Friday, September 6, 2019

Weekly Commentary: $150 Billion Global Corporate Bond Binge

After an extraordinary August, markets are showing no inclination for stability to begin September. Jumping 1.3% Thursday on news of an October restart of trade talks, the S&P500 gained 1.8% for the week. The S&P500 ended the week less than 2% from all-time highs. The Semiconductors surged 4.2%, increasing 2019 gains to almost 36%. The Nasdaq100 advanced 2.1% (up 24.1% y-t-d), now also less than a couple percent from record highs. The Broker/Dealers jumped 2.7%.

Not uncharacteristically, the more dramatic market trading dynamics were visible throughout fixed-income. Curiously, Thursday’s bout of “risk on” (and much stronger-than-expected ADP and ISM Non-Manufacturing reports) finally captured the attention of safe haven bonds. Ten-year Treasury yields surged nine bps to 1.56% - which equated to a painful 1.8% one-day drop in the popular iShares Treasury Bond ETF (TLT). Intraday, TLT was down as much as 2.4%. Bullish pundits were quick to dismiss a single-session yield jump. But of the crowd piling into bond ETFs, how many are unaware of how quickly money can be lost in “safe” bonds?

“Biggest Bond Rout in Years Whiplashes Bulls Who Were Right,” read a Bloomberg article (Liz McCormick) headline. Jumping 9.5 bps to 1.53%, two-year Treasury yields posted their largest one-day jump since February 2015. At one point up 14 bps, two-year Treasury yields were on the cusp of the biggest single-session spike in a decade. Interestingly, the implied yield for December Fed funds futures was little changed for the week at 1.61%.

Investment-grade corporate bonds were under pressure as well. The iShares Investment-Grade Bond ETF (LQD) was down as much as 0.9% intraday before ending Thursday’s session with a loss of 0.7%. While declining almost 1% early in the trading day, the “risk on” backdrop lifted junk bond indices into positive territory by the close.

After trading at a record low negative 0.74% in Tuesday trading, German bund yields spiked to as high as negative 0.575% during Thursday’s session (before ending the week at negative 0.64%). Safe haven Swiss bonds were similarly unstable. After trading as low as negative 1.05% in Wednesday trading, Swiss 10-year yields surged to negative 0.90% - before closing Friday at negative 0.95%.

Curiously, there were bond rallies that didn’t miss a beat. This week’s 12 bps drop in Italian 10-year yields narrowed the spread to German bunds by 18 bps to a 16-month low 151 bps. Greek 10-year yields declined three bps, narrowing the spread to bunds to a near decade-low 222 bps. I’ll assume there have been some bearish bets on Italian and Greek yields (and spreads) that have “blown up.”

Argentine 30-year dollar bonds had a wild ride. After opening Monday trading at 16.69%, yields spiked to as high as 18.25% in Tuesday trading before reversing course and closing out the week at 13.55%. The Argentine peso rallied 6.6% this week, reducing 2019 losses versus the dollar to 32.5%.

And while risk showed its face in (most) bond prices, corporate debt issuance was nothing short of incredible. A Bloomberg headline described the week: “A $150 Billion Global Corporate Bond Binge Is Smashing Records.”

September 6 – Financial Times (Joe Rennison): “Companies across the world, from iPhone maker Apple to German financial technology group Wirecard, sold more bonds this week than ever before, abruptly waking the market from its summer slumber to take advantage of historically low borrowing costs. Investors lapped up more than $140bn of new corporate bonds, marking the biggest weekly volume to hit global markets on record, according to… Dealogic. The debt binge was fuelled by investment-grade companies in the US where $72bn was raised across 45 deals in a single week, roughly equalling the total issued in the whole of August. ‘We have had a month of issuance in three days,’ said Andrew Brenner, head of international fixed income at National Alliance Securities. ‘There is tremendous demand out there.’”

September 4 – Wall Street Journal (Matt Wirz and Nina Trentmann): “Apple… joined U.S. companies including Deere & Co. and Walt Disney Co. in a recent sprint to issue new bonds, taking advantage of the steep decline in benchmark interest rates and a surge in investor demand. Apple launched its first bond deal since 2017, selling $7 billion of debt. All three companies issued 30-year bonds with yields below 3%, a first for the corporate debt market. Twenty-one companies with investment-grade credit ratings issued bonds totaling about $27 billion on Tuesday, said Andrew Karp, head of investment-grade capital markets at Bank of America Corp. ‘That’s equivalent to a busy week for us—in one day,’ he said.”

September 5 – Bloomberg (Brian W Smith and Michael Gambale): “U.S. investment-grade bond issuance is hitting $74 billion for this week, the most for any comparable period since records began in 1972. Thursday’s $20 billion total adds to the $54 billion already sold, thrashing the week’s forecast of $40 billion. With a rally in Treasuries pushing the high-grade bond yield to a three-year low of just 2.77%, companies are borrowing cheap money now to refinance more expensive debt, spurred by a positive tone in global markets.”

September 6 – Financial Times (Joe Rennison): “…In a further sign of investors’ increasingly desperate search for yield, Restaurant Brands, which owns the Popeyes and Burger King chains, was set to issue an 8.5-year bond with a coupon under 4% on Friday, entering a tiny club of junk-rated issuers that have managed to sell debt below that level — and breaching what is typically expected from ‘high yield’ issuers. ‘The conventional heuristics are getting tossed out of the window,’ said John McClain, a portfolio manager at Diamond Hill Capital Management. ‘These are paltry returns.’”

It's difficult to envisage a more manic bond market environment – at home or abroad. In Europe, it’s tulip mania reincarnated, with a third of European investment-grade bonds now trading with negative yields. Draghi had best not disappoint the markets next Thursday. And when he comes through, markets will raise the stakes even higher for next month's meeting. From the Financial Times (Robert Smith): “JPMorgan’s analysts say September is shaping up to be the ‘first issuance window where negative yielding bonds are a common feature, rather than an occasional oddity’. ‘In our view, investors still have cash to deploy, and few other alternatives to buy,’ they say.”

September 5 – Bloomberg (Hannah Benjamin): “Sales of new bonds in Europe will pass 1 trillion euros ($1.1 trillion) on Thursday, earlier in the year than ever before as companies take advantage of ultra-low borrowing costs ahead of potential year-end volatility to raise funds. BT Group Plc, Continental AG and Snam SpA joined the deluge on Thursday, fanning what may be the busiest week for corporate issuance since March 2018. The day’s 13 offerings marketwide will also likely lift sales for the year above 1 trillion euros, about six weeks earlier than last year and two weeks quicker than 2017’s record…”

Beijing was determined to do its share to make the week noteworthy.

