Friday, October 18, 2019

Market Commentary: China Watch

I’ve held the view that Chinese finance has been at the epicenter of international market unease. The U.S./China trade war was not the predominant global risk. However, it has had the potential to become a catalyst for Chinese financial instability. And there remains a high probability for an eruption of Chinese disorder to quickly reverberate through global markets and economies. To be sure, rapidly deteriorating U.S./China relations were a major contributor to this summer’s global yield collapse and bond market dislocation.

At this point, I’ll assume some “phase 1” deal gets drafted and then signed by Presidents Trump and Xi next month in Chile. In the grand scheme of things, little will have been resolved. It appears many of the most critical issues between the world’s two rival superpowers have been excluded from the initial compromise, I’ll assume tabled for some time to come. Short-term focused markets are content with a “truce,” welcoming a period of reduced risk of a rapid escalation of tensions.

Perhaps near-term financial risks have subsided in China. A counter argument would point out that Beijing’s push to improve its negotiating position forced officials to once again hit the Credit accelerator. Did Beijing push its luck too far? I would point to the $1 TN of additional household (chiefly mortgage) debt accumulated over the past year. China’s Household borrowings were up 15.9% in one year, 37% in two, 69% in three and 138% in five years. Importantly, Beijing’s stimulus efforts stoked China’s historic mortgage finance and apartment Bubbles already well into “Terminal Phase” excess. How deeply have fraud and shenanigans permeated Chinese housing finance? Similar to P2P and corporate finance?

China’s Total Aggregate Financing (TAF) increased 2.273 TN yuan, or $321 billion during September. This was almost 20% ahead of estimates – and 5% above September 2018. After a slower July, Credit growth accelerated to place the quarter’s Credit expansion slightly ahead of comparable 2018. At $2.646 TN, year-to-date TAF expansion was 22% above 2018. With rough estimates of $600 billion of Q4 TAF growth and a $600 billion 2019 increase in national debt, China’s total system Credit growth will approach $4.0 TN.

At $240 billion, September growth in Bank Loans was 24% ahead of estimates. Loans grew at the fastest pace since March – and almost 14% above September 2018. Bank Loans expanded $1.924 TN y-t-d, up about 4% from comparable 2018. Yet September Consumer Loan growth was only 1% above September 2018, with third quarter expansion down a notable 7.8% y-o-y.

Chinese GDP expanded at a 6.0% y-o-y pace during Q3, slightly below estimates (and the “lowest level since 1992”). According to Bloomberg, “Consumption’s contribution increased to 60.5% from 55.3%; Investment’s contribution slowed to 19.8% from 25.9%.” That growth continues to slow in the face of 12.5% y-o-y Credit (TAF) growth portends instability ahead. With surging household debt and inflating housing markets, the ongoing consumption boom comes as no surprise. Property Investment was up 10.5% y-o-y, continuing the powerful Bubble momentum unleashed with Beijing’s 2016 stimulus measures. Retail sales were up 7.8% y-o-y in September, in line with estimates.

Beyond the acute vulnerability to any weakening of Credit growth, the Chinese Bubble economy is demonstrating obvious signs of imbalances and price distortions. While the housing boom for the most part is ongoing, auto sales have slowed markedly.

October 12 – Bloomberg: “Chinese auto sales fell in September for the 15th month in 16, extending their unprecedented slump despite government efforts to support the world’s largest car market. Sales of sedans, sport utility vehicles, minivans and multipurpose vehicles dropped 6.6% from a year earlier to 1.81 million units… The only increase since mid-2018 came in June, when dealers offered big discounts to clear inventory.”

Meanwhile, weaker-than-expected trade data point to waning economic momentum.

October 13 – Reuters (Yawen Chen and Gabriel Crossley): “A slide in China’s exports picked up pace in September while imports contracted for a fifth straight month, pointing to further weakness in the economy and underlining the need for more stimulus as the Sino-U.S. trade war drags on… September exports fell 3.2% from a year earlier, the biggest fall since February… Total September imports fell 8.5% after August’s 5.6% decline, the lowest since May, and were expected to fall 5.2%.”

Price data (i.e. CPI at six-year high and PPI at three-year low) also support the view of monetary disorder and an imbalanced economy:

October 14 – Market Watch (Grace Zhu): “Rising pork prices pushed China's consumer inflation to its highest level in nearly six years in September… The consumer price index rose 3% in September from a year earlier compared with the 2.8% expansion recorded August… The government aims to keep consumer inflation under roughly 3% for 2019. In the first nine months of the year China's CPI rose 2.5% from the same period a year earlier… Food prices in September surged 11.2% on year to set the strongest pace in nearly eight years and extend August's 10.0% gain.”

October 14 – Reuters (Yawen Chen and Gabriel Crossley): “China’s factory gate prices declined at their fastest pace in more than three years in September, reinforcing the case for Beijing to unveil further stimulus as manufacturing cools on weak demand and U.S. trade pressures. The producer price index (PPI), considered a key barometer of corporate profitability, dropped 1.2% year-on-year in September…”

The Shanghai Composite dropped 1.3% Friday, the largest decline since September 17th – giving back about half of the previous week’s gain. According to Bloomberg, Chinese defaults this week reached an annual all-time high, with more than two months to spare. There must also be some system stress smoldering below the surface.

