Friday, June 26, 2020

Weekly Commentary: More W than V

The much vaunted “V” recovery is improbable. To simplify, a somewhat “w”-looking scenario is a higher probability. After such an abrupt and extraordinary collapse in economic activity, a decent bounce was virtually assured. Millions would be returning to work after temporary shutdowns to a substantial chunk of the U.S. services economy. There would be pent-up demand, especially for big ticket home and automobile purchases. A massive effort to develop vaccines would ensure promising headlines.

With incredible amounts of liquidity sloshing around, constructive data supporting the “V” premise were all the markets needed. The enormous scope of hedging and shorting activity back in the March and April timeframe ensured the availability of more than ample firepower to fuel a rally. An equities revival would then spur a general restoration of confidence and spending – in a self-reinforcing “V” dynamic.

Inevitably, highly speculative Bubble Markets inflated way beyond anything even remotely justified by the fundamental backdrop – actually coming to believe the “V” hype. The rapid recovery phase, however, will prove dreadfully short-lived. Scores of companies won’t survive, and millions of job losses will prove permanent. Fearful consumers have made lasting changes in spending patterns, with many retrenching. Tons of fiscal stimulus will be burned through with astonishing rapidity. And a raving Credit market luxuriating in Fed monetary inflation will confront Credit losses at a breadth and scale much beyond the last crisis.

My concern has been that the COVID dislocation would be with us for a while. It’s surprising we haven’t seen at least some relief as summer unfolds. I was not expecting major outbreaks in Arizona, Florida, Texas and Southern California this time of year.

At this point, it’s clear that as a nation we haven’t approached pandemic risks with sufficient urgency and resolve. We all watched the crisis play out in New York and the northeast. We witnessed their “curves” brought down dramatically. We convinced ourselves it was more of a major city issue. We watched the European “curves” drop precipitously as well. We extrapolated to the entire U.S.  Human nature took over. Too many of us became impatient and dismissive.

Total U.S. new COVID infections surpassed 44,000 Friday – handily smashing Thursday’s record. From CNN: “So far, 32 states are reporting an increase in new coronavirus cases this week as compared to the prior week. Eleven of them report a 50% increase or greater. They include Montana, Idaho, Vermont, Nevada, Arizona, Texas, Florida, Georgia, Michigan, Missouri and Mississippi” and “at least nine other states have announced they are not moving ahead to the next phase of reopening.”

According to the Washington Post, six states set record new cases Friday, with 12 posting highs for seven-day average new infections. A record 8,942 new cases were reported in Florida, 62% ahead of Wednesday’s previous daily record and a 170% rise from last Friday. Average cases are up 526% since Memorial Day (from Washington Post). The rate of new positive tests surged to an alarming 13.1%. Florida banned the sale of alcohol at bars.

Texas reported 18,000 new COVID cases in three days, with a record 6,584 suffered on Wednesday. Texas paused reopening on Thursday, and then closed bars and limited restaurant capacity to 50% on Friday. Texas’s positive test rate jumped to a worrying 11%. Seeing a record 879 cases in one day and fearing an overwhelmed hospital system, Houston declared its highest level one emergency. Houston Mayor Sylvester Turner: “The community’s infection rate is three times higher today than it was three months ago.” There are increasing calls for a return to a statewide lockdown.

California reported 5,812 new cases Friday, with total infections surpassing 200,000. The state’s positive rate has increased to 5.3%. California governor Gavin Newsom warned his government was prepared to reinstate a state-wide lockdown. He called for counties with rising infections to consider adjusting reopening plans. San Francisco Friday delayed its next phase of reopening.

New daily records were set Friday as well in Arizona (3,428), Tennessee (1,410), Arkansas (669), Georgia (1,900), and Utah (676). The New York Times quoted Ohio Governor Mike DeWine: “This is a very dangerous time. I think what is happening in Texas and Florida and several other states should be a warning to everyone. We have to be very careful.”

June 26 – CNBC: “A JPMorgan study found that increased restaurant spending in a state predicted a rise in new infections there three weeks later. Analyst Jesse Edgerton analyzed data from 30 million Chase credit and debit card holders and from Johns Hopkins University’s case tracker. He said in-person restaurant spending was ‘particularly predictive.’”

M2 money supply surged an unprecedented $2.821 TN over the past 16 weeks - to $18.329 TN. For perspective, M2 expanded on average $641 billion annually over the past decade. For the entire decade of the nineties, M2 gained $1.484 TN. Over the past 16 weeks, Federal Reserve Assets jumped $2.841 TN. Notably, during this crisis period M2 and Fed Assets expanded similar amounts.

Between September 3rd and December 10th, 2008, Federal Reserve Assets jumped $1.344 TN (to $2.25 TN). Over this period, M2 money supply expanded $466 billion to $8.217 TN – gaining about a third of the growth in Fed Assets. Moreover, Institutional Money Fund Assets (not included in M2) rose $200 billion during Q4 2008’s QE adoption – versus about a $1.0 TN surge over the past few months.

There are various factors that might explain why M2 growth (along with Institutional Money Fund assets) corresponded much more closely to the Fed’s balance sheet recently, in contrast to the 2008 crisis period experience. Unparalleled fiscal spending has surely played a major role in expanding bank deposits. It’s not as apparent how Washington spending has impacted Institutional Money Funds.

Analysis points to crucial differences between QE1 and the latest evolution of Fed QE operations. For starters, it was over a year between the 2007 subprime blowup and the Fed resorting to a $1.0 TN QE experiment. Stocks and corporate Credit had been correcting - speculative impulses and Bubble Dynamics had been deflating - for months prior to QE1. The maladjusted U.S. Bubble economy had already commenced restructuring.

This cycle’s dynamics are in stark contrast. The crisis – and Fed response – hit with stocks and corporate Credit just days beyond record highs. Rates were almost immediately slashed to zero - and Fed Credit was inflated almost $2.5 TN in a couple months. Speculative dynamics were quickly reenergized - speculators were further emboldened. Dysfunctional Market Structures – including the massive ETF and derivatives complexes – were reinforced.