September 6 – Bloomberg: “China’s central bank said it will cut the amount of cash banks must hold as reserves to the lowest level since 2007, injecting liquidity into an economy facing both a domestic slowdown and trade-war headwinds. The required reserve ratio for all banks will be lowered by 0.5 percentage points, taking effect on Sept. 16… The PBOC also cut the reserve ratios by one percentage point for some city commercial banks, to take effect in two steps on Oct. 15 and Nov. 15. The cuts will release 900 billion yuan ($126bn) of liquidity, the PBOC said, helping to offset the tightening impact of upcoming tax payments. That is more than the previous cuts in January and May, which released 800 billion yuan and 280 billion yuan, respectively, the PBOC said…”

Though China’s latest cut in bank reserve requirements was well-telegraphed, it along with the restart of trade talks pushed the Shanghai Composite 3.9% higher. The renminbi rallied 0.56% versus the dollar. But before we get too excited by the “release” of an additional $126 billion of lending power, keep in mind that Chinese Credit in 2019 has already been expanding abundantly. After seven months, Total Aggregate Financing had already increased $2.022 Trillion, running at a rate 26% ahead of comparable 2018. Reserve reductions can be expected to somewhat extend China’s historic mortgage finance and apartment Bubbles.

And on the topic of mortgage finance Bubbles…

September 5 – Wall Street Journal (Andrew Ackerman and Kate Davidson): “The Trump administration said it would support returning mortgage-finance giants Fannie Mae and Freddie Mac to private hands, a development that could keep the companies at the center of the housing market for decades to come. The principles announced Thursday represent a major reversal from what leaders of both parties over the past decade promised—to abolish the companies, which guarantee roughly half the U.S. mortgage market. The approach, which doesn’t require approval by Congress, would mark an important win for investors who have been betting politicians wouldn’t follow through on those promises. Treasury officials said they would aim to privatize the government-controlled firms without making it tougher and more expensive for people to get mortgages.”

September 5 – Wall Street Journal (Aaron Back): “America’s mortgage-finance system isn’t going to change in a fundamental way for the foreseeable future. That is the inescapable—though to many parties deeply disappointing—takeaway from the U.S. Treasury Department’s housing reform plan… Mortgage guarantors Fannie Mae and Freddie Mac, which have been wards of the state for 11 years, are likely to remain so for some time. For years a debate has raged over how to deal with the companies that back most mortgages in the U.S. Some, especially holders of their volatile shares, want them recapitalized and released from government control as soon as possible. Others want a fundamental reform of the system, which would require new laws and likely include an explicit government guarantee for the mortgage-backed securities they issue. The Trump administration is trying to straddle the two camps by recommending that Congress get to work on the more fundamental reforms while the executive branch gets started recapitalizing and releasing the companies. But exhortations to Congress are likely to fall on deaf ears. Meanwhile, the route to recapitalizing the companies outlined in the report is tentative and vague. The report uses the term ‘Congress should’ 40 times.”

A factor fundamental to the predicament was captured succinctly by Barron’s (Bill Alpert): “Both Fannie and Freddie now have negative net worths. The Treasury would like to end their government conservatorship and have them stand on their own. But to capitalize them well enough to weather another financial crisis could require a couple of hundred billion dollars.”

Predictably, Washington has failed to resolve the serious systemic risk posed by the GSEs, risk made disastrously clear in 2008. Indeed, the Trump administration has followed Obama’s in lacking the fortitude to even commence the process. It’s been more than a decade since the crisis and resulting Fannie and Freddie government receivership. At the minimum, these two failed institutions should have shrunk. But after ending 2008 at $8.167 TN, Total GSE Securities (chiefly Fannie and Freddie’s) closed out Q1 at a record $9.147 TN.

It’s worth noting GSE Securities surged $626 billion since the end of 2016 – in what is reckless late-cycle growth for institutions with zero capital buffers. But as a wing of the Department of Treasury (and a probable target of the Fed’s next QE program), GSE debt and MBS have enjoyed insatiable demand. In one of history’s great Bond Binges, combined outstanding Treasury and GSE securities have increased $3.0 Trillion over just the past ten quarters.

In theory, it would be prudent to push hard for less Washington monopolization of mortgage Credit. But at this point, the idea of “privatizing” Fannie and Freddie would simply be a return to the disastrous system of privatizing profits while nationalizing risk. There is simply no mechanism to effectively privatize this risk, as markets will invariably recognize these bigger than ever colossal institutions as much too big to fail.

Confident in the Washington backstop, GSE securities will continue to trade with meager risk premiums. This distortion creates extraordinarily attractive profit opportunities for equity investors clamoring for a so-called “privatization.” As before, cheap financing costs and the gross under-reserving for future losses would create the illusion of sound and highly profitable institutions. These “private” companies would surely reward investors with strong earnings growth and dividends, ensuring a hopelessly insufficient capital base for the downside of the cycle.

The Trump administration punted. Yet I would prefer to see these institutions remain under the Treasury umbrella rather than be part of some sham “privatization.” The administration should, however, at the very minimum demand a moratorium on expansion. It would take years, but Fannie and Freddie exposures could be meaningfully reduced. I won’t hold my breath. Cheap mortgage Credit has been a staple for U.S. economic and financial systems now going on three decades. One of many historic market distortions that these days passes as normal and sustainable.

For the Week:

The S&P500 jumped 1.8% (up 18.8% y-t-d), and the Dow gained 1.5% (up 14.9%). The Utilities added 0.6% (up 18.8%). The Banks rose 1.6% (up 10.3%), and the Broker/Dealers jumped 2.7% (up 11.3%). The Transports gained 1.7% (up 12.3%). The S&P 400 Midcaps rose 1.6% (up 14.9%), and the small cap Russell 2000 increased 0.7% (up 11.6%). The Nasdaq100 advanced 2.1% (up 24.1%). The Semiconductors surged 4.2% (up 35.8%). The Biotechs declined 2.6% (up 1.2%). With bullion $, the HUI gold index sank 4.9% (up 35.1%).

Three-month Treasury bill rates ended the week at 1.91%. Two-year government yields gained four bps to 1.54% (down 95bps y-t-d). Five-year T-note yields rose five bps 1.43% (down 108bps). Ten-year Treasury yields jumped six bps to 1.56% (down 112bps). Long bond yields rose six bps to 2.03% (down 99bps). Benchmark Fannie Mae MBS yields declined a basis point to 2.38% (down 112bps).

Greek 10-year yields declined three bps to 1.58% (down 282bps y-t-d). Ten-year Portuguese yields jumped seven bps to 0.19% (down 153bps). Italian 10-year yields dropped 12 bps to 0.88% (down 187bps). Spain's 10-year yields gained seven bps to 0.17% (down 124bps). German bund yields rose six bps to negative 0.64% (down 88bps). French yields jumped seven bps to negative 0.34% (down 105bps). The French to German 10-year bond spread was little changed at 30 bps. U.K. 10-year gilt yields gained three bps to 0.51% (down 77bps). U.K.'s FTSE equities index jumped 1.0% (up 8.2% y-t-d).