October 16 – Financial Times (Don Weinland and Sherry Fei Ju): “China’s central bank made an unexpected Rmb200bn ($28bn) injection into the banking system on Wednesday, highlighting policymakers’ concerns over liquidity levels as economic growth falls to a 30-year low. Policymakers have worried that liquidity constraints over the past year have made banks less willing to lend to companies at a time when the Sino-US trade dispute is also proving a drag on economic activity. ‘It suggests that the [People’s Bank of China] feels the interbank market needs more liquidity,’ said Julian Evans-Pritchard, senior China economist at Capital Economics. ‘Whether or not the goal is to push down interbank rates or simply to keep them broadly stable is unclear at this stage.’”

I have suggested it was no coincidence China’s August money market instability was followed some weeks later by U.S. “repo” market tumult. It was interesting to see both the PBOC and Federal Reserve actively adding liquidity this week. A “phase 1” deal is at hand, while quarter-end funding issues have subsided. Why then does pressure persist in both funding markets?

October 18 – Wall Street Journal (Michael S. Derby): “The Federal Reserve injected both temporary and permanent liquidity into the financial system Friday. The permanent addition came by way of $7.501 billion in Treasury bill purchases, which are aimed at growing the Fed’s nearly $4 trillion in holdings… The New York Fed also on Friday added $56.65 billion in short-term liquidity to financial markets. In a repurchase agreement operation that will expire on Monday, the Fed took in $47.95 billion in Treasurys, $500 million in agency securities, and $8.2 billion in mortgage-backed securities. The Fed’s operations on Friday are part of an effort to help tame volatility in short-term rate markets with temporary and permanent injections of liquidity… On Thursday, the Fed added $104.15 billion in temporary liquidity.”

Fed funds futures price in an 88% probability of a third Fed rate cut on October 30th. Those sure seem like rather short odds considering the backdrop, including an easing of trade tensions and near-record stock prices. There will be a number of dissents if the FOMC accommodates market expectations. Shouldn’t the Fed’s restart of balance sheet expansion support the case for holding off for now on an additional rate reduction? Some bond selling on a rate cut announcement wouldn’t be all that surprising. Curiously, a Friday evening announcement from the ECB: “ECB Policy Makers Don’t Expect More Easing in Coming Months.”

October 18 – Bloomberg (Piotr Skolimowski, Jill Ward and Paul Gordon): “European Central Bank policy makers don’t expect any more monetary easing in coming months despite a likely downgrade in their economic forecasts in December, according to euro-area officials. The interest-rate cuts and quantitative easing pushed through by President Mario Draghi in September are enough to see the euro-zone economy through its slowdown unless it’s hit by shocks such as escalating trade tensions or a no-deal Brexit, the officials said, speaking on condition of anonymity. The vehement opposition by some governors to those measures dampens the chance of more action any time soon, they added.”

October 18 – Bloomberg (Jeff Kearns): “The International Monetary Fund warned that global economic risks have risen as central banks reduce borrowing costs and that stronger oversight is needed to ease threats to an already shaky expansion… ‘The search for yield in a prolonged low-interest-rate environment has led to stretched valuations in risky asset markets around the globe, raising the possibility of sharp, sudden adjustments in financial conditions,’ the fund said. ‘Such sharp tightening could have significant macroeconomic implications, especially in countries with elevated financial vulnerabilities.’”

The entire world these days has “elevated financial vulnerabilities,” certainly including China. Saturday's Brexit vote will be fascinating.

For the Week:

The S&P500 added 0.5% (up 19.1% y-t-d), while the Dow slipped 0.2% (up 14.8%). The Utilities dipped 0.2% (up 14.8%). The Banks jumped 2.4% (up 17.7%), and the Broker/Dealers rose 1.7% (up 8.8%). The Transports gained 2.1% (up 14.6%). The S&P 400 Midcaps advanced 1.1% (up 16.5%), and the small cap Russell 2000 jumped 1.6% (up 13.9%). The Nasdaq100 added 0.3% (up 24.3%). The Semiconductors were little changed (up 37.6%). The Biotechs rose 1.5% (up 1.4%). While bullion traded little changed, the HUI gold index rallied 2.0% (up 29.6%).

Three-month Treasury bill rates ended the week at 1.62%. Two-year government yields slipped two bps to 1.58% (down 91bps y-t-d). Five-year T-note yields added one basis point to 1.57% (down 94bps). Ten-year Treasury yields increased two bps to 1.76% (down 93bps). Long bond yields rose six bps to 2.25% (down 77bps). Benchmark Fannie Mae MBS yields gained two bps to 2.72% (down 77bps).

Greek 10-year yields dropped another 13 bps to 1.30% (down 309bps y-t-d). Ten-year Portuguese yields were unchanged at 0.20% (down 152bps). Italian 10-year yields slipped a basis point to 0.93% (down 182ps). Spain's 10-year yields added one basis point to 0.25% (down 117bps). German bund yields jumped six bps to negative 0.38% (down 62bps). French yields rose five bps to negative 0.08% (down 79bps). The French to German 10-year bond spread narrowed one to 30 bps. U.K. 10-year gilt yields were little changed at 0.71% (down 57bps). U.K.'s FTSE equities index fell 1.3% (up 6.3% y-t-d).