Importantly, QE1 in 2008 worked to accommodate speculative de-leveraging. In short, holdings were shifted from various levered players (i.e. hedge funds, Lehman, Wall Street firms, banks, insurance cos., etc.) onto the Fed’s balance sheet. Fed Credit was used to ease the deflation of a market Bubble. There was an enormous increase in Fed Credit that offset the contraction of securities Credit used in leveraged speculation (as levered positions were unwound). As such, Fed “money printing” was not greatly boosting general liquidity in the securities markets or real economy.

This cycle has experienced profoundly different dynamics. For one, it's important to appreciate that the Fed’s recent QE program actually commenced back in September. Late-cycle “repo” market instability – an indication of problematic excess in leveraged speculation – provoked so-called “insurance” monetary inflation from the Fed. This only exacerbated speculative excess – leverage and manic trading activity – in stocks and corporate Credit, in particular.

Markets were demonstrating acute speculative excess when Wuhan went into lockdown. As the global pandemic was unleashed, U.S. stock and corporate Credit traded to all-time highs on February 19th. Crisis unfolded quickly. Marketplace illiquidity, and then the Fed’s rapid adoption of massive QE, ensured only modest speculative deleveraging. Instead, Trillions of QE incited a massive short squeeze, unwind of bearish hedges and a manic period of speculative excess – all in the face of an unfolding global pandemic. Incredible.

The “V” was more crazy market rationalization and speculation than reality. And with COVID cases again rising rapidly, the harsh reality of a prolonged period of economic depression is coming into clearer view. And again I’m focused on the risk of a bursting speculative Bubble – a Bubble that appears even more dangerous today than in February.

I ponder ramifications for the Fed’s latest $3 TN of QE. Rather than accommodating de-risking/deleveraging, it inflated bank and money fund deposits. It exacerbated Bubbles in equities, corporate Credit, Treasuries and agency securities. It spurred a rally that basically invalidated market hedges. It wreaked bloody havoc for all types of strategies. And as economic prospects continue to deflate, the historic divergence to inflated securities prices becomes only more perilous.

As we’ve witnessed, these Trillions of Fed “money” sure can get the speculative juices flowing. I’m just not so sure this “money” will support the markets during the next serious bout of de-risking/deleveraging. The way I see it, the Fed has significantly boosted the odds of a replay of serious market illiquidity and dislocation. It’s worth noting a record $1.1 TN increase in M2 over the preceding 12 months didn’t stop markets from collapsing into illiquidity in March. Did it contribute?

Global markets remain haunted by the specter of an unwind of unprecedented speculative leverage. When markets break to the downside, there is clear potential for another episode of derivative-related selling that would panic buyers. There will be an additional bout of aggressive hedging and shorting. And Market Structure will ensure an avalanche of selling that will again completely overwhelm marketplace liquidity. And all the “money” on the sidelines will be content to remain sidelined.

A serious bout of de-risking/deleveraging will require another few Trillions of Fed liquidity support. And it’s not obvious to me which would be the more destabilizing Fed response: The Federal Reserve precipitously “printing” Trillions more “money” to pacify the markets - or their reticence to engage in another historic round of monetary inflation only months from their previous historic engagement.

For the Week:

The S&P500 dropped 2.9% (down 6.9% y-t-d), and the Dow fell 3.3% (down 12.3%). The Utilities lost 2.8% (down 13.4%). The Banks sank 8.4% (down 36.5%), and the Broker/Dealers dropped 4.4% (down 10.2%). The Transports declined 3.0% (down 19.2%). The S&P 400 Midcaps dropped 3.8% (down 16.7%), and the small cap Russell 2000 fell 2.8% (down 17.4%). The Nasdaq100 dipped 1.6% (up 12.8%). The Semiconductors declined 2.3% (up 3.9%). The Biotechs slipped 2.0% (up 12.7%). With bullion jumping $27, the HUI gold index jumped 5.0% (up 15.8%).

Three-month Treasury bill rates ended the week at 0.135%. Two-year government yields declined two bps to 0.17% (down 140bps y-t-d). Five-year T-note yields slipped two bps to 0.30% (down 139bps). Ten-year Treasury yields fell five bps to 0.64% (down 128bps). Long bond yields dropped nine bps to 1.37% (down 102bps). Benchmark Fannie Mae MBS yields fell eight bps to 1.58% (down 113bps).

Greek 10-year yields dipped one basis point to 1.26% (down 17bps y-t-d). Ten-year Portuguese yields dropped five bps to 0.46% (up 2bps). Italian 10-year yields fell seven bps to 1.29% (down 12bps). Spain's 10-year yields declined four bps to 0.46% (down 1bp). German bund yields dropped seven bps to negative 0.48% (down 30bps). French yields declined four bps to negative 0.13% (down 25bps). The French to German 10-year bond spread widened three to 35 bps. U.K. 10-year gilt yields fell seven bps to 0.17% (down 65bps). U.K.'s FTSE equities index declined 2.1% (down 18.3%).

Japan's Nikkei Equities Index was little changed (down 4.8% y-t-d). Japanese 10-year "JGB" yields slipped a basis point to 0.01% (up 2bps y-t-d). France's CAC40 declined 1.4% (down 17.9%). The German DAX equities index fell 2.0% (down 8.8%). Spain's IBEX 35 equities index dropped 3.2% (down 24.8%). Italy's FTSE MIB index lost 2.5% (down 18.6%). EM equities were mixed. Brazil's Bovespa index dropped 2.8% (down 18.9%), and Mexico's Bolsa fell 2.5% (down 14.0%). South Korea's Kospi index slipped 0.3% (down 2.9%). India's Sensex equities index gained 1.3% (down 14.7%). China's Shanghai Exchange increased 0.4% (down 2.3%). Turkey's Borsa Istanbul National 100 index rose 0.9% (up 0.2%). Russia's MICEX equities index was little changed (down 9.3%).

Investment-grade bond funds saw inflows of $7.993 billion, while junk bond funds posted outflows of $88 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates were unchanged at 3.13% (down 60bps y-o-y). Fifteen-year rates added a basis point to 2.59% (down 57bps). Five-year hybrid ARM rates slipped a basis point to 3.08% (down 31bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-year fixed rates down 10 bps to 3.39% (down 78bps).

