Friday, August 16, 2019

Weekly Commentary: Comeuppance

The Chinese Credit machine sputtered in July. Growth in Total Aggregate Financing dropped to $144 billion, almost 40% below consensus estimates. This was less than half of June’s $320 billion increase and the slowest expansion since February. The sharp slowdown was beyond typical seasonality, with the month’s growth in Aggregate Financing 18% below July 2018. Despite July’s weak growth, Total Aggregate Financing was still up 10.7% over the past year.

New Bank Loans fell to $150 billion from June’s $235 billion, with growth 28% below that from July 2018. At $2.331 TN, New Loans were still up 12.6% over the past year. Consumer Loans dropped to $74 billion, the weakest showing since February. Consumer Loans were nonetheless up 16.5% over the past year, 38% in two, 71% in three and 138% over five years.

Loans to the non-financial corporate sector collapsed in July to $42 billion, about one third June’s level. Somewhat offsetting this decline, Corporate Bond Issuance almost doubled in July to $32 billion.

The ongoing contraction in “shadow” finance accelerated in July, with declines in outstanding Trust Loans, Entrusted Loans, and Banker Acceptances. On a year-over-year basis, Trust Loans were down 4.3%, Entrusted Loans 10.0% and Bankers Acceptances 15.0%.

China’s July Credit data were alarming on multiple levels. For starters, the sharp Credit slowdown supports the view that financial conditions tightened meaningfully after the government takeover of Baoshang Bank (and attendant money market instability). It also raises the increasingly pressing question as to the willingness of the banking system to continue to take up the slack in the face of a broadly deteriorating backdrop. And in a new development, analysts have begun contemplating the possibility of waning Credit demand.

Furthermore, the sharp pullback in Consumer Loans raises the specter of an inflection point in household mortgage borrowings. Bubbling apartment markets have supported a resilient consumer sector along with an unrelenting housing construction boom. Government tightening measures may be having some impact. It is as well possible that market sentiment has begun to shift.

August 14 – Reuters (Huizhong Wu, Yawen Chen and Stella Qiu): “China’s economy stumbled more sharply than expected in July, with industrial output growth cooling to a more than 17-year low, as the intensifying U.S. trade war took a heavier toll on businesses and consumers. Activity in China has continued to cool despite a flurry of growth steps over the past year, raising questions over whether more rapid and forceful stimulus may be needed, even if it risks racking up more debt. After a flicker of improvement in June, analysts said the latest data was evidence that demand faltered across the board last month, from industrial output and investment to retail sales… Industrial output growth slowed markedly to 4.8% in July from a year earlier…, lower than the most bearish forecast in a Reuters poll and the weakest pace since February 2002.”

August 14 – Reuters (Roxanne Liu): “China’s property investment slowed to its weakest pace this year in a sign the housing market’s resilience may be waning as Beijing toughens its crackdown on speculative investments and holds back on new stimulus… Property investment in July rose 8.5% year-on-year, easing from June’s 10.1% gain and was the slowest since December’s 8.2%...”

China is now only a faltering apartment Bubble away from a period of major economic upheaval and acute financial instability.

Global bond markets were this week nothing short of incredible. Ten-year German bund yields dropped 11 bps to a record low negative 0.69%, and French yields fell 15 bps to negative 0.41%. Swiss 10-year yields sank 19 bps to negative 1.14%. Spanish and Portuguese yields fell 18 bps to 0.08% and 0.11%. Italian yields sank 41 bps to 1.40%. Sovereign yields ended the week at negative 0.69% in Denmark, negative 0.57% in Netherlands, negative 0.49% in Slovakia, negative 0.44% in Austria, negative 0.43% in Sweden, negative 0.42% in Finland, negative 37 bps in Belgium, negative 0.26% in Slovenia, negative 0.18% in Latvia, and negative 0.14% in Ireland. Japanese 10-year yields ended the week down a basis point to negative 0.23%.

Extraordinary in its own right, the Treasury market garnered intense media focus: CNBC: “Bond Market Close to Sending Biggest Recession Signal Yet.” Fox Business: “Recession Indicator with Perfect Track Record Flashing Red.” Business Insider: “The Market's Favorite Recession Indicator Just Flashed its Starkest Warning Since 2007.” NBC: “Wall Street Slides as Inverted Yield Curve Rings Recession Alarm Bells.” Money and Markets: “Yield Curve Blares Loudest Recession Warning Since 2007.”

Ten-year Treasury yields collapsed 19 bps this week to 1.56%, the low going back to August 2016. Thirty-year bond yields traded as low at 1.91% in Thursday’s session, dipping below 2.00% for the first time (ending the week down 22 bps to 2.04%). Two-year yields fell 17 bps to 1.47%, with December Fed funds futures implying a 1.49% funds rate. Wednesday’s inverted Treasury curve was widely cited as the key factor behind the stock market selloff.

August 14 – Reuters (Gertrude Chavez-Dreyfuss and Dhara Ranasinghe): “The U.S. Treasury yield curve inverted on Wednesday for the first time since June 2007, in a sign of investor concern that the world's biggest economy could be heading for recession. The inversion - where shorter-dated borrowing costs are higher than longer ones - saw U.S. 2-year note yields rise above the 10-year yield.”

At this point, Treasury yields have little association with the U.S. economy. The structure of the Treasury curve (along with Federal Reserve monetary policy) has detached from U.S. economic performance. Treasuries are instead caught up in an unprecedented global market phenomenon. Sovereign debt, after all, has traded for hundreds of years. Yet bonds have never traded with negative yields. Never have global bond prices spiked in unison, with yields collapsing to unprecedented lows across the globe.

I understand why market professionals, pundits and journalists focus on the conventional “recession risk” explanation for sinking Treasury yields and the inverted curve. For one, there is insufficient awareness as to the deep structural impairments that today permeate global finance. Besides, no one wants to contemplate that global bond yields might portend serious problems ahead – that global yields are signaling the reemergence of Crisis Dynamics.

Throughout this decade’s long Bubble period, I’ve often written and stated, “I hope things are not as dire as I believe they are.” Along the way, Bubble Analysis has appeared flawed and hopelessly detached from reality. And that’s exactly how these things work.

But I’ve never wavered from the view that this would end badly. Never have I believed that manipulating and distorting markets would achieve anything but epic Bubbles and inevitable terrible hardship. I’ve not seen evidence to counter the view that the longer the global Bubble inflates the greater the downside risk (moreover, such risk grows exponentially over time). And not for one minute did I believe zero rates and QE would resolve deep financial and economic structural issues. Indeed, I have fully expected reckless monetary mismanagement to ensure a global crisis much beyond 2008. From my analytical perspective, the global Bubble has followed the worst-case scenario.