Japan's Nikkei Equities Index surged 3.2% (up 12.4% y-t-d). Japanese 10-year "JGB" yields rose five bps to negative 0.13% (down 13bps y-t-d). France's CAC40 declined 0.5% (up 19.1%). The German DAX equities index gained 1.0% (up 19.6%). Spain's IBEX 35 equities index increased 0.6% (up 9.2%). Italy's FTSE MIB index gained 0.7% (up 21.8%). EM equities were mixed. Brazil's Bovespa index increased 0.9% (up 15.1%), while Mexico's Bolsa was about unchanged (up 3.7%). South Korea's Kospi index rose 0.8% (up 1.0%). India's Sensex equities index jumped 3.1% (up 9.0%). China's Shanghai Exchange fell 1.2% (up 17.8%). Turkey's Borsa Istanbul National 100 index declined 0.6% (up 7.8%). Russia's MICEX equities index rose 1.7% (up 16.2%).

Investment-grade bond funds saw inflows of $2.892 billion, and junk bond funds posted inflows of $1.792 billion (from Lipper).

Freddie Mac 30-year fixed mortgage rates jumped 12 bps to 3.69% (down 116bps y-o-y). Fifteen-year rates rose 10 bps to 3.15% (down 111bps). Five-year hybrid ARM rates were unchanged at 3.35% (down 75bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates rising 12 bps to 4.12% (down 76bps).

Federal Reserve Credit last week increased $0.3bn to $3.910 TN. Over the past year, Fed Credit contracted $230bn, or 5.5%. Fed Credit inflated $1.099 Trillion, or 39%, over the past 362 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt declined $6.9bn last week to $3.412 TN. "Custody holdings" fell $21bn y-o-y, or 0.6%.

M2 (narrow) "money" supply jumped $39.2bn last week to a record $15.144 TN. "Narrow money" gained $920bn, or 6.5%, over the past year. For the week, Currency slipped $0.6bn. Total Checkable Deposits dropped $37.0bn, while Savings Deposits surged $70.6bn. Small Time Deposits dipped $2.2bn. Retail Money Funds gained $8.5bn.

Total money market fund assets declined $1.6bn to $3.468 TN. Money Funds gained $596bn y-o-y, or 20.8%.

Total Commercial Paper fell $12.4bn to $1.079 TN. CP was down $3.2bn y-o-y, or 0.3%.

Currency Watch:

October 12 – Financial Times (Max Seddon and Henry Foy): “Russia is exploring currency settlements in euros and roubles for its vast energy exports in an attempt to avoid the dollar and insulate Moscow from the US-led global financial system. Maxim Oreshkin, Russia’s economy minister, told the Financial Times that Russia wanted to minimise its exposure to the US by attracting more investors through rouble settlements. ‘We have a very good currency, it's stable. Why not use it for global transactions?’ Mr Oreshkin said… ‘We want [oil and gas sales] in roubles at some point,’ he said. ‘The question here is not to have any excessive costs from doing it that way, but if the broad . . . financial infrastructure, is created, if the initial costs are very low, then why not?”

The U.S. dollar index declined 1.2% to 97.141 (up 1.0% y-t-d). For the week on the upside, the British pound increased 2.5%, the Swedish krona 1.6%, the Swiss franc 0.2%, the Mexican peso 1.2%, the euro 1.1%, the Australian dollar 0.9%, the New Zealand dollar 0.7%, the Singapore dollar 0.7%, the South Korean won 0.6% and the Canadian dollar 0.6%. On the downside, the Norwegian krone declined 0.9%, the Japanese yen 0.2%, the South African rand 0.1% and the Brazilian real 0.1%. The Chinese renminbi increased 0.09% versus the dollar this week (down 2.87% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index slipped 0.2% this week (up 2.2% y-t-d). Spot Gold was little changed at $1,490 (up 16.2%). Silver added 0.2% to $17.578 (up 13.1%). WTI crude fell 92 cents to $53.78 (up 18%). Gasoline declined 1.0% (up 23%), while Natural Gas rallied 4.8% (down 21%). Copper increased 0.3% (unchanged). Wheat surged 4.8% (up 6%). Corn dropped 1.7% (up 4%).

Market Instability Watch:

October 16 – Bloomberg (Alexandra Harris): “Signs of pressure in dollar funding markets are reappearing, with rates for repurchase agreements at elevated levels and the Federal Reserve’s overnight operation coming in fully subscribed for the first time in three weeks. The New York Fed took $75 billion of securities in its overnight system repurchase agreement operation Wednesday… That was the maximum amount on offer for the action and less than the $80.35 billion in bids it received. The last time such an overnight offering was fully subscribed was Sept. 25. The rate on overnight general collateral repo was around 2.15% on Wednesday morning… That’s above the range of 1.75%-2.00% that the central bank currently maintains for the federal funds rate…”

October 18 – Bloomberg (Sarah Ponczek and Lu Wang): “When it comes to mixed messages from markets, 2019 has been a year with few precedents. Whenever a believable signal starts to emerge from stocks or bonds about the economy, it changes. While some disagreement is normal, this is approaching the historic. For context, in a typical year, returns in either equities or Treasuries lead the other by 10 percentage points or more, reflecting a relatively firm consensus over whether growth will be good or bad. But over the past 39 weeks, the two markets have been hugging each other like no time since the early 1990s, data compiled by Ned Davis Research show.”