Federal Reserve Credit last week dropped $75.5bn to $7.010 TN, with a 42-week gain of $3.321 TN. Over the past year, Fed Credit expanded $3.214 TN, or 84.7%. Fed Credit inflated $4.199 Trillion, or 149%, over the past 398 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt rose $10.6 billion last week to $3.430 TN. "Custody holdings" were down $37bn, or 1.1%, y-o-y.

M2 (narrow) "money" supply surged $80.3bn last week to a record $18.329 TN, with an unprecedented 16-week gain of $2.821 TN. "Narrow money" surged $3.560 TN, or 24.1%, over the past year. For the week, Currency increased $8.7bn. Total Checkable Deposits surged $85.6bn, while Savings Deposits slipped $3.6bn. Small Time Deposits fell $6.3bn. Retail Money Funds declined $4.0bn.

Total money market fund assets slipped $1.6bn to $4.683 TN. Total money funds surged $1.491 TN y-o-y, or 46.7%.

Total Commercial Paper jumped $17.1bn to $1.028 TN. CP was down $102bn, or 9.0% year-over-year.

Currency Watch:

June 20 – Bloomberg (Arsalan Shahla): “Iran’s currency plummeted against the U.S. dollar as the country continues to grapple with the economic implications of U.S. sanctions and the coronavirus. The rial fell to as low as 188,000 against the the dollar in the free market on Saturday… The currency traded at around 150,000 when the country recorded its first case of Covid-19 in February. The rial has nosedived by more than 500% in value from 2015 when the Islamic Republic accepted curbs on its nuclear program in exchange for some sanctions relief.”

For the week, the U.S. dollar index slipped 0.2% to 97.433 (up 1.0% y-t-d). For the week on the upside, the Swedish krona increased 1.5%, the South Korean won 0.8%, the Swiss franc 0.5%, the Australian dollar 0.4%, the euro 0.4%, the Singapore dollar 0.3%, the New Zealand dollar 0.3%, and the South African rand 0.2%. For the week on the downside, the Brazilian real declined 3.2%, the Mexican peso 1.8%, the Canadian dollar 0.6%, the Norwegian krone 0.5%, the Japanese yen 0.3%, and the British pound 0.1%. The Chinese renminbi declined 0.1% versus the dollar this week (down 1.62% y-t-d).

Commodities Watch:

The Bloomberg Commodities Index fell 2.1% (down 21.8% y-t-d). Spot Gold jumped 1.6% to $1,771 (up 16.7%). Silver gained 0.8% to $18.168 (up 1.4%). WTI crude dropped $1.26 to $38.49 (down 37%). Gasoline sank 9.3% (down 32%), and Natural Gas dropped 7.5% (down 30%). Copper rallied 1.9% (down 4%). Wheat fell 2.0% (down 15%). Corn sank 5.1% (down 18%).

Coronavirus Watch:

June 24 – CNBC (Noah Higgins-Dunn): “The California Department of Public Health reported its second straight record jump in coronavirus cases on Wednesday as the state joins a handful of others with growing case numbers. California reported an additional 7,149 Covid-19 cases since Tuesday, a 69% increase in two days, bringing the state’s total to 190,222 cases, according to the state’s health department. The previous highest day jump was reported on Tuesday when the state recorded 5,019 additional new cases. ‘We cannot continue to do what we have done over the last number of weeks. Many of us understandably developed a little cabin fever, some I would argue developed a little amnesia, others have frankly taken down their guard,’ Gov. Gavin Newsom said…”

June 25 – Reuters (Sharon Bernstein): “California Governor Gavin Newsom… declared a budget emergency in the most populous U.S. state, blaming expenses and the economic downturn caused by the COVID-19 pandemic. Declaring a budget emergency allows the state to tap into its rainy day fund. California anticipates a $54.3 billion budget deficit due to costs and a drop in revenue linked to the pandemic. Under a deal reached with lawmakers, the state would use about $16 billion from the rainy day fund over the next three years to help right its budget…”

June 24 – Associated Press (Carla K. Johnson and Tamara Lush): “Coronavirus cases are climbing rapidly among young adults in a number of states where bars, stores and restaurants have reopened — a disturbing generational shift that not only puts them in greater peril than many realize but poses an even bigger danger to older people who cross their paths. In Oxford, Mississippi, summer fraternity parties sparked outbreaks. In Oklahoma City, church activities, fitness classes, weddings and funerals seeded infections among people in their 20s, 30s and 40s. In Iowa college towns, surges followed the reopening of bars. A cluster of hangouts near Louisiana State University led to at least 100 customers and employees testing positive. In East Lansing, Michigan, an outbreak tied to a brew pub spread to 34 people ages 18 to 23.”

June 23 – The Hill (Justin Wise): “Texas Gov. Greg Abbott (R) is imploring residents to stay home as the state grapples with a surge in coronavirus cases and hospitalizations stemming from the disease… ‘First, we want to make sure that everyone reinforces the best safe practices of wearing a mask, hand sanitization, maintaining safe distance, but importantly, because the spread is so rampant right now, there’s never a reason for you to have to leave your home. Unless you do need to go out, the safest place for you is at your home.’”

June 25 – Reuters (Julie Steenhuysen and Kate Kelland): “Developing a COVID-19 vaccine in record time will be tough. Producing enough to end the pandemic will be the biggest medical manufacturing feat in history. That work is underway. From deploying experts amid global travel restrictions to managing extreme storage conditions, and even inventing new kinds of vials and syringes for billions of doses, the path is strewn with formidable hurdles, according to Reuters interviews with more than a dozen vaccine developers and their backers. Any hitch in an untested supply chain - which could stretch from Pune in India to England’s Oxford and Baltimore in the United States - could torpedo or delay the complex process.”

June 24 – CNBC (Noah Higgins-Dunn): “Travelers arriving in New York, New Jersey and Connecticut from Florida, Texas and other states with spiking Covid-19 infections rates will be subject to a 14-day quarantine and fines if they don’t self-isolate, New York Gov. Andrew Cuomo said… ‘We worked very hard to get the viral transmission rate down. We don’t want to see it go up because a lot of people come into this region and they can literally bring the infection with them,’ Cuomo said…”

June 23 – Reuters (Lisa Shumaker, Karen Pierog, Susan Heavey, Lisa Lambert and Sharon Bernstein): “The governor of Washington state… ordered residents to wear face masks in public as officials across the country sought new means to control the coronavirus pandemic while easing clamp-downs on residents and reopening the economy.”