Japan's Nikkei Equities Index added 0.2% (up 5.9% y-t-d). Japanese 10-year "JGB" yields increased three bps to negative 0.24% (down 24bps y-t-d). France's CAC40 jumped 2.3% (up 18.5%). The German DAX equities index rose 2.1% (up 15.5%). Spain's IBEX 35 equities index gained 2.0% (up 5.3%). Italy's FTSE MIB index surged 2.9% (up 19.8%). EM equities were mostly higher. Brazil's Bovespa index gained 1.8% (up 13.1%), and Mexico's Bolsa added 0.2% (up 2.6%). South Korea's Kospi index rose 2.1% (down 1.6%). India's Sensex equities index declined 0.9% (up 2.5%). China's Shanghai Exchange surged 3.9% (up 20.3%). Turkey's Borsa Istanbul National 100 index rose 2.3% (up 8.5%). Russia's MICEX equities index gained 2.1% (up 18.1%).

Investment-grade bond funds saw inflows of $1.219 billion, while junk bond funds posted outflows of $319 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates dropped nine bps to 3.49% (down 105bps y-o-y). Fifteen-year rates fell six bps to 3.00% (down 99bps). Five-year hybrid ARM rates dipped a basis point to 3.30% (down 63bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates up one basis point to 4.21% (down 21bps).

Federal Reserve Credit last week declined $1.8bn to $3.722 TN. Over the past year, Fed Credit contracted $447bn, or 10.7%. Fed Credit inflated $911 billion, or 32%, over the past 356 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt dropped $24.3bn last week to $3.451 TN. "Custody holdings" rose $22bn y-o-y, or 0.6%.

M2 (narrow) "money" supply jumped $20.6bn last week to $14.958 TN. "Narrow money" gained $717bn, or 5.0%, over the past year. For the week, Currency increased $3.8bn. Total Checkable Deposits gained $9.4bn, and Savings Deposits rose $2.5bn. Small Time Deposits added $0.8bn. Retail Money Funds increased $4.0bn.

Total money market fund assets gained $16.8bn to $3.381 TN. Money Funds gained $516bn y-o-y, or 18%.

Total Commercial Paper gained $3.4bn to $1.124 TN. CP was up $58bn y-o-y, or 5.4%.

Currency Watch:

The U.S. dollar index declined 0.8% to 98.012 (up 1.9% y-t-d). For the week on the upside, the Mexican peso increased 2.7%, the South African rand 2.6%, the Brazilian real 2.1%, the Swedish krona 2.0%, the Australian dollar 1.7%, the Norwegian krone 1.7%, the New Zealand dollar 1.2%, the South Korean won 1.2%, the Canadian dollar 1.1%, the British pound 1.0%, the euro 0.4%, the Singapore dollar 0.4% and the Swiss franc 0.3%. On the downside, the Japanese yen declined 0.6%. The Chinese renminbi increased 0.56% versus the dollar this week (down 3.34% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index gained 1.1% this week (up 1.2% y-t-d). Spot Gold declined 0.9% to $1,507 (up 17.5%). Silver retreated 1.2% to $18.119 (up 16.6%). WTI crude jumped $1.42 to $56.52 (up 25%). Gasoline rose 2.9% (up 19%), and Natural Gas surged 9.2% (down 15%). Copper gained 3.2% (unchanged). Wheat added 0.3% (down 8%). Corn sank 3.9% (down 5%).

Market Instability Watch:

September 5 – New York Times (Ana Swanson and Matt Phillips): “President Trump’s decision to renew talks with China in the coming weeks sent financial markets soaring on Thursday… But expectations for progress remain low, and many in the United States and China see the best outcome as a continued stalemate that would prevent a collapse in relations before the 2020 election. Both Mr. Trump and President Xi Jinping of China are under pressure from domestic audiences to stand tough, and the talks will happen after Mr. Trump’s next round of punishing tariffs take effect on Oct. 1.”

September 5 – Bloomberg (Liz McCormick): “After August’s historic drop, it was starting to seem like Treasury yields could only fall. And then came Thursday, when an enormous surge reminded even well-entrenched bulls that the world’s biggest bond market isn’t a one-way street. Yields on two-year notes jumped as much as 14 bps, which would be the largest full-day increase in a decade, before pulling back to 11 points. A popular iShares ETF tracking long bonds sank as much as 2.4%, the biggest intraday rout since the day after the 2016 U.S. presidential election. The sell-off was global, with German 30-year rates briefly turning positive after a month under zero, and yields in Australia and New Zealand climbing early in Asia on Friday.”

September 4 – Financial Times (Andrew Cummins): “Politics hates a vacuum; capital markets even more so. Argentina is suffering a confidence-driven liquidity crisis in the uncertain lead up to October 27 presidential elections. The country is at risk of experiencing a full-blown economic and banking crisis that becomes a solvency problem. Given the uncertainty, Argentine banks are seeing fearful depositors line up to make dollar withdrawals… New measures announced in the past week may calm markets. Last Wednesday, the country announced plans to ‘reprofile’ its external dollar debt, without cutting the face value or interest rates, and it also delayed payments on its short-term local currency obligations. Then, over the weekend, authorities imposed capital controls to stabilise the tumbling exchange rate and slow panic buying of dollars.”

August 30 – Reuters (John Ainger): “The global stock of negative-yielding debt is now in excess of $17 trillion as rising market volatility lends extra force to this year’s unprecedented bond rally. Thirty percent of all investment-grade securities now bear sub-zero yields, meaning that investors who acquire the debt and hold it to maturity are guaranteed to make a loss. Yet buyers are still piling in, seeking to benefit from further increases in bond prices and favorable cross-currency hedging rates—or at least to avoid greater losses elsewhere.”

September 2 – Reuters (Dhara Ranasinghe): “The pool of negative-yielding bonds in the euro area expanded further in August, with almost half of euro-denominated investment grade corporate debt on the Tradeweb platform now carrying negative yields, Tradeweb said…”

September 4 – Reuters (Richard Leong): “U.S. money market fund assets rose to their highest level since October 2009, as investors resumed their move into these low-risk products due to jitters about a slowing global economy and U.S.-China trade tensions… Assets of money funds, which are seen nearly as safe as bank accounts, climbed by $14.87 billion to $3.331 trillion in the week ended Sept 3… This brought their year-to-date increase in fund assets to about $360 billion.”