Trump Administration Watch:

October 15 – New York Times (Ana Swanson and Keith Bradsher): “President Trump portrayed the ‘Phase 1’ agreement he announced on Friday with China with typical fanfare, describing the pact as ‘massive’ and ‘the largest contract’ ever signed. ‘We made a fantastic deal,’ Mr. Trump said… Tuesday at the White House. There are good reasons to be skeptical about those claims. The deal appears likely to benefit American farmers by increasing Chinese purchases of agricultural goods and gives some other businesses more access to the Chinese market. But the ‘agreement in principle’ is limited in scope, and exact details have yet to be put in writing — a process that has derailed negotiations with China in the past.”

October 14 – Reuters (Makini Brice and Andrea Ricci): “U.S. Treasury Secretary Steven Mnuchin said… that an additional round of tariffs on Chinese imports will likely be imposed if a trade deal with China has not been reached by then, but added that he expected the agreement to go through. ‘I have every expectation - if there’s not a deal, those tariffs would go in place - but I expect we’ll have a deal,’ he said…, when asked about a round of tariffs scheduled for Dec. 15.”

October 12 – Financial Times (Tom Mitchell): “After five months of constant escalations in their long-running trade war with the US, Chinese officials on Friday finally secured a respite. In return for a series of modest concessions, most of which had been offered by President Xi Jinping’s administration in previous negotiating rounds, Donald Trump agreed to suspend another set of tariff increases originally scheduled to take effect on October 15. The truce sets the stage for a series of much higher-stakes negotiations after Mr Xi and Mr Trump’s expected encounter on the sidelines of the Asia Pacific Economic Conference, scheduled for November 16-17 in Santiago, Chile, where Friday’s agreement will be finalised. The two sides are still a long way from a final settlement that addresses much more contentious issues, such as Chinese government support for strategic industries and state-owned enterprises…”

October 16 – Reuters (Patricia Zengerle): “The U.S. House of Representatives… passed four pieces of legislation taking a hard line on China, three related to pro-democracy protests in Hong Kong and one commending Canada in its dispute over the extradition of a Chinese telecom executive. All four measures passed by unanimous voice vote, as members of Congress - Democrats and Republicans - said they wanted to take an aggressive stance on China and show support for Hong Kong following four months of unrest in the city.”

October 16 – Reuters (Timothy Gardner and Arshad Mohammed): “The White House is warning Chinese shipping companies against turning off their ships’ transponders to hide Iranian oil shipments in violation of U.S. sanctions, two senior administration officials said. ‘We’ve been messaging very heavily to the shipping companies, you don’t want to do this, it’s not worth it,’ said one official… ‘It’s incredibly dangerous and irresponsible behavior.’”

Federal Reserve Watch:

October 16 – CNBC (Jeff Cox): “Chicago Federal Reserve President Charles Evans agrees with the two interest rate cuts this year but thinks that’s probably enough for now. As markets anticipate another reduction later this month, Evans, a voting member of the Federal Open Market Committee, said… that policy is probably appropriate given an economy that is softening but still in good shape. ‘I think policy probably is in a good place right now. All told, the growth outlook is good, and we have policy accommodation in place to support rising inflation,’ he said… ‘That said, there is some risk that the economy will have more difficulty navigating all the uncertainties out there or that unexpected downside shocks might hit.’ Evans conceded ‘there is an argument for more accommodation’ as a buffer against downside risks such as a slowing global economy and the U.S.-China trade war. However, he said his ‘own assessment is pretty much in line’ with the consensus that emerged from the September FOMC meeting.”

October 15 – Reuters (Marc Jones and Dhara Ranasinghe): “St. Louis Federal Reserve bank president James Bullard said… that negative interest rates could be problematic in the United States. Central banks in the euro zone and Japan have cut interest rates below zero to boost inflation and economic growth, raising a debate about the ammunition other major central banks such as the U.S. Federal Reserve have to fight a slowdown. ‘I’m not a fan of this policy,’ Bullard told the press… ‘Negative interest rates have had mixed results where they’ve been tried,’ he said, adding that it was not clear either how multi-trillion dollar U.S. money markets would adapt to such a policy.’”

October 15 – Reuters (Ann Saphir): “San Francisco Fed President Mary Daly… said she was watching data closely to see whether the economy maintains its momentum in the face of headwinds including slowing global growth and geopolitical and trade policy uncertainty. ‘Right now, I see the economy in a good place, and policy accommodation in a good place,’ Daly told reporters… As for the headwinds, ‘the gusting seems to have gone down a little bit on the news of some progress on Brexit, some progress on trade negotiations between the U.S. and China’…”

October 16 – Associated Press (Martin Crutsinger): “The U.S. economy was expanding at a modest pace in September and into October despite the fact manufacturing was being hurt by rising trade tensions and weaker global growth while adverse weather was affecting farmers. The Federal Reserve, issuing its latest assessment of business conditions around the country, reported… ‘persistent trade tensions and slower global growth’ were weighing on the economy.”