It sounds archaic, but sound money and Credit are fundamental to sound financial systems, sound economic structure, cohesive societies and a stable geopolitical backdrop. The most unsound “money” in human history comes with dire consequences. Global finance now suffers from irreparable structural impairment. Economies across the globe are deeply maladjusted. Global imbalances are unprecedented. The trajectory of geopolitical strife is frightening.

Meanwhile, central banks are locked in flawed inflationist doctrine. Their experiment is failing, yet in failure they will resort to only more reckless market manipulation and monetary inflation. This analysis is corroborated both by collapsing sovereign yields and a surging gold price. The clear and present risk is of an abrupt globalized market dislocation, financial crisis and resulting economic and geopolitical instability. It may sound like crazy talk, except for the fact that such a scenario is alarmingly consistent with signals now blaring from global bond markets.

August 16 – Bloomberg (John Authers): “There has been a tendency since the financial crisis to label any market that is rallying or deemed overvalued to be in a ‘bubble.’ The word has become overused and debased. But if we treat it rigorously, the bubble concept is still vital in navigating financial markets. And the rigorous treatment reveals that bonds really are in a bubble. Longview Economics Chief Market Strategist Chris Watling published a fascinating research note applying the framework introduced by Charles Kindleberger in his book ‘Manias, Panics, and Crashes.’ …Watling reminds us that Kindleberger needed to satisfy four conditions before he diagnosed a bubble: i) cheap money underpins and creates the bubble; ii) debt is taken on during the bubble build-up, which helps fuel much of the speculative price increases (e.g. buying on margin); iii) once a bubble is formed, the asset price has a notably expensive valuation; & iv) there’s always a convincing narrative to ‘explain away’ the high price. Reflecting that, there’s a wide acceptance in certain quarters that the price is rational (and ‘this time it’s different’).”

I’m biased, but what could be more fascinating than Bubble Analysis? My analytical framework owes a debt of gratitude to Charles Kindleberger’s work. I’ll interject my definition: “A Bubble is a self-reinforcing but inevitably unsustainable inflation.” This “unsustainable” facet has become critical in this bizarro world of central bank finance and accompanying runaway Bubbles. At a decade and counting, it is reasonable to assume that the realm of central bank supported bull markets is everlasting. Such optimism is today dangerously misplaced.

I’ll take somewhat exception to John Authers’, “[Bubble] has become overused and debased.” The key issue is that Bubble Dynamics took root across Credit systems, asset classes and around the world. Never has “Bubble” applied to so many markets in so many places – never has finance created Bubble Dynamics on an almost systemic basis.

I have argued post-crisis monetary stimulus unleashed a historic global Bubble in “financial assets” more generally, a “global government finance Bubble” that fueled hyperinflation in prices for stocks, bonds, structured finance, real estate, private businesses, collectibles, and so on around the world. The word “Bubble” has not been overused and debased, as much as the overuse of central bank and government Credit has worked to debase “money” more generally.

Authers also states: “But if we treat it rigorously, the bubble concept is still vital in navigating financial markets.” The problem is markets love Bubbles – jump aboard and make easy “money.” And for the past decade central banks have incentivized speculation and speculative leverage across assets classes and around the globe.

Bubble Analysis is vital for both navigating markets and for policymaking. For a decade now, speculators have been playing Bubbles, while central bankers have been denying their existence. Global bond markets have become convinced the Bubble is faltering, with the expectation that central banks have no alternative than to drive rates even lower while monetizing further Trillions of government bonds (throwing in some corporate debt and even equities for good measure). This expectation of additional aggressive monetary stimulus has bolstered the view within the risk markets that the bottomless central bank punchbowl will keep the party rocking.

At this point, the overarching issue is not the U.S. vs. China trade war, and it’s not specifically the vulnerable Chinese economic boom. The U.S. economy is certainly not the focal point of global market dynamics. Importantly, the trade war is a catalyst for pushing China’s vulnerable economy to the downside. After a historic Bubble inflation, a faltering Chinese economy is a catalyst for pushing China’s fragile Credit and financial systems beyond the precipice. And as the marginal source of global finance and economic growth, faltering Chinese Credit and economic systems will be a catalyst for bursting Bubbles around the globe.

August 10 – Reuters (Cassandra Garrison and Nicolás Misculin): “Argentine voters soundly rejected President Mauricio Macri’s austere economic policies in primary elections on Sunday, raising serious questions about his chances of re-election in October… A coalition backing opposition candidate Alberto Fernandez - whose running mate is former president Cristina Fernandez - led by a wider-than-expected 14 percentage points with 47.1% of votes, with fourth-fifths of ballots counted.”

Granted, opposition candidate Fernandez’s margin of victory was larger than expected. But what a market reaction. The Argentine peso sank 14.5% in Monday trading. Argentina’s Merval Equities Index collapsed 38% (48% in U.S. dollars) Monday and ended the week down 31.5%. The price of Argentina’s dollar-denominated 30-year bond sank 25%, as yields surged 300 bps in Monday trading to 12.51%. Yields jumped above 15% during Wednesday’s trading before ending the week at 13.50%.

August 13 – Reuters (Tom Arnold): “The cost of insuring against an Argentine sovereign default jumped again on Tuesday as investors continued to react to the heavy defeat of President Mauricio Macri in the country’s primary elections at the weekend. Argentine 5-year credit default swaps (CDS) were marked at 2,116 basis points, up from what was already a five-year high of 1,994 bps the previous day, according to… IHS Markit. Markit calculations estimate that level prices the probability of a sovereign default within the next five years at more than 72%.”

After ending convertibility to the U.S. dollar at a one-to-one rate with the onset of Argentina’s 2001 financial crisis, it now requires 55 pesos to exchange for one dollar. Oversubscribed when issued in the summer of 2017, Argentina’s 100-year bond lost 30% of its value this week and now trades at 52 cents on the dollar.

Market reaction to Argentina’s primary election is further evidence the global market environment has changed. “Risk off” is gaining momentum. De-risking/deleveraging dynamics have altered the liquidity backdrop, leading to more chaotic market reactions along with heightened contagion risk. This week’s EM currency declines included Russia’s ruble 1.9%, Brazil’s real 1.6%, Turkey’s lira 1.5%, Poland’s zloty 1.4% and Mexico’s peso 1.3%. Major equities indices were down 4.0% in Brazil, 3.9% in Turkey, 3.3% in Russia and 2.7% in Mexico.

It was not as if there weren’t constructive developments. At least for the week, the People’s Bank of China stabilized the renminbi (up 0.27% vs. the dollar). Monday’s ugly market performance apparently spurred President Trump to delay imposing additional Chinese tariffs on many goods until December 15th. China announced plans to boost household disposable income. And, from an ECB official, the clearest signal yet that “whatever it takes” is about to shift into overdrive.