Trump Administration Watch:

September 4 – CNBC (Kayla Tausche and Jacob Pramuk): “President Donald Trump wanted to double tariff rates on Chinese goods last month after Beijing’s latest retaliation in a boiling trade war before settling on a smaller increase, three sources told CNBC. The president was outraged after he learned Aug. 23 that China had formalized plans to slap duties on $75 billion in U.S. products in response to new tariffs from Washington… His initial reaction, communicated to aides on a White House trade call held that day, was to suggest doubling existing tariffs… Treasury Secretary Steven Mnuchin and U.S. Trade Representative Robert Lighthizer then enlisted multiple CEOs to call the president and warn him about the impact such a move would have on the stock market and the economy.”

September 2 – Associated Press: “The Trump administration’s latest round of tariffs on Chinese imports took effect early Sunday, potentially raising prices Americans pay for some clothes, shoes, sporting goods and other consumer goods in advance of the holiday shopping season. The 15% taxes apply to about $112 billion of Chinese imports. All told, more than two-thirds of the consumer goods the United States imports from China now face higher taxes. The administration had largely avoided hitting consumer items in its earlier rounds of tariff hikes.”

September 6 – Bloomberg (Saleha Mohsin and Shawn Donnan): “President Donald Trump’s trade war with China is threatening to draw one of the global economy’s neutral referees into the fray: the International Monetary Fund. As part of his campaign to pressure Beijing into changing its trade practices, Trump last month formally declared China a currency manipulator. But in a move that risks undermining the IMF’s place as an arbiter for sound economic policy, Treasury Secretary Steven Mnuchin has also been quietly pushing the fund to endorse its view -- just weeks after the IMF found China’s yuan was fairly valued and declared there was no evidence of manipulation by Beijing, according to people familiar with the matter.”

September 5 – Reuters (Pete Schroeder): “The U.S. Treasury… said the government should draw up a plan to begin recapitalizing mortgage giants Fannie Mae and Freddie Mac, while calling on Congress to pen a comprehensive housing reform that would allow them to be safely freed from government control. The Treasury’s plan, released in a 53-page report, marks the first major effort to jump-start housing finance reform in Washington after a failed 2012 attempt by the Obama administration. The report calls for recuperating Fannie and Freddie and removing them from their government lifeline, but it strikes a cautious tone by failing to commit to concrete timelines or a specific recapitalization plan.”

Federal Reserve Watch:

September 5 – Wall Street Journal (Nick Timiraos): “Federal Reserve officials are gearing up to reduce interest rates at their next policy meeting in two weeks, most likely by a quarter-percentage point, as the trade war between the U.S. and China darkens the global economic outlook. The idea of an aggressive half-point cut to battle the slowdown hasn’t gained much support inside the central bank, according to interviews with officials and their public speeches. While market-determined interest rates have tumbled, signaling a dimmer outlook for growth and inflation, many Fed officials believe that the 10-year U.S. expansion can continue at a modest pace and inflation will gradually rise to their 2% target. ‘The economy is in a good place, but not without risk and uncertainty,” said New York Fed President John Williams… ‘Our role is to navigate a complex and at times ambiguous outlook to keep the economy growing and strong.’”

September 4 – Bloomberg (Christopher Condon): “The U.S. economy grew at a modest pace through much of July and August, with companies remaining upbeat despite disruption caused by international trade disputes, a Federal Reserve survey found. ‘Although concerns regarding tariffs and trade policy uncertainty continued, the majority of businesses remained optimistic about the near-term outlook’…

September 5 – Financial Times (Brendan Greeley and Colby Smith): “Over the summer, investors put a gimlet eye to returns on US Treasuries, examining them for signs of a recession. The Fed has been watching, too, with some disagreement over what it is seeing and how to respond. In appearances this week, two Fed presidents laid out different arguments for the recent dramatic fall in Treasury yields and the concurrent inversion of the yield curve — a traditional harbinger of recession, in which shorter-term interest rates are higher than longer-term ones. Eric Rosengren… attributed the developments in the Treasury market to economic weakness abroad, which means there is less reason for concern at the US central bank. Robert Kaplan… blamed concerns over domestic growth, highlighting the need for the Fed to cut interest rates. Their disagreement lies at the heart of the central bank’s debate about what to do at its next policy meeting, later this month, where Fed chairman Jay Powell is facing a divided committee.”

September 3 – Bloomberg (Christopher Condon): “Federal Reserve Bank of Boston President Eric Rosengren said the U.S. economy remains ‘relatively strong’ despite clearly heightened risks, leaving him unconvinced the central bank needs to cut interest rates at its upcoming meeting this month. ‘If the consumer continues to spend, and global conditions do not deteriorate further, the economy is likely to continue to grow around 2%,’ Rosengren said… At that pace, ‘with continued gradual increases in wages and prices, then in my view, no immediate policy action would be required.’”

September 3 – Reuters (Howard Schneider and Ann Saphir): “The Federal Reserve should use its meeting in two weeks to aggressively cut interest rates, one U.S. central banker said… Less than an hour later, a second U.S. central banker said he saw no need to use up the Fed’s precious firepower when the economy is growing, inflation looks stable and labor markets are in good shape. The dueling views - from St. Louis Fed President James Bullard, who called for a half-a-percentage-point rate cut, and Boston Fed President Eric Rosengren, who saw no immediate need for any move - show the tight spot Fed Chair Jerome Powell finds himself in as the Fed’s next policy-setting meeting approaches.”

September 3 – Reuters (Jonnelle Marte and Trevor Hunnicutt): “The U.S. Federal Reserve’s balance sheet could end up between $3.8 trillion and $4.7 trillion by 2025, according to projections collected by the New York Fed. The regional arm of the central bank, which manages the Fed’s massive bond holdings, released the projections in a report… drawn from surveys of Wall Street traders. The New York Fed’s report showed the Fed could start buying Treasuries as soon as 2019 or as late as 2025, but the decision would depend on the growth of bank reserves and other Fed liabilities, including currency. The Fed currently holds about $3.8 trillion in assets…”

U.S. Bubble Watch:

September 5 – CNBC (Jeff Cox): “Job growth continued at a tepid pace in August, with nonfarm payrolls increasing by just 130,000 thanks in large part to the temporary hiring of Census workers… The increase fell short of Wall Street estimates for 150,000, while the unemployment rate stayed at 3.7%, as expected… Wage growth remained solid, with average hourly earnings increasing by 0.4% for the month and 3.2% over the year; both numbers were one-tenth of a percentage point better than expected. Labor force participation also increased, rising to 63.2% and tying its highest level since August 2013. The total number of Americans considered employed surged by 590,000 to a record 157.9 million, according to the household survey…”

September 5 – CNBC (Jeff Cox): “Company payrolls surged by 195,000 in August, well above Wall Street estimates and at a time when fears have been growing about a looming recession, according to… ADP and Moody’s Analytics. Economists surveyed by Dow Jones had been looking for a gain of just 140,000 following July’s 142,000…”

September 4 – Reuters (Lucia Mutikani): “The U.S. trade deficit narrowed slightly in July, but the gap with China, a focus of the Trump administration’s ‘America First’ agenda, surged to a six-month high… The trade deficit dropped 2.7% to $54.0 billion as exports rebounded and imports fell… The monthly trade gap has swelled from $46.4 billion at the start of 2017… The politically sensitive goods trade deficit with China increased 9.4% to $32.8 billion on an unadjusted basis, the highest since January, with imports jumping 6.4%. Exports to China fell 3.3% in July.”