U.S. Bubble Watch:

October 15 – CNBC (Diana Olick): “Anyone out hunting for an affordable home today knows that the pickings are slim – and they are about to get slimmer. Housing inventory hit a record low about two years ago, but a lull in home sales over the past year helped build back much-needed supply, especially in the mid-priced range. Then a sharp drop in rates this summer brought demand back and depleted that supply dramatically. National housing inventory fell 2.5% annually in September, a sharper decline than August’s 1.8% decrease… Supply has always been leanest on the low end, as investors have been very active in that price range since the foreclosure crisis. Roughly 5 million mostly entry-level homes have been turned into single-family rentals, and strong demand for those rentals means investors are unlikely to put the homes up for sale anytime soon. In addition, an unseasonably strong surge in demand at the end of summer and into this fall now has the supply of homes priced below $200,000 down 10% compared with a year ago.”

October 16 – CNBC (Diana Olick): “U.S. homebuilders are loving today’s lower mortgage rates, which are bringing buyers back and boosting sales. Builder confidence in the single-family market jumped 3 points in October to 71 on the National Association of Home Builders/Wells Fargo Housing Market Index… That is the highest level since February 2018 and up from 68 in October of last year. Anything above 50 is considered positive sentiment… Of the index’s three components, current sales conditions rose 3 points to 78, sales expectations over the next six months jumped 6 points to 76 and buyer traffic rose 4 points to 54.”

October 16 – Reuters (Lucia Mutikani): “U.S. retail sales fell for the first time in seven months in September, suggesting that manufacturing-led weakness could be spreading to the broader economy, keeping the door open for the Federal Reserve to cut interest rates again later this month… Retail sales dropped 0.3% last month as households cut back spending on motor vehicles, building materials, hobbies and online purchases. That was the first drop since February. Data for August was revised up to show retail sales rising 0.6% instead of 0.4% as previously reported.”

October 14 – Wall Street Journal (Maureen Farrell, Liz Hoffman and Eliot Brown): “SoftBank Group Corp. has prepared a financing package that would give it control of WeWork and further sideline its founder Adam Neumann in exchange for relieving the shared-office startup’s looming cash crunch… WeWork is racing to find a way to shore up its financing after its New York parent company We Co. pulled its plans for an initial public offering and Mr. Neumann resigned as chief executive under pressure. One potential solution is the SoftBank package.”

October 18 – Bloomberg (Lisa Lee): “Leveraged loan investors are getting increasingly angsty, and their fear may be a harbinger of more pain coming in credit markets. Money managers are plowing into the least risky junk debt they can find while avoiding the junkiest. Since the start of October, lower rated B loans have dropped about 1%, while less risky BB rated loans have lost just 0.26% through Wednesday. An index of riskier loans is hovering near its lowest level relative to higher-rated loans since mid-2017… Leveraged loans of all stripes are performing worse than junk bonds, which have risen about 0.1% this month…”

October 14 – Bloomberg (Catherine Ngai, Michael Jeffers, and Kevin Crowley): “America’s shale boom got the world accustomed to soaring production. Now growth has slowed, and a cloud has formed over the industry. Fracking pushed the U.S. closer to its long-sought goal of energy independence at a time of unprecedented geopolitical risk. Wells from Texas’s Permian Basin to the Bakken in North Dakota turned farmers and ranchers into overnight millionaires. Drivers enjoyed cheap gasoline, decent-paying jobs sprung up in small towns and new technology attracted investment from all corners of the world, keeping drillers busy… For years, the good times came with the warning that a litany of financial and engineering issues would doom the revolution. Such naysaying was proven wrong again and again by the industry’s resilience. Producers were able to borrow cheaply, fine-tune operations and trim costs along their supply chains. But the tea leaves look different this year. Money isn’t as plentiful for an industry that in the past decade burned through nearly $200 billion. Investors are restless.”

October 15 – Wall Street Journal (Chip Cutter): “Applications to some of America’s most elite business schools fell at a steeper rate this year, as universities struggled to attract international students amid changes to immigration policies and political tensions between the U.S. and China. The declines affected some of the nation’s top-rated programs, with Harvard University, Stanford University and the Massachusetts Institute of Technology, among others, all reporting larger year-over-year drops in business-school applications. Some… posted double-digit percentage declines. Overall, applications to American M.B.A. programs fell for the fifth straight year…”

China Watch:

October 14 – CNBC (Grace Shao): “Chinese state media warned the U.S. over the weekend to ‘avoid backpedaling’ on the partial trade agreement, and expressed caution about the initial phase of the deal which President Donald Trump called ‘very substantial.’ On Friday, the Trump administration announced it was suspending a tariff increase to 30% from 25% on at least $250 billion in Chinese goods which were set to take effect on Tuesday. However, a tariff hike implemented in September was not rolled back and plans for another hike just before the Christmas holiday on Dec. 15 remain in place. ‘While the negotiations do appear to have produced a fundamental understanding on the key issues and the broader benefits of friendly relations, the Champagne should probably be kept on ice, at least until the two presidents put pen to paper,’ said China Daily…”

October 15 – Associated Press (Joe McDonald): “A truce in a U.S.-Chinese tariff war and Beijing’s promises to open more of its state-dominated economy are raising investor hopes. But Beijing is trying to temper expectations, while companies express frustration over the halting pace of market-opening. The China Daily… warned Tuesday the two sides have yet to put last week’s agreement on paper after President Donald Trump suspended a planned tariff hike. In exchange, Trump said Beijing would buy up to $50 billion of American farm goods, a pledge China has yet to confirm.”