August 15 – Wall Street Journal (Tom Fairless): “The European Central Bank will announce a package of stimulus measures at its next policy meeting in September that should exceed investors’ expectations, a top official at the central bank said. …Olli Rehn said the slowing global economy would see the ECB rolling out fresh stimulus measures that should include ‘substantial and sufficient’ bond purchases as well as cuts to the bank’s key interest rate. ‘It’s important that we come up with a significant and impactful policy package in September,’ said Mr. Rehn, who sits on the ECB’s rate-setting committee as governor of Finland’s central bank. ‘When you’re working with financial markets, it’s often better to overshoot than undershoot, and better to have a very strong package of policy measures than to tinker,’ Mr. Rehn said.”

The President’s trade war retreat tweet had a notably short market half-life. It appears markets these days are less invigorated by talk of additional Chinese stimulus. And Olli Rehn’s “significant and impactful policy package” essentially bypassed equities markets while throwing gas on the raging bond fire.

It’s been a full decade of government and central bank backstops, with the “Trump put” a relatively late addition. It sure appears the Trump, central bank and Beijing “puts” have lost some potency. And in about a month we’ll have a better read on the “Fed put.” It’s a reasonable bet the stock market will go into the September 18th FOMC meeting with a gun to its head: “50 bps or we’ll shoot!”

Much can happen in a month – especially at the current mercurial clip of developments. But the Fed will be in a really tough spot. Don’t give the market 50 bps and ultra-dovish commentary and risk getting hit with a heated market tantrum. Give markets what they demand and risk a “sell the news” response and a critical change in market sentiment. It has the feel that a decade of egregious monetary inflation and speculative Bubbles is about to get some Comeuppance.

For the Week:

The S&P500 declined 1.0% (up 15.2% y-t-d), and the Dow fell 1.5% (up 11.0%). The Utilities added 0.3% (up 15.9%). The Banks dropped 3.1% (up 6.7%), and the Broker/Dealers declined 1.3% (up 5.3%). The Transports fell 2.4% (up 8.7%). The S&P 400 Midcaps lost 1.5% (up 12.6%), and the small cap Russell 2000 slumped 1.3% (up 10.8%). The Nasdaq100 dipped 0.6% (up 20.1%). The Semiconductors rallied 1.0% (up 28.1%). The Biotechs declined 0.9% (up 8.0%). While bullion jumped $21, the HUI gold index fell 2.1% (up 3.9%).

Three-month Treasury bill rates ended the week at 1.82%. Two-year government yields dropped 17 bps to 1.48% (down 101bps y-t-d). Five-year T-note yields fell 16 bps to 1.42% (down 109bps). Ten-year Treasury yields sank 19 bps to 1.56% (down 113bps). Long bond yields tumbled 22 bps to 2.04% (down 98bps). Benchmark Fannie Mae MBS yields declined six bps to 2.43% (down 107bps).

Greek 10-year yields dropped 17 bps to 1.95% (down 245bps y-t-d). Ten-year Portuguese yields sank 18 bps to 0.11% (down 161bps). Italian 10-year yields collapsed 41 bps to 1.40% (down 135bps). Spain's 10-year yields sank 18 bps to 0.08% (down 134bps). German bund yields dropped 11 bps to negative 0.685% (down 93bps). French yields fell 15 bps to negative 0.41% (down 112bps). The French to German 10-year bond spread narrowed four to 27 bps. U.K. 10-year gilt yields declined two bps to 0.47% (down 81bps). U.K.'s FTSE equities index dropped 1.9% (up 5.8% y-t-d).

Japan's Nikkei Equities Index fell 1.3% (up 2.0% y-t-d). Japanese 10-year "JGB" yields declined a basis point to negative 0.23% (down 23bps y-t-d). France's CAC40 dipped 0.5% (up 12.1%). The German DAX equities index fell 1.1% (up 9.5%). Spain's IBEX 35 equities index declined 1.0% (up 1.5%). Italy's FTSE MIB index was little changed (up 10.9%). EM equities were mostly lower. Brazil's Bovespa index sank 4.0% (up 9.7%), and Mexico's Bolsa dropped 2.7% (down 5.5%). South Korea's Kospi index declined 0.5% (down 5.6%). India's Sensex equities index slipped 0.6% (up 3.6%). China's Shanghai Exchange rallied 1.8% (up 13.2%). Turkey's Borsa Istanbul National 100 index sank 3.7% (up 4.9%). Russia's MICEX equities index fell 2.4% (up 10.4%).

Investment-grade bond funds saw inflows of $4.032 billion, and junk bond funds posted inflows of $346 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates were unchanged at 3.60% (down 93bps y-o-y). Fifteen-year rates increased two bps to 3.07% (down 94bps). Five-year hybrid ARM rates slipped a basis point to 3.35% (down 52bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up six bps to 4.06% (down 49bps).

Federal Reserve Credit last week increased $2.9bn to $3.744 TN. Over the past year, Fed Credit contracted $473bn, or 11.2%. Fed Credit inflated $934 billion, or 33%, over the past 353 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $5.8bn last week to $3.468 TN. "Custody holdings" rose $35.5bn y-o-y, or 1.0%.

M2 (narrow) "money" supply rose another $23.8bn last week to a record $14.941 TN. "Narrow money" gained $773bn, or 5.5%, over the past year. For the week, Currency increased $1.6bn. Total Checkable Deposits rose $10.3bn, and Savings Deposits added $8.5bn. Small Time Deposits were little changed. Retail Money Funds gained $2.8bn.

Total money market fund assets gained $18.0bn to $3.354 TN. Money Funds gained $503bn y-o-y, or 17.6%.

Total Commercial Paper declined $5.2bn to $1.135 TN. CP was up $79bn y-o-y, or 7.5%.

Currency Watch:

The U.S. dollar index gained 0.7% to 98.203 (up 2.1% y-t-d). For the week on the upside, the British pound increased 1.0%. On the downside, the Brazilian real declined 1.6%, the Norwegian krone 1.4%, the Mexican peso 1.3%, the Swedish krona 1.3%, the euro 1.0%, the Japanese yen 0.7%, the New Zealand dollar 0.6%, the Swiss franc 0.6%, the Canadian dollar 0.4%, the South African rand 0.3%, the South Korean won 0.1% and the Australian dollar 0.1%. The Chinese renminbi increased 0.27% versus the dollar this week (down 2.33% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index declined 0.8% this week (down 0.3% y-t-d). Spot Gold jumped 1.4% to $1,513 (up 18%). Silver gained 1.1% to $17.122 (up 10.2%). WTI crude increased 37 cents to $54.87 (up 21%). Gasoline fell 1.0% (up 25%), while Natural Gas rallied 3.8% (down 25%). Copper increased 0.2% (down 1%). Wheat dropped 4.8% (down 5%). Corn sank 8.9% (up 2%).