September 5 – Reuters (Lucia Mutikani): “U.S. services sector activity accelerated in August and private employers boosted hiring, suggesting the economy continued to grow at a moderate pace despite trade tensions which have stoked financial market fears of a recession… The Institute for Supply Management said its non-manufacturing activity index increased to a reading of 56.4 in August from 53.7 in July.”

September 5 – Financial Times (Richard Henderson): “The US recession has arrived. No, not that one, but a recession in US company profits. As the second-quarter earnings season draws to a close, profits at US blue-chips have fallen 0.3% on a per-share basis, according to FactSet data. The drop means that, following a first-quarter contraction of 0.2%, companies are officially in an ‘earnings recession’…”

September 3 – Bloomberg (Richard Leong): “The U.S. manufacturing sector contracted in August for the first time since 2016 amid worries about a weakening global economy and rising trade tensions between China and the United States… The Institute for Supply Management (ISM) said its index of national factory activity decreased to 49.1, the lowest level since January 2016. This compared with a figure of 51.2 in July.”

September 5 – Reuters (Jason Lange and P.J. Huffstutter): “Farm loan delinquencies rose to a record high in June at Wisconsin’s community banks…, a sign President Donald Trump’s trade conflicts with China and other countries are hitting farmers hard in a state that could be crucial for his chances of re-election in 2020. The share of farm loans that are long past-due rose to 2.9% at community banks in Wisconsin as of June 30…”

September 5 – Bloomberg (Allison McNeely): “Oil wells jet out of the scrubby, dusty ground in West Texas’ Permian Basin as far as the eye can see. A gas station off Route 285 bustles with workers in boots and baseball caps. Residents fret about the crumbling road, which has been pummeled by trucks barreling in and out of the oilfields. There’s nothing to suggest the distress that’s mounting in the busiest U.S. oil and gas region. About 500 miles east, Houston is abuzz about another slump on the way. Restructuring expert Jay Haber, for one, has been fielding call after call from New York with banks, hedge funds and private equity sponsors having to decide whether to sink more money into souring wells or cut their losses. ‘People were far too quick to save basically broke companies in 2015 and 2016,’ said Haber, a… adviser at turnaround shop Getzler Henrich & Associates LLC and 30-year veteran of the energy business. ‘Had oil gone to $80 or $90, things would be better.’”

China Watch:

September 2 – South China Morning Post (Frank Tang): “China will have to go a step further in easing monetary policy and increasing fiscal spending to help support domestic growth given that Beijing sees no near-term resolution to its trade war with the United States, a top policy body has indicated. While the Chinese government policy body did not call for all-out stimulus, it made clear Beijing would not shy away from pumping additional credit into its banking system or boosting fiscal support for the economy, according to the conclusions announced by the decision making meeting chaired by Vice-Premier Liu He. China will ‘enhance countercyclical measures in macroeconomic policies … to ensure sufficient liquidity and reasonable growth in credit…’”

September 3 – Reuters (Marc Jones): “A credit-fuelled stimulus splurge could hurt China’s credit rating more than the immediate hit from U.S. trade tariffs, S&P Global’s main analyst for the country says. S&P last cut China’s rating a couple of years ago, but it has been almost a year since its last formal review of the world’s number two economy and a lot has happened since… ‘If we have an abrupt shock of some sort then I think the government might start running for the more immediate kinds of economic support,’ Tan said. ‘That in our view will mean the banks will have to start lending quite quickly and that would be negative for the government’s rating.’ S&P currently rates China at A+ with a stable outlook. That is the same as both Moody’s and Fitch.”

September 1 – Reuters: “China’s factory activity unexpectedly expanded in August as production edged up…, but orders remained weak and business confidence faltered as the Sino-U.S. trade war continued to escalate. Export orders fell for the third month in a row and at the sharpest pace since November 2018, amid slowing global demand… The Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) for August rose to a five-month high of 50.4 from 49.9 in July, after two months of contraction.”

September 4 – Reuters (Roxanne Liu and Se Young Lee): “Activity in China’s services sector expanded at the fastest pace in three months in August as new orders rose, prompting the biggest increase in hiring in over a year… The Caixin/Markit services purchasing managers’ index (PMI) picked up to 52.1 last month, the highest since May, compared with July’s 51.6.”

September 4 – Bloomberg: “London, Seattle, Manchester and, um, Xiamen. Some of the world’s priciest housing markets aren’t where you might think. A four-year property boom in China has elevated a collection of little-known cities and turned them into real estate gold. While that’s been great news for speculators, it’s raising concern about whether China’s educated middle-class is quickly being priced out of these so-called second-tier cities, undermining Beijing’s goal of making them home to the millions moving from rural areas. Another risk is increasingly stretched family budgets: The average household debt-to-income ratio in China soared to a record 92% last year from just 30% a decade ago. ‘A property bubble is foaming up in many places in China,’ said Chen Gong, the chief researcher at independent strategic think tank Anbound Consulting. ‘Prices are starting to look abnormal when compared to residents’ income.’”

September 2 – Wall Street Journal (Frances Yoon): “A troubled Chinese bank said it would skip a year’s worth of interest payments to international bondholders, days after reporting that losses and problem loans had soared. Bank of Jinzhou is the first Chinese lender to protect its financial health by using this provision on its additional tier-1 dollar bonds, analysts said. A form of ‘contingent convertible,’ or CoCo, these bonds are widely used by lenders in Europe and Asia to shore up their financial positions. If a bank runs low on capital, it can withhold coupon payments or in some cases convert the securities into common stock.”

September 5 – Financial Times (Don Weinland): “Provincial auditors across China are sounding the alarm on a wave of fast-approaching local government debt maturities that analysts think could amount to at least Rmb3.8tn ($560bn) within the next two and half years, presenting a risk to China’s financial system. The auditing office of Shaanxi province in northwestern China is the latest authority to release a worrying report on the level of debt repayments facing the local government. The office… warned this week that the province bears heavy repayment pressure over the next five years and that 34% of its so-called ‘hidden debt’ must be paid back before the end of the year… Hidden debt for Chinese local governments often refers to debt obligations that do not fall directly onto government books but are still considered liabilities. Local government financing vehicles (LGFVs), or companies operated by municipal or provincial officials, are a primary source of the hidden debt load.”