October 14 – Bloomberg: “China wants to hold more talks this month to hammer out the details of the ‘phase one’ trade deal touted by Donald Trump before Xi Jinping agrees to sign it, according to people familiar with the matter. Beijing may send a delegation led by Vice Premier Liu He, China’s top negotiator, to finalize a written deal that could be signed by the presidents at the Asia-Pacific Economic Cooperation summit next month in Chile… Another person said China also wants Trump to scrap a planned tariff hike in December in addition to the hike scheduled for this week, something the administration hasn’t yet endorsed.”

October 16 – Wall Street Journal (Chao Deng and Lingling Wei): “China has promised to buy more U.S. farm products, but questions remain over how much, the time frame for purchases, and what the U.S. might have to give in return. Beijing is pushing the U.S. to drop plans to impose new 15% tariffs on $156 billion in consumer goods starting Dec. 15 and could use the farm purchases as leverage. Chinese negotiators continue to say purchases must be based on actual demand and at fair-market prices… The roughly $50 billion in farm products touted by President Trump is far beyond what China has historically spent in any one year and would likely require Beijing to lean heavily on its state-owned firms to accomplish. ‘The uncertainty is still there,’ says John Frisbie, managing director of international consulting firm Hills & Company…”

October 15 – CNBC (Evelyn Cheng): “China will take countermeasures against the U.S. in response to a bill that favors the Hong Kong protesters, the Chinese Foreign Ministry said… On Tuesday in Washington, the U.S. House of Representatives passed the ‘Hong Kong Human Rights and Democracy Act.’ The bill requests that various government departments consider whether recent political developments in Hong Kong require the U.S. to change the region’s special trading status. Hong Kong is a special administrative region of China, and exports from the mainland traveling through Hong Kong can potentially evade U.S. export controls and sanctions. ‘If the relevant bill is finally passed into law, not only will it hurt Chinese interests and China-U.S. relations, but also seriously damage U.S. interests,’ Geng Shuang, Ministry of Foreign Affairs spokesperson, said…”

October 15 – Reuters (Lusha Zhang and Kevin Yao): “China’s banks extended more new yuan loans than expected in September, as policymakers ramped up support to stabilize the slowing economy during a bruising trade war with the United States… Chinese banks extended 1.69 trillion yuan ($238.98bn) in new loans in September, up from August and exceeding analyst expectations… Analysts polled by Reuters had predicted new yuan loans would rise to 1.4 trillion yuan in September, up from 1.21 trillion yuan in August but largely in line with the tally in September last year… Corporate loans jumped to 1.01 trillion yuan in September from 651.3 billion yuan in August. Household loans, mostly mortgages, rose to 755 billion yuan last month from 653.8 billion yuan in August…”

October 18 – Bloomberg: “The total number of Chinese onshore company bond defaults this year just equaled the record set for the whole of 2018. New defaulted bonds reached 120 this week… The missed payments totaling 102.9b yuan ($14.6bn) is approaching last year’s all-time high of 122 billion yuan. Some 45 companies have defaulted on their debt year-to-date versus 40 in the previous year…”

October 13 – Reuters (Yawen Chen and Gabriel Crossley): “China’s exports to the United States fell 10.7% from a year earlier in dollar terms in January-September, while U.S. imports dropped 26.4% during that period…”

October 15 – Bloomberg: “China’s securities regulators are taking steps to curb private bond issuance in a bid to contain credit risks at the nation’s weaker firms. The China Securities Regulatory Commission and stock exchanges in Shanghai and Shenzhen have sent a window guidance to some brokerages to keep the outstanding value of privately sold corporate bonds on exchanges at or below 40% of issuers’ net assets… New bond sales exceeding this ratio should only be used to repay old debt.”

October 13 – Reuters (Yawen Chen and Ryan Woo): “Chinese President Xi Jinping warned… that any attempt to divide China will be crushed, as Beijing faces political challenges in months-long protests in Hong Kong and U.S. criticism over its treatment of Muslim minority groups. ‘Anyone attempting to split China in any part of the country will end in crushed bodies and shattered bones,’ he told Nepal’s Prime Minister KP Sharma Oli… ‘And any external forces backing such attempts dividing China will be deemed by the Chinese people as pipe-dreaming!’ he was quoted as saying.”

Central Banking Watch:

October 13 – Reuters (Kirsti Knolle): “New Austrian National Bank Governor Robert Holzmann sharply criticized the European Central Bank’s ultra-easy monetary policy in an interview… and said he hoped for a new course under incoming chief Christine Lagarde. Holzmann took over as governor and became a member of the European Central Bank’s rate-setting governing council last month. ‘My statement is that the current monetary policy... is wrong and that a different policy is needed in the future,’ Holzmann told Austrian broadcaster ORF.”