Market Instability Watch:

August 11 – Wall Street Journal (Steven Russolillo): “China’s biggest experiment with its currency since a botched devaluation four years ago suggests its leaders believe they can stem a serious flood of money fleeing its borders. China earlier this month let the yuan depreciate beyond the key 7-to-the-dollar level for the first time since 2008…By the end of the week, the yuan somewhat stabilized, offering hope the two countries might not be on the brink of a full-blown currency war. But allowing the yuan to breach the fiercely defended level against the dollar revived memories of the Chinese currency’s sharp moves in August 2015, when Beijing shocked global financial markets by unveiling a surprise mini-depreciation.”

August 14 – Bloomberg (Cormac Mullen): “The recession alarm bell ringing in U.S. government bond markets sent investors rushing once more to haven assets, pushing the world’s stockpile of negative-yielding bonds to another record. The market value of the Bloomberg Barclays Global Negative Yielding Debt Index closed at $16 trillion Wednesday after the key U.S. 2-year and 10-year yield curve inverted for the first time 2007 -- a move often considered a harbinger of an economic downturn.”

August 14 – Reuters (Gertrude Chavez-Dreyfuss): “The U.S. Treasury yield curve temporarily inverted on Wednesday for the first time since June 2007 in a sign of investor concern that the world’s biggest economy could be heading for recession. The inversion - where shorter-dated borrowing costs are higher than longer ones - saw U.S. 2-year note yields rise above the benchmark 10-year yield, which fell to 1.574%, the lowest since September 2016.”

August 14 – Wall Street Journal (Daniel Kruger): “The cost to borrow cash overnight using Treasurys as collateral has risen, fueling investor concern that bond dealers could become inundated with U.S. debt as the government funds widening budget deficits. The rate that lenders have charged for cash in the market for Treasury repurchase agreements, or repos, was 2.183% on Monday, compared with the 2.1% that the Federal Reserve pays banks to hold excess reserves. The difference has averaged about 0.2 percentage point since the start of July, twice what it was this year through June.”

August 13 – Bloomberg (Yakob Peterseil and Cecile Gutscher): “A familiar bogeyman is lurking alongside the gut-wrenching swings across assets of all stripes: illiquidity. It’s problematic even by the dire standards of August, according to JPMorgan… Measures of market depth in U.S. equities, Treasuries and currencies relative to the rest of the year have fallen below the average since 2010, the bank’s research shows. It’s a sign that market players have diminished capacity to absorb the trade-driven mania sweeping assets. ‘Even by August standards, when market depth tends to decline and volatility to rise, this month is delivering numerous unusual events and milestones,’ strategists led by John Normand wrote…”

August 13 – Bloomberg (Lu Wang and Elena Popina): “A sleepy August morning got frantic in a hurry Tuesday when conciliatory statements on U.S.-China trade ignited an explosion in equity futures trading. Almost 130,000 September contracts on the equity gauge changed hands over five minutes starting at 9:45 a.m. in New York, five times the average for similar periods over the past month… News the Trump administration will delay the 10% tariff on some Chinese products sent prices on the contract up 2% in about half an hour. ‘We go from sipping from the water fountain to drinking from the fire hose,’ said Larry Weiss, head of equity trading at Instinet LLC… ‘The headlines certainly exacerbate intraday volatility, as summertime volumes present us with a decline in institutional and retail liquidity.’ Near-panic has become nearly routine in the U.S. stock market, belying August’s reputation for calm.”

August 15 – Bloomberg (Tasos Vossos): “Plummeting European bond yields have sunk so low they’ve created a distortion with potentially far-reaching effects across the banking and investment industries. The average yield on European investment-grade corporate bonds -- currently around 0.3% -- is lower than bid-ask spreads which analysts use as a proxy for transaction costs and now stand at 0.44 cents on the euro…”

Trump Administration Watch:

August 13 – CNBC (Maggie Fitzgerald): “The United States Trade Representative office said Tuesday that new tariffs on certain consumer items would be delayed until Dec. 15, while other products were being removed from the new China tariff list altogether. It cited health and security factors. The duties had been set to go into effect on Sept. 1, so the announcement eased concerns about the holiday shopping season. The USTR said the delay affects electronics including cellphones, laptops and video game consoles and some clothing products and shoes and ‘certain toys.’”

August 14 – Politico (Doug Palmer): “Commerce Secretary Wilbur Ross suggested Wednesday that United States and China haven’t determined when to hold their next round of face-to-face trade talks. ‘I don’t believe a date has been set,’ Ross said… ‘Instead, the next step in the long-running negotiations is ‘perhaps another phone call in a couple of weeks.’”

August 14 – Reuters (Howard Schneider): “It takes a lot to kill an economic expansion, typically requiring a major shock to bring growth to a halt and trigger a U.S. recession. This week investors signaled that moment may have arrived, and one big question is whether that shock has come from President Donald Trump’s trade war or a mistake by policymakers at the U.S. Federal Reserve. As bond markets flashed concern about recession on Wednesday and major stock indices cratered, Trump put the blame squarely on the Fed for continuing to raise rates through the end of last year. Even Trump foe and New York Times economics columnist Paul Krugman dinged the Fed for ‘a clear mistake.’ In raising interest rates four times last year ‘the Federal Reserve acted far too quickly, and now is very, very late,’ in reversing itself and cutting borrowing costs only modestly so far, Trump tweeted. ‘Too bad, so much to gain on the upside!’”

August 16 – Bloomberg (Nick Wadhams and Tony Capaccio): “The Trump administration has informally told Congress that it supports a potential sale of F-16 fighter jets to Taiwan, a move that will likely anger China at a key moment in trade talks with the U.S. The State Department has informally told key House and Senate committees that it supports the sale of about $8 billion in F-16s… Under U.S. law, Congress has 30 days to decide whether to block the sale, though such a move is seen as unlikely. The U.S., wary of antagonizing China, hasn’t sold advanced fighter jets since then-President George H.W. Bush announced the sale of 150 F-16s to Taiwan in 1992.”

Federal Reserve Watch:

August 15 – Reuters (Howard Schneider): “The inversion of portions of the Treasury bond yield curve this week ‘would have to be sustained over a period of time’ to be taken as a ‘bearish’ signal for a U.S. economy that continues to grow, St. Louis Federal Reserve President James Bullard said… With economies slowing overseas ‘you have this flight to safety going on,’ that is pushing down U.S. rates even though U.S. economic growth is ‘reasonable,’ Bullard said in comments… that seemed to discount the degree to which recent market volatility may figure into the Fed’s next decision on interest rates.”