September 2 – Bloomberg (Nisha Gopalan): “There's a lot working against China's most indebted property firm. China Evergrande Group is sitting on $113.7 billion in debt and its core profit fell 45% in the first half of the year. Real-estate growth is slowing, with banks under orders to curb home loans. President Xi Jinping’s refrain that houses are for living in, not speculation, has been cropping up more frequently. Time to rein things in, right? Not Evergrande. The company, whose portfolio already includes theme parks and a football club, now wants to become the world’s biggest electric-vehicle maker in the next three to five years. It’s burning through precious cash – 160 billion yuan ($22bn) – to build factories in Guangzhou. Investors are voting on this folly with their feet. The company’s shares have fallen 30% this year, making Evergrande the worst performer among Hong Kong-listed Chinese developers. The property firm’s borrowing costs are among the highest in the offshore dollar market and its bonds are tumbling.”

September 3 – Bloomberg: “HNA Group Co.’s cash pile shrank 20 times faster than its debts, indicating that pressure is building for one of China’s most indebted conglomerates to speed up asset sales. Cash, equivalents and short-term investments as of the end of June tumbled 61% from a year earlier, according to data derived from from the Hainan-based Chinese group’s interim report released on Friday. By comparison, total debt fell 3%. The figures illustrate how HNA’s liquidity challenges persist more than a year after the company that was once at the forefront of China’s unprecedented acquisition binge began dumping tens of billions of dollars in assets as borrowing costs soared.”

September 4 – Bloomberg: “More Chinese companies are defaulting on private bonds this year as the slowing economy weighs on weaker companies and firms seek to repay publicly traded debt first. The nation’s issuers have missed repayments on a record 31.8 billion yuan ($4.4bn) of private bonds this year through August, compared with 26.7 billion yuan for all of 2017 and 2018 combined, according to data by China Chengxin International Credit Rating Co., one of China’s biggest rating firms.”

September 2 – South China Morning Post (Teddy Ng and Wendy Wu): “Chinese state media and government advisers have said Beijing is in no rush for a trade deal, instead warning that any concessions made to the United States would be a grave error. A commentary in the Communist Party mouthpiece People’s Daily… said Beijing needed to stand up to the US and not give in to pressure. ‘If China appears weak and gives concessions under hegemony, it will have committed a subversive historical error,’ said the commentary… ‘Facing extreme pressure and bullying behaviour, being weak and taking a step back will not get sympathy. We can only protect the core interest of the nation and the people by upholding rational and favourable struggle at the right pace.’”

September 3 – Bloomberg: “Chinese President Xi Jinping urged the ruling Communist Party to brace for a ‘long term’ struggle against a variety of threats, the latest in a series of warnings to a nation facing a slowing economy and a more confrontational U.S. Xi said officials needed to display a ‘spirit of struggle’ to overcome challenges ranging from security concerns to financial risks, according to the official Xinhua News Agency. ‘The struggles we face will not be short term, but long term,’ Xi told a cadre training course Tuesday in Beijing, adding that they would continue at least through 2049, the 100th anniversary of the People’s Republic of China.”

September 2 – CNBC (Weizhen Tan): “A sense of nationalism is growing in China, and that could bolster support for those hoping to wait out the trade dispute with the U.S., said Max Baucus, a former American ambassador to China. ‘Don’t forget … Chinese (are) very patient historically, they’ll wait it out, they’ll play lots of different angles. They’re going to try to hang in there, waiting for President (Donald) Trump to come to them,’ he told CNBC… ‘There’s a feeling that nationalism is getting a little stronger … I think that’s also emboldening President Xi,’ said Baucus…”

September 5 – Associated Press: “China… criticized Washington’s opposition to Chinese-made next-generation telecoms technology after Vice President Mike Pence called on Iceland and other governments to find alternatives. A foreign ministry spokesman, Geng Shuang, accused American leaders of ‘abusing the concept of national security’ to block Chinese commercial activity.”

September 5 – Reuters: “Global credit rating agency Fitch Ratings on Friday downgraded Hong Kong’s long-term foreign currency issuer default rating to ‘AA’ from ‘AA+’ following months of unrest and protests in the Asian financial hub. Hong Kong’s rating outlook is negative, Fitch Ratings said...The massive, and sometimes violent protests have roiled the financial centre as thousands chafe at a perceived erosion of freedoms and autonomy under Chinese rule.”

September 2 – Reuters (Greg Torode, James Pomfret and Anne Marie Roantree): “Embattled Hong Kong leader Carrie Lam said she has caused ‘unforgivable havoc’ by igniting the political crisis engulfing the city and would quit if she had a choice, according to an audio recording of remarks she made last week to a group of businesspeople. At the closed-door meeting, Lam told the group that she now has ‘very limited’ room to resolve the crisis because the unrest has become a national security and sovereignty issue for China amid rising tensions with the United States. ‘If I have a choice,’ she said…, ‘the first thing is to quit, having made a deep apology.’”

September 3 – Reuters (James Pomfret and Clare Jim): “Hong Kong leader Carrie Lam… withdrew an extradition bill that triggered months of often violent protests so the Chinese-ruled city can move forward from a ‘highly vulnerable and dangerous’ place and find solutions… ‘Lingering violence is damaging the very foundations of our society, especially the rule of law,’ a somber Lam said as she sat wearing a navy blue jacket and pink shirt with her hands folded on a desk… Some lawmakers said the move should have come earlier. ‘The damage has been done. The scars and wounds are still bleeding,’ said pro-democracy legislator Claudia Mo. ‘She thinks she can use a garden hose to put out a hill fire. That’s not going to be acceptable.’”

Central Banking Watch:

September 2 – Financial Times (Huw van Steenis): “As central bankers weigh up cutting interest rates deeper into negative territory, investors should consider when the risks of this trend will begin to outweigh its benefits. With almost $17tn of negative-yielding debt already out there, I fear we have already hit the reversal rate — the point at which accommodative monetary policy ‘reverses’ its intended effect and becomes contractionary for the economy. Conventional macroeconomic models typically take banks and other intermediaries for granted. As a result, the overall benefits of cutting rates below zero may have been exaggerated.”

September 4 – Bloomberg (Craig Stirling and Zoe Schneeweiss): “Mario Draghi’s bid to reactivate bond purchases in a final salvo of stimulus is being threatened by the biggest pushback on policy ever seen during his eight-year reign as European Central Bank president. Bank of France Governor Francois Villeroy de Galhau’s skepticism over the need for an immediate resumption of quantitative easing follows outright opposition from the ECB’s German and Dutch policy makers and a hawkish tone from Austria. It means any push to restart QE to fight the euro zone’s slowdown faces resistance from countries that form the heart of mainland Europe’s economy and half the bloc’s population.”

September 3 – Reuters (Balazs Koranyi and Frank Siebelt): “ECB policymakers are leaning toward a stimulus package that includes a rate cut, a beefed-up pledge to keep rates low for longer and compensation for banks over the side-effects of negative rates, five sources familiar with the discussion said. Many also favor restarting asset buys, a significantly more powerful weapon, but opposition from some northern European countries is complicating this issue, the sources… added.”