Brexit Watch:

October 18 – BBC: “Parliament will sit on a Saturday for the first time in 37 years to vote on Boris Johnson's Brexit deal. The PM has been trying to convince MPs to support the agreement he secured with the EU, ahead of what is expected to be a knife-edge vote in the Commons. His former DUP allies and opposition parties plan to vote against it. But at least nine Labour MPs are expected to rebel and the PM is hoping to be backed by some of the Tory MPs he sacked for opposing him last month. BBC deputy political editor John Pienaar said numbers for the vote looked ‘painfully tight’, adding Mr Johnson ‘either has to win round the DUP - which looks close to impossible - or look elsewhere for votes’.”

Europe Watch:

October 15 – Bloomberg (Alessandro Speciale and Giovanni Salzano): “Italy’s debt rose almost to the highest level on record, adding urgency to the government’s clash over the 2020 budget. The country’s public debt increased to 138% of gross domestic product in the second quarter… That’s just under the high of 138.8% reached in the second quarter of 2015.”

October 13 – Reuters (Emma Pinedo and Joan Faus): “Spain’s Supreme Court on Monday jailed nine Catalan separatist leaders for between nine and 13 years for their role in a failed independence bid, a decision that triggered mass protests in the region and left the future course of the dispute uncertain.”

EM Watch:

October 15 – Bloomberg (Ugur Yilmaz, Tugce Ozsoy, and Asli Kandemir): “Turkey’s market regulators suspended short-selling in seven banks including Turkiye Halk Bankasi AS and ordered brokers not to execute orders unless a client has the respective shares in his account. Traders say the moves make it hard to sell shares in the country’s largest banks.”

Global Bubble Watch:

October 14 – Bloomberg (Masaki Kondo and Toru Fujioka): “The Bank of Japan is on course for an historic turning point that would see its bond holdings shrink next year for the first time in a decade… The shift is all the more notable given that the European Central Bank and Federal Reserve are set to once again increase their balance sheets. It’s a remarkable prospect for a central bank that has refused to drop guidance for boosting government debt holdings by 80 trillion yen ($740 billion) annually, even as it steadily tapers purchases since pivoting to yield-curve control in 2016.”

October 16 – Associated Press (Martin Crutsinger): “The International Monetary Fund is further downgrading its outlook for the world economy, predicting that growth this year will be the weakest since the 2008 financial crisis… The IMF’s latest World Economic Outlook… foresees a slight rebound in 2020 but warns of threats ranging from heightened political tensions in the Middle East to the threat that the United States and China will fail to prevent their trade war from escalating… The new forecast predicts global growth of 3% this year, down 0.2 percentage point from its previous forecast in July and sharply below the 3.6% growth of 2018.”

October 16 – Reuters (Pete Schroeder): “The International Monetary Fund heightened its warnings for the corporate debt market…, as investors search for richer returns in riskier assets after recent interest rate cuts by central banks… The IMF and other economic policymakers have expressed concern over high levels of risky corporate debt in the past. But the group said… attempts by central banks worldwide to lower interest rates to combat immediate economic risks have exacerbated the situation, leading to ‘worrisome’ levels of debt with poor credit quality and increasing financial vulnerabilities over the medium-term.”

Fixed-Income Bubble Watch:

October 16 – Bloomberg (Lara Wieczezynski and Jeannine Amodeo): “U.S. leveraged loan investors are willing to buy the lowest rated junk debt the market has to offer -- for a price. And that price is rising. A flight to quality is driving up borrowing costs for those selling new B rated debt to its highest level in more than three years as investors look to avoid sectors and companies they see at risk of struggling in a downturn. Through Oct. 11, margins on B rated debt -- the amount borrowers pay in addition to the market’s benchmark rate – was 515.9 bps. If that trend continues that will be the highest margin on B rated debt borrowers have had to pay since August 2016.”

October 16 – Bloomberg (Rachel Evans and Gowri Gurumurthy): “Investors are piling back into junk-bond exchange-traded funds as easing trade tensions between the U.S. and China is giving them greater confidence to buy riskier debt that offers higher interest rates. More than $540 million flowed into State Street Corp.’s SPDR Bloomberg Barclays High Yield Bond ETF on Tuesday, the biggest one-day increase since May 2017… Investors also added cash to BlackRock Inc.’s iShares iBoxx High Yield Corporate Bond fund – the largest junk-debt ETF, which is known as HYG -- and to another speculative-grade product that focuses on short-dated securities.”

October 16 – Bloomberg (Danielle Moran): “U.S. state and local governments are poised to sell bonds at the fastest pace in almost two years as they take advantage of lower interest rates and strong investor demand. Municipal bond issuers are expected to sell $21.4 billion in debt over the next month. This is the highest visible supply since December 2017, when governments rushed deals to market to get ahead of federal tax law changes effective at the start of 2018… The upcoming supply will add to the $289 billion in long-term bonds state and local governments have already sold this year, an 11% increase over the same period in 2018.”

Leveraged Speculation Watch:

October 14 – Bloomberg (Heejin Kim): “Lime Asset Management Co., South Korea’s largest hedge fund with about $4 billion of assets, suspended withdrawals from more funds on Monday, freezing a total of $710 million of its portfolio, after the firm said last week it couldn’t sell assets fast enough to meet redemption demands. The hedge fund halted an additional 243.6 billion won ($210 million) today after freezing funds worth 603 billion won on Oct. 10, Won Jong-Jun, chief executive officer at the Seoul-based firm, said in a press briefing this afternoon. A further 489 billion won of funds may also be restricted from withdrawals, he said. Investors are seeking redemptions after local media speculated over the past few months about a Korean regulatory probe into the company’s investments in convertible bonds.”