June 23 – New York Times (Matina Stevis-Gridneff): “European Union countries rushing to revive their economies and reopen their borders after months of coronavirus restrictions are prepared to block Americans from entering because the United States has failed to control the scourge… That prospect, which would lump American visitors in with Russians and Brazilians as unwelcome, is a stinging blow to American prestige in the world…”

June 24 – Bloomberg (Oshrat Carmiel and Henry Goldman): “One night in March, Laura DiMeo fled New York City for an Airbnb house in Cape Cod, where she and her daughter planned to wait out the Covid-19 lockdown. They’re still there, tethered by the internet to work and school back home, and unsure where they’ll settle next. ‘We don’t know which way to go,’ DiMeo said. ‘We’re trying to figure out what to do and what our proximity to New York needs to be.’ It’s a potentially life-changing decision that thousands of other New Yorkers in temporary exile also face… They now have to weigh whether to return to their apartments before the next academic year starts in September, or make the move-out permanent.”

June 23 – Reuters (Junko Fujita and Sakura Murakami): “The daily number of new coronavirus cases in Tokyo climbed to 55 on Wednesday, Governor Yuriko Koike said, the highest tally in 1-1/2 months after a cluster of infections was found at an unnamed office in the Japanese capital.”

June 26 – Reuters (David Lawder): “International Monetary Fund Managing Director Kristalina Georgieva said… the global economic crisis spurred by the coronavirus could ultimately test the Fund’s $1 trillion in total resources, ‘but we’re not there yet.’”

Market Instability Watch:

June 25 – CNBC (Silvia Amaro): “The International Monetary Fund has warned that the ongoing disconnect between financial markets and the real economy could lead to a correction in asset prices. In recent months, equity markets have rallied despite troubling real-world events. The world is grappling with the coronavirus health emergency that has taken the lives of almost 500,000 people…, and threatens to cause an unprecedented economic crisis. In addition, there is social unrest in many advanced economies as citizens demand a more equal society, which could hit investor confidence.”

June 25 – Bloomberg (Emily Barrett): “U.S. funding markets are approaching quarter-end on a remarkably sure footing, given the Treasury is still borrowing in near-record amounts, its cash pile has barely ever been larger, and the pandemic appears to be seeing a resurgence. Even as Libor jumped the most in three months Thursday, indicators of stress in this crucial corner of financial markets -- such as the spread between three-month Libor and the risk-free rate -- are hovering where they were before the March upheaval. In secured funding markets, the benchmark repurchase rate remains in check, and the Federal Reserve’s overnight liquidity facilities have hardly been touched this week.”

June 23 – Bloomberg (David Caleb Mutua): “Companies shoring up cash to survive the global pandemic raised funds in the U.S. high-yield market at the fastest monthly pace ever. Junk issuers have already sold $46.7 billion of bonds in June, surpassing the prior monthly record of $46.4 billion in September 2013…”

Global Bubble Watch:

June 24 – CNBC (Silvia Amaro): “The International Monetary Fund slashed its economic forecasts once again… and warned that public finances will deteriorate significantly as governments attempt to combat the fallout from the coronavirus crisis. The IMF now estimates a contraction of 4.9% in global gross domestic product in 2020, lower than the 3% fall it predicted in April. ‘The Covid-19 pandemic has had a more negative impact on activity in the first half of 2020 than anticipated, and the recovery is projected to be more gradual than previously forecast,’ the IMF said… The fund also downgraded its GDP forecast for 2021. It now expects a growth rate of 5.4% from the 5.8% forecast made in April…”

June 24 – Bloomberg (Fergal O'Brien): “Emergency spending by governments to tackle both the health calamity and economic fallout from the coronavirus is set to push the global debt ratio above 100% for the first time. The jump in the burden this year alone is forecast by the International Monetary Fund to be close to 19 percentage points, dwarfing the increase in 2009 during the global financial crisis. The surge reflects shifts in both sides of the public-finance equation. Massive spending programs are coinciding with a slump caused by restrictions on movement that hit everything from manufacturers to hotels and retailers to airlines. The IMF expects the world economy to shrink 4.9% this year.”

June 18 – Bloomberg (Michelle Fay Cortez): “The virus is winning. That much is certain more than six months into a shape-shifting pandemic that’s killed more than 454,000 people worldwide, is gaining ground globally and has disrupted lives from Wuhan to Sao Paulo. While promising, fast-moving vaccine projects are underway in China, Europe and the U.S., only the most optimistic expect an effective shot to be ready for global distribution this year. If, as most experts believe, an effective vaccine won’t be ready until well into 2021, we’ll all be co-existing with the coronavirus for the next year or longer without a magic bullet. And this next phase of the crisis may require us to reset our expectations and awareness and change our behavior, according to public-health professionals.”

June 24 – Bloomberg (Esteban Duarte): “Fitch Ratings stripped Canada of its AAA status amid a spike in emergency spending for Covid-19, making it the first top-rated country to be downgraded by the ratings agency during the pandemic. The country is expected to run a bigger government deficit this year and emerge from the recession with much higher public debt ratios… It cut the country’s rating one notch to AA+.”

June 25 – Reuters (Marc Jones): “Canada became the latest country to be stripped of a prized ‘triple A’ sovereign credit rating after Fitch downgraded it… After Wednesday’s downgrade of Canada, Fitch now has the fewest ‘AAAs’ since 1998. It now rates 10 sovereigns ‘AAA’, which, at less than 10% of rated sovereigns, is the smallest ever share of the sovereign portfolio.”

June 22 – Wall Street Journal (Liza Lin): “For years, foreign companies and governments have accused Beijing of wielding access to the Chinese market as a diplomatic weapon, using boycotts and commercial penalties to punish perceived political slights. Now, Chinese companies are getting a taste of what it is like to be on the other side. As China’s government grows more combative abroad, overseas consumers and regulators have responded by putting pressure on Chinese firms or spurning Chinese brands altogether—particularly its technology players, which have been among the most prominent Chinese companies doing business around the world. The backlash has been fiercest in India.”