September 4 – Reuters (Martin Arnold and Mehreen Khan): “Christine Lagarde has called on European governments to co-operate more closely over fiscal policy to stimulate the stuttering eurozone economy, in her first public appearance as president-elect of the European Central Bank. Ms Lagarde… made the comments in an address to the European Parliament… as part of her nomination process. Telling MEPs that ‘central banks are not the only game in town’, Ms Lagarde urged richer eurozone governments with low deficits to bolster their crisis-fighting capacities by spending during downturns. ‘I’m not a fairy’, she said. In remarks aimed at rich economies like Germany and the Netherlands, she said governments who ‘have the capacity to use the fiscal space available to them’ should spend on improving their infrastructure.”

September 5 – Financial Times (Martin Arnold): “Poor Jens Weidmann. After the head of Germany’s Bundesbank lost out to Christine Lagarde in the race to succeed Mario Draghi as president of the European Central Bank this year, he faces another long period in the monetary policy wilderness… Once dismissed by Mr Draghi as Nein zu allem — which is German for ‘No to everything’ — Mr Weidmann spent much of his first eight-year term fighting a lonely resistance to the ECB’s increasingly unconventional policies that have flooded markets with cheap money. Having had his term renewed for another eight years in May, the 51-year-old is again gearing up to push back against a fresh wave of monetary stimulus at next week’s meeting of the ECB’s governing council.”

August 31 – Reuters (Michael Shields): “New Austrian National Bank Governor Robert Holzmann set out a hawkish stance before his first meeting as a European Central Bank policymaker, saying stepped-up monetary stimulus for the euro zone posed more risks than benefits. Holzmann, 70, is a pensions specialist who has worked at the World Bank and the International Monetary Fund… In an interview with Austrian broadcaster ORF…, Holzmann, who takes over from Nowotny on Sept. 1, said he was working… to draw up his policy positions. ‘I will probably voice a somewhat more critical stance concerning suggestions about a future deepening of the monetary footprint,’ he said. ‘Cheap money has its charms but also its limits, especially when it lasts for a long time.’”

September 3 – Bloomberg (Piotr Skolimowski): “European Central Bank policy maker Francois Villeroy de Galhau signaled skepticism over the need for renewed asset purchases while leaving open the question of whether he’d still back a stimulus package that includes them. …L’Agefi, Villeroy said the ECB doesn’t have to use all the instruments in its toolbox at the same time, entering an already divided debate within the Governing Council before next week’s policy meeting. Asked whether it was necessary to restart quantitative easing now, the governor of the French central bank said this was ‘a question to be discussed.’ He said the ‘elevated’ stock of assets the ECB has already accumulated significantly pushed down long-term yields.”

September 3 – Bloomberg (Ott Ummelas and Piotr Skolimowski): “European Central Bank policy maker Madis Muller joined the swelling ranks of officials skeptical over the need for a large stimulus package by saying a resumption of bond purchases now would be disproportionate to economic conditions. The Estonian central-bank head signaled he is comfortable with cutting interest rates… on Sept. 12, but said the ECB can’t be hostage to market expectations… ‘I don’t think we have a strong case for reactivating QE now,’ Muller… said… ‘In addition to being disproportionate in a situation where there is no deflation risk, in my opinion there is also a concern over ineffectiveness. It just might not be very productive.’”

September 3 – Bloomberg (Eduardo Thomson): “Chile’s central bank cut its benchmark interest rate to a nine-year low, and hinted on more reductions, in a bid to stimulate an economy… The bank’s board… cut the key rate by 50 bps to 2%...”

Brexit Watch:

September 4 – Reuters (Elizabeth Piper, William James and Kylie MacLellan): “The British parliament voted on Wednesday to prevent Prime Minister Boris Johnson taking Britain out of the European Union without a deal on Oct. 31, but rejected his first bid to call a snap election two weeks before the scheduled exit. After wresting control of the day’s parliamentary agenda from Johnson, the House of Commons backed a bill that would force the government to request a three-month Brexit delay rather than leave without a divorce agreement. Opposition Labour party leader Jeremy Corbyn said he would agree to hold an early election once the bill passed the upper house of parliament…”

Europe Watch:

September 4 – Reuters (Michael Nienaber): “Weaker demand from abroad drove a bigger-than-expected drop in German industrial orders in July… Contracts for ‘Made in Germany’ goods fell 2.7% from the previous month in July, data showed on Thursday, driven by a big drop in bookings from non-euro zone countries, the economy ministry said. That undershot a… forecast for a 1.5% drop.”

EM Watch:

September 2 – Financial Times (Michael Stott and Benedict Mander): “The decision to seek what became the biggest bailout in the IMF’s history took only a few minutes. A loss of faith in Argentina’s reform programme had been visibly demonstrated by a two-week run on the peso in spring last year. President Mauricio Macri had few options left. A long-mooted contingency plan went into action. ‘When it came to it, we had discussed it so much, for Macri it was no problem,’ says one senior government official recalling the events of last May. ‘The decision took five minutes . . . back then, Macri was fine and he was very happy with the agreement . . . after all, we had managed to get $50bn.’”

September 3 – Bloomberg (Anurag Joshi): “India’s shadow banks are getting increasingly squeezed by a crisis of confidence at home, forcing them to cough up more for funds overseas. And that’s just for the lucky ones. The non-bank financing companies have struggled to raise as much abroad this year, as defaults in India’s credit market spread after a shock failure by major shadow lender IL&FS Group last year. They’ve signed $1.5 billion of foreign-currency loans so far in 2019, down from $2 billion in the same period last year… Average margins jumped to a three-year high of 118 bps, compared with 95 for the deals signed in the same period in 2018…”

September 4 – Financial Times (Amy Kazmin): “Kaushik Sengupta, 45, a product development manager for an export-oriented shoe manufacturer, is the kind of middle-class Indian whose family’s consumption should be helping power the economy. But his decision in 2009 to buy a Rs2.4m flat from an ostensibly reputable property developer, who promised it would be ready in two years, proved a financially crippling mistake. Today his unfinished flat on New Delhi’s outskirts is one of the estimated 465,000 residential units across India that were sold but never completed as property developers confronted regulatory issues, litigation over land titles or simply ran out of money. For the past decade, Mr Sengupta, like many others in his situation, has paid both a mortgage and rent, which together eat up around half of his Rs80,000 ($1,109) monthly salary. The rest goes on food, school fees and other household necessities, leaving little for discretionary purchases. ‘I end up with nothing in my hand to spend,’ he said. ‘It’s a disaster.’ He is not alone in this gloom.”