October 16 – Bloomberg (Heejin Kim and Kyungji Cho): “A run on South Korea’s biggest hedge fund is stoking contagion fears as investors in Asia’s fourth-biggest economy rapidly reassess the risk of owning hard-to-trade assets. In an echo of the liquidity crunch that caused the stunning downfall of British investor Neil Woodford, Seoul-based Lime Asset Management Co. last week began freezing withdrawals from $710 million of funds that owned convertible bonds of small Korean companies. Clients asked to pull their cash amid reports of alleged wrongdoing at Lime, but the firm said it couldn’t sell its holdings fast enough to meet the redemption requests. The worry now is that Lime’s crisis will spook investors in other hedge funds, triggering a flood of outflows that ripples through Korean markets.”

October 17 – Bloomberg (Ishika Mookerjee): “Hong Kong’s hedge fund industry saw its biggest quarterly outflow since the global recession a decade ago, a shift that may deepen concern about investor sentiment in the protest-wracked financial hub. Net redemptions totaled about $1 billion in the three months ended September, the most since the second quarter of 2009… Analysts from the research firm said that while anti-government protests in Hong Kong have unnerved markets, the outflow was in keeping with redemptions from hedge funds globally after poor returns from a number of managers in 2018.”

Geopolitical Watch:

October 14 – Reuters: “Turkey vowed to press ahead with its offensive in northern Syria on Tuesday despite U.S. sanctions and growing calls for it to stop, while Syria’s Russia-backed army moved on the key city of Manbij that was abandoned by U.S. forces. They say ‘declare a ceasefire’. ‘We will never declare a ceasefire,’ Turkish President Tayyip Erdogan told reporters… ‘They are pressuring us to stop the operation. They are announcing sanctions. Our goal is clear. We are not worried about any sanctions.’”

October 13 – Financial Times (Chloe Cornish, Laura Pitel and Lauren Fedor): “Kurdish forces say they have struck a deal with the Syrian regime and its Russian backers to stem a Turkish military assault, in a dramatic shift that came just hours after Donald Trump ordered the evacuation of the remaining US forces in the country’s north-east. The Kurdish-led Syrian Democratic Forces (SDF) said it had agreed with the Damascus government that the Syrian army should enter the Kurdish-controlled territory and deploy along the Syrian-Turkish border. The aim, the group said, was to protect Syria’s territorial integrity and ‘liberate areas entered by the Turkish army and its hired mercenaries’…”

October 16 – Reuters (Alexandra Alper and Tuvan Gumrukcu): “U.S. President Donald Trump… said he had no problem if Russia helped Syria in a conflict with Turkey and rejected criticism of his withdrawal of U.S. troops from Syria that exposed Kurdish allies, calling it ‘strategically brilliant.’ Trump’s decision to pull out American forces ahead of a Turkish offensive into northern Syria has shattered the relative calm there and he has been criticized for abandoning Kurdish militia who helped the United States defeat Islamic State militants in the region. Washington’s hasty exit has created a land rush between Turkey and Russia - now the undisputed foreign powers in the area - to partition the formerly U.S.-protected Kurdish area.”

October 15 – Reuters (Josh Smith): “Aides to Kim Jong Un are convinced the North Korean leader plans ‘a great operation’, state media said… in a report that included lavish descriptions and images of the leader riding a white horse up North Korea’s most sacred mountain… ‘His march on horseback in Mt Paektu is a great event of weighty importance in the history of the Korean revolution,’ KCNA said.”

October 14 – Reuters (Twinnie Siu, Farah Master and John Ruwitch and David Brunnstrom): “Embattled Hong Kong leader Carrie Lam… ruled out making any concessions to pro-democracy protesters in the face of escalating violence, which police said was now ‘life threatening’ citing the detonation of a small bomb. ‘I have said on many occasions that violence will not give us the solution. Violence would only breed more violence,’ Lam told a news conference.”

October 15 – Reuters (Chris Prentice, Rodrigo Campos, Marianna Parraga and Devika Krishna Kumar): “India wants to comply with global sanctions, including U.S. sanctions on Venezuela and Russia, but also needs to maintain its own strength and strategic interests, Finance Minister Nirmala Sitharaman said… Sitharaman said the Indian government has expressed its view to the United States… ‘We value the strong partnership with the USA, but we should equally be allowed to be a strong economy.’”

Friday Evening Links

[Reuters] Wall Street weighed by Boeing, J&J, bleak China data

[Reuters] Trump hopes U.S.-China trade deal will be signed by middle of November

[Reuters] Fed's Clarida keeps rate-cut door open; others less sure

[Reuters] Lebanon, pushed to the brink, faces reckoning over graft

[Reuters] Hong Kong protesters vow to hit the streets in major 'illegal' march

[Reuters] Clashes in central Barcelona on fifth day of separatist protests

[Reuters] Turkey plans presence across northeast Syria, Erdogan says