June 24 – Wall Street Journal (Chong Koh Ping): “A distressed energy-trading company overstated its assets by more than $3 billion using ‘routine and pervasive’ forgery, while its founder oversaw years of disastrous bets on oil derivatives, a report filed with a Singapore court said. The study by interim judicial managers… offers the first detailed account of the implosion of Hin Leong Trading Pte. Ltd., a closely held Singapore company that owes $3.5 billion—mostly to banks, including HSBC Holdings PLC.”

June 26 – Financial Times (Leslie Hook and Max Seddon): “An unprecedented heatwave in northern Russia has produced the highest temperature ever recorded inside the Arctic Circle, heightening fears that global warming may be accelerating faster than scientists had thought.”

Trump Administration Watch:

June 24 – Bloomberg (Bryce Baschuk): “The U.S. is weighing new tariffs on $3.1 billion of exports from France, Germany, Spain and the U.K., adding to an arsenal the Trump administration is threatening to use against Europe that could spiral into a wider transatlantic trade fight later this summer. The U.S. Trade Representative wants to impose new tariffs on European exports like olives, beer, gin and trucks, while increasing duties on products including aircrafts, cheese and yogurt…”

June 22 – Reuters (Eric Beech): “White House trade adviser Peter Navarro… walked back on his earlier remarks that the U.S.-China trade pact was ‘over’, stoking volatility in markets already frazzled by the coronavirus pandemic. Navarro said his comments were taken ‘wildly out of context’, while U.S. President Donald Trump confirmed in a tweet the deal with China was ‘fully intact’.”

June 23 – Reuters (David Lawder): “U.S. Treasury Secretary Steven Mnuchin said… a decoupling of the U.S. and Chinese economies will result if U.S. companies are not allowed to compete on a fair and level basis in China’s economy. …Mnuchin said he also had ‘every expectation’ that China would live up to the terms of the Phase 1 trade agreement calling for a massive increase in Chinese purchases of U.S. goods, energy and services. ‘If we can compete with China on a fair and level playing field, it is a great opportunity for U.S. businesses and U.S. workers, as China has a large, growing middle class,’ he said. ‘But if we can’t participate and compete on a fair basis, then you are going to see a de-coupling going forward.’”

June 25 – Bloomberg (Jesse Hamilton): “Wall Street banks will soon be able to boost investments in venture capital funds and pocket billions of dollars they’ve had to set aside to backstop derivatives trades as U.S. regulators continue their push to roll back post-crisis constraints. The Federal Reserve, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. approved changes to the Volcker Rule… that let banks increase their dealings with certain funds by providing more clarity on what’s allowed. The OCC and FDIC also scrapped a requirement that lenders hold margin when trading derivatives with their affiliates. The revisions will complete what watchdogs appointed by President Donald Trump have referred to as Volcker 2.0 – a softening of one of the most controversial regulations included in the 2010 Dodd-Frank Act.”

June 20 – Reuters (Jeff Mason and Makini Brice): “President Donald Trump, addressing a less-than-full arena for his first political rally in months, blasted anti-racism protests and defended his handling of the coronavirus on Saturday in a bid to reinvigorate his re-election campaign.”

Federal Reserve Watch:

June 25 – CNBC (Hugh Son): “The Federal Reserve put new restrictions on the U.S. banking industry… after its annual stress test found that several banks could get uncomfortably close to minimum capital levels in scenarios tied to the coronavirus pandemic. The Fed said… big banks will be required to suspend share buybacks and cap dividend payments at their current level for the third quarter of this year. The regulator also said that it would only allow dividends to be paid based on a formula tied to a bank’s recent earnings.”

June 22 – CNBC (Jeff Cox): “The Federal Reserve’s move into the next phase of its corporate bond buying is generating renewed concerns over potential asset bubbles. In the latest leg of its effort to keep markets functioning, the central bank said last week it will expand its purchases of exchange-traded funds into individual issuance of company debt. While the initial announcement of the program provided a major lift to Wall Street, there now are worries that the risk-on sentiment could be getting carried away. ‘The Fed’s shock-and-awe campaign worked amazingly well,’ …Ed Yardeni said… ‘This raises the question of whether Fed really needs to do much more.’”

June 21 – CNBC (Hugh Son): “It’s the banking world’s version of the rich getting richer. A record $2 trillion surge in cash hit the deposit accounts of U.S. banks since the coronavirus first struck the U.S. in January, according to FDIC data. The wall of money flowing into banks has no precedent in history: in April alone, deposits grew by $865 billion, more than the previous record for an entire year.”

U.S. Bubble Watch:

June 24 – Associated Press (Martin Crutsinger): “The International Monetary Fund has sharply lowered its forecast for global growth this year because it envisions far more severe economic damage from the coronavirus than it did just two months ago... For the United States, it predicts that the nation’s gross domestic product — the value of all goods and services produced in the United States — will plummet 8% this year, even more than its April estimate of a 5.9% drop. That would be the worst such annual decline since the U.S. economy demobilized in the aftermath of World War II.”

June 25 – Bloomberg (Katia Dmitrieva): “The number of Americans seeking unemployment benefits was higher than forecast for a second straight week, adding to signs that the recovery is cooling amid a pickup in coronavirus cases. Initial jobless claims in regular state programs fell to 1.48 million last week from an upwardly revised 1.54 million in the prior week… Continuing claims… declined by more than forecast to 19.5 million in the week ended June 13.”

June 25 – Bloomberg (Elizabeth Dexheimer): “U.S. exports sank to the lowest in more than a decade while imports dropped as the coronavirus continued to curtail demand for goods and upset producers’ supply chains. Goods exports plummeted 5.8% in May from the prior month to $90.1 billion, the lowest since August 2009… Imports decreased 1.2% to $164.4 billion… The goods-trade deficit widened to $74.3 billion, the biggest since June last year, from a revised $70.7 billion a month earlier.”

June 24 – Wall Street Journal (Collin Eaton): “Businesses from factories and offices to salons and bars, once hopeful about a smooth reopening this summer, are now grappling with whether to close, stay open or find some in-between as the number of cases of Covid-19 increases in dozens of states. Apple Inc., which said Friday it would close nearly a dozen stores in four states, said Wednesday it would shut seven more in the Houston area… Restaurants around the country that recently reopened have closed again for anywhere from three days of deep cleaning to two full weeks so staff could self-quarantine after outbreaks.”