Japan Watch:

September 4 – Reuters (Tetsushi Kajimoto): “Budget requests from Japan’s ministries have hit a record amount for the next fiscal year starting in April, the finance ministry said, highlighting the conflicting need to promote fiscal reform while propping up a flagging economy facing external risks. Fiscal reform is an urgent task for Japan, which is saddled with the industrial world’s heaviest public debt at more than twice the size of its $5 trillion economy.”

September 3 – Bloomberg (Ayai Tomisawa and Issei Hazama): “Japan’s troubled regional banks are plunging into riskier corners of the credit markets, in a struggle to survive ultra-low interest rates and an industry shakeout. As debt yields tumble globally, the lenders are also facing weak business at home… That’s prompting authorities to push for consolidation. Desperate to avoid that fate, the banks are shedding their traditional conservatism, fueling questions about their ability to manage riskier holdings including foreign assets… ‘There’s excessive competition among regional banks now, which is driving fierce competition to get profit margins,’ said Takayuki Atake, head of credit research at SMBC Nikko Securities Inc. ‘They used to only buy domestic bond products but they have no choice but to take risks by looking into overseas debt.’”

Global Bubble Watch:

September 1 – Financial Times (Abraham Newman): “With the end of the cold war, it looked as if globalisation had tamed power politics and heralded a more peaceful world. The networks that distributed money, information and production seemed to resist state control. Economic conflict appeared irrational: attacking a rival would hurt your economy as well. That’s not quite how it turned out, as US President Donald Trump’s recent tweets about forcing American businesses to leave China make clear. We are at the beginning of a new ‘quiet war’, where the global networks that were supposed to tie countries together have become a distributed and complex battlefield. Great powers such as the US and China are wielding supply chains as weapons in their grand disputes, while smaller states such as Japan and South Korea copy their tactics. Businesses like FedEx, Huawei and Samsung are pawns on the battlefield or collateral damage. What went wrong? States woke up and realised that global networks could be weaponised.”

September 5 – Bloomberg (Randy Thanthong-Knight, Harry Suhartono, and Xuan Quynh Nguyen): “From quiet beaches in Bali to empty rooms in Hanoi’s hotels, pangs from China’s economic malaise and weakening yuan are being felt across Southeast Asia’s vacation belt. A boom in Chinese outbound travel in recent years that stoked tourism across Southeast Asia is now in reverse gear. The abrupt decline of Chinese travelers is becoming a painful lesson for nations such as Thailand and Indonesia that had become overly dependent on Asia’s top economy. ‘The slump in Chinese arrivals and tourism spending is being felt throughout the region,’ said Kampon Adireksombat, …head of economic and financial market research at Siam Commercial Bank Pcl. ‘There’s always a concentration risk when relying on one market, and many countries may not be able to find a replacement for growth fast enough.’”

September 3 – Reuters (Wayne Cole): “Australia’s much-vaunted economy grew at its slowest pace in a decade last quarter as cash-strapped consumers went on strike, an urgent argument for more monetary and fiscal stimulus as headwinds mount globally. Gross domestic product (GDP) rose just 1.4% in the June quarter from a year earlier…”

September 1 – Reuters: “Australian house prices boasted their biggest monthly gain since 2017 in August as the hard-hit markets of Sydney and Melbourne came roaring back on record low interest rates and looser lending rules. The bounce marks an end to two years of constant decline… The Sydney market saw a jump of 1.6% and Melbourne added 1.4%, gains more reminiscent of the bubble days of 2016. Sydney prices were still down 6.9% year-on-year and Melbourne 6.2%...”

Fixed-Income Bubble Watch:

September 2 – Reuters (Abhinav Ramnarayan): “Junk-rated firms Smurfit Kappa and Thyssenkrupp were overwhelmed with demand when they kicked off post-summer proceedings for the European high-yield market on Monday, as yield-starved investors piled into the new issues. With much of the European bond market now in negative-yielding territory, investors are being forced down the credit spectrum - allowing the likes of Smurfit Kappa and Thyssenkrupp to price deals at levels rarely seen before. Packaging firm Smurfit Kappa caught the eye with its plans to sell 750 million euros ($835.80 million) of eight-year bonds at 1.5%, some of the lowest yields clocked in the European junk bond market for a new issue, particularly for one of such a long maturity.”

September 4 – Wall Street Journal (Liz Hoffman and Telis Demos): “When two of Europe’s corporate titans sat down to negotiate a merger this year, they called American banks. Fiat Chrysler Automobiles hired Goldman Sachs Group Inc. as its lead adviser. France’s Renault SA hired a boutique bank stacked with Goldman alumni. In a deal that would reshape Europe’s auto industry, the continental banks that had sustained Fiat and Renault for more than a century were muscled aside by a pair of Wall Street deal makers. A decade after fueling a crisis that nearly brought down the global financial system, America’s banks are ruling it. They earned 62% of global investment-banking fees last year, up from 53% in 2011… Last year, U.S. banks took home $7 of every $10 in merger fees, $6 of every $10 in stock commissions, and $6 of every $10 paid to hold and move corporate cash.”

Leveraged Speculation Watch:

September 5 – Wall Street Journal (Rachael Levy): “Hedge fund Autonomy Capital lost about $1 billion last month largely on investments tied to Argentina, making it one of the most prominent investors caught on the wrong side of market turmoil in that country. The wager on Argentina is one of the largest for Autonomy’s founder, 50-year-old Robert Gibbins, who is known for making concentrated bets. Last year his fund began making bullish bets on the country’s recovery, including in a wide swath of Argentinian bonds and wagers that Argentina wouldn’t default on its debt…”

Geopolitical Watch:

September 4 – Reuters (Ece Toksabay): “Turkish President Tayyip Erdogan said… it was unacceptable for nuclear-armed states to forbid Ankara from obtaining its own nuclear weapons… ‘Some countries have missiles with nuclear warheads, not one or two. But (they tell us) we can’t have them. This, I cannot accept,’ he told his ruling AK Party members… ‘There is no developed nation in the world that doesn’t have them,’ Erdogan said.”

September 4 – Reuters (Richard Leong): “Iran… said it would take another step away from a 2015 nuclear deal by starting to develop centrifuges to speed up its uranium enrichment but it also gave European powers two more months to try to save the multilateral pact.”

Friday Afternoon Links

[Reuters] Wall Street ekes out gains after China stimulus plan, jobs data

[Reuters] Argentine markets stabilize after political uncertainty smashes bonds, peso

[Reuters] Powell: Fed will continue to act 'as appropriate' to sustain U.S. growth

[Reuters] U.S. wants 'near term' results from new China trade talks: Kudlow

[AP] Brexit crisis grows as opposition rejects snap election call

[Reuters] Opposition to block PM Johnson's early election bid

[Bloomberg] World’s No. 1 Money-Market Fund Shrinks by $120 Billion in China