China and Russia, also eager to break free of U.S. control, are promoting their own alternatives to the global bank-transfer system, which the U.S. effectively controls, and are striking deals to trade with yuan and rubles instead of dollars.”

May 29 – Wall Street Journal (Arthur Herman): “Iran sabotages ships in the Persian Gulf and threatens to resume enrichment of uranium for its nuclear program. Russia dispatches troops to beleaguered dictator Nicol├ís Maduro of Venezuela, while China sends logistical support. China resists a trade truce with the U.S. and seeks to drive a wedge between the U.S. and allies like Jordan and Saudi Arabia by selling them armed drones. Russia sends bombers and fighters into Alaska’s Air Defense Identification Zone. Iran, Russia and China all work tirelessly to keep Syrian dictator Bashar Assad in power. In the aftermath of the Iran nuclear deal in August 2015, I warned of a Moscow-Beijing-Tehran axis. Since then, these three authoritarian and revisionist powers have become bolder, more sophisticated and more global. Their effort to diminish and disrupt the influence of the U.S. and its allies extends from Syria and the Strait of Hormuz to North Korea and Latin America, as well as Central Asia and even the South Pacific.”

May 26 – Reuters (Yimou Lee and Ben Blanchard): “China responded angrily… as Taiwan confirmed the first meeting in more than four decades between senior U.S. and Taiwanese security officials. Taiwan’s national security chief David Lee met White House national security adviser John Bolton earlier this month… The official Central News Agency said the meeting was the first since the island and the United States ended formal diplomatic ties in 1979… ‘China is extremely dissatisfied and resolutely opposed to this,’ Foreign Ministry spokesman Lu Kang told a daily news briefing, adding China was against any form of official exchanges between the United States and Taiwan.”

May 26 – Reuters (Inti Landauro): “Libyan eastern commander Khalifa Haftar has ruled out a ceasefire in the battle for Tripoli and accused the United Nations of seeking to partition Libya, according to an interview… Haftar’s Libyan National Army (LNA) began an offensive in early April to take Tripoli from fighters loyal to Prime Minister Fayez al-Serraj’s Government of National Accord (GNA) which has the backing of the United Nations.”

May 29 – Reuters (Lisa Barrington): “U.S. National Security Adviser John Bolton said… that naval mines ‘almost certainly from Iran’ were used to attack oil tankers off the United Arab Emirates this month, and warned Tehran against conducting new operations.”

May 28 – Reuters (Bozorgmehr Sharafedin): “Iran sees no prospect of negotiations with the United States, a foreign ministry spokesman said…, a day after U.S. President Donald Trump said a deal with Tehran on its nuclear program was possible.”

Friday Evening Links

[Reuters] Wall Street reels as Trump threatens tariffs on Mexico

[Reuters] Gold scales 7-week peak as Trump's Mexico threat rattles markets

[CNBC] Peso plunges vs the US dollar after Trump announces Mexican import tariffs

[Reuters] Oil falls 3% on trade worries, heads for biggest monthly drop in six months

[Reuters] Mexico urges Trump to back down on 'unfair' tariff threat

[CNBC] Mnuchin and Lighthizer were opposed to Trump tariffs on Mexico, source says

[Reuters] Trump's Mexican tariffs threat sends shudders through autos sector

[Reuters] Trump urges Mexico to 'finally do what must be done' on immigration

[AP] Tariffs aimed at Mexico, but US companies in line of fire

[CNBC] Grover Norquist urges Trump to get rid of trade tariffs, calling them taxes on US consumers

[Bloomberg] China Threatens Sweeping Blacklist of Firms After Huawei Ban

[WSJ] Tariffs Against Mexico Would Hit Many Goods That Previously Avoided Penalties

[FT] Investors now see four Fed rate cuts as a possibility