June 25 – Bloomberg (Rich Miller): “The U.S. economic recovery is showing incipient signs of weakening in some states where coronavirus cases are mounting. The ebbing is evident in such high-frequency data as OpenTable restaurant reservations and follows a big bounce in activity as businesses reopened from lockdowns meant to check the spread of Covid-19. ‘We’re now starting to see very early evidence that things are leveling off’ in some of the states that reopened first and are now suffering rising virus cases, said Michelle Meyer, head of U.S. economics at Bank of America Corp.”

June 23 – Wall Street Journal (Justin Lahart): “Spending by Americans with the lowest incomes has registered a far bigger bounce since the worst of the Covid-19 crisis than spending among the better off. That recovery may prove fleeting. The drop in spending that started in mid-March, as worries about the novel coronavirus pandemic became widespread, was swift and devastating. An analysis conducted by nonpartisan research group Opportunity Insights of credit- and debit-card data collected by Affinity Solutions shows that by early April, spending by U.S. consumers had fallen 33% from January levels. Then starting in mid-April, when many Americans began receiving stimulus payments, things started picking up. As of June 17, spending was off by just 8.9%.”

June 22 – Financial Times (Robert Armstrong): “’One of the scariest things for people, even people who are managing, who are making payments, is that their budget is balanced on a knife edge,’ says Lara Briehl, a debt counsellor in Washington state. ‘If they lose any source of income, the whole thing falls down.’ …With the coronavirus outbreak paralysing the US economy and leaving millions out of work, her conversations with clients have taken on new urgency. Many of the people she speaks to work in the gig economy, with little access to unemployment benefits, or come from service industries. A lot are facing debt worries for the first time. Before the virus, Ms Briehl says, she referred clients to social welfare services — unemployment, food, and housing benefits — in perhaps 40% of cases. Now she does so in more than two-thirds.”

June 26 – CNBC (Diana Olick): “After declining for three weeks, the number of borrowers delaying their monthly mortgage payments due to the coronavirus rose sharply once again. The number of active forbearance plans rose by 79,000 in the past week, erasing roughly half of the improvement seen since the peak of May 22, according to Black Knight… As of Tuesday, 4.68 million homeowners were in forbearance plans, allowing them to delay their mortgage payments for at least three months. This represents 8.8% of all active mortgages… Together, they represent just over $1 trillion in unpaid principal.”

June 24 – Bloomberg (Katya Kazakina and Michael Sasso): “The Wandering Tortoise taproom in Phoenix saw a flow of customers after the stay-at-home order ended last month. Then traffic slowed as coronavirus infections began to spike, turning the state into a new pandemic hot spot. In states from Arizona to Texas and Florida where Covid-19 is flaring up, small businesses like the Wandering Tortoise are seeing a drop in demand, salons report that customers are getting more skittish, and some restaurants and bars had to shut down again after reopening. While evidence of a virus-sparked consumer pullback is largely anecdotal for now, it would be a setback for a U.S. economy that has just started to perk up, with retail sales jumping to a record in May.”

June 23 – CNBC (Diana Olick): “Sales of newly built homes jumped far more than expected, up nearly 13% annually… After slowing dramatically in March, as the coronavirus shut down the economy, they posted the strongest May pace since 2007, a recovery that surprised even the builders themselves. But housing starts were not nearly as strong, and builders are struggling to meet this new demand. A telling point in the data: The biggest sales jump came in homes not yet started. That caused the supply of homes for sale that were under construction to drop 15% compared with a year ago.”

June 21 – Bloomberg (John Gittelsohn): “U.S. home-mortgage delinquencies climbed in May to the highest level since November 2011 as the pandemic’s toll on personal finances deepened. The number of borrowers more than 30 days late swelled to 4.3 million, up 723,000 from the previous month, according to… Black Knight Inc. More than 8% of all U.S. mortgages were past due or in foreclosure.”

June 24 – CNBC (Diana Olick): “Mortgage rates remained at a record low last week… Homebuyer mortgage applications have been surging for five straight weeks, thanks to pent-up demand from March and April and a coronavirus-induced desire by more consumers to find more space and escape urban apartments. Purchase mortgage volume fell 3% for the week but was a remarkable 18% higher than a year ago.”

June 25 – Associated Press (Paul Wiseman): “Orders to American factories for big-ticket goods rebounded last month from a disastrous April and March as the U.S. economy began to slowly reopen… Orders for manufactured goods meant to last at least three years shot up 15.8% in May after plunging 18.1% in April and 16.7% in March… A category that tracks business investment — orders for nondefense capital goods excluding aircraft — rose 2.3% after dropping 6.5% in April. Excluding the transportation sector, which bounces around from month to month, durable goods orders rose a more modest 4%.”

June 23 – Reuters (Liz Hampton and Nerijus Adomaitis): “The companies that operate offshore drilling rigs for major oil producers face a second wave of bankruptcies in four years amid a historic drop in energy prices that likely will leave surviving drillers more closely tied to big oil firms. A collapse of the offshore industry will have broad impact. Drillers and their suppliers have driven innovation that has helped shale and offshore wind companies by pioneering remote monitoring and control, and last year directly generated about 25% of global oil production.”

June 24 – Associated Press (Joyce M. Rosenberg and Ken Sweet): “Americans are likely to see more ‘for rent’ signs in the coming months as many businesses devastated by the coronavirus pandemic abandon offices and storefronts and potentially end a long boom in the nation’s commercial real estate market. Hotels, restaurants and stores that closed in March have seen only a partial return of customers, and many may fail. Commercial landlords have already reported an increase in missed rent payments. They expect vacancies to rise through the end of the year. Two trends compound the problem: Office tenants are considering renting less space as more employees work from home, and the trend toward online shopping is accelerating, which could cut already weak demand for retail space in downtown areas and malls.”

June 21 – Financial Times (Derek Brower): “US shale companies could be forced to write down $300bn of their assets this year, starting in the second quarter, as operators begin to account for the oil-price collapse on their balance sheets, according to a new study. The huge impairments — about half the net value of the companies’ property, plant and equipment — would increase the sector’s leverage from 40% to 54%, triggering insolvencies and restructuring, says the study by Deloitte… ‘As Covid-19 impacts amplify pressures on shale companies through 2020, a wave of impairments may prompt the deepest consolidation the industry has ever seen over the next six to 12 months,’ said Duane Dickson, vice-chairman of Deloitte’s US oil and gas business.”