August 12 – Wall Street Journal (Lalita Clozel): “Federal Reserve officials are weighing whether to use a tool that could reduce the risk of a credit crunch in a downturn. The tool is known as the countercyclical capital buffer. It allows the Fed to require banks to hold more loss-absorbing capital should the economy show signs of overheating, or to keep less of it during bad economic times. The buffer applies generally to banks with more than $250 billion in assets, including firms such as JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. The Fed’s board of governors so far hasn’t used the tool, approved in 2016. Its rule on the buffer says it should turn it up when economic risks are ‘meaningfully above normal’ and reduced when they ‘abate or lessen.’”

U.S. Bubble Watch:

August 12 – Bloomberg (Sarah McGregor): “The U.S. fiscal deficit has already exceeded the full-year figure for last year, as spending growth outpaces revenue. The gap grew to $866.8 billion in the first 10 months of the fiscal year, up 27% from the same period a year earlier… That’s wider than last fiscal year’s shortfall of $779 billion -- which was the largest federal deficit since 2012. So far in the fiscal year that began Oct. 1, a revenue increase of 3% hasn’t kept pace with a 8% rise in spending. While still a modest source of income, tariffs imposed by the Trump administration helped almost double customs duties to $57 billion in the period.”

August 13 – Wall Street Journal (Paul Kiernan): “Inflation accelerated in July as an underlying measure of consumer prices posted its strongest two-month gain since early 2006. The consumer-price index… rose a seasonally adjusted 0.3% last month from June… Excluding volatile food and energy, so-called core consumer prices rose 0.3% for a second consecutive month, the strongest two-month gain in more than a decade. The data marked the latest sign that inflation is finding its footing after a sluggish price gains earlier this year raised concerns at the Federal Reserve.”

August 15 – Reuters (Lucia Mutikani): “U.S. retail sales surged in July as consumers bought a range of goods even as they cut back on motor vehicle purchases, which could help to assuage financial markets’ concerns that the economy was heading into recession. …Retail sales rose 0.7% last month. Data for June was revised slightly down to show retail sales gaining 0.3% instead of increasing 0.4%... Economists… had forecast retail sales would rise 0.3% in July. Compared to July last year, retail sales increased 3.4%. Excluding automobiles, gasoline, building materials and food services, retail sales jumped 1.0% last month after advancing by an unrevised 0.7% in June.”

August 16 – Bloomberg (Ryan Haar): “U.S. consumer sentiment plummeted to a seven-month low in August on growing concerns about the economy even as the labor market shows few signs of weakening from robust levels. The University of Michigan’s preliminary sentiment index slumped to 92.1 from July’s 98.4, missing all forecasts… The gauge of current conditions decreased to 107.4 while the expectations index dropped to 82.3, bringing both readings to the lowest levels since early this year.”

August 13 – Reuters (Trevor Hunnicutt): “More people in the United States appear to be struggling to keep up with their credit card and student loan debt, which could put pressure on one of the strongest drivers of economic growth. U.S. credit card balances grew to $868 billion in the second quarter, from $848 billion in the previous three months, and the proportion of those balances seriously past due is on the rise, according to Federal Reserve Bank of New York data… U.S. consumer debt has continued to hit new peaks, rising $192 billion, or 1.4%, to $13.86 trillion in the second quarter. The figure is higher than the previous peak of $12.68 trillion before the 2008 global financial crisis…”

August 14 – Bloomberg (Brian Chappatta): “There’s some good news and bad news about the state of Americans’ finances embedded in the Federal Reserve Bank of New York’s latest Quarterly Report on Household Debt and Credit. First, the good news: 95.6% of households were current on their debt payments as of the second quarter, whether that’s mortgages, student or automobile loans or credit card bills. That’s the largest share since the third quarter of 2006, which of course was well before the financial crisis and the start of the last recession… The bad news is that the share of households deemed ‘severely derogatory’ on payments isn’t going away like it was 13 years ago. The category, which the New York Fed defines as ‘any stage of delinquency paired with a repossession, foreclosure, or ‘charge off,’’ is hovering at 2%, the same level it’s been at since the second quarter of 2015. As the bank’s researchers noted in a blog post, severely derogatory balances now make up almost half of all delinquencies, the largest share ever in data going back to 2003.”

August 13 – Wall Street Journal (Harriet Torry): “U.S. mortgage debt reached a record in the second quarter, exceeding its 2008 peak as the financial crisis unfolded. Mortgage balances rose by $162 billion in the second quarter to $9.406 trillion, surpassing the high of $9.294 trillion in the third quarter of 2008… Mortgages are the largest component of household debt. Mortgage originations, which include refinancings, increased by $130 billion to $474 billion in the second quarter.”

August 15 – Wall Street Journal (Michael Wursthorn): “Investors counting on a corporate earnings rebound in the second half of the year are risking disappointment. Wall Street analysts have cut their third-quarter profit estimates in recent weeks, painting a bleak picture for investors already grappling with a simmering trade war, pockets of economic weakness and ominous signs from the bond market. Despite this week’s partial reprieve from the Trump administration, the latest round of tariffs on Chinese imports compound the problems already facing many companies and threaten to stifle their profit margins. Especially vulnerable are manufacturers, miners and retailers. At best, earnings across the companies in the S&P 500 will grow 1.5% this year, FactSet projects, far short of estimates for growth of more than 6% that analysts initially forecast in January. Worse, a few analysts predict earnings could end up contracting for 2019 as a whole.”

August 11 – Wall Street Journal (Sebastian Herrera and Abigail Summerville): “California, the birthplace of the American tech industry, is emerging as a great foe. On Monday, the state legislature resumes and will consider a bill that, if passed, could classify drivers for ride-hailing companies like Uber Technologies Inc. and Lyft Inc. as employees, entitled to better wages and benefits. The bill, along with state laws pending or passed on issues ranging from privacy to net neutrality, could substantially reshape companies across the technology sector, many of which are based in the Silicon Valley area where local ordinances targeting tech are also taking hold. The push by policy makers against local companies is an unusual turn that is setting a precedent for greater tech governance throughout the country.”

China Watch:

August 15 – Reuters (Lucia Mutikani): “China… vowed to counter the latest U.S. tariffs on $300 billion of Chinese goods but called on the United States to meet it halfway on a potential trade deal, as U.S. President Donald Trump said any pact would have to be on America’s terms. The Chinese finance ministry said… that Washington’s tariffs, set to start next month, violated a consensus reached between Trump and Chinese President Xi Jinping at a June summit in Japan to resolve their disputes via negotiation. In a separate statement, China’s foreign ministry spokeswoman, Hua Chunying, said, ‘We hope the U.S. will meet China halfway, and implement the consensus of the two heads of the two countries in Osaka.’”