Fixed-Income Bubble Watch:

June 24 – Wall Street Journal (Cezary Podkul): “The coronavirus pandemic hit U.S. businesses at a bad time. Companies had loaded up on debt after years of low interest rates, buyouts and increasingly lax lending standards. Much of that borrowing was bankrolled by an elaborate ecosystem of debt funds called collateralized loan obligations. CLOs buy up risky corporate loans and turn them into supposedly safe bonds that are bought by banks, insurance firms and other global investors. Those securities are now struggling because of the economic slowdown. Debt-laden companies like Neiman Marcus, Hertz and J.Crew have already gone bust. That has ricocheted back to the CLOs that own their loans. Prices have been volatile and investors are reassessing the risks of CLOs, crimping the supply of credit when it is needed most.”

June 23 – Financial Times (Joe Rennison and Nikou Asgari): “A record number of US companies sought loan amendments in May after rising debts and falling earnings left them at risk of breaching the terms of their borrowing. Last month, 43 US issuers of leveraged loans asked their lenders for relief on the conditions attached to their debts. That surpassed the previous high of 25 set in March 2009 for these typically lower-rated borrowers, according to figures from LCD, a unit of S&P Global Market Intelligence.”

June 25 – Financial Times (Joe Rennison): “The lowest-rated companies in the US are struggling to raise much-needed cash despite a resurgent market for selling bonds, signalling that investors are staying away from borrowers that went into the Covid-19 crisis with the sickliest balance sheets. Of the $140bn of high-yield or ‘junk’ bonds that have come to market between the beginning of March and Wednesday this week, 57% have been rated double B, or just one notch below investment grade, according… Refinitiv. That is up from 42% for the first two months of the year, before coronavirus sparked a sharp sell-off in risky assets.”

China Watch:

June 22 – Bloomberg: “China’s economy contracted in the three months to June from a year earlier, signaling the start of a recession despite marginal improvements over the previous period when the coronavirus roiled the economy, according to China Beige Book. Key metrics including manufacturing profits, capital expenditures and retail sales volumes remained at historically low levels and barely improved from those in the first quarter, CBB International said in a quarterly report based on a survey of more than 3,300 firms. The retail sector fared the worst, with revenues and profits extending sharp falls. A steep decline in credit costs seemingly didn’t encourage struggling retailers to borrow, signaling continued weakness in the sector. In contrast, the manufacturing sector expanded over the first quarter and services sector performed the best.”

June 23 – South China Morning Post (Amanda Lee): “China's US$40 trillion banking system is seeing growing signs of trouble at its grass roots with bank runs happening at two small local lenders last week, a sign that a mountain of debt and an unprecedented economic contraction has started to take a toll. Local governments and police in both Baoding city in Hebei province and Yangquan, a coal mine town in Shanxi province, last week pleaded with customers not to withdraw cash from local banks despite various unsubstantiated rumours. On Saturday, the city of Baoding said on its official WeChat account that Baoding Bank was operating normally and people ‘should not believe in or spread rumours ... and should jointly be safeguarding good financial and social order’ after a group of depositors rushed to withdraw money from the bank. Local police issued a statement saying it had arrested two individuals for spreading rumours that led to ‘panic among the public’.”

June 23 – Bloomberg: “Surging dollar bond defaults by Chinese companies highlight the increasing pressure the nation’s firms are facing as the economy slows. While the picture looks almost rosy onshore, with the total value of defaults falling 31% to 38 billion yuan ($5.4bn) this year from a year earlier, the situation is far from comforting offshore. Debt failures in the dollar market have jumped nearly 150% to $4 billion -- already above the total for the whole of 2019.”

June 24 – Bloomberg: “China’s shadow banking credit increased for the first time since 2017 as policy makers let up on a years-long crackdown to boost the economy after they imposed a lockdown to protect against the spreading coronavirus, according to Moody’s… Lending by institutions to borrowers outside regular banking channels rose 100 billion yuan ($14bn) to 59.1 trillion yuan in the first quarter, led by wealth management products… Such financing climbed to 60.3% of nominal gross domestic product, up from 59.5% at the end of 2019.”

June 20 – Reuters (Yew Lun Tian and Greg Torode): “China will have overarching powers over the enforcement of a new national security law in Hong Kong, according to details released… that signalled the deepest change to the city’s way of life since it returned to Chinese rule in 1997.”

June 20 – Financial Times (Tom Mitchell and Nicolle Liu): “Beijing will establish a powerful national security agency in Hong Kong as China’s parliament rushes to pass a controversial new law by the end of this month. The official Xinhua news agency reported… the Standing Committee of the National People’s Congress will convene a special session on June 28, at which it is expected to impose a new national security law on Hong Kong. On Saturday, Xinhua reported that the law will authorise the new agency to carry out national security work in Hong Kong. It will also have jurisdiction over ‘a very small number of crimes that endanger national security under certain circumstances’, Xinhua added, without providing further details.”

June 23 – Bloomberg: “China is not only tightening its political grip on Hong Kong to rein in the restive city, it’s pushing harder to deepen its influence over the international finance hub's business life. From real estate to initial public offerings, debt issuance and telecommunications, mainland Chinese companies -- many of which have government backing -- are playing increasingly assertive roles in almost every corner of the city. It’s a shift that has been in progress since the handover in 1997. While supporters of greater economic integration point to the growth-boosting impact of Chinese investment in Hong Kong, critics see it as yet another reflection of the city’s diminishing autonomy from the mainland.”

June 23 – Reuters (Shivani Singh, Colin Qian, Lusha Zhang and Nigel Hunt): “China, the world’s top meat importer, said… a Brazilian beef exporter and a pork plant in Britain had voluntarily suspended exports because of coronavirus infections. Many meat exporting nations, such as Brazil and the United States, have seen thousands of cases of COVID-19, the respiratory disease caused by the virus, among workers in meat plants.”