August 14 – Reuters (Yawen Chen and Kevin Yao): “China’s new home prices rose in July as the property sector held up as one of the few bright spots in the slowing economy, although easing momentum in some markets took immediate pressure off regulators to unleash major new curbs to deter speculation. Average new home prices in China’s 70 major cities rose 0.6% in July from the previous month, unchanged from growth reported in June and marking the 51st straight month of gains… On a year-on-year basis, home prices rose at their weakest pace this year in July by 9.7%, slowing from a 10.3% gain in June.”

August 16 – Reuters (Stella Qiu and Kevin Yao): “China’s state planner said on Friday it would roll out a plan to boost disposable income this year and in 2020 to spur private consumption, a major plank in the world’s second-biggest economy. China will urge local authorities to adopt measures to quickly stimulate consumption, focusing on eliminating ‘pain points’ and ‘blockages’, said Meng Wei, spokeswoman at the National Development and Reform Commission (NDRC).”

August 13 – CNBC (Everett Rosenfeld): “Months of protests, violence and large-scale disruptions in Hong Kong have thrust the city into the global spotlight. According to China, there’s ‘powerful evidence’ that the United States has been involved. A spokeswoman for China’s Foreign Ministry claimed… recent comments from American lawmakers — including House Speaker Nancy Pelosi, D-Calif., and Senate Majority Leader Mitch McConnell, R-Ky. — demonstrate that Washington’s real goal is to incite chaos in the city. ‘The U.S. denied on many occasions its involvement in the ongoing violent incidents in Hong Kong. However, the comments from those members of the U.S. Congress have provided the world with new and powerful evidence on the country’s involvement,’ Foreign Ministry Spokesperson Hua Chunying said…”

August 14 – Bloomberg: “China’s regulators are asking commercial banks to assume a greater role in resolving ‘hidden debt’ borrowed by struggling municipalities, according to people familiar with the matter. China Construction Bank Corp. and China CITIC Bank Corp. are now leading efforts to tackle implicit local government debt in Xiangtan city in the central province of Hunan, according to people… China CITIC Bank has proposed new lending to entities such as local government financing vehicles to repay borrowings from financial institutions, according to one of the people. A previous plan for the city spearheaded by policy lender China Development Bank has been suspended, and instead, the financial regulators are encouraging commercial banks to participate in such programs…”

August 13 – Bloomberg: “China’s 10-year sovereign bond yield fell to 3% for the first time since 2016, joining a global rally of government debt as the nation’s economy slowed and its trade dispute with the U.S. worsened. The yield on the country’s most-active notes due in a decade fell 1 basis point to briefly trade at 3%... Escalations in the trade war since April have put a damper on sentiment in equities, helping spur a rally in Chinese sovereign bonds. The yield on the country’s 10-year debt, which hadn’t touched 3% since November 2016, is down about 40 bps since its April peak.”

August 14 – Reuters (Peter Hobson and Yawen Chen): “China has severely restricted imports of gold since May, bullion industry sources with direct knowledge of the matter told Reuters, in a move that could be aimed at curbing outflows of dollars and bolstering its yuan currency as economic growth slows. The world’s second largest economy has cut shipments by some 300-500 tonnes compared with last year - worth $15-25 billion at current prices, the sources said…”

August 14 – Financial Times (Don Weinland): “Regulators in Hong Kong have launched an investigation at one of the city’s Chinese banks, one of several probes into the offshore financing activities of some of China’s most acquisitive conglomerates. The Hong Kong Monetary Authority dispatched a team to China Citic Bank International to probe the overseas borrowing activities of companies such as airlines-to-finance group HNA and Zhonghong Zhuoye, which once owned a controlling stake in SeaWorld Entertainment… The probe follows investigations by the Chinese government in 2017 that focused on a similar list of companies in the wake of an unparalleled overseas spending spree.”

Central Banking Watch:

August 15 – Reuters (Anthony Esposito): “Mexico’s central bank… cut its key lending rate for the first time since June 2014, citing slowing inflation and increasing slack in the economy, and fueling expectations that further monetary policy easing could be on the way. In a majority decision, the Bank of Mexico’s (Banxico) five-member board voted to lower the overnight interbank rate by 25 bps to 8.00%.”

August 10 – Bloomberg: “Former China central bankers warned… of currency-war risks with the U.S. after an abrupt escalation of trade tensions between the world’s two biggest economies this week. The U.S.’s labeling of China as a currency manipulator ‘signifies the trade war is evolving into a financial war and a currency war,’ and policy makers must prepare for long-term conflicts, Chen Yuan, former deputy governor of the People’s Bank of China, said… Former PBOC Governor Zhou Xiaochuan said… that conflicts with the U.S. could expand from the trade front into other areas, including politics, military and technology. He called for efforts to improve the yuan’s global role to deal with the challenges of a dollar-denominated financial system.”

August 13 – Reuters (Leika Kihara and Charlotte Greenfield): “Negative interest rate policy - an unconventional gambit once only considered by economies with chronically low inflation such as Europe and Japan - is becoming a more attractive option for some other central banks to counter unwelcome currency rises. In Asia, central banks in economies as diverse as Australia, India and Thailand have stunned markets by cutting aggressively rates in response to the broadening fallout from the U.S.-China trade war. The Reserve Bank of New Zealand (RBNZ) - considered a pioneer in central bank policymaking circles since it adopted inflation-targeting nearly three decades ago - floated the possibility of negative rates last week as it, too, slashed rates by a bigger-than-expected 50 bps and sent its currency tumbling to 3-1/2-year lows. The fact such controversial tools are being more widely contemplated underscores the dilemma central banks across the world face, as the global slowdown forces them to go to extremes in shielding their economies from a strengthening currency.”

Brexit Watch:

August 14 – Reuters (William James): “The British parliament is set for a September showdown between Prime Minister Boris Johnson’s ‘do or die’ pro-Brexit government and those implacably opposed to leaving the European Union without a divorce deal. Johnson says Britain will leave the EU with or without a deal on Oct. 31 and is refusing to negotiate with Brussels until it agrees to change the Withdrawal Agreement, the deal it negotiated with his predecessor Theresa May. Brussels says it won’t renegotiate. The impasse leaves Britain on course for a no-deal exit unless parliament can stop it.”

August 14 – Bloomberg (Silla Brush and Alexander Weber): “The European Central Bank blasted banks for slow-walking their Brexit preparations, telling them to move additional staff and resources to the European Union in case Britain leaves without a deal on Oct. 31. The central bank said firms have transferred ‘significantly fewer activities, critical functions and staff’ to their EU operations than originally foreseen… The ECB said some banks are falling short of their supervisory expectations and can’t continue to rely so heavily on servicing EU clients from their branches in the U.K.”

Asia Watch:

August 12 – Asia Times (Marshall Auerback): “It has become media orthodoxy to suggest that the era of US hegemony is slowly slipping away and migrating to Asia – with China as its locus – as we proceed into the heart of the 21st century. There is, however, a competing narrative, one recently expressed on by Michael Auslin, who makes the case that the ‘Asian Century’ ‘is ending far faster than anyone could have predicted.’ ‘From a dramatically slowing Chinese economy to showdowns over democracy in Hong Kong and a new cold war between Japan and South Korea, the dynamism that was supposed to propel the region into a glorious future seems to be falling apart,’ he writes. Auslin makes a very compelling case: As he notes, Asia is increasingly falling prey to the kinds of intra-regional geopolitical disputes that have long characterized other parts of the world (Japan vs China islands dispute, South Korea vs Japan trade dispute, Beijing’s ongoing efforts to subvert democratic reforms in both Hong Kong and Taiwan, to cite a few examples). Disputes, even rivalry, between nations are expensive.”

August 12 – Associated Press (Kim Tong-Hyung): “South Korea said… that it has decided to remove Japan from a list of nations receiving preferential treatment in trade in what was seen as a tit-for-tat move following Tokyo’s recent decision to downgrade Seoul’s trade status amid a diplomatic row. It wasn’t immediately clear how South Korea’s tightened export controls would impact bilateral trade”

August 11 – Financial Times (Edward White, Song Jung-a and Kana Inagaki): “South Korea’s state-run pension fund is reviewing more than $1bn of investments in Japanese companies that operated during Japan’s colonial rule over the Korean peninsula as the economic fallout from a dispute between Tokyo and Seoul over wartime reparation worsens. The National Pension Service of Korea has started to assess whether investments in as many as 75 companies… should be dropped if it can be proved the companies were linked to Japan’s war efforts. ‘We are in the process of adopting a new guideline of responsible investment and we are reviewing whether Japanese ‘war crime companies’ should be excluded from our investment list,’ Kim Sung-joo, NPS chair, told the Financial Times…”

Europe Watch:

August 14 – Reuters (Hannah Roberts): “Prime Minister Giuseppe Conte faces a vote of no confidence in Italy’s upper house on August 20 after Matteo Salvini pulled the plug on the ruling coalition made up of his own far-right League and the populist Five Star movement. Mr Salvini’s popularity has soared since he came to power 14 months ago. Now he wants to seize the momentum, calling for snap elections in October — more than three years early — that could deliver him a majority and allow the League to govern with the anti-immigration, anti-LGBT Fratelli d’Italia, and if necessary Silvio Berlusconi’s centre-right Forza Italia. But a number of scenarios could play out to thwart Mr Salvini’s political manoeuvring.”

August 10 – Reuters (Silvia Aloisi): “The leader of Italy’s League Matteo Salvini, who this week pulled the plug on his own governing coalition and called for a snap election, said on Saturday leaving the euro was not an option on the table… ‘The idea of leaving Europe, leaving the euro has never been in the pipeline,’ Salvini told reporters…”

August 16 – Bloomberg (Raymond Colitt): “Germany’s government is ready to run a budget deficit if Europe’s largest economy goes into recession, magazine Der Spiegel reported. Chancellor Angela Merkel and Finance Minister Olaf Scholz would be willing to increase debt in order to offset a tax revenue shortfall due to an economic slump, the magazine said, citing sources in the chancellery and the finance ministry…”

August 14 – Reuters (Sujata Rao): “Slumping exports sent Germany’s economy into reverse in the second quarter, with prospects of an early recovery slim as its manufacturers struggle at the sharp end of a global slowdown amplified by tariff conflicts and fallout from Brexit. Overall output fell 0.1% quarter-on-quarter… With pressure growing on a thus far reluctant government to provide more fiscal stimulus, the economy minister said action was needed to prevent a second consecutive quarter of contraction that would tip the country into recession.”

EM Watch:

August 12 – Bloomberg (Sarah Ponczek): “The surprise outcome in Argentina’s primary vote roiled the nation’s financial markets, sending the S&P Merval Index plunging 48% in dollar terms. That marked the second-biggest one-day rout on any of the 94 stock exchanges tracked by Bloomberg going back to 1950. Sri Lanka’s bourse tumbled more than 60% in June 1989 as the nation was engulfed in a civil war.”

August 13 – Financial Times (Benjamin Parkin): “Indian vehicle sales fell more than 30% in July as an intensifying economic slowdown drags what was considered among the world’s most promising car markets through one of its worst slumps on record. In the largest fall since the turn of the millennium, passenger vehicle sales fell 31% last month from the same time a year earlier… It was the worst month in a dismal spell that has seen sales fall 20% or more for four consecutive months… ‘This is the first such kind of a decline,’ said Basudeb Banerjee, a motor analyst at… Ambit. ‘Cars have never faced such bad days in the last 20 years.’”

Global Bubble Watch:

August 13 – Financial Times (Tommy Stubbington): “Making an investment that is guaranteed to lose money sounds like something that would cost you your job. But in bond markets, it has become a fact of life. Bonds worth $15tn — roughly a quarter of the debt issued by governments and companies around the world — are currently trading with negative yields. That means prices are so high that investors are certain to get back less than they paid, via interest and principal, if they hold the bond to maturity. They are, in effect, paying someone to look after their money. The spread of negative-yielding debt has raised profound questions about the extraordinary lengths central banks have gone to in a bid to revive the economy over the past decade. At the same time, bond markets’ journey through the looking glass has befuddled many investors. ‘Free money — it’s sort of an insane concept,” said David Hoffman, a bond portfolio manager at Brandywine Global… ‘Having grown up in a very different world it’s challenging to navigate this.’”

August 15 – Bloomberg (Robert Burgess): “Investors no longer need to imagine the day when a major central bank official goes all in on the need for extreme monetary stimulus, including even possibly buying equities, and markets yawn. That day came and went. European Central Bank Governing Council member Olli Rehn told the Wall Street Journal on Thursday that policy makers should come up with an ‘impactful and significant’ stimulus package at their next monetary policy meeting in September. Normally such a pronouncement would spark animal spirits, sending riskier assets flying higher and causing government bonds to crater on the prospect for faster growth and inflation. But instead, European equities fell…”

August 14 – Wall Street Journal (Greg Ip): “When assumptions about how the world works are shattered, a global downturn is often the result. The world learned in the early 1970s that the era of cheap oil was over, in the early 1980s that countries could default, and a decade ago that American mortgages and global banks aren’t safe. Today, a similar rethink of globalization is under way. From Washington to Buenos Aires, nations’ mutually reinforcing commitment to open markets is disintegrating. In response, investors are rearranging portfolios, businesses are rethinking investments and policy makers are struggling to respond—all of which are pushing the global economy closer to recession. Investors believe central banks—the last bastion of the technocratic, globalized elite—can use their limited ammunition to stave off recession. Yet central banks may be dragged into the competitive fray.”