Central Bank Watch:

June 23 – Reuters (Sujata Rao): “As strict coronavirus lockdowns end, some central bankers have started hinting at another kind of exit — from emergency stimulus they launched just three months ago. Markets so far appear to be calling their bluff. The estimated $5 trillion in asset purchases unleashed by the five biggest central banks to cushion the impact of the pandemic has helped lift world stocks to within 10% of record highs, while the global economy seems set for recovery… Some central banks have signalled full-throttle stimulus won’t last for ever…”

June 25 – Reuters (Balazs Koranyi): “European Central Bank policymakers, fending off a German court challenge to their money-printing scheme, insist that bond buys help prop up the economy and their benefits outweigh the side effects, minutes of their June 4 meeting showed… In an indirect response to the ruling, ECB rate-setters said at their latest meeting that a volume of evidence had been amassed to prove that bond buys are a necessity at the moment, crediting them with keeping borrowing costs down while the European Union recovered from its recent debt crisis.”

June 22 – Reuters (Francesco Canepa): “The European Central Bank’s massive buying of government bonds shouldn’t become a form of ‘unbound’, permanent help to indebted governments, ECB policymaker Jens Weidmann said… ‘‘Flexible’ should not mean ‘unbound’,” Weidmann said… ‘Again, it is important to me that monetary policy does not set the wrong incentives for public finances.’”

Europe Watch:

June 21 – Reuters (Valentina Za and Giuseppe Fonte): “Italy’s budget deficit, currently projected to reach 10.4% of domestic output this year, is likely to expand further as the country tries to prop up the economy amid the coronavirus pandemic, Prime Minister Giuseppe Conte said…”

June 22 – Financial Times (Martin Arnold): “Germany’s finance minister has said the stand-off between the country’s highest court and the European Central Bank is about to be resolved ‘without drama’, adding to signs that a solution could be found as soon as this week. The ECB is planning to try to defuse the legal impasse with Germany’s constitutional court on Thursday by publishing the official account of its last monetary policy meeting at which it discussed whether its bond-buying had an excessive impact on economic and fiscal policy — the subject of a contentious constitutional ruling last month.”

EM Watch:

June 22 – Bloomberg (K Oanh Ha, Claire Jiao, and Pauline Bax): “Developing countries face an explosion in coronavirus infections as they exit lockdowns amid worsening outbreaks because the economic cost of remaining shuttered is too great. From Pakistan to the Philippines, Brazil to South Africa, governments have been choosing to end orders confining people to their homes even as the global pandemic envelops the developing world. Researchers at the University of Michigan predict India’s infections could almost double from current levels to more than 750,000 by mid-July, while Brazil just hit 1 million cases… Soaring unemployment and even starvation are forcing many countries to end sometimes months-long lockdowns that largely failed to stymie the virus…”

June 23 – Bloomberg (Eric Martin and Simon Kennedy): “The global pandemic is hitting emerging markets harder than advanced nations because they have less ability to absorb shocks that in some cases are even greater, World Bank chief economist Carmen Reinhart said… ‘If the advanced economies are seeing problems, it actually pales in comparison to some of the problems and challenges that the developing countries and emerging markets are seeing because they don’t have safety nets. Countries are torn between diverting resources to debt servicing versus using the resources to support social safety, both the medical front and support for lost income. There’s that enormous tension,’ she added.”

June 24 – Bloomberg (Anirban Nag): “The International Monetary Fund’s forecast for India’s economy swung from expansion to contraction, marking the sharpest downgrade in projections of the world’s main economies. The… lender now sees India’s gross domestic product declining 4.5% in the fiscal year through March 2021, compared with an April projection of 1.9% growth. The 6.4 percentage-point downgrade in the forecast is due to ‘a longer period of lockdown and slower recovery than anticipated in April,’ the IMF said…”

June 26 – Reuters (Dave Graham): “Mexico’s economy posted a record contraction in April…, as the effects of the coronavirus lockdown devastated economic activity, particularly in manufacturing. Adjusted for seasonal swings, Latin America’s second-biggest economy contracted 17.3% from March, the biggest fall since modern data began being published in early 1993…”

Brazil Watch:

June 26 – Bloomberg (Davison Santana): “Brazilian local bonds underperformed their regional peers this week as the coronavirus pandemic intensified and the fiscal debt threatened to soar. The prospect of the debt burden rising to 93.5% of gross domestic product by the end of the year, the highest of any major economy in Latin America, prompted the swap curve to steepen.”

Japan Watch:

June 23 – Reuters (Leika Kihara): “The Bank of Japan can spend time examining the effects of the stimulus steps put in place since March, a board member said in a June rate review, underscoring BOJ’s view it has done enough for now to cushion the blow from the coronavirus pandemic. Another member of the board said while the BOJ must use ‘all available tools boldly’ to combat the pandemic, it can do so under the crisis-response framework already put in place, a summary of opinions showed…”

Leveraged Speculation Watch:

June 24 – Bloomberg (Melissa Karsh): “Hedge funds saw net inflows for the first time since February, with the industry bringing in $1.7 billion in May, according to data provider eVestment. Still, redemptions for the year stood at more than $30 Billion…”

Geopolitical Watch:

June 24 – Bloomberg (Samson Ellis): “With U.S.-China tensions increasing on a number of fronts, the main issue that could spark a military conflict over the long term is still one that is fundamental to their relationship: Taiwan. Chinese fighter jets have entered Taiwan’s air defense identification zone seven times in the last two weeks, prompting the island to scramble warplanes to warn them off. While the total number of Chinese incursions this year is still largely on pace with previous years, the outburst over the past few weeks is unusual and could augur a dramatic escalation if sustained.”

June 23 – Reuters (Josh Smith): “North Korea is suspending military action plans against South Korea, the official KCNA news agency reported…, as a report from Seoul suggested North Korean troops were taking down loudspeakers reinstalled at the fortified border.”

June 26 – Reuters (James Pearson): “Vietnam and the Philippines warned of growing insecurity in Southeast Asia at a regional summit on Friday amid concerns that China was stepping up its activity in the disputed South China Sea during the coronavirus pandemic. Both Hanoi and Manila lodged protests with China in April after Beijing unilaterally declared the creation of new administrative districts on islands in the troubled waterways to which Vietnam and the Philippines also have competing claims.”