August 13 – Wall Street Journal (Esther Fung): “Commercial-property prices in major cities around the world tumbled in the second quarter, amid signs of slower global growth and heightened trade tension… Average property prices fell in the second quarter from the first quarter in Hong Kong and Seoul to London and Washington, D.C., according to… Real Capital Analytics. Paris commercial real-estate prices declined the most among the markets that Real Capital Analytics tracks in Europe, tumbling 2.6% for the quarter. Prices in Central Chicago fell 2.1%, making it the worst performer among U.S. cities. In Australia, where the economic growth has slowed sharply since mid-2018, property prices were down more than 2% in Melbourne and Central Sydney.”

August 11 – Financial Times (Robert Armstrong): “Global investment banks are shedding tens of thousands of jobs as falling interest rates, weak trading volumes and the march of automation create a brutal summer for the sector. Almost 30,000 lay-offs have been announced since April at banks including HSBC, Barclays, Société Générale, Citigroup and Deutsche Bank. Most of the cuts have come in Europe, with Deutsche accounting for more than half the total, while trading desks have been hit hardest. In New York City, jobs in commodity and securities trading fell 2% in June from the year before, a loss of about 2,800 positions…”

Japan Watch:

August 14 – Reuters (Leika Kihara and Daniel Leussink): “Japan’s core machinery orders unexpectedly rebounded in June to post their largest monthly expansion on record, in a sign corporate investment remains resilient to slowing global growth and international trade frictions. …Core orders, a highly volatile data series regarded as an indicator of capital spending in the coming six to nine months, rose 13.9% in June from the previous month.”

Fixed-Income Bubble Watch:

August 14 – Bloomberg (Davide Scigliuzzo): “The owners of Inc., the DNA analysis and family tree company, are turning to a well-tested private equity play for taking cash out of a company: topping up on debt. An investor group led by Singapore’s sovereign wealth fund GIC and private equity firm Silver Lake Management LLC is looking to pull out more than $900 million from the company through a special dividend mostly funded by new borrowings. They are also seeking approval for another one-time distribution before year-end. The dividend would be one of the largest funded by the issuance of junk debt this year. In May, Hellman & Friedman LLC and Carlyle Group LP sold a risky type of bond to take a payout of as much as $1.1 billion from Pharmaceutical Product Development LLC. In April Sycamore Partners LLC extracted a $1 billion dividend from Staples Inc.”

Leveraged Speculation Watch:

August 13 – Bloomberg (Anurag Joshi): “The risk of overseas investors in rupee bonds getting caught wrong-footed and weakening India’s currency further is surging as losses this month outpace Asian peers amid mounting geopolitical tensions in the region. A sharp drop in the rupee may wipe out most of the profits for offshore investors as they don’t usually hedge currency risk for short-term debt investments into the country, according to Samir Lodha, chief executive officer at QuantArt Market Solutions… Any sell-off in foreign holdings of Indian corporate and government bonds may set off a spin which weakens the currency further. The surge in inbound investments into rupee bonds was largely driven by carry trades, adding to fears of a quick reversal in flows if the drop in rupee is not checked.”

Geopolitical Watch:

August 14 – Reuters (Farah Master and Tony Munroe): “Hong Kong braced for more mass protests over the weekend, even as China warned it could use its power to quell demonstrations and U.S. President Donald Trump urged Chinese President Xi Jinping to meet personally with the protesters to defuse weeks of tensions. Hundreds of China’s People’s Armed Police (PAP) on Thursday conducted exercises at a sports stadium in Shenzhen which borders Hong Kong after the U.S. State Department said it was ‘deeply concerned’ about the movements, which have prompted worries that the troops could be used to break up protests. Ten weeks of confrontations between police and protesters have plunged Hong Kong into its worst crisis since it reverted from British to Chinese rule in 1997 and presented the biggest popular challenge to Xi in his seven years in power.”

August 15 – Bloomberg (Marc Champion and Stuart Biggs): “China’s envoy to the U.K. Liu Xiaoming said ‘foreign forces’ must stop interfering in Hong Kong and respect Chinese sovereignty over the territory, which he said faces the ‘gravest situation’ since the 1997 handover. Speaking at a press conference in London, Liu said U.K.-China ties would be damaged if the British government tried to intervene in Hong Kong, adding that some politicians still regard the territory as part of the U.K. and should ‘change their mindset.’”

August 15 – Reuters (Yimou Lee): “Taiwan unveiled its largest defense spending increase in more than a decade… amid rising military tensions with its giant neighbor China, which considers the self-ruled island its own and has not renounced the use of force against it. President Tsai Ing-wen’s cabinet signed off on an 8.3% increase in military spending for the year starting January to T$411.3 billion ($13.11bn), its largest yearly gain since 2008…”

August 12 – Reuters (Maher Chmaytelli): “Iranian Foreign Minister Mohammad Javad Zarif accused the United States… of turning the Gulf region into a ‘matchbox ready to ignite’, according to Al Jazeera... Zarif… said the Strait ‘is narrow, it will become less safe as foreign (navy) vessels increase their presence in it’. ‘The region has become a matchbox ready to ignite because America and its allies are flooding it with weapons,’ he said.”

August 16 – Wall Street Journal (Andrew Jeong): “Chinese and Russian warplanes have increasingly nosed around and veered into South Korea’s airspace, conducting close patrols that allow Beijing and Moscow to test the air defenses of the U.S. and its allies in the region. The aerial campaigns come as Beijing vows to strengthen its military alliance with Moscow, heightening tensions across the Asia-Pacific region as the U.S. and China jockey for power there. The Korean Peninsula is once again providing a convenient stage for military provocations, as it did during the Cold War.”

August 13 – Financial Times (Laura Pitel, Aime Williams and Henry Foy): “As the date for delivery of Turkey’s order of a Russian S-400 air defence system drew closer, president Recep Tayyip Erdogan faced louder and louder warnings. If the shipment went ahead, US officials and analysts cautioned, then Donald Trump would have no choice but to impose sanctions that could wreak havoc on the fragile Turkish economy. But in recent weeks, 30 planeloads of radars, missile launchers and support vehicles have arrived at an air base near Ankara, Turkey’s capital, and the threatened sanctions have not materialised. It has taken everyone by surprise. ‘No one expected this outcome’ says Asli Aydintasbas, a senior policy fellow at the European Council on Foreign Relations. ‘Erdogan took a huge gamble and it paid off — for now.’”